SPECIFIC CONTRACTS – NOTES

CONTRACT OF INDEMNITY & Guarantee (Sections 124 to 147)

ENGLISH LAW: Indemnity means a promise to save a person harmless from the consequences of an
act. The promise may be express or implied from the circumstances of the case. The meaning and
effect of indemnity can be found in Adamson v. Jarvis (1827) 4 Bing. 66:

In that case, the plaintiff, an auctioneer, sold certain cattle on the instructions of the defendant.
Subsequently, it was known that the livestock did not belong to the defendant but to another person.
That person held the auctioneer liable. Auctioneer, in turn, sued the defendant for indemnity for the
loss he had thus suffered by acting on the defendant’s directions.

The Court held that the plaintiff having acted on the request of the defendant was entitled to assume
that, if what he did, turned out to be wrong, he would be indemnified by the defendant.

Every contract of insurance, other than life insurance, is a contract of indemnity—Oriental fire and
General Insurance Co. v. Savoy Solvent Oil Extractions Ltd. (1997) 6 ALD 1.

INDIAN LAW: Sec. 124: A contract by which one party promises to save the other from loss caused to
him by the conduct of the promisor himself, or by the conduct of any other person, is called a
“contract of indemnity”.

Ill. A contracts to indemnify B against the consequences of any proceedings which C may take against B
in respect of a certain sum of Rs. 200. This is a contract of indemnity.

The person who gives the indemnity is called the “indemnifier” and the person for whose protection it
is given is called the “indemnity-holder” or “indemnified”.

Scope of “indemnity” is restricted to cases where there is a promise to indemnify against loss caused
(a) by the indemnifier himself, or (b) by any other person.

A CONTRACT OF INDEMNITY IS THUS A PROMISE BY THE INDEMNIFIER TO THE INDEMNIFIED TO

SAVE HIM FROM ANY HARM CAUSED BY THE ACT OF THE INDEMNIFIER HIMSELF OR ANY OTHER
PERSON.

Cases of loss arising from accidents like fire or perils of the sea are excluded from its purview. Loss must
be caused by some human agency. A situation as in Adamson is also outside the scope of this definition.
Such cases of loss arising from an act done at the request of the promisor are covered by Sec. 223
providing for indemnity between Principal and Agent.

The promise of indemnity may be express or implied. In Secy of State for India in Council v. Bank of
India Ltd. (AIR 1938 PC 19), a note with forged endorsement was given to a bank which received it for
value and in good faith. The bank sent it to the Public Debt Office for renewal in their name. The true
owner of the note recovered compensation from the State and the State was allowed to recover from
the bank on implied promise of indemnity.

Almost all insurances other than life and personal accident insurance are contracts of indemnity.
The insurer’s promise to indemnify is an absolute one. A suit can be filed immediately upon failure of
performance, irrespective of actual loss. If the indemnity holder incurred liability and that liability was
absolute, he would be entitled to call upon the indemnifier to save him from that liability by paying it
off.

LIABILITY OF INDEMNIFIER (ENTITLEMENT OF INDEMNIFIED):

Under Sec. 125 of the Contract Act, the promisee can recover the following three types of
compensation:

1. Damages he was compelled to pay in respect of his promise to indemnify by the Court.
2. All the costs he had to incur in the prosecution of defence of the suit, as a prudent man
acting in his own case would have incurred and without contravening the orders of the
promisor.
3. All sums he had to incur under the terms of a compromise. The compromise should not
have been against the orders of the promisor. The compromise made has been under
orders of the promisor or it was reasonable to do so as a prudent man, even if there was no
indemnity.

COMMENCEMENT OF LIABILITY: When is the indemnity-holder entitled to recover his indemnity. The
original English rule was that indemnity was payable only after the indemnity-holder had suffered actual
loss by paying off the claim.

“You must be damnified before you can claim to be indemnified”.

The law has changed. Buckley LJ observed in Richardson Re, Ex parte the Governors of St.
Thomas’s Hospital (1911) 2 KB 705: “Indemnity is not necessarily given by repayment after payment.
Indemnity requires that the party to be indemnified shall never be called upon to pay.

Chagla J. explained in Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (AIR 1942 Bom 302)
that if the liability of the indemnified has become absolute, then he is entitled to demand the
indemnifier to pay off the claim or pay into court sufficient money for paying off the claim.

CONTRACT OF GUARANTEE

In English law, a “contract of guarantee” is defined as “a promise to answer for the debt,
default or miscarriage of another”.—S.4, Statute of Frauds.

Under Sec. 126 of the Contract Act, A contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third person in case of his default.

The person who gives the guarantee is called the “surety”.

The person in respect of whose default the guarantee is given is called the “principal debtor” and

The person to whom the guarantee is given is called “the creditor”.

A guarantee may be either oral or written.

Economic functions of guarantee

 The function of a contract of guarantee is to enable a person to get a loan, or goods on credit, or
an employment. Someone comes up and tells the lender or the supplier or the employer that the
person in need (would be principal debtor) may be trusted and in case of any default, “I undertake to be
responsible”. In Birkmyr v. Darnell, 91 ER 27, the Court observed as follows:

“If two come to a shop and one buys, and the other to give him credit, promises the seller, “if
he does not pay you, I will”.

It is a collateral engagement to be liable for the debt of another in case of his default.

“Guarantees are usually taken to provide a second pocket to pay if the first should be empty”

This type of collateral undertaking to be liable for default of another is called “a contract of guarantee”.

There are three parties: the “surety”—the person who gives the guarantee

The Principal Debtor – the person in respect of whose default the guarantee is given

The Creditor—the person to whom the guarantee is given.

A liability incurred independently of a default is not within the definition of guarantee (Punjab
National Bank v. Sri Vikram Cotton Mills, AIR 1970 SC 1973. In Mountstephen v. Lakeman (1871) LR 7 QB
196, a landlord and his tenant went to the plaintiff’s store. The landlord said to the plaintiff:

Mr. Parker will be on our land this year, and you will sell him anything he wants, and I will see it paid.

This promise was held to be an original promise, and not a collateral promise to be liable for the default
of another and, therefore, not a guarantee.

ESSENTIAL FEATURES OF GUARANTEE

There are three parties – Creditor, Principal Debtor and Surety. It is a tripartite agreement.

1. Principal Debt – A recoverable debt is necessary.

Purpose of guarantee is to secure payment of a debt. Therefore, existence of a recoverable
debt is necessary. Essence of guarantee is that there should be someone liable as a principal
debtor. The surety undertakes to be liable on the default of the Principal Debtor. If there is no
principal debt, there can be no valid guarantee—Manju Mahadev v. Shivappa Manju Shetty, ILR
(1918) 42 Bom. 444.
It is a tripartite agreement contemplating the principal debtor, the creditor and the
surety—Swan v. Bank of Scotland, (1836) 10 Bligh NS 627.

GUARANTEE OF MINOR’S DEBT

Where minority is known to all parties, surety cannot be made liable in an action on the
guarantee—Coutts & Co. v. Browne Lecky, 1947 KB 10.
2. CONSIDERATION: Like every other contract, a contract of guarantee should also be supported by
some consideration. A guarantee without consideration is void. But there need not be any
direct consideration between the surety and the creditor.
 Under Sec. 127, “anthing done, or any promise made, for the benefit of the principal debtor,
may be a sufficient consideration to the surety for giving the guarantee.

Loan given or goods sold on credit on the basis of a guarantee is a sufficient consideration.
Where a credit has already been given and payment is due, the creditor refrains from suing the
principal debtor, that would be a sufficient consideration for giving a guarantee.

Where consideration fails, there is no question of recovering anything from the principal
debtor or enforcing bank guarantee. In Ujjal Transport Agency v. Coal India Ltd., AIR 2011 Jha 34, the
contract was for cutting and removing timber from a forest. Forest authorities refused permission for
cutting trees. Consideration failed. Bank guarantee cannot be invoked and the contractor’s earnest
money cannot also be forfeited.

Guarantee for a past debt is invalid. But a guarantee for a past as well as a future debt is
enforceable provided that some further debt is incurred after the guarantee. There should be a clear
understanding for the past debt and as soon as a fresh obligation is incurred, the liability for all the
obligations is coupled up.—Carlesbery Brewery Malayasia v. Soon Heng A.W. & Sons, (1989) 1 MLJ 104.

BENEFIT OF PRINCIPAL DEBTOR IS SUFFICIENT CONSIDERATION

It is not necessary that the Surety is benefited under the contract. If the principal debtor gets a benefit,
that is sufficient consideration for the guarantee. Whether the principal debtor requested for a
guarantee or it was given without his knowledge or consent is not material. In Prasanjit Mahtha v.
United Commercial Bank Ltd, AIR 1979 Pat. 151, Directors of a Company guaranteed the Company’s
loans. Their argument that the Company never requested for the guarantee was not accepted by the
Court.

A counter guarantee is for protection of the original guarantor. When the original guarantor is called
upon to pay and he has fulfilled his obligation under his guarantees, he can call upon the counter
guarantor to pay him.

3. MISREPRESENTATION AND CONCEALMENT

A contract of guarantee is not a contract uberrimae fide or one of absolute good faith. Yet “it is
the duty of the Creditor to inform the surety all facts in his possession which are likely to affect
the degree of his responsibility. If he neglects to do so, it is at his peril. A surety ought to be
acquainted with the whole contract entered into with his principal”.

Under Sec. 142, any guarantee obtained by means of misrepresentation made by the creditor or with
his knowledge and assent, concerning a material part of the transaction, is invalid. Under Sec. 143 “any
guarantee obtained by the Creditor by means of keeping silence as to material circumstances is invalid.

Guarantee for good conduct of a servant comes under this provision. In London General Omnibus
Co v. Holloway, (1912) 2 KB 72(CA), the defendant was invited to give a guarantee for the fidelity of
a servant. The employer had earlier dismissed him for dishonesty, but did not disclose this fact to
the surety. The servant committed another embezzlement. The surety was held not liable. “The
surety believed that he was making himself answerable for a presumably honest man, not for a
known thief”.
CONTRACT NEED NOT BE IN WRITING: Sec. 126 declares that a guarantee may be either oral or
written. Under the Statute of Frauds (in England), a guarantee is not enforceable unless it is in
writing and signed by the party to be charged.

LIABILITY OF SURETY IS CO-EXTENSIVE

Liability of a surety is co-extensive with that of the principal debtor.

The surety is however entitled to place a limit upon his liability, by agreement.

S. 128. States: The liability of the surety is co-extensive with that of the principal debtor, unless it is
otherwise provided by the contract.

Illustration

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C.
A is liable not only for the amount of the bill but also for any interest and charges which may have
become due on it.

Expression “Co-extensive with that of the Principal debtor” shows the maximum extent of the
surety’s liability. He is liable for the whole of the amount for which the principal debtor is liable and
he is liable for no more. A guarantor of rent was held not liable for interest on rent because the
principal debtor himself was not so liable.

A surety can put conditions for his promise. Where there is a condition precedent to the
surety’s liability, he will not be liable unless that condition is first fulfilled. Sec. 144 says: “Where a
person gives a guarantee upon a contract that creditor shall not act upon it until another person has
joined in it as co-surety, the guarantee is not valid if that other person does not join”.

In National Provincial Bank of England v. Brackenbury, (1906) 22 TLR 797, the defendant signed a
guarantee which on the face of it was intended to be a joint and several guarantee of three persons
with him. One of them did not sign. There being no agreement between the bank and co-
guarantors to dispense with his signature, the defendant was held not liable.

RIGHTS OF CREDITOR

 The Creditor can sue the Principal Debtor and Surety together for repayment of the debt.
 The Creditor can sue the Principal Debtor alone for repayment of the debt. His suit cannot be
rejected on the ground that he has not joined the guarantor as a defendant to the suit.
Dismissal of the suit against the principal debtor does not of itself absolve the surety of his
liability under the contract of guarantee.
 The Creditor can sue the Surety alone without exhausting his remedies against the Principal
Debtor. A suit against the surety without even impleading the principal debtor is maintainable.
In N. Narasimhaiah v. Karnataka State Financial Corporation, AIR 2004 Kant 46 the creditor had
shown sufficient reasons for not proceeding against the principal debtor. It was held that the
creditor had the option to sue the company along with guarantors as co-defendants or
guarantors alone.

Where the liability is otherwise unconditional, the court cannot of its own introduce a condition into
it. In Bank of Bihar Ltd. V. Damodar Prasad, AIR 1969 SC 297, the defendant guaranteed a bank’s
loan. On default, the defendant was sued. Trial court decreed that the Bank shall enforce the
guarantee in question only after having exhausted its remedies against the principal debtor. Patna
High Court confirmed the decision. But the Supreme Court overruled it, explaining that a condition
of this kind would defeat the parties’ intention. “The very object of the guarantee is defeated if the
creditor is asked to postpone his remedies against the surety. ……. Solvency of the principal is not a
sufficient ground for restraining execution of the decree against the surety. It is the duty of the
surety to pay the decretal amount. On such payment he will be subrogated to the rights of the
creditors".

SURETY’S RIGHT TO LIMIT HIS LIABILITY OR MAKE IT CONDITIONAL.

Surety has a right to place a limit upon his liability. He may expressly limit the guarantee to a
fixed amount, viz., “my liability under this guarantee shall not at any time exceed the sum of Rs.
1,00,000/-“. In such cases, whatever be the debt of the Principal Debtor, the liability of the surety
cannot go beyond the sum specified.

In Yarlagadda Bapanna v. Devata China Yerkayya, AIR 1966 AP 151, a clause in the contract of
suretyship made the surety liable upto Rs. 15,000/- and further declared that he would be liable for
any amount that might be finally decreed. The Court construed the clause meaning not exceeding
Rs. 15,000/-. A surety can attach any other condition to his liability. The contract can then be
enforced only subject to that condition. A guarantor seeking to make his guarantee dependent on a
third party giving some other valid security must establish that giving of security by third party
formed part of the contract under which guarantee was given.

IMPOSSIBILITY OF MAIN CONTRACT

A surety cannot escape liability under the doctrine of impossibility of performance. Liability of
surety does not depend upon possibility of the surety being able to realize the amount from the
principal debt. In Punjab National Bank v. Lakshmi Industrial & Trading Co (P) Ltd, AIR 2001 All 28, it
was held that guarantors of a company’s loans could not escape liability by reason only of the fact
that the company’s management had totally changed.

129. “Continuing guarantee” A guarantee which extends to a series of transactions, is called a

continuing guarantee”.

Illustration: A, in consideration that B will employ C in collecting the rent of B’s Zamindary promises
B to be responsible, to the amount of Rs. 5000, for the due collection and payment by C of those
rents. This is a continuing guarantee.

A specific guarantee provides for securing of a specific advance or for advances upto a fixed
sum, and ceases to be effective on the repayment thereof. The essence of a continuing guarantee is
that it applies not to a specific number of transactions, but to any number of them and makes the
surety liable for the unpaid balance at the end of the guarantee.

EFFECT OF AGREEMENT BETWEEN TWO PERSONS WITHOUT KNOWLEDGE OF THE OTHER

S 132 states: Liability of two persons primarily liable, not affected by arrangement between them
that one shall be surety on another’s default.
 Where two persons contract with a third person to undertake a certain liability and also contract
with each other that one of them shall be liable only on the default of the other, the third person
not being a party to such contract, the liability of each of such two persons to the third person under
the first contract is not affected by the existence of the second contract, although such third person
may have been aware of its existence.

Illustration: A and B make a joint and several promissory note to C. A makes it, in fact, as surety for
B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C,
made the note as surety for B, is no answer to a suit by C against A upon the note.

Persons who are primarily liable as joint-debtors is not affected by any arrangement between
them as to the order of their liability. A creditor is not affected by any private arrangement entered
into as between his two debtors, that one will be surety of the other even if the creditor knows of
this arrangement. The principle is that whatever be the arrangement between joint-debtors as to
their liability to the creditor, they remain joint debtors. The creditor is not concerned with their
mutual agreement that one would be a principal and the other a surety.

DISCHARGE OF SURETY FROM LIABILITY

1. REVOCATION.

Under Sec. 130, a continuing guarantee may at any time be revoked by the surety, as to future
transactions by notice to the creditor.

Ordinarily a guarantee is not revocable when once it is acted upon. A continuing guarantee may
however be revoked with regard to future transactions.

A, in consideration of B’s discounting, at A’s request, Bills of exchange for C, guarantee to B, for
12 months, the due payment of all such bills to the extent of Rs. 5000. B discounts bills for C to the
extent of Rs. 2000. Afterwards at the end of three months, A revokes the guarantee. This revocation
discharges A from all liability to B for any subsequent discount. But A is liable to B for the Rs. 2000/-,
on default of C.

In Offord v. Davies, the defendants guaranteed the repayment of bills to be discounted by the
plaintiffs for Davies & Co for twelve months not exceeding 600 pounds. The defendants revoked the
guarantee before any bill was discounted. The plaintiffs discounted the bills which remain unpaid.

The question arose whether the defendant had a right to revoke. The court held: “We are
opinion that they had and consequently they were not liable. In the case of a simple guarantee for a
proposed loan, the right of revocation before the proposal has been acted on did not appear to be
disputed”.

In Anil Kumar v. Central Bank of India, AIR 1997 HP 5, it was held that in the case of a continuing
guarantee, every credit given is a separate transaction which makes the surety irrevocably liable, but
he may free himself from further liability.

2. By Death of Surety.
 S.131 states that the death of the surety operates, in the absence of any contract to the contrary,
as a revocation of a continuing guarantee, so far as regards future transactions.

The section is applicable to continuing guarantee. Even in regard to a specific guarantee, no

personal liability falls on the surety after his death. Liability of the deceased surety can however be
imposed against his legal heirs but only to the extent of the property inherited by them—R.K.
Dewan v. State of U.P. (2005) All LJ 2067.

3 By Variance. (Se. 133)

A surety is considered a favoured debtor and his liability is in strictissimi juris (Kay LJ., in Rouse v.
Bradford Banking Co. Ltd, 1894 AC 586). A contract of guarantee may not be considered one of
good faith. But once the contract is formed, a duty of utmost good faith is imposed on the creditor.
The surety is held discharged when, without his consent, the creditor makes any change in the
nature or terms of his contract with the principal debtor. A variance with consent either given in
advance or at the time of variance would maintain the liability of the surety intact. The surety is
discharged as soon as the original contract is altered without his consent. A guarantee is not a
contract in respect of a primary transaction. It is an independent transaction containing
independent and reciprocal obligations.

S. 133 states: Any variance made without surety’s consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to transactions subsequent
to the variance.

In Bonar v. Macdonald, (1850) 3 HL Cas 226, the defendant guaranteed the conduct of a
manager of a bank. The bank afterwards raised his salary on the condition that he would be liable
for one-fourth of the losses on discounts allowed by him. No communication of this new
arrangement was made to the surety. The manager allowed a customer to overdraw his account
and the bank lost a sum of money. It was held that the surety could not be called on to make good
the loss as the fresh agreement was a substitution of a new agreement for the former which
discharged the surety.

In Khatun Bibi v. Abdullah, ILR (1880) 3 All. 9, payment of rent was guaranteed and the rent was
increased without the consent of the surety. Surety was held not liable.

Where a variation is not substantial or is beneficial to the surety, it will not discharge the surety.
In Anirudhan v. Thomco’s Bank Ltd., AIR 1963 SC 746, the defendant guaranteed the repayment of a
loan of Rs. 20,000 given by plaintiff bank to the principal debtor. The guarantee paper showed the
loan to be Rs. 25000. Bank refused to accept. The principal debtor then reduced the amount to Rs.
2000 without intimation to surety, gave it to the bank and the bank accepted. Principal Debtor
failed to pay and bank sued the surety. It was held by majority that the surety was not discharged.

4. Release or discharge of principal debtor.

Sec. 134 states: The surety is discharged by any contract between the creditor and the principal debtor,
by which the principal debtor is released or by any act or omission of the creditor, the legal
consequences of which is the discharge of the principal debtor.
 The section provides for two kinds of discharge from liability. In the first place, if the creditor
makes any contract with the principal debtor by which the latter is released, the surety is discharged.
Ex: the creditor accepts a compromise and release the principal debtor, the surety is released. Any
release of the principal debtor is a release of the surety also.—Kahn Singh v. Tek Chand, AIR 1968 J & K
93.

Where liability of the principal debtor is reduced, question arose whether the liability of the
surety also diminished. In Appunni Mani v. Devassy Kochouseph, AIR 1966 Ker. 203, it was held that the
surety would be liable only for the reduced amount.

The second ground of discharge in Sec. 134 is that when the creditor does “any act or omission
the legal consequence of which is the discharge of the principal debtor”, the surety would also be
discharged from his liability. In United Finance Ltd. v. Woodcock (1963) WLR 455, the creditor
prematurely determined the agreement altering the payment of instalments guaranteed, the court held
that the surety was discharged. Similarly, it was held in Hewison v. Ricketts, (1894) 63 LJQB 711, it was
held that the act of the creditor in terminating the agreement e.g. in determining the agreement of hire
purchase by taking possession of the goods, discharged the surety.

5 DISCHARGE OF SURETY WHEN CREDITOR COMPOUNDS WITH PRINCIPAL DEBTOR. Sec. 135
states that a contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety,
unless the surety assents to such contract.

The section provides for three modes of discharge from liability:

1. Composition. If creditor makes a composition with the principal debtor, without consulting the
surety, the latter is discharged. Composition inevitably involves variation of the original
contract, and, therefore the surety is discharged.—Bolton v. Salmon (1891) 2 Ch 48; Kahn Singh
v. Tek Chand, AIR 1968 J & K 93. On novation of the contract between the creditor and the
principal debtor, to the exclusion of the guarantor releases him from liability.
2. Promise to give time. When time for payment of the guaranteed debt comes, surety has the
right to require the principal debtor to pay off the debt. It is one of the duties of the creditors
towards the surety not to allow the principal debtor more time for payment. If the creditor
does intentionally violate any rights the surety had when he entered into the suretyship, even
though the damage be nominal only, he shall forfeit the whole remedy—Polak v. Everett (1876)
1 QBD 669
3. Promise not to sue the principal debtor. If the creditor under an agreement with the principal
debtor promises not to sue him, the surety is discharged. “The main reason is that a surety is
entitled at any time to require the creditor to call upon the principal debtor to pay off the debt”
when it is due and this right is positively violated when the creditor promises not to sue the
principal debtor.
 But Surety is not discharged when Creditor makes an agreement with a third person to give time
to principal debtor. This is made clear by Sec. 136 which states: “Where a contract to give time
to the principal debtor is made by the creditor with a third person, and not with the principal
debtor, the surety is not discharged.

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

 Creditor’s forbearance to sue also does not discharge surety.— Under Sec. 137, “Mere
forbearance on the party of the creditor to sue the principal debtor or to enforce any other
remedy against does not, in the absence of any provision in the guarantee to the contrary,
discharge the surety.

Illustration

B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the
debt became payable. A is not discharged from his suretyship.

 THUS MERE FORBEARANCE TO SUE does not discharge the surety. But if the forbearance
continues up to the expiry of the period of limitation, the consequence is that the action against
the principal becomes time barred. Under Sec. 134, if the creditor is guilty of any act or
omission the legal consequences of which is the discharge of the principal debtor, the surety is
also discharged. In Ranjit Singh v. Naubat (ILR (1901-03) 24 All. 504, it was observed in spite of
the provisions of Sec. 137, creditor’s right against surety is not preserved unless he sues the
principal debtor within the period of limitation.

RESERVING RIGHTS AGAINST SURETY

An agreement not to sue the principal debtor or to give time with a reservation of the right
against the surety would not discharge the surety (Mahant Singh v. U Ba Yi AIR 1939 PC 410)

6 By IMPAIRING SURETY’S REMEDY

S. 139: If the creditor does any act which is inconsistent with the right of the surety, or omits to do any
act which his duty to the surety requires him to do, and the eventual remedy of the surety himself
against the principal debtor is thereby impaired, the surety is discharged.

B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain
stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A,
prepays to B the last two instalments. A is discharged by this repayment.

It is the plain duty of the creditor not to do anything inconsistent with the rights of the surety. A surety
is entitled, after paying off the creditor, to his indemnity from the principal debtor.

In State of M.P. v. Kaluram, against the terms of the guarantee, Govt. allowed the contractor to
remove felled trees from a forest without payment of price. The surety was held to be discharged.

In Darwen v. Pearce, Re, (1927) 1 Ch 176, the principal debtor was a shareholder in a company.
His shares were partly paid and the payment of the unpaid balance was guaranteed by the surety.
Shareholder defaulted in the payment of calls and company forfeited his shares. – By reason of
forfeiture, the shares became property of the company. If they had not forfeited, the shares would have
belonged to the surety on payment of the outstanding calls.

In State Bank of Saurashtra v. Chiranjan Rangnath Raja, (1980) 4 SCC 516, the bank granted a loan on the
security of the stock in godown. The loan was also guaranteed by a surety. The goods were lost from
the godown on account of the negligence of the bank officials. The surety was discharged to the extent
of the value of the stock so lost.

RIGHTS OF SURETY

Surety is regarded as favoured debtor because primarily the surety does not avail a debt for
himself. He only guarantees a debt taken by the Principal Debtor, to the Creditor. Law therefore vests
in him several rights. They are:

1 Right of Subrogation

S. 140 “Where a guaranteed debt has become due, or default of the principal debtor to perform a
guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for is
invested with all the rights which the creditor had against the principal debtor”.

The surety steps into the shoes of the creditor. The surety may therefore sue the principal debtor in the
rights of the creditor. The Supreme Court has laid down that “the surety will be entitled to every
remedy which the creditor had against the principal debtor; to enforce every security and all means of
payment; to stand in the place of the creditor, to have the securities transferred to him (though there
was no stipulation for that) and to avail himself of all those securities against the debtor.

The position is not always advantageous. If the principal debtor becomes insolvent, the surety cannot
ask the creditor first to pursue his remedy against the principal debtor. In Bank of Bihar Ltd. v. Damodar
Prasad, AIR 1969 SC 297, the Supreme Court pointed out that even then the surety should pay. He is
subrogated to the rights of the creditor, even though such rights against an insolvent debtor may not be
of much use.

RIGHTS BEFORE PAYMENT.

If the principal debtor is disposing of his personal properties, the surety may seek an injunction. In
Mamata Ghose v. United Industrial Bank Ltd., AIR 1987 Cal 280, it was held that if it is proved by affidavit
or otherwise that the defendant threatens or is about to remove or dispose of his property with intent
to default his creditors, the court may grant a temporary injunction to restrain such act or to give such
other order for the purpose of staying or preventing the removal or disposition of the property.

The surety has an equitable right to compel the principal debtor to pay the debt and relieve the
surety from the necessity of paying it out from his pocket.

2 RIGHT TO INDEMNITY

S. 145 “In every contract of guarantee there is an implied promise by the principal debtor to indemnify
the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully
paid under the guarantee, but no sums he has paid wrongfully”.

In every contract of guarantee, there is an implied promise by the principal debtor to indemnify
the surety. The surety can recover from the principal debtor whatever sum he has rightfully paid under
the guarantee, but not sums which he paid wrongfully. In Chekkera Ponnamma v. A.S. Thammayya, AIR
1983 Kant 124, the surety had guaranteed the payment of four motor vehicles delivered on hire
purchase. He contended that he paid Rs. 4000 in discharge of his liability but failed to give account of
the price which the motor vehicles might have realized on resale. He was not allowed to recover his
indemnity.

RIGHTS AGAINST CREDITOR

1 Right to Securities (Sec. 141)

2 Right to share reduction
3 Right of set off

S. 141. A surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of suretyship is entered into, whether the surety knows of the
existence of such security or not; and, if the creditor loses, or without the consent of the surety, parts
with such security, the surety is discharged to the extent of the value of the security.

On paying off the creditor, the surety steps into the shoes of the creditor. He gets the right to
have the securities, if any, which the creditor has against the principal debtor. (State of M.P. v. Kaluram)
The right exists irrespective of the fact whether the surety knows of the existence of security or not. “It
is the duty of the creditor to keep the securities intact, not to give them up or to burden with further
advances”—Forbes v. Jackson.

Expression ‘security’ is not used in any technical sense. It includes all rights which the creditor in
fact has against the principal debtor, whether the surety knew of it or not and whether they were
received before or after the guarantee. In State of M.P. v. Kaluram (AIR 1987 SC 1105, the State sold a
lot of felled timber to a person for a fixed price payable in four equal instalments, the payment of which
was guaranteed by the defendant. The contract further provided that if a default was made in the
payment of an instalment, the State would get the right to prevent further removal of the timber and to
sell the remaining timber for the realization of the price. The buyer defaulted but even so the State
allowed him to remove the timber.

The surety was then sued for the loss. He was held not liable. It was observed: “The State had a
charge over the goods sold as well as to remain in possession till payment of the instalments. When the
goods were removed by the buyer that security was lost and to the extent of the value of the security
lost, the surety stood discharged.”

2 RIGHT TO SHARE REDUCTION. In HOBSON v. JASS, (1871) 6 Ch A 792, J gave a guarantee to B in

the following words: “I hereby guarantee to you the payment of all goods you may supply to E.H., but so
as my liability to you under this or any other guarantee shall not at any time exceed the sum of 250
pounds”. E gave a similar guarantee. B supplied goods to E.H. to the amount of 657 pounds. E.H.
became bankrupt. B proved the whole sum in the insolvency of E.H. and then called on the guarantors
who paid him 250 pounds each. Subsequently B received from the receiver a sum of 2s and 1d. in the
pound on 657 pounds. It was held that each of the guarantors was entitled to a part of the dividend
bearing to the whole the same proportion as 250 pounds to 657.

3 RIGHT OF SET OFF. If the creditor sues the surety, the surety may have the benefit of set off, if
any, that the principal debtor had against the creditor. He is entitled to use the defences of the debtor
against the creditor. He can claim such a right not only against the creditor but also against third parties
who have derived their title from the creditor.

RIGHTS AGAINST CO-SURETIES

Where a debt has been guaranteed by more than one person, they are called co-sureties. Some
of their rights against each other are:

1 Effect of releasing a surety (S. 138)

2 Right to contribution (S. 146-147)

EFFECT OF RELEASING A SURETY.

S. 138 says “Where there are co-sureties, a release by the creditor of one of them does not discharge
the others; neither does it free the surety so released from his responsibility to the other sureties”.

The creditor may at his will release any of the co-sureties from his liability. But that will not
operate as a discharge of his co-sureties. The released co-surety will remain liable to the others for
contribution in the event of default.

RIGHT TO CONTRIBUTION

S. 146 “Where two or more persons are co-sureties for the same debt or duty, either jointly or severally,
and whether under the same or different contracts, and whether with or without the knowledge of each
other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves,
to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”.

Illustration

A, B and C as sureties to D, for the sum of Rs 3000 lent to E. E makes default in payment. A, B and C are
liable, as between themselves, to pay Rs. 1000 each.

A, B and C are sureties to D for the sum of Rs 1000 lent to E and there is a contract between A, B and C
that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter and C to the
extent of one-half. E makes default in payment. As between the sureties, A is liable to pay Rs. 250, B is
liable to pay Rs. 250 and C is liable to pay Rs. 500.

S. 147 LIABILITY OF CO-SURETIES BOUND IN DIFFERENT SUMS. Co-sureties who are bound in different
sums are liable to pay equally as far as the limits of their respective obligations permit.

Illustration

A,B and C as sureties for D enter into three several bonds each in a different penalty, namely, A in the
penalty of Rs. 10000, B in that of Rs 20,000 and C in that of Rs 30,000, conditioned for D’s duly
accounting to E. D makes default to the extent of Rs. 30,000. A, B and C are liable to pay Rs. 10,000/-
each.

A, B and C as sureties for D enter into three several bonds each in a different penalty, namely, A in the
penalty of Rs. 10000, B in that of Rs 20,000 and C in that of Rs 30,000, conditioned for D’s duly
accounting to E. D makes default to the extent of Rs. 40,000. A is liable to pay Rs. 10,000/-, B and C are
liable to pay Rs. 15,000/- each

A, B and C as sureties for D enter into three several bonds each in a different penalty, namely, A in the
penalty of Rs. 10000, B in that of Rs 20,000 and C in that of Rs 30,000, conditioned for D’s duly
accounting to E. D makes default to the extent of Rs. 70,000. A, B and C have to pay each the full
penalty of his bond.

Where there are several sureties for the same debt and the principal debtor has committed a default,
each surety is liable to contribute equally to the extent of the default. (SBI v. Prem Das, AIR 1988 Del 49).
If one of them has been compelled to pay more than his share, he can recover contribution from his co-
sureties so as to equalize the loss as between all of them. (Shirley v. Burdett, (1912) 2 Ch 418.

In Simpson v. Smith, 1999 Ch 340, Peter Gibson LJ summarized the right as follows:

1 Where more than one person guarantee to the creditor the payment of the same debt, an
equity arises such that if one of them pays more than his due proportion of the debt, he is entitled to a
contribution from his co-guarantor or co-guarantors.

2 It is immaterial whether the co-guarantors are bound jointly or severally or jointly and severally,
or by the same instrument or by separate instruments.

3 Normally an action for contribution cannot be brought until payment has been made by a co-
guarantor of more than his share of the common liability.

4 In particular circumstances, an action for contribution will lie even before payment is made.
Where a judgment has been entered by the creditor against one guarantor, who has paid nothing in
respect of the judgment, he can maintain an action in equity against his co-guarantors and obtain an
order requiring payment of the co-guarantor’s due share to the creditor or an order that the co-
guarantor indemnify the judgment-debtor, on payment of his own share, against liability.

DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

Both are devices for providing protection against a probable loss. In either case, loss may arise due to
human conduct. But there are some differences between them on the technique of providing
protection, the need and occasion for protection and the number of parties involved. Both are
described as securities. Yet in Guarantee the arrangement is that a third party—the surety agrees to
assume liability if the debtor defaults. In Indemnity, the indemnifier agrees to assume liability when loss
is caused to the indemnified: The distinctions are:

1. In a contract of indemnity, there are only two parties, viz., the indemnifier and the indemnified.
There are three parties to a guarantee, the creditor, the principal debtor and the surety. It is a
tripartite agreement.
2. The liability under a contract of indemnity is contingent. The contingency may or may not arise.
Under a guarantee, on the other hand, the liability is subsisting in the sense that once a
guarantee has been acted upon, the liability of the surety automatically arises, though it remains
in suspended animation till the principal debtor commits default.
3. The undertaking in a guarantee is collateral. In an indemnity, it is original. The purpose of
guarantee is to support the liability of a third party. In indemnity, there being no third person,
the indemnifier’s liability is in itself primary.
4. In an indemnity, there is only one contract, that is, the contract of indemnity against loss
between the indemnity-holder and the indemnifier. In a guarantee, there are three
contracts—a contract of loan between the principal debtor and the creditor; a contract of
guarantee between the creditor and the surety and finally an implied contract of indemnity
between the principal debtor and the surety.
CONTRACT OF BAILMENT

Bailment implies a sort of relationship in which the personal property of one person temporarily
goes into the possession of another. The ownership of the article or goods is in one person but
possession is with another. -- Delivering a cycle, watch or any other article for repair; leaving a car at the
car park; depositing luggage in a cloakroom, delivering garments to a dry cleaner, delivering goods for
carriage are all situations which create the relation of bailment. Bailment is a subject of considerable
public importance.

WHAT IS BAILMENT? Definition

Sec. 148 “Bailment”, “bailor” and “bailee” defined. A “bailment” is the delivery of goods by one
person to another for some purpose, upon a contract that they shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the person delivering them. The
person delivering the goods is called the “bailor”. The person to whom they are delivered is called the
“bailee”.

Explanation.—If a person already in possession of the goods of another contracts to hold them as a
bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they
may not have been delivered by way of bailment.

ESSENTIAL FEATURES OF BAILMENT

1. Delivery of possession
2. Delivery should be upon contract
3. Delivery should be upon some purpose

DELIVERY OF POSSESSION

An important characteristic of bailment is “the delivery of possession” by one person to another.

Delivery of possession is different from custody. One may be in custody without possession. A servant
in custody of his master’s goods or a guest using his host’s goods. They are not bailees. Goods or article
should be handed over to the bailee for a purpose.

In Ultzen v. Nicols (1894) 1 QB 92, an old customer went into a restaurant for dining. When he
entered the room a waiter took his coat, without being asked, and hung it on a hook behind him. When
the customer rose to leave, the coat was gone. The act of the waiter was a voluntary courtesy towards
the customer. Yet the restaurant keeper was held liable as bailee.

If the customer had instructed the servant where and how the coat should be put, the result,
perhaps would have been otherwise. In Kaliperumal Pillai v. Visalakshmi, AIR 1938 Mad. 32, a lady
handed over to a goldsmith certain jewels for the purpose of being melted and utilized for making new
jewels. Every evening, after the gold-smith’s work was over, the lady used to receive half-made jewels
from the goldsmith and put them into a box in the goldsmith’s room and keep the key in her possession.
The jewels were lost one night. Her action against the gold-smith failed. The Court held delivery is
necessary to constitute bailment. The mere leaving of a box in a room in the defendant’s house, when
the plaintiff herself took away the key, cannot amount to delivery within the meaning of Sec. 149.

