Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed

Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed / The Sale of Goods Act

Currency Date: 22 April 2020

© 2020 LexisNexis
The Sale of Goods Act

Table Showing Corresponding Sections of the Indian and English Sale of Goods Act
and the Indian Contract Act1

Sale of Goods Act, 1930 English Sale of Goods Acts, Contract Act, 1872
1893*/1979
1(1) 64/64
2(1) & (2) 62(1)/61(1)
2(3) 62(4)/61(5)
2(4) 62(I)/61(l); 81(4) of the English
Factors Act, 1889
2(5) & (6) 62(1)/61(1)
2(7) 62(1)/61(1) 76
2(8) 62(3)/61(4) 96 Explanation
2(9) 1(1) of the English Factors Act,
1889
2(10) 1(1)/2(1)(2)
2(11), (12), (13) 62(1)/61(1)
&(14)
3 61(2)/62(2)
4 1/2 77
5(1) 78
5(2) 3/4 10
6 5/5 87,88
7 6/6 20 illus. (a), (b) & (c)
8 7/7 56
9 8/8 89
10 9/9
11 10(1)/10(1) 55
12 ll(l)(b)/ll(3)
13(1) ll(l)(a)/ll(2) 118
13(2) ll(l)(c)/ll(4) 117
13(3) ll(6) 56, 62 to 67
14 12/12(1)(2)(3) 109
15 13/13(1)(2) 113
16(1) 14(1)/14 opening part 114,115
16(2) & (4) 14(2) & (4)/14(2)
16(3) 14(3)/14(4) 110
17 15/15 112
18 16/16 82
19(1) & (2) 17/17
19(3) 18 (opening paragraph) / 18
opening Part.
20 18 Rule 1/18 Rule 1
 Sale of Goods Act, 1930 English Sale of Goods Acts, Contract Act, 1872
1893*/1979
21 18 Rule 2/18 Rule 2 80
22 18 Rule 3/18 Rule 3 81
23 18 Rule 5/18 Rule 5 79,83, 84
24 18 Rule 4/18 Rule 4 78, illus. (b)
25 19/19
26 20/20 86
27 21(1)/21(1) 108 Exception 1
28 108 Exception 2
29 23/23 108 Exception 3
30 25/25
31 27/27
32 28/28
33 90
34 92
35 93
36(1) 29(l)/29(l)(2) 94
36(2),(3),(4) & (5) 29(2), (3), (4) & (5) 29(3), (4),
(5)& (6)
37(1)&(2) 30(1) & (2)/30(1) (2) (3)
37(3) 30(3)/3()(4) 119
37(4) 30(4)/3()(5)
38 31/31
39(1) & (2) 32(1)&(2)/32(1)(2) 91
39(3) 32(3)/32(3)
40 33/33
41 34/34
42 35/35
43 36/36
44 37/37(1)(2)
45 38/38
46 39/39 95,99,107
47 41/41 95 to 97
48 42/42 106 illus.
49
1
43/43
50 44/44 99
51 45/45 100
52 46/46 104,105
53(1) 47/47 98,101,102,103
53(2) new
54(1) 48(1)/48(1)
54(2) 48(3)/48(3) 107
54(3) 48(2)/48(2)
 Sale of Goods Act, 1930 English Sale of Goods Acts, Contract Act, 1872
1893*/1979
54(4) 48(4)/48(4)
55 49(1) & (2)/49(l)(2)
56 50(1)/50(1)
57 51(1)/51(1)
58 52/52
59(1) 53(1)/53(1)
59(2) 53(4)/53(4)
60 39,120
61(1) 54/54
61(2)(a) 49(3)/49(3)
61(2)(b)
62 55/55(1)
63 56/59 46 Explanation
64(1) to (5) 58(1) to (4)/57(l) to (6) 122
64(6) 123
64A
65(Repealed)
66(1)(a) to (c)
66(l)(d) 61(3)/62(3)
66(1)(e) 61(2)/62(2)
66(2) 61(1)/62(1)
66(3) 61(4)/62(4)
1 * Note: English Sale of Goods Act, 1893 was repealed by the English Sale of Goods Act of
1979 [Section 63(2)].

The Sale of Goods Act

Act No. III of 1930

[Passed by the Indian Legislature]

(Received the assent of the Governor-General on the 15 March, 1930)

An Act to define and amend the law relating to the sale of goods.

Whereas it is expedient to define and amend the law relating to the sale of goods; it is
hereby enacted as follows:—
The Sale of Goods Act

Chapter I Preliminary

S 1. Short title, extent and commencement.-

(1) This Act may be called the 1[***] Sale of Goods Act, 1930.

2
[(2) It extends to the whole of India 3[except the State of Jammu and Kashmir].]

(3) It shall come into force on the 1 day of July, 1930.

[s 1.1] Sale of Goods Act, 1930.—

The Sale of Goods Act, 1930 codifies in a separate enactment the law relating to the
sale of goods which was contained in sections 76 to 123 of the Indian Contract Act,
1872. Those sections have been repealed by the present Act (vide section 65).

Despite the separate codification of the law relating to the sale of goods, the
unrepealed provisions of the Contract Act, 1872 continue to apply to the contracts
relating to sale of goods (vide section 3). Some of the expressions and words have not
been defined in this Act and it is intended that such expressions and words should be
construed according to the meanings assigned to them in the Contract Act, 1872 (vide
section 2(15)).

[s 1.2] History of the Sale of Goods Act, 1930.—

The existing law relating to the Sale of Goods contained in Chapter VII, of the Indian
Contract Act, 1872 (sections 76 of 123) was found to be inadequate to deal with new
situations arising due to increase in mercantile transactions in the wake of rapid
industrialisation. The Courts had to draw upon analogies from the decisions of English
Courts to meet the new situations. Hence, the legislature intervened by passing the
present Act incorporating therein the various provisions of the English Sale of Goods
Act, 1893.

[s 1.3] Date of commencement.—

The Act applies to all contracts entered into after 1 July 1930.

[s 1.4] Internationality of contracts and conflict of laws.—

In case of disputes among merchants residing in different countries, it becomes

necessary to ascertain the rule by which the validity, obligations and interpretation of
their contracts are to be governed. Sometimes a person contracts in one, is domiciled
in another and is to perform the contract in a third, and the subject matter may be
situated in a fourth: each of the countries may have different and opposing laws
affecting the subject matter. In such circumstances, it becomes necessary to interpret
the rights or remedies or the defences growing out of it.

Firstly, the parties are at liberty to subject the contract of sale to the law of the country
of their choice. The choice may have been expressly stated by the parties or may be
determined by the Courts from the terms of the contract and the other relevant
circumstances surrounding the contract. Of the various circumstances, the two
important presumptions made by Courts are in favour of applying the law of the place
of making the contract (lex loci contractu) and the law of place where the contract is to
be performed (lex loci solutions) or where the parties have inserted an arbitration
clause into their agreement, the proper law of the contract is the law of the stipulated
arbitration to govern their contract.

The transfer of property in goods under sales made in foreign countries is in general
regulated by the law of the place where the goods are situated at the time of the sale;
the disposition is binding everywhere irrespective of the mode of transfer.

Questions about the admissibility of evidence, the enforceability of the contract by

action and other matters of procedure belong in general to the "lex fori" or the law of
the place where the action is brought.

In the absence of evidence to the contrary, the foreign law is presumed to be the same
as the municipal law. If the foreign law is different, and the difference is relied on, the
party relying upon the foreign law must prove it as a matter of fact.

[s 1.5] Contracts for the International Sale of Goods.—

The United Nations Convention on Contracts for the International Sale of Goods (CISG)
adopted on 11 April 1980 adopted a text of law which declares through Article 1 that it
is applicable to contracts of sale of goods between parties whose places of business
are in different States (a) when the States are Contracting States; or (b) when the rules
of private international law lead to the application of the law of a Contracting State. The
provision further declares that the fact that the parties have their places of business in
different States is to be disregarded whenever this fact does not appear either from the
contract or from any dealings between, or from information disclosed by, the parties at
any time before or at the conclusion of the contract. Neither the nationality of the
parties nor the civil or commercial character of the parties or of the contract is to be
taken into consideration in determining the application of this Convention.

This Convention does not apply to sales:

(i) of goods bought for personal, family or household use, unless the seller, at any
time before or at the conclusion of the contract, neither knew nor ought to have
known that the goods were bought for any such use;

(ii) by auction;

(iii) on execution or otherwise by authority of law;

(iv) of stocks, shares, investment securities, negotiable instruments or money;

(v) of ships, vessels, hovercraft or aircraft;

(vi) of electricity.
The explanatory note accompanying the Convention terms sets out the purpose and
relevance:

Purpose.—The purpose of the CISG is to provide a modern, uniform and fair regime for
contracts for the international sale of goods. Thus, the CISG contributes significantly to
introducing certainty in commercial exchanges and decreasing transaction costs.

Why is it relevant?—The contract of sale is the backbone of international trade in all

countries, irrespective of their legal tradition or level of economic development. The
CISG is therefore considered one of the core international trade law conventions whose
universal adoption is desirable.

The CISG is the result of a legislative effort that started at the beginning of the 20th
century. The resulting text provides a careful balance between the interests of the
buyer and of the seller. It has also inspired contract law reform at the national level.

The adoption of the CISG provides modern, uniform legislation for the international sale
of goods that would apply whenever contracts for the sale of goods are concluded
between parties with a place of business in Contracting States. In these cases, the
CISG would apply directly, avoiding recourse to rules of private international law to
determine the law applicable to the contract, adding significantly to the certainty and
predictability of international sales contracts.

Moreover, the CISG may apply to a contract for international sale of goods when the
rules of private international law point at the law of a Contracting State as the
applicable one, or by virtue of the choice of the contractual parties, regardless of
whether their places of business are located in a Contracting State. In this latter case,
the CISG provides a neutral body of rules that can be easily accepted in light of its
transnational nature and of the wide availability of interpretative materials.

Finally, small- and medium-sized enterprises as well as traders located in developing

countries typically have reduced access to legal advice when negotiating a contract.
Thus, they are more vulnerable to problems caused by inadequate treatment in the
contract of issues relating to applicable law. The same enterprises and traders may
also be the weaker contractual parties and could have difficulties in ensuring that the
contractual balance is kept. Those merchants would therefore derive particular benefit
from the default application of the fair and uniform regime of the CISG to contracts
falling under its scope.4

Key provisions.—The CISG governs contracts for the international sales of goods
between private businesses, excluding sales to consumers and sales of services, as
well as sales of certain specified types of goods. It applies to contracts for sale of
goods between parties whose places of business are in different Contracting States, or
when the rules of private international law lead to the application of the law of a
Contracting State. It may also apply by virtue of the parties' choice. Certain matters
relating to the international sales of goods, for instance the validity of the contract and
the effect of the contract on the property in the goods sold, fall outside the
Convention's scope. The second part of the CISG deals with the formation of the
contract, which is concluded by the exchange of offer and acceptance. The third part of
the CISG deals with the obligations of the parties to the contract. Obligations of the
sellers include delivering goods in conformity with the quantity and quality stipulated in
the contract, as well as related documents, and transferring the property in the goods.
Obligations of the buyer include payment of the price and taking delivery of the goods.
In addition, this part provides common rules regarding remedies for breach of the
contract. The aggrieved party may require performance, claim damages or avoid the
contract in case of fundamental breach. Additional rules regulate passing of risk,
anticipatory breach of contract, damages, and exemption from performance of the
contract. Finally, while the CISG allows for freedom of form of the contract, States may
lodge a declaration requiring the written form.5

Relation to private international law and existing domestic law.—The CISG applies only to
international transactions and avoids the recourse to rules of private international law
for those contracts falling under its scope of application. International contracts falling
outside the scope of application of the CISG, as well as contracts subject to a valid
choice of other law, would not be affected by the CISG. Purely domestic sale contracts
are not affected by the CISG and remain regulated by domestic law.6

The CLOUT (Case Law on UNCITRAL Texts) system contains numerous cases relating
to the application of the CISG. A Digest of those cases is also available.7

[s 1.6] Internet sales platforms.—

There is seldom direct sale of fast moving consumer goods (FMCG) or consumer
packaged goods (CPG). Examples include non-durable goods such as packaged foods,
beverages, toiletries, over the counter drugs and other consumables. There is a large
online market and the consumers are internet users. Fast-moving consumer
electronics are typically low-priced generic items or can easily be substituted.
Examples of consumer articles include: mobile phones, MP3 players, game players,
earphones, headphones, OTG cables, digital cameras, apparels, cosmetics, shoes and
millions of articles of daily consumption including fruits and vegetables. The FMCG
majors market their products through internet portals, like Amazon, Flipkart, Jabong,
Myntra, etc. Apart from the warranties of wholesomeness and marketability of goods
free of defects which the packaging of the products themselves may contain, the
online stores entice consumers by offering credit, instant delivery and refund policy
that assures consumers of return of goods without even assigning reasons. The
provisions of the Sale of Goods Act, 1930, Contract Act, 1872, Consumer Protection
Act, 1986 and several taxing statutes will govern the rights of parties. The interplay of
these enactments will secure to the contracting parties complex relationships for rights
and liabilities. This book predominantly digests case law from the Sale of Goods Act,
1930 and to a lesser extent incidence of tax under the Central and State sales tax
regimes brought through decisions of the Supreme Court and the High Courts. There
may be a sprinkling of consideration of provisions of other enactments mentioned
above.

1 The word "Indian" omitted by Act No. 33 of 1963, section 2 (w.e.f. 22-9-1963).
2 Subs. by the A.O. 1950, for sub-section (2).
3 Subs. by Act 3 of 1951, section 3 and Sch., for "except Part B States" (w.e.f. 1-4-1951).
4 Purpose, Relevance and Overview of the Convention available at
http://www.uncitral.org/uncitral /en/uncitral_texts /sale_goods/1980CISG.html (last accessed
in November 2018)
5 Complete text of the convention as available at http://www.uncitral.org/pdf
english/texts/sales/cisg/ V1056997-CISG-e-book.pdf (last accessed in November 2018).
6 Status of Countries which have ratified the convention along with status of domestic
legislations as available at
http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html; (last
accessed in November 2018) Scholarly articles: Shishir Dholakia, "Ratifying the CISG- India's
Options": Article analysing the advantages and disadvantages of CISG in the Indian context: as
available at http://www.cisg.law.pace.edu/cisg/biblio/dholakia.html (last accessed in November
2018); Christopher Shaeffer, The Failure of the United Nations Convention on Contracts for the
International Sale of Goods and a Proposal for a New Uniform Global Code in International sales
law, as available at http://www.cisg.law.pace.edu/cisg/biblio/sheaffer.html (last accessed in
November 2018); Franco Ferrari, What Sources of Law for Contracts for the International Sale of
Goods? Why One has to Look Beyond the CISG, as available at
http://www.transnational.deusto.esp/ip2009old/academic/FERRARI,%20F.%20Sources.pdf (last
accessed in November 2018).
7 A complete database related to the legislative history, case laws and other scholarly material
is available at the Pace Law School website at http://www.cisg.law.pace.edu/ (last accessed in
November 2018).
The Sale of Goods Act

Chapter I Preliminary

[s 2] Definitions –

In this Act, unless there is anything repugnant in the subject or context,—

(1) "buyer" means a person who buys or agrees to buy goods;

(2) "delivery" means voluntary transfer of possession from one person to another;

(3) goods are said to be in a "deliverable state" when they are in such state that the
buyer would under the contract be bound to take delivery of them;

(4) "document of title to goods" includes a bill of lading, dock-warrant, warehouse

keeper's certificate, wharfingers' certificate, railway receipt, 8[multimodal
transport document,] warrant or order for the delivery of goods and any other
document used in the ordinary course of business as proof of the possession or
control of goods, or authorising or purporting to authorise, either by
endorsement or by delivery, the possessor of the document to transfer or
receive goods thereby represented;

(5) "fault" means wrongful act or default;

(6) "future goods" means goods to be manufactured or produced or acquired by the

seller after the making of the contract of sale;

(7) "goods" means every kind of movable property other than actionable claims and
money; and includes stock and shares, growing crops, grass, and things
attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale;

(8) a person is said to be "insolvent" who has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due,
whether he has committed an act of insolvency or not;

(9) "mercantile agent" means a mercantile agent having in the customary course of
business as such agent authority either to sell goods, or to consign goods for
the purposes of sale, or to buy goods, or to raise money on the security of
goods;

(10) "price" means the money consideration for a sale of goods;

(11) "property" means the general property in goods, and not merely a special
property;

(12) "quality of goods" includes their state or condition;

 (13) "seller" means a person who sells or agrees to sell goods;

(14) "specific goods" means goods identified and agreed upon at the time a
contract of sale is made; and

(15) expressions used but not defined in this Act and defined in the Indian Contract
Act, 1872 (9 of 1872), have the meanings assigned to them in that Act.

[s 2.1] Interpretations of definitions.—

The words in the principal part of this section "unless there is anything repugnant in the
subject or context" clearly imply that the definitions are general and may be interpreted
having regard to their context and subject in which such words may have been used.

The use of the word "includes" in the definitions indicate that the definition is not
exhaustive. Where in an interpretation clause it is stated that a certain term "includes"
so and so, the meaning is that the term retains its ordinary meaning and the clause
enlarges the meaning of the term.9

The words which are not defined in this Act but are defined in the Contract Act, 1872,
have to be construed according to the meanings assigned to them in the Contract Act,
1872. The Sale of Goods Act, 1930 is largely based on the English Sale of Goods Act,
1893 and so the English authorities on the interpretation of the different sections,
although not technically binding in India, would have great persuasive value.10

[s 2.2] Interpretation of a contract.—

The true nature of a transaction evidenced by a written agreement has to be

ascertained from its covenants and not merely from what the parties choose to call it.
The Supreme Court has stated that for considering whether a particular transaction is a
sale or not the Court has to consider whether as a result of the transaction the title to
the property in the goods passed to another in return for price. It is the substance of
the transaction evidenced by the agreement which must be looked at.11 The substance
of the matter must be ascertained by a consideration of the rights and liabilities of the
parties to be derived from a consideration of the whole of the agreement.12

Once the parties have reduced the terms of the contract into writing, no evidence can
be allowed to be led with regard to the negotiations which preceded the contract or
those subsequent thereto. The court has to look to the contract and construe it.

[s 2.3] Clause (1): Buyer.—

The definition of buyer in clause (1) of section 2 includes both a person who buys the
goods as well as a person who merely agrees to buy the goods. Similarly, the definition
of a contract of sale in section 4 includes both a sale and an agreement to sell.
However, where an agreement (generally of a hire purchase agreement) merely gives a
person an option to buy the goods without imposing upon him any legal liability to buy
the goods, such a person is not a buyer.12 A person having agreed to buy goods means
a person who has bound himself by the agreement to buy the goods. But if a person
has option to buy (or to return) the goods, until he exercises an option to purchase, he
has neither bought nor agreed to buy the goods.12

[s 2.4] Clause (2): Delivery.—

This definition involves the transaction of a transfer of possession but this transfer
should be voluntary. The word "voluntary" is significant; it is intended to show that the
transfer of possession should not be under fraud, duress or coercion or criminal
offence. The transfer of possession must be as a result of volition. The law presumes
in favour of honest dealing.13 A possession obtained by a thief or a robber is not
voluntary; the word "possession" is intended either to enable the buyer to exercise his
right of ownership or to enable the carrier to carry the goods and deliver them to the
person entitled thereto. As a general rule delivery of goods may be made by doing
anything which has the effect of putting the goods in the possession of the buyer or of
any person authorised to hold them on his behalf. Delivery may be actual or
constructive. It is actual when the goods themselves are delivered to the buyer or the
key of a warehouse containing the goods is handed over to him. Delivery is
constructive when it is effected without any change in the custody or actual
possession of the thing as in the case of delivery by attornment (acknowledgment) or
symbolic delivery. Delivery by attornment may take place in three cases14:—

(i) seller may be in possession of the goods, but after the sale he may attorn
(acknowledge) to the buyer, and continue to hold the goods as his (buyer's)
bailee,

(ii) the goods may be in the possession of the buyer before sale, but after sale he
may hold them in his own account,

(iii) the goods may be in the possession of a third person, eg, warehouseman as
bailee for the seller, and after sale such third person attorns to the buyer, i.e., the
third person agrees to hold the goods as bailee for the buyer.

Another method of constructive delivery of goods is by symbolic delivery, i.e, delivery of

goods in course of transit may be made by handing over documents of title to goods,
like bill of lading15 or railway receipt or delivery orders.

In constructive delivery of goods there is a change in the character of the possession

of the goods previously held though there is no change in the actual physical custody
of the goods.

The rules relating to delivery of goods are contained in sections 33 to 39 of the Sale of
Goods Act, 1930.

[s 2.5] Clause (3): Deliverable state.—

See sections 20, 21, 22, 23 and 36(5) of the Sale of Goods Act, 1930.

[s 2.6] Clause (4): Documents of title.—

There were different expressions used in the Contract Act, 1872 to convey the same
idea.16 The present Sale of Goods Act, 1930 uses a uniform expression throughout,
namely, "document of title to goods." It is to be observed from the use of the word
includes that the definition of "documents of title to goods" is inclusive and not
exhaustive.17 Besides the documents mentioned in this sub-clause, any other
document can fall under this sub-clause provided (a) it represents the goods, and (b) in
the ordinary course of business (i) it serves as a proof of possession or control of
goods, or (ii) it entitles the possessor of such document to transfer or receive the
goods represented thereby. This gives effect to the ruling of the Privy Council in
Ramdas v Amarchand.18 What was held in that case was that possession of goods
covered by a railway receipt may be transferred by endorsement of the receipt. The last
endorsee is entitled to the delivery of the goods.19 An unendorsed railway receipt does
not entitle a mere holder thereof to receive the goods and hence, it will not be his
document of title to the goods. If a consignee endorses a railway receipt to another
person, the inference is that he appoints that other person as his agent to take delivery
of the goods from the railway.20

A document of title to goods may refer to even unascertained goods.21 In that case
delivery order was given by defendant (seller) to F (buyer's agent) for 2640 bags of
mowra seed which formed part of a consignment of 6400 bags. F gave defendant
cheque and he endorsed delivery order to the plaintiffs who took it in good faith and for
value. As F's cheque was dishonoured, defendant refused to give delivery of seeds to
plaintiffs. It was held that delivery order was a document of title to goods which had
been transferred by F to plaintiffs who took it in good faith and for value and so
defendant's right of lien as unpaid vendor was lost. Further, the delivery order was valid
notwithstanding that it related to goods which were not specific.

A "bill of lading" is a receipt for goods shipped on board a ship, signed by the person
who contracts to carry them, or his agent, and incorporates the terms on which the
goods were delivered to and received by the ship.22

Sometimes as a matter of convenience, shipowners may issue to shippers receipts in

triplicate, for the goods delivered at the warehouse for shipment. Such receipts may be
accepted by shippers in place of bill of lading and forwarded to consignee and these
receipts are accepted by shipowner's agent at port of delivery as entitling the
consignee to delivery. But these receipts are no evidence of shipment and so they are
not bill of lading.

A bill of lading is regarded as a symbol of the goods which it represents. Possession of

the bill of lading is regarded as constructive possession of the goods. Transfer of the
bill of lading transfers constructive possession of the goods to which it refers23
without any need for an attornment by a person in actual possession of the goods. The
common law drew a distinction between bill of lading and other documents of title. The
lawful transfer of the bill of lading operated as a delivery of the goods themselves,
because, while the goods were at sea, they could not be otherwise dealt with.24 But the
transfer of a delivery order or dock warrant operated only as a token of authority to take
possession and not as a transfer of possession. A bill of lading in law and in fact
represents the goods. It is a key which in the hands of a rightful owner is intended to
unlock the door of the warehouse in which the goods may be.25

Secondly, a bill of lading is a negotiable instrument in a limited sense. A bill of lading,

like a cheque, is transferable by endorsement and delivery or if it is endorsed in blank,
by delivery. But unlike negotiable instrument, a transferee of a bill of lading only
acquires such interests as the transferor had in the goods and the transferee cannot
take the goods free from defects which the transferor of bill of lading may be having
with respect of goods.26
If a bill of lading is stolen from a shipper or transferred without his authority, a
subsequent bona fide transferee for value cannot make title under it, as against the
shipper of the goods. The bill of lading only represents the goods: and in this instance
the transfer of the symbol does not operate more than a transfer of what is
represented.26 Mate's receipt is a document entitling the person named therein to
receive the bill of lading; it does not represent the goods and so it is not a document of
title of goods. It is simply a document which acknowledges the receipt of the goods
signed by the mate of vessel where the goods are put on board. Hence, its transfer
does not pass property in the goods nor is its possession equivalent to possession of
the goods.27 The Supreme Court treated in one case a mate's receipt on par with a
delivery order.28 It is submitted that this ruling is contrary to the aforesaid Privy
Council's decision. A delivery order is a document of title and the transferee of it
acquires a title to goods to which it relates. The delivery order passes from hand to
hand by endorsement.29

[s 2.7] Clause (7): Goods.—

"Goods" means every kind of movable property other than actionable claims and
money. "Movable property" is defined in the General Clauses Act, 1897, section 3(34) as
property of every description except immovable property. Lottery tickets are movable
property and so "goods" under the Sale of Goods Act, 1930.30

Shares as goods.—The definition of "goods" in the Sale of Goods Act, 1930 specifically
includes stocks and shares. A share represents a bundle of rights which includes, inter
alia, the rights (i) to elect directors; (ii) to vote on resolutions at meetings of the
company; (iii) to enjoy the profits of the company, if and when dividend is declared and
distributed; and (iv) to share in the surplus, if any, on liquidation.31 It is not, however, the
same thing as saying that the shareholder becomes at once on the acquisition of share
entitled to the property in the company. The true position of a shareholder is that on
buying shares an investor becomes entitled to participate in the profits of the company
in which he holds the shares if and when the company declares, subject to the Articles
of Association, that the profits or any portion thereof should be distributed by way of
dividends among the shareholders. He has undoubtedly a further right to participate in
"the assets of the company which would be left over after winding up".32

Exim scrips.—Export-import licences have their own intrinsic value and could be freely
bought and sold at their market value. There is also a ready market for the sale and
purchase of replenishment licences. When they are transferred or assigned by the
holder/owner to a third person for consideration, they would attract sales tax. However,
the position would be different when replenishment licences or Exim scrips are
returned to the grantor or the sovereign authority for cancellation or extinction. In this
process, as and when the goods are presented, the replenishment licence or Exim scrip
is cancelled and ceases to be a marketable instrument. It becomes a scrap of paper
without any innate market value. Where, therefore, the State Bank of India was merely
acting as per the directions of RBI, as its agent and as a participant in the process of
cancellation, to ensure that the replenishment licences or Exim scrips were no longer
transferred, the intent and purpose was not to purchase goods in the form of
replenishment licences or Exim scrips, but to nullify them. Saying that the object was to
mop up and remove the replenishment licences or Exim scrips from the market, the
Supreme Court said that in the particular context there was no sale.33

Electricity.—Gas and electricity are not goods.34 In Associated Power Co Ltd v Ram
Taran Roy, the Calcutta High Court has held that "electricity" is "goods".35
Things attached to movable property.—The words "growing crops, grass and things
attached to or forming part of land which are agreed to be severed before sale" are
intended to show that the things attached to immovable property would be movable
property where they are agreed to be severed from the land or immovable property
before sale. Thus, "standing timber" on land agreed to be severed from the land before
the sale was held to fall under this definition.36

Interest of Partners.—Similarly interest of the partners in the partnership assets

consisting of immovable property has been held to be movable property.37

Specific, unascertained and future goods.—Goods may be specific, as where there is a

contract for the sale of a specified ring or a watch or a horse. Or they may be
unascertained as where there is a contract for the sale of 50 cwts. of sugar out of 1000
cwts. lying in the seller's warehouse. The goods exist in bulk, but they are not
ascertained until 50 cwts. are set aside and appropriated to the contract. Goods again
may be future goods, as where they do not exist at the time of the contract, but are to
be manufactured or produced or acquired by the seller after the making of the contract
of sale.

Actionable claim.—Actionable claim is defined in section 3 of the Transfer of Property

Act, 1882. The expression used in the English Law is "chose in action" or "thing in
action". "Thing in action" is where a person has not the enjoyment of the thing, but
merely a right to recover it by a suit or action. Money due from a party is a thing in
action or an actionable claim. It is, therefore, not "goods" which could be delivered by
one person to another and hence an actionable claim has been excepted from the
definition.

"Money" means current money. Current money is not "goods". "Current money" means a
legal tender. In case of an exchange of one form of legal tender for another it is not
possible to say that one is the price of the other and hence current money is excluded
from the definition of "goods". Further, the word "price" has been defined as the
consideration in money. Hence, money has been deliberately excluded from the
definition. However, old and rare coins38 which have ceased to be current money or
legal tender may become "goods" and be the subject matter of sale. The mode of
transfer of an actionable claim and the rights of the transferee of such a claim are dealt
with in section 130 et seq. of the Transfer of Properly Act, 1882.

Miscellaneous.—Where a building contractor supplies goods in execution of the

construction of a building, it is not a sale of goods.39 A complex contract involving a
right to cut and take forest produce or tendu leaves to make bricks on the soil, to prune
and burn tendu trees and a right to build and occupy land for business has been held to
be not a contract for sale of goods simpliciter. These rights were spread over many
years and were not so simple as buying leaves in a shop.40

Sugarcane supplied to sugar factory are "goods" within the meaning of section 2(7) of
the Sale of Goods Act, 1930.41

[s 2.8] What are not "goods".—

The case papers entrusted to lawyers by clients are not goods.

It is not possible to extrapolate the word "goods" mentioned under section 171 of the
Indian Contract Act, 1872 in the context of bailment to have any relevance for
understanding this definition. Consequently, files containing copies of records
entrusted to a lawyer cannot come within this definition.42 "Goods" to fall within the
purview of section 171 of the Contract Act, 1872 should have marketability and the
person to whom they are bailed should be in a position to dispose of them in
consideration of money. In other words the goods referred to in section 171 of the
Contract Act, 1872 are saleable goods. There is no scope for converting the case files
into money, nor can they be sold to any third party.

Lottery tickets.—By a lottery ticket, the purchaser would have a claim to a conditional
interest in the prize money which is not in the purchaser's possession. The right would
fall squarely within the definition of an actionable claim and would, therefore, be
excluded from the definition of "goods" under the Sale of Goods Act, 1930 and the
sales tax statutes. To the extent that the sale of a lottery ticket involved a transfer of
the right to claim a prize depending on chance, it was an assignment of an actionable
claim.43

[s 2.9] Clause (8): Insolvent.—

It is not necessary to constitute a person an "insolvent" within the meaning of the Sale
of Goods Act, 1930 that he should have committed an act of insolvency. Under the
Presidency-Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920, a
person cannot be adjudicated and insolvent unless he has committed an act of
insolvency. A list of the acts of insolvency is given in section 9 of the Presidency-Towns
Insolvency Act, 1909 and in section 6 of the Provincial Insolvency Act, 1920. Under the
Sale of Goods Act, 1930 a person is said to be insolvent if he has ceased to pay his
debts in the ordinary course of business or cannot pay them as they become due,
whether he has committed an act of insolvency or not.

[s 2.10] Clause (9): Mercantile agent.—

This definition is taken from the English Factors Act, 1889, section 1(1). The word "his"
which occurs in that section before the word "business" seems to have been omitted by
a printer's mistake in this clause of the Sale of Goods Act, 1930. See note to section 27
below, "Mercantile agent." The words "in the customary course of business as such
agent" are very material; if a person is not carrying on business as such agent, he
would not fall under this definition, thus a caretaker, a warehouseman, a carrier or a
servant and a friend would be excluded.44

[s 2.11] Clause (10): Price.—

The two essential elements of a contract of sale are (1) goods and (2) price. Price is
the money consideration for the sale. A resale of goods is also a sale of goods and the
money consideration for such resale is the price payable in respect of such resale.
When a person purchases goods he may sell them. Such second sale is generally
referred to as a resale. The money consideration for such second sale would be the
price of goods resold.45

In Coffee Board v Commr of Comm Taxes, Karnataka,46 though under the Coffee Act,
1942 a grower of coffee must sell coffee to the Board at a price fixed by the Coffee Act,
1942, the payment of the said price to grower was a sale price under section 4(1) of the
Sale of Goods Act, 1930. A compulsory delivery of coffee by its grower to the Coffee
Board was a sale transaction under the Sale of Goods Act, 1930.
According to the Supreme Court, even in such compulsory delivery of coffee all the four
essential elements of sale were present, viz.: (1) competency of the parties, (2) mutual
assent, (3) passing of property in the goods supplied to the buyer, and (4) payment or
promise of payment of price.

Price of work done cannot be made applicable to professions where professionals

merely provided services for fee.47

[s 2.12] Clause (11): Property.—

Property in the Sale of Goods Act, 1930 means the general property in goods and not
special property. If A who owns goods pledges them for raising money to B, A has the
general property in the goods, while B (pledgee, person with whom goods are pledged)
has a special property or interest in them, e.g., pledgee has a right to retain the pledged
goods until he is paid by A (pledgor) the entire amount of his loan with interest.

Property means ownership. When it is said in the Sale of Goods Act, 1930 that the
property in the goods is in a certain person it means that person is the owner of the
goods. When it is said that the property in the goods has passed from the seller to the
buyer, it means that the goods have ceased to be the property of the seller and have
become the property of the buyer. The general rule is that, unless otherwise agreed, the
goods remain at the seller's risk until the property therein is transferred to the buyer.
When the property therein is transferred to the buyer, the goods are at the buyer's risk
whether delivery of the goods has been made to the buyer or not. In sale the general
property in the goods passes to the buyer. As to the passing of property, see sections
18–24 and as to the passing of risk, see section 26.

[s 2.13] Clause (14): Specific goods.—

The expression "specific" goods is used in contradistinction to generic or

unascertained goods. If the goods are identified at the time of sale, they are specific
goods; if the goods are not identified at the time of the sale, they are unascertained
goods. A sale of a motorcycle in a person's possession is a sale of a specific goods. A
sale of a motorcycle from a showroom containing different models of motorcycles is a
contract for sale of unascertained goods. Similarly, in a transaction where the buyer
expected timber of particular girth of two feet to be supplied, a mere contract to supply
timber cut from the trees would only mean that the goods are still in an unascertained
state. In such a situation, where there was no contract to sell the entire timber from the
forest belonging to a jagirdar, the sale does not fructify.48 There can be no oral contract
with reference to unascertained goods because it is not possible to effect delivery of
such goods.49 It is the appropriation of goods in a deliverable state that renders the
contract complete. 50 The goods must be actually identified: it is not sufficient that they
are capable of identification.51 Where the contract is in respect of existing stock of bidi
leaves in the godowns of the seller at a particular place and the price is fixed at a lump
sum for the amount of the stock, the sale is of specific goods although the buyer may
not have seen the goods.52 In Lalchand v Baijnath, the Calcutta High Court said that
specific goods is not identical with ascertained goods. It does not mean goods
examined by the buyer.53 The distinction between specific and unascertained goods is
important as will be seen from the notes under section 18 and subsequent sections.
"Ascertained goods" is not defined and it is helpful to think in terms of "un-ascertained
goods": If I have 20 chairs of the same kind and 1 offer to sell 10 particular chairs, the
goods are unascertained till 10 particular chairs be appropriated towards the contract.
On appropriation the goods become ascertained. If the identity of contract goods is not
established by appropriating them towards the contract, the contract remains in
respect of unascertained goods.54 A sale of existing stock of particular goods (e.g.,
tobacco) in the specified godowns in which kept is clearly specified and identified as a
plot of land is specified by describing its boundaries.55

8 Ins. by Act 28 of 1993, section 3 and Sch, Pt. III (w.e.f. 16-10-1992).
9 Official Assignee of Bombay v Firm of Chandulal Chimanlal, 76 IC 657 : AIR 1924 Sind 89 .
10 Consolidated Coffee Ltd v Coffee Board, Bangalore, AIR 1980 SC 1468 : (1980) 3 SCC 358 .
11 Khedut Sahakari Ginning & Pressing Society v State of Gujarat, AIR 1972 SC 1786 : (1922) 1
SCR 714 .
12 Helby v Matthews, 1895 AC 471 .
13 Madholal v Official Assignee (Bombay), (1950) AEC 21 : 1949 FCR 441.
14 See Chalmers' Sale of Goods Act, 17th Edn, p 277.
15 JV Gokal & Co Ltd v Asst Collector of Sales Tax, AIR 1960 SC 595 : (1960) 2 SCR 852 .
16 Ramdas v Amarchand, (1916) 40 Bom 630, documents of title and instruments of title.
17 Official Assignee of Bombay v Firm of Chandulal, (1926) 76 IC 657 : AIR 1924 Sind 89 .
18 Ramdas v Amarchand, (1916) 43 IA 164 : 40 Bom 630.
19 Mulji Deoji v UOI, AIR 1957 Ngp 31 .
20 Sheo Prasad v Dominion of India, AIR 1954 All 747 : 1954 AWR (NULL) 24232.
21 Ant Jurgens v Louis Dreyfus & Co, (1914) 3 KB 40 , cf. Anglo India Jute Mills v Omademull,
(1911) 38 Cal 127 : 10 IC 859.
22 Nissim Isaac Bekhor v Haji Sultanali Shastary & Co, (1916) 40 Bom 11, 18.
23 Ramdas v Amarchand, (1916) 40 Bom 637 : AIR 1916 PC 7 : (1916) ILR 40 Bom 630.
24 Sanders v Maclean, (I883) 11 QBD 327, 341; Biddell Brothers v E Clemens Horst Co, (1911) 1
KB at 956.
25 18 Bowen LJ Sanders v Maclean, (I883) 11 QBD 327, p 341.
26 Gurney v Behrend, (1854) 3 E&B 622 : 188 ER 1275.
27 Nippon Yusen Kaisha v Ramjibhan, 65 IA 263 : 40 Bom LR 799 : (1938) A PC 152.
28 Duni Chand Rataria v Bhuwalka Bros Ltd, AIR 1955 SC 182 : (1955) 1 SCR 1071 .
29 Anglo Indian Jute Mills Co v Omademull, (1911) ILR 33 Cal 127 : 10 IC 859.
30 H Anraj v Govt of TN, AIR 1986 SC 63 , 71 : (1986) 1 SCC 414 .
31 Hindustan Lever Employees' Union v Hindustan Lever Ltd, AIR 1995 SC 470 : (1995) Supp. 1
SCC 499.
32 Bacha F Guzdar v CIT, AIR 1955 SC 74 : (1955) 25 Com Case 1 (SC) ; See also section 82 of
the Companies Act, 1956.
33 CTO v SBI, 2016) 10 SCC 595 : 2017 (1) SCJ 211 : 2016 (10) Scale 551 .
34 Rash Behari Shaw v Emperor, (1936) 41 Cal WN 225 : (1936) AC 753.
35 Associated Power Co Ltd v Ram Taran Roy, AIR 1970 Cal 75 : 73 Cal WN 701.
36 State of Maharashtra v Champalal Kishanlal Mohta, AIR 1971 SC 908 : (1970) 1 SCC 611 .
37 Addanki Narayanappa v Bhaskara Krishnappa, AIR 1966 SC 1300 : (1966) 3 SCR 400 .
38 Re Mathur Lalbhai, (1901) 25 Bom 702.
39 State of Madras v Gannon Dunkerley & Co (Madras) Ltd, AIR 1958 SC 560 : (1959) SCR 379 .
40 Mahadeo v State of Bombay, AIR 1959 SC 735 : (1959) Supp. 2 SCR 339 : (1959) SCJ 1021 .
41 UP Co-op Cane Unions Federations v West UP Sugar Mills Assn, AIR 2004 SC 3697 : (2004) 5
SCC 430 .
42 RD Saxena v Balram Prasad Sharma, AIR 2000 SC 3049 : (2000) 7 SCC 264 .
43 Sunrise Associates v Govt of NCT, AIR 2006 SC 1908 : (2006) 5 SCC 603 ; UOI v Martin Lottery
Agencies Ltd, (2009) 12 SCC 209 : (2009) 8 SCR 946 : JT (2009) 11 SC 151 : (2009) 4 Scale 34 ;
State of Kerala v Mini Shamsudin, (2009) 3 SCC 466 : [2009] 1 SCR 723 : JT (2009) 14 SC 369 :
(2009) 3 Scale 143 : (2009) 3 UJ 1296 (SC).
44 Lowther v Harris, (1927) 1 KB 393 ; Budberg v Jerwood & Ward, (1934) 51 TLR 99 .
45 Gopalkrishna Pillai v Mani, AIR 1984 SC 216 : (1984) 2 SCC 83 .
46 Coffee Board v Commr of Commercial Taxes, Karnataka, AIR 1988 SC 1487 : (1988) 3 SCC
263 . See Vishnu Agencies Pvt Ltd v Commercial Tax Officer, AIR 1978 SC 449 : (1978) 1 SCC 520
.
47 Dharmarth Trust J and K, Jammu v Dinesh Chander Nanda, (2010) 10 SCC 331 : [2010] 10
SCR 1101 ,.
48 Ram Narain Mahto v State of MP, (1970) 1 SCC 25 : (1970) 2 SCR 445 : 1970 Mh LJ 770 (SC).
49 20th Century Finance Corp v State of Maharashtra, AIR 2000 SC 2436 : (2000) 6 SCC 12 .
50 Juggilal Kamlapat v Pratampal Rameshwar, AIR 1978 SC 389 : (1978) 1 SCC 69 .
51 Kursell v Timber Operators & Contractors Ltd, (1927) 1 KB 298 , 314.
52 Harnarain Ramchandra Jaiswal v Firm, Radhakisan Narayandas, AIR 1949 Ngp 178 : [1948]
ILR Nag 543.
53 Lalchand v Baijnath, AIR 1937 Cal 140 .
54 Harnarain Ramchandra Jaiswal v Firm, Radhakisan Narayandas, AIR 1949 Ngp 178 : [1948]
ILR Nag 543.
55 Harnarain Ramchandra Jaiswal v Firm, Radhakisan Narayandas, AIR 1949 Ngp 178 , 179 :
[1948] ILR Nag 543.
The Sale of Goods Act

Chapter I Preliminary

S. 3. Application of provisions of Act 9 of 1872.-

The unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are
inconsistent with the express provisions of this Act, shall continue to apply to contracts
for the sale of goods.

[s 3.1] Application of provisions of Contract Act, 1872.—

Though the law relating to the sale of goods is enacted in a separate Act, the
unrepealed provisions of the Contract Act, 1872 are to continue to apply to contracts
for the sale of goods. The rules of law laid down in the Contract Act, 1872 relating to
capacity of a party to enter into contract, disability of persons incompetent to contract,
unlawful consideration or object of a contract, void contracts, damages, fraud,
misrepresentation, etc., will be applicable to a contract of sale as well.
The Sale of Goods Act

Chapter II Formation of the Contract

Contract of Sale

S. 4. Sale and agreement to sell.-

(1) A contract of sale of goods is a contract whereby the seller transfers or agrees
to transfer the property in goods to the buyer for a price. There may be a
contract of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.

(3) 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.

(4) An agreement to sell becomes a sale when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be transferred.

[s 4.1] Examples.—

This section may be explained by the following illustrations:

(1) A agrees to buy B a haystack on B's land with liberty to go to B's land to take it away.
This is a sale.1

(2) A agrees to buy from B a quantity of nitrate of soda to arrive ex a certain ship. This
is an agreement for sale subject to the two conditions of the ship arriving and that too
with the specified cargo.2

(3) A agrees to buy from B 20 tons of oil from B's cisterns. B held the cisterns for A's
accommodation charging rent per ton per week. B had several cisterns at several
places. This is an agreement to sell until the oil is separated.3

[s 4.2] English law.—

This section corresponds to section 2 of the English Sale of Goods Act, 1979. Section 3
of the said Act deals with capacity to buy and sell but the Indian counterpart does not
contain such a specific provision but states in general terms through section 3 that the
unrepealed provisions of the Indian Contract Act, 1872 save so far as they are
inconsistent with the express provisions of the Indian Act shall continue to apply to
contracts for the sale of goods.
[s 4.3] Sub-section (1): Contract of Sale.—

The term "contract of sale" is a generic term. It includes an agreement to sell as well as
a sale, formerly, known as a "bargain and sale."

The essence of sale is the transfer of the general property in the goods from the seller
to the buyer for a price. When under a contract of sale the property in the goods is
transferred from the seller to the buyer, so that the seller ceases to be the owner of the
goods and the buyer becomes the owner, the contract of sale 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. An agreement to sell becomes a sale when the time elapses or the conditions
are fulfilled. Addressing the issue of whether a particular contract in which the terms
provided that resin sold will remain at purchasers risk from the date of acceptance its
bid and the seller will not be responsible for any loss and damage which may occur
from any cause whatsoever, the property was held to have vested in purchaser as a
result of subject contract and consequently the contractual terms were treated as
conveyance for the purpose of stamp duty.4

A sale is sometimes described as an executed contract of sale. An agreement to sell is

sometimes described as executory contract of sale.

The words "transfer the property" indicate that there should be two persons i.e. seller
and purchaser. A man cannot buy his own goods. Moreover, if merely title to the goods
passes but not as a result of any contract between the parties, express or implied, there
is no sale.5

There is no sale of goods when meals are served either to the casual visitors in a
restaurant located in a hotel or to the residents of the hotels in which lodging and
meals are provided.6 The court emphasized that the supply of meals was essentially in
the nature of service provided to them and could not be identified as sale transaction.

Similarly a person, who does not own the goods either fully or partially, cannot transfer
the property, fully or partially, as the case may be.

The words "for a price" are intended to refer to a consideration in money or legal tender.
The said words are intended to exclude barters. Exchange of one form of legal lender
for another is not a sale as it is not possible to say that one is the price of the other.

[s 4.4] Seller.—

"Seller" means a person who sells or agrees to sell his goods; see section 2(13). This is
in conformity with the definition of a contract of sale which includes an agreement to
sell as well as a sale.

[s 4.5] Buyer.—
"Buyer" means a person who buys or agrees to buy goods belonging to another. An
option to buy, however, is not the same thing as an agreement to buy. The agreement
comes into existence only when the option is exercised.7

[s 4.6] Property.—

See note below, "Sale and Agreement to sell."

[s 4.7] Sale by part owner to another.—

We have seen above that the seller must own the goods in order to be the seller and
transfer the properly. The second part of the definition permits a person who owns the
goods partially to sell goods and transfer the ownership to that extent.

[s 4.8] Sub-section (2): Absolute and conditional contracts of sale.—

A contract of sale may be absolute or conditional. It is absolute when it is a sale pure

and simple, transferring the property absolutely to the buyer. It is conditional if there are
conditions annexed to the contract by the parties. These conditions may be conditions
precedent or conditions subsequent. Where an agreement to sell is to become a sale on
the fulfilment of a particular condition, the condition is a condition precedent.
Instances of conditions precedent are given in the note under sub-section (3) below.
Where there is an actual sale passing the property to the buyer, but subject to
defeasance on the happening of some specified event, the case is one of a condition
subsequent. Thus on a sale of goods by auction, there is usually a condition that if the
goods are not paid for within a specified time they may be resold. In such a case there
is an actual sale passing the property to the buyer, but if the buyer does not pay, the
sale goes off, and the property in the goods revests in the seller.8 For sale of a car, the
registration of the vehicle in the name of the purchaser is taken as a post sale event
and sale itself will be taken as complete by delivery.9

[s 4.9] Meaning of "sale".—

The word "sale" is a nomen juris. It is the name of a consensual contract.10 It was held
in Agricultural Market Committee v Shalimar Chemical Works Ltd,11

The Indian Sale of Goods Act is based largely upon the English and American Acts.
Under these Acts, namely, the English Sale of Goods Act, the American Uniform Sales
Act and the Indian Sale of Goods Act, the relevant factor for determining where the sale
takes place is the intention of the parties. A contract of sale, like any other contract, is a
consensual act inasmuch as parties are at liberty to settle, amongst themselves, any
terms they may choose.

In Malnad Areca Processing & Mktg Ltd v CCT,12 the Supreme Court pointed out that a
sale and a purchase are two different aspects of the same transaction.

[s 4.10] Sub-section (3): Sale and Agreement to sell.—

As stated above, where the property in the goods is transferred from the seller to the
buyer, the transaction is one of sale. But when the transfer of property is to take place
at a future time or it is to take place subject to some conditions thereafter to be fulfilled,
the transaction is an agreement to sell. The conditions may have to be fulfilled by the
seller or may have to be fulfilled by the buyer. Thus where the goods have to be
weighed or measured by the seller for the purpose of ascertaining the price, the
transaction is an agreement to sell; but it becomes a sale and the property in the goods
passes to the buyer when the goods are weighed or measured and the buyer has notice
thereof (section 22). Similarly, if goods are delivered to the buyer on approval i.e., "on
sale or return." the transaction is an agreement to sell, but it becomes a sale and the
property in the goods passes to the buyer where the buyer signifies his approval or
acceptance to the seller (section 24). These are cases of conditions precedent referred
to in the preceding note. The agreement to sell becomes a sale on the fulfilment of the
conditions. In Sanket Timber Mart v Conservator of Forest (South Chandrapur) Forest
Division,13

Clause No. 11 in the agreement which was the bone of contention between both the parties
contained a recital, "after bid is accepted, timber shall continue to lie in the depot premises
at total risk of auction purchaser and if it is destroyed in fire, flood, theft etc., the
Government will not be responsible for the same". The petitioners contended that this
clause only envisaged the exemption to Government from paying any compensation to
petitioners in case of loss of timber between the date on which the bid is accepted and the
date on which the complete amount/price therefor was paid by the petitioners or till timber
was shifted by them. According to them, this clause would not enable the Government to
claim unpaid price of destroyed/lost goods from the petitioners.

The Court ruled that the terms and conditions clearly showed that unless and until
complete sale price is received by the Government, the auction purchaser was not
authorised to and could not remove the forest produce/timber purchased by him.
Referring to the clause that if the purchaser did not remove the forest produce within
90 days of the date of auction or the date of receipt of communication of acceptance
of his bid after depositing its complete price, the ownership therein would go back to
State Government, the Court reasoned that it showed that the Government retained
control till the complete sale price was received by it and its ownership was again
restored. The intention of parties therefore as apparent from the document was only to
pass property to auction purchaser if he paid complete price thereof. In the particular
facts of the case, it was apparent that balance 3/4th [75%] of the bid amount offered by
the petitioners was not even paid by them till when the case was filed and hence the
sale had not fructified. The Court therefore accepted the contention of the petitioners
that the clause 11 did not authorise State Government to call upon petitioners to pay
unpaid/balance price of 75%. It only prohibited petitioners from seeking any refund of
money paid by them, either in full or in part, in case before removal of timber the same
was destroyed, damaged or lost. It protected the government from any liability in that
contingency.

[s 4.11] Contract of sale and an agreement of sale.—

The essence of sale is the transfer of the property in a thing from one person to
another for a price. As per the Section, the contract of sale includes an agreement to
sell. It is not necessary that contract of sale must be absolute. It may be conditional as
well. The essential feature that distinguishes the contract of sale from an agreement to
sell is that in a contract of sale the property in the goods is transferred from the seller
to the buyer immediately whereas in an agreement to sell property is transferred on a
future date/dates. An agreement to sell becomes a sale on fulfilment of the conditions
or when the time provided in the agreement elapses.14
[s 4.12] Points of distinction between a sale and an agreement to sell.—

A contract of sale is different from an agreement to sell and unlike other contracts,
operates by itself and without delivery to transfer the property in the goods sold. The
word "sale" connotes both a contract and a conveyance or transfer of property. Thus,
the essential ingredients of the "sale" are agreement to sell movables for a price and
property passing therein pursuant to an agreement. The following are some of the
important points of distinction between a sale and an agreement to sell:

(1) A sale effects a transfer of the general property in the goods to the buyer, in
other words, it creates a jus in rem.15 An agreement to sell there is no transfer of
property13 but it gives to either party a remedy against the person and general
estate of the other for any default in fulfilling his part of the agreement, in other
words, it creates a jus in personam.

(2) If there has been a sale, and the buyer fails to pay for the goods, the seller may
sue for the price: see section 55 (suit for price). Where there is merely an
agreement to sell, and the buyer fails to accept and pay for the goods, the seller
can only sue for damages; see section 56 (damages for non-acceptance).

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

(4) If there is an agreement to sell, and the goods are destroyed, the loss (unless
otherwise agreed) falls on the seller, while, if there has been a sale, the loss
(unless otherwise agreed) falls upon the buyer, though the goods may never
have come into his possession.16 See section 26 below.

[s 4.13] Contract of sale and contract of work.—

If a contract involves the sale of movable property as movable property, it would

constitute a contract for sale. On the other hand, if the contract primarily involves
carrying on of work involving labour and service and the use of materials is incidental
to the execution of the work, the contract would constitute a contract of work and
labour. One of the circumstances which is of relevance is whether the article which has
to be delivered has an identifiable existence prior to its delivery to the purchaser upon
the payment of a price. If the article has an identifiable existence prior to its delivery to
the purchaser, and when the title to the property vests with the purchaser only upon
delivery, that is an important indicator to suggest that the contract is a contract for sale
and not a contract for work. In India, the distinction between the two categories is
elucidated by the Sale of Goods Act, 1930. Sub-section (1) of section 4 provides that a
contract of the sale of goods is a contract, whereby a seller transfers or agrees to
transfer the property in goods to the buyer for a price. Where, under a contract of sale,
the property in goods is transferred from the seller to the buyer, the contract is that of
sale, but where transfer of property in the goods is to take place at a future time, or
subject to some condition thereafter to be fulfilled, the contract is not a sale but is an
agreement to sell. A contract of sale is made by an offer to buy or sell goods for a price
and the acceptance of the offer. Under section 5(1) the contract may provide for
immediate delivery of the goods or immediate payment of the price or postponement
of delivery or payment of the price by installments.17 This distinction becomes crucial
in taxing statutes for the incidence and quantum of tax will depend on whether the sale
is of "goods" or "service".

[s 4.14] Sub-section (4): Agreement to sell becoming a sale.—

In relation to sale of a motor vehicle, the provisions of the Motor Vehicles Act, 1988
contain conditions of registration and third party insurance before the vehicle is put to
use in a public place. This sub-section contemplates that an agreement to sell fructifies
and becomes a sale when the conditions are fulfilled subject to which the property of
the goods is to be transferred. The possession can also be handed over only at or near
the office of the registering authority, normally at the time of registration. In case there
is a major accident when the dealer is taking the motor vehicle to the registration office
and the vehicle can no longer be ascertained or declared fit for registration, clearly the
conditions for transfer of property in the goods do not get satisfied or fulfilled.18

See also note above under sub-section (3), and note to section 26, "Analysis of sections
relating to passing of property."

[s 4.15] Mortgage, pledge and hypothecation of goods.—

The provisions of this Act relating to contracts of sale do not apply to any transaction
in the form of a contract of sale which is intended to operate by way of mortgage,
pledge, charge or other security. See section 66(3).

A mortgage of goods is a transfer of the general property in goods from the mortgagor
to the mortgagee to secure a debt.19 A pledge is a bailment of goods by one person to
another to secure payment of a debt.20 A mortgage of goods may be created without
delivery of possession, but a pledge cannot be created without such delivery. A
mortgage passes the general property in the goods, while a pledge passes a special
property only. A hypothecation of goods is an equitable charge on goods, without
possession, but not amounting to a mortgage.

Question whether a particular Contract is one of the Sale of Goods or that of work and
labour depends on the intention of the parties which is to be determined by looking at
the entire terms of the Contract. So, to answer this question it is necessary to find out
the intention of the parties from the terms and conditions which are agreed upon by the
parties.21 However, it must be kept in mind that the word "contractor" appearing in the
contract is not decisive on the question whether it is a contract of sale or work contract
—the entire document with all the relevant clauses throwing light on the real intention
of the parties must be given due weight in coming to a conclusion one way or the
other.18

Generally a contract to make a chattel and deliver it, when made, is a contract of sale,
but not always. One test would seem to be whether the thing to be delivered has any
individual existence before delivery as the sole property of the party and further the
property therein passes only under the contract relating thereto to the other party who
is to deliver it. But, where the real substance of the contract is the performance of work
by A for B, it is a contract for work and materials notwithstanding that the performance
of the work necessitates the use of certain materials and that the property in those
materials passes from A to B under the Contract.
Illustrations

(1) A promises to make a set of false teeth for B with materials, wholly of A, and B
promises to pay for them when made. This is a contract for sale of Goods.22

(2) A promises to paint a picture for B. A uses the paint and canvas which are of small
value and B promises to pay for the picture as a work of art. This is a contract for work
and labour and not the sale of goods.23 The substance of the contract is skill and
labour should be exercised for producing the portrait and it is only ancillary to the
contract that there would pass paint and canvas from the artist to his customer.

(3) A contract to build a house according to specification is a contract for work and
labour. This is not a contract to sell materials.24 In building contract the property in the
materials used does not pass to other party as movable property. The materials in the
construction of building become the property of the other party to contract by theory of
accretion.

Halsbury's Laws of England25 is often quoted for the test to distinguish these two
types of contract.

A contract of sale of goods is a contract whose main object is the transfer of property in,
and delivery of the possession of, a chattel as a chattel to the buyer.

Where the main object of work undertaken by the payee of the price (e.g., the
contractor) "is not the transfer of a chattel qua chattel, the contract is one for work and
labour." In contract of sale the primary intention of the parties to the contract is the
passing of the property in the goods from the seller to the buyer under their agreement.
In contract of sale, the thing produced as a whole has individual existence as the sole
property of the party who produced it at some time before delivery and the property
therein passes only under the contract relating thereto to the other party for a price.
Mere transfer of property in the goods used in the performance of contract is not
sufficient to constitute a sale there must be an agreement express or implied relating
to the sale of goods and completion of agreement by passing of title in the very goods
contracted to be sold.

On the other hand in contract of work, there is in the person performing work or
rendering service no property in the thing produced as a whole notwithstanding that a
part or even the whole of the materials used by him may have been his property.26

Where the main object of contract is transfer of property in a chattel as a chattel to

buyer, it is still a contract of sale though some work may be required to be done under
the contract as ancillary or incidental to the sale. So a contract for supply of an Air
Conditioner may provide that a supplier of an Air Conditioner will fix it up in the buyer's
premises. Such a contract would be a contract for sale as the work of fixing it up would
be incidental to sale.27

By the aforesaid discussion, it would be noticed, that illustration (1) dealing with false
teeth is a contract for sale of goods as it is a contract for a chattel or goods to be made
and delivered. But in illustration (2) the substance of contract undertaken by the painter
is bestowing his skill and labour for the production of the portrait and it is only ancillary
to the contract that passes paint and canvas.

However to paint a picture is different from taking a photograph.

But the sale of enlarged photograph as reproduced on paper of a particular quality and
size is a separate contract to sell it as such. The Supreme Court in Asst. Sales Tax
Officer v B.C. Kame,28 held that where a photographer undertakes to take photograph,
develop negative or do other photographic work and thereafter supplies the prints to
the customers, he cannot be said to enter into a contract for sale of goods. It is a
contract for use of skill and labour by the photographer—except when he sells the
goods purchased by him—is essentially one of skill and labour. In view of this, it is
submitted that the decision of Patna High Court in M. Ghosh case is considerably
weakened.

So a contract of sale is a contract whose main object is the transfer of the property in
and the delivery of the possession of, chattel as a chattel to the buyer. In contract of
sale the contract is for the supply of finished goods. If the substance of contract is the
production of something to be sold as a chattel, it is a contract of sale of goods.

In Commissioner of ST MP v Purshottam Premji,29 under a contract with S.E. Rly., the

Respondent was to quarry stones from quarries belonging to Railway and break the
stones into pieces and convert them into ballast of specific size and supply them to
Railway Administration at specified rates. Under the contract the Respondent had to
remove from Railway premises all rejected ballast and had to pay certain royalty.

Respondent received Rs 40,000 from S.E. Rly. and the question was whether there was
sale in the supply of ballast to Railway under the contract within section 2(n) M.P. Gen.
Sales Tax Act, 1958. The Supreme Court answered in negative as the property in the
ballast, at all relevant times, was with S.E. Rly. and ballast was never the property of
Respondent; there was no question of Respondent transferring any property in it to
Railway.

In Sentinel Rolling Shutters and Engineering Co Pvt Ltd v Commr, ST,30 an assessee
respondent company entered into a contract with B company for fabrication, supply
erection and installation of Rolling Shutters in the Sugar factory of B Company and
completed the said contract.

Question arose as to whether it was a contract of sale or contract of work and labour.
The Supreme Court analysed the contract and pointed out that not only are the Rolling
Shutters to be manufactured as per specifications, designs, drawings and instructions
provided in the contract but they are also to be erected and installed at the Company's
premises. The erection and installation of Rolling Shutters is as much an essential part
of contract as fabrication and supply. It is only on erection and installation of Rolling
Shutters that the contract would be fully executed.

According to the Supreme Court a Rolling Shutter consisted of several component

parts and the component parts do not constitute a Rolling Shutter until they are fixed
and erected on the premise. It is only when component parts are fixed on the premise
and fitted into one another that they constitute a Rolling Shutter as a commercial
article and till then they are merely component parts and cannot be said to constitute a
Rolling Shutter. The erection and installation of the Rolling Shutter cannot therefore be
said to be incidental to its manufacture and supply. It is a fundamental and integral part
of contract because without it the Rolling Shutter does not come into being.31 The
contract for fabrication, supply and erection of Rolling Shutter was held contract for
work labour and not for sale. Similarly, in State of Rajasthan v Man Industrial Corp Ltd,32
Respondent carried on business of fabricating steel doors, windows entered into a
contract with Rajasthan Government, to prepare window leaves as per specifications
and to fix them to building, within a specified time. It was held on consideration of the
terms of contract that it was a contract of service and not for sale, as the primary
undertaking was not merely to supply windows but to fix them to building. The fixing of
windows in the stipulated manner required special skill and so it was not incidental to
sale of the windows. It was only upon fixing of window leaves and after the window
leaves had become the part of building construction that property passed. The contract
was a contract for work, as only upon the fixing of the windows as stipulated, the
contract could be fully executed and the property in the windows passed on the
completion of work and not before. It was not a contract of sale as their contract was
not for transfer of property in the window leaves as window leaves. It was a contract
for providing and fixing windows and windows could come into existence only when
the windows leaves were fixed to building by bestowing labour and skill.

Similarly in Carl Still v State of Bihar,33 Appellants, a foreign company, entered into a
contract with Sindri Fertilizers and Chemicals Pvt Ltd, known here as owner for
assembling and installing machineries, plants and accessories for a coke oven, battery
and by-products plant at Sindri in the State of Bihar for Rs 2,31,50,000. The
arrangement provided appellant to supply all the materials and labour required for the
erection of the works the clause provided that all materials in connection with the coke
brought by the contractor on site shall become the owner's property. This clause, as the
Supreme Court interpreted, meant to ensure that materials of right sort were used in
construction and nothing else. The Supreme Court justified the above conclusion as
the second part of the said clause provided that if materials were destroyed by fire,
tempest or otherwise, the loss would fall not on the owner which must be the result if
property is transferred to him, but on the contractor. Further according to the Supreme
Court, this last clause meant that property in the materials had not been absolutely
transferred to owner. Ultimately, the court opined that it was a contract for construction
of specified works for a lumpsum and not a contract of sale.

However, it should not be understood that every contract providing for fixing of a
chattel to another chattel is always a works contract. It may be sale of goods, e.g., A
requiring new motor tyres for his car goes to a dealer and asks for tyres. Though fixing
of tyres to the car may not be an easy operation and may require an expert hand, yet it
is a contract of sale of goods.34 Thus, it would be seen that there is no general
proposition of law that whenever a contract provides for fixing of a chattel it is no sale
of goods but works contract.

Rather, it depends on construction of a contract which has to be made by ascertaining

the real intention of the parties to be gathered by looking at their contract as a whole. If
the intention of parties is that a chattel should be produced and transferred as a
chattel, it is a contract of sale of goods and not a works contract. In Patnaik and Co v
State of Orissa,35 the contract provided that Government was to supply chassis and the
Appellants were to fix the bus bodies on the chassis supplied by the Government. The
Appellants were to construct the bus bodies in workmanlike and in strict compliance
with the specifications. Examining their terms of contract the Supreme Court found
that the contractor was responsible for safe custody of chassis supplied by
Government from the date of its receipt till the delivery to Government and the
contractor had to take insurance. Further if before delivery the bus bodies were
destroyed, the loss would fall on the contractor as their agreement provided for
insurance of chassis but not for bus bodies and till the delivery is made the bus bodies
remain the property of the contractor. Significantly, under the contract property in the
bus body did not pass to Government till the chassis with the bus body is delivered at
the destination named by Government. Further, their contract expressly provided that
completed bus body shall be delivered to Government on or before specified day. On
these, it was held by the Supreme Court that it was a Sale of Goods as the property in
the bus body did not pass on being placed or constructed on the chassis but when the
whole vehicle including the bus body was delivered. This aspect of Patnaik case was
highlighted in subsequent Supreme Court decision of State of Gujarat Variety Body
Builders where it observed:36

Property in the materials used by assessees (Patnaik & Co.) in constructing the bus bodies
never passed to their customers during the course of construction and that it was only when
the complete bus with the body fitted to the chassis was delivered to the customer that the
property in the bus body passed to the customer.
The Appellant contractor had to deliver the specific goods i.e., finished bus body built
under the specifications prescribed by Government and at the destination named by
Government. In Patnaik case (supra), there were circumstances for the Sale of Goods
as the contractor had agreed to and did supply motor-bus body.37 The bus body spoken
of here is a composite thing or unit to be put on chassis and the composite body
consists not only of things actually fixed on chassis but movable things like seat
cushions or other things which can be detached.

State of Gujarat v Kailash Engineering Co Pvt Ltd,38 is also an interesting case as it

explains the basis of the earlier Supreme Court decision of Patnaik case (supra)
referred to earlier.

In Kailash case, the Respondents contracted with the Railway Administration for the
performance of the works of building, erecting and furnishing three broad gauge
passenger coaches over the chassis supplied to them by the Railway Administration.
The respondents constructed the broad gauge passenger coaches, received the money
and argued before the Sales Tax authority to hold that this was a works contract and
they were not liable to pay Sales Tax as the transaction, in respect of which they
received the money did not amount to sale. The Appellant relied on Patnaik case
(supra) and argued that the transaction was a sale and the Respondents were liable to
pay sales tax. Rejecting the Appellant's contention the Supreme Court found the
following three main circumstances of terms in Patnaik case (supra) for holding the
transaction a sale which did not find in contract before them.

(1) In Patnaik case, the bus bodies were throughout the contract spoken of as a unit or
as a composite thing to be put on the chassis. This composite body consisted not only
of things actually fixed on chassis but movable things like seat cushions and other
things which could be easily detached. But in the case before them the coach bodies
are not separately described as units or components to be supplied by the
Respondents to Railway. The Respondents under their contract were bound to
construct, erect and furnish-coach bodies on the underframes supplied to them. At no
stage, does the contract mention that ready coach bodies were to be delivered by the
respondents (Kailash Engineering Company) to the Railway. In fact, even during the
process of construction of the coach bodies, the unfinished bodies in process of
construction were treated as the property of the Railway under the terms of the
contract.

(2) If some work was not satisfactorily done and the contractor on receipt of a written
order did not dismantle or replace the defective work or materials at his own cost
within seven days the controller was entitled to get the balance of the work done by
another agency and recover the difference in the cost from the contractor. But in the
case before them, the unfinished bodies of the coaches were from the earliest stage
treated as the property of the Railway and there was no question of ownership of the
unfinished body not passing to Railway.

(3) In order that the liability of loss or damage of the bus bodies due to fire is fastened
the contract stipulated for insurance of the chassis but it did not provide regarding
insurance of the bus bodies. The Court thus inferred that till delivery was made the bus
bodies remained the property of contractor on whom the loss would fall. On the other
hand, in the case before them as discussed earlier the terms envisaged the property in
the unfinished bodies vesting in the Railway. However, as the unfinished bodies were to
be in charge of the contractor during the construction a special provision had to be
made making contractor responsible for the loss and throwing upon him the liability to
reimburse the Railway for loss by fire etc. So in Kailash case the Supreme Court found
that the contractor was not to become the owner of the ready-coach bodies and that
the property in the bodies vest in Railway even during process of construction and
there never involved a question of delivery of the finished goods to the other party to
the contract and therefore it was a works contract and not a sale of passenger coach
by the contractor to Railway. Indeed the contract provided that as soon as plant and
materials were brought on the site where the coaches were to be constructed the
ownership in them would vest in Railway.

In State of Gujarat v Variety Body Builders,39 question was whether three contracts for
construction of coaches on the under-frames supplied by Western Railway
Administration were contracts for Sale of goods or works contract. To answer this
question the Supreme Court examined the terms of contract between the parties to
find out whether their contract intended the contractor to transfer any completed
Railway coach to Railway Administration. If that was so, it meant that the parties
intended to enter into contract of sale which required the seller of an article must be its
owner, i.e., the Railway Coach when constructed must be as a unit the property of the
contractor. The Supreme Court inquired whether it was possible to conclude consistent
with the terms of the contract that what was contracted was to sell to Railway the
Railway Coach constructed by the contractor. On examining the terms of the contract
the Supreme Court found that the contractor was not to become the owner of railway
coach when constructed completely because not all the materials, labour and skill
came from the contractor for building the railway coach but the Railway Administration
as well supplied men and materials (e.g., electrical fittings, Railway staff worked in
association with the contractor's staff for installation of electrical equipment).
Moreover, under the terms the railway coach was to be constantly supervised by the
Railway Administration while being constructed. Further, under the clause of the
contract in the event of contractor's death or insolvency, his legal representative had no
interest in the contract save for claim for money due for work done under the contract
and for return of security deposit. All this found the Supreme Court to go to show that
the predominant element in the contract was works contract as it was not possible to
hold from the material terms of the contract that the parties intended that the
contractor should transfer property in the railway coach to Railway Administration after
its completion.

A contract to embroider where a saree is supplied by a customer and the embroiderer

employing his jari in embroidering is a contract for skill and labour.40

Though hire or hire purchase is a method of sale of goods, there are material
differences between hire purchase and sale of goods. In sale property the goods
passes from seller to buyer. In Hire Purchase, the hirer (person who secures goods on
hire purchase) initially only gets possession over the goods but not ownership over it.
He gets ownership over the goods when under the Hire Purchase agreement he
exercises an option to buy the goods. From this it follows that hirer cannot pass
ownership over the goods to any subsequent person from him when he has not
secured ownership over the goods. But in sale, the buyer being already the owner of
goods can transfer his ownership over the goods when he makes sale. In Johar case,41
the Supreme Court observed that in sale—even if—price is to be paid by instalments,
the property passes as soon as sale is made. The essence of sale is that properly is
transferred from seller to buyer for a price, whether paid at once or later by instalments.
On the other hand, the Hire Purchase agreement, as the name implies, has two aspects.
First aspect is bailment of goods subjected to Hire Purchase agreement and then an
element of sale which fructifies when option to purchase is exercised by intending
purchaser. The intending purchaser is known as the hirer so long as option to purchase
is not exercised. The essence of Hire Purchase agreement is that property in the goods
does not pass at the time of agreement but remains in the intending seller and passes
later when the option is exercised by intending purchaser.

[s 4.16] Controlled sales.—

As a result of the regulations relating to the control of prices and control of movement
and supply of goods, complicated questions arise as to whether in a given case it is a
sale or not. In such cases bargains are regulated and controlled and freedom of
contract becomes a matter of Hobson's choice.42

In New India Sugar Mills Ltd v Commr. S.T.,43 Appellant owned a sugar factory in Bihar,
dispatched sugar to Provincial Government of Madras in compliance with the lawful
directions issued by the controller in exercise of powers under the Sugar Control Order.
The question arose whether it amounted to sale of goods or not. The majority view
represented by Shah J (as he then was) held it not a sale as sugar was dispatched
pursuant to valid directions of the controller. There was manifestly no offer to purchase
sugar by Government and no acceptance of any offer by the manufacturer. The
manufacturer had no option but to dispatch the sugar as he would be punished for
declining to carry out the order. Thus, the sugar was dispatched pursuant to the
directions of the controller and not in acceptance of any offer by Madras Government.
Further, in calling upon the manufacturer to supply sugar, the controller was not the
agent of Madras Government to purchase the sugar as he acted under his statutory
authority. Hidayatullah J (as he then was) dissented and construed the transaction
sale. He fell that the Province of Madras, on obtaining the permit telegraphed
instructions to dispatch sugar and mills dispatched it, a contract emerged and consent
must be implied on both sides.

The majority view of Shah J in the above case has not secured the approval in two
subsequent Supreme Court Cases. In Andhra Sugar Ltd v State of A.P., Bachawat J
speaking for the unanimous view of the court cautioned44 that the majority judgment in
New India Sugar Mills case "should not be treated as an authority for the proposition
that there can be no contract of sale under compulsion of the statute." The case was
decided on its special facts. In the second case of Vishnu Agencies Pvt Ltd v Commr.
Tax Officer,45 the Supreme Court did not approve the majority view of Shah J but
preferred the minority view of Hidayatullah J in New India Sugar case (supra) discussed
above.

In Vishnu Agencies case, the Supreme Court held that a transaction which is effected in
compliance with the obligatory terms of a statute may be sale if mutual assent,
express or implied, is not totally excluded. So in that case an act of appellant to supply
cement to various allottees in pursuance of allotment order issued by appropriate
authority was held sale. In Andhra Sugar Ltd v State of AP,46 cited earlier, under AP
Sugarcane (Regulation of Supply and Purchase) Act, 1961 the sugarcane grower was
free to make or not to make an offer of sale of sugarcane to occupier of factory but the
latter was bound to accept the offer, if made by sugarcane grower. In spite of such
legal compulsion upon occupier of factory to enter into agreement, their agreement,
according to Supreme Court, was valid and enforceable as the consent of occupier of
factory was not vitiated by coercion (the compulsion of law to accept the offer is not
coercion under the law of contract), undue influence, fraud, misrepresentation, and
mistake. To constitute a "sale" under the Sale of Goods Act, 1930 there must be an
agreement for sale of goods for a price and the passing of property pursuant to
agreement which conditions were satisfied in the facts of Andhra Sugar case (supra).
The Supreme Court emphasised that unlike New India Sugar Mills case (supra), here
(Andhra Sugar case) the cane grower made an offer to occupier of factory directly and
the latter accepted though under compulsion of law, but a direct Privity of contract
between the parties was established. On the other hand in New Sugar Mills case the
dispatch of the goods in compliance with the directions of the controller was not
acceptance by the manufacturer of any offer nor could it be deemed to be an offer by
manufacturer to supply the goods. On this special fact the majority held that no
contract of sale resulted.
The Supreme Court in Andhra Sugar case examined the purpose of A.P. Act of 1961
which was to regulate purchase of sugarcane by factory owners who enjoyed almost
monopoly and could dictate their own terms upon the sugarcane growers who were
scattered over the country and so the Act intervened to help canegrowers who had
weaker bargaining position. In Coffee Board v Commr. of Commercial Taxes,
Karnataka,47 coffee growers had an option or volition to enter into coffee growing
trade. Coffee growing was not compulsory. Further, the Board under the Act had a right
to reject coffee if it was below standard. No time was fixed for delivery of coffee to
Board under the Act. The Supreme Court held that the compulsory delivery of coffee by
coffee growers to Coffee Board was sale as the consent though minimal was not
totally absent especially when coffee growing was not compulsory but optional. Under
the Coffee Act, 1942 almost the entire coffee produced was regularised through the
modality of compulsory delivery and corresponding obligation on the Coffee Board to
purchase compulsorily. The Supreme Court observed that the limitations imposed by
Control Order under the Coffee Act, 1942 on the normal rights of dealers and
consumers to supply and obtain goods, the obligations and penalties imposed by
Orders are quite in harmony with the idea that parties must be deemed to have
completed the transaction under agreement by which one party binds itself to supply
the seated quantity of goods at a price not higher than the notified price and the other
party consents to accept on conditions mentioned in the order issued by the concerned
authority.

So the Supreme Court has taken the view that transaction effected in compliance with
obligatory terms of a statute is nevertheless a sale. Courts are conscious of the fact
that towards the close of 19th century the background of law—social, political and
economical—has changed fundamentally. Laissez Faire economic policy of state (and
corresponding freedom and sanctity of contract) has been supplanted by Social
Security whereby State plays a positive role and may compel persons to make contract
and incorporate into it certain terms positively. It is now increasingly realised about the
economic disparity between the contractual parties and so the policy of legislatures
and the attitude of the courts towards the contract have changed significantly.

In Khedut Sahakari Ginning and Pressing Society Case,48 the farmers' Co-operative
Society was authorised by its bye laws to pool cotton of its members (farmers), grade it
if necessary and then sell it either after ginning or without ginning and pay the sale
price to them in the manner prescribed by bye laws. The Supreme Court held that the
transaction of accepting cotton by Society from its members was not a sale by
members to the society as the bye law of society clearly indicated that the members of
the society were merely entrusting their cotton to society. Further, the society was
empowered to advance loans up to 75% of the estimated value of goods so entrusted
when served as a security for the advance. Had the said transaction been a sale by
members to the society, there could be no question of entrustment nor can society
advance money on the security of its own goods.

[s 4.17] What are not sales.—

For sale there must be two parties, i.e., buyer and seller and transfer from firm (of
whom a partner is a constituent) to partner does not qualify for the same.49

A hire-purchase agreement is not a sale, as no property passes in such a transaction

until the option to purchase is exercised and the other terms of the agreement are
fulfilled. Taking possession of the vehicle by the financier by the person, who has
availed of loan for securing a vehicle on hire purchase, on the ground of non-payment
of instalment has always been upheld to be a legal right of the financier.50 If the
Reserve Bank of India has issued a circular that right of re-possession must be clearly
spelt in the contract and that no force shall be used by the financier, any use of force
for taking possession of the vehicle will be liable for court's intervention to the benefit
of the hirer.51

A building contract involves a composite transaction of supply of goods and services.

It is indivisible and there involves no sale of goods.52 It is contract of works. Article 366
of the Constitution had been amended to include clause 29A tax on the sale or
purchase of goods, "a tax on the transfer of property in goods (whether as goods or in
some other form) involved in the execution of a works contract". Various amendments
were made in the sections of the Finance Act, 1987 by which "works contracts" which
were indivisible and composite were split so that only the labour and service element
of such contracts would be taxed under the heading "service tax". In Kone Elevator India
Pvt Ltd v State of TN,53 the issue was whether contract of sale of elevators will
constitute a sale of goods or a works contract. In case of the former, the entire sale
consideration would be taxable under the sales tax or value added tax enactments of
the State Legislatures, whereas in the latter case, the consideration payable or paid for
the labour and service element would have to be excluded from the total consideration
received and sales tax or value added tax would be charged on the balance amount.
The majority in the Constitution Bench reasoned that after the Constitutional
amendment the 'dominant intention test of sale of goods or works contract was not
material. The Court listed out the four concepts as emerging out of discussion: (i) the
works contract is an indivisible contract but, by legal fiction, is divided into two parts,
one for sale of goods, and the other for supply of labour and services; (ii) the concept
of "dominant nature test" or, for that matter, the "degree of intention test" or
"overwhelming component test" for treating a contract as a works contract is not
applicable; (iii) the term "works contract" as used in clause (29-A) of Article 366 of the
Constitution takes in its sweep all genre of works contract and is not to be narrowly
construed to cover one species of contract to provide for labour and service alone; and
(iv) once the characteristics of works contract are met with in a contract entered into
between the parties, any additional obligation incorporated in the contract would not
change the nature of the contract.

A transaction between a hotelier and a resident customer is one of "service" and is not
taxable as "sale of goods", if there is a consolidated charge for boarding and lodging.

Supply of electricity to a consumer by a statutory board is not sale.54

Goods provided in rendering medical service do not qualify as "sale". A transaction of

supply of medicines, surgical items, x-ray films and plates etc. for the treatment of the
indoor patients does not come under the purview of "sale" because the hospital
treating the patient is not selling those items to the indoor patients but in fact they are
being consumed, utilised, administered to those indoor patients, which are essentially
required for their treatment.55

[s 4.18] Interpretation of "sale occasions import" occurring Central Sales Tax

Act, 1956.—

Answering the question of what meaning should be given to the expression "sale
occasions import", occurring in section 5(2) of the Central Sales Tax Act, 1956 (CST
Act), the Supreme Court observed in the State of Maharashtra v Embee Corporation,56
that it was almost settled by numerous decisions that the expression "sale occasions
import" was to be interpreted in the same manner in which the expression "occasions
the movement of goods" occurring in section 3(a) of the Act has received
interpretation. In other words, the expression "sale occasions import" has to be given
the same meaning which the expression "occasions the movement of goods" has
received by the Courts.

The definition of "sale" in the CST Act shows that the word "sale" has been given a very
wide meaning so as to include not only the sale of goods, but also the transaction,
namely, a transfer of goods or hire purchase system. Further, the use of words "sale of
goods" in section 3 of the CST Act and the words "contract of sale" occurring in section
4(2) of the Sale of Goods Act have been assigned the same meaning which is wider to
the meaning of sale in the general law. In such a situation the word "sale" defined in
section 2(g) of the CST Act and employed in section 3 and other sections of the CST
Act would embrace not only completed contract, but also the contract of sale or
agreement of sale if such contract of sale or agreement of sale provides for movement
of goods or movement of goods as incident of the contract of sale. This matter may be
examined from another angle. An agreement to transfer goods to the buyer for a price
is an important element of sale and the same is also borne out from section 4 of Sale
of Goods Act. If section 4 of the Sale of Goods Act, 1930 is read along with section 3
and 4 of the CST Act, it would mean an agreement to sell would also be a sale, which
stipulates for transfer or movement of goods or movement of goods as incident of the
contract of sale and in that case, such movement of goods would be deemed to be
occasioned by the sale. It is immaterial that actual sale does not take place at the time
of movement of goods and takes place later on. This interpretation of section 3(a) of
the CST Act if applied to sub-section (2) of section 5 of the CST Act, would mean that if
an agreement for sale stipulates import of goods or import of goods is incident of
contract of sale and goods have entered the import stream, such import would fall
within the expression "sale occasions import".

[s 4.19] Test whether the transaction is inter-state or branch transfer exigible

to tax under Central Sales Tax, 1956.—

It is an accepted position in law that a mere transfer of goods from a head office to a
branch office or an inter-branch transfer of goods, which are broadly brought under the
phrase "branch transfers" cannot be regarded as sales in the course of inter-state trade,
for the simple reason that a head office or branch cannot be treated as having traded
with itself or sold articles to itself by means of these stock transfers.57

[s 4.20] Under Customs law.—

Where the goods are not brought in to the customs frontiers of India before sale
actually takes place outside India, say by purchase in a duty-free shop outside India,
they cannot be said to be brought "in the course of import" for the purpose of levy of
customs duty. Transfer of documents of title itself may be irrelevant in certain cases,
for after all. Transfer of documents of title may only be one of the modes of transfer. A
mere delivery of goods could constitute the transfer.58

1 Wood v Manley, (1839) 11 A&E 34 : 52 RR 271.

2 Johnson v Macdonald, (1842) 9 M & W 600 : 60 RR 838.
3 White v Wilks, (1813) 5 Taunt 176 : 23 RC 252 (Eng Com Law Reps., vol 1).
4 State of Uttaranchal v Khurana Brothers, AIR 2011 SC 224 : 2011 (84) ALR 779 : 2011 2 All WC
1467 SC : (SC Suppl) 2011 (2) CHN 153 : JT 2010 (12) SC 323 : 2011 (1) Kant LJ 16 : 2011-1-LW
97 : (2011) 3 Mad LJ 999(SC) : 2011 (1) Pat LJR 26 : 2010 (4) RCR (Civil) 945 : 2011 112 RD 504
: 2010 (11) Scale 348 : 2010 (2) U.D. 393 : 2010 (10) UJ 5103 .
5 State of Madras v Gannon Dunkerley and Co, AIR 1958 SC 560 at 567, para 16 : 1959 SCR 379 .
6 See Northern Indian Caterers (India) Ltd v Lt Governor of Delhi, AIR 1978 SC 1591 : [1978] 4
SCR 36 ; State of HP v Associated Hotels of India Ltd, AIR 1972 SC 1131 : (1972) 1 SCC 472 .
7 Helby v Mathews, (1895) AC 471 ; Belsize Motor Supply Co v Cox, (1914) 1 KB 244 .
8 Chalmers' Sale of Goods, 10th Edn, pp 6, 7.
9 CCT v KTC Automobiles, AIR 2016 SC 805 : (2016) 4 SCC 82 : 2016 (1) Scale 702 .
10 Assn of Leasing & Financial Service Companies v UOI, (2011) 2 SCC 352 : 2010 (11) Scale
461 .
11 Agricultural Market Committee v Shalimar Chemical Works Ltd, AIR 1997 SC 2502 : (1997) 5
SCC 516 .
12 Malnad Areca Processing & Mktg Ltd v CCT, (2008) 11 SCC 536 : 2008 (4) Scale 829 .
13 Sanket Timber Mart v Conservator of Forest (South Chandrapur) Forest Division, 2010 (6) All
WC 5459 : [2010] 10 SCR 1101 : IV (2010) BC 632 : 2010 (5) Bom CR 891 .
14 State of Uttaranchal (now known as State of Uttarakhand) v Khurana Brothers, AIR 2011 SC
224 : 2011 (1) Pat LJR 26 : 2010 (11) Scale 348 : 2010 (10) UJ 5103 (SC).
15 Sales Tax Officer v Budh Prakash Jai Prakash, AIR 1954 SC 459 : [1955] 1 SCR 243 .
13 Sanket Timber Mart v Conservator of Forest (South Chandrapur) Forest Division, 2010 (6) All
WC 5459 : [2010] 10 SCR 1101 : IV (2010) BC 632 : 2010 (5) Bom CR 891 .
16 Chalmers' Sale of Goods Act , 10th Edn, p 9.
17 The Commissioner of Income Tax-TDS v Glenmark Pharmaceuticals Ltd, (2010) 231 CTR
(Bom) 105 : [2010] 324 ITR 199 (Bom).
18 CCT v KTC Automobiles, AIR 2016 SC 805 : (2016) 4 SCC 82 : 2016 (1) Scale 702 .
19 Keith v Burrows, (1876) 1 CPD 722 , 731.
20 Indian Contract Act, 1872, section 172.
21 State of Gujarat v Variety Body Builders, AIR 1976 SC 2108 : (1976) 3 SCC 500 ; Asst Sales
Tax Officer v BC Kame, AIR 1977 SC 1642 : (1977) 1 SCC 634 .
22 Lee v Griffin, (1861) 1 B&S 272 : (1861) 121 ER 716 ; Baretto v Pruce, AIR 1939 Ngp 19 .
23 Robinson v Graves, (1935) 1 KB 579 .
24 State of Madras v Gannon Dunkerley & Co Ltd, AIR 1958 SC 560 : 1959 SCR 379 .
25 Halsbury's Laws of England, 3rd Edn, vol 34, para 3, p 6.
26 Commr, ST MP v Purshottam Premji, (1970) 26 STC 38 at 41 (SC). See also State of Gujarat v
Variety Body Builders, AIR 1976 SC 2108 : (1976) 3 SCC 500 .
27 See Sentinel Rolling Shutters & Engineering Co Pvt Ltd v The Commr, ST, AIR 1978 SC 1747 at
1750 : (1978) 4 SCC 260 .
28 Asst Sales Tax Officer v BC Kame, AIR 1977 SC 1642 : (1977) 1 SCC 634 .
29 Commissioner of ST MP v Purshottam Premji, (1970) 26 STC 38 (SC).
30 Sentinel Rolling Shutters and Engineering Co Pvt Ltd v Commr, ST, AIR 1978 SC 1747 : (1978)
4 SCC 260 .
31 See Sentinel Rolling Shutters and Engineering Co Pvt Ltd v Commissioner of ST, AIR 1978 SC
1747 at 1751, para 6 : (1978) 4 SCC 260 .
32 State of Rajasthan v Man Industrial Corp Ltd, AIR 1969 SC 1245 : (1969) 1 SCC 567 .
33 Carl Still v State of Bihar, AIR 1961 SC 1615 : [1962] 2 SCR 81 .
34 See Patnaik & Co v State of Orissa, AIR 1965 SC 1655 and 1662, para 21 : [1965] 2 SCR 782 .
35 Patnaik and Co v State of Orissa, AIR 1965 SC 1655 : [1965] 2 SCR 782 .
36 State of Gujarat v Variety Body Builders, AIR 1976 SC 2108 at 2115, para 45 : (1976) 3 SCC
500 .
37 See State of Rajasthan v MI Corp, AIR 1969 SC 1245 at 1248, para 11 : (1969) 1 SCC 567 .
38 State of Gujarat v Kailash Engineering Co Pvt Ltd, AIR 1967 SC 547 : [1967] 1 SCR 543 .
39 State of Gujarat v Variety Body Builders, AIR 1976 SC 2108 : (1976) 3 SCC 500 .
40 A Jariwala v State of Gujarat, AIR 1965 Guj 253 : (1965) 16 STC 942 Guj.
41 KL Johar & Co v Dy. Commercial Officier, AIR 1965 SC 1082 : [1965] 2 SCR 112 .
42 Indian Steel & Wire Products v State of Madras, AIR 1968 SC 478 : [1968] 1 SCR 479 ; Andhra
Sugar Ltd v State of A.P., AIR 1968 SC 599 : [1968] 1 SCR 705 (both cases held to be of contracts
of sale); New Indian Sugar Mills v Sales Tax Commissioner, Bihar, AIR 1963 SC 1207 : 1963 Supp
(2) SCR 459 (held to be not a case of contract of sale).
43 New India Sugar Mills Ltd v Commr. S.T., AIR 1963 SC 1207 : 1963 Supp (2) SCR 459 .
44 Andhra Sugar Ltd v State of AP, AIR 1968 SC 599 at 606, para 8 : [1968] 1 SCR 705 .
45 Vishnu Agencies Pvt Ltd v Commr. Tax Officer, AIR 1978 SC 449 : (1978) 1 SCC 520 .
46 Supra fn 44.
47 Coffee Board v Commr of Commercial Taxes, Karnataka, AIR 1988 SC 1487 : (1988) 3 SCC
263 .
48 Khedut Sahakari Ginning & Pressing Society v State of Gujarat, AIR 1972 SC 1786 : (1971) 3
SCC 480 .
49 Synthetic Suppliers v The Commissioner of Sales Tax, (2010) 30 VST 632 (Bom).
50 Sardar Trilok Singh v Satya Deo Tripathi, AIR 1979 SC 850 : (1979) 4 SCC 396 : 1979 SCC (Cri)
987 has categorically held that under the hire-purchase agreement, the financier is the real
owner of the vehicle, therefore, there cannot be any allegation against him for having the
possession of the vehicle. This view was again reiterated in KA Mathai v Kora Bibbikutty, (1996)
7 SCC 212 : 1996 SCC (Cri) 281 ; Jagdish Chandra Nijhawan v S.K. Saraf, (1999) 1 SCC 119 :
1999 SCC (Cri) 20 and Charanjit Singh Chadha v Sudhir Mehra, (2001) 7 SCC 417 : 2001 SCC (Cri)
1557 following the earlier judgment of this Court in Sundaram Finance Ltd v State of Kerala, AIR
1966 SC 1178 ; Lalmuni Devi v State of Bihar, (2001) 2 SCC 17 : 2001 SCC (Cri) 275 and
Balwinder Singh v CCE, (2005) 4 SCC 146 : 2005 SCC (Cri) 1092 . See for the same position, also
Suryapal Singh v Siddha Vinayak Motors, (2012) 12 SCC 355 : (2013) 2 SCC (Civ) 373 : (2013) 4
SCC (Cri) 665 .
51 ICICI Bank Ltd v Prakash Kaur, (2007) 2 SCC 711 ; Citicorp Maruti Finance Ltd v S. Vijayalaxmi,
(2012) 1 SCC 1 .
52 Gannon Dunkerley and Co v State of Rajasthan, (1993) 1 SCC 364 : 1992 (3) Scale 173 . See
also CCE & Customs v Larsen & Toubro Ltd, (2016) 1 SCC 170 : 2015 (9) JT 245 .
53 Kone Elevator India Pvt Ltd v State of TN, (2014) 7 SCC 1 : 2014 (7) Scale 226 : 2014 (7) SCJ
7.
54 Karnataka Power Transmission Corp v Ashok Iron Works Pvt Ltd, AIR 2009 SC 1905 : (2009) 3
SCC 240 .
55 Tata Main Hospital v The State of Jharkhand, 2008 (2) JCR 174 (Jhr) : (2007) 9 TMI 599.
56 State of Maharashtra v Embee Corp, JT 1997 (7) SC 472 : (1997) 107 STC 196 .
57 CCT v Desai Beedi Co, (2015) 17 SCC 13 : 2015 SCC OnLine SC 1508 following Hyderabad
Engg. Industries v State of AP, (2011) 4 SCC 705 : (2011) 2 SCC (Civ) 433 .
58 Indian Tourist Dev Corp Ltd v CCT, (2012) 3 SCC 204 : (2012) 2 SCC (Civ) 67 .
The Sale of Goods Act

Chapter II Formation of the Contract

Formalities of the Contract

S. 5. Contract of sale, how made.-

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

(2) Subject to the provisions of any law for the time being in force, a contract of sale
may be made in writing or by word of mouth, or partly in writing and partly by
word of mouth or may be implied from the conduct of the parties.

[s 5.1] English law.—

Sub-section (2) of this Act corresponds to section 4 of the English Sale of Goods Act,
1979. The English Act, however, excludes the applicability of the provisions to law
relating to corporations.

[s 5.2] Contract of sales how made.—

This section provides for bare formalities for making of "contracts of sale".

(A) Formation of the contract—

(i) An offer to sell or buy goods and acceptance of such offer.

(ii) Provision for delivery of goods./Delivery may be immediate,

simultaneous, by instalments or in future.

(iii) Provision for payment of price. Payment of price may be immediate,

simultaneous, by instalments or in future.

Besides the above bare requirements, a contract of sale may contain

other terms as the nature of the case may require.

(B) How made—

(i) May be in writing.

(ii) May be by word of mouth.

(iii) May be partly in writing and partly oral.

(iv) May be implied from the conduct of parties or by course of their

business.
 (v) In case of Government and certain statutory corporations, law provides
for formal written instruments under seal. This category is covered by
words "subject to the provisions of any law for the time being in force."

[s 5.3] Ingredients of contract of sale.—

The section provides that a contract of sale is made by an offer to buy or sell goods for
a price and the acceptance of such offer. These provisions show that price is an
essential element of sale of goods. In Poppatlal Shah v State of Madras,59 it was held by
a Constitution Bench of the Supreme Court that the expression "sale of goods" is a
composite expression consisting of various ingredients or elements. There are the
elements of a bargain or contract of sale, the payment or promise of payment of price,
the delivery of goods and the actual passing of title and each one of them is essential
to a transaction of sale though the sale is not completed or concluded unless the
purchaser becomes the owner of property. In State of Madras v Gannon Dunkerley & Co
(Madras) Ltd,60 it was observed that according to the law both of England and of India,
in order to constitute a sale it is necessary that there should be an agreement between
the parties for the purpose of transferring title to the goods which, of course,
presupposes capacity to contract, that it must be supported by money consideration
and that as a result of the transaction property must actually pass in the goods. Unless
all these elements are present, there can be no sale. The law is, therefore, well settled
that in a matter relating to sale of movable property or goods, price is an essential
element of the transaction.

What constitutes real price has an important bearing on excise levies. In CCE, Noida v
Accurate Meters Ltd,61 the issue was actual valuation of products whose components
seemed to include freight and insurance charges. The ex-factory price was known and
the value of impugned electric meters was to be fixed as at the factory gate. The freight
and the insurance charges, were to be charged on an average basis and not on actual.
To the query whether "freight" and "insurance charges" constituted the value of the
goods for the purpose of computation of excise duty, it was considered in the context
of the facts that under normal circumstances, a place where excisable goods are sold
could be a place of removal. The manufacturer was bound to transport the goods from
the factory gate to the place of buyers at the rates specified in the tender. Prior thereto,
the buyers were to make inspection of impugned goods. The court reasoned that there
were two separate contracts; one for sale of impugned goods, which was governed by
the provisions of the Sale of Goods Act, and the other governing transportation of the
goods. Hence, amount claimed by way of transportation charges and insurance could
not be considered for determining the value of the impugned goods supplied.

In Dresser Rand SA v Bindal Agro Chem Ltd,62the issue of price came under the
following terms: Clause B mentioned the total price exclusive of taxes and duties
payable and provided that the letter of credit should be opened by 31 August 1991 by a
bank acceptable to Dresser Rand S.A. (DR). Clause D provided that delivery date shall
be 15½ months from the date of receipt of the letter of intent by DR. Clause F stated
that "this letter of intent shall serve as DR's authorisation to proceed with this order".
Clause L stated that:

This contract will come into force upon receipt of this letter of intent by supplier.

DR contended that as the letters of intent were referred to as "this order" and "this
contract" in clauses F and L, and as clause F authorised DR to proceed with the order,
the letters of intent were, in fact, purchase orders. Harmoniously reading the clauses,
the Supreme Court held that what was clear was that letters of intent merely required
the supplier to keep the offer open till 31 August 1991 with reference to the price and
delivery schedule. They also made it clear that if the purchase orders were not placed
and letter of credit was not opened by 31 August 1991, DR was at liberty to alter the
price and the delivery schedule. In other words, the effect of letters of intent was that if
the purchase orders were placed and LCs were opened by 31 August 1991, DR would
be bound to effect supply within 15½ months, at the prices stated in the letter of intent.
Therefore, the Court reasoned that it might not be possible to treat the letters of intent
as purchase orders.

[s 5.4] Absence of a written agreement is irrelevant.—

State of UP v Combined Chemicals Co Pvt Ltd,63 the contract was being entered on
behalf of Governor, UP for supply of 200 metric tones Zinc Sulphate of Agriculture
Grade for a certain price and the terms and conditions mentioned in the acceptance
letter, tender form and the agreement forms were treated as part of the contract. The
schedule of supply was also indicated in the acceptance letter. Clause 10 of the terms
and conditions embodied in the acceptance letter did speak of formal agreement, but
the same was to be executed only if required. Undisputedly, the respondent completed
all the formalities inasmuch as it deposited the security money and dispatched a duly
signed agreement to the Directorate of Agriculture, which was to take the supply of
Zinc Sulphate, and also sent letters for placing the supply order. Thus, a contract had
come into existence between the parties and the fact that the Director of Agriculture
did not sign the formal agreement sent by the respondent could not lead to an
inference that the contract had not been executed, in terms of section 5 (1) of the Sale
of Goods Act, 1930. The Court pointed out that:

Sub-section (1) whereof lays down that a contract of sale is made by an offer to buy or sell
goods for a price and the acceptance of such offer. The sub-section, further lays down that
the contract may provide for the immediate delivery of the goods or immediate payment of
the price or both, or for the delivery or payment by installments, or that the delivery or
payment or both shall be postponed. Sub-section (2) of section 5 lays down that subject to
the provisions of any law for the time being in force, a contract of sale may be made in
writing or by word of mouth, or partly in writing and partly by word of mouth or may be
implied from the conduct of the parties.

[s 5.5] Earnest.—

Very often, an agreement to sell is concluded by payment of earnest money. Such a

payment serves two purposes, if the purchase is carried out, it goes in part payment of
the price and if the purchase is not carried out because of the failure of the seller, the
seller is bound to pay it to the purchaser and if the purchase had fallen through by
reason of the fault of the purchaser, the earnest is forfeited to the seller who is entitled
to retain the same.

59 Poppatlal Shah v State of Madras, AIR 1953 SC 274 : [1953] 4 SCR 677 : 1953 Cr LJ 1105 .
60 State of Madras v Gannon Dunkerley & Co (Madras) Ltd, AIR 1958 SC 560 : [1959] 1 SCR 379 .
61 CCE, Noida v Accurate Meters Ltd, (2009) 6 SCC 52 : [2009] 3 SCR 1146 : JT 8009 (3) SC 481
.
62 Dresser Rand S.A. v Bindal Agro Chem Ltd, (2006) 1 SCC 751 : AIR 2006 SC 871 : [2006] 1
SCR 308 .
63 State of U.P. v Combined Chemicals Company Pvt Ltd, JT 2011 (1) SC 179 : 2011 (1) Scale 85
: (2011) 2 SCC 151 : 2011 (1) UJ 245 (SC).
The Sale of Goods Act

Chapter II Formation of the Contract

Subject-matter of Contract

S. 6. Existing or future goods.-

(1) The goods which form the subject of a contract of sale may be either existing
goods, owned or possessed by the seller, or future goods.

(2) There may be a contract for the sale of goods the acquisition of which by the
seller depends upon a contingency which may or may not happen.

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

[s 6.1] English law.—

This section corresponds to section 5 of the English Sale of Goods Act, 1979.

[s 6.2] Sub-section (1): Existing or future goods.—

The goods which form the subject of a contract of sale may be goods owned by the
seller or possessed by the seller as agent, mortgagee. Goods may be existing or goods
to be manufactured or acquired or produced by the seller after the making of a contract
of sale, called future goods. [See section 2(6) Future goods].

A contracts on the 1 January 1930 to sell to B shares in a certain company, to be

delivered and paid for on the 1 March 1930. A, at the time of making the contract, is not
in possession of any shares. This is a valid contract, though A can acquire the shares
only by purchase.

[s 6.3] Sub-section (2): Acquisition of goods depending on a contingency.—

A agrees to sell hemp to B to be delivered "on arrival per Fanny and Almira." If the ship
arrives, but with no hemp on board, the seller is not liable, for the contract is to deliver
the goods only if the goods should arrive.64 But if A agrees to sell "50 cases of tallow to
be delivered on the safe arrival of the ship Elgin," and the ship arrives, but with no goods
on board, the seller is liable in damages to the buyer, for the contract is to deliver the
goods if the ship should arrive, whether the goods were on board or not.65 The
distinction between the two classes of cases is this,

where there is an agreement to deliver to the vendor on a certain condition and the
condition (without any fault of the vendor) never comes to pass, it is plain that he will not be
liable for a non-delivery. But where the agreement is absolute or conditional on an event
which happens, the vendor will be liable for a breach, although he could not help the non-
 performance; for it is his own heedlessness if he runs the risk of undertaking to perform an
impossibility, when he might have provided against it by his contract.66

In India, mere agreement to sell tangible immovable property would not confer an
equitable interest to the purchaser.67

[s 6.4] Sub-section (3): Present sale of future goods.—

When by a contract of sale the seller purports to effect a present sale of future goods,
the contract operates as an agreement to sell the goods. Though the seller may purport
to effect a present sale of future goods, the transaction is not a sale, but an agreement
to sell. The reason is that "a man cannot in equity, any more than at law, assign what
has no existence." But a man can agree to assign property which is to come into
existence in the future. Such a contract at law creates only a personal obligation to
pass the property; it does not create any real right or jus in rem. In equity, however, the
buyer is in a better position, and such a contract would, when the goods come into
existence, give him a good title thereto against all persons excepting anyone who, in
the meantime and bona fide, may have had the property transferred to him. The lessee
of a mill covenants with his landlord that he would assign to the landlord all machinery
which might thereafter be brought into the mill. The lessee brings new machinery into
the mill. Before any assignment to the landlord is made, a creditor who has obtained a
decree against the lessee attaches the new machinery in execution of the decree. The
landlord is entitled to the new machinery as equitable assignee and the attachment
should be raised. It was so held in Holroyd v Marshall,68 which is the leading case on
assignment of after-acquired property.

64 Boyd v Siffkin, (1809) 2 Camp 326.

65 Hale v Rawson, (1858) 27 LJ CP 189 : 4 CBNS 85.
66 Hale v Rawson, (1858) 27 LJ CP 189, at p 191.
67 See Satyabrata Ghose v Mugneeram, AIR 1954 SC 44 at p 49 : 1954 SCR 310 ; Section 54 of
the Transfer of Property Act, 1882.
68 Holroyd v Marshall, (1862) 10 HLC 191 : (1861–73) All ER Rep. 414 . See also Collyer v
Isaacs, (1881) 19 Ch D 342 ; Tailby v Official Receiver, (1888) 13 App Cas 523 (543, 547).
The Sale of Goods Act

Chapter II Formation of the Contract

Subject-matter of Contract

S. 7. Goods perishing before making of contract.-

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

[s. 7.1] English law.—

This section corresponds to section 6 of the English Sale of Goods Act, 1979.

[s. 7.2] Specific goods perishing before making of contract.—

This section is confined to the case of specific goods. Specific goods mean goods
identified and agreed upon at the time a contract of sale is made [section 2(14)]. The
section says that if the goods without the knowledge of the seller have perished at the
time when the contract was made, the contract is void. The section is founded on the
rule that where both the parties to a contract are under a mistake as to a matter of fact
essential to the contract, the contract is void; see Contract Act, section 20.

This section goes further and relies upon the ignorance of the seller only. The words
"without the knowledge of the seller" refer to the ignorance of the seller only and not to
that of the purchaser. The ignorance of the seller is the important consideration under
this section.

Illustrations

(a) A agrees to sell to B a specific cargo of goods, supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain, the ship conveying
the cargo had been cast away and the goods lost. Neither party was aware of the facts.
The contract is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the
time of the bargain, though neither party was aware of the fact. The contract is void.

[s. 7.3] Unascertained goods perishing before making of contract of sale.—

This section, as stated above, applies only to specific goods. It does not apply to
unascertained goods. A agrees to sell to B 50 bales of Bengal cotton out of 3,000 bales
in his godown. The godown had, at the time of the contract, been destroyed by fire
unknown to A. Here the sale is not of specific goods, but of a certain quantity of
unascertained goods. The contract is not void, and A must procure 50 bales of Bengal
cotton elsewhere or pay damages for the breach.

[s. 7.4] Where goods have become damaged.—

The section also says that if the goods without the knowledge of the seller have
become so damaged as no longer to answer to their description in the contract, the
contract is void. A agrees to sell to B a specific cargo of corn while at sea. It turns out
that, before the day of the bargain, the ship had stranded and the corn had been so
damaged as not to answer to its description in the contract. The contract is void.69 But
if the goods, though damaged, answer to the description, the buyer must, apart from
the warranty express or implied, take the risk as to their quality and condition and must
pay the price. The contract is not void in such a case.70 See in this connection section
62 below.

[s. 7.5] Where part of the goods have perished.—

This section applies where the contract is one and indivisible and part of the goods
have perished at the time when the contract was made. Thus, if A agrees to sell to B a
parcel of 700 bags of groundnuts lying at a particular place, and at the date of the
contract there were not 700 bags in the parcel but only 591 bags, the remaining 109
bags having been abstracted by a third party before the date of the contract without the
knowledge of the seller, the contract is void under this section.71 It was held that the
section was applicable even when a part of the goods have perished at the time when
contract was made. As it was a contract for parcel of 700 bags and not for 591 bags,
the subject matter of bargain did not exist as the entire parcel of 700 bags had to be
delivered to buyer. A contract for a parcel of 700 bags is different from a contract for
591 bags. The Court thought that position was no way different from what it would
have been if the whole 700 bags had ceased to exist. Further, as the contract was void
the buyer who had given bills in payment of the price of the whole 700 bags was
entitled to repudiate the whole contract and cannot be compelled to accept what was
left with the seller. Similarly, the seller also could not be compelled to deliver what was
left with him. But if the contract is divisible the destruction of the part will not avoid the
contract for the remainder of the goods.

[s. 7.6] Knowledge of the parties.—

The Seller's knowledge is relevant. If the Seller knowing the goods to have perished
agreed to sell them, he would be liable for damages according to the High Court of
Australia. In Australia a well-known case of McRae v Commonwealth Disposals
Commission,72 the defendant commission advertised for sale an oil tanker which was
described as stranded at a named reef off the coast of New Guinea. The plaintiff
accepted the offer and incurred expenses in salvage operation to rescue the stated oil
tanker. In fact, there was no tanker at all in the stated locality. The plaintiff was
successful in claiming the salvage cost from the defendant in his action for non-
delivery of the goods as the defendant seller by representation had warranted that
there was a tanker in existence to be rescued.
69 Couturier v Hastie, (1856) 5 HLC 673 : 10 ER 1065 : (1856) Int Com LR 06/26.
70 Barr v Gibson, (1838) 3 M & W 390.
71 Barrow, Lane & Ballard, Ltd v Phillip Phillips & Co, (1929) 1 KB 574 .
72 McRae v Commonwealth Disposals Commission, (1951) 84 CLR 377 : [1951] HCA 79.
The Sale of Goods Act

Chapter II Formation of the Contract

Subject-matter of Contract

S. 8. Goods perishing before sale but after agreement to sell.-

Where there is an agreement to sell specific goods, and subsequently the goods
without any fault on the part of the seller or buyer perish or become so damaged as no
longer to answer to their description in the agreement before the risk passes to the
buyer, the agreement is thereby avoided.

[s. 8.1] English law.—

This section corresponds to section 7 of the English Sale of Goods Act, 1979.

[s. 8.2] Goods perishing before sale but after agreement to sell.—

Section 7 relates to the case where the goods have perished, etc. at the time when the
contract was made. The present section deals with the case where the goods perish,
etc., after the agreement to sell is made and before the risk passes to the buyer. Under
section 7, the contract is void ab initio while under this section the agreement is
avoided. The rule is based on the ground of impossibility of performance. See the
Indian Contract Act, 1872, section 56.

As regards risk, the general rule is that the goods remain at the seller's risk until the
property therein is transferred to the buyer but when the property therein is transferred
to the buyer, the goods are at the buyer's risk whether delivery has been made out
(section 26).

[s. 8.3] Unascertained goods.—

This section, like section 7, applies only to the sale of specific goods. If the sale is of a
certain quantity of unascertained goods, the perishing of the whole quantity of such
goods in the possession of the seller will not relieve him of his obligation to deliver. See
note to section 7, "Unascertained goods perishing before making of contract of sale."

[s. 8.4] Specific goods.—

See definition section 2(14).

[s. 8.5] C.I.F. Contract.—

In this form of contract, the sale of goods is to be performed by delivering documents
representing the goods i.e., of documents giving the right to have the goods delivered
or the possible right, if they are lost or damaged, of recovering their value from the
shipowner or from underwriters. The provisions of sections 7 and 8 relating to sale of
specific goods do not apply to C.I.F. contract as the contract is effected by delivering
the documents.
The Sale of Goods Act

Chapter II Formation of the Contract

The Price

S. 9. Ascertainment of price.-

(1) The price in a contract of sale may be fixed by the contract or may be left to be
fixed in manner thereby agreed or may be determined by the course of dealing
between the parties.

(2) Where the price is not determined in accordance with the foregoing provisions,
the buyer shall pay the seller a reasonable price. What is a reasonable price is a
question of fact dependent on the circumstances of each particular case.

[s. 9.1] English law.—

This section corresponds to section 8 of the English Sale of Goods Act, 1979.

[s. 9.2] Ascertainment of Price.—

In section 4, price is an essential condition of a contract of sale of goods. The question

is as to the mode of fixing the price. This section says down four modes i.e. (i) fixed by
the contract, (is) to be fixed in a manner agreed upon (such as market price prevailing
on a particular date), (iii) by the course of dealings between the parties (such as usual
manufacturing cost, market price or reasonable price), and (iv) reasonable price.

Price may be fixed by control orders issued by government73 or the market authorities.

[s. 9.3] When price is not fixed at the time of transfer.—

Section 4 read with section 2(10) of the Sale of Goods Act, 1930 requires that the
contract of sale must provide for the payment of money as a consideration for the
transfer of goods, or to put it differently, that a price must be paid. But section 9 of the
1930 Act allows the parties not to fix the price at the time of the transfer and to leave
the determination of the amount of consideration to a later date. An agreement which
provides for the future fixation of price either by the parties themselves or by a third
party is capable of being made certain and is not invalid as provided under section 29
of the Indian Contract Act, 1872. [See Illustration (e)] In the particular case in MS
Madhusoodhanan v Kerala Kaumudi Pvt Ltd,74 drawing a distinction between English
law and the Indian law which provides under section 9 for determination of price post
sale, the Court ascertained the fact that the first stage of the agreement for the
immediate transfer of shares was executed. As regards the question as to what would
be the reasonable price for the shares, the Court considered the aspect that the parties
had been at loggerheads and that it was unlikely that they would mutually agree to the
price to be paid for the transferred shares or to a mutually acceptable their party in
terms of the agreement. The article of association provided that fair value of shares
could be fixed by the company by a resolution and might refer the dispute in that regard
to arbitrators. Having regard to the language of section 9(2), the Court held that it
would be appropriate to decree the suit for specific performance of sale and to give
directions for appointment of arbitrators by the parties to determine fair value of
shares for ascertaining the amount of consideration.

In Claude-Lila Parulekar v Sakal Papers Pvt Ltd,75 there existed a pre-emptive right to
purchase some shares left behind by a deceased shareholder of a company in favour
of his widow and the articles of the company provided for a valuation to be determined
by a named auditor, the moment the price is determined and the pre-emptor exercises
the willingness to purchase but still raises a dispute with regard to the valuation, the
contract becomes complete. The Supreme Court held price is required to be fixed
under the terms of an agreement by a third party, the moment the price is fixed and did
not depend upon the payment of price, which was an independent obligation for the
widow as a pre-emptor to perform.

73 Indian Steel and Wire Products Ltd v State of Madras, AIR 1968 SC 478 : [1968] 1 SCR 479 ;
Coffee Board v Commr of Commercial Taxes, Karnataka, AIR 1988 SC 1487 : (1988) 3 SCC 263 .
74 MS Madhusoodhanan v Kerala Kaumudi Pvt Ltd, (2004) 9 SCC 204 : [2003] Supp 2 SCR 107 :
(2003) 6 Scale 191 .
75 Claude-Lila Parulekar v Sakal Papers Pvt Ltd, AIR 2005 SC 4074 : (2005) 11 SCC 73 : JT 2005
(3) SC 523 .
The Sale of Goods Act

Chapter II Formation of the Contract

The Price

S. 10. Agreement to sell at valuation.-

(1) Where there is an agreement to sell goods on the terms that the price is to be
fixed by the valuation of a third party and such third party cannot or does not
make such valuation, the agreement is thereby avoided:

Provided that, if the goods or any part thereof have been delivered to, and
appropriated by the buyer, he shall pay a reasonable price therefor.

(2) Where such third party is prevented from making the valuation by the fault of the
seller or buyer, the party not in fault may maintain a suit for damages against
the party in fault.

[s. 10.1] English law.—

This section corresponds to section 9 of the English Sale of Goods Act, 1979.

[s. 10.2] Agreement to sell at valuation.—

This section declares the consequences flowing from non-fixation of the price by
valuation by a third party.

Where the third party is not willing to value the price, the contract is avoided provided
the goods are not delivered to the buyer.

Where the third party is unable for any reason to value the price, the contract is avoided
provided the goods are not delivered to the buyer,

Where the third party is prevented from valuing the price as a result of the fault of the
seller or buyer, the party in fault is liable to pay damages to the party not in fault.

Where, however, the goods are delivered to buyer before the price is valued, the buyer is
liable to pay to the seller reasonable price for the goods delivered. Such reasonable
price may be fixed by the Court or by arbitrator. The liability to pay reasonable price and
the liability to pay damages are two distinct remedies contemplated by this section.

There is a difference between arbitration and valuation.76 The former is in the nature of
a judicial proceeding while the latter is not in the nature of a judicial proceeding. For the
definition of "fault," see section 2 (5) above.
76 Bos v Helsham, LR (1866) 2 Ex. 72 : 36 LJ Ex 20; Stewart v Williamson, (1910) AC 455 :
(1910) VKHL 2.
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 11. Stipulations as to time.-

Unless a different intention appears from the terms of the contract, stipulations as to
time of payment are not deemed to be of the essence of a contract or sale. Whether
any other stipulation as to time is of the essence of the contract or not depends on the
terms of the contract.

[s. 11.1] English law.—

This section corresponds to section 10(1) and (2) of the English Sale of Goods Act,
1979. Sub-section (3) of the English Act specifically says that the term "month" prima
facie means calendar month.

[s. 11.2] Under Contract Act.—

The general rule of law as contained in section 55 of the Indian Contract Act, 1872 is
that where a party to a contract promises to do a certain thing at or before a specified
time and (fails to do it at or before the specified time, the contract becomes voidable at
the option of the promisee, if the intention of the parties was that time should be of the
essence of the contract. But if it was not the intention of the parties that time should be
of the essence of the contract, the contract does not become voidable by the failure to
do the thing at or before the specified time, and the remedy of the promisee is in
damages for any loss occasioned to him by the failure.

[s. 11.3] Contract for sale of immovable property.—

In the case of contracts for the sale of immovable property, time is not, unless a
contrary intention appears, of the essence of the contract.77 Thus, if A agrees to sell
and B agrees to buy a house belonging to A, and the contract provides that the sale
should be completed on or before a specified day, time is not of the essence of the
contract. The result is that neither party is entitled to avoid the contract merely because
of the failure of the other to perform his part of the contract at or before the specified
time, and the Court may at the suit of either party enforce specific performance of the
contract if such party offered to perform his part of the contract within a reasonable
time after the expiry of the period fixed by the contract.78

[s. 11.4] Contract of sale of goods.—

The law, however, is different as regards contracts for the sale of goods. Section 11 of
the Sale of Goods Act, 1930 contemplates that unless a different intention appears
from the terms of the contract, stipulation as to time of payment is not deemed to be
the essence of a contract of sale. The question whether time is the essence of the
contract depends on the terms of the contract.79

Though section 11 makes it clear that stipulations as to time of payment would ordinarily be
not of the essence of contract for sale of goods, yet on the question whether the time of
delivery of goods would also be not of the essence of the contract the section merely says
that it depends on the terms of the contract. In ordinary commercial contracts for sale of
goods time is prima facie of the essence with respect to delivery. When forward contracts
are entered into by parties who are anticipating fluctuations in prices, in the absence of any
evidence to the contrary, the prima facie view that in commercial transactions of this type
time is of essence of delivery may be accepted. The parties who are gambling on
fluctuations in prices must obviously have intended that time was of the essence of
contract.80

Though the Act does not lay down any general rules the courts have done so. "In
ordinary commercial contracts for the sale of goods the rule clearly is that time is
prima facie of the essence with respect to delivery".81 This rule applies not only when
the seller is under obligation to dispatch the goods to the buyer but also when the
buyer has to collect the goods from the seller. Thus, section 11 makes a distinction
between stipulations as to time of payment and other stipulations as to time. Prima
facie the former is not the essence of contract but regarding the other stipulations as
to time, the law raises no prima facie presumption. The words "not deemed to be of the
essence of a contract of sale" would mean that the failure by the buyer to pay the price
in time would not as a rule entitle the seller to treat the contract as repudiated.82

The words "unless a different intention appears from the terms of the contract" would
cover the case of a sale of perishable cargo C.I.F. wherein it was stipulated that the
payment should be made in exchange of bill of lading and insurance policy. In such a
contract, time for payment is of the essence of the contract the buyer is under an
obligation to pay within a reasonable time after the shipping documents are tendered
to him even if at that time of tender of shipping documents the goods have not arrived
at the port of delivery.83 The defendant company agreed to manufacture and deliver to
plaintiff 50 Rly. wagons of certain specifications. These wagons were to be delivered in
six months from the date of receipt by the defendant company of an order for wagons.
Regarding payment, the plaintiff should pay 1/3 of the price on the order for wagons
being given, other 1/3 of the price when under frames of the wagons should be
wheeled and the remaining 1/3 when wagons should be delivered. The contract
contained no provision regarding extension of time for delivery of wagons. It was held
that as the price was to be paid at certain times; that the manufacture of wagons
involved considerable expenditure of men and materials and that it might be difficult to
enforce payment against His Highness—the plaintiff—, hence the time of payment was
of the essence of the contract and so when the plaintiff failed to pay the second
instalment, the defendant company became entitled to repudiate the contract. But the
defendant company by delivering eight wagons treated the contract as a subsisting
contract and the defendant company was not on that delivery of eight wagons entitled
to insist on payment for them as the contract price was not payable until 50 wagons
had been delivered.84 As regards the other stipulations of time it may be stated that if
time is specified for delivery of goods or for doing any other act, delivery must be made
or the act done at the specified time. Thus, if A agrees to sell and deliver goods to B on
a certain day, he must deliver them on that day. If he fails to do so B is entitled to put an
end to the contract. The leading English case on the subject is Reuter v Sala.85 In that
case A agreed to sell to B 25 tons of pepper of October shipment, and to declare the
name of the vessel and other particulars to B within 60 days of the bill of lading. Only
20 tons were declared within the 60 days, the remaining 5 tons having been declared
subsequently. B refused to accept the goods, and it was held that he was justified in
doing so.
Where time is of the essence of the contract and is extended, the extended date is also
of the essence of the contract.86 In a Calcutta case,87 on 1 October 1910 plaintiff
engaged the defendants elephant up to 31 March 1911 to capture wild elephants at a
certain price. Defendant agreed to deliver to plaintiff on 1 October 1910 but obtained
extension of time till 6th of that month for delivery of elephants. The defendant did not
deliver elephant till 11 October 1910. It was held that parties intended that time should
be of essence of contract. Defendant asked for extension of time for delivery of
elephant, which showed that time was of the essence of the contract and so defendant
was liable for breach of the contract.