BANK LOCKER
Hiring of a Bank’s locker and storing things would not constitute a bailment. Things are put in a hired
portion of the premises and not entrusted to the bank. The court held in Atul Mehra v. Bank of
Maharashtra that there was no proof of the fact that at the time when the locker was robbed the
customer had some items of jewellery in the locker. The customer was not allowed to claim any
damages.

DELIVERY MAY BE ACTUAL OR CONSTRUCTIVE

Sec. 149 explains the meaning of delivery of possession

149. Delivery to bailee how made:-- The delivery to the bailee may be made by doing anything which
has the effect of putting the goods in the possession of the intended bailee or of any person authorized
to hold them on his behalf.

Explanation to Sec. 148 provides that “if a person already in possession of the goods of another
contracts to hold them as a bailee, he thereby becomes the bailee and the owner becomes the bailor
although they may not have been delivered by way of bailment”.

Delivery of possession may be actual delivery or constructive delivery. When the bailor hands over to
the bailee physical possession of the goods, that is called ‘actual delivery’. Constructive delivery takes
place when there is no change of physical possession, goods remaining where they are, but something is
done which has the effect of putting them in the possession of the bailee. Driver of the car being
entrusted to keep the car at the driver’s premises. – Delivery of a railway receipt amounts to delivery of
goods. In Fazal v. Salman Rai, (1928) 120 IC 421, the defendant was holding the plaintiff’s mare under
the execution of a decree. Plaintiff satisfied the decree and the court ordered redelivery of the mare to
the plaintiff. Defendant refused to do so unless the maintenance charges were also paid. The mare was
stolen from his custody. He was held liable. The Court said after the deliver order had been passed, the
relation of bailor and bailee was established by virtue of Explanation to Sec. 148.

In N.R. Srinivasa Iyer v. New India Assurance Co. Ltd. (1983) 3 SCC 458. Owner of a car involved
in an accident delivered it under the policy on behalf of the insurer to the nearest garage for repairs. In
a fire on the garage, the car was lost. The delivery was regarded as sufficient to constitute the insurance
company as a bailee and the garage as a sub bailee. They became responsible for the loss.

DELIVERY SHOULD BE UPON CONTRACT

Delivery of goods should be made for some purpose and upon a contract. When the purpose is
accomplished, the goods shall be returned to the bailor. When a person’s goods go into the possession
of another without a contract, there is no bailment. In Ram Gulam v. Govt. of U.P., AIR 1950 All 206, the
plaintiff’s ornaments, having been stolen, were recovered by the police and while in police custody,
were stolen again. Plaintiff action against the State for the loss was dismissed. Seth J. said “the
obligation of a bailee is a contractual obligation and springs only from the contract of bailment. It
cannot arise independent of contract. In that case, the ornaments were not handed over to Govt. under
any contract whatsoever. Govt. therefore never occupied the position of bailee and is not liable as such
to indemnify the plaintiffs”.

English law recognizes bailment without contract. Indian courts have also followed this view. In
State of Gujarat v. Meon Mohamed Haji Hasan, AIR 1967 SC 1885, certain motor vehicles and other
goods belonging to the plaintiffs were seized by the State in exercise of its powers under Sea Customs
Act. The goods while in the custody of the State remained totally uncared for. State contended that its
position was not that of a bailee. Shelat J. observed: “That contention is not sustainable. Bailment is
dealt with by the Contract Act only in cases where it arises from a contract, but it is not correct to say
that there cannot be a bailment without an enforceable contract… Nor is consent indispensable for such
a relationship to arise. A finder of goods of another has been held to be a bailee in certain
circumstances”.

The contract may be express or implied. In Governor General of India in Council v. Jubilee Mills
Ltd., AIR 1953 Bom. 46, with the consent of the station master, goods were stored on a railway
company’s platform. Wagons were not available. The goods were damaged in a fire caused by a spart
emitted by a passing engine. The railway company was held liable.

DELIVERY SHOULD BE UPON SOME PURPOSE

Bailment of goods is always made for some purpose and subject to the condition that when the
purpose is accomplished the goods will be returned to the bailor or disposed of according to his
mandate. If the person to whom the goods are delivered is not bound to restore them to the person
delivering them or to deal with them according to his directions, their relastionship will not be that of
bailor and bailee. In Secretary of State v. Sheo singh Rai (1875-80) 2 All 756, plaintiff delivered to the
Treasury Officer at Meerut nine Govt. promissory notes for cancellation and consolidation into a single
note of Rs. 48,000/-. The defendant’s servants misappropriated the notes. The plaintiff sued the State
to hold them responsible as bailees. His action failed. It was held that there can be no bailment unless
there is a delivery of goods and a promise to return. Govt. was not bound to return the same notes, nor
was it bound to dispose of the surrendered notes in accordance with the plaintiff’s directions.

DISTINCTION BETWEEN BAILMENT AND OTHER SIMILAR RELATIONS

 A deposit of money with a banker is not a bailment as he is not bound to return the same notes
and coins. (Ichha Dhanji v. Natha, ILR (1888) 13 Bom. 338. In Union Bank of India v. K.V.
Venugopalan, AIR 1990 Ker 223, bank was not allowed to exercise the right of lien as a bailee on
money held under a fixed deposit.
 An agent who has collected money on his principal’s behalf is not a bailee of the money for the
same reason. An important distinguishing feature between agency and bailment is that the
bailee does not represent the bailor. He merely exercises, with the leave of the bailor, certain
power of the bailor in respect of the property. Secondly, bailee has no power to make contracts
on behalf of the bailor; nor can he make the bailor liable, simply as bailee for any acts he does.
 Bailment is different from sale. In sale, not only mere possession ownership is also transferred.
The person buying is under no obligation to return. HIRE PURCHASE contract is a bailment. It
has two elements – bailment plus an element of sale – Instalment Supply Pvt.Ltd. v. Union of
India, AIR 1962 SC 53; Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178.
 Post office is a bailee of the articles of the sender.

DUTY OF BAILOR

According to Sec. 150: bailors are of two kinds:

1 Gratuitous bailor; and

2 Bailor for reward.

DUTY OF GRATUITOUS BAILOR

Sec. 150 BAILOR’S DUTY TO DISCLOSE FAULTS IN GOODS BAILED.—The bailor is bound to disclose
to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with
the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he
is responsible for damage arising to the bailee directly from such faults.

If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or
was not aware of the existence of such faults in the goods bailed.

Illustrations

A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is
vicious. The horse runs away. B is thrown and injured. A is responsible for B for damage sustained.

A hires a carriage of B. The carriage is unsafe, though be is not aware of it, and A is injured. B is
responsible to A for the injury.

The conditions of bailor’s liability are:

 He should have knowledge of the defect and the bailee should not be aware. (Gratuitous bailor
not liable for defects not known to him)
 The defects in the goods must be such as exposes the bailee to extraordinary risks or materially
interferes in the use of the goods.

DUTY OF BAILOR FOR REWARD

The duty of bailor for consideration is much greater. He is making profit from his profession and
therefore it is his duty to see that the goods which he delivers are reasonably safe for the purpose of the
bailment. He cannot say that he was not aware of the defect. Sec. 150 says “if the goods are bailed for
hire, the bailor is responsible for such damage, whether he was or was not aware of such faults in the
goods bailed.”

In Hyman & Wife v. Nye & Sons, (1881) 6 QBD 685, plaintiff hired from the defendant for a
specific journey a carriage, a pair of horses and a driver. During the journey a bolt in the underpart of
the carriage broke, the splinter bar became displaced, the carriage was upset and the plaintiff injured.
Defendant was held liable. Justice Lindley said: “A person who lets out carriages is not responsible for
all defects discoverable or not; he is not an insurer against all defects. But he is an insurer against all the
defects which care and skill can guard against. His duty is to supply a carriage as fit for the purpose for
which it is hired as care and skill can render it”.

In Reed v. Dean, (1949) 1 KB 188, plaintiff hired a motor launch from defendant for a holiday on
the river Thames. The launch caught fire. Plaintiffs were unable to extinguish it, the fire-fighting
equipment was out of order. They were injured and suffered loss. Court held that there was an implied
undertaking that the launch was fit for the purpose for which it was hired as reasonable care and skill
could make it. Defendant was held liable.
 Where the bailor delivers goods to another for carriage or some other purpose and if the goods
are of dangerous nature, the fact should be disclosed to the bailee – Lyell v. Ganga Dai, ILR (1875-80) 1
All 60.

DUTIES OF BAILEE

The following are the duties of bailee:

1. Duty of reasonable care (151-152)

2. Duty not to make unauthorized use (154)
3. Duty not to mix (155-157)
4. Duty to return (160-161)
5. Duty not to set up jus tertii
6. Duty to return increase

DUTY OF REASONABLE CARE

151 CARE TO BE TAKEN BY BAILEE. In all cases of bailment the bailee is bound to take as much care
of the goods bailed to him as a man of ordinary prudence would, under similar circumstances take, of
his own goods of the same bulk, quality and value as the goods bailed.

S. 151 lays down a uniform standard of care for “all cases of bailment”. Under the original
English law, bailee’s “liability was absolute. It was no excuse for the bailee to say that the damage or
failure to return was due to no fault of his own; he was liable in any case”. But in R. Viscount Hertford,
(1681) shower 172, the court held that “if money be given to one to keep generally without
consideration and the person be robbed, he is discharged”. In Coggs v. Bernard”, absolute liability was
further reduced to bailees “who exercised a public calling” namely, public carriers and innkeepers. The
rest of the bailees owe only the duty of reasonable care. The Court of Appeal in Houghland v. R.R. Low
(Luxuary Coaches) Ltd., (1962) 1 QB 694 held that the standard of care was that of reasonable care and
was the same whether the bailment was gratuitous or for reward.

In Martin v. London County Council, 1047 KB 628, plaintiff was brought to a paid hospital as a
patient. On her entry, the hospital officials took charge of two pieces of jewellery and a gold cigarette-
case. They were subsequently stolen by a thief who broke into the room in which they were kept. It
was held that defendants were bailees for reward and were liable for the loss as they had failed to
exercise care which the nature and quality of the articles required.

S. 151 prescribes a uniform standard of care in all cases of bailment—degree of care which a
man of ordinary prudence would take of his own goods of the same type and under similar
circumstances. Bailee would be liable if the care devoted falls below this standard.

S. 152 BAILEE WHEN NOT LIABLE FOR LOSS, ETC. OF THING BAILED.-- The bailee, in the absence of any
special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has
taken the amount of care of it described in Sec. 151.

Nature, quality and bulk of the goods, bailed, the purpose of bailment, facilities reasonably
available for safe custody and the like will be taken into account for determining whether proper care
has been taken. Bailee was held not liable, where a part of the food grains stored at his godown were
damaged by floods unprecedented in the history of the place (Union of India v. Udha Ram and Son, AIR
1963 SC 422.

Loss by theft

Where the bailor’s goods are stolen from the custody of the bailee, he will be liable if there has
been negligence on his part. In Jan and Son v. A. Cameron, (1922) 4 All E R 735, the plaintiff stayed at a
hotel and his articles were stolen while he was away, the hotelier was held liable as the room was, to his
knowledge, in an insecure condition.

In Rampal Ramchand Agarwal v. Gourishankar Hanuman Prasad, AIR 1952 Nag. 8, bailor’s
ornaments were kept in a lock and the key was kept in a cash box in the same room. The room was in
the ground floor and easily accessible to burglars. The ornaments were stolen. The bailee was held
liable.

Burden of Proof

The burden of proof is on the bailee to show that he was exercising reasonable care. If the
bailee places before the court evidence to show that he had taken reasonable care to avoid damage,
which was reasonably forseeable or had taken all reasonable precautions to obviate risks which were
reasonably apprehended, he would be absolved of his liability. (Kuttappa v. State of Kerala, 1988 (2) KLT
54.

Loss due to bailee’s servant

Where the loss has been due to the act of the bailee’s servant, he would be liable if the
servant’s act is within the scope of his employment. In Sanderson v. Collins, (1904) 1 KB 628, the
defendant sent his carriage to the plaintiff for repairs. Plaintiff lent his own carriage to the defendant
while the repairs were going on. Defendant’s coachman, without his knowledge, took away the
carriage for his own purpose and damaged it. The defendant was held not liable as the coachman at the
time when the injury was done to the carriage not acting within the course of his employment.

But in Cooper (Lee) Ltd. v. C.H. Jeakins & Sons Ltd. (1967) 2 QB 1, the bailee’s driver left the
vehicle in which he was carrying the plaintiff’s goods unattended and half the goods were stolen, the
bailee was held liable.

Involuntary bailee

“A person who has come into possession of a chattel through no act of his own and without his consent”
is called an involuntary bailee. He is also liable to take reasonable care of the goods. In Newman v.
Bourne & Hollingsworth, (1951) 31 TLR 209, plaintiff went to the defendant’s shop to buy a coat. She
took the coat off, which she was wearing with a diamond brooch by its side. While leaving, she forgot
the brooch and it was handed by an assistant to the shopkeeper, who put it in his desk, from where it
was lost. The defendant was held liable.

If the involuntary bailee does something, without negligence, which results in the loss of the property,
he will not be liable for conversion.

CONTRACT TO THE CONTRARY

Sec. 152 opens with the remark “in the absence of any special contract. In SBI v. Quality Bread Factory,
AIR 1983 P&H 244, it was held that under Sec. 152 a bailee can contract himself out of the obligation
under Sec. 151. But the courts have interpreted that Sec. 152 has the effect of saying that unless the
standard of care is enhanced by special contract, the bailee will be liable only when he fails to observe
the requirement of Sec. 151. The words in Sec. 152 “in the absence of any special contract” would
permit the standard of duty to be revised upwards and not to be diluted. In Mahendra Kumar Chandulal
v. CBI, AIR 1984 Guj NOC 53, bales of cloth were lost from bank custody under circumstances showing
negligence. The banker was held liable irrespective of a clause which absolved him of all liability. In
Cochin Port Trust v. Associated Cotton Traders Ltd., 1983 KLT 562, the court held that the Port Trust
which is in the position of a bailee has a duty to take all proper measures for protection of the goods.
When goods entrusted to a bailee are lost or damaged, there is initial presumption of negligence on the
part of the bailee.

DUTY NOT TO MAKE UNAUTHORISED USE (S. 154)

154. LIABILITY OF BAILEE MAKING UNAUTHORISED USE OF GOODS BAILED. If the bailee makes any use
of the goods bailed which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods or during such use of them.

In Alias v. E.M. Patil, AIR 2004 Ker. 214, a vehicle was delivered to a workshop for repair and the
owner of the workshop allowed an unlicensed employee to drive the vehicle and he caused accident
resulting in the death of a person. It was held that the bailee was liable to compensate the deceased as
also the owner of the vehicle because it was unauthorized use and liability was absolute.

!53. TERMINATION OF BAILMENT BY BAILEE’S ACT INCONSISTENT WITH CONDITIONS. A contract of

bailment is avoidable at the option of the bailor, if the bailee does any act with regard to the goods
bailed inconsistent with the conditions of the bailment.

Illustration

A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option of
A, a termination of the bailment.

DUTY NOT TO MIX (S. 155-157)

The bailee should maintain the separate identity of the bailor’s goods. He should not mix his
own goods with those of the bailor and without his consent. If the goods are mixed with the consent of
the bailor, both will have a proportionate interest in the mixture thus produced (S.155). If the mixture is
made without bailor’s consent, and if the goods can be separated, or divided, the bailee is bound to
bear the expenses of separation as well as any damaging arising from the mixture (156). But if the
mixture is beyond separation, the bailee must compensate the bailor for his loss.

155. EFFECT OF MIXTURE, WITH BAILOR’S CONSENT, OF HIS GOODS WITH BAILEE’S. If the bailee,
with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the
bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.

156. EFFECT OF MIXTURE, WITHOUT BAILOR’S CONSENT WHEN THE GOODS CAN BE SEPARATED.-- If
the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the
goods can be separated or divided, the property in the goods remains in the parties respectively; but the
bailee is bound to bear the expense of separation or division, and any damage arising from the mixture.

Illustration

A bails 100 bales of cotton marked with a particular mark to B. B without A’s consent, mixes the 100
bales with other bales of his own, bearing a different mark; A is entitled to have his 100 bales returned,
and B is bound to bear all the expenses incurred in the separation of the bales, and any other incidental
damage.

157. EFFECT OF MIXTURE, WITHOUT BAILOR’S CONSENT, WHEN THE GOODS CANNOT BE SEPARATED.
If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such
a manner that it is impossible to separate the goods bailed from the other goods, and deliver them back,
the bailor is entitled to be compensated by the bailee for the loss of the goods.

Illustration

A bails a barrel of Cape flour worth Rs. 45 to B. B, without A’s consent, mixes the flour with country
flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour.

DUTY TO RETURN (160 – 161)

160. RETURN OF GOODS BAILED, ON EXPIRATION OF TIME OR ACCOMPLISHMENT OF PURPOSE. It is

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

161. BAILEE’S RESPONSIBILITY WHEN GOODS ARE NOT DULY RETURNED. If, by the default of the bailee,
the goods are not retured, delivered or tendered at the proper time, he is responsible to the bailor for
any loss, destruction or deterioration of the goods from that time.

In Shaw & Co. v. Symmons & Sons (1917) 1 KB 799, plaintiff entrusted books to the defendant, a
bookbinder, to be bound. The latter promised to return them within a reasonable time. Plaintiff having
required the defendant to deliver the whole of the books then bound, defendant failed to deliver them
within a reasonable time and they were subsequently burnt in an accidental fire on his premises.
Defendant was held liable in damages for the loss of the books.

159. RESTORATION OF GOODS LENT GRATUITOUSLY. The lender of a thing for use may at any time
require its return, if the loan was gratuitous, even though he lent it for a specified time or purpose. But,
if, on the faith of such loan made for a specified time or purpose, the borrower has acted in such a
manner that the return of the thing lent before the time agreed upon would cause him loss exceeding
the benefit actually derived by him from the loan, the lender must, if he compels the return, indemnify
the borrower for the amount in which the loss so occasioned exceeds the benefit so derived.

159. TERMINATION OF GRATUITOUS BAILMENT BY DEATH. A gratuitous bailment is terminated by the

death either of the bailor or of the bailee.

162. BAILMENT BY SEVERAL JOINT OWNERS. If several joint owners of goods bail them the bailee may
deliver them back to, or according to the directions of, one joint owner without the consent of all, in the
absence of any agreement to the contrary.
DUTY NOT TO SET UP JUS TERTII (166-167)

A bailee is not entitled to set up, as against the bailor’s demand, the demand of jus tertii, that is to say,
that the goods belong to a third person. (This is called the estoppel of bailee. He can return the goods
to the person bailed them even against the demands of the true owner unless he is under legal
pressure.) The bailee is estopped from denying the right of the bailor to bail the goods and to receive
them back. Even if there is a person who has a better title to the goods than that of the bailor or who
claims ownership of the goods, the bailee may safely return the goods to the bailor and he will not be
liable to the owner for conversion.

166. BAILEE NOT RESPONSIBLE ON RE-DELIVERY TO BAILOR WITHOUT TITLE. If the bailor has no title
to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of the
bailor, the bailee is not responsible to the owner in respect of such delivery.

But the person who claims the ownership may apply to the court to prevent the bailee from the
returning the goods to the bailor and to have the question title decided. (Rogers Sons & Co. v. Lambert
& Co., (1891) 1 QB 318 (CA).

167. RIGHT OF THIRD PERSON CLAIMING GOODS BAILED. If a person other than the bailor, claims
goods bailed, he may apply to the Court to stop the delivery of the goods to the bailor, and to decide the
title to the goods.

Further, if the bailee has already delivered the goods to the person having a better title, and yet
the bailor sues him, he may prove that such person had a better right to receive the goods as against the
bailor – Explanation 2 to Sec. 117 of Evidence Act.

DUTY TO RETURN INCREASE

In the absence of any agreement to the contrary, the bailee is bound to return to the bailor
natural increases or profits accruing to the goods during the period of bailment.

S. 163 BAILOR ENTITLED TO INCREASE OR PROFIT FROM GOODS BAILED. In the absence of any
contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrued from the goods bailed.

Illustration: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to
deliver the calf as well as the cow to A.

In Standard Chartered Bank v. Custodian, (2000) 6 SCC 427, shares and securities were pledged with a
bank and the bank received bonus shares and dividends and interest in respect thereof. It was held that
the bank could not be compelled to handover such increment unless the pledged securities were
redeemed.

FINDER (S. 168-169)

168. RIGHT OF FINDER OF GOODS: MAY SUE FOR SPECIFIC REWARD OFFERED. The finder of goods
has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him to
preserve the goods and to find out the owner; but he may retain the goods against the owner until he
receives such compensation; and where the owner has offered a specific reward for the return of goods
lost, the finder may sue for such reward, and may retain the goods until he receives it.
169. WHEN FINDER OF THING COMMONLY ON SALE MAY SELL IT. When a thing which is commonly the
subject of sale is lost, if the owner cannot with reasonable diligence be found, or if he refuses, upon
demand to pay the lawful charges of the finder, the finder may sell it—

1. when the thing is in danger of perishing or losing the greater part of its value, or

2. when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of its value.

A finder of goods is a bailee thereof and as such bound by the duty of reasonable care. He does not
have the right to sue the owner for compensation for trouble and expense voluntarily incurred by him to
preserve the goods and to find the owner. He has the right to lien. He can sue for the reward
announced. He can also sell the goods in the circumstances stated in Sec. 169.

RIGHTS OF BAILEE

1. Right to compensation (S. 164)

2. Right to expenses or remuneration (S. 158)
3. Right to lien (170-171)
4. Right to sue (180-181)

RIGHT TO COMPENSATION

S. 164. BAILOR’S RESPONSIBILITY TO BAILEE. The bailor is responsible to the bailee for any loss which
the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive
back the goods, or to give directions respecting them.

If the bailor has no right to bail the goods, or to receive them back or to give directions
respecting them and consequently the bailee is exposed to some loss, the bailor is responsible for the
same.

RIGHT TO EXPENSES OR REMUNERATION

158. REPAYMENT BY BAILOR OF NECESSARY EXPENSES. Where, by the conditions of the bailment, the
goods are kept or to be carried, or to have work done upon them by the bailee for the bailor, and the
bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred
by him for the purpose of the bailment.

A bailee is entitled to recover his agreed charges. But where there is no such agreement at all,
sec. 158 comes into play. Where the bailee is required by the terms of bailment to keep or carry the
goods or to do some work upon them for the benefit of the bailor, and the contract provides for no
reward, the bailee has a right to ask the bailor for payment of necessary expenses incurred by him for
the purpose of the bailment. The Calcutta High Court has laid down that this right is not linked with the
right of lien. Where the bailment is for the benefit of the bailee, if in using the thing, the borrower is put
to any expense, this must be borne by himself.

RIGHT OF LIEN

If the bailee’s lawful charges are not paid he may retain the goods. The right to retain any
property until the charges due in respect of the property are paid is called the right of lien. In Syndicate
Bank v. Vijay Kumar, (1992) 2 SCC 330, the nature of lien was explained by quoting from Halsbury’s laws
of England:

“Lien is in its primary sense a right in one man to retain that which is in his possession belonging to
another until certain demands of the person in possession are satisfied. In this primary sense it is given
by law and not by contract”.

LIENS ARE OF TWO KINDS: (1) Particular lien and (2) General Lien.

PARTICULAR LIEN (170)

As a general rule a bailee is entitled only particular lien, which means the right to retain only
that particular property in respect of which the charge is due. This right is provided in Sec. 170.

170. BAILEE’S PARTICULAR LIEN. Where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the
absence of a contract to the contrary, a right to retain such goods, until he receives due remuneration
for the services he has rendered in respect of them.

Illustration: A delivers a rough diamond to B, a jeweler, to be cut and polished, which is accordingly
done. B is entitled to retain the stone till he is paid for the services he has rendered.

A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished
and to give a three month’s credit for the price. B is not entitled to retain the coat until he is paid.

RIGHT TO PARTICULAR LIEN is available subject to certain important conditions. The foremost is that
the bailee must have rendered some service involving exercise of labour or skill in respect of the goods
bailed. The labour or skill exercises by the bailee must be such as improve the goods.

Secondly, the labour or skill must have been exercised in accordance with the purpose of the bailment
and the terms of the contract. (Skinner v. Jager, ILR (1883) 6 All 139

Thirdly, only such goods can be retained on which the bailee has bestowed trouble and expense. He
cannot retain any other goods belonging to the bailor which are in his custody (Chase v. Westmore,
(1816) 15 M & S 180). It is this element of “particular lien” which distinguishes it from “general lien”.

Lastly, (Possessory right) the right depends on possession and is lost as soon as possession of the goods
is lost. In Eduljee v. Café John Bros., ILR 1944 Nag 37, plaintiff purchased an old refrigerator, the vendor
agreeing to repair it for a fixed charge. When the repair was over the condition of the machine was foud
satisfactory, it was delivered to the plaintiff but a part of the repair was still unpaid. The machine broke
down again and the vendor carried its engine and another part for further repairs and claimed lien on
these parts until the outstanding charges of repair were paid. The Court held that delivery of possession
after repair already effected puts an end to the lien for the charges of repairs and cannot be revived
because the repairer undertakes further repairs merely out of grace and not as a matter of fresh
contract.

Thus lien is a possessory right which continues only so long as the possessor holds the goods.
The right of lien may also be defeated or excluded by an agreement to the contrary.

GENERAL LIEN (171)

 Right of General lien means the right to hold the goods bailed as security for a general balance
of account. The right of particular lien entitles a bailee to detain only that particular property in respect
of which charges are due. General lien entitles the bailee to detain any goods bailed to him for any
amount due to him whether in respect of those goods or any other goods.

171. GENERAL LIEN OF BANKERS, FACTORS, WHARFINGERS, ATTORNEYS AND POLICY BROKERS.
Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a
contract to the contrary, retain as a security for a general balance of account, any goods bailed to them;
but no other persons have a right to retain, as security for such balance, goods bailed to them, unless
there an express contract to that effect.

THE RIGHT OF GENERAL LIEN is a privilege and is specially conferred by S. 171 on certain kinds of bailees
only. They are (1) Bankers (2) Factors (3) Wharfingers (4) Attorneys of a High Court, and (5) policy
brokers.

BANKERS

The general lien of bankers, as judicially recognized and dealt with Sec. 171 attaches to all goods
and securities deposited with them as bankers by a customer or third person on a customer’s account,
provided there is no contract, express or implied, inconsistent with such lien. A banker’s lien on
negotiable securities has been judicially defined as an ‘implied pledge’. A banker has, in the absence of
agreement to the contrary, a lien on all bills received from a customer in the ordinary course of banking
business in respect of any balance that may be due from such customer.

By mercantile custom the banker has a general lien over all forms of commercial paper
deposited by or on behalf of a customer in the ordinary course of banking business. The custom does
not extend to valuables lodged for the purpose of safe custody and may in any event be disposed by an
express agreement or circumstances which show an implied agreement inconsistent with the lien.

In K. Sita v. Corporation Bank, (1999) 3 An WR 393 (AP), certain gold ornaments were pledged with a
bank for raising a loan. The borrower paid back the loan. The bank retained the security because of
another loan subsequently taken by the borrower. The bank was held to be entitled to do so till the
satisfaction of the other loan also.

The lien extends only to goods which have been bailed to the banker as a bailee. Sec. 171 does
not apply to deposit of money in a bank. The bank cannot claim lien on such money. In cases of deposit
of money, the relationship of bailor and bailee is not established. There is a creditor and debtor
relationship. The money belongs to the Bank. Bank cannot claim lien on money which belongs to it.

Similarly, where goods are deposited with the bank for safe custody or some other special
purpose, they will not be under the spell of general lien. Where securities were given to a bank to get
them exchanged for fresh bills, the banker could not exercise lien on the new securities which were
delivered to them for a special purpose inconsistent with the existence of the lien claimed.. Brandao v.
Barnett 136 ER 207.

In Mercantile Bank of India Ltd. v. Rochaldas Gidumal & Co. AIR 1926 Sind 225, a customer gave
his banker a sum of money for transmission by telegraphic transfer to his own firm at another place.
The bank purported to hold the money for their balance of account against the firm. The court held that
the money given for telegraphic transfer is given for a special purpose inconsistent with the exercise of
the right of lien.

In K.S. Nagalambika v. Corporation Bank, AIR 2000 Kant 201, the Karnataka High Court has held
that the right would extend to the fixed deposits of the customer including those of his/her spouse. The
bank was entitled to adjust the amounts towards the loan account. Court relied upon the decision of the
Supreme Court in Syndicate Bank v. Vijay Kumar (1992) 2 SCC 330 which held that banker’s lien could be
exercised in respect of a joint account also.

In Firm Jai Kishan Das Jinda Ram v. Central Bank of India Ltd., AIR 1955 Punj. 250, one of two
firms gave a sum of money to the bank to remit the same to a sugar mill. The mill refused to accept the
amount when offered. The amount thus came back to the bank and it claimed lien on it for a balance
due against the other firm. The two firms have separate accounts in the bank and agreed to give the
bank a general lien over all monies of the two firms. The court held that the specific object for which
they money was given having failed, the money was no long bound by any incident of trust and,
therefore, the bank had a good lien in the terms of the firms’ agreement.

FACTORS

“Factor” means an agent entrusted with possession of goods for the purpose of selling them for his
principal. He is given possession of goods in the ordinary course of business for the purpose of sale. He
has a general lien on the goods of his principal for his balance of account against the principal. In E.H.
Parakh v. King Emperor, AIR 1926 Oudh 202, a motor car was delivered to an agent for sale. He was
entitled to retain the car until his charges were paid.

A factor, like a banker, will not have the right of lien on such goods as have come to his
possession for a specific purpose which impliedly excludes his right to lien. In Dixon v. Stansfield, 16 LT
150, a factor who used to have various dealings with his principal was instructed by the principal to
effect a policy of insurance on a ship. The principal sent the premium and he policy remained in the
possession of the agent, who claimed lien for the money which was owing to him in his capacity as a
factor. His claim was not allowed, as the policy of insurance had not come to his possession in his
capacity as a factor.

WHARFINGERS

“Wharf means a place contiguous to water, used for the purpose of loading and unloading
goods, and over which the goods pass in loading and unloading. It is essential to a wharf that goods
should be in transit over it. It is a place, not for storing goods, but in the process of their transit to or
from water. “Wharfinger” is he that owns or keeps a wharf, or hath the oversight or the management of
it”—Chatok v. Bellamy, (1895) 64 LJ QB 250. A wharfinger has general lien on the goods bailed to him
until his wharfage—charges due for the use of his wharf—are paid.

ATTORNEYS OF HIGH COURT

An attorney or a solicitor who is engaged by a client is entitled to general lien until the fee for
his professional service and other costs incurred by him are paid—General Share Trust Co. v. Chapman,
(1876) 1 CPD 771. The right extends to the proceeds of the action that come to the hands of the
attorney—Devkabai v. Jefferson, ILR (1886) 10 Bom. 248. He has a right of lien over funds which are
deposited with the court—Tyabji Dayabhai & Co. v. Jetha Devji & Co. AIR 1927 Bom 542. A solicitor who
is discharged by his clind, has the right to hold the papers entrusted to him subject to his lien for costs.

But if the attorney himself decides not to act for the client, he forfeits his lien and, therefore, he
must hand over the papers to the client, whether his costs are paid or not. The Andhra Pradesh High
Court has summarized the law on the point as follows:

1. The common law right of passive and retaining lien available to a solicitor in England is accepted
by courts in India as part of the law of this country.
2. The said common law right is not abrogated by Sec. 171, Contract Act.
3. Sec. 171 Contract Act, enacts a special rule of lien applicable exclusively to attorneys who are
also known as solicitors.
4. The other practitioners, who discharge the functions of solicitors, are entitled to invoke the
common law rights applicable to solicitors though Sec. 171 is inapplicable to them.
5. The practitioner forfeits the right of retaining lien the moment he discharges himself or by his
client for misconduct.

The Supreme Court has laid down in R.D. Saxena v. Balram Prasad Sharma, AIR 2000 SC 2912 that
advocates have no right of lien over clients’ papers for their unpaid fee. Court said that files containing
copies of the records including some original documents also, could not be equated with the word
‘goods’ referred in Sec. 171. Hence an advocate cannot place reliance upon Sec. 171.

POLICY BROKERS

An insurance agent who is employed to effect a policy of marine insurance is called a policy
broker. His lien extends to any balance on any insurance account due to him from the person who
employed him to effect the policy.

LIEN AGAINST TIME BARRED DEBT

One of the great advantages of the right of lien is that it can be exercised for the realization of a debt
even when an action for recovery of the debt would be time barred.

MARITIME LIEN

As explained by Supreme Court in M.V. Al Quamar v. Tsavliris Salvage (International) Ltd. AIR 2000 SC
2826, there are two attributes to maritime lien: (a) a right to a part of the property in the res; and (b) a
privileged claim upon a ship, aircraft or other maritime property in respect of services rendered to or
injury caused by that property. Maritime lien thus attaches to the property in the event of the cause of
action arising and remains attached. It is however inchoate and very little positive in value unless it is
enforced by an action. It is a right which stems from general maritime law and is based on the concept
as if the ship itself caused the harm, loss or damage to others or to their property and the ship itself
must make good that loss.

CARRIER’S LIEN

A Carrier has the right to retain goods until his dues are paid. A carrier cannot be forced to
deliver goods without payment of demurrage even if the detention order was issued by the Customs
Authorities. The detention order turned out to be illegal. Therefore, the Customs Authorities became
liable to pay the demurrage—Shipping Corporation of India Ltd. v. C.L. Jain Woollen Mills, (2001) 5 SCC
345.

TYPES OF LIEN COVERED BY THE CONTRACT ACT

1. Lien of finder of goods

2. Bailee’s lien: -- Particular and General lien
3. Lien of Pledgee or Pawnee
4. Lien of Agents.

RIGHT TO SUE

S. 180. SUIT BY BAILOR OR BAILEE AGAINST WRONGDOER. If a third person wrongfully deprives the
bailee of the use of possession of the goods bailed, or does them any injury, the bailee is entitled to use
such remedies as the owner might have used in the like case if no bailment had been made; and either
the bailor or the bailee may bring a suit against a third person for such deprivation or injury.

S. 181 APPORTIONMENT OF RELIEF OR COMPENSATION OBTAINED BY SUCH SUITS.—Whatever is

obtained by way of relief or compensation in any such suit shall, as between the bailor and the bailee,
be dealt with according to their interests.

Sec. 180 enables a bailee to sue any person who has wrongfully deprived him of the use or
possession of the goods bailed or has done them any injury. The bailee’s right and remedies against the
wrongdoer are just the same as those of the owner. An action may, therefore, be brought by the bailee
or the bailor. Whatever is obtained by way of relief or compensation in any such suit shall, as between
the bailor and the bailee, be dealt with according to their respective interests.

PLEDGE

The bailment of goods as security for payment of a debt or performance of a promise is called
“pledge”.

The bailor is called ‘the pawner’ and the bailee ‘the pawnee’.

Thus pledge is only a special kind of bailment. The chief distinction is the object of the contract.
Where the object of delivery of goods is to provide security for a loan or for the fulfilment of an
obligation, that kind of bailment is called pledge. It is thus a bailment of personal property as security
for some debt or engagement.

ESSENTIAL CHARACTERISTICS OR INGREDIENTS OF A PLEDGE

1. Delivery of possession.

Delivery of the chattel pawned is a necessary element in the making of a pawn. The property
pledged should be delivered to the pawnee. Delivery may be actual or constructive. Delivery of the key
of the godown where the goods are stored is an illustration of constructive delivery. Delivery of
documents of title which would enable to the pledgee to obtain possession is equally effective to create
a pledge.
 In Madras Official Assignee v. Mercantile Bank of India Ltd., 1935 AC 53, the producer of a film
borrowed a sum of money from a financier and agreed to deliver the final print of the film when ready.
The agreement was held not a pledge, because there was no delivery of possession.

In Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954, the Supreme Court held that
delivery of railway receipts was the same thing as delivery of goods. In that case, certain goods were
consigned with the Railways to “self” from Bombay for transit to Okhla. The consignor endorsed the
railway receipts to the appellant bank against an advance of Rs. 20,000/-. The goods having been lost in
transit, pledgee sued the bank for the loss of the goods (worth Rs. 35,500). The Bombay High Court
allowed recovery upto Rs. 20,000/. The Supreme Court held the pledgee was entitled to recover the full
value of the goods lost and not merely the amount of his advance.

PLEDGE BY HYPOTHECATION

Sometimes the goods are allowed to remain in the custody of the pledger for a special purpose.
That does not militate against the effectiveness of the pledge. In Reeve v. Capper, (1838) Bing NC 136,
captain of a ship pledged his chronometer with the shipowner who allowed him to use the instrument
for the purpose of a voyage. The captain pledged it over again with another person. The question was
whether the first pledge was valid. The court held that it was. A constructive pledge comes into
existence as soon as the pawner, without actually delivering the goods, agrees to hold them for the
pawnee and promises to deliver them on demand.

In Bank of Chittoor v. Narasimhulu, AIR 1966 AP 163, a cinema projector and accessories were
pledged with a bank. The bank allowed the property to remain with the pledgers, since they formed the
equipment of a running cinema. Subsequently the pledgers sold the machinery. The court held that the
sale was subject to the pledge. There was a constructive delivery or delivery by attornment to the bank.

2. PLEDGE IS A CONVEYANCE IN PURSUANCE OF CONTRACT

It is essential to a valid pledge that the chattel shall be made over by the pledger to be pledgee
in pursuance of the contract of pledge. It is not necessary that delivery of possession and the loan
should be contemporaneous. Delivery and advance need not be simultaneous and a pledge may be
perfected by delivery after the advance is made. Delivery may be made made before or in
contemplation of an advance. In Blundell Leigh v. Attenborough, (1921) 3 KB 235, on Nov 1, 1919,
plaintiff handed her jewellery to one Miller to value it and let her know what offer he could make as to
lending her money. He was to keep the jewellery as security if he was to advance the money. On the
same day, Miller pledged the jewellery with the defendants, who advanced 1000 pounds, in good faith.
On November 5, Miller advanced 500 pounds to the plaintiff on security of the ring. Plaintiff came to
know of the facts. She paid the amount she had borrowed and sued the defendant for return of the
jewellery. She contended that on Nov. 1, Miller became only a gratuitous bailee. Subsequently, when
he advanced the money, no valid pledge could arise as he had already parted with the possession of the
goods.

The court held that delivery made by plaintiff on November 1 was a good delivery for the
purpose of creating a pledge. It is clear that the plaintiff intended, when she handed over the jewellery
to Miller, to create a valid pledge as between him and her, by way of loan which she was prepared to
accept.
RIGHTS OF PAWNEE

1. Right of retainer (S. 173-174)

Sec. 173 The pawnee may retain the goods pledged, not only for a payment of the debt or the
performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him
in respect of the possession or for the preservations of the goods pledged; but

Sec. 174 The pawnee shall not, in the absence of a contract to that effect, retain the goods
pledged for any debt or promise other than the debt or promise for which they are pledged, but such
contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent
advances made by the pawnee.

The first important right of a pawnee is the right to retain the goods pledged until his dues are
paid. He has a right to retain the goods not only for payment of the debt or performance of the
promise, but for the interest due on the debt and all necessary expenses incurred by him in respect of
the possession or for the preservation of the goods pledged.

The pledgee can retain the goods only for the payment of that particular debt for which the
goods were pledged and not for any other debt or promise, unless there is a contract to the contrary.
Where, however, after a pledge is created, a subsequent advance is made without any other security, a
contract to burden the same goods shall be presumed—Cowasji Muncherji Banaji v. Official Assignee of
Bombay, AIR 1928 Bom. 507. The rights of retainer ends on proper tender of payment. If he refused,
pledger can resort to sections 160 and 161.

SPECIAL AND PARAMOUNT INTEREST OF PLEDGEE

The right of retainer is in the nature of a particular lien. Lien is different from pledge. A pawn or
pledge is an intermediate between a simple lien and a mortgage. The pawnee gets a special property in
the goods pledged. The general property remains in the pawner and wholly reverts to him on discharge
of the debt. The right to property vests in the pledgee only so far as is necessary to secure the debt. In
Bank of Bihar v. State of Bihar, (1972) 3 SCC 196, the Supreme Court observed. “This special property or
interest is to be distinguished from the mere right of detention which the holder of a lien possesses, in
that it is transferable in the sense that a pawnee may assign or pledge his special property or interest in
the goods. Thus, so long as the pawnee’s claim is not satisfied no other creditor of the pawner has any
right take away the goods or their price. In Bank of Bihar’s case, goods which were under pledge of the
bank were seized by the State. It was held that seizure could not deprive the pledgee of his right to
realize the amount for which the goods were pledged and therefore the State was bound to indemnify
it.

HYPOTHECATEE HAS NO DIRECT RIGHT OF SEIZURE

Where the pledge is by way of hypothecation, the creditor cannot directly seize the goods by
entering the premises or otherwise. He has to do so either with the consent of the borrower or through
a court order. In Union of India v. Shenthilnathan, (1977) 2 MLJ 499, it was held that “at best the right
the plaintiff had under the agreement was to file a suit on the debt and after obtaining a decree to
proceed against the property specified in realization of the decree.

2. RIGHT TO EXTRA ORDINARY EXPENSES

S. 175 Pawneee is entitled to receive from the pawner extraordinary expenses incurred by him for the
preservation of the goods pledged. He cannot retain the goods demanding extra ordinary expenses. He
can only sue to recover such expenses.

3. RIGHT TO SELL (176)

If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of
the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain the goods pledged as a collateral security, or he may sell
the thing pledged, on giving the pawnor reasonable notice of the sale.

The right to sue is a personal action and rests upon the contract of loan. Until the money due is
recovered, the pledged goods may be retained. They have to be surrendered when the loan is realized.
If the pledgee is unable to return the goods, he cannot have a judgment for the debt.

In Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322, defendant borrowed Rs. 20,000 from the
plaintiff on a promissory note and gave him aeroscrapes worth about Rs. 35,000 as security for the loan.
The plaintiff sued for repayment of the loan, but was unable to produce the security, having sold it, and
therefore his action for the loan was rejected.

House of Lords in Trustees of the Property of Ellis & Co v. Dixon Johnson, 1925 AC 489 observed:

“If a creditor holding security sues for the debt, he is under an obligation on payment of the
debt to hand over the security, and that if, having improperly made away with the security he is unable
to return it to the debtor he cannot have judgment for the debt.”

Requirement of notice

Pledgee may sell the goods. But before making the sale, he is required to give to the pawner, a
reasonable notice of his intention to sell. Pawner’s right to redeem cannot be taken away, nor can he be
foreclosed from redeeming the pledge.

LOSS OF GOODS

Where goods are lost due to the negligence of the pledgee, the liability of the pledger is reduced
to the extent of the value of such goods.

PAWNER’S RIGHT TO REDEEM (177)

If a time is stipulated for the payment of the debt, or performance of the promise, for which the
pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at
the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of
them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.

Satisfaction of the debt or engagement extinguishes the pawn. The pawnee on such satisfaction
is bound to redeliver the property. The pawner has the absolute right to redeem the property pledged
upon tender of the amount advanced. The special interest of the pledgee comes to an end as soon as
the debt for which the goods were pledged is discharged. If no specific period is prescribed for
redemption, the pawnor may redeem the pledge at any time by payment of the amount for which the
pledge had been made. The right to redeem continues upto the time on the expiry of which the pawnee
has notified that the goods would be sold. Pawner may redeem the goods at any time before the actual
sale.

The pawner has the right to take back with the goods the increase, if any, that the goods have
undergone during the period of pledge. In M.R. Dhawan v. Madan Mohan, AIR 1969 Del 313, certain
shares of a company was under pledge. During the period of the pledge, the company issued bonus and
rights shares. It was held that these increases belonged to the pawnor.

WHO CAN PLEDGE

Pledge may be made by the owner or by any person with the owner’s authority. Pledge by any
other person may not be valid. In Biddomoy Dabee v. Sittaram, ILR 4 Cal 497, pledge by a servant in the
temporary absence of the owner was held to be invalid.

PLEDGE BY MERCANTILE AGENT (178)

The first exception to the above rule is found in Sec. 178. Where a mercantile against is, with the
consent of the owner, in possession of goods or documents of title to goods, any pledge made by him
while acting in the ordinary course of business shall be valid, provided that the pawnee acts in good
faith and has no notice of the fact that the agent has no authority to pledge. Necessary conditions of
validity under Sec. 178 are:

 Mercantile Agent
There should be a mercantile agent. Explanation to Sec. 178 says that “mercantile agent” has
the same meaning as in Sale of Goods Act, 1930. Under Sec. 2(9), mercantile agent means an
agent having in the customary course of business as such agent authority either to sell the
goods, or to consign goods for the purpose of sale, or to buy goods or to raise money on the
security of goods”.
 Possession with Owner’s Consent
The mercantile agent should be in possession of the goods or documents of title with the
consent of the owner. Consent means agreeing on the same thing in the same sense (Sec. 13
Contract Act). If consent is real, it is immaterial that it was obtained by fraud or
misrepresentation or with dishonest intention. These may make the person receiving
possession liable for some offence. But consent of the owner actually given is not annulled
thereby. In S. Sulaiman v. Ma Ywet, AIR 1934 Rang 198, a goldsmith obtained possession of
certain jewellery under the pretence that he had a customer and pledged the jewellery. The
pledgee was held to have obtained a good title.
 In the Course of business
Goods should have been entrusted in his capacity as a mercantile agent and he should be in
possession in that capacity. If the goods are entrusted to him in a different capacity, it is not
open to a third party who taken a pledge from him to say that they were in his possession as a
mercantile agent and therefore he had the power to create a pledge.
It is necessary that he should make the pledge in the ordinary course of his business as such
agent.
 Good faith
The last essential requirement is that the pawnee should act in good faith. At the time of
pledge, he should not have notice that the pawnor has no authority to pledge. According to the
General Clauses Act, 1895, a thing is said to be done in good faith when it is done honestly,
whether negligently or not. “Notice” will mean actual or constructive notice.
PLEDGE BY DOCUMENTS OF TITLE
Where a mercantile agent is in possession of the documents of title relating to his
principal’s goods and if he pledges the same, the pledgee gets a good title if he acts in good faith
and without notice. Explanation to Sec. 178 says that the expression “documents of title” shall
have the same meaning in Sale of Goods Act. According to Sec. 2(4) of Sale of Goods Act, 1930
“documents of title to goods” includes a bill of lading, dock warrant, warehouse keeper’s
certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods
and any other documents used in the ordinary couse of business as proof of the possession or
control of goods, or authority of the document to transfer or receive goods thereby
represented.
PERSON IN POSSESSION UNDER VOIDABLE CONTRACT (178-A)
178-A When the pawnor has obtained possession of the goods pledged by him under a
contract voidable under Sec. 19 or Sec. 19-A, but the contract has not been rescinded at the
time of the pledge, the pawnee acquires a good title to the goods provided he acts in good faith
and without notice of the pawnor’s defect of title.
In Phillips v. Brooks Ltd (1919) 2 KB 243, a fraudulent person, pretending to be a man of
credit, induced the plaintiff to give him a valuable ring in return for his cheque which proved
worthless. Before the fraud could be discovered, the ring was pledged with the defendants.
The pledge was held to be valid. Because it was made by a person in possession under a
voidable contract. Effect of fraud is to render the transaction voidable and not void. If an
innocent person has taken the goods under a pledge before the transaction is avoided, the true
owner cannot claim them back.
If the contract under which possession is obtained is void, the person in possession
cannot create a valid pledge.
PLEDGE BY PLEDGEE (179)
Where a person pledges goods in which he has only a limited interest, the pledge is valid
to the extent of that interest.
When a pledgee further pledges the goods, the pledge will be valid only to the extent of his
interest. His interest is the amount for which the goods have been given to him as a security. If
he pledges for a larger amount, the original pledger will still be entitled to his goods on paying
the amount for which he himself pledged the goods (Firm Thakur Das v. Mathura Prasad, AIR
1958 All 66). If an effective pledge in favour of the pledgee has not taken place, any repledge
made by him will be equally ineffective.
AGENCY INDIAN CONTRACT ACT, 1872

CHAPTER X - AGENCY (182-209)

WHO IS AN AGENT – Definition of Agency – Sec. 182

An “agent” is a person employed to do any act for another, or to represent another in dealings
with third persons. The person for whom such act is done, or who is so represented, is called the
“Principal”.

An agent acts as a representative of the other in business negotiations, that is to say, in the
creation, modification or termination of contractual obligations between that person and third persons.

Supreme Court observed In Syed Abdul Khader v. Rami Reddy, AIR 1979 SC 553:

“The expression agency is used to connote the relation which exists where one person has an authority
or capacity to create legal relations between a person occupying the position of principal and third
parties”.

TEST OF DETERMINING EXISTENCE OF AGENCY RELATIONSHIP

“Agency depends on true nature of relationship”. Use of the words ‘agency agreement’ and
‘agent’ by the parties in a contract does not necessarily establish a relationship of agency in the legal
sense. Parties calling their relationship ‘agency’ is not conclusive. To know whether a person occupies
the position of an agent or not, the law has to go by his functions.

ESSENTIALS OF AGENCY –

PRINCIPAL SHOULD BE COMPETENT TO CONTRACT

Sec. 183. WHO MAY EMPLOY AN AGENT. Any person who is of the age of majority according to the law
to which he is subject, and who is of sound mind, may employ an agent.

A minor cannot appoint an agent. Appointment of an agent involves a contract. A minor’s

agreement is void. “An infant cannot appoint an agent to act for him, neither by means of a power of
attorney, nor by any other means. If he purports to appoint an agent, not only is the appointment itself
void, but everything done by the agent on behalf of the infant is also void and incapable of
ratification”.—Lord Denning in Shephard v. Cartwright, (1953) 1 All ER 569.

But in situations where a minor is capable of binding himself by contract, he may appoint an
agent to contract on his behalf. Bowstead on Agency (quoted in Kusa Parida v. Baishnab Malik, AIR 1966
Ori 60), says “an infant or a lunatic is bound by a contract made by his agent with his authority, where
the circumstances are such that he would have been bound if he had himself made the contract”.

There is nothing in the Act which prohibits the guardian of a minor from appointing an agent for
him—Madanlal Dhariwal v. Bherulal, AIR 1965 Mys 272.

In Mahendra Pratap Singh v. Padam Kumari Devi, AIR 1993 All 143, it was held: “where a
principal who had executed a power of attorney became old, weak, mentally infirm and not in a position
to think independently, the power of attorney had become worthless”.
AGENT NEED NOT BE COMPETENT

S. 184 As between the principal and third persons, any person may become an agent, but no person
who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his
principal according to the provisions in that behalf herein contained.

The section states that an agent need not be competent to contract. Ordinarily, an agent incurs
no personal liability while contracting for his principal. Therefore, it is not necessary that he should be
competent to contract. A company may act as an agent beyond its capacity—Bell House Ltd. v. City Wall
Properties Ltd. (1966) 2 All ER 674. A person may act as trustee despite his contractual incompetence.

CONSIDERATION FOR APPOINTMENT NOT NECESSARY

185. No consideration is necessary to create an agency.

Generally, an agent is remunerated by way of commission for services rendered. No consideration is

necessary at the time of appointment.

DISTINCTION BETWEEN AGENT AND SERVANT

Agent occupies a position which is in many respects similar to that occupied by a servant, bailee or
trustee. The Supreme Court in Lakshminarayan Ram Gopal & Sons Ltd. v. Govt. of Hyderabad, AIR 1954
SC 364 adopted the following distinctions, as stated in Powell’s Law of Agency and Halsbury’s Laws of
England:

1. An agent has the authority to act on behalf of his principal and to create contractual relations
between the principal and a third party. This kind of power is not generally enjoyed by a
servant.
2. A principal has the right to direct what the agent has to do; but a master has not only that right,
but also the right to say how it is to be done. (R. v. Walker, 1858 LJMC 207). A servant acts
under the direct control and supervision of his master and is bound to conform to all reasonable
orders given to him in the course of his work.
But an agent though bound to exercise his authority in accordance with all lawful instructions, is
not subject in its exercise to the direct control or supervision of the principal.
3. The mode of remuneration is generally different. A servant is paid by way of salary or wages; an
agent receives commission on the basis of work done.
4. A master is liable for a wrongful act of his servant if it is committed in the course of the servant’s
employment. A principal is liable for his agent’s wrong done within the “scope of authority”.
5. A servant usually serves only one master, but an agent may work for several principals at the
same time.

A servant may act as agent in certain circumstances. The managing director of a company is an
employee of the company. In the matter of the company’s relation with third parties he occupies the
position of an agent—Hely Hutchinson v. Brayhead Ltd. (1967) 3 All ER 98

The Secretary of a company is its servant, but in respect of the matters that come under his domain, he
becomes an agent in his dealings with third persons.
 DISTINCTION BETWEEN AGENT AND BAILEE

1. The relationship of bailor and bailee subsists only so long as the bailee holds some goods
belonging to the bailor. This is not necessary in the case of agency. Sometimes, an agent may
be in possession of his principal’s property and to that extent, he may also be a bailee.
Sometimes an ordinary bailee may become an agent when he is authorized to dispose of the
bailor’s property according to his directions.
2. An agent is a representative with a power to contract on behalf of his principal. A bailee does
not have that power. In UCO Bank v. Hem Chandra Sarkar, (1990) 3 SCC 389, a banker had
assumed the responsibility of receiving the goods on behalf of an account-holder and to release
them in favour of his customers against payment. The Supreme Court held that the banker had
not become an agent and remained only a bailee.

AGENT AND BUYER

Legal position of an independent buyer is enormously different from that of an agent. An agent
can become a purchaser when he pays the principal and discloses to him that fact.

KINDS OF AGENTS

The word ‘agent’ is often abused. Description ‘agent’ is used in complimentary sense and not in
legal sense. ‘Dress agency’, ‘Private inquiry agent’ ‘secret agent’, ‘mechanical agents’ ‘washing and
cleaning agent’. These are not really agents. Agents known to the business world are:

1. FACTOR: Factor (in India as well as in England) is an agent entrusted with the possession of
goods for the purpose of selling them. He is a mercantile agent whose ordinary course of
business is to dispose of goods, of which he is entrusted with the possession or control by his
principal.
2. BROKER: A ‘broker’ is also a kind of mercantile agent. He is appointed to negotiate and make
no contracts for the sale or purchase of property on behalf of his principal, but is not given
possession of the goods.
3. DELCREDERE AGENT: He is another type of mercantile agent. In ordinary cases, agent’s function
is to effect a contract between his principal and a third party. Once it is done, the agent drops
out. He cannot sue on the contract nor can he be sued for failure of third party to perform.
Delcredere Agent is an agent who undertakes, on the payment of some extra commission, to be
liable to the principal for the failure of the third party to perform the contract. His extra
commission for the guarantee is known as delcredre commission.
In Couturier v. Hastie, (1856) 5 HL cas 673, defendants acting as del credere agents sold the
plaintiff’s goods which were supposed to be on a voyage but which unknown to the parties had
already been sold by the captain owing to damage by heat. The buyer repudiated the contract
and therefore the agents were sued for the buyer’s failure to perform. The court held that the
agents were liable. “A higher reward is paid in consideration of their taking greater care in sales
to their customers and also for assuming a greater share of responsibility than ordinary agents,
namely responsibility for the solvency and performance of their contracts by their vendees.

CREATION OF AGENCY
An agency may be created in the following ways:
1. BY EXPRESS APPOINTMENT: Any person who is competent to contract and who is of sound
mind may appoint an agent. The appointment may be expressed in writing or it may be oral.
(Delhasse, ex p (1878) 7 Ch 511. In English law no man can become the agent of another except
by the will of that other person. His will may be manifested by writing or orally or simply by
placing another in a situation in which, according to the ordinary usage of mankind, that other is
understood to represent and act for the person who has so placed him. Thus the relationship of
principal and agent can only be established by the consent of the principal and agent. The
consent must have been given by each of them, either expressly or by implication from their
words and conduct.
Under the Indian law, definition in Sec. 182 does not limit the employment to one by principal
only. It will include an employment by any authority authorized by law to make the
employment. An appointment under the Bengal Tenancy Act in Dept. of Animal Husbandry v.
Rinzing, AIR 1998 Sik 7, for the protection of the interests of quarrelling co-owners and of third
persons was held to come within the definition. A power of attorney signed by three persons as
principals appointing a person as a caretaker of certain agricultural lands, was held by the
Supreme Court as creating agency—Syed Abdul Khader v. Rami Reddy, AIR 1979 SC 553.
An oral appointment is also valid even though the contract which the agent is authorized to
make has to be in writing—Heard v. Pilley, (1869) LR 4 Ch 548.

2. IMPLIED AGENCIES: Implied agencies arise from the conduct, situation or relationship of parties.
Whenever a person places another in a situation in which that other is understood to represent
or to act for him, he becomes an implied agent. In Smith v. Mosse, (1940) 1 All ER 469, a woman
allowed her son to drive a car for her, she paying all the expenses of maintenance and
operation. It was held that the son was an implied agent of the mother and when he made a
collision injuring his wife, the wife could sue the mother for the fault of her agent. In Ormrod v.
Crossville Motor Services Ltd, (1953) 2 All ER 753 (CA), permission granted to a person to ferry a
car from one place to another makes him an agent for that limited purpose so as to create
liability for consequences of negligent driving. An employer allowed to collect premiums from
his employees and forward the collection to the organization, became the implied agent of the
latter though described explicitly in the scheme as the agent of the employees—Delhi Electric
Supply Undertaking v. Basanti Devi, AIR 2000 SC 43.
IMPLIED AGENCY BY HOLDING OUT OR ESTOPPEL: Where a principal has by his voluntary act
placed an agent in such a situation that a person of ordinary prudence, conversant with business
usages and the nature of the particular business, is justified in presuming that such agent has
authority to perform a particular act and therefore deals with the agent, the principal is
estopped as against such third person from denying the agent’s work.—Johnson v. Milwaukee,
(1895) 46 Neb 480.
In Pickering v. Busk, (1803-13) All ER Rep 657, a purchaser of hemp allowed it to remain in the
custody of the broker through whom he had bought it. The broker’s ordinary business was to
buy and sell hemp. He sold the hemp and received the price. The court held that the sale and
receipt of money were binding on the principal.
In Kasinath Das v. Nisakar Rout, AIR 1962 Ori. 164, a landlord appointed a Tahsildar to manage
his agricultural lands. He let out the lands to tenants on certain terms. An authority of this kind
was not given to the Tahsildar. The question was whether the tenancy agreements would bind
 the landlord. It was held that the landlord had, by making the Tahsildar in charge of the lands,
created appearance of authority, which according to the prevailing usages, included the right to
let.
HUSBAND AND WIFE
A wife living with her husband has the implied authority of the husband to buy articles
of household necessity. As long as people continue to live in houses, the wife will normally do
the household shopping, and the husband will pay the bills. The law of principal and agent will
always cut deeply into the law of husband and wife—(The Principles of agency).
Wife’s authority to bind her husband for credit purchase is subject to limitations: (1) It
is necessary that the husband and wife should be living together. If the wife is living apart from
her husband without his fault and she has been left unprovided for, she may become an agent
of necessity of her husband to pledge his credit to the extent to which a reasonable
maintenance makes it necessary. But she will not be an implied agent.
(2) They must be living together in a domestic establishment of their own. The mere fact of
marriage does not make the wife an agent in law of her husband. The fact of living together is
also not sufficient. There must be a domestic establishment of which the wife is in charge.
If there is a domestic establishment of which a person is acting as the manager, the presumption
of agency will arise even if that person is not the wife. In Debenham v. Mellon, (1880) 6 AC 24,
the defendant was the manager of a hotel, where his wife acted as the manageress. They lived
together in the same hotel, but had no domestic establishment of their own. The wife incurred
with a tradesman a debt for clothes, payment for which was demanded from the husband. He
was held not liable. Mere fact of cohabitation did not give rise to presumption of agency, unless
it was a domestic establishment.
(3) The wife can run her husband into debt only for necessaries. The domestic arrangement of
the family being usually left to the control of the wife, her authority extends to all those matters
which fall within her department—supply of provisions for the house, clothing for herself and
things of that sort.—Phillipson v. Hayter (1870) LR 6 CP 38.
(4) The husband will not be liable if he makes a reasonable allowance to his wife for her needs.
In Girdhari Lal v. W. Crawford, ILR (1887) (All 147, it was held that the husband will not be liable
even if the fact of allowance is not known to the seller. The husband has negative liability by
proving—
1. that he expressly warned the tradesman not to supply goods on credit.
2. that the wife was already supplied with sufficiency of the articles in question
3. that the wife was supplied with sufficient means for the purpose of buying articles without
pledging the husband’s credit.
A HUSBAND IS NOT HOWEVER AN IMPLIED AGENT OF HIS WIFE. His authority can arise only
from appointment as agent, expressly or impliedly, or by ratification by his wife of acts done by
him on her behalf. A husband has no implied authority to sell his wife’s property.

AGENCIES OF NECESSITY

Although the powers of the agents are, ordinarily limited to particular acts, extra-ordinary
emergencies may arise, in which a person, who is an agent may, from the necessities of the case, be
justified in assuming extraordinary powers. His acts fairly done under such circumstances will be
binding upon his principal.
The principle of agency of necessity was first applied to cases of marine adventures. Unforeseen
emergencies may arise in the course of marine adventure. The goods may be threatened and the
master of the ship unable to communicate with the principal. In such circumstances, the master gets
the power, and it is also his duty, to sell the goods in order to save their value. Such sale will bind the
cargo owner. Initially, the doctrine of authority by reason of necessity was applied to exceptional cases.
In Sims & Co. Midland Rly. Co, 1924 All ER 524, a quantity of butter was consigned with the defendant
railway company. It was delayed in transit owing to a strike. The goods being perishable, the company
sold them. The sale was held binding on the owner.
In Great Northern Rly Co. v. Swaffield, (1874-80) All ER 1065, a horse, was consigned with the
defendant company. It was not received by anyone at the destination. The company had no
arrangement of its own to keep animals and, therefore, placed the horse with a livery stable keeper.
The action of the company was held to be reasonably necessary and it was allowed to recover the
charges of the stable-keeper.
Thus, this principle became a principle of general application.
Pre-existing Agency not necessary. It was initially thought that agency of necessity is confined to cases
in which there is subsisting relationship of principal and agent. Two exceptions cited were where the
finder of a dog spent money on feeding it and a person spent money on rescuing logs from a river.
Other exceptions have also been admitted. A person who carries on salvage at the sea is entitled to his
compensation from the person whose property has been salvaged.
Another occasion for a person to act as an agent of necessity arises when an injured person is in urgent
need of medical attendance. Any person acting on his behalf may call the services of a doctor or any
doctor may volunteer his services. The person benefited is bound to pay the charges of the service.

CONDITIONS FOR THE APPLICATION OF THE PRINCIPLE OF AGENT OF NECESSITY

1. INABILITY TO COMMUNICATE WITH THE PRINCIPAL: Agency of necessity does not arise if the
agent can communicate with his principal. If the principal’s directions can be obtained, the
agent should ask for it
2. ACT SHOULD BE REASONABLY NECESSARY: It is essential for the agent to prove that the sale
was necessary. “By necessary is meant reasonably necessary and in considering what is
reasonably necessary every material circumstances must be taken into account e.g. danger,
distance, accommodation, expense, time and so forth. In Sachs v. Milkos, (1948) 2 KB 23,
defendant allowed the plaintiff to store certain furniture in his house free of charge. Thereafter
they lost touch with each other. Three years later, defended needed space taken up by the
furniture and wrote to the plaintiff in the address supplied by his bank. No reply was received.
Defendant’s attempt to reach plaintiff by telephone also failed. He then sold the furniture. Six
years later, plaintiff claimed the furniture. The court held that facts of the case gave rise to no
agency of necessity. As to question of damages, the court held that if the plaintiff had received
the letter, he would be entitled to the actual sale proceeds of the furniture. If he did not receive
the letters, he would be entitled to compensation for the increased value of furniture between
date of sale and discovery of it.
 RELATIONS OF PRINCIPAL AND AGENT

DUTIES OF AGENT

1. DUTY TO EXECUTE MANDATE: The first and foremost duty of every agent is to carry out the
mandate of his principal. He must perform the work which he has been appointed to do. Any
failure in this respect would make the agent absolutely liable for the principal’s loss. In Pannalal
Jankidas v. Mohanlal, AIR 1951 SC 144, a commission agent purchased goods for his principal
and stored them in a godown pending their dispatch. The agent was under instruction to insure
them. He actually charged the premium for insurance, but failed to insure the goods. The
goods were lost in lost in explosion in the Bombay harbor. The agent was held to compensate
the principal for his loss minus the amount received under the Bombay Explosion
(Compensation) Ordinance, 1944.
2. DUTY TO FOLLOW INSTRUCTIONS OR CUSTOMS: (S. 211) An agent is bound to conduct the
business of principal according to the directions given by the principal, or in the absence of any
such directions, according to the custom which prevails in doing business of the same kind at
the place where the agent conducts such business. If the agent acts otherwise and sustain any
loss, he must account for it. In Lilley v. Doubleday, (1881-85) All ER Rep 406, an agent was
instructed to warehouse his principal’s goods at a particular place. He placed a part of them at a
different warehouse which was equally safe. But the goods were damaged without negligence.
The agent was held liable for the loss.
In the absence of instructions, business customs must be followed. Suppose customs of a
particular trade require that goods should not be sold on credit or in return for a negotiable
instrument, the agent should not do so. If he does so, he would be liable to the principal for any
loss resulting from the transaction—Ferrer v. Robbins (1835) 2 CM & R 152.
It is also his duty to maintain business secrets of the principal. In Shankarlal Agarwalla v. SBI, AIR
1987 Cal 29, the Bank informed the Income Tax authorities regarding the currency notes
deposited with the bank by the customer after demonitisation. Action against the bank failed
because the bank was under a higher national duty which superseded the duty to the customer.
An agent is also under a duty to maintain confidence, secrecy and non-disclosure of any
sensitive information about the affairs of his principal. A banker may be liable if the state of his
customer’s account is leaked except where the leak is under the compulsion of law.
3. DUTY OF REASONABLE CARE AND SKILL (S. 212): An agent is bound to conduct the business of
the agency with as much skill as is generally possessed by persons engaged in similar business,
unless the principal has notice of his want of skill. The agent is always bound to act with
reasonable diligence, and to use such skill as he possesses, and to make compensation to his
principal in respect of the direct consequences of his own neglect, want of skill or misconduct,
but not in respect of loss or damage which are indirectly or remotely caused by such neglect,
want of skill, or misconduct.
Every agent is bound to carry on the business of agency with reasonable skill and care. In Bank
of Bihar Ltd. v. Tata Scob Dealers (Controlled Stock) Calcutta Ltd., AIR 1960 Cal 475, the bank
was instructed by the plaintiff to collect a certain amount on his behalf and to remit it to him.
There was no specific instruction as to the manner of remittance. The bank sent the amount by
draft sent in a cover by ordinary post. The bank was held negligent in sending the amount like
that.
 In State Bank of Indore v. National Textile Corporation, (2004) 4 MPLJ 214, the bank was
entrusted with certain cheques for collection. The bank sent them to the drawee bank for
collection but were lost in transit. The bank was held liable to the customer for the principal
value of the cheques.
The standard of care and skill an agent has to bestow depends upon the nature of his
profession. If the principal suffers any loss owing to the agent’s want of care or skill, the agent
must compensate the principal for such loss. In Keppel v. Wheeler, (1927) 1 KB 577, an agent
was appointed to sell a house. He received an offer which he promptly communicated to his
principal. The latter accepted it provisionally “subject to contract”. Subsequently, the agent got
a higher offer which was not communicated to the principal. The house was sold for the first
offer. In the action by the principal against the agent, the agent was held liable to make good
the principal’s loss in terms of the difference in the two prices. Pannalal Jankidas v. Mohanlal is
also relevant.

S. 214. Agent’s duty to communicate with the principal. It is the duty of an agent, in cases of
difficulty, to use all reasonable diligence of communicating with his principal and in seeking to
obtain his instructions.
In Jayabharathi Corporation v.Rajasekhara Nadar, 1993 Suup (1) SCC 401, the agent informed
his principal that purchases have been effected on his behalf and subsequently confirmed it by
reporting that the goods would be despatched as soon as transport strike was over. In fact, he
had done nothing in the matter. The Supreme Court held that such a neglect and misconduct
misinforming the principal was squarely within the wide terms of S. 212.
4. DUTY TO AVOID CONFLICT OF INTEREST (S. 215-216): S. 215: If an agent deals on his own
account in the business of the agency, without first obtaining the consent of his principal and
acquainting him with all material circumstances which have come to his own knowledge on the
subject, the principal may repudiate the transaction, if the case shows, either that any material
fact has been dishonestly concealed from him by the agent, or that the dealings of the agent
have been disadvantageous to him. Se. 216: If an agent, without the knowledge of his principal,
deals in the business of the agency on his own account instead of on account of his principal, the
principal is entitled to claim from the agent any benefit which may have resulted to him from
the transaction.
An agent occupies fiduciary position. It is his duty not to do anything which would bring his
personal interest and his duty to the principal in conflict with each other. This conflict invariably
arises when the agent is personally interested in the principal’s transaction. Ex. He himself buys
the property which he is appointed to sell or deliver his own goods when he instructed to buy
on behalf of the principal. In De Busche v. Alt, (1878) 8 Ch D 828, The plaintiff consigned a ship
to a company in China for sale “at 90,000 pounds payable in cash”. With the consent of the
plaintiff the company appointed the defendant, a Japanese agent, to sell the ship. The
defendant attempted to sell the ship, but having failed to find a customer, bought the ship
himself and without disclosing this, remitted the above sum through the company to the
plaintiff. Soon thereafter, war broke out and ships were again in great demand. A Japanese
prince bought it from the defendant at 1,60,000 pounds. The plaintiff sued the defendant to
recover the profit made on resale. He was held bound to account for the profit.
 The principle is incorporated in Sec. 215. The principal, if acquainted with the true facts may
repudiate the transaction if he can show that—(a) a material fact has been dishonestly
concealed from him, or (b) the dealing of the agent has been disadvantageous to him.
5. DUTY NOT TO MAKE SECRET PROFIT. Another aspect of this principle is the duty of the agent
not to make any secret profit in the business of agency. His relationship with the principal is of a
fiduciary nature. This requires absolute good faith in the conduct of agency. Where an agent
sells his own stock to the principal without disclosing that fact, he is bound to account for any
profit he makes in the transaction. But knowledge which is acquired by an agent in the course
of business of agency and which he converts into advantage does not require accountability. As
a part of agent’s duty to be honest to his principal, the agent should not disclose any
confidential information received by him from his principal. If he does so, the principal may
terminate the contract and hold the agent liable in damages for his loss, if any.
6. DUTY TO REMIT SUMS: S. 218. Subject to such deductions, the agent is bound to pay to his
principal all sums received on his account.—The agent is bound to pay to his principal all sums
received on his account. He is however, entitled to deduct his lawful charges. Subject only to
this right, the principal’s money must be remitted to him even if it has been received in
pursuance to a void or illegal contract.
7. DUTY TO MAINTAIN ACCOUNTS (S.213): An agent is bound to render proper accounts to his
principal on demand.—Accounts are necessary for the proper performance of the agent’s other
duties. Eg., agent’s duty to remit sums to the principal. An agent has no statutory right to
account from his principal. The principal has also the right to inspect his underwriting agent’s
computerized accounts. The obligation to provide an accurate account in the fullest sense arises
by reason of the fact that the agent has been entrusted with the authority to bind the principal
to transactions with third parties and the principal is entitled to know what his personal
contractual rights and duties are in relation to those third parties as well as what he is entitled
to receive by way of payment from the agent. The duty to provide access to the records
survives the termination of the contract. It would be extremely inconvenient and potentially
very damaging to the principal if the obligation does not survive termination of the contract.—
Heyman v. Darwins Ltd. (1942) AC 356.
8. DUTY NOT TO DELEGATE (S. 190): Delegatus non potest delegare is a well-known maxim of the
law of agency. The principal chooses a particular agent because he has trust and confidence in
his integrity and competence. Ordinarily, the agent cannot further delegate the work which has
been delegated to him by his principal. In McCain and Co. v. Pow, (1975) 1 All Er 129 (CA), it was
laid down that unless so authorized by the principal, an estate agent has no right to appoint a
sub-agent and delegate to him his powers which require special skill and care.
S. 190. When agent cannot delegate. An agent cannot lawfully employ another to perform acts
which he has expressly or impliedly undertaken to perform personally, unless by the ordinary
custom of trade a sub-agent may, or, from the nature of the agency, a sub agent must be
employed.
There are however exceptions. In the following cases, the agent may delegate the work to
another:
a) Nature of work: Sometimes, the very nature of work makes it necessary for the agent to
appoint a sub-agent. For example, an agent appointed to sell an estate may retain the
services of an auctioneer and an agent one authorized to file a suit may engage a
 lawyer. A banker instructed to make payment to a particular person at the particular
place may appoint a banker who has an office at that place.
b) Trade custom: Secondly, a sub agent may be appointed and the work delegated to him
if there is an ordinary custom of trade to that effect. Architects generally appoint
surveyors.
c) Ministerial Action: An agent cannot, of course, delegate acts which he has expressly or
impliedly undertaken to perform personally. But the agent may delegate acts which are
purely ministerial in nature.
d) Principal’s Consent: The principal may expressly allow his agent to appoint a sub-agent.
His consent may also be implied from the conduct of the parties. The principal may
ratify his agent’s unauthorized delegation.

SUB AGENT

S.191 A “sub agent” is a person employed by, and acting under the control of, the original agent
in the business of the agency. – In Union of India v. Mohd Nazim, AIR 1980 SC 431, a person had sent
certain parcels by VPP to a destination in Pakistan. The articles reached Pakistan. They were delivered
to the addressee and their value was collected. The govt. of Pakistan, having snapped the postal treaty
with the Govt. of India, did not forward the amount. The Indian Post Office could not pay to the sender.
The sender sued the Govt. Govt. was held not liable. The Court said: When two sovereign powers enter
into a postal treaty, neither of them can be described as an agent of the other. Neither can be said to be
employed or acting under the control of the other as required of a sub agent under Sec. 191

WHAT IS THE RELATIONSHIP BETWEEN THE PRINCIPAL AND SUB AGENT?. Answer depends upon
whether the sub agent has been properly or improperly appointed.