As regards the relative obligations of the seller to deliver and of the buyer to pay the
price, see section 32 below. Payment and delivery are concurrent conditions.

[s. 11.5] Any other stipulation as to time.—

As regards the time for payment, the first part has provided.

As regards the time for performing any other part of the contract, whether the
stipulation as to time is of essence of the contract or not, one has to refer to and
construe the terms of the particular contract. Such intention is to be gathered from (i)
the language used on the contract, (ii) nature of the goods sold, (iii) conduct of the
parties such as extending the date of performance, and (iv) surrounding circumstances
at the time of making of the contract.88 A provision for default clause and providing a
penalty may not be sufficient.82

77 Pakharshing v Kishansingh, AIR 1974 Raj. 112 : 1973 WLN 630 .

78 Jamshed v Burjorji, (1916) 43 IA 26 : 40 Bom 289.
79 Sharma Enterprises v Hotel Leelaventure Ltd, CS(OS) No. 2254 of 1989, decided on
13.04.2009 (Delhi HC)
80 Ramdhan Das v Kishori Chand, AIR 1954 Ori. 254 .
81 Hartley v Hymans, (1920) 3 KB 475 at 484.
82 Martindale v Smith, (1841) 1 QB 389 : 55 RR 285.
83 Ryan v Ridley & Co, (1902) 8 Com Cas 105 .
84 Bunt & Co v HH Shri Lukhdhiraj of Morvi State, AIR 1925 PC 188 : 90 Ind Cas 52.
85 Reuter v Sala, (1879) 48 LJCP 492 (Sale of pepper) : (1879) 4 CPD 239 (249).
86 Orissa Textile Mills v Ganesh Das, AIR 1961 Pat. 107 .
87 Bhudar Chandra Goswami v Betts, AIR 1916 Cal 901 : 33 Ind Cas 347.
88 Pakharsingh v Kishansingh, AIR 1974 Raj. 112 : 1973 WLN 630 .
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 12. Condition and warranty.-

(1) A stipulation in a contract of sale with reference to goods which are the subject
thereof may be a condition or a warranty.

(2) A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated.

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

(4) Whether a stipulation in a contract of sale is a condition or a warranty depends

in each case on the construction of the contract. A stipulation may be a
condition, though called a warranty in the contract.

[s. 12.1] English law.—

The English law that excludes Scotland for its applicability is contained in section 11 of
the English Sale of Goods Act, 1979. It includes the provision as contained in section
13 of the Indian counterpart.

[s. 12.2] Condition and warranty explained.—

During negotiation parties exchange many statements regarding the subject matter of
the contract. Whatever the parties say during the course of such negotiation leading to
the formation of the contract may or may not become the part of the contract. These
statements may be classified either as the term of the contract or as mere
representation not forming the term of the contract. If a statement is a mere
representation which cannot be called a term of the contract, it cannot be either a
condition or a warranty. It is only if it is a term of a contract, then it can be either a
condition or a warranty. When the statement becomes the term of the contract of sale,
the obligations on the seller under a contract of sale are not all of equal importance.
There are some which go so directly to the root or substance of the contract, or, in
other words, are so essential to its very nature that their non-performance may fairly be
considered by the other party as a substantial failure to perform the contract at all.
Such obligations are called conditions. In a contract to sell peas, if the seller sends
anything else in their stead it is a breach of a condition.89 On the other hand, there are
other obligations which, though they must be performed, are not so vital that a failure
to perform them goes to the root or substance of the contract. These are called
warranties.90
[s. 12.3] Commendation by seller of his goods.—

Mere words of commendation used by a seller in reference to his wares do not

constitute a warranty in respect of those wares.91

[s. 12.4] Remedies of buyer arising from breach of condition and breach of
warranty.—

The remedies of the buyer arising from a breach by the seller of a condition and a
breach of a warranty are different. In both cases the buyer is entitled to damages. But
in the case of a breach of a condition he has the option of another remedy, namely, of
treating the contract as repudiated and rejecting the goods altogether, provided he has
not accepted the goods or any part thereof, or, in the case of specific goods, the
property has not passed to him (see section 13).

In Svenska Handelsbanken v Indian Charge Chrome,92 the contract stipulated a

condition for establishing a power plant of 108 mw capacity. There was a breach of
condition. Therefore, the plaintiff could have repudiated the contract as provided in
section 12(2) of the Sale of Goods Act, 1930 or treated as a warranty by waiving the
condition or elect to treat the breach of the condition as a breach of warranty and not
as a ground for treating the contract as repudiated. The plaintiff had not repudiated the
contract. In fact, the plaintiff was working with the power plant and, therefore, the
breach of condition had been treated by the plaintiff as a breach of warranty and in
view of section 12(3) of the Sale of Goods Act, 1930 the breach of warranty only gave a
right to claim for damages but not to a right to reject the goods and treat the contract
as repudiated.

In CN Anantharam v Fiat India Ltd,93 the buyer of a car had complained of major
manufacturing defect. The buyer had sought for replacement of vehicle and refund of
cost. The National Commission before which the case was prosecuted directed
delivery of vehicle to petitioner after having the same properly checked by independent
technical expert who would have to certify that vehicle was free from any defect when
it was delivered. The question was whether a manufacturing company and by
extension dealer/agent was under any compulsion to replace vehicle itself when engine
of vehicle from which certain noises were allegedly emanating had been replaced. The
National Commission took note of the fact the vehicle had done only 800 kilometres
and had found that apart from complaint relating to noise from engine and gear box,
there was no other major defect which made vehicle incapable of operation,
particularly when engine was replaced with new one. The Court directed that if
independent technical expert was of opinion that there were inherent manufacturing
defects in vehicle, the petitioner would be entitled to refund of price of vehicle and
lifetime tax and EMI along with interest at the rate of 12% per annum.

[s. 12.5] Express or implied conditions and warranties.—

Conditions and warranties are either express or they are implied by law. Conditions and
warranties implied by law are enumerated in sections 14 to 17 below.

[s. 12.6] Construction of condition and warranties.—

As regards express conditions and warranties, no particular form of words is necessary
to create a condition or warranty. The question in such a case is what the parties
intended, whether they intended that a term or stipulation should operate as a condition
entitling the buyer to treat the contract as repudiated and to reject the goods if the
stipulation is not fulfilled, or that it should operate as a mere collateral contract or
warranty for the breach of which the remedy of the buyer is an action for damages.
Where the contract is in writing, and it is not ambiguous, it is conclusive evidence of
their intention, and to put a meaning on the contract is simply a question of
construction for the Court. If the contract is ambiguous, so that the intention cannot be
read on the face of the document, the Court may look at the surrounding facts and
circumstances to determine what the parties intended.94 A stipulation may be a
condition, though called a warranty in the contract. It is important to note that an
express condition or warranty does not negative a condition or warranty implied by the
Act unless inconsistent therewith [section 16(1)].

89 Lord Arbinger, C.B. in Chanter v Hopkins, (1838) 4 M & W at p 404 : 51 RR at p 654;

Drummond v Van Ingen, (1887) 12 App Cas 284 .
90 Wallis v Pratt, (1910) 2 KB 1003 , 1012 : (1911) AC 394 .
91 Bannerman v White, (1861) 31 LJCP 28 : 142 ER 685 : 10 CB (NS) 844.
92 Svenska Handelsbanken v Indian Charge Chrome, (1994) 1 SCC 502 : AIR 1994 SC 626 : JT
1993 (6) SC 189 .
93 CN Anantharam v Fiat India Ltd, AIR 2011 SC 523 : JT 2011 (1) SC 202 : 2011 (1) RCR (Civil)
246 : 2010 (12) Scale 359 : (2011) 1 SCC 460 : 2011 (1) UJ 205 (SC).
94 See Behn v Burness, (1863) 32 LJQB 304 . See also the Indian Evidence Act, 1872, sections
91 and 92.
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 13. When condition to be treated as warranty.-

(1) Where a contract of sale is subject to any condition to be fulfilled by the seller,
the buyer may waive the condition or elect to treat the breach of the condition as
a breach of warranty and not as a ground for treating the contract as repudiated.

(2) Where a contract of sale is not severable and the buyer has accepted the goods
or part thereof 95[***] the breach of any condition to be fulfilled by the seller can
only be treated as a breach of warranty and not as a ground for rejecting the
goods and treating the contract as repudiated, unless there is a term of the
contract, express or implied, to that effect.

(3) Nothing in this section shall affect the case of any condition or warranty
fulfilment of which is excused by law by reason of impossibility or otherwise.

[s. 13.1] English law.—

This section corresponds to sections 11(2), (4) and (6) of the English Sale of Goods
Act, 1979.

[s. 13.2] Sub-section (1): Waiver of condition.—

Where a contract is subject to a condition to be fulfilled by the seller, the buyer may
waive the condition. If he does so waive, he cannot afterwards insist on its fulfilment. A
buyer may accept either defective goods or beyond stipulated time. Waiver may be
express or implied.

[s. 13.3] Election by buyer to treat breach of condition as breach of warranty.—

Where a contract of sale is subject to any condition to be fulfilled by the seller, and the
seller commits a breach of the condition, the buyer may treat the contract as
repudiated and refuse to accept the goods. He is not, however, bound to do so. He may
accept the goods and, treating the breach of the condition as a breach merely of a
warranty, set up against the seller the breach of the warranty in diminution of the price,
or he may sue the seller for damages for breach of warranty. A buyer who has used the
goods cannot repudiate the transaction and demand a free replacement even without
payment of price. The buyer who wants the benefit of the bargain shall act as per the
terms of the contract stipulations as regards payment, if he could complain of breach
of warranty to sustain a claim for damages.96 See note to section 12 above "Remedies
of buyer arising from breach of condition and breach of warranty." See also section 56
below.

[s. 13.4] Sub-section (2): Where goods accepted or property in goods has
passed.—

The substance of the rule contained in this sub-section is that the right which the buyer
has to treat the contract as repudiated on the breach of a condition by the seller cannot
be exercised if he has accepted the goods, the remedy of the buyer is confined to
damages.

This gives rise to the following question:—

When is the buyer deemed to have accepted the goods?

The buyer is deemed to have accepted the goods when he intimates to the seller that he
has accepted them, or when the goods have been delivered to him and he does any act
in relation to them which is inconsistent with the ownership of the seller, e.g., reselling
the goods without examination or, where he uses them, or where, after the lapse of a
reasonable time, he retains the goods without intimating to the seller that he has
rejected them; see section 42 (acceptance). Where goods are sold subject to a
"condition" to be fulfilled by the seller, and the buyer has accepted the goods, he is not
entitled to reject the goods, unless there is a term of the contract to that effect. He can
only treat the breach of the condition as a breach of warranty and claim damages. This
is so even in the case of specific goods, the property in which has passed to the buyer.
The rules as to the passing of property are laid down in Chapter III. Instances of both
these classes of cases are given in the notes under section 16 below (implied
conditions as to quality or fitness).

The words "or where the contract is for specific goods the property in which has
passed to buyer" are omitted by section 3 of the Indian Sale of Goods (Amendment)
Act, 33 of 1963 as these words (now omitted) gave rise to some difficulty which may
be explained here. Under section 20 of the Sale of Goods Act, 1930 property in the
specific goods in a deliverable state passes when the contract is made. Under section
17(2) of the Sale of Goods Act, 1930 when there is a contract for the Sale of Specific
Goods by sample, it is required that the bulk to correspond with the sample in quality.
Though by section 20 of the Act the property (i.e., ownership) passes to the buyer when
the contract is made, it may happen that the goods are subsequently delivered and they
may not correspond with the sample. Therefore, before the amendment in 1963 the
position came to be that an implied condition raised by section 17(2)(a) had to be
treated as warranty under section 13(2). While breach of condition entitled the buyer to
repudiate the contract and breach of warranty entitled him to claim only damages. To
resolve this conflict between section 13(2) (as it originally stood before amendment in
1963) and section 17(2)(a), it was felt that section 13(2) be amended by deleting the
case of sale of specific goods and this amendment was made. So the amendment
allows a buyer an option to choose between repudiation of contract or to claim simply
damages.

[s. 13.5] Sub-section (3).—

This sub-section saves the right of the seller, in appropriate cases, to rely upon the
impossibility as an excuse to himself, if sued by the buyer. The words "excused by law
… or otherwise" are wide enough to cover provisions of other statutes and notification97
and the conduct of buyer as well. See the Indian Contract Act, 1872 section 56
[Agreement to do impossible act, etc.], and sections 62 to 67 [Contracts which need not
be performed].

95 The words "or where the contract is for specific goods the property in which has passed to
the buyer" omitted by section 3 of the Indian Sale of Goods (Amendment) Act (Act 33 of 1963)
(w.e.f. 22-9-1963).
96 See Kailash Sharma v The Patna Municipal Corp, AIR 2009 Pat. 10 : 2008 (57) BLJR 97 : 2009
(2) Pat LJR 378 .
97 Esposito v Bowden, (1857) 7 E&B 763 (781) : (1857) 119 ER 1430 ; United States v Pelly,
(1899) 15 Tax LR 166 : 4 Commercial Cases 100 (1899) (Declaration of War).
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 14. Implied undertaking as to title, etc.-

In a contract of sale, unless the circumstances of the contract are such as to show a
different intention there is—

(a) an implied condition on the part of the seller that, in the case of a sale, he has a
right to sell the goods and that, in the case of an agreement to sell, he will have a
right to sell the goods at the time when the property is to pass;

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

(c) an implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the buyer
before or at the time when the contract is made.

[s. 14.1] English law.—

This section corresponds to sections 12(1) to (3) of the English Sale of Goods Act,
1979.

[s. 14.2] Implied conditions and warranties.—

As has already been stated, conditions and warranties are either express or they are
implied by law. See notes to section 12, "Express conditions and warranties." Sections
14 to 17 deal with implied conditions and warranties.

[s. 14.3] Implied condition as to title.—

In every contract of sale, unless the circumstances of the contract are such as to show
a different intention, there is an implied condition on the part of the seller that, in the
case of a sale, he has a right to sell the goods. Thus, if A sells to B tins of condensed
milk labelled "Nissly brand," and this is proved to be an infringement of N. Company's
trade mark, it is a breach of the implied condition that A had the right to sell. In the
Court of Appeal Scrutton LJ thought that defendants could have been restrained by
injunction from selling them (tins of condensed milk) because they were infringing the
rights of third persons. If a vendor can be stopped by process of law from selling, he
has not the right to sell. B may therefore reject the goods, or take off the labels, and
claim damages for the reduced sale value.98 Defendants had broken also the implied
condition that the goods should be merchantable quality [mentioned in section 16(2) of
our Act] and implied warranty that buyers should have and enjoy quiet possession of
the goods [mentioned in section 14(b) of our Act].

If the seller has no title, and the buyer has to give up the goods to the real owner, he is
entitled to a return of the price.99 The circumstances, however, of the contract may be
such as to show that there was no condition as to title. Thus, where goods seized
under a distress warrant are sold by public auction and the buyer knows that they are
sold under a distress, the auctioneer is not liable if the warrant turns out to be invalid
and the buyer has to return the goods. The same principle applies in case of sale held
by the sheriff in execution of the decree.100 The buyer in such a case takes the risk of
the warrant turning out invalid.101

[s. 14.4] Implied warranty of quiet possession.—

In every contract of sale, unless the circumstances of the contract are such as show a
different condition, there is an implied warranty that the buyer shall have and enjoy
quiet possession of the goods. If there is a breach of this warranty, the seller is liable to
the buyer in damages.

[s. 14.5] Implied warranty that goods are free from encumbrances.—

There is also an implied warranty on the part of the seller that the goods are free from
any charge or encumbrance. If the goods are afterwards found to be subject to a
charge in favour of a third party, the seller is liable to the buyer in damages.

98 Niblett v Confectioners' Materials Co, (1921) 3 KB 387 .

99 Rowland v Divall, (1923) 2 KB 500 : (1922) R 2746 (Case of stolen goods).
100 Dorab Ally v Executors Khajah Moheeoodeen, 3 Cal 806 (PC) : (1878) ILR 3 Cal 806.
101 Payne v Elsden, (1900) 17 Tax LR 161 .
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 15. Sale by description.-

Where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with the description; and, if the sale is by
sample as well as by description, it is not sufficient that the bulk of the goods
corresponds with the sample if the goods do not also correspond with the description.

[s. 15.1] Implied condition in sales by description.—

In the case of a sale of goods by description there is an implied condition that the
goods shall correspond with the description. It is a condition which goes to the root of
the contract and the breach of it entitles the buyer to reject the goods whether the
buyer is able to inspect them or not.102 "If you contract to sell peas, you cannot oblige a
party to take beans. If the description of the article tendered is different in any respect,
it is not the article bargained for, and the other party is not bound to take it."103

[s. 15.2] What is a sale by description.—

The term "Sale of Goods by description" applies to all cases—unascertained goods,

future goods and also specific goods—where the purchaser has not seen the goods but
is relying on the description alone.104 The expression "description" usually means a
particular class or kind of goods (e.g., Fair Bengal Cotton, Java Sugar) but it also
includes any statement which may be essential to the identity of the goods as
contracted for i.e., the quality or fitness, place of shipment, time of dispatch or delivery,
time of shipment, mode of packing. Falsity of description renders the goods
substantially different amounting to failure of consideration.105 Where goods are
bought by description, there is an implied condition that goods shall be of
merchantable quality. The "merchantable" is not defined in the Act. Merchantable
quality is fulfilled when goods do not differ from the normal quality of the goods
described. The goods should be immediately saleable under the description by which
they are known in the market.106 When goods are sold by description it is an implied
term of the contract that they shall answer the description and so it is not much
essential to inquire whether buyer had opportunity to inspect the goods or not.107 A
sale in a shop could become a sale by description so long as it is sold not merely as
the specific thing but as a thing corresponding to a description e.g., woollen
undergarments or a hot water bottle.108 Buyer can reject goods for breach of condition
although he suffers no damage as the goods may be of merchantable quality.109

A buyer may also rely on his alternative remedy and sue for damages for breach of
warranty.110

Illustrations
(a) A, at Calcutta, sells to B 12 bags of "waste silk" then on its way from Murshidabad
to Calcutta. There is an implied condition that the silk shall be such as is known in the
market as "waste silk." If it is not, B is entitled to reject the goods.

(b) A agrees to sell to B "Calcutta linseed," then on its way from Calcutta to England.
Linseed sent to England from Calcutta contains about two or three per cent of other
seeds, while the seed tendered to B contains about 15 per cent, and is not saleable in
the market as Calcutta linseed. B may refuse to accept the goods. But if he accepts
them, he can only claim damages as on a breach of warranty.111 [Section 13(2).]

(c) A sells to B 50 parcels of sawn lath to be of "about the specification" mentioned in

the contract. Thirty-three per cent of the laths shipped under the contract are not of
"about" the specification nor commercially within its meaning. The buyer is entitled to
reject the whole consignment.112

(d) A agrees to sell to B rice "to be shipped at Madras during the months of March
and/or April, about 300 tons, per Rajah of Cochin." Part of the cargo is shipped in
February and part in March. B may refuse to accept any of the rice, the goods not
corresponding with the description.113

(e) Plaintiff agreed to sell to the defendant tea in chests containing 80 pounds of tea.
Plaintiff tendered tea chests containing 76 pounds of tea. The defendant was entitled
to reject the goods114 as any statement in contract for sale of goods as to mode of
packing also forms part of description.

(f) A agrees to sell and B agrees to buy a reaping machine which B has never seen and
which is represented by A to have been new the previous year and used to cut only 50
to 60 acres. After delivery B finds that the machine does not correspond with A's
representations. B is entitled to return the machine.115 The mere fact that B has taken
delivery does not constitute acceptance (see section 42). In the case last cited
Channell J, said in the course of his judgment: "The term sale of goods by description
must apply to all cases where the purchaser has not seen the goods, but is relying on
the description only." But, as stated by Chalmers,116 it may apply even where he has
seen the goods if the deviation of the goods from the description is not apparent.

(g) In a contract for sale by description Defendant agreed to sell to PI "damangan Toor
Dal" which was recognised as of the best quality. Plaintiff never examined the goods.
Defendant loaded the goods in rain and even R/R contained note that when goods were
loaded in train, they were drenched by rain. So when the goods arrived at the
destination, they no longer answered the description and could not be sold as "Toor Dal
of the best quality." It was held; goods were not of merchantable quality.117

[s. 15.3] Implied condition as to description distinct from that relating to

quality.—

The implied condition in sales by description, namely, that the goods shall correspond
with the description, is quite distinct from the implied condition as to quality dealt with
in the next section. Thus, a contract may contain terms whereby the seller may guard
himself from any responsibility as to quality; yet if the sale is by description he is bound
to supply goods which correspond with the description.118 In Wallis v Pratt, seller sold
by sample Common English Sainfoin seed giving no warranty express or implied as to
growth, description or any other matters. The seed supplied was identical with sample
but was giant sainfoin, a seed of inferior quality. It was held by the House of Lords that
the exemption clause did not protect the sellers and they were liable to pay damages to
the buyer as in the case of breach of warranty. The goods supplied cannot be regarded
as the goods ordered as a contract for common English Sainfoin seed is not performed
by delivery of giant sainfoin. The Court felt that exemption clause regarding warranty
cannot exclude a breach of condition which was to deliver common English Sainfoin.
Again, a contract may contain a term that if the goods should turn out inferior in quality
the buyer should not be entitled to reject them but should be entitled only to a fair
allowance for inferiority in quality, or it may contain a term that should any dispute arise
between the buyer and the seller, it should be referred to arbitration; neither of these
terms relieves the seller from the obligation to supply goods corresponding with the
description.119 The implied condition under section 16, sub-section (1) is, unless the
contract otherwise provides, in addition to the condition in this section.

A man may require goods for a particular purpose and make it known to the seller so as to
secure the implied condition of fitness for that purpose: but there is no reason why he
should not abandon that purpose if he pleases and apply the goods to any purpose for
which the description makes them suitable. If they do not correspond with the description,
there seems no business or legal reason why he should not reject them if he finds it
convenient so to do.120

In Arcos case the contract was to supply timber of 1/2 inch thickness for being made
into cement barrels and this was known to the sellers. The timber supplied varied in
thickness. The House of Lords held that the buyer was entitled to reject the timber on
the ground of breach of condition as to description. Lord Atkin said:

If the written contract specifies conditions of weight, measurement … those conditions must
be complied with. A ton does not mean about a ton or a yard about a yard … If the seller
wants a margin he must and does stipulate for it … No doubt there may be microscopic
deviation which businessmen and therefore lawyers will ignore … But apart from this
consideration of the right view is that the conditions of the contract must be strictly
performed.

The court rejected the seller's contention that in all commercial contracts the question
was whether there was a substantial compliance with the contract.121

[s. 15.4] Sale by sample as well as description.—

If the sale is by sample as well as by description, it is not sufficient that the bulk of the
goods corresponds with the sample if the goods do not also correspond with the
description. The fundamental condition is that the goods must correspond with the
description. The stipulation that the goods shall be according to the sample affects the
quality and not the nature of the article.122 Therefore, though the bulk may agree with
the sample, yet if the bulk does not correspond with the description in the contract, the
condition is broken and the buyer is entitled to reject the goods.

Illustrations

(a) A buys by sample, 100 bales of "Fair Bengal" cotton, and after having inspected the
bulk, the cotton proves not to be such as is known in the market as "Fair Bengal." A may
reject the goods when delivered to him.

(b) A sells to B five parcels of "foreign refined rape oil warranted only equal to samples."
The samples consist of rape oil mixed with hemp oil. The oil tendered corresponds with
the samples, but it is not such as is known in the market as "foreign refined rape oil." B
may reject the goods. "The warranty affects only the quality, but not the nature of the
article itself."123

[s. 15.5] Sale by description and sample.—

When a sale is by sample alone the duty is lesser as compared when sale is by sample
as well as by description where the goods must correspond with the description as well
as by sample.124

102 Jones v Just, (1866) LR 3 QB 197 (204).

103 Bowes v Shand, (1877) 2 App Cas 455 , 460.
104 Varley v Whipp, (1900) 1 QB 513 .
105 Sorabji M Joshi & Co v Ismail, AIR 1960 Mad. 520 .
106 See Sorabji Case, AIR 1960 Mad. 520 .
107 Beale v Taylor, (1967) 1 WLR 1193 : (1967) 3 All ER 253 ; Car advertised as 1961 model.
Buyer examined car before sale. Deviation from description in advertisement not apparent on
reasonable examination. Buyer was entitled to damages as seller was selling a car of
description as advertised.
108 Grant v Australian Knitting Mills Ltd, AIR 1936 PC 34 at 41 : (1935) All ER 209 at 215.
109 Arcos Ltd v Ronaasen & Son, (1933) All ER Rep 646 : (1933) AC 470 .
110 Sha Thilokchand Poosaji v Crystal & Co, AIR 1955 Mad. 481 .
111 Wieler v Schilizzi, (1856) 25 L.J.C.P. 89; National Traders v Hindustan Soap Works, AIR
(1959) Mad. 112 (Caustic Soda Solid No. 97/98 U.S.A.).
112 Vigers v Sunderson, (1901) 1 KB 608 .
113 Bowes v Shand, (1877) 2 App Cas 455 .
114 Journal Kasturchand v Hassanali Khanbhai, (1954) A. Saur. 79 AIR 1954 Guj 79 ; Citing
Moore & Co v Landauer & Co, (1921) 2 KB 519 .
115 Varley v Whipp, (1900) 1 QB 513 ; Re Beharilal, (1955) AM 271 : AIR 1955 Mad. 271 .
116 Chalmers' Sale of Goods, 10th Edn, p 45.
117 Shivallingappa S. Mendse v Balkrishna Chettiar, AIR 1962 Mad .426 .
118 Wallis v Pratt, (1911) AC 394 : (1910) 2 KB 1003 .
119 Azemar v Casella, (1867) 30 L.J.C.P. 124; Vigers v Sanderson, (1901) 1 KB 608 .
120 Arcos, Ltd v A Ronaasen & Son, (1933) AC 470 (HL).
121 Arcos, Ltd v A Ronaasen & Son, (1933) AC 470 , pp 479–480 (HL).
122 Nichol v Godus, (1854) 23 LJ Ex 314 : 10 Exch 191 : 102 RR 523.
123 Nichol v Godus, (1854) 23 LJ Ex 314 : 10 Exch 191 : 102 RR 523.
124 See Willis v Pratt, (1910) 2 KB 1003 , 1012.
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 16. Implied conditions as to quality of fitness.-

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, except as follows:—

(1) Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required, so as to show that the
buyer relies on the seller's skill or judgment, and the goods are of a description
which it is in the course of the seller's business to supply (whether he is the
manufacturer or producer or not), there is an implied condition that the goods
shall be reasonably fit for such purpose:

Provided that, in the case of a contract for the sale of a specified article under
its patent or other trade name, there is no implied condition as to its fitness for
any particular purpose.

(2) Where goods are bought by description from a seller who deals in goods of that
description (whether he is the manufacturer or producer or not), there is an
implied condition that the goods shall be of merchantable quality:

Provided that, if the buyer has examined the goods, there shall be no implied
condition as regards defects which such examination ought to have revealed.

(3) An implied warranty or condition as to quality or fitness for a particular purpose

may be annexed by the usage of trade.

(4) An express warranty or condition does not negative a warranty or condition

implied by this Act unless inconsistent therewith.

[s. 16.1] Caveat emptor.—

The next question to consider is whether if the goods correspond with the description,
but are of inferior quality or damaged or unfit for some particular purpose, the buyer is
entitled to reject them or whether he takes the risk as to their quality and condition.
This section adopts the English Common Law maxim to caveat emptor in its first part
and then lays down exceptions to that maxim.

Upon sale of goods, the general rule with regard to their nature or quality is caveat
emptor, so that in the absence of fraud, the buyer has no remedy against the seller for
any defect in the goods not covered by some condition or warranty, expressed or
implied. It is beyond all doubt that, by the general rules of law there is no warranty of
quality arising from the bare contract of sale of goods, and that where there has been
no fraud, a buyer who has not obtained an express warranty, takes all risk of defect in
the goods, unless there are circumstances beyond the mere fact of sale from which a
warranty may be implied. No one ought in ignorance to buy that which is the right of
another. The governing maxim is, caveat emptor qui ignorare non debuit quod jus
alienum emit, meaning "let a purchaser beware; who ought not to be ignorant that he is
purchasing the rights of another". The buyer has to be cautious, as the risk is his and
not that of the seller. In the context of levy of penalty for import of gold and silver on
the basis of forged special import licence, the Supreme Court applied the doctrine in
Commr of Customs (Preventive) v Aafloat Textiles (I) Pvt Ltd,125 to the purchaser who
pleaded that he was ignorant of the forged character of SIL and found the import to be
unauthorised and upheld the contention of the Revenue that penalty was justified. The
Supreme Court reasoned that the question of whether the buyer had made any enquiry
as to the genuineness of the import licence shall be within his special knowledge. He
has to establish that he made enquiry and took requisite precautions to find out about
the genuineness of the import licence which he was purchasing. If he has not done
that, consequences have to follow.

The principle of "caveat emptor", buyer beware, under the Sale of Goods Act cannot be
applied to an examinee at a public examination. At best, what may be noticed by such
an examinee is a torn question paper, mutilated or smudged question etc. This does
absolve the respondents of their basic duty to provide correct question papers.126

This section begins with an enunciation of the rule involved in the maxim caveat
emptor. It then proceeds to lay down three exceptions to the rule, the first in sub-
section (1), the second in sub-section (2) and the third one in sub-section (3). It says
that there is no implied warranty or condition as to the quality (which includes stale or
condition) or fitness for any particular purpose of the goods supplied under a contract
of sale except in two cases. In the first case [sub-sections (1) and (3)], there is an
implied condition that the goods are reasonably fit for the purpose for which they are
required. In the second case [sub-section (2)], there is an implied condition that the
goods are of merchantable quality. In all other cases the buyer takes the risk as to the
quality, condition and fitness of the goods. If he wants to protect himself in such cases,
he must do so by an express warranty or condition.

[s. 16.2] Sub-section (1): First exception: Implied condition as to quality or

fitness.—

The first class of cases is where—

(i) the buyer makes known to the seller the particular purpose for which the goods
are required;

(ii) the buyer relies on the seller's skill or judgment; and

(iii) the goods are of a description dealt in by the seller, whether he be the
manufacturer or not.

In such cases there is an implied condition that the goods sold are reasonably fit for
the purpose for which they are bought. The three conditions mentioned above must co-
exist. They may be considered in order.

(i) Firstly, the particular purpose for which the goods are required must be made known
to the seller. The purpose may be made known expressly or by implication. It should be
made known expressly if the goods may be used for a multitude of purposes, for then
the buyer should inform the seller of the particular purpose for which he requires the
goods.127 But the purpose may be made known by implication and without any express
notification. This implication may arise from the very nature of the goods. The
description or the goods may be such as to show that they are required for a particular
purpose. If a fishmonger sells oysters he must know that they are required for the
particular purpose of being eaten.128 If a retail dealer in woollen goods sells
underpants he must know that they are required for particular purpose of being worn
next to the skin.129 The seller being a dealer in the goods sold there is a presumption
that the buyer relies on his skill or judgment. The seller is therefore liable if the oysters
are poisonous or if the underpants cause skin disease.

Illustrations

(a) A goes to a chemist's shop and asks for a hot-water bottle. He is shown a bottle
which the chemist says will not stand boiling water, but is meant for hot water. A buys
the bottle. After a few days, while using it, it burst and injures A. It is found that the
bottle was not fit for use as a hot-water bottle. This is a sale of an article required for
the purpose of holding hot water, and it is a "particular purpose" within the meaning of
sub-section (1). There is therefore an implied condition that the bottle is fit for that
purpose, and the seller is liable in damages for a breach of warranty.130

(b) A goes to a milk dealer and buys milk for family use. At the time of sale the milk
dealer gives A a printed statement that the milk was free from the germs of disease.
The milk supplied contains typhoid germs, in consequence whereof A's wife is infected
and dies. Here the purpose for which the milk was supplied was sufficiently made
known by the buyer to the seller by its description. There was therefore an implied
condition that the milk was reasonably fit for human consumption. The milk, not being
so fit, the milk dealer is liable in damages for a breach of warranty.131

(c) A sells to B a boiler for the purpose of manufacturing carbon paper. The boiler does
not satisfy the requirements of the Indian Boilers Act. B is entitled to recover
damages.132

(d) A contracts to make and deliver a set of false teeth to B. The false teeth do not fit in
the mouth of B. B is entitled to reject the goods.133

(ii) Secondly, the buyer must have relied on the seller's skill or judgment. Where the
special purpose for which the goods are ordered is disclosed to the seller, and the order
is accepted in the terms in which it is given, such an acceptance is sufficient to show
that the buyer has relied on the seller's skill and judgment without any further evidence
on the point.134 The special purpose may be disclosed by implication arising out of the
description of the goods sold, for they may be such as can only be required for one
particular purpose. In such cases the buyer goes to the shop in the confidence that the
tradesman has selected his stock with skill and judgment.135 It is obvious that if the
buyer himself selects the articles, there is no implied condition as to fitness.136 The
following passage from Benjamin on Sale,137 has received judicial approval:

Where it is part of the contract that goods shall be made according to a certain plan or
according to a certain style, shape, or form, or of specified materials, the buyer relies upon
his own judgment as to the sufficiency of the plan, style, etc., or of the materials for
effecting the purpose contemplated, the only liability thee of the manufacturer is to execute
the work according to the plan, etc., and in a workman-like manner, and to exercise due care
and skill in the selection and testing to the materials, in the absence of an express
engagement on his part to produce goods which will be adapted to the buyer's purpose.138

(iii) Lastly, the goods must be of a description which it is in the course of the seller's
business to supply, as where bread is bought from a baker, milk from a milk dealer, coal
from a dealer in coal, and copper for sheathing vessels from a copper manufacturer.
There is no implied condition if the goods are not of a description dealt in by the seller.
This sub-section applies to sale of specific goods at the counter.139
[s. 16.3] Sale of article under patent or trade name.—

In the case of a contract for the sale of a specified article under its patent or other trade
name, there is no implied condition for its fitness for any particular purpose. The buyer
in such a case defines by his order the particular article to be supplied and the contract
is performed if the seller supplied that article.

Illustrations

(a) B writes to A, the owner of a patent invention of cleaning cotton, "send me your
patent cotton-cleaning machine to clean the cotton at my factory." A sends the machine
according to order. There is no implied warranty or condition on the part of A that the
machine is fit for the particular purpose of cleaning the cotton at B's factory.

(b) B writes to A "send me your patent hopper and apparatus to fit up my brewing

copper with your smoke consuming furnace." A sends the machine according to order.
There is no implied warranty or condition on the part of A that the furnace supplied
should be fit for the purpose of a brewery. B having defined by the order the particular
machine to be supplied. A has performed his part of the contract by supplying that
machine.140

(c) B buys a cargo of Cyfarth Merthyr coal for the particular purpose of bunkering
steamers. This is a contract for the sale of coal under a particular description known in
the coal trade and not a contract for the sale of a specified article under its patent or
trade name. The proviso to sub-section (1) does not therefore apply, and there is an
implied condition that the coal is reasonably fit for bunkering.141

The mere fact, however, that an article is sold under its trade name, in the sense that
the trade name forms part of the description of the thing sold, does not necessarily
bring the case within the proviso, so as to exclude the implication of the condition of
fitness. If the buyer, while asking to be supplied with an article of a named make,
indicates to the seller that he relies on his skill and judgment for its being fit for a
particular named purpose, he does not buy it "under its trade name" within the meaning
of the proviso, and if the Court is satisfied upon the facts that the buyer relied on the
seller's skill and judgment, the proviso does not apply. B goes to A, a motor car dealer,
and asks for a comfortable car which is suitable for touring purposes. A says that a
"Bugatti car," a type of car in which he specialised, will meet those requirements, and
shows him a specimen. B then gives A an order for "an eight cylinder Bugatti car." An
eight cylinder Bugatti car is delivered to B pursuant to the order, but the car proves to be
uncomfortable and unsuited for touring purposes. B is entitled to reject the car and to
recover back the purchase money.142

[s. 16.4] Sub-section (2): Second exception: Implied condition as to

merchantableness.—

The second exception is where—

(1) goods are bought by description;

(2) from a seller who deals in goods of that description, whether he be the
manufacturer or not.

In such cases there is an implied condition that goods shall be merchantable quality.
There is a sale by description even though the buyer is buying something displayed
before him on the counter. A thing is sold by description, though it is specific, so long
as it is sold not merely as a specific thing but as a thing corresponding to a
description.143 If the seller deals in goods of that description there is an implied
condition that the goods shall be of merchantable quality.

In cases of this class the goods must not only answer to the description in the contract
as required by section 15, but must also be of merchantable quality, i.e., saleable in the
market as goods of that description. The buyer, in other words, is entitled to receive a
saleable article answering the description in the contract.144 Thus, if a person orders
motor horns from a manufacturer of horns, and the horns supplied are scratched and
damaged owing to bad packing, he is entitled to reject them as unmerchantable.145 But
merchantable does not mean merely saleable. In the case of goods purchased for
Underwear from a retailer by description the Privy Council said that the second
exception overlaps the first and that merchantable does not mean that a thing is
saleable in the market because it looks all right. The garments were saleable as anyone
who did not know of their defect would readily buy them but they were not
merchantable in the statutory sense because their defect rendered them unfit to be
worn next to the skin. It may be that after sufficient washing that defect would have
disappeared, but statute requires goods to be merchantable in the state in which they
were sold and delivered.146 The Privy Council found that in this case the implied
condition of being fit for a particular purpose for which they are required and implied
condition of being merchantable quality (i.e., the article sold if only meant for one
particular use in ordinary course is fit for that use) had been overlapping here. It is not
merchantable if it has defects unfitting it for its only proper use but not apparent on
ordinary examination.147 The phrase "merchantable quality" would mean that the
article is of such quality and in such condition that a reasonable man, acting
reasonably, would accept it under the circumstances of the case in performance of his
offer to buy that article, whether he buys it for his own use or to sell again.148 As to the
purpose, they should be reasonably capable of being used for any one or more of the
purposes, even if unfit for one particular purpose which the buyer intended.149 So
where an article may be used for various purposes but the buyer has not specified his
purpose, the buyer will have no remedy merely because it was unfit for his particular
purpose which he did not specify. So where barley was sold under the description of
feeding barley but due to fungus in it was useless as food for pigs but was capable of
being used as feeding stuff for other animals. It was held that it was merchantable.150

It is not sufficient that the goods correspond with the description, but if the buyer fakes
the goods after examining them, there is no implied condition as regards defects which
such examination ought to have revealed; in such a case the implied condition protects
him only from a latent defect. What amounts to an examination is a question of fact in
each case. A mere opportunity of examining is not sufficient. At the same time if the
buyer does examine the goods, though cursorily, and he has had an opportunity of
examining the goods more fully if he desired to do so, that amounts to an examination
within the meaning of this section.151 In Grant case the Privy Council found proviso to
exception (ii) not applicable as the examination of the buyer would not have revealed
the defect i.e. the hidden presence of sulphites in the underwear.152

A sale of a bottle of "Stone's Ginger Wine" at a public house is a sale of goods by

description, and if the bottle breaks while opening with a corkscrew by reason of a
defect in the bottle and injures the buyer, there is a breach of condition as to
merchantable quality, and the buyer is entitled to damages.153 Quality of goods
includes their state or condition [section 2 (12)].

The fact, however, that a certain person is allergic to particular goods does not affect
the merchantable quality of the goods. Thus, where a person purchased from a retail
trader a Harris tweed coat and contracted dermatitis and that was due to the fact that
the purchaser's skin was abnormally sensitive, the seller was not liable in damages.154

It is important to note that except in the cases mentioned in this section there is no
implied condition or warranty as to the quality, fitness or merchantableness of goods
supplied under a contract of sale. If a case falls within the exceptions there is an
implied condition, the breach whereof entitles the buyer to reject the goods or, at his
option, to claim damages. If a case does not come within the exceptions, the maxim
caveat emptor applies and the buyer takes the risk as to the quality and condition of the
goods. If he desires to protect himself, he must do so by an express warranty or
condition. It is also important to note that neither exception applies unless all the
conditions therein are satisfied, there being three conditions in the first exception and
two in the second. No serious difficulty should arise if this is carefully borne in mind.

In State Bank of Mysore v Machado Computer Services, through its proprietor Shri
Carmelino Machado, Diginerve Networks Pvt Ltd and Bank of Maharashtra,155 goods
were certified to have been received in full and in satisfactory working condition.
Hence, the right of the buyer under section 41 of the Sale of Goods Act, 1930 was held
to have been availed of by the plaintiff and he was deemed to have accepted the goods
upon such intimation of acceptance to the supplier as stated specifically in the delivery
challan. This acceptance was both for the quality as well as the quantity of the goods
supplied as per section 42 of the Act. Further upon such acceptance after examination
of the goods specifically accepted, the description of the goods as regards the make or
the brand are also deemed to have been accepted and there could be no defect stated
to be in respect of such brand as per the second proviso to section 16 of the Act. The
duty of the supplier in the contract of sale was therefore, complete. The plaintiff has
accepted the goods. The plaintiff was, therefore, held required to make payment for the
goods, having accepted as per the enjoinment under sections 31 and 32 of the Act.

[s. 16.5] Sale of provisions.—

Section 111 of the Indian Contract Act, 1872 provided that on a sale of provisions there
was an implied warranty that they were sound. Thus, if provisions were sold by a dealer
in provisions, there was an implied warranty that they were fit for food. There is no
implied warranty or condition under the present section unless (1) the purpose for
which they are required is made known to the seller, (2) the buyer relies on the seller's
judgment, and (3) the goods are of a description dealt in by the seller. If these
conditions are satisfied, there is an implied condition as to fitness under the first
exception [sub-section (1)] but not otherwise. Thus, if a person goes to a milk dealer
and asks for milk for family use,156 or goes to a fish-monger and asks for fresh crabs
for tea,157 and leaves it to the seller to select the provisions, there is an implied
condition that the milk or crabs supplied to him are fit for human consumption. In
cases such as these the food is sold for the purpose of human consumption and
although this is the purpose for which all food is sold it is a "particular purpose", within
the meaning of the section, made known to the seller. But it is different if the buyer
selects the goods himself. In such a case there is no implied condition as to fitness.

Again, provisions may be bought by description in which case the second exception
[sub-section (2)] may operate. Thus, if a person goes into a beer-house which he knows
to be tied to certain brewers, and asks for beer, and is supplied with beer contaminated
with arsenic, it is a breach or condition under sub-section (2) of this section, and the
seller is liable to the buyer in damages as for a breach of warranty. But if he examines
the provisions and then takes them, there is no implied condition except as regards
latent defects.158
Even in case where there is no implied condition as to the provisions being fit for
human consumption the seller may be liable to an action for negligence, as where a
bun supplied by a baker contains a stone on which the buyer breaks one of his
teeth.159

[s. 16.6] Sale of dangerous goods.—

Where a person sells goods which he knows to be dangerous, without warning the
buyer of the fact, he may be liable in damages for the consequences. This is so apart
from any implied condition.160

[s. 16.7] Sub-section (3): Usage of trade as annexing implied condition as to

quality or fitness.—

An implied warranty or condition as to quality or fitness for a particular purpose may be

annexed by the usage of trade. It may similarly be excluded by the usage of trade.161

[s. 16.8] Sub-section (4): Implied warranty or condition may co-exist with
express warranty or condition.—

Thus, an implied condition as to fitness for a particular purpose or as to merchantable

quality, may be superadded to express conditions contained in the contract, such as a
condition that the car shall be reasonably fit as a touring car.162

125 Commr of Customs (Preventive) v Aafloat Textiles (I) Pvt Ltd, (2009) 11 SCC 18 : [2009] 2
SCR 490 : JT 2009 (5) SC 276 .
126 Mukesh Kumar Singh v The State of Bihar, 2009 (57) BLJR 1184 .
127 Priest v Last, (1903) 2 KB 148 ; Re Andrew Yule & Co, (1932) 59 Cal 928 : 140 IC 877 : (32)
AC 879.
128 Wallis v Russell, (1902) 2 IR 585 .
129 Grant v Australian Knitting Mills, (1936) 70 MLJ 513 : 159 IC 667 : (36) APC 34.
130 Priest v Last, (1903) 2 KB 148 .
131 Frost v Aylesbury Dairy Co, (1905) 1 KB 608 (CA).
132 Joseph Mavr v Phani Bhusan, (1938) 2 Cal 88 : 182 IC 397 : AIR 1939 Cal 210 .
133 Baretto v Price, AIR 1939 Ngp 19 .
134 Manchester Liners, Ltd v Rea Ltd, (1922) 2 AC 74 .
135 Grant v Australian Knitting Mills, (1936) 70 MLJ 513 : 159 IC 667 : (36) APC 34; Eastern
Mining Contractors Pvt Ltd v Premier Automobiles Ltd, 65 Bom LR 183.
136 Brown v Edgington, (1841) 2 M & G 279.
137 Benjamin's Sale of Goods, 7th Edn, pp 662, 663.
138 Cammell Laird & Co v Manganese Bronze & Brass Co, (1933) 2 KB 141 .
139 Eastern Mining Contractors Pvt Ltd v Premier Automobiles Ltd, 65 Bom LR 183.
140 Chanter v Hopkins, (1838) 4 M & W 399.
141 Gillespie Brothers v Cheney & Co, (1896) 2 QB 59 .
142 Baldry v Marshall, (1925) 1 KB 260 : [1924] All ER 155 .
143 Grant v Australian Knitting Mills, (1936) 70 Mad LJ 513 : 159 IC 667 : (36) APC 34.
144 Randall v Newson, (1877) 2 QBD 100 , 102.
145 Jackson v Rotax Motor and Cycle Co, (1910) 2 KB 937 .
146 Grant v Australian Knitting Mills, AIR 1936 PC 34 at 40.
147 Grant v Australian Knitting Mills, AIR 1936 PC 34 at 40.
148 Bristol Tramways Co v Fiat Motors Ltd, (1910) 2 KB 831 (840–1); S.S. Mendse v Balkrishna
Chettiar, (1963) 2 Mad LJ 140 : AIR (1962) Mad. 426 .
149 Canada Atlantic Grain Export Co v Eilers, (1929) 35 Com Cas 90 , 102; Re Andrew Yule & Co,
(1932) 59 Cal 928 , 936.
150 Canada Atlantic Grain Export Co v Eilers, (1929) 35 Com Cas 90 and Re Andrew Yule & Co,
AIR 1932 Cal 879 : 140 Ind Cas 877 (Merchantable quality was satisfied where hessian cloth
had unusual smell which made it unfit for packing of good stuff but as buyer had not disclosed
his particular purpose and the goods could be used for other purpose than packing.).
151 Thornett v Beers, (1919) 1 KB 486 .
152 Supra note 10.
153 Morelli v Fitch and Gibbons, (1928) 2 KB 636 ; Godley v Perry, (1960) 1 All ER 36 : [1960] 1
WLR 9 .
154 Griffiths v Peter Conway, Ltd, (1939) 1 All ER 685 .
155 State Bank of Mysore v Machado Computer Services, 2009 (4) Bom CR 199 : 2009 (111)
Bom LR 2481 .
156 Frost v Aylesbury Dairy Co, (1905) 1 KB 608 .
157 Wallis v Russell, (1902) 2 IR 585 .
158 Wren v Holt, (1903) 1 KB 610 .
159 Chaproniere v Mason, (1905) 21 TLR 633 .
160 Clarke v Army & Navy Coop Society, (1903) 1 KB 155 .
161 See Cointat v Myham, (1913) 2 KB 220 : (1911–13) All ER 724 .
162 Baldry v Marshall, (1925) 1 KB 260 ; Horn v Minister of Food, (1948) 2 All ER 1036 .
The Sale of Goods Act

Chapter II Formation of the Contract

Conditions and Warranties

S. 17. Sale by sample.-

(1) A contract of sale is a contract for sale by sample where there is a term in the
contract, express or implied, to that effect.

(2) In the case of a contract for sale by sample there is an implied condition—

(a) that the bulk shall correspond with the sample in quality;

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

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

[s. 17.1] Sale by sample.—

A sale is by sample when there is a term in the contract express or implied to that
effect. Thus, if A sells goods to B on the terms that "the goods shall be equal in quality
to the sample," the sale is a sale by sample and the incidents mentioned in sub-section
(2) will attach. It has been decided that where samples are analysed and transformed
into a formula, the sale may still be by sample.163 But if the seller exhibits the sample
merely to show the sort of goods he is offering, the sale is not necessarily by
sample.164 In such a case if the seller shows goods on one quality and delivers goods
of another quality, he may be liable for fraud, but the sale is not a sale by sample.

[s. 17.2] Implied condition on sale by sample.—

On a sale of goods by sample the seller expressly warrants that the goods sold should
answer the description of a small parcel approved at the time of the sale. Sub-section
(2) therefore lays down that there is an implied condition that the bulk is equal in
quality to the sample. If the bulk does not correspond with the sample, there is a
breach of condition, and the buyer is entitled to reject the goods unless he has
accepted them, or, in the case of a contract relating to specific goods, the property in
the goods has passed to him, in both of which cases he is entitled to damages only on
the footing of a breach of warranty as laid down in section 13(2) above. "Quality"
includes the state or condition of goods [section 2(12)]. As to sale by sample as well as
by description, see section 15 above.

[s. 17.3] Opportunity of comparing bulk with sample.—

In a sale by sample the buyer is entitled to have a reasonable opportunity of comparing
the bulk with the sample. The Act speaks not of a "practicable" but of a "reasonable
opportunity" of examination.165 If such opportunity is not given, the buyer may refuse
to take the goods. In a case where A contracted to sell by sample two parcels of wheat,
one containing 700 bushels and the other 1,400 and he is allowed inspection of the
smaller parcel but is refused inspection of the larger parcel, it was held that the buyer
was entitled to refuse to take any of the wheat.166 The right to inspect, however, may
be postponed by the express terms of the contract, as where payment is to be made in
cash on arrival of the goods "against shipping or railway documents." In such a case
the buyer is not entitled to inspect the goods before payment. He is bound to pay on
arrival of the goods and production of the documents, although he would still have the
right to reject if, on subsequent examination, it was found that the bulk did not
correspond with the sample.167 This is always so in the case of contracts on C.I.F.
terms; see note, "C.I.F. contract," under section 39 below (delivery to carrier).

The right of examination contemplated under clause (b) is distinct from the one
contemplated in section 41.

[s. 17.4] Where part only of the goods equal to sample.—

Where part of the goods is equal to the sample and part inferior to the sample, the
buyer may reject the whole, or he may accept the whole and claim damages for the
portion which is inferior to the sample. But he cannot retain the part which is equal to
the sample and reject the other part, unless the contract is severable.

[s. 17.5] Free from defect.—

Clause (c) is a special application of the principle that the seller's duty to furnish
merchantable goods answering the description is paramount to any particular
condition or warranty. It will not avail him to say that the sample was faulty. All the
three conditions are essential. Neither the inspection of the bulk nor the use of the
sample absolutely excludes an enquiry whether the goods supplied are otherwise in
accordance with the contract.168

Summary of the law relating to implied condition and warranties

I. The breach of a condition gives rise to a claim to treat the contract as repudiated and
to reject the goods (section 12).

II. The breach of a warranty gives rise to a claim merely for damages (section 12).

III. The buyer may waive a condition to be fulfilled by the seller. After waiver he cannot
reject the goods [section 13(1)].

IV. The buyer may elect to treat the breach of a condition as a breach of a warranty, i.e.,
instead of rejecting them he may accept them and claim damages as if the breach was
a breach of warranty [section 13(1)].

V. Even if there is a breach of a condition to be fulfilled by the seller, the buyer cannot
reject the goods

(i) after he has accepted them, or

 (ii) in the case of specific goods, after the property in the goods has passed to the
buyer [section 13(2)].

Notes.—See section 42 as to acceptance and sections 20 to 24 as to passing of

property.

VI. An express warranty or condition does not negative a warranty or condition implied
by the Act unless inconsistent therewith [section 16 (4)].

163 Lalchand v Baijnath, (1937) 63 Cal 736 : 169 IC 128 : AIR 1937 Cal 140 .
164 Hill v Smith, (1812) 4 Taunt 520.
165 Godley v Perry, (1960) 1 All ER 36 : [1960] 1 WLR 9 .
166 Lorymer v Smith, (1822) 1 B&C 1 : SC 1 Law J Rep KB 7.
167 Polenghi v Dried Milk Co, (1904) 10 Com Cas 42 ; E Clemens Horst Co v Biddell Bros, (1912)
AC 18 .
168 Mody v Gregson, (1868) LR 4 Ex 49, 56.
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 18. Goods must be ascertained.-

Where there is a contract for the sale of unascertained goods, no property in the goods
is transferred to the buyer unless and until the goods are ascertained.

[s 18.1] Transfer of property as between seller and buyer.—

The first part of this chapter deals with the transfer of property as between the seller
and the buyer. The essence of sale is the transfer of the property in goods from the
seller to the buyer for a price. The passing of the property holds a key of the contract of
sale. It is this factor which decides various rights and liabilities of sellers and buyers.
Property means the general property or ownership in goods as distinguished from
special property or interest such as that of a bailee or pledgee [section 2(11)]. When it
is said that the property in the goods has passed to the buyer it means that the goods
have ceased to be the property of the seller and have become the property of the buyer.
Transfer of property in goods is distinct from delivery of goods. Property in goods may
pass from the seller to the buyer without delivery of the goods to the buyer, i.e., though
the goods have never come into the possession of the buyer. Property in goods is thus
distinct from possession of goods.

The subject under consideration is of great importance in view of the consequences

which follow from the passing of the property. Of these, there are two which require
special notice, namely—

(1) As a rule the goods remain at the seller's risk until the property therein is
transferred to the buyer, but where the property is transferred to the buyer, the
goods, as a rule, are at the buyer's risk, whether delivery of the goods has been
made to the buyer or not. Risk, in other words, prima facie passes with the
property (section 26).

(2) Where the contract is for specific goods the property in which has passed to the
buyer (sections 20, 21, 22 and 24), the buyer cannot, even if there has been a
breach of condition on the seller's part, reject the goods, unless there is a term
of the contract, express or implied, to that effect [section 13(2)].

[s 18.2] Goods must be ascertained.—

Goods for the purposes of this chapter may be divided into two classes, namely,
specific or ascertained, and generic or unascertained.
Specific goods mean goods identified and agreed upon at the time a contract of sale is
made; specific goods, in other words, are ascertained goods. Specific goods must be
distinguished from generic or unascertained goods which are defined by description
and/or sample only.

The present section provides that where there is a contract for the sale of
unascertained goods, no property in the goods passes to the buyer unless and until the
goods are ascertained.

In one case, the Supreme Court held that the ascertainment took place when the goods
from the larger stock were delivered.1 Until appropriation, there is merely an agreement
to sell. The agreement to sell becomes a sale when the goods on which the contract is
to operate are ascertained and unconditionally appropriated to the contract as per
section 23. The mere fact that the goods are to come out of a specified stock does not
make them ascertained goods nor is it sufficient to transfer the property therein to the
buyer.2,3

As to the passing of property in specific goods, see sections 19, 20, 21, 22 and 24. As
to the passing of property in unascertained goods, see section 23.

Ascertainment of goods and appropriation of goods to the contract are two distinct
concepts and steps.

1 Jute and Gunny Brokers Ltd v UOI, AIR 1961 SC 1214 : (1962) 2 Scale 227 .
2 White v Wilks, (1813) 5 Taunt 176 : 14 RR 735.
3 Laurie & Morewood v Dudin & Sons, (1926) 1 KB 223 : 95 LJ KB 191.
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 19. Property passes when intended to pass.-

(1) Where there is a contract for the sale of specific or ascertained goods the
property in them is transferred to the buyer at such time as the parties to the
contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties regard shall be had
to the terms of the contract, the conduct of the parties and the circumstances of
the case.

(3) Unless a different intention appears, the rules contained in sections 20 to 24 are
rules for ascertaining the intention of the parties as to the time at which the
property in the goods is to pass to the buyer.

[s 19.1] Scheme of the provisions relating to transfer.—

In Contship Container Lines Ltd v DK Lall,4 the Supreme Court explained the scheme of
the provisions relating to transfer of title relating to goods. Section 19 of the said Act
provides that in a contract for the sale of specific or ascertained goods, the property in
them is transferred to the buyer at such time as the parties to the contract intend it to
be transferred and that for the purpose of ascertaining the intention of the parties
regard shall be had to the terms of the contract, the conduct of the parties and the
circumstances of the case.

Sections 20 to 24 of the said Act prescribe rules for ascertaining the intention of the
parties as to the time at which the property is to pass to the buyer. One of the said rules
is that in unconditional contracts for the sale of specific goods in a deliverable state,
the property in the goods passes to the buyer when the contract is made irrespective of
the fact that the time of payment of the price or the time for the delivery of the goods
or both are postponed.

Yet another rule contained in section 23 of the Act is that where the contract is for the
sale of unascertained or future goods by description and goods of that description are
unconditionally appropriated to the contract either by the seller with the assent of the
buyer or by the buyer with the assent of the seller, the property in the goods passes to
the buyer. So also, where the seller delivers the goods to the buyer or to a carrier or
other bailee for the purpose of transmission to the buyer and does not reserve the right
of disposal, he is deemed to have unconditionally appropriated the goods to the
contract.

Section 26 of the Act provides that unless otherwise agreed, the goods remain at the
seller's risk until the property therein is transferred to the buyer but when the property
therein is transferred to the buyer, the goods are at the buyer's risk whether delivery has
been made or not.
[s 19.2] Property passes when intended to pass.—

Section 18 says that in the case of a contract for the sale of unascertained goods, no
property in the goods passes to the buyer unless and until the goods are ascertained.
But what if the contract is for the sale of specific or ascertained goods? Does the
property in the goods pass immediately when the contract is made? The answer to this
question is afforded by section 19. It says that the property passes when the parties to
the contract intended it to pass. It is a question of construction of a contract in each
case at what stage the property shall pass and a question of fact in each case whether
that stage has been reached.5 There is no difficulty when the parties have expressed
their intention in express and clear terms. When, however, they have not done so, the
intention must be gathered from the whole agreement, and the courts have for this
purpose adopted some rules of construction which are set out in subsequent
questions.6

The words in sub-section (1) "at such time as the parties to the contract intend it to be
transferred" indicate that the intention of the parties is paramount and hence the rules
laid down in sections 20 to 24 are presumptive. The said rules can be rebutted by the
terms of the contract, the conduct of the parties and the circumstances of the case.7 In
a contract of a sale of logs of wood, it was provided that the buyer was entitled to
inspect, measure and weigh the goods at the place of destination before taking delivery
from the railway. It was held that the parties did not intend to pass property in goods
until the buyer had performed the said acts.8

Where a contract provided that the seller shall consign the goods "free on rail", it was
held that the circumstances showed an intention that the property should not pass to
the buyer until the goods were placed in safety on rail.9

In case of goods delivered on the basis of "on sale for cash or return within a week" the
parties did not intend to pass the property in the goods until the price was paid in a
week or the goods are returned within a week.10

Whether transfer of movable goods like a motor vehicle would be dependent upon
registration? Is there any law that governs the transfer of title in the movable goods?
Section 4 of the Sale of Goods Act, 1930 shows how a property in goods is transferred,
i.e., by agreement to do so. According to the provisions of the Sale of Goods Act, 1930,
the sale of a motor car which is a movable property is governed by the provisions of
that Act and as soon as a sale of movable property is completed by delivery of
possession and acceptance of price in the manner agreed to and accepted by the
parties, the contract is complete and the property in the goods immediately passes to
the buyer when the contract is made.11

When the title passes is really one of intention of parties to be gathered from the terms
of contract. Dealing with the issue of transfer of title to a motor bus with permit, where
the title was intended to pass after all the registration formalities are completed under
the Motor Vehicles Act, 1939 and after the payment of price, the Supreme Court made
a distinction between registration of ownership under the Motor Vehicles Act, 1939 and
transfer of title under the Sale of Goods Act, 1930 as held in Vasantha Viswanathan v
VK Elayalwar.12

Section 31 of the Motor Vehicles Act, 1939 lays down that where the ownership of any
motor vehicle registered under the Motor Vehicles Act is transferred, the transferor and
transferee both are required to report the fact of transfer to the registering authority so that
particulars of transfer of ownership may be entered in the certificate of registration. The
transfer is not effected under section 31 of the Motor Vehicles Act, 1939, but the same
simply prescribes procedure for entering the factum of transfer in the registration
certificate, which is an act posterior to the transfer. The transfer of vehicles in question
would be governed by the provisions of section 19 of the Sale of Goods Act according to
which property in the vehicle would pass to Defendant no. 1 at such time as the parties to
 the contract intend it to be transferred. Thus the passing of property in the goods would be
dependent upon the intention of the parties, as evidenced from the contract. From the
contract, Exhibits A-1 and A-2, it would appear that the parties intended that after the
registration formalities were completed, price of the vehicles covered by the permits would
be ascertained and thereafter the same would be paid by the Defendant no. 1, entitling him
to take possession of the vehicles. Thus the parties intended that property in the vehicles
shall pass only after possession of the vehicles was delivered to the Defendant no. 1 after
completion of all the aforesaid formalities. In the present case, after registration formalities
were completed, the value of the vehicles covered by the permits was not ascertained,
much less paid, rather, on the other hand, possession was forcibly taken by the Defendant
no. 1. Therefore, property in the vehicles did not pass to the Defendant no. 1 as required
under section 19 of the Sale of Goods Act.

Section 19 of the Sale of Goods Act, 1930 lays down that where there is a contract for
sale of specific or ascertained goods, the property in them is transferred to the buyer at
such time as the parties to the contract intend it to be transferred. For the purpose of
ascertaining the intention of the parties, regard shall be had to the terms of the
contract, conduct of the parties and the circumstances of the case. Sections 20 to 24
contain rules for ascertaining the intention of the parties as to the time at which the
property in the goods is passed to the buyer. But these rules will apply only if a different
intention does not appear from the contract itself. In United Breweries Ltd v State of
AP,13 a manufacturing company of liquor, while entering into contract of supplies with
its dealers/customers, with a view not to lose the bottles and crates in which the beer
was supplied, charged 40 paise per bottle as deposit and the customers were also
advised to do likewise when they sold the beer to the consumers. The whole intention
was to get back the bottles from the consumers through the customers. The scheme
was that United Breweries would regularly send trucks with beer to the customers to
supply beer and get back the empties. Consequently, the amount collected per bottle
was excluded from the price calculated for the bottles of beer and held not to involve
the title in the empty bottles themselves for the purpose of determination of sales tax.

4 Contship Container Lines Ltd v DK Lall, AIR 2010 SC 1704 : (2010) 4 SCC 256 : [2010] 3 SCR
460 .
5 Seath v Moore, (1886) 11 App Cas 350 (HL).
6 Hoe Kim Seing v Maung Ba Chit, AIR 1935 PC 182 : (1935) 62 IA 242 : 14 Rang 1 : 37 Bom LR
866 : 157 IC 891.
7 State of Madras v Ramalingam & Co, AIR 1956 Mad 695 : 1956 2 Mad LJ 384 : 69 Mad LW 655;
Hoe Kim Seing v Maung Ba Chit, (1935) 62 IA 242 : 14 Rang 1 : 37 Bom LR 866 : 157 IC 891.
8 CST, Eastern Division Nagpur v Husenali Adamji & Co, AIR 1959 SC 887 : [1959] Supp (2) SCR
702 .
9 Underwood Ltd v Burgh Castle Brick and Cement Syndicate, (1922) 1 KB 343 ; Bhagwandas
Sitaram v Albion Jute Mills Co Ltd, AIR 1957 Cal 143 (free alongside the steamer).
10 Re Ferrier, (1944) 1 ChD 295 .
11 Sabir Hussain v Maya Bai, 1997 ACJ 1258 (MP) : 1997 AIHC 2401 : 1995 SCC OnLine MP
241.
12 Vasantha Viswanathan v VK Elayalwar, AIR 2001 SC 367 : (2001) 8 SCC 133 : (2001) 3 Arb LR
110 : 2001 (5) Scale 483 (SC).
13 United Breweries Ltd v State of AP, AIR 1997 SC 1316 : (1997) 3 SCC 530 : [1997] 2 SCR 690 .
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 20. Specific goods in a deliverable state.-

Where there is an unconditional contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment of the price or the time of delivery of the
goods, or both, is postponed.

[s 20.1] Ascertaining the intention for time when transfer takes place.—

Section 19 attempts to give effect to the elementary principle of the Law of Contract
that the parties may fix the time when the property in the goods shall be treated to have
passed. It may be the time of delivery, or the time of payment of price or even the time
of the making of contract. It all depends upon the intention of the parties. It is,
therefore, the duty of the court to ascertain the intention of the parties and in doing so,
they have to be guided by the principles laid down in section 19(2) which provides that
for ascertaining the intention of the parties, regard shall be had to the terms of the
contract, the conduct of the parties and the circumstances of the case.

Section 20 indicates that in case of unconditional contract of sale in respect of

specified goods in a deliverable state, the property in the goods passes to the buyer at
such time as the parties intend it to be transferred. Section 19(3) provides that sections
20 to 24 contain the rules for ascertaining the intention of the parties as to the time at
which the property in the goods shall be treated to have passed to the buyer. Both
sections 19 and 20 apply to the sale of "specific" or "ascertained" goods.

Section 20, which contains the first rule for ascertaining the intention of the parties,
provides that where there is an unconditional contract for the sale of "specific goods" in
a "deliverable state", the property in the goods passes to the buyer when the contract is
made. This indicates that as soon as a contract is made in respect of specific goods
which are in a deliverable state, the title in the goods passes to the purchaser. The
passing of the title is not dependent upon the payment of price or the time of delivery
of the goods. If the time for payment of price or the time for delivery of goods, or both,
is postponed, it would not affect the passing of the title in the goods so purchased.

In order that section 20 is attracted, two conditions have to be fulfilled: (i) the contract
of sale is for specific goods which are in a deliverable state; and (ii) the contract is an
unconditional contract. If these two conditions are satisfied, section 20 becomes
applicable immediately and it is at this stage that it has to be seen whether there is
anything either in the terms of the contract or in the conduct of the parties or in the
circumstances of the case which indicates a contrary intention. This exercise has to be
done to give effect to the opening words, namely, "Unless a different intention appears"
occurring in section 19(3). In Hoe Kim Seing v Maung Ba Chit,14 it was held that
intention of the parties was the decisive factor as to when the property in goods
passes to the purchaser. If the contract is silent, intention has to be gathered from the
conduct and circumstances of the case.
The Supreme Court in Consolidated Coffee Ltd v Coffee Board,15 has held that in an
auction-sale of chattels, property passes to the purchaser on the acceptance of his bid.
This occurs not because of section 64(2) but because of the rule contained in section
20.

In Agricultural Market Committee v Shalimar Chemical Works Ltd,16 the goods which
were the subject-matter of sale were ascertained goods. They were also in a
deliverable state. On the order being placed by the respondent, the seller in the State of
Kerala, loaded the goods on the lorry and despatched the same to Hyderabad. It was at
that stage that the examination of the conduct of the parties would become extremely
relevant. It was one of the terms of the contract between the parties that the seller
would not be liable for any future loss of goods and that the goods were being
despatched at the risk of the respondent. The respondent had also obtained insurance
of the goods and had paid the policy premium. He, therefore, intended the goods to be
treated as his own so that if there was any loss of goods in transit, he could validly
claim the insurance money. The weighment of the goods at Hyderabad or the collection
of documents from the bank or payment of price through the bank at Hyderabad were
immaterial, inasmuch as the property in the goods had already passed at Kerala and it
was not dependent upon the payment of price or the delivery of goods to the
respondent.

[s 20.2] Unconditional contract of sale of specific goods in a deliverable state.

—

This section applies to the case of specific goods—

(1) where the contract is unconditional, i.e., not subject to any condition to be
fulfilled by the parties; and

(2) where the goods are in a deliverable state, i.e., they are in such a state that the
buyer would under the contract be bound to take delivery of them.

In such a case the section says the property in the goods passes to the buyer when the
contract is made, whether the time of payment of the price or the time of delivery of the
goods, or both, is postponed. This is the case of a sale as distinguished from an
agreement to sell.

Illustrations

(a) B offers A for his horse Rs 1,000, the horse to be delivered to B on a stated day and
the price to be paid on another stated day. A accepts the offer. The horse becomes B's
property when the contract is made, that is, as soon as the offer is accepted.

(b) B offers A for his horse Rs 1,000 on a month's credit. A accepts the offer. The horse
becomes B's property as soon as the offer is accepted.

(c) B on the 1 January, offers to A for a quality of rice Rs 2,000 to be paid on the 1
March following, the rice not to be taken away till paid for. A accepts the offer. The rice
becomes B's property as soon as the offer is accepted, and the goods are at B's risk
from the moment of the acceptance of the offer.

(d) Where the contract was for the sale of a fixed condensing engine which had to be
severed and delivered free on rail at a specified price and it was damaged in transit
before it reached the railway, it was held that the engine was not in a deliverable state
when it reached the railway.17
14 Hoe Kim Seing v. Maung Ba Chit, AIR 1935 PC 182 : 62 IA 242 : (1935) AWR 1299 : 37 Bom LR
366 : 157 IC 891.
15 Consolidated Coffee Ltd v Coffee Board, AIR 1980 SC 1468 : (1980) 3 SCC 358 : 1980 SCC
(Tax) 279 : [1980] 3 SCR 625 : (1980) 46 STC 164 .
16 Agricultural Market Committee v Shalimar Chemical Works Ltd, AIR 1997 SC 2502 : (1997) 5
SCC 516 : 1997 (4) Scale 93 .
17 Underwood v Burgh Castle Brick and Cement Syndicate, (1922) 1 KB 343 .
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 21. Specific goods to be put into a deliverable state.-

Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.

"Specific goods" in this section necessarily means the goods which can be ascertained
with certainty.18

[s 21.1] Contract of sale of specific goods to be put into a deliverable state.—

The words "and the buyer has notice thereof" are intended to prevent the hardship
which might result in the risk being transferred to the buyer without notice.

The words "has notice thereof" have been deliberately used; the said words do not cast
a direct obligation on the seller to give notice. The said words mean that the buyer has
knowledge thereof, i.e., comes to know of it somehow.

Illustration

A, a ship-builder, contracts to sell to B, for a stated price, a vessel which is lying in A's
yard; the vessel to be rigged and fitted for a voyage, and the price to be paid on delivery.
Under the contract, the property in the vessel and the risk do not pass to B until the
vessel has been rigged and fitted and notice thereof is given to B.

[s 21.2] Goods in process of manufacture.—

Where there is a contract for the sale of a thing which has yet to be made or finished,
the property in the thing does not pass to the buyer until it is delivered in a finished
state, or until it is ready for delivery and is approved by the buyer in that state; and this
is so even where the thing is to be paid for by stated instalments as the work
progresses. But the contract may provide that the property in the goods to be
manufactured and sold shall pass from time to time to the buyer while they are in the
course of manufacture and before completion. Such an agreement is usually found in
the construction of ship where property in the uncompleted ship passes to the buyer as
and when the instalment of the price is paid corresponding to progress of
construction.19 Such a contract generally stipulates for inspection by or on behalf of
the buyer regarding the progress of the work. These principles enunciated with
reference to the ship may be made applicable by contract for the manufacture of other
chattels also. So the materials provided by the seller in the un-completed state of a
ship (or other chattel like carriage bus if contract so provides) may become the buyer's
property if such materials are affixed to or made part of the vessel or other chattel. But
courts are reluctant to hold that the parties intended that property should stand
transferred in such ascertained materials at some earlier stage before being affixed. So
in Reid v Macbeth,20 a contract for the construction of a ship between the shipbuilders
and shipowners provided that vessel as she is constructed and all materials intended
for her (wherever situated) shall immediately as the same proceeds become the
property of the purchaser (i.e., shipowners). The House of Lords held that various iron
and steel plates lying at railway station which had been marked showing their proposed
position in the ship were still the property of the shipbuilders as they had not yet
become part of the ship's structure. They cannot be regarded as appropriated to the
contract unless they have been affixed to the ship.

In a case where the seller had to bag the rice and book it on the railway and dispatch it
as and when the wagons became available and then deliver the railway receipt to the
buyer, it was held that until the goods were loaded in wagons and dispatched, they
were not in a deliverable state; it was held that it was the seller's duly to get the
wagons.21 So the seller cannot sue for the price. This contract of sale is known as
"bilty cut" souda.

18 Emperor v Kunverji, AIR 1941 Bom 106 : (1941) 43 Bom LR 95 .

19 Seath v Moore, (1886) 11 App Cas 350 .
20 Reid v Macbeth, (1904) AC 223 : (1904) 6F (HL) 25.
21 Lachhmi Niwas Rice Mills v Firm Ram Das Ramniwas, AIR 1963 All 110 : ILR (1962) 2 All 763 .
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 22. Specific goods in a deliverable state, when the seller has to do anything
thereto in order to ascertain price.-

Where there is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test or do some other act or thing with reference to
the goods for the purpose of ascertaining the price, the property does not pass until
such act or thing is done and the buyer has notice thereof.

[s 22.1] Contract of sale of specific goods in a deliverable state when the seller
has to do anything thereto in order to ascertain the price.—

Where anything remains to be done to the goods by the seller for the purpose of
ascertaining the amount of the price, e.g., weighing them or measuring them, the
property does not pass until this has been done and the buyer has notice thereof.

Illustration

A, the owner of a stack of bark, contracts to sell it to B, weigh and deliver it, at Rs 100
per ton. B agrees to take and pay for it on a certain day. Part is weighed and delivered
to B. The ownership of the residue is not transferred to B until it has been weighed
pursuant to the contract and the notice thereof is given to B.

The section does not apply when the thing which has to be done is to be done by the
buyer and not the seller.22

[s 22.2] Predominance of intention.—

The fact that the goods transacted are in a deliverable state do not conclude the issue
of transfer of title under section 22. It must be seen in the context of section 19 as well.
As per section 19 of the Sale of Goods Act, 1930, the property in the goods passes
when the parties intended it to pass. In Usha Beltron Ltd v State of Punjab,23 it was a
case of sale of some cables. The contract provided that property in the goods shall not
pass till after delivery and after successful testing and issuance of takeover certificate.
The mere fact that the goods had been delivered at the site of the purchaser in such a
situation was held not to result in transfer of ownership in goods.

Illustration

A contracts to sell a heap of clay to B at a certain price per ton. B (the buyer) is, by the
contract, to load the clay in his own carts and weigh each load at a certain weighing
machine, which his carts must pass on their way from A's ground to B's place of
deposit. Here nothing more remains to be done by the seller. The sale is complete and
the ownership of the heap of clay is transferred at once to B.
22 Hoe Kim Seing v Maung Ba Chit, AIR 1935 PC 182 : (1935) 62 IA 242 : 14 Rang 1 : 37 Bom LR
366 : 157 IC 891 (buyer had to measure paddy to ascertain the quantity).
23 Usha Beltron Ltd v State of Punjab, (2005) 7 SCC 58 .
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 23. Sale of unascertained goods and appropriation.-

(1) Where there is a contract for the sale of unascertained or future goods by
description and goods of that description and in a deliverable state are
unconditionally appropriated to the contract, either by the seller with the assent
of the buyer or by the buyer with the assent of the seller, the property in the
goods thereupon passes to the buyer. Such assent may be expressed or implied,
and may be given either before or after the appropriation is made.

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

[s 23.1] Contract of sale of unascertained goods and appropriation.—

It has been seen that where there is a contract for the sale of unascertained goods, no
property in the goods is transferred to the buyer unless and until the goods are
ascertained (section 18). Until that is done there are no goods on which the contract
can operate. How then are the goods to be ascertained?

At the outset it is to be remembered that when the contract is for the sale of
unascertained goods, the goods can be defined by description only, e.g., Fair Bengal
cotton, Calcutta silk, Java sugar. Suppose that the contract is for the sale of 100 bales
of Fair Bengal cotton out of 5,000 bales of cotton of different descriptions lying in the
seller's warehouse. In such a case the goods to be selected by the seller must
correspond with the description in the contract, i.e., the cotton must be Fair Bengal
cotton. Assuming that the seller has selected 100 bales of Fair Bengal cotton, it is not
sufficient for passing the property in the bales to the buyer that he has set aside the
100 bales in his own warehouse. Such an act indicates merely an intention to
appropriate the bales to the contract. The matter resting in intention only, the seller is
at liberty to change his mind and deliver the goods to another buyer. What is required
for the transfer of the property to the buyer is an unconditional appropriation of the
bales to the contract. This is usually done by the seller giving notice to the buyer that
the bales are ready for delivery and the buyer assenting to the appropriation by saying
that he will take delivery thereof.24 It is at this stage that goods are ascertained and
unconditionally appropriated by the seller to the contract with the assent of the buyer.
The buyer becomes the owner of the goods, and the seller cannot deliver them to
another person for he is no longer the owner of the goods.

In Nippon case24 the Respondents who were a firm of brokers in Calcutta purchased
bales of gunnies from mills and sold, on behalf of themselves as undisclosed
principals, a large quantity of gunnies to International Export Co. Ltd. (referred here as
buyers). Their contract stipulated for mate's receipts to be exchanged for bill of lading.
Clause (3) precluded passing of property until price is paid in cash in exchange of
mate's receipt. Clause (4) provided that so long as mate's receipts were in the
possession of the sellers, they will have the lien as unpaid sellers on the goods
represented by the mate's receipts. The contract stipulated for delivery of goods free
alongside the ship, i.e., FAS which meant that the sellers undertake to deliver the goods
free alongside a ship and the buyers have to arrange for the shipping space.
Accordingly, the buyer sent the shipping instructions to the Respondents. The
Respondents (sellers) sent the goods alongside the ship and obtained mate's receipts
which were issued not in the name of the Respondents but in the name of the buyers.
On the same day, the shipping company (shipowners) issued bills of lading to the
buyers which were named as shippers in mate's receipts. The shipping company while
issuing bills of lading to the buyers did not obtain from them the mate's receipts but
obtained their guarantee or indemnity. Eventually, the buyers got the goods from the
shipping company and sold them to sub-buyers but they defaulted to make the
payment when Respondents demanded the payment. The Respondents sued the
buyers and the shipping company (Appellants) for issuing bills of lading to the buyers
without exchanging mate's receipts. The Privy Council held that the shipping company
(Appellants) could not be held liable to Respondents for issuing bills of lading to the
buyers without having mate's receipts from them as Respondents' notice intimating of
their lien to shipping company was late. The court also viewed that provision regarding
issue of bills of lading on presentation of mate's receipt was solely for the protection of
shipowner and it could be waived. This aspect is not relevant to us here.

Secondly, the property had passed to the buyers because the goods were appropriated
by the sellers by delivery alongside the ship, i.e., the goods were placed in possession
of shipping company in implementation of the contract. Clause (3) would prevent the
passing of property until payment but clause (3) had to be read together with clause (4)
which provides that the property in the goods passes when the goods are delivered
alongside the ship, i.e., placed in possession of the shipowners. The result of this was
that the sellers had parted with property and possession and so it cannot be said that
sellers had reserved the right to dispose (jus disponendi). It was also said that the
position would have been different if sellers had taken the mate's receipt in their own
(and not in the buyers') name. If the mate's receipt had the seller's name, it amounted
to reservation of the right of disposal with the sellers and would be sufficient to prevent
the passing of property in favour of the buyers.

The appropriation may also be made by the buyer and assented to by the seller. The
selection of the goods by the one party and the adoption of that act by the other,
connects that, which before was a mere agreement to sell into an actual sale, and the
property thereby passes.25 A agrees to supply logs of wood to B and it is agreed that
goods should be inspected on arrival at a named station and after measuring the same
B would accept the goods. Property in the goods passed on B's acceptance at the
named station.26

Illustrations

1. A, having a quantity of sugar in bulk, more than sufficient to fill 20 hogsheads,

contracts to sell to B 20 hogsheads of it. Alter the contract, A fills 20 hogsheads with
the sugar, and gives notice to B that the hogsheads are ready and requires him to lake
them away. B says he will take them as soon as he can. By this appropriation by A and
assent by B, the property in the sugar passes to B.27

2. A contracts to sell B a certain quantity of liquor out of a big cask containing a much
larger quantity. The required quantity is not separated or bottled. The property in the
liquor does not pass to the purchaser.28
3. Sale on 6 May of certain quantity of oil, price paid by the buyer. The goods were not
in possession of the sellers at the date of the contract but had been dispatched to
them on 25 April. Subsequently they received the railway receipt and endorsed it and
sent it to the buyer. Afterwards, on 12 May, the goods were destroyed by fire while in
transit. The property had passed to buyer who had to bear the loss.29

[s 23.2] Essentials of appropriation.—

(1) The goods should conform to the description and quality stated in the contract.
In Vigers v Sanderson,30 there was a contract for two parcels of Swan laths of
specified length, and it was provided that property should pass on shipment,
and that if any dispute arose, the buyer was not to reject the goods but the
dispute was to be referred to arbitration. However, the goods supplied by the
seller were not of the contract description. It was held that no question of
passing of property arose. The buyer could reject the goods in spite of the
clause stipulating that he shall not reject the goods as the seller has to deliver
the goods what he has contracted to deliver.

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

(3) The goods must be unconditionally (as distinguished from an intention to

appropriate) appropriated to the contract either by delivery to buyer or his agent
or the carrier. Section 23(2) of the Sale of Goods Act, 1930 provides one
instance of unconditional appropriation of goods. It shows clearly that the seller
has not reserved his right to dispose of the goods (jus disponendi). However,
there is a conditional appropriation of the goods where the seller will not part
with the goods until he is paid [see section 25(1) of the Sale of Goods Act,
1930]. So also there is a conditional appropriation where a seller ships goods as
per his contract but takes out a bill of lading to his own order or to the order of
his agent [see section 25(2) of the Sale of Goods Act, 1930]. In the above
situations, the seller when he ships the goods is prima facie deemed to have
reserved the right of disposal and so the property will not pass on shipment of
the goods. But where the seller takes a bill of lading to the order of the buyer, the
case is entirely different as this act shows that seller has not reserved with him
the right to dispose of the goods in any other manner. In Nippon Yusen v
Ramjiban,31 the Respondents sold the goods to the buyers but the mate's
receipt issued by the shipowners had the name of the buyers as shippers of the
goods. The Privy Council held that the insertion of the name of the buyer in
mate's receipt as shipper indicated that there was no reservation of the right of
disposal by the sellers. In Shanker Das v Bhana Ram,32 sellers had contracted to
sell oil and had received the price. Subsequently, they received from their
vendors a railway receipt for the goods and sellers endorsed them to their buyer.
It was held that property had passed to the buyer and the risk of destruction in
transit lay with him.

(4) The appropriation must be

(i) by seller with the assent of buyer.

(ii) by buyer with the assent of seller.

(5) The assent may be expressed or implied.

(6) The assent may be given either before or after appropriation.

[s 23.3] Authority to select and appropriate.—

A contract for the sale of unascertained goods may provide that the buyer shall have
the authority to select and appropriate the goods to the contract or that the right to
select and appropriate shall be in the seller. If the buyer has the right to select, and he
selects the goods out of the bulk, no difficulty arises. When he has done so, the goods
are ascertained and the property in the goods passes to him. The difficulty arises when
the seller makes the selection pursuant to an authority derived from the buyer, for the
question may then arise whether the acts done by the seller merely express a revocable
intention to appropriate certain goods to the contract, or whether they show an
irrevocable exercise of a right of election.33 In the former case, the seller may change
his mind and send the goods to another buyer; in the latter he cannot. When, then, is
the seller entitled to select and when does the appropriation by him become final? The
general rule is that where by the terms of the contract the seller is to dispatch the
goods, or to do any act with reference to the goods which cannot he done until they are
appropriated to the buyer, the seller has a right to select any goods answering to tie
description in the contract and the property is transferred the moment the dispatch or
other act has commenced, for then an appropriation is made finally and the election
irrevocably determined34 [Illustrations (a) and (b), below]. But if there is no authority to
dispatch the goods or to do anything to them which cannot be done till the goods are
appropriated, the appropriation is not complete until the buyer has assented to it
[Illustration (c), below]. The matter is thus put by Blackburn in his work on Contract of
Sale.35

But the difficulty arises when the original agreement does not ascertain the specific goods
(i.e. the agreement is for the sale of unascertained goods), and one party has appropriated
some particular goods to the agreement, but the other party has not subsequently assented
to such an appropriation. Such an appropriation is revocable by the party who made it and
not binding on the other party, unless it was made in pursuance of an authority to make the
election conferred by agreement; or unless the act is subsequently and before its revocation
adopted by the other party. In either case it becomes final and irrevocably binding on both
parties.

Illustrations

(a) A sends a written order to B, a manufacturer, for a quantity of hardware to be

dispatched on insurance being effected. B, in pursuance of the order, packs up a cask
of hardware and sends it to his shipping agents. The cask is marked with the buyer's
initials and insured on his account. The property in the goods passes to A from the
moment the goods leave B's warehouse. B cannot thereafter change his mind and
deliver the goods to another buyer.36

(b) B agrees with A to purchase of him, at a stated price to be paid on a fixed day, 50
maunds of rice out of a larger quantity in A's granary. It is agreed that B shall send
sacks for the rice, and that A shall put the rice into them. B does so, and A puts 50
maunds of rice into the sacks. The property in the goods passes to B from the moment
A commences to put the rice into B's sacks. A cannot thereafter change his mind and
deliver the goods to another buyer.37

(c) B orders two machines to be made by A according to a certain design. A makes the
machines, packs them in boxes, and writes to B to say that they are ready and inquires
by what conveyance they are to be sent. Before B replies to the letter, A becomes
insolvent. B claims the machines as his property. The Official Assignee claims them as
property still belonging to A. The Official Assignee is entitled to the machines. Here A
had no authority from B to dispatch the machines as in Illustration (a), nor had he any
authority to do any act with reference to them which could not be done until the goods
were appropriated as in Illustration (b). Therefore B's assent to the appropriation was
necessary before the property could pass to him. No such assent having been given,
the property in the machines remained in A, though he had intended them for B and
informed him of that intention. For all that had been done, A might still have supplied B
with any other two machines answering the description in the contract.38

(d) A contracts to sell to B 100 maunds of grain, according to a sample produced, out
of a larger bulk which B has not seen, and which is already in sacks of A. Certain
number of the sacks are marked by A with B's name and the words "To Wait Orders".
The sacks so dealt with do not become B's property in the absence of specific assent
from B or previous authority from B to A to select them on B's behalf.39

(e) The Defendant contracted to purchase 20 boxes of mackerel from the plaintiff, a
fish exporter in Ireland. The plaintiff consigned to an Irish railway company 190 boxes
of mackerel and telegraphed the railway officials at Holyhead to deliver 20 boxes to
defendant and the rest to two other consignees. The Irish train was delayed and fish
deteriorated before boxes were earmarked at Holyhead. It was held40 that property had
not passed to Defendant before the boxes were earmarked and fish remained as the
property of the seller.

In order that delivery to the carrier should have passed the property, each box ought to
be marked with the name of its consignee.

(f) Goods answering the description in a contract were manufactured by the vendor
who also appropriated the goods to the contract. The Purchaser was informed of it and
he directed the vendor to mark and dispatch them for shipment as per certain
instructions. The goods were marked and dispatched from the vendor's mill but could
not be shipped as the vessels named by the purchaser were not available at their usual
place. It was held that the property in the goods passed to the purchaser and he was
liable in damages for declining to take delivery of the goods. It was observed that "the
act of dispatching the goods from the mill was … the act of the defendant (i.e.
purchaser) through his agent the plaintiffs, and this act of the defendant constituted an
implied assent to the appropriation by the plaintiffs, which then became no longer
revocable."41

The conduct of the purchaser in directing the seller to mark and dispatch the goods for
shipment shows that he assented to the appropriation which the seller made. The
conduct of the seller in marking and dispatching the goods was a complete
compliance with the directions of the purchaser who had not instructed him to ship the
goods, but only to dispatch the goods for shipment. Hence this case was
distinguishable from Jenner v Smith of Illustration (d) where the purchaser gave no
instructions to the seller and never signified his assent to such appropriation as had
been made. There the appropriation was dearly conditional only on the purchaser
giving the necessary orders.

[s 23.4] Essentials of delivery to carrier.—

(1) Delivery must be in pursuance of the contract i.e., the goods must be of the
description and quality of the goods contracted.

(2) Seller delivers goods to the buyer or to a carrier or a bailee for transmission to
the buyer. This must be pursuant to the contract.

(3) Seller does not reserve right of disposal (jus disponendi).

[s 23.5] Sub-section (2): Delivery to buyer.—

Where, in pursuance of the contract, the seller delivers the goods to the buyer, the
delivery operates as an unconditional appropriation by the seller, and the property
passes to the buyer at the moment of delivery.

[s 23.6] Sub-section (2): Delivery to carrier.—

The commonest case of appropriating goods to the contract (i.e., a contract for the
sale of unascertained goods) is where, in pursuance of the contract, the seller delivers
goods to a carrier for the purpose of transmission to the buyer. In such a case the
delivery operates as an unconditional appropriation by the seller provided the seller has
not reserved his right of disposal on the goods and if these conditions are fulfilled, the
property in the goods passes to the buyer at the moment of delivery to such carrier.
Thus if a tradesman orders goods to be sent through a carrier, though he does not
name any carrier, the moment the goods are delivered to the carrier it operates as a
delivery to the buyer and the property in the goods passes to the buyer.42 The seller,
however, may not desire that the property in the goods should pass to the buyer at the
moment of delivery to the carrier. He may desire to retain the property until the price is
paid or until some condition imposed by him on the buyer is fulfilled by the buyer. This
he may do by reserving the right of disposal (jus disponendi) of the goods. This right
may be reserved by the terms of the contract or of appropriation. Where the right of
disposal is reserved, the appropriation is conditional, and the property does not pass to
the buyer until the conditions imposed by the seller are fulfilled by the buyer. As to what
those conditions may be, see note to section 25, "Modes of reserving right of disposal."

[s 23.7] Undertaking by seller to deliver goods at a particular place.—

The general rule, as slated above, is that delivery by the seller to the carrier is a delivery
to the buyer, and that the risk is, after such delivery, of the buyer. But if by the terms of
the contract the seller undertakes to deliver the goods at a certain place, and in order to
do so delivers them to a carrier to be taken to that place, section 23(2) does not apply,
and the property and risk do not pass to the buyer until the goods are delivered at that
place.43

[s 23.8] Risk may pass though property has not passed.—

Where there is a contract for the sale of goods which constitute part of a larger
quantity, and the goods have to be selected by the seller, the property does not pass
until the seller has selected the goods and appropriated them to the contract. The
buyer, however, acquires an undivided interest in the larger bulk, and such an interest is
an insurable interest.44 Moreover, if the seller gives a delivery order upon a party in
possession of the large bulk of goods in respect of the quantity sold to the buyer, and
the buyer accepts the order, the risk of loss from something happening to the goods,
such as a deterioration in their quality, passes to the buyer on acceptance of the
delivery order.45

[s 23.9] Future goods.—

The rules stated above apply not only on unascertained goods, but also to future
goods, i.e., goods to be manufactured or acquired by the seller after the making of the
contract of sale. Illustration (c) under the note, "Authority to select and appropriate," is a
case of future goods.

24 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 : 65 IA 263 : 40 Bom LR 799.
24 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 : 65 IA 263 : 40 Bom LR 799.
25 Rhodes v Thwaites, (1827) 6 B&C 388 : 108 ER 495, per Holroyd, J.
26 Commissioner of Sales Tax, Eastern Division, Nagpur v Husenally Adamji & Co, AIR 1959 SC
887 : [1959] Supp (2) SCR 702 .
27 Rhodes v Thwaites, (1827) 6 B&C 388 : 108 ER 495. Hogshead is a large cask or barrel that is
used as a unit of capacity for measuring goods in liquid or dry form.
28 Emperor v Kunverji Kavasji, AIR 1941 Bom 106 : (1941) 43 Bom LR 95 : 194 IC 302.
29 Shanker Das v Bhana Ram, AIR 1926 Lah 606 .
30 Vigers Bros v Sanderson Bros, (1901) 1 KB 608 .
31 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 : 65 IA 263 : 40 Bom LR 799.
32 Shanker Das v Bhana Ram, AIR 1926 Lah 606 .
33 Sir Mackenzie Dalzell Edwin Stewart Chalmers, The Sale of Goods Act, 1893, 10th Edn,
Butterworths, 1910, p 61.
34 Colin Blackburn, A Treatise on the Effect of the Contract of Sale, 3rd Edn, p 138.
35 Colin Blackburn, A Treatise on the Effect of the Contract of Sale, 3rd Edn, p 137.
36 Fragans v Long, (1825) 4 B&C 219.
37 Aldridge v Johnson, (1857) 26 LJQB 296 : (1857) 7 E&B 885.
38 Atkinson v Bell, (1828) 8 B&C 277. Colin Blackburn, A Treatise on the Effect of the Contract of
Sale, 3rd Edn, pp 139–140.
39 Jenner v Smith, (1869) LR 4 CP 270.
40 Healy v Howlett & Sons, (1917) 1 KB 337 .
41 Clive Jute Mills Co v Ebrahim, (1896) 24 Cal 177 : (1897) ILR 24 Cal 177.
42 Dutton v Solomonson, (1803) 3 B&P 582 : 7 RR 883.
43 See judgment of Lord Cottenham, LC, in Anderson v Morice, (1875) 44 LJCP 10 : 1 App Cas
713, at pp 728, 729 : LR 10 CP 609.
44 Inglis v Stock, (1885) 10 App Cas 263 .
45 Sterns, Ltd v Vickers, Ltd, (1923) 1 KB 78 : (1922) All ER 126 (CA).
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 24. Goods sent on approval or "on sale or return".-

When goods are delivered to the buyer on approval or "on sale or return" or other similar
terms, the property therein passes to the buyer—

(a) when he signifies his approval or acceptance to the seller or does any other act
adopting the transaction;

(b) if he does not signify his approval or acceptance to the seller but retains the
goods without giving notice of rejection, then, if a time has been fixed for the
return of the goods, on the expiration of such time, and, if no time has been
fixed, on the expiration of a reasonable time:

[s 24.1] Goods sent on approval or on sale or return.—

This section relates to specific goods and it should have been placed immediately after
section 22.

The questions to be considered are whether the goods are delivered on the basis of
"sale or return" or on some other terms. It depends upon the terms of the contract and
surrounding circumstances. Sometimes the person to whom goods are delivered may
be an agent for sale.

When goods are sent on approval, or on sale or return, or other similar terms, e.g., on
trial, the transaction is merely an agreement to sell, and the property and the risk
remain in the seller until the buyer does one or other of the things mentioned in the
section. If the buyer does any one of those things, the transaction becomes a sale and
the property and risk pass to the buyer. Thus if goods are sent on sale or return and the
buyer pledges them to a third person, he has adopted the transaction and the property
passes to him. The seller therefore cannot remove the goods from the third person.
This is so even if the pledge is in fraud of the seller who intended that the goods should
be disposed of in the ordinary course of business.46 The seller, however, may protect
himself by delivering the goods on special terms.47 When goods are sold on "jangad" it
means that the goods are to be shown for approval. A purchaser, therefore, does not
obtain a good title from a broker who has received goods on "jangad" terms unless the
consent of the owner has been obtained.48

Where goods have been delivered by a person on "sale for cash or return within a week"
and two days after such delivery execution is levied against prospective buyer on
behalf of his creditors, it cannot be said that the party has retained such goods and
therefore the property has passed to him.49
[s 24.2] Any other act adopting the transaction.—

Such an act would be in the nature of an exercise of right of ownership of the goods
such as a sale to a third person, pledging the goods with a pledgee, using the goods for
his own purpose.

[s 24.3] On similar terms.—

These words are to be construed ejusdem generis. Sale on trial will come within this
expression.

[s 24.4] Reasonable time.—

What is a reasonable time depends upon the facts and circumstances of each case.
Time would begin to run from the date or time the purchaser receives the goods.

[s 24.5] Gathering intention, its importance.—

Section 24 has to be read along with sub-section (3) of section 19 which says that
"unless a different intention appears, the rules contained in sections 20 to 24 are rules
for ascertaining the intention of the parties as to the time at which the property in the
goods is to pass to the buyer". Section 24 appears to be practically in the same terms
as section 18 of the English Sale of Goods Act, 1979 which itself is but a repetition of
the common law rule to that effect. The law in this behalf is stated in Halsbury's Laws
of England, 50 in the following words:

727. When property passes.—Unless a different intention appears, when goods are delivered
to the buyer on approval, or on sale or return, or other similar terms, the property in the
goods passes to the buyer when he signifies his approval or acceptance to the seller or
does any other act adopting the transaction; and if he does not signify his approval or
acceptance to the seller but retains the goods without giving notice of rejection, then, if a
time has been fixed for the return of the goods, on the expiration of that time and, if no time
has been fixed, on the expiration of a reasonable time. What is a reasonable time is a
question of fact.

In para 728, it is stated:

728. Similar terms.—A delivery of goods is not made on terms similar to a delivery on
approval or on sale or return unless the effect of the transaction is that the bailee has the
option of becoming the owner of the goods and on terms substantially the same as those
already mentioned.

The principle of section 24 inter alia is that where the goods are delivered to the buyer
on terms similar to the delivery of goods on approval or "on sale or return", the property
in the goods therein passes to the buyer, if he does not signify his approval or
acceptance and also does not return the goods within the time prescribed therefor.
According to the said principle, the position of the purchaser, until he returns the goods
within the prescribed period, is that of a bailee and on the expiry of the said period, he
becomes a purchaser. Where, however, the person to whom the goods are delivered is
under an obligation to return the goods, there is no question of sale ever coming into
being and the person to whom the goods are delivered remains a bailee.

The Supreme Court was dealing with the above provisions in State of Maharashtra v
Britannia Biscuits Co Ltd,51 and particularly in a transaction in its nature nearer to the
situation contemplated by and to the principle of section 24, where the biscuit tins were
delivered to the buyer with the stipulation that if he returns the tins in which the biscuits
were sold in good condition within three months, he would get back the deposit kept by
him in that behalf. It meant that after the expiry of the said period, he had no right to
claim the refund on return of goods. The transaction then became a sale. The customer
had under the contract a right to return the tins in good condition within three months.
Correspondingly, the biscuit company was under an obligation to refund the deposit
amount if the tins were returned within three months in good condition; after the expiry
of three months, the respondent was under no such obligation though it may be that for
his own business or other reasons, he may yet accept the return of the tins and refund
the deposit.

46 Kirkham v Attenborough, (1897) 1 QB 201 ; London Jewellers Ltd v Sutton (Attenborough on

Appeal), (1934) 2 KB 206 (CA) : (1934) 50 TLR 193 ; U. Sulaiman v Ma Twet, ('34) AR 198 : 151 IC
413.
47 Wiener v Gill, (1906) 2 KB 574 .
48 Amritlal v Bhagwandas, (1939) Bom 454 : 186 IC 8 : ('39) AB 435 : 41 Bom LR 609.
49 Re Ferrier, (1944) 1 ChD 295 .
50 Halsbury's Laws of England, IVth Edn, vol 41, para 727.
51 State of Maharashtra v Britannia Biscuits Co Ltd, 1995 Supp (2) SCC 72 : (1994) 5 Scale 44 :
(1995) 96 STC 642 (SC).
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 25. Reservation of right of disposal.-

(1) Where there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract, the seller may, by the terms of the
contract or appropriation, reserve the right of disposal of the goods until certain
conditions are fulfilled. In such case, notwithstanding the delivery of the goods
to a buyer, or to a carrier or other bailee for the purpose of transmission to the
buyer, the property in the goods does not pass to the buyer until the conditions
imposed by the seller are fulfilled.

52
[(2) Where goods are shipped or delivered to a railway administration for carriage
by railway and by the bill of lading or railway receipt, as the case may be, the
goods are deliverable to the order of the seller or his agent, the seller is prima
facie deemed to reserve right of disposal.

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

Explanation.—In this section the expressions "railway" and "railway

administration" shall have the meanings respectively assigned to them under
the Indian Railways Act, 1890 (9 of 1890)53].

[s 25.1] Amendment.—

Sub-sections (2) and (3) were substituted by Act 33 of 1963. It has the effect of
including carriage by railway.

[s 25.2] Railway.—

"Railway" is defined in section 3(4) of the Indian Railways Act, 1890 as follows:—

(4) "Railway" means a railway or any portion of a railway, for the public carriage of
passengers, animals or goods, and includes—

(a) All land within the fences or other boundary marks indicating the limits of the
land appurtenant to a railway;

(b) All lines of rails, siding or branches worked over for the purposes of, or in
 connection with, a railway;

(c) All stations, office warehouses, wharves, workshops, manufactories, fixed plant
and machinery and other works constructed for the purposes of, or in
connection with, a railway, and

(d) All ferries, ships, boats and rafts which are used on inland waters for the
purposes of the traffic of a railway and belong to or are hired or worked by the
authority administering the railway.

[s 25.3] Railway Administration.—

"Railway Administration" has been defined by section 3 of the Indian Railways Act,
1890, as follows:

(b) "Railway administration" or administration in the case of a railway administered

by the Government means the Manager of the railway and includes the
Government and in the case of a railway administered by a railway Company,
means the railway Company.

[s 25.4] Reservation of right of disposal.—

This section is to be read with section 23. It is founded on the judgment of Cotton J., in
Mirabita v Imperial Ottoman Bank.54 The following are the material passages in the
judgment:

In the case of such a contract (that is, a contract for the sale of unascertained goods), the
delivery by the vendor to a common carrier, or, unless the effect of the shipment is restricted
by the terms of the bill of lading, shipment on board a ship of, or chartered for, the
purchaser, is an appropriation sufficient to pass the property. (This corresponds to section
23).

If, however, the vendor, when shipping the articles which he intends to deliver under the
contract, takes the bill of lading to his own order, and does so not as agent, or on behalf of
the purchaser, but on his own behalf, it is held that he thereby reserves to himself a power of
disposing of the property, and that consequently there is no final appropriation, and the
property does not on shipment pass to the purchaser. [This corresponds to sub-sections (1)
and (2) of the present section.]

If the vendor deals with, or claims to retain the bill of lading, in order to secure the contract
price, as and when he sends forward the bill of lading with a bill of exchange attached, with
directions that the bill of lading is not to be delivered to the purchaser till acceptance or
payment of the bill of exchange, the appropriation is not absolute, but until acceptance of
the draft, or payment or tender of the price, is conditional only, and until such acceptance or
payment or tender, the property in the goods does not pass to the purchaser.55 [This
corresponds to sub-section (3).] It is also explanatory of the words "unconditionally
appropriated" in section 23(1).

[s 25.5] Modes of reserving right of disposal.—

The object of reserving the right of disposal of goods is generally to secure that the
price shall be paid before the property passes to the buyer. One mode of reserving the
right of disposal of goods is to send the VPP (Value Prepaid). Property in the goods
does not pass until payment is made by the buyer. Under VPP system the seller retains
control over the goods right upto the time the goods are delivered to buyer against
payment of price and contract would fall under section 25 of the Sale of Goods Act,
1930.56 When the goods are sent by sea the seller ships them from Cochin to Bombay
and takes bill of lading making the goods deliverable to his own order or to that of his
agent at the port of discharge. These he transmits to his agent with instructions not to
hand them over except on payment of the price.57 Or he may draw a bill of exchange on
the buyer and discount the bill with his own bankers, handing them the bills of lading
which their agents at the port of discharge will retain until the bill is paid.58 In either
case, if there is nothing to show the contrary, it is clear that the intention and the effect
of so acting is that the property does not pass on shipment of the goods.59 Instead of
acting in either of ways above suggested, the seller may draw on the buyer for the price
and transmit the bill of exchange and the bill of lading to the buyer for payment or
acceptance of the former. If the buyer does not accept the bill of exchange, he must
return the bill of lading. If he does not, no property in the goods passes to him [section
25(3)]. The protection obtained by the seller in this case, however, is not complete.
Where a buyer who had contracted to purchase the goods in his turn agreed to sell to a
third party and thereafter became insolvent and received the bill of lading together with
an invoice from the seller and the buyer in his turn without payment endorsed the bill of
lading to the third party and received the price thereof, it was held that the buyer having
received the bill of lading from the seller directly he was in possession of the bill of
lading with the consent of the seller and the third party took the bill of lading in good
faith and without notice of the defect in the buyer's title and hence the third party got a
good title to the goods.60 This case was treated as a sale by a mercantile agent to the
third party as if falling under the proviso to section 27.60

When a railway receipt is made out in the name of the consignee, the railway receipt,
invoice and Bill of Exchange for price are sent to the bank, to be handed over to the
buyer (consignee) on his honouring the Bill of Exchange or against payment. If in such
a case the consignee obtains the goods from the railway by giving an indemnity, that
would be a tortious act and the property would not pass to the buyer by such a tortious
act.61

In the instant case though railway receipt was taken in the name of the consignee, yet it
did not show that property in the goods passed to consignee (i.e., buyer) when the
goods were appropriated and handed over to the railway as under the circumstance of
the case the buyer had to pay 65% of the price on arrival of the goods. In Shamji Bhanji
and Co v North Western Rly Co,62 P sold goods to S. The goods were to be supplied to S
at Peshawar. P entrusted the goods to Railway company to be carried to Peshawar at
railway risk. The railway issued railway receipt in P's name as the goods were
consigned by P to himself at Peshawar. On this it was held that P did not
unconditionally appropriate the goods to the contract for sale but reserved the right of
disposal insofar as P obtained railway receipt in respect of the goods in his own (P's)
name as consignee until certain condition was fulfilled, i.e., the price of goods was paid
by S as against the receipt of the goods by P from railway at Peshawar. Thus,
notwithstanding the delivery of goods to railway for transmission to S, the property in
goods could not pass to S until price is not paid to P.

Where a bill of lading is taken by the seller in his name but he endorses it in favour of
the buyer or endorses it in blank and sends it to the buyer together with invoice stating
that the goods are shipped "on account and risk of buyers" the seller did not reserve his
right of disposal.

Where a contract of sale specifically provided that no property in the goods will pass to
the buyer until payment of the price, with the seller's lien on the goods and on the
documents until such payment, it was held that the property in the goods passed to the
buyer when the goods were handed over to the shipowner on FAS basis63 (i.e., free
alongside, meaning the seller placing the consignment in possession of shipowner).
Sub-sections (2) and (3) have been amended so as to include carriage by railway on the
ground that goods are frequently consigned by rail with the railway receipts made out
in the name of the consignor or his agent or bank with the clear intention of reserving a
right of disposal to the consignor and there was no reason why in such cases the
consignor by rail should not have the same rights as the consignor by ship.

52 Subs. by Act 33 of 1963, section 4 for sub-sections (2) and (3).

53 See the Railways Act, 1989 (24 of 1989).
54 Mirabita v Imperial Ottoman Bank, (1878) 3 Ex D 164 , at p 172.
55 See The Prinz Adalbert, (1917) AC 586 : LR (1916) p 81.
56 CIT v PM Rathod & Co, AIR 1959 SC 1394 : [1960] 1 SCR 401 .
57 Carona Sahu Co (Pvt) Ltd v State of Maharashtra, AIR 1966 SC 1153 : [1966] 2 SCR 845 .
58 Ford Automobiles India Ltd v Delhi Motor and Engineering Co, 1922 (24) Bom LR 1140 : (1923)
AB 125 : 70 IC 138.
59 Mirabita v Imperial Ottoman Bank, (1878) 3 Ex D 164 .
60 Cahn v Packett's Bristol Channel Co, (1899) 1 QB 643 : 43 SIJ 331. The above passage is
taken from Patrick Selim Atiyah, Atiyah's Sale of Goods, 12th Edn, Pearson Education Canada,
2010.
60 Cahn v Packett's Bristol Channel Co, (1899) 1 QB 643 : 43 SIJ 331. The above passage is
taken from Patrick Selim Atiyah, Atiyah's Sale of Goods, 12th Edn, Pearson Education Canada,
2010.
61 N Mohammed Sherif v Official Liquidator, Seetharam Spinning and Weaving Mills Ltd, AIR 1964
Ker 135 : 1963 Ker LT 741 : ILR (1963) 2 Ker 723 .
62 Shamji Bhanji and Co v North Western Rly Co, AIR 1947 Bom 169 : (1946) 48 Bom LR 698 .
63 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 : 65 IA 263 : 40 Bom LR 799.
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Property as between Seller and Buyer

S. 26. Risk prima facie passes with property.-

Unless otherwise agreed, the goods remain at the seller's risk until the property therein
is transferred to the buyer, but when the property therein is transferred to the buyer, the
goods are at the buyer's risk whether delivery has been made or not;

Provided that, where delivery has been delayed through the fault of either buyer or
seller, the goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault:

Provided also that nothing in this section shall affect the duties or liabilities of either
seller or buyer as a bailee of the goods of the other party.

[s 26.1] Risk prima facie passes with property.—

The general rule is that in absence of special terms, the risk follows the property. The
words "unless otherwise agreed" indicate that the rule stated in this section will apply if
there is no agreement to the contrary. The prima facie rule in this section is that the
goods remain at the seller's risk until the property in the goods is transferred to the
buyer. But when the property in the goods is transferred to the buyer the goods are at
the buyer's risk whether delivery has been made or not. The above rule has some
exceptions. The first proviso provides that where delivery of goods has been delayed
due to the fault of either the buyer or the seller, the goods are at the risk of the party in
fault as regards any loss which might not have occurred but for such fault. The second
proviso is further subject to the first proviso and provides that nothing in the section
shall affect the duties or liabilities of either the seller or the buyer as a bailee of the
goods of the other party.

The first proviso lays down a rule of equity. It serves as an exception to the general rule.
If there was any weighing or anything of the sort which prevented the contract from
being emptio perfecta, whenever loss was occasioned by one of the parties in mora, as
it was his default he shall bear the risk as if there was emptio perfecta.64

In Demby Hamilton & Co Ltd v Barden,65 X contracted to sell 30 tons of apple juice to be
delivered to Y. X accordingly crushed the apple to make juice and put the juice in casks
pending delivery. Y was late in taking delivery and some juice went bad. It was held that
the first proviso applied and Y (buyer) was liable as he bore the risk of deterioration
which was due to his delayed taking of delivery. The contract in this case required that
delivery should be as per sample. So it would have been very difficult for the seller to
obtain the goods (i.e., apple juice) which complied with the sample which meant that
apples had to be from the same district. Moreover, the season was also ending. Under
these circumstances the seller could not have reasonably disposed of these goods
(i.e., apple juice) and minimise the loss on the buyer. Thus to meet with his obligation
towards the buyer (i.e., delivery as per sample) the seller had to keep 30 tons of juice at
the same time.
Illustrations

(a) B offers, and A accepts, Rs 100 for a stack of firewood standing on A's premises.
The firewood is to be allowed to remain on A's premises till a certain day and not to be
taken away till paid for. Before payment, and while the firewood is on A's premises, it is
accidentally destroyed by fire. B must bear the loss. This is a case of an unconditional
contract for the sale of specific goods in a deliverable state. Therefore section 20
applies and the property in the goods passes to the buyer, and along with the risk, when
the contract is made, i.e., B's offer is accepted by A, though payment and delivery are
both postponed.

(b) A bids Rs 1,000 for a picture at a sale by auction. After the bid it is injured by an
accident. If the accident happens before the hammer falls, the loss falls on the seller; if
afterwards, it falls on A. This again is a case of an unconditional contract for the sale of
specific goods. Therefore, section 20 applies and the property in the picture passes to
A when the contract is made, i.e., when A's offer is accepted, the acceptance being
indicated by the fall of the hammer.

[s 26.2] Risk is no test of property.—

There is nothing to prevent the parties from contracting that though one party has the
property in the goods, yet if the goods are lost, the other party is to pay for them; the
parties, in other words, may contract that the risk shall pass on delivery irrespective of
the passing of the property.66

[s 26.3] "Unless Otherwise agreed".—

The agreement to the contrary contemplated in this section may be in writing or may be
inferred from the course of dealing or by usage binding on both.

Where the goods lay at seller's risk for two months and the two months expired, the risk
fell on the buyer after the expiry of the two months, where the goods were consigned
by railway and the railway receipt, which was taken in the name of the consignor, was
endorsed by the consignor in favour of the buyer and sent to the bank with instructions
to deliver the railway receipt to the buyer against payment and if the goods reach their
destination safely but are then stolen before the buyer pays to the bank and goes to
take delivery, it was held that the course of dealing indicated that the property did not
pass till the buyer paid and hence the goods were lying at the seller's risk till payment
of the price.67

Where a contract of sale provides that either party shall insure the goods during transit,
it is presumed that the party who has to insure the goods in transit takes upon himself
the risk of loss.68

[s 26.4] Seller or buyer as bailee.—

If A sells goods to B, but continues in possession after sale, he is a bailee of the goods
for B. Similarly if A agrees to sell goods to B, who obtains possession thereof before
the property in the goods passes to him, B is a bailee of the goods for A. In either case
the duties and liabilities of A and B as a bailee for the other are not affected by this
section. For rights and liabilities of bailees, see sections 148–181 of the Indian
Contract Act, 1872.

[s 26.5] Analysis of sections relating to passing of property

(1) Sale is transfer of property in the goods (sold) from the seller to the buyer (section
4).

(2) The transfer of property may take place either when the contract of sale is made or
subsequent thereto.

(3) The transfer takes place when the contract is made, if the goods are specific and in a
deliverable state and the contract is unconditional (section 20). The transaction in such
a case amounts to a sale. But if the goods are not in a deliverable state or the contract
is not unconditional, the transaction is an agreement to sell as distinguished from a
sale.

(i) The goods may be specific and in a deliverable state, but the contract is
conditional upon the seller having to do some act to ascertain the price, e.g., to
weigh the goods. In such a case the property passes when the goods are
weighed and the buyer has notice thereof (section 22).

(ii) The goods may be specific, but not in a deliverable state, and the contract is
conditional upon the seller having to do something to put them in a deliverable
state. In such a case the property passes when the seller has put the goods in a
deliverable state and the buyer has notice thereof (section 21).

(iii) Where specific goods are delivered to the buyer—which cannot be done unless
they are in a deliverable state—on approval as on sale or return, the property
passes on the fulfilment by the buyer of the condition implied in such a
transaction, namely, the buyer signifying his approval or acceptance to the seller
(section 24).

(4) In the case of an agreement to sell unascertained or future goods, the property
passes when the goods are ascertained by appropriating them to the contract (section
23).

[s 26.6] CIF contract.—

The buyer under a cost, insurance and freight (CIF) contract is in effect the insurer of
his goods, and the risk prima facie attaches to him on and after shipment by the seller,
subject to the seller's obligation to tender such valid and effective documents as are
contemplated by the contract or as are usual.69 The obligations upon a seller under a
CIF contract are also well known, some of which are in relation to goods and some of
which are in relation to documents. In relation to goods, the seller must ship goods of
contract description on board a ship bound to the contract destination. If there is a late
shipment or the seller has put goods on board a ship not bound to the contract
destination as stipulated, the logical inference that must necessarily follow is that the
seller has not put on board goods conforming to a contract destination. The liability of
the seller will not cease to exist on shipment of the goods or in any case when the
shipping documents were handed over through the banking channels on negotiations
of the letter of credit, when the seller is in breach at the threshold. It will also be
immaterial whether or not the buyers had a right of action against the insurers or the
carrier.70 As to what is a CIF contract, see note to section 26, "CIF contract".
[s 26.7] FOB. contract.—

In the case of a contract for the sale of goods to be shipped F.O.B., i.e., free on board,
the property and risk in goods do not, in the absence of special agreement, pass to the
buyer till the goods are actually put on board.71

[s 26.8] Benefit.—

It may be asked as to whom the benefit goes.

The section deals with the risk but it is silent as to the accrual of the benefit. The
converse of the rule res perit demino holds good and by parity of reasoning, benefits or
fruits of the goods sold belong prima facie to the person who has the property in the
goods.

64 Martineau v Kitching, (1872) LR 7 QB 436.

65 Demby Hamilton & Co Ltd v Barden, (1949) 1 All ER 435 : (1949) WLN 73 .
66 See Anderson v Morice, (1875) 44 LJCP 10 : 1 App Cas 713, 735 : LR 10 CP 609; Sterns, Ltd v
Vickers, Ltd, (1923) 1 KB 78 .
67 NS Billimoria v Gauri Mal Narain Das, AIR 1928 Lah 481 , 112 IC 457.
68 Anderson v Morice, (1875) 44 LJCP 10 : 1 App Cas 713 : LR 10 CP 609.
69 Groom v Barber, (1915) 1 KB 316 : (1915) 112 LT 301 .
70 Phulchand Exports Ltd v OOO Patriot, (2011) 10 SCC 300 : (2012) 1 SCC (Civ) 131 : 2011 (11)
Scale 475 .
71 Stock v Inglis, (1885) 10 App Cas 263 . See CIT Madras v Mysore Chromite Ltd, AIR 1955 SC
98 : [1955] 1 SCR 849 ; Cowasjee v Thompson, (1845) 5 Moore PCC 165 : 70 RR 27.
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Title

S. 27. Sale by person not the owner.-

Subject to the provisions of this Act and of any other law for the time being in force,
where goods are sold by a person who is not the owner thereof and who does not sell
them under the authority or with the consent of the owner, the buyer acquires no better
title to the goods than the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller's authority to sell:

Provided that, where a mercantile agent is, with the consent of the owner, in
possession of the goods or of a document of title to the goods, any sale made by him,
when acting in the ordinary course of business of a mercantile agent, shall be as valid
as if he were expressly authorised by the owner of the goods to make the same;
provided that the buyer acts in good faith and has not at the time of the contract of sale
notice that the seller has no authority to sell.

Illustrations

1. A finds a ring and after making reasonable efforts to find out the owner, sells it to B
who buys without knowledge that A was merely a finder. The true owner may recover
the ring from B.72

2. A delivers goods to B on sale or return basis, on condition that they are to remain the
property of A until paid for. B sells the goods to C without paying A. C buys in good faith
and without notice of A's title. Still A can recover the goods or their value from C.73

3. The hirer of goods under a hire purchase agreement "sells" them. The "buyer" from
him, though acting in good faith, does not acquire the property in the goods as against
the owner, but at the most such interest as the hirer had.74

4. One Alfred Blenkarn, writing from an address which he gave as 37, Wood Street,
Cheapside and signing his name as Blenkiron & Co., ordered some goods from the
plaintiff-Respondents (Lindsay & Co). A reputable firm W. Blenkiron & Co carried on
business at 123, Wood Street. The plaintiffs consigned the goods to Messrs. Blenkiron
& Co. 37, Wood Street and Blenkarn obtained possession of the goods and resold to
Defendants who bought in good faith. The Defendants acquired no title as against the
plaintiffs.75

5. Plaintiff entrusted a motor car to a mercantile agent for sale, stipulating that the car
should not be sold below a certain price. To this the agent professed to agree but
intended from the outset to sell the car at such price as he could obtain and
misappropriate the proceeds. He sold it to A who bought in good faith for less than the
stipulated price. Subsequently A sold the car to defendant. The plaintiff cannot recover
the car from the defendant.76

[s 27.1] Sale by person not the owner—General rule.—

As a general rule, no man can sell goods and give a good title to them unless he is the
owner, or some one having his authority or consent, e.g., an agent. And the rule is the
same, although the sale is accompanied by a transfer of a bill of lading, delivery order,
warrant, or similar documents. Such documents are not negotiable instruments so as
by their transfer to pass to the buyer a title superior to that of the seller. A person,
therefore, however innocent, who buys goods from one not the owner obtains no
property in them whatsoever.77 The general rule of law, as stated by Wilies, J, is that
"no one can transfer a better title than he himself possesses." This is expressed by the
maxim nemo dot quod non habet.78

In the development of law, the legislature had to find a balance between two principles.
The first one relates to protecting one's own property. In order to protect the owner's
property so that the owner alone can pass title, the first para of this section has been
enacted so that a person not an owner cannot pass any title. However, in the interest of
trade and commerce and its development, it was necessary to permit sales by
authorised agents. This is secured by the proviso to this section whereby sales by
commercial agents are protected. Sections 28, 29, 30(1), (2) fall in the second
category.

[s 27.2] Title by estoppel: Estoppel of owner.—

But though the general rule is as stated above, the owner may be estopped by his
conduct from denying the seller's title and setting up his title against the buyer.

The words "unless the owner of the goods is by his conduct precluded from denying
the seller's authority to sell" refer to estoppel of the owner. The said words carve out an
exception to the general rule. The estoppel may arise by words or conduct which
wilfully causes another to alter his position and to induce him to act on that belief or
stands by negligently or culpably and allows another to contract on the faith and
understanding as if the seller has the authority to sell, or is the owner or has apparent
title to the goods.

Negligence on the part of the owner, in order to constitute conduct precluding him from
denying the seller's authority to sell, must be more than mere negligence in the
management of his own affairs and must amount to a disregard of his obligations
towards the buyer.79

In Mercantile Bank v Central Bank,80 the Respondent Central Bank advanced monies to
a merchant, on the pledge of railway receipt. The bank instead of sending railway
receipt to its own godown keeper to enable him to obtain goods was accustomed in
the usual course of business to hand railway receipt back to a merchant for the specific
purpose of clearing the goods and storing them in bank's godown. A merchant, instead
of doing so, repledged the receipts with the Appellant bank. On merchant's failure, a
question of priority arose between these two banks with regard to pledged railway
receipts with these two banks. An estoppel by conduct or neglect was sought to be
raised against the Respondent, Central Bank, but the Privy Council rejected it on the
ground that Respondent, Central Bank, owed no duty to Appellant, Mercantile Bank, in
the matter as there was no relationship of the contract or agency between them. Lastly,
the Appellant bank argued that there was estoppel as railway receipt contained a
representation by Respondent to any person to whom merchant might produce it, that
the merchant had the power to obtain a pledge on security of goods. Thus the
argument ran that apart from the question of negligence of the respondent, there was a
representation of authority which bound the Respondent because it enabled merchant
to mislead Appellant. The Privy Council refused to accede to the argument and
observed that estoppel by representation did not exist in the case inasmuch as the
railway receipt was in form merely authority to take delivery of goods and there was no
ground for finding any representation as was argued by the appellant. Possession of
railway receipt, like possession of goods, did not convey a representation that
merchants were entitled to dispose of property. The Privy Council accepted that
estoppel by holding out or representation may arise if a share certificate with transfer
form in blank has been placed with share broker. Brokers in ordinary course of
business are employed to sell, buy and to raise money upon security of the customer.
Accordingly, it was reasonable assumption that broker had full authority to deal with
the securities. But the railway receipt was in form merely an authority to take delivery of
the goods and possession of such documents contained no representation that holder
had any implied authority or right to dispose of the goods. It was at best an ambiguous
document.

In Mohambaram v Ram Narayan,81 an owner of bus engaged A as his agent to ply the
bus for hire and left a duly signed letter addressed to District Magistrate requesting to
grant "G" permit to "A". The registration certificate of the bus was also left with A. A
fraudulently altered the letter into one addressed to DSP requesting him to transfer the
registration in his (A's) name, which having been done, A sold the bus to a stranger who
was ignorant about A's real title. The owner, challenged the buyer's title. It was held that
the owner could not have contemplated the possibility of fraud of A and that true owner
was not precluded under section 27 of the Sale of Goods Act, 1930 from challenging
the title acquired by the buyer.82

[s 27.3] Exceptions to the general rule.—

The following are the exceptions to the rule that no seller of goods can give to the
buyer thereof a better title than his own, namely,—

(1) Where person without title selling the goods with consent or authority of the
owner (section 27).

(2) Where an Owner of goods is precluded by his conduct to deny the seller's
authority to sell

(3) Sale by a mercantile agent (proviso to section 27).

(4) Sale by one of the joint owners (section 28).

(5) Sale by a person in possession under a voidable contract (section 29).

(6) Sale by one who has already sold the goods but continues in possession thereof
[section 30(1)].

(7) Sale by buyer obtaining possession before the property in the goods has vested
in him [section 30(2)].

(8) Where an unpaid seller resells the goods when he has exercised his right of lien
or stoppage in transit (section 54).

All these exceptions are necessary for the protection of persons who deal bona fide for
value without notice and person dealing with mercantile agents.

The words "subject to the provisions of this Act and of any other law for the time being
in force" are wide enough to provide further exceptions as under:—

(1) Sale by a pawner under his power of sale (see section 176 of Indian Contract
Act, 1872).
 (2) Sale by a Court Receiver under his powers under O 40 of Civil Procedure Code,
1908.

(3) Sale by Official Assignee under the Insolvency Law or by Liquidators under the
Indian Companies Act, 1956.

(4) Sale by a mortgagor in possession to a buyer without notice of encumbrance.

(5) Sale by a finder of goods pursuant to the provisions of section 169 of the Indian
Contract Act, 1872.

(6) Sale by a master of the ship in case of necessity.

[s 27.4] Sale by mercantile agent.—

Mere possession of goods or of the documents of title to goods gives no power to

dispose of them. Thus a clerk in a merchant's office who as such is possessed of
delivery orders or other documents of title for the purposes of his employment has no
power to dispose of them. But it is different when the person in possession of goods is
a mercantile agent, such as a factor, broker or auctioneer. Lord Wright in Lowther v
Harris,83 observed that a mere shopkeeper or servant cannot be a mercantile agent. A
person who has his own shop and gives receipts and takes cheque in his own
registered business name and earns commission is not a mere servant but agent even
if his discretionary authority is limited. A mercantile agent may act for only one
principal and may not have general occupation as agent. Persons who deal in picture
and object of art on commission can be mercantile agent. A sale by such a person of
goods or the documents of title to goods will pass a good title to the buyer—

(1) if he is in possession of the goods or of the documents with the consent of the
owner;

(2) if the sale is made by him when acting in the ordinary course of business of a
mercantile agent;

(3) if the buyer acts in good faith and has not at the time the contract of sale notice
that the seller has no authority to sell.

The proviso to the section is a reproduction of section 2(1) of the Factors Act (English),
1889. It is founded on the principle that where a person has entrusted goods or the
documents of title to goods to an agent who, in the course of such agency, sells or
pledges the goods, he ought, as regards innocent third parties, to be treated as the
owner of the goods. This is the principle running through the earlier Factors Acts of
1823, 1825, 1842 and 1877, all of which have been repealed by the Factors Act of 1889.
It is a departure from the common law rule that mere possession of goods or of the
documents of title to goods does not enable the person in possession to dispose of
them in contravention of his instructions in respect of them. The present section deals
with the sale of goods by a mercantile agent. Section 178 of the Indian Contract Act,
1872, as amended by the Indian Contract (Amendment) Act, 1930, deals with the
pledge of goods by a mercantile agent.

[s 27.5] Mercantile agent.—

The proviso to the section validates a sale by a mercantile agent. A mercantile agent is
one who has, in the customary course of his84 business as such agent, authority either
to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise
money on the security of goods [section 2(9) of the Sale of Goods Act, 1930]. A person
having authority to consign goods is called a forwarding agent.

The term "mercantile agent" does not include a mere servant or caretaker, or one who
has possession of goods for carriage, safe custody, or otherwise as an independent
contracting party. It only includes persons whose employment corresponds to that of
some known kind of commercial agent, e.g., a factor, an auctioneer or a broker.85 A
broker is an agent to make contracts between other persons in matters of trade or
commerce. A mercantile agency under this section may exist although the agent is
acting for one principal only and has no general occupation as agent. The section does
not require a general occupation as agent.86

To constitute an agent he must be (1) a mercantile agent (2) having the customary
course of his business as such agent authority to sell goods, etc. A mere insurance
agent who on a particular occasion is entrusted with pictures to sell on commission is
not a mercantile agent. It cannot be said of one who is merely an insurance agent that
he has "in the customary course of his business as such agent authority," etc. A pledge
therefore of the pictures given to him for sale would not be valid.

The definition of the terms "goods" in section 2(7) shows that the section under
consideration is not confined to dealing in merchandise, but also includes sales of
furniture, etc.

[s 27.6] Possession by mercantile agent.—

The mercantile agent must have possession of the goods or of document of title to the
goods in his capacity as mercantile agent and not in other capacity. So where a
warehouseman who was also a broker had the goods qua warehouseman, it was held
that he could not validly pledge the goods received by him in his capacity as a
warehouseman.87 Mercantile agent is in possession of goods even if he obtains
possession of goods by his fraud. So in Lowther v Harris,88 where mercantile agent was
allowed to take certain tapestry away in van after the real owner (plaintiff) had
sanctioned the sale of the goods to the buyer, it was held that a mercantile agent was
in possession of the goods though he (mercantile agent) never intended sale to be
made to that buyer as he had just obtained by fraud possession of the goods from the
real owner to pawn it with a pledgee. But mercantile agent is not in possession of the
goods when he had stolen the goods from the real owner (plaintiff) who never parted
with it.

[s 27.7] Possession must be with consent.—

To validate a sale by a mercantile agent under this section he must be in possession of

the goods or of the documents of title to the goods with the consent of the owner. This
implies that he must have been entrusted with the goods, as a mercantile agent and not
in any other capacity, in other words, the capacity in which the agent receives the
goods must be one which clothes him with authority to sell or pledge the goods. Thus
if a house is let furnished to a person who happens to be an auctioneer, it is let to him
as a tenant and not as an auctioneer. He cannot therefore sell the furniture by auction
and give a good title to the buyer.

The consent contemplated by this section is consent in fact. If the goods or documents
are obtained by theft there is no consent.89 Similarly there is no consent if the goods or
documents are obtained by what is equivalent to theft, as where A falsely pretending
that he is B receives goods or documents from the owner. But it is different if the buyer,
who is also the mercantile agent, has received the bill of lading directly from the seller
together with the invoice and bill of exchange. It may be held that the buyer received
the bill of lading with the consent of the owner90 [see section 30(2)].

[s 27.8] Sale must have been made when acting in the ordinary course of
business of a mercantile agent.—

It is not sufficient that the sale is made by a "mercantile agent," i.e., a mercantile agent
having in the ordinary course of his business as such agent authority to sell or pledge
the goods [section 2(9) of Sale of Goods Act, 1930]. The sale must also have been
made by him when acting in the ordinary course of business of a mercantile agent. In
other words, the seller must occupy the character of a mercantile agent as defined in
section 2(9) of Sale of Goods Act, 1930 and, further, he must act within business hours,
at a proper place of business, and in other respects in the ordinary way in which a
mercantile agent would act, so that there is nothing to lead the buyer or pledgee to
suppose that anything wrong is being done, or to give him notice that the sale or pledge
is one which he has no authority to make.91 So where a mercantile agent employed a
friend of his to pledge the goods for him, it was held not to be in the ordinary course of
business of a mercantile agent, and the pledge was held to be invalid.92

The matter may be put in another form. If a mercantile agent has express authority to
sell, and he sells, no difficulty arises. The case then falls within the first part of the
section. The difficulty arises when he has no authority to sell and he sells the goods in
contravention of his instructions, for instance, where he has authority only to pledge,
but he fraudulently sells. In such a case the section applies and protects the innocent
buyer, if the agent has acted "in the ordinary course of business of a mercantile agent."

In dealing with third person the section gives him authority if he acts "in the ordinary
course of business of a mercantile agent," i.e., an ostensible authority. This authority
cannot be cut down by private instructions or by a particular trade custom, except that
the existence of a notorious trade custom would fix the buyer or the pledgee from the
agent with notice of a restricted authority to deal with the goods and thus bring the
case within the last part of the section.93

Illustrations

Travelling Jewellery salesman—

(1) A is a manufacturing jeweller. B is a person whose business it is to travel about the

country selling jewellery. A delivers certain articles of jewellery to B upon the terms that
they should remain the property of A until sold or paid for. B fraudulently pledges the
jewellery with a pawn-broker and money-lender. The pledge is valid. B is a mercantile
agent and as such has an ostensible authority to pledge the jewellery.94

Diamond Broker—

(2) A diamond merchant delivers to B, a diamond broker, a parcel of diamonds on B's

representation that a specified firm of diamond merchants would probably buy them. B
does not show the diamonds to the firm, but pledges them to C who is a bona fide
pledgee. A sues C to recover the diamonds. Evidence is given in the suit of a custom in
the diamond trade that a diamond broker employed to sell has no authority to pledge
them for his principal. The pledge is valid. The ostensible authority which B had as a
mercantile agent to pledge the diamonds could not be cut down by a particular trade
custom.95

It will be noted that in both the cases cited above the express authority was to sell, but
the mercantile agent pledged the goods, and the pledge was held valid. The cases
being those of a pledge are more appropriate as illustrations of section 178 of the
Indian Contract Act, 1872, as amended by the Indian Contract (Amendment) Act, 1930.

Certified sharebroker—

Where a registered shareholder handed over to a certified sharebroker a blank transfer

form together with the share certificates for sale in the market and the sharebroker
sold the shares to a bona fide purchaser for value, the purchaser gets a good title and
the purchaser can get the shares transferred to his name filling in the blank transfer
form. It was held that the shareholder having put forward the share-brokers as his
agents in the market to make representations to innocent third parties to the effect that
they were duly authorised to transfer his title in the shares and to receive the price
thereof, he could not be heard to say that the brokers obtained the share certificates by
cheating him because the third party had acted on the representations of the brokers.
The purchasers were to be bona fide purchasers for value without notice.96

[s 27.9] Good faith and absence of notice on the part of the buyer that the
seller has no authority to sell.—

To validate a sale by a mercantile agent under this section the buyer must have acted in
good faith, i.e., with honesty and must not have at the time of the sale notice that the
seller had no authority to sell goods.97 The onus of proving both these facts as well as
the fact that the agent was in possession of the goods with the consent of the owner
rests upon the buyer.98

Under section 3 of the General Clauses Act, 1897, a thing is deemed to be done in good
faith where it is in fact done honestly whether it is done negligently or not. Gross
negligence may be evidence of bad faith, but it is not the same thing and does not
entail the same consequence.99

The term "notice" in this section includes both express and constructive notice. A
person is deemed to have constructive notice of a fact when but for wilful abstention
from an inquiry or search which he ought to have made, or gross negligence, he would
have known it.100 See comments under this heading in section 29.

[s 27.10] Subject to the provisions of any other law for the time being in force.
—

The section preserves the powers of sale conferred by other acts. Thus if the pawnor
makes default in payment of the debt at the stipulated time, the pawnee may sell the
goods pledged and may give a good title to the buyer, though he was only a special
property in the goods as distinguished from the general property which a mortgagee
has in the goods mortgaged to him.101 See note to section 4 above, "Mortgage, pledge
and hypothecation of goods."

[s 27.11] Indian Contract Act, 1872, section 108.—

This section now takes the place of section 108, Exception I of the Indian Contract Act,
1872. By that Exception it was provided that when any person was, by the consent of
the owner, in possession of any goods or of the documents of title to the goods, he
could transfer the ownership of the goods or documents, and give such person a good
title thereto notwithstanding any instructions to the contrary: provided that the buyer
acted in good faith and under circumstances which were not such as to raise a
reasonable presumption that the person in possession of the goods or documents had
no right to sell goods. The language of that section was very wide, the words of the
section being "any person in possession" of the goods or of the documents of title of
goods. The courts, however, endeavoured to keep the results within tolerable bounds by
putting a strict construction on the words "possession," and interpreting it to mean
juridical possession as distinguished from mere physical possession or custody. It was
accordingly held that a sale of buffaloes by a person with whom they were left by the
owner to take care of during his absence does not pass a good title to the buyer.102
Similarly where a piano had been hired from the plaintiff with an option of purchase,
and the hirer sold the piano to the defendant before he had exercised that option, it was
held that the defendant was liable in trover to the plaintiff, although it was found that he
acted in good faith.103 These cases would be decided the same way, the first on the
ground that a bailee for safe custody is not a mercantile agent, and the second on the
ground that the hirer of goods under a hire-purchase agreement with an option to
purchase cannot sell them so as to give a good title to the buyer under section 30(2)
below. He can do so only if he is under a binding agreement to buy them, for then he
has "agreed to buy goods" within the meaning of that section.104 Under the Sale of
Goods Act, 1930, a sale by a person who is not the owner, nor is authorised by the
owner to sell is not valid unless the case falls within one of the four sections, namely,
section 27, section 28, section 29 and section 30. The capacity to give a good title to a
bona fide buyer is confined to the classes of persons, mentioned in those sections.

[s 27.12] Sale in market overt.—

The exceptions to the rule that a person cannot make a valid sale of goods which do
not belong to him have already been enumerated in the note "Exceptions to the general
rule," above. In England, there is an additional exception in the case of sales in market
overt. Where goods are sold in market overt, according to the usage of the market, the
buyer acquires a good title to the goods, provided he buys them in good faith and
without notice of any defect or want of title on the part of the seller.105 Market overt is
an open, public and legally constituted market. In the city of London every shop in
which goods are openly sold is market overt, for such goods as the owner openly
professes to trade in. In the country the only place that is market overt is the particular
spot of ground set apart by custom for the sale of particular goods, and this does not
include shop.106 The result is that where goods obtained by theft are sold in market
overt, the property in the goods passes to the buyer. There is no such provision in the
Indian law. According to the Indian law a thief cannot give a good title to a purchaser
from him of goods which he has stolen, however innocent the purchaser may be of any
knowledge of the theft. It may be interesting to note that in the Contract Bill as drafted
by the Law Commissioners it was provided in effect that a purchaser acting in good
faith, and in the absence of suspicious circumstances, might acquire a good title from
any person in possession of goods, in other words, that every place in India should be a
market overt. The Select Committee to which the Bill was referred objected to this
clause, the ground of objection being substantially that the provision would make
British India an asylum for cattle stealers from the native States. The clause, after a
good deal of controversy, was ultimately moulded in a different form and it appeared as
section 108 in the Indian Contract Act, 1872. In England also the law of market overt
has so many exceptions grafted on it that it has long ceased to be of any general
importance.107 In fact the Select Committee in the Commons, to which the Sale of
Goods Bill (English) was referred, decided for the abolition of the rule of sale in market
overt, but the rule was restored in Committee of the whole House, and it is now
contained in section 22 of the English Sale of Goods Act, 1893.

72 Farquharson Bros. v King & Co, (1902) AC 325 at 335, 336.

73 Edwards v Vaughan, (1910) 26 TLR 545 (CA).
74 Helby v Matthews, (1895) AC 471 ; Belsize Motor Supply Co v Cox, (1914) 1 KB 244 .
75 Cundy v Lindsay, (1878) 3 App Cas 459 .
76 lkes v King, (1923) 1 KB 282 : (1922) All ER Rep 658 .
77 Anthone Gordon Guest (ed), Benjamin's Sale of Goods, 6th Edn, Sweet & Maxwell, 2003, p 11.
78 Whistler v Forster, (1863) 4 CB (NS) 248 : 143 ER 441 : 32 LJCP pp 161, 164.
79 Heap v Motorists Advisory Agency, Ltd, (1923) 1 KB 577 .
80 Mercantile Bank v Central Bank, AIR 1938 PC 52 : (1938) 47 LW 329 .
81 Mohambaram v Ram Narayan, AIR 1935 Mad 850 : (1935) 69 Mad LJ 691.
82 Woodley v Coventry, (1863) 2 H&C 64 : 32 LJ Ex 185 : (1863) 159 ER 68 .
83 Lowther v Harris, (1926) All ER Rep 352 : (1927) 1 KB 393 .
84 The omission of the word "his" in the Sale of Goods Bill was a printer's mistake. The mistake
is repeated in the Act.
85 Heyman v Flewker, (1863) 143 ER 205 : 32 LJCP 132; Cole v North Western Bank, (1875) LR
10 CP 354, 372–373.
86 Weiner v Harris, (1910) 1 KB 285 ; Turner v Sampson (1911) 27 TLR 200 ; Lowther v Harris,
(1927) 1 KB 393 : (1926) All ER Rep 352 .
87 Cole v North Western Bank, (1874–80) All ER Rep 486 : (1875) LR 10 , CP 372.
88 Lowther v Harris, (1927) 1 KB 393 : (1926) All ER Rep 352 .
89 Lowther v Harris, (1927) 1 KB 393 : (1926) All ER Rep 352 ; See also Central National Bank v
United Industrial Bank, AIR 1954 SC 181 : [1954] SCR 391 for a similar approach under section
30(2) of Sale of Goods Act, 1930.
90 Cahn v Pockett's Bristol Channel Co, (1899) 1 QB 643 , 654, 659.
91 Oppenheimer v Attenborough, (1908) 1 KB 221 , per Buckley, LJ.
92 De Gorter v Attenborough, (1904) 21 TLR 19 .
93 Anthone Gordon Guest (ed), Benjamin's Sale of Goods, 6th Edn, Sweet & Maxwell, 2003, p 41.
94 Weiner v Harris, (1910) 1 KB 285 .
95 Oppenheimer v Attenborough, (1908) 1 KB 221 .
96 Fazal v Mangaldas, AIR 1922 Bom 303 : 23 Bom LR 1144 : 46 Bom 489.
97 Amritlal v Bhagwandas, AIR 1939 Bom 435 : 41 Bom LR 609 : (1939) Bom 454 : 186 IC 8.
98 Heap v Motorists' Advisory Agency Ltd, (1923) 1 KB 577 .
99 Jones v Gordon, (1877) 2 App Cas 616 , 629.
100 See Transfer of Property Act, 1882, section 3.
101 Indian Contract Act, 1872, section 176.
102 Shankar v Mohanlal, (1887) 11 Bom 704 : (1887) ILR 11 Bom 705.
103 Greenwood v Holquette, (1873) 12 Beng LR 42, 46.
104 Belsize Motor Supply Co v Cox, (1914) 1 KB 244 .
105 Sale of Goods Act (English), section 22(1).
106 Anthone Gordon Guest (ed), Benjamin's Sale of Goods, 6th Edn, Sweet & Maxwell, 2003, p
18.
107 See Hargreave v Shink, 1 QB 25, and the judgment of Scrutton J, in Clayton v Le Roy, (1911)
2 KB 1031 , seq, where further references may be found.
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Title

S. 28. Sale by one of joint owners.-

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

[s 28.1] Sale by a co-owner.—

Ordinarily a co-owner could transfer his share only and hence this section enables a co-
owner to sell not only his own share but also of his other co-owners. This section lays
down three conditions for validating a sale by one of the co-owners, i.e., (i) he must be
in sole possession by permission of his co-owners; (ii) the purchaser acts in good faith,
i.e., with honesty; and (iii) the purchaser had no notice at the time of the contract of
sale that the seller had no authority to sell. This is the fourth exception of the rule that a
man cannot make a valid sale of goods which do not belong to him. It is a reproduction
of Exception 2 to section 108 of the Indian Contract Act, 1872. A, B and C own certain
cattle in common. A is left by B and C in possession of a cow which he sells to D. D
purchases bona fide. The property in the cow is transferred to D. This section has been
applied to a joint Hindu family.108

108 Taruck Chunder v Jodeshur, (1873) 11 Beng LR 193.

The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Title

S. 29. Sale by person in possession under voidable contract.-

When the seller of goods has obtained possession thereof under a contract voidable
under section 19 or section 19A of the Indian Contract Act, 1872 (9 of 1872), but the
contract has not been rescinded at the time of the sale, the buyer acquires a good title
to the goods, provided he buys them in good faith and without notice of the seller's
defect of title.

[s 29.1] Sale by person in possession under voidable contract.—

This section is, in effect, the first part of Exception 3 to section 108 of the Indian
Contract Act, 1872 up to the words "buys them in good faith of the person in
possession." The wording of the section is taken from section 23 of the English Sale of
Goods Act, 1893. It is the fifth exception to the rule that a man cannot make a valid sale
of goods which do not belong to him. It deals with the case of a sale by a person who
has obtained possession of goods under a contract voidable under section 19 or
section 19A of the Indian Contract Act, 1872. Section 19 says that where consent to an
agreement is caused by coercion as defined in section 15, or fraud as defined in
section 17 or misrepresentation as defined in section 18, the agreement is a contract
voidable at the option of the party whose consent was so caused. Section 19A says
that where consent to an agreement is caused by undue influence as defined in section
16, the agreement is a contract voidable at the option of the party whose consent was
so caused. Section 29 validates a sale by a person who has obtained possession of
goods under a contract voidable at the option of the other party on the ground of
coercion, fraud, misrepresentation or undue influence, provided the contract has not
been rescinded by the other party at the time of the sale. A, by misrepresentation has B's
computer delivered for sale. A in turn sells it to C, who purchases it bona fide without
knowing the misrepresentation practiced on B. The purchase by C is complete, but will
have a right of action for damages against A for the loss sustained by him by such
misrepresentation.

A person may obtain possession of goods under a contract which is voidable at the
opinion of the lawful owner on the ground of fraud, misrepresentation or coercion or on
the ground of undue influence. Possession so obtained is not by the free consent of the
lawful owner as defined in section 14 of the Indian Contract Act, 1872. It is
nevertheless possession of consent, and the person in possession may make a valid
pledge of the goods, provided the contract has not been rescinded at the time of the
pledge. There is in such a case a de facto contract, though voidable on the ground of
fraud and the like. It is, however, different if there is no real consent, as where goods
have been obtained by means of theft as defined in section 378 of the Indian Penal
Code, 1860. A thief has no title and can give none. Section 29 of the Sale of Goods Act,
1930 has no application if seller has obtained possession otherwise than under a
contract, e.g., by committing an offence of theft.

Where goods have been obtained by fraud the person who has so obtained may either
have no title at all, or a voidable title, according to the nature of the transaction. If the
nature of the fraud is such that there never was a contract between the parties, the
person who so obtains the goods has no title and can give none. Thus if A represents
to B that he is acting as agent for C, and B relying on that representation delivers goods
to A as buyer, there is not avoidable contract between A and B, but no contract at all. No
property passes to A and he can neither make a valid sale109 nor a valid pledge. This is
really a case of a fundamental error as to the person with whom one is contracting.
There is no real consent and no contract; there is only an offer on B's part to the person
with whom alone he means to deal and thinks he is dealing; see Indian Contract Act,
1872, section 13. But if a person buys goods with the intention of not paying for them,
there is consent, though not free, and a contract, though voidable110 and he may make
a valid sale or pledge of the goods while the contract is still subsisting,111 though the
fraud may amount to the offence of cheating, as defined in section 415 of the Indian
Penal Code, 1860. This was not so under section 178 of the Indian Contract Act, 1872.
Under that section the buyer who obtained possession of goods "by means of an
offence or fraud" could not make a valid pledge. Under section 29, a person who
obtains possession of the goods under a contract voidable under section 19 or section
19A may make a valid pledge though the transaction may amount to an offence or
fraud.

[s 29.2] "In good faith".—

A thing is deemed to be done in good faith when it is in fact done honestly whether it
be done negligently or not.

[s 29.3] Without notice of the seller's defect of title.—

The said words clearly show that mere acting in good faith is not sufficient. There must
be want of notice or knowledge to the buyer of the seller's defect in title or authority to
sell. If the buyer or his agent had the knowledge or the means of knowledge about the
seller's defect in title or authority to sell and he shuts his eyes wilfully thereto, the buyer
would be deemed to have notice and he would not get a good title.112

To establish notice, it is sufficient to show that the circumstances attending the

transaction were such as a reasonable or prudent businessman applying his
understanding to the circumstances would certainly know, as distinguished from mere
suspicion, that the seller had no authority to sell or pledge.113

Proof of circumstances which ought to put the principal or his agent, having knowledge
of them on enquiry, is sufficient to disentitle him to get a good title.114 In a case where
the railway administration appointed a contractor to supply earth and the contractor
removed earth from the plaintiff's land, the railway administration was held liable to the
plaintiff for conversion of the earth, although the railway administration had paid to the
contractor the price of the earth.

109 Hardman v Booth, (1863) 32 LJ Ex 105 : 1 H&C 803.

110 Clough v London & NW Ry Co, (1871) LR 7 Ex 26.
111 Croft v Lumley, (1858) 6 HL Cas 672, 705 : (1843-60) All ER 162 : 10 ER 1459.
112 Jones v Gordon, (1877) 2 App Cas 616 , 625.
113 Gobind Chunder v Ryan, (1861) 9 Moore IA 140 (164).
114 Nandlal v Bank of Bombay, (1910) 12 Bom LR 316 , 337; Jones v Gordon, (1877) 2 App Cas
616 , 628.
The Sale of Goods Act

Chapter III Effects of the Contract

Transfer of Title

S. 30. Seller or buyer in possession after sale.-

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

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

[s 30.1] Disposition by seller remaining in possession.—

Sub-section (1) deals with dispositions by a seller continuing in possession of the

goods after sale. It says that where a person has sold goods but continues in
possession of them or of documents of title to them, he may sell them to a third
person, and if such person obtains delivery thereof in good faith and without notice of
the previous sale, he gets a good title to them, although the property in the goods has
passed to the first buyer. A pledge, mortgage or any other disposition of the goods is
equally valid. The disposition may be made not only by the seller in possession, but
also by a mercantile agent acting for him. A sells goods to B. B for his own
convenience leaves the goods with A. A fraudulently sells the goods to C, who buys
them in good faith and without notice of the sale to B. C gets a good title to the goods.
The delivery of the goods by A to C has the same effect as if A were expressly
authorised by B to deliver the goods. The transaction would be equally valid if A
pledged or mortgaged the goods to C.

It will be seen from what is stated above that to enable the seller to pass a good title—

(1) the seller must continue in possession of the goods or of the documents of title
to the goods as a seller. Possession as a hirer or bailee of the goods from the
buyer after delivery of the goods to him will not do.115

(2) the goods must have been delivered to the buyer or the documents of title must
have been transferred to him. A mere agreement for sale, pledge or other
disposition will not do;
 (3) good faith and absence of notice of the previous sale on the part of the second
buyer.

[s 30.2] Disposition by buyer obtaining possession.—

Sub section (2) deals with the converse case of a sale or other disposition by the buyer
of goods in which the property has not yet passed to him. The section says that if the
buyer obtains possession of the goods, before the property in them has passed to him,
with the consent of the seller, he may sell, pledge or otherwise dispose of the goods to
a third person, and if such person obtains delivery of the goods in good faith and
without notice of any lien or other right of the original seller in respect of the goods, he
will get a good title to them. As to an unpaid seller's lien, see section 47; as to his right
of stoppage in transit, see section 50 below.

To enable the buyer to pass a good title—

(1) There must be possession of the goods or documents with the consent of the
seller. A sells certain copper to B and draws on B for the price and forwards to B
the bill of exchange and bill of lading (endorsed in blank) together to secure
acceptance or payment of the bill. B who is insolvent does not accept the bill of
exchange, but transfers the bill of lading to C in fulfilment of a previous contract
to supply him with copper. C in good faith pays the price. A cannot stop the
copper in transit. Here B, not having accepted the bill of exchange, was bound to
return the bill of lading to A, and the property in the goods did not pass to him
[section 25(3)]. B, however, has possession of the bill of lading with the consent
of the seller, the seller having voluntarily, and without being deceived by any
trick, sent it to him. B therefore could pass a good title to C.116 The words "with
the consent of the seller" are very material. The Supreme Court has held that
"the consent" in this section means "agreeing on the same thing in the same
sense" and does not mean "free consent."117 In that case A having agreed to sell
to B certain shares sent the share certificates with blank transfer forms to his
banker with instructions to deliver them to B against payment of the price. The
bank's clerk went to B's office with the documents to deliver them against
receipt of price thereof. The bank's clerk placed the documents on B's table
asking B to pay the price and to sign the transfer form. B began to scrutinise the
documents which the bank's clerk allowed but the bank's clerk insisted upon the
payment of the price thereof before B took delivery thereof. On the pretext of
bringing moneys, B left the office and took with him the said documents. B
disappeared from the other door and pledged them. Plaintiff Bank contended
that it received shares by way of pledge in good faith and without notice of the
title of the intending purchaser B and Plaintiff Bank had actual possession of
share with the consent of the seller and so pledge would be effective under
section 30(2). It was held that B, the intending buyer, had not obtained
possession of the documents "with the consent of the seller". B's possession
was without such consent; B could not therefore create a valid pledge and
hence the pledgee did not acquire any title against the true owner and/or
against the owner's bank.118

(2) The goods must have been delivered to the buyer or the documents of title
transferred to him. A mere agreement for sale, pledge or other disposition will
not do.

(3) There must be good faith, and absence of notice of the seller's right of property
on the part of the second buyer.
[s 30.3] Chain of contracts.—

Sub-section (2) appropriately applies to a case involving a chain of contracts wherein

the documents, such as delivery orders, are handed over by one seller to his buyer and
the latter in his turn to his buyer and so on. But in such cases, the buyer gets
possession of the documents of title to the goods with the consent of the seller after
paying the price thereof in cash or on credit.119

[s 30.4] Hire-purchase agreements.—

The hirer under a hire-purchase agreement is not a person who "has agreed to buy
goods" within the meaning of sub-section (2) unless he has hound himself to buy. A
mere option to purchase is not sufficient.119

[s 30.5] Mercantile agent.—

For the definition of mercantile agent, see section 2(9). See sale by a mercantile agent
under section 27.

[s 30.6] Documents of title to goods.—

For the definition of documents of title to goods, see section 2(4).

[s 30.7] Or other disposition.—

These words follow the words "any sale or pledge" and hence they have to be
construed ejusdem generis with the preceding words.120 Therefore there must be a
transfer of property or a transfer of a right to property. A hypothecation will not be
covered by the said words "or other disposition" as it does not involve transfer of
property.120

115 Parbati Devi Bagla v Lachminarayan, AIR 1957 Cal 551 ; Staffs Motor Guarantee, Ltd v British
Wagon Co, (1934) 2 KB 305 ; Union Transport Finance, Ltd v Ballardie, (1937) 1 KB 510 . The word
"possession" includes possession by another person on behalf of the person whose possession
is material; City Fur Manufacturing Co. Ltd v Fureenbond (Brokers) London, Ltd, (1937) 1 All ER
799 .
116 Cahn v Pockett's Bristol Channel Co, (1899) 1 QB 643 .
117 Central National Bank Ltd v United Industrial Bank Ltd, AIR 1954 SC 181 : [1954] SCR 391 .
118 Duni Chand Rataria v Bhuwalka Bros Ltd, AIR 1955 SC 182 : [1955] 1 SCR 1071 .
119 Belsize Motor Supply Co v Cox, (1914) 1 KB 244 ; Gopal v Sorabji, (1904) 6 Bom LR 871 .
120 Pramatha Nath v Probirendra, AIR 1966 Cal 405 .
120 Pramatha Nath v Probirendra, AIR 1966 Cal 405 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 31. Duties of seller and buyer.-

It is the duty of the seller to deliver the goods and of the buyer to accept and pay for
them, in accordance with the terms of the contract of sale.

[s 31.1] Duties of seller and buyer.—

The two parties to a contract of sale are the seller and the buyer, and each has his
duties and obligations to perform. The duty of the seller is to deliver the goods, whether
he is the owner or not, and whether he has the goods in his possession at the time of
the contract of sale or not. The duties of the buyer are to accept the goods (section 42)
and to pay for them. Both these duties are to be performed in accordance with the
terms of the contract of sale.

This section emphasises reciprocity of the promises of duties. The words "in
accordance with the terms of the contract of sale" are intended to show that the parties
are at liberty to modify the terms. In absence of a contract to the contrary these duties
are concurrent conditions as stated in the following section.

In certain F.O.B. contracts, it was held that the buyer had prima facie to open a
confirmed bank's credit before the goods are shipped by the seller.1

Where a buyer has put an end to the contract and has repudiated his obligation, a seller
would be absolved from his duty of delivering the goods.2

Similarly, if the seller has refused to perform his part of the contract, without any
justification even before the final date of delivery of goods had arrived, the buyer need
not make a formal application for delivery.3

In State Bank of Mysore v Machado Computer Services,4 goods were certified to have
been received in full and in satisfactory working condition. Hence, the right of the buyer
under section 41 of the Sale of Goods Act, 1930 was held to have been availed of by
the plaintiff and he was deemed to have accepted the goods upon such intimation of
acceptance to the supplier as stated specifically in the delivery challan. This
acceptance was both for the quality as well as the quantity of the goods supplied as
per section 42 of the Sale of Goods Act, 1930. Further, upon such acceptance after
examination of the goods specifically accepted, the description of the goods as
regards the make or the brand is also deemed to have been accepted and there could
be no defect stated to be in respect of such brand as per the second proviso to section
16 of the Sale of Goods Act, 1930. The duty of the supplier in the contract of sale was,
therefore, complete. The plaintiff accepted the goods. The plaintiff was, therefore,
required to make payment for the goods, having accepted as per the enjoinment under
sections 31 and 32 of the Sale of Goods Act, 1930.
1 Ian Stach Ltd v Baker Bosley Ltd, (1958) 2 WLR 419 : (1958) 2 QB 130 .
2 Chhunna Mal v Mool Chand, AIR 1928 PC 99 : 9 Cal 510 : (1928) 30 Bom LR 837 .
3 Devi Lal v Govind Lal, AIR 1961 Raj. 283 .
4 State Bank of Mysore v Machado Computer Services, 2009 (4) Bom CR 199 : (2009) 111 Bom
LR 2481 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 32. Payment and delivery are concurrent conditions.-

Unless otherwise agreed, delivery of the goods and payment of the price are concurrent
conditions, that is to say, the seller shall be ready and willing to give possession of the
goods to the buyer in exchange for the price, and the buyer shall be ready and willing to
pay the price in exchange for possession of the goods.

[s 32.1] Payment and delivery are concurrent conditions.—

This section says that delivery of the goods and payment of the price are concurrent
conditions. Concurrent conditions mean that they have to be performed
simultaneously, that is to say, the seller must be ready and willing to give delivery in
exchange for the price, and the buyer must be ready and willing to pay the price in
exchange for possession of the goods.

Section 32 has no relevance to the question whether there was a contract at all
between the parties, but if a contract is shown to exist, the payment and delivery are
concurrent conditions. It pertains to a condition which is to be implied, unless there is a
provision to the contrary, in a contract. Indeed, the section assumes the existence of a
contract in respect of which such a term may or may not be read in.5

[s 32.2] Ready and willing.—

The seller in order to be ready and willing need not be in actual possession of goods; it
is sufficient if he has such control of goods that he can cause them to be delivered.6
Similarly, a buyer must have proper arrangements for securing payment.7 Insolvency or
inability to take or give delivery is indication of being "not ready and willing".8

[s 32.3] Unless otherwise agreed.—

The rule laid down in this section applies "unless otherwise agreed." Thus, if A sells
goods to B on credit, and nothing is said as to the time of delivery, the buyer is entitled
to immediate possession, without paying the price when possession is given. A C.I.F.
contract which is a sale of goods by transfer of documents would fall within the
expression "unless otherwise agreed."9

[s 32.4] Inter-state sale, place of payment of price is not relevant.—

In construing whether a particular transaction involves an inter-state sale or not, the

place of payment of price is not much of consequence because as per section 20 of
the Sale of Goods Act, 1930 in cases where there is an unconditional contract for sale
of specific goods in deliverable state, the property in the goods passes to the buyer
when the contract is made, and it is immaterial that time of payment of the price or the
time of delivery of the goods or both are postponed. In terms of this section and
section 9, merely because that person who took delivery of the goods from the
respondent happened to be an agent of some other person outside the State, and had
consigned the said goods to his principal outside the State, the purchase of the goods
made by him from the respondent would not make the transaction of sale made by the
respondent transaction of inter-state sales.10

5 Claude-Lila Parulekar v Sakal Papers, Pvt Ltd, AIR 2005 SC 4074 : (2005) 11 SCC 73 .
6 Kumar Bhan Sukha Nand. v Ganpat Rai, AIR 1926 Lah 318 : (1926) 7 Lah 442 : 94 IC 304.
7 Kidar Nath Behari Lal v Shimphu Nath Nandu Mal, AIR 1927 Lah 176 : (1926) 8 Lah 198 : 99 IC
812.
8 Chunna Mal Ram v Mool Chand Ram, AIR 1928 PC 99 : 55 IA 154 : 9 Lah 510 : 108 IC 678.
9 E. Clements Horst Co v Biddel Bros, (1912) AC 18 .
10 State of AP v Computer Graphics Pvt Ltd, (2009) 21 VST 42 (AP) : LNIND 2008 AP 373 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 33. Delivery.-

Delivery of goods sold may be made by doing anything which the parties agree shall be
treated as delivery or which has the effect of putting the goods in the possession of the
buyer or of any person authorised to hold them on his behalf.

[s 33.1] English law.—

There are no corresponding provisions for sections 33, 34 and 35 in English law. The
law, however, is not different and they are covered through rules to determine the
intention when title is intended to pass and set out in section 18 of the English Sale of
Goods Act, 1979 and several other sections.

[s 33.2] Delivery how made.—

The first part of the present section which says that delivery may be made by doing
anything which the parties agree shall be treated as delivery presents no difficulty. The
question is one of agreement between the parties, and where a dispute arises the Court
is called upon to do no more than ascertain what the agreement between the parties
was. Where a seller sells his horse but the buyer allows the horse to remain in custody
of the seller on buyer's behalf.11 The delivery in this case would fall under the first part
viz. "made by doing anything which the parties agree shall be treated as delivery."

The second part of the section says that the delivery may be made by doing anything
which has the effect of putting the goods in the possession of the buyer. This part of
the section may be explained by the following illustrations.

Illustrations

(1) B, in USA, orders two containers of garments from A, and books a space in the ship
docked in Mumbai. On being informed, A puts on board the containers containing the
garments. The placing of the containers on board by A is delivery to B.

(2) A sells to B five metric tonnes of rice in possession of C, a warehouse manager. A

gives B an order to C (called a delivery order) to transfer the rice to B, and C assents to
such order, and transfers the rice in his books to B. This is a delivery to B.

(3) A agrees to sell B five tons of oil, at Rs 1000 per ton, to be paid for at the time of
delivery. A gives to C, a wharfinger, at whose wharf he has 20 tons of the oil, an order to
transfer five tons out of them into the name of B. C makes the transfer in his books, and
gives A's clerk a notice of the transfer to B. A's clerk takes the transfer notice to B, and
offers to give it to him on payment of the price of the oil. B refuses to pay. There has
been no delivery to B, as B never assented to make C his agent to hold for him the five
tons selected by A.12 [The assent of all the three parties, namely, (1) the seller, (2) the
buyer, and (3) the seller's bailee is necessary to constitute a transfer of possession, as
in illustration (2).]
[s 33.3] Symbolic delivery.—

Delivery of the key of a godown or warehouse is symbolic delivery of the goods therein.
Delivery of a key, however, does not operate as delivery of the goods under the lock if it
does not in fact give complete access to them.13

Illustrations

(1) A sells to B certain specific goods which are locked up in a godown. A gives B the
key of the godown in order that he may get the goods. This is a delivery to B.

(2) A sells to B certain specified goods which are locked up in a receptacle, but retains
the key of the outer enclosure. This is not a delivery to B.

[s 33.4] Constructive delivery.—

There may be change in the possession of goods, and therefore delivery within the
definition above, without any change in their actual and visible custody. There is said to
be a constructive delivery in such cases. Firstly, the seller's possession of the goods
may change as after the sale, he may no longer hold the goods as owner but may hold
the goods on account of the buyer, e.g., as a bailee for the buyer. So, in Elmore v
Stone,14 a horse was sold. The seller at the buyer's request agreed to keep it at his
livery and moved the horse from sale stable into another stable. It was held that there
was a delivery. Illustration (2) under the heading "Delivery how made" is another
instance on constructive delivery. The handing over of the delivery order by the seller to
the buyer and the assent of the seller's bailee (warehouseman in that illustration)
constitutes a constructive delivery. But all the three parties must concur. Otherwise
there is no delivery. The warehouseman by assenting to hold the goods for B attorns to
B. Such an "agreement of attornment", as it is sometimes called, has the effect of
transferring the legal possession to the buyer. Note that in Illustration (3) under the
heading "Delivery how made", all the three parties did not concur. B's assent was
wanting. When once, however, the assent of all the three parties is obtained, the
delivery as between the seller and buyer is complete and the seller will not be
responsible if the bailee afterwards wrongfully delivers the goods to some third
person.15

Lastly, constructive delivery also takes place where a buyer, before sale, is in
possession of the goods of the seller, instead of holding the goods in that capacity of a
bailee for the seller, after the sale the buyer holds the goods as the owner of it. The
above three instances are of constructive delivery which is effected without any change
in the actual possession of the thing delivered which is the subject matter of the sale.

11 Elmore v Stone, 127 ER 912 : 1 Taunt 458.

12 Godis v Rose, (1885) 17 CB 229 : 139 ER 1058.
13 Milgate v Kebble, (1841) 3 Man. & Gr. 100 : 60 RR : 475 : 39 Digest (Repl.) 777, 2533.
14 127 ER 912.
15 Wood v Tassell, (1844) 6 QB 234 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 34. Effect of part delivery.-

A delivery of part of goods, in progress of the delivery of the whole, has the same
effect, for the purpose of passing the property in such goods, as a delivery of the
whole; but a delivery of part of the goods, with an intention of severing it from the
whole, does not operate as a delivery of the remainder.

[s 34.1] Part delivery.—

This affirms the common law rule that delivery of part may be a delivery of the whole if
it is so intended and agreed, but not otherwise, and the burden of proof seems to be on
the party affirming that such was the intention.16 A delivery of part operates as a
constructive delivery of the whole only where the delivery of part takes place in the
course of the delivery of the whole; in such a case the faking possession by the buyer of
that part is the acceptance of constructive possession of the whole.17 But if part of the
goods be delivered with intent to separate that part from the rest, it is not an inchoate
delivery of the whole.18 What was the intention of the parties in any particular
transaction is a question of fact to be determined with regard to all the circumstances
of each case.18 The following illustrations explain the scope of the section:

(1) A ship arrives in a harbour laden with a cargo consigned to A, the buyer of the
cargo. The captain begins to discharge it and delivers over part of the goods to A in
progress of the delivery of the whole. This is a delivery of the cargo to A for the purpose
of passing the property in the entire cargo.

(2) A sells to B a stack of firewood, to be paid for by B on delivery. After the sale, B
applies for and obtains from A leave to take away some of the firewood. This has not
the legal effect of a delivery of the whole.

(3) A sells 50 maunds of rice to B. The rice remains in A's warehouse. After the sale, B
sells to C 10 maunds of the rice, and A at B's desire sends the 10 maunds to C. This has
not the legal effect of a delivery of the whole.

(4) In a contract to purchase "5 bales of chrome orange twist or any part thereof that
may be in a merchantable condition ex ss.… with specific marks and numbers each
bale to contain 500 Lbs." it was held that delivery of each bale was a separate
transaction, as the purchaser had the right in case of each bale to ascertain if it is in a
merchantable condition.19

(5) Sale of a quantity of goods lying at a wharf. The seller left an order with the
wharfinger to deliver the goods to the buyer, who has paid by a bill. The buyer
subsequently weighed the goods and took away part of them. This was held to amount
to a delivery of the whole of the goods.20
16 Per Lord Blackburn in Kemp v Falk, (1882) 7 App Cas 573 , 586.
17 Bolton v L. & Y. R. Co, (1886) LR 1 CP p 440 ; Pranlal v Manekji Petit Mfg Co, AIR 1933 Bom 46
: 34 Bom LR 1252 : 140 IC 610.
18 Dixon v Yates, (1833) 5 B. & Ad. 313, 339 : 39 RR 489, 499 : (1824–1834) All ER Rep 744 ,
751; Mitchell Reid & Co v Buldeo Doss Khettry, (1888) 15 Cal 1 .
18 Dixon v Yates, (1833) 5 B. & Ad. 313, 339 : 39 RR 489, 499 : (1824–1834) All ER Rep 744 ,
751; Mitchell Reid & Co v Buldeo Doss Khettry, (1888) 15 Cal 1 .
19 Mitchell Reid & Co v Buldeo Doss Khettry, 15 Cal 1 (7) : (1888) ILR 15 Cal 1.
20 Hammond v Anderson, (1803) 1 B & PNR 69 : 127 ER 384.
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 35. Buyer to apply for delivery.-

Apart from any express contract, the seller of goods is not bound to deliver them until
the buyer applies for delivery.

[s 35.1] Buyer to apply for delivery.—

This is a reproduction of section 93 of the Indian Contract Act, 1872. There is no such
section in the English Sale of Goods Act, 1979. The rule contained in this section has
been found in practice to be very salutary. The buyer has no cause of action against the
seller if he has not applied for delivery and he must state that cause of action in his
plaint.21 In other words, the seller of goods is not bound to deliver until the buyer
applies for the delivery.22

The words "until the buyer applies" would mean that a demand by a third party is not
valid under this section.23 In a case where the contract provided that seller should give
notice of the arrival of the goods (such as railway receipt and the invoice), the buyer
was still under an obligation to apply for delivery.24

The application for delivery must be according to the provisions of section 32, i.e.,
unless otherwise agreed upon, the buyer must be ready and willing to pay the price in
exchange for possession of goods.25

B buys goods from A, and assigns the benefit of the contract to C. C applies for
delivery. B then takes a reassignment from C and sues A on the contract without
making any demand for the goods. It is found that the assignment to C was fictitious. B
is not entitled to adopt the demand for delivery made by C. Such a demand is no
demand at all, and B's suit should be dismissed. He ought to have made a fresh
demand for the goods.

When the buyer has applied for delivery, it will be a question dependent on the nature
and circumstances of the particular contract as to the time within which the seller is
bound to comply with the buyer's demand.26

The words "Apart from any express contract" are intended to exclude any express
contract from the general rules laid down in this section. C.I.F.27 (Cost, Insurance and
Freight) and F.O.B. (Free on Board) contracts would be covered by the said expression.
Under C.I.F. contract there is an obligation on the seller to tender the shipping
documents or certain agreed documents at the particular stage and the buyer's
obligation is to pay the price against the tender of the documents. When it is an initial
obligation of the seller to tender the documents and it is upon such tender that the
obligation of the buyer arises to pay the price in exchange of the documents and to
take delivery of the goods, the provisions of section 35 of the Sale of Goods Act, 1930
are not applicable.26 The Calcutta High Court26 drew the distinction between an
ordinary contract of Sale of Goods and C.I.F. type contract. In C.I.F. contract seller's
duty is to deliver documents representing the goods and it is no part of his duty to
deliver the actual physical delivery of the goods to the buyer as is the case in ordinary
contract of sale of goods. Where the goods are being imported from a foreign country
by the seller and the delivery is to be given at the jetty, there is clearly an obligation on
the seller to inform the buyer about the arrival of the goods at the port of destination. It
is only then that the obligation, if any, of the buyer to apply for delivery would arise.

This section also excludes any custom or usage to the contrary by reason of section 1
of the Contract Act, 1872 read with section 3 of the Sale of Goods Act, 1930.28 The
said expression has been used for excluding the scope of any implied stipulations as
well as trade usage.29

The rule contained in this section applies to contract of sale for ready as well as
forward goods.30 The buyer's duty to apply for delivery under section 35 of the Sale of
Goods Act, 1930 does not arise where the seller has refused to perform his part of the
contract without any justification even before the final date of delivery has arrived as it
would become an idle formality to apply for delivery. In the case of anticipatory breach
of contract by the seller the provisions of section 35 have no application when the
buyer treats the contract as rescinded by virtue of section 60 of the Sale of Goods Act,
1930.31

21 Sivayya v Ranganayakulu, AIR 1935 PC 67 : (1935) 37 Bom LR 538 : 62 IA 89; Alapty

Ramamoorthy v P. Satyanarayana, ('58) A Andh Prad 550.
22 Gujarat Urja Vikas Nigam Ltd v Essar Power Limited, (2016) 9 SCC 103 .
23 Mulji v Nathubhai, (1890) 15 Bom 1; Sivayya v Ranganayakulu, (1935) 62 IA 89 : 58 Mad 670 :
154 IC 1097, ('35) APC 67.
24 Ganesh Das v Ram Nath, (1928) A Lah 20, 27 : 9 Lah 148 : 111 IC 498.
25 Sivayya v Ranganayakulu, AIR 1935 PC 67 : 62 IA 89.
26 Sivayya v Ranganayakulu, AIR 1935 PC 67 : (1935) 62 IA 89 : 58 Mad 670 154 IC 1097.
27 B.R. Herman & Mohatta Ltd v Pran Ballav Majumdar, AIR 1960 Cal 524 (530) : 64 Cal WN 798.
26 Sivayya v Ranganayakulu, AIR 1935 PC 67 : (1935) 62 IA 89 : 58 Mad 670 154 IC 1097.
26 Sivayya v Ranganayakulu, AIR 1935 PC 67 : (1935) 62 IA 89 : 58 Mad 670 154 IC 1097.
28 Sivayya v Ranganayakulu, AIR 1935 PC 67 (70) : 58 Mad 670 154 IC 1097 : 62 IA 89 : 37 Bom
LR 538.
29 Alapaty Ramamoorthy v Polisetti Satyanarayana, AIR 1958 AP 550 .
30 Dinkerrai v Sukhdayal, AIR 1947 Bom 293 : 48 Bom LR 821.
31 Devilal v Govindlal, AIR 1961 Raj. 283 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 36. Rules as to delivery.-

(1) Whether it is for the buyer to take possession of the goods or for the seller to
send them to the buyer is a question depending in each case on the contract,
express or implied, between the parties. Apart from any such contract, goods
sold are to be delivered at the place at which they are at the time of the sale, and
goods agreed to be sold are to be delivered at the place at which they are at the
time of the agreement to sell, or, if not then in existence, at the place at which
they are manufactured or produced.

(2) Where under the contract of sale the seller is bound to send the goods to the
buyer, but no time for sending them is fixed, the seller is bound to send them
within a reasonable time.

(3) Where the goods at the time of sale are in the possession of a third person,
there is no delivery by seller to buyer unless and until such third person
acknowledges to the buyer that he holds the goods on his behalf:

Provided that nothing in this section shall affect the operation of the issue or
transfer of any document of title to goods.

(4) Demand or tender of delivery may be treated as ineffectual unless made at a

reasonable hour. What is a reasonable hour is a question of fact.

(5) Unless otherwise agreed, the expenses of and incidental to putting the goods
into a deliverable state shall be borne by the seller.

[s 36.1] Rules as to delivery.—

The rules as to delivery stated in this section are based on section 29 of the English
Sale of Goods Act, 1979. They may be varied by agreement between the parties.

[s 36.2] Interpretation of contract.—

The first part sub-section (1) lays down that in each case the question as to whether
the buyer has to apply for possession or the seller has to send the goods to the buyer
should be determined on the basis of the construction of each contract.

[s 36.3] Place of delivery.—

Apart from any such express or implied contract, the goods are to be delivered at the
place where they were lying, at the time of the sale or at the time of the agreement to
sell; if the goods are future goods, they should be delivered at the place of manufacture
or production thereof.

[s 36.4] Place and mode of delivery.—

The first part of this rule deals incidentally with the mode of delivery, and the second
part with the place of delivery.32 The section lays down a specific rule as to the place of
delivery, but none as to the mode of delivery. The mode of delivery, i.e., whether the
seller is to send the goods to the buyer or the buyer is to take possession of them,
depends, says rule (1), on the contract between the parties. The contract may be
express or implied. In the absence of any such contract, the mode of delivery may be
governed by the usage of the trade.

In the absence of any contract express or implied as to delivery, delivery has to be

made at the place stated in this rule. A agrees to sell goods to B "to be delivered at any
place in Bengal to be mentioned hereafter." Here there is an express contract as to
delivery giving the buyer the right to fix the place anywhere in Bengal. If the buyer
demands delivery, say, at the Howrah railway station, the seller must deliver the goods
at that station.33

[s 36.5] Time for delivery.—

Sub-section (2) states that when the seller is bound to send the goods to the buyer, he
must send them within a reasonable time. Where time is fixed, the seller is bound to
deliver the goods in time. If the contract of sale states that the goods will be delivered
as and when required, a request for delivery is a condition precedent to the seller's
obligation to deliver. Where no time is limited for making a request for delivery the
request for delivery must be made within a reasonable time which depends upon
particular circumstances of each case, nature of goods, transport facilities, etc. Once
"reasonable time" is implied within the meaning of this sub-section 2, it becomes a
contract as if the parties have themselves fixed a specified time and when the
reasonable time expires, there arises a breach of contract.34 If A agrees to sell and
deliver goods to B "as required," B is not entitled to wait indefinitely. He must require
delivery within a reasonable time. If B fails to do so, A may rescind the contract, i.e., put
an end to it, but he cannot do so without previous notice to B giving B a reasonable
time to pay for and take delivery of the goods.35 For the meaning of the expression
"reasonable time"36.

[s 36.6] Goods in possession of third person.—

When the goods are in the possession of a third person, e.g., a warehouseman, there is
no delivery unless he assents to attorn to the buyer and becomes his bailee instead of
that of the seller.37 A sells to B five metric tonnes of rice in the possession of C, a
warehouse manager. A hands over to B his (A's) order issued to C to transfer the rice
sold to B. C assents to the order and transfers the rice in his books to B. This is a
delivery of the goods to B. By assenting to the order, C attorns to B, the buyer, and
becomes B's bailee. Before the assent C held the goods as the bailee of A, the seller. All
the three parties must agree.
Issue or transfer of document of title to goods.—The expression "document of title to
goods" is defined in section 2(4) of the Sale of Goods Act, 1930. It includes a bill of
lading and a railway receipt. The proviso to section 36(1) of the Sale of Goods Act,
1930 covers the case of goods in course of transit at sea or on land. In the case of
goods while they are at sea, the lawful transfer of a bill of lading operates as a delivery
of the goods themselves.38 And so does a railway receipt in the case of goods in
course of transit on land.39

[s 36.7] Demand or tender of delivery.—

This must be at a reasonable hour.

[s 36.8] Expenses of delivery.—

A agrees to sell and deliver goods to B. The agreement is silent as to the expenses of
putting the goods in a deliverable state, that is to say, in such a state, that the buyer
would under the agreement be bound to take delivery of them [section 2(3)]. The
expenses must be borne by A. He cannot charge B with them. If B is compelled to pay
them, he may recover them from A. The words "unless otherwise agreed" would cover
agreements to the contrary, e.g., in F.O.B. and F.O.R. contracts, seller has to bear
expenses of putting goods "on board" or "on rails". In C.I.F. contract, the freight has to
be borne by the seller. Wharfage charges, demurrage are to be borne by the buyer.

In a case of a contract for sale of goods the words used were "station delivery", the
question arose as to who has to bear the customs duty payable on the goods in
respect of the goods in transit up to the railway station and upon the evidence it was
held that the buyer had to bear the customs duty. It was in evidence that custom
receipts were invariably made out in the name of the buyer indicating thereby that the
responsibility for payment of custom dues was on the buyer and not on the seller. The
seller bore the expenses of carrying the goods from his business place to the railway
station in his carts.40

See also notes on C.I.F. contracts under section 39.

32 Chalmers' Sale of Goods, 10th Edn, p 86.

33 Grenton v Lachmi Narain, (1896) 23 IA 119 , 24 Cal 8.
34 Dinkerrai v Sukhdayal, AIR 1947 Bom 293 : 48 Bom LR 821 : (1948) Bom 90.
35 See Jones v Gibbons, (1853) 8 Exch. 920, 922 : 91 RR 841.
36 See section 63 infra.
37 Bentall v Burn, (1824) 3 B & C 423 3 LJKB 42.
38 See E. Clemens Horst & Co, (1911) 1 KB at pp 952, 956.
39 Ramdas v Amerchand & Co, (1916) 43 IA 164 , 40 Bom 630.
40 Shreechand Aggarwalla v Bhagwan Das, AIR 1952 Ori. 85 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 37. Delivery of wrong quantity.-

(1) Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them, but if the buyer accepts the goods
so delivered he shall pay for them at the contract rate.

(2) Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell, the buyer may accept the goods included in the contract and
reject the rest, or he may reject the whole. If the buyer accepts the whole of the
goods so delivered, he shall pay for them at the contract rate.

(3) Where the seller delivers to the buyer the goods he contracted to sell mixed with
goods of a different description not included in the contract, the buyer may
accept the goods which are in accordance with the contract and reject the rest,
or may reject the whole.

(4) The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.

A contract for the quantity of goods lying at a particular place for a lump sum price is
prima facie an entire (for the entire lot) contract.41 Subject to the rule de minimis non
curat lex, the seller does not fulfil his contract by tendering less than the stipulated
quantity and cannot call upon the buyer to accept it and equally the buyer cannot call
for delivery of anything short of the full quantity unless he is prepared to accept the
whole.42

Delivery of wrong quantity.—This section provides for three cases, namely, where the
seller delivers to the buyer—

(1) a quantity less then he contracted to sell;

(2) a quantity larger then he contracted to sell;

(3) goods ordered mixed with goods of a different description.

When the seller delivers a smaller or a larger quantity of goods than was ordered under
an entire contract, such delivery amounts to a proposal by the seller for a new
contract.43

[s 37.1] Delivery of less.—

The following cases explain the operation of sub-section (1). They may be stated in the
form of illustrations—

Illustrations
(a) A agrees to sell and deliver to B 500 maunds of rice, but only 420 are delivered. B
has the rice weighed and he accepts the quantity sent. B cannot afterwards object that
the whole of the 500 maunds was not delivered, and he must pay for the 420 maunds
accepted by him at the contract rate.44

(b) A sells to B 2000 gross of "200 yards reels" of sewing cotton. After taking delivery B
finds that the length of the cotton per reel is less than 200 yards, the average shortage
being about 6%. The case is one of short delivery, and B is entitled to damages.45

(c) A agrees to sell and deliver "200 tons, 5% more or less," of certain goods. A may
under this contract deliver 5% more, i.e., 210 tons [see sub-section (2)], or he may
deliver 5% less, i.e., 190 tons, and the buyer cannot refuse delivery in either case.46

By accepting lesser quantity, the buyer does not preclude himself from claiming
damages for short delivery.47

[s 37.2] Delivery of more.—

A orders of B two dozen bottles of wine. B sends five dozen. A is entitled to reject the
whole. Or he may accept two dozen and reject the rest. If he accepts all the five dozen,
he must pay for them at the contract rate.48

De minimis non curat lex.—The above two rules are subject to this rule of de minimis
non curat lex i.e. law does not count of the trivial variation. The burden of proving that a
breach of contract falls within this principle is on the party seeking to excuse the
breach.49

[s 37.3] Mixed delivery.—

The words "mixed with" in sub-section (3) mean "accompanied by".50 The sub-section
provides for the case where the seller sends to the buyer the goods he contracted to
sell with goods of a different description, i.e., a different class, kind or sort.

(a) A orders to B specific articles of china. B sends these articles to A in a hamper with
other articles of china which had not been ordered. A may refuse to accept any of the
goods sent. The purchaser was entitled to an unconditional tender and such a tender
not having been made, he was at liberty to refuse to accept.51

(b) A, under a contract for the sale of Ruabon coals, sends one lot of 15 tons of such
coals, and another lot of 7 tons of coals which are not Ruabon coals, and mixes them
all together in delivery. The whole of the quantity so delivered must be considered not
according to contract, and the delivery is a bad delivery.52

(c) A agrees to sell to B 3000 tins of canned fruit to be packed in cases, each
containing 30 tins. About one-half of the goods tendered are packed in cases, each
containing 24 tins. B is entitled to reject the whole consignment. He is not bound to
accept the cases properly packed, though the market value of the whole consignment
is not affected by the mixture.53 This is a case of mixing up goods agreed to be sold
with goods of a different description.

(d) The word "description" in sub-section (3) is to be strictly construed. The sub-section
entitles the buyer to accept the goods which are in accordance with the contract and
reject the rest only if the seller delivers to the buyer the goods he contracted to sell
mixed with goods of different description. Thus if goods of the description ordered are
delivered, but some of them are of inferior quality, the case is not within this sub-
section. In such a case the remedy of the buyer is to accept or to reject all.54 In Nagpur
case out of the bargained quantity of 2,35,000 gaddis of bidi leaves lying at the two
godowns, only 77,300 gaddis of bidi leaves were of good quality as per the contract
and the rest gaddis of bidi leaves were worthless. It was observed by the Court that the
case fell under section 37(1), and not under section 37(3), of the Sale of Goods Act,
1930. A mixing of an inferior quality is not a mixing of goods of different description as
contemplated by section 37(3) of the Sale of Goods Act, 1930. Here, there was a tender
and delivery of only a part, viz., 77,300 gaddis of bidi leaves and as the buyer had
accepted the partial delivery, he had to pay for the part accepted by him at the contract
rate. See sections 12(2) and 16 above.

[s 37.4] Trade usages.—

The last sub-section specifically provides that contracts for sale of goods would be
subject to the usages of the different trades and markets. It will be open to the parties
to show that in a particular trade or market certain qualifying words have special
meanings (e.g., giving an option of 5%). In order to protect against the provisions of
this section, in various contracts the words used are "more or less", "about"55 "not less
than", "not more than".56

41 Harnarain v Firm Radhakrishan Narayandas, AIR 1949 Ngp 178 (180).

42 Kingdom v Cox, (1848) 5 CB 522 (526).
43 See Cunliffe v Harrison, (1851) 6 Exch. 903, at p 906 : 86 RR 543.
44 Morgan v Gath, 3 H & C 478, 34 LJ Ex. 165 : 140 RR 114.
45 Beck & Co v Syzmanowski & Co, (1924) AC 43 .
46 Re Thornett Fehr Yullis, Ltd, (1921) 1 KB 219 .
47 Garrison v Perrin, (1857) 2 CBNS 681 : 109 RR 830; Bech & Co v Syzmanowski & Co, (1924)
AC 43 .
48 See Hart v Mills, 15 M & W 85, 15 LJ Ex 200 : 71 RR 578.
49 Ronaasen & Son v Arcos Ltd, ( 1932) 37 Com Cas 291 .
50 Moore & Co v Landauer & Co, (1921) 2 KB 519 ; London Plywood & Timber Co Ltd, v Nasik Oak
Extract Factory and Steam Sawmills Co, Ltd, (1939) 2 KB 343 .
51 Levy v Green, (1859) 8 E. & B. 575 : 117 RR 552 : (1859) 1 E & E 969 : 120 ER 1174.
52 Nicolson v Bradfield Union, (1866) LR 1 QB 620.
53 Moore & Co v Landauer & Co, (1921) 2 KB 519 ; London Plywood & Timber Co Ltd, v Nasik Oak
Extract Factory and Steam Sawmills Co, Ltd, (1939) 2 KB 343 .
54 Aitken Campbell & Co v Bullen & Gatenby, (1908) SC 490 (Scotland); Harnarayan v Firm
Radhakrishan, (1949) A Nag 178.
55 Societic Anonyme & Co v Scholefield, (1902) 7 Com Cas 114 (Re, meaning of the word
"about").
56 Harnarain v Firm Radhakrisan, (1949) A Nag 178.
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 38. Instalment delivery.-

(1) Unless otherwise agreed, the buyer of goods is not bound to accept delivery
thereof by instalments.

(2) Where there is a contract for the sale of goods to be delivered by stated
instalments which are to be separately paid for, and the seller makes no delivery
or defective delivery in respect of one or more instalments, or the buyer neglects
or refuses to take delivery of or pay for one or more instalments, it is a question
in each case depending on the terms of the contract and the circumstances of
the case, whether the breach of contract is a repudiation of the whole contract,
or whether it is a severable breach giving rise to a claim for compensation, but
not to a right to treat the whole contract as repudiated.

Sub-section (1)

The words "unless otherwise agreed" clearly show that there must be a specific
agreement for delivery by instalments. Such an agreement may, however, be inferred
from the nature of the contract itself or the conduct of the parties.57

[s 38.1] Instalment deliveries.—

This section is an application to contracts of sale of the general principle contained in

section 39 of the Indian Contract Act, 1872. Cases of the kind which fall to be decided
under the present section were decided before the Sale of Goods Act, 1930 under
sections 39 and 120 of the Indian Contract Act, 1872. Section 120 occurred in the
Chapter on Sales. It was in these terms: "If a buyer wrongfully refuses to accept the
goods sold to him, this amounts to a breach of the contract of sale."

Sub-section (2)

Sub-section (2) contemplates that there might be an agreement for delivery by

instalments but the price may be payable either on complete delivery or on delivery of
each instalment. In any of these contingencies, the main consideration is whether the
contract is an entire one or a divisible one. It is on this aspect of the matter that the
rights of parties have to be determined with regard to further performance or with
regard to breach or with regard to payment of price or a claim for damages or with
regard to rejection of the instalments of goods already delivered. The test laid down in
sub-section (2) is "in each case it depends upon the terms of the contract and the
circumstances of the case."

The rule of law is that where there is a contract in which there are two parties, each
side having to do something, if you see that the failure to perform one part of it goes to
the root of the contract, it is a good defence to say, "I am not going to perform my part
of it when that which is at the root of the whole and substantial consideration for my
performance is defeated by your misconduct".58

A mere refusal to pay for one or more instalments of goods, to be delivered by

instalments at stated times and to be paid for on delivery, unaccompanied by any other
act, does not amount to a repudiation of the contract so as to discharge the other party
from performing his contract. In each case all the circumstances have to be considered
in determining whether there is evidence on which it may be found that there has been
a repudiation of the entire contract.59 Where the repudiation is on the part of the seller,
the buyer is relieved from his obligation to accept the residue of the goods. Where the
repudiation is on the part of the buyer, the seller is not bound to tender the residue of
the goods; he need not make or offer goods which he knows the buyer will refuse.60
Where a buyer of straw, which was to be delivered in instalments and paid for on
delivery, said to the seller, in effect, "You may bring your straw, but I will not pay you
upon delivery as under the contract I ought to do; I will always keep one bundle of straw
in hand so as to have a check upon you," it was held he had shown an intention to
repudiate the contract, and that the seller might treat is as at an end.61

The law on the subject may be stated in one sentence thus: unless otherwise agreed
[Illustration (i)], mere failure to make one of a series of payments [Illustration (ii)], or to
make one or more deliveries, will not generally, in the absence of a prospective refusal,
discharge the other party from proceeding with the contract.

Illustrations

(i) A agrees to sell goods to B to be delivered in three instalments in January, February

and March 1931, and ade on due date as a condition precedent to future deliveries." B
fails to pay for the first instalment on the due date. A may refuse to make further
deliveries.62 See section 11 above, "Stipulations as to time."

(ii) A agrees to sell to B 300 tons of sugar, "the shipment to be made during September
and October next in lots of about 75 tons in a shipment," payment to be made in cash
before delivery. A informs B of the arrival of the first shipment and demands payment,
but B fails to pay. This does not discharge A from making further deliveries.63

(iii) In a contract for delivery of 7500 bags of Castor Seeds to be shipped per steamer
deliveries to be made each month of 2500 bags and terms cash on delivery, the seller
consigned 1690 bags on 12 December in a steamer and 610 bags on 17 December, the
buyer refused to accept deliveries as being less than 2500, it was held that 2500 bags
were shipped in December and hence the buyer's refusal to accept deliveries was
wrong.64

(iv) In a contract to supply 1500 bags of corn in three instalments of 500 bags each, it
was held that the seller had three causes of action in respect of three instalments, and
that each instalment was intended to be separate.65

(v) The seller agreed to supply 4000 maunds of sabai grass and received a sum of Rs
1000/- as deposit from the buyer; the buyer was to supply wagons from time to time as
required by seller every month and buyer was to pay for each wagon separately. As the
buyer put off supplying wagons as requested by the seller, the seller intimated that he
would sell off the goods and hold the buyer liable for loss. It was held that the buyer
was in breach and that the contract was an entire one. Buyer having failed to accept
delivery of more than half the stipulated quantity the buyer was in breach of the entire
contract.66
57 Colonial Insurance Co of New Zealand v Adelaide Insurance Co, (1886) 12 AC 128 (138–39).
58 Mersey Steel and Iron Co v Naylor, Benzon & Co, (1884) 9 App Cas 434 , 443.
59 Freeth v Burr, (1874) LR 9 CP 208 : (1874–80) All ER Rep 751 ; Cornwall v Henson, (1900) 2
Ch 298 .
60 Cort v Ambergate Ry. Co, (1851) 17 QB 127 .
61 Withers v Reynolds, 2 B. & Ad. 882, approved by the House of Lords in Mersey Steel and Iron
Co v Naylor, Benzon & Co, (1884), 9 App Cas 434 at p 442.
62 Ebbw Vale & Co v Blaina Iron Co, (1901) 6 Com Cas 33 .
63 Rash Behary v Nrittya Gopal, (1906) 33 Cal 477 . See also Sooltan Chund v Schiller, (1878) 4
Cal 252 ; Volkart Bros v Ratna Velu, (1894) 18 Mad 63.
64 Simson v Gorachand, (1883) 9 Cal 473 .
65 Ratilal v Lakhmichand, AIR 1938 Rang 364 .
66 Sriram Agarwalla v Sagarmal Modi, AIR 1957 Ori. 8 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 39. Delivery to carrier or wharfinger.-

(1) Where, in pursuance of a contract of sale, the seller is authorised or required to

send the goods to the buyer, delivery of the goods to a carrier, whether named
by the buyer or not, for the purpose of transmission of the buyer, or delivery of
the goods to a wharfinger for safe custody, is prima facie deemed to be a
delivery of the goods to the buyer.

(2) Unless otherwise authorised by the buyer, the seller shall make such contract
with the carrier or wharfinger on behalf of the buyer as may be reasonable
having regard to the nature of the goods and the other circumstances of the
case. If the seller omits so to do, and the goods are lost or damaged in course
of transit or whilst in the custody of the wharfinger, the buyer may decline to
treat the delivery to the carrier or wharfinger as a delivery to himself, or may hold
the seller responsible in damages.

(3) Unless otherwise agreed, where goods are sent by the seller to the buyer by a
route involving sea transit, in circumstances in which it is usual to insure, the
seller shall give such notice to the buyer as may enable him to insure them
during their sea transit, and if the seller fails so to do, the goods shall be
deemed to be at his risk during such sea transit.

[s 39.1] Delivery to carrier or wharfinger.—

Sub-sections (1) and (2).—This section is a combination of section 32 of the English

Sale of Goods Act, 1979 and section 91 of the Contract Act, 1872.

In view of the provisions of section 23 and section 39 of the Sale of Goods Act, 1930, it
was found in Escorts JCB Ltd v CCE,67 that goods were to be treated as delivered to the
buyer and property and possession of the goods passed on to the buyer when the
goods were handed over to the transporter.

[s 39.2] In pursuance of a contract of sale.—

These words govern the mode of delivery and the presumption is stated in the section.
If the contract of sale specifics the name of the carrier, the seller must deliver the
goods to such named carrier. If the instructions of the buyer are carried out properly,
the risk is with the buyer. If the instructions of the buyer are not carried out properly, the
goods remain at the risk of the seller during transit.

Sub-section (1) raises a prima facie presumption. For the purposes of raising a prima
facie presumption, the seller should deliver the goods to a carrier or a wharfinger, if so
provided in the contract, i.e., in pursuance of a contract of sale. It the contract does not
so provide, the buyer should have required or asked the seller so to deliver.
The use of the expression prima facie is intended to raise a presumption. When a seller
delivers the goods to a carrier but takes the bill of lading or railway receipt in his name
and not in the name of the buyer, it is not a delivery to carrier for transmission to the
buyer and it cannot be deemed to be a delivery to the buyer.68 But if such a bill of lading
or railway receipt is endorsed in favour of the buyer and sent to the buyer, it shall be
deemed to be a delivery to the buyer.69 In such a case if a few articles are found
missing from the consignment when it reaches the destination, it is as between the
seller and buyer, the buyer who is responsible for value of the missing articles. The
fiction of presumption has been created in order to fix on whom the loss would be
during transit.

[s 39.3] Carrier, whether named or not.—

If a tradesman orders goods to be sent by a carrier, though he does not name any
carrier, the moment the goods are delivered to a carrier, the delivery to the carrier is
prima facie deemed to be a delivery to the buyer. It is well established that it is the
seller's duty to be reasonable so as to secure the responsibility of the carrier for the
safe delivery of the goods. If the seller omits to do so and the goods are lost or
damaged in course of transit, the buyer may decline to treat the delivery to the carrier
as a delivery to himself and hold the seller responsible in damages.70 The duty to make
reasonable contract of carriage does not mean that it is the seller's duty to insure the
goods during transit unless so agreed or unless it is customary for the seller to assume
such duty. The same rule applies where the goods are delivered to a wharfinger.

Where the buyer has named the carrier, the goods must be delivered to that carrier. But
the section leaves the choice of the carrier to the seller despite naming of the carrier.71

The section makes prima facie the carrier or wharfinger an agent of the buyer to take
delivery only. The right to examine the goods and accept or reject the goods remains
with the buyer. The presumption of delivery to the buyer raised by section 39(1) does
not apply when the carrier is an agent or servant of the seller himself72 or where the
goods are delivered to a carrier for transmission to person on approval or on sale or
return basis.73

[s 39.4] Seller's duty while delivering goods to the carrier.—

Sub-section (2) is in the nature of a proviso to sub-section (1). Sub-section (2) lays
down a duty of the seller in making delivery to a carrier or a wharfinger. The seller's duty
is to do whatever is necessary to secure the carrier's responsibility for the safe delivery
of the goods to the buyer so that in the event of a loss, the buyer may have his
indemnity against the carrier.74

Neglect to appraise the carrier that the value of goods exceeded a particular maximum
value,75 mere delivery to the carrier without obtaining proper receipt, leaving the goods
in the premises of the carrier without taking proper receipt, will bring the case in the
second part of sub-section (2).

In order to bring his case in the first part of sub-section (2), the seller must act
reasonably and with due care and diligence.

Illustration
B at Agra, orders of A, a tradesman in Calcutta, casks of oil to be sent to him by railway.
A takes 3 casks of oil directed to B to the railway station and leaves them there without
conforming to the rules which must be complied with in order to render the railway
company responsible for their safety. The goods do not reach B. There has not been a
sufficient delivery to charge B in a suit for the price. It was A's duty to secure the
responsibility of the carriers for the safe delivery of the goods, and to put the goods
into such a course of conveyance as that in the case of a loss the buyer might have his
indemnity against the carrier.76

[s 39.5] Sub-section (3): Sea transit.—

This sub-section contemplates the case (1) where goods are sent by sea, and (2) it is
usual for the buyer himself to insure. In such a case it is the duty of the seller to give
such notice of the shipment to the buyer as may enable him to insure the goods. If he
does not, the risk does not pass to the buyer. The three common forms of contract as
regards carriage by sea are:

(i) F.O.B.

(ii) C.I.F.

(iii) Ex-ship.

This section applies to F.O.B. contracts. It does not apply to a C.I.F. contract, for the
insurance in the case of such a contract is to be effected by the seller and it is specified
in the contract itself. Nor does it apply to ex-ship contracts.

[s 39.6] F.O.B. contract.—

A, in Calcutta orders goods to B, a merchant in London. The contract contains a

stipulation that B shall deliver the goods "F.O.B.", i.e., "free on board." The meaning of
these words is that B, the seller, is to put the goods on board at his own expense. The
seller is not responsible for any further expenses, e.g., the expenses of stowing the
goods once they are put on board. If the seller pays stowage charges, he can recover
the same from the buyer. Immediately the goods are put on board, the property and the
risk pass to the buyer who is considered to be the shipper.77 The goods, whether
specified or unascertained, are at the buyer's risk and he is responsible for the freight
and subsequent charges including insurance.76 But the seller has in such a case to
give such notice to the buyer as may enable the buyer to insure to protect himself by
insurance against loss during sea transit.78 If the seller fails to do so, the goods are
deemed to be at his risk during the transit, unless the buyer, has information from other
sources about the shipment so as to enable him to insure the goods.79 It may be as
well to explain the terms "C.I.F." and "Ex-Ship."

[s 39.7] English case.—

If the seller sends them to the port of shipment, but the buyer does not nominate an
effective ship, and the goods in consequence remain at the port, the seller cannot sue
for the price but can only maintain an action for damages.80
[s 39.8] C.I.F. contract.—

A contract on C.I.F. terms means a contract at a price to cover cost, insurance and
freight. If a merchant agrees to sell goods at Rs 30 per ton C.I.F Bombay Docks, that
sum will include price of the goods, the premium for insuring them and freight payable
for carrying them to their named destination, Bombay. In the absence of any special
provision to the contrary, the seller is bound under such a contract to do the following
things:81 First, to make out an invoice of the goods sold: [the invoice shows the cost of
the goods]. Second, to ship at the port of shipment goods of the description contained
in the contract. If the goods shipped do not correspond with the contract description,
there is a breach of the contract when the goods are shipped. Third, to procure a
contract of affreightment (bill of lading) under which the goods will be delivered at the
destination named in the contract (the bill of lading shows inter alia the date of
shipment and freight). The contract of affreightment must cover the whole transit; a
through bill of lading from an intermediate port is insufficient. Fourth, to arrange for an
insurance upon the terms current in the trade which will be available for the benefit of
the buyer. If the goods are not covered by an effective policy, there is a breach of the
contract even if the goods arrive safely. Fifth, with all reasonable despatch to send
forward and tender to the buyer these shipping documents, namely, the invoice, bill of
lading and policy of insurance, so that the buyer may know what freight he has to pay,
and obtain delivery of the goods if they arrive, or recover for their loss if they are lost on
the voyage. If the seller does not tender the documents within a reasonable time, that
may amount to a breach of contract.82 If no place is named in the contract for the
tender of the documents, they must prima facie be tendered at the residence or place
of business of the buyer.83

A C.I.F. contract is not a mere sale of documents,84 though the buyer has to pay against
delivery of documents. It is a sale of goods, though they are deliverable by means of
documents; in other words, delivery of documents is symbolical of delivery of the
goods.85 As to inspection of goods before payment, see notes under section 41 below.
C.I.F contract usually provides for payment of cash against documents and the fact
that goods have not arrived at the time when the documents are tendered does not
excuse the buyer from making payment.86

In National Insurance Co Ltd v Sky Gems,87 the Supreme Court explained the rights and
liabilities of the parties in a C.I.F. contract by reference to Lord Porter in Comptoir D'
Achat v Luis De Ridder; The Julia (quoted in the book Schmitthoff's Export Trade—The
Law and Practice of International Trade by Leo D' Arcy, Carole Murray and Barbara
Cleave (10th Edn), at p 29, and read as follows:

The obligations imposed on a seller under a CIF contract are well known, and in the ordinary
case, include the tender of a bill of lading covering the goods contracted to be sold and no
others, coupled with an insurance policy in the normal form and accompanied by an invoice
which shows the price and, as in this case, usually contains a deduction of the freight which
the buyer pays before delivery at the port of discharge. Against tender of these documents
the purchaser must pay the price. In such a case the property may pass either on shipment
or on tender, the risk generally passes on shipment or as from shipment, but possession
does not pass until the documents which represent the goods are handed over in exchange
for the price. In the result, the buyer, after receipt of the documents, can claim against the ship
for breach of the contract of carriage and against the underwriters for any loss covered by the
policy. The strict form of CIF contract may, however, be modified. A provision that a delivery
order may be substituted for a bill of lading or a certificate of insurance for a policy would
not, I think, make the contract be concluded on something other than CIF terms.

If the issue is as regards the price that may be relevant for levy of excise, it would be
the value at the factory gate that would exclude freight and insurance charges.88

The principles which apply to a C.I.F contract apply to a C. and F. contract.89

[s 39.9] Difference between F.O.B. and C.I.F. contracts.—

In Contship Container Lines Ltd v D.K. Lall,90 referring to a claim against an insurance
company by a shipping company, for misdelivery of goods in an F.O.B. contract, the
Supreme Court explained that in F.O.B. contracts for sale of goods, the property is
intended to pass and does pass on the shipment of the goods. The seller would have
no insurable interest in the goods thereby absolving the Insurance Company of the
liability to reimburse the loss, if any, arising from the misdelivery of such goods.
Consequently, the claim made by the shipper against the Insurance Company was
liable to be rejected on the ground that the shipper had not observed utmost good faith
while obtaining the insurance cover and the case was required to be seen only in the
context of liability arising under an F.O.B. contract. Making a distinction between F.O.B
and C.I.F. contracts, the Court explained: While in the case of C.I.F. contract, the seller,
in the absence of any special contract, is bound to do certain things like making an
invoice of the goods sold, shipping the goods at the port of shipment, procuring a
contract of insurance under which the goods will be delivered at the destination, etc., in
the case of F.O.B. contracts, the goods are delivered free on board the ship. Once the
seller has placed the goods safely on board at his cost and thereby handed over the
possession of the goods to the ship in terms of the bill of lading or other documents,
the responsibility of the seller ceases and the delivery of the goods to the buyer is
complete. The goods are from that stage onwards at the risk of the buyer.

[s 39.10] Ex-ship contract.—

In the case of a contract of sale "Ex-ship" the seller has to cause delivery to be made to
the buyer from a ship which has arrived at the port of delivery, and has reached the
usual place of delivery therein for the discharge of goods of the kind in question. The
seller has therefore to pay the freight and to provide the buyer with an effectual
direction to the master of the ship to deliver. Till this is done, the buyer is not bound to
pay for the goods.91 Where delivery is Ex-ship the seller commits breach of his duty
under section 31 of the Sale of Goods Act, 1930 if he stores the goods in godown and
asks the buyer to take delivery of the goods from godown as it is not delivery Ex-ship.
The buyer is justified in refusing to accept any goods from godown where contract is
Ex-ship because ex-ship delivery greatly ensures that goods are really imported stuff
while ex-godown leaves room for dispute.92

67 Escorts JCB Ltd v CCE, AIR 2002 SC 3708 : (2003) 1 SCC 281 . In such a case, element of
freight and transit insurance was not to be included in the normal value of the goods. This was
so stated in the context of excise law for levy of tax on goods and the impermissibility of adding
the components of freight and insurance in the price for determining the liability; Also see, CCE v
Accurate Meters Ltd, (2009) 6 SCC 52 : (2009) 3 SCR 1146 for application of law on similar
facts.
68 Jagdish Prasad v Produce Exchange Corp Ltd, AIR 1946 Cal 245 : 8 Cal LJ 170.
69 LG Lakshmana Iyer v Pachiappa Mudaliar, AIR 1961 Mad. 343 : (1961) 2 Mad LJ 75.
70 Clark v Hutchins, 104 ER 683.
71 Sriranganaikulu v Venkatasubbarao, (1958) Andh LT 1155 .
72 Galbraith & Grant Ltd v Block, (1922) 2 KB 155 .
73 Swain v Shepherd, (1832) 1 Mood & R 223.
74 Clark v Hutchins, (1811) 14 East 475 : 13 RR 283 : 39 Digest (Repl.) 702, 1938.
75 Siddaiya v Muthayanna, AIR 1957 Mad. 183
76 Clark v Hutchins, (1811) 14 East 475.
77 Stock v Inglis, (1884) 12 QBD 564 at p 573 affirmed; Inglis v Stock, (1885) 10 App Cas 263 ;
Wimble v Rosenberg, (1913) 3 KB 743 at p 757; Diamond Alkali Export Corp v Bourgeois, (1921) 3
KB 443 .
76 Clark v Hutchins, (1811) 14 East 475.
78 See The Indian Sale of Goods Act, 1930, section 39(3).
79 Northern Steel and Hardware Co v Batt & Co, (1917) 33 TLR 516 .
80 PST Energy 7 Shipping LLC v OW Bunker Malta Ltd, [2016] UKSC 23 : [2016] WLR (D) 257.
81 Johnson v Taylor Bros & Co, (1920) AC 144 , Herman & Mohatta (India) Ltd v Pran Ballar, AIR
1960 Cal 524 .
82 Narayanswami v Soundarajan, AIR 1958 Mad. 43 : (1957) ILR Mad 1108 : (1957) 2 Mad LJ
528.
83 Johnson v Taylor Bros. & Co, (1920) AC 144 , 145; Biddel Brothers v E. Clements Horst & Co,
(1911) 1 KB 214 , at p 220, per Hamilton, J., approved AC (1912) 18; Hannson v Hamel and
Horley, (1921) 26 Com Cas 236 , affirmed. (1922) 2 AC 36 ; Diamond Alkali Co v Bourgeois,
(1921) 3 KB 443 ; Steel Brothers & Co, Ltd v Dayal Khatao & Co, (1923) 47 Bom 924, 25 Bom LR
1203.
84 C.I.F. contract is a sale of document as per Scrutton J in Arnhold Karberg v Biythe Green,
Jourdain & Co, (1915) 2 KB 379 , 388 but disapproved by Banker LJ and Warrington LJ in Arnold
Karberg and Go v Blythe Green Jourdain & Co, CA (1916) 1 KB 495 , 510 and 514 respectively.
85 Olympit Oil Co v Produce Brokers Co, (1917) 1 KB 320 ; Johnson v Taylor Bros. & Co, (1920)
AC 144 .
86 E Clemens Horst Co v Biddle Bros, (1912) AC 18 .
87 National Insurance Co Ltd v Sky Gems, AIR 2002 SC 545 : (2002) 2 SCC 273 .
88 CCE v Accurate Meters Ltd, AIR 2009 SC (Supp) 2827 : (2009) 6 SCC 52 .
89 State of Madras v Ramalingam & Co, AIR 1956 Mad. 695 : (1957) 8 STC 77 : (1956) 69 LW
655 .
90 Contship Container Lines Ltd v D.K. Lall, AIR 2010 SC 1704 : (2010) 4 SCC 256 : JT 2010 (3)
SC 201 .
91 Yang-tze Ins. Ass. v Lukmanji, (1918) AC 585 –589.
92 Herman & Mohatta (India) Ltd v Pran Ballar, AIR 1960 Cal 524 , 531, para 18.
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 40. Risk where goods are delivered at distant place.-

Where the seller of goods agrees to deliver them at his own risk at a place other than
that where they are when sold, the buyer shall, nevertheless, unless otherwise agreed,
take any risk of deterioration in the goods necessarily incident to the course of transit.

[s 40.1] Deterioration of goods in transit to buyer.—

Where the seller agrees to deliver the goods to the buyer at a place other than that
where they are when sold, the merchantable quality of the goods may be affected by
the operation of the transit. In such a case the section throws the risk of necessary
deterioration on the buyer. A agrees to sell hoop iron to B to be sent from port X to port
Y. The iron is clean and bright when it is despatched, hut it is rusted to a certain extent
before it reaches port Y. The rusting is no more than what would necessarily occur in
the course of transit, i.e., risk of deterioration necessarily consequent upon the
transmission as incidental having regard to their nature and ordinary circumstances
attending such transmission. The seller is not responsible if the iron becomes
unmerchantable to that extent.93 The words "necessarily incident to the course of
transit" are intended to distinguish them from the unusual risk which is not necessarily
incident to the course of transit and hence such unusual risk would fall on the seller. As
observed by Alderson, B, "a manufacturer who contracts to deliver a manufactured
article at a distant place must, indeed, stand the risk of any extraordinary or unusual
deterioration."

In accordance with section 62, the risk mentioned in this section may be transferred to
the seller by express agreement or by usage of trade or by the course of dealings
between the parties. The section also applies to animals sent for human food from one
place to another.

In the case of such perishable goods, the seller must be deemed to warrant that the
goods will be in merchantable condition for a reasonable time even after the
completion of the transit.94

93 Bull v Robinson, (1854) 10 Exch. 342 : 102 RR 620.

94 See Beer v Walker, (1877) 46 LJCP 677 (rabbits) : 37 L.T. 278; Ollett v Gordon, (1918) 2 K.B,
41.
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 41. Buyer's right of examining the goods.-

(1) Where goods are delivered to the buyer which he has not previously examined,
he is not deemed to have accepted them unless and until he has a reasonable
opportunity of examining them for the purpose of ascertaining whether they are
in conformity with the contract.

(2) Unless otherwise agreed, when the seller tenders delivery of goods to the buyer,
he is bound, on request, to afford the buyer a reasonable opportunity of
examining the goods for the purpose of ascertaining whether they are in
conformity with the contract.

[s 41.1] Buyer's right to inspect before acceptance.—

This section is based on the principle that a buyer cannot be said to have accepted the
goods unless he had an opportunity to examine the goods and ascertain that they are
in conformity with the contract.

This section emphasizes the distinction between delivery of goods and acceptance of
goods. Delivery of goods to the buyer does not amount to acceptance thereof by the
buyer.

Despite examination of the goods by the buyer in consonance with his right under this
section, the buyer has a right to reject the goods if a hidden, not apparent, defect is
subsequently found out.95

Sub-section (2) deals with the case where the seller tenders delivery of goods to the
buyer; sub-section (1) deals with the case where goods are already delivered to the
buyer which he has not previously examined.

If the seller gives notice to the buyer that casks containing goods ordered by the buyer
are at a particular place ready for delivery on payment of the price, but does not allow
the buyer to open the casks to enable him to inspect the goods, it is not a valid tender
of the goods.96 But the right of inspection may be waived. It may also be excluded by
agreement between the parties.97 as where goods are sold on C.I.F. terms. In such a
case the buyer is not entitled to inspect the goods before payment. He is bound to pay
against the delivery of the shipping documents, whether the goods have arrived or not.
See cases cited in notes to section 39 under the heading "C.I.F. contract". See Indian
Contract Act, 1872 section 38(3).

[s 41.2] Time and place of examination.—

Under sub-section (1), the place of examination will be the buyer's place and it will be
within a reasonable time (see section 42) after the goods are delivered.
Under sub-section (2), the time of examination will be at the time of tender for delivery
and the place will be placed for delivery.

Where goods are sold F.O.B., the place for examination will be final place of
destination.98

[s 41.3] Reasonable opportunity.—

It would be unreasonably to place no limit on the right of inspection.99 Is a purchaser of

wine bottles sold in lot entitled to open and taste every, bottle of wine or is a purchaser
of 100 cotton bales entitled to pass every pound of cotton through an expert's hands.
There must be some limit.99 Reasonable opportunity is alike for vendor as well as
purchaser.99 In that case 24 hours' time was held to be sufficient to inspect the
sampling order of cotton in respect of the contract for 100 bales of cotton.

Where a buyer of vegetable glue went to seller's godown and the seller offered every
facility to examine the goods but the purchaser being pressed for time examined the
barrels from outside and did not get any barrels opened and then placed the order for
the goods slating that he had inspected the parcel, it was held that the goods were
examined and the buyer could not reject the goods subsequently.100

Where the goods were installed and commissioned to the satisfaction of the purchaser
and he also appreciated the work of the seller, a plea that the buyer could not inspect
the goods would make no sense. Therefore, an objection nearly a year after the
installation that the goods suffered by some defect will not be countenanced.101
Therefore, once a reasonable period of time for inspection was available and the buyer
does not complain about the goods but in fact utilises the goods, the buyer is
prevented from raising any objection as to the quality of the goods.102 Reasonable
time is a question of fact, as per section 63 of the Sale of Goods Act, 1930, and cannot
be as long as claimed by the buyer, such as in the case where debit notes were raised
by him on the seller after two and a half years after the sale.103

95 Re Beharilal Baldeoprasad, (1955) A Mad 271; Heilbutt v Hickson, (1872) LR 7 CP 438 (paper
found in the soles of shoes means for the use of the army).
96 Isherwood v Whitmore, (1843) 11 M & W 347 : 63 RR 624; Ruttonsey v Jamnadas, (1882) 6
Bom 692.
97 Pettitt v Mitchell, (1842) 4 M & G 819, 12 LJCP 9 [sale by auction].
98 Boks v Rayner & Co, (1921) 37 TLR 519 affirmed ib., 800 CA
99 Ruttonsey v Jamnadas, (1882) 6 Bom 692.
99 Ruttonsey v Jamnadas, (1882) 6 Bom 692.
99 Ruttonsey v Jamnadas, (1882) 6 Bom 692.
100 Thornet v Beers, (1919) 1 KB 486 .
101 Nilkamal Bito Storage Systems Pvt Ltd v Brahma Auto Industries Pvt Ltd, 2017 SCC OnLine
Del 9225 : LNIND 2017 DEL 2457 .
102 Satyapal v Slick Auto Accessories Pvt Ltd, AIR 2014 Del 115 : (2014) 4 HCC (Del) 532 : 2014
SCC OnLine Del 998.
103 Unique Engineers Pvt Ltd v Nitya Elecrocontrols Pvt Ltd, 2018 SCC OnLine Del 7283 : LNIND
2018 DEL 694 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 42. Acceptance.-

The buyer is deemed to have accepted the goods when he intimates to the seller that
he has accepted them, or when the goods have been delivered to him and he does any
act in relation to them which is inconsistent with the ownership of the seller, or when,
after the lapse of a reasonable time, he retains the goods without intimating to the
seller that he has rejected them.

[s 42.1] Acceptance.—

Where goods are delivered to the buyer which he has not previously examined, he is not
deemed to have accepted them unless he has had a reasonable opportunity of
examining them. Mere receipt is no acceptance. In other words in order that an act may
amount to an acceptance within the meaning of this section, the two essential
conditions are that:

(i) the goods are delivered, and

(ii) the buyer had the reasonable opportunity to examine them.

If any act inconsistent with his ownership is done by the buyer before the goods are
delivered, it will not amount to acceptance.

In State Bank of Mysore v Machado Computer Services,104 goods were certified to have
been received in full and in satisfactory working condition. Hence, the right of the buyer
under section 41 of the Sale of Goods Act, 1930 was held to have been availed of by
the plaintiff and he was deemed to have accepted the goods upon such intimation of
acceptance to the supplier as stated specifically in the delivery challan. This
acceptance was both for the quality as well as the quantity of the goods supplied as
per section 42 of the Sale of Goods Act, 1930. Further, upon such acceptance after
examination of the goods specifically accepted, the description of the goods as
regards the make or the brand is also deemed to have been accepted and there could
be no defect stated to be in respect of such brand as per the second proviso to section
16 of the Sale of Goods Act, 1930. The duty of the supplier in the contract of sale was,
therefore, complete. The plaintiff has accepted the goods. The plaintiff was, therefore,
held required to make payment for the goods, having accepted as per the enjoinment
under sections 31 and 32 of the Sale of Goods Act, 1930.

[s 42.2] Modes of acceptance.—

This section contemplates direct and indirect modes of acceptance. The direct method
is the intimation by the buyer to the seller that he has accepted the goods. The indirect
methods are (i) exercise by the buyer of his right of ownership on the goods such as
using the goods, sale or mortgage of the goods, etc., and (ii) retaining the goods
without examining the goods despite lapse of a reasonable time after delivery. Where
goods are delivered at a place where the buyer has a reasonable opportunity of
examining them, and the buyer without examination sends them to his sub-purchaser,
he does an act which is inconsistent with the ownership of the seller, and he must be
deemed to have accepted them. He cannot reject them, though he may be entitled to
damages if the goods do not correspond with the contract description.105 Where the
purchaser searchingly examined the goods and thereafter exported them to his vendee,
and the American vendee rejected goods, the seller was held not liable for damages in
a suit by the purchaser on the ground that the purchaser did not lead cogent evidence
to disprove that the seller had delivered the goods contracted for.106 Where goods are
delivered to an employee of the buyer and remain on his premises for upwards of three
weeks, the buyer himself not doing any act in relation to those goods, he must be
deemed to have accepted the goods.107

It may be that, owing to special circumstances, such as the difficulty of opening and
reclosing metal vessels, the goods cannot be inspected when they are delivered to the
buyer, but only at their final destination. In such a case, if on examination the goods are
found to be of inferior quality, the damages will be assessed according to the prices
ruling at the date of the examination by the ultimate consignees.108

Time for rejection.—The parties may by contract limit the time within which the buyer
should accept or reject the goods. If they have not so provided, that must be done
within a reasonable time.109 What is reasonable time is a question of fact in each case.
See the provisions of section 37 which refers to the right of acceptance or rejection.

104 State Bank of Mysore v Machado Computer Services, 2009 (4) Bom CR 199 : 2009 AIHC
3066 .
105 Hardy & Co v Hillerns, (1923) 2 KB 490. See also section 13(2); Nagardas v Velmahomed, 32
Bom LR 454; Shah Mohanlal v Dhirubhai, (1961) 2 Guj LR 629 : AIR 1962 Guj 56 .
106 Gan Kim v Rally Bros, (1886) 13 Cal 237 PC.
107 Re A Debtor, (1939) 1 Ch 225 ; Haridas v Kalumull, (1903) 30 Cal 649 .
108 Vanden Hurk v Marten & Co, (1920) 1 KB 850 as explained in Saunt v Belcher and Gibbons,
(1921) 90 LJKB 541 .
109 Bright Star Hotels Pvt Ltd v Gobind Singh, RFA 476/2007, dated 20.10.2008 (Delhi HC).
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 43. Buyer not bound to return rejected goods.-

Unless otherwise agreed, where goods are delivered to the buyer and he refuses to
accept them, having the right so to do, he is not bound to return them to the seller, but it
is sufficient if he intimates to the seller that he refuses to accept them.

[s 43.1] Buyer not bound to return rejected goods.—

Where a buyer rejects goods as not being of the contract description, it is not his duty
to send them back to the seller it is enough for him to give a clear notice that they are
not accepted, and then they are at the seller's risk.110

The object of requiring the buyer to give intimation of rejection to the seller is that the
buyer should place the rejected goods at the full disposal of the seller without
obstruction. Since the seller has to take back the rejected goods, the cost of returning,
or taking back, the rejected goods has to be borne by the seller. The rule in this section
applies even though the place of delivery and the place where the goods are inspected
and rejected may be different.111 This rule is based on the presumption that the seller
is at fault for delivery of the goods which are not in conformity with the contract. He is
not bound to put himself to the expenses and trouble of returning the goods, and it is
the seller's business to take away the goods if he is so minded.112 But the buyer, being
a bailee of the goods, though an involuntary one, must take as much care of the goods
as a man of ordinary prudence would, under similar circumstances, take of his own.113
As the rejected goods must be at the disposal of the seller, the buyer cannot keep them
as security for the price which he may have paid in advance. The buyer in such a case
is not in a similar position to that of an unpaid seller within the meaning of section
45(2) of the Sale of Goods Act, 1930.114

110 Grimoldby v Wells, (1875) LR 10 CP 391 [treated as not really arguable]; Sumer Chand v
Ardeshir, (1907) All WN 67.
111 Heilbutt v Hickson, (1872) LR 7 CP 438 : 39 Digest (Repl.) 561, 902.
112 Phaggu Mal v Babu Lal, (1913) 35 All 325 : 19 IC 254; Buch v Gordhandas, 24 Bom LR 991 :
(1923) A Bom 92 : 70 IC 877.
113 Munnalal Pansari & Sons v Ganga Prasad Sudarshan Chawrasia, AIR 1955 VP 30 and Indian
Contract Act, 1872, section 151.
114 JL Lyons & Co v May & Baker Ltd, (1923) 1 KB 685 .
The Sale of Goods Act

Chapter IV Performance of the Contract

S. 44. Liability of buyer for neglecting or refusing delivery of goods.-

When the seller is ready and willing to deliver the goods and requests the buyer to take
delivery, and the buyer does not within a reasonable time after such request take
delivery of the goods, he is liable to the seller for any loss occasioned by his neglect or
refusal to take delivery and also for a reasonable charge for the care and custody of the
goods:

Provided that nothing in this section shall affect the rights of the seller where the
neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract.

[s 44.1] Buyer's liability for delay in taking delivery.—

This section contemplates the case where the property in the goods has passed to the
buyer and he has become the owner thereof. The fact that the seller has been given the
right to recover charges for care and custody and to recover the loss shows that the
buyer's neglect does not entitle the seller to put an end to the contract, that the property
in the goods has passed to the buyer and that the goods are kept against the seller's
will.115 In such a case if the buyer fails to take delivery within a reasonable time, he is
liable to the seller for any loss occasioned by his default, and also for a reasonable
charge for the care and custody of the goods.115 Conversely, if the seller delays
delivery, and the buyer notwithstanding the delay accepts delivery, the seller is liable for
any loss occasioned by the delay.

115 Greaves v Ashlin, (1813) 3 Camp 426 : 14 RR 471.

115 Greaves v Ashlin, (1813) 3 Camp 426 : 14 RR 471.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

S. 45. Unpaid seller defined.-

(1) The seller of goods is deemed to be an "unpaid seller" within the meaning of this
Act—

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

(b) when a bill of exchange or other negotiable instrument has been received
as conditional payment, and the condition on which it was received has
not been fulfilled by reason of the dishonour of the instrument or
otherwise.

(2) In this Chapter, the term "seller" includes any person who is in the position of a
seller, as, for instance, an agent of the seller to whom the bill of lading has been
endorsed or a consignor or agent who has himself paid, or is directly
responsible for, the price.

[s 45.1] "Unpaid seller" defined.—

The seller of goods who is "unpaid" has certain rights conferred upon him by section
46. A seller is unpaid so long as he has not received the whole price, also if the buyer
has given him a bill for the price and the bill is dishonoured. The expression "the whole
of the price" would mean the whole amount stipulated in respect of an entire contract
and when the contract is severable, the price of the severable part as apportioned.
Whether it was given in absolute or conditional payment is a question of fact in each
case. A seller partially unpaid stands on par with the one wholly unpaid.1

If the seller endorses the bill of lading in favour of his agent, the agent is an "unpaid
seller," and he may exercise the rights conferred upon an "unpaid seller", e.g., stop the
goods in transit in his own name. The reason is that the endorsement of a bill of lading
vests the property in the endorsee and entitles him to possession of the goods. If
before the goods are actually delivered to the buyer, the latter becomes insolvent, the
seller becomes an unpaid seller.2

Prima facie, the terms of the High Seas sales agreement shall be that till the entire sale
price was paid by the buyer the seller would retain his lien over the goods in question
and title would also pass to the petitioner only on payment of the full price of the
goods.3

A merchant who buys on his own credit for another to whom he endorses the bill of
lading is in the position of a "seller" for the purpose of exercising the rights given by
section 464; and so is a broker liable on a "principal contract".5 A commission agent
who has paid the price (or made himself liable to pay it) was entitled to exercise rights
of the unpaid seller of stoppage in transit when his principal became insolvent during
the course of transit of the goods.6 Section 38(2) of the English Sale of Goods Act,
1893 [(corresponding to section 45(2) of the Indian Sale of Goods Act, 1930] accords
with this judicial view. But a buyer of goods, who pays for them and, finding that they
are not of the contract description, rejects them, is not in the position of an unpaid
seller.7

[s 45.2] Payment by bills is normally conditional payment.—

Where payment by acceptance of bills or the like is stipulated for, it is prima facie
conditional on the bills being met, but this general rule may be excluded if the intention
of the parties is to treat it as a final discharge of the debt, leaving the creditor to his
remedies on the bills. It is a question of fact whether the parties intended the taking of
the negotiable instrument to operate as an absolute payment,8 but the presumption is
against it.

1 Hodgson v Loy, 101 ER 1065 : (1797) 7 TR 445.

2 Gunn v Bolckow Vaughan & Co, (1875) LR 10 Ch App 491 (501).
3 Suchetan Exports Pvt Ltd v Gupta Coal (India) Ltd, (2011) 13 SCC 83 : (2012) 3 SCC (Civ) 263 :
[2011] 9 SCR 689 : 2011 (8) Scale 165 .
4 Fieze v Wray, (1802) 3 East 93.
5 Ramendra Nath v Brajendra Nath, (1919) ILR 46 Cal 831; Harilal Chimanlal v Pehladrai & Co, AIR
1929 Bom 260 : 31 Bom LR 508 : 120 IC 337 (commission agent).
6 Ireland v Livingston, (1872) LR 5 HL 395 : (1861–1873) All ER Rep 585 ; Cassaboglou v Gibb,
(1883) 11 QBD 797 .
7 Lvons & Co v May and Baker, (1923) 1 KB 685 ; Sha Thilokchand Poosaji v Crystal & Co, AIR
1955 Mad. 481 : (1955) 1 MLJ 494 .
8 Goldshede v Cottrell, 6 Digest (Repl) 329, 2404.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

S. 46. Unpaid seller's rights.-

(1) Subject to the provisions of this Act and of any law for the time being in force,
notwithstanding that the property in the goods may have passed to the buyer,
the unpaid seller of goods, as such, has by implication of law—

(a) a lien on the goods for the price while he is in possession of them;

(b) in case of the insolvency of the buyer a right of stopping the goods in
transit after he has parted with the possession of them;

(c) a right of re-sale as limited by this Act.

(2) Where the property in goods has not passed to the buyer, the unpaid seller has,
in addition to his other remedies, a right of withholding delivery similar to and
co-extensive with his rights of lien and stoppage in transit where the property
has passed to the buyer.

[s 46.1] Unpaid seller's rights.—

When the seller has given possession of the goods to the buyer under the contract of
sale, all his rights are completely gone. The delivery and acceptance of possession
complete the sale and give the buyer unqualified, absolute and undefeasible right of
property in the goods even though the price is not paid. This section therefore deals
with a case where the seller has not parted with possession of the goods for delivery
thereof to the buyer and the seller continues in possession of the goods. The unpaid
seller has, by implication of law, the following rights, notwithstanding that the property in
the goods may have passed to the buyer, namely:—

(a) a lien on the goods for the price while he is in possession of them;9

(b) if the buyer becomes insolvent before payment, a right to stop the goods in
transit after he has parted with the possession of them;

(c) a right of resale, which implies that he is in possession.

The seller's lien is exercisable provided the property in the goods has passed to the
buyer because an owner cannot have a lien on his own goods.10

The seller's lien is exercisable when the price is due and unpaid, whether the buyer is
insolvent or not. The right of stoppage in transit arises only when the buyer is insolvent.
The lien attaches only if the seller is in possession. The right of stoppage arises only if
he has parted with possession and his lien is gone.

[s 46.2] Insolvency of buyer.—

The insolvency referred to therein means the buyer's inability to pay his debts as they
become due or he has ceased to pay his debts in the ordinary course of his business
[vide section 2(8)].

[s 46.3] Sub-section (2).—

Suppose the property in the goods has not passed to the buyer, and the buyer becomes
insolvent before the price is paid. Here the seller, being still the owner, can have no
such right as a lien, for a man cannot have a lien on his own goods. But he has the right
to withhold delivery of the goods until the price is paid, even though the sale was on
credit.11 The right is analogous to a lien11 and is sometimes called a quasi-lien.

9 The seller cannot add warehouse charges for keeping the goods till the debt is paid: EH
Parakh v G Mackenzie & Co, AIR 1934 Oudh 280 : (1934) 151 IC 117 .
10 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 , 155 : 65 IA 263 : 40 Bom LR
799.
11 Griffiths v Perry, (1889) 28 LJQB 204 : 117 RR 397 : 1 E&E 680; Pawan Hans Helicopter Ltd v
AES Aerospace Ltd, 2008 (2) Arb LR 63 : 2008 (103) DRJ 174 .
11 Griffiths v Perry, (1889) 28 LJQB 204 : 117 RR 397 : 1 E&E 680; Pawan Hans Helicopter Ltd v
AES Aerospace Ltd, 2008 (2) Arb LR 63 : 2008 (103) DRJ 174 .
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Unpaid Seller's Lien

S. 47. Seller's lien.-

(1) Subject to the provisions of this Act, the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or
tender of the price in the following cases, namely:—

(a) where the goods have been sold without any stipulation as to credit;

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

(c) where the buyer becomes insolvent.

(2) The seller may exercise his right of lien notwithstanding that he is in possession
of the goods as agent or bailee for the buyer.

[s 47.1] Unpaid seller's lien.—

The lien of an unpaid seller is a right to retain possession of the goods until tender or
payment of the price. A person cannot have a lien on his own goods.12 On the basis of
this principle, when the statute gives a right of lien to the seller, it presumes that the
property in the goods has passed to the buyer.12 The lien depends on actual
possession and not on title, and is not affected by his having parted with a document
capable of transferring title. He may have given a bill of lading which passes the legal
property in the goods, or he may have given a delivery order which, though it does not
pass the legal title or property in the goods, enables the person receiving it to acquire
possession of the goods and acquire a title in that way, but whatever he has done in
that respect does not destroy his right of lien as long as he keeps possession of the
goods as a vendor.13 Under sub-section (2), an unpaid seller could exercise his right of
lien even though his character of an unpaid vendor has ceased and he has become the
bailee or agent for the buyer. Accordingly, it has been held that giving a delivery order
by a seller to a buyer does not itself give the buyer such a possession of the goods as
to defeat the seller's lien for the price.14 But the seller's lien may be defeated where the
circumstances of the case are such as to estop him from denying that payment had
been received for the goods to which the delivery order related.15

[s 47.2] Lien extends only to price.—

The lien extends only to the price. It does not extend to warehouse or other charges for
keeping the goods, for they are kept against the buyer's will. For these the seller has
only a personal remedy against the buyer.16
[s 47.3] Tender of price extinguishes lien.—

The section says that the seller is entitled to a lien until payment or tender of the price.
A tender of the price, therefore, puts an end to the lien even if the seller declines to
receive the money.17

The unpaid seller is entitled to a lien only in the three cases mentioned in the section.
The following may be considered in order.

[s 47.4] No stipulation as to credit—

Where goods are sold, and nothing is said as to the time of delivery or the time of
payment, the seller is entitled to retain possession until the price is paid, although the
property in goods may have passed to the buyer. The seller is liable to deliver the goods
to the buyer when demanded by the buyer but he has no right to have possession of the
goods till he pays for the price.18

[s 47.5] Sale on credit.—

A sale on credit operates as a waiver of the lien during the currency of the credit. But if
the goods are left in the seller's possession till the credit has expired, the lien revives
even if the buyer is not insolvent.19 A sells to B a quantity of sugar in A's warehouse. It
is agreed that three months' credit shall be given. B allows the sugar to remain in A's
possession till the expiry of the three months, and then does not pay for them. A may
retain the goods for the price. Under clause (b) the period of credit should have ended.

[s 47.6] Insolvency of buyer.—

If the buyer becomes insolvent before the price is paid, and the seller is in possession
of the goods, he is entitled to retain possession even if the goods are sold on credit and
the term of credit has not expired. A sells to B a quantity of sugar in A's warehouse. It is
agreed that three months' credit shall be given. B allows the sugar to remain in A's
warehouse. Before the expiry of the three months B becomes insolvent. A may retain
the goods for the price because upon insolvency, B would have no right to claim
delivery although the period of credit has not expired.

[s 47.7] Sub-section (2): Seller holding as buyer's bailee.—

The section says that the unpaid seller may exercise his right of lien notwithstanding
that he has assented to hold the goods as bailee for the buyer. It may be logically
argued that by ceasing to possess in his original character, and agreeing to hold
possession on the buyer's account, he has abandoned his lien; and this reason was
allowed by English authorities before the English Sale of Goods Act, 1893, when the
buyer was merely in default; but if the buyer was insolvent, the right of lien was held to
revive. This distinction was done away with by section 41 of the English Act, and an
unpaid seller, though he holds the goods as bailee for the buyer, may exercise his right
of lien whether the buyer is insolvent or has merely made default in payment of the
price. The Indian section follows the English section. On 1 January 1931, A sells to B
certain goods in A's warehouse, and receives from B a bill payable on 1 March 1931.
The goods are kept at B's request in A's warehouse, and B pays rent for it. B deals with
the goods as his own, and sells part of them which are delivered to the sub-buyer. B
then becomes insolvent, and the bill is subsequently dishonoured. A is entitled to
exercise his lien in respect of the goods which remain in his godown.20

The seller's lien will, however, be destroyed in some cases, e.g., an endorsement on the
delivery order by the buyer which entitles the subsequent buyer to demand delivery of
the goods (delivery order treated as a document of title according to the usage of the
market).21 Jessel MR treated the case on the basis that the seller's act in issuing the
warrants led to the loss of both his lien and his right of stoppage. He said "any man
who gives this warrant understands that it shall pass from hand to hand for value by
endorsement, and that the indorsee is to have the goods free from any vendor's claim
for purchase money."22

The seller may lose his lien if the purchaser has endorsed the document of title to the
goods to the sub-purchaser for value who bona fide has taken the document of title
after due inquiry from the manufacturer.23 In the Anglo-India Jute Mills Co Ltd case
(supra), Defendant Company sold Hessian cloth to the buyer on terms of cash payment
in exchange of delivery order which was issued by the sellers of the cloth in favour of
the buyer. Later the buyer made a pledge and secured an advance from the plaintiffs on
the security of the delivery order which was endorsed by the buyer to plaintiffs on the
same day, the buyer paid the cheque to the Defendant Company for the payment of the
goods but the cheque was dishonoured and so Defendant Company refused to deliver
goods to plaintiffs under the delivery order. It was held that the Defendant Company
was estopped from denying that cash has been paid for the goods to which delivery
order related and Defendant Company had no lien as against the plaintiffs.

[s 47.8] Insolvent.—

A person is said to be insolvent who has ceased to pay his debts in the ordinary course
of business, or cannot pay his debts as they become due, whether he has committed
an act of insolvency or not (section 2(8)). The seller is not entitled to treat the buyer as
insolvent merely because he is in some temporary embarrassment. It must appear from
his admission or by other sufficient proof that he is unable to pay the price in due or
reasonable time, and therefore does not expect or intend to pay.24

[s 47.9] No lien in case of F.O.B. contracts.—

In a contract of sale on FOB basis, the unpaid seller's lien over the goods recognised in
terms of sections 46 and 47 will stand terminated upon delivery of the goods to the
carrier. The reason is that the goods shall be from the stage when goods are placed
say, on board a ship be held by the carrier at the risk of the buyer and the property in the
goods stand vested in the buyer.

[s 47.10] Seller's lien against subsequent buyer.—

See section 53 below and notes thereto.

[s 47.11] Distinction between lien and stoppage in transit.—

See under section 50.

Distinction between Lien and Pledge

Lien Pledge
1. Right to retain possession until seller's claim 1. Right to retain goods as a security for the
is satisfied. debtor's debt.
2. Unpaid seller exercises the right against the 2. Pledgee keeps the goods of the debtor with
wishes of the buyer. the consent of the debtor.
3. Lien terminates if price is tendered. 3. Pledge is redeemed if the debtor pays the
debt.
4. Does not authorise seller to resell. 4. Authorises the pledgee to sell in case of
default.