1. IMPROPER DELEGATION: Sec. 193—Where an agent without having authority to do so, has
appointed a person to act as a sub agent, the agent stands towards such person in the relation
of a principal to an agent, and is responsible for his acts both to the principal and to third
persons; the principal is not represented by or responsible for the acts of the person so
employed nor is that person responsible to the principal.—
Delegation is improper when it is not authorized, i.e., when it is not within any of the recognized
exceptions. The effect is that the principal is not bound by the appointment. He is not
represented by that person, nor bound by his acts. That person is also not responsible to the
principal. But the agent stands in the position of principal towards that person and is as such
responsible for his acts to third parties.

2. PROPER DELEGATION (S. 192)—Where a sub-agent is properly appointed, the principal is, so far
as regards third persons, represented by the sub-agent and is bound by and responsible for his
acts, as if he were an agent originally appointed by the principal.
The agent is responsible to the principal for the acts of the sub agent.
The sub agent is responsible for his acts to the agent, but not to the principal, except in case of
fraud or wilful wrong.
In Calico Printers’ Asson v. Barclays Bank, (1931) 145 LT 51 (CA), effect of proper delegation was
explained by Wright J.: “Even where the sub-agent is properly employed, there is no privity
between him and the principal; the latter is entitled to hold the agent liable for breach of the
 mandate, which he has accepted and cannot, in general claim the sub-agent for negligence or
breach of duty”.
Under Sec. 192, effects of appointment of sub agent are as follows:
a) PRINCIPAL REPRESENTED BY SUB-AGENT. In the first place, so far as regards third persons,
the principal is represented by the sub-agent. He is bound by and responsible for his acts as
if he were an agent originally appointed by the principal.
b) AGENT’S RESPONSIBILITY FOR SUB AGENT: Secondly, the agent is responsible to the
principal for the acts of the sub-agent. If, for example, the sub-agent misappropriates the
property of the principal or sale proceeds, the agent is responsible for the same. There is no
privity of contract between the principal and the sub-agent. Therefore, he cannot sue the
sub-agent, except for fraud or wilful wrong. Even where fraud or wilful wrong is established
the principal has the choice to sue either the agent or the sub agent.(Summan Singh v.
National City Bank of New York, AIR 1962 Punj 172)
c) SUB-AGENT’S LIABILITY TO PRINCIPAL: The sub-agent is not directly liable to the principal
except for fraud and wilful wrong. In Calico Printers’ Assn v. Barclays Bank, the sub-agent
failed to insure the principal’s goods, which were destroyed by fire. The principal could not
recover against the sub-agent.
A sub-agent, is however, bound by all the duties of an ordinary agent. His rights cannot go
beyond those of the main agent and they have to be exercised through the agent except
where direct action would be necessary to give business efficacy to the appointment of a
sub-agent.
SUBSTITUTED AGENT (Ss. 194-195)
194. Where an agent, holding an express or implied authority to name another person to act for the
principal in the business of the agency, has named another person accordingly, such person is not a sub-
agent but an agent of the principal for such part of the business of the agency as is entrusted to him.
195. In selection of such agent for his principal, an agent is bound to exercise the same amount of
discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not
responsible to the principal for the acts or negligence of the agent so selected.
A sub agent has to be distinguished from a substituted agents. According to Se. 194, when an
agent has an express or implied authority of his principal to name a person to act for him and the agent
has accordingly named a person, such person is not a sub-agent, but he becomes an agent for the
principal in respect of the business which is entrusted to him.
Illustration: A solicitor is appointed to sell an estate by auction and to employ an auctioneer for the
purpose. The auctioneer thus appointed is not a sub-agent but an agent of the employer himself for the
purpose of the sale. Similarly, when an agent is not authorized to recover debts and he appoints a
solicitor for the purpose, the latter is not a sub-agent, but a full-fledged agent for the purpose.
One of the effects of appointing a substitute is that a direct privity of contract is established
between the principal and the ‘substitute’. The agent is not concerned with the work of the substitute.
His only duty is to make the selection of the substitute with reasonable care. Sec. 195 says that in
selection such agent for his principal, an agent is bound to exercise the same amount of discretion as a
man of ordinary prudence would exercise in his own case, and if he does this he is not responsible to the
principal for the acts or negligence of the agent so selected.
Illustrations: A merchant is instructed to buy a ship for his principal. The merchant employs a ship
surveyor of good reputation to choose a ship for the principal. The surveyor makes the choice
negligently, the ship turns out to be unseaworthy and is lost. The surveyor, and not the agent, is liable
to be principal. In the second illustration, goods are consigned to a merchant for sale. The merchant
employs an auctioneer in good credit to sell the goods and allows him to receive the proceeds. The
auctioneer becomes bankrupt without having accounted for the proceeds to the principal. The
merchant is responsible to the principal for the proceeds.
REMEDIES OF PRINCIPAL FOR BREACH OF DUTY.
A principal has threefold rights against an agent who fails in his duty. They are:
a) To ask for an account and also demand payment of secret and illicit profits earned by him as an
agent.
b) To seek damages for disregard of the terms of agency as also for want of skill and care;
c) To resist the claim of the agent for commission and indemnity by the plea that the agent had
acted for himself i.e., as a principal.

RIGHTS OF AGENT

The following are some of the important rights of an agent:

1. RIGHT TO REMUNERATION (S. 219):

Sec. 129—In the absence of any special contract, payment for the performance of any act is not
due to the agent until the completion of such act; but an agent may detain moneys received by
him on account of goods sold, although the whole of the goods consigned to him for sale may
not have been sold, or although the sale may not be actually complete.
Every agent is clearly entitled to his agreed remuneration. If there is no agreement, he is
entitled to a reasonable remuneration. Sometimes, the amount of remuneration is left to be
decided on principal’s discretion. Even then, reasonableness would be the criterion.
When does the remuneration become due? As per Sec. 219, in the absence of any special
contract, payment for the performance of any act is not due until the completion of such act.
When is the act complete? Is the act the result of agent’s services? Where an agent was
appointed to secure orders for advertisements in a newspaper, the agent was held entitled to
remuneration on orders actually obtained by him and not after publication of advertisement in
newspaper. In Ayyanah Chetty v. Subramania Iyer, (1923) 45 MLJ 409, where an agent was
engaged to negotiate for the purchase of a house at a commission of 2 percent on the purchase
price, he was held not entitled to any commission till the completion of the purchase of the
house. Much depends upon the nature of the service that the agent undertakes to provide.
Secondly, the transaction that results must be due to the agent’s services. The bargain must be
direct result of his services. In Green v. Barlett, 11 WR 834, an agent was appointed to sell a
house. He held an auction but failed to find a purchaser. One of the persons attending the
auction directly contacted the principal and purchased the house from him. The transaction
resulted not from the intervention of the agent. Yet it was held that he was entitled to his
remuneration.
In Tribe v. Taylor (1876) LR 1 CPD 505, it was held that where the agent’s services were remotely
connected with the transaction, he was not entitled to remuneration. The defendant requested
the plaintiff to introduce a purchaser of his premises or a source of capital. Plaintiff introduced
one Wood, who advanced a sum of money by way of loan. The agreed commission was paid to
the plaintiff. Subsequently, Wood entered into partnership with the defendant and advanced a
further loan. Plaintiff’s action for commission on this transaction failed.
 But the principal is under a duty not to prevent the agent from earning his commission.
EFFECT OF MISCONDUCT
S. 220—An agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of that part of the business which he has misconducted. An agent, who
is guilty of misconduct in the business of agency, is not entitled to any remuneration in respect
of that part of the business he has misconducted. The effect of misconduct is two-fold.
Firstly, the agent forfeits his right to commission, irrespective of whether principal
suffered any loss or not. The principle underlying the rule is that “the principle is entitled to
have an honest agent and it only the honest agent who is entitled to commission”. The
commission is forfeited only in respect of that part of the agency business which has been
misconducted.
In Heath v. Parkinson, (1926) 42TLR 693, an agent was employed to sell a leasehold
premises. Many tailors were interested in taking lease. Agent was afraid that the landlord
would not permit lease to tailors. He obtained advance permission of the landlord. This
considerably increased the price. Agent kept this as a secret from the principal and induced him
to accept a lower price. This was a misconduct and breach of duty on the part of the agent. He
was not allowed to recover his commission.
Secondly, the principal is entitled to recover compensation for any loss caused by the
misconduct. In illustration (b) to Sec, 220, A employed B to recover 1000 rupees from C.
Through B’s misconduct the money is not recovered. B is entitled to no remuneration for his
services, and must make good the loss. Agent is thus liable to pay compensation also.
2. RIGHT OF RETAINER (S. 217)
217—An agent may retain, out of any sums received on account of the principal in the business
of the agency, all moneys due to himself in respect of advances made or expenses properly
incurred by him in conducting such business, and also such remuneration as may be payable to
him for acting as agent.
The right can be exercised on “any sums received on account of the principal in the business of
the agency”. He can retain only such money in his possession. He is not entitled to an equitable
lien, i.e., that is the right to have his claims satisfied in preference to other creditors out of the
plaintiff’s money not in his possession. A solicitor or vakil is entitled to an equitable lien on the
proceeds of an action conducted by him till his costs are paid. His fee is first charged on the
proceeds even if they are not in his possession. He is also entitled, for this purpose, to have the
proceeds pass through his hands.
3. RIGHT OF LIEN (S. 221)
S.221—In the absence of any contract to the contrary, an agent is entitled to retain goods,
papers and other property, whether movable or immovable, of the principal received by him,
until the amount due to himself for commission, disbursements and services in respect of the
same has been paid or accounted for to him.
The conditions of this right are:
a) The agent should be lawfully entitled to receive from the principal a sum of money by way
of commission earned or disbursements made or services rendered in the proper execution
of the business of agency.
b) The property over which the lien is to be exercised should belong to the principal and it
should have been received by the agent in his capacity and during the course of his ordinary
 duties as agent. Where an auctioneer was engaged to sell furniture of the owner’s house,
he was held to be sufficiently in possession to exercise lien for his commission. The
property held by an agent for a special purpose cannot be subjected to lien. Where,
possession is obtained without principal’s authority or by fraud or misrepresentation, there
is no lien. Briefly stated, agent’s possession must be lawful.
c) The agent has only a particular lien. A particular lien attaches only to that specific subject
matter in respect of which the charges are due. No other property can be retained.
The agent’s lien does not give unrestricted authority to the agent to deal with the property
in any manner he may like. The right is limited in nature. It enables the agent to retain the
property till his due are paid. He has no authority to sell or otherwise dispose of the
property without the consent of the owner.

LOSS OF LIEN
The agent’s lien is lost in the following cases:
1. Lien, being a possessory right, is lost as soon as possession is lost. Possession is lost
when the agent delivers the goods to the principal himself or to a carrier for the
purpose of transmission to the principal. In the latter case, the agent cannot revive the
lien by stopping the goods in transit. (Kishan Das v. Ganesh Ram, AIR 1950 Pat. 481) But
where the property has been delivered for a special purpose, like safe custody, which is
inconsistent with lien, the lien is not lost. As long as the agent remains in possession, his
lien is effective. Lien is not affected by the fact that the company is wound up or that
the principal has become insolvent. Agent’s possession is not terminated, when
property has been obtained from him by unlawful means or by fraud or
misrepresentation.
2. The lien is lost, when the agent waives his right. Waiver may arise out of an agreement
express or implied or may be inferred from conduct inconsistent with the right.
3. The agent’s lien is subject to a contract to the contrary and, therefore, does not exist
where the agent has by his agreement with the principal excluded it.

4. RIGHT TO INDEMNITY (Ss. 222-223)

S. 222. --The employer of an agent is bound to indemnify him against the consequences of all
lawful acts done by such agent in exercise of the authority conferred upon him.

Right to indemnity extends to all losses and expenses incurred by the agent in the conduct of
the business. The agent must have been damnified in the lawful conduct of the business of
agency. A wagering contract is not unlawful. It is only void. In Kishanlal v. Bhanwar Lal, AIR
1954 SC 500, SC allowed an agent to recover indemnity for losses incurred by him in wagering
transactions entered into on instruction of the principal.

S. 223—Where one person employs another to do an act, and the agent does the act in good
faith, the employer is liable to indemnify the agent against the consequences of that act, though
it causes an injury to the rights of third persons.

In Adamson v. Jarvis, (1827) 4 Bing 66, an auctioneer sold certain cattle on instruction from the
defendant and was held liable by the true owner for conversion. He recovered indemnity from the
principal because the act in question was apparently lawful.
 Where, however, the act in question is apparently unlawful or criminal, such as beating a person
or publication of a libel, the principal will not be liable upon an expense or implied promise to indemnify
the agent against the consequences of such act.

S. 224.—Where one person employs another to do an act which is criminal, the employer is not
liable to the agent, either upon the express or implied promise, to indemnify him against the
consequences of that act.

Where the act in question is apparently tortious, the agent, who has been held liable on it, may
recover contribution from the principal (not indemnity).

5 RIGHT TO COMPENSATION (S. 225).—The principal must make compensation to his agent in
respect of injury caused to such agent by the principal’s neglect or want of skill.

Thus, every principal owes to his agent the duty of care not to expose him to unreasonable risks.
Illustration: A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The
scaffolding is unskillfully put up and B is in consequence hurt. A must make compensation to B.

RELATION OF PRINCIPAL WITH THIRD PARTIES

AGENT’S AUTHORITY

The acts of the agent within the scope of his authority bind the principal. Sec. 226 gives
statutory effect to the principle by declaring that:

S. 226: Contracts entered into through an agent, and obligation arising from acts done by an agent, may
be enforced in the same manner, and will have the same legal consequences, as if the contracts had
been entered into and the acts done by the principal in person.

For this effect to follow, the agent must have done the act within the scope of his authority.
Authority emanates from the principal. Authority of an agent means his capacity to bind the principal. It
refers to the sum total of the acts it has been agreed between principal and agent that the agent should
do on behalf of the principal.

Actual authority: Actual authority of an agent is the authority conferred on him by the principal. It is of
two kinds – express or implied.

S. 186. The authority of an agent may be express or implied.

S. 187. An authority is said to be express when it is given by words spoken or written. An authority is
said to be implied when it is to be inferred from the circumstances of the case, and things spoken or
written, or the ordinary course of dealing, may be accounted circumstances of the case.

EXPRESS AUTHORITY

Where the authority is conferred by words, spoken or written, it is called express authority. A
power of attorney, for example, which is a kind of deed and authorizes the agent to do certain acts, is an
illustration of express authority. There may arise disputes as to the scope of the authority of an agent.
The scope of express authority is worked out by construction of the words used in the documents. In
Reid v. Rigby, (1894) 2 QB 40, in an agency by power of attorney, the agent obtained a long outside his
authority by signing a cheque on behalf of his principal to pay the principal’s workmen. The principal
was held bound. In Reckitt v. Barnet, Prembroke & Slater Ltd. 1929 AC 176, agent was given very wide
power of withdrawing the principal’s money “without restriction”. The agent gave a cheque to a car
dealer to purchase a car for himself. The principal was held not bound.

IMPLIED AUTHORITY

An authority is said to be implied when it is to be inferred from the circumstances of the case;
and things spoken or written in the ordinary course of dealing, may be accounted circumstances of the
case. Implied authority is an instance of real or actual authority because it is conferred upon the agent
by the conduct of the principal as interpreted in the circumstances of the case.

Distinction between express and implied authority is not fundamental. It depends merely on
whether the authority is delimited by words or conduct. In Ryan v. Pilkington, (1959) 1 All ER 689 (CA),
an estate agent was appointed to find a purchaser for certain property. He accepted a deposit from a
prospective customer and misappropriated it. The principal was held liable because an estate agent has
an implied authority to take a deposit.

SCOPE OF AGENT’S AUTHORITY

The extent of an agent’s authority, whether express or implied, depends upon—

1. The nature of the act or business he is appointed to do.

2. The things which are incidental to the business or are usually done in carrying it out
3. The usual customs and usages of the trade.

This is the essence of Sec. 188 which defines the extent of the agent’s authority.

S. 188—Extent of agent’s authority. An agent, having an authority to do an act, has authority to do

every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on a business, has authority to do every lawful thing
necessary for the purpose, or usually done in the course, of conducting such business.

In Dingle v. Hare, (1859) 7 CB (NS) 145, an agent was authorized to sell artificial manure. He had no
authority to give any warranty about the goods. Yet he warranted to the buyer that the manure
contained 30 percent phosphate of lime. The warranty was found to be false and the principal was sued
for its breach. He was held liable because it was usual in the artificial manure trade to give a warranty of
this kind.

Thus every agent has the implied authority to act according to the customs and usages of a
particular market or trade. The principal is bound by such usages even if he is unaware of them or even
if they conflict with his instructions. But the custom or usage must not be unlawful or unreasonable.

AUTHORITY OF SPECIAL AGENTS

FACTOR: A factor is a mercantile agent who is put in possession of the goods of his principal for sale. He
has the authority to sell them in his own name, to warrant them if it is usual to do so, to fix the selling
price and to receive payment.

BROKER; A broker is a mercantile agent appointed to sell the goods of his principal but he is not given
possession thereof. He may sell the goods in his own name, and may receive payment. But if he
discloses the name of the principal, he cannot receive payment. He may act according to the usual
course of business except where a usage is unreasonable or unlawful. He may sell on reasonable credit.

ESTATE OR HOUSE AGENT: A house or estate agent is in a different position from a broker at the stock
exchange owing to the peculiarities of the property with which he has to deal. The parties do not
ordinarily contemplate that the agent should have the authority to complete the transaction in such
cases. The authority given to the broker is to negotiate a sale and find a purchaser without furnishing
him with all the terms. It means “to find a man willing to become a purchaser and not to bind him and
make him a purchaser”.

AUCTIONEER: An auctioneer is an agent appointed to sell goods at a public auction. He does not have
the authority to sell by private contract. He cannot sell on credit or accept any payment other than
cash, or warrant the goods. He acts both for seller and buyer and therefore can sign the contract for
both.

POWER OF ATTORNEY HOLDER: Except where a matter is required to be personally, acts and
statements of a power of attorney are attributable to the principal. In Satnam Channan v. Darshan
Singh, AIR 2007 DOC 216 (P&H), statement made by the attorney to the effect that his principal was in
personal need of the premises was held to be receivable in evidence for ordering eviction.

OSTENSIBLE OR APPARENT AUTHORITY:

Ostensible or apparent authority is the authority of an agent as it appears to others. It often

coincides with actual authority. When the Board of Directors appoint one of them to be Managing
Director, they invest him not only with implied authority but also with ostensible authority to do all such
things as fall within the usual scope of that office. Other people who see him acting as Managing
Director are entitled to assume that he has the usual authority of a managing director. Sometimes,
ostensible authority exceeds actual authority. The Board of Directors may expressly limit the authority
of M.D. by saying he is not to order goods worth more than rupees 5 crores without sanction of the
Board. Then his actual authority is subject to the rupees 5 crores limitation. His ostensible authority
includes all the authority of the Managing Director. A third party may not be aware of his actual
authority. If the M.D. orders goods worth 1000 pounds, the company is bound to the other party who
does not know of the rupees 5 crore limitation. In Valapad Co-operative Stores Ltd. v. Srinivasa Iyer, AIR
1964 Ker. 176, it was held that a person having responsibility to carry on the business of the store of a
co-operative society must be deemed to have authority to purchase goods on credit notwithstanding
that the society had advanced him enough money for the purpose.

DISTINCTION BETWEEN IMPLIED AND OSTENSIBLE AUTHORITY: Implied authority is real authority, the
exercise of which is binding not only as between the principal and the third party, but also between
principal and agent. It differs only from an express authority in that it is conferred by no express words
but it is to be gathered from surrounding circumstances. The term ostensible authority, on the other
hand, denotes no authority at all. It is a phrase conveniently used to describe the position which arises
when one person has clothed another, or allowed him to assume an appearance of authority to act on
his behalf, without actually giving him any authority either express or implied, by which appearance of
authority a third party is misled into believing that a real authority exists (Mathew J. Valapad Co-
op;Stores)
APPARENT AUTHORITY IS REAL AUTHORITY: An apparent authority once created continues to exist
unless it is terminated by notice to the third party. It cannot be terminated or restricted privately. In
Dodsley v. Varley, (1840) 12 A&E 632, a principal had terminated the authority of his agent who had
occasionally bought wool for him. But he was held liable for the agent’s further purchases as the
supplier had no notice of the termination. In Ryan v. Sams, (1848) 12 QB 460, a man lived with his
mistress as husband and wife and used to pay for the mistress’s purchases. He was held liable for the
purchases made after he had left her, because the supplier did not know of that fact.

AGENT’S POSSESSION: The possession of servant or agent is that of his master or principal for all
purposes. A suit against servant or agent cannot be maintained on the basis of such possession.

EMPLOYER’S UNDERTAKING TO PAY INSURANCE PREMIA: In LIC v. K. Rama Iyer, AIR 2004 Kant 594, an
employer, in a group savings linked insurance scheme, undertook to pay monthly premiums to the
insurer from wages or salaries of employees. When a worker died it came to light that the premiums
were in default. It was held that the insurer was bound to pay the insurance money to employee’s
family. The employer had become the agent of the insurer for the agreed purpose. Lack of
consideration between the insurer and employer was immaterial because no consideration is necessary
at the time of creation of agency.

The doctrine of ostensible authority is given statutory shape in Sec. 237.

S. 237. Liability of principal inducing belief that agent’s unauthorized acts were authorized.—When an
agent has, without authority, done acts or incurred obligations to third persons on behalf of his
principal, the principal is bound by such acts or obligations if he has by his words or conduct induced
such third person to believe that such acts and obligations were within the scope of the agent’s
authority.

This provision has been used in many cases to fix the principal with liability for uauthorised acts of his
agents. In Bissessardas v. Kabulchand, AIR 1945 Nag 121, a banking firm was held liable for the
misappropriation of the funds of a customer by a person who, to the knowledge of the firm, was
accepting deposits from customers. The Nagpur High Court followed the decision of the Privy Council in
Ram Pertab v. Marshall, ILR (1898) 26 Cal. 701 wherein it was ruled that the right of a third party against
the principal on the contract of his agent though made in excess of agent’s actual authority was
nevertheless to be enforced when the evidence showed that the contracting party had been led into an
honest belief in the existence of the authority to the extent apparent to him”.

ACTUAL OR CONSTRUCTIVE NOTICE OF LACK OF AUTHORITY; Where a person contracting with the
agent has actual or constructive notice of any restriction of the agent’s ostensible authority, he is bound
by the restriction. In Jacobs v. Morris, (1902) 1 Ch 816 (CA), the agent authorized by a power of attorney
to operate a business but not to borrow money, produced the power of attorney to a lender and asked
for a loan. The lender did not read it and advanced the loan. He could not recover it from the principal
as he had constructive notice that the agent had no power to borrow.

AGENT’S AUTHORITY IN EMERGENCY.

S. 189. An agent has authority, in an emergency, to do all such acts for the purpose of protection his
principal from loss as would be done by a person of ordinary prudence, in his own case, under similar
circumstances.
The section creates a special authority in emergency. It constitutes an agent into an agent of necessity
to counteract the emergent situation. An act done in the exercise of this extended authority would bind
the principal.

WHERE AGENT EXCEEDS AUTHORITY

S. 227: When an agent does more than he is authorized to do, and when the part of what he does,
which is within his authority, can be separated from the part which is beyond his authority, so much
only of what he does as is within his authority is binding as between him and his principal.

S. 228: Principal not bound when excess of agent’s authority is not separable. When an agent does
more than he is authorized to do and what he does beyond the scope of his authority cannot be
separated from what is within it, the principal is not to recognize the transaction.

If an agent exceeds his authority, actual or apparent, the principal is not bound by the excess
work. If the unauthorized portion of the work can be separated from the unauthorized, principal is
bound as regards the authorized part only. Eg., An agent is authorized to insure a ship. He insures the
ship and cargo under separate policies. Principal is bound to pay for insurance on the ship and not on
the cargo. Where the authorized work is not separable from the rest, the principal may repudiate the
whole of the transaction. In Avlapa Nayak v. Narsi Keshawji (1871) 8 Bom HC App Cas 19, an agent was
instructed to purchase cotton to be delivered at the end of January, Agent contracted for the middle of
that month. Principal was held not liable.

S. 229 deals with consequences of notice given to agent. Notice given or information obtained by agent
as between principal and third parties have the same legal consequences as if it had been given to or
obtained by the principal.

Under Sec. 238, misrepresentation by agent, within his authority will bind the principal as between him
and third parties. A master is liable for the wrongs of his servant committed in the course of business.
The principles governing the master and servant relationship have been applied to that of principal and
agent and also to partners. Principal will not, however, be liable for exaggerated versions given by the
agent. The principle is that a principal is not liable for fraud in respect of his agent’s acts unless (1) he
intends or knowingly permits the agent to make a false statement, or (2) his agent within the actual or
apparent scope of his authority makes a statement with knowledge of its falsity or recklessly not caring
whether it be true or false.

AGENT’S TORTS

One who chooses to do business through an agent may in certain circumstances be liable for
tort committed by the agent. The doctrine of respondea superior (let the superior answer) will be
applied to make the principle liable where an agent commits a tort while engaged in the business of the
principal. Principal will not be liable where the agent committed a tort for his personal benefit and not
for the benefit of the principal (Barwick v. English Joint Stock Bank, (1861-73) All ER Rep 194). In Lloyd v.
Grace, Smith & Co., 1912 AC 176, it was held that Barwick’s case is not an authority and that the only
condition of the principal’s liability is that the act in question must be within the course of the agency
business.

RIGHTS AND LIABILITIES OF UNDISCLOSED PRINCIPAL

 The rights and liabilities of a principal under contracts made by the agent depend upon whether

1. The principal’s existence and name were disclosed by the agent;

2. The principal’s existence was disclosed but not his name;
3. Neither existence nor name of the principal was disclosed.

WHERE THE PRINCIPAL IS DISCLOSED

Sec. 226 applies to a case where the principal is disclosed. The agent’s acts and contracts will
have the same legal consequence as if the contracts had been entered into and acts done by the
principal in person. The principal may sue the third party on contract and third party may sue the
principal. Eg., where the agent is authorized to receive payment, payment to agent discharges the third
party from his liability to the principal.

The agent can neither sue nor be sued upon a contract made by him on behalf of his principal.
The contract is the contract of the principal and not that of the agent. Prima facie, at common law, the
only person who can sue is the principal and the only person who can be sued is the principal”.

UNNAMED PRINCIPAL

Where the agent does not disclose the name of his principal, but discloses his own
representative character, the contract will be the contract of the principal, unless there is something in
its form or signature to show that the agent intended to be personally liable. If he simply sign the
contract as a broker “for my principal” but without disclosing who the principal is, he is not personally
liable.

UNDISCLOSED PRINCIPAL

The doctrine of undisclosed principal comes into play when the agent neither discloses the
existence of principal nor his representative character.

RELATION BETWEEN AGENT AND THIRD PARTY: As the agent has contracted in his own name, he is
bound by the contract. He may be sued on the contract and he has the right to sue the third party. The
principal is not liable in such a case. But the principal too has the right to intervene and asserts his
position as an undisclosed party to the contract. This right of the principal is protected by Sec. 231,
which states: “If an agent makes a contract with a person who neither knows, nor has reason to suspect
that he is an agent, his principal may require the performance of the contract.. In such cases, the right
of the principal is known as anomalous because it does not fit in any of the established principles of law
of contract.

The right of the undisclosed principal to intervene and sue the third party is subject to the
following qualifications (laid down in Secs. 231 and 232):

Firstly, the other contracting party would have against the principal, the same rights which he
would have had against the agent if the agent had been the principal. The principal, if he requires the
performance of the contract, can only obtain such performance subject to the rights and obligations
subsisting between the agent and the third party. The third party should not be put to any
inconvenience due to the intervention of the principal.
 Secondly, if the principal discloses himself before the contract is completed, the third party may
repudiate the contract if he can show that if he had known who the principal was or that the agent was
not the principal, he would not have contracted (Govt. of Goa v. Goa Urban Co-operative Bank Ltd.,
(2011) 2 Mah L.J. 37 (Bom). The right of the third party to repudiate the contract arises only when the
identity of the undisclosed principal would have been so material to him that if he had known the true
facts, he would not have contracted.

Lastly, an undisclosed principal cannot intervene if some express or implied term of the contract
excludes him from doing so. If an agent describes himself as owner or properties, it shows an intention
to make a personal contract and consequently precludes the undisclosed principal from intervening.

THIRD PARTY’S RIGHT AGAINST UNDISCLOSED PRINCIPAL

Just as the undisclosed principal has the right to sue the third party, the latter has the right to
sue the principal.

PERSONAL LIABILITY OF AGENT

Sec. 230 In the absence of any contract to that effect, an agent cannot personally enforce contract
entered into by him on behalf of his principal, nor is he personally bound by them. A contract to the
contrary shall be presumed to exist if:

1. Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad.
2. Where the agent does not disclose the name of his principal
3. Where the principal, though disclosed, cannot be sued.

AGENT CANNOT SUE OR BE SUED UNLESS THERE IS A CONTRARY CONTRACT

The chief function of an agent is to establish contractual relationship between the principal and
third parties. The agent then drops out. He can neither sue or be sued on contracts made by him on
behalf of his principal. Sec. 230 provides that in the absence of a contract to the contrary, an agent
cannot personally enforce contracts entered into by him on behalf of the principal, nor is he personally
bound by them.

But there are certain circumstances in which the agent incurs personal liability. Sec. 230 says
that there may be a contract to the contrary. In other words, the agent may contract to undertake
personal liability. In the following cases, there is presumption of a contract to the contrary:

1. Foreign principal: When an agent contracts for “a merchant resident abroad”, there is a
presumption that the agent undertakes personal liability (S. 230(1)). The original presumption
of English Law was that the agent alone was liable and he had no right to pledge the credit of a
foreign principal. This presumption was needed when it was difficult to sue foreign principals.
On account of changed conditions of international trade, merchants trust each other and agents
do not like to incur personal liability. The presumption is still part of the law. An agent can
overthrow it by contracting in a manner showing an intention not to incur personal liability.
2. Principal unnamed. The presumption of agent’s personal liability arises when he does not
disclosed the name of his principal. Where an agent contracts for an undisclosed principal, he
definitely is personally liable, being a party to the contract. But when he contracts for an
 unnamed principal, there is only a presumption of his personal liability. The presumption arise
even where the agent discloses his representative character, but not the name of his principal.
But where the agent discloses his representative character, personal liability could not be
imposed on him. The result would be the same where representative character is already
known to the third party. But in every such case the form of contract will be the deciding factor.
3. Non-existent or incompetent principal: An agent is presumed to incur personal liability where
he contracts on behalf of a principal who, “though disclosed cannot be sued”. An agent who
contracts for a minor, the minor being not liable, the agent becomes personally liable. The
result would be different, if the third party already knows that the principal is minor.

ELECTION BY THIRD PARTY

Sec. 233. In cases where the agent is personally liable, a person dealing with him may hold either him or
his principal, or both of them liable. A enters into a contract with B to sell him 100 bales of cotton and
afterwards discovers that B was acting as agent for C. A may sue either B or C or both, for the price of
cotton. This is a departure from English law, where the third party has to elect between the liability of
principal or agent and the election once made is final and binding on him. If he obtains a judgment
against, he cannot proceed against principal.

ESTOPPEL OF THIRD PARTY

Sec. 234: When a person who has made a contract with an agent induces the agent to act upon the
belief that the principal only will be held liable, or induces the principal to act upon the belief that the
agent only will be held liable, he cannot afterwards hold liable the agent or principal respectively.

4. PRETENDED AGENT

235. A person untruly representing himself to be the authorized agent of another, and thereby
inducing a third person to deal with him as such agent, is liable, if his alleged employer does not ratify
his acts, to make compensation to the other in respect of any loss or damage which he has incurred by
so dealing.

Where a person pretends to act as the agent of another, he may be saved by the principal by
ratifying his act. If no ratification is forthcoming the pretended agent becomes personally liable to the
third party for any loss that he may have suffered by relying upon the representation of authority.
Where pretention is as to a matter of law, the agent would not be liable.

Sec. 236. When a person has, in fact, no principal, yet persuades the other to contract with him
as an agent of another, he is estopped from saying that he had no principal, and since the contract was
with his principal and not with him he has no locus standi to sue under that right. In Gopal Sridhar v.
Sashi Bhushan, AIR 1933 Cal.109, a shipping agent gave a personal commitment of issuing a bill of lading
after mate’s receipt but did not do so. He was held personally liable to the principal for the fort of
conversion and for breach of contract under sec. 73.

5. BREACH OF WARRANT OF AUTHORITY: Where a person is in fact an agent but exceeds his
authority, or represents to have a kind of authority which he in fact does not have, he commits
breach of warranty of authority and is personally liable to the third party for any loss caused to
him by reason of acting on the false representation. This is the principle in Collins v. Wright, 27
 LJ QB 215. W was land agent for one G. W agreed to grant to the plaintiff a lease of G’s farm for
12 and a half years. He honestly believed that he had the authority to do so. But G refused to
execute the lease and he proved that he had given no such authority to the agent. W having
died in the meantime, the plaintiff sued his executors for the loss and they were held liable.

RATIFICATION

The doctrine of ratification comes into play when a person has done an act on behalf of another
without his knowledge or consent. The doctrine gives the person on whose behalf the act is done an
option either to adopt the act by ratification or to disown it. Ratification is thus a kind of affirmation of
unauthorized acts. (Sec. 196). Ratification may be express or implied in the conduct of the person on
whose behalf the acts are done (S. 197).

REQUIREMENTS OF RATIFICATION:

1. On behalf of another: It is necessary that the act in question must have been done on behalf of
the person who wants to ratify it. The agent must profess to act as an agent and on behalf of an
identifiable principle. It is not necessary that he should be named, but there must be such a
description of him as shall amount to reasonable designation of the person intended to be
bound by the contract. If the agent acts in his name and makes no allusion to agency, his act
cannot be ratified by any other person, even if the agent in his secret mind intended to act for
another.
2. Competence of principal: Ratification relates back to the date when the contract was originally
made by the agent. It is necessary that the principal who purports to ratify must be in existence
at the time of the contract and should also be competent. A person cannot ratify a contract
which was entered on his behalf during his minority. A company cannot ratify a contract made
before its incorporation.
3. What acts can be ratified (Acts should be lawful)”. Only a lawful act can be ratified. An act
which is void from the very beginning cannot be ratified. Ratification must be in relation to a
transaction which may be valid in itself and not illegal. Subject to this, any act may be ratified,
whether it is founded on a tort or on a contract.
ACTS DONE ON BEHALF OF GOVT. Such acts are ratifiable in the same way in which private acts
can be. Where public officers exceed their authority the State will be liable only to the extent it
has expressly or implied ratified or approved the acts of such officers. (Collector of Masulipatam
v. Cavaly Vencata Narrianpah, (1861) 8 MIA 529.
4. Knowledge of facts: Sec. 198 states that no valid ratification can be made by a person whose
knowledge of the facts of the case is materially defective. The following conditions must exist
for ratification: (1) the acts must have been done for and in the name of the supposed principal,
and (2) there must be full knowledge of what those acts were, or such an unqualified adoption
that the inference may properly be drawn that the principal intended to take upon himself the
responsibility for such acts, whatever they were.
5. Whole transaction: Sec. 199 states that a person ratifying any unauthorized act done on his
behalf, ratifies the whole of the transaction of which such act formed a part. A person cannot
ratify a part of the transaction which is beneficial to him and repudiate the rest. So a ratification
of a part of a transaction operates as a ratification of the whole of the transaction.
 6. Within reasonable time: A ratification to be effective must come within reasonable time. If a
time is fixed for performance of the contract, ratification must come before the time otherwise
it will be too late.

EFFECTS OF RATIFICATION

1. It establishes the relationship of principal and agent in so far as the act ratified is concerned
between the person ratifying and the person doing the act.
2. Ratification establishes the relationship of contract between the principal and the third party.

DOCTRINE OF RELATION BACK

Ratification relates back to the date on which the agent first contracted. As declared in Sec. 196,
if an unauthorized act is ratified by the person on whose behalf it was done, the same effects will follow
as if they had been performed by his authority.

DETERMINATION OF AGENCY

Relationship of principal and agent may end in any of the ways mentioned in Sec. 201. They are:

1. Revocation
2. Renunciation by agents
3. Completion of business
4. Principal or agent’s death
5. Principal or agent becomes person of unsound mind
6. Insolvency of principal
7. Expiry of time

BY REVOCATION

Revocation may be express or implied. A empowers B to let A’s house. Afterwards A lets it
himself. This is an implied revocation of B’s authority. A contract of Vakalatnama can be withdrawn by
client at any time. An example of implied revocation was found in a case in which a father, after
executing a power of attorney in favour of his son, fell into strained relations with him so that the son
became an adversary and was therefore no more capable of acting as an agent. Execution of power of
attorney does not denude the principal of his power to act independently of the attorney. Principal is
not required to take attorney’s consent.

Even where the agent has partly exercised his authority, the principal may revoke it for the
future. But it is irrevocable as regards such acts and obligations as arise from acts already done in the
agency. (Sec. 204). Sec. 206 mandates that reasonable notice must be given of such revocation or
renunciation, otherwise the damage thereby resulting to the principal or the agent, as the case may be,
must be made good to the one by the other.