12 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 , 155 : 65 IA 263 : 40 Bom LR
799.
12 Nippon Yusen Kaisha v Ramjiban Serowgee, AIR 1938 PC 152 , 155 : 65 IA 263 : 40 Bom LR
799.
13 Imperial Bank v London and St Katherine Docks Co, (1877) 5 Ch Div 195, 200.
14 Le Geyt v Harvey, (1884) 8 Bom 501.
15 Anglo-India Jute Mills Co v Omademull, (1910) 38 Cal 127 ; Kalka Prasad Ram Charan v Harish
Chandra, AIR 1957 All 25 .
16 Somes v British Empire Shipping Co, (1860) 30 LJQB 229 : 8 HLC 338.
17 Martindale v Smith, (1841) 1 QB 389 ; Hazarimal v Champalal, AIR 1943 Ngp 141 (contract
may provide for lien on storage charges).
18 Bloxham v Sanders, (1825) 4 B&C 941 : 28 RR 525 : 107 ER 1309.
19 Bunney v Poyntz, (1833) 4 B&Ad 586 : 38 RR 309.
20 Mler v Gorton, (1833) 3 LJ Ex 155 : 39 RR 820; Grice v Richardson, (1877) 3 App Cas 319 .
21 Merchant Banking Co v Phoenix Bessemer Steel Co, (1877) 5 Ch Div 205.
22 Merchant Banking Co v Phoenix Bessemer Steel Co, (1877) 5 Ch Div 205, p 215.
23 Anglo-India Jute Mills Co Ltd v Omademull, (1910) 38 Cal 127 .
24 Re Phoenix Bessemer Steel Co, (1876) 4 Ch Div 108.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Unpaid Seller's Lien

S. 48. Part delivery.-

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

[s 48.1] Lien and part delivery.—

The unpaid seller may exercise his right of lien, after a part delivery, over the remainder
of the goods, unless such part delivery has been made under such circumstances as to
show an agreement to waive the lien. Such an agreement will be implied where the
delivery of part is made under such circumstances as to operate as a delivery of the
whole. Generally a delivery of part of the goods sold is not equivalent to a delivery of
the whole as to destroy the seller's lien25 nor could the seller be presumed to abandon
his lien on the residue. If a part of the goods are delivered but the payment is to be
made against full delivery, the seller has no lien under this section. But this lien may be
exercised upon the insolvency of the buyer under the preceding section.26

Where the buyer of a parcel of hay took delivery of part thereof with the seller's
permission, it was held that the intention of both the parties was to separate the part
delivered from the residue and the vendee took possession of a part only.27 But where
the goods sold were lying at a wharf, and a delivery order for all the goods was given to
the buyer, and the buyer after weighing the whole took possession of part at the wharf,
it was held that the part delivery operated as a delivery of the whole so as to destroy
the seller's lien, and the seller was not entitled to countermand the delivery order after
the part delivery was made.28

[s 48.2] Lien and part delivery under instalment contract.—

Where the goods are deliverable by instalments which are to be separately paid for, the
seller cannot retain the instalments paid for by reason of the non-payment of the price
of the residue of the goods, though he may, on the buyer's insolvency, retain any
instalment unpaid for till he is paid the price of that and of any other instalment
previously delivered, as his lien revives by implication of law.29 A agrees to sell goods
to B by five monthly instalments, payment to be made by cash in 14 days from the date
of each delivery. The first three instalments are delivered and paid for. The fourth
instalment is delivered but not paid for. B then becomes insolvent. A is entitled to retain
the fifth instalment till he has been paid for both the fourth and the fifth instalments.30
Suppose the third instalment was paid for but not delivered, can A retain that
instalment? No; he must deliver it, though B is insolvent.31
25 Kempp v Folk, (1882) 7 App Cas 573 , p 583.
26 Ex Parte Carnforth Haematite Iron Co, (1876) 4 Ch Div 108 (113).
27 Bunney v Poyntz, (1833) 4 B&Ad 568 : 38 RR 309.
28 Hammond v Anderson, (1803) 1 B&PNR 69 : 8 RR 763.
29 Anthone Gordon Guest (ed), Benjamin's Sale of Goods, 6th Edn, Sweet & Maxwell, 2003, p
956.
30 Ex Parte Chalmers, (1873) LR 8 Ch App 289.
31 Merchant Banking Co v Phoenix Bessemer Steel Co, (1877) 5 Ch Div 205.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Unpaid Seller's Lien

S. 49. Termination of lien.-

(1) The unpaid seller of goods loses his lien thereon—

(a) when he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the
goods;

(b) when the buyer or his agent lawfully obtains possession of goods;

(c) by waiver thereof.

(2) The unpaid seller of goods, having a lien thereon, does not lose his lien by
reason only that he has obtained a decree for the price of the goods.

[s 49.1] Termination of lien.—

This section deals with the termination of the lien of the unpaid seller. The lien is lost in
any of the three cases mentioned in the section. Unpaid seller's lien is a possessory
lien and hence this right is available to the seller so long as he is in possession but the
moment he parts with possession, that right is lost. It is this principle which is implied
in clauses (a) and (b).

[s 49.2] Delivery to carrier.—

The ordinary rule is that a delivery of the goods to a common carrier for conveyance [to the
buyer] is such a delivery of actual possession to the buyer through his agent, the carrier, as
suffices to put an end to the seller's lien.32 The seller may, however, reserve the right of
disposal of the goods, which he prima facie does when, on shipment, he takes a bill of
lading making the goods deliverable to the order of himself,33 or of his agent. This reserves
not only the right of property, but also the possession, for such a delivery is not a delivery to
the buyer, but to the captain of the vessel on behalf of the person indicated by the bill of
lading, and it is by the endorsement and delivery only of the bill of lading that a symbolical
delivery of the whole is effected.34

Where the right of disposal is reserved, and the buyer becomes insolvent while the
goods are in transit, the right of lien becomes changed into a right of stoppage in
transit.

Without reserving right of disposal.—The expression "without reserving the right of

disposal of the goods" is very important and significant. If the right of disposal is
reserved to the seller, the seller constitutes the carrier as his agent and bailee and the
carrier would have to act according to the directions of the seller. If the seller does not
reserve the right of disposal, the seller constitutes the carrier as agent of the buyer, the
carrier holding the goods as bailee for the buyer (for modes of reserving right of
disposal, see commentary under section 25).

[s 49.3] Lawful possession by buyer.—

The second case is where possession has been lawfully obtained by the buyer. The
word "lawfully" means "not tortiously."

The lien is lost by delivery of the goods to the buyer. No delivery, however, is necessary
where the goods are at the time of the contract of sale actually in the possession of the
buyer as agent or bailee of the seller. In such a case the mere completion of the
contract operates as a delivery of possession.35 Where the second-hand refrigerator
was sold and delivered to a buyer but later on the two parts of the refrigerator, i.e., the
thermostat and engine were taken away by the seller for further repairs, it was held that
the seller had no lien over the two parts on the ground that the original cost of the
repairs had not been fully paid.36

Where a seller gave share certificates and a blank transfer form to his share broker who
handed over the same to the buyer against the latter's cheque for the price thereof,
there was complete delivery to the buyer although the cheque was subsequently
dishonoured and therefore there could not be any lien or stoppage in transit.37

In Walchandnagar Industries Ltd, Deputy General Manager (Commercial) Mr RJ Prakash

Joyce v The Official Liquidator and Indian Renewable Energy Development Agency Ltd,38
the facts were that the action was at the instance of a company which had supplied a
boiler to a company in liquidation and was now seeking to exclude the same from the
list of properties sought to be sold by the secured creditor. The contention was built on
the grounds that they sold the boiler to the company in liquidation and received most of
the money payable and hence the seller had a lien on the boiler, for the balance amount
due.

Referring to sections 45(1), 46, 49(1) and (2) the court held:

It is clear (i) that the title in the goods (boiler) had already passed to the company in
liquidation; (ii) that the company in liquidation took delivery of the boiler lawfully, without the
applicant reserving the right of disposal. Therefore, the applicant had lost its lien on the
boiler. Consequently, the applicant had become merely an unsecured creditor, who holds a
decree in its favour (for whatever it is now worth) and can only stand in the long queue of
unsecured creditors, behind all those secured creditors and workmen. In such
circumstances, the prayer made for excluding the boiler sold by Walchandnagar Industries
Ltd., to the company in liquidation, cannot be granted.

[s 49.4] Waiver.—

The third case is where the lien is lost by waiver. The lien may be waived expressly or
by implication.

First, as to express waiver.—Where the contract of sale provides in express terms that
the seller shall not be entitled to retain possession until payment of the price, the case
is one of express waiver.

Next, as to implied waiver.—The lien is waived by implication:

(1) when goods have been sold on credit, during the currency of the credit; but the
lien revives on the expiry of the credit;
 (2) when the seller takes a bill of exchange for the price payable at a future day,
during the currency of the bill; but the lien revives if the bill is dishonoured; the
same principle will apply if the seller accepts negotiable instrument or other
security for payment of price;

(3) if the seller assents to a sub-sale;

(4) if the seller parts with the documents of title so as to exclude his title by
estoppel under the provisions of section 27 above; or which are negotiable by
custom of trade and according to parties;

(5) if the seller wrongfully refuses to deliver the goods, such a refusal being a
repudiation of the contract; or if the seller wrongfully converts the remaining
goods for his own use.39

32 Bolton v L&Y Rly, (1866) LR 1 CP 431, 439 : 39 Digest (Repl) 765, 2423.
33 Lakshmana Iyer v Muddaliar, AIR 1961 Mad. 342 : (1961) 2 Mad LJ 75.
34 Anthony Gordon Guest, Benjamin's Sale of Goods, 1st Edn Sweet & Maxwell, 1974, para 1077;
see also sections 23(2) and 25(2).
35 Anthony Gordon Guest, Benjamin's Sale of Goods, 1st Edn Sweet & Maxwell, 1974, para 1070.
36 Eduljee v John Bros, AIR 1943 Ngp 249 : (1944) Nag 37 : 209 IC 356.
37 Maneckji Pestonji Bharucha v Wadilal Sarabhai & Co, AIR 1926 PC 388 : 53 IA 92 : 28 Bom LR
777 : 50 Bom 360.
38 Walchandnagar Industries Ltd, Deputy General Manager (Commercial) Mr RJ Prakash Joyce v
The Official Liquidator and Indian Renewable Energy Development Agency Ltd, [2011] 162 Comp
Cases 464 (Mad) : (2011) 3 Comp LJ 66 (Mad) : (2011) 2 CTC 533 .
39 Gurr v Cuthbert, (1843) 12 LJ Ex 309 : 61 RR 787.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Stoppage in Transit

S. 50. Right of stoppage in transit.-

Subject to the provisions of this Act, when the buyer of goods becomes insolvent, the
unpaid seller who has parted with the possession of the goods has the right of
stopping them in transit, that is to say, he may resume possession of the goods as long
as they are in the course of transit, and may retain them until payment or tender of the
price.

[s 50.1] Basis of the right of stoppage in transit.—

The right of "stoppage in transit" is founded upon the plain reason of justice that one
man's goods shall not be applied to the payment of another man's debt. It is the right
not only to countermand delivery to the purchaser but to order delivery to the vendor.40

[s 50.2] Stoppage in transit.—

This is the second of the three rights of an unpaid seller (section 46). This right
consists in stopping the goods while they are in the possession of a carrier, or lodged
at any place in the course of transmission to the buyer, and on resuming possession
thereof, and retaining them until the price is tendered or paid. In order that the right to
stop goods in transit may be exercised, the following conditions must all be satisfied;
the seller must be unpaid; the buyer must be insolvent (see notes under sections 46
and 47 of the Sale of Goods Act, 1930); the seller must have parted with the
possession of the goods; and the buyer must not have acquired it.41 This last
condition, as we shall see under section 51, is that which is shortly expressed by saying
that the goods are in transit on land or sea or air.42

The right of stoppage in transit is against the goods only. Suppose the goods arrive at
its destination, in a damaged condition, the seller has a right against such damaged
goods only; the seller cannot make any claim to moneys paid by the underwriters to the
buyers for loss of goods by reason of nonarrival of the goods.43 The emphasis is that
this right is against the goods only. This right can be exercised in respect of such part
of the goods which are in transit, even though it is lost in respect of the goods already
taken delivery of by the buyer.

Lien and Stoppage in Transit Distinguished

Lien Stoppage in Transit

(1) Its essence is to retain possession, (1) Its essence is to regain possession.
(2) Seller's possession of the goods is the sine (2) Its sine qua non is
qua non. (i) seller parting with possession of goods,
(ii) possession with a carrier (middleman), and
 Lien Stoppage in Transit
(iii) buyer having not acquired possession.
(3) This right can be exercised even if the buyer (3) This right cannot be exercised unless the
is not insolvent. buyer is insolvent,
(4) When this right ends, the right to stop in (4) This right begins when the right of lien ends.
transit begins.

When the unpaid seller delivers the goods to a carrier for transmission to the buyer, the
unpaid seller, under section 49(l)(a) of the Sale of Goods Act, 1930, normally loses his
right of lien. However, he may exercise his right of stoppage and resume has lien (or
acquire a lien, if he had no lien earlier) if the buyer becomes insolvent while the goods
are in transit.

The common factors in respect of the said rights are that (i) the property in the goods
has passed to the buyer, (ii) the seller is unpaid as defined in section 45, and (iii) part
delivery of the goods does not affect exercise of these rights in respect of the
remainder of the goods not delivered, unless part delivery is delivery of the whole.

[s 50.3] Legal effect of stoppage in transit.—

The exercise of the right of stoppage in transit does not mean that the seller cancels
the sale or that the property re-vests in him.44 The seller gets the right to repossess the
goods. This right of stoppage in transit enables the unpaid seller to gain priority in
regard to the goods over the general creditors of insolvent buyer as by stopping the
goods in transit the carrier is put under an obligation by section 52(2) of the Sale of
Goods Act, 1930 to redeliver the goods to the unpaid seller who thereby reacquires
possession of the goods. Moreover, it puts the seller in a position in which he can
exercise his statutory power of resale under section 54(2) of the Sale of Goods Act,
1930.

After repossessing the goods the seller is bound to deliver the goods if the price is paid
or tendered within a reasonable time either by the buyer or the Official Assignee or
Receiver in bankruptcy or Assignee in insolvency. The benefit of the contract would
vest in the Official Assignee who may complete the contract for the benefit of the
creditors.45 The subsequent rights are stated in section 54.

The seller's right of stoppage in transit is subject to the particular lien of the carrier for
the conveyance of that particular consignment but it is paramount to any general lien
of the carrier against the consignee as well as the rights of the execution creditor of the
consignee. The right of seller to stop in transit could not be defeated as the creditor
could have no greater right in the goods than the purchaser himself.46

40 Narain Das v OA, AIR 1936 Sind 106 : 163 IC 875; Booth Steamship & Co v Cargo Fleet Iron Co,
(1916) 2 KB 570 , 580.
41 GIP Rly Co v Hanmandas, (1889) 14 Bom 57.
42 Kendall v Marshall, (1883) 11 QBD 356 .
43 Berndtson v Strang, (1868) LR 3 Ch App 588, 591.
44 US Steel Products Co v G W Rly, (1916) 1 AC 189; see section 54.
45 Jaffer v Budge Budge Jute Mills, (1907) 34 Cal 289 : (1906) ILR 33 Cal 702.
46 Smith v Goss, 170 ER 958 : 10 RR 684 : 1 Camp 282.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Stoppage in Transit

S. 51. Duration of transit.-

(1) Goods are deemed to be in course of transit from the time when they are
delivered to a carrier or other bailee for the purpose of transmission to the buyer,
until the buyer or his agent in that behalf takes delivery of them from such
carrier or other bailee.

(2) If the buyer or his agent in that behalf obtains delivery of the goods before their
arrival at the appointed destination, the transit is at an end.

(3) If, after the arrival of the goods at the appointed destination, the carrier or other
bailee acknowledges to the buyer or his agent that he holds the goods on his
behalf and continues in possession of them as bailee for the buyer or his agent,
the transit is at an end and it is immaterial that a further destination for the
goods may have been indicated by the buyer.

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

(5) When goods are delivered to a ship chartered by the buyer, it is a question
depending on the circumstances of the particular case, whether they are in the
possession of the master as a carrier or as agent of the buyer.

(6) Where the carrier or other bailee wrongfully refuses to deliver the goods to the
buyer or his agent in that behalf, the transit is deemed to be at an end.

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

[s 51.1] Sub-section (1): Duration of transit.—

In all cases stoppage in transitus it is necessary first of all to ascertain what is the transitus
or passage of the goods from, he possession of the vendor to that of the purchaser. The
moment the goods are delivered by the vendor to a carrier to be carried to the purchaser the
transitus begins. When the goods have arrived at their destination and have been delivered
to the purchaser or his agent, or when the carrier holds them as warehouseman for the
purchaser and no longer as carrier only, the transitus is at an end.47

The test is not whether the goods have arrived at their destination but having arrived,
whether there has been a delivery to the buyer or his agent or a demand by the buyer or
his agent for delivery of the goods and the wrongful refusal on the part of the carrier to
deliver the goods to the buyer or his agent.48 So the unpaid seller's right of stoppage
ends if the buyer (or his agent) is ready and willing to take delivery but the carrier
wrongfully refuses to deliver. And the carrier has no legal justification for refusing to
deliver if—e.g., he has no lien over the goods for unpaid freight and has not got valid
notice of stoppage in transit. There has been a difficulty in some cases where the
question would be whether the original transit is at an end and a fresh transit has
commenced. When the transit is a transit which has been caused by the terms of the
contract or by the directions of the purchaser to the vendor or to the carrier, the original
transit continues, but if after the original transit, the further transit is to continue to the
consequence of fresh directions given by the purchaser for a new transit, such a transit
may not be part of the original transit.48 Sub-section (3) clearly gives a clue or a
guideline that it is the carrier's acknowledgement to the buyer to hold the goods on his
behalf that such acknowledgement puts an end to the original transit. The goods need
not be in motion. If the goods are lodged at any place in the course of transmission to
the buyer, e.g., with a forwarding agent,49 or with a bonded warehouseman, who
happens to be the vendor, the mere fact that the buyer agrees to pay warehouse
charges for goods retained by the unpaid seller on his premise does not mean that the
seller has lost either his possession or his lien.50 [See also section 47(2) of the Sale of
Goods Act, 1930.] The vendors were also warehousemen of the goods sold under the
arrangement under which the purchasers had to pay warehouse rent. It was held that
the goods remained in the possession of vendors and as no actual delivery had been
made to purchasers, the vendor's lien revived on the insolvency of purchasers.50 "The
essence of stoppage in transitu is that the goods should be in the possession of a
middle man or of some person intervening between the vendor who has parted with
and the purchaser who has not yet received them."51 The mere arrival of the goods at
their destination is not sufficient to defeat the seller's right of stoppage. The transit
continues until the buyer takes delivery of the goods from the carrier.

In the Ex-parte Golding Davis & Co52 case, there was a contract between supplier and
his buyer for delivery of drums at Liverpool. The buyer resold the drums to his sub-
buyer at NY when the ship was lying at Liverpool. Later on, the buyer became insolvent
without paying the supplier, the bill of lading was made out in the name of the sub-
buyer, but the goods were not delivered to him. It was held that the original seller was
entitled to stop the goods in transit which were never ceased nor were altered. There
was no new or different journey than indicated. Mere transfer of bill of lading or sale of
goods by which the property in the goods may effect transfer but it does not thereby
terminate the transit. [See also section 46(1) of Sale of Goods Act, 1930]

Illustrations

(a) B, living at Madras, orders goods of A, at Patna, and directs that they shall be sent to
Madras. The goods are sent to Calcutta, and there delivered to C, a wharfinger, to be
forwarded to Madras. The goods, while they are in the possession of C, are in transit.

(b) B, at Delhi, orders goods of A, at Calcutta. A consigns and forwards the goods to B
at Delhi. On arrival there, they are taken to the warehouse of B, and left there. B refuses
to receive them, and immediately afterwards stops payment. The goods are in transit.

(c) B, a merchant of Bombay, orders goods of A, a merchant of Calcutta, to be delivered

at a named station in Bombay. A delivers the goods to a railway company for
conveyance to Bombay. B endorses and delivers the railway receipt to C. On arrival of
the goods at the station C pays the freight and loads the goods in his carts. The transit
is at an end, though the carts may not have left the goods yard of the railway station.53
[s 51.2] Sub-section (2): Anticipation by buyer of end of transit.—

If the buyer or the agent appointed by him to take delivery obtains delivery of the goods,
or with or without the consent of the carrier,54 before their arrival at the place to which
under the contract the goods are to be consigned, the transit is at an end. The effect of
this sub-section is that the buyer may anticipate the end of the transit, and thus put an
end to the seller's right of stoppage in transit. The buyer may under this sub-section
"obtain delivery" of the goods by the carrier's attornment to him before the arrival of the
goods at the appointed destination.55 Sub-section (3) provides for the case of the
carrier's attornment after the arrival of the goods at the appointed destination.

[s 51.3] Sub-section (3): Attornment by carrier to buyer.—

This sub-section provides that if, after the arrival of the goods at the place to which
under the contract the goods are to be consigned, the carrier expressly or by
implication enters into a new agreement, distinct from the original contract for carriage,
to hold the goods for the buyer, not for the purpose of expediting them to the place of
original destination pursuant to that contract, but in a new character, for the purpose of
custody on his account, and subject to in new or further order to be given by him, the
original transit is at an end.56 It is immaterial that the goods are to be conveyed from
the original destination to a further destination to which the buyer may wish to consign
them.

It may be observed that the seller's assent is not necessary under this clause. The mere
fact that the freight is not paid is not conclusive against such an agreement under this
clause.57

Illustration

B, who lives at Poona, orders goods of A at Bombay. A sends them to Poona by C, a

carrier appointed by B. The goods arrive at Poona and placed by C, at B's request, in C's
warehouse. The goods are held by C no longer as carrier, but as warehouseman or
bailee for B, and they are no longer in transit. (Note that there is no significance in the
fact that C was appointed as his carrier by B. C's capacity, whether he was appointed by
A or B, is that of a carrier, and it continues to be so until he attorns to B.)

[s 51.4] Sub-section (4): Goods rejected by buyer.—

This sub-section is based on the principle laid down in Bolton v L & Y Rly Co.58 It ruled
that:

the question of rejection will often depend on the intention of the consignee; if he has no
intention of taking possession, the transit is not at an end, despite the fact that the carrier
intended to deliver the goods.59 The arrival which is to divert the vendor's right of stoppage
in transit must be such as that the buyer has taken actual or constructive possession of the
goods; and that can not be so long as he repudiates them.60

Thus a bankrupt buyer by refusing to take delivery of the goods may give the unpaid
seller the opportunity to exercise his right of stoppage in order to gain priority over the
general creditor of the buyer.61

[s 51.5] Sub-section (5): Delivery on ship chartered by buyer.—

Whether a vessel chartered by the buyer is to be considered his own ship depends on
the charter-party. If the charterer is the owner for the voyage, i.e., if the ship has been
demised to him and he has employed the captain, so that the captain is his servant,
then a delivery on board of such a ship would be a delivery to the buyer [see Illustration
(a) below]. But though there is in such a case an actual delivery to the buyer's agent, the
seller may annex terms to such delivery, and so prevent it from being absolute and
irrevocable; he may, in other words, preserve his right of stoppage in transit by taking
bills of lading, making the goods deliverable to his order or assign. This the seller may
also do even if the buyer sends his own ship as in the illustrations given below. In fact,
there is little difference for the present purposes between the buyer sending his own
ship and his sending a ship demised to him under a charter party.

If the owner of the vessel chartered by the buyer has his own captain and crew on
board, so that the captain is the servant of the owner, and the effect of the charter is
merely to secure to the charterer the exclusive use and employment of the vessel, then
a delivery by the seller of goods on board is not a delivery to the buyer, but to an agent
for carriage.62

Illustrations

(a) B, a merchant of London, orders 100 bales of cotton of A, a merchant at Bombay. B

sends his own ship to Bombay for the cotton. The transit is at an end when the cotton
is delivered on board the ship.

(b) B, a merchant of London, orders 100 bales of cotton of A, a merchant at Bombay. B

sends his own ship to Bombay for the cotton. A delivers the cotton on board the ship,
and takes the bill of lading from the master, making the cotton deliverable to A's order
or assigns. The cotton arrives at London, but, before coming into B's possession, B
becomes insolvent. The cotton has not been paid for. A may stop the cotton.

[s 51.6] Sub-section (6): Wrongful refusal by carrier to deliver.—

If the carrier wrongfully refuses to deliver the goods to the buyer, the transit is at an
end, but not if he does so rightfully.

[s 51.7] Sub-section (7): Part delivery.—

Generally delivery of a part is not equivalent to delivery of the whole. The burden of
proof lies on the party who alleges the contrary. Delivery of an essential part of a
machine has been held to operate as a delivery of the whole.63

[s 51.8] Wrongful delivery by carrier.—

Any tortious act of the carrier after the goods are "at home" (i.e., have arrived at the
place of destination), such as delivery to a person purporting to claim under the unpaid
seller's authority, but not having such authority in fact, cannot defeat the buyer's right.64
Nor, on the other hand, does a mistaken or otherwise wrongful delivery of goods by the
carrier after notice to stop in transit defeat the right of the unpaid vendor.65
[s 51.9] Landing at public wharves.—

Public wharves in India are governed by the Major Port Trusts Act, 1963 and respective
State Port Trust Acts.66

When a shipowner lands the goods under the statute and his freight has been paid, his
right of control and lien over the goods is gone and thenceforward the goods are held
by the statutable wharfingers for the consignee alone. So long as the freight is not paid
the goods are subject to the shipowner's lien for freight and therefore transit is not
ended. But as soon as the freight is paid, the transit would be at the end.66

47 Per Cave, J., in Bethell v Clark, (1887) 19 QBD 553 , 561 : 20 QBD 615; see Bapuji Sorabji
Framji v Clan Line Steamers Ltd, 1910 (12) Bom LR 553 : 34 Bom 640.
48 Bird v Brown, (1850) 80 RR 775 : 4 Exch 786. See section 51(6) of the Indian Sale of Goods
Act.
48 Bird v Brown, (1850) 80 RR 775 : 4 Exch 786. See section 51(6) of the Indian Sale of Goods
Act.
49 Colin Blackburn, A Treatise on the Effect of the Contract of Sale, p 234.
50 Grice v Richardson, (1877) 3 App Cas 319 .
50 Grice v Richardson, (1877) 3 App Cas 319 .
51 Per Lord Cairns, J, in Schotsmans v Lancashire and Yorkshire Rly Co, (1867) LR 2 Ch App 332,
338.
52 Ex-parte Golding Davis & Co, (1883) 13 ChD 628 .
53 GIP Rly Co v Hanmandas, (1889) 14 Bom 57; see also 17 Bom 62.
54 Whitehead v Anderson, 9 M&W 534.
55 Anthony Gordon Guest, Benjamin's Sale of Goods, 1st Edn Sweet & Maxwell, 1974, para 1100.
56 Plischke v Allison Bros Ltd, (1936) 2 All ER 1009 .
57 Kendal v Marshal Stevens & Co, (1883) 11 QBD 356 ; Colin Blackburn, A Treatise on the Effect
of the Contract of Sale, 3rd Edn, pp 398–399.
58 Bolton v L & Y Rly Co, (1866) LR 1 CP 431.
59 Bolton v L & Y Rly Co, (1866) LR 1 CP 431, 438.
60 Bolton v L & Y Rly Co, (1866) LR 1 CP 431, 440.
61 Ex parte Cooper, (1879) 11 Ch Div 68.
62 Anthone Gordon Guest (ed), Benjamin's Sale of Goods, 6th Edn, Sweet & Maxwell, 2003, para
1018; Schotsmans v Lancashire & Yorkshire Rly, Co (1867) LR 2 Ch App 332, 335, 336.
63 Ex parte Cooper, (1879) 11 Ch Div 68.
64 Bird v Brown, (1850) 4 Ex 786 : 80 RR 775; Lilladhar v George Wreford, (1892) 17 Bom 62.
65 Litt v Cowley, (1816) 7 Taunt. 169 : 129 ER 68.
66 See Lilladhar v George Wreford, (1892) 17 Bom 62.
66 See Lilladhar v George Wreford, (1892) 17 Bom 62.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Stoppage in Transit

S. 52. How stoppage in transit is effected.-

(1) The unpaid seller may exercise his right of stoppage in transit either by taking
actual possession of the goods, or by giving notice of his claim to the carrier or
other bailee in whose possession the goods are. Such notice may be given
either to the person in actual possession of the goods or to his principal. In the
latter case the notice, to be effectual, shall be given at such time and in such
circumstances that the principal, by the exercise of reasonable diligence, may
communicate it to his servant or agent in time to prevent a delivery to the buyer.

(2) When notice of stoppage in transit is given by the seller to the carrier or other
bailee in possession of the goods, he shall re-deliver the goods to, or according
to the directions of the seller. The expenses of such re-delivery shall be borne by
the seller.

[s 52.1] Mode of stoppage in transit.—

The two modes are either taking actual possession of the goods or giving notice to the
carrier or bailee or his agent not to deliver the goods to the buyer or his agent. This
remedy could be exercised by obtaining the court's injunction or if the goods are in the
hands of the master, by arrest of the ship.67

[s 52.2] Notice.—

The section does not prescribe any form of notice, it may be oral or in writing. Telegram
stating "don't deliver" may be sufficient.68 Section provides that notice be given to the
person who is actually in possession (i.e., agent of carrier or the principal). The section
provides the precautions to be adopted in such cases. The essence is diligent
communication before delivery is effected. Notice to principal must be given in
advance so as to enable the principal to give effective notice to the person in actual
possession.

[s 52.3] Notice by unauthorised person.—

Notice of stoppage in transit if given by an unauthorised person will not be valid unless
the act is ratified by the seller before the transit is at the end.69 If ratification is made
after the transit has terminated, ratification is ineffectual to alter retrospectively the
ownership of the goods which had vested in the Official Assignee of the bankrupt
buyer.69
[s 52.4] Carrier's duty.—

As soon as the carrier receives notice of the seller's claim, he has to use reasonable
diligence in communicating it to his servant or agent to prevent delivery of the goods to
the buyer and then re-deliver the goods to the seller or according to the seller's
directions. In case of doubt, the carrier may interplead.70

The carrier cannot insist upon the buyer's consent. The carrier has no other alternative
but to comply with the seller's claim as aforesaid. If he refuses to do so, he may be
sued in conversion.70 Failure to exercise due and reasonable diligence may expose the
carrier to a suit for damages for breach of his statutory obligations.71

[s 52.5] Seller's duty.—

The carrier must give effect to the seller's claim as soon as he is satisfied that it is
made by or on behalf of the seller. In case of real doubt, the carrier ought to
interplead72 lest by re-delivering the goods to the seller he should render himself liable
at the suit of the buyer.73 Correlative to the duty of the carrier to the seller is the duty of
the seller to the carrier to give directions as to the delivery of the goods—and to pay the
freight due in respect of the goods. Failure to do so may render him liable in damages
to the carrier.74

67 The Tigress, (1963) 32 LJ Adm 97, 101, 102 : BR&L 38 : 167 ER 286; Tailor v GE Rly, (1901) 1
KB 774 .
68 Rijhumal v Michumal, 26 IC 424 : 8 Sind LR 65.
69 Bird v Brown, (1850) 4 Exch 786 : 80 RR 775.
69 Bird v Brown, (1850) 4 Exch 786 : 80 RR 775.
70 Jackson v Nicoll, (1839) 5 Bing NC 508.
70 Jackson v Nicoll, (1839) 5 Bing NC 508.
71 Litt v Cowley, (1816) 7 Taunt 169 : 17 RR 482 : 129 ER 68.
72 The Tigress, (1863) 32 LJ Adm 97 : BR&L 38 : 167 ER 286.
73 Taylor v GE Rly, (1901) 1 KB 774 .
74 Booth Steamship Co v Cargo Fleet Iron Co, (1916) 2 KB 570 .
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Transfer by Buyer and Seller

S. 53. Effect of sub-sale or pledge by buyer.-

(1) Subject to the provisions of this Act, the unpaid seller's right of lien or stoppage
in transit is not affected by any sale or other disposition of the goods which the
buyer may have made, unless the seller has assented thereto:

Provided that where a document of title of goods has been issued or lawfully
transferred to any person as buyer or owner of the goods, and that person
transfers the document to a person who takes the document in good faith and
for consideration, then, if such last mentioned transfer was by way of sale, the
unpaid seller's right of lien or stoppage in transit is defeated and, if such last
mentioned transfer was by way of pledge or other disposition for value, the
unpaid seller's right of lien or stoppage in transit can only be exercised subject
to the rights of the transferee.

(2) Where the transfer is by way of pledge the unpaid seller may acquire the pledgee
to have the amount secured by the pledge satisfied in the first instance, as far
as possible, out of any other goods or securities of the buyer in the hands of the
pledgee and available against the buyer.

[s 53.1] Effect of sub-sale or pledge by buyer on lien and stoppage.—

Suppose the buyer, without paying the whole of the price, sells the goods or pledges
them to another person. Does the sub-sale or pledge affect the unpaid seller's right of
lien or stoppage in transit, and, if so, to what extent? The present section affords an
answer to this question.

[s 53.2] Sub-section (1).—

Sub-section (1) says that neither the right of lien nor the right of stoppage is affected
by a sub-sale or pledge by the buyer, unless the seller has assented thereto. The assent
must be such an assent as in the circumstances shows that the seller intends to
renounce his rights against the goods. It is not enough to show that the fact of the sub-
sale or pledge has been brought to his notice and that he has assented to it merely in
the sense of acknowledging the receipt of the information.75 In Mordaunt Bros v British
Oil & Cake Mills Ltd,76 the Defendants sold a quantity of oil to a merchant who resold a
portion of it to the Plaintiffs giving them delivery orders addressed to the Defendants
requiring them to deliver to the plaintiffs ex our contract. The Defendants retained the
orders when presented and either made no comment or told the plaintiffs that they
were in order and entered the plaintiff's name in their books. The merchant who bought
from the Defendants, at first kept-up the payments and the Defendants duly delivered
the oil to the plaintiffs. Later the merchant defaulted in payment and so the Defendants
claimed to exercise their right of lien and refused to make further deliveries to the
plaintiffs. It was held that the Defendants were entitled to do so as it did not show that
the Defendants had intended to renounce his rights against the goods.

[s 53.3] Waiver of rights.—

There could be instances of acts of the seller accepting the delivery order presented by
sub-buyer and entering the sub-buyer's name in his books for delivery of the goods, or
the seller agreeing to deliver to the sub-buyer 60 maunds of barley out of the 80
maunds of barley out of his granary agreed to be sold to the buyer77 or the seller's
agent's endorsement on the buyer's delivery order that the goods would be delivered to
the sub-buyer who consequently took part of the delivery of the goods. It was held in
such cases that the seller had waived his lien and was estopped from exercising his
lien or right of stoppage as the seller had recognised the sub-buyer's title or had
assented. This sub-section, however, has to be read along with the proviso.

[s 53.4] Proviso.—

The proviso to sub-section (1) contemplates the case where (i) the seller has issued or
lawfully transferred a document of title to goods, e.g., a bill of lading or a railway receipt
[section 2(4)] to a person as buyer, and (ii) the buyer transfers the document by way of
sale or pledge to a person who takes the document in good faith and for consideration.
In such a case the proviso says that if the transfer was by way of sale, the unpaid
seller's right of lien or stoppage is defeated, and if it was by way of pledge, his right of
lien or stoppage can only be exercised subject to the rights of the pledgee. So the effect
of the rule is that the seller may still exercise his rights by paying off the pledgee. The
rule also accounts for the description of the bill of lading as negotiable instruments
"against stoppage in transitu only."78

The words "lawfully transferred to the buyer" the "document of title" predicate two
things that there must be firstly a document of title within the meaning of its definition.
The test is whether the document is used in the ordinary course of business as proof of
the possession of the goods or as proof of the control of the goods or as authorising or
purporting to authorise either by endorsement or delivery the possessor of the
document to transfer the goods thereby represented or to receive the goods. A delivery
chit will not be a document of title.79 Secondly, it must be lawfully transferred
according to law.

[s 53.5] Consideration.—

The pledge may be to secure an advance made specifically upon the document of title,
or it may be to secure an antecedent debt. In this respect the law as laid down in the
present section differs from that which was laid down in section 103 of the Indian
Contract Act, 1872. Under that section a transfer of a document of title by way of
pledge prevailed over the unpaid seller's rights only if the transfer was made to secure
an advance made specifically upon it. A document of title given to secure an antecedent
debt was not effectual against the unpaid seller. In this respect section 103 adopted
the decision of the Judicial Committee in Rodger v Comptoir d'Escompte de Paris.80 But
in Leask v Scott,81 the Court of Appeal in England dissented from this decision. It was
held in that case that a transfer of a document by way of pledge to secure a debt,
though antecedent, prevails over the rights of an unpaid seller. The Court observed that
there was no principle or authority to support the novel distinctions introduced by the
Judicial Committee. The antecedent debt may be a debt due upon a general balance of
account between the buyer and the pledgee or it may be any other existing debt due
from the buyer to the pledgee. The word used in this section is "consideration," and an
antecedent debt would be "consideration" within the meaning of the section. The result
is that under the law as contained in the section, a transfer of a document of title by
way of pledge to secure a balance of account, or any other existing debt, will prevail
over the rights of an unpaid seller. But the facts connected with the transfer must show
that it was agreed that such debt should be the consideration.82 The pledge of a
document of title specifically for a definite sum does not of itself and without any
agreement entitle the pledgee to hold the goods against the unpaid seller in respect of
the pledgee's general balance of account against the buyer, even if the pledgee is the
buyer's factor.83 See illustrations below. Further, the right of stoppage in transit is not
affected under this proviso if transfer of bill of lading is made by the seller to the buyer
or the bill of lading is issued in the first instance by the carrier to the buyer without the
privity of the seller. Also, if bill of lading though issued in the sub-buyer's name but is
not delivered to him, it will not defeat stoppage in transit.84

[s 53.6] In good faith.—

The transfer of a document of title, in order to affect the unpaid seller's right, must be
to a person who takes it "in good faith." A thing is to be deemed to be done "in good
faith" if it is in fact done honestly, whether it is done negligently or not.85 Mere notice of
the fact that the goods have not been paid for does not negative good faith, for a man
may be perfectly honest in buying or in taking a pledge of goods which he knows have
not been paid for. But he cannot be said to be acting in good faith if he has notice of
such facts as render the document of title not fairly and honestly transferable,86 e.g.,
notice that the buyer is insolvent.87

Illustrations

(a) A sells and consigns certain goods to B, and sends him the bill of lading. A being
still unpaid, B becomes insolvent, and, while the goods are in transit, assigns the bill of
lading for cash to C, who is not aware of B's insolvency. A cannot stop the goods in
transit.

(b) A sells and consigns certain goods to B. A being still unpaid, B becomes insolvent,
and, while the goods are still in transit, assigns the bill of lading for cash to C, who
knows that B is insolvent. The assignment not being in good faith, A may still stop the
goods in transit.

(c) A sells and consigns goods to B of the value of Rs 12,000. B assigns the bill of
lading for these goods to C, to secure specific advance of Rs 5,000 made to him upon
the bill of lading by C. B becomes insolvent, being indebted to C to the amount of Rs
9,000 including the Rs 5,000. A is not entitled to stop the goods except on payment or
tender to C of Rs 5,000. He is not bound to pay or tender the balance of Rs 4,000.

(d) A sells and consigns goods to B of the value of Rs 12,000. B assigns the bill of
lading for these goods to C, to secure the sum of Rs 5,000 due from him to C, upon a
general balance of account. B becomes insolvent. A is not entitled to stop the goods in
transit except on payment or tender to C of the Rs 5,000.

If the pledgee obtains the goods by virtue of pledge and sells them, the seller is entitled
to claim that the balance of the price shall be paid directly to him and not to the
insolvent buyer.88 This decision of the House of Lords was concerned with the rights of
pledgee over those of the seller but Professor Atiyah89 considers the decision
recognising the right of stoppage of the unpaid seller in that circumstance.

[s 53.7] Burden of proof.—

The burden of proof is on the second buyer to prove that he acted in good faith and has
given valuable consideration.90

[s 53.8] Sub-section (2).—

This sub-section means that where the pledgee has other security besides the goods
comprised in the document of title, the unpaid seller can call on him to resort to that
security before resorting to the goods covered by the document of title.91 This is
known as marshalling the securities.

[s 53.9] Railway receipt.—

Note that a railway receipt is a document of title to goods.92 See section 2(4).

75 Mordaunt Brothers v British Oil and Cake Mills Ltd, (1910) 2 KB 502 .
76 Mordaunt Brothers v British Oil & Cake Mills Ltd, (1910) 2 KB 502 .
77 Knights v Wiffen, (1870) LR 5 QB 660. Maund is unit of weight used in Indian subcontinent,
whose value, subject to small variations, hovered around 37 kg/82 lbs.
78 Willes, J., in Fuentes v Montis, (1868) LR 3 CP 268, 276.
79 Hukumat Rai Arjandas v Nandu Virumal, AIR 1941 Sind 78 : 195 IC 137.
80 Rodger v Comptoir d'Escompte de Paris, (1868) LR 2 PC 393.
81 Leask v Scott, (1877) 2 QBD 376 .
82 Glegg v Bromley, (1912) 3 KB 474 .
83 Spalding v Ruding, (1843) 3 Beav 376 : 49 ER 871.
84 Ex parte Golding Davis & Co, (1880) 13 Ch Div 628 : 4 RC 851.
85 General Clauses Act, 1897, section 3(20); See Rash Behari v Narain Das, AIR 1923 Cal 182 :
50 Cal 399 : 80 IC 485.
86 Cuming v Brown, (1808) 9 East 506 : 9 RR 603.
87 Vertue v Jewell, (1814) 4 Camp 31.
88 Kemp v Falk, (1882) 7 App Cas 573 .
89 Judah Philip Benjamin, Benjamin's Sale of Goods, 5th Edn, Sweet & Maxwell, 1975, p 264.
90 Rash Behari v Narain Das, AIR 1923 Cal 182 : 50 Cal 399 : 80 IC 485.
91 Re Westzinthus, (1833) 5 B&Ad 817 : 39 RR 665.
92 See Ramdas v Amerchand & Co, (1916) 43 IA 164 : 40 Bom 630.
The Sale of Goods Act

Chapter V Rights of Unpaid Seller Against the Goods

Transfer by Buyer and Seller

S. 54. Sale not generally rescinded by lien or stoppage in transit.-

(1) Subject to the provisions of this section, a contract of sale is not rescinded by
the mere exercise by an unpaid seller of his right of lien or stoppage in transit.

(2) Where the goods are of a perishable nature, or where the unpaid seller who has
exercised his right of lien or stoppage in transit gives notice to the buyer of his
intention to re-sell, the unpaid seller may, if the buyer does not within a
reasonable time pay or tender the price, re-sell the goods within a reasonable
time and recover from the original buyer damages for any loss occasioned by
his breach of contract, but the buyer shall not be entitled to any profit which may
occur on the re-sale. If such notice is not given, the unpaid seller shall not be
entitled to recover such damages and the buyer shall be entitled to the profit, if
any, on the re-sale.

(3) Where an unpaid seller who has exercised his right of lien or stoppage in transit
re-sells the goods, the buyer acquires a good title thereto as against the original
buyer, notwithstanding that no notice of the re-sale has been given to the
original buyer.

(4) Where the seller expressly reserves a right of resale in case the buyer should
make default, and, on the buyer making default, re-sells the goods, the original
contract of sale is thereby rescinded, but without prejudice to any claim which
the seller may have for damages.

[s 54.1] Re-sale by unpaid seller.—

This section deals principally with re-sale by an unpaid seller who has exercised his
right of lien, or has exercised the right of stoppage in transit and resumed possession
of the goods.

[s 54.2] Sub-section (1): Sale not rescinded by lien or stoppage in transit.—

To understand sub-section (1), we start with the fundamental proposition that in a

contract for the sale of goods mere default on the part of the buyer in payment of the
price does not entitle the seller to rescind the contract of sale unless the right to
rescind is expressly reserved [sub-section (4)]. Is the position altered if an unpaid seller
has exercised his right of lien so as to entitle him to retain possession of the goods
until payment of the price, or has exercised his right of stoppage in transit and thereby
again secured his lien? Sub-section (1) says, No. A contract of sale, it says, is not
rescinded by the mere exercise by an unpaid seller of his right of lien or stoppage in
transit. His only remedy, it would seem, is to re-sell the goods as provided by sub-
section (2) and claim damages arising out of the re-sale.93 These damages represent
the difference between the contract price and the price realised at the re-sale.

[s 54.3] Sub-section (2): Re-sale.—

As regards the rights and remedies of an unpaid seller who has exercised his right of
lien or stoppage in transit, Lord Blackburn expressed the opinion long ago:

that, viewing it as a practical question, the most convenient doctrine would be to consider
the vendor as entitled in all cases to hold the goods as a security for the price, with a power
of re-sale to be exercised, in case the delay of payment was unreasonably long, in such a
manner as might be fair and reasonable under all the circumstances.94

The statutory power of re-sale under section 54(2) arises if the property in the goods
has passed to the buyer. Where the property in the goods has not passed to the buyer,
the seller has no right of re-sale under section 54(2). So if the goods are unascertained
goods (i.e., no portion of a specified larger stock of goods lying in the seller's godown
was appropriated to the contract by the seller with the buyer's consent), the seller had
no right of re-sale of the goods under section 54(2) of the Sale of Goods Act, 1930. In
such a case the claim to recover the deficiency of re-sale is not sustainable but the
seller is entitled to claim by way of damages the difference between the contract price
and the market price on the date of the breach, i.e., the refusal by the buyer to accept
the goods.95 Where the contract expressly reserves the right of re-sale, the condition of
the passing of the property is not required. He should before exercising the right of re-
sale, give notice to the buyer of his intention to re-sell and thus give him an opportunity
to pay for and take delivery of the goods. The notice should be given without
unreasonable delay after the breach and the goods should be sold within a reasonable
time after the notice, otherwise the seller will not be entitled to damages arising on the
re-sale, but to damages as represented by the difference between the contract price
and the market price at the date of the breach.96 If the re-sale without proper notice
results in a profit, the difference between the contract price and the price realised on re-
sale is payable to the buyer. But a buyer's cause of action is not rendition of
accounts.97 This section does not apply if the sale has not taken place at all for non-
payment of money, if it is made a condition in the contract for sale. Consequently, the
unpaid seller in whom the title still vests and who could re-sell shall not be governed by
the rights set out through this section. 98 In case of goods of a perishable nature, the
notice of intention to re-sell does not appear to be compulsory.

The term "perishable" is not defined but means "perishable not only physically but in a
commercial sense becoming unmerchantable," for example, dates becoming
impregnated with sewage and in such a condition as to be no longer merchantable as
dates99 or the cement becoming so wet as to lose its properties as cement.100

In exercising his right of re-sale, the seller continues his capacity as an unpaid seller
and he does not thereby become an agent of the buyer.101

Pakka Adatia.—An agent who has made himself personally liable for the price of goods
purchased from his principal has the same rights to re-sell and of stoppage in transit as
a vendor.102

[s 54.4] Delay in re-sale.—

Sub-section (2) lays emphasis on the requirement of "reasonable time" to entitle an
unpaid seller to exercise his right of re-sale after notice. The seller should therefore not
be guilty of delay. Where, however, the buyer asked from time to time adjournments or
extensions of time to enable him to make payment and ultimately the seller had to re-
sell the goods, it was held that the delay caused thereby was fully justified as the delay
on the part of the seller was mainly due to unreasonable and unfair attitude adopted by
the buyer with a view to gain time. Hence the seller was not acting with undue delay in
not exercising his right of re-sale immediately.103

As per the Supreme Court decision, section 54(2) does not permit an unpaid seller to
exercise his right of re-sale without a notice. If the seller does not give the notice and
sells the goods; he must content himself with what the goods fetch and cannot ask for
more. But as soon as he gives notice, his right to re-sale arises and if for any reason
(such as re-sale taking place after an unreasonable time of the giving of the notice)
though the re-sale is not proper, it does not mean that the seller is deprived of the
damages contemplated by section 54(2). In such a case the damages are to be
ascertained not at the difference between what the re-sale realises and the price of the
goods but the difference is between what the court holds should have been realised by
the seller on a proper re-sale and the purchase-price.104

[s 54.5] Sub-section (3).—

On a re-sale by the unpaid seller, the purchaser acquires a good title thereto as against
the original buyer, even if no notice of re-sale has been given to him. This is as it should
be, for the original buyer being in default, is not entitled to the possession of the goods,
and therefore cannot sue to recover the goods or their value.

[s 54.6] Sub-section (4): Express reservation of right of re-sale.—

A re-sale by the seller, where a right of re-sale is expressly reserved in a contract of

sale, has the effect of rescinding the contract, but it does not prejudice any claim which
the seller may have for damages against the buyer. Stated briefly, the exercise of an
expressly reserved power of re-sale rescinds the contract of sale in which the power is
contained.

A common type of cases in which an express right of re-sale is reserved is afforded by

what are called contracts of "indents." These indents are as a rule in printed forms, and
almost every indent contains a clause that on default on the part of the buyer to pay for
and take delivery of the goods within a specified time the seller should be at liberty to
re-sell the goods, and that the buyer should pay all loss arising on the re-sale with
interest. In such cases the seller is entitled to re-sell the goods on default on the part of
the buyer, even if the property in the goods has not passed to the buyer, and to sue the
buyer for the loss on re-sale.105 But it is necessary to the exercise of this power that
the goods contracted for should at least have been appropriated for the purposes of
the contract. If there has been no such appropriation, there is nothing to which the
power of re-sale under the contract could attach, and the seller is not entitled in such a
case to the loss on re-sale, but to the difference between the contract price and the
market price at the dale of the breach.106 But it has been held that it is competent to
the parties by an apt clause to provide for the exercise of the power of re-sale even if
no goods are appropriated to the contract.107
[s 54.7] Rescission and arbitration clause.—

The rescission contemplated in sub-section (4) is something less than a complete

annulment of the contract and the arbitration clause contained in the contract of sale is
not wiped out and the seller's claim as to damages can be referred to arbitration
despite rescissioan.108

93 The decision in Baldeo Doss v Howe, (1880) 6 Cal 64 , does not seem to be good law.
94 Kemp v Falk, (1882) 7 App Cas 573 , 581.
95 PSNS Ambalavana Chettiar & Co Ltd v Express Newspapers Ltd, AIR 1968 SC 741 : (1968) 2
SCJ 259 .
96 Prag Narain v Mul Chand, (1897) 19 All 535 ; Hirji Bhannal v Bombay Cotton Ltd, AIR 1958
Bom 411 : (1957) 59 Bom LR 4 : ILR 1957 Bom 163 .
97 UOI v Munna Lal, AIR 1956 P&H 34 .
98 Pawan Hans Helicopter Ltd v AES Aerospace Ltd, 2008 (2) Arb LR 63 : 2008 (103) DRJ 174 .
99 Asfar & Co v Blundell, (1896) 1 QB 123 .
100 Duthie v Hilton, (1868) LR 4 CP 138.
101 Dhanrajmal Gobindram v Shamji Kalidas & Co, AIR 1961 SC 1285 : (1962) 64 Bom LR 169 :
[1961] 3 SCR 1029 .
102 Harparshad v Jindar Parshad, (1934) 15 Lah 496 : 150 IC 109 : ('34) AL 191; Balmukund v
Jagan Nath, AIR 1963 Raj. 212 ; Girdharlal v Jethmal, AIR 1963 AP 185 .
103 Sheo Narain v New Sevan Sugar and Gur Refining Co Ltd, AIR 1938 All 272 .
104 Hirji Bharmal v Bombay Cotton Ltd, AIR 1958 Bom 411 : (1957) 59 Bom LR 4 .
105 Moll Schutte & Co v Luchmi Chand, (1898) 25 Cal 505 , dissenting on this point from Yule &
Co v Mahomed Hossain, (1896) 24 Cal 124 ; Basdeo v John Smidt, (1899) 22 All 55 , 65; Best v
Haji Muhammad, (1898) 23 Mad 18; Sheo Narain v New Sevan Sugar and Gur Refining Co Ltd, AIR
1938 All 272 : 175 LC 552.
106 Angullia & Co v Sassoon & Co, (1912) 39 Cal 568 .
107 Angullia & Co v Sassoon & Co, (1912) 39 Cal 568 , at p 581.
108 Gulabchand v Sarangpur Cotton Mfg. Co, AIR 1959 Bom 158 : 60 Bom LR 37; Karam Narain v
Volkart Bros, AIR 1946 Lah 116 : (1946) Lah 692 (FB); Dhanrajmal Gobindram v Shamji Kalidas &
Co, AIR 1961 SC 1285 : 64 Bom LR 169 : [1961] 3 SCR 1020 .
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 55. Suit for price.-

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

(2) 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 has not
passed and the goods have not been appropriated to the contract.

[s 55.1] Suits for breach of the contract.—

This chapter deals with suits for breach of a contract of sale. These are:

(i) a suit for the price by the seller against the buyer [section 55];

(ii) a suit for damages by the seller against the buyer for non-acceptance of the
goods [section 56];

(iii) a suit for damages by the buyer against the seller for non-delivery of the goods
[section 57];

(iv) a suit for specific performance by the buyer against the seller [section 58];

(v) a suit by the buyer against the seller for breach of warranty [section 59];

(vi) a suit for damages by seller or buyer for anticipatory breach of contract [section
60].

[s 55.2] Suit for price.—

Sub-section (1) deals with a contract where the property in the goods has passed
irrespective of delivery. This will involve two types of cases as follows:

(i) suit for price of goods sold and delivered;

(ii) suit for price of goods bargained and sold (even though not delivered).

Besides the second remedy, where the goods have not come into the actual
possession of the buyer, the seller has the right of lien and stoppage in transit—dealt
with in sections 46 to 54 above.

Even if the property in the goods has not passed to the buyer, the seller may maintain
an action for the price if the price is payable on a day certain, the words "payable on a
day certain" mean "at a time specified in the contract not depending upon a future or
contingent event."1 The contingent events contemplated by sub-section (2) are (i) non-
delivery, (ii) non-appropriation of the goods to the contract, and (iii) property in the
goods continuing to vest in the seller; otherwise the seller's only remedy is a suit for
damages for non-acceptance of the goods under section 56 below.

[s 55.3] "Buyer wrongfully neglects or refuses to pay".—

These are the important and key words. The said expression has been used in both the
sub-sections. Therefore, when a seller becomes entitled to sue for the price, he has to
prove the said acts on the part of the buyer. The meaning of the term "wrongful" must
be determined by looking to the term of the contract. Consequently, if the sale be on
credit, no action lies until the period of credit has expired.2

Price may be payable either against delivery or after a time where the goods are sold
on credit; the period of credit should be allowed to expire before a seller can sue for the
price. If a negotiable instrument has been accepted for the payment of the price, unless
the negotiable instrument is dishonoured the seller cannot sue for the price. Where a
bill of cheque is given for the price, generally it operates as conditional payment.3 If the
bill is dishonoured, the debt revives and the buyer may sue either on the bill or on the
original consideration.4

In Stein Forbes & Co v County Tailoring Co,5 goods were sold C.I.F., payment by cash
against documents on arrival of ship. The goods were shipped in three instalments and
buyer wrongfully refused to pay against documents relating to third shipment. It was
held that as the property in the goods has not passed to the buyer, no action for price
can be brought by the seller under section 49(1) of the English Sale of Goods Act, 1979
corresponding to section 55(1) of the Sale of Goods Act, 1930 despite the fact that it is
the wrongful act of the buyer which prevented the passing of the property in his own
favour. Also, the facts of the case did not satisfy section 49(2) of the English Sale of
Goods Act, 1979 [section 53(2) of the Sale of Goods Act, 1930] i.e., "the price is payable
on a day certain irrespective of delivery", as their contract clearly provided payment of
price against delivery, i.e., against delivery of the document.

Lastly, the distinction between action for the price and an action for damages is of
some practical significance. As Prof Atiyah remarks,

In purely monetary terms there will usually be a substantial difference between the price of
the goods and damages for non-acceptance. Moreover, if the property has passed to the
buyer and the seller is entitled to sue for the price, he is under no obligation to mitigate his
damages by attempting to re-sell the goods or otherwise.6

1 Shell-Mex Ltd v Elton Cop Dyeing Co Ltd, (1928) 34 Comp Cases 39, 43.
2 Ferguson v Carrington, 109 ER 22 : 9 Karn & C 59. See also Helps v Winterbottom, 109 ER 1203,
39 Digest (Repl) 735, 2137.
3 Gunn v Bolckow Vaghan & Co, (1875) 10 Ch App 491.
4 Davis v Reilly, (1898) 1 QB 1 .
5 Stein Forbes & Co v County Tailoring Co, (1916) 86 LJ KB 448.
6 The Sale of Goods Act, 5th Edn, pp 272–273.
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 56. Damages for non-acceptance.-

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the
seller may sue him for damages for non-acceptance.

[s 56.1] Damages for non-acceptance.—

This section deals with a suit for damages by the seller. The next section deals with a
suit for damages by the buyer. Before suing for damages, the buyer may consider if he
is entitled to specific performance (as contemplated in section 58); the parties may
also wait till the date of delivery and either sue for price of goods or delivery of goods
(as contemplated in section 60).

The previous section dealt with a seller's right to file a suit for the price of the goods. In
this connection the provisions of section 60 may also be considered by the students.
This section and section 60 deal with the seller's rights to sue for damages.

But before the seller becomes entitled to sue for damages, there must be either a
wrongful neglect or refusal on the part of the buyer to accept and pay for the goods. If
the seller's case does not fall under any of the sub-sections of the preceding section,
he will have to sue for damages under this section.

[s 56.2] Measure of damages.—

The section says that where the buyer wrongfully neglects or refuses to accept and pay
for the goods, the seller may sue him for damages for non-acceptance of the goods.
The next section provides that 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. Both
these sections are silent as to the measure of damages, as that subject is dealt with in
section 73 of the Indian Contract Act, 1872, to which the student is referred. It is
unnecessary to repeat here what has been stated in the notes under that section. It is
sufficient to state here the leading rules applicable to cases both under this and the
following section.7 They are as follows:

(i) Where there is an available market for the goods in question, the measure of
damages is prima facie to be ascertained by the difference between the contract
price and the market price at the date of the breach.

(ii) Where there is no such market, the measure of damages is the estimated loss
directly and naturally resulting, in the ordinary course of events, from the breach
of the contract. Thus if the exact sort of goods which the buyer has contracted
for may not be obtainable, he may buy similar goods and may claim from the
seller the difference in price.8 If no such purchase is made by the buyer, but the
buyer has during the contract period settled contracts for the same kind of
goods with other persons, the rates at which those contracts were settled may
 afford a basis for ascertaining the damages.9 When on the breach of a contract
for sale of goods the goods cannot be replaced in the market, the proper
measure of damages is the profit which the purchaser would have made if the
contract had been carried out.10

[s 56.3] Nature of damages.—

Section 56 and section 57 deal with the question of damages arising from non-
acceptance or from non-delivery. Section 60 deals with the question of damages
arising as a result of "anticipatory breach." Section 59 deals with the question of
damages arising in consequence of a breach of warranty. Section 61 refers to a
question of special damages. The measure of damages under section 59 and under
section 61 would be quite different from the one under sections 56, 57, 58 and 60.

7 English Sale of Goods Act, 1979, sections 50 and 51; B Muniswami Chetty & Co v D
Muniswami Chetty & Co, AIR 1944 Mad. 416 : (1945) Mad 180.
8 Hinde v Liddell, (1875) LR 10 QB 265.
9 Jagmohandas v Nusserwanji, (1902) 26 Bom 744.
10 Leavey & Co Ltd v George H Hirst & Co Ltd, (1944) 1 KB 24 .
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 57. Damages for non-delivery.-

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.

[s 57.1] Buyer's remedies.—

The breach of contract for which a buyer may have to take action are:

(i) for specific performance (section 58).

(ii) a suit for damages for seller's default in delivering the goods even when the
property has passed to him (section 57).

(iii) defect in the goods delivered, i.e., breach of warranty (section 59).

Under the aforesaid categories (ii) and (iii) the buyer may sue for damages or for
wrongful detention, trover or conversion of the goods. This remedy would be open
when the property in the goods has passed to the buyer.

[s 57.2] Damages for non-delivery.—

A buyer may sue for damages for non-delivery of the goods provided the seller
wrongfully neglects or refuses to deliver the goods. The wrongful neglect or refusal to
deliver the goods may arise in the following circumstances:

(i) where the buyer has prepaid the price wholly or partly and the goods are not
delivered.

(ii) where the seller has unreasonably delayed delivering the goods.

Where a buyer has failed to pay the price within 15 days of the date of delivery of the
goods in respect of prior deliveries and the seller withholds the delivery, the seller
cannot be said to be neglecting or refusing to deliver the goods. The seller would be
entitled to prove impossibility of performance of the contract on his part.
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 58. Specific performance.-

Subject to the provisions of Chapter II of the Specific Relief Act, 1877 (1 of 1877), in
any suit for breach of contract to deliver specific or ascertained goods, the Court may,
if it thinks fit, on the application of the plaintiff, by its decree direct that the contract
shall be performed specifically, without giving the defendant the option of retaining the
goods on payment of damages. The decree may be unconditional, or upon such terms
and conditions as to damages, payment of the price or otherwise, as the Court may
deem just, and the application of the plaintiff may be made at any time before the
decree.

[s 58.1] Equitable rights.—

This section is the only one in the Sale of Goods Act, 1930 which deals with the
equitable right to a specific performance. The present section makes the power of the
Court to decree Specific delivery of chattel subject to the provisions of Chapter II of the
Specific Relief Act, 1877 (Specific Relief Act, 1963). By this, the specific relief may be
granted when compensation in money would not afford the buyer adequate relief or
when it would be extremely difficult to ascertain the actual damage caused,11 but the
court will not grant relief when the goods were articles of commerce readily available in
the market. In Behnke v Bede Shipping Co Ltd,12 the article was found to be of peculiar
importance and of unique value and so the court granted the relief, against the seller.
There was a contract to sell a ship to a German Shipowner. The ship was an old ship
but her engine and boilers were new and such as to justify the German Regulations and
be registered.

[s 58.2] Specific performance.—

This section furnishes a remedy to a buyer. This section does not apply unless the
goods are specific or ascertained. Thus a contract to supply all coal that may be
required for the buyer's steel works is not a contract for specific or ascertained goods,
and it cannot, therefore, be specifically enforced.13 A contract to sell a moiety of
special wheat about to be shipped is not a contract for the sale of "specific or
ascertained goods" on the ground that there was no ascertainment or identification of
the moiety of the goods out of the cargo in bulk."14

11 Specific Relief Act, 1963, section 10.

12 Behnke v Bede Shipping Co Ltd, (1927) 1 KB 649 .
13 Dominion Coal Co v Dominion Iron & Steel Co, (1909) AC 293 .
14 Re Wait, (1927) 1 Ch 606 .
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 59. Remedy for breach of warranty.-

(1) Where there is a breach of warranty by the seller, or where the buyer elects or is
compelled to treat any breach of a condition on the part of the seller as a breach
of warranty, the buyer is not by reason only of such breach of warranty entitled
to reject the goods; but he may—

(a) set up against the seller the breach of warranty in diminution or

extinction of the price; or

(b) sue the seller for damages for breach of warranty.

(2) The fact that a buyer has set up a breach of warranty in diminution or extinction
of the price does not prevent him from suing for the same breach of warranty if
he has suffered further damage:

[s 59.1] Remedy for breach of warranty.—

The distinction between a condition and a warranty has already been pointed in section
12 above.

Breach of conditions or warranties may be relating to title to the goods, quality,

merchantability, description and fitness of the goods. See comments under sections
14, 15, 16 and 17.

A breach of a condition, e.g., a condition as to fitness (section 16), entitles the buyer to
treat the contract as repudiated and to reject the goods; but he may elect to treat the
breach of the condition as a breach of warranty in which case he is entitled to the
remedy prescribed by the present section (section 13). If the buyer has already
accepted the goods, the breach of the condition can only be treated as a breach of a
warranty (section 13(2)), and the buyer's remedy is that prescribed by the present
section. A breach of a warranty, as distinguished from that of a condition, docs not
entitle the buyer to reject the goods (section 12), his only remedy is that prescribed by
the present section.

[s 59.2] Four remedies.—

(i) He may claim a deduction from the price if the loss occasioned by the breach of
warranty is less than the price. "The rule of a reduction or extinction of the price is not a
set-off but it applies only to cross claims under the same contract",15 (ii) He may refuse
to pay the price altogether, if the loss equals the price, (iii) If the loss exceeds the price,
he may not only refuse to pay the price, but also claim the excess, (iv) Or he may pay
the price in all these cases, and sue the seller for damages for the breach of warranty.
Buyer may either sue for his claim or may claim a set-off or may file a counter-claim.
[s 59.3] Measure of damages for breach of warranty.—

The section is silent as to the measure of damages for breach of warranty, presumably
because the Legislature thought that damages would be governed by the provisions of
section 73 of the Indian Contract Act, 1872. On that footing the measure of damages
would be the loss or damage directly and naturally resulting in the usual course of
things from the breach of warranty.16 In the case of breach of warranty of quality such
loss is prima facie the difference between the value of the goods at the time of delivery
to the buyer and the value they would have had if they answered to the warranty.17

The special value of the goods to the buyer is not to be taken into account. The value of
the goods as warranted is their intrinsic value and not any special value which the
goods may have to the buyer. Where 20 tons of super phosphate guaranteed to contain
30% of phosphate of lime was sold at 5 gms a ton and the goods delivered contained
low percentage of phosphate of lime and such goods were valued at 2 gms per ton, the
damages were awarded at the rate of 3 gms per ton.18 In case of a sale of cigarettes
which turned out to be mildewed and unfit for consumption, damages were awarded on
the basis of the difference between the contract price and the price realised on sale.19

As a general rule the date at which the difference between the two values is to be fixed
is the date of delivery unless the circumstances warrant taking the value as of a later
date.20 If there is no difference in the values, the court may award the nominal
damages. In case of a chain of contracts, the seller may have to pay to his purchaser
damages which were obtained by the last purchaser in the chain.21

Although a buyer is entitled to claim damages, one important duty cast upon him is
that he should take reasonable steps to minimize the damages. The act of the last
seller in defending the action for damages instituted by the last ultimate buyer was
held to be a reasonable step.22 The buyer can recover no more than he would have
suffered if he had acted reasonably.

[s 59.4] Sub-section (2).—

This sub-section clearly indicates that the right to claim damages is in addition to the
right to claim diminution or extinction of the price. If in a suit by the seller for the price
the buyer has set up his claim for diminution of price, he is thereby not precluded from
filing a suit for damages. This is clearly intended to state that the right to damages is
an additional right and not an alternative one.

15 Benjamin's Sale of Goods Act, Sweet & Maxwell 1974.

16 As to the English law, see the Sale of Goods Act, 1893, section 53(2), (3).
17 Mangilal v Shantibai, AIR 1956 Ngp 221 .
18 Dingle v Hare, (1859) 7 CB 145 (NS) : 121 RR 424.
19 UOI v Rallia Ram, AIR 1963 SC 1685 : (1964) 3 SCR 164 .
20 Van Den Hurk v R Martens, (1920) 1 KB 850 (goods intended for export—known to seller and
buyer).
21 Kasler & Cohen v Slavouski, (1928) 1 KB 78 (Fur Collars); British Oil and Cake Co v Burstall,
(1923) 39 TLR 406 (oil cakes).
22 Kasler and Cohen v Slavouski, (1928) 1 KB 78 .
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 60.

Repudiation of contract before due date.-Where either party to a contract of sale

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

[s 60.1] Repudiation of contract before due date: anticipatory breach.—

Very often situations may arise wherein the performance is to take place in future but
before the time for performance arrives, the promisor says that he will not carry out his
part of the performance when the time for performance arrives. Strictly speaking, it is
no breach not to do an act at a time when its performance is not yet contractually due.
It is for this reason that this section gives an option to the promisee either to wait till
the date of performance treating the contract as subsisting or to treat the contract as
rescinded in anticipation. This section reproduces the rule laid down in Frost v Knight.23
The law on the subject was thus stated by Cockburn, CJ, in that case:

The promisee, if he pleases, may treat the notice of intention as inoperative, and await the
time when the contract is to be executed and then hold the other party responsible for all
the consequences of non-performance but in that case he keeps the contract alive for the
benefit of the other party as well as his own; he remains subject to all his own obligations
and liabilities under it, and enables the other party not only to complete the contract, if so
advised, notwithstanding his previous repudiation of it, but also to take advantage of any
supervening circumstances which would justify him in declining to complete it. On the other
hand, the promisee, may if he thinks proper, treat the repudiation of the other party as
wrongful putting an end to the contract, and may at once bring his action as on a breach of
it; and in such action he will be entitled to such damages as would have arisen from the
non-performance of the contract at the appointed time, subject, however, to abatement in
respect of any circumstances which may have afforded him the means of mitigating his
damage.

The question whether or not there has, in fact, been repudiation depends on the facts
of each particular case.24

A contract is repudiated when a party to the contract shows by his conduct an intention
not to be bound by the contract or which he refuses to perform or has disabled himself
from performing it.25 This section gives an option to the party. The party cannot sue for
damages on ground of anticipatory breach and at the same time treat the contract as
subsisting.

[s 60.2] Repudiation and rescission.—

The rescission is the result of repudiation together with the acceptance of repudiation.
Both should co-exist for the purpose of rescission. Acceptance of repudiation may be
by an institution of a suit.
[s 60.3] Anticipatory breach and measure of damages.—

The measure of damages is not affected by the date of the buyer's refusal to accept. It
is fixed by the difference between the contract price and the market price on the day
when they ought to have been delivered or accepted,26 as the case may be, or on the
several days if the delivery was to be by instalments,27 the fundamental principle being
that the plaintiff is to be put, as near as may be, in the same condition as if the contract
had been performed. Thus if A agrees in January 1931, to sell and deliver goods to B on
31 August 1931, and on 10 June 1931, B intimates to A that he will not pay for and take
delivery of the goods, and A treats the repudiation as an immediate breach of the
contract, A may at once sue B for damages for the breach. But the measure of
damages is not fixed by the difference between the contract price and the market price
on 10 June 1931, but by the difference between the contract price and the market price
on 31 August 1931. If the goods were to be delivered by instalment at the end of the
three months of August, September and October, the measure of damages is the sum
of the differences between the contract price and the market price of the several
instalments on the respective final days of performance.27 The same rules apply where
the seller, before the due date, has refused to carry out the contract.28 In Millett v Van
Heck & Co,29 the seller repudiated the contract before the date of performance and this
was accepted by the buyer who claimed that the damages should be fixed by reference
to the market price at the date of rescission, but this was rejected as the Sale of Goods
Act, 1930 never intended to vary what was the rule of law at the time when it was
passed, namely, that the damages are to be fixed in reference to the time for
performance of the contract subject to questions of mitigation. The measure of
damages is not affected by the date of the defaulting party's repudiation and is fixed by
the difference between the contract price of the goods and the market price on the day
when delivery ought to have been accepted, i.e., the date fixed for delivery.

If either party accepts the repudiation of the other as an immediate breach, he must act
reasonably by way of minimising the loss caused thereby. As stated in section 73 of
the Indian Contract Act, 1872 "in estimating the loss or damage arising from a breach
of contract, the means which existed of remedying the inconvenience caused by the
non-performance of the contract must be taken into account." Thus, if the contract is
for delivery in May, and the buyer repudiates the contract in April, the seller will not be
justified in holding back the goods on a falling market, and thus enhancing the
damages, if he could have sold them at a higher price in April.30 Conversely, if the
repudiation is by the seller, the buyer has no right to wait on a rising market and claim
damages for the increased price in May, if he could have bought against the contract at
a lower price in April.31 In either case the party must act in a reasonable way to
mitigate the effects of the breach.

Where the contract is one for the manufacture and delivery of goods, e.g., chairs, and it
is repudiated by the buyer before the due date, the measure of damages is ordinarily
the difference between the contract price and the cost of production and of delivery,
that is to say, the seller's profit.32

[s 60.4] Election to treat contract as subsisting—Legal effect—Grounds to

justify repudiation.—

The wrongful repudiation of a contract by one party may operate as a waiver of

conditions precedent to be performed by the other. The leading case on the subject is
Braithwaite v Foreign Hardwood Co,33 In that case the plaintiff agreed to sell rosewood
to the defendants to be delivered by instalments and paid for by cash against bills of
lading. The defendants repudiated the contract before the first instalment arrived. They
alleged that the plaintiff (seller) had broken a term that he would not ship rosewood to
the buyers' competitors. Ultimately, however, it was realised that the contract contained
no such term and so the above-mentioned buyers' repudiation could not be justified on
the ground given by the buyers. The plaintiff did not, however, accept the buyers'
repudiation and kept the contract subsisting. On its arrival the plaintiff tendered the bill
of lading, but the defendants repeated their refusal, and the plaintiff resold the goods.
The plaintiff similarly tendered the second instalment, but this also was refused by the
defendants, and resold by the plaintiff. The defendants subsequently discovered that
the first instalment was inferior to the contract quality. The plaintiff sued for non-
acceptance of the goods. The defendants contended as to the first instalment, a
certain quantity of rosewood was not of the contract description and was of inferior
quality. It was held that the defendants had by repudiating the contract waived the
performance of the conditions by the plaintiff and that the plaintiff was entitled to
recover the difference between the contract price and the price realised at the re-sale in
respect of both instalments. This case has been supposed to imply that a party
repudiating for one reason cannot afterwards justify his repudiation on any other
ground. This reasoning was felt incorrect in a different case by the House of Lords
observing that for giving a reason should not place him in a worse position than a party
who gives no reason and can justify his repudiation on any ground.34 Lord Sumner in
the House of Lords felt that defendants repudiating the contract for wrong reason or
for no reason at all should have the right to prove that there were at the time facts in
existence which provided a good reason or justification in answer to plaintiff's case.35
Accordingly he felt better to allow defendants to raise different grounds which he had
not depended on at the time of repudiating the contract. The Privy Council have
accordingly held that a party repudiating is entitled to justify his repudiation on any
ground which existed at the time when he repudiated,36 whether he knew of that
ground or not at the time or whether he gave no reason or whether he gave some other
and invalid reasons.

23 Frost v Knight, (1872) LR 7 Ex 111, at pp 112, 113.

24 Hiralal & Sons v Aspirants Mill, AIR 1956 P&H. 13 .
25 Rash Behary v Nrittya Gopal, (1906) 33 Cal 477 , 481.
26 Phillpotts v Evans, (1839) 5 M&W 475 : 52 RR 802; Maung Po Kyaw v Saw Tago, AIR 1933
Rang 25 .
27 Brown v Muller, (1872) LR 7 Ex 319.
27 Brown v Muller, (1872) LR 7 Ex 319.
28 Roper v Johnson, (1873) LR 8 CP 167; Krishna Jute Mills Co v Innes, (1911) 21 Mad LJ 18 : 9
IC 104.
29 Millett v Van Heck & Co, (1921) 2 KB 369 .
30 Roth v Taysen, (1896) 1 Comp Cases 306.
31 Nickoll v Aston, (1900) 2 QB 298 , 305.
32 Cort v Ambergate Rly Co, (1851) 17 QB 127 .
33 Braithwaite v Foreign Hardwood Co, (1905) 2 KB 543 .
34 British & Benningtons Ltd v NW Cachar Tea Co, (1923) AC 48 (UKHL).
35 British & Benningtons Ltd v NW Cachar Tea Co, (1923) AC 48 at 71.
36 Nune Sivayya v Maddu Ranganayakulu, AIR 1935 PC 67 : (1935) 62 IA 89 : 58 Mad 670 : 37
Bom LR 538 : 154 IC 1097 : (1935) 41 LW 775 .
The Sale of Goods Act

Chapter VI Suits for Breach of the Contract

S. 61.

Interest by way of damages and special damages.-

(1) Nothing in this Act shall affect the right of the seller or the buyer to recover
interest or special damages in any case where by law interest or special
damages may be recoverable, or to recover the money paid where the
consideration for the payment of it has failed.

(2) In the absence of a contract to the contrary, the Court may award interest at
such rate as it thinks fit on the amount of the price—

(a) to the seller in a suit by him for the amount of the price—from the date of
the tender of the goods or from the date on which the price was payable;

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

[s 61.1] Interest.—

This section saves the right which a party may have to recover interest or special
damages, or to recover money paid on failure of consideration. The Interest Act (Act
XXXII of 1839) permitted interest to be awarded at the current rate in the case as
under:—

(a) on all debits or certain sums payable at a certain time under a written
instrument from the due date mentioned in the agreement.

(b) in other cases from the date the demand in writing is made for interest from the
date of demand.

Sub-section (1) affirms the principle laid down by the proviso in the Interest Act, 1839,
which lays down that "interest shall be payable in all cases in which it is now payable by
law." This proviso applies to cases in which Court of Equity exercises jurisdiction to
allow interest.37 Interest which can be said to be payable in law would be such as (i)
under sub-section (2), and (ii) under section 80 of the Negotiable Instruments Act,
1881. Interest prior to the suit may be awarded: (i) if there is an agreement for the
payment of interest at a fixed rate, or (ii) it is payable by usage of trade having the force
of law or (iii) under the provisions of substantive law.37 The provisions of the
substantive law, i.e., the Interest Act have been stated above. The legislature has,
therefore, laid down rules as regards interest for two specific cases which constantly
arise in practice. This was necessary in view of the conflict of decisions on the subject.

[s 61.2] Interest in suit for price.—

If under a contract of sale the seller lends the goods to the buyer, and the buyer
wrongfully refuses to accept and pay for them, the Court may award interest on the
price from the date of the tender. If the price is payable on a day certain irrespective of
delivery, interest will run from that day and if the goods are sold on credit, interest will
run from the expiry of the credit.

[s 61.3] Contract to the contrary.—

A clause in a tradesman's bill charging interest at a certain rate does not constitute a
contract to the contrary.38

[s 61.4] Interest in suit for refund of price.—

If the buyer pays the price, and the seller fails to deliver the goods, the buyer is entitled
in a suit for a refund of the price to interest from the date of payment of the price.
Interest at 6% per annum was allowed from the date the price is payable39 and from
the sale of the transaction.40 In Vijay Industries v NATL Technologies Ltd,41 the Supreme
Court drew the justification for awarding interest not merely to the provisions of section
61(2)(a) of the Sale of Goods Act, 1930 but found that interest may be held to be
payable in terms of section 3 of the Interest Act, 1978 as also in terms of sections 5
and 6 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial
Undertakings Act, 1993. In Bharat Electronics Ltd v Shyam Telecom Ltd,42 the defendant
had accepted a part of the supply of equipment effected by the plaintiff and
complained that the contract failed with regard to another part on account of defect in
the goods. The defects in those units were rectified by the plaintiff company after the
last date stipulated for supply of the equipment but as the defendant did not accept
them at a later date no liability to pay arose. As regards the units which were free of
defects, the court held that defendant had no right to ask the plaintiff to take all the
goods back. Adverting to the claim for interest for goods sold at "cash credit rate", the
court observed that there was no agreement between the parties for payment of
interest. No custom or usage for term for payment of interest had either been pleaded
or proved by the Plaintiff. Interest could not be awarded as damages. However, since
this was a suit for price for goods sold and delivered, the Court said that in view of this
provision, it could award interest to the Plaintiff at such rate as it found fit on the price
of the goods, from the date of tender of the goods or from the date on which the price
was payable. Taking into consideration the nature of transaction between the parties,
the Plaintiff was awarded interest at the rate of 12% per annum. In GG Ravi v K
Sathiyamoorthy,43 also the trial court's award of interest at 12% for price not paid was
upheld by the High Court of Madras.

[s 61.5] Interest on damages.—

Under the English common law no interest can be recovered on damages.44 The same
rule, it would seem, applies in India.45 See, however, the provisions of section 34 of the
Civil Procedure Code, 1908 and Interest Act No. 14 of 1978.

[s 61.6] General damages and special damages.—

Sub-section (1) refers to the recoverability of special damages. Section 73 of the Indian
Contract Act, 1872 refers to general damages as well as special damages. The words
"compensation for any loss or damage which naturally arose from the usual course of
things from such breach" in section 73 refer to general damages. The words "or which
the parties knew when they made the contract to be likely to result from the breach of
it" in section 73 refer to special damages. A loss which was actually in contemplation
of the parties at the time of entering into the contract is a special loss.

[s 61.7] Special damages.—

Where the breach of a contract has occasioned a special loss which was actually in
contemplation of the parties at the time of entering into the contract, the party who
suffers by the breach is entitled to special damages.46 This case is covered by the
latter part of the first paragraph of section 73 of the Indian Contract Act, 1872. The best
instance is illustration (j) to that section.

Special damages may be, however, illustrated, e.g., in case of a failure to deliver a
machine in time, the special damages awarded were the cost of stacking wheat, loss
due to deterioration in wheat as they were damaged by rain and the expenses of drying
the wheat but not any loss due to the fall of market price47 where the seller knew that
the buyer had bought the goods for re-sale to a party in Russia and the seller delivered
goods late, the buyer was held entitled to special damages in the form of increased
freight and insurance which he had to pay due to approach of winter;48 where the seller
knew that the coal was required by the buyer to be supplied to a steamer but as coal
was not delivered in time the steamer was delayed, the buyer had to pay damages and
cost of the suit brought against him by the shipping company; the buyer was held
entitled to special damages from the seller in the form of damages and cost of
defending the suit, both of which he had to pay in the suit by the shipping company.49

[s 61.8] Recovery of money paid for failure of consideration.—

Money paid under a contract of sale, when the consideration on which it was paid had
failed, can be recovered as money had and received.50 On this principle the buyer is
entitled to recover the price paid to the seller if it turns out that the seller had no title to
the property (section 14), as where the goods sold were stolen goods,51 or the goods
sold are not of the contract description (section 15), or there has been a breach of a
condition as to quality or fitness (section 16).

[s 61.9] Partial failure of consideration.—

Where a sum of money has been paid for an entire consideration and there is only a
partial failure of consideration neither the whole nor any part of such sum can be
recovered. Where, however, the consideration is severable, a failure of part is a failure
of that part only and the buyer's rights are unaffected by the acceptance of the other
parts of the consideration.
37 Bengal Nagpur Rly v Ruttanji, AIR 1938 PC 67 : Bom LR 746 : 65 IA 65.
37 Bengal Nagpur Rly v Ruttanji, AIR 1938 PC 67 : Bom LR 746 : 65 IA 65.
38 Standard Printing Machinery Co v Vinayagam & Co, (1959) 1 Mad LJ 167.
39 State of Madras v MAS Mohta, AIR 1964 Mad. 508 .
40 Kurupati V Mallayya v Thondepu Ramaswami & Co, AIR 1964 SC 818 : 1963 Supp (2) SCR 995
.
41 Vijay Industries v NATL Technologies Ltd, AIR 2009 SC 1695 : (2009) 3 SCC 527 .
42 Bharat Electronics Ltd v Shyam Telecom Ltd, CS (OS) No. 474/1997, dated 20.1.2011 (Delhi
HC) : LNIND 2011 DEL 96 .
43 GG Ravi v K Sathiyamoorthy, AS No 799 of 2009, dated 24.01.2017 (Madras HC) : LNIND
2017 MAD 297 .
44 See London, C&D Rfy Co v South Eastern Railway Co, (1893) AC 429 , and per Lindley, LJ
same case in Court of Appeal (1892) 1 Ch at p 140.
45 See Jamal v Moolla Dawood Sons & Co, (1916) 43 Cal 493 , 503 : 43 IA 6, 11; Bengal Nagpur
Rly. v Ruttanji, AIR 1938 PC 67 : 40 Bom LR 746 : 65 LA 65; UOI v Rallia Ram, AIR 1963 SC 1685 :
[1964] 3 SCR 164 .
46 Hydraulic Engineering Co v Mc-Haffice, (1878) 4 QBD 670 , 677.
47 Smeed v Foord, (1859) 1 EI & EI 602 : 117 RR 365 : 28 LJQB 178.
48 Borries v Hutchinson, (1865) 18 CB (NS) 445 : 144 RR 563.
49 Agius v Great Western Colliery Co, (1899) 1 QB 413 .
50 Damodhar v Allabux, AIR 1943 Ngp 332 : (1943) Nag 762 : 210 IC 625.
51 Rowland v Devall, (1923) 2 KB 500 .
The Sale of Goods Act

Chapter VII Miscellaneous

S. 62. Exclusion of implied terms and conditions.-

Where any right, duty or liability would arise under a contract of sale by implication of
law, it may be negatived or varied by express agreement or by the course of dealing
between the parties, or by usage, if the usage is such as to bind both parties to the
contract.

Exclusion of Implied Terms and Conditions

[s 62.1] By express agreement.—

This section provides that any right or liability arising under a contract of sale by
implication of law may be negatived or varied by express agreement. As observed by
Lord Blackburn,

there is no rule of law to prevent parties from making any bargain they please.1

Thus the conditions and warranties implied under sections 14 to 17 may be negatived
or varied by express agreement and so the rules as to the passing of property under
sections 20 to 24. Under sub-section (4) of section 16 it is laid down that an express
warranty or condition would not negative a warranty or condition implied by this Act
unless inconsistent therewith. Therefore before it is held under this section that an
express agreement varies those conditions implied by law, the court must also hold
that the express conditions are inconsistent with those implied by this Act. The words
"by implication of law" under this section are wider than the words "warranty or
condition implied by this Act" in sub-section (4) of section 16. The expression "express
agreement" should be understood in the light of section 9 of the Contract Act, in other
words, it should have been expressed in words, oral or written.

[s 62.2] How to imply a term in a contract.—

The law as to the imparting of implied conditions into contracts of sale is somewhat
difficult. It is explained by Atkin, LJ, in a luminous judgment in Tournier v National
Provincial and Union Bank of England.2

Ordinarily a term may be implied in any contract provided it is such a necessary term
that both parties must have intended that it should be a term of the contract and have
only not expressed it because its necessity was so obvious that it was taken for
granted;2 a term cannot be implied simply because it is a reasonable one or that a
reasonable man would not have entered into the contract unless it was included.2 The
said observations are quite general and apply to any contract.

[s 62.3] By course of dealing.—

This is the second method for determining whether the parties have negatived or varied
the rights, duties and obligations implied by law or not. The course of dealing must be
quite clear and unambiguous. The course of dealing may arise with equal force
whether from a written or oral bargain or from the repeated occurrence of similar
methods as between the parties.3

[s 62.4] Usage of trade.—

See Indian Evidence Act, 1872, section 92(5).

As regards a person who is ignorant of the existence of a usage of trade, the usage
may control the mode of performance of the contract, but cannot change its intrinsic
character. Thus if a person employs a broker to buy goods on his behalf, and the broker,
instead of buying the goods on account of his principal as a broker should do, buys the
goods on his own account and sends them to his principal, the principal is not bound to
accept them, even though there is a usage of trade allowing the broker to do so, if the
principal was not aware of the usage. It is the duty of a person employed as a broker to
establish privity of contract between his principal and the seller of goods, and it is a
breach of the duty if he converts himself into a principal as, indeed, he does by buying
the goods on his own account. This alters the intrinsic character of the contract, which
the law would not allow as against a person who is ignorant of the usage.4

1 Calcutta Co v De Mattos, (1863) 32 LJ QB 322, 329.

2 Tournier v National Provincial and Union Bank of England, (1924) 1 KB 461 , 483.
2 Tournier v National Provincial and Union Bank of England, (1924) 1 KB 461 , 483.
3 Pocahontas Fuel Co v Ambatielos, (1922) 27 Comp Cases 148 (152–153) : (1922) 10 ULR 152.
4 Robinson v Mollett, (1875) LR 7 HL 802.
The Sale of Goods Act

Chapter VII Miscellaneous

[s 63]

Reasonable time a question of fact.- Where in this Act any reference is made to a
reasonable time, the question what is a reasonable time is a question of fact.

[s 63.1] Reasonable time.—

The effect of the rule laid down in this section is that in contracts for the sale of goods
the question what is a reasonable time is a question of fact.

"Reasonable time" would depend upon the particular circumstances, nature of

commodity, the question of transports and the time during which the contract was
entered into and so on.5 Usage of a particular trade may be taken into consideration in
determining the question of reasonable time in respect of a contract relating to that
trade.6

5 Dinkerrai v Shukhdayal, AIR 1947 Bom 293 : 48 Bom LR 821 : ILR (1948) Bom 91 ; See also
Bengal Coal Co v Homee Wadia, (1900) 24 Bom 97.
6 Moult v Halliday, (1898) 1 QB 125 : 77 LT 794 : 67 LJB 451 : 14 TLR 109.
The Sale of Goods Act

Chapter VII Miscellaneous

[s 64] Auction sale.-

In the case of a sale by auction—

(1) where goods are put up for sale in lots, each lot is prima facie deemed to be the
subject of a separate contract of sale;

(2) the sale is complete when the auctioneer announces its completion by the fall
of the hammer or in other customary manner; and, until such announcement is
made, any bidder may retract his bid;

(3) a right to bid may be reserved expressly by or on behalf of the seller and, where
such right is expressly so reserved, but not otherwise, the seller or any one
person on his behalf may, subject to the provisions hereinafter contained, bid at
the auction;

(4) where the sale is not notified to be subject to a right to bid on behalf of the
seller, it shall not be lawful for the seller to bid himself or to employ any person
to bid at such sale, or for the auctioneer knowingly to take any bid from the
seller or any such person; and any sale contravening this rule may be treated as
fraudulent by the buyer;

(5) the sale may be notified to be subject to a reserved or upset price;

(6) if the seller makes use of pretended bidding to raise the price, the sale is
voidable at the option of the buyer.

[s 64.1] Kinds of Auction sales.—

Auction sales are of following kinds:—

(1) sale without reserve;

(2) sale with a reserve price;

(3) sale with a right reserved to bid by or on behalf of the seller;

(4) sale with a condition that the highest bidder shall be declared a purchaser.

Fixing a reserve price and reserving a right to the seller/owner to bid are two distinct
matters.

[s 64.2] Auction sales.—

This section lays down the rules as to sales by auction.

Sub-section (1) lays down that when an auctioneer puts up each lot for sale, each lot
would be prima facie the subject matter of a separate contract of sale. A bidder who
has purchased several lots does not convert his purchases into one contract.7

Sub-section (2) lays down that so long as the auction is not complete, any bidder could
go on making bids or withdraw his bids, in other words, his bids are in the nature of
proposals. The last of such proposals would be accepted by announcing the
completion of the auction either by the fall of the hammer or in other customary
manner. The acceptance of the last bid or proposal may be subject to the conditions of
sale and if it is a sale through Court, it would be subject to confirmation by the Court.

Sub-sections (3), (4) and (5) clearly lay down that a seller cannot make a bid at the
auction sale unless his right to bid is specifically reserved. The seller cannot put up his
nominee or his agent to make a bid. If the seller does so, the sale may be held to be
either fraudulent or voidable. Unless the seller's right is reserved, the auctioneer also
cannot permit the seller or his agent or nominee to make a bid.

Sub-section (5) lays down that the auction sale may be held subject to a minimum or
reserved price. Unless the bid reaches the minimum or reserved price, the auctioneer
could cancel or postpone the auction sale or the bid below the reserved price may be
conditionally or provisionally accepted subject to confirmation by seller.

Reserving the right to bid for a seller is quite a different thing from the reserve price
(under sub-section 5). If a sale is subject to a reserve or minimum price, it does not
mean that the seller has a right to bid [as contemplated in sub-section (3)].8

The Supreme Court9 has held that an auctioneer can set his own terms for holding an
auction. If he does so, those conditions would govern the rights of the parties. Where in
an auction the Coffee Board prescribed that it was not bound to accept the highest bid,
it necessarily implied that the Coffee Board can accept any lower bid and was not
bound to accept the highest bid. However, where such condition is not specified in the
auction sale, the situation is different.

[s 64.3] Upset price.—

"Upset price" is the Scottish equivalent of "reserved price." The words "or upset" in sub-
section (5) seem to have crept in at the last moment by some mistake. They ought to
have been omitted.

[s 64.4] Reserve price (knock-out-agreement).—

A combination among intending bidders to stifle competition, i.e., not to bid against
each other is called knock-out agreement and is not unlawful.10 The seller can protect
himself by a reserve bid.11

Where the sale is subject to a reserve price, every bid is a proposal conditional on the
reserve price having been reached; the fall of the hammer is likewise conditional.12
7 McManus v Fortescue, (1907) 2 KB 1 ; Champa Lal v Jai Gopal, AIR 1922 Mad. 486 .
8 Gilliat v Gilliat, (1869) LR 9 Eq 60.
9 M Lochia Setty and Sons Ltd v The Coffee Board, Bangalore, AIR 1981 SC 162 : (1980) 4 SCC
636 .
10 Jyoti v Jhowmull, (1909) 36 Cal 134 ; Hari v Naro, (1893) 18 Bom 342; Mahomed Meera v
Savvasi Vijaya Gopalar, (1899) 27 IA 17 ; Rawlings v Gen Trading Co, (1921) 1 KB 635 ; Cohen v
Roche, (1927) 1 KB 169 .
11 Rawlings v General Trading, (1921) 1 KB 635 .
12 McManus v Fortescue, (1907) 2 KB 1 .
The Sale of Goods Act

Chapter VII Miscellaneous

13[S.
64A. In contracts of sale, amount of increased or decreased taxes to be
added or deducted.-

(1) Unless a different intention appears from the terms of the contract, in the event
of any tax of the nature described in sub-section (2) being imposed, increased,
decreased or remitted in respect of any goods after the making of any contract
for the sale or purchase of such goods without stipulation as to the payment of
tax where tax was not chargeable at the time of the making of the contract, or
for the sale or purchase of such goods tax-paid where tax chargeable at that
time,—

(a) if such imposition or increase so takes effect that the tax or increased
tax, as the case may be, or any part of such tax is paid or is payable, the
seller may add so much to the contract price as will be equivalent to the
amount paid or payable in respect of such tax or increase of tax, and he
shall be entitled to be paid and to sue for and recover such addition, and

(b) if such decrease or remission so takes effect that the decreased tax only,
or no tax, as the case may be, is paid or is payable, the buyer may deduct
so much from the contract price as will be equivalent to the decrease of
tax or remitted tax, and he shall not be liable to pay, or be sued for, or in
respect of such deduction.

(2) The provisions of sub-section (1) apply to the following taxes, namely—

(a) any duty of customs or excise on goods,

(b) any tax on the sale or purchase of goods.]

[s 64A.1] Amendment.—

The new section has been substituted for the old by Act 33 of 1963 with effect from 22
September 1963.

Section 64A was first inserted by Act XLI of 1940 which referred only to customs and
excise duty. On principle there is no reason why there should not be a provision to deal
with the case of the imposition or change in the rate of a sale or purchase tax
subsequent to the making of a contract for the sale of goods. However, the section is
subject to contract between the parties.

[s 64A.2] Intention of parties through contract, the governing consideration for

liability.—

In Numaligarh Refinery Ltd v Daelim Industrial Co Ltd,14 the Supreme Court explained
that the expression, unless a different intention appears from the terms of the contract,
implies that in case of the imposition or increase in the tax after the making of a
contract, the party shall be entitled to be paid such tax or such increase. The primary
consideration shall be to gather the intention of the parties, as per the terms of the
contract. In a contract by a government company inviting global tenders for
establishing a co-generation captive power plant for its petroleum refinery in Assam
Deelim Industrial Company (DIC) obtained the competitive bid. When the issue arose
whether DIC could claim reimbursement, it contended that at the time when the
agreement was executed between the parties, countervailing duty was not there but
introduced after the purchaser had submitted its initial and final bids. The government
company relied on a clause in the instruction to the bidders that the entire customs
duties or levies including the stamp duty and important licence fees levied on the
equipments of sale by the Government of India or any State Government would have to
be borne by the contract for bids that On facts, the court found that the perusal of the
contract made it clear that DIC was under obligation to pay the taxes, duties and levies.
To a query whether by virtue of operation of section 69 of the Contract Act, 1872 there
would be any liability for reimbursing to DIC, the Court said that the said section would
not apply where there are clear terms of the agreement that the taxes, levies were to be
paid by DIC.

In Bihar SEB v Usha Martin Industries,15 there was no evidence in the case that the
parties intended that the relief of excise duty if abolished or reduced would be passed
on to the consumers. It was specifically stated in clause 16.4, one of the clauses of
tariff notification, that if the excise duty was enhanced, the tariff would be raised. No
provision was made for reduction of tariff under any circumstance. The specific
provision for raising tariff in case of enhancement of excise duty and absence of any
such provision for reduction of tariff in case of lowering or abolition of excise duty, the
court reasoned, would go to show that there was no intention on the part of the Board
to reduce the tariff in case of lowering or abolition of the excise duty. The provision of
section 64-A can only apply if intention to the contrary did not appear from the terms of
the contract. The court further observed, adverting to facts that the tariff was fixed by
exercise of statutory power and not fixed as a result of any bargaining by and between
the Board and the consumers. It was a uniform tariff which every consumer would have
to pay for the electricity consumed by him.

[s 64A.3] Buyer's Right of deduction.—

Clause (b) of sub-section (1) entitles a buyer to deduct the amount of decreased or
remitted tax from the contract price payable by him to the seller: the said clause further
emphasises that the buyer shall not be liable to pay, nor be sued for, in respect of such
deduction. What is emphasised is that the buyer is entitled to deduct the amount of
decreased or remitted tax from the amount of price payable by him to the seller. It may
as well happen that in the process of calculation and in exercising his right of
deduction of the decreased tax from the contract price, the buyer's liability to pay the
price may be wiped off.16 If the buyer has already paid the price, he would be entitled to
sue the seller for its recovery.17

On the contrary, it is the liability of the Petitioner to pay the extra price when the excise
duty had been enhanced prior to the delivery of the vehicle.18 Even increase in diesel
price was reckoned to be added to the price already stipulated to compensate the
seller for the additional cost involved in transportation.19
13 Subs. by Act 33 of 1963, section 5, for section 64A (w.e.f. 22-9-1963). Section 64A was
inserted by Act 41 of 1940.
14 Numaligarh Refinery Ltd v Daelim Industrial Co Ltd, (2007) 8 SCC 466 : 2007 (3) Arb LR 378
(SC) : JT 2007 (11) SC 73 .
15 Bihar SEB v Usha Martin Industries, AIR 1997 SC 2489 : (1997) 5 SCC 289 : JT (1997) 5 SC
431 .
16 Central Hindustan Italian Trading Co v Pitty Bros, AIR 1962 Bom 222 : 63 Bom LR 966.
17 Chhotabhai Jethabai Patel & Co v UOI, AIR 1962 SC 1006 : [1962] Supp 2 SCR 1 : (1962) 2
SCA 522 .
18 Ravinder Raj v Competent Motors Co Pvt Ltd, AIR 2011 SC 1061 : JT 2011 (2) SC 149 .
19 Lift and Shift India Pvt Ltd v Central Warehousing Corp, (2017) IV AD (Delhi) 109.
The Sale of Goods Act

Chapter VII Miscellaneous

S. 65. Repeal.-

[Rep. by the Repealing Act 1938 (1 of 1938) section 2 and sch.]

The Sale of Goods Act

Chapter VII Miscellaneous

S. 66. Savings.-

(1) Nothing in this Act or in any repeal effected thereby shall affect or be deemed to
affect—

(a) any right, title, interest, obligation or liability already acquired, accrued or
incurred before the commencement of this Act, or

(b) any legal proceedings or remedy in respect of any such right, title,
interest, obligation or liability, or

(c) anything done or suffered before the commencement of this Act, or

(d) any enactment relating to the sale of goods which is not expressly
repealed by this Act, or

(e) any rule of law not inconsistent with this Act.

(2) The rules of insolvency relating to contracts for the sale of goods shall continue
to apply thereto, notwithstanding anything contained in this Act.

(3) The provisions of this Act relating to contracts of sale do not apply to any
transaction in the form of a contract of sale which is intended to operate by way
of mortgage, pledge, charge or other security.

This last section is called the "Savings" section. The object of this section is to clarify
the position of this statute with respect to the previous law, previous proceedings,
previous liabilities and rights and with respect to the other existing laws. Clauses (a),
(b) and (c) state that the rights, liabilities, proceedings etc. prior to the commencement
of this Act are not affected by this Act, in other words, they would be governed by the
previous law. Clauses (d) and (c) declare that the other law not inconsistent with this
Act or which is not expressly repealed by this Act will continue to apply and they will
not be affected. Sub-sections (2) and (3) refer to the other existing laws which will not
be affected by this Act, such as Presidency Towns Insolvency Act, Provincial Insolvency
Act, the Companies Act and the provisions of the Transfer of Property Act and of the
Contract Act, 1872 relating to mortgage, pledge, charge or other security.

Special Terms in Respect of Sale of Goods Explained

[s 66.1] C.I.F. (cost, insurance and freight) contract.—

A C.I.F. (cost, insurance and freight) contract is a contract for sale of goods by delivery
of the documents i.e. bill of lading, insurance policy, invoice of the goods to the buyer.
Seller's duties are:

(i) to ship the goods of the description contained in the contract from the port of
shipment,
 (ii) to ship the goods in time,

(iii) to ship in the steamer stipulated, if possible,

(iv) to insure the goods for the voyage for the benefit of the buyer,

(v) to make out an invoice of the goods contracted. Price is inclusive of freight and
insurance,

(vi) the bill of lading should contain correct date of shipment, name of steamer,
description of goods, value of goods etc,

(vii) to tender to the buyer the bill of lading, insurance policy and invoice of the
goods,

(viii) to bear the freight.

Buyer's duties and rights are:—

(i) In C.I.F. contract the seller charges an inclusive price covering the cost of the
goods, freight and insurance. If under the contract of carriage the freight is
payable at the destination; it may in fact be paid by the buyer; but in that case it
is simply deducted by the buyer from the price.20

(ii) Not to defer payment until delivery of goods or inspection thereof.

(iii) To pay cost of unloading, lighterage, landing at the port of destination.

(iv) To pay import duties, wharfage charges, if any.

The buyer can reject the documents if they are not in order. The buyer can reject the
goods after inspecting them if they are not according to the contract quality,
description etc. The goods are at the risk of the buyer during the voyage. The property
in the goods passes to the buyer when he accepts the documents. If the buyer rejects
the goods, the property revests in the seller. If the goods are lost, the buyer can recover
from the ship owner (for misconduct on the part of master or mariners not covered by
the policy) and insurance company.21

[s 66.2] F.O.B. (Free on Board) Contract.—

The duties of the seller are:—

(i) to put the goods on board a ship for the purpose of transmission to the buyer,

(ii) to put the goods on board in time and in the steamer named (as far as possible),

(iii) to bear the cost of putting the goods on board the ship,

(iv) to procure bill of lading in the name of buyer,

(v) to procure insurance policy in the name of the buyer if required,

(vi) to obtain export licence if required,

(vii) to give notice to buyer of the shipment. Delivery is complete as soon as the
goods of the contract quality and description are placed on board of the
steamer. Thereafter, the goods remain at the risk of the buyer. Property in the
goods passes to the buyer after the goods are duly shipped and the buyer is
intimated about the shipment.
The buyer's duties and rights are:—

(i) to insure the goods as soon as he receives intimation of shipment;

(ii) to pay the price against tender of documents i.e. bill of lading or delivery order
and invoice and insurance policy if seller is asked to insure;

(iii) to pay the freight and unloading charges, wharfage charges, import duty etc, at
the port of destination;

(iv) get the import licence if necessary.

The buyer can inspect the goods after they are taken delivery of. The buyer can reject
the goods if not in accordance with the contract quality, description, fitness etc.

[s 66.3] Ex-ship contract.—

The seller undertakes to ship the goods and to deliver the goods to the buyer direct at
the port of destination. The buyer is not concerned with the bill of lading or freight or
cost of insurance. As soon as the steamer arrives at the port of destination, the seller
intimates to the buyer to take delivery. The buyer is given a delivery order on the shipper
or his agent. The seller is liable for freight and to release the ship owner's lien. The
goods are at the risk of the seller till goods are delivered to the buyer. Buyer can inspect
the goods at the time of taking delivery. The property in the goods passes to the buyer
after he accepts the goods. Delivery order or direction to the shipper to deliver does not
pass possession or property to the buyer.

[s 66.4] F.O.R. (free on rail) and F.O.T. (free on truck) contract.—

The seller has to place the goods on the railway or on the truck and obtain railway
receipt or transport receipt as the case may be. The place of despatch is agreed upon.
The place of delivery or destination is to be named by the buyer. The seller has to bear
the cost of loading the goods on the railway or the truck. The goods are at the risk of
the buyer as soon as the seller has obtained the railway receipt or transport receipt.
The buyer has to pay the cost of freight, unloading charges, excise duties etc. The
buyer can inspect the goods at the place of delivery, if not inspected earlier.

[s 66.5] Ex-factory, warehouse, works contracts.—

The seller must place the goods at the disposal of the buyer at the named factory,
warehouse or works. It is for the buyer to pay the price and arrange to take delivery,
arrange for transport and bear all cost. The property and risk in the goods passes to
buyer after he takes delivery.

[s 66.6] E.S.A. (Exclusive Sales Agreement).—

Whereby a seller grants to an overseas buyer the sole trading rights in goods of a
specific kind within a defined area. The buyer undertakes to purchase the said goods
from that seller only and the seller undertakes not to sell directly to any other
customers in the defined area and to direct all enquiries from the said area to the buyer.
Buyer agrees to respect the seller's patents and trademarks and advertise seller's
goods. There are other terms.

[s 66.7] E.LA. (Exclusive Licence Agreement).—

Whereby the know-how and right to manufacture specified goods is sold to a buyer on
certain terms.

20 Benjamin's Sale of Goods, 1974, para 1497. See also Smyth (Ross T) & Co Ltd v Bailey Son &
Co, (1940) 3 All ER 60 at 68.
21 Ireland v Livingston, (1861–73) All ER Rep 585 at 590; see also Hansson v Hamel & Horley
Ltd, (1922) 2 AC 36 .
 Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed

Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed / The Indian Partnership Act (Act IX of
1932)

Currency Date: 22 April 2020

© 2020 LexisNexis
The Indian Partnership Act (Act IX of 1932)

The Indian Partnership Act

(Act IX of 1932)

(Received the assent of the Governor-General on the 8 April 1932)

An Act to define and amend the law relating to Partnership

Whereas it is expedient to define and amend the law relating to partnership; it is hereby
enacted as follows:
The Indian Partnership Act (Act IX of 1932)

Chapter I Preliminary

S. 1. Short title, extent and commencement.-

(1) This Act may be called the Indian Partnership Act, 1932.

1
[(2) It extends to the whole of India 2[except the State of Jammu and Kashmir].]

(3) It shall come into force on the 1st day of October 1932, except Section 69, which
shall come into force on the 1st day of October, 1933.

[s 1.1] STATE AMENDMENTS

[Dadra and Nagar Haveli].—In section 1, for sub-section (3), the following sub-section
(3) shall be substituted, namely:—

"(3) It shall come into force at once except section 69, which shall come into force on
the 1st day of July, 1966."—Regulation VI of 1963, as amended by Regulation II of 1965.

[Goa, Daman and Diu].—In section 1, for sub-section (3), the following sub-section (3)
shall be substituted, namely:—

"(3) It shall come into force at once except section 69, which shall come into force on
the 1st day of January, 1965."—Regulation XI of 1963.

[Laccadive, Minicoy and Amindivi Islands].—In section 1, for sub-section (3), the
following sub-section (3) shall be substituted, namely:—

"(3) It shall come into force at once except section 69, which shall come into force on
the expiry of a period of one year from the date of commencement of the rest of this
Act."— Regulation VIII of 1965.

3[Pondicherry].—In section 1, for sub-section (3), the following sub-section (3) shall be
substituted, namely.—

"(3) It shall come into force at once except section 69, which shall come into force on
the 1st day of July, 1964."—Regulation VII of 1963.

[s 1.2] Law of Partnership.—

Before the Indian Partnership Act, 1932, the law of partnership was dealt with in
Chapter XI of the Indian Contract Act, 1872. The present Act makes considerable
changes in definition and arrangement, gives effect (but short of making the firm a
legal person) to the mercantile view of a firm's continuity, and adds provisions for
voluntary registration of firms. The law relating to the insolvency of partners and its
effect upon partnership has been altered.
[s 1.3] Act not exhaustive.—

The Act purports merely to define and amend the law relating to partnership, and
expressly states that "nothing in this Act or any repeal effected thereby shall affect or
be deemed to affect any rule of law not inconsistent with this Act."4 The provisions of
section 3 also confirm this view.

[s 1.4] Act not retrospective.—

The Act is not retrospective and applies only to anything done or suffered after the
commencement of the Act.5

[s 1.5] Insolvency.—

In spite of the fact that the Act has dealt with the effect of insolvency upon dissolution
of partnership, it does not affect any rule of insolvency relating to partnership.6

1 Subs. by A.O. 1950, for sub-section (2).

2 Subs. by Act 3 of 1951, section 3 and sch., for "except Part B states".
3 The Union Territory of Pondicherry shall be known as the Union Territory of Puducherry vide
The Pondicherry (Alteration of Name) Act, 2006, Act No. 44 of 2006 dated 13.09.2006 (w.e.f. 1-
10-2006).
4 The Indian Partnership Act, 1932, section 74(f).
5 The Indian Partnership Act, 1932, section 74(a) to (c).
6 The Indian Partnership Act, 1932, section 74(e).
The Indian Partnership Act (Act IX of 1932)

Chapter I Preliminary

S. 2. Definitions.-

In this Act, unless there is anything repugnant in the subject or context,—

(a) an "act of a firm" means any act or omission by all the partners, or by any partner
or agent of the firm which gives rise to a right enforceable by or against the firm;

(b) "business" includes every trade, occupation and profession;

(c) "prescribed" means prescribed by rules made under this Act;

(d) "third party" used in relation to a firm or to a partner therein means any person
who is not a partner in the firm; and

(e) expressions used but not defined in this Act, and defined in the Indian Contract
Act, 1872 (9 of 1872), shall have the meanings assigned to them in that Act.

[s 2.1] STATE AMENDMENT

Maharashtra.—In its application to the State of Maharashtra, in section 2, after clause

(c), the following clause shall be inserted, namely:—

"(c-1) "Registrar" means the Registrar of Firms appointed under sub-section (1) of
section 57 and includes the Deputy Registrar of Firms and Assistant Registrar of Firms
appointed under sub-section (2) of that section."—Maharashtra Act 29 of 1984, section
2 (w.e.f. 1 January 1985).

[s 2.2] Sub-section (a): "Act of a firm."—

The relations of partners to third parties are generally dealt with in Chapter IV of the
Act. An "act of a firm" may be illustrated by examples. A, B and C are partners. A on
behalf of the firm enters into a contract with a third party. If the third party commits a
breach of the contract, the firm may sue to enforce the contract. On the other hand, if
the firm commits a breach of the contract, the third party would be entitled to hold the
firm liable for the consequences. The contract between A on behalf of the firm and the
third party would be an act of the firm.7 An admission falling under section 23; a
wrongful act under section 26; a misappropriation under section 27; or the case of
wilful default in the ordinary course of business, falls within the definition of an "act of
a firm."

The definition is based upon the principle that "every partner is in contemplation of law
the general and accredited agent of the partnership." However in respect of an act of
insolvency, it cannot be said that an act of insolvency on the part of a partner is an act
of the partnership. The provisions of sections 42(d) and 69(3)(b) contemplate that an
act of insolvency on the past of a partner may affect such a partner alone. While
construing "act of a firm" in the context of Provincial Insolvency Act, 1920, the Supreme
Court held that a firm can be adjudged insolvent if there was an act of insolvency by
each of the partners. A firm can also be declared insolvent if there was an act of
insolvency by agent of the firm which was such as must be imputed to a firm. The
question whether an act of insolvency of one or more partners can be regarded as act
of all the partners is a question of fact in each case. Here a partner gifted away to his
son a property which was not a partnership property. Moreover, there was no collective
act of insolvency alleged on behalf of all the partners of the firm. In view of this, a firm
cannot be adjudged insolvent for the said act of his partner.8

Mere fact of closing the business of the firm and thus committing an act of insolvency
by one partner without authorisation, express or implied, from the other partners is not
enough to impute the said act as an act of firm and so a creditor of a firm cannot get
the firm adjudged insolvent.9 Re Mahomed Hashan & Co,10 one of the partners in a firm
of two partners departed from the usual place of business with intent to delay and
defeat the claims of the creditors of a firm. It was held that a firm cannot be adjudged
insolvent unless other partner had also departed with like intent. Failure to pay rent
where the premises were taken on lease on behalf of a firm was an "act of a firm" under
section 2(a) of the Act but a suit for recovery of such arrears is maintainable against
the contracting partner alone in view of section 25 of the Indian Partnership Act,
1932.11

[s 2.3] Sub-section (b): Business.—

The definition of "business" in the Indian Partnership Act, 1932 is of importance as this
element of business is the motive force which leads to the formation of partnership as
is seen in the definition of "Partnership" given in section 4 of the Act. The element of
"business" is one of the three elements in the definition of "partnership" given in section
4 of the Indian Partnership Act, 1932. The definition of "business" given under section
2(b) of the Act is based on section 2(1) of the English Partnership Act of 1890. The
definition of business is of wide sweep and has extensive meaning because the
definition starts with the word "includes" and not "means". The expression "includes" is
used in the Act when it is intended that the term defined should retain its ordinary
meaning and its scope should be widened by specific enumeration of certain matters
which its ordinary meaning may or may not compromise. This makes the definition
enumerative but not exhaustive. On the other hand if the legislature uses the
expression "means" it wants to exhaust the significance of the term defined.12

"Business" has a more extensive meaning than "trade."13 In Smith v Anderson,14 Jessel,
MR, said:

There are many things which in common colloquial English would not be called a business,
when carried on by a single person, which would be so called when carried on by a number
of persons. For instance, a man who is the owner of a house divided into several floors and
used for commercial purposes, e.g., offices, would not be said to carry on a business he let
the offices as such. But suppose a Company was formed for the purpose of buying a
building, or leasing a house, to be divided into offices and to be let out, should not we say, if
that was the object of the Company that the Company was carrying on business for the
purpose of letting offices? The same observation may be made as regards a single
individual buying or selling land, with this addition, that he may make it a business, and then
it is a question of continuity. When you come to an Association or a Company, formed for a
purpose, you would say at once that it is a business, because there you have that from
which you would infer continuity. So in the ordinary case of investments, a man who has
money to invest, the object being to obtain his income, invests his money, and he may
occasionally sell the investments and buy others, but he is not carrying on a business.
New Mofussil Co Ltd v Rustomji,15 also suggested that the test of business is continuity
and repetition of acts. But this is one of the tests and it is not a conclusive test.16 In
Seth Suganmal v Mt Umraobi,17 the Nagpur High Court observed that though money
lending is a trade or occupation, an isolated act of money lending on a joint security did
not make the lenders as partners because the said isolated act was not a business.
This decision was better explained in a subsequent case by the same High Court in
Birdichand v Harakchand.18 Accordingly, where money is jointly lent, the lenders'
agreement may be silent and may not provide as to how the principal and interest when
repaid (i.e. the income) should be held on a joint account for a fresh endeavour.
Without such a provision in the agreement the ordinary rule applied and gave each
(lender) an undivided interest in the whole of the income. However, if their agreement
had provided that not only was the lending to be on a joint account but also the money
repaid (i.e. income) so that it could be used again for a joint endeavour,19 there would
have been business and the lenders would become the partners as well. If partnership
exists, the lenders being partners could not then have claimed the right to use one's
share in the income (i.e. money repaid with interest) for his own purpose unilaterally.
On the other hand, where partnership on a joint endeavour does not exist and money is
simply lent on a joint account, each lender has an undivided interest in the whole of the
income (i.e. money repaid with interest) and he could deal as he pleased independent
of the consent of the other. In the very case, it was held that an isolated act of purchase
and sale of cotton by two persons who have agreed to share profit and loss equally
was a business. In K Jaggaiah v Kokumann Venkatasatyanareyan,20 it was not insisted
upon that there must be more than one transaction or venture before it can be
described as business. The test was whether there is any activity capable of it being
described as business. The road building activity in pursuance of a single contract with
the government was held business. The court found that it was spread over for a
particular period of time; it required employment of workers, supervisors, preparation of
bills as well as getting payment after approval of the government. There was no
inherent improbability of the road building transaction not being capable of subject
matter of venture under the partnership as the court observed. While discussing
Birdichand case earlier we had stated that to become a business transaction, the
agreement of the parties should not only provide for outgoing (money lent) but also for
income (principal sum repaid with interest) on a joint account. This thing should be
kept in mind while understanding illustrations (a) and (b) to section 239 of the Indian
Contract Act, 1872 which is analogous to section 4 of the present Act. Illustration (a)
provided "A and B buy 100 bales of cotton which they agree to sell for their joint
account. A and B are partners in respect of such cotton." Illustration (b) provided "A and
B buy 100 bales of cotton, agreeing to share it between them. A and B are not partners."
Co-ownership does not imply a business or partnership.21 Joint owners of the property
are not as such partners although they develop the property and either let or use the
joint property for their mutual benefit. But if they go further and carry on a business
with respect to it, they are partners with respect to that business. Accordingly, section
2(1) of the English Partnership Act, 1890 enacts that "joint tenancy, tenancy in
common,22 joint property, common property or part ownership does not of itself create
a partnership as to anything so held or owned …". As seen earlier mere community or
property or profits thereof is not business "unless it be community in the carrying on of
a business".23 So, where a group of co-owners was collecting rents from properties
gifted to them, it was held that collecting rent was not a business.24

The word business does not necessarily mean some undertaking of an industrial or
commercial nature. Where two doctors form partnership to treat patients and not to do
anything of a commercial nature such as selling medicine, it was incidentally observed,
without actually deciding, that it was business.25
[s 2.4] Sub-section (c): Prescribed.—

Under section 71 the Governor-General in Council and the Local Governments are
empowered to make rules for the purposes mentioned in that section.

[s 2.5] Sub-section (d): Third Party.—

Anyone who is not a partner is, in relation to a firm, a third party, e.g., a creditor; a
debtor; a transferee of a partner's share;26 or a minor who has been admitted to the
benefits of partnership.27

7 See The Indian Partnership Act, section 22.

8 Firm Mukundlal Veerkumar v Purushottam Singh, AIR 1968 ASC 1182 : (1968) 2 SCJ 863 :
(1968) 2 SCWR 293 .
9 Gopal Naidu v Mohanlal, AIR 1926 Mad. 206 : (1926) ILR 49 Mad 189 : (1925) 49 Mad LJ 709.
10 Re Mahomed Hashan & Co., AIR 1923 Bom 107 : 24 Bom LR 861.
11 Jatindrakumar Dass v Dhirajlal, AIR 1975 Cal 123 .
12 Calico Mills Ltd v State of MP, AIR 1961 MP 257 at 259; Prov of Bengal v Hingul Kumari, AIR
1946 Cal 217 at 224.
13 Harris v Amery, (1886) 35 LJ CP at p 92; Rolls v Miller, 27 Ch D 71.
14 Smith v Anderson, (1880) 15 Ch D 247 , 260–261.
15 New Mofussil Co Ltd v Rustomji, 60 Bom 800 at 828 : (1936) 38 Bom LR 408 at 46.
16 Birdichand v Harakchand, AIR 1940 Ngp 211 at 212 : 190 IC 613.
17 Seth Suganmal v Mt Umraobi, AIR 1938 Ngp 550 .
18 Birdichand v Harakchand, AIR 1940 Ngp 211 .
19 Birdichand v Harakchand, AIR 1940 Ngp 211 , pp 212–215.
20 K Jaggaiah v Kokumanu Venkatasatyanarayana, AIR 1984 AP 149 . See also Senaji v Panaji,
AIR 1930 PC at 300.
21 Under Hill's Principles of the Law of Partnership, 10th Edn, 1975, p 4.
22 In Joint tenancy property is acquired by two or more persons with the right of survivorship
which means that on the death of one of the parties, his share accrues to the other by
survivorship while in tenancy common Survivor does not acquire the share of the deceased
owner which accrues to the heirs of the deceased person and not the survivor or survivors.
23 Under Hill's Partnership p 5.
24 Ibrahim Shah Mohd v Noor Ahmed, AIR 1984 Guj 127 : (1983) 2 GLR 961 . See also Anantha v
J Bapanna Rao, AIR 1959 AP 448 .
25 Edulji Meharbanji Boyce v Shyam Sunder, AIR 1943 All 192 at 193.
26 The Indian Partnership Act, section 29.
27 The Indian Partnership Act, section 30.
The Indian Partnership Act (Act IX of 1932)

Chapter I Preliminary

S. 3. Application of provisions of Act 9 of 1872.-

The unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are
inconsistent with the express provisions of this Act, shall continue to apply to firms.
The Indian Partnership Act (Act IX of 1932)

Chapter II The Nature of Partnership

S. 4. Definition of "partnership," "partner," "firm," and "firm name".-

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

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

[s 4.1] Definition of Partnership.—

Section 239 of the Indian Contract Act defined partnership as follows:

"Partnership" is the relation which subsists between persons who have agreed to combine
their property, labour or skill in some business, and to share the profits thereof between
them.

The amendments made are little more than verbal and make no change in what is
essential to the constitution of a partnership, though it has been observed that, if
anything, this section has the effect of widening the definition of partnership, as
originally under section 239 of the Indian Contract Act, it was inter alia necessary to
agree to combine property, labour and skill.1 The definition in section 4 contains three
elements—

(1) there must be an agreement entered into by all the persons concerned;

(2) the agreement must be to share the profits of a business; and

(3) the business must be carried on by all or any of the persons concerned acting
for all.

CIT v G Parthasarthy Naidu2 was a case that dealt with the question of whether two
firms having the same partners can be treated as single firm for the purpose of
assessment of tax. The Court held that the components of the definition of
"partnership", and, therefore, of "a firm" consist of (a) persons, (b) a business carried on
by all of them or any of them acting for all, and (c) an agreement between those
persons to carry on such business and to share its profits. It is the relationship between
those persons which constitutes the partnership. The relationship is founded in the
agreement between them.

[s 4.2] There must be an agreement.—

This element relates to the voluntary contractual nature of partnership, as

distinguished from non-contractual partnership relations, such as a Hindu joint family.
The question whether there is or there is not an agreement is to be answered in
reference to the provisions of the Indian Contract Act, 1872.3 A person who has signed
an agreement of partnership cannot plead that he signed benami for someone else and
escape liability.4 If, however, the parties to an agreement have not agreed to the date of
the commencement of the partnership, it cannot be said that they have become
partners.5 Where a society was registered under the Societies Registration Act, but
such registration is invalid, the invalidity of the registration does not make the
members partners.6 A Hindu joint family carrying on a family business is not governed
by the provisions of this Act. The rights and liabilities of the coparceners must be
considered with regard to the general rules of Hindu Law.7 The rights of members of
the Hindu joint family arise from status (i.e. by birth in the family) and not by
agreement. In the case, however, of a partnership composed of certain individual
members of a Hindu joint family and others who are strangers to the family, the
relations of the parties are governed by the provisions of this Act, and not by any rules
of Hindu joint family.8 The fact that the manager of a Hindu joint family has entered
into a contract of partnership does not make other members of the family the
members of the partnership.9

A partnership agreement is the source of a partnership; it also gives expression to the

other ingredients defining the partnership, specifying the business agreed to be carried
on, the persons who will actually carry on the business, the shares in which the profits
will be divided, and several other considerations which constitute such an organic
relationship. It is permissible to say that a partnership agreement creates and defines
the relation of partnership and, therefore, identifies the firm. If that conclusion is to be
right, it is only a further step to hold that each partnership agreement may constitute a
distinct and separate partnership and, therefore, distinct and separate firms. An
agreement between the partners to carry on a business and share its profits may be
followed by a separate agreement between the same partners to carry on another
business and share the profits therein. The intention may be to constitute two separate
partnerships and, therefore, two distinct firms. Or to extend merely a partnership
originally constituted to carry on one business, to the carrying on of another business.
It will all depend on the intention of the partners. The intention of the partners will have
to be decided with reference to the terms of the agreement and all the surrounding
circumstances, including evidence as to the interlacing or interlocking of management,
finance and other incidents of the respective business. The Supreme Court in
Gannmani Anasuya v Parvatini Amerendra Chowdhary,10 drew out some parameters for
determining the interests inter se between the partners in business:

If the said immovable property formed assets of the joint venture, the same would be an
index to determine the shares held by the parties thereto. Ordinarily, the extent of an
involvement made shall be the criteria for determining the share of the co-entrepreneurs. In
absence of terms and conditions of the joint venture having not been reduced to writing,
conduct of the parties how they dealt with affairs of the business would be relevant.

[s 4.3] Persons.—

Obviously there must be an agreement between two or more persons before there can
be a partnership. A person cannot be a partner in his individual capacity as also in a
representative capacity as how it could be argued that a man can be at one and the
same time a Partner in his individual capacity and partner in a representative
capacity.11 A person cannot be a partner with a wakf, as a wakf, is not a persona.12
Where a partner has died and one of the legal representatives has taken his place as a
partner, the other legal representatives are not partners and cannot sue for dissolution
or accounts.13

[s 4.4] Neither firm nor HUF included within the meaning of "persons".—
The view of the Supreme Court expressed in Rashiklal & Co v CIT, Orissa14 was that
when section 4 of the Indian Partnership Act, 1932 spoke of "persons" who had entered
into partnership with one another it could only be individuals and not a body of
persons. A body of persons like a firm could not enter into partnership with other
individuals. The reasons that are applicable to hold that a firm cannot join a partnership
with another "individual" will apply with equal force to an HUF. In law, an HUF can never
be a partner of a partnership firm. Even if a person nominated by the HUF joins a
partnership, the partnership will be between the nominated person and the other
partners of the firm. Having regard to the definition of "partnership" and "partners". If a
Karta or any other member of the HUF joins a partnership, he can do so only as an
individual. His rights and obligations vis-a-vis other partners are determined by the
Indian Partnership Act, 1932 and not by Hindu law. Whatever may be the relationship
between an HUF and its nominee partner, in a partnership neither the HUF nor any
member of the HUF can claim to be a partner or connected with the partnership
through a nominee. If any payment by the firm to a partner is prohibited by law, the
Karta cannot be heard to say that the payment was received by him not as a partner
but in some other capacity. Within the partnership, the Karta is a partner like any other
partner with whom he has entered into a partnership agreement individually. It is
essential to have an agreement between the partners to form a partnership. A HUF not
being a "person" cannot enter into an agreement of partnership.

[s 4.5] Minors.—

See notes to section 30.

[s 4.6] Sharing of profits of business.—

"Profits" is not defined in the Act, but it means the excess of returns over outlay, that is
net profits. "Business" includes every trade, occupation and profession.15 Co-
ownership of land does not constitute a partnership between the co-owners, but the co-
owners may work the land in partnership.16 As common interest will not make a
partnership without division of profits, so sharing profits will not arise unless there is a
common business. The business of course must be lawful. Where 20 or more persons
purport to form a partnership, such a partnership is illegal as contrary to section 11(2)
of the Companies Act, 1956.17 An occupation discouraged by law, though not
punishable, may be unlawful, e.g., a firm of book-makers.18 But this view of Darling J
which was based on the dictum of Fletcher Moulton LJ in Hyams v Stuart King19 has
not been accepted as the correct law of England by McCardic J in Jeffrey & Co v
Bamford20 holding that Partnership for the purpose of betting and bookmakers is not
per se illegal or impossible in law. The Supreme Court in Gherulal Parekh v
Mahdeodas21 has observed that partnership of two persons providing that one of them
to enter into a wagering transaction on behalf of the firm with outsider is not one
prohibited by law under the first clause of section 23 of the Indian Contract Act and so
such partnership is not unlawful or illegal. It is submitted that the above view of the
Supreme Court was expressed on section 30 of the Indian Contract Act, 1872 with
reference to its application in India outside the Maharashtra State. In the Maharashtra
State (and probably in the Gujarat State22) where wagering transactions are not only
void but also illegal and so partnership for the purpose of doing wagering transaction
may be declared as illegal or unlawful in view of the special provisions of Bombay Act
III, of 1865 [The Act for Avoiding Wagering (Amendment) Act]. The agreement to share
profits is essential, but it should be noted that an agreement to share the losses is not
essential. There is nothing to prevent one or more partners from agreeing to indemnify
the others against loss or to prevent full effect from being given to a contract of
partnership containing such clause of indemnity.23 Where nothing is said as to the
sharing of losses, by virtue of section 13(b) of the Indian Partnership Act, 1932 the
partners shall contribute equally to the loss sustained by the firm. It may, however, be
agreed that as between the partners any one or more of them shall not be liable for
losses.24 They may agree to share profits in certain proportions or to receive or pay a
fixed annual or monthly sum in lieu of an amount of profits which may vary every
year.25 A Commission of certain percentage on the net profits given to a person in
charge of the firm devoting his whole time to the business was held to be "sharing of
profits" and made him a partner even if he was not to get any share in the profits of the
firm.26 The essential motive in making a partnership agreement is the making of profit
and this has been clearly brought out in definition. So, where persons agree to share
the profits of a money-lending business, they become partners,27 but where one of the
so called partners is not to receive profits, he is not a partner.28 In this case though the
partnership deed described B as one of the partners of the firm with 10 annas share29
but a clause of the partnership deed provided that Partner B's share was not to stand in
his name but shall stand in the name of Firm, while the capital contributed by the other
partners was to stand in their own name. Similarly, profit and loss incurred had to be
credited or debited in the name of the firm and not towards the name of partner B.
Applying the test of Partnership laid down by section 4 of the Act, the court construing
the terms held that B cannot be a partner in the firm as B did not provide capital for
partnership and B was not allotted profit for his share and did not incur liability for his
share of the partnership.

Though sharing of profits and contributing to the loss of a business are indications of
the existence of partnership, anyone who shares profit may not be a partner in a given
case. Reference may be made to Explanation 2 to section 6 of the Act. In fact one can
be regarded as a partner when the business can be said to have been conducted on his
behalf.30

Illustrations

(1) A agrees with B to carry passengers by car from Bombay to Poona on the following
terms: B is to pay to A Rs. 15 per mile per annum, and A and B are to share the
expenses of repairing and replacing the cars, and to divide equally the money received
for conveying passengers A and B are partners.31

(2) A and B are co-owners of a house let to a paying tenant. A and B divide the net rents
between themselves. A and B are not partners, because letting a house is not a
business.32 There is no partnership without combination to carry on a business and
therefore the mere fact that persons own in common something which produces
returns, and divide those returns according to their respective interests, does not make
them partners. Now, if A and B used the house as an hotel managed by themselves or
their agent for their common profit, they would be partners in the business of hotel
keeping.

(3) A and B buy 100 bales of cotton, which they agree to sell for their joint account. A
and B are partners in respect of such cotton.33

(4) A and B buy 100 bales of cotton, agreeing to share it between them. A and B are not
partners.34

(5) A agrees with B, a goldsmith, to buy and furnish gold to B, to be worked up by him
and sold, and that they shall share in the resulting profit or loss. A and B are partners.35
(6) A and B agree to work together as carpenters, but that A shall receive all profits and
shall pay wages to B. A and B are not partners.36

(7) A and B are joint owners of a ship. This circumstance does not make them
partners.37

[s 4.7] Carried on by all or any of the persons concerned, acting for all.—

The fundamental principal of a partnership is that partners when carrying on the

business of the firm are agents as well as principals.

Illustrations

A, B and C carry on business as partners. An outsider, D deals with the firm through C. A
is between C and D, C is a principal and also the agent of A and B. Therefore A, B and C
can all sue, and be sued by D. Further, because C is in this transaction an agent of A
and B, he is accountable to them.

The law as to partnership is undoubtedly a branch of law of principal and agent; and it
would tend to simplify and make more easy of solution the questions which arise on this
subject, if this true principle were more constantly kept in view.38

The question whether a person is a partner or not depends in nearly all cases upon
whether he has the authority to act for those who are admittedly partners, and whether
those admittedly partners have the authority to act for him. In Cox v Hickman,39 the
creditors of a trader entered into an arrangement with him by which the trade was to be
conducted under their superintendence, and they were gradually to be paid off out of
the profits. These creditors may have agreed to take a share of the profits, and may
even have supervised the business, but they did not become partners, because the
business was not carried on their behalf:—

the real ground of the liability is that the trade has been carried on by persons acting on his
behalf.40

The test of liability, therefore, is not merely whether there is participation or sharing of
profits, but whether there is such sharing of profits as to constitute the relation of
principal and agent between the person taking the profits and those actually carrying
on the business.41 Here, two plaintiffs both were registered firms and were individually
carrying on their own business. They financed the large quantities of corrugated iron
sheets purchased by two defendants. Their financial agreement with the defendants
provided that pledgees (plaintiffs) would lend the pledgors (defendants) a certain
amount against the pledge of corrugated iron sheets. If there was default by the
pledgors, the pledgees were entitled to sell the pledged goods. The plaintiffs' share
was equal in the profits (i.e. receipts from defendants by interest on money advanced
and commission to be paid by pledgors). If there was any loss (which would be from
failure by debtors to pay the amount due), it was to be shared equally by two plaintiffs.
On a suit to recover the amount due, the defendants raised a defence that as the two
plaintiffs were partners in respect of lending transactions and as their partnership was
unregistered, the suit was not maintainable. It was held that one partner can always
bind another partner in any matter which falls within the scope of partnership business
subject to the provisions of section 20 of the Act. Here the defendants failed to prove
that two plaintiff firms were in any respect agents one for the other.

There is nothing to show that one pledgee could act on behalf of other.…I see no reason to
suppose that one of these two pledgees could have sold the pledged goods without
consulting the other pledgees.42
Further the court pointed out that part of the advances to the defendants were out of
the borrowing by the lenders from the bank and whenever cheque was drawn to make
advance to the defendants, the cheques were signed by one partner in both the plaintiff
firms. This showed co-lending by two plaintiffs and it did not show that the two
plaintiffs were partners in relation to financial arrangement with the defendant. There
was nothing to show that one of the plaintiff firms had any authority to act for the other
and so there was no partnership.

Finally the Bombay High Court observed that it may be very common for two or more
banks or financial houses to undertake jointly to finance some undertaking which
requires more extensive help than one lender is prepared to lend and it is very unlikely
that people acting together to finance an undertaking consider that they are becoming
partners.

Acting for all.—The other partners are bound by the act of one only when the act is in
the course of business. Whether an act is or is not done for carrying on in the usual
way business of the kind carried on by the firm, depends upon the nature of the
business and the practice of persons engaged in it.43

The said expression is intended to emphasize the principle that partners when they
carry on business of the firm act as agents as well as principals. Relationship of mutual
agency between the partners is the real test of partnership. If a partner does not take
part in the management of the business, it does not have the result that he is not
carrying on business as a partner because the essence of partnership is that each of
the partners is the agent of the others for the purpose of carrying on the partnership
business.44

[s 4.8] Partners.—

Persons who have entered into partnership with one another are called individually
"partners."

[s 4.9] Firm.—

Persons who have entered into partnership with one another are called collectively "a
firm." By the current usage of affairs, a firm is distinct from its members. They may
have claims on the firm's property, but it is not theirs. It has separate accounts, and is
their debtor and creditor. Although in the commercial sense "a firm" has a distinct
meaning, yet both according to English and according to Indian Law, a firm is not a
legal entity. A firm is merely a collective name for the individuals, who have entered into
partnership. It is not a separate entity from the partners who compose it. Each
individual partner has a responsibility for the transactions effected and the liability
incurred by any one partner on behalf of the firm. A private property of each partner is
available to the firm's creditors for unsatisfied firm's debts. As a firm is not a legal
entity, there cannot be a partnership of firms, but when two firms combine, the legal
effect is that the individuals in the two firms become partners.45

Illustration

A, B and C are partners in X & Co., and D, E and F are partners in Y & Co. Both X & Co.
and Y & Co., combine and form Z & Co. The partners in Z & Co. will be A, B, C, D, E and F.
The result is that unless there is a contract to the contrary, the firm of Z & Co., would be
dissolved by the death of any one of the partners, e.g. D.
Proceedings by or against firms,—

Under the Code of Civil Procedure, 1908, Order 30, suits may be brought by and against
partners in the name of the firm, but this is only a matter of procedure. In the above
illustration A, B and C may give notice for dissolution of the firm of Z & Co. and the suit
for dissolution and accounts may be filed by X & Co., and after a declaration has been
made under Order 30, the suit will proceed as one by A, B and Co.46

Distinguished from other associations:—

A partnership is to be distinguished from other kinds of association e.g. a club, a

society or a company.

In the case of a club or a society, the two essential ingredients i.e. intention to share
profits47 and an intention to constitute one member as agent for another member48
are lacking.

In case of a company, the later is a juristic entity distinct from its shareholders while a
firm is a compendious name for all the partners.49 A shareholder has no interest in the
property of the company while a partner has an interest in the property of the firm.49

Distinction between a partnership and a registered company:—

Partnership Registered company

(1) Formed by an agreement, express or (1) Formed by registration under Indian
implied. Companies Act.
(2) Not a legal entity or personality from the (2) Separate legal entity or personality distinct
partners who compose it. from its members (or share holders).
(3) A partner has an interest in the assets of (3) A member has no interest in the assets of
the partnership. the company.
(4) It cannot have more than 20 partners. (4) Its members may be more than 20.
(5) Liability of partners is unlimited. (5) Liability of its members is limited.
(6) A creditor can sue in the name of the firm or (6) A creditor can sue the company alone and
in the names of its partners. cannot sue its members except in case of
certain offences.
(7) Partnership deed is not open to public (7) Its memorandum and Articles of
inspection and the outsiders are not presumed Association are open to public inspection.
to have any knowledge of its contents.
(8) Every partner has an implied authority to act (8) No member has any implied authority to act
as agent of the firm and other partners. for the company or any other members.
(9) A partner can transfer his share but the (9) Share of a member can be transferred.
transferee does not become a partner and has Transferee has full rights of the Transferor
a right to receive a share of profits but has no member.
other rights.
(10) Partnership Deed can be altered at any (10) Its Articles of Association and
time by agreement. Memorandum can be altered according to the
statutory provisions of the Indian Companies
Act.
(11) Upon the insolvency of partner, the firm (11) Upon the insolvency of a member—
stands dissolved unless there is a contract to shareholder—the company is not affected at
the contrary. all.
Co-ownerships simpliciter between joint purchasers, co-tenants, co-heirs are
distinguishable from partnerships. Co-owners may share profits but not by virtue of
agreement but may do so by virtue of their status; one co-owner is not the agent of the
other co-owner; a co-owner may transfer his share to a stranger but a partner cannot
do so.50

For partnership distinguished from joint Hindu family see section 5.

Firm name.—The name under which the business of the partners is carried on is called
the "firm name." A firm name shall not contain any of the following words, namely,
"Crown", "Emperor," "Empress", "Empire", "Imperial", "King", "Queen", "Royal" or words
expressing or implying the sanction, approval or patronage of Government, except
when the State Government signifies its consent to the use of such words as part of
the firm name by order in writing.51 Otherwise, there are not prescribed forms for the
style of a firm, and the liberty of partners to assume any firm name they please is
bounded only by the general rules as to goodwill and trade-names. A firm name may be
personal or impersonal, singular or plural, and need not contain the name of any
existing partner. "X & Co.," "X, Y & Z", "the X, Co.," "X & Son," "X & Sons," "X Brothers" and
other varieties, are alike, usual and allowed.

Individuals may carry on business under any name and style they may choose to adopt,52

provided they do not adopt a name tending to mislead the public into confusing them
with others already trading under the same or like names. The Court will not interfere
merely because the similarity may be an occasion for careless people to make
mistakes. Lord Justice Knight Bruce said in a celebrated judgment observed:

All the Queen's subjects have a right, if they will, to manufacture and sell pickles and sauces,
and not the less that their fathers have done so before them. All the Queen's subjects have a
right to sell these articles in their own names, and not the less so that they bear the same
name as their fathers.53

Where fraudulent intention is shown, it is not a sufficient answer for the defendant to
say that the name he is using in business is the name he has adopted for all purposes;
freedom of choice does not extend to choosing just that name which will enable one to
appropriate the reputation of another man's goods.54

[s 4.10] Partnership is not heritable status but one founded on contract.—

It is clear that when there are only two partners constituting the partnership firm, on the
death of one of them, the firm is deemed to be dissolved despite the existence of a
clause which says otherwise. A partnership is a contract between the partners. There
cannot be any contract unilaterally without the acceptance by the other partner.
Persons who are the legal representatives of a deceased partner cannot be asked to
continue the partnership. There is no legal obligation upon them to do so as
partnership is not a matter of heritable status but purely one of contract, which is also
clear from the definition of partnership under section 4.55

1 Birdichand v Harakchand, (1940) 190 IC 613 : (1940) AN 211.

2 CIT v G Parthasarthy Naidu, (1999) 236 ITR 350 (SC) : (1998) 8 SCC 487 .
3 See the Indian Partnership Act, 1972, section 3. As to who are competent to contract, see
section 11 of the Indian Contract Act, 1872.
4 Shankar v Shankar, AIR 1956 Bom 165 .
5 Shardaprasad Gokul Prashad v Nomanbhai Shamsuddin, AIR 1937 Nag 68 : (1937) 169 IC 95 .
6 Re State of Madras, AIR 1958 Mad 394 : (1958) 1 Mad LJ 206.
7 Chhedi Lal v CIT, AIR 1942 Oudh 108 : (1942) 17 Luck 426 : 197 IC 478.
8 Pichappa Chettiar v Chockalingam Chettiar, AIR 1934 PC 192 : (1934) 67 Mad LJ 366 : 36 Bom
LR 976 : 150 IC 802; Kanhaya Lal v Devi Dayal, AIR 1936 Lah 514 .
9 Gangayya v Venkatramiah, (1918) 41 Mad 454; Kharidkar Kapra Co, Ltd v Daya Kishan, (1921)
43 All 116 .
10 Gannmani Anasuya v Parvatini Amerendra Chowdhary, AIR 2007 SC 2380 : (2007) 10 SCC 296
: [2007] 7 SCR 201 .
11 Hosain Kasim Dada v Com IT Bengal, (1937) 2 Cal 160 . See also S Magnus v CIT, Bombay,
AIR 1958 Bom 467 : (1958) 60 Bom LR 41 : ILR (1958) Bom 428 .
12 Hossen Kasam v CIT, (1941) Cal WN 629 : (1937) 2 Cal 160 .
13 Peeran Sahib v Jamaluddin, AIR 1958 AP 48 .
14 Rashiklal & Co v CIT, Orissa, AIR 1997 SC 4389 : (1998) 2 SCC 49 .
15 The Indian Partnership Act, 1932, section 2(b). See notes to section 2(b).
16 Chettyar Firm v Chettiyar Firm, AIR 1933 Rang 120 : 144 IC 1007.
17 Badri Prasad v Nagarmal, AIR 1959 SC 559 : [1959] SCR Supp (1) 709.
18 O'Connor v Ralston, (1920) 3 KB 451 .
19 Hyams v Stuart King, (1908) 2 KB 696 .
20 Jeffrey & Co v Bamford, (1921) 2 KB 351 .
21 Gherulal Parekh v Mahdeodas, AIR 1959 SC 781 : [1959] SCR Supp (2) 406.
22 See section 87 of the Bombay Reorganisation Act (XI of 1960).
23 Lindley on Partnership (13th Edn 1971) p 83; See Abdul Latiff v Gopeswar, AIR 1933 Cal 204 ;
Raghunandan v Hormasji, AIR 1927 Bom 187 : (1927) 29 Bom LR 207 .
24 Ragkunandan v Hormasji, AIR 1927 AB 187 : (1927) 51 Bom 342, 29 Bom LR 207, 100 IC
1025; British Cotton Growers' Association (Punjab) Ltd v CIT, AIR 1937 Lah 338 : (1937) Lah 306,
168 IC 549.
25 Ragkunandan v Hormasji, AIR 1927 AB 187 : (1927) 51 Bom 342 : 29 Bom LR 207 : 100 IC
1025; British Cotton Growers' Association (Punjab) Ltd v CIT, AIR 1937 Lah 338 : (1937) Lah 306 :
168 IC 549.
26 Raghumal v Official Assignee of Calcutta, AIR 1924 Cal 424 : (1923) 28 Cal WN 34.
27 Gokuldas v Kesherao, (1937) Nag 358, 169 IC 855, (1937) AN 134.
28 CIT v B Kejriwal & Co, AIR 1958 Pat 165 : (1958) 34 ITR 777 (Pat).
29 "If 16 annas make a rupee, a 10 annas share would mean 10/16th share".
30 See Chimanram v Jayantilal, AIR 1939 Bom 410 : (1939) Bom 616 : 41 Bom LR 899.
31 Green v Beesley, (1835) 2 Bing NC 108.
32 But letting furnished lodging is business. See Pollock's Digest of the Law of Partnership, 12th
Edn, p 3 fn (d).
33 Illustration (a) to section 239 of Indian Contract Act; Birdichand v Harakchand, (1940) 190 IC
613 : (1940) AN 211.
34 Illustration (b) to section 239 of Indian Contract Act.
35 Illustration (c) to section 239 of Indian Contract Act.
36 Illustration (d) to section 239 of Indian Contract Act.
37 Illustration (e) to section 239 of Indian Contract Act.
38 Per Lord Wensleydale in Cox v Hickman, (1860) 8 HLC 268, 312. This is expressly recognized
in section 18.
39 Cox v Hickman, (1860) 8 HLC 268.
40 Cox v Hickman, (1860) 8 HLC 268, 306.
41 Chimanram v Jayantilal, (1939) Bom 616 : 41 Bom LR 899 : 184 IC 397 : (1939) AB 410;
Meenakshi Sundaram v Subbiah Cheltiar, AIR 1957 Mad 297 : (1956) 69 LW 1006 ; Hirabai v
Bhagirath & Co, AIR 1946 Bom 174 : 47 Bom LR 808 : 46 Bom 173.
42 Chimanram v Jayantilal, (1939) Bom 616 : 41 Bom LR 899 : 184 IC 397 : (1939) AB 410, 412.
43 Mara v Browne, (1896) 1 Ch 199 ; Baird's case (1870) 5 Ch 725 , 733. See Haji Isa v Saru Bai,
AIR 1938 Nag 324 : (1938) 177 IC 831 .
44 Wallace Bros v CIT, AIR 1948 PC 118 at 121 para 23 : (1948) 50 Bom LR 482 (PC).
45 Seodayal v Joharmal, (1923) 50 Cal 549 ; Muhammad Abdul v Sheikh Ismail, AIR 1934 Mad 9 :
148 IC 1137.
46 Ram Singh v Ram Chand Tirath Ram, AIR 1936 Lah 78 : 157 IC 1113.
47 Re State of Madras, AIR 1958 Mad 394 : (1958) 1 Mad LJ 206.
48 Samuel Bros Ltd v Whetherly, (1908) 1 KB 184 .
49 Bacha Gazdar v CIT, Bombay, AIR 1955 SC 74 : [1955] 1 SCR 876 .
49 Bacha Gazdar v CIT, Bombay, AIR 1955 SC 74 : [1955] 1 SCR 876 .
50 Champaran Cane Concern (dissolved) v State of Bihar, AIR 1963 SC 1737 : (1964) 2 SCR 921 .
51 The Indian Partnership Act, 1932, section 58(3).
52 Erle, CJ, Maugham v Sharpe, (1864) 17 CBNS 443 (462) : 142 RR 439.
53 Burgess v Burgess, (1853) 3 De GM & G 896, 904 : 193 ER 351.
54 Pinet et Cie v Maison Louis P'inet, (1898) 1 Ch 179 : 67 LJ (CH) 41 : 17 LT 613 : 14 TLR 87.
55 Mohd Laiquiddin v Kamala Devi Misra (Dead) by LRs, (2010) 2 SCC 407 : [2010] 1 SCR 873 :
(2010) 2 Mad LJ 820 (SC).
The Indian Partnership Act (Act IX of 1932)

Chapter II The Nature of Partnership

S. 5. Partnership not created by status.-

The relation of partnership arises from contract and not from status; and, in particular,
the members of a Hindu undivided family carrying on a family business as such, or a
Burmese Buddhist husband and wife carrying on business as such, are not partners in
such business.

[s 5.1] STATE AMENDMENT

Goa, Daman and Diu.—In its application to U.T. of Goa, Daman and Diu for the words
"Burmese Buddhist husband and wife carrying on business as such", substitute the
words "a husband and wife under the regime of communion of property carrying on
business as such".—Goa Daman and Diu Act 6 of 1966, Section 2 (22 August 1966).

[s 5.2] Contract and status.—

When a person agrees with another to share the profits of a business, to be carried on
by them together, the partnership arising from such agreement is said to be the
outcome of contract. If, however, as in a joint Hindu family a person becomes entitled
to a share in the family business by the mere fact that he is either born or adopted in
the family, he is not a partner within the meaning of the Indian Partnership Act, 1932,
but a joint owner of the business. The joint ownership so created is not a partnership
arising out of a contract, but merely a family quasi-partnership created by the operation
of law. Two Hindu joint families cannot unite to constitute a partnership but their
managing members may become partners, each having rights and duties with
reference to their respective families.56Since the relationship is created by contract,
every liability arising even in individual capacity could affect the qualification of
partners to be awarded a contract. Consequently, a liability of a person as dues to the
government in a liquor vending contract could constitute a disqualification for award of
contract to a partnership in which the said person was a partner.57

[s 5.3] Difference between partnership and joint Hindu family.—

In case of a joint Hindu family business (i) one coparcener is not the agent of the
others, (ii) all powers are vested in the karta,58 (iii) a coparcener is liable to the extent
of his share in the family estate but in case of a partnership debt, a partner's own
separate estate is also liable,59 (iv) death of a partner dissolves partnership but in case
of the death of a coparcener the family business is not dissolved, and (v) a coparcener
cannot ask, unlike a partner, for an account of past profits and losses.60

See section 4 under the heading "There must be an agreement."

[s 5.4] Contract.—

Contract of partnership may be proved by an express or an implied contract.61 Section

11 clearly specifies this.

[s 5.5] Commencement of partnership.—

Ordinarily partnership deed provides for its commencement. If it does not provide for
its commencement, the partnership comes into existence from the date of its
execution.62 The provisions of section 31(2) also provide that an incoming partner is
not liable for the acts of the firm prior to the date of his introduction.

56 Udai Chand v Than Singh, (1935) 62 Cal 586 : 157 IC 937 : AIR 1935 Cal 537 .
57 Modern Hotel v CCE, (2016) 15 SCC 620 : 2015 (9) Scale 50 .
58 Sakrabhai v Maganlal, (1902) 26 Bom 206 : 3 Bom LR 738.
59 Sakrabhai v Maganlal, (1902) 26 Bom 206 : 3 Bom LR 738.
60 Samalbhai v Someshwar, ILR (1880) 5 Bom 38 .
61 Dwarkadas v Bansilal, AIR 1956 Ajm 8 .
62 Shiamlal v Shiamlal, AIR 1935 All 1008 : 159 Ind Cas 433.
The Indian Partnership Act (Act IX of 1932)

Chapter II The Nature of Partnership

S. 6. Mode of determining existence of partnership.-

In determining whether a group of persons is or is not a firm, or whether a person is or

is not a partner in a firm, regard shall be had to the real relation between the parties, as
shown by all relevant facts taken together.

Explanation 1.—The sharing of profits or of gross returns arising from property by

persons holding a joint or common interest in that property does not of itself make
such persons partners.

Explanation 2.—The receipt by a person of a share of the profits of a business, or of a

payment contingent upon the earning of profits or varying with the profits earned by a
business, does not of itself make him a partner with the persons carrying on the
business;

and, in particular, the receipt of such share or payment—

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

(b) by a servant or agent as remuneration,

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

(d) by a previous owner or part owner of the business, as consideration for the sale
of the goodwill or share thereof,

does not of itself make the receiver a partner with the persons carrying on the
business.

[s 6.1] Determining existence of partnership.—

In Ross v Parkyns63 Jessel, MR, stated the law as follows:

It is said (and about that there is no doubt) that the mere participation in profits inter se
affords cogent evidence of partnership. But it is now settled by the cases of Cox v.
Hickman,64 Buller v. Sharp,65 and Mollwo, March & Co. v. Court of Wards,66 that although a
right to participate in profits is a strong test of partnership, and there may be cases where
upon a simple participation in profits there is a presumption, not of law, but of fact, that
there is a partnership, yet whether the relation of partnership does or does not exist must
depend upon the whole contract between the parties, and that circumstance is not
conclusive." The law as stated above has been restated in this section. The section also
indicates the manner in which the general principle is to be applied to particular
circumstances. The question whether the relation of partnership does or does not exist,
"must depend on the real intention and contract of the parties.67

[s 6.2] Explanation 1.—

The mere fact that a person is entitled to a share in the profits does not make him a
partner, because the real relationship may be one of debtor and creditor.

Illustrations

(1) A Rajah entered into a contract with a partnership firm as follows. The Rajah was to
receive in consideration of advances a commission on the net profits of the partnership
business. Large powers of control over the business were given to him for his
protection, but no power to direct transactions. It was held that the contract was not of
partnership but of loan and security between a debtor and a creditor.68

(2) A does in his own name the business of loading and unloading wagons for a limited
company. A appoints B to manage the business. It is agreed between them that B shall
get a 12 annas share out of the net profits as remuneration, and that A shall get a 4
annas share but shall not be liable for any loss.69 A was to take contract of loading and
unloading in his own name and was to have a voice in determining what work was to be
undertaken or when the work was to be stopped or whether the Contract with the
company was to be renewed or not on the expiry of its period. On this the Court held
that the relationship is not of partnership but is of principal and agent as A was entitled
in his own name to deal with the company.70

The legal existence of a partnership has to be determined from all the facts. A
statement in a document that nothing therein contained is to constitute the relationship
of partners will not necessarily prevent the parties from being partners in the eyes of
the law. So too, a mere statement that the parties are to be partners will not necessarily
constitute them partners in law.71 Further, although a person may hold himself out to
be a partner and be liable to third parties accordingly, yet it does not necessarily follow
that he is partner in law.72 In Mollwo, March & Co v Court of Wards their Lordships said:

If cases should occur where any persons, under the guise of such an arrangement (i.e.
apparently a debtor and creditor arrangement), are really trading as principals, and putting
forward as ostensible traders, others who are really their agents, they must not hope by
such devices to escape liability; for the law, in cases of this kind, will look at the body and
substance of the arrangements, and fasten responsibility on the parties according to their
true and real character.73

Illustrations

(1) A and B enter into a partnership for a fixed term. It is agreed that if either of them
dies before the end of the term his representatives shall during the rest of the term
receive the share of the profits he would have been entitled to if living. A dies, and his
share of the profits is paid to his executors as provided by the agreement. The
executors are not partners.74

(2) A, B and C enter into an agreement in writing reciting that A and B have agreed to be
partners, and have requested C to lend Rs 1,00,000 to be invested in their firm. The
agreement declares that the money is advanced by C to A and B by way of loan and
such advance shall not be considered to make C a partner. By other clauses of the
agreement C is entitled to inspect the books, to receive a copy of the annual account, to
share profits in a fixed proportion, and has the option to dissolve the partnership and
conduct the liquidation of the business in certain events. C's capital is not to be
withdrawn till the termination of the partnership. Under such an agreement C is a
partner with A and B.75

(3) A purports to enter into a partnership agreement with B and agrees to make
advances for use in business. According to the terms of the agreement, A is to receive
12% interest on his advances as the share of his profits. By other clauses of the
agreement, A was authorised to receive payments of bills due to B on account of the
contracts executed by him and to give receipts in his own name as the agent of B. It
was held that A and B are not partners, for A was to receive interest whether there was
a profit or not.76

(4) A and B, both of them attorneys-at-law, came to the following agreement, B "agreed
to admit A as a partner" in his (B's) firm. It was agreed that the partnership was to be
for one year; that in lieu of his share of profits A was to receive Rs 500 per month and
was not to be responsible for any losses or liabilities of the firm: and on its termination
he was to cease to have any interest in the firm and its property. The clients of the firm
were informed by a general notice that A was "admitted into partnership." A and B are
partners although A is entitled only to a fixed salary.77

Referring to the facts of the above case and the argument that the above agreement
did not constitute a partnership in law, because they did not agree to share the profits
between them, Marten, CJ, said as follows:

Partners can agree to share those profits in any way they like. They may agree to share
them equally. They may also agree, in my opinion, that one partner is to receive a fixed
annual or monthly sum in lieu of a sum varying in accordance with the profits actually
earned. In other words the defendant (i.e., A) thus became a salaried partner which is
an expression we are quite familiar with not only in England but also in Bombay."78 In
Girdharbhai v. Saiyed Mohd. Kadri79 the Supreme Court observed that Section 6
reiterates that in determining partnership regard shall be had to real relation between
parties as shown by all the relevant facts taken together. So where a partner brought in
as his asset tenancy in the premises in which partnership business was to be carried
on, the fact that he was to share profits only and was to get a fixed percentage of the
profits and that he was not to operate bank account. On this the Supreme Court
concluded that it could not be said that no genuine partnership had come into
existence.

[s 6.3] Explanation 2.—

This explanation deals with certain instances which commonly occur.

63 Ross v Parkyns, (1875) LR 20 Eq 331, 335.

64 Cox v Hickman, (1860) 8 HLC 268.
65 Buller v Sharp, (1865) LR 1 CP 86, Ex Ch.
66 Mollwo, March & Co v Court of Wards, (1872) LR 4 PC 419 : (1872) Sup Vol IA 86.
67 Mollwo March & Co, v Court of Wards, (1872) Sup Vol IA 86 : (1872) LR 4 PC 419; Hari Sao v
Gulab Chand, AIR 1940 Pat 116 ; Thota K Somayya v Commissioner, Excess Profits Tax, AIR 1956
Hyd 87 ; Ram Avatar v Ramjivan, AIR 1956 Hyd 131 ; MP Davis v Commissioner of Agricultural
Income Tax, AIR 1959 SC 719 : (1959) 35 ITR 803 (SC).
68 Mollwo, March & Co v Court of Wards, (1872) Sup Vol IA 86 : (1872) 4 PC 419.
69 If 16 annas make a rupee, a 4 annas share and 12 annas share would mean 25% and 75%,
respectively.
70 Abdul Latiff v Gopeswar Chattoraj, AIR 1933 Cal 204 : (1932) 56 Cal LJ 172 .
71 Mamooji v Tayebali, (1933) AS 210 : 146 IC 730: Kamidan Sarda v Sailaja Kanta, AIR 1940 Pat
683 : (1940) 19 Pat 715 : 192 IC 187. MP Davis v Commissioner of Agricultural Income-Tax, AIR
1959 SC 719 : (1959) 35 ITR 803 (SC).
72 Raghunandan Nanu v. Hormasjee, AIR 1927 Bom 187 : (1927) 51 Bom 342, 346–347 : 29
Bom LR 207 : 100 IC 1025.
73 Mollwo, March & Co v The Court of Wards, (1872) Sup Vol IA 86, 106 : (1872) 4 PC 419; Steel
Bros & Co Ltd v CIT, AIR 1958 SC 315 : (1958) 33 ITR 1 .
74 Holme v Hammond, (1872) LR 7 Ex 218.
75 Ex parte Delhasse, (1877) 7 ChD 511 .
76 Karnidan Sarda v Sailaja Kanta, AIR 1940 Pat 683 : (1940) 19 Pat 715.
77 Raghunandan Nanu v Hormasjee Benzoojee, AIR 1927 Bom 187 : (1927) 51 Bom 342 : 29
Bom LR 207 : 100 IC 1025.
78 Raghunandan v Hormasjee, (1927) 51 Bom 342, at pp 248–349 : 29 Bom LR 207 : 100 IC
1025: 1927 Bom 187.
79 Girdharbhai v Saiyed Mohd Kadri, AIR 1987 SC 1782 : (1987) 3 SCC 538 .
The Indian Partnership Act (Act IX of 1932)

Chapter II The Nature of Partnership

S. 7. Partnership at will.-

Where no provision is made by contract between the partners for the duration of their
partnership, or for the determination of their partnership, the partnership is "partnership
at will".

Two conditions are to be complied with before partnership can be regarded as a

Partnership at will. Firstly, there should be no provision in the contract between the
partners for the duration of their partnership. Secondly, there should be no provision in
their contract for the determination (i.e. ending) of their partnership. If either of these
provisions exists, it is not a partnership at will. However, though there may be no
express provision in the deed of partnership as to its duration or determination, there
may be an implied agreement to continue partnership for the definite period or from the
nature of partnership as well as from the relevant circumstances as implied term as to
when the partnership will determine may be gathered. In such cases also there can be
no partnership at will. Thus we may say that there is no partnership at will where there
is in the contract of partnership an express or implied provision as to its duration or its
determination.80 The essence of partnership at will is that it is open to either partner to
dissolve the partnership by giving notice.81

In the leading case of K Thiagarajah v Muthappa, earlier referred to, there were two
partners doing business jointly by securing managing agency of the mills. The
agreement of partnership between them regarding managing agency of the mills
recited for carrying on the management of the mill in rotation for first four years to
appellant and thereafter respondent to manage the mill for the next four years and in
the same way thereafter. Even the heirs of the partners would also carry on the
management in rotation. The Supreme Court considered the above provision as well as
the nature of business of partnership and came to the conclusion that it could not be
contemplated by the parties that partnership could be brought to an end by notice by
either party and so it was not a partnership at will. The intention obviously was to have
partnership of some duration though the duration was not expressly fixed in the
agreement. The Supreme Court also found that the partnership was formed for the sole
business of carrying on managing agency business by rotation and therefore followed
that the partnership would determine (i.e. comes to an end) when managing agency
terminates. The terms of the contract here clearly imply a duration of partnership which
corresponds with the time when the managing agency terminates.

A provision in the agreement of partnership for the retirement of a partner disrupts the
partnership, only as between the retiring partner and the continuing partners but not as
between all the partners. So a provision for retirement of a partner is not a provision
"for the determination of their partnership within the meaning of section 7 of the Act.
The pronoun "their" in section 7 of the Act stands for partnership between all the
partners and not partnership of only one partner with the rest, as the Gujarat High Court
in the well reasoned judgment observed.82 When a partner retires from a firm, there is
no dissolution of partnership between all the partners. It does not involve severance of
jural relation of partnership inter se between all the partners. The partnership continues
as between the continuing partners whose jural relation remains unaffected. As
dissolution of partnership between all the partners is contemplated in the definition of
partnership at will, it follows that a provision for retirement of a partner has no bearing
on dissolution of partnership. The law of partnership draws a clear distinction between
retirement of a partner under section 32 (Chapter V) and dissolution of firm under
section 39 (Chapter VI) of the Act. When a partner retires from a firm, there is no
dissolution of a firm. In view of this, the High Court rejected the contention which
sought to equate the retirement of partner with the dissolution of firm. So a provision
for the retirement of a partner is not a provision for the determination of partnership as
contemplated in section 7 of the Act.

In Suresh Kumar Sanghi v Amrit Kumar Sanghi,83 agreement of partnership provided

that partnership was not to be dissolved on death or retirement of a partner but was to
be continued with the other partners and legal heirs of deceased or retiring partner
whose legal heirs can simply claim admission to firm with the same rights of deceased
or retiring partner. Further, there was a term that no revaluation of assets of partnership
was to be made on death or retirement of a partner. On this type of partnership the
Delhi High Court held that parties never intended that partnership be dissolved at sweet
will of any of the partners rather their intention was that business of partnership to
continue as long as possible notwithstanding the death or retirement of any partner.
The term against revaluation of asset pointed out that the outgoing partner was simply
entitled to the capital standing to his account on the date of his retirement or death.
This provision could not exist if there had been partnership at will, according to the
Delhi High Court.

In Talakchand v KD Shetti84 clause 5 of Partnership deed provided that a partner

desiring to retire to give 6 months' notice of his intention to do so to the other partners
to enable account of business to be taken for ascertaining assets and liability and it
was optional for the other partner to continue business in the firm name on paying unto
him the value of the dues on his share. On this, it was contended that the clause
provided for determination of partnership and therefore it was not a partnership at will.
Rejecting this contention the Calcutta High Court observed that clause 5 was not a
provision for dissolution of partnership but for retirement of a partner under certain
express term. Section 32(1)(C) shows that even in case of partnership at will a partner
may retire by giving notice in writing to all partners of his intention to retire. Thus
Partnership Law makes it clear that a provision for retirement is not in-consistent with
a partnership at will though firm consists of two partners only.

In Moss v Elphick85 a question arose whether a partnership of two persons providing

that it would be terminated only by mutual agreement of the parties was a partnership
at will or not when one partner only gave notice to the other. The other partner
contended that the said notice was inoperative. Accepting this argument the court held
that it was not a partnership at will as partnership at will is determinable at the will of
either party, while in this case, it provided that partnership shall be for the joint lives of
parties unless terminated by mutual agreement. This is thus a special provision as to
duration of partnership and so was not a partnership at will.

[s 7.1] Partnership at will.—

This definition is inserted, as the phrase "partnership at will" is used in other sections,
in particular section 43. The expression "partnership at will" has always been used in
the law of partnership and has always had the same meaning that stated in this
section.

Where a partnership deed provided that upon the death of a partner one of his nephews
shall act in his stead, it was held that this was a partnership at will.86 The High Court
did not agree that the said clause meant that parties must be considered to have
agreed to carry on partnership during the life time of the plaintiff. On the contrary the
court construed the clause to be not for a fixed period and such a provision was not in-
consistent with a partnership at will.

In a partnership at will it is open to a partner, even if there is no dispute between the

parties, to dissolve the firm by virtue of section 43 of the Act. His right to dissolve
partnership cannot be taken away by arbitration clause in a partnership deed. It is
difficult to understand, the court observed, how a partner who desires to dissolve the
firm can be forced to resort to arbitration. It follows, therefore, that the clause about
arbitration in the partnership deed has application only during subsistence of
partnership and it cannot take away right conferred on a partner by section 43 of Act to
have partnership dissolved.87

See notes to section 17(b).

[s 7.2] Presumption as to duration.—

The court declined to infer that the partnership was for a particular period from the fact
of the purchase of leasehold interest for particular period88 or from the fact that the
partnership had charged its assets for the payment of its debts.89

80 See K Thiagarajah v Muthappa, AIR 1961 SC 1225 at 1229 para 6; Keshavlal v Bhailal, AIR
1968 Guj 157 at para 2.
81 Suresh Kumar Sanghi v Amrit Kumar Sanghi, AIR 1982 Del 131 at 137 para 5 : (1983) 4 DRJ
186 .
82 Keshavlal v Bhailal, AIR 1968 Guj 157 at 161 para 4.
83 Suresh Kumar Sanghi v Amrit Kumar Sanghi, AIR 1982 Del 131 .
84 Talakchand v KD Shetti, AIR 1973 Cal 279 .
85 Moss v Elphick, (1910) 1 KB 846 .
86 Sami Aiyangar v Srinivasa, (1909) 19 Mad LJ 77.
87 Manibhai S Patel v Swashray Construction Co, (1982) 1 GLR 312 .
88 Crawshay v Maule, (1818) 36 ER 479 : 18 RR 126.
89 King v Accumulative Assurance Co, (1857) 3 CBNS 151 : 27 LJCP 57.
The Indian Partnership Act (Act IX of 1932)

Chapter II The Nature of Partnership

S. 8. Particular partnership.-

A person may become a partner with another person in particular adventures or

undertakings.

[s 8.1] Particular partnership.—

This section was inserted to meet cases which are probably much more frequent in
India than in England. Where persons enter into an agreement constituting a
partnership limited to a joint trading adventure, and goods are purchased, ostensibly by
an individual adventurer but truly and substantially for the purpose of the joint
adventure, the adventurers are liable as partners; but there is no such responsibility for
goods purchased before the partnership agreement upon the credit of an individual
adventurer, though they are afterwards brought into stock as his contribution to the
joint adventure.90 It need hardly be stated that all the requisites of a partnership must
be present before a transaction between two persons limited to a single adventure is
held to be a partnership.91 This section is intended to show that even a single
adventure may constitute a "business," as defined under section 2(b), for the purposes
of a partnership business.

[s 8.2] Where an adventure becomes illegal.—

See notes to section 41(b) proviso. Where such partnership is dissolved. See section
42(b).

[s 8.3] Partnership deed.—

As explained in foregoing comments an agreement of partnership need not be in

express but can be inferred from the course of conduct of the parties and that the
relationship arises from a contract. Since a partnership is required to pay income-tax,
the partnership is required to be registered under section 26A of the Income-Tax Act. It
is therefore usual and in practice, a contract of this kind is executed and it is called a
partnership deed. Such a deed usually contains provisions relating to points as follows:
—

(i) Name of the firm.

(ii) Duration of partnership.

(iii) Nature of business.

(iv) Place where business is to be carried on.

(v) Capital brought in by each individual partner.

 (vi) Property of the firm.

(vii) Proportions of profits and losses of each partner.

(viii) Rights and duties of partners.

(ix) Provisions for accounts, audit, keeping of account books.

(x) Making up annual accounts and preparing annual balance sheet and division of
profits and losses and rectifying mistakes.

(xi) Further capital to be brought in.

(xii) Rate of interest on capital.

(xiii) Drawings by partners and specially by a working partner.

(xiv) Property of any partner given for use to the firm.

(xv) Dissolution of the firm.

(xvi) Retirement of a partner.

(xvii) Settlement of accounts, division of assets, profits etc., upon dissolution.

(xviii) Arbitration clause in case of dispute.

90 Kannali v Vora Karimji, (1915) 42 I.A. 48 : 39 Bom 261 : 17 Bom LR 103.

91 Suganmal v Mt Umraobai, AIR 1938 Ngp 550 : (1938) Nag LJ 403 .
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 9. General duties of partners.-

Partners are bound to carry on the business of the firm to the greatest common
advantage, to be just and faithful to each other, and to render true accounts and full
information of all things affecting the firm to any partner of his legal representative.

[s 9.1] STATE AMENDMENT

Maharashtra.—In section 9 for the words "or his legal representative" the words "his
heir or legal representative" shall be substituted.—Maharashtra Act 29 of 1984, section
3 (w.e.f. 1-1-1985).

The duties in general are:—

(1) To act to the greatest common advantage;

This duty be read along with the provisions of section 16. If a partner makes a personal
profit, he has to account for it to the firm, as making a personal profit would be acting
not to the greatest common advantage.

(2) To be just and faithful to each other;

Any fraudulent act or wilful default on the part of a partner would be inconsistent with
his duty stated above. Sections 10 and 13(f) elaborate this duty. This duty demands
uberrimae fidei amongst the partners.

(3) To render true accounts;

The provisions of sections 15 and 16 elaborate the duty enunciated herein. In order to
render true accounts, a partner has to keep accounts and vouchers relating to the
partnership dealings and moneys. If he fails to do so and mixes up with his private
affairs or moneys, he has to account for the same.1 A partner making secret profits has
to account for the same to the firm.

(4) Render full information;

This duty is part and parcel of the duty of being just and faithful to each other. The
underlying principle is that a partner should make a full disclosure and should not
conceal. If a partner sells a partnership property to a third party and then repurchases it
for himself, concealing material facts from his partners, he has violated his duty under
this section and has to account for the profit under section 16.2 Similarly if he sells his
own goods to the firm at a higher price without disclosure of his prior purchase, he will
have to account for the profits.3 In a transaction between partners for the sale and
purchase of a share in the business, if one of them is better acquainted with the
accounts than the other, it is his duty to disclose all material facts; but the party entitled
to such disclosure may elect at any stage to waive his right to further information, even
if he knows that there has been some concealment of facts which he has since
discovered, and believes that other facts are still concealed.4
1 Maung Tha Huyin v Mah Thein Myah, (1901) 28 Cal 53 (PC) : 27 IA 189.
2 Gordon v Holland, (1913) 108 LT Rep 385 (PC) : (1913) 82 LJPC 81 .
3 Kuhlirz v Lambert Bros Ltd, (1913) 108 LT Rep 565.
4 Law v Law, (1905) 1 ChD 140 .
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 10. Duty to indemnify for loss caused by fraud.-

Every partner shall indemnify the firm for any loss caused to it by his fraud in the
conduct of the business of the firm.

[s 10.1] Fraud.—

This section is mandatory and not subject to a contract to the contrary, so that there is
no doubt that a partner cannot contract himself out of liability for fraud, as he may do
in the case of wilful default.5 The innocent partners of a firm are liable to third parties
for the fraud of one of them, but under this section they are entitled to proceed against
the partner who has committed the fraud.6 For definition of "Fraud" see section 17 of
the Indian Contract Act, 1872.

5 See The Indian Partnership Act, section 13(f).

6 Thomas v Artherton, (1878) 10 ChD 185 .
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 11. Determination of rights and duties of partners by contract between the

partners.-

(1) Subject to the provisions of this Act, the mutual rights and duties of the partners
of a firm may be determined by contract between the partners, and such
contract may be express or may be implied by a course of dealing.

Such contract may be varied by consent of all the partners, and such consent
may be expressed or may be implied by a course of dealing.

(2) Agreement in restraint of trade.- Notwithstanding anything contained in section

27 of the Indian Contract Act, 1872 (9 of 1872), such contracts may provide that
a partner shall not carry on any business other than that of the firm while he is a
partner.

[s 11.1] "Subject to the provisions of this."—

These words are intended to show that a partnership contract will be subject to the
provisions of this Act. Where a provision is mandatory, the contract shall not prevail.
Thus court decreed dissolution of partnership prayed by the plaintiff on the ground of
section 44(f) of the Act i.e. the partnership could only be carried on at a loss, despite
the fact that partnership agreement provided against the dissolution and for the
continuance of partnership until the construction of dock was fully completed.7
Similarly, according to the Gujarat High Court8 this statutory right to dissolution was
not allowed to have been taken away by arbitration clause of partnership deed. The
clause providing for submission of disputes to arbitration does not have the effect of
taking away right conferred on a partner by section 43 of the Act to have partnership
dissolved.

[s 11.2] Liberty to the parties to determine their mutual rights and obligation.—

This section incorporates the principle that except in cases where this Act makes a
mandatory provision, the parties are entitled to agree to any terms and provide for their
mutual rights and obligations. The provisions of sections 12 to 17, 20 and 42 are
subject to the contract. The provisions of sections 9 and 10 are not subject to the
contract. The principles laid down in sections 11, 18 and 19 are subject to the
provisions of this Act.

[s 11.3] Variations by consent.—

Partners, if they please, may, in the course of the partnership, daily come to a new
arrangement for the purpose of having some addition or alteration in the terms on which
 they carry on business provided those additions or alterations be made with the unanimous
concurrence of all the partners.9

This section does not interfere with a judge's exercise of discretion under section 44
(corresponding to section 254 of the Indian Contract Act, 1872) which will not be
reviewed if not shown to be capricious or to disregard any legal principle.10 A partner's
claim to a decree for dissolution rests in its origin not on contract but on his inherent
right to invoke the court's discretion on equitable grounds, in spite of the terms that the
partnership shall continue and shall only be dissolved on certain specific contingency
which has not occurred. So where Defendants, a firm of contractors had undertaken
construction of New Alexandria Dock in island of Bombay and they entered into a
partnership with plaintiff providing that their partnership shall continue until
construction of dock was completed and partnership should then be wound-up.
However, from the very beginning, their business had a considerable loss and the
plaintiff sought remedy of dissolution from the court [under section 254 (6) of the
Indian Contract Act, 1872, corresponding to section 44(f) of the present partnership
Act] on the ground that business can only be carried on at a loss. The Court—despite
the term regarding the continuance of partnership while the construction of dock was
not completed—granted dissolution of partnership observing that to meet this precise
predicament the court's power to decree dissolution is conferred.

Illustrations

(1) A, B and C intending to enter into partnership, execute written articles of agreement,
by which it is stipulated that the net profits shall be equally divided. Afterwards they
carry on the partnership business for many years, A receiving one half of the net profits
and the other half being divided equally between B and C. All parties know of and
acquiesce in this arrangement. This course of dealing supersedes the provision in the
articles as to the division of profits.11

(2) A, B and C enter into an agreement of partnership. It is agreed that if any partner
desires to retire, he should sell his share to the other partners. In case of any dispute,
the matter should be referred to arbitration. A instead of carrying out the terms of the
partnership agreement files a suit for dissolution. Held, that the suit did not lie and in
view of the express agreement between the parties the provisions of section 44 had no
application.12

[s 11.4] Agreement against dissolution by Court.—

It must be noted that the contract contemplated in section 11 of the Act cannot be
contrary to the provisions of this Act as section 11 makes this clear by enacting
"subject to the provisions of this Act." So it is not open to the parties to the contract to
take away by contract the right of dissolution conferred on him by section 44 of the
Act.13 The J & K High Court observed that section 44 of the Act confers an absolute
and independent right on a partner to have partnership dissolved on the grounds
specified therein. Similarly, according to the Madras High Court14 section 11 of the Act
allows the contract between parties subject to the provisions of the Act and section 44
providing for dissolution by Court being one of the provisions of the Act, the contract is
undoubtedly subject to the right under section 44. Thus the right of dissolution under
section 44 is not subject to contract between the parties. Section 11, therefore, does
not overrule section 44 of the Act. The court also observed that in the Act itself
whenever a particular section is intended by the legislature to be subject to the contract
between the partners, it has expressly so stated e.g. sections 12–17 and 42 of the Act.
On the other hand, the Allahabad High Court15 viewed that section 11 of the Act has
been so worded as to make it clear that the relationship of partners should be
determined by the contract between the parties unless the same was prohibited by any
provision in the Act and that provision for arbitration not being illegal or invalid under
any provision of the Act, the plaintiffs suit for dissolution cannot lie and the partnership
should not be dissolved on the happening of the contingencies mentioned in the Indian
Partnership Act, 1932. While coming to the aforesaid conclusion the Allahabad High
Court distinguished the Privy Council case of Rahmatunnisa Begum v Price,16 earlier
referred to, on the ground that there the decree of dissolution of the Partnership was
the only appropriate protection available to the plaintiff, while that was not so before
them as in the Allahabad case the dissatisfied partner with the conduct of the business
of the firm had other remedies besides dissolution e.g. selling ones share or submitting
dispute to arbitration.

Secondly, in the Privy Council case the partnership business had considerable loss from
the beginning while this aspect was absent, and on the contrary the working of the firm
showed considerable profit. Lastly, the Privy Council case was decided on the wordings
of section 252 of the Indian Contract Act, 1872, whose wordings were not the same as
those of section 11 of the Indian Partnership Act, 1932, with which the Allahabad High
Court was concerned.

See Gujarat High Court decision for arbitration clause and right of dissolution on page
155 note 8 supra.

7 Rehmat-un-Nissa Begam v Price, 45 IA 61 : 42 Bom 380.

8 Manibhai S Patel v Swashray Construction Co, 23 (1982) IGLR 312.
9 Per Lord Langdale, MR, England v Curling, (1844) 8 Beav 129, 133.
10 Rehmat-un-Nissa Begam v Price, (1917) 45 IA 61 , 42 Bom 380.
11 See Repealed section 252 of the Indian Contract Act, 1872.
12 Dropadi v Bankeylal, (1939) All 577 : 184 IC 511, (1939) AA 548. But this case has been
dissented from in Venkataswami v Venkataswami, AIR 1954 Mad. 9 : (1953) 2 Mad LJ 396.
13 Hardutt Singh v Mukha Singh, AIR 1973 J&K 46 .
14 V Venkataswamy v G Venkataswami, AIR 1954 Mad. 9 : (1953) 2 Mad LJ 396.
15 Dropadi v Bankey Lal, AIR 1939 All 548 .
16 Rahmatunnisa Begum v Price, AIR 1917 PC 116 : 42 Bom 380.
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 12. The conduct of the business-

Subject to contract between the partners—

(a) every partner has a right to take part in the conduct of the business;

(b) every partner is bound to attend diligently to his duties in the conduct of the
business;

(c) any difference arising as to ordinary matters connected with the business may
be decided by a majority of the partners, and every partner shall have the right to
express his opinion before the matter is decided, but no change may be made in
the nature of the business without the consent of all the partners; and

(d) every partner has a right to have access to and to inspect and copy any of the
books of the firm.

[s 12.1] STATE AMENDMENT

Maharashtra.—In its application to the State of Maharashtra, in section 12,—

(a) in clause (c), the word "and" appearing at the end shall be deleted;

(b) in clause (d), for the words "books of the firm," the words "books of the firm;
and" shall be substituted;

(c) after clause (d), the following clause shall be added, namely:—

(e) in the event of the death of a partner, his heirs of legal representatives or their
duly authorised agents shall have a right of access to and to inspect and copy
any of the books of the firm.—Maharashtra Act 29 of 1984, section 4 (w.e.f. 1
January 1985).

[s 12.2] Clause (a): Right of partners to attend to business.—

Clause (a) provides for a partner's right to take part in the conduct of the partnership
business. This right cannot be taken away except by a contract. It is quite common in
practice to provide by express agreement that this or that partner need not, and
sometimes even that he may not, take any active part in the business, and also for the
payment of salary to a managing or acting partner. Any such salary will of course rank,
in taking accounts as between the partners, as a debt from the firm.
[s 12.3] Clause (b): Duty to attend.—

Every partner is under an obligation to attend diligently to his duties in the conduct of
the partnership business unless partnership provides that he need not attend. The
word "diligently" is of great significance. A partner has to use his knowledge and skill in
the conduct of the partnership business. Refusal and neglect on the part of any one
partner to perform his duties gives to the other partner, on whom the whole conduct of
the business is thrown, a right to compensation.17

[s 12.4] Sub-section (c) Power of majority.—

The Supreme Court observed that under clause (a) every partner has a right to take
part in the conduct of the partnership business. While a partner exercises his right
under clause (a), it is only if any difference arises as to ordinary matters that the
question of decision by a majority arises as otherwise clause (c) would not come into
play.18 The majority partners cannot bind other partners with regard to matters of vital
importance and decision with regard to the same must be with the consent of all the
partners.19 Clause (c) is intended for effective directions in the management and
conduct of the partnership business.18 This power, though not in itself of a judicial
kind, is subject to the rule of natural justice which governs quasi-judicial powers of
private persons and bodies in general. Every partner must have an opportunity of being
heard, and the decision must be made in good faith with a view to the collective
interest of the firm.20 So where a managing partner was working as such from the
beginning by the consent of all the partners but had no opportunity of being heard
when the resolution of majority removing him as such was passed, the Delhi High Court
considered the action of majority as inspired by ill will and not with a sense of
responsibility for furtherance of business interest of partnership. It was not also
recorded in the minute book of the firm.21 It would appear that where a suit is filed by
one partner without the consent of the other partners, the majority of the partners may
decide to discontinue the suit.22 Clause (c) is based on democratic principles.

Not only the nature of business,23 but the place where it is carried on, may not be
varied without the consent of all the partners.

[s 12.5] Power of majority to expel partners.—

See note to section 33.

[s 12.6] Sub-section (d): Right of access to books.—

A partner may inspect the books of the firm, and make extracts therefrom. This,
however, does not give him any privilege to use those extracts for purposes hostile or
injurious to the firm after he has ceased to be a partner.24 A partner may employ an
agent, who is not objectionable, to inspect the books on his behalf.25
17 Krishnamachariar v Shankara Sah, AIR 1921 PC 91 : (1920) 22 Bom LR 1343 : 57 IC 713.
18 Erin Estate v CIT Madras, AIR 1958 SC 779 (783) : [1959] SCR 573 : (1958) SCJ 912 : (1958) 2
Mad LJ 145.
19 Suresh Kumar Sanghi v Amrit Kumar Sanghi, AIR 1982 Del 131 at 141, para 32.
18 Erin Estate v CIT Madras, AIR 1958 SC 779 (783) : [1959] SCR 573 : (1958) SCJ 912 : (1958) 2
Mad LJ 145.
20 Const v Harris, (1823) T&R 496, 525. See section 33 wherein this principle of good faith is
stated.
21 See supra note 19.
22 House Ltd Agency v Paints and Lacquers Ltd, AIR 1954 Cal 409 .
23 Attorney General v GN Rly, (1860) 1 Dr & Sm 154 : 29 LJ Ch 794.
24 Trego v Hunt, (1896) AC 7 , 26 (HL).
25 Bevan v Webb, (1901) 2 ChD 59 .
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 13. Mutual rights and liabilities.-

Subject to contract between the partners—

(a) a partner is not entitled to receive remuneration for taking part in the conduct of
the business;

(b) the partners are entitled to share equally in the profits-earned, and shall
contribute equally to the losses sustained by the firm;

(c) where a partner is entitled to interest on the capital subscribed by him such
interest shall be payable only out of profits;

(d) a partner making, for the purposes of the business, any payment or advance
beyond the amount of capital he has agreed to subscribe, is entitled to interest
thereon at the rate of six per cent per annum;

(e) the firm shall indemnify a partner in respect of payments made and liabilities
incurred by him—

(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purpose of protecting the firm
from loss, as would be done by a person of ordinary prudence, in his own
case, under similar circumstances; and

(f) a partner shall indemnify the firm for any loss caused to it by his wilful neglect in
the conduct of the business of the firm.

[s 13.1] Sub-section (a): Remuneration.—

This sub-section does not touch the case of undue labor and trouble being imposed on
one partner by another's wilful neglect of the business to which he ought to attend. A
partner on whom the whole conduct of the business has been thrown in this manner is
entitled to compensation,26 but any moneys obtained as salary or remuneration are in
the nature of profits accrued to him.27

Clause (a) makes an initial presumption that work done for the firm is gratuitous as
every partner including a managing partner is bound to attend diligently the business of
the firm and cannot charge his other partners with any sum like salary, commission etc.
for taking trouble in conducting partnership business. But this is a presumption which
can be dispensed with by agreement between the partners as to how the extra labor is
to be remunerated.28 Moreover when as a result of wilful refusal by one of the partners
to perform his obligations, the business of partnership had been continued and the
contractual obligations of the firm with regard to the outsiders had been performed by
the other co-partner without the assistance from the former partner, the Privy Council
allowed the latter partner to have proper allowance for the work done by him.29 In Airey
v Borham30 two partners agreed to devote their whole time to the partnership business;
but they quarreled and one of them afterwards attended the partnership business
before its dissolution. An inquiry was directed by the Court to ascertain what allowance
should be made to him for having carried on the business alone.

[s 13.2] Sub-section (b): Share in profits and losses.—

As this sub-section lays down a presumption in the case of partners as to equality of

shares, the burden of proof lies on the party who sets up a contract to the contrary.31
The contract to the contrary may even be that one of the partners is to have only a fixed
salary.32 The contract might provide that the profit or loss of two partners is joint.33 As
regards the question of losses in business, it is perfectly open to partner A to say that
as between himself and his partner B, the partner A shall bear all the losses of the
business. This, of course, applies only as between themselves, for whatever their
agreement may be, they would both be liable to third parties.34

According to the Supreme Court35 two presumptions are clubbed by section 13(1)(b)
of the Act. First, if no specific contract is proved, the shares of partners must be
presumed to be equal. So where there is unequal shares, the first presumption has no
application. The second presumption is that where partners are to participate in profits
in certain shares, they should also participate in losses in similar shares. Hence if
profits are shared in unequal shares, that applies equally to losses; according to the
Supreme Court.

[s 13.3] Sub-sections (c), (d): Interest on capital and advances.—

Where a partner is entitled to interest on the capital, he will be paid interest only if there
are profits. If, however, he advances moneys to the firm, he will be entitled to interest at
6% from the firm whether there are profits or not,36 but he is not entitled to interest
after the date of dissolution.37

[s 13.4] Sub-section (e): Partner's right to indemnity and contribution.—

In addition to the ordinary claim of an agent to be indemnified, a partner may be

entitled to reimbursement for what may be called emergency or salvage expenses
incurred by him personally on behalf of the firm in circumstances of extraordinary
requirement.38 Money payments to satisfy debts of the firm are the commonest
examples under this head. There may also be urgent and necessary payments required
for keeping the business of the firm in existence as a going concern; thus in a mining
business it may be necessary to sink a new shaft promptly to get at unexhausted
minerals. There is no rule whereby the measure of the amount, which can be allowed
as proper, is limited to the nominal capital of the concern.39

The question whether a given act can or cannot be said to be done in carrying on a business
in the way in which it is usually carried on must evidently be determined by the nature of the
business and by the practice of persons engaged in it. Evidence on both of these points is
therefore necessarily admissible.40
[s 13.5] Sub-section (f): Wilful neglect and fraud.—

In the case of wilful neglect, partners may contract with each other that they will not be
liable to the firm for any loss caused to it by their neglect in the conduct of the business
of the firm. The case of fraud, however, stands on a different footing. A partner cannot
contract himself out of his liability to the firm for any loss caused to it by his fraud. See
notes to section 10.

The words "wilful neglect" would mean an act done deliberately and intentionally in
contradistinction to an act done in inadvertence or by a mistake or by accident.41

The firm is liable to third persons for the wilful neglect or fraud of one of the partners,
but under this section, the innocent partners are entitled to compensation from their
partner for the loss caused to them by his wilful neglect.42

According to the Allahabad High Court43 the legal position was that in view of section
13 of the Act either the firm shall indemnify partner for payments made by liabilities
incurred by him or alternatively a partner shall indemnify a firm for any loss caused to it
by his wilful neglect in the conduct of business of firm. But the section does not
contemplate suit by a partner for damages against another partner. The liability of a
partner is to a firm and not to one particular partner.

26 Krishnamachariar v Sankara Sah, (1920) 22 Bom LR 1343 : 57 IC 713 : AIR 1921 PC 91 .

27 S Magnus v CIT, AIR 1958; Bom 467 : (1958) 60 BOM LR 41 .
28 VD Dhanawatey v CIT, MP, AIR 1968 SC 683 : [1968] 2 SCR 62 ; Shelat Bros v Nanalal H Shelat,
AIR 1973 Mad. 78 : (1972) 85 LW 716 .
29 See supra note 26.
30 Airey v Borham, (1861) 29 Beav 620 : 54 ER 768.
31 Jadobram v Bulloram, (1899) ILR 26 Cal 281.
32 Raghunandan Nanu v Hormasjee Bezonjee, (1927) 51 Bom 342 : 29 Bom LR 207 : 100 IC
1025 : AIR 1927 Bom 187 .
33 Hukumchand Sarupchand v Hansraj Harji, (1938) 2 Mad LJ 966 (PC).
34 Raghunandan Nanu v Hormasjee Bezonjee, (1927) 51 Bom 342, 348, supra.
35 M Govindu & Co v CIT AP, AIR 1975 SC 2284 : (1976) 1 SCC 248 .
36 See Somasundaram v Sevugan Chettiar, AIR 1940 Mad. 505 : (1940) 190 IC 748 ; Motilal v
Sarupchand, (1936) AIR 1937 Bom 81 : 38 Bom LR 1058 : 167 IC 208.
37 Chandra v Madhaviah, AIR 1961 Mad. 478 : (1961) 2 Mad LJ 67 : 1961–74 LW 256.
38 See the Indian Partnership Act, section 21.
39 Mining Co's Case, (1853) 4 DM&G 19, 42.
40 Lindley on Partnership, 9th Edn, p 180.
41 Tamboli v GIP Rly, 52 Bom 169 (PC); Govind v Rangnath, 32 Bom LR 232 (250) : 54 Bom 226 :
AIR 1930 Bom 572 .
42 Thomas v Atherton, (1878) 10 ChD 185 (CA).
43 Gurdayal Prasad v Raghunath Prasad, AIR 1976 All 141 at 146, para 18.
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 14. The property of the firm.-

Subject to contract between the partners, the property of the firm includes all property
and rights and interests in property originally brought into the stock of the firm or
acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the
course of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in property
acquired with money belonging to the firm are deemed to have been acquired for the
firm.

[s 14.1] Partner's nature of Share in partnership property.—

All joint property of partners is not partnership property. Only property answering the
description in section 14 is partnership property. Principles of co-ownership cannot
apply to partnership property e.g. Co-owner can, without the consent of others, transfer
his interest to a stranger. A partner cannot do this. One co-owner is not the agent of the
other. A partner is.44 As firm has no legal existence or legal personality, partnership
property will vest in all partners and in that sense every partner has an interest in the
partnership property. But during the subsistence of partnership, no partner can deal
with any portion of the property as his own. Nor can he assign his interest in a specific
item of partnership property to any one. His right is to obtain such profits as fall on his
share and on dissolution of firm to a share in the assets of firm which remains after
satisfying liabilities set out in section 48(a)(b) of the Act. The whole concept of
partnership is to embark upon a joint venture and for that purpose to bring in as capital
money or property. Once that is done, whatever is brought in would cease to be the
exclusive property of the person who brought it in. It would be trading assets of
partnership in which all partners would have interest in proportion to their share in joint
venture of business of partnership.45 During partnership the partners cannot take away
their property that they may have put into the stock of partnership. The individual owner
becomes a joint owner with other partners.46 No partner has any beneficial interest in
any particular estate or property until partnership is wound up and accounts taken.47

[s 14.2] Partnership property.—

Property belonging to the partners or to one of them, does not become partnership
property merely by being used for the purposes of the business.48 In Davis v Davis,49 a
testator devised his residuary estate comprising his business, the premises on which
the business was carried on and some adjoining premises, to his two sons as tenants
in common. The sons continued the business for three years without any express
agreement. They borrowed the money on mortgage of adjoining premises as well as on
their business premises and used the money in the business, especially in the purchase
of new plant and machinery. It was held that the sons were partners in the business but
that the premises on which the business was carried on and the adjoining premises
belonged to them as co-owners. Co-owners may be partners in respect of a business
carried on or upon the property without being partners in respect of the property itself.
As the Patna High Court50 observed that persons may be mere co-owners of the
property and may yet be partners in the profits made from its use. Two brothers may
have been devised coal mine by will of the father. The sons may work the mine in
partnership as a colliery business but does not make the mine part of the partnership
property. Similarly, where two persons horsed a coach and shared profits derived from
running; it was held that two persons were partners in profits but not in the horses by
which the work was done.51 Mere use of property by a firm does not make the property
as belonging to partnership.

In relation to the question of property of the partnership firm, the Supreme Court
examined in Mohd Laiquiddin v Kamala Devi Misra52 section 14 of the Indian
Partnership Act, 1932, the legal position and the terms of the contract between the
parties. Section 14 defines what a property of the firm is. It is subject to the contract
between the parties. According to this section, the property of the firm includes all
properties and rights and interests in property originally brought into the stock of the
firm or acquired by purchase or otherwise by or for the firm or for the purposes and in
the course of the business of the firm and includes also the goodwill of the business.
The general rule laid down in the section "subject to contract between the parties"
makes it clear that the partners may agree between themselves to change the general
rule and such an agreement may be expressed or implied.

By virtue of section 14 of the Act, even immovable property can be thrown into
partnership stock without any formal document and registration for transferring the
property to partnership is not necessary.53 What is required is that there must be
evidence that such property was brought into stock of firm and the evidence of mere
user of property by the firm for its business does not make it a partnership property.54

[s 14.3] Individual right in property could be merged into partnership asset by

conduct.—

In Shreedhar Govind Kamerkar v Yesahwant Govind Kamerkar,55 the appellant claimed

full ownership in tenanted premises and in business on ground of being sole assignor
of property. Parties herein are brothers. The dispute between them is tenancy right in
respect of a premises known as "Navalkar Building" situate at NC Kelkar Road, Dadar in
the town of Mumbai. The appellant allegedly acquired the said tenancy right in terms of
a deed of assignment entered into by and between him and one Saraswati Balkrishna
Pawar and three others. He was said to have obtained possession of the said premises
on 23 March 1978, whereafter he started a business under the name and style of
"Shree Medico". He along with his three brothers, entered into a partnership on 1 April
1971. The same was dissolved on 31 March 1977, inter alia, on the premise that the
appellant had been claiming full ownership in relation to the said tenanted premises as
also the business in Shree Medico.

In the absence of any instrument of partnership, the Court was left to gather proof of
what formed the assets of the partnership from only the admission of parties and other
documents filed. The appellant admitted that the royalty received from the said
tenanted premises was being deposited in the partnership account. This was held to be
a clear pointer to show that the same was the property of the partnership. The fact that
the usufruct of his lease hold was to be deposited in the partnership account was itself
proof that the tenancy formed the part of the assets of the partnership.

Where a tenant of the premise subsequently entered into a partnership with certain
partners and has thrown into partnership his tenancy right which he had. It was held by
the Division Bench of the Gujarat High Court that it amalgamated partnership asset and
amounted to sub-letting under the Bombay Rents Control Act, 1947, and exposed the
original tenant of the premise to eviction at the suit of his landlord.56

Illustrations

(1) A and B are partners. A, without the authority of B, buys railway shares in his own
name with the money and on account of the firm. The shares are partnership
property.57

(2) A and B are partners. A buys land with partnership moneys, for his sole benefit.
Thereafter A debits himself in the firm books and becomes a debtor to the firm for the
amount of the purchase money. The land is not partnership property, because there
was clearly a contrary intention.58

(3) A and B are partners. A buys land in his own name out of the profits of the
partnership business. The land is partnership property, because there are no facts
showing a contrary intention.59

(4) A, B and C are partners. The partners buy a property in the name of a fictitious
person with the moneys of the partnership. The legal and equitable interest in the
property passes to all the three partners.60

(5) A and B, partners, effect assurance on their lives for and on account of partnership
and the premiums in respect of the assurance policies are paid out of the funds of the
partnership. The policies form part of the partnership assets.61

(6) A, B and C carry on business as members of a joint Hindu family. After a partition
had been effected between them they continued to carry on the business as partners
and stipulated that their shares in the immovable properties were not to be varied, but
their shares in the business were varied. This raises a strong presumption that the
partners did not regard the immovable properties as part of the assets of the
partnership business.62

It is competent to partners by an agreement between themselves to convert

partnership property into the separate property of an individual partner and vice
versa.63 The word "includes" shows that the meaning given is not exhaustive.64 A debt
due to a firm at the date of dissolution is a property of the dissolved firm.

[s 14.4] Partnership arrangement does not annihilate individual property rights

of a partner.—

A partnership firm is an association of persons. But in spite of that unity between

themselves, every partner can have his own separate existence from the firm. Holding
that any right which a partner has over any property, other than the partnership
property, would remain as his individual asset, the Supreme Court ruled in Shashi Kapila
v RP Ashwin65 that the mere fact that the particular person has chosen to include
himself as a partner of a firm will not result in incorporation of all his individual
properties as the assets of the partnership. Referring to the section, the Court said in
the instant case, it was an admitted fact that appellant was a tenant of the building
even earlier than the formation of the firm Shiva and Co. In such a situation the tenancy
right of the appellant in respect of the building is a separate right available to the
appellant individually over which the partnership has no claim. Appellant never
contended that he had offered the suit property as an asset of the partnership firm. Nor
did the firm at any time claim that appellant threw the tenancy right over the building
into the hotchpot of the partnership at any time.
In Ashok Transport Agency v Awadhesh Kumar,66 the same proposition was illustrated
in another situation of how survival rights of a proprietary concern and partnership take
place in the continuation of civil proceedings. A partnership firm differs from a
proprietary concern owned by an individual. A partnership is governed by the provisions
of the Indian Partnership Act, 1932. Though a partnership is not a juristic person, O
XXX rule 1 CPC enables the partners of a partnership firm to sue or to be sued in the
name of the firm. A proprietary concern is only the business name in which the
proprietor of the business carries on the business. A suit by or against a proprietary
concern is by or against the proprietor of the business. In the event of the death of the
proprietor of a proprietary concern, it is the legal representatives of the proprietor who
alone can sue or be sued in respect of the dealings of the proprietary business. The
provisions of rule 10 of O XXX which make applicable the provisions of O XXX to a
proprietary concern enable the proprietor of a proprietary business to be sued in the
business names of his proprietary concern. The real party who is being sued is the
proprietor of the said business. The said provision does not have the effect of
converting the proprietary business into a partnership firm.

[s 14.5] Goodwill.—

Goodwill of business is inclusive of positive advantages such as carrying on

commercial undertaking at a particular place and in a particular name and also its
business connection, its business prestige and several intangible advantages which
business may acquire.67 Goodwill of business is an asset like any other asset and
representatives of deceased partner are entitled to share in it. If action be taken in time,
the surviving partners can be restrained by injunction from appropriating goodwill.68
"Goodwill" is properly a commercial term, signifying the value of the business in the
hands of a successor, so far as increased by the continuity of undertaking being
preserved in the shape of the right to use the old name and otherwise. It is something
more than the mere chance or probability of old customers maintaining their
connection, though this is a material part of the practical fruits; it may be summed up
as "the whole advantage of the reputation and connection of the firm which may have
been built up by years of honest work or by lavish expenditure."69 See sections 35 and
55.

In a Supreme Court case70 an appellant, one of the partners, on dissolution of the firm,
purchased the goodwill of the firm, carried on hosiery business in the name of the
same firm and obtained quota of Woollen yarn after the dissolution of the firm in the
firm's name for the Textile Commissioner on the basis of the firm's consumption figures
before its dissolution. The question for determination was whether the quota allotted
to Appellant, after dissolution of business and all accounts settled between the
partners is the partnership property or not. The Supreme Court held that the fact that
quota was granted in the firm's name does not convert the quota into partnership asset
as the business name did belong to Appellant. The Appellant, after dissolution, carried
on business in the same name of the firm and he was entitled to apply for quota in that
business name and so quota granted in that business name is his separate property. It
is not the asset of the firm and it is not also an after acquired asset of partnership.

[s 14.6] Valuation of goodwill.—

See note "Valuation of goodwill" under section 55.

[s 14.7] Trade Mark.—

It could form part of the firm's property.71

44 Vraj Kuwar Bai v Kunjbiharilal, AIR 1971 MP 109 : 1971 MPLJ 144 .
45 A Narayanappa v Bhaskar, AIR 1966 SC 1300 : [1966] 3 SCR 400 .
46 Sudhansukanta v Mahindra Nath, A, 1965 Pat 144.
47 Re Adarji Dalal, AIR 1931 Bom 428 : (1931) 33 Bom LR 576 .
48 Davis v Davis, (1894) 1 ChD 393 ; Lachhman Das v Gulab Devi, AIR 1936 All 270 : 162 IC 143.
49 Davis v Davis, (1894) 1 ChD 393 .
50 Sudhansukanta v Mahindra Nath, AIR 1965 Pat. 144 , para 7.
51 Fromont v Coupland, 2 Bing 170.
52 Mohd Laiquiddin v Kamala Devi Misra, (2010) 2 SCC 407 : [2010] 1 SCR 873 : (2010) 2 Mad LJ
820 (SC).
53 Chief Controlling Revenue Authority v Chidambaram, AIR 1970 Mad. 5 ; Prem Raj Brahman v
Bhani Ram Brahmin, (1946) 1 Cal 191 ; Sudhan Sukanta, AIR 1965 Pat. 144 ; Ram Sahay Mall
Rameshwar Daya v Bishwanath Prasad, AIR 1963 Pat. 221 .
54 Sudhan Kanta v Manindra Nath, AIR 1965 Pat. 144 .
55 Shreedhar Govind Kamerkar v Yesahwant Govind Kamerkar, [2006] Supp SCR 751 : 2007 (1) UJ
54 (SC).
56 Shah Chatrabhuj Narsi v Nansibhai, (1980) 21 GLR 377 .
57 Ex parte Hinds, (1849) 3 De G and Sm 613.
58 Smith v Smith, (1800) 5 Ves 189.
59 Nerot v Burnard, (1827) 4 Russ 247; Sudarsanam v Narsimhulu, (1902) 25 Mad 149, 165, 166.
60 Wray v Wray, (1905) 2 ChD 349 .
61 Re Adarji Mancherji Dalal, (1931) 55 Bom 795 : 133 IC 845 AIR 1931 Bom 428 .
62 Lachman Das v Gulab Devi, (1936) 162 IC 143 : (1936) AA 270.
63 Bolton v Puller, (1796) 1 Bos&P 539. Lindley on Partnership, 9th Edn, pp 422–426; Buban
Mohan v Surendra Mohan, AIR 1951 Cal 69 (FB) : (1952) ILC 2 Cal 23.
64 Appaya v Subrao, (1937) 39 Bom LR 1214 : AIR 1938 Bom 108 .
65 Shashi Kapila v RP Ashwin, AIR 2002 SC 101 : (2002) 1 SCC 583 .
66 Ashok Transport Agency v Awadhesh Kumar, AIR 1999 SC 1484 : (1998) 5 SCC 567 .
67 New Gujarat Cotton Mills Ltd v Labour Appellate Tribunal, AIR 1957 Bom 111 : (1957) 27
Comp Cas 500 (Bom).
68 Mohammad Abdul Sathar Baig v Hafija Bibi, AIR 1944 Mad. 346 : (1944) Mad 729.
69 Trego v Hunt, (1896) AC 7 , 24; Churton v Douglas, (1858) Johns 174. [Apart from the right to
use the name of the firm, goodwill involves a right to represent that you are carrying on the
business of the firm, to solicit the customers of the old firm, to have the books of the firm, and
to prevent anybody else from saying that he is carrying on the business. Hill v Fearis, (1905) 1
ChD 466 , in argunendo.] New Gujarat Cotton Mills Ltd v Labour Appellate Tribunal, (1957) A Bom
111 : (1957) 59 Bom 209.
70 Shadi Lal v Nagin Chand, AIR 1973 SC 776 : (1973) 1 SCC 185 .
71 Balaji Chettiar v Hindustan Lever Bros Ltd, AIR 1967 Mad. 148 (151) : ILR 1967 (1) Mad 753 .
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 15. Application of the property of the firm.-

Subject to contract between the partners, the property of the firm shall be held and
used by the partners exclusively for the purposes of the business.

[s 15.1] Use of partnership property.—

The rule laid down in this section is subject to the contract between the parties. The
words "shall be held and used exclusively for the purposes of the business" indicate
that the partnership property must be used exclusively for the partnership business.
The word "exclusively" would indicate that such property is not to be used for a purpose
other than that of partnership business. So a mortgage of partnership property by a
partner for his own benefit is invalid.72

If a partner uses the property of the firm for his own purposes, he will be liable to
account to the firm for the profits, if any, that he may make. A contract of partnership is
uberrimae fidei.

72 Vraj Kuwar Bai v Kunjbiharilal, AIR 1971 MP 109 : (1971) MPLJ 44 .

The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 16. Personal profits earned by partners.-

Subject to contract between the partners,—

(a) 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 or the firm name,
he shall account for that profit and pay it to the firm;

(b) if a partner carries any business of the same nature as and competing with that
of the firm, he shall account for and pay to the firm all profits made by him in
that business.

[s 16.1] Personal profits.—

The rules laid down in this section flow as consequence of the main and dominant
principle viz. a partner is an agent of the other partners, underlying the Indian
Partnership Act, 1932. The said rules also flow from the duties stated in section 9. The
rule (a) is applicable even after dissolution and the Privy Council73 in one case directed
the partner to account for the assets together with interest thereon. Where a partner
had retained the assets of a firm in his hands without any settlement of accounts and
he had applied the assets in continuing the business for his own benefit. The section
may be illustrated by the following illustrations:—

(l) A, B and C are partners in trade. C, without the knowledge of A and B, obtains for his
own sole benefit a lease of the house in which the partnership business is carried on. A
and B are entitled to participate, if they please, in the benefit of the lease.74

(2) A, B and C carry on business together in partnership as merchants trading between

Bombay and London. D, a merchant in London to whom they make their consignments,
secretly allows C a share of commission which he receives upon such consignments in
consideration of C using his influence to obtain the consignments from him. C is liable
to account to the firm for the money so received by him.

[s 16.2] Competing business.—

One or more persons may, with the knowledge and consent of all parties, be members
of two distinct firms carrying on as similar, if not a directly competing business, as
where the two undertakings are a morning and an evening newspaper. In such a case
members of a firm A who also belong to firm B are not entitled, though a majority in A,
to user's special information for the purposes of B.75 The rule enunciated in clause (b)
will not apply if the business carried on by a partner is not of the same nature or
competing with that of the partnership business nor injurious in anyway to the
partnership business nor if it is totally independent business not within the scope of
the partnership business.76 In Aas v Benham,76 defendant, a partner of a firm of Ship
Brokers, assisted in the formation of a limited company for the purpose of building
ships and in so doing availed himself of information as a member of firm and
occasionally used the name and office papers of the firm in his correspondence on that
subject and he received remuneration for his services in the formation of a company
for shipbuilding. The plaintiffs, the other two partners of the firm of shipbrokers,
claimed an account from the defendant for his profits and salary in connection with the
new company. But it was held that as the business of the new company was beyond
the scope of and did not compete with the partnership business the plaintiffs claim
failed. Lindley LJ in the Court of Appeal observed that the defendant was never in fact
acting for his firm nor did his other partners (plaintiffs) ever suppose that the
defendant was so acting, nor did the defendant derive any benefit from his connection
with the firm.

Regarding the information used by the defendant for his benefit, the court observed
that it was not the source of information but the use to which it is applied is important.
To hold that a partner can never derive any personal benefit from information which he
obtains as a partner would be manifestly absurd. Developing the point the court
mentioned that in the course of carrying on his business, a partner is well acquainted
with a particular branch of science or trade and he publishes a book on it, the profits
thereby obtained could not be claimed by the firm. Thus, according to this decision, a
partner may make personal profit from information obtained in the course of
partnership business where he does so in another activity which is outside the scope of
partnership business. Here, partnership business was of ship broker (ship broking) and
defendant had made profit in the business which had no connection with that of
partnership.

Similarly, in India also it was held77 that knowledge and information derived by a
partner from partnership was not regarded as partnership property.

73 Ahmad Musaji v Hashim Ebrahim, 42 IA 91 : 17 Bom LR 432.

74 Featherstonhaugh v Fenwick, (1810) 17 Ves. 298 : 34 E.R. 115.
75 Glassington v Thwaites, (1823) 1 S&St 124.
76 Trimble v Goldberg, (1906) AC 494 ; Aas v Benham, (1891) 2 ChD 244 .
77 Rattanlal v Jai Janinder Prasad, AIR 1976 P&H. 200 .
The Indian Partnership Act (Act IX of 1932)

Chapter III Relations of Partners to One Another

S. 17. Rights and duties of partners.-

Subject to contract between the partners—

(a) after a change in the firm.- where a change occurs in the constitution of a firm,
the mutual rights and duties of the partners in the reconstituted firm remain the
same as they were immediately before the change, as far as may be;

(b) after the expiry of the term of the firm; and.- where a firm constituted for a fixed
term continues to carry on business after the expiry of that term, the mutual
rights and duties of the partners remain the same as they were before the expiry,
so far as they may be consistent with the incidents of partnership at will; and

(c) where additional undertakings are carried out.- where a firm constituted to
carry out one or more adventures or undertakings carries out other adventures
or undertakings, the mutual rights and duties of the partners in respect of the
other adventures or undertakings are the same as those in respect of the
original adventures or undertakings.

This section gives general rules for the determination of the rights and duties of the
partners after the happening of events which would otherwise leave these rights and
duties undetermined. Sub-section (a) covers cases where there has been a change in
the firm. Sub-section (b) provides for the case where the original term fixed has expired;
and sub-section (c) provides for the case where a firm formed for particular
undertakings proceeds to carry out other undertakings.

[s 17.1] Sub-section (a): Change in the firm.—

This sub-section would cover the case of a new partner introduced into the firm. This
sub-section was applied to a case in which A and B were partners with ten annas and
six annas share respectively. On the death of A his son stepped into his shoes and
without any express agreement carried on the business with B. A's son was held
entitled to ten annas share.78 A new partner, however, may not be bound by a special
term of which he had no notice.79 If a partner dies after the passing of decree and the
business was being carried on, since the rights and duties shall be construed to remain
the same, the amount due under the decree, if paid to the firm, the death of the partner
would not require any further enquiry for determination of how the amount must be
distributed.80

If two partners retire from partnership which was carrying on dealership in setting up a
petrol outlet, the rights of remaining partners to carry on business and enforce their
rights against the principal cannot be defeated for the only reason that the contractual
term of consent from the retiring partners had not been given to the principal. A
retirement deed for consideration executed by the retiring partners shall be treated as
such consent.81
[s 17.2] Sub-section (b): Extension of partnership.—

The continuance of business without liquidating the partnership affairs is presumed to

be a continuance of the partnership. Where the partnership is continued after the expiry
of the period fixed by the partnership agreement, such terms of the partnership
agreement as are consistent with a partnership at will remain applicable, but such
terms as are inconsistent with a partnership at will cease to be applicable.

The following provisions have been held to be consistent with the incidents of a
partnership at will—

(1) option for a surviving partner to purchase a deceased partner's share at a fixed
valuation;82

(2) articles of partnership for a fixed year having an arbitration clause and the
partnership is continued beyond that fixed year. It was held that the arbitration clause is
still binding;83 and

(3) a power to nominate a successor.84

On the other hand, a power to expel contained in articles of a partnership for seven
years is not exercisable after that term has expired although the partnership may have
been continued on the old footing. Such of the articles as are inconsistent with a
partnership at will have no application.85

[s 17.3] Sub-section (c): Additional undertakings.—

This sub-section contemplates a case in which the partners are the same, but there are
further or other underta`kings for which the partnership was originally formed.

78 Dawood Sahib v Sheikh Mohideen, AIR 1934 Mad. 5 : (1937) 2 Mad LJ 760 : 175 IC 766 :
1937–46 LW 520 .
79 Austen v Boys, (1857) 24 Beav 598, 606.
80 Niranjan Sarkar v South Eastern Coal Fields Ltd, 2017 (1) CG LJ 260.
81 Bharat Petroleum Corp Ltd v BM Motors, AIR 2015 SC 251 : 2014 (5) Scale 143 : (2014) 16
SCC 749 : 2014 (10) SCJ 580 .
82 Cox v Willoughly, (1880) 1 ChD 863 .
83 Gillet v Thornton, (1875) 19 Eq 599 .
84 Cuffe v Murtagh, (1881) 7 LR Ir 411.
85 Clark v Leach, 32 Beav 14 : 55 ER 6.
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 18. Partner to be agent of the firm.-

Subject to the provisions of this Act, a partner is the agent of the firm for the purposes
of the business of the firm.

[s 18.1] Partner is agent—

In the leading case of Cox v Hickman,1 Lord Wensleydale laid down the law as follows:

A man who allows another to carry on trade, whether in his own name or not, to buy and sell,
and to pay over all the profits to him, is undoubtedly the principal, and the person so
employed is the agent, and the principal is liable for the agent's contracts in the course of
his employment. So if two or more agree that they should carry on a trade, and share the
profits of it, each is a principal, and each is an agent for the other, and each is bound by the
other's contract in carrying on the trade, as much as a single principal would be by the act of
an agent, who was to give the whole of the profits to his employer.

In other words, a partner transacts business for himself as principal, and also as an
agent for the other partners even though the other partner is a sleeping partner.2 One
of the tests of partnership is whether there was a binding contract of mutual agency
between the partners.3 See note "Carried on by all or any of the persons concerned,
acting for all," under section 4.

The converse does not follow. There is no general presumption that the firm is the
agent of the partners. Payment to the firm is no discharge of a separate debt to one
partner, unless it is proved that the firm had authority to receive payment for him.4

The principle of agency does not carry with it a right to a reasonable remuneration for
the work done. The reason is that a partner has a dual capacity of principal and agent.

1 Cox v Hickman, (1860) 8 HLC 268, 312.

2 Wallace Bros v CIT, (1948) 50 Bom LR 482 .
3 Janki Nath v Dholkar Mal, AIR 1935 Pat. 376 : 156 IC 200.
4 Powell v Broadhurst, (1901) 2 Ch 160 .
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 19. Implied authority of partner as agent of the firm.-

(1) Subject to the provisions of section 22, the act of a partner which is done to
carry on, in the usual way, business of the kind carried on by the firm, binds the
firm.

The authority of a partner to bind the firm conferred by this section is called his
"implied authority."

(2) In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empower him to—

(a) submit a dispute relating to the business of the firm to arbitration,

(b) open a banking account on behalf of the firm in his own name,

(c) compromise or relinquish any claim or portion of a claim by the firm,

(d) withdraw a suit or proceeding filed on behalf of the firm,

(e) admit any liability in a suit or proceeding against the firm,

(f) acquire immovable property on behalf of the firm,

(g) transfer immovable property belonging to the firm, or

(h) enter into partnership on behalf of the firm.

[s 19.1] "Implied authority."—

"Every partner is in contemplation of law the general and accredited agent of the
partnership, or as it is sometimes expressed, each partner is praepositus negotiis
societatis, and may consequently bind all the other partners by his acts in all matters
which are within the scope and objects of the partnership."5 The implication of sub-
section (1) is that the most intelligent and prudent partner may be liable for the acts of
an imprudent or a reckless partner provided they are done in usual course of business.
His want of knowledge or disapproval of such acts serve no purpose. If the act is
"outside the usual course of the business of the firm" it will not bind the firm, even if it is
prudent or has benefited the firm, unless it is ratified and approved by all the partners.
Power to do the usual does not include power to do the unusual. Whether a particular
act is done in the usual way of the business of the kind carried on by the firm is a
question to be determined by the nature or kind of the business carried on by the firm.
For this purpose, the firms are divided into two categories: trading firms and non-
trading firms. A trading firm is one whose business depends upon buying and selling
goods. But a firm of solicitors,6 engineering contractors,7 cinematographic theatre
proprietors8 are instances of non-trading partnership and members of such a firm have
no implied authority to borrow money on the credit of the firm for partnership
purposes. An auctioneer9 does not buy and it is non-trading. As Lush, J10 said that a
firm is not a trading firm merely because its business involves spending of money.
Trading firm is one which depends on the buying and selling of goods. But a partner of
a trading firm has implied authority to borrow money for purposes of partnership on the
credit of the firm and in so borrowing he may bind the other partners although he may
wrongfully apply it to other than partnership purposes.11 According to the Bombay
High Court12 no duty is cast on the person advancing the money to make any inquiry
and other partners of the trading firm are liable even if borrowed money is
misappropriated by the borrowing partner. Hence:

if the partnership be of a general commercial or trading nature, he may pledge or sell the
partnership property; he may buy goods on account of the partnership; he may borrow
money, contract debts, and pay debts on account of the partnership; he may draw, make,
sign, endorse, accept, transfer, negotiate, and procure to be discounted promissory notes,
bills of exchange, cheques and other negotiable paper in the name and on account of the
partnership. Each partner is the agent only for the business of the firm and his acts beyond
that business will not bind the firm. Neither will his acts done in violation of his duty to firm,
bind it when the other party to transaction is cognisant of or co-operates in such breach.13

Illustrations

(a) A and B trade in partnership, A residing in England, and B in India. A draws a bill of
exchange in the name of the firm. B has no notice of the bill, nor is he at all interested in
the transaction. The firm is liable on the bill, provided the holder did not know of the
circumstances under which the bill was drawn.

(b) A being one of a firm of solicitors and attorneys, draws a bill of exchange in the
name of the firm without authority. The other partners are not liable on the bill, for it is
no part of the ordinary business of a solicitor to draw, accept, or endorse bills of
exchange.

(c) A and B carry on business in partnership as bankers. A sum of money is received by

A on behalf of the firm. A does not inform B of such receipt, and afterwards A
appropriates the money to his own use. The partnership is liable to make good the
money.

(d) A and B are partners. A with the intention of cheating B goes to a shop and
purchases articles on behalf of the firm, such as might be used in the ordinary course
of the partnership business, and converts them to his own separate use, there being no
collusion between him and the seller. The firm is liable for the price of the goods.

[s 19.2] What partners may generally do.—

In order to bind a firm, an act or instrument done or executed by a partner or other

person on behalf of the firm shall be done or executed in the firm name, or in any other
manner expressing or implying an intention to bind the firm.14 In an ordinary
partnership, every partner may bind the firm by any of the following acts15:—

(1) He may sell any goods or personal chattels of the firm.

(2) He may purchase on account of the firm any goods of a kind necessary for or
 usually employed in the business carried on by it.

(3) He may receive payment of debts due to the firm, and give receipts. A release by
one partner binds the firm.

(4) He may engage servants for the partnership business.

In the case of partnerships of a general, commercial or trading nature, a partner

(1) may accept, make, and issue bills16 and other negotiable instruments in the
name of the firm. In trading firms every partner has implied power to bind the
firm if there is no agreement to the contrary. However, a non-trading firm is not
bound unless the issue of negotiable instruments by one partner is shown to be
necessary or usual in the particular business. In the case of non-trading firm, the
implied authority to bind his co-partners depends on the nature of the business
of the partnership.17

When a negotiable instrument is regularly drawn by a partner in a trading firm in

a transaction incident to the firm's business, another partner is not the less
liable because his name does not appear on the face of the instrument.18

In order to take a case out of this general law, it must be shown that the holder
of a bill knew that, at the time he received it, that the transaction was the private
affair of a single person;19

(2) may borrow money on the credit of the firm;

(3) may for that purpose pledge any goods or personal chattels belonging to the
firm; and

(4) may for the like purpose make an equitable mortgage by deposit of title deeds
belonging to the firm;

(5) may acknowledge a debt and it binds the firm. Section 19(2) of the Indian
Partnership Act, 1932 laying down the exceptions to the implied authority of a
partner does not lay down that the partner cannot acknowledge the subsisting
debt of a firm in favour of its creditors. On the contrary it is provided that a
partner cannot compromise or relinquish a claim nor can admit any liability in a
suit or proceeding against a firm. Acknowledgement of liability of a firm in
respect of a subsisting debt made by a partner before the suit was filed does
not amount to compromising or relinquishing a claim or portion thereof nor
does it amount to admission of any liability in a suit or proceeding as against
the firm;20

(6) may hire on the credit of the firm any goods of a kind used in its business.
Where a partner hired an elephant to trap wild elephants and one of the terms
was that the hirer should pay Rs 5,000 if the elephant died during the period of
hire, it was held that the other partners were bound by that term.21

[s 19.3] Sub-section (2): What a partner cannot do.—

Sub-section (2) gives a list of acts which do not fall within a partner's implied authority,
unless there is any usage or custom of trade to the contrary, such acts, however, can be
ratified by the partners.22 Although a partner is entitled to assign a decree in favour of
the firm, he has no implied authority to assign such a decree for a lesser sum. This
would amount to relinquishing a portion of the claim by the firm.23 It is not within the
implied authority of a partner to set off his own separate debt against the debt due to
the firm.24

(1) Submitting dispute to arbitration:—

The instructive reasoning of Best, CJ in Stead v Salt,25 is worth mentioning. According

to the Chief Justice, an authority can only be implied for what is necessary to carry on
the trade in which partners are concerned. To enter into a submission for arbitration is
not part of the ordinary business of a trading firm.

However, it has been held26 that it is possible for other partners who were not a party
to reference to arbitration to ratify the act of reference to arbitration made by the other
partner and this ratification can be express or implied. If the other partners stand by
after being aware of the arbitration proceedings, they will be deemed to have ratified
the act of their partners.

(2) Standing as surety:—

A partner signing as a surety on behalf of his firm cannot bind the other partners of the
firm to answer the claim of the creditor who can make the signatory partner liable as a
surety. This view was expressed by the Gujarat High Court27 where it was not the usual
course of business of the respondent firm to execute any surety contract for the benefit
of the third parties when they become the debtor. The Court relied on Nathaniel
Lindley:28

unless it can be shown that the giving of guarantee is necessary for carrying on the
business of the firm in the ordinary way, one of the members will be held to have no implied
authority to bind the firm for, generally speaking, it is not usual for persons in business to
make themselves answerable for the conduct of other people.

The court emphasised that the partner's act of standing as a surety must be shown to
be done in the usual way to carry on the business of the kind carried on by the firm. The
evidence showed that the Respondent firm was doing ordinary commercial activity like
selling ghee and was not carrying on any business of underwriting loan transaction of
third party by standing as a surety. Also, there was no ratification by other partners. The
court explained section 22 of the Indian Partnership Act, 1932 as merely of procedure
and cannot be the basis of making the Respondent firm (or other non-signatory
partners) liable if the concerned act of a partner to stand as surety was not done in the
usual way to carry on the business of the kind carried on by the firm. If this basic
requirement is not satisfied, even if a partner complied with the procedure, of section
22 of the Indian Partnership Act, 1932, it would remain an abortive exercise.

[s 19.4] Usage or Custom.—

The term "usage of trade" is to be understood as referring to a particular usage to be

established by evidence.29 To prove such a usage, there need not be either the
antiquity, the uniformity, or the notoriety of custom in its technical sense; usage may
still be in course of growth, and may require evidence for its support in each case.30

"Custom of trade" refers to a general custom of merchants which has been ratified by
decisions of courts and adopted as settled law.

[s 19.5] Partner not automatically liable under section 138 of the Negotiable
Instruments Act, 1881.—
Under section 141 of the Negotiable Instruments Act, 1881, only those partners of a
firm can be proceeded, who were in charge of the affairs of the company and
responsible for it. However, every partner of the firm cannot automatically be roped in
section 141 of the Negotiable Instruments Act, 1881 because it raises a legal fiction in
terms whereof the Directors of a company which would include the partners of a firm
would be deemed to have committed an offence along with the company if they are in
charge of the affairs of the company and responsible for it. In a case where the
authorised signatory of the partnership has signed a cheque, no person other than the
authorised signatory and the partnership firm could be made liable. No other partner
could be proceeded with for the criminal offence in the absence of specific averments
implicating the other partners.

[s 19.6] VDS scheme under the Income-tax Act, 1961 partnership cannot avail
benefits.—

An act of partner binds the firm. In Tanna & Modi v CIT,31 in a search and seizure
operation some undisclosed income was subject to penal action against an individual
in a partnership in such individual capacity. The very same income was sought to be
disclosed under voluntary disclosure scheme under the Income-tax Act, 1961 to obtain
concessions and the benefit was also given. Later the CIT cancelled the assessment
holding that a fraud had been committed by the partnership that the amount declared
under the scheme was the very same amount which was unearthed by the department
in a search and seizure operation. The court held:

it is one thing to say that for the purpose of invoking the provisions of the Income Tax Act
and other taxation laws of a firm, a firm and its partners are treated to be separate entities
but while construing a statute involving immunity from certain penal actions, in our opinion,
the provisions thereof should not ordinarily be judged on the touchstone of the provisions of
the 1961 Act, only because the 1997 Scheme has a direct nexus therewith.

5 Story on Agency, section 124; Bank of Australasia v Breillat, (1847) 6 Moo PC 152, 193 : (1848)
NSW Sup C3 : 13 ER 642.
6 Hedley v Boinbridge, (1842) 3 QB 316 .
7 Raghavaveera Sons v Padmavathi, AIR 1978 Mad. 81 , at para 9 : (1978) 1 Mad LJ 36.
8 Higgins v Beauchamp, (1914) 3 KB 1192 : (1914) All ER 937 .
9 Wheatley v Smithers, (1906) 2 KB 321 .
10 Higgins v Beauchamp, (1914) 3 KB 1192 , 1195 : (1914) All ER 937 .
11 Brown v Kidger, (1858) 28 LJ (Ex) 66 ; Saremal Punamchand v Kapurchand Punamchand, AIR
1924 Bom 260 : (1923) 25 Bom LR 1093 ; see also Veeria Perumal Pillai v Avukkarumnal
Muhammad Pathummal, AIR 1958 Ker. 257 .
12 Saremal Punamchand v Kapurchand Punamchand, AIR 1924 Bom 260 : (1923) 25 Bom LR
1093 .
13 Story on Agency, section 124; Bank of Australasia v Berillat, (1847) 6 Moo PC 152, 193 :
(1848) NSW Sup C3 : 13 ER 642.
14 Section 22.
15 Frederick Pollock, A Digest of the Law of Partnership, 12th Edn, Stevens and Sons, 1877, p
33.
16 Bunarsee Das v Gholam Hoosein, (1870) 13 Moo Ind App 358 .
17 Ernest H Scamell, Lindley on the Law of Partnership, 13th Edn, Sweet & Maxwell Ltd, 1971, p
169.
18 Chandanlal v Amin Chand, AIR 1960 P&H. 500 . G Subbarayudu v Narasimham, AIR 1974 AP
307 . Motilal Manucha v Unao Commercial Bank, AIR 1930 PC 238 : (1930) 32 Bom LR 1571 .
19 Bunarsee Das v Gholam Hossein, (1870) 13 Moo Ind App 358 ; Motilal Manucha v Unao
Commercial Bank, AIR 1930 PC 238 : (1930) 32 Bom LR 1571 ; Raghavaveera Sons v Padmavathi,
AIR 1978 Mad. 81 : (1978) 1 Mad LJ 36.
20 Firm of Sarabhai Hathising v Ratilal Nathalal, AIR 1979 Guj 110 : (1979) 20 GLR 484 .
21 Mathura Nath v Sreejukta Bageshwari, AIR 1928 Cal 57 : (1927) 46 Cal 362 .
22 Ram Bahadur Thakur v Thakur Das, AIR 1958 All 522 .
23 Krishnaji Bharmalji & Co v Abdul Razak Ahmedbhoy, AIR 1942 Bom 22 : (1941) 43 Bom LR
888 ; Mudenur Nagappa v Bhagawanji Rasaji, AIR 1936 Mad. 593 : (1936) 59 Mad 1036.
24 Dalichand V Parekh v Mathuradas Ravji, AIR 1958 Bom 428 : (1957) 59 Bom LR 1066 : (ILR)
1958 Bom 218.
25 Stead v Salt, (1825) 130 ER 452 .
26 Mohinder Kaur Kochhar v Punjab National Bank, AIR 1981 Del 106 .
27 Porbandar Commercial Cooperative Bank Ltd v Bhanji Lavji, AIR 1985 Guj 106 : (1985) 1 GLR
49 .
28 A Treatise on the Law of Partnership, 11th Edn, Sweet & Maxwell, 1950, p 203.
29 Section 92(5) of the Indian Evidence Act, 1872.
30 Juggomohun Ghose v Manickchund, (1859) 7 Moo Ind App 263 , 282.
31 Tanna & Modi v CIT, AIR 2007 SC 2301 : (2007) 7 SCC 434 : (2007) 8 Scale 511 .
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 20. Extension and restriction of partner's implied authority.-

The partners in a firm may, by contract between the partners, extend or restrict the
implied authority of any partner.

Notwithstanding any such restriction, any act done by a partner on behalf of the firm
which falls within his implied authority binds the firm, unless the person with whom he
is dealing knows of the restriction or does not know or believe that partner to be a
partner.

[s 20.1] Restriction of authority.—

A third party is not affected by a secret limitation of a partner's implied authority, unless
he has actual notice of it. The reason for this rule is that a third party is entitled to
assume that all the partners have full implied authority.
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 21. Partner's authority in an emergency.-

A partner has authority, in an emergency, to do all such acts for the purpose of
protecting the firm from loss as would be done by a person of ordinary prudence, in his
own case, acting under similar circumstances, and such acts bind the firm.

See notes to section 13(e).

The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 22. Mode of doing act to bind firm.-

In order to bind a firm, an act or instrument done or executed by a partner or other

person on behalf of the firm shall be done or executed in the firm-name, or in any other
manner expressing or implying an intention to bind the firm.

[s 22.1] Act binding firm.—

A firm can only be bound by what is done on behalf of the firm; even if the firm has the
use of money borrowed by a partner in his own name, this is at most evidence, but not
conclusive, to show that the borrowing was in fact on account of the firm.32 Where a
partner took some premises on lease in his own name, it was held that he did not
intend to act on behalf of the firm nor to act as its benamidar nor did he intend to bind
the firm.33 Where a managing partner executes a surety bond and from the terms
thereof it appears that he clearly meant to act on behalf of the firm, the other partners
become liable.34 But this case cannot be considered an authority on the question of
whether one partner can bind the other partners without their consent while executing
a surety bond. This point was not argued in that case. According to English law no
partner can bind the firm by giving a guarantee unless he is authorised by special
agreement or it is allowed by general usage of firm engaged in that kind of business.35

The Gujarat High Court35 has also shared the same view.

[s 22.2] Relation between sections 19 and 22:—

See Porbandar Commercial Cooperative Bank Ltd v Bhanji Lavji36, while discussing
section 19. (Page 189 note 27).

32 Ramchandra v Kasem Khan, AIR 1925 Cal 29 : (1924) 28 Cal WN 824 : 81 IC 513.
33 Devji v Maganlal, AIR (1965) SC 139 : [1964] 7 SCR 564 .
34 Suwalal v Fazle Hussain, AIR 1939 Ngp 31 : (1939) 179 IC 771 .
35 Brettle v Williams, (1849) 4 Ex 623 ; Porbandar Commercial Co-op Bank Ltd v Bhanji Lavji, AIR
1985 Guj 106 : (1985) 1 GLR 49 .
35 Brettle v Williams, (1849) 4 Ex 623 ; Porbandar Commercial Co-op Bank Ltd v Bhanji Lavji, AIR
1985 Guj 106 : (1985) 1 GLR 49 .
36 Porbandar Commercial Cooperative Bank Ltd v Bhanji Lavji, AIR 1985 Guj 106 : (1985) 1 GLR
49 .
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 23. Effect of admissions by a partner.-

An admission or representation made by a partner concerning the affairs of the firm is

evidence against the firm, if it is made in the ordinary course of business.

[s 23.1] Partner's admission.—

A partner's admission is at most evidence against all the partners of the firm and as
such evidence it may affect them more or less.37 Of course a partner cannot increase
his authority to bind the firm by any statement of his own about it.38 This section is
subject to provisions of section 19.

The admissions are not conclusive evidence. A partner's statement about the extent of
his authority can add nothing to the authority he has in fact.39

37 Stead v Salt, (1825) 130 ER 452 , 453.

38 Ex parte Agace, (1792) 2 Cox 312.
39 Ex parte Agace, (1792) 2 Cox 312. See Jacobs v Morris, (1902) 1 Ch 816 .
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 24. Effect of notice to acting partner.-

Notice to a partner who habitually acts in the business of the firm of any matter relating
to the affairs of the firm operates as notice to the firm, except in the case of a fraud on
the firm committed by or with the consent of that partner.

[s 24.1] Notice to partner.—

Notice to any habitually acting partner of anything relating to partnership affairs is

generally notice to the firm.

It is not a mere question of constructive notice or inference of fact, but a rule of law which
imputes the knowledge of the agent to the principal, or, in other words, the agency extends
to receiving notice on behalf of his principal of whatever is material to be stated in the
course of the proceedings.40

40 Rampal Singh v Balbhaddar Singh, (1902) 25 All 1 , 17 : 29 IC 203; Morumal v Gobindram, AIR
1933 Sindh 176 : (1933) AS 176 : 144 IC 452. Cf section 3, Explanation III of the Transfer of
Property Act, 1882.
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 25. Liability of a partner for acts of the firm.-

Every partner is liable, jointly with all the other partners and also severally, for all acts of
the firm done while he is a partner.

[s 25.1] Acts of the firm.—

See section 2(a).

[s 25.2] Done while he is a partner.—

The rule laid down in this section flows from the rule laid down in section 18. The
condition that the act shall have been done while he is a partner is very material so that
any act done prior to, or subsequent to, his becoming or ceasing to be the partner will
not bind him. This condition is illustrated by the various other sections, e.g., sections
31(2), 32(3), 34(2) and 35.

See notes to section 43 of the Indian Contract Act, 1872.

[s 25.3] Joint and several liability.—

This section is very important from the point of view of a creditor who has dealt with
the firm. A creditor can sue the partners jointly as well as separately and successively.
A creditor has therefore several actions in respect of the same debt. So the telephone
department rented out to a firm telephone and the firm defaulted to pay the dues in
respect of the telephone charges, whereupon the telephone department disconnected
the telephone line held by a partner in his own name as well as the line held by a firm.
In an action by a partner for disconnecting his own telephone line, it was held that any
payment due by the firm in respect of the telephone was the joint and several liability of
the partners. When the partnership incurred liability to telephone department, it
became the liability of all the partners Relying on a judgment of the Supreme Court in
Mandalsa Devi v Ramnarain Pvt Ltd,41 wherein it had been held that a partnership has
no legal personality and that a proceeding against a firm is really a proceeding against
all partners, the High Court ruled that. to meet this liability of the firm towards the
department, the department was competent to disconnect the telephone line of the
partner held by him personally.42

Under English law, the liability of partners on contracts is only a joint liability. See
section 9 of the English Partnership Act, 1890.

In Ashutosh v State of Rajasthan,43 the effect of section 24 and section 25 was

expounded.
Section 24 deals with the effect of notice to a partner. Such notice may be binding if
the following conditions are satisfied:

(a) the notice must be given to a partner;

(b) the notice must be a notice of any matter relating to the affairs of the firm;

(c) fraud should not have been committed with the consent of such partner on the
firm.

Section 24 is based on the principle that as a partner stands as an agent in relation to

the firm, a notice to the agent is tantamount to the principles and vice versa. As a
general rule, notice to a principal is notice to all his agents; and notice to an agent of
matters connected with his agency is notice to his principal.

Under section 25, the liability of the partners is joint and several. It is open to a creditor
of the firm to recover the debt from any one or more of the partners. Each partner shall
be liable as if the debt of the firm has been incurred on his personal liability.

In a partnership firm, the partner is always liable for partnership debt unless there is
implied or express restriction. Notice to a principal is notice to all his agents; and notice
to an agent of matters connected with his agency is notice to his principal. Thus, each
partner shall be liable as if the debt of the firm has been incurred on his personal
liability. Interest on principal sum was decreed and directions issued.

Section 25 provides that every partner is liable, jointly with all the other partners and
also severally for all acts of the firm done while he is a partner. A firm is not a legal
entity. It is only a collective or compendious name for all the partners. In other words, a
firm does not have any existence away from its partners. A decree in favour of or
against a firm in the name of the firm has the same effect as a decree in favour of or
against the partners. While the firm is incurring a liability, it can be assumed that all the
partners were incurring that liability and so the partners remain liable jointly and
severally for all the acts of the firm. Consequently, property belonging to the partners
could be proceeded against for recovery of dues on account of sales tax assessed
against the partnership firm under the provisions of the Karnataka Sales Tax Act,
1957.44

In Income Tax Officer (III), Circle-I, Salem v Arunagiri Chettiar,45 the question was
whether an erstwhile partner is liable to pay the tax arrears due from the partnership
firm pertaining to the period when he was a partner. The Madras High Court has held
that he is not. Disputing the correctness of the said judgment, the Revenue Department
came in appeal before the Supreme Court which held:

Section 25 of the Partnership Act does not make a distinction between a continuing partner
and an erstwhile partner. Its principle is clear and specific, viz., that every partner is liable for
all the acts of the firm done while he is a partner jointly along with other partners and also
severally. Therefore, it cannot be held that the said liability ceases merely because a partner
has ceased to be partner subsequent to the said period.

[s 25.4] Torts.—

Both under English and under Indian Law, in the case of torts, partners are liable jointly
and severally for wrongful acts committed by a partner acting in the ordinary course of
the partnership business. The principle underlying this is that the other members hold
him out to the world as a person for whom they are responsible.46

See the next section.

41 Bhagwanji Devraj v UOI, (1975) 16 GLR 357 cited and followed in Indravadan Pranlal Shah v
General Manager, Ahmedabad Telephone District AIR 1990 Guj 85 : 1990 (1) Guj LR 297: (1990)
1 GLH 1 .
42 Mandalsa Devi v Ramnarain Pvt Ltd, AIR 1965 SC 1718 : [1965] 3 SCR 421 : 1966 MhLJ 273
43 Ashutosh v State of Rajasthan, AIR 2005 SC 3434 : (2005) 7 SCC 308 : 2005 (8) SC 58 .
44 Dena Bank v Bhikhabhai Prabhudas Parekh & Co, AIR 2000 SC 3654 : 2000 (5) SCC 694 : 2000
(4) Scale 125 .
45 Income Tax Officer (III), Circle-I, Salem v Arunagiri Chettiar, AIR 1996 SC 2160 : (1996) 9 SCC
33 : (1996) 134 CTR (SC) 167.
46 Earl of Dundonald v Materman, (1869) LR 7 Eq 504, 517.
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 26. Liability of the firm for wrongful acts of a partner.-

Where, by the wrongful act or omission of a partner acting in the ordinary course of the
business of a firm, or with the authority of his partners, loss or injury is caused to any
third party, or any penalty is incurred, the firm is liable therefor to the extent as the
partner.