In certain circumstances, however, an agency becomes irrevocable. This happens when the
agent is personally interested in the subject-matter of agency. Sec. 202 provides that where the agent
has himself an interest in the property which forms the subject-matter of the agency, the agency
cannot, in the absence of an express contract, be terminated to the prejudice of such interest.
 A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to
him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death. Where an
agreement is entered into on a sufficient consideration, whereby an authority is given for the purpose of
securing some benefit to the donee of the authority, such an authority is irrevocable. The simplest case
of such agency occurs when the principal owes something to the agent and authorizes him to sell the
principal’s goods and pay himself out of the sale proceeds. But an authority to pay debts which the
principal owes to some third person does not make the agency irrevocable. An agency of this kind is not
even terminated by the principal’s death.

RENUNCIATION BY AGENT (S. 206)

An agent may renounce the business of agency in the same manner in which the principal has
the right of revocation. If the agency is for a fixed period, the agent would have to compensate the
principal for any premature renunciation without sufficient cause (Sec. 205). Secondly, a reasonable
notice of renunciation is necessary. If agent renounces without proper notice, he shall have to make
good any damage thereby resulting to the principal.

COMPLETION OF BUSINESS (S.201)

An agency is automatically and by operation of law determined when its business is completed.
For example, the authority of an agent appointed to sell goods ceases to be exercisable when the sale is
completed. He cannot afterwards alters the terms of the sale.

DEATH OR INSANITY (S. 201)

An agency is determined automatically on the death or insanity of the principal or the agent
Winding up of a company or dissolution of a partnership has the same effect. Acts done by the agent
before death would remain binding.

PRINCIPAL’S INSOLVENCY (S.201)

An agency ends on the principal being adjudicated insolvent.

ON EXPIRY OF TIME (S.201)

Where an agent has been appointed for a fixed term, the expiration of the term puts an end to
the agency, whether the purpose of the agency has been accomplished or not. An agency comes to an
automatic end on the expiry of its term. Where the agency was to run a petrol pump for a specified
period, it was held that the agent was bound to vacate the premises on expiry of the period. There was
no renewal clause, nor in fact was there any renewal.

EFFECTS OF TERMINATION (S.208)

The termination of the authority of an agent does not, so far as regards the agent, take effect
before it becomes known to him, or, so far as regards third persons, before it becomes known to them.

As between the principal and the agent, the authority of the agent ends when he comes to
know of the fact of termination. Even when the agency is terminated by the death of the principal, the
termination is effective only when it comes to the knowledge of the agent. In Drew v. Nunn, (1879) 4
QBD 661, a wife was authorized by her husband to keep buying goods from a dealer. The husband
became a person of unsound mind. The wife kept up her purchases from the seller, the latter not
knowing of the husband’s incapacity. The husband was held liable to pay for the goods.

TERMINATION OF SUB AGENCY

When the authority of an agent terminates, it entails the termination of the authority of all sub-
agents appointed by him. Sec. 210 states: The termination of the authority of an agent causes the
termination (subject to the rules herein contained regarding the termination of an agent’s authority) of
the authority of all sub-agents appointed by him.

AGENT’S DUTY ON TERMINATION

S. 209. When an agency is terminated by the principal dying or becoming of unsound mind, the agent is
bound to take, on behalf of the representatives of late principal, all reasonable steps for the protection
and preservation of the interests entrusted to him.
 PARTNERSHIP ACT, 1932

Before the commencement of the Indian Partnership Act, 1932, the law of partnership was contained in
Sections 239 to 266 of Chapter IX of the Indian Contract Act, 1872. While repealing Chapter IX of the
Contract Act, Section 74 of the Partnership Act provided as follows:

“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.

Expansion of trade and commerce required further expansion and elaboration of the law of partnership.
The general principles contained in the Contract Act are still applicable and the Contract Act is
considered to be the parent Act in that regard. Sec. 3 of the Indian Partnership Act provides that the
unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are in consistent with the
express provisions of this Act shall continue to apply to firms. The Act containing 74 sections is
applicable to the whole of India (except the State of Jammu and Kashmir). By the repeal of Article 370,
the Contract Act now extends to Jammu, Kashmir and Ladakh.

Section 2 defines certain words and expressions:

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 a partner therein means any person who is not a
partner in the firm; and
e) Expression used but not defined in this Act and defined in the Indian Contract, 1872 shall have
the meanings assigned to them in that Act.

CHAPTER II

DEFINITION AND NATURE OF PARTNERSHIP

DEFINITION AND ESSENTIAL ELEMENTS OF PARTNERSHIP: Sec. 4 defines partnership as:

“Partnership’ is the relation between persons who have agreed to share profits of a business
carried on by all or any of them acting for all”.

The minimum number of partners required for forming a partnership is thus two and the
maximum number of partners prescribed by the Act for banking business is 10 and in the case of any
other business 20.
In Pratibha Rani v. Suraj Kumar, (1985) 2 SCC 370, the Supreme Court pointed out two essential
elements of partnership:

1. Some real or external physical act by two persons to start a business, and
2. If all carry or any one of them carries the business, the partners shall share profits on the basis
of the shares allotted to them under the agreement.

Going by the definition and the above decision, there are four (five) essential elements of partnership:

1. Agreement
2. Business
3. Sharing of profits
4. The business should be carried by all or any of the partners acting for all of them
5. Mutual agency

I AGREEMENT: According to Sec. 4, the first essential element of partnership is agreement.

Partnership is a relation between persons who have ‘agreed’ to share profits. There can be no
partnership without an agreement. Sec. 5 clarifies that “the relation of partnership arises from
contract and not from status”. In Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes) v.
M/s. Kelukutty, AIR 1985 SC 1143, the Supreme Court held that relation between partners is founded on
agreement between them. Thus the basis of partnership and firm is partnership agreement. It is not
necessary that the agreement must be formal or in writing. It is also not necessary that it must always
be express. It may be implied or may be inferred from the conduct of the parties.

PARTNERSHIP NOT A MATTER OF HERITABLE STATUS BUT PURELY ONE OF CONTRACT. In

Liaquiddin v. Kamala Devi Misra, (2010) 2 SCC 407, a partner of a partnership firm died. Question arose
whether there was obligation upon the legal representatives of the deceased partner to continue the
partnership. Legal representatives were not interested. The Supreme Court held that since there was no
obligation upon the legal representatives to continue the partnership or to constitute a fresh firm, they
cannot be asked to continue the partnership or to constitute a fresh firm because partnership is not a
matter of heritable status but purely one of contract.

II BUSINESS: The second essential element of partnership is ‘business’. Without business, there
can be no partnership. Under sec. 2(b) “business” includes every trade, occupation and profession. The
word ‘business’ should be interpreted in its practical sense. It is not necessary that the business is long
standing or permanent. A single transaction may constitute a business. If two advocates or solicitors,
who are not partners, are appointed jointly to plead a case and they agree to divide the profits, they
become partners in respect of this particular case. It is sufficient that a transaction is capable of being
carried on by two or more persons. A single transaction with the Govt. can be subject-matter of
partnership. Sec. 8 provides that “a person may become a partner with another person in particular
adventures or undertaking”.

It is however necessary that the business must be in existence. Partnership shall not be deemed
to be in existence where a business is contemplated and not started. In Ram Priya Saran v. Ganshyam
Das, AIR 1981 All. 184, the plaintiff and the defendant agreed that after the acceptance of their tender,
they shall construct the dam in partnership. Plaintiff gave Rs. 2000 to the defendant for deposit towards
earnest money. The tender was not accepted. The Allahabad High Court held that this was a
partnership but its terms indicated that the partnership was to start after the acceptance of the tender.
Since the tender was not accepted, work did not commence and the partnership did not come into
existence. Plaintiff was entitled to receive the earnest money from the defendant.

III SHARING OF PROFITS: Sharing of profits is the third essential element. If two or more persons
carry on a business but their object is not to share profits, it will not constitute a partnership. Sharing of
profits or participation in profits of a business is one of the important essential elements of partnership.
This was considered to be the decisive factor before 1860. In Cox v. Hickman, (1860) 8 HLC 268, the
House of Lords observed that sharing of profits is a good evidence that the business in which profits
have been incurred is being carried on behalf of the persons who are sharing profits. Thus, sharing of
profits is prima facie evidence of partnership. But the decisive test is Mutual Agency.

IV THE BUSINESS SHOULD BE CARRIED ON BY ALL OR ANY OF THE PARTNERS ACTING FOR ALL OF
THEM: All the partners collectively are called the firm. The essence of partnership consists in each
partner being an agent of the firm. Partnership is often said to be ‘a branch of the law of Agency’. As
observed by Sir George Jessel M.R., “Each partner is both an agent and principal for himself and
others’.

V MUTUAL AGENCY: A partnership may not always come into existence if two or more persons
agree to carry on a business to share profits. In Cox. V. Hickman, two persons (iron merchants) carried
on business in partnership. Due to financial crisis, they obtained loans. They were unable to pay off the
debts. They executed a trust deed in favour of creditors. Some of the creditors were made trustees of
the business. Cox and Wheatcroft were among them. Under the deed, the property was assigned to the
trustees and they were empowered to enter into contracts and execute instruments to carry on
business and to divide the profits among the creditors. The deed was executed for realization of debts
given by creditors. After recovery of the debts, the property was to be restored to the above mentioned
two partners.

Cox never acted as trustee and retired. Wheatcroft acted as trustee for some time and then
retired. Other trustees who were carrying on business became indebted to Hickman and executed a Bill
of Exchange. The Bill of Exchange was not accepted and paid. Hickman sued the trustees for recovery of
money on account of goods delivered. The trustees could be held if they were partners. Court held that
they were not partners and they were not liable. Lord Wensleydale observed:

“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 of the other, and each is bound to 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. Sec. 18 clarifies and confirms this when it provides “Subject to the provisions of this Act, a
partner is the agent of the firm for the purposes of the business firm”.

Thus the firm as well as other partners will be bound by the act of the firm. In Narcinva V.
Kamat v. Alfredo Antonio Doe Martins, (1985) 2 SCC 574, the appellant, a partner of the firm drove the
car of the firm negligently and as a result one person died. The car was insured in the name of the firm.
The Supreme Court held that every partner of the firm will be deemed to be insured. Every partner, if
he possesses a driving licence, will be entitled to drive it.
 The Supreme Court held in Chandrakant Manilal Shah v. Commissioner of Income Tax,
Bombay, AIR 1992 SC 66, that there can be a partnership between a member of Hindu Undivided Family
and Karta.

ILLUSTRATIONS

1. A carries on in his name the business of loading and unloading wagons of a limited company. A
appoints B to manage the business. It is agreed between them that B shall get 75 rupees share
out of the net profits as remuneration and that A shall get 25 rupees but shall not be liable for
loss. Are A and B partners. In this illustration, there is agreement between A and B; the
agreement is to carry on business and the objective or motive of the agreement is to divide
profits but the fourth element i.e., mutual agency is absent. A and B are therefore not partners.
The fact that A is not liable shows that there is no mutual agency. The relation between A and B
is simply that of principal and agent.
2. An author receiving royalty from the publisher is not a partner because there is no mutual
agency between them.
3. The members of a Hindu joint family carrying on a family business would not necessarily
constitute a partnership business. The main reason for this is that the relation of partnership
arises from contract and not from status. Sec. 5 of the Partnership At makes it clear that
members of a Hindu undivided family carrying on a family business as such are not partners in
such business. Besides this, in an undivided Hindu family, each member of the family in the
usual course of business cannot bind other members because there is no mutual agency
between them.

TYPES OF PARTNERS:

1. Active Partner: Active partner is one who takes active part in the business of the firm. That he
is a partner is known to third parties who have dealing with the firm.
2. Nominal Partner: A nominal partner is one who allows his name to be used as if he were a
member of the firm. There is no partnership agreement between him and the partners. He has
no share in the profits. However, he would be liable for the acts of the firm in as much as he has
permitted his name to be used by the firm as though he were a partner.
3. Sleeping partner: A sleeping partner is to be distinguished from a nominal partner. He is a real
partner but takes no active part in the business. He is entitled to the profits of the business and
is liable to third parties like other partners.
4. Dormant partner: A dormant partner is a person who is not known to the persons dealing with
the firm. Under proviso to S. 45(1), such a partner is not liable for holding himself out as
partner.
5. Partner only for profits: There may be an agreement between the partners by which one of
them is to be given a share in the profits but is not bound to share in the losses. Such an
agreement is valid. However, such a partner would be liable to third parties dealing with the
firm just like the other partners. His agreement gives him no immunity so far as parties dealing
with the firm are concerned. It only enables him, when accounts are taken between the
partners, to insist that no losses should be debited to his account.

MODE OF DETERMINING THE EXISTENCE OF PARTNERSHIP

 It is not an easy task to determine whether a group of persons constitute a partnership or not.
The word “partner” quite often is used vaguely in specific instruments without caring about its legal
connotation. By the use of the word ‘partner’ in an instrument or by description, a person does not
become partner. If on the other hand, legal requirements or essential elements of partnership are
fulfilled, no description will prevent a person from becoming a partner.

Sec. 6 of the Act provides:

“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”.

In order to determine 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—Raghunath Sahu v. Trinath, AIR 1985 Ori. 8. In Khan v. Miah, (2000) 1
WLR 2123, certain persons obtained a loan from a Bank in their joint names to purchase premises for a
restaurant. They also entered into a contract for purchase of equipment and laundry for the restaurant.
Their relationship got terminated before opening the restaurant. The question before the House of
Lords was whether their relationship was a partnership. The Court of Appeal held that they had not
become partners in a restaurant business by the date when the relation was terminated.

To determine whether a given relationship is a partnership, Sec. 6 give illustrations under two
explanations:

1. SHARING OF PROFITS OR OF GROSS RETURNS ARISING FROM PROPERTY BY PERSONS HOLDING

A JOINT OR COMMON INTEREST: As per Explanation 1 of Sec. 6, 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. Joint owners of a property gifted to them collect
rent but no business is carried on by all or any of them on behalf of all. There is no partnership.
In such a case, a suit for dissolution of partnership cannot be filed and the proper suit is a suit
for partnership and account.
2. PERSONS RECEIVING SHARE OF PROFITS OUT OF BUSINESS: Under Explanation 2 to Sec. 6,
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 in business, does not of itself make him a
partner with the persons carrying on the business. Under this illustration also, no partnership is
constituted because the element of mutual agency was not present.
3. SHARING OF PROFITS BY A LENDER OF MONEY: Under Explanation 2(a) of Sec. 6, the receipt of
such share does not itself make the receiver a partner with the persons carrying on the business.
In Mollow March Co. v. The Court of Wards, (1872) LQR 2 C.P. 419, a Hindu Raja advanced loan
to Watson & Co., a trading company of Calcutta. In consideration of the said advance and loans
in future, the parties entered into agreement by which the Raja would exercise control over
some matters of business and further the Raja would get 20% commission on all profits earned
by the firm. In addition, Raja would get 12 percent interest on loans given by him.
Subsequently, Raja advanced more loans for which the Company executed a mortgage deed of
properties of the firm in favour of the Raja. The Raja gave up his right to receive commission.
The Raja however was not empowered to direct the transactions of the firm. Raja did not
interfere in the business of the firm nor did he exercise control over the business to make him a
 partner. Appellants were traders in London and they sued the firm and Raja for recovery of
money. After the death of Raja, his legal representatives were impleaded in the suit. If Raja was
proved to be a partner, he could be held liable as a partner to the liabilities of the firm. The
Privy Council held that he was not a partner. The agreement entered between the firm and the
Raja was not an agreement of partnership. It was an agreement between a creditor and a
debtor and it was in respect of the debt and its security.
4. SHARING OF PROFITS OR RECEIPT THEREOF BY A SERVANT OR AGENT AS REMUNERATION:
Receipt of share or payment by a servant or agent as remuneration does not of itself make the
receiver a partner with the partner carrying on the business. On occasions, it may not be easy
to distinguish between partnership and share of profits received as remuneration. In Munshi
Abdul Latif v. Gopeshwar Chatterjee, AIR 1933 Cal. 204, A carried on loading and unloading
goods in wagons. He appointed B to manage the business. By agreement between A and B, B
was to get 75% of net profits and A 25%. The agreement further provided that A shall not be
liable for any loss. The Calcutta High Court held that the relation between A and B was not that
of a partnership but that of Principal and Agent.
But in Raghunandan v. Hormustee, 51 Bom 342, plaintiff was sole owner of a solicitor’s firm. He
entered into an agreement with the defendant making the defendant partner for one year.
After the said period, the defendant was not to retain any interest in the firm and he shall have
no claim in respect of property, name and good will of the firm. In return defendant would get
Rs. 500/- per month and he would not be liable for the losses or obligations of the firm. The
Court held that on the basis of the terms of the agreement the defendant had become a partner
and that he was not a servant of the firm.
5. RECEIPT OF SHARE OR PAYMENT BY A WIDOW OR CHILD OF DECEASED PARTNER AS ANNUITY
will not, by itself, make the receiver a partner with the persons carrying on the business.
6. THE RECEIPT OF SHARE OR PAYMENT BY SALE OF GOODWILL will not of itself make the person
receiving the money a partner along with the persons carrying on the business. In Helper
Girdharbhai v. Saiyed Mohmad Mirasaheb Kadri and others, AIR 1987 SC 1782, a partner
brought in his tenancy of premises as asset, in which partnership was carried on. He was to
share profits but was not allowed to operate bank accounts. The question was whether he was
a partner. Sabyasachi Mukharji J. observed: The following important elements must be there in
order to establish partnership: (1) There must be an agreement entered into by all parties
concerned; (2) the agreement must be to share profits of business; and (3) the business must be
carried on by all or any of the persons concerned acting for all. The partnership deed was there
entitling the petitioner to share in the partnership. It is true that he was not allowed to operate
bank accounts. The partnership deed provided that irrespective of profit, the appellant was to
be given a fixed percentage of profit. He was not to share the losses. The court considered
nothing illegal about it because the appellant was to bring his asset being the tenancy of the
premises for use of the partnership. The deed gave the appellant right to share profits and
made him agent for certain limited purposes of the firm and there was evidence that the
partnership deeds were acted upon. The court held that the firm was a partnership firm and the
appellant a partner.

So, 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. As provided in Sec. 4, the following four elements must be
present: (1) Agreement (2) Business (3) Sharing of profits, and (4) Mutual Agency.

DISTINCTION BETWEEN PARTNERSHIP AND CO-OWNERSHIP

In Champaran Cane Concern v. State of Bihar, AIR 1965 SC 1737, the Supreme Court laid down
the following as the main difference between Partnership and Co-ownership:

1. Partnership is always created by agreement but co-ownership is not essentially created by

contract.
2. In partnership, there is essentially profit or loss whereas the same is not the case in co-
ownership.
3. A partner cannot, without the consent of other partners, transfer his whole interest in
partnership to a stranger or third person. That is to say, a stranger who purchases a partner’s
interest in partnership cannot become a partner without the consent of other partners. On the
other hand, a co-owner without the consent of the other co-owners, can transfer his interest to
a stranger or third person.
4. In partnership, a partner is the agent of other partners but it is not so in the case of co-
ownership.
5. In addition to the above, there is a distinction relating to legal remedy. In partnership, the
proper remedy is a suit for dissolution and accounts. The proper remedy for a co-owner is a suit
for partition.

Where co-owners appoint a common manager who divides profits among the co-owners, there is no
partnership between him and the co-owners. If two persons buy a tea shop and give it on rent to a third
person and share the profits proportionately, they do not become partners in the tea shop but remain
co-owners. (Govindan Nair v. Nagabhushanamal, AIR 1948 Mad. 343). By dividing the profits, a co-
owner does not become a partner. For existence of partnership, there must be a business and the
business should be carried on by all or by any one of them on behalf of all. In other words, the element
of mutual agency must be present.

DISTINCTION BETWEEN PARTNERSHIP AND JOINT FAMILY

The main points of distinction between Partnership and Joint Family are the following:

1. Partnership is always created by contract. Under Sec. 5, a relation of partnership arises from
contract and not from status. On the other hand, joint family is created by status and not from
contract. Joint family is created by status conferred by the personal religion of Hindus. Sec. 5
makes it clear that members of a Hindu undivided family carrying on a family business as such
are not partners in such business.
2. A new partner can be admitted in the partnership only when all the existing partners consent.
By the mere birth in the joint family, a child becomes entitled to the share in the joint family
property and also to a share in the business carried on by the joint family.
3. In partnership, the death of a partner dissolves the firm. Death of a member of a joint family
does not affect the joint family or its business.
 4. In partnership, all partners are entitled to participate in the business of the firm. Management
of business of a joint family is usually done by the eldest male member of the family, known as
Karta.
5. In partnership, every partner is the agent of other partners. In joint family, it is the Karta or
Manager who represents the joint family.
6. A partner is jointly and severally liable for the debts of the firm. A member of a joint family is
liable for the debts of joint family to the extent of his share. The rule has no application where
such member himself is a party to the contract.
7. In partnership, being an agent of other partners, a partner has unlimited power to bind other
partners by his acts as the acts of the firm. Members of joint family do not have this power.
8. After partition, a member of joint family has no right to see or demand the past accounts of the
past. Even after dissolution or leaving the firm, a partner has the right to see and demand the
account books of the past.
9. The remedies of partnership and joint-family are also different. A partner can sue for
dissolution and accounts. A member of joint family can sue for partition.

DISTINCTION BETWEEN PARTNERSHIP AND COMPANY

The main points of distinction between a partnership and a company are:

1. Partnership is a group of persons and in law the name of the firm is only a brief method of
description of partners. A company is a separate juristic entity and distinct from its
shareholders. (M/s Bacha T. Guzdar v. Commissioner of Income Tax, AIR 1955 SC 74). It can sue
and can be sued, in its own name.
2. In partnership, each partner is an agent of other partners and each partner has the unlimited
capacity to bind other partners by his acts as the acts of the firm. Consequently, the liability of
partners is unlimited. In the case of a company, liability of a shareholder is limited to the extent
of his share. As observed by W.M. Jones, L.J. (Baird’s case of Court of Appeal in Chancery (1870)
LR 5 Ch All. 725): “As between the partners and the outside world (whatever may be their
private arrangements between themselves), each partner is the unlimited agent of every other
in every matter connected with partnership business, or which he represents as partnership
business, and not being in its nature beyond the scope of partnership. A partner who may not
have a farthing of capital left take moneys or assets of this partnership to the value of millions,
may bind the partnership by contracts to any amount, may give the partnership acceptance for
any amount, and may even as has been shown in many painful instances in this court involve his
innocent partners in unlimited amounts for frauds which he has craftly concealed from them”.
3. A partner cannot transfer whole of his interest to others or third persons without the consent of
other partners. Its legal meaning is that if a partner transfers his share to a person, then such a
person by such purchase cannot become a partner. In the case of a company, shares of a
company can be sold freely to non-members. In course of time, all original members may sell
their shares and may be substituted by new members.

TYPES OF PARTNERSHIP

Partnership may be of two types—(1) Partnership for a fixed period (particular partnership); and
(2) Partnership at will. If no period or duration of partnership is fixed under the partnership agreement,
it is called a Partnership at Will.
PARTNERSHIP AT WILL

Sec. 7 of the Act provides:

“Where no provision is made by contract between the partners for the duration of their
partnership, or for the determination of their partnership, the partnership is ‘partnership at will”.

In the case of a partnership of two persons, absence of one automatically gives room for
determination of the partnership under Sec. 7. In the case of a partnership of more than two persons,
absence of one will not automatically determine the partnership. Such a partnership will have to be
treated as partnership at will in the absence of any condition of duration on determination. (Rathinder
Nath Dey v. Dilip Kumar Dey, AIR 2001 Cal. 172).

Under Sec. 7, a partnership can be called a partnership at will if the following two elements are
present:

1. There must be no provision, express or implied relating to the duration of the partnership in the
partnership agreement.
2. The partnership agreement must also not contain any provision regarding the termination of
partnership. A provision relating to retirement of a partner, in the partnership deed, cannot be
said to be relating to determination of the partnership.

DISSOLUTION OF PARTNERSHIP AT WILL

Under Sec. 43,

1. Where a 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 communication of the notice”.

If the duration of the partnership is fixed, dissolution of such partnership is subject to certain conditions
and can be done only in pursuance of the prescribed procedure. In the case of a partnership with two
partners, whose duration is not fixed, Sec. 7 applies. In such a partnership deed, a provision relating to
retirement of a partner is not inconsistent with Sec. 7 (Talak Chand Kanji v. Keshavlal Dullabaiji, AIR
1973 Cal. 279).

In Karumuthu Thiagrajan Chettiar v. E.M. Muthappa Chettiar, AIR 1961 SC 1225, partnership
agreement between the appellant and the respondent contained provisions relating to agency of the
management of mills stating that the partners shall get equal share in salaries, commissions, profits etc.
The management shall be carried on for four years at a time by each of the partners and in the
beginning the management shall be in the hands of the appellant. A partner and his heirs and those
getting rights from him shall carry on business one by one and if any partner decides to give up his right
to manage, it should be given to the other partner and that it cannot be sold or transferred to any other
person. Finally, it was provided that both the partners shall keep the management under their hands for
four years each and that the income shall be divided equally every year. Their heirs shall also get equal
share in the income and they shall also carry on the business accordingly. The Supreme Court held that
the intention of the partnership was not to create a partnership at will. Their intention obviously was to
create a partnership of some duration though the duration was not expressly fixed in the agreement.
 The Supreme Court held that in this specific case there were only two partners and that as soon
as one partner relinquished his right in favour of the other, the partnership shall be determined. But if
there were more than two partners and one of them relinquished his right of management in favour of
the other, the partnership would not be determined.

PARTICULAR PARTNERSHIP

Under Sec. 8, a person may become a partner with another person in particular adventures or
undertakings. Such contracts will get terminated once the adventure or project is completed. As
observed in Deoki Prasad Rajgarhiah v. Smt. Amar Das Poddar, AIR 1999 Pat. 22, where a partnership is
constituted for a specific job and the duration of partnership is also mentioned in the deed with a rider
that partnership will continue till completion of the job and the partnership does not undertake any
other venture, partnership will come to end after completion of job and this is not a partnership at will”.

CHAPTER III

RELATION OF PARTNERS TO ONE ANOTHER

DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS

As defined in Sec.4 and further explained in Sec. 5, a partnership is created by contract.

Therefore, the fundamental principle relating to relations of partners with each other depends upon the
consent of the partners. Sec. 11(1) of the Act provides:

“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 expressed 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. The general principles of Law of contract are applicable to a
contract of partnership. Sec. 27 of the Contract Act states that

“Every agreement by which anyone is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void.”

Sec. 27 contains an exception in respect of sale goodwill. Sec. 11(2) of the Partnership Act is another
exception to Sec. 27. It provides:

“Notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such
contract may provide that a partner shall not carry on any business other than that of the firm while he
is a partner”.

ILLUSTRATION

X,Y and Z are partners. The partnership deed provides that if any partner ceases to be a partner
he will not carry on any business similar to that of the firm throughout India. Z retires from the firm and
takes steps to set a similar business in Calcutta. Can Z be restrained by the court at the suit of X and Y?
This case is not covered under Sec. 11(2) of the Partnership Act. Section 11(2) applies while a
person is a partner. Sec. 54 is also relating to agreement in restraint of trade. It provides: 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 specified local limits and notwithstanding
anything contained in Section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the
restrictions imposed are reasonable.”

For a case to be covered under Section 54, following conditions must be satisfied:

(a) restriction for carrying on similar business must be within a specified period or within specified local
limits, and

(b) restrictions imposed are reasonable.

The case under the illustration is not covered even under Sec. 54 because restriction is that the retiring
partner will not carry on any business similar to that of the firm throughout India. Restrictions cannot
be said to be within a specified period or within specified local limits. Moreover, such a restriction is not
reasonable. Thus such a restrictions shall be void under Sec. 27 of the Indian Contract Act; Z cannot
therefore be restrained by the court at the suit of X and Y.

MUTUAL RIGHTS AND DUTIES OF PARTNERS

DUTIES OF PARTNERS

Partnership is a fiduciary relationship. In Helmore v. Smith, (1856) 35 Ch. D 436, Bacom VC

observed:

“If fiduciary relationship means anything I cannot conceive a stronger case of fiduciary relations
than that which exists between partners. Their mutual confidence is the life blood of the concern. It is
because they trust one another that they are partners in the first place; it is because they continue one
another that the business goes on”.

I GENERAL DUTIES OF PARTNERS:

Under Sec. 9, partners are bound to carry on the business of the firm to the greatest common
advantage, to be just and faithful to each other, and to render true accounts and full information of all
things affecting the firm to any partner or his legal representatives.

They are bound to carry on the business of the firm to the greatest common advantage. During
partnership, a partner cannot do any act in conflict with his duty to work to the greatest common
advantage and to be just and faithful. If a partner is authorized to buy goods for the firm, he cannot
supply it from his own stock and earn profit. Similarly, a partner cannot buy the goods from the firm
and sell to another in which he has interest, to make profit for himself. Thus, the general duties are:

 Partners are bound to be just and faithful to each other

 They are also bound to carry on business of the firm to the greatest common advantage
 During the course of business, no partner can do any act which may be against his duty to work
to the greatest common advantage.
 If a partner is authorized to buy goods for partnership firm and he supplies from his own stock
and earns profits, he will be bound to give the said profits to the firm.
  Similarly, if a partner himself buys goods from the firm and earns profits by selling them to a
company in which he has vested interest, he is liable for violation of Sec. 9 and should give the
profit to the firm.

Sec. 16 provides:

“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 name, he shall account for that profit and pay it to
the firm.
(b) If a partner carries on 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.”

This rule is subject to contract between the partners. If partners so please, they may modify this rule
and provide that a partner may use the firm’s property and relations for the benefit of his own business.

II DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD

Under Sec. 10, every partner shall indemnify the firm for any loss caused to it by his fraud in the
conduct of the business of the firm. Eg. Partnership firm of A and B entered into a contract with the
Govt. and subsequently due to act and conduct of B, Govt. cancelled the contract and gave the contract
to B. The Bombay High Court held that the contract obtained by B in his own name shall be for the
benefit of the partnership. It was further held that if the contract given to B is of less value than that of
the earlier contract with the partnership, B will be liable for the loss because the situation has been
brought about by his fraudulent conduct.

III DUTY RELATING TO THE CONDUCT OF BUSINESS:

Under Sec. 12(b), “subject to contract between the partners, every partner is bound to attend
diligently to his duties in the conduct of the business”.

Under Sec. 12(c), “subject to contract between the partners, any difference arising as to
ordinary 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 partners. Sec. 12(c) makes it clear that in ordinary matters,
decision shall be taken by majority of partners but before taking the decision every partner must be
given opportunity to express his view. The majority should decide the matter in good faith.

In Suresh Kumar v. Amrit Kumar, AIR 1982 Del. 131, plaintiff and defendants 1 to 6 were
carrying on the business of motor cars, jeeps and their spare parts under the name of “Sanghi Motors”.
Plaintiff was the managing partner. His appointment was made with the consent of all the partners.
While acting in that capacity, he was removed by majority of partners and they appointed Ashok Kumar
Sanghi Motors. The Delhi High Court held that the majority decision cannot be enforced. Under Sec.
12(c) majority decision can apply only in respect of ordinary matters of conduct of business. Decision by
majority cannot be taken on important matters. Such decisions can be taken with the consent of all the
partners. It is also necessary that the majority decision should have been taken in good faith.
IV DUTY TO INDEMNIFY THE FIRM FOR ANY LOSS CAUSED TO IT BY HIS WILFUL NEGLECT.

Under Sec. 13(f), subject to contract between partners, 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.

If a partner during the course of the conduct of the business, commits breach of duty or fraud or
is guilty of culpable negligence and the property or interest of the firm are thereby adversely affected or
damaged, whether or not in law he may be held liable, in equity he can be held liable to indemnify the
firm. In Bury v. Allen, (1845) 1 Coll. CC 509, Knight Bruce V.C. observed:

“Suppose the case of an act of fraud or culpable negligence, or wilful default by a partner during
the partnership, to the damage of its property or interest, in breach of his duty to the partnership;
whether in law compellable or not compellable, he is certainly in equity compellable to compensate or
indemnify the partnership in this respect”.

Under Sec. 13(f), a partner shall not be liable for ordinary negligence. He is liable to indemnify
when he is guilty of wilful negligence. Wilful means an act done by a partner wilfully knowing that it will
cause damage. If in the ordinary course, if a partner commits an error in taking a decision which causes
loss to the firm, he shall not be liable to indemnify the firm.

V DUTY IN RESPECT OF PERSONAL PROFITS EARNED BY PARTNERS:

Under Sec. 16(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. But this is subject to contract between the partners. Every partner
must account to the firm for every benefit derived by him without the consent of his co-partners from
any transaction concerning the partnership or from any use by him of the partnership property, name or
business concern.—Aas v. Beham, (1891) 2 Ch. 244

Thus, in the absence of a contract to the contrary, if a partner earns profits by making use of
firm’s name or property he must account for and pay to the firm such profits. In a case, a partner
without consent and notice of other partners, purchased the property of the firm for himself. It was
held that the other partners are entitled either to prevent such sale or to challenge the sale price and
compel the partner to purchase it on proper and fair price.

VI DUTY NOT TO COMPETE WITH THE BUSINESS OF THE FIRM. Sec. 16 (b) provides: Subject to
contract between the partners, if a partner carries on 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.

Under a contract of partnership, partners may allow a partner to carry on a business competing
with the business of the firm. The partnership deed may prohibit a partner to carry on a business
competing with the business of the firm. A partner violating such a contract will have to account for and
pay to the firm. However, if a partner does some private act outside the scope of the business of the
partnership firm and earns profits, he shall not be liable to account for and pay to the firm such
profits.—Aas v. Beham.

VII DUTY IN RESPECT OF APPLICATION OF THE PROPERTY OF THE FIRM

 Under Sec. 15, subject to the contract between partners, the property of the firm shall be held
and used by the partners exclusively for the purposes of the business. If a partner uses firm’s property
for private benefits, he shall account for and pay such profits to the firm.

VIII DUTY TO CONTRIBUTE EQUALLY TO THE LOSSES:

Sec. 13(b) provides that the partners shall contribute equally to the losses sustained by the firm.

RIGHTS OF PARTNERS

1. RIGHT TO TAKE PART IN THE CONDUCT OF THE BUSINESS: Every partner has a right to take
part in the conduct of the business. This right is, however, subject to the contract between the
partners. Unless there is a contract to the contrary between the partners, the court cannot
through an injunction, prevent or restrain a partner from taking part in the conduct of the
business. A partner can be deprived of his right to take part in the conduct of business only
through a contract between partners.
2. RIGHT TO HAVE ACCESS TO AND TO INSPECT AND COPY BOOKS OF THE FIRM: Subject to
contract between the parties, every partner has a right to have access to and to inspect and
copy, any of the books of the firm.—Sec. 12(d)
3. RIGHTS TO SHARE EQUALLY IN THE PROFITS EARNED: The partners are entitled to share equally
in the profits earned. This is subject to contract between the partners—Sec.13(b).

DOCTRINE OF ACTUS CURIAE NEMINEM GRAVABIT: A party should not suffer on account of
the fault of the court.

When on account of the act of a party, persuading the court to pass an order which at the end is
held as not sustainable, one party has gained an advantage which it would not have otherwise earned,
or the other party has sustained a loss or impoverishment which it would not have suffered but for the
order of the Court, the successful party at the end of the litigation, if the loss could be assessed in terms
of money, would be entitled to be compensated in the same manner in which the parties would have
been if the interim order of the Court would not have been passed. The successful party can demand:
(a) the delivery of benefit earned by the opposite party under the interim order of the Court or (b) to
make restitution for what it has lost.

In T.O. Alias and others v. M/s T.O. Abraham & Co. and others, AIR 2004 Ker. 344, the civil
court ordered that funds of a partnership firm could be utilized only after getting majority decision of
partners. Two partners filed writ petition before the High Court without making other partners as party
to the case, for release of funds from the Bank. High Court by interim order allowed release of funds.
The funds were utilized without obtaining approval of majority of partners. The Division Bench of the
High Court ruled that the conduct of the two partners was an abuse of the process of High Court. The
doctrine of actus curiae neminem gravabit would apply to the facts of the case. The two partners were
directed by the Court to re-deposit the said amount in the bank. Applying the principle, the Court held
that the court would not have so acted had it been correctly appraised of the facts by respondents 1 and
2 and under such circumstances, the parties should be placed in the same situation that they got before
the passing of the judgment by this Court.

4. RIGHT TO RECEIVE INTEREST ON THE CAPITAL SUBSCRIBED: A partner is entitled to receive

interest on capital subscribed by him. Subject to contract between the partners, where a
 partner is entitled to interest on the capital subscribed by him, such interest shall be payable
only out of profits—Sec. 13(c). Further, for any payment or advance beyond the amount of
capital he has agreed to subscribe, a partner is entitled to interest thereon at the rate of six per
cent per annum. This, again is subject to contract between the partners—Sec. 13(d).
5. RIGHT TO INDEMNITY IN RESPECT OF PAYMENTS MADE AND LIABILITIES INCURRED. Under
Sec. 13(e), subject to contract between the parties, the firm shall indemnify a partner in respect
of payments made and liabilities incurred by him:
a) In the ordinary and proper conduct of the business; and
b) In doing such act, in an emergency, for the purposes of protecting the firm from loss as
would be done by a person of ordinary prudence, in his own case under similar
circumstances.
Sec. 13(e) confers on a partner the right to receive indemnity in two situations: (1) in the
ordinary and proper conduct of the business and (2) in emergency. As regards the first
situation, a partner gets the right to be indemnified by the firm only when he makes
payments and incurs liabilities in the ordinary and proper conduct of the business. If the
partner does an act out the scope of his authority and is guilty of wilful neglect and
carelessness, he will not be entitled to be indemnified—Thomas v. Atherton, (1877) 10 Ch.
D. 185. The second situation entitling a partner to be indemnified is during emergency. His
right to be indemnified is subject to the condition that he would have done the act 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.