[s 26.1] Ground of liability; usage of firm, how material.—

The principle of this section is a branch of the universal rule that everyone must answer
for the acts and defaults of his servants or agents in the course of their employment.
This section refers to two kinds of tortious acts, i.e., (i) one done while acting in the
ordinary course of the business, and (ii) one done with the express or implied authority
of the other partners. In respect of the first category the firm would be liable for the
acts of a partner which he was to do properly but which he did improperly. If the
wrongful act is done by a partner within the scope of his employment, the firm would
be liable. The next section amplifies section 26. The chief difficulty that occurs in
practice is that of knowing whether the neglect or fraud of a partner really took place
"in the management of the business of the firm," or was only his own particular wrong,
for which his position in the firm gave him an opportunity.47 Where the default consists,
as it usually does, in the misappropriation of money which a customer or client was
minded to entrust to the firm, it is material to consider whether it ever came into the
firm's custody; in this case the firm is liable for misappropriation by a partner, whether
he was the partner originally trusted or not, and whether he acted in the exercise of
apparently regular authority or not. Further, the question of whether a partner was
acting on behalf or with the ostensible authority of the firm can seldom be answered
except by reference to the expectations created either by the special usage of that firm,
or by what is usual in that kind of business generally. Depositing securities with a
banker for safe custody will make his firm responsible for a misappropriation of them;
but putting money in the hands of one member of a banking firm to be invested at his
discretion will not; for the former transaction is within the scope of what bankers in
England habitually do for their customers, the latter is outside it.48

In Hamlyn v Houston,49 one of two partners without the knowledge of his copartner by
bribery induced a clerk of the plaintiff a competitor in trade, in breach of duty to his
employer to divulge confidential information in regard to the plaintiff's business. It was
in the ordinary course of the business of the firm to obtain such information by
legitimate methods, and the partner acted in the interests of the firm. Both partners
were held liable to the plaintiff. The same principle was followed in a case where a
partner received the stolen goods and credited the sale proceeds to the firm.50 In the
case of defamatory statements in a letter by the partners of a firm on a privileged
occasion, each partner has a personal privilege and only a partner actuated by malice
is liable in damages.51
47 See Munshi Basiruddin Mullick v Surja Kumar Naik, (1908) 12 Cal WN 716, 719.
48 Contrast Clayton's case (1816) 1 Mer 572, 579 : 35 ER 781, 786 with Bishop v Countess of
Jersey, (1854) 2 Drew 143.
49 Hamlyn v Houston, (1903) 1 KB 81 .
50 Hurruck Chand v Gobind Lal, (1906) 10 Cal WN 1053.
51 Meekins v Henson, (1962) 1 All ER 899 : (1964) 1 QB 472 .
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 27. Liability of firm for misapplication by partners.-

Where—

(a) a partner acting within his apparent authority receives money or property from a
third party and misapplies it, or

(b) a firm in the course of its business receives money or property from a third
party, and the money or property is misapplied by any of the partners while it is
in the custody of the firm, the firm is liable to make good the loss.

[s 27.1] Difference between sub-sections (a) and (b).—

Under the first paragraph, the receipt and misapplication of the money or property must
be by the same partner before it reaches the firm; whereas, under the second
paragraph the firm receives money or property, and the money or property so received
is misapplied by any of its members. In both cases the firm is liable to make good the
loss. The other distinction is that clause (a) contemplates that an act may not be within
the ordinary course of the firm's business but it may have been within the scope of his
ostensible authority.52 Clause (b) refers to an act within the implied authority of a
partner.

52 Rhodes v Moules, (1895) 1 Ch 236 .

The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 28. Holding out.-

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

(2) Where after the partner's death the business is continued in the old firm name,
the continued use of that name or of the deceased partner's name as a part
thereof shall not of itself make his legal representative or his estate liable for
any act of the firm done after his death.

[s 28.1] "Holding out."—

This section is based on the well-known principle of estoppel. The principle of estoppel
introduced in this section imposes liability on two distinct classes of persons, i.e., (i) a
person who is not a partner, and (ii) a person who may be an ex-partner who suffers the
other partners to represent that the ex-partner continues to be the partner. The result is
that he is held liable to such persons as if he were a partner. The words "given credit to
the firm" expressly refer to contractual debts. This section does not refer to tortious
acts at all. The creditor must in fact have given credit to the firm in the belief, induced
by the express or tacit representation of the supposed partner that he is a member of
the firm. Without such facts there is no ground for holding any one responsible. Any
representation of this kind "can only conclude the defendants with respect to those
who have altered their condition on the faith of its being true."53 It is not necessary to
show that the statement or conduct which amounts to holding out was wilful or
fraudulent as the section does not use such an expression. The determining clement is
not the knowledge of the party making it but the effects of the representation as having
caused another to act on the faith of it.54 In fact, this kind of liability is neither more nor
less than a special application of the principle of estoppel.

Where a man holds himself out as a partner, or allows others to do it he is then properly
estopped from denying the character he has assumed and upon the faith of which creditors
may be presumed to have acted. A man so acting may be rightly held liable as a partner by
estoppel.55

No evidence of intention or knowledge of the consequences of his acts and conduct is

necessary to make the apparent parties liable.56

[s 28.2] Proof of "holding out."—

The creditor need not prove specifically that he gave credit to the firm on the faith of a
certain person being a partner in it. Giving credit to a firm is the same thing as giving
credit to all and each of the persons believed by the creditor to be its members. It is a
question of fact in each case whether credit was given on the faith of the
representation. In order to establish a liability under this section the creditor must prove
by clear and unambiguous evidence that the person charged was acting as a partner
and under section 109 of the Indian Evidence Act, 1872, the onus is then on the firm to
show that the apparent partner was not really a partner.57 But, when the representation
and the creditor's knowledge of it are proved, the remaining inference is so easily drawn
that the results will almost always be the same. As the liability depends on estoppel
and not on any contract between the apparent partners, it is immaterial what the
agreement between them, if any, may really be.

[s 28.3] By conduct represents.—

Allowing one's name to be put upon the prospectus58 or becoming a party to a

resolution59 are illustrations of such representation.

[s 28.4] By words or conduct represents.—

Oral representation that he is a partner or signing receipts of cargo for transport may
lead to such an inference.60 The representation as the basis of holding out may be
express or implied. It may consist of verbal or written statement or even may be by
conduct. Conduct may be of any overt act of the party. Even omission or mere neglect
of a person where there is an obligation to do a particular act may amount to conduct.
Whether the particular words or conduct amount to holding out or not is a question of
fact depending on the facts and circumstances of that particular case.

Mere fact that a person's name is used in the firm name does not make that person a
partner of the firm. So when father was carrying on business in the name of son, it was
held that it does not establish that son was a partner as father might have used son's
name as father regarded it as propitious for the business. There must be a consentient
act on the part of son indicating that he was a member of the firm.61 So there can be
no liability if a person is represented as a partner without his knowledge and assent.
Mere negligence or carelessness in not seeing that all the note papers of a firm had
been destroyed when the retired person left the business did not bring him as a partner
by holding out.62

[s 28.5] Knowingly permits himself to be represented.—

This would seem on principle to be a particular case of leading another person to

believe that one is a partner. There is nothing to show how much more than passive
assent is signified by the "knowingly permits" of this section. It can hardly be the law
that, if A hears a report that Z is representing him as a partner in X & Co, he becomes
bound at his peril to notify to the world that he is not. But there is an amount of silence,
in the face of known persistent representations made to persons likely to be misled,
which may be good evidence of "knowingly permits himself to be represented." All that
can be said in general terms is that prudent men will rather use a little abundant
caution in due season than run the risk of much more trouble at a later time.
[s 28.6] Liable … to any one who has on the faith of any such representation
given credit to the firm:—

A person who knew nothing of the representation and entered into a transaction with
the firm will not be permitted to take advantage of any such representation of which he
subsequently knows.

However, it is not necessary that the representation must be directly made to the
person giving credit to the firm. One who makes an assertion intending it to be
repeated and acted upon by third person will be liable to those who afterwards hear of
it and act upon it.63

There can be no question of any liability if the person to whom the representation was
made did not believe it or took it to be false or if he believed it but did not act upon it.

The doctrine of holding out which is a part of the law of estoppel would not apply to
anything done or any credit given after the death of the person making the
representation.

[s 28.7] Deceased partner and retired partner.—

In practice, questions of this kind are suggested mainly by the case of a deceased or
retired member's name being continued in the firm. Since the law does not require the
name of a firm to correspond with the name of actual partners,64 the presence of a
given name is of itself no representation that any person bearing that name is in fact a
partner. It is accordingly well settled that the continuance of a deceased partner's
name will not make his estate liable for partnership debts contracted after his death
and this is enacted in sub-section (2). But a living retired partner may be exposed to
risk in this way, that customers of the firm who have no notice of his retirement and
may go on dealing with the firm on the faith of his being a member. Therefore it is
prudent and usual to notify customers of changes in the constitution of the firm. No
creditor, however, can hold a retired partner liable whom he did not know to be a
partner before the change in the firm, and who had ceased to be a partner in fact when
the credit was given. Thus a "dormant partner," i.e., one not generally known to be a
partner, "may retire from a firm without giving notice to the world."65

Strictly speaking, it seems that in the case of a retiring partner the representation that
he is still a member of the firm is not made by others and consented to by him, but it is
his own; for, much oftener than not, credit given on the faith of his being a partner is so
given not because the other partners say anything, but because he has said nothing.
Indeed, the presence of a particular name in the firm has very little to do with the
matter, save so far as the disappearance of a personal name may be a warning that
some member of that name has died or retired. A retired member of a firm with an
impersonal name might be liable to a customer who had known him to be a member.66

[s 28.8] Not applicable to torts.—

The doctrine of "holding out" does not apply to liability for civil wrongs, as it rests
entirely on credit having been given to the person whom it is sought to make liable.65
One man is not answerable for another's wrongful acts merely because that other
might be supposed to be his servant. Ostensible employment, if one may use the term,
is material only so far as it tends to prove real employment.67
[s 28.9] Effect of holding out.—

If a person holds himself out to be the partner of a firm, he becomes personally liable.
He does not therefore become a partner in the firm; and is not entitled to any rights as
against those who are in fact partners in the firm. By holding himself out to be a
partner, he does not become the agent of the firm. He merely makes himself personally
liable for the credit given to the firm on the faith of his representation.

[s 28.10] Registration of firms and holding out.—

Where the provisions of Chapter VII are made applicable cases of a person being liable
on the ground that he has held himself out to be a partner will seldom occur. The
Register will give information as to who are really partners; and though there is no duty
to take inspection it is unlikely that a third person will act on a representation of
partnership without such inspection; and if he does, no estoppel will arise, for the
doctrine of estoppel does not apply, where the facts are known to both sides.68

53 Quarman v Burnett, (1840) 6 M&W 499, 509 : 151 ER 509.

54 Sarat Chunder Dev v Gopal Chunder Laha, (1893) 20 Cal 296 , 312 (PC); Barkat Ali Haji v
Prasanna Kumar Talukdar, AIR 1929 Cal 819 : (1929) 33 Cal WN 873.
55 Mollwo, March & Co v Court of Wards, (1872) LR 4 PC 419, 435.
56 Porter v Incell, (1905) 10 Cal WN 313, 320.
57 Bharat Spinning and Weaving Co v Manilal Lallubhai, AIR 1935 PC 175 : (1935) 37 Bom LR
826 : 157 IC 4.
58 Collingwood v Berkeley, (1863) 15 CBNS 145 .
59 Maddick v Marshall, (1863) 16 CBNS 387 , affirmed in 17 CBNS 829.
60 Snow White Food Products (Pvt) Ltd v Sohan Lal Bagla, AIR (1964) Cal 209 .
61 Tulsidas v Lyon Lord & Co, AIR 1925 Sind 225 .
62 Tower Cabinet Co Ltd v Ingram, (1949) 1 All ER 1033 : (1949) 2 KB 397 .
63 Frederick Pollock, A Digest of the Law of Partnership, 12th Edn, Stevens and Sons, 1877, p
60. Also see Parker J, in Dickinson v Valpy, (1829) 10 B&C 128, 140, 141.
64 See note "Firm name" under section 4.
65 Health v Sansom, (1832) 4 B&Ad 172, 177.
66 Smith v Bailey, (1891) 2 QB 403 .
65 Health v Sansom, (1832) 4 B&Ad 172, 177.
67 See Carter v Whalley, (1830) 1 B&Ad 11.
68 Mohori Bibee v Dharmodas Ghose, (1903) 30 IA 114 : 30 Cal 539.
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 29. Rights of transferee of a partner's interest.-

(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage,
or by the creation by him of a charge on such interest, does not entitle the
transferee, during the continuance of the firm, to interfere in the conduct of the
business, or to require accounts, or to inspect the books of the firm, but entitles
the transferee only to receive the share of profits of the transferring partner, and
the transferee shall accept the account of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled as against the remaining partners to receive the share of
the assets of the firm to which the transferring partner is entitled, and, for the
purpose of ascertaining that share, to an account as from the date of the
dissolution.

[s 29.1] Share of partner.—

See "Partner's nature of share in Partnership property" in commentary of section 14.

[s 29.2] Partner's dealing with his share.—

The effect of the section is that a partner may transfer his share to a third person,
absolutely or by way of security, but cannot make the transferee a partner, unless the
other partners recognize the transferee as a partner.69 This section is subject to the
terms of the partnership agreement, and if a partner has an unconditional right to
transfer his share, he is relieved from liability as between himself and his co-partners in
respect of transactions subsequent to the transfer and notice thereof given to them.70
But the transfer alone does not render the transferee a member of the partnership and
liable as between himself and other members to any of the debts of the firm until the
co-partners acknowledge him to be a partner.69 The purchaser of a share in a
partnership (i.e., transferee) must personally indemnify his vendor against the
partnership debts.71 The transferee has no direct claim to the profits which are
received in the first instance by the transferor.72 Moreover, such a transfer will not
entitle the transferee during the continuance of the firm to interfere in the conduct of
business. The transferee is entitled only to receive the share of profits of the
transferring partner and he shall accept the account of profits agreed to by the
partners. What is meant by a share of a partner is his proportion of the partnership
assets after they have all been realised and converted into money and all the
partnership debts have been paid.73 But after dissolution the transferee is entitled as
against the remaining partners to demand accounts as from the date of dissolution
and payment of the share of the partnership assets to which the transferor would be
entitled.74
[s 29.3] Specific performance:—

Specific performance of a contract to sell a share in a partnership business may be

enforced.73

[s 29.4] Purchase of share by partner.—

A transfer of his interest by one partner to another, where there are only two partners,
operates as a dissolution.75 One of several partners may purchase the share of another
for his own benefit, and not for the benefit of the firm.76

[s 29.5] Power to introduce partners.—

See notes to section 31.

[s 29.6] Dissolution of partnership.—

Where a partner, other than the partner suing, has in any way transferred the whole of
his interest in the firm to a third party, the court may dissolve the firm.77

[s 29.7] Transferee's right to account.—

A receiver appointed at the instance of a transferee is in no better position than the

transferee himself, and is not entitled to ask for accounts.78 But the transferee of a
partner's interest has, on dissolution or retirement from the firm of the transferor, a
statutory right to a judicial account and this is not affected by an arbitration clause in
the partnership deed.79

[s 29.8] What transferee cannot do.—

A transferee of a partner's interest is not entitled, during the continuance of the

partnership,

(1) to interfere in the conduct of the business;80 or

(2) to require accounts;81 or

(3) to inspect the books of the firm (during the continuance of partnership); or

(4) to challenge the accounts of profits agreed to by the partners;

(5) cannot sue for dissolution or for account before dissolution.82 The assignor
continues to remain partner and assignee is only entitled to receive the share of
profits due to assignor. It is only if and when dissolution occurs that transferee
would be entitled as against the remaining partners to ask for account as from
the date of dissolution and to receive his share of the assets of firm to which
transferring partner was entitled on that footing.83 The Supreme Court also
 reiterated that what the assignee would get would be the right to receive the
share of profits of the assignor and accept the account of profit agreed to by the
partners.84 Though the section deals with voluntary transfer of the share of a
partner, the principles contained in it can also be applied to involuntary
transfer.85 For the purpose of section 17(1) of the Registration Act, 1908, the
interest of the partner in immovable assets of the partnership is movable
property and does not require registration.86 This is so because a partner
seeking to get his share could not get his share in specie in immovable property
but only after the assets have been converted into money and debts and
liabilities discharged and it is only in the residue that he could get his
proportionate share.85

Creation of sub-partnership—does it involve transfer of partnership interest?—There is a

clear distinction between a case where a partner of a firm assigns his share in favour
of a third person and a case where a partner constitutes a sub-partnership with his
share in the main partnership. Whereas in the former case, in view of section 29(1) of
the Indian Partnership Act, 1932, the assignee gets no right or interest in the main
partnership, except of course, to receive that part of the profits of the firm referrable to
the assignment and to the assets in the event of dissolution of the firm, but in the latter
case, the sub-partnership acquires a special interest in the main partnership. In CIT v
Sunil J Kinariwala,87 the case was not one of a sub-partnership, though in view of
Section 29(1) of the Indian Partnership Act, 1932, the Trust, as an assignee, became
entitled to receive the assigned share in the profits from the firm not as a sub-partner
because no sub-partnership came into existence but as an assignee of the share of
income of the assigner-partner.

In MV Karunakaran v Krishan,88 the Supreme Court explained that a distinction exists

between the right of a partner to sell a property during subsistence of the partnership
and the right of an erstwhile partner to sell the property of the firm after it stood
dissolved. Where persons who had definite pre-existing rights as co-owners merely
applied their own property for running a business in partnership, on dissolution of
partnership their right in property would revive and they would continue to have
undivided share in the property. Even during subsistence of partnership, question of
their ceasing to have any interest therein on its automatic dissolution would not arise.

69 Jefferys v Smith, (1827) 3 Russ 158; Mangilal v Bhanwarlal, AIR 1963 Raj. 153 .
70 Jefferys v Smith, (1827) 3 Russ 158.
69 Jefferys v Smith, (1827) 3 Russ 158; Mangilal v Bhanwarlal, AIR 1963 Raj. 153 .
71 Dodson v Downey, (1901) 2 Ch 620 .
72 Ramachar v TT Comm, AIR 1961 SC 1059 : [1961] 3 SCR 380 .
73 Reddi Veerraju v Chittori Lakshminarasamma, AIR 1971 AP 266 .
74 Mangilal v Bhanwarlal, AIR 1963 Raj. 153 ; Addanki Narayanappa v Bhaskara Krishnappa, AIR
1966 SC 1300 : [1966] 3 SCR 400 .
73 Reddi Veerraju v Chittori Lakshminarasamma, AIR 1971 AP 266 .
75 Health v Sansom, (1832) 4 B&Ad 172.
76 Cassels v Stewart, (1881) 6 App Cas 64 .
77 Section 44(e).
78 Mistry Gowa Petha v NH Moos, AIR 1931 Pat. 312 : (1931) 10 Pat 792 : 133 IC 40.
79 Bonnin v Neame, (1910) 1 Ch 732 : 79 LJ Ch 388.
80 Reddi Veerraju v Chittori Lakshminaramma, AIR 1971 AP 266 ; Mangilal v Bhanwarlal, AIR
1963 Raj. 153 .
81 Mangilal v Bhanwarlal, AIR 1963 Raj. 153 .
82 Dhanaji Jelhaji v Gulabchand Pana, AIR (1925) Bom 345 : 27 Bom LR 409 : 87 IC 812.
83 Mangilal v Bhanwarlal, AIR 1963 Raj. 153 .
84 Addanki Narayanappa v Bhaskara Krishnappa, AIR 1966 SC 1300 : [1966] 3 SCR 400 .
85 Ajudhia Pershad v Sham Sunder, AIR 1947 Lah 13 .
86 Addanki Narayanappa v Bhaskara Krishnappa, AIR 1966 SC 1300 : [1966] 3 SCR 400 .
85 Ajudhia Pershad v Sham Sunder, AIR 1947 Lah 13 .
87 CIT v Sunil J Kinariwala, AIR 2003 SC 668 : (2003) 1 SCC 660 : (2003) 179 CTR (SC)15 :
[2003] 259 ITR 10 (SC) : JT 2002 (10) SC 277 : 2003 (1) UJ 543 (SC) : 2002 (9) Scale 217 .
88 MV Karunakaran v Krishan, AIR 2007 SC 1501 : 2009 (17) SCC 334 : 2007(3) Andh LD 39 (SC)
: 2007 (2) All WC (Supp) 1145 SC : 2007 (1) Ker LT 243 (SC) : (2007) 147 PLR 247 : 2006 (14)
Scale 75 : [2006] Supp (10) SCR 1234 .
The Indian Partnership Act (Act IX of 1932)

Chapter IV Relations of Partners to Third Parties

S. 30. Minors admitted to the benefits of partnership.-

(1) A person who is a minor according to the law to which he is subject may not be
a partner in a firm but, with the consent of all the partners for the time being, he
may be admitted to the benefits of partnership.

(2) Such minor has a right to such share of the property and of the profits of the
firm as may be agreed upon, and he may have access to and inspect and copy
any of the accounts of the firm.

(3) Such minor's share is liable for the acts of the firm, but the minor is not
personally liable for any such act.

(4) Such minor may not sue the partners for an account or payment of his share of
the property or profits of the firm, save when severing his connection with the
firm, and in such case the amount of his share shall be determined by a
valuation made as far as possible in accordance with the rules contained in
section 48:

Provided that all the partners acting together or any partner entitled to dissolve
the firm upon notice to other partners may elect in such suit to dissolve the firm,
and thereupon the Court shall proceed with the suit as one for dissolution and
for settling accounts between the partners, and the amount of the share of the
minor shall be determined along with the shares of the partners.

(5) At any time within six months of his attaining majority, or of his obtaining
knowledge that he had been admitted to the benefits of partnership, whichever
date is later, such person may give public notice that he has elected to become
or that he has elected not to become a partner in the firm, and such notice shall
determine his position as regards the firm:

Provided that, if he fails to give such notice, he shall become a partner in the
firm on the expiry of the said six months.

(6) Where any person has been admitted as a minor to the benefits of partnership in
a firm, the burden of proving the fact that such person had no knowledge of
such admission until a particular date after the expiry of six months of his
attaining majority shall lie on the person asserting that fact.

(7) Where such person becomes a partner,—

(a) his rights and liabilities as a minor continue up to the date on which he
becomes a partner, but he also becomes personally liable to third parties
for all acts of the firm done since he was admitted to the benefits of
partnership, and

(b) his share in the property and profits of the firm shall be the share to
which he was entitled as a minor.
 (8) Where such person elects not to become a partner,—

(a) his rights and liabilities shall continue to be those of a minor under this
section up to the date on which he gives public notice.

(b) his share shall not be liable for any acts of the firm done after the date of
the notice, and

(c) he shall be entitled to sue the partners for his share of the property and
profits in accordance with sub-section (4).

(9) Nothing in sub-sections (7) and (8) shall affect the provisions of section 28.

[s 30.1] English law.—

Infant may be a partner.89 While he is an infant, he incurs no liability and is not

responsible for the debts of firm which he can repudiate both during his minority as
well as on attaining majority.90 For the partnership debt the creditor has no right to levy
execution on the separate property of an infant partner.91

Notwithstanding the above legal position, as against his co-partners an infant cannot
insist that in taking the partnership accounts he shall be credited with profits and not
be debited with losses. The infant partner must either repudiate or abide by the
agreement under which alone he shares the profits.92 Lastly, an infant partner on
becoming major must express speedily his determination to retire from the firm. This is
well illustrated in Goode v Harrison,93 where infant was and was known to be a member
of the firm. On attaining majority, he did not expressly either affirm or disaffirm the
partnership. However, he was held liable for debts incurred by his co-partners
subsequently, when he attained majority. According to the court's view, an infant, when
he becomes major, must take care to notify that he has ceased to be a partner if he
desires to avoid liability.94

[s 30.2] Indian law.—

Even before the Indian Partnership Act, 1932 was enacted, the law in India was that a
minor could not make any contract at all, and therefore could not be a partner,95 and
this has been recognised by express enactment in section 30(1). Obviously there
cannot be a partnership of minors, as they cannot enter into a contract.96 A person
under the age of majority cannot be a partner by contract and he cannot be one of that
group of persons called firm.97 The minor, however, "may be admitted to the benefits of
partnership," and his share in the firm's property is subject to the firm's debts. Creditor
of a firm is not entitled to proceed against minor personally, being restricted only to his
interest in the property of the firm.98 See sub-section (3). The section applies only
where a minor is admitted to the benefits of a subsisting partnership, and is not in
terms applicable to a case in which a person is the sole proprietor of a business. So
where B & H were partners in equal shares of a confectionery business, H died leaving a
minor son. After H's death, B carried on business under the old name with the
partnership funds which he retained in his hands. The minor son alleged that after his
father's death, he was admitted to the benefit of partnership. It was held that though B
was bound to render account of profit of the partnership to the minor son for
employing the partnership capital since the death of H, the minor son (plaintiff) could
not be admitted to the benefit of partnership as no partnership existed after H's death
nor could the plaintiff being a minor enter into a contract with B to form partnership.99
There should be at least two partners before a minor is admitted.100

[s 30.3] Admitted for the benefit of partnership.—

We shall see the judicial interpretation focusing the meaning of this expression.

1. All four partners were to attend business and if consent was needed, all partners
including minor had to give their consent in writing. Minor was entitled to
manage the affairs of the firm including inspection of account books and had
right to vote. Minor was entitled to share not only profit but also liable to bear all
the losses including loss of capital. It was held that section 30 did not render a
minor a full partner and any document which made a minor full partner and goes
beyond this section is not valid. Here no distinction was practically made
between an adult partner and a minor and to all intents and purposes minor was
a full partner, though under section 30 he could only be admitted to the benefit of
partnership and not as a partner. The result was that tax authority were justified
in not according registration under the Income-Tax Act, 1961.101

2. Effect of a minor introduced as a partner through guardian, deed not void ab

initio.—Progressive Financers v CIT, Madras,102 dealt with the question of whether
a partnership firm could be registered under the Income-Tax Act, 1961, where one
of the partners was a minor and she was represented through the guardian and
signed as such in the partnership deed. The deed contained a specific recital that
the minor had been admitted only to the benefits of partnership but capital had
been shown to have been contributed on behalf of the minor also. The Supreme
Court called for a reasonable construction of the partnership, holding that the
registration should have been granted by the Income Tax Officer and set aside
the orders passed by the authorities below that the partnership deed itself was
void ab initio. The construction of the partnership shall be such as to take the
minor only for the profits of the partnership and distribute the losses against the
major partners only in the same proportion to which they were entitled to profits.

3. Registration of Firm where minor is said to be a partner and not merely admitted
to benefits of partnership, not tenable.—In CIT v Dwarkadas Khetan and Co,103
the Supreme Court noticed the divergent views amongst the High Courts on the
point that where a minor is admitted as full partner by adult partners, the
partnership document can be registered after interpreting it to mean that the
minor has been admitted to the benefits of partnership and not as a full partner.
Approving the view of the Calcutta High Court and the Punjab High Court it was
held, that the Income Tax authorities cannot make out a new contract between
the parties and register document which is different from the one actually
executed and ask to be registered. The apex court thus disapproved the view of
the Madras High Court holding that the document must be construed as showing
only that the minor was admitted not as full partner but to the benefits of
partnership. The relevant para reads as follows (page 533).

Section 30 of the Indian Partnership Act clearly lays down that a minor cannot become a
partner though with the consent of the adult partners he may be admitted to the benefit of
partnership. Any document which goes beyond this section cannot be regarded as valid for
the purpose of registration. Registration can only be granted of a document between
persons who are parties to it and on the covenant set out in it. If the Income Tax authorities
register the partnership as between adults only contrary to the terms of the document, in
substance a new contract is made out. It is not open to the Income Tax authorities to
register a document, which is different from the one actually executed and asked to be
registered.
[s 30.4] Sub-section (2).—

This sub-section is restricted to the accounts only. A minor is not entitled to inspect
and/or to have a copy of any other books.

[s 30.5] Sub-section (3).—

This sub-section excludes personal liability and restricts it the extent of the minor's
share in the partnership assets. A minor being entitled to the benefits, it would be just
and equitable that his share in the partnership assets should be held liable. Similarly a
minor partner would not be adjudged insolvent but his share in the assets would vest in
the Official Assignee.104

[s 30.6] Sub-section (4).—

Under this sub-section a minor cannot sue for an account and profits or for his share of
the property of the firm except when he severs his connection with the firm. Moreover,
such a suit by the minor does not however dissolve the firm. But the court may treat the
suit as of dissolution and accounts at the request of all the partners or any partner
entitled to dissolve the firm. In the undermentioned case, the Supreme Court observed
that section 30(4) contemplates that capital may have been contributed on behalf of a
minor and guardian may on behalf of a minor sever his connection with the firm. When
guardian is entitled to sever the minor's connection with the firm, it must be held that
he is entitled to refuse to accept the benefit of partnership or agree to accept the
benefit of partnership for a further period on terms which are in accordance with the
law.105

[s 30.7] Sub-section (5).—

Under section 30(5), it is provided that at any time within six months of his attaining
majority or of his obtaining knowledge that he had been admitted to the benefit of
partnership, whichever date is later, such person may give public notice of his election
and accordingly his position as regards the firm shall be governed.106 This sub-section
is new as it does not prescribe the reasonable time as was under section 248, the
Indian Contract Act, 1872 but fixes six months period within which the minor should
decide as to his connection with the firm. Under the proviso to section 30(5), if he fails
to give the required notice, he shall become a partner in a firm on the expiry of six
months' time. So a minor need not give public notice if he has elected to become a
partner.

The Kerala High Court in the undermentioned case observed that where the suit for
enforcing partnership liability had been instituted before the expiry of six months
allowed to a minor under section 30(5), in that event minor could not issue public
notice as required by section 30(5) of the Indian Partnership Act, 1930—as before six
months' period suit was filed—and so minor cannot be considered as partner merely for
the reason of failure to issue such public notice.107

When a minor elects to continue as a partner, he is entitled to his profits as computed

at the end of the year, regulated by partnership deed. On the other hand, if he elects to
sever all his connection with partnership and decides not to become a partner, he is
entitled to whatever amount is due to him at the date when he makes the election not
to become a partner. This is so because in the first case there is no break in the
continuity of partnership and so there is no need to make up any accounts, while in the
latter case, there is a break in partnership and accounts have to be made up as of a
particular date because the minor who has become a major has the right to claim a
specific amount as due to him on a particular date.108 According to the Supreme
Court,109 section 30(5) of the Indian Partnership Act, 1930 presupposes the existence
of partnership. A minor after attaining majority cannot elect to become a partner of a
firm which ceases to exist. When a partnership was dissolved before the minor
becomes a major, the partnership has become non-existent when the minor becomes a
major and it is legally impossible to hold that he became a partner of the dissolved firm
by reason of his inaction in the matter of exercising his option after he became a major
within the time prescribed by section 30(5) of the Indian Partnership Act, 1930. In view
of this, section 30(5) of the Indian Partnership Act, 1930 does not apply to him. He is
not a partner of the firm and so he cannot be adjudicated insolvent for the acts of
insolvency committed by major partners of firm.

[s 30.8] Sub-section (7).—

According to Gujarat High Court,110 the rights and liabilities of a minor admitted to the
benefit of partnership continue up to the date on which he becomes a partner. A minor
who has elected to become a partner under section 30(5) will be personally liable not
only for all acts of the firm done after he became a partner but also for all such acts of
the firm as had been done since he was admitted to the benefit of partnership.110 Thus
he incurs retrospective liability as it relates back to the date when minor was admitted
to the benefit of partnership. In England, the position is not so strict. If minor, on
becoming major, neither affirms nor dis-affirms the partnership, he is held liable only for
debts incurred by the firm since his majority.111

Accordingly, Indian law seems to protect the creditors of a firm in a more favourable
position than in England.112

[s 30.9] Sub-section (8).—

A minor who elects not to become a partner, his rights and liabilities are enumerated in
this sub-section. He is liable to the extent of his share both in the property as well as in
the profits of the firm for all obligations incurred by the firm up to the date on which he
gives public notice of his intention to sever his connection with the firm and his share is
not liable for acts of firm done after such notice. He can bring a suit for account and
ask for the amount of his share in the partnership property and profits on the date of
his severance.113

[s 30.10] Sub-section (9).—

If the minor, after attaining majority, does in fact act as a partner before giving public
notice, he will be liable to third parties on the principles of holding out.

[s 30.11] Accounts.—
Before this Act, it was doubtful whether a minor could sue the partners for an account,
but by sub-section (4) it is settled that he is not entitled to sue for accounts or for
payment of his share, except when severing his connection with the firm, during
minority, and when, under sub-section (8)(c), after attaining majority he elects not to
become a partner. Where a minor on attaining majority becomes a partner, he is
entitled to profits as computed at the end of the year, and is not entitled to receive
profits that may have arisen on calculation made as on the day he attained majority.114

[s 30.12] Rights and liabilities of minor in a firm.—

The position of a minor in a firm may be stated as follows:—

Rights of Minor Disabilities

(1) May be admitted to the benefits of (1) May not be a partner (sub-section 1).
partnership (sub-section 1).
(2) Right to inspect and copy any of the (2) May not sue for accounts unless he severs
accounts of the firm (sub-section 2). his connection with the firm (sub-section 4).
Rights of Minor Liabilities
(1) On severance he may sue for accounts (1) May have his share in the firm attached for
(sub-section 4). the acts of the firm (sub-section 3).
(2) On attaining majority may elect to become (2) Unless within the period mentioned in sub-
partner, and he will be entitled to the share to section (5), he elects not to become a partner,
which he was entitled as a minor (sub-section he will be liable as a partner (sub-section 5).
5).
(3) On attaining majority may elect not to (3) Where a minor on attaining majority has
become partner, in which case his share is not elected to become a partner, he becomes
liable for any acts of the firm done after the personally liable to third parties for all acts of
date of the public notice that he has elected not the firm done since he was admitted to the
to become a partner (sub-section 5). benefits of partnership [sub-section 7(a)].
(4) After attaining majority, he may be liable for
holding himself out as a partner (sub-section
9).

89 Re A & M, (1926) 1 Ch 274 , the only two partners were both infants.
90 See Goode v Harrison, (1821) 5 B&A 147 : 106 ER 1147.
91 Lovell and Christmas v Beauchamp, (1894) AC 607 .
92 Ernest H Scamell, Lindley on the Law of Partnership, 13th Edn, Sweet & Maxwell Ltd, 1971, p
55 citing Lovell and Christmas v Beauchamp, (1894) AC 607 , 611.
93 Goode v Harrison, (1821) 5 B&A 147 : 106 ER 1147.
94 See section 30(5) of the Indian Partnership Act, 1932 for Indian position on this.
95 Sanyasi Charan Mandal v Krishnandhan Banerji, AIR 1922 PC 237 , 239–240 : (1922) 49 IA
108 : 49 Cal 560, 570 : 67 IC 124 : (1922) 24 Bom LR 700 .
96 Shriram Sardarmal Didwani v Gourishankar Alias Rameshwar Joharmal, AIR 1961 Bom 136 :
(1960) 62 Bom LR 336 .
97 Re A & M, (1926) 1 Ch 274 .
98 Sanyasi Charan Mandal v Asutosh Ghose, AIR 1915 Cal 482 : (1915) 42 Cal 225 ; Joykisto
Cowar v Nittyanund Nundy, (1878) 3 Cal 738 .
99 Lachhmi Narain v Beni Ram, AIR 1931 All 327 : (1931) 53 All 479 : 130 IC 704.
100 AA Khan v Amer Karim, (1952) A Mys 131: Chhotelal R v Rajmal, AIR 1951 Ngp 448 .
101 CIT, Bombay v Dwarkadas Khetan & Co, AIR 1961 SC 680 : [1961] 2 SCR 821 : (1962) 2 Mad
LJ 42.
102 Progressive Financers v CIT, Madras, AIR 1997 SC 2160 : (1997) 3 SCC 79 : [1997] 2 SCR
280 : 1997 (2) Scale 257 .
103 CIT, Bombay v Dwarkadas Khetan & Co, AIR 1961 SC 680 : [1961] 2 SCR 821 : (1962) 2 Mad
LJ 42 (SC); CIT v Badri Nath Ganga Ram, [2005] 273 ITR 485 : (2005) 194 CTR All 347 (All).
104 Sanyasi Charan Mandal v Ashutosh Ghose, AIR 1915 Cal 482 : (1915) 42 Cal 225 ; Sanyasi
Charan Mandal v Krishnadhan Banerji, AIR 1922 PC 237 : (1922) 49 Cal 560 : (1922) 24 Bom LR
700 : (1922) 49 IA 108 : 67 IC 124.
105 CIT, Bangalore v Shah Mohandas Sadhuram, AIR 1966 SC 15 : [1965] 3 SCR 771 : (1965) 2
SCWR 358 : (1965) 57 ITR 415 .
106 Shivagouda Ravji Patil v Chandrakant Neelkanth Sedalge, AIR 1965 SC 212 : [1964] 8 SCR
233 : 1964 All LJ 890, (1964) 1 SCWR 721 ; VJ Masarwala v P Shah & Co, (1981) 22 GLR 689 .
107 PK Kunchachumma v The Chalapuram Bank Ltd, AIR 1958 Ker. 318 : 1957 Ker LJ 808 : 1957
Ker LT 1264 .
108 Bhogilal Laherchand v CIT, Bombay, AIR 1956 Bom 411 : (1956) 58 Bom LR 57 : : ILR (1956)
Bom 93 : (1955) 28 ITR 919 .
109 Re A & M, (1926) 1 Ch 274 .
110 Section 30(7) (a); VJ Masarwala v P Shah & Co, (1981) 22 GLR 689 , 693, para 7.
110 Section 30(7) (a); VJ Masarwala v P Shah & Co, (1981) 22 GLR 689 , 693, para 7.
111 See Goode v Harrison, (1821) 5 B&A 147, 157 : 106 ER 1147.
112 Haramohandas Poddar v Sudarshan Poddar, AIR 1921 Cal 538 , 540.
113 Lachhmi Narain v Beni Ram, AIR 1931 All 327 : (1931) 53 All 479 : 130 IC 704.
114 Bhogilal Laherchand v CIT, AIR 1956 Bom 411 : (1956) 58 Bom LR 57 : ILR (1956) Bom 93 :
(1955) 28 ITR 919 .
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 31. Introduction of a partner.-

(1) Subject to contract between the partners and to the provisions of section 30, no
person shall be introduced as a partner into a firm without the consent of all the
existing partners.

(2) Subject to the provisions of Section 30, a person who is introduced as a partner
into a firm does not thereby become liable for any act of the firm done before he
became a partner.

[s 31.1] Introduction of new partners.—

Express power for a senior or principal partner to introduce one or more new partners,
named or not named, under agreed conditions, is in fact constantly given by
partnership articles. A person duly nominated under such a power acquires rights in
the partnership property, which the court will enforce by way of appropriate specific
relief,1 though it cannot enforce an agreement to enter into partnership, because the
foundation of partnership is mutual confidence, which the Court cannot supply where it
does not exist.

The words "without the consent of all the existing partners" indicate that the
introduction of a new partner is based upon the consent of the existing partners. This
requirement is, however, subject to the contract between the partners as staled in the
opening words of the section. Accordingly, if the agreement provides that a senior or
any partner shall have the right to introduce a new partner at any time, then the
contract will be binding on the partners. In the case of a partnership consisting of only
two partners, if one of partners dies, the partnership would be dissolved under section
42(c) and it would be a contradiction in terms to say that there can be a contract
between two partners to the effect that on the death of one of them the partnership will
not be dissolved by will continue.2 No heir of the deceased partner can become a
partner with the surviving partner except with the latter's consent, express or implied.2

An incoming partner is subject to the terms of the partnership, though he may not be
bound by a special term of which he had no notice.3

[s 31.2] Liability for old debts of partnership on incoming partner, extent of.—

Whether an incoming partner could be made liable personally for the arrears of sales
tax accrued prior to his induction as a partner of the firm is the question that came up
for consideration in the case in Vinod Babu v District Collector4, before the Kerala High
Court. Section 31(1) states that subject to contract between the partners and to the
provisions of section 30, no person shall be introduced as a partner into a firm without
the consent of all the existing partners. Section 31(2) stipulates that subject to the
provisions of section 30, a person who is introduced as a partner into a firm does not
thereby become liable for any act of the firm done before he becomes a partner. Sub-
section (2) provides that where a person has been introduced as a partner into an
existing firm, he does not thereby become liable for any act of the firm done, any
obligation of the firm incurred, before he becomes a partner therein. Each partner
becomes a partner of the firm for the future and his present connection with the firm is
no evidence that he ever expressly or impliedly authorised what may have been done
prior to his admission. Even if an incoming partner agrees with his co-partners that the
debts of the old firm shall be taken by the new firm, as regards strangers, res inter alios
acta, it does not confer upon them any right to fix liability for the old debts on the new
partner. In order to render an incoming partner liable to the creditors of the old firm,
there must by some agreement, express or tacit, to that effect between him and the
creditors and on some sufficient considerations.5 A new partner does not by the mere
fact of his introduction into the firm become liable for any act of the firm done before
he became a partner. Arrangements, however, for transferring debts from the members
of an old firm to a new firm are not uncommon, and if assented to by the old creditors,
may constitute a complete novation.6 Where the business is carried on continuously,
the creditors knowing of the change, both the assumption of existing debts by the new
partners and the assent of the creditors to accept them as debtors and to discharge
the retiring partners will be rather easily inferred.7 An incoming partner becomes liable
for an existing debt where the following two conditions are fulfilled:

(1) Where the new firm constituted by his introduction has agreed to take over the
liability of the old firm, and

(2) Where the creditor had agreed to discharge the old firm, and to accept the new firm
as his debtors; in other words, unless there is a tripartite contract.

1 Byrne v Reid, (1902) 2 Ch 735 CA.

2 CIT MP v Seth Govind Sugar Mills, AIR 1966 SC 24 : (1965) 3 SCR 488 : (1965) 2 SCJ 289 .
2 CIT MP v Seth Govind Sugar Mills, AIR 1966 SC 24 : (1965) 3 SCR 488 : (1965) 2 SCJ 289 .
3 Austen v Boys, (1857) 24 Beav 598, 606 : 27 LJ Ch 714.
4 Vinod Babu v District Collector, 2005 (4) KLT 412 .
5 Russa Engineering Works v Kanara Transport Co, (1926) 41 Mad 930 : 98 IC 257 : AIR 1926
Mad 1138 .
6 See notes to section 62 of Indian Contract Act.
7 Rolfe v Flower, (1866) LR 1 PC 27, 40. See section 32(2).
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 32. Retirement of a partner.-

(1) A partner may retire—

(a) with the consent of all other partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts
of the firm done before his retirement by an agreement made by him with such
third party and the partners of the reconstituted firm, and such agreement may
be implied by a course of dealing between such third party and the reconstituted
firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners, to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement, until
public notice is given to the retirement:

Provided that a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.

[s 32.1] Retirement of a partner.—

The word "retire" is confined to cases where a partner withdraws from a firm and the
remaining partners continue to carry on the business of the firm without dissolution of
partnership between them.8 It does not cover the case of a partner who withdraws
from a firm by dissolving it. This would be a dissolution and not retirement.

[s 32.2] Three ways of retiring.—

A partner may retire—

(1) where all the partners consent to his retirement;

(2) where it is part of the partnership agreement that a partner might retire without
seeking a dissolution of the firm; and

(3) where the partnership is at will,9 by giving notice in writing to all the other
 partners of his intention to retire.

[s 32.3] Novatio.—

See notes "Liability of new partner," under section 31.

Illustration

A, B and C are partners. D is their creditor. A retires, and a new partner X is introduced
into the firm. X agrees to take over the liability of A. D, the creditor, agrees with A, and
the reconstituted firm of B, C and X, that he will look only to the new firm for the
payment of his debt. A, the retiring partner, is discharged from liability to D.

Unless, therefore, there is novatio a partner who retires does not thereby cease to be
liable for the firm's liabilities incurred before his retirement. A partner of a firm that had
infringed a trademark is liable even though he had retired before the suit for damages
was filed. A partner remains liable for damages, though he may be retired before the
institution of the suit.10 He remains liable on all contracts entered into on behalf of a
firm until the partnership affairs are wound up; or such liabilities are discharged, and
this is so although he may be only a sleeping partner.11

[s 32.4] Extent of continuance of liability of partner after retirement to a pre-

existing debt of creditor.—

Retirement of a partner is effected when a partner retires by following any one of the
modes as prescribed under section 32(1) of the said Act and such retirement is not
controlled and/or subject to the rigor as contained in sub-section (2) or sub-section (3)
of section 32 of the said Act. Both sub-section (2) and sub-section (3) of section 32
deal with the liability of the retiring partner after his retirement. Sub-section (2) of
section 32 of the said Act provides that the retiring partner may be discharged from
any liability to any third party for acts of the firm done before his retirement by an
agreement made by him with such third party and the partners of the reconstituted firm
and such agreement may be implied in course of dealing between such third party and
reconstituted firm after he had knowledge of the retirement. Sub-section (3) of section
32 of the said Act provides that notwithstanding the retirement of a partner from a firm,
he and the partners continue to be liable as partners to third parties for any act done by
any of them which would have been an act of the firm if done before the retirement,
until public notice is given of the retirement. Provided that a retired partner is not liable
to any third party who deals with the firm without knowledge that he was a partner. The
said provision thus provides that the liability of a retiring partner to the third party will
continue even after retirement until public notice is given of the retirement.12

However, under section 32(2) of the Indian Partnership Act, 1932, partner even after
retirement from the firm will be liable to a third party in respect of any pre-retirement
transaction or liability, unless he is discharged from such liability by an agreement
made by him with third party and surviving partners of the re-constituted firm. It is not
sufficient only to intimate the registrar of firms, but also need to be published in
Gazette and news paper.13

The case in Syndicate Bank v RSR Engineering Works14, debates the scope for a bank to
proceed against its debtors, in this case a partnership firm, for recovery of debts. An
agreement was formed between the partners and the appellant bank for obtaining loan
from the bank. On non-payment, the appellant bank filed a suit against all the partners
including two of the partners who had retired from the firm. The retired partners said
that they were not liable since the entire liability of the firm rested with the fourth
partner. The Trial Court did not decree the suit against the second and third
respondents who had retired from the firm. The ruling of the Trial Court was sustained
by the High Court. However, the Supreme Court went against the rulings of the Trial
Court and the High Court and permitted the Bank to proceed against all the defendants
in the suit. The court found that there was also no evidence to show that there was an
implied contract between the appellant and respondent No. 4 who allegedly agreed to
discharge the liabilities of respondent Nos. 2 and 3.

A retired partner would be discharged of his liability by a tripartite agreement or after

giving a public notice.

Illustrations

(1) A, B and C are partners. C, who is an active partner, retires without giving public
notice of retirement. A and B in carrying on the old business incur a liability towards X.
C is also liable to X.

(2) A, B and C are partners. C, who is an active partner, retires without giving public
notice of his retirement. Thereafter, C has a business transaction with X, purporting to
act on behalf of the firm from which he had retired. A and B are also liable to X.

[s 32.5] Creditor's Election.—

Where a change is made in a partnership by the retirement of an old and the admission
of a new member, a customer of the old partnership who, without notice of the change,
supplies goods to the new firm, may elect to make either the partners of the old firm
liable, or the partners of the new firm, but he cannot hold both the outgoing and the
incoming partners liable.

Illustration

A, B and C are partners. C retires and A and B take D into partnership, continuing the old
firm name. A customer deals with the firm as newly constituted without having notice
of the change. He may elect to hold liable either A, B and C, or A, B and D, but he cannot
sue A, B, C and D. Once he has elected to sue A, B and C, he cannot sue A, B and D, and
vice versa.15

[s 32.6] Proviso.—

"A dormant partner may retire from a firm without giving notice to the world."16 The
reason for this is that a sleeping partner, who has never been known to creditors as a
partner, has never been given credit by third parties.17 Another reason, according to the
Gujarat High Court18 is that section 32(3) is not intended to create a liability where non-
existed before or to penalise a retired partner who failed to give Public Notice of his
retirement. So a creditor who had no previous dealings with the firm or knowledge
about its partners is not entitled to hold the retired partner liable for debts incurred by
firm subsequent to his retirement notwithstanding that no notice of any sort is given.19

Illustration
A, B and C are partners. C is a sleeping partner, who has not been known by creditors to
be a partner of A and B. C retires without giving public notice of his retirement. C is not
liable for subsequent debts incurred by A and B.

[s 32.7] Sub-section (4): Public notice.—

Before this Act the law was that besides public notice to the general public actual
notice should be given to old customers.20 This has been superseded by sub-section
(3) which makes a public notice sufficient even as to old customers. However, if
instead of issuing a public notice the retiring partner had given an individual notice
(personal or actual notice) of his retirement to a specified or a named creditor dealing
with the firm, the retiring partner can urge that he is not bound for the subsequent
dealings of the remaining partners with that creditor.21 The purpose, according to
Gujarat High Court, of section 32(3) is to avoid the necessity of giving actual or private
notice to the various persons dealing with the firm. The public notice is intended to
bring home to persons concerned the fact of retirement. That purpose would
undoubtedly be served in a better way by personal or actual notice. To content that
actual notice cannot take the place of the public notice is to miss the substance of the
matter.

Regarding the importance of public notice the said High Court stated that issue of
public notice assumes importance only for those third parties dealing with the firm not
knowing that one of its partners had retired and the giving of public notice in such
cases (despite non-issue of individual notice of the retirement to particular third party)
would relieve the retiring partner from liability.

However, if no public notice or individual notice is issued, the retiring partner cannot
escape from his liability as a partner for dealings by the remaining partners after his
retirement if they would have been the acts of firm if done before the retirement. As to
what constitutes public notice, see section 72.

Public notice may be given either by the retired partner or by any partner of the
reconstituted firm.

This sub-section does not, of course, exclude the effect of notice in fact by any other
means.

[s 32.8] Manner of valuation of the share of a retired partner.—

In Pamuru Vishnu Vinodh Reddy v Chillakuru Chandrasekhara Reddy,22 the Supreme

Court dealt with the manner of valuation of the share a retired plaintiff was entitled to.

Use of the word "retire" in section 32 of the Act is confined to cases where a partner
withdraws from a firm and the remaining partners continue to carry on the business of
the firm without dissolution of partnership as between them. Where a partner
withdraws from a firm by dissolving it, it shall be dissolution and not the retirement.
Retirement of a partner from a firm does not dissolve it, in other words it does not
determine partnership inter se between all the partners. It only severs the partnership
between the retiring partner and continuing partners, leaving the partnership amongst
latter unaffected and the firm continues with the changed constitution comprising of
the continuing partners. There is no express provision in the Act for the separation of
his share and the intention appears to be that it would be determined by agreement
between the parties. Section 37 deals with rights of outgoing partners. Although the
principle applicable to such cases is clear, at times, some complicated questions arise
when disputes are raised between the outgoing partner or his estate on the one hand
and the continuing or surviving partners on the other in respect of subsequent
business. Such disputes are to be resolved keeping in view the facts of each case
having due regard to section 37 of the Act. Section 48 deals with the mode of
settlement of accounts between the partners after dissolution of the partnership firm.

On facts, the Court held that it was clear that the plaintiff had retired from the firm on 5
April 1971 after selling his share in the partnership firm. Once he had retired from the
partnership firm, he had no right to claim any further share in the profits of the firm. A
finding of fact had also been recorded that the defendants had not paid the value of the
share of the plaintiff pursuant to the agreement for retiring from the firm. If the
defendants failed to pay the value of the share of the plaintiff as agreed to, it became a
debt on the defendants and the plaintiff was entitled to recover the same with interest.
After the retirement from the partnership firm and particularly when the firm was
reconstituted with new partners, there was no question of using the plaintiff's share for
earning profit in the reconstituted firm. When the plaintiff retired from the partnership
firm on 5 April 1971, his share could be valued as on that date. Once the valuation was
made as on that date, for any delay in payment he was to be compensated by awarding
interest as is evident from section 37 of the Act itself. The value of the share of the
plaintiff on the date of his retirement from the firm could be regarded as a pure debt
with effect from the date on which he ceased to be a partner as per the agreement
entered into between the parties. Otherwise the result would be that he was deemed to
have been continued as partner of the firm even after he retired from the firm by selling
his share. In such a view, the plaintiff could certainly claim the value of his share as on
5 April 1971 with interest till the payment was made.

8 Vishnu Chandra v Chandvika Prasad, AIR 1983 SC 523 : (1983) 1 SCC 22 .

9 The Indian Partnership Act, section 7.
10 Thomas Bear & Sons v Rulia Ram, AIR 1934 Lah 625 : 148 IC 763.
11 Court v Berlin, (1897) 2 QB 396 CA : 66 LJ 714 : 77 LT 293 : 46 WR 55.
12 Gaur Karuna Dey v Nemai Dey, 2008 (3) CHN 590 : 2 (2008) CLT 537 .
13 Ram Bhat v Leelaram Shevaram (India) Pvt Ltd, ILR 2006 (4) Ker 127 : 2006 (4) KLT 609 .
14 Syndicate Bank v RSR Engineering Works, 2003 (4) Andh LD 62 (SC) : 2003 (51) BLJR 1677 :
2003 (3) JCR 162 (SC) : JT 2003 (4) SC 578 : 2003 4 LW 684 : (2003) 134 PLR 570 : 2003 (4)
Scale 648 : (2003) 6 SCC 265 : [2003] Supp 1 SCR 213.
15 Scarf v Jardine, (1882) 7 App Cas 345 .
16 Heath v Sanson, (1832) 4 B & Ad 172, 177.
17 Ramasami v Kadar Bibi, (1886) 9 Mad 492; Greaves v Parshotum, (1905) 5 Bom LR 366 ;
Gorio v Vallabhdas, (1915) 17 Bom LR 762 on this point is no longer law.
18 Nautamlal v Shri Vivekanand Coop Housing Society, AIR 1986 Guj 162 at 173 : (1985) 2 GLR
1264 .
19 Pollock on Law of Partnership, 15th Edn p 96.
20 Jawaladull R Pillani v Bansilal Motilal, (1929) 56 IA 174 : 53 Bom 414 : 31 Bom LR 687 : 115
IC 707 : AIR 1929 PC 132 .
21 See supra note 14. See also Central United Bank v Venkataramma, AIR 1963 Mad 302 : (1963)
ILR Mad 147 : (1963) 1 MLJ 345 .
22 Pamuru Vishnu Vinodh Reddy v Chillakuru Chandrasekhara Reddy, AIR 2003 SC 1614 : (2003)
3 SCC 445 : [2003] 2 SCR 57 .
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 33. Expulsion of a partner.-

(1) A partner may not be expelled from a firm by any majority of the partners, save
in the exercise in good faith of powers conferred by contract between the
partners.

(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an
expelled partner as if he were a retired partner.

[s 33.1] Sub-section (1): Expulsion.—

Power to expel a partner may be conferred by express agreement, but, even more than
the ordinary powers of a majority, it must be exercised in good faith. Reasonable
warning and opportunity of explanation must be given.23 An irregular expulsion being
wholly inoperative, the person against whom it is directed does not cease to be a
partner; he may claim reinstatement in his rights,24 and, not being legally deprived of
anything, cannot sue for damages.25

Under the repealed section 253 (9) of the Indian Contract Act, 1872, the Court had
power to expel a partner, where the partnership was for a fixed term. There appears to
be no such provision in this Act.

[s 33.2] Sub-section (2): Liability after expulsion of partner.—

The liability of the firm and of the expelled partner after expulsion is on the same
footing as the liability of a firm and a retired partner after retirement.26

23 Barnes v Young, (1898) 1 Ch 414 : 67 LJ Ch 263 : 46 WR 332.

24 Blisset v Daniel, (1853) 10 Ha 493 : 90 RR 454 : 68 ER 1022.
25 Wood v Wood, (1874) LR 9 Ex 190 : 43 LJ Ex 153.
26 See "Liability of retired partner" under section 32. Dwarka Das v Chuni Lal, 12 Cal WN 455;
Din Muhammad v Kanshi Ram, 120 IC 613 : AIR 1930 Lah 378 .
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 34. Insolvency of a partner.-

(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 the firm
is thereby dissolved.

(2) Where under a contract between the partners the firm is not dissolved by the
adjudication of a partner as an insolvent, the estate of a partner so adjudicated
is not liable for any act of the firm and the firm is not liable for any act of the
insolvent, done after the date on which the order or adjudication is made.

[s 34.1] Insolvency of partner.—

Before the Act, the law in India with reference to the effect of the insolvency of a
partner was different. The insolvency of a partner did not per se effect a dissolution of
the firm neither did the insolvent partner cease to be a partner, but the other partner
could sue for a dissolution.27 Under this section an insolvent partner ceases to be a
partner on the date on which the order of adjudication is made. Unless that is a
contract to the contrary, a further effect of the insolvency of a partner is that the firm is
dissolved. See section 42(d).

Furthermore, the estate of a partner so adjudicated is not liable for any act of the firm
and the firm is not liable for any act of the insolvent done after the date on which the
order of adjudication is made.

The consequences resulting from the insolvency of a partner are:—

(1) The partner adjudicated an insolvent ceases to be a partner,

(2) He ceases to be a partner on the dale on which the order of adjudication is

made;

(3) The firm is dissolved on the date of the order of adjudication, unless there is a
contract to the contrary, [section 42(d)];

(4) The estate of the insolvent is not liable for any act of the firm after the date of
the order of adjudication; and

(5) The firm cannot be held liable for any acts of the insolvent partner after the date
of the order of adjudication;

(6) The share of the insolvent partner will vest in the Official Assignee with a right to
ask for an account but without any right in management of the partnership
business.
27 Section 254(2) of Indian Contract Act, 1872.
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 35. Liability of estate of deceased partner.-

Where under a contract between the partners the firm is not dissolved by the death of a
partner, the estate of a deceased partner is not liable for any act of the firm done after
his death.

[s 35.1] Liability of estate of deceased partner.—

It may be taken as a general proposition that the estate of a deceased partner is not
liable to third parties for what may be done after his decease by the surviving partners,
after his partner's death. It is immaterial if the obligation was incurred towards creditor
who believed the deceased partner to be living and a member of the firm.28 The proviso
to section 45 contains similar rule. No public notice is required in respect of the estate
of deceased partner. See also section 28(2).

Where money is borrowed by surviving partners to pay for and take delivery of goods
ordered by the firm in the life-time of the deceased partner the estate of the deceased
is not liable for the debt. All that the creditor is entitled to is a personal decree against
the surviving partners and a decree against the partnership assets in the hands of
those partners.29 According to the court, section 263 of Indian Contract Act
(corresponding to section 47 of the Indian Partnership Act) cannot override section 261
of Indian Contract Act (corresponding to section 35 of the Indian Partnership Act) and
so obligations created by a firm after the death of a partner are not binding on the
estate of the deceased partner. If goods are ordered before, but not delivered till after
the death of a partner, a suit for goods sold and delivered will not lie against the
representatives of the deceased partner.30 Here the Court reiterated the view
expressed in Friend v Young31, that when debt does not accrue in the partner's life time,
it is right to hold that his estate is not liable for goods delivered to a partnership after
his death. On facts, there was no delivery till the death of the partner and so there was
no debt until delivery of the goods.

But this section does not override the express provisions of section 47 by which mutual
rights and duties of the partners continue notwithstanding the dissolution, so far as
may be necessary to wind up the affairs of firm and to complete transaction begun but
not Finished at the time of dissolution.32 The section applies where a firm continues
without its dissolution. (See the text of section 35 of the Act).

28 Neel Comul Mookerjee v Bipro Dass, (l901) 28 Cal 597; see the Indian Partnership Act, 1932,
section 28(2).
29 Seshi Ammal v Vairavan Chettiar, (1918) 35 Mad LJ 669, 47 IC 958 : 42 Mad 15.
30 Bagel v Miller, (1903) 2 KB 212 .
31 Friend v Young, (1897) 2 Ch 421 .
32 Administrator General of Madras v Official Assignee, ILR (1909) 32 Mad 462 : 32 IC 169.
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 36. Rights of outgoing partner to carry on competing business.-

(1) An outgoing partner may carry on a business competing with that of the firm
and he may advertise such business, but, subject to contract to the contrary, he
may not—

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm before he
ceased to be a partner.

(2) Agreements in restraint of trade.- A partner may make an agreement with his
partners that on ceasing to be a partner he will not carry on any business similar
to that of the firm within a specified period or within specified local limits; and,
notwithstanding anything contained in section 27 of the Indian Contract Act,
1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are
reasonable.

[s 36.1] Outgoing partners.—

A retired partner,33 an expelled partner,34 and a partner who has ceased to be a partner
by virtue of an order of adjudication,35 fall within the meaning of an outgoing partner.

[s 36.2] Sub-section (1): Restriction on outgoing partners.—

This sub-section, while recognising the right of an outgoing partner to carry on a

business, competing with that of the firm, and even to advertise such business,
imposes certain restrictions on his activities in order to prevent unfair competition with
the firm. The principle underlying the sub-section is that an outgoing partner has
presumably received payment for the value of his share in the property of the firm,
including the goodwill of the business, and he-should therefore be regarded as having
sold his share in the goodwill of the business to his fellow partners. He is, therefore,
placed in the position of a person who sells the goodwill of his business to another.36
The restrictions imposed upon him are:—

(1) he may not use the firm name. He cannot use a name similar to that of the old
firm so as to mislead the public to believe that it is the old business.37 He may,
however, use his own name provided he does not make a dishonest use of it.37

(2) he may not represent himself as carrying on the business of the firm. The
following observations in connection with Churton v Douglas37, from Lindley's
Partnership,38 be noted: He (i.e. the retiring partner) was entitled to carry on, by
 himself, or in partnership with others, the kind of business previously carried on
by him with his late partners and (2) he was entitled so to do in the immediate
neighbourhood of the place where he and his late partners previously carried on
their business.

(3) he may not solicit the custom of persons who were dealing with the firm before
he ceased to be a partner.39 He cannot solicit either personally or by private or
public circulars or advertisements.40 Since the restriction is in respect of the
customers prior to his retirement, it will not apply in respect of the customers
who are subsequent to his retirement.41

The above restrictions are subject to a contract to the contrary. See Students' Contract
Act under section 27.

[s 36.3] Sub-section (2): Restraint of trade.—

Agreements between partners of the kind recognized by this sub-section have been
allowed in England ever since there has been any settled partnership law and are
exceedingly common; indeed, some such clause is rarely absent from partnership
articles.

The test to determine the reasonableness of the restriction would be whether the
restriction is such only as to afford a fair protection to the interest of the party in whose
favour it is given and not so large as to interfere with the interest of the public.42
Reasonableness is to be judged by the character and nature of the business and of its
customers.42

33 The Indian Partnership Act, 1932, section 32.

34 The Indian Partnership Act, 1932, section 33.
35 The Indian Partnership Act, 1932, section 34. A partner on adjudication is to be deemed to
be an outgoing partner only when the partnership agreement provides for the continuance of
the business. Otherwise dissolution would be effected.
36 See the Indian Partnership Act, 1932, section 55.
37 Churton v Douglas, 28 LJ Ch 841 : 123 RR 56 : 70 ER 385.
37 Churton v Douglas, 28 LJ Ch 841 : 123 RR 56 : 70 ER 385.
37 Churton v Douglas, 28 LJ Ch 841 : 123 RR 56 : 70 ER 385.
38 Lindley on Partnership, 13th Edn, 1971, p 465.
39 The rule in Walker v Mottram, (1881) 19 ChD 355 (CA), that where the Official Assignee has
sold the goodwill of an insolvent's business, the insolvent is not debarred from soliciting old
customers, must be deemed to be superseded by section 36, as it makes no difference in the
case of a partner ceasing to be a partner on insolvency.
40 Curl Bros Ltd v Webster, (1904) 1 Ch 685 .
41 See Trego v Hunt, (1896) AC 7 (HL).
42 Krishnarao v Shankar, AIR 1954 Bom 532 : 56 Bom LR 973 (979).
42 Krishnarao v Shankar, AIR 1954 Bom 532 : 56 Bom LR 973 (979).
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 37. Right of outgoing partner in certain cases to share subsequent profits.-

Where any member of a firm had died or otherwise ceased to be a partner, and the
surviving or continuing partners carry on the business of the firm with the property of
the firm without any final settlement of accounts as between them and the outgoing
partner or his estate, then, in the absence of a contract to the contrary, the outgoing
partner or his estate is entitled at the option of himself or his representatives to such
share of the profits made since he ceased to be a partner as may be attributable to the
use of his share of the property of the firm or to interest at the rate of six per cent per
annum on the amount of his share in the property of the firm:

Provided that where by contract between the partners an option is given to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner, and
that option is duly exercised, the estate of the deceased partner, or the outgoing
partner or his estate, as the case may be, is not entitled to any further or other share of
profits; but if any partner assuming to act in exercise of the option does not in all
material respects comply with the terms thereof, he is liable to account under the
foregoing provisions of this section.

[s 37.1] Duties between continuing and outgoing partners.—

Various and often complicated questions have arisen where a retiring or deceased
partner's capital has been left in the firm's business without any settlement of
accounts. Thus section has been enacted in accordance with the result of a long series
of authorities.43 If there is no special agreement the outgoing partner or his
representative may claim at his or their option "such share of the profits made since he
ceased to be a partner as may be attributable to the use of his share of the firm", (but
experience is not favourable to this method), or interest at the rate is 6% per annum on
the amount of the share. The outgoing partner is entitled to elect between profits and
interest after his share had been ascertained.44 If there is an agreement that the
continuing partner shall take over the share of a deceased partner at a proper
valuation, the representative of the deceased partner can insist that the purchase shall
stand subject to correction of the valuation which is incident to the purchase.45 (See
proviso to section 37 of the Act). But if there is no such agreement and a continuing
partner takes, when he is not bound to take the share of a deceased partner at an
undervalue, the representative of the deceased partner cannot compel him to retain it
at a proper valuation. His proper remedy is to have the account settled on principles
enacted in this section.46 But where the surviving partner does not carry on this
business, but carries on another though similar business, this section has no
application.47

The share referred to in this section is the share actually used in continuing the
business and not the entire share of the deceased or outgoing partner in the assets of
the firm.48 Legal representatives are not bound to exercise option before the profits are
ascertained.48
Under section 37 of the Act, the legal representative of the deceased partner has a
claim either for profits or for interest at 6% for the exclusive use of money or assets
belonging to a firm by one or some of the partners. Thus, he cannot claim a share in
some of the assets of business, without admitting his liability in the firm. What section
37 speaks of is a share of profits made and not a share of the assets only and
completely leaving liabilities out of accounts.49

[s 37.2] "Or otherwise ceased to be a partner."—

This expression has been applied to a partner who becomes an alien enemy on the
outbreak of the war.50

[s 37.3] Surviving partner not a trustee.—

Surviving partner is at times described as a trustee for the deceased partner's

representatives in respect of partnership. Sir Frederick Pollock has observed51 that the
use of the word "trustee" in this connection is an inaccurate expression. As we have
seen on dissolution by death of a partner, his representative is entitled to ask the
surviving partners to account for the deceased partner's share as it stood on his death
and to have his claim satisfied out of the assets of a dissolved partnership after
discharging all liabilities incurred before dissolution as well as only such liabilities
incurred thereafter by the surviving partners as are incidental and necessary for the
winding up of the business (Section 47).

After dissolution of partnership by death of a partner the obligations of the surviving

partners to the legal representative of the deceased partner are not more onerous than
those of a partner to his other partners in running partnership. The surviving partners
have right and duty to realise the partnership property and in this sense and for this
purpose they hold a fiduciary relationship towards the deceased partner's legal
representative as regards his interest in partnership property. The surviving partners
are not trustees for a deceased partner's legal representative or liable to them
otherwise than as debtor, though the obligation is one in the nature of trust. The
surviving partners have themselves an interest in the assets of dissolved firm and all
that law requires is that there should be no conflict between their interest and their duty
to legal representative and they should not gain an unfair advantage over the latter.52

[s 37.4] In the absence of contract to the contrary.—

If there is a clause in the partnership deed providing for mode of valuation of the share
of the deceased partner, the contractual term will govern the rights of parties and this
section will not apply. Therefore, the Supreme Court explained in Kodendera K Uthaiah v
PM Medappa53, that where the deed of partnership in clause 14, stipulated that in the
event of death of a partner, the remaining partners shall have the option to give a
written notice within three months of the death, to the legal heirs of the deceased
partner, for purchase of the shares of the deceased at a price being the share of the
deceased as determined at the last annual general accounts, inclusive of interest @
10% per annum, up to the date of purchase, the said clause alone shall prevail.

[s 37.5] Forfeiture clause.—

The due exercise by the continuing firm of an option (such as is often given by
partnership articles) to buy out the share of the late partner excludes any further claim
to an account of profits. The existence of such an option has no effect if it is not
exercised in accordance with its terms. The surviving partners are not trustees for an
outgoing partner or a deceased partner's representatives. Whatever is due on that
account is a debt and nothing else than an ordinary debt, and as such it is subject to
the ordinary law of limitation of actions.54

[s 37.6] Where surviving partner is a trustee.—

Further and more complicated questions may arise if a continuing partner is personally
responsible as executor or trustee to the persons beneficially interested in the late
partner's shares; his liability in that capacity must be carefully distinguished from that
which he may incur simply as a partner. The principle is "that a trustee or executor who
uses trust-money in trade must account for the profits which he makes by that use of
it."55

[s 37.7] Interest.—

The ordinary rule is to allow interest only from the date when the amount due is
ascertained. But interest may be allowed from the date of the filing of the plaint if the
debtor partner has been guilty of misconduct.56

[s 37.8] Manner of valuation of the share of a retired partner.—

See commentaries under the same sub-topic under section 32.

43 See Ahmed Musaji v Hashim Ebrahim, (1915) 42 IA 91 : 42 Cal 914 : 28 IC 710.

44 Mansha Ram v Tej Bhan, AIR 1958 P&H 5 .
45 Hordern v Hordern, (1910) AC 465 .
46 Sivagnanathammal v Nallaperumal, AIR 1935 Mad 165 : (1934) 67 Mad LJ 880 : 155 IC 783.
47 Mohanasundaram v Neelambal, AIR 1955 Mad 442 : (1995) ILR Mad 1154.
48 Kasi v Ramanathan Chettiar, AIR 1949 Mad 693 .
48 Kasi v Ramanathan Chettiar, AIR 1949 Mad 693 .
49 Sahul Hamid v Sulthan, AIR 1947 Mad 287 at 291, para 17.
50 Hugh Stevenson & Sons Ltd v Aktiengesellschaft fur Cartonnagen Industries, (1918) AC 239 :
(1917) 1 KB 842 .
51 Pollock on Law of Partnership, 14th Edn, p 119.
52 Kasi v Ramanathan Chettiar, AIR 1949 Mad 693 : (1949) 1 Mad LJ 298.
53 Kodendera K Uthaiah v PM Medappa, (2017) 16 SCC 331 .
54 Knox v Gye, (1872) LR 5 HL 656, 675.
55 Vyse v Foster, (1874) LR 7 HL 318, 329.
56 Thulasi Ammal v Ramachandra, AIR 1955 Mad 171 : (1955) ILR Mad 1115.
The Indian Partnership Act (Act IX of 1932)

Chapter V Incoming and Outgoing Partner

S. 38. Revocation of continuing guarantee by change in firm.-

A continuing guarantee given to a firm, or to a third party in respect of the transactions

of a firm, is, in the absence of agreement to the contrary, revoked as to future
transactions from the date of any change in the constitution of the firm.

[s 38.1] Continuing guarantee.—

The agreement to the contrary required to displace the effect of this section must be
clearly shown expressly or even impliedly. It is not implied in the mere fact that the
guarantee was to continue notwithstanding a change in the persons constituting the
firm.57 Such an intention may be apparent from other circumstances.

[s 38.2] Revocation.—

It commences "from the date of any change in the constitution of the firm." It applies to
"future transactions."

The one Indian decision reported on this section is in a plain case. A becomes surety to
the firm of "N.C. Mookerji" for B's conduct as cashier to the firm. The constitution of the
firm is subsequently changed, and its name is altered to "N. Mookerji & Son." A is not
liable for B's defalcations subsequent to the change.58

57 Backhouse v Hall, (1865) 6 B & S 509 : 141 RR 495 : 122 ER 1283.

58 Neel Comul Mookerjee v Bipro Dass, (1901) 28 Cal 597 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 39. Dissolution of a firm.-

The dissolution of partnership between all the partners of a firm is called the
dissolution of the firm.

The Indian Partnership Act, 1932 recognises the difference between a dissolution of
the firm and a mere retirement of a partner. On dissolution each partner is paid his
share of the profits, if any, whereas on the retirement, death or adjudication of one
partner, a dissolution does not necessarily follow, for it may be a term in the
partnership agreement that the firm should be continued by the other partners. The
Supreme Court1 has also clarified this point while stating "there is no dissolution of the
firm by the mere incoming or outgoing of partners. A partner can retire ... and a person
can be introduced in partnership by consent of the other partners. The reconstituted
firm can carry on its business in the same firm's name till dissolution. The law with
respect to retiring partner as enacted in partnership Act is to a certain extent a
compromise between strict doctrine of English Common Law which refuses to see
anything in the firm but a collective name for individuals carrying on the business in
partnership and the mercantile usage which recognises the firm as a distinct person or
quasi-corporation". The Gujarat High Court2 also reiterated that in retirement a partner
withdraws from the firm without affecting the jural relation subsisting between other
partners. There is no severance of the jural relation of partnership inter se between all
the partners. A dissolution does not necessarily follow because the partnership has
ceased to do business, for the partnership may continue for the purpose of realising
the assets.3

1 C.I.T., W.B. v A. W. Figgis & Co, AIR 1953 SC 455 at 456 : (1954) 1 SCR 171 .
2 See also Keshavlal Patel v Bhailal Patel, AIR 1968 Guj 157 at 159–160 para 3 : (1968) 9 Guj LR
649.
3 Sathappa v Subramaniam, ('27) APC 70, 53 Mad LJ 245 : 101 IC 17; Palhoomal v Parmanand,
('33) AS 121 : 143 IC 900.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 40. Dissolution by agreement.-

A firm may be dissolved with the consent of all the partners or in accordance with a
contract between the partners.

[s 40.1] Dissolution by consent.—

A partner's refusal to advance money for partnership purposes is not evidence of a

dissolution by consent or of an abandonment of his interest in the partnership as there
may be some genuine reasons to do, e.g., failure to account for the earlier.4 In the case
last cited the Privy Council said that however precarious or speculative the subject
matter of a partnership may be, such refusal was evidence too slender to justify an
inference of abandonment or loss of interest by laches.

But in a Madras case the inference of a dissolution was drawn when a partner ceased
to do business.5

The contract may expressly provide for dissolution in certain situations. But even where
there is no such express term, an implied term as to dissolution may be inferred.
Dissolution of partnership may be inferred from the circumstances of the case and the
conduct of the parties. Dissolution of partnership may not be evidenced by document.6

4 Maung Tha Huyin v Mah Thein Myah, (1900) 28 Cal 53 : 27 IA 189.

5 Sudarsanam v Narasimhulu, (1902) ILR 25 Mad 149, 164.
6 Kaniram v CIT, AIR 1953 Pat. 271 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 41. Compulsory dissolution.-

A firm is dissolved,—

(a) by the adjudication of all the partners or of all the partners but one as insolvent,
or

(b) by the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership:

Provided that, where more than one separate adventure or undertaking is carried
on by the firm the illegality of one or more shall not of itself cause the
dissolution of the firm in respect of its lawful adventures and undertakings.

[s 41.1] Compulsory dissolution.—

The expression in the marginal note is not accurate. It is intended to connote a

dissolution by operation of law on the happening of certain events. It is also intended
to emphasise the distinction between dissolutions by other methods, e.g., (i) by
agreement (section 40), (ii) in accordance with the contract (section 42), (iii) by giving
of a notice in the case of a partnership at will (section 43), and (iv) by court (section
44).

[s 41.2] Sub-section (a): Insolvency of partners.—

This sub-section is based upon the obvious principle that there must be at least two
persons to constitute a firm. As already seen, on adjudication as insolvent a partner
ceases to be a partner as from the date on which he is adjudicated an insolvent.7
Under section 42(d), in the absence of a contract to the contrary, the adjudication of a
single partner operates as a dissolution of the firm. The case contemplated, however,
by this section is where the whole firm is adjudged insolvent, or all the partners but one
are adjudged insolvents. It is clear that under the circumstances, the firm is dissolved,
there being no question of a contract to the contrary.

[s 41.3] Sub-section (b): Prohibition of business.—

Where a partnership carrying on business in British territory is dissolved by one partner

becoming an alien enemy, and the British partner continues to carry on the business,
the enemy partner is entitled to share the profits made after dissolution by the use of
his capital, payment being of course suspended during the war.8 An agreement may be
void but not illegal. An agreement by way of wager is void but not illegal under section
30 of the Indian Contract Act, 1872. The Supreme Court9 has held that a partnership
formed for entering into wagering transaction would not be illegal; though it would be
void. A firm would not be illegal and its speculative business being void would not be
enforceable in court of law. But the collateral transaction between the partners would
be enforceable. So a partner who has paid fully a certain loss in the speculative
transaction to another person was allowed to recover from his co-partner contribution
for loss incurred in speculative transaction as his suit was not for the enforcement of
the main contract but was incidental as he was seeking contribution from his co-
partner.

[s 41.4] Proviso.—

Trading with a particular country, for example, may very well be interrupted and
forbidden by war, while trade with other countries is lawful and within the scope of the
partnership.

7 Indian Partnership Act, 1932, section 34.

8 Hugh Stevenson & Sons v Aktiengesellschaft fur Cartonnagen Industries, (1918) AC 239 .
9 Gherulal Parakh v Mahadeo Das, AIR 1959 SC 781 : 1959 Supp (2) SCR 406 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 42. Dissolution on the happening of certain contingencies.-

Subject to contract between the partners a firm is dissolved,

(a) if constituted for a fixed term, by the expiry of that term;

(b) if constituted to carry out one or more adventures or undertakings, by the

completion thereof;

(c) by the death of a partner; and

(d) by the adjudication of a partner as an insolvent.

[s 42.1] Subject to contract.—

The provisions of section 41 are mandatory, while the present section lays down rules
applicable where there is no contract to the contrary.

[s 42.2] Sub-section (a): Partnership for fixed term.—

Where a partnership has been entered into for a fixed term, the partnership is at the end
of that term dissolved by the expiry of that term, without any further act or notice,
except in cases provided for in section 17(b). Even where there is a partnership for
fixed period, the death of a partner taking place during the continuance of the
partnership period dissolves the partnership earlier.10 Under section 47 the authority of
partners, however, continues for the purposes of winding up.

Where there is no express agreement to continue a partnership for a definite period

there may be an implied agreement to do so.11 The burden of proving such an implied
agreement is upon the person who alleges its existence12 and the provisions relied on
must be clearly inconsistent with the general right to dissolve.13

[s 42.3] Sub-section (b): Completion of adventure.—

This sub-section refers to the dissolution of particular partnerships. For the definition
of a particular partnership, see section 8. Where a partnership was constituted only for
the purpose of exploiting a salt licence, the partnership is dissolved on the salt control
being lifted and on the termination of the licence.14 Termination of managing agency
would come under this clause.15 So where a partnership was constituted to carry out
contract with specified persons during a particular season and the said contracts were
closed, the partnership was dissolved.16 However, the death of a partner dissolves
earlier even a partnership for a particular adventure.17 Completion of an adventure or
undertaking does not mean supply of part or even a substantial part of the agreed
goods. It is completed upon the realisation of amount in respect of the said supply.18
Where the business of the parties was to give truck on hire and share the proceeds, the
sale of truck will mean putting an end to the business and a suit for accounts treating
the partnership as having come to an end is maintainable.19

[s 42.4] Sub-section (c): Death of a partner.—

It is often desirable, and in practice it is not uncommon, to provide by agreement that

the death of a partner shall not dissolve the contract as between others.

Partners may agree (as they frequently do) that on the death of any of them his
nominee or legal representative shall be entitled to take his place. In the case of a
power to nominate a successor on death, it is necessary that there should be a specific
direction in that behalf either in express terms, or at any rate, by a specific disposal of
the deceased partner's interest in the firm. This will of a deceased partner, making a
general bequest of his property, does not operate as an exercise of such a power.20

Even under categories (a) and (b), death of a partner would dissolve partnership.21 No
effect could be given to a recital in a partnership deed that death of a partner would not
dissolve the firm if the partnership consists of only two partners.22 Dissolution is
inevitable, unless the surviving partner enters into a fresh partnership with the heir or
nominee of the deceased partner.23 It is a contradiction in terms to say that there can
be a contract between two partners to the effect that on the death of one of them the
partnership will not be dissolved but will continue.22

According to the Karnataka High Court the dissolution of a firm due to death of one of
the two partners will not extinguish proprietary interest of the partner if a new firm out
of it is constituted the very next day, after the dissolution. So where eviction order was
passed in favour of a firm consisting of the two partners and subsequently the firm
was dissolved due to the death of a partner but the surviving partner formed on the
next day new partnership with the heir of deceased partner, it was held that an eviction
order passed in favour of the old partnership will not lapse but the new firm can
execute the eviction order.24

On the death of father, a partner with his son, while suit was pending, for enforcement
of right to a partnership, was allowed to be prosecuted only by the surviving son by
applying the principle under order XXII, rule 10 of CPC, 1908 in the interest of justice, on
the failure of the daughter who could have joined in the suit but who evinced no
interest; the Supreme Court held that the continuance of the suit by the surviving son
by recording the death of father was justified.25

[s 42.5] Sub-section (d): Insolvency of a partner.—

Under the Indian Contract Act, 1872, the adjudication of a partner did not operate as a
dissolution. It was merely one ground on which dissolution could be sought by the
other partners. Under the present section the insolvency of a partner operates as a
dissolution of the firm, unless there is a contract to the contrary. The date of
dissolution would be the date on which the order of adjudication is made.26
10 Sayyed Abdul v Tumuluri, AIR 1927 Mad. 491 : (1927) 52 Mad LJ 318.
11 King v Accumulative Assurance Co, (1857) 3 CBNS 151 .
12 Burdon v Barkus, (1862) 4 De GF&J 42.
13 Baxter v Plenderleath, (1824) 2 LJ (OS) (Ch) 119.
14 Ramnarayan v Kashinath, AIR 1954 Pat. 53 : (1953) 1 BLJR 289 .
15 Karumuthu Chettiar v Muthiappa Chettiar, AIR 1961 SC 1225 : [1961] 3 SCR 998 : (1962) ISCJ
31.
16 Gherulal Parakh v Mahadeodas, AIR 1959 SC 781 at 784, Para 5.
17 See supra Note 9.
18 Bansi Lal Jalan v Chiranjitlal Sarawii, AIR 1968 Pat. 96 at 99.
19 Vinubhai Najibhai Chavda v Maheshkumar Ramachandra Raval, AIR 2013 Guj 254 : (2013) 3
Guj LR 2503.
20 Bachubhai v Shamji, (1885) 9 Bom 536, 554.
21 Abdul Azeez v MKP Kader Mahideen, AIR (1963) Mad 428 (fixed term partnership); Sayyed
Abdul v Tumuluri, (1927) 52 MLJ 318 ; Hemraj v Topan, AIR 1925 Sind. 300 .
22 Mohd Laiquiddin and Another v Kamala Devi Misra (Dead) by LRs, (2010) 2 SCC 407 : [2010] 1
SCR 873 : 2010 (2) All MR (SC) 490 : 2010 1 All WC (Supp) 707 SC : JT 2010 (1) SC 440 : (2010)
2 MLJ 820 (SC) : 2010 (1) Scale 227 .
23 CIT (MP) v Seth Govindram Sugar Mills, AIR 1966 SC 24 : [1965] 3 SCR 488 : (1965) 2 SCJ
289 ; See Erach FD Mehta v Minoo Mehta, AIR 1971 SC 1653 : (1970) 2 SCC 724 : AIR [1971] 2
SCR 99 .
22 Mohd Laiquiddin and Another v Kamala Devi Misra (Dead) by LRs, (2010) 2 SCC 407 : [2010] 1
SCR 873 : 2010 (2) All MR (SC) 490 : 2010 1 All WC (Supp) 707 SC : JT 2010 (1) SC 440 : (2010)
2 MLJ 820 (SC) : 2010 (1) Scale 227 .
24 U Vishwanatha Nayak v MV Kamath & Co, AIR 1900 (N.O.C.) 105 Kant.
25 AVK Traders v Kerala State Civil Supplies Corp Ltd, (2013) 15 SCC 217 : (2013) 13 Scale 316 .
26 See Indian Partnership Act, 1932, section 34(1).
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 43. Dissolution by notice of partnership at will.-

(1) Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the
communication of the notice.

[s 43.1] Partnership at will.—

For definition, see section 7.

[s 43.2] Notice.—

No particular formality is required, but the notice must be an unambiguous intimation

of a final intention to dissolve a partnership.27 The notice must be explicit, precise and
final.28 A mere proposal to dissolve a partnership depending upon the result of an
inquiry to be made and information to be gathered would not amount to an
unconditional expression of an intention to dissolve under this section.27 A resolution
passed at the meeting of the partners would be a result of the deliberations; this may
come under section 40 but not under this section as it is not a notice in writing by a
partner to all other partners as required by this section.27 The service of the writ and
plaint in a suit for dissolution upon all defendants may be a sufficient notice of an
intention to dissolve.29 The notice should be served on all the other partners. The
notice once given cannot be withdrawn unless all the other partners consent.30 The
fact that one of the partners receiving the notice is of unsound mind does not affect
the validity of the notice.31 In a partnership at will it is open to a partner even if there is
no dispute between them to dissolve the firm by virtue of this section.32 Section 43
cannot control section 44 nor does it control the other provisions of Chapter VI of the
Indian Partnership Act, 1932 and so it is possible to have partnership dissolved even
when no notice in writing was given as required by section 43 of the Indian Partnership
Act, 1932.33

[s 43.3] Date of dissolution.—

The dissolution takes effect from the date mentioned in the notice, or if no date is
mentioned, as from the date of the communication of the notice.34 Where before the
date mentioned in the notice, the partner dies, the partnership will stand dissolved
under section 42(c).35 In the case of a suit for dissolution, the date of dissolution will
be the date fixed in the preliminary decree passed under order XX, rule 15 of Civil
Procedure Code, 1908.

[s 43.4] Relation between section 40 and section 43.—

The Allahabad High Court36 has made some interesting observations regarding the
relation between these two sections. Firstly, partnership under section 40 can be
dissolved with the consent of all the partners or in accordance with the contract
between the partners. Under section 43 it can be dissolved even without the consent of
others by giving a notice in writing to all other partners of an intent to dissolve. This,
however, does not preclude the partners of partnership at will to dissolve it with the
consent of all the partners. Secondly, in dissolution of partnership under section 40
there is mutuality amongst all the partners to dissolve the partnership. While under
section 43, one partner can enforce the dissolution by serving notice on the rest even if
they do not agree. Lastly, section 43 does not control other provisions of Chapter VI of
the Indian Partnership Act, 1932 and so it is possible to dissolve firm even where no
notice in writing is given under section 43.

[s 43.5] Limitation.—

Under Article 5 of the Schedule to the Limitation Act, 1963, a suit for rendition of
account of a partnership at will shall be filed within three years from the date when the
partnership at will is sought to be dissolved by service of notice.37

27 Parsons v Hayward, (1862) 4, De G.F. & J. 474 : 31 Beav 199 : 135 R.R. 249; Chainkaran v Dixit,
AIR 1956 Mag 46 : ILR (1955) Nag 498 .
28 Dhulia-Amalner Municipal Transport v Raychand, 54 Bom LR 294 : ILR (1952) Bom 795 : AIR
1952 Bom 337 .
27 Parsons v Hayward, (1862) 4, De G.F. & J. 474 : 31 Beav 199 : 135 R.R. 249; Chainkaran v Dixit,
AIR 1956 Mag 46 : ILR (1955) Nag 498 .
27 Parsons v Hayward, (1862) 4, De G.F. & J. 474 : 31 Beav 199 : 135 R.R. 249; Chainkaran v Dixit,
AIR 1956 Mag 46 : ILR (1955) Nag 498 .
29 Banarsi Das v Kanshi Ram, AIR 1963 SC 1165 : [1964] LSCR 316; See Sathappa Chetty v
Subrahamayan Chetty, AIR 1927 PC 70 ; If the suit were to constitute as notice, a plea by
defendant that notice was not issued will be of no avail, TP Muraleedharan v M Ibrahimkutty, AIR
2014 Ker. 90 : 2014 (1) KHC 550 : (2014) 1 Ker LT 820
30 Jones v Lloyd, (1874) LR 18 Eq 265, 271.
31 Robertson v Lockie, (1846) 15 Sim. 285.
32 Manibhai S Patel v Swashray Construction, 23 (1982) Guj LR 312 at 315, para 5.
33 Hardutt Singh v Mukha Singh, AIR 1973 J&K 46 .
34 C.I.T. v Pigot Champan & Co, AIR 1982 SC 1085 : (1982) 2 SCC 330 .
35 Macleod v Dowling, (1927) 43 T.LR 665 .
36 Shrikishan Gupta v Ram Babu Gupta, AIR 1990 All 171 : (1990) 1 All WC 12.
37 LR's of Ram v Maya Devi, AIR 2013 Raj1 72 : (2013) 2 WLN 597 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 44. Dissolution by the Court.-

At the suit of a partner, the Court may dissolve a firm on any of the following grounds,
namely:

(a) that a partner has become of unsound mind, in which case the suit may be
brought as well by the next friend of the partner who has become of unsound
mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of the business, regard being had to the
nature of the business;

(d) that a partner, other than the partner suing, wilfully or persistently commits
breach of agreements relating to the management of the affairs of the firm or
the conduct of its business, or otherwise so conducts himself in matters
relating to the business that it is not reasonably practicable for the other
partners to carry on the business in partnership with him;

(e) that a partner, other than the partner suing, has in any way transferred the whole
of his interest in the firm to a third party, or has allowed his share to be charged
under the provisions of rule 49 of order XXI of the First Schedule to the Code of
Civil Procedure, 1908 (5 of 1908) or has allowed it to be sold in the recovery of
arrears of land revenue or of any dues recoverable as arrears of land revenue
due by the partner;

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be
dissolved.

[s 44.1] Sub-section (a): Insanity.—

Insanity does not dissolve the partnership ipso facto but confirmed lunacy provides a
ground for dissolution by the court if other partners apply to court for dissolution.38 It
was made clear that in the case of insanity, a next friend on behalf of the lunatic may
sue for dissolution. The judge exercising jurisdiction in lunacy is also empowered to
dissolve a partnership in the case of a partner becoming a lunatic.39 For the purposes
of sub-section (a), it is not necessary that the partner of unsound mind should be found
a lunatic by inquisition. Until partnership is dissolved by court the authority of the
partners to bind the firm would continue and the property of the lunatic partner would
be liable for the debts and liabilities of the firm.40 Similarly, the acts of the lunatic
partner would continue to bind the firm.

[s 44.2] Sub-section (b): Incapacity.—

In Whitwell v Arthur,41 the incapacity was due to paralysis. As, however, the health of
the partner improved before the trial, it was held that there was no sufficient ground for
dissolution as incapacity was not of a permanent nature and further proceedings were
stayed, but liberty to apply was reserved. Where a partner is imprisoned for a long
period of time, the Court may dissolve the partnership.

[s 44.3] Sub-section (c): Misconduct.—

The misconduct must be such as is likely to affect prejudicially the carrying on of the
business, and it must be wilful misconduct. This sub-section might cover a case in
which one partner commits misconduct, though not in the actual business, which
destroys mutual confidence, e.g., a conviction for an office involving moral turpitude
has been held to come under this clause,42 adultery with a co-partner's wife.43 This is
because the sub-section does not require that the misconduct must be in the actual
carrying on the business of the firm. It is enough if the misconduct is likely to affect
prejudicially the business of the firm which generally is decided by reference to the
credit and custom of the particular business. Thus misapplication of monies of a client
by a solicitor44 or adultery by a doctor45 or speculation in shares by a partner in a
mercantile business46 is regarded as sufficient ground for interference by the court.
Adultery by a partner may not be regarded as giving his co-partners sufficient ground to
seek a dissolution under this sub-section. But adultery by a partner would invite
interference by court if it is committed with the wife of the other partner.47

[s 44.4] Sub-section (d): Breaches of agreement.—

Persistent refusal or neglect to attend to the business would give to any other partner
right to apply for dissolution.48 Neglect to account49 and taking away of partnership
books50 are other instances. A guilty party may ask for dissolution, if he is otherwise
entitled to do so.51 Breaches of partnership agreement must be substantial.52 So
where a partnership deed provided against giving of guarantee without the consent of
the other partners, and one partner gave once guarantee in breach of the above clause
in the course of eight years, it was held that this was a small infraction of the deed of
partnership and so was not a sufficient ground for dissolution.53

[s 44.5] Sub-section (e): Transfer of interest.—

Where two out of three partners assigned their shares, it was held that the case fell
under this clause.54

[s 44.6] Sub-section (f): Business carried on at a loss.—

When the business of the partnership cannot be carried on except at a loss, the Court
may, in its discretion, dissolve the partnership before the expiration of its term. If the
trial judge orders a dissolution neither capriciously nor without disregard of legal
principles, the exercise of the discretion is not open to review upon appeal.55

[s 44.7] Sub-section (g): Any other grounds.—

In Atwood v Maude,56 Lord Cairns said:

It is evident that in every partnership such a state of feeling may arise and exist between the
partners as to render it impossible that the partnership can continue with advantage to
either.

All matters which would not strictly fall under the sub-sections, would fall under this
sub-section.57

Adultery with a co-partner's wife has been held to be a fit ground for decreeing
dissolution,58 and such a case seems naturally to fall under this sub-section.

Want of co-operation or mutual confidence and chronic disputes,59 or state of tensed

feelings between partners60 would also entitle a court to order dissolution under this
clause. Where a partner who considered his rights to have been prejudiced or if he
desired to sell his shares, under the deed of partnership he can offer his share to the
members of the firm. Accordingly, the plaintiffs (partners) by notice offered the shares
to members but no resolution was passed on the notice though it was included in the
agenda. It was held that dissolution could not be enforced under section 44 as under
the deed of partnership it was open to the plaintiffs to sell their shares privately if they
considered their rights to have been prejudiced or desired to sell the shares for some
reason.61

[s 44.8] Court's power to consider dissolution on just and reasonable grounds;

Court also has power to refer to arbitral clause to refer to arbitrator's decision.
—

Jagdish Chandra v Hari Narain,62 was a case where the terms of partnership did not
contemplate dissolution of the firm "at will" but by "mutual agreement". The court in its
discretion may not stay a suit for dissolution, if dissolution is sought under section
44(g). If there is an arbitral clause in the partnership deed, it is still permissible for the
court to refer to an arbitrator for dissolution or on grounds such as destruction of
mutual trust and confidence between the partners which is the foundation therefor.

[s 44.9] Date of dissolution.—

Under this section, the date of dissolution would be from the date of the judgment
unless the judgment provides otherwise.63

[s 44.10] Effect of agreement against dissolution by Court.—

See pages 181–182 containing views of the High Court of JK, Madras and Allahabad.
38 Jugal Chandra Bhattacharjee v Gunny Hajee Ahmed, AIR 1926 Cal 271 : (1925) 53 Cal 214
(225, 226, 235) : 91 IC 824.
39 Section 52 of Indian Lunacy Act, 1912.
40 Jagat Chandra v Gunny Hajee, (1926) 53 Cal 214 .
41 Whitwell v Arthur, (1865) 35 Beav 140.
42 Pearce v Foster, (1886) 17 Q.B.D. 536 (gambling on stock exchange); Essell v Hayward,
(1860) 30 Beav 158 (Solicitor misappropriating client's moneys); Clifford v Timms, (1908) AC 12
(professional misconduct by too much self-praise and self-commendation).
43 Abbot v Crump, (1870) 5 Beng LR 109.
44 Essell v Hayard, (1860) 30 Beav 158 : 54 ER 849.
45 Snow v Milford, (1868) LT 142 .
46 Pearce v Foster, (1886) 17 QBD 536 .
47 See infra note 54.
48 Krishnamachariar v Sankara Sah, AIR 1921 PC 91 : (1920) 22 Bom LR 1343 : 57 IC 713 (PC).
49 Cheesman v Price, (1865) 35 Beav 142 : 147 RR 74 : 55 ER 849.
50 Charlton v Poulter, (1753) 19 Ves 148 m.
51 Ram Singh v Ram Chand, AIR 1924 PC 2 : (1923) 5 Lah 23 (PC) : 26 Bom LR 196 : 51 LA 154.
52 Anderson v Anderson, 53 ER 609.
53 Wray v Hutchinson, 39 ER 934.
54 Domaty v Ramen Chetty, 27 Cal 93 (PC).
55 Rehmat-un-Nissa Begam v Price, (1917) 45 IA 61 , 42 Bom 380, 45 IC 568.
56 Atwood v Maude, (1868) LR 3 Ch 373.
57 Hasham v Nariman, AIR 1924 Bom 57 : 81 IC 463.
58 Abbot v Crump, (1870) 5 Beng LR 109.
59 Babu Lal v Kanhaiya Lal, AIR 1953 VP 43 ; Bhut Nath v Girish Chandra, 11 Cal WN 311.
60 Hasham v Nariman, AIR 1924 Bom 57 : 81 IC 463.
61 Gur Dayal v Raghunath, AIR 1976 All 141 .
62 Chandra v Hari Narain, RLW 2010 (3) Raj 2794 .
63 Besch v Frolich, 65 RR 363 : 41 ER 597; Lyon v Tweddell, 17 ChD 529.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 45. Liability for acts of partners done after dissolution.-

(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as

such to third parties for any act done by any of them which would have been an
act of the firm if done before the dissolution, until public notice is given of the
dissolution:

Provided that the estate of a partner who dies, or who is adjudicated an

insolvent, or of a partner who, not having been known to the person dealing with
the firm to be a partner, retires from the firm, is not liable under this section for
acts done after the date on which he ceases to be a partner.

(2) Notices under sub-section (1) may be given by any partner.

[s 45.1] Liability for acts after dissolution.—

This section provides that despite dissolution, the partners cannot escape their liability
to third parties for acts done even thereafter unless public notice of dissolution is
given. This provision accords with similar provision made under section 32(3) in
respect of a retiring partner and under section 33(2) in respect of an expelled partner.
These provisions emphasise the necessity of giving a public notice before a partner
could terminate his further liability whether it is a case of dissolution, retirement or
expulsion. Under section 47 a partner of a dissolved firm has the power to do all acts
for winding up the affairs of the firm and hence they bind all the partners and hence a
third party is entitled to assume, until a public notice is given, that the partners continue
to be each other's agents.64

[s 45.2] Example.—

The first part of the section may be illustrated by the following illustration:

Illustration

A and B trade together in partnership. They execute a deed declaring that the
partnership is dissolved as from the 1st of January; they do not give public notice of
the dissolution, but continue the business. In February A endorses a bill in the
partnership name to C, who is not aware of the dissolution. The firm is liable on the
bill.65

[s 45.3] Not having been known to be a partner.—

This refers to a dormant partner. See note "Proviso" under section 32.
Costs incurred in a suit authorised by the firm before dissolution of the partnership are
not affected by this sub-section, for they are within the obligation of the original
retainer so long as it has not been determined.66 Here a firm (consisted of an active
and the dormant partners) retained a solicitor to bring an action to recover a debt due
to the firm. While the legal proceedings were pending two dormant partners retired
from the firm. A question arose whether these dormant partners were liable for the
solicitor's costs incurred after their retirement. It was held that they were liable
although the solicitor did not know that they were partners of the firm because the
dormant partners were liable on all contracts already entered into on behalf of the firm.

[s 45.4] Deceased partner's estate.—

"It may be taken as a general proposition that the estate of a deceased partner is not
liable to third parties for what may be done after his decease by the surviving
partner."67 It is immaterial if the obligation was incurred towards a creditor who
believed the deceased partner to be living and a member of the firm.68 Where money is
borrowed by surviving partners to pay for and take delivery of goods ordered by the
firm in the lifetime of the deceased partner, the estate of the deceased is not liable for
the debt. All that the creditor is entitled to is a personal decree against the surviving
partners and a decree against the partnership assets in the hands of those partners.69

[s 45.5] Retiring partner's criminal liability under section 138, the Negotiable
Instruments Act, 1881.—

Partners of a partnership firm shall be deemed to be liable for payment of liability of

firm even after dissolution of firm until public notice is given with regard to
dissolution.70 In the context of considering the civil liability of a retiring partner or a
partner of a dissolved firm it has been held that in the said decision the procedure
prescribed under sections 45, 63 and 72 of the Indian Partnership Act, 1932 should be
complied with. The partnership continues as regards third parties who deal with the
members of the firm as partners until public notice of dissolution is given, even though
as between the partners the firm has been dissolved prior to such notice. But while
considering the criminal liability of the retiring partner of the firm or the partner of the
dissolved firm under section 138 of the Negotiable Instruments Act, 1881, the main
question to be considered is as to whether on the date of issue of cheque and on the
date of arising of cause of action such partner was really and actually a partner of the
firm or not.71

[s 45.6] Estate of Insolvent partner.—

The estate of a partner who is adjudged an insolvent is not liable for acts done by the
firm after the date of the order of adjudication, for that is the date on which he ceases
to be a partner.72

[s 45.7] Sub-section (2): Notice.—

In the case of a person dying, or a dormant partner retiring, or a partner being

adjudicated an insolvent, no liability attaches to their estate even though no public
notice was given that they have ceased to be partners.

Public notice73 may be given by any partner of the fact of dissolution, as provided for
under section 72.

64 C Assiamma v State Bank of Mysore, AIR 1990 Ker. 157 at 165.

65 Ex parte Robinson, (1833) 3 D & Ch at p 338.
66 Court v Berlin, (1897) 2 QB 396 .
67 Dowse v Gorten, (1891) AC 190 .
68 Neel Comul Mookerjee v Bipro Dass, (1901) 28 Cal 597 .
69 Seshi Ammal v Vairavan Chettiar, (1919) 42 Mad 15 : 35 Mad LJ 669, 47 IC 958.
70 S Raja Saravanan v K Anandarajan S/o Kathavarayan, (2008) 1 Mad LJ 263 (Mad)
71 Indian Partnership Act, section 34.
72 Indian Partnership Act, section 34.
73 As defined in Indian Partnership Act, section 72.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 46. Right of partners to have business wound up after dissolution.-

On the dissolution of a firm every partner or his representative is entitled, as against all
the other partners or their representatives, to have the property of the firm applied in
payment of the debts and liabilities of the firm, and to have the surplus distributed
among the partners or their representatives according to their rights.

The provisions of sections 46, 48, 49, 50, 51 and 55 should be borne in mind for the
purpose of taking accounts of the assets, liabilities, profit, loss, payment of debts,
appropriation of assets, sale of stock and goodwill, etc., upon dissolution of the
partnership. This section deals with one of the rights of the partners of a dissolved
partnership.

[s 46.1] Nature of right.—

The right of a partner as against other partners to enforce payment of partnership

debts out of the partnership property is in the nature of an equitable lien,74 which has
nothing to do with possession and is to be distinguished from possessory lien, familiar
in several heads of the Common Law.75 Such right of a partner is known as a partner's
lien. The right of a partner or his representatives to have the property of the firm
applied in payment of the debts and liabilities of the firm and to have the surplus
distributed among the partners or their representatives arises only on the dissolution of
the firm. A partner's or his representative's lien with reference to partnership assets is
on the surplus of the assets of the firm and not on any particular item of property
belonging to the partnership.

The right of "application" conferred by this section cannot be availed of against a bona
fide purchaser or mortgagee of the partnership property.76 Distribution of partnership
assets amongst the partners or their allotment to one of them in satisfaction of his
claim pursuant to this section would not amount to a transfer or sale of assets.77 This
was so held because the sale according to its ordinary meaning is a transfer of
property for a price and adjustment of rights of partners in a dissolved firm is not a
transfer nor is it for a price. The distribution of surplus of a dissolved partnership as
contemplated by sections 46 and 48, the Indian Partnership Act, 1932, is for the
purpose of adjustment of rights of partners in the assets of partnership: it does not
amount to transfer of assets.78 The right conferred by this section upon the partners is
not lost by any misconduct on the part of the partner concerned.79

[s 46.2] According to their rights.—

This would mean distribution of the balance in proportion to their rights as provided for
in the partnership deed and by the Indian Partnership Act, 193280 or in proportion to
their respective interests therein or to their contributions.81
[s 46.3] Dissolution and account.—

No suit will lie as a general rule by one partner against another for partnership
accounts without praying for a dissolution. A widow of a deceased partner filed a suit
against her deceased husband's co-partners in respect of certain alleged losses of the
concern and to recover a moiety of money expended by her husband in advances made
to indigo cultivators on behalf of partnership. When the suit was brought there was no
dissolution of partnership. It was held that the plaintiff was not entitled to claim as the
suit was not for dissolution and for account.82 In such a suit all partners are necessary
parties and the legal representatives of deceased partners must also be made parties
if they have an interest in the partnership accounts.83 But if the suit is for the
dissolution of a subordinate partnership, the members of the superior partnership of
which the suit firm is a partner as one unit is not a necessary party.84 Each party is
bound to produce and discover all documents relating to the partnership. If the
commissioner appointed for the purpose takes accounts without production and
discovery of the partnership books and documents, the account will have to be
investigated afresh.85 The accounts of the partnership should be fully analysed and a
statement prepared of the assets and liabilities of the firm and a scheme of distribution
made according to the terms of the partnership.86 If a partner, on behalf of the firm,
with the express or implied consent of the other partners spends sums of money on
bribes, credit should be given to him for such sums in the taking of accounts, the
question whether the expenditure on bribes was opposed to public policy being
irrelevant, as the bribes in such a case are not the consideration of a contract which is
sought to be enforced by the partners.87 But where a partner has given bribes without
the consent of the other partners, he is not entitled to bring into account such
payments so as thereby to obtain contributions for such payments from the other
partners.88 If one of the partners is of a subordinate partnership, the shares of
members of the subordinate partnership may be decreed in a lump sum.89 In a case in
which the decree as to the share of a partner was merely declaratory and not framed in
an executable form that partner's representative was allowed after the partner's
decease to file a fresh suit for the amount found payable.90 All questions arising
between the partners out of the partnership transactions should be disposed of in the
suit.91 Therefore, one partner cannot file a separate suit for money lent by him to the
firm, for the advance is but an item in the partnership account.92 Similarly, where one
partner has paid off a partnership debt from his own moneys, he cannot file a suit for
contribution against the other partners but must, if he so desires, file a suit for
dissolution and accounts.93 As a rule, no suit will lie between partners except one for
general accounts as the partners are not, as regards partnership dealings, regarded as
debtor and creditor inter se until the concern is wound up.94 A covenant in partnership
deed provided that the defendant partner will continue as member for three years and
shall act for the dramatic business of the firm. The plaintiff partner's suit for damages
alone without a suit for general account was filed when the defendant partner did not
present himself for stage performance. It was held that suit of such a nature was not
maintainable by a partner against his co-partner. Where, however, money is advanced
to a partner personally and not to the partnership firm, a suit can be filed against that
partner for the loan.95

[s 46.4] Partial account without dissolution.—

A suit will, however, lie for partial account with a prayer for dissolution if brought on a
transaction which does not involve a general account of all partnership dealings. This
is necessary for otherwise as said in an English case96 a partner might be compelled
to the alternative of dissolving the partnership or being required by a continual violation
of partnership control. Thus, if by the agreement of partnership the managing partner is
to render accounts each year, that obligation can be enforced by suit.97 Again a partner
can sue his co-partners for contribution in respect of moneys borrowed under an
express agreement for partnership purposes,98 or when he has paid the full amount of
a decree against the firm.99 And one partner may sue another for advances made by
him not to the partnership concern but to the other partner in respect of what he has to
contribute to the joint capital.100 But if a partner asks for an account without asking for
a dissolution, the Court must be satisfied that there are special grounds for granting
the prayer, which grounds must be alleged by the plaintiff in his pleadings.101

A partner may file a suit to recover mortgage money from the other partner if the
mortgage has no concern with the partnership without filing a suit for general accounts
and for dissolution.102

[s 46.5] Settlement of account.—

If the partnership account has been settled between the partners, that is a good
defence to a suit for accounts. But the Court should come to a clear finding whether
there was a settlement, and if so, when.103

[s 46.6] Legal representative of deceased partner.—

The legal representative of a deceased partner is not liable to render accounts to the
surviving partners.104 In an Allahabad case where after the death of the partner a firm
was dissolved and the minor son and estate of the deceased partner received large
sums of moneys, it was held that the suit for accounts against the minor son and the
estate of the deceased partner was maintainable.105 A legal representative, however, is
entitled to sue the partners for a debt due to him.106 The word "representative" includes
official assignee.107

[s 46.7] Neither death of a partner or dissolution of partnership defeats

provision for arbitration.—

In Ravi Prakash Goel v Chandra Prakash Goel,108 the issue was the entitlement of a legal
representative of the deceased partner to invoke the provision of a partnership deed for
reference of a dispute to arbitration by the partner. The legal representative was the
son of a deceased partner who claimed under an unprobated will. No legal heir
disputed the will and even without reference to the will, he was the only legal
representative. The Supreme Court was considering the Clause 13 of the Partnership
Deed that referred to arbitration clause:

That all the disputes touching the affairs of the partnership firm shall be referred to
arbitrator in accordance to the provisions of the Indian Arbitration Act and the award of
such Arbitrator shall be final and binding on the parties.

The Court had to render its decision on the following points of law:

(a) Where right to sue for rendition of accounts survives on the legal representative
of a deceased partner, are the legal representatives not entitled to invoke
arbitration clause contained in the Partnership Deed?
 (b) Whether the arbitration can be commenced by the heirs after the death of
partner especially where the dispute had arisen already during the lifetime of the
partner?

Section 46 provides two things, namely, (1) to realise the assets of the business and
then to apply the same for discharge of liabilities, and (2) finally to distribute the
surplus, if any, among the partners. All that section 46 empowers is that every partner
shall claim that this is to be done for ultimate distribution of the surplus to the partners
according to their shares. A suit to enforce the latter right relating to the distribution of
surplus is generally called a suit for an account, which means account taken up
accordingly. This right of a partner to file a suit for account is not affected by the fact
that the retiring partner has already inspected the accounts of the firm. Section 46 is,
however, merely declaratory of the rights of the partners or their legal representatives in
the surplus and does not set out the mode of calculating the surplus. The share of a
partner upon the winding up of a dissolved firm is only in the residue which is left after
the liabilities mentioned in the various clauses of section 48 have been paid out.
Payment of capital and advances to partners is not out of the residue. The amount paid
as capital investment to a partner will have to be deducted in order to find the value of
the residue, because the value of a partner's share is only his proportion of the residue.

It is clear from section 40 of the Arbitration and Conciliation Act, 1996 that an
arbitration agreement is neither discharged by the death of any party thereto and on
such death it is enforceable by or against the legal representatives of the deceased, nor
is the authority of the arbitrator revoked by the death of the party appointing him,
subject to the operation of any law by virtue of which the death of a person
extinguishes the right of action of that person. On the dissolution of the firm, the
arbitration clause does not come to an end and so if a dispute had arisen during the
lifetime of the deceased partner, his legal representatives would be entitled to take
proceedings under section 20 of the Arbitration Act, 1940.

In view of the provisions of section 46 read with section 48 of the Indian Partnership
Act, 1932 as well as section 40 of the Arbitration and Conciliation Act, 1996, the
application for appointment of an arbitrator under the arbitration clause of the
partnership deed would be maintainable. While right to sue for rendition of accounts of
partnership firm survives on the legal representative of a deceased partner, he is also
entitled to invoke the arbitration clause contained in the partnership deed. On the death
of a partner, a legal representative could seek for adjudication through arbitration any
dispute concerning the partnership affairs, especially when it had arisen already during
her lifetime.

[s 46.8] Appointment of receiver.—

In England the effect of appointing a receiver is, to the extent of the authority delegated
to him by the Court, to exclude everyone else from exercising the authority of a partner,
whether usual or specially regulated by agreement; and if he is also appointed
manager, the whole control of the business is transferred to him, subject to the
directions of the Court, whose officer he is. Hence, a receiver is seldom appointed
when a dissolution is not contemplated,109 though it can be done,110 and a manager
never.111 Where the partnership is already dissolved it is almost a matter of course,
though not a matter of right, to appoint a receiver at the instance of a partner.112 On
the other hand, where the partnership is not yet dissolved, the appointment of a
receiver is not an ordinary incident of an action for dissolution. "The due winding up of
the affairs of the concern must be endangered to induce the Court to appoint a receiver
of its assets."113 There must be fraud or gross misconduct of some kind,114 or wilful
denial of the complaining partner's rights,115 or persistence under colour of right, in
conduct endangering the assets.116 In such cases the Court will appoint a receiver
either before or after a dissolution. As, in the ordinary course of trade, if any of the
partners seek to exclude another from taking that part in the concern which he is
entitled to take, the Court will grant a receiver, so in the course of winding up the affairs
after the determination of the partnership the Court, if necessary, interposes on the
same principle.117 The jurisdiction "is founded on the common right of persons who
are interested in property, which is in danger, to apply for its protection."118

[s 46.9] Receivers in Indian practice.—

The power of Indian Courts to appoint a receiver is now defined by order 40, rule 1 of
the Code of Civil Procedure, 1908. Under that rule a receiver may be appointed "where it
appears to the Court to be just and convenient." The High Courts here in their original
jurisdiction possess the same powers with regard to the appointment of a receiver as
are possessed and exercised by the Courts in England under the Judicature Act,
1873.119 And when the assets of a partnership are in the hands of a receiver, they
cannot be attached by a creditor of the firm without the leave of the Court first
obtained, as the assets in such a case are in the hands of the Court through its office,
the receiver; and such leave will not be granted except on such terms as will ensure
equality between the creditors.120 The Civil Procedure Code 1908 (order 40)
assimilates Indian to English practice.

[s 46.10] Assets brought in after dissolution.—

"Where after a dissolution and winding up of the partnership affairs an asset falls in,
which for any reason has not been taken into account, it ought to be divided between
the ex-partners or their representatives, according to their shares in the former
partnership." But if there has been no taking of accounts and no final settlement, the
proper remedy is to have the accounts of the partnership taken; and if it is too late to
do that it is too late to claim a share in the newly recovered asset; for the plaintiff could
not make such a claim good without showing that he would be entitled to that share
upon the due taking of the accounts.121 It is open, however, to the partners to come
together and agree to an account among themselves even after the expiry of three
years from the date of dissolution; and such a settlement is supported by
consideration, as all of them make mutual promises to abide by such settlement.122

[s 46.11] Costs in a suit for dissolution.—

Under ordinary circumstances, the costs of a partnership suit should be paid out of the
assets of the partnership, or, in default of assets, by the partners in proportion to their
respective shares, unless any partner denies the fact of a partnership, or opposes the
taking of the accounts, and so renders a suit necessary, when he is usually made to pay
the costs up to the hearing.123

[s 46.12] Interest.—
Interest on any sum found due to a partner runs only from the date of the final decree
by which it is found due. A partner is not generally chargeable with interest on
overdrawings.124 Where, however, there is an agreement between the partners that
interest should be charged on advances and withdrawals, then interest should be paid
and charged respectively to individual partners on capital advances and upon
withdrawals after the dissolution and up to the final settlement of accounts.125 But the
court has jurisdiction to award interest on amount found to be due to one partner from
another partner from the date of the institution of the suit until realisation and the court
should so award interest in a case in which the former managing partner has retained
in his hands and for his own purposes the assets of the firm without accounting for
them or their proceeds to his co-partner for a period of two years after dissolution of
the partnership.126

74 West v Skin, 27 ER 1006; Holderness v Shackles, 108 ER 1170.

75 Pollock's Digest, 12th Edn, p 119. See Suganchand Hazarilal Parwar v Lukhe More Kori, AIR
1938 Ngp 182 : (1938) 173 IC 897 .
76 Bourne v Bourne, (1906) 2 Ch 427 : 75 LJ Ch 779; Maniram v Badri Das, AIR 1933 All 175 : 31
All LJ 170.
77 CJT (MP) v Dewas Cine Corp, AIR 1968 SC 676 : (1968) 2 SCR 173 : (1968) ISCJ 691.
78 CJT (MP) v Dewas Cine Corp, AIR 1968 SC 676 , 678, para 4.
79 Ram Singh v Ram Chand, 51 IA 154.
80 Valliamai Achi v Ramanathan Chettiar, AIR 1969 Mad. 257 (261) : (1969) ILR 1 Mad 734.
81 Wood v Scoles, (1866) 1 Ch App 369 : 35 LJ Ch 547; Alluri Appamma v Balaji Lal, AIR 1957 AP
974 .
82 Kassa Mal v Gopi, (1887) 9 All 120 ; Damodara v Subraya, (1917) 33 Mad LJ 509 : 43 IC 217.
83 Baboo Janokey Doss v Bindabun Doss, (1843) 3 Moo Ind App 175 .
84 Sathappa v Subramaniam, AIR 1927 PC 70 : 53 Mad LJ 245 : 101 IC 17.
85 Dwarka Nath v Haji Mahomed, (1915) 17 Bom LR 5 .
86 Haveli Shah v Charan Das, AIR 1929 PC 184 : 115 IC 727.
87 Joti Prasad v Hardwari Mal, AIR 1932) All 128 : (1930) 53 All 54 : 137 IC 334.
88 Venkatachala Chetty v Natesa Chetty, AIR 1939 Mad. 670 : (1939) 1 Mad LJ 905.
89 Ram Singh v Ram Chand Tirath, (1936) AL 78 : 157 IC 1113.
90 Rathan Chand v Amichand, AIR 1934 Mad. 665 : (1934) 67 Mad LJ 413 : 156 IC 264.
91 Bhagtidas v Oliver, (1872) 9 BHC 418.
92 Rustomji v Sheth Purshotamdas, (1901) 25 Bom 606; Bishen Narain v Swaroop Narain, (1938)
175 IC 109 : (1938) AL 43: Ghisulal-Ganeshi Lal v Gumbhir-mul-Pandya, (1938) 62 Cal 510 : 164 IC
111 : (1938) AC 377 ; Kansi Ram v Jai Ram, AIR 1956 HP 4 .
93 Mst. Jagpati Kuer v Sukhdeo Prasad, AIR 1942 Pat. 204 : (1942) 20 Pat 811 : 198 IC 521;
Rajagopala v Palani, AIR 1954 Mad. 1101 .
94 Santhanakrishna v Chellapa, AIR 1927 Mad. 650 ; Mst. Jagpati Kuer v Sukhdeo Prasad, AIR
1942 Pat. 204 .
95 Lala Nand Kishore v Azmat Ulla, AIR 1934 PC 277 : (1938) All LJ 896, 178 IC 406; Bijai Ram v
Jai Ram, AIR 1955 HP 57 ; K.T. Singh v CJ Singh, AIR 1954 Manipur 17 .
96 Fairthorn v Weston, (1844) 3 Har 387.
97 Binjraj v Kisanlal, AIR 1933 Ngp 127 : 141 IC 277.
98 Durga v Raghu, (1898) 26 Cal 254 ; Subbarayudu v Adinarayudu, (1895) 18 Mad 134.
99 Ellappa v Swaminatha, AIR 1933 Mad. 755 : 145 IC 858.
100 Rustomji v Sheth Purshotamdas, (1901) 25 Bom 606.
101 Krishnaswami Naidu v Jayalakshmi, AIR 1931 Mad. 300 : (1931) 54 Mad 671, 130 IC 766;
Lachmichand Jagannath v Jagoo Lal Jasaraj, AIR 1937 Pat. 55 : (1937) 166 IC 953 .
102 Harivallabhdas v Ahmedali, AIR 1969 Guj 145 : 1969 Guj LR 481.
103 Rangaswami v Narayana, AIR 1936 Mad. 557 : (1930) 70 Mad LJ 691, 162 IC 266.
104 Vaikayyamma v Tirapaya, AIR 1955 Mad. 32 : 1955 ILR Mad 21.
105 Shankar Lal v Ram Babu, (1918) ILR 40 All 446.
106 Babu v Gokuldass, AIR 1930 Mad. 393 : 112 Ind Cas 184.
107 Whitworth v Davis, 35 ER 212 : 11 Ves and B. 545 (for specific performance of contract and
for discovery).
108 Ravi Prakash Goel v Chandra Prakash Goel, AIR 2007 SC 1517 : [2007] 4 SCR 295 .
109 See Hall v Hall, 3 Mac & G 79.
110 Const. v Harris, (1823) T & R 496, 517.
111 Lindley, 557 (12th Edn).
112 Pini v Roncorori, (1892) 1 Ch 633 .
113 Const. v Harris, (1823) T & R 496.
114 E.g., Smith v Jeyes, (1841) 4 Beav 503.
115 Hale v Hale, (1841) 4 Beav 369.
116 Madgwick v Wimble, (1843) 6 Beav 495.
117 Lord Eldon., Wilson v Greenwood, (1818) 1 Saw 471, 481.
118 Knight Bruce LJ. Evans v Coventry, (1854) 5 DMG 911, 916.
119 Jaikissondas v Zenabai, (1890) 14 Bom 431, 434.
120 Shidlingappa v Shankarappa, (1903) 28 Bom 176.
121 Gopala Chetty v Vijayaraghavachariar, AIR 1922 PC 115 : (1922) APC 488 : 49 IC 181 : 45
Mad 378 : 24 Bom LR 1197 : 74 IC 621; Rajapopala v Palani, AIR 1954 Mad. 1101 .
122 Rochi Ram v Faizullah, AIR 1933 PC 120 : (1933) 37 Cal WN 580 : 35 Bom LR 745 : 142 IC
549.
123 Ram Chunder v Manick Chunder, (1881) 7 Cal 428 .
124 Suleman v Abdul Latif, (1930) 57 IA 245 : 58 Cal 208 : 32 Bom LR 1152 : 124 IC 891.
125 Lilaram Kewalram v Hiranand Notandas, AIR 1937 Sindh 103 : (1937) 169 IC 635 .
126 Hakim Rai v Ganga Ram, AIR 1942 PC 61 : (1942) All LJ 710 : (1943) 1 Mad LJ 16 : 202 IC
754; Ahmed Musaji v Hashim Ebrahim, 42 IA 91. Rajagopala v Palani, AIR 1954 Mad. 1101 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 47. Continuing authority of partners for purposes of winding up.-

After the dissolution of a firm the authority of each partner to bind the firm, and the
other mutual rights and obligations of the partners, continue notwithstanding the
dissolution, so far as may be necessary to wind up the affairs of the firm and to
complete transactions begun but unfinished at the time of the dissolution, but not
otherwise:

Provided that the firm is in no case bound by the acts of a partner who has been
adjudicated insolvent; but this proviso does not affect the liability of any person who
has after adjudication represented himself or knowingly permitted himself to be
represented as a partner of the insolvent.