6. RIGHT TO RECEIVE REMUNERATION: The general rule is that a partner is not entitled to receive
remuneration for taking part in the conduct of the business. But this rule is subject to contract
between the partners. If the contract provides for payment of remuneration to any partner,
then such a partner will be entitled to receive it.
7. MAJORITY RIGHTS: Under Sec. 12(c), subject to contract between the partners, 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
partners.

DUTIES OF PARTNERS INTER SE:

1. DUTY TO BE DILIGENT: Every partner is bound to attend to his duties diligently –Sec. 12(b)
2. NOT TO CLAIM REMUNERATION: A partner cannot claim remuneration for taking part in the
conduct of partnership business. This is because his right is to share in the profits.
3. To observe good faith: It is a general duty of a partner to be just and faithful to the other
partners, render true accounts and communicate to other partner’s information affecting the
firm (Sec. 9)
4. To indemnify for wilful neglect. A partner is bound to indemnify the firm for lossesses
occasioned by his willful neglect.
 5. To indemnify for fraud: A partner has to indemnify the firm for losses occasioned by his fraud
(Sec. 10)
6. To account for personal profits: The relationship between partners is a fiduciary relationship.
So one partner cannot take advantage of his position as such to make personal profits. If a
partner makes a private profit out of partnership transactions, he has to account for such profits
to the firm (S 16); and
7. To account for profits in competing business: If a partner conducts a business similar to that of
the partnership in competition with the partnership business, he has to account for the profits
made therein (Sec. 16(b)).

RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE IN THE FIRM

A change in firm may occur in the constitution of the firm, or on expiry of the term of the firm or
where additional undertakings are carried out. Under Sec. 17, subject to contract between the partners,

a) 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, and
b) 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 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 a firm constituted to carry out one or more 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.

Under Sec. 17(a) where a change occurs in the constitution of the partnership firm, the mutual rights
and duties of the partners of the reconstituted firm do not change. Sec. 17(b) provides that after the
expiry of the term of the firm, mutual rights and duties of the partners remain the same. But after the
expiry of the term, the partnership becomes a partnership at will. It is therefore necessary that the
rights and duties of partners must be consistent with the incidents of partnership at will.

Under Sec. 17(c) where additional undertakings are carried out, the mutual rights and duties of
partners in respect of those undertakings or adventures shall remain the same as those in respect of the
original adventures or undertakings. The same rule applies where the business is continued after the
death of a partner. The main reason behind this rule is that in the absence of an express agreement,
either the original contract is deemed to have continued or its novation take taken place.

PARTNERSHIP PROPERTY

According to Sec. 14, subject to contract between the partners, property of the firm includes all
property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for
the firm, or for the purpose 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 interest in property acquired with
money belonging to the firm are deemed to have been acquired for the firm.

Under Sec. 14, partnership property may be of following three types:

1. PROPERTY ORIGINALLY BROUGHT INTO THE STOCK OF THE FIRM: Property originally brought
into the stock of the firm undoubtedly constitutes partnership property. Of course, this is
subject to contract between the partners. Thus property originally brought into the stock of the
firm at the commencement of the business is partnership property. When a partner bring his
property to the partnership firm as his contribution to its capital, it is not regarded as sale. (CIT
v. Janab N. Hyath Batcha Sahib, (1969) 72 ITR 528. When a partner bring in his personal asset
into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive
interest in the asset to share rights in it with the other partners of the firm. Though he does not
lose his right altogether, he would thereafter enjoy an abridged right which cannot be identified
with the fullness of the right which he enjoyed in the asset before it entered the partnership
capital. (Sunil Sidharthbhai v. C.I.T. Ahmedabad, (1985)4 SCC 519.
The partnership commences a joint undertaking. Whatever property is brought to the firm
ceases to be the exclusive property of the partner who brings it. All the partners have interest in
trading assets or properties of partnership in the same proportion in which they carry on the
partnership business of the joint undertaking. The partner who has brought in property cannot
even claim his right in the business to the extent of his share. He has right only to receive his
share in the profits from time to time and on dissolution to receive his share in the remaining
property. (Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300

2. PROPERTY ACQUIRED BY PURCHASE OR OTHERWISE BY OR FOR THE FIRM. Partnership also

includes property acquired by purchase or otherwise, by or for the firm, or for the purpose and
the course of the business of the firm. Such property includes the good will of the firm. Under
Sec. 14, subject to contract between the partners, all property and its rights earned by the use
of firm money are deemed to be earned for the benefit of the firm. If a partner of the firm,
without consent or authority or other partners, buys shares of a company by investing the firm
money, these shares shall be included in the firm’s property. If a partner insures his life on
behalf of partnership and pay premia from firm money, the policy shall be included in
partnership property (In re Adarji Mancherji Dalal, AIR 1929 Bom 67). In Mohan Lal Bahri
(deceased) by LRs. V. K.L. Bahri, AIR 1988 All 247, a partner purchased a property without
obtaining the consent of other partners by using amounts withdrawn from firm’s bank account.
The partner in question himself looked after the business and also supervised filing of Income
Tax returns and maintenance of account books and did not include the property in the register
of the firm. The Court held that it cannot be inferred that the property was not purchased for
interest and benefit of firm but was purchased for the benefit of the partner in question.
3. PARTNER’S PROPERTY IN USE OF FIRM OR FOR THE FIRM: Under certain circumstances, a
partner’s property, used by or for the firm, becomes the property of the firm. It, however,
depends on the intention of the partners. In Robinson v. Ashton, (1875) 20 Eq. 25, a mill owner
entered into an agreement that he will carry on production in partnership with them. He
included in the accounts of the firm the price of the mill and his capital along with the money
received through production. The Court held that the Mill, Machinery and subsequent increases
were the property of the firm.
In Mills v. Clarke, (1953) All ER 779, a person carried on photography in a premises on lease. He
included another partner in his business. The agreement provided that the profits from
 business would be divided equally. Question arose whether the lease, furniture, goods of the
studio etc. formed part of partnership property. Court held that they did not.
Supreme Court clarified the position in M/s. Bud Narayana Murthy and Sons v. Valluri venkat
Suguna and others, AIR 1978 AP 257. In this case, five persons purchased a property and
constructed a cinema hall “Minerva Talkies”. The partnership firm exhibited films and the five
persons shared the profits among themselves. The question before the Andhra Pradesh High
Court was whether the Cinema Hall was partnership property. No evidence was adduced to
show that the money of the firm was used for the construction of the Hall. The Division Bench
held that it is not essential that every partnership business must have its own property for
carrying on its business. It can use property of others for the purpose of its business. A
property can become firm’s property when it was brought to the stock of the firm by partners
when partnership was constituted or it has been purchased or acquired by the firm. There was
no evidence for reaching that conclusion. On the other hand, evidence showed that the
property in question was never regarded as partnership property and was held as co-owners.
It has to be concluded that under certain circumstances a partnership property may become
partner’s separate property. That is possible when the parties so intend.

CHAPTER IV

RELATION OF PARTNERS TO THIRD PARTIES

Cox v. Hickman (1860) 8 HCL 268

In this case, the Court observed as follows:

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 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.

This principle is incorporated in sections 18 and 25.

Sec. 18: ‘Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the
firm’.

Sec. 25: ‘Every partner is liable jointly with all other partners and also severally, for all acts of the firm
done while he is a partner’.

In India, liability of a partner is joint and several. In England, it is only joint and not several. But
for Torts and other wrongs, the liability is joint and several, even in England.

In Goldburg v. Jenkins (1889) 15 VLR 36, the Court held:

“The power of a partner to bind his co-partners depends upon the question of agency. Law of
Partnership starts with the principle that each partner is the agent of all the partners for transacting all
the ordinary partnership business”.

If the partner concerned has not been authorized to do the act in question and the third party is
aware of this, the firm and other partners will not be bound by such act of the partner.
Illustrations

A: A negotiable instrument is drawn by G, a partner in a trading firm “G & Sons”. In a suit on the
basis of this instrument by a third party, the other partner ‘K’ contends that as his (k’s) signatures do not
appear on the face of the instrument, he (K) is not bound by it. Is K’s contention maintainable?

K’s contention is not maintainable. Under Sec. 18, a partner is agent of the firm for the
purposes of the business of the firm. Under Sec. 25, each partner is liable jointly with all other partners
and also severally for all the acts of the firm where he is a partner. Under Sec. 19(1), subject to Sec. 22,
act of a partner which is done to carry on in the usual, the business of the kind carried on by the firm,
binds the firm.

Sec. 22 states: 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 and other partners.

In Bank of Australia v. Breillat (1847) 6 Moo PCC 152, it was observed:

“Borrowing of money is part of ordinary business, and consequently each partner has implied
authority to bind his co-partners by borrowing money”

Q: B, a partner, pays off personally the entire amount on a promissory note executed by a
firm and bring a suit against the other members of the firm for contribution. They resist the suit on the
ground that the plaintiff’s only remedy is for dissolution and account and the suit is not maintainable.

Answer: The partners will be liable to contribute. Every partner is an agent of the firm and
other partners for the purposes of the business of the firm. Their liability is joint and several. The other
partners are liable to contribute.

Sec. 13(1)(a) provides that the firm shall indemnify a partner in respect of payments made and
liability incurred by him in the ordinary and proper conduct of the business. Under Sec. 13(b) partners
shall contribute equally to losses sustained by the firm. Thus partners are bound to contribute.

IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM

The authority of a partner to bind the firm is called Implied Authority. In Bank of Australia v.
Breillat (1847) 6 Moo PCC 152, it was held:

“Every partner is, in contemplation of law, the general and accredited agent of the partnership.
Each partner is praepositus negotieus societatis and may consequently bind all other partners by his
acts, in all matters which are within the scope and objects of the partnership”. (Praepositus negotieus
societatis means ‘liable for all the negotiations with the society at large’)

The principle of implied authority has been incorporated in Sec. 19(1) which provides:

“Subject to the provisions of S. 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.”

ESSENTIAL CONDITIONS FOR THE EXERCISE OF IMPLIED AUTHORITY TO BIND THE FIRM
 The following conditions must be fulfilled by a partner in exercise of implied authority to bind
the firm.

1. Act done in the usual way the business of the kind carried on by the firm. The act must have
been done in the usual way the business of the kind is carried on by the firm.
If a partnership carries on business of selling and buying rubber, act of a partner to buy gold will
not bind the firm, because it is not the kind carried on by the firm.
If a partner buy goods in his own name and does not disclose that he is acting on behalf of the
firm, such a transaction cannot be regarded as transaction of the firm. The contention that it
was convenient for other partners or in the interest of the firm is immaterial. Such acts will not
bind the firm.
If a partner draws a cheque in his own name and endorses it to a third party, the third party
should inquire whether it was on behalf of the firm or individual. The third party has to prove
that circumstances were such that the transaction was permitted by the other partners.
In Raghavaveera Sons & Others v. Mrs. Padmavathi, AIR 1978 Mad. 81, the partnership carried
on business as Engineering Contractors. One of the partners drew a promissory note for taking
money for the firm. The question was whether the partner had the authority to take debt for
the partnership by drawing a promissory note. Ramaswami J. of Madras High Court held:
“As a partner, the second defendant is entitled to borrow money on behalf of the firm and that
is authorized under the provisions of the Partnership Act. The partnership in the present case
had been constituted to carry on business as Engineering Contractors. Whether nature of
business carried on by the firm is such that any partner has authority to bind the firm by his
individual act is a question of fact. In the case of partnerships which are not of a mercantile
character—non trading firms—there is no implied authority to bind the firm by his individual
act. The partnership in the case was of Engineering Contractors and not a trading firm. Second
defendant was not entitled to borrow money on behalf of the firm.”
2. MODE OF DOING ACT TO BIND THE FIRM: Under Sec. 22, in order to bind the 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.
In Devji v. Magan Lal, AIR 1965 SC 139, a partner took a sub-lease in his own name and not in
firm’s name. No intention was shown to bind the firm by this business transaction. Where
partnership deed specifies the business to be carried on by the firm and provides that to carry
on business in any other commodity, agreement of other partners is required, a partner cannot
invoke implied authority, if managing partner does any act without taking permission of other
partners.—Khadiyara Seshagiri Rao v. Kannegemti Dasarah, AIR 2000 AP 263.

RESTRICTIONS ON THE IMPLIED AUTHORITY OF PARTNERS

Restrictions are of two types:
1. Statutory restrictions under Sec. 19(2)
2. Restrictions imposed by partnership deed and those implied by agreement between partners.

Statutory restrictions are binding upon all irrespective of whether they knew it or not. Restrictions
imposed by partnership deed apply and have effect on the third parties only when they know of them.

STATUTORY RESTRICTIONS UNDER SEC. 19(2):

Sec. 19(2) states:

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 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.

Operation of Sections 18 and 19(1) is subject to the exceptions in Sec. 19(2). Sec. 19(2) says ‘in
the absence of any usage or custom of trade to the contrary’. In Sanganu Dal and Flour Mill v. FCI, AIR
1982 SC 481, the partner was empowered to enter into contract to supply Dal. In the contract executed,
there was a clause on referring ‘dispute’ to arbitration. The trial Court and High Court held that the
partner had the implied authority to agree to the clause on arbitration as well.

Two points are to be noted under Sec. 20:

1. Partners may by contract extend or restrict the implied authority of a partner.

2. If partners restrict implied authority of a partner, then notwithstanding these restrictions, act
done by a partner under his implied authority shall bind the firm unless certain conditions are
satisfied. The firm can avoid liability, only if:
a) The person with whom the partner is dealing knows the restriction
b) He does not know or believe that the partner was a partner in the firm

PARTNER’S AUTHORITY IN EMERGENCY

Sec. 21: A partner has authority in an emergency to do all such acts for the purpose of protecting the
firm from loss as would be done by a person of ordinary prudence in his own case, acting under similar
circumstances and such acts binds the firm.

Thus, acts done by a partner during emergency binds the firm, if the following conditions are
satisfied:

1. There must be an emergency

2. The act must be done for the purpose of protecting the firm from loss
3. The act must be such as a person of ordinary prudence would have done in his own case acting
in similar circumstances.

EFFECT OF ADMISSION BY PARTNER

Sec. 23: An admission or representation made by a partner concerning the affairs of the firm is evidence
against the firm, if it is made in the ordinary course of business.

If by such representation, a partner increases the scope of his authority through a false
statement, it will not bind the firm.
EFFECT OF NOTICE TO ACTING PARTNERS

Sec. 24: Notice to a partner who habitually acts in the business of the firm, can have the effect of notice
to the firm, if the following conditions are satisfied:

1. Notice is given to a partner who habitually acts in the business of the firm. Eg., Notice to
terminate the tenancy given to Managing Partner will have the effect of notice to the firm.
2. The notice must be actual and not constructive
3. Fraud must not have been committed by the partner or with his consent.

LIABILITY OF FIRM FOR WRONGFUL ACTS OF A PARTNER

Sec. 26: The firm can be held liable for the wrongful acts of a partner to a third party when the following
conditions are fulfilled:

1. The partner was acting either in the ordinary course of business of the firm or with the authority
of other partners. Eg. If a partner under general authority of the firm and in the knowledge of
the other partners file a malicious prosecution, the firm is liable (Citizen Life Ins. Co. v. Brown,
1904 AC 423)
2. The partner must be guilty of a wrongful act or omission
3. Loss or injury is caused to any third party or any penalty is incurred
4. The firm will be liable therefor to the same extent as the partner

In Hurruck Chand v. Govind Lal Khetry, (1906) 10 CWN 105, a partner of the defendant firm sold stolen
goods in the course of business and money thus obtained was included in the money of the firm. The
other partners had no knowledge about it. Yet the firm was held liable.

But if the wrongful act or omission has not been done in the ordinary course of business or is
not within the authority of the partner, the firm will not be liable (TN Waterworks Co. v. Jones, (1903) 2
Ch. 615.

If managing partner initiates a malicious prosecution, the firm or other partners will not be liable
unless he shows that the firm was in some way connected with the case. Ahmedbhai v. Pramji (1903) 24
Bom. 226.

In Sarojben Ashwin Kumar & Anr. V. State of Gujarat & Another, (2011) 13 SCC 574, the
Supreme Court held that as regards liability under Sec. 141 of the Negotiable Instruments Act, there has
to be evidence that at the time of the offence was committed, the partner was in charge of and was
responsible to the firm for conduct of the business of the firm.

LIABILITY OF FIRM FOR MISAPPROPRIATION BY A PARTNER

Sec. 27: The firm is liable in two situations, for misappropriation by a partner:

1. When the partner acting under ostensible authority receives money from a third party and
misapplies it. In Blair v. Bromley, (1847) 2 Ph 354, A and B were carrying on business of
Solicitors in Partnership. C, a client of the firm gave to A some money to invest in some specific
security. A misapplied it. B neither received the money nor had any knowledge of the
transaction. The Court held the firm liable since the said money was obtained in the ordinary
course of business.
 In Rhodes v. Moules (1895) 1 Ch. D. 236, Defendants were a firm of Solicitors. Plaintiff asked a
partner to obtain a loan for him by mortgaging property documents. The said partner made a
false representation to the plaintiff that some additional security was required. Plaintiff gave
some share warrants, which were payable to bearer. The partner sold the share warrants. The
firm was held liable, though the other partners were not aware of it because the partner was
acting under implied authority.
2. When the firm in the course of ordinary business received money or property from a third party
and any of the partners misapplies it.
The difference between the two is in the first a partner receives and misapplies money. In the
second, the firm receives money or property from a third party and a partner misapplies it. In
Devaynee v. Noble, Clayton’s case (1816) 1 Merc 572, A, B and C were partners in a banking
partnership. C was a sleeping partner. A customer deposited some security with the firm for
safe custody. A and B sold it without authority. C was not aware. Firm including C was held
liable.
Where a third party enters into a transaction with the partner, not as an agent of the firm in his
personal capacity, firm will not be liable. In Ex Party Cyre, (1842) ER 618, a customer deposited
a box containing some securities with a banking firm. Subsequently, the customer authorized a
partner to remove some securities from the box and replace them with some other. The
partner was not authorized to do so by the firm. He removed some more items unknown to the
customer. The firm was held not liable.

LIABILITY FOR HOLDING OUT

Sec. 28(1) incorporates the principle of Estoppel as follows:
“Anyone 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 anyone
who has on the faith of such representation given credit to the firm, whether the person representing
himself or represented to be a partner does or does not know the representation has reached the
person so giving credit.

ESSENTIAL ELEMENTS OF SEC. 28(1) FOR HOLDING OUT:

1. REPRESENTATION: A person can be held liable for holding out only when it is determined that
he has made a representation. When a person represents to the world that he is a partner, it
means that he voluntarily acts himself as a partner. He lends his name for the partnership. He
may not be aware that his name is being misused. The representation may be oral or written or
it may be implied.
In Partes v. Incell (1905) 10 CWN 313, Defendant gave debt to a person for establishing a farm.
He was very much interested and used personal influence in getting land for the farm. He
remained at the farm most of the time and supplied goods to the farm. Plaintiff believed that
he was a partner. On that belief, he supplied goods to the farm. Court held he was liable as a
partner.
A person may make a representation through his conduct. The position would be the same if he
knowingly permits himself to be represented, similarly. In Tower Cabinet Co. Ltd. v. Ingram
(1949) 1 All ER 1033, I (Ingam) and C commenced business in partnership of household furnisher
 by name MERRYS. The partnership was dissolved by agreement. Notice of dissolution was given
to bankers and third parties were notified through C that he had severed connection with the
partnership. Firm circulated a new note in which I’s name was omitted. The new firm (without I)
placed an order of furniture with a furniture company who had dealing with the firm in the past.
C confirmed the order on a note paper bearing names of I and C, which had been in use before
dissolution. On supply of goods, firm failed to pay. The supplier company was awarded a
decree against the firm. The company sought to execute the decree against I also on the ground
that the note contained the name of I. Court held that I had not knowingly offered himself to be
represented as a partner. I was not known the plaintiff as a partner and therefore I was not
liable.
2. ON THE FAITH OF ANY SUCH REPRESENTATION GIVEN CREDIT TO THE FIRM: Representation
by itself does not create liability. Liability arisen when a person believing the representation
gives credit to the firm or supplies goods to the firm on credit. A person can rely on the
representation only when he has knowledge of the representation. The person making the
representation would be liable as partner, if someone, on the face of the representation supply
goods to the firm or give credit to the firm. It is not necessary that a direct contract must be
established between the person making representation and the person who acts on the face of
such representation.

LIABILITY FOR HOLDING OUT THUS DEPENDS ON TWO ESSENTIAL ELEMENTS:

1. A representation by a person that he is partner of a firm; and

2. Any other person on the faith of the representation gives credit or supplies goods on credit to
the firm.

It is necessary to prove that the person giving credit or supplying goods to the firm had knowledge of
the representation. It is not necessary to prove that the partner had knowledge that his representation
reached the person who gave credit or supplied goods on credit to the firm.

PRINCIPLE OF HOLDING OUT IN THE CASE OF RETIRED PARTNERS

Sec. 32(3) provides: Notwithstanding the retirement of a partner from a firm, he and the other partners
continue to be liable 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
knowing that he was a partner.

A retiring partner, if he does not want to be held liable, should give public notice of his
retirement. Otherwise, his liability for the acts of the firm does not end. He remains liable under the
principle of holding out in respect of customers who have no knowledge of his retirement.

In Scarf v. Jardine (1882) 7 App. Cas 345, Scarf and Rodgers were two partners of a firm, ‘R &
Co.’. Scarf retired. He did not give public notice of his retirement. Rodgers continued the business in
the name of the old firm. Jardine used to supply goods on credit. He had no notice of the retirement of
Scarf. He continued to supply goods on credit to the new firm. He sued the firm for non-payment of
price (without Scarf’s name). The firm had become bankrupt and he could not recover. He then sued
Scarf. Court observed that when he filed a suit against the new firm, he had an option to elect to file a
suit against the firm including Scarf. He omitted to do so. He accepted that Scarf has retired. He could
have filed suit against the old firm. That having not done, he lost the right to hold Scarf liable.

EXCEPTIONS TO THE PRINCIPLE OF HOLDING OUT

Principle of holding out does not apply or public notice is not required in the following cases:

1. DECEASED PARTNER: Death itself is public notice. After death, principle of holding out does
not apply. Under Sec. 28(2), where after a partner’s death, the business is continued in the old
firm name, the continued use of that name or 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 after his
death.
2. INSOLVENT PARTNER: Under Sec. 45(1) in spite of dissolution, partners continue to be liable.
This principle is not applicable to insolvent partners. Proviso to Sec. 45(1) provides that “the
estate of a partner who dies, or who is adjudicated as insolvent, or if 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 the section for acts done after the date on which he ceases to be a partner.
3. DORMANT PARTNERS: A Dormant partner is a person who is not known to the persons dealing
with the firm. Under proviso to Sec. 45(1) such a partner is not liable for holding out.

RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST

A partnership is a creation of contract and not by status. A transferee cannot become a partner
in his place. But as he has acquired the interest of a partner, he gets the share of the said partner in the
profits of the firm. He also gets the right to sue for accounts of the firm and to get share the partner
from date of dissolution. Such a transferee cannot interfere so long as the firm business continues. He
cannot also inspect the accounts of the firm.

MINORS ADMITTED TO BENEFITS OF PARTNERSHIP

By virtue of Sections 10 and 11 of the Indian Contract Act, 1872, a minor is incompetent to enter
into a contract. Such a contract is void ab initio. A partnership arises out of contract and not status
(Sections 4 and 5). A minor cannot therefore be a partner.

Under Sec. 30(1), a person who is a minor, may not be a partner, but with the consent of all
partners, he may be admitted to the benefits of partnership. In Venkatarama Iyer v. Balayya, AIR 1934
Mad. 595, the Madras High Court held that to admit a minor to the benefit of partnership of a family
business, there must be some positive act on the part of regular members to show that minors have
been admitted to the benefits of partnership. In Addl. Commr. Of Income Tax v. Uttam Kumar Promod
Kumar (97 ITR 730), it was observed:

“Sec. 30(2) makes it clear that even to admit a minor to the benefit of partnership, there must
be an agreement between the minor and existing partners. Minor cannot be admitted without there
being an agreement between partners and some on behalf of the minor.”

In short, a minor can be admitted to the benefits of partnership where the conditions
mentioned in Sections 30(1) and (2) are satisfied. Under Sec. 30(1), there must be consent of all
partners. Under Sec. 30(2), such a minor has the right to such share of property and of the profits of
the firm as may be agreed upon.
RIGHTS AND LIABILITIES OF A MINOR ADMITTED TO THE BENEFITS OF PARTNERSHIP

1. A minor admitted to the benefit of partnership has a right to such share of the property and of
the profits of the firm as may be agreed upon (S. 30(1)
2. Such a minor may have access to, and inspect and copy, any of the accounts of the firm (Sec.
30(2)
3. Such minor’s share is liable for the acts of the firm but the minor is not personally liable for any
such act (Sec. 30(3).
4. Such minor may not sue the partners for an account or payment of his share of property or
profits of the firm except when severing his connecting 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 Sec. 48.
Provided that all 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 court shall
proceed with the suit as one for dissolution and for settling accounts between the partners, and
the amount of the share of minor shall be determined along with the shares of partners.

RIGHT OF ELECTION TO BECOME OR NOT TO BECOME A PARTNER BY A MINOR AFTER HE BECOMES A

MAJOR
Sec. 30(5): At any time within six months of attaining majority or of his obtaining knowledge that
he has been admitted to the benefits of partnership, whichever is later, he has to give public notice of
election to become a partner in the firm or not to become partner. Such notice shall determine his
position as regards the firm.
If he fails to give notice, he will become partner on expiry of said six months.
If someone asserts that the said person had no knowledge of being admitted to the benefits of
partnership, it is for such person to prove it.
A minor cannot be held liable on the mere ground that he had not exercised his right of election,
under Sec. 30(5). In Shivaganga Ravji Patil v. Chandrakanth Neelkanth Sadalge, AIR 1965 SC 212, the
minor was sought to be impleaded in insolvency proceedings. He had not exercised election to become
a partner. The Court held that since he is not a partner of the firm, he cannot be impleaded in
insolvency proceedings.
RIGHTS AND LIABILITIES OF A MINOR WHO BECOMES A PARTNER AFTER EXERCISING HIS ELECTION TO
BECOME A PARTNER
1. Rights and liabilities of minor continues upto the date on which he becomes partner. He also
becomes personally liable to third parties for all acts of the firm done since he was admitted to
the benefits of the partnership (Sec. 30(7)(a)).
The principle behind this rule is that as minor, his contract was void, he was never personally
liable. After attaining majority, he becomes competent and elected to become a partner, he
becomes personally liable.
2. His share in the property and profits of the firm shall be the share to which he was entitled to as
minor (30(7)(b)).

RIGHTS AND LIABILITIES OF MINOR, WHEN HE ELECTS NOT TO BECOME PARTNER

1. The rights and liabilities shall continue to be those of a minor under Sec. 30 upto the date on
which he gives a public notice.
 2. His share shall not be liable for any acts of the firm done after the date of notice.
3. He shall be entitled to sue the partners for his share of the property – and profits in accordance
with Sec. 30(4)—30(3)(c)
4. However, nothing in sub-sections (7) and (8) shall affect the provisions of S. 28 relating to
holding out. In spite of electing not to become a partner, if he represents that he is a partner or
allows himself to be a partner and a third person acting on the representation give credit to the
firm, he will be liable as if he is a partner of the firm.

CHAPTER V

INCOMING AND OUTGOING PARTNERS

INCOMING PARTNER

Partnership is based on the principle that partners are just and faithful to each other.

A new partner can be included in a firm only when existing partners have faith and trust in him.

Under Sec. 31(1), no person shall be introduced as a partner into a firm without the consent of
all the existing partners.

But this is subject to contract between the partners.

Existing partners may provide that on death of a partner a new partner may be nominated.
However, a dying partner cannot nominate a person by his will.

LIABILITY OF INCOMING PARTNER

1. The new partner is not liable for acts of the firm done before he became a partner. (S. 31(2)).
This is subject to Sec. 30. When a minor admitted to the benefits of partnership elects to
become a partner on attaining majority, he becomes personally liable to third parties for all acts
of the firm done since he was admitted to the benefits of partnership.
2. A new partner can contract with the partners that he will remain liable for past acts of the firm.
3. For this purpose, novation of the contract is necessary exempting the old firm from liability.

TO DETERMINE WHETHER A NEW PARTNER IS LIABLE, THE FOLLOWING POINTS MUST BE PROVED:

1. The new firm has taken the liability to pay the existing debts of the old firm.
2. Creditors have exempted the debts of the old firm and have agreed or given consent that they
will realize their debts from the new firm.
The agreement need not always be express. It may be implied.
The creditors of the old firm have the option to sue the old firm or to exempt it and sue the new
firm.
An agreement between the partners would not be sufficient. There must be a complete
novation of the contract. (Meenakshi v. Subramaniam, AIR 1957 Mad. 8)

OUTGOING PARTNERS
An outgoing partner is a partner who retires or otherwise leaves the firm and the remaining
partners continue the business of the firm. A partner may leave the firm in any of the following ways:
 1. With the consent of other partners. Under Sec. 32(1)(a), a partner may retire with the consent
of all the other partners.
2. With an express agreement by partners. Sec. 32(1)(b) provides that a partner may retire under
an express agreement by partners. In Vishnu Chandra v. Chandrika Prasad Agarwal, AIR 1983
SC 523, para 18 of the partnership agreement provided that a partner may by giving 30 days’
notice to other partners retire. Para 20 provided that if a partner leaves the firm within one
year of commencement of the business, his capital shall not be retired by the end of one year.
The question to be determined was whether the agreement really permitted retirement of a
partner. The Court concluded that a combined reading of both paras 18 and 20 makes it clear
that any partner may retire after giving a month’s notice but the capital will not be returned by
the end of one year.
3. By giving notice to all other partners in case of partnership at will. Under Sec. 32(1)(c), a
partner may retire by giving notice to the other partners. This is possible only in case of a
partnership at will. Notice must be in writing and must express an intention to retire. Notice
must be given to all the other partners.
4. BY EXPULSION. Under Sec. 33(1), a partner may not be expelled from a firm by any majority of
partners, except in exercise of (good faith) powers conferred by contract between the partners.
For such exercise, the following two conditions must be fulfilled:
a) Such power must have been conferred by contract between the partners. A partner cannot
be expelled in violation of the provisions of the partnership contract.
b) The power to expel must be exercised in good faith.
In Carmichael v. Evans (1904) 1 Ch. 486, a partner travelling without ticket was convicted on
that charge. Majority of partners by decision expelled him for breach of duty. His expulsion
was justified because the first duty of a partner is to be honest not only to other partners
but also towards third parties. The power must have been exercised in the interest of the
firm.
Expulsion of a partner to gain more profits or to give benefit to a relation of a partner
cannot be said to have been done in good faith. Such an expulsion is not in the interest of
the firm and hence not justified (Blisset v. Daniel, (1853) 10 Hare 493)
5. INSOLVENCY OF A PARTNER: On being adjudicated insolvent, a partner ceases to be partner. It
is immaterial whether the firm has been dissolved or not. Under Sec. 42(d), a firm is dissolved
by adjudication of a partner as insolvent. This is however subject to contract. Under Sec. 34(2),
under contract, firm is not dissolved on adjudication of a partner as insolvent and estate of the
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 of order of adjudication.
6. BY DEATH. Under Sec. 42(c), a firm is dissolved by the death of a partner. This is also subject to
contract. If there is no agreement, the firm will be dissolved on the death of partner. If the firm
is not dissolved, as per contract, the estate of deceased will not be liable for acts of the firm,
done after his death.

LIABILITY OF A RETIRED PARTNER

Liability of a retired partner may be of two types:

1. Liability for acts done before his retirement

2. Liability for acts done after his retirement
I LIABILITY FOR ACTS DONE BEFORE RETIREMENT

A partner remains bound by the acts of the firm. Under Sec. 25, every partner is liable jointly
and severally. Under Sec. 18, a partner is agent of the firm for the purpose of business of the firm. Even
after retirement, a partner remains liable for acts of the firm done before his retirement. But by
contract, a retired partner may be discharged from such liabilities by contract between third parties and
partners of the reconstituted firm. (Sec. 32(2). Such agreement may be express or implied.

A RETIRING PARTNER MAY BE DISCHARGED FROM SUCH LIABILITIES, ONLY WHEN THE FOLLOWING
CONDITIONS ARE FULFILLED:

a) There must be an agreement between the retiring partner and remaining partners that they
have discharged him from such liabilities and that debts of the firm will be borne by partners of
the reconstituted firm.
b) The creditors must have notice or knowledge of the said agreement. Thus, there must be
complete novation by express agreement or implied from the course of dealing between such
third party and reconstituted firm after he had knowledge of retirement.

II LIABILITY FOR ACTS OF THE FIRM DONE AFTER HIS RETIREMENT.

The general principle is that a retired partner is not liable for acts of the firm done after his
retirement. Reason is that principle of mutual agency ceases to exist on his retirement. Retiring partner
should, however give public notice of his retirement. Otherwise, he would continue to be liable under
Sec. 32(3) to third parties for any act done by any of the partners until public notice is given

Provided that a retired partner is not liable to any third party who deals with the firm without
knowledge that he was a partner.

Rights of a third party against an outgoing partner, as per law in England are:

1. A creditor who had previous dealings with the firm is entitled to treat all those whom he knew
to be members, as remaining until he has actual notice to the contrary.
2. A creditor who had no previous dealing with the firm but who knew the partners, is entitled to
treat such person as remaining member, until he receives notice.
3. A creditor who had no dealing with the firm or knowledge of its members is entitled to hold the
retired partner liable for acts of the firm, even if he had no notice.

RIGHTS OF OUTGOING PARTNERS

I RIGHT OF OUTGOING PARTNERS TO CARRY ON COMPETING BUSINESS

Under Sec. 27 of the Indian Contract Act, 1872, every agreement whereby a person is restrained
from carrying on a lawful trade, profession or occupation is to that extent void. Exception recognized by
Sec. 27 is goodwill. Sec. 36(2) of the Partnership Act recognizes another exception:

“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.
Such agreements shall be valid, if restrictions imposed are reasonable.”
 Thus an agreement between partners may provide that a partner shall not carry on any business
otherwise than that of the firm while he is a partner (S. 11(2). Under S. 16(b), if a partner runs a
competing business, he shall account for the same. So long as he is a partner, he cannot run a
competing business. Once he is retired, he can carry on business which may compete with the business
of the firm. But subject to contract to the contrary, he may not

a) Use the name of the firm

b) Represent himself as carrying on business of the firm, or
c) Solicit customers who were dealing with the firm before he ceased to be a partner

II RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFIT (S.37)

Where a partner has died or otherwise ceased to be a partner, without final settlement of
account between him and other partners, the outgoing partner or his estate will be entitled to such
share in profits made since he ceased to be a partner, as attributable to the share of property of the firm
or interest at 6 % on the amount of his share in the property of the firm.

But where, by agreement, interest of deceased or outgoing partner is purchased on option by

remaining partners, outgoing partner or his estate will not be entitled to the benefits.

Sec. 37 applies

a) Where a member of the firm has died or has ceased to be a partner; and
b) The remaining partners carry on the business without any final settlement of accounts with the
retiring partner or his estate.

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM

Sec. 38 A continuing guarantee is revoked when there is a change in form and surety is
discharged but this is subject to contract between surety and the new firm. Where guarantor himself
waived off rights conferred on him as surety, by agreement, there can be no reciprocal waiver of
liability.

CHAPTER VI

DISSOLUTION OF A FIRM

MEANING OF DISSOLUTION OF FORM

The dissolution of a partnership between all the partners of a firm is called the “dissolution of
the firm”. When all the partners stop carrying on the partnership business, the firm is dissolved. Firm is
not dissolved when some partners disassociate with the firm and remaining partners continue the
partnership business.

Dissolution of a firm is distinct from retirement of a partner. In M/s. Best Enterprises v. S.

Elanchizian & Another, AIR 2006 Mad. 274, there were four partners in a firm. One partner –
respondent – holding 29% shares dissolved the firm and freezed the bank accounts. Rest of the partners
holding 71% shares decided to continue. The Court held that respondent could not unilaterally dissolve
the firm and freeze the bank accounts, which could be operated by two other partners.
 A partnership does not end at dissolution. Partnership continues, after dissolution, for the
realization of assets and liabilities of the firm.

U/S. 46 “On the dissolution of a firm, every partner or his representative is entitled, as against
all other partners or their representatives, to have the property of the firm applied in payment of debts
and liabilities of the firm and to have the surplus distributed among the partners or their representatives
according to their rights.