[s 47.1] Continuing authority of a partner after dissolution.—

After dissolution the partnership continues for the purpose of winding up the business
and adjusting rights of the partners inter se. For this purpose the authority of partners
to bind the firm and all their other mutual rights and obligations continue
notwithstanding dissolution.127 The power of each partner, however, extends only so
far as it is necessary to wind up the affairs of firm and to complete the transactions
already begun. If a debt is owing to a firm, the payment by a debtor to any of the
partners discharges the debtor even if a particular partner is appointed to collect the
debt owing to a firm and the debtor is aware of such appointment. Any partner can
effectively release the debtor and give a valid receipt for the debt if such action is not in
fraud of his co-partners and is not in collusion with the debtor.127 If a release by a
partner is fraudulent, the other partners can avoid it and seek to recover their share of
released debt.128 So even after dissolution, a partner can give a valid security on the
property of partnership for money required to complete a contract made by a firm prior
to the dissolution129 or to mortgage the partnership property as security for the
overdraft.130

The English Law is also the same. In Butchart v Dresser,131 two partners are share
brokers contracted to buy shares. Before paying for the shares, their partnership was
dissolved but one of the partners of the dissolved firm pledged the shares to their
bankers so as to pay for their purchase of the shares and authorised the bankers to sell
the shares. The other partner contended that as the bankers knew of the dissolution
they could not retain the shares against him. But it was held that the partner who had
pledged the shares had authority, after and notwithstanding the dissolution, to
complete the contracts previously made by the firm. In another case a bank to whom a
partnership owed money was pressing the partner to make payment of the dues and
the bank was taking steps to file a suit against the partners. Under this circumstance, a
partner approached the plaintiff who advanced the money to the firm for the purpose of
discharging its debt due to the bank. While decreeing the plaintiffs suit against the
partners the court observed that even if there was a dissolution, section 47 would be
attracted and the plaintiffs advance was necessary for winding up the firm. Otherwise
the suit by the bank would have been disastrous and this might result in the taking
away of the winding up affairs from the hands of the partners. Moreover, the loan was
calculated to lighten the burden of the firm.132

[s 47.2] Acknowledgement of debt and winding up.—

One of the partners died in 1948 and the surviving partner acknowledged in 1951 a
debt already existing to save it from becoming time barred under the Limitation Act. It
was held that such an acknowledgement could not be considered as necessary to wind
up the affairs of firm and so the surviving partner could not bind the estate of deceased
partner. The court coming to this conclusion emphasised that under section 45 of the
Act the acknowledgement made by the surviving partner, after one partner dies, is not
binding on the heirs of deceased partner and the estate of deceased partner in the
hands of the heir would not be liable. Under these circumstances, the
acknowledgement was not necessary for winding up the affairs of the firm.133

Regarding the validity of renewing or acknowledging promissory note made by the

surviving partner to save it for the Limitation Act the same as above mentioned
conclusion is reached by other High Courts,134 but with different reasoning. These
High Courts have observed that such acknowledgement or part payment towards the
debt made after the death of a partner (and consequently after dissolution of
partnership due to death) will not bind the heir of the deceased partner as under the
proviso to section 47 of the Indian Partnership Act, 1932, the heirs of the deceased
partner stand on a different footing in relation to such acts after dissolution. The courts
have emphasised that once the partnership is dissolved there cannot subsist any
relation of partnership and so implied agency disappears after the dissolution of
partnership. For this they relied on a very old case of Premji Ludha v Dossa
Doongarsey.135 The jural relationship of partners having been ended, there can be no
question of any person acting in any representative capacity. Section 47 which purports
to regulate rights and obligations between the partners inter se cannot be invoked to
bind the legal representatives or the heirs of the deceased partner as there cannot be
any relationship of partners between the legal representative and surviving partners,
especially when such acknowledgement of liability was not necessary to wind up the
affairs of the firm. If the surviving partners continue to carry on business, they must be
regarded as having formed a fresh partnership.

Another point regarding the authority of a partner after dissolution is that where a
partnership is dissolved on the terms of one partner taking over the business and
assets, he has no authority to bind the outgoing partner by making the negotiable
instruments in the name of the firm.136 But this must be distinguished from the case
where a partner gives wide and extensive power to the other partner to enable him to
expedite the work of winding up the affairs of the firm.137

Lastly, it is held that the right to wind up affairs of a dissolved partnership is personal to
the members of the firm and on the death or insolvency of a partner, his executor, legal
representative, heir or trustee or official Assignee or Receiver will not be permitted to
take the management of the affairs of partnership out of the hands of the other
partners.138 The English Law on this point is also the same.139

[s 47.3] Use of firm name.—

See notes to section 53.

[s 47.4] Liability for insolvent partner.—

Under the Proviso to section 47 of the Indian Partnership Act, 1932, the firm is in no
case bound by the acts of a partner who has been adjudged insolvent. But if a person
represents himself or knowingly permits himself to be represented as a partner of the
insolvent, he will be liable for the acts of the insolvent. The estate of the insolvent,
however, will be liable for the acts of a solvent partner during the course of the winding
up.

Illustration

A and B trade together in partnership. A is adjudged an insolvent. B in winding up the

firm pays partnership moneys into a bank to meet current bills of the firm. The bank is
entitled to this money as against the Official Assignee.140

It should be noted, however, that under the Indian Partnership Act, 1932 an insolvent
partner ceases to be a partner on the date of the order of adjudication,141 and
therefore, all acts done by him up to the date of the order of adjudication are binding on
the firm.

Illustration

A and B are partners. A commits an act of insolvency and afterwards indorses in the
name of the firm a bill belonging to the partnership. Thereafter, A is adjudged an
insolvent. The indorsee acquires a good title in the bill.142

If a firm had two partners and one died and the surviving partner became insolvent, the
interest of the insolvent in the partnership, in a case governed by the Presidency Towns
Insolvency Act, 1909, will devolve upon the Official Assignee as an incident of the
estate for the benefit of the firm. So the right to realise the partnership assets and to
sell partnership property to pay and all things necessary to wind up the partnership
vests in the Official Assignee.143

127 Motilal v Sarupchand, AIR 1937 Bom 81 : (1936) 38 Bom LR 1058 .

127 Motilal v Sarupchand, AIR 1937 Bom 81 : (1936) 38 Bom LR 1058 .
128 Palani Appa Chettiar v Veerappa, (1918) 41 Mad 446.
129 Babu v Gokuldas, AIR 1930 Mad. 393 : 112 Ind Cas 184.
130 Re Bourne, (1906) 2 Ch 427 .
131 Butchart v Dresser, (1853) 4 DMG 542 : 43 ER 619.
132 Veeria Perumal Pillai v Avukkarummal Mohd., AIR 1958 Ker. 257 .
133 Probodhchandra Chakravarty v Bharat Loan Co, AIR 1964 Assam 114 Cf. Markandrai v
Virendrarai, (1917) 19 Bom LR 837 at 842; Babu v Dayambhai, AIR 1935 Bom 357 : 37 Bom LR
516.
134 K Venkatasubbamma v V Subba Rao, AIR 1964 AP 462 , Abdul Gani v VM Periya Swami
Chetty & Co, AIR 1960 Mad. 495 , Sheonaran v Babulal, AIR 1925 Ngp 268 ; Rajagopala Pillai v
Krishna Swami, (1898) 8 Mad LJ 261.
135 Premji Ludha v Dossa Doongarsey, (1886) 10 Bom 358.
136 Heath v Sansom, (1832) 4B&Ad 172 : 110 ER 420.
137 Smith v Winter, (1838) 4 M&W 454 : 150 ER 1507.
138 Shidhapa v Shivalingappa, (1899) 1 Bom LR 42 ; Palaniappa Chettiar v Veerappa, (1918) 41
Mad 446; Allen v Kilbre, 4 Mad Rep 464.
139 Exparte Finch, (1832) 1 D&Ch 274; Fraser v Kershaw, (1856) 2 J&K 496.
140 Woodbridge v Swann, (1833) 4 B. & Add. 633, 38 R.R. 337.
141 See Indian Partnership Act, 1932, section 34.
142 In this respect English law is different. Under English law the indorsee acquires no property
in the bill, as the insolvent partner ceases to be a partner from the date of the commencement
of insolvency.
143 Adm. General of Madras v Official Assignee of Madras, (1909) 32 Mad 462.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 48. Mode of settlement of accounts between partners.-

In settling the accounts of a firm after dissolution, the following rules shall, subject to
agreement by the partners, be observed:

(a) losses, including deficiencies of capital, shall be paid first out of profits, next out
of capital, and, lastly, if necessary, by the partners individually in the proportions
in which they were entitled to share profits;

(b) the assets of the firm, including any sums contributed by the partners to make
up deficiencies of capital, shall be applied in the following manner and order:

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due to him from the firm for
advances as distinguished from capital;

(iii) in paying to each partner rateably what is due to him on account of

capital; and

(iv) the residue, if any, shall be divided among the partners in the proportions
in which they were entitled to share profits.

[s 48.1] "Subject to agreement by the partners."—

The rules laid down in this section are to be observed provided there is no different
stipulation in the partnership deed.144 Any such stipulation must be clearly proved
before the provisions of clauses (a) and (b) are disregarded.

[s 48.2] Sub-section (a): Deficiencies of capital.—

Where a partnership is dissolved, and after the debts to third parties have been paid
and advances made by a partner have been repaid, the assets are insufficient to repay
each partner his capital in full, any deficiency must be borne by the partners in the
same proportion as the profits would have been divided.145 Thus, in Garner v Murray,146
a partnership had been formed upon the terms that the capital should be contributed
by the three partners in unequal shares, but that they should receive equal shares of the
net profits. After all the liabilities of the firm had been paid and all advances made by
the partners had been repaid, the assets were insufficient to repay the capital. The
deficit arose by reason of the default of the third partner to contribute his share of the
deficiency (i.e., his share of the capital). The question was how this deficiency was to
be borne. It was held that each partner was liable to contribute one-third of the
deficiency because this was the proportion in which the profits were divisible. There
was nothing in the Indian Partnership Act, 1932 to make a solvent partner liable to
contribute for an insolvent who failed to pay his share.
[s 48.3] Sub-section (b): The assets of a firm are to be applied in paying—

(1) joint debts to third parties;

(2) advances, as distinguished from capital, of each partner;

(3) to each partner what is due from the firm to him in respect of capital.

If after the above payments are made, there is surplus, that surplus is to be divided in
the proportion.147

In Nowell v Nowell,148 Sir WM James, VC, on this point said: Every partnership is a
series of partnership adventures; and if the matter be tested by one adventure, the rule
is made very clear. Two persons engage in a speculation, say, in the purchase of £1000
worth of cotton. One partner has the £1000 at his command, the other has not. The
first partner advances his £1000 for the purpose of the speculation. If the cotton
produces £1100, the £100 is divided between the two parties. If it only produces £900,
could it be contended that the capitalist partner is to put up with the entire loss; and
that the game of partnership between the man without money, and the man with, was
to be on the principle of "Heads, I win; tails you lose?"

In the above case each partner would have to contribute £50 towards the loss of
capital. The capitalist partner would, therefore, be entitled to £50 from the other
partner. This would be in accordance with the last part of clause (a).

Illustrations

(1) A and B trade as partners, and it is agreed that profits should be shared and losses
borne equally. On dissolution it is found that A has advanced more capital than B to the
extent of £1900. The net assets were only £1400. There is thus a deficiency of capital
to the extent of £500. Under sub-section (a) both the partners must contribute in the
proportion in which they were entitled to share profits, i.e., equally. Therefore, B should
pay to A the sum of £250.149

(2) A, B and C entered into partnership upon the terms that the capital of the business
should be contributed in certain unequal shares, and that each partner should be
entitled to share equally in the profits. On dissolution £2500 is due to A in respect of
capital; and £266 in respect of advance to the firm.

There is due to B in respect of capital a sum of £314 and in respect of advances £148.

After paying the debts of third parties and also the advances of A and B to the firm, it is
found that the deficiency of capital is £840. In other words, if the residue had been
£2814 there would have been no deficiency, but the residue is in fact only £1974. Under
sub-section (a) each partner must contribute equally one-third, i.e., £280, towards the
deficiency. C is an insolvent and cannot contribute, and neither A nor B can be called
upon to contribute for C. By the contributions of A and B the amount of £1974
increases by £560, i.e., it becomes £2534. This amount not being sufficient to recoup
the entire capital, it must be divided rateably between A and B. If fractions of a penny
are not counted, A will get £2251 4s. 10d, and B will get £282 15s. 2d.150

[s 48.4] Assets: Benefit of a contract.—

The benefit of a contract may be an asset of a firm. A contract on the part of a

company to continue to employ a firm, as its agents, is not to be regarded as asset of
the firm where the contract was determinable at any time by the company. Secondly, in
the instant case the profits in respect of such a contract would be derived entirely from
the services of the surviving partners and no liability was to be incurred by the estate of
the deceased partner.151 But the contract would constitute a valuable asset if the
estate of the deceased partner would be liable in the event of loss.152

The unauthorised sums withdrawn by a partner in his capacity as a receiver after

dissolution were held to be assets of the firm in his hands together with mercantile
interest thereon from the date of withdrawals.153 The assets are to be valued on the
basis of their fair value to the firm, i.e., at the market value, on the date of dissolution
and not on the basis of their book value.154 This is, however, subject to the contract to
the contrary.

[s 48.5] Claim for partner's remuneration for services rendered.—

As a general rule, a partner is not entitled to claim remuneration for services rendered
to the firm.155 If, however, the contract of partnership so provides he may claim
remuneration.

[s 48.6] Costs.—

In a suit for accounts after dissolution, a partner's advances156 and what is due to him
in respect of capital157 are payable out of the assets before the costs of the suit. In
Ross v White,158 it was held that the fund in Court representing the partnership assets
ought to be applied, first, in payment of the debts, second, in payment of the excess of
the balance due to the one partner over the balance due to the other, and, third in
payment, so far as it would extend, of the costs of the action, and that the rest of the
costs should be borne by the partners in proportion to their interest in the partnership.

144 Nawaneetdas v Gordhandas, AIR 1955 Mad. 113 .

145 Under Hill's Partnership, 10th Edn, (1975), p 135.
146 Garner v Murray, (1904) 1 Ch 57 .
147 See Indian Partnership Act, 1932, section 13(b).
148 Nowell v Nowell, (1868) LR 7 Eq 538, 541.
149 Nowell v Nowell, (1869) LR 7 Eq. 538.
150 Garner v Murray, (1904) 1 Ch 57 .
151 Bachubhai v Shamji, (1885) 9 Bom 535, 536.
152 Ambler v Bolton, (1872) LR 14 Eq 427 (an unassignable mail contract held by a partner);
McClean v Kennard, (1874) 9 Ch 356 .
153 Mst. Nag Kuer v Sham Lal, AIR 1925 PC 257 : 23 All LJ 1045 : 92 IC 274.
154 Muhammad Ussain v Abdul Gaffoor, AIR 1950 Mad. 758 ; Cruickshank v Sutherland, (1923)
92 LJ Ch 136 (HL).
155 Khemchand v Mulchand, (1932) A. Sind 126.
156 Potter v Jackson, (1880) 13 ChD 845 .
157 Ross v White, (1894) 3 Ch 326 .
158 Ross v White, (1894) 3 Ch 326 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 49. Payment of firm debts and of separate debts.-

Where there are joint debts due from the firm, and also separate debts due from any
partner, the property of the firm shall be applied in the first instance in payment of the
debts of the firm, and, if there is any surplus, then the share of each partner shall be
applied in payment of his separate debts or paid to him. The separate property of any
partner shall be applied first in the payment of his separate debts, and the surplus (if
any) in the payment of the debts of the firm.

Even the personal debt of a partner could constitute a disqualification for award of
contract of liquor licence, if the Act under which contract is awarded contains such a
disqualification for a firm applying for licence.159 The rights created by this section in
favour of joint and/or separate creditors for the purpose of realising their dues may be
applied in suits, decrees, and execution proceedings.160

159 Modern Hotel v CCE, (2016) 15 SCC 620 : (2015) 9 Scale 50 .

160 Pacific Bank v Thakur, AIR 1949 Cal 396 ; TG Sundaraiyer v KN Balusami, AIR 1956 Mad..192
: (1955) 2 Mad LJ 276.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 50. Personal profits earned after dissolution.-

Subject to contract between the partners, the provisions of clause (a) of section 16
shall apply to transactions by any surviving partner or by the representatives of a
deceased partner, undertaken after the firm is dissolved on account of the death of a
partner and before its affairs have been completely wound up:

Provided that where any partner or his representative has bought the goodwill of the
firm, nothing in this section shall affect his right to use the first name.

[s 50.1] Profits by partner after dissolution and before winding up.—

Where a partner, after dissolution and before the affairs of the partnership are wound
up, derives any profit for himself from any transaction of the firm, or from the use of the
property or business connection of the firm or the firm name, he shall account for that
profit and pay his share to the surviving partner or the representatives of the deceased
partner.161 But if a partner carries on another business of a similar nature, this section
would not apply.162 For a fuller treatment of the subject, see commentary to section
16(a).

Illustrations

(1) A and B carry on business in partnership. The firm holds leasehold for the purposes
of the business. A dies. Before the affairs of the firm are completely wound up, the
lease expires and B renews it. The renewed lease is partnership property.163

(2) A, B and C are partners. A agrees to take a lease in his own name, but in fact for
partnership purposes, and dies before the lease is executed. The representatives of A
cannot deal with the lease without the consent of B and C.164

[s 50.2] Dissolution of firm does not put an end to rights accrued during
existence of partnership.—

Mere execution of deed of dissolution did not discharge the parties thereto from their
rights and liabilities. The rights and liabilities of the partners in respect of the
partnership property would be discharged only when the firm is finally wound up and
the properties of the firm are distributed. Sections 50 and 53 of the Indian Partnership
Act, 1932 indicate to the said effect. The partner of a dissolved firm cannot only
exercise his right under section 50, he may also restrain the use of the firm's name and
firm's property in terms of section 53 of the Indian Partnership Act, 1932. Section 37 of
the Indian Partnership Act, 1932 determines the rights of the outgoing partner in
certain cases to avoid shares to subsequent profits. If the tenancy right was being
subjected to any profit by one of the partners, the cause of action arose. The cause of
action for the suit, therefore, did not perish with the execution of the deed of
dissolution on 31 March 1977.
[s 50.3] Proviso.—

Where on dissolution a partner has bought the goodwill of the firm, he may use the firm
name even before the affairs of the partnership have been completely wound up.

161 Haji Hedayetullah v Mahomed Kamil, AIR 1924 PC 93 : 29 Cal WN 161 : 81 IC 525; Ahmed
Musaji v Hasim Ebrahim, 42 IA 91 : 42 Cal 914 : AIR 1915 PC 116 .
162 Mohanasundaram v Neelambal, AIR 1955 Mad. 442 : (1955) ILR Mad 1154.
163 Clements v Hall, (1857) 2 De G & J 173 : 119 RR 74 : 44 ER 954.
164 Alder v Fouracre, (1919) 3 Swanst 489 : 19 RR 256 : 36 ER 947.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 51. Return of premium on premature dissolution.-

Where a partner has paid a premium on entering into partnership for a fixed term, and
the firm is dissolved before the expiration of that term otherwise than by the death of a
partner, he shall be entitled to repayment of the premium or of such part thereof as
may be reasonable, regard being had to the terms upon which he became a partner and
to the length of time during which he was a partner, unless,

(a) the dissolution is mainly due to his own misconduct, or

(b) the dissolution is in pursuance of an agreement containing no provision for the

return of the premium or any part of it.

[s 51.1] Principle of the rule.—

The language of the section is taken from Atwood v Maude,165 where Lord Cairns, LC,
stated the rule as follows:

If the partner who has received the premium should afterwards commit a breach of the
partnership articles, and himself dissolve the partnership, or render its continuance
impossible, the Court will not allow him to take advantage of his own wrongful act, but
decrees the restitution of a proportion of the premium paid, having regard to the terms of
the contract and to the length of time during which the partnership has continued. But, on
the other hand, if the partner who had paid the premium is guilty of a like breach of the
partnership articles, and is himself the author of the dissolution, the Court will not allow him
to found a claim to the restitution of the premium upon his wrongful act.

[s 51.2] When entitled to return of premium.—

In case of earlier dissolution the partner paying the premium is entitled to a return of a
proportionate part of the premium, except when the partnership is dissolved:

(1) by death of one of the partners;

(2) owing to the misconduct of the partner paying the premium; and

(3) in pursuance of an agreement, which does not provide for the return of the
premium or any part of it.

Where, therefore, the partnership is dissolved:

(1) without the fault of either party;166 or

(2) owing to the fault of both;167 or

(3) owing to the fault of the partner receiving the premium;168 or

 (4) owing to the insolvency of the partner receiving the premium, where the partner
paying the premium was not aware of the other's embarrassed circumstances
at the time of entering into partnership,169

the partner paying the premium is entitled to the proportionate part of the premium.

[s 51.3] Return of reasonable premium.—

In absence of special reasons, the amount of premium to be returned should bear the
same proportion to the whole premium as the unexpired term bears to the whole term
agreed upon.170 But where part of the consideration of the payment of premium is not
referable to the whole of the term it may be difficult to apply the said principle. The
legislature has used the expression "as may be reasonable". The said expression is
controlled by the words which follow it. Under the said expression it may not be
possible to take into consideration other advantages to the partner paying the
premium, such as, obtaining a footing in a large town, making a large acquaintance
with the customers170 or a misrepresentation as to the income of the original owner171
or the person was induced to enter into partnership by reason of fraud.172

[s 51.4] Interest whether recoverable.—

In calculating what proportion of the premium should be returned, interest on the

premium paid is not to be accounted for, as under the contract it belonged to the
person who received it.173

Illustrations

(1) A and B entered into partnership as solicitors for a term of seven years, A paying a
premium of £800. B, before entering into the partnership, knew that A was
inexperienced and incompetent. After the expiration of two years B complained that A's
incompetence was injurious to the business, and called upon him to dissolve the
partnership: A thereupon files a suit praying for a dissolution and for a return of a
proportionate part of the premium. A is entitled to the return of a part of the premium
proportionate to the unexpired portion of the term.174

(2) A and B become partners for 10 years, A paying B a premium of £1000. A quarrel
occurs at the end of the eight years, both parties being in the wrong, and a dissolution
is decreed. A is entitled to a return of £200 of the premium from B.175

(3) A agrees to take B into partnership with him for 14 years, in consideration of a
premium of £2500, one-half of which is to be paid at the signing of the articles, and the
other half at the time of the execution of a deed of partnership to be founded on the
articles. The articles are signed, the first instalment of the premium is paid and the
parties enter into partnership on 15 February 1842. Alter the lapse of a few months A,
under considerable provocation from B, excludes B from partnership. The partnership
is dissolved on 1 July 1843 and no further premium is paid. Both are held to blame.

In the accounts to be taken between A and B, the latter is to be credited with the whole
of the amount of the premium, i.e., £2500, but to be debited with the unpaid instalment,
i.e., £1250, and with an additional portion of the premium, calculated with reference to
the actual duration of the partnership, i.e., £245 19s. 6d. The result is that B will be
entitled to a return of £2,500–£1,495, 19s. 6d. : £1004 0s. 6d.176
[s 51.5] Sub-section (b): Dissolution by mutual agreement.—

If by mutual agreement the partnership is dissolved before the expiry of the term fixed,
and nothing is provided at the time of the dissolution for the return of the premium, the
partner, who paid the premium, cannot afterwards claim to have any part of it
returned.177

[s 51.6] No return of premium in case of death.—

The party paying the premium is not entitled to a return of any part of the premium on
the death of his partner before the expiry of the term fixed, as it is an implied term of
the contract that the partnership should last for the fixed period, provided both be
alive.178 In Whincup v Hughes,179 Brett, J, explained the principle as follows:

The case does not fall within the rule as to a total failure of consideration, nor within the rule
as to a mutual rescission of contract, but within the rule that where a special sum is paid for
a special consideration, and there is a partial failure, a party cannot recover even part.

[s 51.7] Insolvency of partner.—

Where a partner, who has paid a premium, had at the time of the contract of
partnership notice of the embarrassed circumstances of his partner, the partner paying
the premium is not entitled to the return of any part of it on the insolvency of the
partner receiving the premium.180 Where, however, there is no similar notice of the
embarrassed circumstances of the partner, a portion of the premium is returnable on
the insolvency of that partner.181

[s 51.8] Partnership at will.—

The section applies only to partnerships for a fixed term, and not to a partnership at
will. In the case of a partnership at will, the premium is not returnable on dissolution, in
the absence of fraud, or an express stipulation on the point.182

165 Atwood v Maude, (1868) 3 Ch 369 , 372.

166 E.g., mere incompetence of the partner paying premium.
167 Astle v Wright, (1856) 23 Beav 77; Bury v Allen, (1845) 1 Coll 589.
168 See Bluck v Capslick, (1879) 12 ChD 863 ; Hamil v Stokes, (1817) 4 Pri 161.
169 See Atwood v Maude, (1868) 13 Ch at pp 372–373.
170 Bullock v Crockett, (1862) 3 Giff 507 : 133 RR 169 : 66 ER 509 (per Stuart VG.).
170 Bullock v Crockett, (1862) 3 Giff 507 : 133 RR 169 : 66 ER 509 (per Stuart VG.).
171 Jauncey v Knowles, (1859) 29 LJ Ch 95 .
172 Mackenna v Parkes, 36 LJ Ch 366.
173 Astle v Wright, (1856) 23 Beav 77.
174 Atwood v Maude, (1868) 3 Ch 369 .
175 Pease v Hewitt, (1862) 31 Beav. 22.
176 Bury v Allen, (1845) 1 Coll. 589 : 63 E.R. 556.
177 Lee v Page, (1851) 30 LJ Ch 857 .
178 Per Willes, J, in Whincup v Hughes, (1871) 40 LJCP 104, 107.
179 Whincup v Hughes, (1871) 40 LJCP 104, 109.
180 Akhurst v Jackson, (1818) 1 Wils (Ch) 47.
181 Freeland v Stansfield, (1853) 2 Sum & G 479. See Atwood v Maude, (1868) 3 Ch at pp 372–
373.
182 See observations in Tattersall v Groote, (1800) 2 Bos & P 131, at p 134.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 52. Rights where partnership contract is rescinded for fraud or

misrepresentation.-

Where a contract creating partnership is rescinded on the ground of the fraud or

misrepresentation of any of the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitled,

(a) to a lien on, or a right of retention of, the surplus or the assets of the firm
remaining after the debts of the firm have been paid, for any sum paid by him for
the purchase of a share in the firm and for any capital contributed by him;

(b) to rank as a creditor of the firm in respect of any payment made by him towards
the debts of the firm; and

(c) to be indemnified by the partner or partners guilty of the fraud or

misrepresentation against all the debts of the firm.

[s 52.1] Partnership contracts.—

A partnership contract is one which requires the utmost good faith and this duty
"extends to persons negotiating for a partnership, but between whom no partnership as
yet exists".183

Where a partner has been induced to enter into a partnership by reason of fraud or
misrepresentation, such a contract is voidable at his option under section 19 of the
Contract Act, 1872. Rescission of a contract will not be refused even though the firm
has been adjudged insolvent.184

[s 52.2] Without prejudice to any other right.—

The rights conferred by clauses (a), (b) and (c) are in addition to the other rights of
such a partner. The other rights would be refund of capital,185 premium,185
contribution, damages, interest on all payments made and costs in the suit for
rescission.186 Upon rescission, he cannot retain the profits received as that would
amount to approbation.187

[s 52.3] Rights of a partner on rescission.—

This section lays down the rights of a partner on his rescinding the contract, but these
rights he is entitled to only against the partner. But as against third parties, it is no
defence that he was fraudulently induced to become a partner. Such a contract is
voidable, and until the contract is rescinded, all the partners are liable to creditors.187

Illustration

A fraudulently induces B to enter into partnership with him—B pays A a premium of Rs

5000. Within a few months the firm incurs liabilities to the extent of Rs 10,000 and on
discovering the fraud B files a suit for the rescission of the contract creating
partnership, and the contract is rescinded. In the meanwhile creditors of the firm levy
attachment on B, who pays Rs 3000 to the creditors. B on rescinding the contract is
entitled to a decree for Rs 5000 and Rs 3000 against A, and is entitled to a lien for the
said amounts on the assets of the firm. He is also entitled to a declaration that A is
bound to indemnify B against all outstanding debts, claims, demands, and liabilities
which B has become or may become liable to pay.188

183 Lindley, 12th Edn, pp 342, 344.

184 Adam. v Newbigging, 13 AC 308 (322); Rawlins v Wickham, 3 De G. & J. 304 : 44 ER 1285 :
122 RR 134.
185 McKenna v Parkes, (1866) 36 LJ Ch 366 .
186 Mycock v Beatson, (1879) 13 ChD 384 .
187 Re Hooper: Ex-parte Broome, (1811) 1 Rose 69, 71.
187 Re Hooper: Ex-parte Broome, (1811) 1 Rose 69, 71.
188 Newbigging v Adam, (1887) 34 ChD 582 ; Mycock v Beatson, (1879) 13 ChD 384 ; Redgrave v
Hurd, (1881) 20 ChD. 1 .
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 53. Right to restrain from use of firm name or firm property.-

After a firm is dissolved, every partner or his representative may, in the absence of a
contract between the partners to the contrary, restrain any other partner or his
representative from carrying on a similar business in the firm name or from using any
property of the firm for his own benefit, until the affairs of the firm have been
completely wound up:

Provided that where any partner or his representative has bought the goodwill of the
firm, nothing in this section shall affect his right to use the firm name.

[s 53.1] Use of firm name.—

Under section 55(1) goodwill is a saleable asset. Provisions of section 55(2) are
intended not to affect the goodwill which is sold off. Under section 50 after dissolution,
a partner cannot derive profit by use of partnership property or its goodwill. This
section supplies an effective means to check any abuse of the provisions of section 50
and to prevent any prejudice to the value of the goodwill which is saleable under
section 55.

A surviving partner, while he has authority to act for the best interest of the business, is
bound not to act in such a manner as to destroy any part of its value. It is quite settled
in our modern law that the goodwill is an asset of the firm and does not, as once
supposed, "survive" to the continuing partner alone. Certainly one partner may be
restrained from using the firm name or the firm's property to do business for his own
exclusive profit pending the liquidation of the partnership affairs.189 After dissolution
and liquidation of a firm there is no exclusive right to the use of the old name unless it
has been so agreed; but it must not be used so as to expose a former partner to liability
on the ground of "holding out".190 Whether there is any substantial risk of that kind is a
question of fact in each case.

However, this section will not prevent a surviving partner from carrying on business
subject to the provisions of section 55(2).

[s 53.2] Proviso.—

See proviso to section 50.

189 Turner v Major, (1882) 3 Giff 442 : 66 ER 483.
190 Burchell v Wilde, (1900) 1 Ch 551 : 69 LJ Ch 314.
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 54. Agreements of restraint of trade.-

Partners may, upon or in anticipation of the dissolution of the firm, make an agreement
that some or all of them will not carry on a business similar to that of the firm within a
specified period or within specified local limits; and notwithstanding anything
contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement
shall be valid if the restrictions imposed are reasonable.

See commentaries to section 27 in the Contract Act, 1872.

Exception 2 to section 27 of the Indian Contract Act, 1872 has been repealed by section
73, and re-enacted in this section.

A firm consisting of two partners was the selling agent of a mill. It is agreed that on the
termination of the partnership neither partner is to take up the agency of the mill. Such
a clause is in restraint of trade and the restriction unenforceable.191

[s 54.1] Reasonable restrictions.—

Whether the restrictions are reasonable will depend on the facts of each case. The
restrictions should afford a fair protection to the interest of the party concerned and
not be so large as to interfere with the interest of the public.192

Restrictions may be with respect to time and place. The degree of protection may vary
in different cases depending upon the character and nature of the business
concerned.192

191 Deva Shanna v Laxminarain, AIR 1956 P&H. 49 .

192 Krishna Rao v Shankar, AIR 1954 Bom 532 : 56 Bom LR 973 (979).
192 Krishna Rao v Shankar, AIR 1954 Bom 532 : 56 Bom LR 973 (979).
The Indian Partnership Act (Act IX of 1932)

Chapter VI Dissolution of a Firm

S. 55. Sale of goodwill after dissolution.-

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to
contract between the partners, be included in the assets, and it may be sold
either separately or along with other property of the firm.

(2) Rights of buyer and seller of goodwill.- Where the goodwill of a firm is sold after
dissolution, a partner may carry on a business competing with that of the buyer
and he may advertise such business, but, subject to agreement between him
and the buyer, he may not,

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm before its
dissolution.

(3) Agreements in restraint of trade.-Any partner may, upon the sale of goodwill of
a firm, make an agreement with the buyer that such partner will not carry on any
business similar to that of the firm within a specified period or within specified
local limits and, notwithstanding anything contained in section 27 of the Indian
Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions
imposed are reasonable.

This section should be read together with section 36. Under the Indian Partnership Act,
1932 the principles applicable to the use of the firm name are the same as those
applicable to the sale of goodwill after dissolution. Whereas section 36 deals with the
rights of outgoing and continuing partners, section 55 deals with the rights of buyers
and sellers of goodwill.

[s 55.1] Goodwill.—

Under section 14 "Goodwill" is an asset of the firm. It may be sold separately or along
with the other property of the firm.

[s 55.2] Nature of goodwill.—

See note "Goodwill" under section 14.

The word "goodwill" has not been defined affirmatively in the Indian Partnership Act,
1932. But this section clearly reveals what was intended thereby by the draftsman of
this statute. The word "goodwill" as spelt out of this section would mean (i) "the name
and style of the firm" [vide sub-section 2(a)], (ii) the customers of the firm prior to its
dissolution [vide sub-section 2(c)], and (iii) the carrying on of the business in such a
manner as to represent as if it is the continuation of the old firm's business [vide sub-
section 2(b)]. It may be noticed that the carrying on of a competing business will not
infringe the goodwill because sub-section (3) clearly states that a total restriction upon
carrying on of a similar business would be bad as a restraint upon trade unless the
restrictions are reasonable. Where the terms of a proclamation of sale emphasised the
sale of the goodwill of the business as a going concern, it was held that the sale of the
business as a going concern included the very basic right to occupy the shop room
from where the business was carried on.193 In another case the Privy Council held that
the right to ply ferry between certain ghats of a river constituted goodwill.194

[s 55.3] Valuation of goodwill.—

In valuing the goodwill the Court should set such a value upon it as it might consider to
have been attached to the business at the date of dissolution, and the value (if any) of
the goodwill ought to be appraised on the footing that, if it were sold, the old partners
would be at liberty to carry on a rival business, but would not have the right to solicit
any person who was a customer of the old firm, or the right to carry on business under
the firm name.195

[s 55.4] Where goodwill not sold.—

Upon the dissolution of a partnership, without any sale or assignment of the goodwill,
and without any provision as to the use of the firm name, each of the partners is
entitled to carry on business under that name, provided that he does not by so doing
expose his former partners to any risk of liability. Whether there will be any such risk is
a matter to be determined having regard to the circumstances of each case.196

Illustration

JW. Burchell, CTD Burchell, and WG Wilde carried on business as solicitors under the
style of "Burchell & Co." The partnership was dissolved by consent, there being no sale
of the goodwill and no provision as to the use of the firm name. Thereafter JW Burchell
and CTD Burchell carried on business as solicitors under the style of "Burchell & Co."
Wilde and his son carried on business under the style of "Burchell & Co." It was held that
the business being one of solicitors, there was no substantial risk of the Burchells being
held liable, and therefore, Wilde and his son were entitled to carry on business under
the style of "Burchell & Co."197

[s 55.5] Sub-section (2): Where goodwill sold.—

Where the goodwill is sold the vendor may carry on a business competing with that of
the buyer, and may advertise such business but, unless there is a contract to the
contrary, he may not:

(i) use the firm name; or

(ii) represent himself as carrying on the old firm; or

(iii) solicit old customers.

The vendor may even deal with customers of the old firm, provided they come to him of
their own accord.198

[s 55.6] Represent himself as carrying on the old firm.—

The vendor may advertise the fact that he had been with the old firm, but he must take
care not to do so in a way calculated to lead the public to believe that he is carrying on
the business of the old firm, or is in any way connected with it.199

Illustration

One Hookham, an old established tailor, took one Pottage into partnership, and they
carried on business under the style of "Hookham and Pottage". The partnership was
afterwards dissolved by a decree of the Court in which it was provided that the goodwill
should belong to Hookham. Hookham continued the business under the name of
"Hookham & Co." Pottage set up a shop only a few doors from that business, and
painted over the door the words "Pottage from Hookham and Pottage". It was held that
having regard to the manner in which the names were painted up, Pottage had done
that which was calculated to lead the public to suppose that he was still connected
with the old firm, and Hookham was, therefore, entitled to an injunction.200

[s 55.7] Use of firm name.—

The name under which the business is carried on is called the "firm name".201 The sale
of a goodwill includes the right to use the firm name, unless it would lead people to
believe that the old business was still being carried on, and might cause the vendor to
incur liability.202

Illustrations

(1) A carried on business under the name of "Madame Elise", which was the name of his
wife. A sold his business with the goodwill, together with the exclusive right of using
the name "Madame Elise and Company". The buyer persisted in using the name
"Madame Elise". It was held that the purchaser was not entitled to trade under the old
name alone, inasmuch as it would lead people to believe that the old business was still
being carried on, and might cause the vendor to incur liability.203

(2) One Townsend and one EJ Jarman carried on business under the style of "Jarman &
Co." Thereafter there was a dissolution, and EJ Jarman assigned the goodwill to
Townsend, who carried on the business under the name of "Jarman & Co". In a few
months EJ Jarman brought out a similar business in the same locality under the name
of "Jarman and Jarman". In a suit by Townsend, it was held that EJ Jarman should be
restrained from carrying on business in the name of "Jarman and Jarman" or "Jarman &
Co." but that there was no objection to his trading in the name of "E.J. Jarman". It was
also held that there was no appreciable risk to the defendant in the plaintiff carrying on
the business in the name of "Jarman & Co."204

[s 55.8] Soliciting old customers.—

Under clause (c) the vendor cannot solicit the customers of the old firm. In Curl
Brothers Ltd v Webster,205 Farwell, J, applied this rule to the case of an old customer,
who had of his own accord dealt with the new firm set up the vendor.

Illustration

A sells the goodwill of his business to B, and sets up a new business. X, who was and
remains a customer of the old firm, deals of his own accord with the new firm set up by
A. A is not entitled to solicit even such a customer as X, though if X continues to deal
with A of his own accord, A would be entitled to deal with him.206

[s 55.9] Sub-section (3): Restraint of trade.—

Agreements between partners of the kind recognised by this sub-section have been
allowed in England ever since there has been any settled partnership law, and are
exceedingly common; indeed, some such clause is rarely absent from partnership
articles.

193 Dulaldas Mullick v Ganesh Das Damani, AIR 1957 Cal 280 .
194 Chandrakanta v Parasullah, (1921) ILR 48 Cal 1030 (PC).
195 Re David and Matthews, (1899) 1 Ch 378 ; Dulaldas Mullick v Ganesh Das, AIR (1957) Cal
280 (Sale of goodwill of a going concern in execution includes sale of tenancy rights).
196 Burchell v Wilde, (1900) 1 Ch 551 .
197 Burchell v Wilde, (1900) 1 Ch 551 .
198 Leggot v Barrett, (1880) 15 ChD 306 , pp 310, 313, 315.
199 Hookham v Pottage, (1872) 8 Ch 91 .
200 Hookham v Pottage, (1872) 8 Ch 91 .
201 Indian Partnership Act, 1932, section 4. See note "Firm name" under section 4.
202 Chatteris v Isaacson, (1887) 57 LT 177 .
203 Chatteris v Isaacson, (1887) 57 LT 177 .
204 Townsend v Jarman, (1900) 2 Ch 698 : 69 LJ Ch 823.
205 Curl Brothers Ltd v Webster, (1904) 1 Ch 685 .
206 Curt Brothers Ltd v Webster, (1904) 1 Ch 685 .
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 56. Power to exempt from application of this Chapter.-

The 1[State Government of any State] may, by notification in the Official Gazette, direct
that the provisions of this Chapter shall not apply to 2[that State] or to any part thereof
specified in the notification.

This chapter provides for the registration of firms, the object being that a third party
dealing with a firm may know who the partners are in that firm. The sections on the
whole provide for acts which are of a ministerial nature, although certain sections are
so framed as to affect the rights of partners inter se and against third parties.

The outlines of the scheme are briefly stated in the Report of the Special Committee as
follows:—

The English precedent is so far as it makes registration compulsory and imposes a penalty
for non-registration has not been followed, as it is considered that this step would be too
drastic for beginning in India, and would introduce all the difficulties connected with small
and ephemeral undertakings. Instead, it is proposed that registration should lie entirely
within the discretion of the firm or partner concerned; but following the English precedent,
any firm which is not registered will be unable to enforce its claims against third parties in
the civil courts; and any partner who is not registered will be unable to enforce his claims
either against third parties or against his fellow partners. One exception to this disability is
made—any unregistered partner in any firm, registered or unregistered, may sue for
dissolution of the firm. This exception is made on the principle that registration need not
prevent the disappearance of an unregistered or imperfectly registered firm. Under this
scheme a small firm, or a firm created for a single venture, not meeting with difficulty in
getting payment, need never register; and even a firm with a large business need not register
until it is faced with litigation. Registration may then be effected at any time before the suit
is instituted. The rights of third parties to sue the firm or any partner are left intact.

The scheme of this chapter may also be elucidated with the assistance of an
illustration.

Illustration

A, B & Co is a newly constituted firm and commences business without registering their
firm. X is their creditor and Y their debtor. X may sue A, B & Co, but A, B & Co, or the
partners thereof, cannot sue Y, who is their debtor, unless before instituting the suit
they effect registration of their firm under the Act.3 Even in the suit by X against A, B &
Co, A, B & Co cannot claim a set off against X, unless the firm is registered under the
Indian Partnership Act, 1932.4

If, however, the partners in A, B & Co wish to dissolve the partnership, they may file a
suit for dissolution although the firm is not registered or they may file a suit against the
debtors of the firm after dissolution.5 But one of the partners may not file a suit against
the other partners, e.g., for contribution for moneys borrowed by him under an express
agreement for the purposes of the partnership, unless the firm is registered.6

Where the firm is registered, the statements required by, and made under section 58
will be conclusive evidence against each of the partners under section 68.
1 Subs. by A.O. 1937, for Governor General in Council.
2 Subs. by the A.O. 1937, for any Province.
3 Section 69(2).
4 Section 69(3).
5 The Indian Partnership Act, 1932, section 69(3)(a). Abdul Subhan Sahib v Abdul Ravoof Sahib,
AIR 1942 Mad 707 : (1942) 2 Mad LJ 309 : 203 IC 644.
6 The Indian Partnership Act, 1932, section 69(1).
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

7S. 57. Appointment of Registrars.-

(1) The 8[State] Government may appoint Registrars of Firms for the purposes of
this Act, and may define the areas within which they shall exercise their powers
and perform their duties.

(2) Every Registrar shall be deemed to be a public servant within the meaning of
section 21 of the Indian Penal Code (45 of 1860).

The Government of Bombay has appointed the Registrar of Joint Stock Companies at
Bombay to be the Registrar of Firms for the whole of the Bombay State.

[s 57.1] STATE AMENDMENTS

Maharashtra.—For section 57, the following section shall be substituted, namely:—

"57. Appointment of Registrar of firms and Deputy and Assistant Registrars of firms.—(1)
The State Government may, by notification in the Official Gazette, appoint a Registrar of
Firms who shall exercise, perform and discharge the powers, functions and duties of the
Registrar under the Act throughout the State of Maharashtra.

(2) The State Government may likewise appoint one or more Deputy Registrars of Firms and
Assistant Registrars of Firm who shall exercise, perform and discharge all or such of the
powers, functions and duties of the Registrar and in such areas as the State Government
may, by notification in the Official Gazette, specify.

(3) The officers appointed under sub-section (1) and sub-section (2) shall be deemed to be
public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860)."
[Maha. Act 29 of 1984 section 5 (w.e.f. 1 January 1985)].

Uttar Pradesh.—For section 57, substitute as under—

"57. Appointment of Registrar, Deputy Registrars and Assistant Registrars.—(1) The State
Government may, by notification, appoint a Registrar of Firms, who shall exercise, perform
and discharge the powers, functions and duties of the Registrar under this Act throughout
Uttar Pradesh.

(2) The State Government may likewise appoint one or more Deputy Registrars of Firms and
Assistant Registrars of Firms who shall exercise, perform and discharge all or such of the
powers, functions and duties of the registrar and in such areas as are notified in the
notification.

(3) The officers appointed under sub-section (1) or sub-section (2) shall be deemed to be
public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860)."
[U.P. Act 34 of 1979, section 2 (w.e.f. 22 October 1979)].
7 See the Partnership (Registration of Firms in Kutch Validation) Act, 1958 (Bombay Act 45 of
1958), Section 2 for the validation of the registration of certain partnerships in the Kutch area of
the then State of Bombay during the period between 1 November 1953 and 31 January 1957.
8 Subs. by A.O. 1950.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 58. Application for registration.-

(1) The registration of a firm may be effected at any time by sending by post or
delivering to the Registrar of the area in which any place of business of the firm
is situated or proposed to be situated, a statement in the prescribed form and
accompanied by the prescribed fee, stating—

(a) the firm name,

(b) the place or principal place of business of the firm,

(c) the names of any other places where the firm carries on business,

(d) the date when each partner joined the firm,

(e) the names in full and permanent addresses, of the partners, and

(f) the duration of the firm.

The statement shall be signed by all the partners, or by their agents

specially authorised in this behalf.

(2) Each person signing the statement shall also verity it in the manner prescribed.

(3) A firm name shall not contain any of the following words, namely:—

"Crown," "Emperor," "Empress," "Empire," "Imperial," "King," "Queen," "Royal," or

words expressing or implying the section, approval or patronage of 9[* * *]
Government, 10[* * *] except when 11[the] 12[State] Government] signifies 13[its]
consent to the use of such words as part of the firm name by order in writing.
14[* * *].

[s 58.1] STATE AMENDMENTS

Goa, Daman and Diu.—In its application to the U.T. of Goa, Daman and Diu, in section
58.—

(i) for sub-section (3), the following shall be substituted, namely—

"(3) No firm shall be registered by a name which in the opinion of the Registrar is
undesirable";

(ii) after sub-section (3), insert the following:—

"(4) Any person aggrieved by an order of the Registrar under sub-section (3) may,
within 30 days from the date of communication of such order, appeal to the State
Government whose decision shall be final.

(5) A firm's name shall not contain any of the following words, namely, 'Union, State,
President, Republic, Governor,' or words expressing or implying sanction, approval
 or patronage of Government unless the Government of Goa, Daman and Diu
signifies, by order in writing, its consent to the use of such words as part of the
firm's name:

Provided that nothing in this sub-section shall apply to any firm carrying on
business under any such name, before the date of the commencement of the
Indian partnership (Goa, Daman and Diu Amendment) Act, 1966.

(6) Any person who contravenes the provisions of sub-section (5) shall be
punishable with fine which may extend to five hundred rupees."—Goa, Daman and
Diu Amendment Act 6 of 1966, section 3 (22.8.1966).

Maharashtra.—In section 58—

(a) In sub-section (1)

(i) for the words "The registration of a firm" the words, brackets, figure and
letter "Subject to the provisions of sub-section (1A), the registration of a
firm" shall be substituted;

(ii) The words "at any time" shall be deleted;

(iii) after the words "prescribed fee" the words "and a true copy of the deed of
partnership" shall be inserted;

(iv) after clause (a), the following clause shall be inserted, namely:—

"(aa) the nature of business of the firm";

(b) After sub-section (1), the following sub-section shall be inserted, namely:—

"(1A) The statement under sub-section (1) shall be sent or delivered to the
Registrar within a period of one year from the date of constitution of the firm:

Provided that in the case of any firm carrying on business on or before the date of
commencement of the Indian Partnership (Maharashtra Amendment) Act, 1984
(Maharashtra Act 29 of 1984), such statement shall be sent or delivered to the
Registrar within a period of one year from such date";

(c) for sub-section (3), the following sub-sections shall be substituted, namely.—

"(3) A firm shall not have any of the names or emblems specified in the schedule to
the emblems and Names (Prevention of Improper Use) Act, 1950 (12 of 1950), or
any colourable imitation thereof, unless permitted so to do under that Act, or any
name which is likely to be associated by the public with the name of any other firm
on account of similarity, or any name which, in the opinion of the Registrar for
reasons to be recorded in writing, is undesirable".

Provided that nothing in this sub-section shall apply to any firm registered under
any such name before the date of the commencement of the Indian Partnership
(Maharashtra Amendment) Act, 1984 (Maharashtra Act 29 of 1984).

(4) Any person aggrieved by an order of the Registrar under sub-section (3) may,
within 30 days from the date of communication of such order, appeal to the officer
not below the rank of Deputy Secretary to Government authorized by the State
Government in this behalf, in such manner, and on payment of such fee, as may be
prescribed. On receipt of any such appeal, the authorized officer shall, after giving
an opportunity of being heard to the appellant decide the appeal, and his decision
shall be final." [Maha. Act 29 of 1984, section 6 (w.e.f. 1-1-1985)].

Pondicherry.—In its application to the U.T. of Pondicherry, for sub-section (3), substitute
the following sub-sections:—

(3) The Registrar shall refuse to register—

(a) a firm under sub-section (1) or

 (b) an alteration of the firm name;

If the proposed name or alteration of the firm name is identical with the name by which any
other existing firm has been registered or in the opinion of the Registrar so nearly resembles
such other name as to be likely to deceive or mislead the public or the members of either
firm.

(4) Any person who is aggrieved by an order of Registrar under sub-section (3) may file an
appeal before such person or authority, in such manner within such time and on payment of
such fees as may be prescribed. The appeal shall be heard and decided in such manner as
may be prescribed." [Pondicherry Act 8 of 1969, section 2 (w.e.f. 1-1-1970)].

Rajasthan.—In its application to the State of Rajasthan, for sub-section (3), substitute
the following sub-sections:

"(3) No firm shall be registered by a name which in the opinion of the State Government, is
undesirable.

(4) Except with the previous sanction, in writing, of the State Government, no firm shall be
registered by a name which contains any of the following words, namely:—

(a) 'Union, State, President, Republic' or any words expressing or implying the sanction,
approval or patronage of the Central or any State Government; and

(b) 'Municipal', 'Chartered' or any word which suggests or is calculated to suggest

connection with any municipality or local authority:

Provided that nothing in this sub-section shall apply to any firm registered before the date of
commencement of the Indian Partnership (Rajasthan Amendment) Act, 1971" [Rajasthan
Act 10 of 1971, section 2 (w.e.f. 15-9-1971)].

Tamil Nadu.—Same as in Rajasthan except for the name of the Act in the proviso to
sub-section (4), the name reads "Indian Partnership (Madras Amendment) Act, 1965".
[Tamil Nadu Act 35 of 1965, section 2 (w.e.f. 1-4-1966)].

The word "may" shows that the registration is optional. The words "at any time" show
that the registration may be done at any time subject to the provisions of section 69 as
pointed out under section 56. The registration under this Act should not be confused
with the registration of documents under Indian Registration Act, 1908.15

[s 58.2] A partner refusing to register.—

The registration of a partnership is optional and one partner cannot compel another
partner to join in the registration of the firm. Even if it is an implied term of the
partnership agreement that the partners should register the partnership, a suit to
enforce such a contract would not lie having regard to the provisions of section
69(1).16 The mere sending of an application under this section does not amount to the
registration of the firm.17

9 The words "the Crown or the Central Government, or any Provincial" omitted by A.O. 1950.
10 The words "or the Crown Representative" omitted by A.O. 1948.
11 Subs. by A.O. 1937.
12 Subs. by A.O. 1950.
13 Subs. by A.O. 1937.
14 The words "under the hand of one of the Secretaries of the Government of India" omitted by
A.O. 1937.
15 Girdhari Lal v Spedding Dinga Singh & Co, AIR 1954 HP 52 .
16 Keshavlal & Co v Chunilal & Co, AIR 1941 Rangoon 196 : (1941) 196 IC 96 .
17 Bank of Koothattukulam v Itten Thomas, AIR 1955 Trav Co 155.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 59. Registration.-

When the Registrar is satisfied that the provisions of section 58 have been duly
complied with, he shall record an entry of the statement in a register called the Register
of Firms, and shall file the statement.

The fact of registration raises presumption about his satisfaction.18

Where the Registrar acts bona fide and follows the prescribed procedure, his
satisfaction on the said points is not open to question in a court of law.19

[s 59.1] STATE AMENDMENTS

Maharashtra.—Section 59 shall be renumbered as sub-section (1) of that section, and,

—

(a) in sub-section (1) as so renumbered, after the words "file the statement" the
words "On the date such entry is recorded and such statement is filed, the firm
shall be deemed to be registered," shall be added;

(b) after sub-section (1) as so renumbered, the following sub-section shall be

added, namely:
"(2) The firm, which is registered, shall use the brackets and word "(Registered)
immediately after its name,".—Maharashtra Act 29 of 1984, S.7 (1.1.1985)

Section 59-A:

Andhra Pradesh.—In its application to the State of Andhra Pradesh, after section 59,
insert the following:

"59-A. Amendment of the Register of Firms.—(1) Notwithstanding anything in this chapter,

the Registrar of Firms, Andhra Pradesh, may, by order in writing amend the register by
deleting therefrom the entries relating to any firm, whose place of business has, by virtue of
the provisions contained in the State Reorganization Act, 1956 and the Andhra Pradesh and
Madras (Alteration of Boundaries) Act, 1959, ceased to be in the Andhra Pradesh; the
Registrar may likewise amend the register by adding thereto the entries relating to any firm
included in the register of another State but whose place of business has, by reason of the
said provisions, become included in the State of Andhra Pradesh:

Provided that the Registrar shall, before passing an order under this sub-section, give to the
firm concerned an opportunity of making its representation, if any.

(2) The Registrar shall cease to perform the functions of a Registrar under the Act in respect
of any firm the entries relating to which are deleted as aforesaid and shall perform the
functions of a Registrar under the Act in respect of any firm the entries relating to which are
added as aforesaid.

(3) Any person aggrieved by an order under sub-section (1) may appeal to such authority
and within such time as may be specified in this behalf by an order made by the
Government of the Andhra Pradesh and the Authority shall pass such order on the appeal as
it thinks fit.
 (4) An order of the Registrar under sub-section (1), or where an appeal has been preferred
against it under sub-section (3), the order of the appellate authority, shall be final,"—Andhra
Pradesh Act 7 of 1965, section 2 (10 March 1965).

Kerala.—In its application to the State of Kerala, after section 59, insert—

"59-A. Amendment of register.—(1) Notwithstanding anything contained in this Chapter, the

Registrar of Firms, appointed by the State of Kerala may, by order in writing, amend the
register by deleting therefrom the entries relating to any firm whose place of business has,
by reason of the re-organization of States, ceased to be situated in the State of Kerala.

The Registrar may likewise amend the register by adding thereto the entries relating to any
firm included in the register of the State of Madras but whose place of business has, by
reason of the said reorganisation of States, become part of the State of Kerala:

Provided that the Registrar shall, before passing an order, make such inquiry as he deems
necessary.

(2) After such amendment the Registrar shall cease to perform the functions of a Registrar
in respect of any firm the entries relating to which have been deleted as aforesaid and shall
perform all the functions of a Registrar in respect of all firms the entries relating to which
are added as aforesaid.

(3) Any person aggrieved by an order under sub-section (1) may appeal to such authority
and within such time as may be specified in this behalf by the State Government of Kerala
and such authority shall pass such order on the appeal as it thinks fit.

(4) An order of the Registrar under sub-section (1), or where an appeal has been preferred
against it under sub-section (3), the order of the appellate authority, shall be final.

(5) The provisions of this section shall cease to be in force from such date as the State
Government of Kerala may, by notification in the Gazette, appoint."—Kerala A.L.O,1957
(30.10.1957).

Madhya Pradesh.—In its application to the State of Madhya Pradesh, after section 59,
insert—

"59-A. (1) Notwithstanding anything contained in this Chapter, the Registrar of Firms,
appointed by the State of Madhya Pradesh may, by order in writing, amend the register by
deleting therefrom the entries relating to any firm whose place of business has, by reason of
the reorganization of States, ceased to be situated in the State of Madhya Pradesh.

The Registrar may likewise amend the register by adding thereto the entries relating to any
firm included in the register of the State of Madras but whose place of business has, by
reason of the said reorganisation of States, become part of the State of Madhya Pradesh:

Provided that the Registrar shall, before passing an order, make such inquiry as he deems
necessary.

(2) After such amendment the Registrar shall cease to perform the functions of a Registrar
in respect of any firm the entries relating to which have been deleted as aforesaid and shall
perform all the functions of a Registrar in respect of all firms the entries relating to which
are added as aforesaid.

(3) Any person aggrieved by an order under sub-section (1) may appeal to such authority
and within such time as may be specified in this behalf by the State Government of Madhya
Pradesh and such authority shall pass such order on the appeal as it thinks fit.

(4) An order of the Registrar under sub-section (1), or where an appeal has been preferred
against it under sub-section (3), the order of the appellate authority, shall be final.

(5) The provisions of this section shall cease to be in force from such date as the State
Government of Madhya Pradesh may, by notification in the Gazette, appoint."—Madhya
Pradesh Adaptation of Laws (State and Concurrent Subjects) (Third Amendment) Order,
1957 (with retrospective effect from 1.11.1956).

Maharashtra.—(i) In its application to the State of Maharashtra, after section 59, insert
—

"59-A. Deletion and addition of entries relating to certain firms, by reason of

reorganisation of States.—(1) Notwithstanding anything contained in this Chapter, the
Registrar of Firms, appointed for any area by the Government of Bombay may, by order in
writing, amend the Register of Firms maintained by him by deleting therefrom the entries
relating to any firm whose place of business has, by reason of the reorganization of States
 under the States Reorganisation Act, 1956, ceased to be situated in the State of Bombay.
The Registrar may likewise and without any charge or fee therefore amend the Register by
adding thereto the entries relating to any firm included in the Register of another State but
whose place of business has, by reason of such reorganisation, become part of the area
within his jurisdiction in the State of Bombay.

Provided that the Registrar shall, before passing any order under this sub-section, make
such inquiry as he deems necessary and give notice to the firm and the Registrar of the
State concerned.

(2) After such amendment the Registrar shall cease to perform the functions of a Registrar
in respect of any firm the entries relating to which have been deleted as aforesaid and shall
perform all the functions of a Registrar in respect of all firms the entries relating to which
are added as aforesaid.

(3) Any person aggrieved by an order under sub-section (1) may appeal to such authority
and within such time, as may be specified in this behalf by the Government of Bombay by
notification in the Official Gazette; and such authority shall pass such order on the appeal as
it thinks fit.

(4) An order of the Registrar under sub-section (1), or where an appeal has been preferred
against it under sub-section (3), the order of the appellate authority, shall be final.

(5) The provisions of this section shall cease to be in force from such date as the
Government of Bombay may, by notification in the Gazette, appoint."—Central Acts on State
and Concurrent Subjects (Bombay Adaptation) (Amendment) Order, 1957 (17.10.1957)

(ii) After section 59 the following section shall be inserted, namely:—

"59A-1. Late registration on payment of penalty.— If the statement in respect of any firm is
not sent or delivered to the Registrar within the time specified in sub-section (1A) of section
58, then the firm may be registered on payment, to the Registrar, of a penalty of one hundred
rupees per year of delay or a part thereof."—Mah. Act 29 of 1984, section 8(1-1-1985).

Mysore (Karnataka).—In its application to the State of Karnataka, in section 59-A, in

sub-section (1), for the words "by reason of the reorganisation of States," the words,
brackets, etc., "by reason of the addition of the Bellary district to the State of Mysore
under the Andhra State Act, 1953 (Central Act 30 of 1953), or of the reorganisation of
States under the States Reorganisation Act, 1956 (Central Act 37 of 1956) shall be
substituted – Mys. Act 19 of 1961, section 2 (14-9-1961).

Note.—This amendment relates to section 59-A as introduced by Madras Adaptation of

Laws (Central Acts) Order, 1957.

Tamil Nadu.—In its application to the State of Tamil Nadu, after section 59, insert -

"59-A. Special provisions for amending the register.—(1) Notwithstanding anything

contained in this Chapter, the Registrar of Firms, appointed by the State Government of
Madras may, by order in writing, amend the register by deleting therefrom the entries
relating to any firm the place of business of which has, by reason of the formation of the
State of Andhra or of the addition of the Bellary district to the State of Mysore under the
Andhra State Act, 1953 or of the reorganization of States under the States Reorganisation
Act, 1956, or of the alteration of boundaries under the Andhra Pradesh and Madras
(Alteration of Boundaries) Act, 1959, ceased to be located in the State of Madras.

The Registrar may likewise amend the register by adding thereto the entries relating to any
firm included in the register of the State of Madras but whose place of business has, by
reason of the said reorganization of States, become part of the State of Madras:

Provided that the Registrar shall, before passing an order, make such inquiry as he deems
necessary.

(2) After such amendment the Registrar shall cease to perform the functions of a Registrar
in respect of any firm the entries relating to which have been deleted as aforesaid and shall
perform all the functions of a Registrar in respect of all firms the entries relating to which
are added as aforesaid.

(3) Any person aggrieved by an order under sub-section (1) may appeal to such authority
and within such time as may be specified in this behalf by the State Government of Madras
and such authority shall pass such order on the appeal as it thinks fit.
 (4) An order of the Registrar under sub-section (1), or where an appeal has been preferred
against it under sub-section (3), the order of the appellate authority, shall be final.

(5) The provisions of this section shall cease to be in force from such date as the State
Government of Madras may, by notification in the Gazette, appoint." – Madras (Added
Territories) A.L.O., 1961 (with retrospective effect from 1.4.1960).

Section 59-B:

Gujarat.—In its application to the State of Gujarat, after section 59-A, insert the
following:—

"59B. Deletion of entries relating to certain firms by reason of reorganisation of Bombay

State.— (1) Notwithstanding anything contained in this Chapter, the Registrar of Firms,
appointed for any area by the Government of Gujarat may, by order in writing, amend the
Register of Firms maintained by him by deleting therefrom the entries relating to any firm
whose place of business has, by reason of the reorganization of the State of Bombay, by the
Bombay Reorganisation Act, 1960, ceased to be situated in the State of Gujarat.

Provided that the Registrar shall, before passing an order under this sub-section, make such
inquiry as he deems necessary and give notice to the firm and the Registrar of the State of
Maharashtra.

(2) After such amendment the Registrar shall cease to perform the functions of a Registrar
in respect of any firm the entries relating to which have been deleted as aforesaid.

(3) Any person aggrieved by an order under sub-section (1) may appeal to such authority
and within such time as may be specified in this behalf by the Government of Gujarat, by
notification in the Official Gazette; and such authority shall pass such order on the appeal as
it thinks fit.

(4) An order of the Registrar under sub-section (1), or where an appeal has been preferred
against it under sub-section (3), the order of the appellate authority, shall be final." – Gujarat
Adaptation of Laws (State and Concurrent Subjects) (Eighth Amendment) Order, 1961 (with
retrospective effect from 1.5.1960).

Maharashtra.—In its application to the State of Maharashtra, after section 59-A, insert
the following:—

"59-B.—Same as in Gujarat, except for the words underlined, for which read as follows:—

(i) In the marginal note, for the words 're-organisation of Bombay State', substitute the
words 'formation of State of Gujarat";

(ii) In sub-sections (1) and (3), for "Gujarat", read "Maharashtra" and for "Maharashtra"
in the proviso, read "Gujarat";

(iii) In sub-section (1), read "by reason of the formation of the State of Gujarat" for "by
reason of reorganisation of the State of Bombay"— Central Acts on State and
Concurrent Subjects (Maharashtra Adaptation) (Amendment) Order, 1961 (with
retrospective effect from 1.5.1960).

18 Chhotey Lal v Collector of Moradabad, (1922) APC 279 : 44 All 514; Girdhari Lal v Spedding
Dinga Singh & Co, AIR 1954 HP 52 .
19 Girdhari Lal v Spedding Dinga Singh & Co, AIR 1954 HP 52 .
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 60. Recording of alterations in firm name and principal place of business.-

(1) When an alteration is made in the firm name or in the location of the principal
place of business of a registered firm, a statement may be sent to the Registrar
accompanied by the prescribed fee, specifying the alteration, and signed and
verified in the manner required under section 58.

(2) When the Registrar is satisfied that the provisions of sub-section (1) have been
duly complied with, he shall amend the entry relating to the firm in the Register
of Firms in accordance with the statement, and shall file it along with the
statement relating to the firm filed under section 59.

STATE AMENDMENT

Maharashtra.—In section 60.—

(a) for sub-section (1), the following sub-section shall be substituted, namely:—

"(1) when an alteration is made in the firm name or in the nature of business of a
firm or in the location of the principal place of business of a registered firm, a
statement shall be sent to the Registrar, within a period of 90 days from the date of
making such alteration, accompanied by the prescribed fee, specifying the
alteration and signed and verified in the manner required under section 58."

(b) in the marginal note, for the words "firm name and" the words "firm name, nature
of business and" shall be substituted.—Mah. Act 29 of 1984, section 9 (1
January 1985).
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 61. Noting of closing and opening of branches.-

When a registered firm discontinues business at any place or begins to carry on

business at any place, such place not being its principal place of business, any partner
or agent of the firm may send intimation thereof to the Registrar, who shall make a note
of such intimation in the entry relating to the firm in the Register of Firms, and shall file
the intimation along with the statement relating to the firm filed under section 59.

STATE AMENDMENT

Maharashtra.—In section 61, for the words "may send intimation thereof to the
Registrar, who shall" the following shall be substituted, namely:—

shall send intimation thereof to the Registrar, within a period of 90 days from the date of
such discontinuance or, as the case may be, from the date on which the firm begins to carry
on business at such place. The Registrar shall then.—Mah. Act 29 of 1984, section 10 (1
January 1985).
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 62. Noting of changes in names and addresses of partners.-

When any partner in a registered firm alters his name or permanent address, an
intimation of the alteration may be sent by any partner or agent of the firm to the
Registrar, who shall deal with it in the manner provided in section 61.

STATE AMENDMENT

Maharashtra.—In its application to the State of Maharashtra, in section 62, for the
words "may be sent", the words "shall be sent, within a period of 90 days from the date
of making such alteration," shall be substituted.—Maharashtra Act 29 of 1984, section
11 (w.e.f. 1January 1985).
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 63. Recording of changes in and dissolution of a firm.-

(1) When a change occurs in the constitution of a registered firm any incoming,
continuing or outgoing partner, and when a registered firm is dissolved any
person who was a partner immediately before the dissolution, or the agent of
any such partner or person specially authorised in this behalf, may give notice to
the Registrar of such change or dissolution, specifying the date thereof; and the
Registrar shall make a record of the notice in the entry relating to the firm in the
Register of Firms, and shall file the notice along with the statement relating to
the firm filed under section 59.

(2) Recording of withdrawal of a minor.-When a minor who has been admitted to

the benefits of partnership in a firm attains majority and elects to become or not
to become a partner, and the firm is then a registered firm, he, or his agent
specially authorised in this behalf, may give notice to the Registrar that he has
or has not become a partner, and the Registrar shall deal with the notice in the
manner provided in sub-section (1).

STATE AMENDMENT

Maharashtra.—In section 63,—

(a) in sub-section (1).—

(i) for the word "any," wherever it occurs, the word "every" shall be
substituted.

(ii) For the words "may give notice to the Registrar of such change or
dissolution, specifying the date thereof;" the following shall be
substituted, namely:—

"shall, within a period of 90 days from the date of such change or

dissolution, give notice to the Registrar of such change or dissolution,
specifying the date thereof";

(b) after sub-section (1), the following sub-section shall be added, namely:

"(1A) Where a change occurs in the constitution of a registered firm, all persons,
who after such change are partners of the firm, shall jointly send an intimation of
such change duly signed by them, to the Registrar, within a period of 90 days from
the date of occurrence of such change and the Registrar shall deal with it in the
manner provided by section 61.";

(c) in sub-section (2), for the words "may give notice to the Registrar" the words
"shall, within a period of 90 days from the date of his election, give notice to the
Registrar" shall be substituted.—Mah. Act 29 of 1984, section 12 (1.1.1985).
[s 63.1] Alterations and registration.—

The provisions of sections 59, 60, 61, 62 and of this section indicate that by reason of
(i) the alteration in the name of the firm or in the name of its partner, or (ii) alteration of
the place of business, (iii) ceasing to carry on business at any place, or (iv)
commencing to do business at any other place, or (v) change in address of a partner, or
(iv) change in the constitution of the firm20 the original registration of the firm under
sections 58 and 59 is not affected. Such alterations if intimated properly require the
Registrar to amend the entry relating to the firm in the Register of Firms. A Registered
Firm consisting of A, B, C was dissolved by a resolution of partners with a view to have
a division of business of the firm conducted at two places. A and B took over the
business at one place and carried on business in the same name. C looked over the
business at another place. Copy of this resolution was sent to the Registrar of
Partnership under section 63 with the intimation that C had ceased to be a partner of
the firm. The Punjab High Court held that this was sufficient compliance with section
63 of the Indian Registration Act, 1908.21 Even if there is any mistake in making entries,
it may be corrected by the Registrar either suo motu [under section 64(1)] or upon
application of parties [under section 64(2)] or by an order of a court (under section 65).
The mistake or omission in the registration does not affect registration.22

The retirement of a partner may in a particular case occasion the dissolution of a

partnership, but as long as the partners suing were shown in the register as partners,
the firm, notwithstanding the death or retirement of one of the original partners,
remains a registered firm and can sue.23

There is no obligation to give notice of change immediately upon the change occurring.
No time limit is fixed in any of the sections 60–63 as to when notice of alterations or
changes should be given. 23

The word "constitution" used in section 63 cannot be read only as a constitution

regarding partners. It ought to be taken as including even the duration of partnership
which is required to be stated under section 58(f) of the Indian Partnership Act, 1932.24

In Sharad Vasant Kotak v Ramniklal Mohanlal Chawda,25 dealing with a situation before
section 69(2A) was held to be unconstitutional,26 the question was the effect of the
non-compliance with the requirement of a reconstituted firm for fresh registration. The
Court held that non-compliance of provisions in respect of giving information to
Registrar about changes would not lead to conclusion that firm ceased to exist. The
provisions of section 69(2A) were themselves not applicable in such case. In that case,
there was no dispute that the partnership, as entered into under a deed dated 28
November 1979, was duly registered and a certificate of registration was granted. It
was also an admitted fact that the plaintiff, first respondent herein, was one of the
founder partners under the deed dated 28 November 1979 and his name did find a
place in the register of firm as a partner and there was nothing to show that at any
point of time, his name has been removed from the register of firm. On the death of one
of the partners, his widow was inducted into the partnership and a deed was entered
into on 20 October 1986, repeating almost all the clauses in the partnership deed dated
28 November 1979 except for consequential changes necessitated by the induction of
new partner in the place of deceased partner.

The first Deed of Partnership was entered into on 29 November 1979 and that
partnership firm was registered on 15 December 1980. One of the partners died on 6
May 1986 and in his place, his widow was inducted. The second Deed of Partnership
was drawn on 20 October 1986. The issue was, if by reason of the second Deed of
Partnership, the existing firm could be said to have dissolved or ceased. Both the deeds
expressly had recitals that the death, insolvency or retirement of any partner shall not
dissolve the partnership firm. On the other hand, it expressly stated that the partner
was entitled to carry on the partnership business on the terms and conditions mutually
agreed upon by the said partners. Could it then be said that by reason of inducting the
widow of the deceased partner the existing registered firm ceased and totally a new
partnership firm came into existence? Clauses 4 and 5 made reference to
commencement of the partnership and accounting year. These were minimal changes
introduced in the second Deed of Partnership by reason of the introduction of a new
partner in place of Clauses 4 and 5 in the first Partnership Deed and in other respects,
namely, the name of the partnership firm, the address and location of the firm, the
business carried on and shares allotted among the partners and duration of the
partnership, were identical. Clauses 5 and 6 of the second Partnership Deed would give
an impression that the partners agreed to continue the existing firm. The profits or
losses for the period prior to and up to the death of deceased partner was dealt with
and provided. There was no indication that the old firm was dissolved. Even the
reliance placed on the recitals in the third Deed of Partnership drawn on 3 November
1992 could not alter the situation.

The next question was whether the registration given to the firm under the first
Partnership Deed ceased when a new partner was introduced into the firm. Considering
sections 58, 59 and 63, rules 3, 4, 6 and 17 and the forms "A", "E", "G" and "H", it would
seem that there was a definite distinction between the Certificate of Registration given
to the firm and any alterations to be entered in the Register of Firms. The changes in
the constitution of the firm will not affect the registration once made. In other words, it
is not required that every time a new partner is inducted, fresh registration has to be
applied and obtained. However, information about changes has to be given. Failure to
comply attracts penalties under section 69(2A) of the Indian Partnership Act, 1932.

For the purpose of section 69(2A), the partnership firm will mean the firm as found in
the certificate of registration and the partners as found in the register of firms
maintained as per rule in Form "G". The present suit being one for dissolution and
accounts by one of the partners, whose name admittedly found place in the Register of
Firms along with the names of all the appellants, the requirements of section 69(2A)
are satisfied. Section 4 of the Indian Partnership Act, 1932 is also complied with for
this limited purpose.

A third party cannot insist on a reconstitution of a firm, on the death of a partner which
impedes with the right of other partners for carrying on the business in terms of the
partnership deed. In Shree Niwas Ramgopal v The Director of Consumer Goods,27 a
partnership firm was a dealer in kerosene with licence from Indian Oil Corporation. One
of the partners, who was the father died and one son, who was not already a partner
claimed that his father had willed his entire interest in the partnership to be transferred
to him. The surviving partners however sought the renewal of licence but in the
meanwhile the supplies of kerosene were stopped relying on the policy guidelines of
the corporation that all the legal heirs of the deceased partner were to be added. The
High Court accepted the contention on behalf of the partnership firm that the right to
continue the affairs of the firm on the death of one of the partners was protected under
contract and under law and directed the corporation to renew the licence subject to the
result of probate proceedings initiated at the instance of the son who set up a will of
his deceased father.

20 Bharat Survodaya Mills Co v Mohatta Bros, AIR 1969 Guj 178 : (1969) GLR 457 .
21 Dr VS Bahal v SL Kapur & Co, AIR 1956 P&H 24 .
22 Sohanlal Pachisia v Bilasray Khemani, AIR 1954 Cal 179 ; Girdhari Lal v Spedding Dinga Singh
& Co, AIR 1954 HP 52 .
23 Pratapchand Ramchand & Co v Jehangirji Bomanji, AIR 1940 Bom 257 : (1940) Bom 715 : 42
Bom LR 497 : 190 IC 148; Tapendra v Jogendra, AIR 1942 Cal 76 : (1941) 2 Cal 289 : 199 IC 220.
24 Kuriachan Chacko v Registrar of Firms, AIR 2016 Ker 14 : 2015 (4) KHC 491 : 2015 (4) Ker LJ
125 .
25 Sharad Vasant Kotak v Ramniklal Mohanlal Chawda, AIR 1998 SC 877 : (1998) 2 SCC 171 :
[1997] Supp 6 SCR 543.
26 See the judgment in V Subramaniam v Rajesh Raghuvandra Rao, (2009) 2 SCC 630 .
27 Shree Niwas Ramgopal v The Director of Consumer Goods, 2013 (3) CHN 484 : 2012 (3) Cal
LJ 447 .
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 64. Rectification of mistakes.-

(1) The Registrar shall have power at all times to rectify any mistake in order to
bring the entry in the Register of Firms relating to any firm into conformity with
the documents relating to that firm filed under this chapter.

(2) On application made by all the parties who have signed any document relating
to a firm filed under this chapter, the Registrar may rectify any mistake in such
document or in the record or note thereof made in the Register of Firms.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 65. Amendment of Register by order of court.-

A Court deciding any matter relating to a registered firm may direct that the Registrar
shall make any amendment in the entry in the Register of Firms relating to such firm
which is consequential upon its decision; and the Registrar shall amend the entry
accordingly.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 66. Inspection of Register and filed documents.-

(1) The Register of Firms shall be open to inspection by any person on payment of
such fee as may be prescribed.

(2) All statements, notices and intimations filed under this chapter shall be open to
inspection, subject to such conditions and on payment of such fee as may be
prescribed.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 67. Grant of copies.-

The Registrar shall on application furnish to any person, on payment of such fee as
may be prescribed, a copy, certified under his hand, or any entry or portion thereof in
the Register of Firms.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 68. Rules of evidence.-

(1) Any statement, intimation or notice recorded or noted in the Register of Firms
shall, as against any person by whom or on whose behalf such statement,
intimation or notice was signed, be conclusive proof of any fact therein stated.

(2) A certified copy of an entry relating to a firm in the Register of firms may be
produced in proof of the fact of the registration of such firm, and of the contents
of any statement, intimation or notice recorded or noted therein.

[s. 68.1] Object of the section.—

The object of this section is to compel members of a firm to have all subsequent
changes in the constitution of a Registered firm notified to or "registered" with the
Registrar of Firms. This object is carried out by providing that any statement, intimation
or notice recorded in the Register shall be conclusive proof of the facts stated therein,
as against any person by whom or on whose behalf the same was signed; in other
words, he will not be able to set up a state of affairs different from that which he has
caused to be slated in the Register.28 But a third party whose name is not in Register
can prove that a particular person (whose name is not recorded in the Register of
Firms) is a partner nonetheless.29 The importance, or rather the compelling force of the
section may be shown by the following example:

Illustration

A, B and C are partners in a registered firm. A retires. It will be as necessary for A as for
B and C to give public notice of his retirement—which, under section 72 of the Act,
includes notice to the Registrar. If this is not done, A will be as much liable for the acts
of the continuing partners or of the firm as if A had continued to be a member of the
firm. And on the other hand, the firm will be liable for any act purporting to be done by A
on behalf of the firm after retirement—see section 32(3).

[Note:—The same considerations will apply when A is expelled—see section 33; but not
if A dies or becomes insolvent—see sections 34 and 35.]

[s. 68.2] Sub-section (2).—

Oral evidence of the registration of a firm is not admissible.30

28 Snow White Food Products Ltd v Sohan Lal Bagla, AIR 1964 Cal 209 .
29 Snow White Food Products Ltd v Sohan Lal Bagla, AIR 1964 Cal 209 , 212, para 8.
30 Chhotelal v Mohammad Hussain, (1955) A Vind Prad 44.
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 69. Effect of non-registration.-

(1) No suit to enforce a right arising from a contract or conferred by this Act shall
be instituted in any Court by or on behalf of any person suing as a partner in a
firm against the firm or any person alleged to be or to have been a partner in the
firm unless the firm is registered and the person suing is or has been shown in
the Register of Firms as a partner in the firm.

(2) No suit to enforce a right arising from a contract shall be instituted in any Court
by or on behalf of a firm against any third party unless the firm is registered and
the persons suing are or have been shown in the Register of Firms as partners in
the firm.

(3) The provisions of sub-sections (1) and (2) shall apply also to a claim to set-off
or other proceedings to enforce a right arising from a contract, but shall not
affect—

(a) the enforcement of any right to sue for the dissolution of a firm or for
accounts of a dissolved firm or any right or power to realise the property
of a dissolved firm, or

(b) the powers of an official assignee, receiver or Court under the

Presidency-towns Insolvency Act, 1909, or the Provincial Insolvency Act,
1920, to realise the property of an insolvent partner.

(4) This section shall not apply—

(a) to firms or to partners in firms which have no place of business in 31[the

territories to which this Act extends], or whose places of business in
32[the said territories], are situated in areas to which, by notification under
33[section 56], this chapter does not apply, or

(b) to any suit or claim of set-off not exceeding one hundred rupees in value
which, in the Presidency-towns, is not of a kind specified in section 19 of
the Presidency Small Causes Courts Act, 1882, or, outside the
Presidency-towns, is not of a kind specified in the Second Schedule to
the Provincial Small Cause Courts Act, 1887, or to any proceeding in
execution or other proceeding incidental to or arising from any such suit
or claim.

[s 69.1] STATE AMENDMENT

Maharashtra.—(i) In section 69.—

(a) to sub-section (1), the following proviso shall be added, namely:—

 "Provided that the requirement of registration of firm under this sub-section shall
not apply to the suits or proceedings instituted by the heirs or legal representatives
of the deceased partner of a firm for accounts of the firm or to realize the property
of the firm."

(b) after sub-section (2), the following sub-section shall be inserted, namely:—

"(2A) No suit to enforce any right for the dissolution of a firm or for accounts of a
dissolved firm or any right or power to realize the property of a dissolved firm shall
be instituted in any Court by or on behalf of any person suing as a partner in a firm
against the firm or any person alleged to be or to have been a partner in the firm
unless the firm is registered and the persons suing is or has been shown in the
Register of Firms as a partner in the firm:

Provided that the requirement of registration of firm under this sub-section shall not
apply to the suits or proceedings instituted by the heirs or legal representatives of
the deceased partner of a firm for accounts of a dissolved firm or to realize the
property of a dissolved firm.";

(c) in sub-section (3).—

(i) for the words, brackets and figures "sub-sections (1) and (2)" the words,
brackets, figures and letter "sub-sections (1), (2) and (2A)" shall be
substituted;

(ii) for clause (a), the following clause shall be substituted, namely :-

"(a) the firms constituted for a duration up to six months or with a capital
up to Rs 2,000; or" [Vide Maharashtra Act 29 of 1984, S.13 (w.e.f. 1 January
1985)].

(ii) After section 69, insert the following section, namely:—

69A. Penalty for contravention of section 60, 61, 62 or 63.—If any statement,
intimation or notice under section 60, 61, 62 or 63 in respect of any registered firm
is not sent or given to the Registrar, within the period specified in that section, the
Registrar may, after giving notice to the partners of the firm and after giving them a
reasonable opportunity of being heard, refuse to make the suitable amendments in
the records relating to the firm, until the partners of the firm pay such penalty, not
exceeding ten rupees per day, as the Registrar may determine in respect of the
period between the date of expiry of the period specified in sections 60, 61, 62 or as
the case may be 63 and the date of making the amendments in the entries relating
to the firm. [Vide Maharashtra Act 29 of 1984, section 14 (w.e.f. 1 January 1985)].

[s 69.2] Application of the section.—

This section did not come into operation until 1 October 1933—see section 1(3).

[s 69.3] Object of the section.—

By providing certain disabilities, this section renders the registration of a firm

compulsory. The disabilities provided are as under

(a) A firm may not enforce in a court of law its dues from third parties; nor will the
partners be enabled to do so by filing a suit in their own names instead of in the
name of the firm. Thus it is necessary that not only the firm should be registered
but the person suing must be shown as a partner in the firm.34 So where one of
the partners of a firm who had been a partner for several years had not been, at
the time of institution of the suit, shown in the Register of Firms as a partner, it
 was held that suit must be dismissed.35 So the two requirements of section
69(2) of the Indian Partnership Act, 1932 must be fulfilled before a suit can be
filed to enforce a contractual right by a firm or on behalf of a firm.

They are that the firm must be registered and all persons suing are or have been
shown in the Register of Firms as Partners of the firm when the cause of action
arose.36

(b) A partner will not be entitled to recover through a court his dues from the firm or
from his fellow partners, though he may sue for dissolution, or pay for
accounts37 and realisation of his shares where the firm has been actually
dissolved. Suit by A, partner of unregistered dissolved firm, against B, the other
partner, to recover (1) sum which was overdrawn by B from the partnership
asset (2) sum which was B's share of loss incurred by partnership is a suit to
recover property of a dissolved firm and is valid even if a firm is not registered.38
Similarly suit filed by persons who were the only members of a firm at the date
of dissolution to recover a debt due to a firm which is dissolved is a suit to
enforce a right to realise the property of a dissolved firm and is maintainable
even if firm was not registered.39 In the same effect the Calcutta High Court40
has observed that if a firm is dissolved by retirement of some partners, the
dissolved firm can maintain a suit without being properly registered for realising
the moneys due to the dissolved firm by virtue of section 69(3)(a) of the Indian
Partnership Act, 1932. It is not material in such a case that a firm is
unregistered.

(c) Neither the firm nor the partners will, when sued, be entitled to counterclaim or
set-off subject to clause (b) of sub-section 4.

It should be noted that this section does not affect the right of a third party to proceed
against the firm or its partners, even though unregistered, nor does it affect the right of
an official assignee to realise the property of an insolvent partner.

It is also important to note that the Act does not say that any transaction of an
unregistered firm will be invalid. There would not be a bar to file a fresh suit on the
same cause of action after a firm gets registration and for doing that no permission is
needed.41

A suit by two partners of an unregistered firm against another partner that the sale of
the property claimed to be the partnership asset was invalid shall be barred by this
section.42 The contention that the property was the joint property of the plaintiffs and
the defendant in their individual capacity and the sale by one of them without the
concurrence of the other co-owners was rejected.

Sub-section (1) refers to two kinds of rights, i.e., (a) a right arising from a contract and
(b) a right conferred by this Act. A right arising from a contract may be for specific
performance or breach of contract or injunction and/or damages for breach of
contract. So where a building contract was executed by an unregistered firm and
plaintiff was seeking to enforce right arising under that contract, it was held that it
could not be done as such a suit was barred under section 69(2)(3) of the Indian
Partnership Act, 1932.43 But a suit for eviction can be filed by an unregistered firm
whose partners needed its disputed premises for purpose of another firm of which also
they were the partners. According to the Court, the right to sue for eviction is a
statutory right and bar under section 69(2) of the Indian Partnership Act, 1932 does not
apply to eviction suit.44 For illustration of a right conferred by the Act see sections 13,
16 and 28.
Where a partner has entered into a personal contract with a third party and is entitled to
sue and does sue on that contract in his own name, this section has no application
although the benefit of that contract accrues to the partnership.45 A covenant in
restraint of trade to come into operation after dissolution can be enforced after the
dissolution of the firm, although the firm was not registered.46

Though the compliance with the requirement of registration of a firm for filing of a suit
is mandatory,47 there are different views of the high courts on the question of whether
registration of a firm is a condition precedent to the filing of a suit or whether this
defect can be remedied by registration of a firm effected subsequent to the filing of the
suit. The majority of the high courts have held the requirement of the registration of
partnership as a condition precedent to the filing of a suit and subsequent registration
cannot cure the defect which existed at the time of the institution of the suit.48

So the Madras High Court has taken the view that a suit is instituted when a plaint is
filed in a court of competent jurisdiction. The registration of a firm is a condition
precedent to the right to institute a suit and court has no jurisdiction to proceed when a
condition precedent has not been fulfilled. Section 69 of the Indian Partnership Act,
1932 is considered to be similar to section 80 of the Civil Procedure Code, 1908 where
also there is a statutory and unqualified obligation upon the Court.

The other view shared by very few high courts49 is that a suit by an unregistered firm
could be validated by the subsequent registration of a firm and plaint already filed can
be treated as valid not from the date when the plaint is filed but is valid from the date of
registration of a firm. So the suit is not to be dismissed but ought to be deemed to have
been instituted on the date when firm was registered. So if registration has been done
during the pendency of the suit, it may be legally proceeded from that subsequent date
unless there is a bar of limitation at the point of time. In other words if a plaint is within
the Limitation Act, 1963 on the date when firm is registered—after the filing of a suit—it
can be proceeded with.

Another question is whether the failure to raise an issue in the trial court regarding
registration of a firm prevents the defendant to raise it in appeal court for the first time.
According to the Rajasthan High Court, it cannot be invoked for the first time in second
appeal as this question must be determined as a preliminary issue.50 According to
Nagpur High Court,51 where a suit has been disposed of before registration was carried
out, the proceedings cannot be validated and appellate court cannot look into the
merits and pass a decree even if registration is effected during appeal. However, the
Madras High Court52 has held that the point as to non-registration of a firm being one
of the law can be raised for the first time in appeal if all the facts necessary for its
determination are on record.

If a point regarding non-registration of a firm is not taken up by the defendant, the court
is not bound to dismiss suo motu a suit on the evidence of non-registration of a firm as
there is no such provision in the Indian Partnership Act, 1932 as there is in the
Limitation Act, 1963 under which a court is bound to dismiss a suit if it finds the suit
time barred irrespective of the fact whether a plea of this kind has been raised by the
defendant.53

[s 69.4] Bar to file winding up proceedings by an unregistered partnership

against a defaulting debtor company.—

In order to maintain winding up petition it has to be filed by any creditor or creditors

including contingent or prospective creditors or creditors. A non-registered partnership
firm is a non-entity in the eye of law and it cannot be good petitioner creditor.54

[s 69.5] Even oral agreement by a third party to an individual partner cannot be

enforced.—

In Sri Sadaram Visweswara Rao v Malla Seetha Ratnam,55 the contention of the plaintiff
was that there was an oral agreement between the partners subsequent to the
execution of the partnership deed creating a liability for one partner against the other
and basing on the same, he filed the suit against the other partner. The Court said that
even if there was an oral agreement that came into existence subsequent to the
original partnership between the partners, as contended by the petitioner, the claim of
the plaintiff would become a right arising out of original partnership deed, which was
unregistered. Therefore, mere existence of subsequent oral agreement would not
enable the plaintiff to get over the mandatory requirement of section 69 of the Indian
Partnership Act, 1932.

[s 69.6] Burden of proof that the person suing is or has been shown in the
Register of Firms was not a partner in the firm lies on the person who denies it.
—

Section 69(2) provides that no suit to enforce a right arising from a contract shall be
instituted in any court by or on behalf of a firm against any third party unless the firm is
registered and the persons suing are or have been shown in the Register of Firms as
partners in the firm. In Kai-Tech Constructions Pvt Ltd v Durga Tiles,56 the respondent
firm produced a copy of Form No VI which was filed by the firm with the Registrar after
its reconstitution with addition of the new partner. Affidavit in evidence also produced
which is supported by the said certificate to further prove that new partner was the
partner of the firm not only on the date when the complaint was filed but as well as
when he filed his affidavit in evidence on behalf of the said firm. The court held that the
onus to rebut that new partner was not the partner was upon the accused which the
accused had failed to discharge. The conviction of accused by lower court was upheld
in the revision petition.

[s 69.7] Inapplicability of bar under the section to arbitral agreements.—

A clause for referral to arbitration in case of disputes between partners as well as the
retirement deed shall be enforced without being fettered by this section.57 In Firm
Ashok Traders v Gurumukh Das Saluja,58 the Supreme Court clarified that the bar
enacted by section 69 of the Indian Partnership Act, 1932 does not affect the
maintainability of an application under section 9 of Arbitration and Conciliation Act,
1996. The Act is a long leap in the direction of alternate dispute resolution systems. It
is based on the United Nations Commission on International Trade Law Model. The
decided cases under the preceding Act of 194059 have to be applied with caution for
determining the issues arising for decision under the new Act. An application under
section 9 under the scheme of 1996 Act is not a suit. Undoubtedly, such application
results in initiation of civil proceedings but can it be said that a party filing an
application under section 9 of the Act is enforcing a right arising from a contract?
"Party" is defined in Clause (h) of sub-section (1) of section 2 of the Arbitration and
Conciliation Act, 1996 to mean a party to an arbitration agreement. So, the right
conferred by section 9 is on a party to an arbitration agreement. The time or the stage
for invoking the jurisdiction of court under section 9 can be (i) before, or (ii) during
arbitral proceedings, or (iii) at any time after the making of the arbitral award but before
it is enforced in accordance with section 36. In the same way, a legal representative of
a deceased partner in an unregistered partnership is not barred from applying under
section 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator
for dissolution and for rendition of accounts by virtue of provisions of section 46 and
48 of the Indian Partnership Act, 1932 read with section 40 of the Arbitration and
Conciliation Act, 1996.60 The Supreme Court came by the same reasoning to defeat a
plea that an unregistered partnership cannot make a counter claim in arbitral
proceedings.61

[s 69.8] Inapplicability of suit for damages by a partner against another for

misconduct.—

In Chandrayya Mutwayya Irabatti v Sidram Ganpat Ingale,62 the suit had been filed by the
plaintiff for recovery of damages for a misconduct committed by another partner by his
act of forcible breaking the lock of the shop of the partnership firm and taking away
certain articles lying therein. One other wrongful act attributed to him was the
surrendering of a godown and collecting money from the owner. The court relied on its
own judgment rendered earlier in the case of Navinchandra v Moolchand.63 In that case
there were two partners of an unregistered partnership firm. The said firm had entered
into a contract with the Government. One of the partners by his misconduct caused the
government to cancel the said contract and to reconstruct the same work in his own
name. It was held by the Division Bench that the contract secured by this partner in his
own name must be held to be for the benefit of the partnership and if the contract was
given to B for a lesser amount, it was this erring partner who brought about the
situation and therefore, would be liable for the same on account of his fraudulent
conduct as such. For deciding this case, the Division Bench in para 19 observed as
under:

Even a suit by one partner against another for damages for misconduct in the ultimate
analysis, must fall within the exceptions. When a partner claims damages on the ground of
the misconduct of his partner, what he really means is that the partner must make good the
loss sustained by the partnership by his misconduct and the amount so brought into the
partnership should be divided between the partners. The amount brought into the
partnership is, of course, the realisation of the properties of the partnership. One must
notice in this connection that the Partnership Act imposes no disability on the partner of an
unregistered firm entering into contracts either with third parties or amongst themselves.
The prohibition is only in respect of the partners of the firm being able to file suits during the
continuance of the partnership. Suits, however, of the nature referred to in the exception
could be filed.

[s 69.9] No bar to institute writ proceedings.—

In Ashutosh Chakraborty v UOI,64 the High Court of Calcutta held that section 69 of the
Act would not bar the partners of an unregistered firm to seek remedy by way of a writ
petition for enforcement of their fundamental rights under the contract. However, a
disputed question of fact, such as the affixture of signature in Form V by one party and
the assertion of execution by other partners will not be decided in a writ petition.65

[s 69.10] Inapplicability of the section to enforcement of a debt contracted

with a private individual who later joins the partnership.—
If the right sought to be enforced does not arise from a contract to which the
unregistered firm is a party, or is not entered into in connection with the business of the
unregistered firm with a third party, the bar of section 69(2) will not apply. In
Purushottam v Shivraj Fine Art Litho Works,66 the Plaintiff No 1 carried on business as
the sole proprietor of the concern and supplied goods to the defendants' registered
firm. In 1974, suit was filed for dissolution of the defendant partnership firm and for
rendering of accounts. During pendency of the suit a receiver was appointed initially to
take possession of the properties of the firm and to run the business of firm. During
pendency, Plaintiff No 1 had business dealings with the defendant firm. Amount due
and payable to the Plaintiff No 1 were fully paid up before the date of appointment of
receiver. Even successive receivers purchased goods from Plaintiff No 1. Later, from 1
January 1980 the proprietary firm of Plaintiff No 1 was taken over by a partnership of
which Plaintiff No 1 was a partner. The said partnership firm took over all the assets
and liabilities of unregistered firm. Though the said partnership firm came into
existence on 1 January 1980, application for registration of the firm under the Act was
made on 14 January 1980. While the said application was pending, the suit was filed.
Later, Plaintiff No 2-firm was granted registration under the Act. Dealing with the right
of the plaintiffs to enforce the debt, the Supreme Court said that having regard to the
purpose section 69(2) seeks to achieve and the interest sought to be protected, the bar
must apply to a suit for enforcement of right arising from a contract entered into by the
unregistered firm with a third party in the course of business dealings with such third
party. If the right sought to be enforced does not arise from a contract to which the
unregistered firm is a party, or is not entered into in connection with the business of the
unregistered firm with a third party, the bar of section 69(2) will not apply. The court
reasoned that though the partnership firm, which was unregistered, became entitled to
enforce the contractual obligation of the defendant firm which it owed to Plaintiff No 1,
contract was not one entered into by the unregistered firm with a third party, nor was it
one entered into by the unregistered firm in the course of its business dealings with the
defendants and hence the bar did not apply.

[s 69.11] No bar for an unregistered partnership to maintain a petition for

eviction under Rent Control Act.—

The Andhra Pradesh High Court said in AS Mehta and Co, rep by its Partners v
Yogendranath Sachdev,67 that a petition for eviction is not on a contract but through the
provisions of a special enactment on property and hence the bar of this section cannot
operate. The reasoning could have been that the status of a landlord to maintain the
petition, if it avails to a body of persons, than such identification obtaining through the
unregistered partnership, is irrelevant.

[s 69.12] Maharashtra amendment to section 69 barring the remedy of

dissolution of unregistered partnership is ultra vires the Constitution.—

The constitutional validity of the amendment to section by introducing sub-section 2A

was considered by the Supreme Court in V Subramaniam v Rajesh Raghuvandra Rao.68
The English law insofar as it makes registration compulsory for a firm and imposes a
penalty for non-registration was not followed when the Partnership Act was made in
India in 1932 as it was considered that this step would be too drastic and would
introduce several difficulties. Hence registration was made optional at the discretion of
the partners, but following the English precedent, any firm which was not registered by
virtue of sub-sections (1) and (2) of section 69 disabled a partner or the firm (as the
case may be) from enforcing certain claims against the firm or third parties (as the
case may be) in a civil court. An exception to this disability with regard to an
unregistered firm was made in sub-section (3)(a) to section 69, and this clause enabled
the partners in an unregistered firm to sue for the dissolution of the firm or for
accounts or for realising the property of the dissolved firm. This exception in clause (a)
of section 69(3) was made on the principle that while registration of a firm is designed
primarily to protect third parties, the absence of registration does not mean that the
partners of an unregistered firm lose all rights in the said firm or its property and hence
cannot sue for accounts or for its dissolution or for realising their property in the firm.

The Maharashtra Amendment Act of 1984 introducing sub-section 2A with effect from
1 January 1985 laid down a partner in an unregistered partnership firm in the State of
Maharashtra cannot file a suit for dissolution or for accounts of a dissolved firm or
realise properties of a dissolved firm, unless the duration of the firm was only six
months or its capital is up to Rs 2000. Ruling on the effect of this provision, the
Supreme Court said:

Sub-section (2-A) virtually deprives a partner of a firm from his share in the property of the
firm without any compensation. Also, it prohibits him from seeking dissolution of the firm
although he may want it dissolved. … The primary object of registration of a firm is
protection of third parties who were subjected to hardship and difficulties in the matter of
proving as to who were the partners. Under the earlier law, a third party obtaining a decree
was often put to expenses and delay in proving that a particular person was a partner of
that firm. The registration of a firm provides protection to the third parties against false
denials of partnership and the evasion of liability. Once a firm is registered under the Act the
statements recorded in the register regarding the constitution of the firm are conclusive
proof of the fact contained therein as against the partner. A partner whose name appears
on the register cannot deny that he is a partner except under the circumstances provided.
Even then registration of a partnership firm is not made compulsory under the Act. A
partnership firm can come into existence and function without being registered.

Referring to the great hardship that the amendment caused, the Court observed:

However, the Maharashtra Amendment effects such stringent disabilities on a firm as in our
opinion are crippling in nature. It lays down that an unregistered firm cannot enforce its
claims against third parties. Similarly, a partner who is not registered is unable to enforce
his claims against third parties or against his fellow partners. An exception to this disability
was a suit for dissolution of a firm or a suit for accounts of a dissolved firm or a suit for
recovery of property of a dissolved firm. Thus a partnership firm can come into existence,
function as long as there is no problem, and disappear from existence without being
registered. This is changed by the 1984 Amendment extending the bar of the proceedings to
a suit for dissolution or recovery of property as well. … The effect of the 1984 Amendment is
that a partnership firm is allowed to come into existence and function without registration
but it cannot go out of existence (with certain exceptions). This can result into a situation
where in case of disputes amongst the partners the relationship of partnership cannot be
put to an end by approaching a court of law. A dishonest partner, if in control of the
business, or if simply stronger, can successfully deprive the other partner of his dues from
the partnership. It could result in extreme hardship and injustice. Might would be right. An
aggrieved partner is left without any remedy whatsoever.

The Court therefore held that the restrictions placed by sub-section (2A) of section 69
introduced by the Maharashtra Amendment Act were arbitrary, unreasonable and of
excessive nature and went beyond what is in the public interest.

[s 69.13] Sub-section 3.—

The condition precedent for the operation of ban under sub-section (3) is that the
launching of a suit in a court of law should be present and it should be by an
unregistered firm or by a person claiming to be partner of an unregistered firm either to
a claim for set-off in the said suit or any other proceedings intrinsically connected with
the said suit.69

[s 69.14] Sub-section 4(b).—

This exception was inserted in the interest of firms doing business in a small way.
Explaining that the expression, "other proceedings" cannot include arbitral proceedings,
the Supreme Court said:

The ban imposed under sub-sections (1), (2) and (3) will have no application to any of those
proceedings set out in clauses (a) and (b) of the said sub-section (4). A specific reference to
clause (b) of sub-section (4) disclose that in the last part of the said sub-clause it is
specifically provided that other proceedings incidental to or arising from any suit or claim of
set-off not exceeding Rs 100 in value under those specific statute referred to in the said
sub-clause can also be launched without any ban being operated as provided under sub-
sections (1), (2) and (3). The said part of clause (b) of sub-section (4) thus gives a vivid
picture as to the position that the "other proceeding" specified in the said sub-section can
only relate to a pending suit in a court and not to any other different proceeding which can
be categorised as "other proceedings".70

[s 69.15] Unregistered partnership as a defendant with no counter-claim. –

The section makes reference to only enforcement of right through suit and makes
reference to a right of defence in a suit against an unregistered firm. There is clearly no
bar. In Leela Shashikant Purandare v Arvind Vishnu Govande,71 the suit for recovery of
possession on the ground that the defendant was a licensee but had started putting
the property to unauthorised use was resisted by the defendant contending that her
husband was a partner with the plaintiff initially and after his death, by the defendant
along with the plaintiff. The right of defence by an unregistered partnership was taken
by the defendant but the Supreme Court rejected the contention as not necessary to be
answered since the courts below did not accept the contention of the defendant as a
partner in the first place and the question of fact would not be reopened before the
Supreme Court.

31 Subs. by Act 3 of 1951, section 3 and Sch., for "Part A States and Part C States".
32 Subs. by Act 3 of 1951, section 3 and Sch., for "such states".
33 Subs. by Act 24 of 1934, section 2 and Sch. I, for "Section 55".
34 Bank of Koothattukulam v Itten Thomas, AIR 1955 Trav Co 155; Ram Kumar Shew Chandrai v
Dominion of India, AIR 1977 Cal 37 : 80 Cal WN 633 : (1976) 2 Cal 366 .
35 Shreeram Finance Corp v Yasin Khan, AIR 1989 SC 1769 : [1989] 3 SCR 484 : (1989) 3 SCC
476 : 1989 (3) SC 146 ; Chandu Financiers v G Ramakrishna Naidu, 2013 (4) Andh LD 148 : 2013
(4) All LT 504.
36 VJ Masarwala v P Sheth & Co, (1981) 22 Guj LR 689.
37 Abdul Razaak v Mashiruddin Ahmed, AIR 1959 Cal 660 : 63 Cal WN 766 : ILR (1960) 2 Cal 111
.
38 Sheo Dutt v Pushi Ram, AIR 1947 All 229 .
39 Appaya Nijlinagappa v Subrao Babaji, AIR 1938 Bom 108 : 39 Bom LR 1214.
40 Sohanlal Pachisia & Co v Bilasray Khemani, AIR 1954 Cal 179 .
41 Buhari Trading Co v Star Metal Co, AIR 1983 Mad 150 : (1983) 1 Mad LJ 10 : (1983) 96 Mad
LW 20 .
42 Farooq v Sandhya Anthraper Kurishingal, (2017) SCC OnLine 732 : C.A.5587 of 2017 dated
24.04.2017.
43 Chhote Lal v UP State Electricity Board, AIR 1990 All 27 : 1990 (16) All LR 39 : 1989 All WC
1157.
44 Padam Singh Jain v Chandra Bros, AIR 1990 Pat 95 : (1990) 1 Pat LJR 797 .
45 Goverdhandoss Takersey v Abdul Rahiman, AIR 1942 Mad 634 : (1942) ILR Mad 775 : (1942)
2 Mad LJ 636.
46 Krishna Rao v Shankar, AIR 1954 Bom 532 : 56 Bom LR 973.
47 Loon Karan Sethia v Ivan E John, AIR 1977 SC 336 : (1977) 1 SCC 379 : [1977] 1 SCR 853 .
48 KKA Ponnuchami Gounder v Muthusami Gounder, AIR 1942 Mad 252 : (1941) 2 Mad LJ 968;
Dwijendra Nath Sing v Govinda Chandra, AIR 1953 Cal 497 : (1953) ILR 2 Cal 154 : 57 Cal WN 225;
Firm Laduram Sagarmal v Jamuna Prasad, AIR 1939 Pat 239 : (1938) ILR 18 Pat 114; Puran Mal
Ganga Ram v Central Bank of India Ltd, AIR 1953 P&H 235 ; Dr VS Bahal v SL Kapur & Co, AIR
1956 P&H 24 ; UOI v Durga Dutt, AIR 1961 Assam 2 ; Govindmal Gianchand v Kunj Biharilal, AIR
1954 Bom 364 : 56 Bom LR 348.
49 Jakiuddin Badruddin v Vithoba Jagannath, AIR 1939 Nag 301 ; Atmuri Mahalakshmi v
Jagadeesh Traders, AIR 1990 AP 288 : 1990 (1) AP LJ 354 follows T Vardarajulu Naidu and
Kuppuswami Naidu & Co v R Rajamanika Mudaiiar, AIR 1937 Mad 767 : (1937) 2 Mad LJ 273
which was expressly overruled by KKA Ponnuchami Gounder v Muthusami Gounder, AIR 1942
Mad 252 : (1941) 2 Mad LJ 968.
50 Kalyan Sahai v Firm Lachhminarain Shambhulal, AIR 1951 Raj 11 .
51 Snow White Food Products Ltd v Sohan Lal Bagla, AIR 1964 Cal 209 .
52 Goverdhandoss Takersey v Abdul Rahiman, AIR 1942 Mad 634 : (1942) ILR Mad 775 : (1942)
2 Mad LJ 636.
53 Goverdhandoss v Abdul Rahiman, AIR 1929 Mad 634 , cited in Sri Balaji Traders rep by its
Managing Partner v United India Insurance Co Ltd, 2004 SCC OnLine Mad 826 : (2005) 1 CTC 267
: (2005) 1 LW 595 : (2005) 2 Mad LJ 26 : (2005) 4 ICC 296 (Mad) (DB).
54 Deb Paints Pvt Ltd v Universal Lime Industries, (2002) 1 Cal LT 94 : (2002) 110 Comp Cas 429
(Cal).
55 Sri Sadaram Visweswara Rao v Malla Seetha Ratnam, 2010 (6) Andh LT 198 .
56 Kai-Tech Constructions Pvt Ltd v Durga Tiles, Application No 62 of 2006, dated 16.03.2007,
(Bombay HC) : LNIND 2007 GOA 57 .
57 Ananthesh Bhakta v Nayana S Bhakta, (2017) 5 SCC 185 .
58 Firm Ashok Traders v Gurumukh Das Saluja, AIR 2004 SC 1433 : (2004) 3 SCC 155 : [2004] 50
SCL 224 (SC) : [2004] 1 SCR 404 : 2004 (1) Arb LR 141 (SC) : 2004 2 All WC (Supp) 949 SC :
(2004) 2 Comp LJ 419 (SC) : 2004 (2) CTC 208 : 2005 (2) Jab LJ 269 (SC) : JT 2004 (2) SC 352 :
2004 (3) Mh LJ 592 : 2004 MPLJ 266 (SC) : (2004) 137 PLR 526 : 2004 (1) scale 297; To the
same view, see also to an action by petition under section 8 of the Act in Prabhu Shankar Jaiswal
v Sheo Narain Jaiswal, 1996 VIII AD (SC) 296 : 1996 (2) Arb LR 677 (SC) : JT 1996 (10) SC 11 :
1996 (7) scale 878 : (1996) 11 SCC 225 : [1996] Supp 8 SCR 44 : 1996 (2) UJ 828 (SC); The
same view was taken to a petition under section 11 of the Indian Partnership Act, 1932 in Smt
Prem Lata Kapoor v Shri YN Kapoor, 2001 VAD (Delhi) 969 : (2001) 92 DLT 713 : 2001 (60) DRJ
176 : 2002 (1) RAJ 531 ; Also see, Vanita Gambhir v District Judge, 2005 (1) Arb LR 166 (Delhi);
Raj Kumar Sharma v Prasanta Kumar Chandra, 2007 (4) Arb LR 37 (Cal).
59 The provisions of section 69 were interpreted in a judgment of four learned judges of the
Supreme Court in Jagdish Chander Gupta v Kajaria Traders (India) Ltd, AIR 1964 SC 1882 : [1964]
8 SCR 50 : (1965) Mh LJ 45, a case decided under the 1940 Act, the partnership was entered
into in order to carry on the business of export. An Arbitration Agreement was contained in the
deed of partnership. It was alleged that one of the partners failed to carry out his part of the
partnership. The Arbitration Agreement was invoked and an application was filed under section
8(2) of the Indian Arbitration Act, 1940 for the appointment of an Arbitrator. One of the defences
to the application was that since the partnership was not registered, section 69(3) of the Indian
Partnership Act, 1932 was a bar to a petition seeking an appointment of an arbitrator. In this
Court, the two learned judges who constituted the Division Bench differed in the application of
section 69(3) to an application for the appointment of an arbitrator. On a reference to a third
judge, it was held that the application was competent. Hon'ble M Hidyatullah, CJ, as the learned
Chief Justice then was, while delivering the judgment of the Supreme Court held that the right to
proceed to arbitration was founded on an agreement between the parties, the agreement being
the partnership document. The Court was of the view that the application in its true sense
sought to enforce rights arising from a contract and by virtue of the provisions of sub-section
(3) of section 69, an application for the appointment of an arbitrator would stand barred.
Referring to the Supreme Court's judgment, the Bombay High Court in Ezra Victor Aboody v H
Dhanrajgir Estate Pvt Ltd, Arbitration Application No 4 of 2007, dated 19 November 2010
(Bombay HC) : LNIND 2010 BOM 888 applied the exception carved out in section 69(3) and held
that the bar will not affect the enforcement of a right to sue for dissolution of a firm or for
accounts of a dissolved firm or for the realisation of the property of dissolved firm. An
application for the appointment of an arbitrator would (Footnote number 61 cont.) fall within
this exception when the claim sought to be enforced is the right to sue for dissolution or for
accounts of a dissolved firm or to realise the property of a dissolved firm.
60 Ravi Prakash Goel v Chandra Prakash Goel, AIR 2007 SC 1517 : [2007] 4 SCR 295 : 2007 (4)
scale 562 : (2008) 13 SCC 667 .
61 Umesh Goel v HP Coop Group Housing Society Ltd, (2016) 11 SCC 313 : (2016) 3 SCC (Civ)
795 : 2016 SCC OnLine SC 624.
62 Chandrayya Mutwayya Irabatti v Sidram Ganpat Ingale, AIR 2006 Bom76 : 2006 (1) All MR 417
: 2006 (1) Bom CR 36 .
63 Navinchandra v Moolchand, AIR 1966 Bom 111 : (1965) 67 Bom LR 357 : ILR 1965 Bom 641 .
64 Ashutosh Chakraborty v UOI, WP No 9100 (W) of 2009, dated 19.11.2009, (Calcutta HC) :
LNIND 2009 CAL 870 .
65 Raman Kapoor v Govt of NCT Delhi, 2002 VAD (Delhi) 217 : 98 (2002) DLT 135 : 2002 (63)
DRJ 678 .
66 Purushottam v Shivraj Fine Art Litho Works, 2007 1 All WC (Supp) 878 SC : 2006 (2) CTLJ 269
(SC) : JT 2007 (4) SC 564 : (2007) 1 Mad LJ 623 (SC) : 2006 (12) scale 232 : [2006] Supp (8)
SCR 524 .
67 AS Mehta and Co, rep by its Partners v Yogendranath Sachdev, 2001 (6) Andh LT 723 .
68 V Subramaniam v Rajesh Raghuvandra Rao, AIR 2009 SC 1858 : (2009) 5 SCC 608 : [2009] 5
SCR 942 : 2009 (4) scale 459.
69 Umesh Goel v HP Coop Group Housing Society Ltd, (2016) 11 SCC 313 : (2016) 3 SCC (Civ)
795 : 2016 SCC OnLine SC 624.
70 Umesh Goel v HP Coop Group Housing Society Ltd, (2016) 11 SCC 313 : (2016) 3 SCC (Civ)
795 : 2016 SCC OnLine SC 624.
71 Leela Shashikant Purandare v Arvind Vishnu Govande, (2014) 3 SCC 645 : (2014) 2 SCC (Civ)
315 .
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 70. Penalty for furnishing false particulars.-

Any person who signs any statement, amending statement, notice or intimation under
this chapter containing any particulars which he knows to be false or does not believe
to be true; or containing particulars which he knows to be incomplete or does not
believe to be complete, shall be punishable with imprisonment which may extend to
three months, or with fine, or with both.

[s 70.1] STATE AMENDMENT

Maharashtra.—In section 70 for the words "shall be punishable with imprisonment

which may extend to three months, or with fine, or with both" the following shall be
substituted, namely:

shall, on conviction, be punished with imprisonment for a term which may extend to one
year, or with fine, or with both:

Provided that in the absence of special and adequate reasons to the contrary to be
mentioned in the judgment of the Court, the fine shall not be less than one thousand rupees.
[Maha. Act 29 of 1984, section 15 (w.e.f. 1 January 1985)]

S. 70A. After section 70, the following section shall be inserted namely:—

"70A. Maximum fees and powers to amend Schedule I.—(1) The fees payable under this Act
and the rules made thereunder shall not exceed the maximum fees as specified in Schedule
I.

(2) Subject to the provisions of this section, the State Government may, having regard to the
expenditure incurred or to be incurred for carrying out the purposes of this Act, from time to
time, by notification in the Official Gazette, vary any of the amounts of maximum fees and
other particulars specified in Schedule I, and, thereupon, the said Schedule shall be deemed
to be amended accordingly.

(3) Every notification issued under sub-section (2) shall take effect from the date of its
publication in the Official Gazette, unless some other date is specified therein for this
purpose.

(4) Every notification issued by the State Government under sub-section (2), shall be laid, as
soon as may be after it is issued, before each House of the State Legislature, while it is in
session, for a total period of 30 days, which may be comprised in one session or in two
successive sessions, and if, before the expiry of the session in which it is so laid or the
session immediately following, both Houses agree in making any modification in the
notification or both Houses agree that the notification should not be issued, and notify such
decision in the Official Gazette, the notification shall, from the date of publication of such
decision, have effect only in such modified form or be of no effect, as the case may be; so,
however, that any such modification or annulment shall be without prejudice to the validity
of anything previously done or omitted to be done in pursuance of that notification." [Maha.
Act 29 of 1984, section 15 (w.e.f. 1-1-1985)]
The Indian Partnership Act (Act IX of 1932)

Chapter VII Registration of Firms

S. 71. Power to make rules.-

(1) The 72[State Government] 73[may, by notification in the Official Gazette, make
rules] prescribing the fees which shall accompany documents sent to the
Registrar of Firms, or which shall be payable for the inspection of documents in
the custody of the Registrar of Firms, or for copies from the Register of Firms:

Provided that such fees shall not exceed the maximum fees specified in
Schedule I.

(2) The State Government may 74[also] make rules—

(a) prescribing the form of statement submitted under section 58, and of the
verification thereof;

(b) requiring statements, intimations and notices under sections 60, 61, 62
and 63 to be in the prescribed form, and prescribing the form thereof;

(c) prescribing the form of the Register of Firms and the mode in which
entries relating to firms are to be made therein, and the mode in which
such entries are to be amended or notes made therein;

(d) regulating the procedure of the Registrar when disputes arise;

(e) regulating the filing of documents received by the Registrar;

(f) prescribing conditions for the inspection of original documents;

(g) regulating the grant of copies;

(h) regulating the elimination of registers and documents;

(i) providing for the maintenance and form of an Index to the Register of
Firms; and

(j) generally, to carry out the purposes of this Chapter.

(3) All rules made under this section shall be subject to the condition of previous
publication.

75
[(4) Every rule made by the State Government under this section shall be laid, as
soon as it is made, before the State Legislature.]

[s 71.1] STATE AMENDMENTS

Andhra Pradesh.—In section 71, in sub-section (1), after the proviso, the following
proviso shall be added, namely:—
 "Provided further that the fees payable under this Act, shall be collected in the form of Court-
fee stamps which shall be affixed to the documents sent to the Registrar of Firms." [A.P. Act
27 of 1994, section 2 (w.e.f. 1-4-1995)]

Maharashtra.—In section 71,—

(a) for sub-section (1), the following sub-section shall be substituted, namely:—

"(1) Subject to the provisions of section 70A, the State Government may, by
notification in the Official Gazette, make rules prescribing the fees which shall
accompany documents sent to the Registrar or which shall be paid in respect of
any intimation, notice or application given to the Registrar or which shall be payable
for the inspection of documents in the custody of the Registrar or for copies from
the Register of Firms or which shall be paid for supply of any prescribed forms.";

(b) in sub-section (2),—

(i) in clause (a), for the words and figures "under section 58" the words,
brackets and figures "under sub-section (1) of section 58" shall be
substituted;

(ii) after clause (a), the following clause shall be inserted, namely:—

"(aa) prescribing the manner of filing an appeal under sub-section (4) of

section 58;"

(c) for sub-section (4), the following sub-section shall be substituted namely:—

"(4) Every rule made under this section shall be laid, as soon as may be after it is
made, before each House of the State Legislature, while it is in session, for a total
period of thirty days, which may be comprised in one session or in two successive
sessions, and if, before the expiry of the session in which it is so laid or the session
immediately following, both Houses agree in making any modification in the rule or
both Houses agree that the rule should not be made, and notify such decision in the
Official Gazette, the rule shall, from the date of publication of such decision, have
effect only in such modified form or be of no effect, as the case may be; so,
however, that any such modification or annulment shall be without prejudice to the
validity of anything previously done or omitted to be done in pursuance of that rule,"
[Maha. Act 29 of 1984, section 17 (w.e.f. 1-1-1985)]

72 Subs. by A.O. 1950.

73 Subs. by Act 20 of 1983, section 2 and Sch., for "may make rules" (w.e.f. 15-3-1984).
74 Ins. A.O. 1937.
75 Ins. by Act 20 of 1983, section 2 and Sch. (w.e.f. 15-3-1983).
The Indian Partnership Act (Act IX of 1932)

Chapter VIII Supplemental

S. 72. Mode of giving public notice.-

A public notice under this Act is given

(a) where it relates to the retirement or expulsion of a partner from a registered firm,
or to the dissolution of a registered firm, or to the election to become or not to
become a partner in a registered firm by a person attaining majority who was
admitted as a minor to the benefits of partnership, by notice to the Registrar of
Firms under section 63, and by publication in the Official Gazette and in at least
one vernacular newspaper circulating in the district where the firm to which it
relates has its place or principal place of business, and

(b) in any other case, by publication in the Official Gazette and in at least one
vernacular newspaper circulating in the district where the firm to which it relates
has its place or principal place of business.

[s 72.1] Public Notice.—

Sub-section (a) prescribes the cases in which a public notice should be given in the
manner stated therein. In case a retiring partner desiring to terminate further liability
[section 32(3), (4)], or an expelled partner desiring to terminate further liability [section
33(2)] or partners of a dissolved firm desiring to terminate further liability (section 45),
or a minor admitted to benefits of partnership electing to become or not to become
partner [section 30(5)], public notice should be given as stated in sub-section (a).
Reading the provisions of the said sections, the requirement of a public notice
becomes necessary or mandatory. Section 72 prescribes that Public Notice has to be
given by intimation to Registrar of Firms and by publication in Official Gazette and at
least in one vernacular newspaper circulating in the district where the firm has its place
of business. So if there is mere publication of notice in one daily, it would not satisfy
the requirements of section 72 of the Indian Partnership Act, 1932.1

1 C Assiamma v State Bank of Mysore, AIR 1990 Ker 157 , 166, para 23 : ILR (1990) (2) Ker 43 .
The Indian Partnership Act (Act IX of 1932)

Chapter VIII Supplemental

S. 73. Repeals.-

[Rep. by the Repealing Act, 1938 (I of 1938), sec. 2 and Sch.]

The Indian Partnership Act (Act IX of 1932)

Chapter VIII Supplemental

S. 74. Savings.-

Nothing in this Act or any repeal effected thereby shall affect or be deemed to affect,—

(a) any right, title, interest, obligation or liability already acquired, accrued or
incurred before the commencement of this Act, or

(b) any legal proceeding or remedy in respect of any such right, title, interest,
obligation or liability, or anything done or suffered before the commencement of
this Act, or

(c) anything done or suffered before the commencement of this Act, or

(d) any enactment relating to partnership not expressly repealed by this Act, or

(e) any rule of insolvency relating to partnership, or

(f) any rule of law not inconsistent with this Act.

[s 74.1] STATE AMENDMENT

Goa, Daman and Diu.—In its application to the U.T. of Goa, Daman and Diu, section 74
shall be renumbered as sub-section (1) thereof and after it insert the follow:—

"(2) Notwithstanding anything contained in sub-section (1) and in any other law in force in
the Union territory of Goa, Daman and Diu, the provisions of sub-sections (1) and (2) of
section 69 shall apply to all suits instituted in the Union territory of Goa, Daman and Diu
after the 1st January, 1965, even if the cause of action with respect to the said suits had
arisen before that date."—Goa. Daman and Diu. Act 6 of 1966, section 4 (22-8-1966)

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

Document or act in respect of which the Maximum fee

fee is payable
Statement under section 58 Three
Statement under section 60 One rupee
Intimation under section 61 One rupee
Intimation under section 62 One rupee
Notice under section 63 One rupee
Application under section 64 One rupee
 Document or act in respect of which the Maximum fee
fee is payable
Inspection of the Register of Firms under sub- Eight annas for inspecting one volume of the
section (1) of section 66 Register.
Inspection of documents relating to a firm Eight annas for inspection of all documents
under sub-section (2) of section 66 relating to one firm
Copies from the Register of Firms Four annas for each hundred words or part
thereof.

STATE AMENDMENTS

Andhra Pradesh.—For Schedule I, the following Schedule shall be substituted, namely:

—

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

Document or act in respect Maximum fee

of which the fee is payable
Statement under section 58 for each partner Rs. 100/-
Statement under section 60 Rs. 100/-
Intimation under section 61 Rs. 100/-
Intimation under section 62 Rs. 100/-
Notice under section 63 Rs. 100/-
Application under section 64 Rs. 100/-
Inspection of the Register of For inspecting the entry of each Rs. 20/-
Firms under sub-section (1) of firm in the Register.
section 66
Inspection of documents For each inspection of all Rs. 20/-
relating to a firm under sub- documents relating to one
section (2) of section 66 single firm
Copies from the Register of For each hundred words or part Rs. 4/-
Firms thereof.

—Andhra Pradesh Act 27 of 1994, section 3 (w.e.f. 22-12-1994).

Goa, Daman and Diu.—For Schedule I, (a) for the words 'eight annas', at both the places
where they occur, substitute the words 'fifty paise'; and (b) in entries relating to copies
from the Register of Firms, for the words 'four annas', substitute the words 'fifty paise'.

[Vide Goa, Daman and Diu Act 6 of 1996, section 5 (w.e.f. 22-8-1966)].

Gujarat.—For Schedule I, substitute the following Schedule, namely:—

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

 Document or act in respect of which the Maximum fee
fee is payable
Statement under section 58 Fifty rupees
Statement under section 60 Twenty-five rupees
Intimation under section 61 Twenty-five rupees
Intimation under section 62 Twenty-five rupees
Notice under section 63 Twenty-five rupees
Application under section 64 Twenty-five rupees
Inspection of the Register of Firms under sub- Ten rupees for inspecting one volume of the
section (1) of section 66 Register.
Inspection of documents relating to a firm Ten rupees for inspection of all documents
under sub-section (2) of section 66 relating to one firm
Copies from the Register of Firms Five for each hundred words or part thereof.

—Gujarat Act 13 of 1991, section 2 (w.e.f. 6.4.1991).

Karnataka.—In its application to the State of Karnataka, for Schedule I, the following
Schedule shall be substituted, namely:—

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

Document or act in respect of which the Maximum fee

fee is payable
Statement under section 58 One hundred rupees and one rupee
Statement under section 60 Fifty rupees
Intimation under section 61 Twenty-five rupees
Intimation under section 62 Twenty-five rupees
Notice under section 63 Twenty-five rupees
Application under section 64 One rupee
Inspection of the Register of Firms under sub- Twenty rupees for inspecting one volume of
section (1) of section 66 the Register.
Inspection of documents relating to a firm Ten rupees for the inspection of all documents
under sub-section (2) of section 66 relating to one firm
Copies from the Register of Firm Twenty five paise for each hundred words or
part thereof.

Vide Karnataka Act 1 of 1987, section 2 (w.e.f. 30-4-1987).

Kerala.—In its application to the State of Kerala, for Schedule I, the following Schedule
shall be substituted, namely:

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

 Document or act in respect of which the Maximum fee
fee is payable
Statement under section 58 Fifteen rupees
Statement under section 60 Five rupees
Intimation under section 61 Five rupees
Intimation under section 62 Five rupees
Notice under section 63 Five rupees
Application under section 64 Five rupees
Inspection of the Register of Firms under sub- Two rupees for inspecting one volume of the
section (1) of section 66 Register
Inspection of the documents relating to a firm Two rupees for the inspection of all documents
under sub-section (2) of section 66 relating to one firm
Copies from the Register of Firms Fifty paise for each hundred words or part
thereof

Vide Kerala Act 25 of 1973, section 2 (w.e.f. 24-8-1973).

Madhya Pradesh.—No.F-1(1) 62-2003 – XI—In exercise of the powers conferred under

section 71, sub- section (1) of Indian Partnership (Madhya Pradesh Amendment) Act,
1998 (No. 34 of 1998) the State Government hereby enhances the fee prescribed in
schedule by 5%.

Therefore a new Schedule be incorporated as per section 3 of the said Act as under:—

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

Document or act in respect of which the Maximum fee

fee is payable
(1) (2)
Statement under section 58 Two hundred rupees
Statement under section 60 Twenty-five rupees
Intimation under section 61 Twenty-five rupees
Intimation under section 62 Twenty-five rupees
Notice under section 63 Twenty-five rupees
Application under section 64 Twenty-five rupees
Inspection of the Register of firms under sub- Ten rupees for inspecting one volume of the
section (1) of section 66. Register
Inspection of documents relating to a firm Ten rupees for inspection of all documents
under sub-section (2) of section 66 realting to one firm
Copies from the Register of firms under section Two rupees for each hundred words or part
67 thereof)

Provided that the State Government may increase the rate subject to a maximum of
five percentage of the above rate in every two years.

Note: In case where the applicant requires copies from the Registrar of firms and
Societies under section 67 early i.e. within five working days, he shall file separate
application along with double amount of fee and the Competent Authority shall grant
copies within five working days.

Vide Madhya Pradesh Act 27 of 1998, section 3 (w.e.f. 30-10-1986)

Maharashtra.—For Schedule I, the following Schedule shall be substituted, namely:-

Schedule I

Maximum Fees

(See sections 70A and 71)

Document or act in respect of which the fee is payable Maximum fee

(1) Statement under section 58(1) Fifty rupees
(2) Memorandum of appeal under Twenty-five rupees
section 58(4)
(3) Statement under section 60 Fifteen rupees
(4) Intimation under section 61 Fifteen rupees
(5) Intimation under section 62 Fifteen rupees
(6) Notice under section 63(1) Fifteen rupees
(7) Intimation under section Fifteen rupees
63(1A)
(8) Notice under section 63(2) Fifteen rupees
(9) Application under section 64 Fifteen rupees
(10) Inspection of the Register of Seven rupees and fifty paise.
Firms under sub-section (1) of
section 66, for inspection of
one volume of the Register of
Firms.
(11) Inspection of documents Seven rupees and fifty paise.
relating to a firm under sub-
section (2) of section 66, for
the inspection of all documents
relating to one firm
(12) Copies from the Register of Two rupees
Firms under section 67, for
each hundred words or part
thereof
(13) Price of Forms prescribed One rupee per Form
under the rules

Vide Maharashtra Act 29 of 1984, section 18 (w.e.f. 1-1-1985).

Pondicherry.—In its application to the U.T. of Pondicherry, Column (1) same as the
principal Act; for column (2) substitute as follows serially:- Rs. 10.00; Rs. 3.00; Rs. 3.00;
Rs. 3.00; Rs. 3.00; Re. 1.00 a; Re. 1.00 b; Re. 0.40 c.

(a) For inspecting the entry of each firm in the Register.

(b) For inspection of all documents relating to one firm.

(c) For each hundred words or part thereof.

Vide Pondicherry Act 8 of 1969, section 3 (w.e.f. 1.1.1970)

Rajasthan.—For Schedule I as existing in the application thereof to the State of

Rajasthan, the following shall be substituted, namely:-

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

Sl. No. Document or act in respect Maximum fee

of which the fee is payable
(1) (2) (3)
1. Statement under section 58 Hundred rupees
2. Statement under section 60 Thirty rupees
3. Intimation under section 61 Thirty rupees
4. Intimation under section 62 Thirty rupees
5. Notice under section 63 Thirty rupees
6. Application under section 64 Thirty rupees
7. Inspection of the Register of Twenty rupees for inspecting
Firms under sub-section (1) of one volume of register.
section 66
8. Inspection of documents Twenty rupees for inspection
relating to a firm under sub- of all documents relating to
section (2) of section 66 one firm
9. Copies from the Register of Six rupees for each hundred
Firms words or part thereof

Vide Rajasthan Act 8 of 1996, section 2 (w.e.f. 8-10-1996).

Tamil Nadu.—In its application to the State of Tamil Nadu, for Schedule I, the following
Schedule shall be substituted, namely:—

Schedule I

Maximum Fees

[See sub-section (1) of section 71]

Document or act in Maximum fee Rs. p.

respect of which the
fee is payable
1. Statement under 50.00
section 58
2. Statement under 5.00
section 60
3. Intimation under 5.00
section 61
4. Intimation under 5.00
section 62
 Document or act in Maximum fee Rs. p.
respect of which the
fee is payable
5. Notice under section 5.00
63
6. Application under 5.00
section 64
7. Inspection of the For inspecting the 2.00
Register of firms under entry of each firm in
sub-section (1) of the Register.
section 66
8. Inspection of For each inspection of 2.00
documents relating to all documents relating
a firm under sub- to one firm
section (2) of section
66
9. Copies from the For each hundred 0.50
Register of Firms words or part thereof

Vide Tamil Nadu Act 38 of 1982, section 2.

Uttar Pradesh.—In its application to the State of Uttar Pradesh, for Schedule I, the
following Schedule shall be substituted, namely:—

Schedule I

Maximum Fees

(See sub-section (1) of section 71)

Document or Act in respect of which the Maximum fee

fee is payable
1. Statement under section 58 … . Five thousand rupees
2. Statement under section 60 … . Five hundred rupees
3. Intimation under section 61 … . Five hundred rupees
4. Intimation under section 62 … . Five hundred rupees
5. Notice under section 63 … . Five hundred rupees
6. Application under section 64 … . Five hundred rupees
7. Inspection of the Register of firms under … . One hundred rupees
sub-section (1) of section 66
8. Inspection of documents relating to a firm … . One hundred rupees
under sub-section (2) of section 66
9. Copies from the Register of firms Fifty rupees for each hundred words or part
thereof

Vide Indian Partnership (U.P. Amendment) Act, 2011, U.P. Act No. 2 of 2013, section 2,
(w.e.f. 13-8-2001).

Schedule II

Enactment Repealed.-- [Repealed by the Repealing Act, 1938 (1 of 1938), section 2 and
Sch.]
 Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed

Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed / The Limited Liability Partnership Act,
2008 Act No. 6 of 2009

Currency Date: 22 April 2020

© 2020 LexisNexis
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

1. Salient Feature.—

The most important feature of the Act is a hybrid creation of partnership with
assemblage of persons called partners in to a distinct legal entity, a company that
cocoons liability of partners to a pre-determined limit specified through the instrument
of partnership. The Act recognising such a formulation called the Limited Liability
Partnership Act, 2008 received the assent of the President on 7 January 2009 and
published in the Gazette of India, Extraordinary, Pt II, section 1, dated 9 January 2009,
pp 1–35, No. 7. The basis of Limited Liability Partnership (LLP) is the partnership
agreement that determines the liability of the partnership. Even a corporate entity could
be a partner. It has a distinct legal entity apart from the partners that constitute it and
consequently, any change in the composition of partners does not affect the existence,
rights or liabilities of LLP.

The human element to this entity is through designated partners who shall not be less
than two in number. At least one shall be an Indian citizen. He shall not be appointed
without his consent. He shall be assigned a Designated Partner Identification Number
(DPIN) by the Central Government. The designated partners shall be personally liable
for all statutory returns and roughly partake the character of Directors of a company.

2. Statement of Objects and Reasons.—

The Parliament, while introducing the bill, had the following SOR to declare:

1. With the growth of the Indian economy, the role played by its entrepreneurs as well
as its technical and professional manpower has been acknowledged internationally. It
is felt opportune that entrepreneurship, knowledge and risk capital combine to provide
a further impetus to India's economic growth. In this background, a need has been felt
for a new corporate form that would provide an alternative to the traditional
partnership, with unlimited personal liability on the one hand, and, the statute-based
governance structure of the limited liability company on the other, in order to enable
professional expertise and entrepreneurial initiative to combine, organise and operate
in flexible, innovative and efficient manner.

2. The Limited Liability Partnership (LLP) is viewed as an alternative corporate

business vehicle that provides the benefits of limited liability but allows its members
the flexibility of organising their internal structure as a partnership based on a mutually
arrived agreement. The LLP form would enable entrepreneurs, professionals and
enterprises providing services of any kind or engaged in scientific and technical
disciplines, to form commercially efficient vehicles suited to their requirements. Owing
to flexibility in its structure and operation, the LLP would also be a suitable vehicle for
small enterprises and for investment by venture capital.

3. Keeping in mind the need of the day, the Government had introduced the Limited
Liability Partnership Bill, 2006 in the Rajya Sabha on the 15 December 2006. It was
referred to the Department Related Parliamentary Standing Committee on Finance for
examination and report. The Hon'ble Committee presented its 58th Report to the Lok
Sabha on 27 November 2007 and also laid the said Report in the Rajya Sabha on the
same day. The Hon'ble Committee made several recommendations which were
examined and considered by the Government. Most of the recommendations made by
the Hon'ble Committee have been accepted by the Government. Based on the
recommendations of the Hon'ble Committee, extensive changes were found to be
necessary in the Bill. Hence, it is proposed to withdraw the Limited Liability Partnership
Bill, 2006 and introduce a fresh Bill incorporating the changes.

4. The salient features of the Limited Liability Partnership Bill, 2008, inter alia, are as
follows:—

(i) the LLP shall be a body corporate and a legal entity separate from its partners.
Any two or more persons, associated for carrying on a lawful business with a
view to profit, may by subscribing their names to an incorporation document and
filing the same with the Registrar, form a Limited Liability Partnership. The LLP
will have perpetual succession;

(ii) the mutual rights and duties of partners of an LLP inter se and those of the LLP
and its partners shall be governed by an agreement between partners or
between the LLP and the partners subject to the provisions of the proposed
legislation. The Bill, if enacted, would provide flexibility to devise the agreement
as per their choice. In the absence of any such agreement, the mutual rights and
duties shall be governed by the provisions of proposed legislation;

(iii) the LLP will be a separate legal entity, liable to the full extent of its assets, with
the liability of the partners being limited to their agreed contribution in the LLP
which may be of tangible or intangible nature or both tangible and intangible in
nature. No partner would be liable on account of the independent or
unauthorised actions of other partners or their misconduct. The liabilities of the
LLP and partners who are found to have acted with intent to defraud creditors
or for any fraudulent purpose shall be unlimited for all or any of the debts or
other liabilities of the LLP;

(iv) every LLP shall have at least two partners and shall also have at least two
individuals as Designated Partners, of whom at least one shall be resident in
India. The duties and obligations of designated partners shall be as provided in
the law;

(v) the LLP shall be under an obligation to maintain annual accounts reflecting true
and fair view of its state of affairs. A statement of accounts and solvency shall
be filed by every LLP with the Registrar every year. The accounts of LLPs shall
also be audited, subject to any class of LLPs being exempted from this
requirement by the Central Government;

(vi) the Central Government shall have powers to investigate the affairs of an LLP, if
required, by appointment of competent Inspector for the purpose;

(vii) the compromise or arrangement including merger and amalgamation of LLPs

shall be in accordance with the provisions of the proposed legislation;

(viii) a firm, private company or an unlisted public company would be allowed to be

converted into LLP in accordance with the provisions of the proposed Bill.
Upon such conversion, on and from the date of certificate of registration
issued by the Registrar in this regard, the effects of the conversion shall be
such as are specified in the proposed Bill. On and from the date of registration
specified in the certificate of registration, all tangible (movable or immovable)
and intangible property vested in the firm or the company, all assets, interests,
rights, privileges, liabilities, obligations relating to the firm or the company, and
the whole of the undertaking of the firm or the company, shall be transferred to
and shall vest in the LLP without further assurance, act or deed and the firm or
 the company, shall be deemed to be dissolved and removed from the records
of the Registrar of Firms or Registrar of Companies, as the case may be;

(ix) the winding up of the LLP may be either voluntary or by the Tribunal to be
established under the Companies Act, 1956. Till the Tribunal is established, the
power in this regard has been given to the High Court;

(x) the proposed legislation would confer powers on the Central Government to
apply provisions of the Companies Act, 1956 as appropriate, by notification with
such changes or modifications as deemed necessary. However, such
notifications shall be laid in draft before each House of Parliament for a total
period of 30 days and shall be subject to any modification as may be approved
by both Houses;

(xi) the Indian Partnership Act, 1932 shall not be applicable to LLPs.

5. The Bill seeks to achieve the above objectives.

3. Incorporation of LLP.—

LLP obtains legal entity through incorporation with the Registrar of Companies (RoC). A
certificate of registration shall be issued and it shall have a registered office. The entity
shall be described along with its name with a suffix, "Limited Liability Partnership or
"LLP" as last words of its name". On registration, LLP shall be capable of suing and
being sued; acquiring, owning, holding or disposing of property; having a common seal,
if it decides to have one and doing such other acts and things as bodies corporate may
lawfully do.

4. Relationship inter se among partners and vis-a-vis LLP.—

The relationship between partners shall on incorporation be governed by the LLP

Agreement. In the absence of such agreement, Schedule 1 shall govern such rights.
The admission and expulsion of a partner shall be governed by the agreement. A
partner may voluntarily retire from the partnership by giving a 30 days notice
expressing his intention to resign. Death and insolvency cause cessation of the status
of a partner. The liability provisions are the key to understanding the efficacy of LLP.
There is no personal liability for the partners, except for his/her wrongful acts or acts of
fraud or in a situation of holding out to a creditor who acts on such representation. To
bring accountability to LLP, a partner can turn in as a whistle blower to report to
authorities of any information of wrongdoing of LLP. In such case, penalty on him will
be reduced by Tribunal and he cannot be discharged, demoted or harassed because of
providing such information.

5. Contribution to the capital of LLP and financial disclosures.—

In the absence of any agreement to the contrary, the partners are entitled to equal
share of contribution to the capital of LLP. The contribution shall be in terms of money,
property or services. Monetary value of such contribution shall be accounted in LLP
and duly disclosed in its returns. Each LLP is required to maintain books of accounts.
Accounts should be audited, unless exempted by the Central Government. Statement
of Account and Solvency shall be prepared within six months of close of financial year
and filed with RoC within prescribed time. Annual Return shall be filed with RoC within
60 days of closure of financial year. Non-filing of these financial disclosures attracts
very heavy fines on the designated partners.

6. Why LLP, instead of amending Partnership Act or Companies Act?—

The Ministry of Corporate Affairs, Government of India has the following response to
the above question. The Companies Act, 1956 is not suited to the liability and
governance structure intended for LLPs. The overall intent of the legislation to regulate
widely-held companies is different. Therefore, in accordance with the
recommendations of the Irani Committee, it is felt appropriate to bring about a
separate legislation for LLPs. The administration and enforcement of partnership firms
under the Indian Partnership Act, 1932 is at the State level. Besides, a partnership firm
involves full joint and several liabilities of the partners. Because of this, many
firms/enterprises engaged in biotech, information technology, intellectual property and
other knowledge-based sectors find traditional partnerships unsuitable. The traditional
partnerships are also considered unsuitable for multi-disciplinary combinations
comprising a large number of partners, seeking a flexible working environment but with
limited liability. LLP structure would promote growth and enable such firms/enterprises
expand their trade/business or services across states in India and also abroad.

7. Firm in relation to Income-Tax Act, 1961.—

The Income-Tax Act, 1961 in its reference to the terms "firm", "partner" and
"partnership" to include also the terms as used in the Limited Liability Partnership Act.1
Significant changes have been made by introducing 35-DDA relating to liability of LLP
for a company that is since converted in the process of re-organisation, amendment to
section 71A dealing with manner of reckoning accumulated loss or unabsorbed
depreciation of a company that is converted to LLP, amendment to sections 43 and 47
that deal with manner of reckoning the written-down value of block assets and capital
assets respectively transferred by a company to LLP on its conversion, amendment of
the definition of "eligible assessee" occurring in section 44-AD, amendment to section
49 as regards the cost of acquisition of capital asset by a partner in LLP, the
inapplicability of section 115 JAA to an LLP, section 140 (cd) dealing with the
competency of the designated partner to verify and sign the returns and section 167 C
dealing with liability of partners to tax by a partnership in liquidation.

8. Comparison between LLP and Conventional Partnership

Limited Liability Partnership Conventional Partnership

A body corporate formed and incorporated
under the Limited Liability Partnership Act,
2008.
Incorporation is compulsory.
It has no individual identity and has no
existence other than through partners.
Registration with the Registrar of Firms is not
compulsory but in the absence of registration,
it has disabilities outlined under section 69 of
the Indian Partnership Act, 1932.
 Limited Liability Partnership Conventional Partnership
It has perpetual succession and death or Its existence is limited by the terms of
alteration of partners does not affect the partnership and the death of partner does not
identity of the partnership or its liability. automatically survive the rights of partner as
such to the legal representative.
Any change in the partners of a limited liability Change in the partners affects the existence,
shall not affect the existence, rights or rights and liabilities of the partnership firm.
liabilities of the LLP.
Minor can also be a partner. A minor could only be admitted to the benefits
of partnership.
Minimum number of partners, although two, The partnership will cease to exist with only
LLP does not cease to exist if it is carried on one partner. The maximum shall be 20.
only with one partner. In such an event, when
the business is carried on beyond a period of
six months, the liability will be personal on the
lone surviving partner. There can be any
number of partners.
Concept of designated partners requires at There is no concept of a designated partner.
least two individuals (not being a corporate
entity) to be so named and registered with the
Registrar giving his consent, besides securing a
DPIN from the Central Government.
Designated partners alone will be personally All partners shall be liable for statutory
liable for all statutory returns. compliances.
There is no personal liability for a partner Every partner is personally liable for the liability
except for wrongful deeds except his/her own, of the firm.
in a situation where he/she holds out to be a
partner for inducing credit to the firm or by
reason of fraud committed by the partner.
There are specific requirements regarding There are no restrictions.
name of the partnership to be shown as
Limited Liability Partnership or LLP and also
restrictions of what names it shall not have.
Every partner of an LLP is, for the purpose of On the principle of agency, every partner shall
the business of the LLP, the agent of the LLP, be liable for the acts of one or the other
but not of other partners. partners.
A partner can enter into business with LLP. A partner cannot enter into business dealing
with firm.
Every LLP shall file within the prescribed time, There is no such financial control by any state
the Statement of Account and Solvency authority and no such financial returns need be
prepared with the Registrar of Companies every submitted to the Registrar of Firms.
year in such form and manner and
accompanied by such fees as may be
prescribed.
A private company or an unlisted public Such conversion is not possible.
company can be converted as an LLP by
following a prescribed procedure.
Provisions of the Companies Act, 1956 could Provisions of the Companies Act, 1956 cannot
be applied to LLP in the manner provided by the be extended to partnership.
Central Government through notification.
 Limited Liability Partnership Conventional Partnership
The Schedule 1 to the Act makes mandatory Reference to arbitration shall be expressly
the resolution of disputes to be referred to provided in the partnership deed and statutorily
Arbitration and Conciliation Act, 1996. mandated.

9. Comparison between LLP and Company

LLP Company
Any two or more persons shall form the Any seven or more persons or where the
partnership and register the same with RoC by company to be formed will be a private
document of incorporation. It shall have a suffix company, any two or more persons, associated
along with the name of the partnership, for any lawful purpose may, by subscribing their
"Limited Liability Partnership" or LLP. names to a Memorandum of Association and
otherwise complying with the requirements of
this Act in respect of registration, form an
incorporated company, with or without limited
liability. If it is a limited company, it shall have a
suffix, "Limited" or "Ltd".
LLP agreement is furnished later after the Articles of association are at the time of
incorporation and if not filed, First Schedule will incorporation of the company.
be treated as applicable.
Designated Partner is the chief functionary of Managing Director shall look after the day-to-
LLP and shall be personally responsible for all day affairs of the company.
statutory compliances.
There is no ceiling on remuneration to a partner There are statutory controls over the
but the remuneration shall be provided in the remuneration to the Directors.
LLP agreement.
A partner is an agent of LLP. A shareholder or a director is not an agent of
the company.

*The Limited Liability Partnership Act, 2008

Act No. 6 of 2009

(Received the assent of the President on 7 January 2009)

An Act to make provisions for the formation and regulation of limited liability
partnerships and for matters connected therewith or incidental thereto.

Be it enacted by Parliament in the Fifty-ninth Year of the Republic of India as follows:—

1 Section 2(23)(i), (ii) and (iii), Income-Tax Act 1963.

* Statutory Provision with minimal notes
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter I Preliminary

S. 1. Short title, extent and commencement.-

(1) This Act may be called the Limited Liability Partnership Act, 2008.

(2) It extends to the whole of India.

(3) It shall come into force on such date1 as the Central Government may, by
notification in the Official Gazette, appoint:

Provided that different dates may be appointed for different provisions of this
Act and any reference in any such provision to the commencement of this Act
shall be construed as a reference to the coming into force of that provision.

1 Date of Enforcement.—Section 1, section 2 except clauses (c) and (u) of its sub-section (1),
sections 3 to 30, section 31 [except to the extent of its application in context of the "Tribunal"],
sections 32 to 50, sections 52 to 54, sections 59 to 62, sections 66 to 71, sections 74 to 80,
section 81 [except clauses (b) to the extent of its application to sections 51, 63 and 64 and
clause (c)], First Schedule, came into force (w.e.f. 31.03.2009) [Vide S.O. 891(E), dated 31-3-
2009].

Sections 55 to 58, Second Schedule, Third Schedule and Fourth Schedule, came into force
(w.e.f. 31.05.2009) [Vide S.O. 1323(E), dated 22-5-2009].
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter I Preliminary

S. 2. Definitions.-

(1) In this Act, unless the context otherwise requires,—

(a) "address", in relation to a partner of a limited liability partnership, means

—

(i) if an individual, his usual residential address; and

(ii) if a body corporate, the address of its registered office;

(b) "advocate" means an advocate as defined in clause (a) of sub-section (1)

of section 2 of the Advocates Act, 1961 (25 of 1961);

(c) "Appellate Tribunal" means the National Company Law Appellate Tribunal
constituted under sub-section (1) of section 10-FR of the Companies Act,
1956 (1 of 1956).

Note: The amended provision by introducing section 10-FR of the

Companies Act, 1956 was the subject of challenge in UOI v R Gandhi,
President, Madras Bar Association.2 The Supreme Court upheld the
legislative competence of the Parliament to constitute National Company
Law Appellate Tribunal (NCLAT). Responding to concerns over
proliferation of Tribunals and the possible breach of separation of
powers, the Court held that when the Tribunal exercises judicial
functions, its members cannot be drawn from various government
departments or civil services who continue to be employees of different
Ministries by maintaining lien over their respective posts. It held that only
judges and advocates should be considered for appointment as Judicial
Members of the National Company Law Tribunal (NCLT) and NCLAT. Only
the High Court judges or judges who have served in the rank of a District
Judge for at least five years or a person who has practiced as a Lawyer
for 10 years can be considered for appointment as a Judicial Member.
The technical members also should as nearly as possible have the same
position and status as High Court judges. It is not mandatory that
Tribunals should always have technical members.

(d) "body corporate" means a company as defined in section 3 of the

Companies Act, 1956 (1 of 1956) and includes—

(i) a limited liability partnership registered under this Act;

(ii) a limited liability partnership incorporated outside India; and

(iii) a company incorporated outside India,

but does not include—

(i) a corporation sole;

(ii) a co-operative society registered under any law for the time being
in force; and

(iii) any other body corporate (not being a company as defined in

 section 3 of the Companies Act, 1956 (1 of 1956) or a limited
liability partnership as defined in this Act), which the Central
Government may, by notification in the Official Gazette, specify in
this behalf;

Note: It is the feature of treating it as a distinct legal entity capable of

suing and being sued that proximate LLP to a company and distances it
from the fundamental feature of the partnership firm which has no
individual identity than through members. Limit to liability provisions are
another distinguishing feature that signals a departure from the
conventional understanding of a partnership. Under the provisions of the
Act, it shall become possible to convert an LLP to a company and vice
versa. See sections 55 to 58 and Schedule III and IV below.

(e) "business" includes every trade, profession, service and occupation;

Note: Apart from the activity that an LLP could undertake, to the extent to
which a partner could do business with LLP, the definition assumes
importance.

(f) "chartered accountant" means a chartered accountant as defined in

clause (b) of sub-section (1) of section 2 of the Chartered Accountants
Act, 1949 (38 of 1949) and who has obtained a certificate of practice
under sub-section (1) of Section 6 of that Act;

(g) "company secretary" means a company secretary as defined in clause (c)

of sub-section (1) of section 2 of the Company Secretaries Act, 1980 (56
of 1980) and who has obtained a certificate of practice under sub-
section (1) of section 6 of that Act;

(h) "cost accountant" means a cost accountant as defined in clause (b) of

sub-section (1) of section 2 of the Cost and Works Accountants Act,
1959 (23 of 1959) and who has obtained a certificate of practice under
sub-section (1) of section 6 of that Act;

(i) "Court", with respect to any offence under this Act, means the Court
having jurisdiction as per the provisions of section 77;

Note: The definition of Court under section 77 addresses the court of

jurisdiction as Judicial Magistrate for prosecution of criminal offences
and for enforcement of penalties.

(j) "designated partner" means any partner designated as such pursuant to

section 7;

Note: The definition and duties assigned to this designation provide the
human interface to the legal entity created through LLP.

(k) "entity" means any body corporate and includes, for the purposes of
sections 18, 46, 47, 48, 49, 50, 52 and 53, a firm set-up under the Indian
Partnership Act, 1932 (9 of 1932);

(l) "financial year", in relation to a limited liability partnership, means the

period from the 1st day of April of a year to the 31st day of March of the
following year:

Provided that in the case of a limited liability partnership incorporated

after the 30th day of September of a year, the financial year may end on
the 31st day of March of the year next following that year;

(m) "foreign limited liability partnership" means a limited liability partnership

 formed, incorporated or registered outside India which establishes a
place of business within India;

(n) "limited liability partnership" means a partnership formed and registered

under this Act;

Note: Once incorporated, the partnership name shall have a suffix

"Limited Liability Partnership" or "LLP". The Companies Act, 1956
requires a limited company to attach a suffix "Limited" or "Ltd" and
empowers the Central Government to exempt charitable or certain class
of companies from such a suffix.

(o) "limited liability partnership agreement" means any written agreement

between the partners of the limited liability partnership or between the
limited liability partnership and its partners which determines the mutual
rights and duties of the partners and their rights and duties in relation to
that limited liability partnership;

Note: Unlike articles of association which are submitted along with the
memorandum, the agreement can be submitted subsequent to the
incorporation of LLP. In the absence of such agreement, the rights shall
be governed by the provisions of Schedule 1. It is a crucial document
which delineates the relationships between partners and the individual
partner vis-a-vis the LLP.

(p) "name", in relation to a partner of a limited liability partnership, means—

(i) if an individual, his forename, middle name and surname; and

(ii) if a body corporate, its registered name;

(q) "partner", in relation to a limited liability partnership, means any person

who becomes a partner in the limited liability partnership in accordance
with the limited liability partnership agreement;

(r) "prescribed" means prescribed by rules made under this Act;

(s) "Registrar" means a Registrar, or an Additional, a Joint, a Deputy or an

Assistant Registrar, having the duty of registering companies under the
Companies Act, 1956 (1 of 1956);

(t) "Schedule" means a Schedule to this Act;

(u) "Tribunal" means the National Company Law Tribunal constituted under
sub-section (1) of section 10-FB of the Companies Act, 1956 (1 of 1956).

(2) Words and expressions used and not defined in this Act but defined in the
Companies Act, 1956 (1 of 1956) shall have the meanings respectively assigned
to them in that Act.

2 UOI v R Gandhi, President, Madras Bar Association, (2010) 11 SCC 1 : 2010 (5 ) Scale 514 :
(2010) 2 Comp LJ 577 (SC). Further affirmed in Madras Bar Association v UOI, (2015) 8 SCC 583
: 2015 (6) Scale 331 : (2015) 3 Comp LJ 1 (SC).
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 3. Limited liability partnership to be body corporate.-

(1) A limited liability partnership is a body corporate formed and incorporated under
this Act and is a legal entity separate from that of its partners.

(2) A limited liability partnership shall have perpetual succession.

(3) Any change in the partners of a limited liability partnership shall not affect the
existence, rights or liabilities of the limited liability partnership.

Note: This provision marks the important difference between the conventional
partnerships and brings similarity to the corporate identity of a company incorporated
under the Companies Act, 1956.

In an agreement of sale by an LLP with a third party, unless the LLP is made a party, the
agreement cannot be enforced. Consequently, in a suit for specific performance
alleged to have been executed by LLP, the claim for interim injunction in a suit instituted
only against partners was considered to be lacking in privity of contract between
parties and the interim relief was declined.1

1 Rajesh Baid v Mohammad Ibrahim, AIR 2016 Cal 344 : (2016) 166 AIC 800 .
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 4. Non-applicability of the Indian Partnership Act, 1932.-

Save as otherwise provided, the provisions of the Indian Partnership Act, 1932 (9 of
1932) shall not apply to a limited liability partnership.

Note: The saving clause does not appear to have any relevance, for there exists no
provision of the Partnership Act that could be applied to an LLP. With effect from 1
January 1997, P&O Containers Ltd, UK and Nedlloyd Lines B.V. pooled their business
worldwide as both these companies were acquired by P&O Nedlloyd Container Ltd, U.K.
The name of P&O Containers Ltd, U.K. was changed to P&O Nedlloyd Ltd which
operates in India with effect from that date. However, the return for the above
assessment year was stated to be inadvertently filed in the name of P&O Containers
Ltd reflecting only the freight collected by P&O Containers Ltd, UK A revised return of
income was being filed in the name of P&O Nedlloyd Ltd being the beneficiary receiver
of freight income earned in India, including the freight earned by Nedlloyd Lines BV
from 1 January 1997 to 31 March 1997. The revised return claimed a refund of ₹
25,29,231. The contention was the income earned from international traffic was not
chargeable to tax in India by reason of the India-UK and India-Netherlands Double
Taxation Avoidance Agreements (DTAA). It was contended that the partners thus were
competent to maintain the challenge against the notice where the income of the
partnership was already assessed and granted exemption since the provisions of
Articles 9 and 8(A) of the India-UK and India-Netherlands Treaties did not permit
taxation of income in India and specifically covers shares of joint business also. The
court found that since section 2(31)(iv) of the Income-tax Act, 1995 included from the
definition of "person" as a taxing entity also a "firm" of partnership including an LLP and
hence the benefit of the convention was applicable against double taxation.2 That
obviated the operation of the provisions of this Act.

2 P & O Nedlloyd Ltd v Assistant Director of Income Tax International Taxation-II, Kolkata, (2014)
369 ITR 282 .
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 5. Partners.-

Any individual or body corporate may be a partner in a limited liability partnership:

Provided that an individual shall not be capable of becoming a partner of a limited

liability partnership, if—

(a) he has been found to be of unsound mind by a Court of competent jurisdiction

and the finding is in force;

(b) he is an undischarged insolvent; or

(c) he has applied to be adjudicated as an insolvent and his application is pending.

It would seem that there is no bar against a minor being inducted as a partner in LLP
and not merely to the benefits of partnership.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 6. Minimum number of partners.-

(1) Every limited liability partnership shall have at least two partners.

(2) If at any time the number of partners of a limited liability partnership is reduced
below two and the limited liability partnership carries on business for more than
six months while the number is so reduced, the person, who is the only partner
of the limited liability partnership during the time that it so carries on business
after those six months and has the knowledge of the fact that it is carrying on
business with him alone, shall be liable personally for the obligations of the
limited liability partnership incurred during that period.

Note: The fall in the number below two does not annihilate the existence of LLP but
only renders the sole partner to be personally liable.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 7. Designated partners.-

(1) Every limited liability partnership shall have at least two designated partners
who are individuals and at least one of them shall be a resident in India:

Provided that in case of a limited liability partnership in which all the partners
are bodies corporate or in which one or more partners are individuals and
bodies corporate, at least two individuals who are partners of such limited
liability partnership or nominees of such bodies corporate shall act as
designated partners.

Explanation.—For the purposes of this section, the term "resident in India" means
a person who has stayed in India for a period of not less than one hundred and
eighty-two days during the immediately preceding one year.

(2) Subject to the provisions of sub-section (1),—

(i) if the incorporation document—

(a) specifies who are to be designated partners, such persons shall be

designated partners on incorporation; or

(b) states that each of the partners from time to time of limited
liability partnership is to be designated partner, every such partner
shall be a designated partner;

(ii) any partner may become a designated partner by and in accordance with
the limited liability partnership agreement and a partner may cease to be
a designated partner in accordance with limited liability partnership
agreement.

(3) An individual shall not become a designated partner in any limited liability
partnership unless he has given his prior consent to act as such to the limited
liability partnership in such form and manner as may be prescribed.

(4) Every limited liability partnership shall file with the registrar the particulars of
every individual who has given his consent to act as designated partner in such
form and manner as may be prescribed within thirty days of his appointment.

(5) An individual eligible to be a designated partner shall satisfy such conditions

and requirements as may be prescribed.

(6) Every designated partner of a limited liability partnership shall obtain a

Designated Partner Identification Number (DPIN) from the Central Government
and the provisions of sections 266-A to 266-G (both inclusive) of the Companies
Act, 1956 (1 of 1956) shall apply mutatis mutandis for the said purpose.

Note: The human element in the LLP is the designated partner and his position could
be likened in a loose sense to a Director of a company.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 8. Liabilities of designated partners.-

Unless expressly provided otherwise in this Act, a designated partner shall be—

(a) responsible for the doing of all acts, matters and things as are required to be
done by the limited liability partnership in respect of compliance of the
provisions of this Act including filing of any document, return, statement and the
like report pursuant to the provisions of this Act and as may be specified in the
limited liability partnership agreement; and

(b) liable to all penalties imposed on the limited liability partnership for any
contravention of those provisions.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 9. Changes in designated partners.-

A limited liability partnership may appoint a designated partner within thirty days of a
vacancy arising for any reason and provisions of sub-section (4) and sub-section (5) of
section 7 shall apply in respect of such new designated partner:

Provided that if no designated partner is appointed, or if at any time there is only one
designated partner, each partner shall be deemed to be a designated partner.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter II Nature of Limited Liability Partnership

S. 10. Punishment for contravention of sections 7, 8 and 9.-

(1) If the limited liability partnership contravenes the provisions of sub-section (1)
of section 7, the limited liability partnership and its every partner shall be
punishable with fine which shall not be less than ten thousand rupees but which
may extend to five lakh rupees.

(2) If the limited liability partnership contravenes the provisions of sub-section (4)
and sub-section (5) of section 7, section 8 or section 9, the limited liability
partnership and its every partner shall be punishable with fine which shall not be
less than ten thousand rupees but which may extend to one lakh rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 11. Incorporation document.-

(1) For a limited liability partnership to be incorporated,—

(a) two or more persons associated for carrying on a lawful business with a
view to profit shall subscribe their names to an incorporation document;

(b) the incorporation document shall be filed in such manner and with such
fees, as may be prescribed with the Registrar of the State in which the
registered office of the limited liability partnership is to be situated; and

(c) there shall be filed along with the incorporation document, a statement in
the prescribed form, made by either an advocate, or a Company Secretary
or a Chartered Accountant or a Cost Accountant, who is engaged in the
formation of the limited liability partnership and by any one who
subscribed his name to the incorporation document, that all the
requirements of this Act and the rules made thereunder have been
complied with, in respect of incorporation and matters precedent and
incidental thereto.

(2) The incorporation document shall—

(a) be in a form as may be prescribed;

(b) state the name of the limited liability partnership;

(c) state the proposed business of the limited liability partnership;

(d) state the address of the registered office of the limited liability
partnership;

(e) state the name and address of each of the persons who are to be
partners of the limited liability partnership on incorporation;

(f) state the name and address of the persons who are to be designated
partners of the limited liability partnership on incorporation;

(g) contain such other information concerning the proposed limited liability
partnership as may be prescribed.

(3) If a person makes a statement under clause (c) of sub-section (1) which he—

(a) knows to be false; or

(b) does not believe to be true,

shall be punishable with imprisonment for a term which may extend to two
years and with fine which shall not be less than ten thousand10,000 rupees but
which may extend to five lakh rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 12. Incorporation by registration.-

(1) When the requirements imposed by clauses (b) and (c) of sub-section (1) of
section 11 have been complied with, the Registrar shall retain the incorporation
document and, unless the requirement imposed by clause (a) of that sub-
section has not been complied with, he shall, within a period of fourteen days—

(a) register the incorporation document; and

(b) give a certificate that the limited liability partnership is incorporated by

the name specified therein.

(2) The Registrar may accept the statement delivered under clause (c) of sub-
section (1) of section 11 as sufficient evidence that the requirement imposed by
clause (a) of that sub-section has been complied with.

(3) The certificate issued under clause (b) of sub-section (1) shall be signed by the
Registrar and authenticated by his official seal.

(4) The certificate shall be conclusive evidence that the limited liability partnership
is incorporated by the name specified therein.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 13. Registered office of limited liability partnership and change therein.-

(1) Every limited liability partnership shall have a registered office to which all
communications and notices may be addressed and where they shall be
received.

(2) A document may be served on a limited liability partnership or a partner or

designated partner thereof by sending it by post under a certificate of posting or
by registered post or by any other manner, as may be prescribed, at the
registered office and any other address specifically declared by the limited
liability partnership for the purpose in such form and manner as may be
prescribed.

(3) A limited liability partnership may change the place of its registered office and
file the notice of such change with the Registrar in such form and manner and
subject to such conditions as may be prescribed and any such change shall take
effect only upon such filing.

(4) If the limited liability partnership contravenes any provisions of this section, the
limited liability partnership and its every partner shall be punishable with fine
which shall not be less than two thousand rupees but which may extend to
twenty-five thousand rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 14. Effect of registration.-

On registration, a limited liability partnership shall, by its name, be capable of—

(a) suing and being sued;

(b) acquiring, owning, holding and developing or disposing of property, whether

movable or immovable, tangible or intangible;

(c) having a common seal, if it decides to have one; and

(d) doing and suffering such other acts and things as bodies corporate may lawfully
do and suffer.

Note: This section gives LLP the legal identity and marks the distinguishing feature
from the conventional partnership.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 15. Name.-

(1) Every limited liability partnership shall have either the words "limited liability
partnership" or the acronym "LLP" as the last words of its name.

(2) No limited liability partnership shall be registered by a name which, in the

opinion of the Central Government is —

(a) undesirable; or

(b) identical or too nearly resembles to that of any other partnership firm or
limited liability partnership or body corporate or a registered trade mark,
or a trade mark which is the subject matter of an application for
registration of any other person under the Trade Marks Act, 1999 (47 of
1999).

Note: See section 20 of the Companies Act, 1956 for a similar provision.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 16. Reservation of name.-

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

(a) the name of a proposed limited liability partnership; or

(b) the name to which a limited liability partnership proposes to change its
name.

(2) Upon receipt of an application under sub-section (1) and on payment of the
prescribed fee, the Registrar may, if he is satisfied, subject to the rules
prescribed by the Central Government in the matter, that the name to be
reserved is not one which may be rejected on any ground referred to in sub-
section (2) of section 15, reserve the name for a period of three months from
the date of intimation by the Registrar.

Note: There is no similar provision under the Companies Act, 1956 for reservation of
name.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 17. Change of name of limited liability partnership.-

(1) Notwithstanding anything contained in sections 15 and 16, where the Central
Government is satisfied that a limited liability partnership has been registered
(whether through inadvertence or otherwise and whether originally or by a
change of name) under a name which—

(a) is a name referred to in sub-section (2) of section 15; or

(b) is identical with or too nearly resembles the name of any other limited
liability partnership or body corporate or other name as to be likely to be
mistaken for it,

the Central Government may direct such limited liability partnership to change
its name, and the limited liability partnership shall comply with the said direction
within three months after the date of the direction or such longer period as the
Central Government may allow.

(2) Any limited liability partnership which fails to comply with a direction given
under sub-section (1) shall be punishable with fine which shall not be less than
ten thousand rupees but which may extend to five lakh rupees and the
designated partner of such limited liability partnership shall be punishable with
fine which shall not be less than ten thousand rupees but which may extend to
one lakh rupees.

Note: See the similarity of this provision with section 22 of the Companies Act, 1956.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 18. Application for direction to change name in certain circumstances.-

(1) Any entity which already has a name similar to the name of a limited liability
partnership which has been incorporated subsequently, may apply, in such
manner as may be prescribed, to the Registrar to give a direction to any limited
liability partnership, on a ground referred to in section 17 to change its name.

(2) The Registrar shall not consider any application under sub-section (1) to give a
direction to a limited liability partnership on the ground referred to in clause (b)
of sub-section (1) of section 17 unless the Registrar receives the application
within twenty-four months from the date of registration of the limited liability
partnership under that name.

Note: See the similarity of this provision with section 22 of the Companies Act, 1956.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 19. Change of registered name.-

Any limited liability partnership may change its name registered with the Registrar by
filing with him a notice of such change in such form and manner and on payment of
such fees as may be prescribed.

Note: See the similarity of this provision with section 21 of the Companies Act, 1956.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 20. Penalty for improper use of words "limited liability partnership" or

"LLP".-

If any person or persons carry on business under any name or title of which the words
"Limited Liability Partnership" or "LLP" or any contraction or imitation thereof is or are
the last word or words, that person or each of those persons shall, unless duly
incorporated as limited liability partnership, be punishable with fine which shall not be
less than fifty thousand rupees but which may extend to five lakh rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter III Incorporation of Limited Liability Partnership and Matters

Incidental Thereto

S. 21. Publication of name and limited liability.-

(1) Every limited liability partnership shall ensure that its invoices, official
correspondence and publications bear the following, namely:—

(a) the name, address of its registered office and registration number of the
limited liability partnership; and

(b) a statement that it is registered with limited liability.

(2) Any limited liability partnership which contravenes the provisions of sub-section
(1) shall be punishable with fine which shall not be less than two thousand
rupees but which may extend to twenty-five thousand rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IV Partners and Their Relations

S. 22. Eligibility to be partners.-

On the incorporation of a limited liability partnership, the persons who subscribed their
names to the incorporation document shall be its partners and any other person may
become a partner of the limited liability partnership by and in accordance with the
limited liability partnership agreement.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IV Partners and Their Relations

S. 23. Relationship of partners.-

(1) Save as otherwise provided by this Act, the mutual rights and duties of the
partners of a limited liability partnership, and the mutual rights and duties of a
limited liability partnership and its partners, shall be governed by the limited
liability partnership agreement between the partners, or between the limited
liability partnership and its partners.

(2) The limited liability partnership agreement and any changes, if any, made therein
shall be filed with the Registrar in such form, manner and accompanied by such
fees as may be prescribed.

(3) An agreement in writing made before the incorporation of a limited liability

partnership between the persons who subscribe their names to the
incorporation document may impose obligations on the limited liability
partnership, provided such agreement is ratified by all the partners after the
incorporation of the limited liability partnership.

(4) In the absence of agreement as to any matter, the mutual rights and duties of
the partners and the mutual rights and duties of the limited liability partnership
and the partners shall be determined by the provisions relating to that matter as
are set out in the First Schedule.

Note: Sections 22 to 26 shall be read along with Schedule 1 which describes the status
and liability of partners inter se and vis-a-vis the LLP. It shall become possible to
customise the inter se relations by express provisions in the partnership agreement.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IV Partners and Their Relations

S. 24. Cessation of partnership interest.-

(1) A person may cease to be a partner of a limited liability partnership in

accordance with an agreement with the other partners or, in the absence of
agreement with the other partners as to cessation of being a partner, by giving a
notice in writing of not less than thirty days to the other partners of his intention
to resign as partner.

(2) A person shall cease to be a partner of a limited liability partnership—

(a) on his death or dissolution of the limited liability partnership; or

(b) if he is declared to be of unsound mind by a competent court; or

(c) if he has applied to be adjudged as an insolvent or declared as an

insolvent.

(3) Where a person has ceased to be a partner of a limited liability partnership

(hereinafter referred to as "former partner"), the former partner is to be regarded
(in relation to any person dealing with the limited liability partnership) as still
being a partner of the limited liability partnership unless—

(a) the person has notice that the former partner has ceased to be a partner
of the limited liability partnership; or

(b) notice that the former partner has ceased to be a partner of the limited
liability partnership has been delivered to the Registrar.

(4) The cessation of a partner from the limited liability partnership does not by itself
discharge the partner from any obligation to the limited liability partnership or to
the other partners or to any other person which he incurred while being a
partner.

(5) Where a partner of a limited liability partnership ceases to be a partner, unless

otherwise provided in the limited liability partnership agreement, the former
partner or a person entitled to his share in consequence of the death or
insolvency of the former partner, shall be entitled to receive from the limited
liability partnership—

(a) an amount equal to the capital contribution of the former partner actually
made to the limited liability partnership; and

(b) his right to share in the accumulated profits of the limited liability
partnership,

after the deduction of accumulated losses of the limited liability partnership,

determined as at the date the former partner ceased to be a partner.

(6) A former partner or a person entitled to his share in consequence of the death
or insolvency of the former partner shall not have any right to interfere in the
management of the limited liability partnership.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IV Partners and Their Relations

S. 25. Registration of changes in partners.-

(1) Every partner shall inform the limited liability partnership of any change in his
name or address within a period of fifteen days of such change.

(2) A limited liability partnership shall—

(a) where a person becomes or ceases to be a partner, file a notice with the
Registrar within thirty days from the date he becomes or ceases to be a
partner; and

(b) where there is any change in the name or address of a partner, file a
notice with the Registrar within thirty days of such change.

(3) A notice filed with the Registrar under sub-section (2)—

(a) shall be in such form and accompanied by such fees as may be

prescribed;

(b) shall be signed by the designated partner of the limited liability

partnership and authenticated in a manner as may be prescribed; and

(c) if it relates to an incoming partner, shall contain a statement by such

partner that he consents to becoming a partner, signed by him and
authenticated in the manner as may be prescribed.

(4) If the limited liability partnership contravenes the provisions of sub-section (2),
the limited liability partnership and every designated partner of the limited
liability partnership shall be punishable with fine which shall not be less than
two thousand rupees but which may extend to twenty-five thousand rupees.

(5) If any partner contravenes the provisions of sub-section (1), such partner shall
be punishable with fine which shall not be less than two thousand rupees but
which may extend to twenty-five thousand rupees.

(6) Any person who ceases to be a partner of a limited liability partnership may
himself file with the Registrar the notice referred to in sub-section (3) if he has
reasonable cause to believe that the limited liability partnership may not file the
notice with the Registrar and in case of any such notice filed by a partner, the
Registrar shall obtain a confirmation to this effect from the limited liability
partnership unless the limited liability partnership has also filed such notice:

Provided that where no confirmation is given by the limited liability partnership

within fifteen days, the registrar shall register the notice made by a person
ceasing to be a partner under this section.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter V Extent and Limitation of Liability of Limited Liability

Partnership and Partners

S. 26. Partner as agent.-

Every partner of a limited liability partnership is, for the purpose of the business of the
limited liability partnership, the agent of the limited liability partnership, but not of other
partners.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter V Extent and Limitation of Liability of Limited Liability

Partnership and Partners

S. 27. Extent of liability of limited liability partnership.-

(1) A limited liability partnership is not bound by anything done by a partner in

dealing with a person if—

(a) the partner in fact has no authority to act for the limited liability
partnership in doing a particular act; and

(b) the person knows that he has no authority or does not know or believe
him to be a partner of the limited liability partnership.

(2) The limited liability partnership is liable if a partner of a limited liability

partnership is liable to any person as a result of a wrongful act or omission on
his part in the course of the business of the limited liability partnership or with
its authority.

(3) An obligation of the limited liability partnership whether arising in contract or

otherwise, shall be solely the obligation of the limited liability partnership.

(4) The liabilities of the limited liability partnership shall be met out of the property
of the limited liability partnership.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter V Extent and Limitation of Liability of Limited Liability

Partnership and Partners

S. 28. Extent of liability of partner.-

(1) A partner is not personally liable, directly or indirectly for an obligation referred
to in sub-section (3) of section 27 solely by reason of being a partner of the
limited liability partnership.

(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this
section shall not affect the personal liability of a partner for his own wrongful
act or omission, but a partner shall not be personally liable for the wrongful act
or omission of any other partner of the limited liability partnership.

In a consumer complaint where the partners of an LLP had been sought to be made
liable, a preliminary objection was taken by the partners that the complaint was not
maintainable. Even while maintaining the orders of the Consumer Forum and the State
Commission, the National Commission held that the issue surely merited consideration
at the final enquiry by virtue of the provisions of this Act.1

1 Shree Matangi Projects v Mitesh R Mumbaiwala, 2017 SCC OnLine NCDRC 1437.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter V Extent and Limitation of Liability of Limited Liability

Partnership and Partners

S. 29. Holding out.-

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

Provided that where any credit is received by the limited liability partnership as a
result of such representation, the limited liability partnership shall, without
prejudice to the liability of the person so representing himself or represented to
be a partner, be liable to the extent of credit received by it or any financial benefit
derived thereon.

(2) Where after a partner's death the business is continued in the same limited
liability partnership name, the continued use of that name or of the deceased
partner's name as a part thereof shall not of itself make his legal representative
or his estate liable for any act of the limited liability partnership done after his
death.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter V Extent and Limitation of Liability of Limited Liability

Partnership and Partners

S. 30. Unlimited liability in case of fraud.-

(1) In the event of an act carried out by a limited liability partnership, or any of its
partners, with intent to defraud creditors of the limited liability partnership or
any other person, or for any fraudulent purpose, the liability of the limited liability
partnership and partners who acted with intent to defraud creditors or for any
fraudulent purpose shall be unlimited for all or any of the debts or other
liabilities of the limited liability partnership:

Provided that in case any such act is carried out by a partner, the limited liability
partnership is liable to the same extent as the partner unless it is established by
the limited liability partnership that such act was without the knowledge or the
authority of the limited liability partnership.

(2) Where any business is carried on with such intent or for such purpose as
mentioned in sub-section (1), every person who was knowingly a party to the
carrying on of the business in the manner aforesaid shall be punishable with
imprisonment for a term which may extend to two years and with fine which
shall not be less than fifty thousand rupees but which may extend to five lakh
rupees.

(3) Where a limited liability partnership or any partner or designated partner or

employee of such limited liability partnership has conducted the affairs of the
limited liability partnership in a fraudulent manner, then without prejudice to any
criminal proceedings which may arise under any law for the time being in force,
the limited liability partnership and any such partner or designated partner or
employee shall be liable to pay compensation to any person who has suffered
any loss or damage by reason of such conduct:

Provided that such limited liability partnership shall not be liable if any such
partner or designated partner or employee has acted fraudulently without
knowledge of the limited liability partnership.

Note: Where the LLP is not made a party and there was no case made for fraud by the
partners, a claim for injunction against property that was the subject-matter from being
alienated was declined.4

4 Rajesh Baid v Mohammad Ibrahim, AIR 2016 Cal 344 : (2016) 166 AIC 800
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter V Extent and Limitation of Liability of Limited Liability

Partnership and Partners

S. 31. Whistle blowing.-

(1) The Court or Tribunal may reduce or waive any penalty leviable against any
partner or employee of a limited liability partnership, if it is satisfied that—

(a) such partner or employee of a limited liability partnership has provided

useful information during investigation of such limited liability
partnership; or

(b) when any information given by any partner or employee (whether or not
during investigation) leads to limited liability partnership or any partner or
employee of such limited liability partnership being convicted under this
Act or any other Act.

(2) No partner or employee of any limited liability partnership may be discharged,

demoted, suspended, threatened, harassed or in any other manner
discriminated against the terms and conditions of his limited liability
partnership or employment merely because if his providing information or
causing information to be provided pursuant to sub-section (1).
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VI Contributions

S. 32. Form of contribution.-

(1) A contribution of a partner may consist of tangible, movable or immovable or

intangible property or other benefit to the limited liability partnership, including
money, promissory notes, other agreements to contribute cash or property, and
contracts for services performed or to be performed.

(2) The monetary value of contribution of each partner shall be accounted for and
disclosed in the accounts of the limited liability partnership in the manner as
may be prescribed.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VI Contributions

S. 33. Obligation to contribute.-

(1) The obligation of a partner to contribute money or other property or other

benefit or to perform services for a limited liability partnership shall be as per
the limited liability partnership agreement.

(2) A creditor of a limited liability partnership, which extends credit or otherwise

acts in reliance on an obligation described in that agreement, without notice of
any compromise between partners, may enforce the original obligation against
such partner.

Note: Sub-section (2) is an obvious corollary to section 29.

The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 34. Maintenance of books of account, other records and audit, etc.-

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

(2) Every limited liability partnership shall, within a period of six months from the
end of each financial year, prepare a Statement of Account and Solvency for the
said financial year as at the last day of the said financial year in such form as
may be prescribed, and such statement shall be signed by the designated
partners of the limited liability partnership.

(3) Every limited liability partnership shall file within the prescribed time, the
Statement of Account and Solvency prepared pursuant to sub-section (2) with
the Registrar every year in such form and manner and accompanied by such
fees as may be prescribed.

(4) The accounts of limited liability partnerships shall be audited in accordance

with such rules as may be prescribed:

Provided that the Central Government may, by notification in the Official Gazette,
exempt any class or classes of limited liability partnerships from the
requirements of this sub-section.

(5) Any limited liability partnership which fails to comply with the provisions of this
section shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees and every designated
partner of such limited liability partnership shall be punishable with fine which
shall not be less than ten thousand rupees but which may extend to one lakh
rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 35. Annual return.-

(1) Every limited liability partnership shall file an annual return duly authenticated
with the Registrar within sixty days of closure of its financial year in such form
and manner and accompanied by such fee as may be prescribed.

(2) Any limited liability partnership which fails to comply with the provisions of this
section shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees.

(3) If the limited liability partnership contravenes the provisions of this section, the
designated partner of such limited liability partnership shall be punishable with
fine which shall not be less than ten thousand rupees but which may extend to
one lakh rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 36. Inspection of documents kept by Registrar.-

The incorporation document, names of partners and changes, if any, made therein,
Statement of Account and Solvency and annual return filed by each limited liability
partnership with the Registrar shall be available for inspection by any person in such
manner and on payment of such fee as may be prescribed.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 37. Penalty for false statement.-

If in any return, statement or other document required by or for the purposes of any of
the provisions of this Act, any person makes a statement—

(a) which is false in any material particular, knowing it to be false; or

(b) which omits any material fact knowing it to be material,

he shall, save as otherwise expressly provided in this Act, be punishable with

imprisonment for a term which may extend to two years, and shall also be liable
to fine which may extend to five lakh rupees but which shall not be less than one
lakh rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 38. Power of Registrar to obtain information.-

(1) In order to obtain such information as the Registrar may consider necessary for
the purposes of carrying out the provisions of this Act, the Registrar may require
any person including any present or former partner or designated partner or
employee of a limited liability partnership to answer any question or make any
declaration or supply any details or particulars in writing to him within a
reasonable period.

(2) In case any person referred to in sub-section (1) does not answer such question
or make such declaration or supply such details or particulars asked for by the
Registrar within a reasonable time or time given by the Registrar or when the
Registrar is not satisfied with the reply or declaration or details or particulars
provided by such person, the Registrar shall have power to summon that person
to appear before him or an inspector or any other public officer whom the
Registrar may designate, to answer any such question or make such declaration
or supply such details, as the case may be.

(3) Any person who, without lawful excuse, fails to comply with any summons or
requisition of the Registrar under this section shall be punishable with fine
which shall not be less than two thousand rupees but which may extend to
twenty-five thousand rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 39. Compounding of offences.-

The Central Government may compound any offence under this Act which is
punishable with fine only, by collecting from a person reasonably suspected of having
committed the offence, a sum which may extend to the amount of the maximum fine
prescribed for the offence.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 40. Destruction of old records.-

The Registrar may destroy any document filed or registered with him in physical form
or in electronic form in accordance with such rules as may be prescribed.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VII Financial Disclosures

S. 41. Enforcement of duty to make returns, etc.-

(1) If any limited liability partnership is in default in complying with—

(a) any provisions of this Act or of any other law which requires the filing in
any manner with the Registrar of any return, account or other document
or the giving of notice to him of any matter; or

(b) any request of the Registrar to amend or complete and re-submit any
document or to submit a fresh document,

and fails to make good the default within fourteen days after the service on the
limited liability partnership of a notice requiring it to be done, the Tribunal may,
on application by the Registrar, make an order directing that limited liability
partnership or its designated partners or its partners to make good the default
within such time as specified in the order.

(2) Any such order may provide that all the costs of and incidental to the application
shall be borne by that limited liability partnership.

(3) Nothing in this section shall limit the operation of any other provision of this Act
or any other law imposing penalties in respect of any default referred to in this
section on that limited liability partnership.

Note: The Transitional provisions contained under section 81 would require the use of
the expression "Tribunal" occurring in clause (b) of sub-section (1) of section 41.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter VIII Assignment and Transfer of Partnership Rights

S. 42. Partner's transferable interest.-

(1) The rights of a partner to a share of the profits and losses of the limited liability
partnership and to receive distributions in accordance with the limited liability
partnership agreement are transferable either wholly or in part.

(2) The transfer of any right by any partner pursuant to sub-section (1) does not by
itself cause the disassociation of the partner or a dissolution and winding up of
the limited liability partnership.

(3) The transfer of right pursuant to this section does not, by itself, entitle the
transferee or assignee to participate in the management or conduct of the
activities of the limited liability partnership, or access information concerning
the transactions of the limited liability partnership.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 43. Investigation of the affairs of limited liability partnership.-

(1) The Central Government shall appoint one or more competent persons as
inspectors to investigate the affairs of a limited liability partnership and to
report thereon in such manner as it may direct if—

(a) the Tribunal, either suo motu, or on an application received from not less
than one-fifth of the total number of partners of limited liability
partnership, by order, declares that the affairs of the limited liability
partnership ought to be investigated; or

(b) any Court, by order, declares that the affairs of a limited liability
partnership ought to be investigated.

(2) The Central Government may appoint one or more competent persons as
inspectors to investigate the affairs of a limited liability partnership and to
report on them in such manner as it may direct.

(3) The appointment of inspectors pursuant to sub-section (2) may be made,—

(a) if not less than one-fifth of the total number of partners of the limited
liability partnership make an application along with supporting evidence
and security amount as may be prescribed; or

(b) if the limited liability partnership makes an application that the affairs of
the limited liability partnership ought to be investigated; or

(c) if, in the opinion of the Central Government, there are circumstances
suggesting—

(i) that the business of the limited liability partnership is being or has
been conducted with an intent to defraud its creditors, partners or
any other person, or otherwise for a fraudulent or unlawful
purpose, or in a manner oppressive or unfairly prejudicial to some
or any of its partners, or that the limited liability partnership was
formed for any fraudulent or unlawful purpose; or

(ii) that the affairs of the limited liability partnership are not being
conducted in accordance with the provisions of this Act; or

(iii) that, on receipt of a report of the Registrar or any other

investigating or regulatory agency, there are sufficient reasons
that the affairs of the limited liability partnership ought to be
investigated.

Note: The Transitional provisions contained under section 81 would require the
use of the expression "Tribunal" occurring in clause (a) of sub-section (1) of
section 43 and section 44, to be substituted the words "Company Law Board".
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 44. Application by partners for investigation.-

An application by partners of the limited liability partnership under clause (a) of sub-
section (1) of section 43 shall be supported by such evidence as the Tribunal may
require for the purpose of showing that the applicants have good reason for requiring
the investigation and the Central Government may, before appointing an inspector,
require the applicants to give security, of such amount as may be prescribed, for
payment of costs of the investigation.

Note: The Transitional provisions contained under section 81 would require the use of
the expression "Tribunal" occurring in this section 44, to be substituted the words
"Company Law Board".
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 45. Firm, body corporate or association not to be appointed as inspector.-

No firm, body corporate or other association shall be appointed as an inspector.

The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 46. Power of inspectors to carry out investigation into affairs of related

entities, etc.-

(1) If an inspector appointed by the Central Government to investigate the affairs of

a limited liability partnership thinks it necessary for the purposes of his
investigation to investigate also the affairs of an entity which has been
associated in the past or is presently associated with the limited liability
partnership or any present or former partner or designated partner of the limited
liability partnership, the inspector shall have the power to do so and shall report
on the affairs of the other entity or partner or designated partner, so far as he
thinks that the results of his investigation thereof are relevant to the
investigation of the affairs of the limited liability partnership.

(2) In the case of any entity or partner or designated partner referred to in sub-
section (1), the inspector shall not exercise his power of investigating into, and
reporting on, its or his affairs without obtaining the prior approval of the Central
Government thereto:

Provided that before according approval under this sub-section, the Central
Government shall give the entity or partner or designated partner a reasonable
opportunity to show cause why such approval should not be accorded.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 47. Production of documents and evidence.-

(1) It shall be the duty of the designated partner and partners of the limited liability
partnership—

(a) to preserve and to produce before an inspector or any person authorised

by him in this behalf with the previous approval of the Central
Government, all books and papers of, or relating to, the limited liability
partnership or, as the case may be, the other entity, which are in their
custody or power; and

(b) otherwise to give to the inspector all assistance in connection with the
investigation which they are reasonably able to give.

(2) The inspector may, with the previous approval of the Central Government,
require any entity other than an entity referred to in sub-section (1) to furnish
such information to, or produce such books and papers before him or any
person authorised by him in this behalf, with the previous approval of that
Government, as he may consider necessary, if the furnishing of such
information or the production of such books and papers is relevant or necessary
for the purposes of his investigation.

(3) The inspector may keep in his custody any books and papers produced under
sub-section (1) or sub-section (2) for thirty days and thereafter shall return the
same to the limited liability partnership, other entity or individual by whom or on
whose behalf the books and papers are produced:

Provided that the inspector may call for the books and papers if they are needed
again:

Provided further that if certified copies of the books and papers produced under
sub-section (2) are furnished to the inspector, he shall return those books and
papers to the entity or person concerned.

(4) An inspector may examine on oath—

(a) any of the persons referred to in sub-section (1);

(b) with the previous approval of the Central Government, any other person
in relation to the affairs of the limited liability partnership or any other
entity, as the case may be; and

(c) may administer an oath accordingly and for that purpose may require any
of those persons to appear before him personally.

(5) If any person fails without reasonable cause or refuses—

(a) to produce before an inspector or any person authorised by him in this

behalf with the previous approval of the Central Government any book or
 paper which it is his duty under sub-section (1) or sub-section (2) to
produce; or

(b) to furnish any information which is his duty under sub-section (2) to
furnish; or

(c) to appear before the inspector personally when required to do so under

sub-section (4) or to answer any question which is put to him by the
inspector in pursuance of that sub-section; or

(d) to sign the notes of any examination,

he shall be punishable with fine which shall not be less than two thousand
rupees but which may extend to twenty-five thousand rupees and with a further
fine which shall not be less than fifty rupees but which may extend to five
hundred rupees for every day after the first day after which the default
continues.

(6) The notes of any examination under sub-section (4) shall be taken down in
writing and signed by the person whose examination was made on oath and a
copy of such notes shall be given to the person so examined on oath and
thereafter be used as an evidence by the inspector.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 48. Seizure of documents by inspector.-

(1) Where in the course of investigation, the inspector has reasonable ground to
believe that the books and papers of, or relating to, the limited liability
partnership or other entity or partner or designated partner of such limited
liability partnership may be destroyed, mutilated, altered, falsified or secreted,
the inspector may make an application to the Judicial Magistrate of the first
class, or, as the case may be, the Metropolitan Magistrate, having jurisdiction,
for an order for the seizure of such books and papers.

(2) After considering the application and hearing the inspector, if necessary, the
Magistrate may, by order, authorise the inspector —

(a) to enter, with such assistance, as may be required, the place or places
where such books and papers are kept;

(b) to search that place or those places in the manner specified in the order;
and

(c) to seize books and papers which the inspector considers it necessary for
the purposes of his investigation.

(3) The inspector shall keep in his custody the books and papers seized under this
section for such period not later than the conclusion of the investigation as he
considers necessary and thereafter shall return the same to the concerned
entity or person from whose custody or power they were seized and inform the
Magistrate of such return:

Provided that the books and papers shall not be kept seized for a continuous
period of more than six months:

Provided further that the inspector may, before returning such books and papers
as aforesaid, place identification marks on them or any part thereof.

(4) Save as otherwise provided in this section, every search or seizure made under
this section shall be carried out in accordance with the provisions of the Code of
Criminal Procedure, 1973 (2 of 1974) relating to searches or seizures made
under that Code.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 49. Inspector's report.-

(1) The inspectors may, and if so directed by the Central Government, shall make
interim reports to that Government, and on the conclusion of the investigation,
shall make a final report to the Central Government and any such report shall be
written or printed, as the Central Government may direct.

(2) The Central Government—

(a) shall forward a copy of any report (other than an interim report) made by
the inspectors to the limited liability partnership at its registered office,
and also to any other entity or person dealt with or related to the report;
and

(b) may, if it thinks fit, furnish a copy thereof, on request and on payment of
the prescribed fee, to any person or entity related to or affected by the
report.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 50. Prosecution.-

If, from the report under Section 49, it appears to the Central Government that any
person in relation to the limited liability partnership or in relation to any other entity
whose affairs have been investigated, has been guilty of any offence for which he is
liable, the Central Government may prosecute such person for the offence; and it shall
be the duty of all partners, designated partners and other employees and agents of the
limited liability partnership or other entity, as the case may be, to give the Central
Government all assistance in connection with the prosecution which they are
reasonably able to give.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 51. Application for winding up of limited liability partnership.-

If any such limited liability partnership is liable to be wound up under this Act or any
other law for the time being in force, and it appears to the Central Government from any
such report under Section 49 that it is expedient to do so by reason of any such
circumstances as are referred to in sub-clause (i) or sub-clause (ii) of clause (c) of sub-
section (3) of section 43, the Central Government may, unless the limited liability
partnership is already being wound up by the Tribunal, cause to be presented to the
Tribunal by any person authorised by the Central Government in this behalf, a petition
for the winding up of the limited liability partnership on the ground that it is just and
equitable that it should be wound up.

Note: The Transitional provisions in section 81 provide the substitution of the

expression "Tribunal" occurring in this section as High Court.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 52. Proceedings for recovery of damages or property.-

If, from any report under Section 49, it appears to the Central Government that
proceedings ought, in the public interest, to be brought by the limited liability
partnership or any entity whose affairs have been investigated,—

(a) for the recovery of damages in respect of any fraud, misfeasance or other
misconduct in connection with the promotion or formation, or the management
of the affairs, of such limited liability partnership or such other entity; or

(b) for the recovery of any property of such limited liability partnership or such other
entity, which has been misapplied or wrongfully retained,

the Central Government may itself bring proceedings for that purpose.

Note: The liability in such a situation shall be not merely of the LLP but also personally
against partners who are guilty of fraud.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 53. Expenses of investigation.-

(1) The expenses of, and incidental to, an investigation by an inspector appointed
by the Central Government under this Act shall be defrayed in the first instance
by the Central Government; but the following persons shall, to the extent
mentioned below, be liable to reimburse the Central Government in respect of
such expenses, namely:—

(a) any person who is convicted on a prosecution, or who is ordered to pay

damages or restore any property in proceedings brought by virtue of
section 52, may, in the same proceedings, be ordered to pay the said
expenses to such extent as may be specified by the court convicting
such person, or ordering him to pay such damages or restore such
property, as the case may be;

(b) any entity in whose name proceedings are brought as aforesaid shall be
liable, to the extent of the amount or value of any sums or property
recovered by it as a result of the proceedings; and

(c) unless, as a result of the investigation, a prosecution is instituted in

pursuance of section 50,—

(i) any entity, a partner or designated partner or any other person

dealt with by the report of the inspector shall be liable to reimburse
the Central Government in respect of the whole of the expenses,
unless and except in so far as, the Central Government otherwise
directs; and

(ii) the applicants for the investigation, where the inspector was
appointed in pursuance of the provisions of clause (a) of sub-
section (1) of section 43, shall be liable to such extent, if any, as
the Central Government may direct.

(2) Any amount for which a limited liability partnership or other entity is liable by
virtue of clause (b) of sub-section (1) shall be a first charge on the sums or
property mentioned in that clause.

(3) The amount of expenses in respect of which any limited liability partnership,
other entity, a partner or designated partner or any other person is liable under
sub-clause (i) of clause (c) of sub-section (1) to reimburse the Central
Government shall be recoverable as arrears of land revenue.

(4) For the purposes of this section, any costs or expenses incurred by the Central
Government or in connection with the proceedings brought by virtue of section
52 shall be treated as expenses of the investigation giving rise to the
proceedings.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter IX Investigation

S. 54. Inspector's report to be evidence.-

A copy of any report of any inspector or inspectors appointed under the provisions of
this Act, authenticated in such manner, if any, as may be prescribed, shall be admissible
in any legal proceeding as evidence in relation to any matter contained in the report.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter X Conversion into Limited Liability Partnership

S. 55. Conversion from firm into limited liability partnership.-

A firm may convert into a limited liability partnership in accordance with the provisions
of this Chapter and the Second Schedule.

Note: Sections 55 to 57 are unique in the sense that they allow for flexibility for a firm to
be converted to an LLP and vice versa.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter X Conversion into Limited Liability Partnership

S. 56. Conversion from private company into limited liability partnership.-

A private company may convert into a limited liability partnership in accordance with
the provisions of this Chapter and the Third Schedule.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter X Conversion into Limited Liability Partnership

S. 57. Conversion from unlisted public company into limited liability

partnership.-

An unlisted public company may convert into a limited liability partnership in

accordance with the provisions of this Chapter and the Fourth Schedule.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter X Conversion into Limited Liability Partnership

S. 58. Registration and effect of conversion.-

(1) The Registrar, on satisfying that a firm, private company or an unlisted public
company, as the case may be, has complied with the provisions of the Second
Schedule, the Third Schedule or the Fourth Schedule, as the case may be, shall,
subject to the provisions of this Act and the rules made thereunder, register the
documents submitted under such Schedule and issue a certificate of
registration in such form as the Registrar may determine stating that the limited
liability partnership is, on and from the date specified in the certificate,
registered under this Act:

Provided that the limited liability partnership shall, within fifteen days of the date
of registration, inform the concerned Registrar of Firms or Registrar of
Companies, as the case may be, with which it was registered under the
provisions of the Indian Partnership Act, 1932 (9 of 1932) or the Companies Act,
1956 (1 of 1956), as the case may be, about the conversion and of the
particulars of the limited liability partnership in such form and manner as may
be prescribed.

(2) Upon such conversion, the partners of the firm, the shareholders of private
company or unlisted public company, as the case may be, the limited liability
partnership to which such firm or such company has converted, and the
partners of the limited liability partnership shall be bound by the provisions of
the Second Schedule, the Third Schedule or the Fourth Schedule, as the case
may be, applicable to them.

(3) Upon such conversion, on and from the date of certificate of registration, the
effects of the conversion shall be such as specified in the Second Schedule, the
Third Schedule or the Fourth Schedule, as the case may be.

(4) Notwithstanding anything contained in any other law for the time being in force,
on and from the date of registration specified in the certificate of registration
issued under the Second Schedule, the Third Schedule or the Fourth Schedule,
as the case may be,—

(a) there shall be a limited liability partnership by the name specified in the
certificate of registration registered under this Act;

(b) all tangible (movable or immovable) and intangible property vested in the
firm or the company, as the case may be, all assets, interests, rights,
privileges, liabilities, obligations relating to the firm or the company, as
the case may be, and the whole of the undertaking of the firm or the
company, as the case may be, shall be transferred to and shall vest in the
limited liability partnership without further assurance, act or deed; and

(c) the firm or the company, as the case may be, shall be deemed to be
dissolved and removed from the records of the Registrar of Firms or
Registrar of Companies, as the case may be.
 Note: Notice of Income Tax demand after the company under the Companies
Act, 1956 was changed as partnership under LLP will be liable for being
quashed.1

1 ITO v Aravali Polymers Pvt Ltd, 2015 SCC OnLine ITAT 14390.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XI Foreign Limited Liability Partnerships

S. 59. Foreign limited liability partnerships.-

The Central Government may make rules for provisions in relation to establishment of
place of business by foreign limited liability partnerships within India and carrying on
their business therein by applying or incorporating, with such modifications, as appear
appropriate, the provisions of the Companies Act, 1956 (1 of 1956) or such regulatory
mechanism with such composition as may be prescribed.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XII Compromise, Arrangement or Reconstruction of Limited

Liability Partnerships

S. 60. Compromise, or arrangement of limited liability partnerships.-

(1) Where a compromise or arrangement is proposed—

(a) between a limited liability partnership and its creditors; or

(b) between a limited liability partnership and its partners,

the Tribunal may, on the application of the limited liability partnership or of any
creditor or partner of the limited liability partnership, or, in the case of a limited
liability partnership which is being wound up, of the liquidator, order a meeting
of the creditors or of the partners, as the case may be, to be called, held and
conducted in such manner as may be prescribed or as the Tribunal directs.

(2) If a majority representing three-fourths in value of the creditors, or partners, as

the case may be, at the meeting, agree to any compromise or arrangement, the
compromise or arrangement shall, if sanctioned by the Tribunal, by order be
binding on all the creditors or all the partners, as the case may be, and also on
the limited liability partnership, or in the case of a limited liability partnership
which is being wound up, on the liquidator and contributories of the limited
liability partnership:

Provided that no order sanctioning any compromise or arrangement shall be

made by the Tribunal unless the Tribunal is satisfied that the limited liability
partnership or any other person by whom an application has been made under
sub-section (1) has disclosed to the Tribunal, by affidavit or otherwise, all
material facts relating to the limited liability partnership, including the latest
financial position of the limited liability partnership and the pendency of any
investigation proceedings in relation to the limited liability partnership.

(3) An order made by the Tribunal under sub-section (2) shall be filed by the limited
liability partnership with the Registrar within thirty days after making such an
order and shall have effect only after it is so filed.

(4) If default is made in complying with sub-section (3), the limited liability
partnership, and every designated partner of the limited liability partnership
shall be punishable with fine which may extend to one lakh rupees.

(5) The Tribunal may, at any time after an application has been made to it under this
section, stay the commencement or continuation of any suit or proceeding
against the limited liability partnership on such terms as the Tribunal thinks fit,
until the application is finally disposed of.

Note: The Transitional provision in section 81 provides the substitution of the

expression "Tribunal" occurring in this section up to section 64 to be substituted as
"High Court". See the similarity of the provision under section 391 of the Companies
Act, 1956 section 28 of the Presidency Towns Insolvency Act, 1909 and section 38 of
the Provincial Insolvency Act, 1920. Composition of debts where there involves a large
body of creditors under the above Acts do not compel unanimity and makes exigent
settlement that satisfies the majority of the body of creditors.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XII Compromise, Arrangement or Reconstruction of Limited

Liability Partnerships

S. 61. Power of Tribunal to enforce compromise or arrangement.-

(1) Where the Tribunal makes an order under section 60 sanctioning a compromise
or an arrangement in respect of a limited liability partnership, it—

(a) shall have power to supervise the carrying out of the compromise or an
arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such
directions in regard to any matter or make such modifications in the
compromise or arrangement as it may consider necessary for the proper
working of the compromise or arrangement.

(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement

sanctioned under section 60 cannot be worked satisfactorily with or without
modifications, it may, either on its own motion or on the application of any
person interested in the affairs of the limited liability partnership, make an order
for winding up the limited liability partnership, and such an order shall be
deemed to be an order made under section 64 of this Act.

Note: See the similarity of the provision under section 392 of the Companies Act, 1956.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XII Compromise, Arrangement or Reconstruction of Limited

Liability Partnerships

S. 62. Provisions for facilitating reconstruction or amalgamation of limited

liability partnerships.-

(1) Where an application is made to the Tribunal under Section 60 for sanctioning
of a compromise or arrangement proposed between a limited liability
partnership and any such persons as are mentioned in that section, and it is
shown to the Tribunal that—

(a) compromise or arrangement has been proposed for the purposes of, or in
connection with, a scheme for the reconstruction of any limited liability
partnership or limited liability partnerships, or the amalgamation of any
two or more limited liability partnerships; and

(b) under the scheme the whole or any part of the undertaking, property or
liabilities of any limited liability partnership concerned in the scheme (in
this section referred to as a "transferor limited liability partnership") is to
be transferred to another limited liability partnership (in this section
referred to as the "transferee limited liability partnership"),

the Tribunal may, either by the order sanctioning the compromise or

arrangement or by a subsequent order, make provisions for all or any of
the following matters, namely:—

(i) the transfer to the transferee limited liability partnership of the

whole or any part of the undertaking, property or liabilities of any
transferor limited liability partnership;

(ii) the continuation by or against the transferee limited liability

partnership of any legal proceedings pending by or against any
transferor limited liability partnership;

(iii) the dissolution, without winding up, of any transferor limited

liability partnership;

(iv) the provision to be made for any person who, within such time
and in such manner as the Tribunal directs, dissent from the
compromise or arrangement; and

(v) such incidental, consequential and supplemental matters as are

necessary to secure that the reconstruction or amalgamation
shall be fully and effectively carried out:

Provided that no compromise or arrangement proposed for the

purposes of, or in connection with, a scheme for the
amalgamation of a limited liability partnership, which is being
wound up, with any other limited liability partnership or limited
liability partnerships, shall be sanctioned by the Tribunal unless
the Tribunal has received a report from the Registrar that the
affairs of the limited liability partnership have not been conducted
 in a manner prejudicial to the interests of its partners or to public
interest:

Provided further that no order for the dissolution of any transferor

limited liability partnership under clause (iii) shall be made by the
Tribunal unless the Official Liquidator has, on scrutiny of the
books and papers of the limited liability partnership, made a report
to the Tribunal that the affairs of the limited liability partnership
have not been conducted in a manner prejudicial to the interests
of its partners or to public interest.

(2) Where an order under this section provides for the transfer of any property or
liabilities, then, by virtue of the order, that property shall be transferred to and
vest in, and those liabilities shall be transferred to and become the liabilities of,
the transferee limited liability partnership; and in the case of any property, if the
order so directs, freed from any charge which is, by virtue of the compromise or
arrangement, to cease to have effect.

(3) Within thirty days after the making of an order under this section, every limited
liability partnership in relation to which the order is made shall cause a certified
copy thereof to be filed with the Registrar for registration.

(4) If default is made in complying with the provisions of sub-section (3), the limited
liability partnership, every designated partner of the limited liability partnership
shall be punishable with fine which may extend to fifty thousand rupees.

Explanation.—In this section "property" includes property, rights and powers of

every description; and "liabilities" includes duties of every description.

Note: See section 394 of the Companies Act, 1956 for similarity in the provision.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIII Winding up and Dissolution

S. 63. Winding up and dissolution.-

The winding up of a limited liability partnership may be either voluntary or by the

Tribunal and limited liability partnership, so wound up may be dissolved.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIII Winding up and Dissolution

S. 64. Circumstances in which limited liability partnership may be wound up by

Tribunal.-

A limited liability partnership may be wound up by the Tribunal,—

(a) if the limited liability partnership decides that limited liability partnership be
wound up by the Tribunal;

(b) if, for a period of more than six months, the number of partners of the limited
liability partnership is reduced below two;

(c) if the limited liability partnership is unable to pay its debts;

(d) if the limited liability partnership has acted against the interests of the
sovereignty and integrity of India, the security of the State or public order;

(e) if the limited liability partnership has made a default in filing with the Registrar
the Statement of Account and Solvency or annual return for any five consecutive
financial years; or

(f) if the Tribunal is of the opinion that it is just and equitable that the limited liability
partnership be wound up.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIII Winding up and Dissolution

S. 65. Rules for winding up and dissolution.-

The Central Government may make rules for the provisions in relation to winding up
and dissolution of limited liability partnerships.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 66. Business transactions of partner with limited liability partnership.-

A partner may lend money to and transact other business with the limited liability
partnership and has the same rights and obligations with respect to the loan or other
transactions as a person who is not a partner.

Note: This is a unique provision that allows for a partner to do business with the
partnership. It is incidentally a corollary to giving a distinct identity to LLP and treats
the latter's liability as distinct from the liability of the partner.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 67. Application of the provisions of the Companies Act.-

(1) The Central Government may, by notification in the Official Gazette, direct that
any of the provisions of the Companies Act, 1956 (1 of 1956) specified in the
notification—

(a) shall apply to any limited liability partnership; or

(b) shall apply to any limited liability partnership with such exception,
modification and adaptation, as may be specified, in the notification.

(2) A copy of every notification proposed to be issued under sub-section (1) shall be
laid in draft before each House of Parliament, while it is in session, for a total
period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately
following the session or the successive sessions aforesaid, both Houses agree
in disapproving the issue of the notification or both Houses agree in making any
modification in the notification, the notification shall not be issued or, as the
case may be, shall be issued only in such modified form as may be agreed upon
by both the Houses.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 68. Electronic filing of documents.-

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

(2) A copy of or an extract from any document electronically filed with or submitted
to the Registrar which is supplied or issued by the Registrar and certified
through affixing digital signature as per the Information Technology Act, 2000
(21 of 2000) to be a true copy of or extract from such document shall, in any
proceedings, be admissible in evidence as of equal validity with the original
document.

(3) Any information supplied by the Registrar that is certified by the Registrar
through affixing digital signature to be a true extract from any document filed
with or submitted to the Registrar shall, in any proceedings, be admissible in
evidence and be presumed, unless evidence to the contrary is adduced, to be a
true extract from such document.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 69. Payment of additional fee.-

Any document or return required to be filed or registered under this Act with the
Registrar, if, is not filed or registered in time provided therein, may be filed or registered
after that time up to a period of three hundred days from the date within which it should
have been filed, on payment of additional fee of one hundred rupees for every day of
such delay in addition to any fee as is payable for filing of such document or return:

Provided that such document or return may, without prejudice to any other action or
liability under this Act, also be filed after such period of three hundred days on payment
of fee and additional fee specified in this section.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 70. Enhanced punishment.-

In case a limited liability partnership or any partner or designated partner of such

limited liability partnership commits any offence, the limited liability partnership or any
partner or designated partner shall, for the second or subsequent offence, be
punishable with imprisonment as provided, but in case of offences for which fine is
prescribed either along with or exclusive of imprisonment, with fine which shall be
twice the amount of fine for such offence.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 71. Application of other laws not barred.-

The provisions of this Act shall be in addition to, and not in derogation of, the
provisions of any other law for the time being in force.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 72. Jurisdiction of Tribunal and Appellate Tribunal.-

(1) The Tribunal shall exercise such powers and perform such functions as are, or
may be, conferred on it by or under this Act or any other law for the time being in
force.

(2) Any person aggrieved by an order or decision of Tribunal may prefer an appeal
to the Appellate Tribunal and the provisions of Sections 10-FQ, 10-FZA, 10-G, 10-
GD, 10-GE and 10-GF of the Companies Act, 1956 (1 of 1956) shall be applicable
in respect of such appeal.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 73. Penalty on non-compliance of any order passed by Tribunal.-

Whoever fails to comply with any order made by the Tribunal under any provision of
this Act shall be punishable with imprisonment which may extend to six months and
shall also be liable to a fine which shall not be less than fifty thousand rupees.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 74. General penalties.-

Any person guilty of an offence under this Act for which no punishment is expressly
provided shall be liable to a fine which may extend to five lakh rupees but which shall
not be less than five thousand rupees and with a further fine which may extend to fifty
rupees for every day after the first day after which the default continues.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 75. Power of Registrar to strike defunct limited liability partnership off

register.-

Where the Registrar has reasonable cause to believe that a limited liability partnership
is not carrying on business or its operation, in accordance with the provisions of this
Act, the name of limited liability partnership may be struck off the register of limited
liability partnerships in such manner as may be prescribed:

Provided that the Registrar shall, before striking off the name of any limited liability
partnership under this section, give such limited liability partnership a reasonable
opportunity of being heard.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 76. Offences by limited liability partnerships.-

Where an offence under this Act committed by a limited liability partnership is proved—

(a) to have been committed with the consent or connivance of a partner or partners
or designated partner or designated partners of the limited liability partnership;
or

(b) to be attributable to any neglect on the part of the partner or partners or

designated partner or designated partners of that limited liability partnership,

the partner or partners or designated partner or designated partners of the

limited liability partnership, as the case may be, as well as that limited liability
partnership shall be guilty of the offence and shall be liable to be proceeded
against and punished accordingly.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 77. Jurisdiction of Court.-

Notwithstanding any provision to the contrary in any Act for the time being in force, the
Judicial Magistrate of the first class or, as the case may be, the Metropolitan
Magistrate shall have jurisdiction to try any offence under this Act and shall have power
to impose punishment in respect of said offence.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 78. Power to alter schedules.-

(1) The Central Government may, by notification in the Official Gazette, alter any of
the provisions contained in any of the Schedules to this Act.

(2) Any alteration notified under sub-section (1) shall have effect as if enacted in
the Act and shall come into force on the date of the notification, unless the
notification otherwise directs.

(3) Every alteration made by the Central Government under sub-section (1) shall be
laid, as soon as may be after it is made, before each House of Parliament, while
it is in session, for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry of the
session immediately following the session or the successive sessions
aforesaid, both Houses agree in making any modification in the alteration, or
both Houses agree that the alteration should not be made, the alteration shall,
thereafter, have effect only in such modified form or be of no effect, as the case
may be; so, however, that any such modification or annulment shall be without
prejudice to the validity of anything previously done in pursuance of that
alteration.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 79. Power to make rules.-

(1) The Central Government may, by notification in the Official Gazette, make rules
for carrying out the provisions of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such
rules may provide for all or any of the following matters, namely:—

(a) form and manner of prior consent to be given by designated partner

under sub-section (3) of Section 7;

(b) the form and manner of particulars of every individual agreeing to act as
designated partner of limited liability partnership under sub-section (4) of
Section 7;

(c) the conditions and requirements relating to the eligibility of an individual

to become a designated partner under sub-section (5) of Section 7;

(d) the manner of filing the incorporation document and payment of fees
payable thereof under clause (b) of sub-section (1) of Section 11;

(e) the form of statement to be filed under clause (c) of sub-section (1) of
Section 11;

(f) the form of incorporation document under clause (a) of sub-section (2) of
Section 11;

(g) the information to be contained in the incorporation document

concerning the proposed limited liability partnership under clause (g) of
sub-section (2) of Section 11;

(h) the manner of serving the documents on a limited liability partnership or

a partner or a designated partner and the form and manner in which any
other address may be declared by the limited liability partnership under
sub-section (2) of Section 13;

(i) the form and manner of notice to the Registrar and the conditions in
respect of change of registered office under sub-section (3) of Section 13;

(j) the form and manner of application and amount of fee payable to the
Registrar under sub-section (1) of Section 16;

(k) the manner in which names will be reserved by the Registrar under
subsection (2) of Section 16;

(l) the manner in which an application may be made by an entity under sub-
section (1) of Section 18;

(m) the form and manner of notice of change of name of limited liability
partnership and the amount of fee payable under Section 19;

(n) the form and manner of the limited liability partnership agreement and
the changes made therein and the amount of fee payable under sub-
section (2) of Section 23;
(o) the form of notice, the amount of fee payable and the manner of
authentication of the statement under clauses (a), (b) and (c) of sub-
section (3) of Section 25;

(p) the manner of accounting and disclosure of monetary value of

contribution of a partner under sub-section (2) of Section 32;

(q) the books of account and the period of their maintenance under sub-
section (1) of Section 34;

(r) the form of Statement of Account and Solvency under sub-section (2) of
Section 34;

(s) the form, manner, fee and time of filing of Statement of Account and
Solvency under sub-section (3) of Section 34;

(t) the audit of accounts of a limited liability partnership under sub-section

(4) of Section 34;

(u) the form and manner of annual return and fee payable under sub-section
(1) of Section 35;

(v) the manner and amount of fee payable for inspection of incorporation
document, names of partners and changes made therein, Statement of
Account and Solvency and annual return under Section 36;

(w) the destruction of documents by Registrar in any form under Section 40;

(x) the amount required as security under clause (a) of sub-section (3) of
Section 43;

(y) the amount of security to be given under Section 44;

(z) the fee payable for furnishing a copy under clause (b) of sub-section (2)
of Section 49;

(za) the manner of authentication of report of inspector under Section 54;

(zb) the form and manner of particulars about conversion under the proviso
to sub-section (1) of Section 58;

(zc) in relation to establishment of place of business and carrying on

business in India by foreign limited liability partnerships and regulatory
mechanism and composition under Section 59;

(zd) the manner of calling, holding and conducting meeting under sub-
section (1) of Section 60;

(ze) in relation to winding up and dissolution of limited liability partnerships

under Section 65;

(zf) the manner and conditions for filing document electronically under sub-
section (1) of Section 68;

(zg) the manner for striking off the names of limited liability partnerships
from the register under Section 75;

(zh) the form and manner of statement containing particulars and amount of
fee payable under sub-paragraph (a) of Paragraph 4 of the Second
Schedule;

(zi) the form and manner of particulars about conversion under the proviso
to Paragraph 5 of the Second Schedule;

(zj) the form and manner of the statement and the amount of fee payable
 under sub-paragraph (a) of Paragraph 3 of the Third Schedule;

(zk) the form and manner of particulars about conversion under the proviso
to Paragraph 4 of the Third Schedule;

(zl) the form and manner of the statement and amount of fee payable under
sub-paragraph (a) of Paragraph 4 of the Fourth Schedule; and

(zm) the form and manner of particulars about conversion under the proviso
to Paragraph 5 of the Fourth Schedule.

(3) Every rule made under this Act by the Central Government shall be laid, as soon
as may be after it is made, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one session
or in two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid, both
Houses agree in making any modification in the rule, or both Houses agree that
the rule should not be made, the rule shall, thereafter, have effect only in such
modified form or be of no effect, as the case may be; so, however, that any such
modification or annulment shall be without prejudice to the validity of anything
previously done under that rule.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 80. Power to remove difficulties.-

(1) If any difficulty arises in giving effect to the provisions of this Act, the Central
Government may, by order published in the Official Gazette, make such
provisions, not inconsistent with the provisions of this Act as may appear to it to
be necessary for removing the difficulty:

Provided that no such order shall be made under this section after the expiry of
a period of two years from the commencement of this Act.

(2) Every order made under this section shall be laid, as soon as may be, after it is
made, before each House of Parliament.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

Chapter XIV Miscellaneous

S. 81. Transitional provisions.-

Until the Tribunal and the Appellate Tribunal are constituted under the provisions of the
Companies Act, 1956 (1 of 1956), the provisions of this Act shall have effect to the
following modifications, namely:—

(a) for the word "Tribunal" occurring in clause (b) of sub-section (1) of Section 41,
clause (a) of sub-section (1) of Section 43 and Section 44, the words "Company
Law Board" had been substituted;

(b) for the word "Tribunal" occurring in Section 51 and in Sections 60 to 64, the
words "High Court" had been substituted;

(c) for the words "Appellate Tribunal" occurring in sub-section (2) of Section 72, the
words "High Court" had been substituted.
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

FIRST SCHEDULE

[See Section 23(4)]

PROVISIONS REGARDING MATTERS RELATING TO MUTUAL RIGHTS AND DUTIES OF

PARTNERS AND LIMITED LIABILITY PARTNERSHIP AND ITS PARTNERS APPLICABLE
IN THE ABSENCE OF ANY AGREEMENT ON SUCH MATTERS

1. The mutual rights and duties of the partners and the mutual rights and duties of the
limited liability partnership and its partners shall be determined, subject to the terms of
any limited liability partnership agreement or in the absence of any such agreement on
any matter, by the provisions in this Schedule.

2. All the partners of a limited liability partnership are entitled to share equally in the
capital, profits and losses of the limited liability partnership.

3. The limited liability partnership shall indemnify each partner in respect of payments
made and personal liabilities incurred by him—

(a) in the ordinary and proper conduct of the business of the limited liability
partnership; or

(b) in or about anything necessarily done for the preservation of the business or
property of the limited liability partnership.

4. Every partner shall indemnify the limited liability partnership for any loss caused to it
by his fraud in the conduct of the business of the limited liability partnership.

5. Every partner may take part in the management of the limited liability partnership.

6. No partner shall be entitled to remuneration for acting in the business or

management of the limited liability partnership.

7. No person may be introduced as a partner without the consent of all the existing
partners.

8. Any matter or issue relating to the limited liability partnership shall be decided by a
resolution passed by a majority in number of the partners, and for this purpose, each
partner shall have one vote. However, no change may be made in the nature of
business of the limited liability partnership without the consent of all the partners.

9. Every limited liability partnership shall ensure that decisions taken by it are recorded
in the minutes within thirty days of taking such decisions and are kept and maintained
at the registered office of the limited liability partnership.

10. Each partner shall render true accounts and full information of all things affecting
the limited liability partnership to any partner or his legal representatives.

11. If a partner, without the consent of the limited liability partnership, carries on any
business of the same nature as and competing with the limited liability partnership, he
must account for and pay over to the limited liability partnership all profits made by him
in that business.
12. Every partner shall account to the limited liability partnership for any benefit derived
by him without the consent of the limited liability partnership from any transaction
concerning the limited liability partnership, or from any use by him of the property,
name or any business connection of the limited liability partnership.

13. No majority of the partners can expel any partner unless a power to do so has been
conferred by express agreement between the partners.

14. All disputes between the partners arising out of the limited liability partnership
agreement which cannot be resolved in terms of such agreement shall be referred for
arbitration as per the provisions of the Arbitration and Conciliation Act, 1996 (26 of
1996).
The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

THE SECOND SCHEDULE

(See section 55)

CONVERSION FROM FIRM INTO LIMITED LIABILITY PARTNERSHIP

1. Interpretation.—In this Schedule, unless the context otherwise requires,—

(a) "firm" means a firm as defined in section 4 of the Indian Partnership Act, 1932 (9
of 1932);

(b) "convert", in relation to a firm converting into a limited liability partnership,

means a transfer of the property, assets, interests, rights, privileges, liabilities,
obligations and the undertaking of the firm to the limited liability partnership in
accordance with this Schedule.

2. Conversion from firm into limited liability partnership.—(1) A firm may convert into a
limited liability partnership by complying with the requirements as to the conversion set
out in this Schedule.

(2) Upon such conversion, the partners of the firm shall be bound by the provisions of
this Schedule that are applicable to them.

3. Eligibility for conversion.—A firm may apply to convert into a limited liability
partnership in accordance with this Schedule if and only if the partners of the limited
liability partnership into which the firm is to be converted, comprise, all the partners of
the firm and no one else.

4. Statements to be filed.—A firm may apply to convert into a limited liability

partnership by filing with the Registrar—

(a) a statement by all of its partners in such form and manner and accompanied by
such fee as the Central Government may prescribe, containing the following
particulars, namely:—

(i) the name and registration number, if applicable, of the firm; and

(ii) the date on which the firm was registered under the Indian Partnership
Act, 1932 (9 of 1932) or under any other law, if applicable, and

(b) incorporation document and statement referred to in section 11.

5. Registration of conversion.—On receiving the documents referred to in paragraph 4,

the Registrar shall subject to the provisions of this Act, register the documents and
issue a certificate of registration in such form as the Registrar may determine stating
that the limited liability partnership is, on and from the date specified in the certificate,
registered under this Act:

Provided that the limited liability partnership shall, within fifteen days of the date of
registration, inform, the concerned Registrar of Firms with which it was registered
under the provisions of the Indian Partnership Act, 1932 (9 of 1932) about the
conversion and of the particulars of the limited liability partnership in such form and
manner as the Central Government may prescribe.
6. Registrar may refuse to register.—(1) Nothing in this Schedule shall be construed as
to require the Registrar to register any limited liability partnership if he is not satisfied
with the particulars or other information furnished under the provisions of this Act:

Provided that an appeal may be made before the Tribunal in case of refusal of
registration by the Registrar:

1[Provided further that until the Tribunal is constituted under the Companies Act, 1956,
the appeal under this sub-paragraph may be made before the Company Law Board].

(2) The Registrar may, in any particular case, require the documents referred to in
paragraph 4 to be verified in such manner, as he considers fit.

7. Effect of registration.—On and from the date of registration specified in the

certificate of registration issued under paragraph 5,—

(a) there shall be a limited liability partnership by the name specified in the
certificate of registration registered under this Act;

(b) all tangible (movable and immovable) property as well as intangible property
vested in the firm, all assets, interests, rights, privileges, liabilities, obligations
relating to the firm and the whole of the undertaking of the firm shall be
transferred to and shall vest in the limited liability partnership without further
assurance, act or deed; and

(c) the firm shall be deemed to be dissolved and if earlier registered under the
Indian Partnership Act, 1932 (9 of 1932) removed from the records maintained
under that Act.

8. Registration in relation to property.—If any property to which sub-paragraph (b) of

paragraph 7 applies is registered with any authority, the limited liability partnership
shall, as soon as practicable after the date of registration, take all necessary steps as
required by the relevant authority to notify the authority of the conversion and of the
particulars of the limited liability partnership in such medium and form as the authority
may specify.

9. Pending proceedings.—All proceedings by or against the firm which are pending in

any Court or Tribunal or before any authority on the date of registration may be
continued, completed and enforced by or against the limited liability partnership.

10. Continuance of conviction, ruling, order or judgment.—Any conviction, ruling, order

or judgment of any Court, Tribunal or other authority in favour of or against the firm
may be enforced by or against the limited liability partnership.

11. Existing agreements.—Every agreement to which the firm was a party immediately
before the date of registration, whether or not of such nature that the rights and
liabilities there under could be assigned, shall have effect as from that date as if—

(a) the limited liability partnership were a party to such an agreement instead of the
firm; and

(b) for any reference to the firm, there were substituted in respect of anything to be
done on or after the date of registration a reference to the limited liability
partnership.

12. Existing contracts, etc.—All deeds, contracts, schemes, bonds, agreements,

applications, instruments and arrangements subsisting immediately before the date of
registration relating to the firm or to which the firm is a party, shall continue in force on
and after that date as if they relate to the limited liability partnership and shall be
enforceable by or against the limited liability partnership as if the limited liability
partnership were named therein or were a party thereto instead of the firm.

13. Continuance of employment.—Every contract of employment to which paragraph

11 or paragraph 12 applies shall continue to be in force on or after the date of
registration as if the limited liability partnership were the employer thereunder instead
of the firm.

14. Existing appointment, authority or power.—(1) Every appointment of the firm in any
role or capacity which is in force immediately before the date of registration shall take
effect and operate from that date as if the limited liability partnership were appointed.

(2) Any authority or power conferred on the firm which is in force immediately before
the date of registration shall take effect and operate from that date as if it were
conferred on the limited liability partnership.

15. Application of paragraphs 7 to 14.—The provisions of paragraphs 7 to 14 (both

inclusive) shall apply to any approval, permit or licence issued to the firm under any
other Act which is in force immediately before the date of registration of the limited
liability partnership, subject to the provisions of such other Act under which such
approval, permit or licence has been issued.

16. Partner liable for liabilities and obligations of firm before conversion.—(1)
Notwithstanding anything in paragraphs 7 to 14 (both inclusive), every partner of a firm
that has converted into a limited liability partnership shall continue to be personally
liable (jointly and severally with the limited liability partnership) for the liabilities and
obligations of the firm which were incurred prior to the conversion or which arose from
any contract entered into prior to the conversion.

(2) If any such partner discharges any liability or obligation referred to in sub-paragraph
(1), he shall be entitled (subject to any agreement with the limited liability partnership
to the contrary) to be fully indemnified by the limited liability partnership in respect of
such liability or obligation.

17. Notice of conversion in correspondence.—(1) The limited liability partnership shall

ensure that for a period of twelve months commencing not later than fourteen days
after the date of registration, every official correspondence of the limited liability
partnership bears the following:

(a) a statement that it was, as from the date of registration, converted from a firm
into a limited liability partnership; and

(b) the name and registration number, if applicable, of the firm from which it was
converted.

(2) Any limited liability partnership which contravenes the provisions of sub-paragraph
(1) shall be punishable with fine which shall not be less than ten thousand rupees but
which may extend to one lakh rupees and with a further fine which shall not be less
than fifty rupees but which may extend to five hundred rupees for every day after the
first day after which the default continues.

1 Ins. by GSR 386(E), dated 4-6-2009, (w.e.f. 4-6-2009).

The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

THE THIRD SCHEDULE

(See section 56)

CONVERSION FROM PRIVATE COMPANY INTO LIMITED LIABILITY PARTNERSHIP

1. Interpretation.—In this Schedule, unless the context otherwise requires,—

(a) "company" means a private company as defined in clause (iii) of sub-section (1)
of section 3 of the Companies Act, 1956 (1 of 1956);

(b) "convert", in relation to a private company converting into a limited liability

partnership, means a transfer of the property, assets, interests, rights, privileges,
liabilities, obligations and the undertaking of the private company to the limited
liability partnership in accordance with this Schedule.

2. Eligibility for conversion of private companies into limited liability partnership.—(1)

A company may convert into a limited liability partnership by complying with the
requirements as to the conversion set out in this Schedule.

(2) A company may apply to convert into a limited liability partnership in accordance
with this Schedule if and only if—

(a) there is no security interest in its assets subsisting or in force at the time of
application; and

(b) the partners of the limited liability partnership to which it converts comprise all
the shareholders of the company and no one else.

(3) Upon such conversion, the company, its shareholders, the limited liability
partnership into which the company has converted and the partners of that limited
liability partnership shall be bound by the provisions of this Schedule that are
applicable to them.

3. Statements to be filed.—A company may apply to convert into a limited liability

partnership by filing with the Registrar—

(a) a statement by all its shareholders in such form and manner to be accompanied
by such fees as the Central Government may prescribe, containing the following
particulars, namely:—

(i) the name and registration number of the company;

(ii) the date on which the company was incorporated; and

(b) incorporation document and statement referred to in section 11.

4. Registration of conversion.—On receiving the documents referred to in paragraph 3,

the Registrar shall, subject to the provisions of this Act and the rules made thereunder,
register the documents and issue a certificate of registration in such form as the
Registrar may determine stating that the limited liability partnership is, on and from the
date specified in the certificate, registered under this Act:
Provided that the limited liability partnership shall, within fifteen days of the date of
registration, inform the concerned Registrar of Companies with which it was registered
under the provisions of the Companies Act, 1956 (1 of 1956) about the conversion and
of the particulars of the limited liability partnership in such form and manner as the
Central Government may prescribe.

5. Registrar may refuse to register.—(1) Nothing in this Schedule shall be construed as

to require the Registrar to register any limited liability partnership if he is not satisfied
with the particulars or other information furnished under the provisions of this Act:

Provided that an appeal may be made before the Tribunal in case of refusal of
registration by the Registrar:

2[Provided further that until the Tribunal is constituted under the Companies Act, 1956,
the appeal under this sub-paragraph may be made before the Company Law Board].

(2) The Registrar may, in any particular case, require the documents referred to in
paragraph 3 to be verified in such manner, as he considers fit.

6. Effect of registration.—On and from the date of registration specified in the

certificate of registration issued under paragraph 4—

(a) there shall be a limited liability partnership by the name specified in the
certificate of registration registered under this Act;

(b) all tangible (movable or immovable) and intangible property vested in the
company, all assets, interests, rights, privileges, liabilities, obligations relating to
the company and the whole of the undertaking of the company shall be
transferred to and shall vest in the limited liability partnership without further
assurance, act or deed; and

(c) the company shall be deemed to be dissolved and removed from the records of
the Registrar of Companies.

7. Registration in relation to property.—If any property to which clause (b) of paragraph

6 applies is registered with any authority, the limited liability partnership shall, as soon
as practicable, after the date of registration, take all necessary steps as required by the
relevant authority to notify the authority of the conversion and of the particulars of the
limited liability partnership in such form and manner as the authority may determine.

8. Pending proceedings.—All proceedings by or against the company which are

pending before any Court, Tribunal or other authority on the date of registration may be
continued, completed and enforced by or against the limited liability partnership.

9. Continuance of conviction, ruling, order or judgment.—Any conviction, ruling, order

or judgment of any Court, Tribunal or other authority in favour of or against the
company may be enforced by or against the limited liability partnership.

10. Existing agreements.—Every agreement to which the company was a party

immediately before the date of registration, whether or not of such nature this the
rights and liabilities thereunder could be assigned could be assignee, shall have effect
as from that date as after or not of such nature that the rights and liabilities hereunder
could be assigned, shall have effect as from that date as if—

(a) the limited liability partnership were a party to such an agreement instead of the
company; and

(b) for any reference to the company, there were substituted in respect of anything
 to be done on or after the date of registration a reference to the limited liability
partnership.

11. Existing contracts, etc.—All deeds, contracts, schemes, bonds, agreements,

applications, instruments and arrangements subsisting immediately before the date of
registration relating to the company or to which the company is a party shall continue
in force on and after that date as if they relate to the limited liability partnership and
shall be enforceable by or against the limited liability partnership as if the limited
liability partnership were named therein or were a party thereto instead of the company.

12. Continuance of employment.—Every contract of employment to which paragraph

10 or paragraph 11 applies shall continue in force on or after the date of registration as
if the limited liability partnership were the employer thereunder instead of the company.

13. Existing appointment, authority or power.—(1) Every appointment of the company

in any role or capacity which is in force immediately before the date of registration shall
take effect and operate from that date as if the limited liability partnership were
appointed.

(2) Any authority or power conferred on the company which is in force immediately
before the date of registration shall take effect and operate from that date as if it were
conferred on the limited liability partnership.

14. Application of paragraphs 6 to 13.—The provisions of paragraphs 6 to 13 (both

inclusive) shall apply to any approval, permit or licence issued to the company under
any other Act which is in force immediately before the date of registration of the limited
liability partnership, subject to the provisions of such other Act under which such
approval, permit or licence has been issued.

15. Notice of conversion in correspondence.—(1) The limited liability partnership shall

ensure that for a period of twelve months commencing not later than fourteen days
after the date of registration, every official correspondence of the limited liability
partnership bears the following, namely:—

(a) a statement that it was, as from the date of registration, converted from a
company into a limited liability partnership; and

(b) the name and registration number of the company from which it was converted.

(2) Any limited liability partnership which contravenes the provisions of sub-paragraph
(1) shall be punishable with fine which shall not be less than ten thousand rupees but
which may extend to one lakh rupees and with a further fine which shall not be less
than fifty rupees but which may extend to five hundred rupees for every day after the
first day after which the default continues.

2 Ins. by GSR 386(E), dated 4-6-2009, (w.e.f. 4-6-2009).

The Limited Liability Partnership Act, 2008 Act No. 6 of 2009

THE FOURTH SCHEDULE

(See section 57)

CONVERSION FROM UNLISTED PUBLIC COMPANY INTO LIMITED LIABILITY

PARTNERSHIP

1. Interpretation.—(1) In this Schedule, unless the context otherwise requires,—

(a) "company" means an unlisted public company;

(b) "convert", in relation to a company converting into a limited liability partnership,

means a transfer of the property, assets, interests, rights, privileges, liabilities,
obligations and the undertaking of the company to the limited liability
partnership in accordance with the provisions of this Schedule;

(c) "listed company" means a listed company as defined in the Securities Exchange
Board of India (Disclosure and Investor Protection) Guidelines, 2000 issued by
the Securities and Exchange Board of India under section 11 of the Securities
and Exchange Board of India Act, 1992 (15 of 1992);

(d) "unlisted public company" means a company which is not a listed company.

2. Conversion of company into a limited liability partnership.—(1) A company may

convert into a limited liability partnership by complying with the requirements as to the
conversion set out in this Schedule.

(2) Upon such conversion, the company, its shareholders, the limited liability
partnership into which the company has converted and the partners of that limited
liability partnership shall be bound by the provisions of this Schedule that are
applicable to them.

3. Eligibility for conversion.—A company may apply to convert into a limited liability
partnership in accordance with the provisions of this Schedule if and only if—

(a) there is no security interest in its assets subsisting or in force at the time of
application; and

(b) the partners of the limited liability partnership to which it converts comprise all
the shareholders of the company and no one else.

4. Statements to be filed.—A company may apply to convert into a limited liability

partnership by filing with the Registrar—

(a) a statement by all its shareholders in such form and manner to be accompanied
by such fee as the Central Government may prescribe containing the following
particulars, namely:—

(i) the name and registration number of the company;

(ii) the date on which the company was incorporated; and

(b) incorporation document and statement referred to in section 11.

5. Registration of conversion.—On receiving the documents referred to in paragraph 4,
the Registrar shall, subject to the provisions of this Act, and the rules made there under,
register the documents and issue a certificate of registration in such form as the
Registrar may determine stating that the limited liability partnership is, on and from the
date specified in the certificate, registered under this Act:

Provided that the limited liability partnership shall, within fifteen days of the date of
registration, inform the concerned Registrar of Companies with which it was registered
under the provisions of the Companies Act, 1956 (1 of 1956) about the conversion and
of the particulars of the limited liability partnership in such form and manner as the
Central Government may prescribe.

6. Registrar may refuse to register.—(1) Nothing in this Schedule shall be construed as

to require the Registrar to register any limited liability partnership if he is not satisfied
with the particulars or other information furnished under the provisions of this Act:

Provided that an appeal may be made before the Tribunal in case of refusal of
registration by the Registrar:

3[Provided further that until the Tribunal is constituted under the Companies Act, 1956,
the appeal under this sub-paragraph may be made before the Company Law Board].

(2) The Registrar may, in any particular case, require the documents referred to in
paragraph 4 to be verified in such manner, as he considers fit.

7. Effect of registration.—On and from the date of registration specified in the

certificate of registration issued under paragraph 5—

(a) there shall be a limited liability partnership by the name specified in the
certificate of registration registered under this Act;

(b) all tangible (movable or immovable) and intangible property vested in the
company, all assets, interests, rights, privileges, liabilities, obligations relating to
the company and the whole of the undertaking of the company shall be
transferred to and shall vest in the limited liability partnership without further
assurance, act or deed; and

(c) the company shall be deemed to be dissolved and removed from the records of
the Registrar of Companies.

8. Registration in relation to property.—If any property to which clause (b) of paragraph

7 applies is registered with any authority, the limited liability partnership shall, as soon
as practicable, after the date of registration, take all necessary steps as required by the
relevant authority to notify the authority of the conversion and of the particulars of the
limited liability partnership in such form and manner as the authority may determine.

9. Pending proceedings.—All proceedings by or against the company which are

pending in any Court or Tribunal or before an authority on the date of registration may
be continued, completed and enforced by or against the limited liability partnership.

10. Continuance of conviction, ruling, order or judgment.—Any conviction, ruling, order

or judgment of any Court, Tribunal or other authority in favour of or against the
company may be enforced by or against the limited liability partnership.

11. Existing agreements.—Every agreement to which the company was a party

immediately before the date of registration, whether or not of such nature that the
rights and liabilities thereunder could be assigned, shall have effect as from that date
as if—
 (a) the limited liability partnership were a party to such an agreement instead of the
company; and

(b) for any reference to the company, there were substituted in respect of anything
to be done on or after the date of registration a reference to the limited liability
partnership.

12. Existing contracts, etc.—All deeds, contracts, schemes, bonds, agreements,

applications, instruments and arrangements subsisting immediately before the date of
registration relating to the company or to which the company is a party shall continue
in force on and after that date as if they relate to the limited liability partnership and
shall be enforceable by or against the limited liability partnership as if the limited
liability partnership were named therein or were a party thereto instead of the company.

13. Continuance of employment.—Every contract of employment to which paragraph

11 or paragraph 12 applies shall continue in force on or after the date of registration as
if the limited liability partnership were the employer thereunder instead of the company.

14. Existing appointment, authority or power.—(1) Every appointment of the company

in any role or capacity which is in force immediately before the date of registration shall
take effect and operate from that date as if the limited liability partnership were
appointed.

(2) Any authority or power conferred on the company which is in force immediately
before the date of registration shall take effect and operate from that date as if it were
conferred on the limited liability partnership.

15. Application of paragraphs 7 to 14.—The provisions of paragraphs 7 to 14 (both

inclusive) shall apply to any approval, permit or licence issued to the company under
any other Act which is in force immediately before the date of registration of the limited
liability partnership, subject to the provisions of such other Act under which such
approval, permit or licence has been issued.

16. Notice of conversion in correspondence.—(1) The limited liability partnership shall

ensure that for a period of twelve months commencing not later than fourteen days
after the date of registration, every official correspondence of the limited liability
partnership bears the following, namely:—

(a) a statement that it was, as from the date of registration, converted from a
company into a limited liability partnership; and

(b) the name and registration number of the company from which it was converted.

(2) Any limited liability partnership which contravenes the provisions of sub-paragraph
(1) shall be punishable with fine which shall not be less than ten thousand rupees but
which may extend to one lakh rupees and with a further fine which shall not be less
than fifty rupees but which may extend to five hundred rupees for every day after the
first day after which the default continues.

3 Ins. by GSR 386(E), dated 4-6-2009, (w.e.f. 4-6-2009).