MODES OD DISSOLUTION

1. DISSOLUTION BY AGREEMENT (S.40)

2. COMPULSORY DISSOLUTION (S.41)
3. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES (S.42)
4. DISSOLUTION BY NOTICE OF PARTNERSHIP (S.43)
5. DISSOLUTION BY COURT (S.44)

I DISSOLUTION BY AGREEMENT:

Under S. 40, a firm may be dissolved with the consent of all the partners or in accordance with
the contract between the partners. Sec. 40 takes in two modes of dissolution:

1. Firm may be dissolved at any time with the consent of all partners.
2. Firm may be dissolved in accordance with the contract between the partners.

If the partnership deed contains any provision regarding dissolution, the firm is dissolved accordingly.

A partnership firm may be dissolved by any other contract between the partners.

II COMPULSORY DISSOLUTION:

Sec. 41(a) is omitted by First Schedule of Insolvency & Bankruptcy Code, 2016.

Dissolution of Partnership may take place on the following two grounds:

(a) ONE OF THE PARTNERS OR BOTH PARTNERS BECOMING INSOLVENT: Under Sec. 34(1), where a
partner in a firm is adjudicated insolvent, he ceases to be a partner on and from the date of
adjudication; whether firm is dissolved or not in not material. When a partner is adjudicated
insolvent, he becomes incompetent to contract. Where all partners are adjudicated insolvent,
the firm is compulsorily dissolved because for a partnership, there must be at least two partners
competent to contract. When one of two partners die, then also the firm is dissolved. If a new
partner is admitted, it becomes a partnership (F.D. Mehta v. Minor F.D. Mehta, AIR 1971 SC
1653).
(b) HAPPENING OF ANY EVENT MAKING THE BUSINESS OF THE FIRM UNLAWFUL: Under Sec. 41(b),
on the happening of any event which makes it unlawful to carry on the business of the firm, the
firm is dissolved. Proviso to Sec. 41(b), however, provides that
“When more than one separate adventure or undertaking is carried on by the firm, the illegality
of one or more, shall not cause dissolution of the firm in respect of its lawful adventures and
undertakings”. This principle is based on the doctrine of SEVERABILITY. If illegal part can be
separated from legal part, illegal part alone will be void and legal part shall remain valid.
III DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES
Under Sec. 42, a firm is dissolved on the happening of any of the following contingencies.
1. U/s. 42(a) BY EXPIRY OF FIXED TERM: If a firm is constituted for a fixed term, it is dissolved, by
expiry of the term.
Sec. 42(a) and 42(b) – completion of one or more adventures or undertakings – are subject to
Sec. 42(c) and 42(d). Sec. 42(c) deals with death of a partner and Sec. 42(d) deals with
adjudication of a partner as insolvent. In such cases, in the absence of a contract to the
contrary, the firm is dissolved.
Even after the expiry of the fixed term, by mutual consent, partners may continue the
partnership. If there is no mutual consent, partnership is dissolved on expiry of the term.
2. U/s. 42(b). ON COMPLETION OF ADVENTURE OR UNDERTAKING: Where partnership is
constituted for one or more adventures or undertakings, on completion of adventure, the firm is
dissolved. S. 42(b) applies to cases where partnership is created for one or more adventures,
though no period is fixed. The firm is dissolved on completion of the undertaking. Whether
partnership is created for one or more undertaking depends on the nature of undertaking and
conduct of parties.
In Cherulal Parekh v. Mahadeo Das Maiya, AIR 1959 SC 781, partnership was created for
speculative transactions in sale and purchase of wheat. Sale and purchase relate to future
contract was terminated before time. The Court held that the firm was not immediately
dissolved and would be dissolved after realization of the assets.
3. BY THE DEATH OF A PARTNER: Sec. 42(c). Subject to contract between the partners, the firm is
dissolved by the death of a partner. The reason is, in law “firm” is not a person. It is only a
group of persons and only the collective name of the partners constitute the firm name. IT IS
ONLY THE MODE DESCRIBING THE PERSONS WHO HAVE AGREED TO CARRY ON THE BUSINESS
(Dulichand Lakshmi Narayan v. C.I.T., Nagpur, AIR 1956 SC 354).
For a limited purpose of S. 37, the firm is dissolved on the death of a partner. If surviving
partners continue the business, a new partnership comes into existence. Same is the case when
a new partner is admitted or when a partner retires. A NEW GROUP OR A NEW FIRM COMES
INTO EXISTENCE.
When one or two partners dies, the firm is automatically dissolved. Even if there is a clause in
the partnership deed that firm will continue in spite of death of a partner, it will not save the
firm from dissolution. (Jai Narayan Misra v. Hashmathunisa Begum, AIR 2002 A.P. 389)
If a dispute had arisen during the lifetime of the deceased, his legal representatives can take
legal proceedings under Sec. 20 (Ravi Prakash Goel v. Chandra Prakash, AIR 2007 SC 1517).
When a partner dies, there is no obligation on legal representative to continue the partnership.
The legal representative cannot be asked to continue partnership. Partnership property has to
be disposed of in accordance with the Act and Partnership Deed. (Mohd. Liaquiddin v. Mala
Devi Misra, (2010) 2 SCC 407).
4. BY THE ADJUDICATION OF A PARTNER AS AN INSOLVENT: Under Sec. 42(d), subject to contract
between the partners, a firm is dissolved by the adjudication of a partner as insolvent.

IV DISSOLUTION BY NOTICE OF A PARTNERSHIP AT WILL: Under Sec. 43(1), where the partnership
is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his
intention to dissolve the firm.
 Under Sec. 43(2), the firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is mentioned, as from the date of communication of the notice.

In order to dissolve the firm Under Sec. 43(1) , the following conditions must be satisfied:

1. The notice must be in writing

2. Notice must express the intention of the partner to dissolved the firm; and
3. Written notice must be given to all the other partners.

FILING OF A SUIT IS NOT DEEMED TO BE A NOTICE UNDER SEC. 43(1): In Banarasi Das v. Seth
Kashiram, AIR 1963 SC 1165, the Court observed:

“Under Sec. 43(2), notice must contain the date from which the firm will be dissolved. Question of
writing the date of dissolution in a plaint does not arise. Thus a plaint cannot be taken as notice under
Sec. 43(1)/

In Arunachalam & Co. v. M. Sadasivan, AIR 1985 Mad. 354, there were two partners having 50%
shares in the firm and both agreed to have the firm dissolved. Partners did not maintain good relation
thereafter. Defendant continued the firm as if nothing happened. The Court held that in such
circumstances, appointment of receiver would be proper for rendition of accounts for completion of
winding up.

In Subash Chandra Kesarwani v. Asst. Registrar, Firms, Societies and Chits, AIR 2003 All. 254,
partners agreed that partnership will not be dissolved on the death of a partner and will be continued
with remaining partners. On the death of a partner, another partner was not willing to continue.
Registrar ordered reconstitution of the firm. Court held it not improper.

V DISSOLUTION BY COURT

Under Sec. 44, Court may dissolve a firm on any of the following grounds:

1. A PARTNER BECOMING OF UNSOUND MIND: Under Sec. 44(a), at the suit of a partner, Court
can dissolve the firm on the ground that a partner has become a person of unsound mind. Such
a suit may be brought by his next friend as well. A person of unsound mind cannot properly
perform works of a partnership firm. It is in the interest of such person and other partners to
dissolve the firm.
2. A PARTNER BECOMING PERMANENTLY INCAPABLE: Under Sec. 44(b), at the suit of a partner, a
firm may be dissolved on the ground that a partner has become permanently disabled. If the
incapacity is temporary and cannot affect the duties of the partner, firm cannot be dissolved. In
Whitewell v. Arthur (1865) 147 RR 73, a partner suffered from paralysis but he was speedily
improving. The Court held, in order to dissolve the firm, the incapacity must be permanent.
3. A PARTNER GUILTY OF CONDUCT LIKELY TO AFFECT PREJUDICIALLY THE CARRYING ON OF THE
BUSINESS: There are two points to be noted:
(a) Under Sec. 44(c), if the partner filing the suit himself is guilty of conduct likely to affect
prejudicially the carrying on of business, court will not order dissolution (Harrison v. Tenant,
(1856) 21 Beav 482). Under Sec. 44(c), the suit must be filed by a partner alleging prejudicial
conduct by another partner and not himself.
 (b) In order to dissolve the firm on this ground, the partner must be guilty of a conduct which in
the nature of the business is likely to affect prejudicially the carrying on of the business. A
wilful wrongful act may not lead his continuance detrimental to the firm. In Annon, (1885-
86) 2 K & J 441, a partner attempted to commit suicide. The Court held that since the
partner had not committed the act wilfully, the firm could not be dissolved.
(c) Whether a conduct affects the business depends on the nature of business of the firm. In
Snow v. Milford (1868) 18 LT 142, the partnership firm carried on the business of bankers.
Milford, a partner, was allegedly living in adultery with several women. Other partners filed
the suit for dissolution. Court held that though it condemns act of adultery of a person, that
in itself is not a ground for dissolution or expelling a partner.
If a doctor in partnership with another doctor constitute a firm and later on finds out that he
is immoral towards some patients, that will be a conduct prejudicially affecting the carrying
off of the business. In Carmichael v. Evans, (1904) 1 Ch. 486, the court observed: If the
moral conduct of a partner is likely to affect prejudicially the conduct of business, court may
dissolve the firm. If the conduct of a partner is such that partners may lose faith in each
other, the firm may be dissolved.
4. WILFUL OR PERSISTENT BREACH OF AGREEMENTS RELATING TO THE BUSINESS OR
MANAGEMENT OF AFFAIRS OF THE FIRM: Court cannot dissolved a firm under Sec. 44(d) on
the ground that a partner, other than the partner suing, wilfully or persistently commit breach
of agreements relating to management or affairs of the firm. Under Sec. 44(d), there must be
wilful or persistent breach of agreements relating to the business of the firm or conduct of a
partner and it is not practically possible for other partners to carry on business with him.
A single breach or a breach which is not wilful will not be a ground to dissolve the firm. The
following are good grounds:
(a) Persistent refusal by a partner to perform his duties (Baxter v. West, 127 RR 64)
(b) One partner habitually accusing other partner of gross misconduct in the business
(Krishnanacharya v. Sankar, 22 Bom. LR 1343).
5. TRANSFER OF THE WHOLE INTEREST IN THE FIRM BY A PARTNER TO A THIRD PARTY: Under
Sec. 44(e), the firm may be dissolved on the ground that a partner, other than the one suing, has
transferred in a way the whole of his interest in the firm to a third party, or has allowed his
share to be charged under O. XXI Rule 49 CPC or has allowed 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. When a partner transfers whole of his interest in the firm, he will have no interest left
in the firm. Any other partner can get the firm dissolved.
The third party will not become a partner in the firm. He shall only be entitled to share of
profits of the transferring partner. He has to accept account of profits agreed by the partners.
He is also entitled to share of assets of the firm from the date of dissolution.
6. PERPETUAL LOSS: Under Sec. 44(f), Court may dissolve a firm on the ground that the firm
cannot carry on save at a loss. Under Sec. 4, objective of partnership is to share profits. If the
objective cannot be achieved, business of the firm cannot be carried on save at a loss. Even if
the partnership is for a fixed period, this ground can be sought by a partner in case of persistent
loss.
7. JUST AND EQUITABLE: Under Sec. 44(g), at a suit of a partner, the Court may dissolve a firm on
the ground that it is just and equitable to do so. Sec. 44(g) gives very wide powers to the Court.
 What the Court has to decide is whether it is just and equitable to dissolve the firm. Court’s
discretion cannot be restricted by rigid or inflexible rules. In a case, four out of nine partners
wanted dissolution. Their shares were 7/9. There was no co-operation and mutual faith
between partners. The Court held it was just and equitable to dissolve the firm.

SECTION 44 IS NOT SUBJECT TO CONTRACT BETWEEN THE PARTNERS. IT CONFERS RIGHT ON

PARTNERS TO FILE SUIT FOR DISSOLUTIO OF THE FIRM ON GROUNDS MENTIONED IN THE
SECTION.

CONSEQUENCES OF DISSOLUTION

I LIABILITIES FOR ACTS DONE AFTER DISSOLUTION:

S.45: Notwithstanding dissolution of the firm, partners continue to be liable as such to third
parties for acts done by any of them, which would have been an act of the firm, if done before
dissolution, until notice is given.
Provided that estate of partner, who died or who is adjudicated as insolvent or who retired from
the firm and also not known to the third party as partner, is not liable for acts done after he ceases to be
a partner. Notice may be given by a partner under Sec. 45(1).
Thus until public notice is given of dissolution, partners remain liable for their acts as they were
liable before dissolution. It is therefore essential to give public notice of dissolution.
Under sub sec. (2) of Sec. 45, notice of dissolution may be given by any partner.
Notices of dissolution does not apply to cases of deceased partner, partner adjudicated as
insolvent and a partner who is not known to the third party as partner and who retired. In Tower
Cabinet Co. v. Ingram (1949)1 All ER 1033, Lynskey J. says:
“If the person dealing with the firm did not know that the particular partner was a partner, and
if that partner retired, as from the date of retirement he ceases to be liable for further debts contracted
by the firm with that person.
EFFECT OF NO PUBLIC NOTICE:
In Hurst v. Bryk, (2000) 2 WLR 740, partners prematurely dissolved the firm. Agreement was
signed by the partners without the consent of one partner. That partner treated the agreement as
repudiatory breach of partnership deed and accepted repudiation. Court accepted his argument
regarding repudiation. He was however held liable to pay his share of partnership liabilities including
ongoing liabilities and liabilities yet to be realized.

II RIGHT OF PARTNERS TO HAVE THE BUSINESS WOUND UP AFTER DISSOLUTION:

On dissolution, every partner is entitled as against all other partners, or their representatives to
have the property of the firm applied in payment of debts and liabilities of the firm and to have surplus
distributed among partners or their legal representatives according to their rights.
CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP: (EQUITABLE LIEN)
After dissolution, authority of each partner to bind the firm continue, notwithstanding
dissolution, so as to wind up affairs of the firm and complete transactions given but unfinished at
dissolution. But the firm is not bound by acts of a partner who has been adjudicated insolvent.
MODE OF SETTLEMENT OF ACCOUNTS
 Subject to agreement, the following rules have to be observed in settling account, after
dissolution:
Sec. 48
(a) Losses including deficiencies of capital shall be paid first out of profits, next out of capital
and lastly, if necessary by partners individually in the proportion in which they are entitled
to share profits.
(b) The assets of the firm, including any sums contributed by partners to make up deficiencies
of capital shall be applied in the following manner:
(i) In paying 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 partners, in the proportion in which they
were entitled to share profits.

PAYMENT OF FIRM DEBTS AND SEPARATE DEBTS

Sec. 49: Where there are joint debts due from the firm and separate debts due from any partner,
property of firm shall first be applied to payment of debts of the firm. If there is any surplus, share of
each partner shall be applied in payment of his separate debts or paid to him.

PERSONAL PROFITS EARNED AFTER DISSOLUTION

Sec. 50: Sec. 16(a) shall apply to transactions by any surviving partner or by representatives of a
deceased partner undertaken after the firm is dissolved on account of death, before it is wound up.
Right of a partner who has bought the goodwill of the firm, shall however not be affected.

RETURN PREMIUMS ON PREMATURE DISSOLUTION

Sec. 51: Premium is money taken by an established firm from a person for admitting him as a partner.
Ordinarily, a new partner is admitted for a fixed period. If on account of insolvency or for any other
reason, the firm is dissolved prematurely, the partners shall be entitled to return of premium or such
part of it, as is reasonable, depending on the terms and period during which he was partner.

Premium will not be returned, if

(a) Dissolution is mainly due to his own misconduct; or

(b) The dissolution is in pursuance of an agreement containing no provision for return of
premium or any part of it.

FREELAND V. STANSFELD, 65 ER 490

A and B entered into partnership agreement for certain years. A paid premium to B for being
partner. Before expiry of the period, B was adjudicated insolvent. Court held that keeping in view length
of time for which partnership existed, reasonable proportional premium be returned to A from estate of
B.
BURRY V. ALLEN, 63 ER 556

A and B entered into partnership agreement for 14 years. B paid premium to A. Soon partners
started quarrelling each other. A removed B from partnership. B sued for dissolution of firm and return
of premium. Court held that keeping in view the period of time, reasonable proportional premium be
returned to B.

Under Sec. 52, if contract with the new partner is entered into by fraud or misrepresentation,
and such partner rescinds the contract, such partner is entitled to:

(a) Lien on, or a right of retention of the surplus or assets of the firm remaining after debts of the
firm are paid towards any payment made by him to the firm or capital contributed by him.
(b) To rank as a creditor of the firm in respect of any payment made by him towards the debt of the
firm.
(c) To be indemnified by the partner or partners guilty of fraud or misrepresentation against all
debts of the firm.

PREMIUM SHALL NOT BE RETURNED IN THE FOLLOWING CASES:

1. If the dissolution takes place on account of the death of a partner

2. Dissolution takes place in pursuance of agreement which contains no provision for return of
premium.

LEE V. PAGE, (1851) 30 LJ Ch. 857

A and B entered into partnership for 14 years. A paid premium to B. Quarrels started from 4th
year. Firm was dissolved by mutual consent. There was no agreement for return of premium.
Court held that subsequently A cannot sue for return of premium.

3. Where partnership is not for a fixed period or it is partnership at will

4. Where dissolution takes place on account of misconduct of the partner, admitted to partnership
on payment of premium.

RIGHT TO RESTRAIN FROM USE OF FIRM NAME OR FIRM PROPERTY

Sec. 53. After dissolution, every partner may restrain other partners or representatives from
carrying on similar business in the firm name or from using property of the firm for his own benefit until
the firm is completely wound up. This is subject to any contract to the contrary. The proviso states that
the partner or representative buying goodwill of the firm will not be affected by the provisions of
Sec.53.

AGREEMENT IN RESTRAINT OF TRADE

Sec. 54 allows partners to make agreement that some or all of them will not carry on business
similar to that of the firm within a specified period or within certain local limits, notwithstanding Sec. 27
of the Indian Contract Act. Such agreements would be valid in restriction is reasonable. This provision is
similar to exception in Sec. 27. Agreement under Sec. 53(3) shall be valid, if

(1) The restraint is within a specified period or within specified locality.

(2) Restraint shall last till buyer or someone having right under him carries on the business.
(3) Restrictions would be valid if they are reasonable.

SALE OF GOODWILL AFTER DISSOLUTION

Goodwill is a commercial term which means “benefit from connection and reputation”. Person
purchasing goodwill gets the right to carry on business with the firm name. He can also describe himself
as successor of the firm.

Under Sec. 55, rules relating to sale of goodwill are:

1. The goodwill, subject to agreement, shall be included in the assets. It may be sold separately or
along with property of the firm.
2. Where goodwill is sold after dissolution, a partner may carry on business competing with that of
the buyer and he may advertise such business. But he cannot, subject to agreement to the
contrary:
a) Use the firm name
b) Represent himself as carrying on business of the firm; or
c) Solicit customers or persons who were dealing with the firm before its dissolution (55(2)).

The above restrictions are actually the rights of the buyer. Owner of goodwill or partner having
ownership of property also possesses these rights. But the above rights are subject to contract between
seller and buyer of goodwill.

CHAPTER VII

REGISTRATION OF FIRMS

Under Sec. 58, State Government may appoint, Registrar or firms for the purpose of
partnerships for different areas. The Registrar is deemed to be a public servant under Sec. 21 IPC.
Registration is not compulsory. Application for registration shall state the following:

1. Firm name
2. Place or principal place of business of firm
3. Names of places where firm carries on business
4. Date when each partner joined the firm
5. Name and full address of partners
6. Duration of firm

The statement shall be signed by the partners or their agents. Firm name shall not cover words such as
“Crown, Emperor, Empress, Empire, Imperial, King, Queen, Royal or words expressing sanction, approval
or patronage of Government except where such consent is given.
Once registered, the following changes can be made:

 Alterations of firm name and principal place of business can be recorded under S. 58, on a
request made complying Sec. 60(1).
 Opening and closing of branches can be noted.
 Noting of changes in names and addresses of partners
 Recording of changes in and dissolution of firm
 Recording of withdrawal of minor
 Rectification of mistakes
 Amendment of Register and filed documents permitted on payment of fee prescribed

Entries in the Register is conclusive proof. Certified copy can be issued by the Registrar. Certified copy
when produced is proof of fact of registration and contents of any statement recorded or noted therein.
Furnishing of false particulars shall be punishable with imprisonment for a period of three months or
with fine or both.

EFFECT OF NON-REGISTRATION: The Act does not prescribe any penalty for non-registration. It
depends on the sweet will of partners to get or not to get their firm registered. The consequences of
non-registration are serious, the partners would be compelled to make registration, even subsequently.

 Sec,. 69(1): No suit to enforce a right arising from a contract conferred by the Partnership Act
can 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 have been a partner in the firm, unless the person suing or
sued and the firm is registered. However a suit for accounts can be maintained under Sec. 20.
Such a suit will not be barred under Sec. 69(1), as such suits have been protected under sub-
sections (a) and (b) of Sec. 69. As held in Ramesh Kumar Bhalotia v. Lalit Kumar Bhalotia, AIR
2001 Pat. 174, a suit by one of the partners of an unregistered firm claiming declaration of
share, proper administration of firm and rendition of accounts is barred under Sec. 69(1). But a
suit for dissolution of partnership firm is maintainable under Sec. 3(a) of the Act.
 Sec. 69(2): The firm cannot file a suit against third parties. Under Sec. 69(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 partner in the Firm. In Ram Adhar v. Ram Kirat Tiwari, AIR 1981 All 405,
plaintiff firm sold bricks to the defendant. Plaintiff sued the defendant for recovery of the price
of bricks. The Allahabad High Court held that such a suit is barred by Sec. 69(2). In C.M.
Muthukumaraswami v. Kumar Textiles, AIR 1996 Mad. 433, the Court held that provisions of
Sec. 69(2) are mandatory. If the firm suing has not been registered and even if no objection has
been made by defendant on this aspect, the trial court must arrive at a finding on this issue after
giving opportunity to both parties to adduce evidence. Such a plaint is void and the court has no
jurisdiction to accept such a suit. If the firm gets itself registered during the pendency of the
suit, it should be allowed to revive from the date of registration (M/s. Raptakos Brett & Co. Ltd.
v. Ganesh Property, AIR 1998 SC 3103-04).
 Sec. 69(3) bars claim of set off and other proceedings. According to Sec. 69(3), provisions of
sub-secs. (1) and (2) shall apply also to a claim of set off or other proceedings to enforce a right
arising from a contract. The Supreme Court in Jagdish Chandra Gupta v. Kajaria Traders (India)
 Ltd., AIR 1964 SC 1882, Supreme Court held that the words “other proceeding to enforce a right
arising from a contract” include arbitration proceedings because the right to refer to arbitration
depends on the contract between parties.

EXCEPTIONS:

(1) According to Sec. 69(3)(a), sub-sections (1) and (2) shall not affect 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
realize the property of dissolved firm. Thus, Sec. 69(1) and (2) do not bar the following suits:
(a) For dissolution of the firm (D.C. Upreti v. B.D. Karnatak, AIR 1986 All 32)
(b) For accounts of the dissolved firm (Do.)
(c) For any right to recover or get the property of the dissolved firm.
(2) The powers of an official assignee, receiver or court under the Presidency Towns Insolvency Act,
1909, or the Provincial Insolvency Act, 1920, to realize the property of an insolvent partner.
(3) The provisions of Sectios. 69(1) and (2) shall not apply to firms or to partners in firms which have
no plce of business in territories to which the Act extends or whose places of business in such
territories are situated in areas to which by notifications under Sec. 56, this chapter does not
apply
(4) The provisions of Sectios. 69(1) and (2) shall not apply also to any suit or claim or set off not
exceeding one hundred rupees in value which is not a kind specified in the 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 of claim.

A suit is not barred by Sec. 69(2), if a statutory right or a common law right is being enforced. The
prohibition contained in Sec. 69 is in respect of instituting a proceeding to enforce a right arising from a
contract by an unregistered firm..

(5) Bar under Sec. 69(2) is not applicable to statutory obligations of defendants under Sectios. 108
and 111 of TP Act.
SALE OF GOODS ACT, 1930

Prior to the enactment of the Sale of Goods Act, 1930, the law of sale of goods was contained in
Sections 76 to 123 of the Indian Contract Act, 1872. As the trade and commerce expanded, it was
realized that the provisions of Chapter VII of the Contract (Sections 76 to 123) were inadequate and the
provisions were not adequate to cope with the new trends and situations. Provisions in Sections 76 to
123 were based on English common law. In England itself, Sale of Goods Act was codified in 1893
discarding many rules of the common law. Thus Sale of Goods Act, 1930 is not a new law. Un-repealed
provisions of the Contract Act are applicable to Sale of Goods, so long as they are not inconsistent with
the latter.

DEFINITION OF SALE OF GOODS:

Sec. 4(1) provides “A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale
between one part owner and another”.

Sec. 2(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) “deliverable state”. Goods are said to be in 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,
wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other
documents used in the ordinary course of business as a proof of the possession or control of goods, or
authorizing or purporting to authorize, either by endorsement or by delivery the possessor of the
document to transfer or receive goods thereby represented.

A Railway receipt is just like a negotiable document in the course of business. It not only represents the
title of the goods but the goods themselves. Once the railway receipt is handed over with endorsement
of payment of price of goods, there is absolute transfer both of goods and the right to take delivery
under the contract. In Kailas Chandra Modi v. Union of India, AIR 2008 (NOC) 538 (Raj) it was held that
consignee of the endorsee of the consignment is entitled to action for delivery of the consignment as
also the damages occasioned on account of failure to perform the contract.

(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;

In Bharat Airtel Ltd., Bangalore v. State of Karnataka, AIR 2009(3) Kant. 235, it was held that artificially
created electricity used for transmission of data of subscribers of assessee through its ‘OFC Network’ is
(7) “goods” within the meaning of Art. 366(2) of Constitution and also Sec. 2(7) of Sale of Goods Act.
(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;

(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 of 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,

(15) expressions used but not defined in this Act and defined in the Indian Contract Act, shall continue to
apply to contracts for the sale of goods

ESSENTIAL ELEMENTS OF SALE

1. Two parties. For constituting a sale, there must be at least two parties—a seller and a buyer.
Seller and buyer must be different. A person cannot buy his own goods. In M/s. Khedut
Sahakari Ginning and Pressing Society v. State of Gujarat, AIR 1972 SC 1786, the co-operative
society of cotton farmers pooled cotton from its members. The Society was authorized to grade
the cotton and if necessary sell them and pay the price to its members. The question arose
whether the society purchased the cotton from the farmers. It was held that society could not
purchase from its members because the society simply acts as the agent of its members.
The rule is, however, subject to the following exceptions:
a) AUCTION SALE. In an auction sale, the seller may reserve a right of making a bid, as
provided in Sec. 64(3) of the Sale of Goods Act. This exception is to protect the seller from
an upset price in an auction.
b) EXECUTION OF A DECREE: When goods are sold in execution of a decree, the Judgment
Debtor may come forward and purchase his own goods. This is to provide an opportunity to
the JD, who might not have been in a position to pay his debts at the time of the decree.
Subsequently, his financial position might have improved and he may purchase the property
to save his property.
c) BETWEEN PART OWNERS: Sec. 4(1) of the Act itself provides that there may be a contract of
sale between one partner and another or between a partner and partnership firm.
2. THE SUBJECT MATTER OF THE CONTRACTS MUST BE GOODS. Subject matter of a contract of
sale is always ‘goods’, as defined in Sec. 2(7). “Goods” means every kind of movable property
other than actionable claims and money; and includes stock and shares, growing crops, grass
and things attached to or forming part of the land which are agreed to be severed before sale or
under the contract for sale.
 There is a difference between land and things agreed to be severed from land. Where things
were lying in the land for several years and became part of it, itcannot be said to be things
agreed to be severed. Ex: granite stones.
Goods means every form of movable property except actionable claims and money. Money
means recognized currency. Old coins and notes after demonitisation are not legal tender. They
can be subject matter of goods. Water, gas, electricity, trade mark, patents, shares, stock etc.
are goods. Goods, which are subject matter of sale, may be goods owned or possessed by the
seller or future goods.
3. AGREEMENT: To constitute a transaction of sale there should be an agreement, express or
implied. The sale will be complete by passing of title in those goods. There must be an
agreement between the parties for the sale of the very goods in which eventually property
passes (State of Madras v. Cannon Dunkerley & Co (Madras) Ltd., AIR 1958 SC 560.
4. TRANSFER OF PROPERTY. One of the most essential elements of a contract of sale is the
transfer of the property in the goods to the buyer. It is the essence of a contract of sale. “Mere
transfer of goods from one place to another” by its owner does not amount to a sale (Sales Tax
Officer, Navgaon v. Timber & Fuel E. Corporation Tikamganj, AIR 1973 SC 2350.
When a customer goes to a restaurant and orders food and pays the price, it is a clear case of
transfer of property in the goods to the customer. Once he pay for the food, it makes no
difference whether he eats the entire food supplied to him or waste a part of it.
5. PRICE: In contract, there should be consideration. In a contract of sale, price, in terms of money
is the consideration. A contract without consideration is void under Sec. 25 of the Contract Act.
A contract of sale will not be complete without some consideration. Consideration must be in
terms of money. It is this special feature which distinguishes sale from barter or exchange. As
held in South Australian Insurance Co. v. Randell (1869) LR 3 PC 101, where goods are passed
partly for goods and partly for money or for exchange of goods or alternatively price, it will still
constitute a contract of sale.
The General principles of contract are applicable to sale. In order to constitute a valid sale, the
parties to the contract must be competent and there must be mutual consent between the
parties. There are four essentials : (1) parties must be competent to contract; (2) there must be
mutual consent between the parties; (3) there must be transfer of property in goods from the
seller to the buyer; (4) there must be money consideration, called ‘price’.
Payment of money consideration called price is an important element which indicates the
mutuality of consent in the transactions—Vishnu Agencies (Pvt) Ltd v. Commercial Tax Officer,
AIR 1978 SC 449.

DISTINCTION BETWEEN A CONTRACT OF SALE AND A CONTRACT OF WORK AND LABOUR

The nature and substance of the contract determines whether it is a sale or contract of work
and labour. If the property in goods is to be passed, it is a contract of sale. Where the essence of
contract is to provide skill and labour, it is a contract of works and labour. In Lee v. Griffin, a Dentist
filed a suit to recover 21 pounds for two sets of artificial teeth made for a lady (deceased). It was held
to be a contract of sale because at the end of the transaction, property in goods (teeth) was transferred
from the seller to the buyer.
In Robinson v. Graves, (1935) 1 KB 579, defendant engaged the plaintiff (an artist) to paint the
portrait of a lady for a price. Since the money was not paid, plaintiff filed the suit to recover the price of
the portrait. Court held that it was a contract of work and labour and plaintiff could recover only the
price for work and labour.

In a contract, if work is the essence of the contract and material is of no importance, the
contract is that of work and labour. But if the nature of contract is such that property in goods is to be
transferred, the contract will be one of sale, although some labour may have been put in preparing the
article.
DISTINCTION BETWEEN SALE AND AGREEMENT TO SELL
Sec. 4(3) of the Sale of Goods Act states:
“Where under a contract of sale the property in goods is transferred from seller to buyer, the
contract is called a sale. Where transfer of property in goods is to take place at a future time or subject
to some conditions to be fulfilled, the contract is called an agreement to sell.”
Sec. 4(4) adds that: an agreement to sell becomes a sale when the time elapses or the conditions are
fulfilled subject to which property in the goods is to be transferred.

The main points of distinction between a contract of sale and an agreement to sell are:
1. A contract of sale is also a conveyance. An agreement to sell is simply a contract.
2. In a contract of sale, property in goods passes to the buyer—the owner—immediately. In an
agreement to sell, transfer of property in goods is to take place at a future time or subject to
some conditions to be fulfilled.
3. Thus a contract of sale confers on the buyer jus in rem (right against the whole world in respect
of the goods). An agreement to sell gives only jus in personam (a personal remedy only against
the seller). As observed in State of Madras v. Gannon Dunkerley & Co, AIR 1958 SC 560, under
a contract of sale title to the goods has not passed, then there is an agreement to sell and not a
completed sale.”
4. According to Sec. 26 of Sale of Goods Act, risk prima facie passes with property. In a contract of
sale, property in goods immediately passes to the buyer and the buyer becomes responsible for
any risk to the property. In an agreement to sell, the passing of property is to take place in
future or is subject to some conditions to be fulfilled. The seller remains responsible for the risk
until the agreement to sell ripens into a sale.
5. The remedies for a contract of sale and an agreement to sell are also different. In a contract of
sale, if the seller is liable for breach of contract or for non-delivery of the goods, the buyer may
sue for price or specific performance of the contract. This remedy is not available in an
agreement to sell. The buyer can only sue for damages for breach of contract.
6. In case 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 he has a right to sell the
goods. But in case of an agreement to sell, there is an implied condition that the seller will have
a right to sell the goods at the time when the property is to pass. See Sec. 14(a).

Sec. 4(4) provides that an agreement to sell becomes a sale when the time elapses or the conditions are
fulfilled subject to which the property in goods is to be transferred. In an auction for sale, when the bid
of the highest bidder is accepted by the authorities concerned, the contract becomes concluded, risk
passes to the buyer and payment of purchase price cannot be denied by purchaser on the ground of
frustration of contract (by destruction of timber in fire)—M/s, Digamber Pershad Kirti Prasad v. State of
U.P., AIR 1996 All 1.
 In Hyderabad Engineering Industries v. State of Andhra Pradesh, (2011) 4 SCC 705, the
Supreme Court held that a contract of sale of goods would be effective when a seller agrees to transfer
the property in goods to the buyer for a price and that such a contract may be either absolute or
conditional. If the transfer is in praesenti, it is called a ‘sale’ but if the transfer is to take place at a
future time and subject to some conditions to be fulfilled subsequent to the contract, it is called an
agreement to sell.

DISTINCTION BETWEEN SALE AND HIRE PURCHASE

The main points of distinction are:

1. A person getting possession of the goods under an agreement to sell can pass a good title to a
bona fide buyer from him. But the same can be under a hire-purchase agreement because the
hirer gets only possession of the goods and cannot pass on a good title to any buyer.
2. Implied conditions and warranties provided under Sale of Goods Act apply in case of sale. But a
hire purchase agreement is not subject to implied conditions and warranties. A hire-purchase
agreement is subject to the conditions provided in Hire Purchase Agreement.
3. Sales tax can be levied on a sale but no sales-tax (now GST on sale) can be levied on a hire-
purchase agreement until it ripens into a sale.

Some case law will help us understand the distinction better. In Lee v. Butler, (1893) 2 QB 318, one
Lloyd was given some furniture subject to the condition that he would pay by way of rent one pound on
May 6 and a further sum of 96 pounds on August 1. The owner would be entitled to take possession of
the goods in case of default of payment. It provided further that on payment of all the instalments, the
rent would cease and the hirer would become the owner of the furniture. Before payment of the entire
money, Lloyd’s wife sold the furniture. Owner filed a suit against the defendant to recover the
furniture. It was held that the defendant could not be compelled to return the furniture because Lloyd
had agreed to buy the furniture and could be compelled to buy it for he had no option to return the
furniture.

In Helby v. Mathews, 1895 AC 471, plaintiff gave a piano on hire to Brewster under the
agreement that he would pay 36 monthly instalments of 10s. 6p. and after the payment of all the
instalments the piano would become the property of Brewster. The agreement also gave an option to
Brewster to terminate the hire at any time by returning the piano. However, he would remain liable for
arrears of hire. Before making the payment of all the instalments, Brewster pledged the piano to the
defendant. He was a pledgee in good faith. It was held that the plaintiff was entitled to recover the
piano from defendant because the agreement between plaintiff and Brewster was that of hire-purchase
and the hirer had not “agreed to buy”

In K.L. Johar & Co. v. Deputy Commercial Tax Officer, AIR 1965 SC 1082, Supreme Court
observed that “it is immaterial whether the price is paid at once or in instalments because the essence
of sale is the transfer of property in goods from the seller to the buyer. A hire-purchase agreement on
the other hand, has two elements (a) element of bailment; and (b) element of sale, in the sense that it
contemplates an eventual sale. In hire-purchase agreement, property in the goods does not pass when
the agreement is made but only passes when the option is finally exercised after complying with all the
terms of the agreement.”
 The sum and substance is two-fold. One, the owner under the hire purchase agreement enters
into a transaction of hiring out the goods on the terms and conditions mentioned in the agreement. The
option to purchase is exercisable by the hirer on payment of all the instalments and not until then. In
such a hire purchase agreement, there is no agreement to buy goods. The hirer is not under obligation
to buy but has an option to return the goods or to become its owner by payment in full of the price by
exercising the option.—Sundaraam Finance Ltd., AIR 1988 Bom. 168. Where there is simply an
agreement to buy and no option to return the goods, the agreement is an agreement to sell—Shyam
Kumar Verma v. S.P. Verma, AIR 1959 All 498.

In Suryapal Singh v. Siddha Vinayak Motors and another, (2012) 12 SCC 355, Supreme Court
summarized the position in the following words:

Under the hire-purchase agreement, it is the financier who is the owner of the vehicle and the
person who takes the loan retains the vehicle only as a bailee/trustee. Therefore, taking possession of
the vehicle on the ground of non-payment of instalment has always been upheld to a legal right of the
financier. Under hire-purchase agreement, the financier is the real owner of the vehicle and there
cannot be any allegation against him for having the possession of the vehicle—Sardar Trilok Singh v.
Satya Deo Tripathi, AIR 1979 SC 850.

DISTINCTION BETWEEN SALE AND BAILMENT

The essence of sale is that the property in goods passes from the seller to the buyer for a price.
A contract of sale may be absolute or conditional. Bailment is the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering them.

In sale, parties are called seller and buyer. In case of bailment, parties are called bailor and
bailee.

In sale, property in goods is transferred from seller to the buyer. The buyer becomes the owner
of the property and also becomes responsible to the risk of the property. But in bailment, the goods are
delivered to the bailee for a purpose and he does not become the owner and has to return the goods or
dispose of them according to the directions of the bailor.

In every case, the test to be applied is whether the person who has delivered the goods is
entitled to their return. In South Australian Insurance Company v. Randel, (1869) 3 PC 101, the
distinction was explained thus:

“where there is a delivery of property on a contract for an equivalent in money or some valuable
commodity, and not for return of the identical subject matters in its original or an altered form, this is a
transfer of property in value, a sale not a bailment.”

If the goods are destroyed during bailment due to the negligence of the bailee, the bailee would
be liable to compensate the bailor for the loss.

DISTINCTION BETWEEN SALE AND BARTER OR EXCHANGE

 The main feature which distinguishes sale from other transactions is that the consideration must
always be price i.e., consideration in terms of money. Such a feature is absence in barter or exchange,
where goods are exchanged for goods.

DISTINCTION BETWEEN SALE AND GIFT

The main different is that while in sale consideration in terms of money called price is an
essential element of the contract. In case of gift, the element of consideration is absent. Goods are
transferred from one person to another without any consideration.

FORMALITIES OF CONTRACT OF SALE

As per Sec. 5 of the Sale of Goods Act, 1930

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 provisions of any law, 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 by the conduct of parties.

SUBJECT MATTER OF CONTRACT OF SALE

In a contract of sale, the subject matter of contract must always be goods. Goods may be either
existing goods, owned or possessed by the seller or future goods (Sec. 6(1). Sec. 2(6) defines future
goods as goods to be manufactured or produced or acquired by the seller after the making of the
contract of sale. ‘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 contract of sale.

FUTURE GOODS: There may be a contract for sale of goods, the acquisition by the seller
depends upon a contingency which may or may not happen. In Union of India v. Tarachand, AIR 1976
MP 101, the contract was for sale of residue of coal ash, if any, after all the coal ash produced at the
Nandgaon pump house was picked or unpicked by Railway administration for delivery. It was a running
contract and the plaintiff was not entitled to appropriate all the coal ash produced unless the same was
picked or unpicked and stocked by Railway administration for delivery. Since no part of such coal ash
had been stocked for delivery, the property in goods had not passed to the buyer and as such his claim
for conversion could not succeed. The Court held that the property in future goods passes to the buyer
when it is identified by coming into existence, without any further act of appropriation.

EFFECT OF GOODS PERISHING BEFORE MAKING CONTRACT

Sec. 7 provides that “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. The
following essentials should be there to attract Sec. 7:

1. The contract must be of sale of specific goods which according to the Sec. 7, are “goods
identified and agreed at the time a contract is made.
 2. The goods must have perished or damaged as no longer to answer their description in the
contract at the time of making the contract.
3. The goods perished or damaged without the knowledge of the seller.
4. If the above essentials are satisfied, the contract will be void.

“Perished” means not only physical destruction but also if the goods have lost their commercial value or
become unfit for re-sale. In Asfar & Co. Ltd. v. Blundell, (1896) 1 QB 123, at the time of contract of sale
of dates, the dates had been contaminated with sewage without the knowledge of the seller. The dates
had been damaged so much that they no longer answered to their description under the contract and
had become unfit for resale, although they could still be used for some other purposes. It was held that
the contract was void.

GOODS PERISHING BEFORE SALE BUT AFTER AGREEMENT TO SELL

Under Sec. 8, where there is an agreement to sell specific goods, and subsequently 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 void.”

The section applies if following conditions are satisfied:

1. There is an agreement to sell

2. The agreement to sell is in respect of specific goods
3. The goods perished or so damaged as no longer to answer their description in the agreement
4. Goods perish before the risk passes to the buyer, i.e, after the agreement to sell but before it
ripens into sale; and
5. Without any fault of the buyer or seller.

This provision is a particular application of Sec. 56 of the Contract Act. Para 2 of Sec. 56 reads:

“ A contract to do an act which, after the contract is made, becomes impossible, or by reason of
some event which the promisor could not prevent, unlawful, becomes void when the act becomes
impossible or unlawful”.

In Howell v. Coupland, (1876) 1 QBD 258, there was an agreement to sell between the
defendant and the plaintiff for supply of 200 tons of regent potatoes to the plaintiff. In order to perform
his part of the agreement, defendant had grown regent potatoes on his land. Without his fault the crop
was damaged on account of a disease. He could deliver only 8 tons of potatoes. The Court (Mellish L.J.)
held that performance had become impossible without any fault of either party.

In Elphick v. Barnes, (1880) 5 CPC 321, agreement to sell was that of a horse, given to the buyer
for eight days on basis of sale or return. Before the expiry of the said period, the horse died without any
fault of the buyer. The buyer was held not responsible for the loss, as the agreement to sell had not
ripened into a sale and as such the risk had not passed to the buyer.

In Shipton Anderson Co. v. Harrison Bros, (1915) KB 676, a specific parcel of wheat lying in a
warehouse was the subject matter. The contract provided for payment of the price within seven days
against transfer order. Till then, the wheat was to remain the property of the seller. Before the expiry of
seven days (the said period) the wheat was lawfully requisitioned. It was held that performance having
become impossible the contract could be avoided.
 ASCERTAINMENT OF PRICE

According to Sec. 9,

1. The price in a contract may be fixed by (1) the contract or (2) may be left to be fixed in manner
thereby agreed or (3) may be determined by the course of dealing between the parties.
2. Where the price is not determined as above, buyer shall pay reasonable price. Reasonable price
is a question of fact dependent on the circumstances of each particular case.

In Aluminium Industries Ltd., Madras v. Minerals and Metals Trading Corporation of India Ltd., AIR
1998 Mad. 239, the contract was for sale of aluminium by the Govt. owned undertaking. Delivery order
was issued providing for delivery on 23.3.1981. Buyer went to take delivery on that date. Seller refused
delivery without assigning any reason. Subsequently, seller increased the price and claimed enhanced
price. The Madras High Court held that after issuing of the delivery order, when the buyer had fulfilled
all his obligations and performed his part of the contract, the seller cannot delay delivery or postpone
delivery without any valid reason and then insist for increased price on the basis of the revised price.

In M.S. Madhusoodanan v. Kerala Kaumudi Pvt. Ltd., AIR 2004 SC 909, it was held that an
agreement which provided 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 under Sec. 29 of the Contract Act.

AGREEMENT TO SELL AT VALUATION

Sec. 10: (1) When 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 default may maintain a suit for damage against the party in default.

Ordinarily, valuation made by a valuer is final but it may be challenged if he acts improperly or
he procured it by fraud. In such a case, the valuation would not be binding on the parties.

CHAPTER III

CONDITIONS AND WARRANTIES

A contract of sale may contain a number of terms and stipulations. All the terms are not of
equal significance. Some are so important and go to the root of the contract. Breach of such a term is
considered serious and the party aggrieved may treat the breach as a breach of the whole contract.
Such a term or stipulation is called a condition. There may be other terms or stipulations, which are
not so vital. They are not considered serious. Breach of such terms or stipulations may not give the
aggrieved party the right to treat the entire contract as breached but he may claim only damages for
such breach. Such terms are called warranties.

Sec. 12(2) of the Sale of Goods Act defines a condition as a stipulation in a contract of sale
which is essential to the main purpose of the contract, the breach of which gives rise to treat the
contract as repudiated. Thus condition is a term which goes to the root of the contract breach of which
entitles the other party to end the contract. On the other hand, a warranty is not so important and a
breach of it does not entitle the other party to end the contract. Under Sec. 12(3), a warranty is a
stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for
damages but not a right to reject the goods and treat the contract as repudiated.

Whether a stipulation in a contract of sale is a condition or warranty depends on the

construction of the contract. Though called a warranty, a stipulation may in fact be a condition. In
Baldry v. Marshall, plaintiff consulted the defendants, a car dealer for purchasing a car suitable for
touring purposes. Plaintiff purchased “Burgatti” car which was proved to be unsuitable for touring
purposes. Plaintiff wanted to reject the car and claimed refund of the price. The contract excluded all
guarantees and warranties except a guarantee against the mechanical defects for a period of one year.
Defendants therefore contended that the plaintiff could not reject the car. The court held that fitness of
car for touring purposes was a condition and therefore the plaintiff could reject the car and refund the
price.

STIPULATION OF TIME

Sec.11 deals with stipulation as to time. The section has to be considered with reference to the
provisions of sec. 55 of the Indian contract Act. It says: When a party to a contract promises to do a
certain thing at or before a specified time, or certain thing at or before specified times, and fails to do
any such thing or before the specified time, the contract, or so much of it as has not been performed,
becomes voidable at the option of the promise, if the intention of the parties was that time should be of
essence of the contract.

EFFECT, WHERE TIME IS NOT ESSENTIAL

If the intention of the parties was that time is not of essence of the contract, the contract does
not become voidable by the failure of the ting to do such thing at or before the specified time. In such
cases, the promisee is entitled to compensation from the promisor for any loss caused to him by such
failure.

EFFECT OF ACCEPTANCE OF PERFORMANCE AT TIME OTHER THAN THAT AGREED UPON

In a case of contract voidable on account of promisor’s failure to perform the promise at the
time agreed, and if the promisee accepts performance of such promise at any time other than agreed,
the promise cannot claim compensation for any loss occasioned by the non-performance of the promise
at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his
intention to do so.

According to Sec. 11, the general rule is that in respect of a contract of sale, stipulation as to
time of payment is not deemed to be the essence of the contract. This is subject to a contrary intention
of the parties, which may be gathered from (i) the language of the agreement, (ii) the nature of the
property sold; and (iii) conduct of the parties and surrounding circumstances at or before the contract. A
mere mention of a specified date of completion of the contract or prescribing a penalty for default alone
will not constitute evidence of intention of the parties. In Martindale v. Smith, (1841) 1 QB 389, in a
contract of sale of oaks, the logs were lying on the ground and the buyer was required to pay the price
within 12 weeks. Seller demanded the price but the buyer did not pay within the stipulated time. He
claimed extension of time and after the extended period, still further time. Buyer did not make
payment within the extended time. Seller refused to extend the time further and claimed that the
buyer was not entitled to get the logs. Later on, buyer tendered the price but the buyer refused to
accept. The buyer sued the seller. The Court held that the buyer was entitled to get the logs.

In Pulgaon Cotton Mills v. Mst. Gulabhai, AIR 1953 Nag. 345, plaintiff was required to take
delivery of 51 bales of yarn by the end of June, 1940. On his request, time was extended till the end of
July, 1940. The court held that the fact that a request for extension of time was made shows that time
was of the essence of the contract.

Where the contract itself provides for extension of time, time will not be of essence of contract.
Time will be of the essence of contract in the following cases:

1. Where the parties have expressly agreed to consider time as the essence of the contract.
2. Where delay operates as an injury; and
3. Where the nature and necessity of the contract require it to be so construed.

A party in whose favour such stipulations are made, may waive them. On such waiver, he ceases to have
the right to rescind the contract.—Orissa Textile Mills Ltd. v. Ganesh Das Ram Kishan, AIR 1961 Pat.
109.

WHEN CONDITION TO BE TREATED AS WARRANTY

In Maruti Udyog Ltd. v. Susheel Kumar Galigotra, AIR 2006 SC 1586, the purchaser of the car
alleged that there was manufacturing defect in the car and requested for the replacement of the car.
The warranty terms clearly referred to replacement of defective part and not replacement of car. The
High Court directed replacement of the car. The Supreme Court held that the complainant was entitled
to get replacement of defective part at the cost of the appellant. In addition, the Supreme Court
awarded Rs. 50,000/- for inconvenience caused to the purchaser.

In case of breach of a condition, the aggrieved party can treat the contract as repudiated. It is
the right of the aggrieved party. The aggrieved party need not, however, avail of this right in every case.
The party may treat breach of condition as breach of warranty. Instead of ending the contract, he may
continue the contract and claim damages for the breach of condition, as if it is a breach of warranty.

Sec. 13 provides for the circumstances under which a condition may be treated as warranty.

1. By waiver: Under Sec. 13(1), where a contract of sale is subject to any condition to be fulfilled
by the seller, the buyer may waive a condition or elect to treat the breach of the condition as a
breach of warranty and not as a ground for treat the contract as repudiated. It is for the buyer
either to repudiate the contract on account of breach of condition or to treat it only as a breach
of warranty and continue the contract and claim only damages for such breach. Once he waives
his right to repudiate the contract and elects to treat it as breach of warranty, he loses his right
to end the contract.
2. By acceptance: Another method of reducing a condition as warranty is to accept the goods
despite the breach of condition. Sec. 13(2) provides that “where a contract of sale is not
severable and the buyer has accepted the goods or part thereof, 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, unless there is a term of the contract, express or implied to that effect”.

Under Sec. 42, 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.

When buyer accepts the goods, the condition is reduced to a warranty and he loses his right to
reject the goods and treat the contract as repudiated. This is subject to two conditions: 1. It is possible
only where the contract is not severable. 2. There is nothing in the contract which expressly or
impliedly provides the contrary.

It does not mean that a condition becomes a warranty. It is only that legal remedies for breach
of condition are limited to the remedies which are available for a breach of warranty. In Hardy & Co. v.
Flower, (1923) 2 KB 490, in a CIF contract for sale of wheat, the ship reached the port on 20th March. On
the same day, buyer received the documents. On 21st March, unloading started and buyer sold the
goods to a third party. On 23rd March, he discovered that the wheat was not according to the contract.
He sought to reject the goods and gave a notice to the seller to that effect. The Court of appeal held
that though notice was given within a reasonable time, it was of no effect because the buyer had
accepted the goods. Buyer was therefore not entitled to reject the goods.

IMPLIED CONDITIONS

Apart from the express conditions included in the contract, law implies certain conditions. Such
conditions are stated in Sections 14 to 17.

1. IMPLIED CONDITION AS TO TITLE. Sec. 14(a) provides that “in a 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 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 at the time when the property
in the goods is to pass.
If a seller who has no right to sell, sells the goods to the buyer, the seller would be bound to pay
the price to the buyer. A seller may not have the right to sell (1) if he is not the owner of the
goods he sells or (2) even though he is owner he has no right to sell. In Roland v. Divial, (1923)
2 KB 500, defendants sold a car, though they had no title to the car. After using the car for some
time, the plaintiff had to give the car to the real owner. Plaintiff sued the defendant to recover
the price paid. The Court held that he was entitled to recover the price.
In Niblett v. Confectioners Material Co., (1921) 3 KB 387, under a CIF contract from New York to
London, defendants sold to the plaintiff condensed milk of ‘Nissly brand’. It was actually an
infringement of the trade mark “Nestle brand”. Nestle moved the Customs authorities and the
condensed milk was retained by the customs. Later on, buyer was permitted to take possession
of the condensed milk but after removing the brand – Nissly brand. Since there was no brand
name, buyers could sell the milk only at a reduced value and thus suffered losses. The court of
appeal held that the buyers were entitled to get damages for the loss suffered as there was
 breach of an implied condition as to time as well as breach of implied warranty of quiet
possession.
2. IMPLIED CONDITION OF SALE BY DESCRIPTION: Lord Blackburn observed in Bowes v. Shand,
(1877) 2 App. Cas 445: “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”
Sec. 15 of the Sale of Goods Act states that “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.
The rule applies to cases where the buyer has not seen the goods. In Varley v. Whipp, (1900) 1
QB 513, the subject of sale was a reaping machine. The buyer had not seen the machine. It was
described as a new machine and could reap 50 to 60 acres in a year. On delivery, the buyer
found that the machine was old and the description that it used to reap 50 to 60 acres was false.
The buyer rejected the goods. Plaintiff sued the defendant-buyer for the price. The suit was
dismissed and it was held that the defendant was not liable.
The rule applies even where the buyer had seen the goods but yet relies on the description of
the goods given by the seller. In Lami v. Tucker, (1829) 4 C & P 15, a buyer bought two pictures
of a renowned artist but discovered subsequently that they are not genuine pictures of the said
renowned artist. In view of the false description, the goods actually delivered would be
substantially different from the goods described. It would therefore constitute a failure of
consideration.
3. IMPLIED CONDITION AS TO SALE BY SAMPLE. In case of a 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. (Sec. 17(2).
In Godley v. Perry, (1960) 1 All ER 36, a retailer bought a number of plastic toy catapults
from a wholesaler under a contract of sale by sample. The retailer sold a toy to a boy of six
years. While trying to play, the boy was seriously injured and he lost an eye. The retailer
had to pay compensation to the boy because the accident was due to the defect in the toy.
The retailer sued the wholesaler to recover the compensation. Though the sample had
been shown to the retailer before sale, the defect was latent one and the retailer could not
find it by seeing the sample. It was held that the goods were unmerchantable and the
wholesaler was bound to indemnify the retailer for the loss suffered by him.
In Lorymer v. Smith, (1822) B & C 1602, the contract was for sale two parcels of wheat
containing 700 and 1400 bushels respectively. The contract was entered into on 11th
September and the buyer went to examine the goods on 19th September. He was shown the
parcel containing 700 bushels but not the other parcel containing 1400 bushels. The latter
was not there in the warehouse. The buyer rescinded the contract. Seller moved the Court.
The Court held that the contract was rightfully rescinded.
Under Sec. 17(2), the buyer’s right to have reasonable opportunity of comparing the bulk
with the sample does not end at examination before delivery. He has a further right to
examine the goods after delivery, as provided in Sec. 41 of the Act, as follows:
 (i) Where the 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.
(ii) 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.
Even where sample has been shown, responsibility of the seller does not end. There
is still an implied condition that the goods shall be free from any defect, rendering
them unmerchantable, which would not be apparent on reasonable examination of
the sample.

4. IMPLIED CONDITION AS TO SALE BY SAMPLE AS WELL AS DESCRIPTION: Under Sec. 15, where
there is a sale by sample as well as by description, it is not sufficient that the bulk of goods
corresponds with the sample. The goods should also correspond with the description. The
goods must correspond with both sample and description. In Wallis v. Pratt, 1911 AC 394, the
contract of sale was by sample as well as description. The contract was for supply of ‘Common
English Saifoin”. Sample was shown to the buyer. As per terms of the contract, all warranties
and guarantees as to growth, description or any other matter were excluded. The seller
supplied ‘giant Saifoin’ instead of ‘Common English Saifoin’. Though buyer had seen it, he could
not discover it because the seeds of ‘giant saifoin’ are similar to that of ‘Common English
Saifoin’. It could be discovered only after the seeds were bought and sown by a third party.
There was a breach of condition. Though sample was shown, the goods sold did not correspond
to their description. It was held that the buyer was entitled to recover damages. THE GENERAL
RULE THEREFORE IS THAT, ON THE SALE OF GOODS BY DESCRIPTION, WHETHER THE VENDEE IS
ABLE TO INSPECT THEM OR NOT, IT IS AN IMPLIED TERM OF THE CONTRACT THAT THEY SHALL
REASONABLY ANSWER SUCH DESCRIPTION—Jones v. Just, (1868) LR 3 QB 197.
5. IMPLIED CONDITION AS TO QUALITY OF FITNESS OR EXCEPTIONS TO THE PRINCIPLE OF
CAVEAT EMPTOR: “Caveat Emptor” means “Buyer Beware”. It means, before buying the
goods, it is the duty of the buyer to ensure that the goods are of the quality which he wants.
This principle was prevalent during the times when the goods were brought in the open
markets. The buyer could see and examine the goods before buying. Once the goods were
bought, buyer could not claim that the goods were unsuitable for his purpose. In Word v.
Hobbs, (1878) 4 App. Cas. 13, a number of pigs were sold in an auction in which the seller
excluded all warranties with respect to any defect or description. The pigs bought by the buyer
in auction were actually diseased, though the buyer intended to purchase healthy pigs. He
suffered heavy loss on that account and some of the pigs of the buyer also got infected. His
action was rejected as there was no breach of any implied condition or warranty.
The principle of Caveat Emptor is incorporated in Sec. 16. The rule of Caveat Emptor originated
and prevailed in olden times when the goods were bought and sold in open markets and the
buyer could examine the goods before buying them. Modern times have brought considerable
changes. The condition, circumstances and trends of trade and commerce have undergone
considerable changes. It is no more possible nor practicable for the buyer to examine every
 goods that he buys. A number of exceptions to the rule of Caveat Emptor have been
recognized. The rule now seems to have become rule of “Caveat Venditor”. Instead of buyer to
be careful, it has become the duty of the seller to be beware and careful before selling the
goods. Sec. 16 thus incorporates the principles of “Caveat Emptor: as well as exceptions
thereto:

EXCEPTIONS TO THE RULE OF CAVEAT EMPTOR:

a) IMPLIED CONDITION AS TO THE FITNESS FOR BUYER’S PURPOSE: As per Sec. 16(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 be fit for that purpose. To attract Sec. 16 (1) the
following conditions are to be satisfied:
(i) The buyer makes known to the seller the particular purpose for which the goods are
required;
(ii) He relies on the seller’s skill or judgment; and
(iii) 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)

If the above three conditions are satisfied, the principle of ‘Caveat Emptor’ will not apply. In other
words, IMPLIED CONDITION AS TO FITNESS FOR BUYER’S PURPOSE IS AN EXCEPTION TO THE RULE OF
CAVEAT EMPTOR.

If the goods are such that they are used only for one purpose or the purpose for which goods is
generally used is already known to the seller, it will not be necessary for the buyer to expressly specify
the purpose for which the goods is required. In Priest v. Last, (1903) 2 KB 149, plaintiff purchased a hot
water bottle from the defendant, a chemist. Defendant knew well in advance that hot-water bottle is
generally used for applying heat to the human body. Wife of the plaintiff was using the hot-water bottle
to heat her body. It burst and injured her. In the action, it was held that there was the breach of
implied conditions and that the seller was liable to pay compensation to the buyer.

Where a particular goods is used generally for one purpose only, it is not necessary for the buyer
to make known to the seller the particular purpose for which the goods are required. It is not necessary
for the buyer in every case to inform or make known to the seller expressly the purpose for which the
goods are required. It is sufficient if he impliedly makes known to the seller the particular purpose. In
Raghava Menon v. Kutappan Nair, AIR 1962 Ker. 318, the plaintiff purchased a wrist watch from the
seller. The wrist watch did not give correct time. Despite several attempts, the defendant failed to set it
right. Plaintiff brought an action for replacement of the watch or alternative to refund of the price.
Defendant was held liable because the buyer made known to the seller, by implication, the purpose for
which he purchased the watch and he also relied on the seller’s skill and judgment.

Where the goods are capable for more than one use, it is necessary that the buyer makes known
to the seller the particular purpose for which he wants to buy the goods. If in respect of such goods, the
buyer does not inform the particular purpose, the seller will not be liable. In Jones v. Padgett, (1890) 24
QBD 650, there was a contract for sale by sample of indigo cloth by a woolen manufacturer to a woolen
merchant. The buyer, a tailor, wanted to use the cloth for making into liveries but he did not make it
known to the seller. The buyer found the cloth unfit for the purpose. In the action against the seller, the
Court held the seller not liable.

To attract Sec. 16(1), it is not sufficient that the buyer makes known the purpose. He must also
rely on the skill and judgment of the seller. But the buyer cannot be said to have relief on the skill and
judgment of the seller when the seller deals in only one brand of goods and that is known to the buyer.
In Eternil Everest Ltd. Coimbatore v. C.G. Abraham, AIR 2003 Ker. 273, the contract was for sale of
asbestos sheets for roofing of building. Plaintiff wanted Everest asbestos sheets, which had a reputation
regarding quality. Plaintiff trusted the skill and judgment of the defendant. The asbestos sheets
supplied had manufacturing defect and it was leaking during rainy season. High Court held that as the
article was purchased for a specific purpose disclosed to the seller and as there was an implied warranty
as to the quality of the article sold and since the asbestos sheets were leaking, there was a breach of the
implied warranty. As the goods did not conform to the quality or fitness for the purpose for which it was
purchased.

In Morelli v. Fitch and Gibbons, (1928) 2 KB 636, known as Stone Gingerwine case, plaintiff
purchased a bottle of Stone’s Gingerwine when the plaintiff tried to open it with corkscrew with due
care. The bottle broke on account of some defect in it and plaintiff’s hand was cut. The seller was held
liable to pay damages to the plaintiff.

Where the buyer purchases goods for resale, “merchantable quality” means that the goods
must be fit for resale. To attract the provision under Sec. 16(2), it is necessary that the goods must be
purchased by buyer under a description. In Shivallingappa Shankarapp Mendse v. Bal Krishna & Sons,
AIR 1962 Kerl 426, defendants sold best quality of Damangau Toor Dhal. Toor Dhal was loaded in train
during rains. When it reached the destination it had become so much damaged by moisture. It became
unfit for resale as best quality of Toor Dhal. Court held there was breach of implied condition of
merchantable quality and as such he seller was liable to pay damages to the buyer.

EXAMINATION OF THE GOODS BY THE BUYER

Sec. 16(2) is subject to the proviso which says that if the buyer has examined the goods, there
shall be no implied condition as regards defects which such examination ought to have revealed.
Implied condition of merchantable quality does not apply where the buyer has examined the goods.
Buyer must have examined the goods thoroughly. What is implied is that the buyer must be given an
opportunity to examine the goods. This proviso applies only in cases where the defect is a patent one,
i.e., discoverable by an examination of the buyer. Where the defect is a latent one i.e., not discoverable
by examination, the implied condition of merchantable quality will apply. In Thornett Fehr v. Beers &
Son, (1919) 1 KB 486, the contract was for a sale of a number of casks of vegetable glue. The buyer was
provided with the opportunity to examine the goods. But for paucity of time, he only looked at the
outside of the casks. When the casks of glue were supplied, they were found to be unmerchantable.
The defect was a patent one and could have been discovered by the buyer had examined the glue.

(c) Implied condition annexed by the usage of trade.—Sec. 16(3) provides an implied warranty or
condition as to quality of fitness for a particular purpose may be annexed by the usage of trade. Where
an implied condition as to quality of fitness for a particular purpose is annexed by the usage of trade, it
is not necessary for the seller to make it known expressly to the buyer.
EXPRESS CONDITION DOES NOT EXCLUDE IMPLIED CONDITIONS: Sec. 16(4) makes it clear that an
express warranty or condition does not negative a warranty or condition implied by this Act unless
inconsistent therewith. A mere mention of an express condition does not negate a condition implied by
the Act. Implied condition can be negated by an express condition only when it is inconsistent with the
implied condition. In Bigge v. Parkinson, (1862) 7 H & N 955, defendant offered to supply to the
plaintiff’s ship Queen Victoria troops stores subject to survey of East India Company. When supplied,
the goods were found not fit for consumption. Plaintiff brought action against the defendant.
Defendant contended that the implied condition was negative by the express condition of the contract.
Court rejected the contention and held that an express condition will be deemed to be annexed to that
which is ordinarily implied unless the express condition is inconsistent with the implied condition.

IMPLIED WARRANTIES

A contract of sale has the following implied warranties:

1. IMPLIED WARRANTY OF QUIET POSSESSION: Sec. 14(b) says that in a contract of sale, unless
the circumstances of the contract are such as to show a different intention, there is “an implied
warranty that the buyer shall have and enjoy quiet possession of the goods”. Thus along with
the implied condition as to title under Sec. 14, there is an implied warranty that the buyer shall
have and enjoy quiet possession of the goods. Rule of implied warranty of quiet possession
applies to cases where the seller is not the owner and where he has no right to sell. In Mason v.
Burmigham, (1949) 2 KB 545, the defendant sold a second hand typewriter to the plaintiff for 20
pounds. Plaintiff spent another 11 pounds and 10 s to overall the typewriter. Later on it was
found that the typewriter was stolen and it had to be returned to the true owner. Plaintiff sued
the defendant. Court held that the seller was liable to pay 20 pounds as price paid plus 11
pounds 10 s spent to get the typewriter overhauled.
2. IMPLIED WARRANTY AGAINST CHARGES OR ENCUMBRANCES: Under Sec. 14(c), unless the
circumstances of the contract are such as to show a different intention, there is an ‘implied
warranty that the goods shall be free from any charge or encumbrance in favour of a third party
not declared or known to the buyer before or at the time when the contract is made. If there is
a charge or encumbrance on the goods, it is the duty of the seller to make it known or declare to
the buyer before or at the time of the contract. If he does not discharge this duty, and there is
some charge or encumbrance on goods, he will be guilty of breach of implied warranty against
charges or encumbrance. In case the buyer discharges the charge or encumbrance, the seller
will be liable to pay compensation to the buyer—Nottidge v. Aring (1909) 2 Ch. 656.
3. IMPLIED WARRANTY ANNEXED BY THE USAGE OF TRADE: As per Sec. 16(3), an implied
warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade.
This is however subject to the provisions of the Act and of any other law for the time being in
force.

EXCLUSION OF IMPLIED CODITIONS AND WARRANTIES.

Sec. 16(4) provides that an express warranty or condition does not negative a warranty or
condition implied by the Act unless inconsistent therewith. In Ward v. Hobbs, (1878) 4 AC 13, pigs were
sold in auction which were diseased. The contract excluded all guarantees and warranties in respect of
the goods. Since the seller had expressly excluded all guarantees and warrantees being inconsistent
with the under the implied conditions and warranties, House of Lords held that the seller was not liable
to compensate the loss.

The implied warranties and conditions may be negatived or varied (1) by express agreement; (2)
by course of dealing between the parties, and (3) by usage binding both the parties to the contract. The
agreement must be clear and unambiguous. An implied condition or warranty may also be negatived or
varied by course of dealing between the parties. Course of dealing means that past business between
the parties raised an implication as to the terms to be implied in a fresh contract, where no express
provision is made on the point at issue.

CHAPTER IV

TRANSFER OF PROPERTY

The essence of a contract of sale is the transfer of property from the seller to the buyer. Sec.
4(1) of Sales of Goods Act, 1930 states that 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. Under Sec. 5(1), the
contract may provide for immediate delivery of goods or immediate payment of the price or both, or the
delivery or payment by instalments, or the delivery or payment or both shall be postponed.

The most crucial time is when risk passes from the seller to the buyer.

 In the first place, risk prima facie passes with the property because with the transfer of property
the buyer becomes the owner. He therefore becomes responsible for the risks attached to the
property.
 Secondly, the buyer acquires proprietary rights over the goods.
 Thirdly, if the price has not been paid to the seller, he may sue for price against the property.
 Fourthly, in case the seller is a company, in the event of liquidation, the buyer gets a good title
against the liquidator in respect of the goods which are in the possession of the company.
 In the case of motor vehicles, the Supreme Court has held that transfer of possession of a motor
vehicle can take place only when the vehicle reaches the place where the registering authority
will be obliged to inspect the vehicle for the purpose of finding out whether it is a roadworthy
and registrable vehicle and its identification marks tally with those given in the sale invoice and
application for registration. Possession can lawfully be handed over to the purchaser at this
juncture because law requires the purchaser to be the owner to make an application for
registration. Law also prohibits use of the motor vehicle by the owner until it is registered by
the registering authority. Thus registration of the motor vehicle, though a post-sale event, is
closely linked in time with the event of registration.—Commissioner of Commercial Taxes,
Thiruvananthapuram v. K.T.C. Automobiles, (2016) 2 SCC 82.

WHEN DOES THE PROPERTY PASS? According to Sec. 19

1. When there is a contract for the sale of specific or ascertained goods the property in them is
transferred to the buyer at such time as the parties to the contract intended them 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 in Secs. 20 to 24 prescribe the method of
ascertaining the intention of the parties as to the time at which the property in goods is to pass
to the buyer.

Thus, the paramount consideration is the intention of the parties. In other words, the governing
principle as to the passing of property in goods is the intention of the parties. This rule applies when the
goods are specific or ascertained. In the case of unascertained goods, property in goods does not pass
until the goods are ascertained. Sec. 18 provides by stating:

“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”.

Sec. 19(2) also provides 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 circumstances of the case. In
Chidambaran Chettiar v. Steel Bros, AIR 1946 Rangoon 419, the contract for sale of paddy provided that
paddy in the first instance would be delivered to the defendant for storage. Plaintiff would have the
option to name a day on which defendant could purchase at the days’ prevailing rate. Court held that
from the terms of the contract it was clear that the property in goods would not pass until the plaintiff
exercised his option.

The intention of parties to the contract is generally gathered from the terms of the contract, the
conduct of the parties and circumstances. Where intention of parties cannot be gathered from the
terms of the contract, conduct of the parties and circumstances of the case, rules 20 to 24 would apply.
The rules deal with the following three kinds of situations:

1. Sale of specific goods in a deliverable state

2. Sale of unascertained goods and appropriation; and
3. Sale of goods on approval or “on sale or return”

I SALE OF SPECIFIC GOODS IN DELIVERABLE STATE

According to the law of England, as observed by Sir Creswell in Gilmour v. Supple, (1858) 11
Moo. PC 531, in a contract of sale, “the property immediately vests in the buyer and a right to the price
in the seller, unless it can be shown that such was not the intention of the parties. Where there is a
unconditional contract for the sale of specific goods in a deliverable state, the property in the good
passes to the buyer when the contract is made and it is immaterial the time of payment of the price or
the time of delivery of the goods, or both, is postponed. Sec. 20 contains the following essentials:

1. The contract must be unconditional;

2. The contract must be for the sale of specific goods; and
3. The goods must be in a deliverable state.

In case of a conditional contract, sections 21 and 22 apply. If the contract is unconditional, it is

immaterial whether the time of payment or the delivery of goods, or both is postponed, if the contract is
for specific goods in a deliverable state. In Dwarka Das v. Ram Ratan, AIR 1922 All 458, in a contract for
sale of specific goods in a deliverable state, buyer requested the seller to postpone the delivery of goods
for some time. It was held that property passed at the time of making of contract and postponement of
time of delivery of goods was immaterial.
 In Ram purchase Society v. State of Madras, AIR 1959 AP 36, seller took the railway receipt in his
own name and instructed the banker not to hand over the receipt to the buyer until the price was paid.
Court held that the property in goods did not pass until the payment was made.

The second essential element of Sec. 20 is that the goods must be specific. Under Sec. 2(14)
specific goods means goods identified and agreed upon at the time a contract of sale is made. Where
goods are not identified and agreed upon at the time of making the contract, the goods cannot be said
to be ‘specific goods’. In such a case, property in goods shall not pass at the time of making the
contract. In Kirsell v. Operators and Contractors Ltd., (1927) 1 KB 298, the contract was for the sale of
uncut timber consisting of all trunks and branches of trees but not seedlings and young trees of less than
six inches in diameter at a height of four feet from the ground. Timber sold was timber to be cut, to be
not more than 12 inches, by the buyers within a period of 15 years. It was held that property in goods
did not pass when contract was made because the timber was not in a deliverable state.

In Underwood Ltd. v. Burg Castle Brick and Cement Syndicate, (1922) 1 KB 343, contract was
for sale of condensing engine weighing about 30 tons. At the time of contract, the engine was at the
premises of the seller (plaintiff) fixed to a bed of concrete by bolts. It was required to be unbolted and
dismantled by the plaintiff. While dismantling, the engine was damaged. The defendant refused to
accept the engine. Plaintiff brought an action contending that the engine had passed to the buyer at the
time of the contract. Court of Appeal rejected the contention and held that the property in engine had
not passed to the buyer at the time of contract because the engine was not in a deliverable state.

In some cases, it would be the seller who has to do something to make the goods in deliverable state
and in some other cases, the buyer.

SPECIFIC GOODS TO BE PUT INTO A DELIVERABLE STATE

Under Sec. 21, “where there is a contract for 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 the notice thereof”. The section incorporates the English
rule. In Gilmour v. Supple, (1858) 11 Moo. PC 551, Judicial Committee of Privy Council observed:

“By the law of England, by a contract for the sale of specific ascertained goods the property
immediately vests in the buyer, and a right to the price in the seller, unless it can be shown that such
was not the intention of the parties. Various circumstances have been treated by our Courts as
sufficiently indicating such contrary intention. If it appears that the seller is to do something to the
goods sold on his own behalf, the property will not be changed until he has done it or waived his right to
do it”.

In Lachhmi Niwas Rice Mills v. Firm Ram Das Ramnivas, AIR 1963 All 110, appellants agreed to
sell rice to the defendants. Under the agreement, appellants were required to put the rice in bags, book
it on the Railway, dispatch it when wagons became available and finally deliver the Railway receipt to
the respondents. Appellants put the rice bags, got it weighed and stocked in godown but could not
dispatch it as wagons were not available for a reasonable time. The Court held that property in rice did
not pass to the respondents. Appellants could not sue because the appellants failed to get the wagons
for dispatching the bags of rice which was necessary to put the goods in a deliverable state.
 In Agricultural Market Committee v. Shalimar Chemical Works Ltd., AIR 1997 SC 2502, the
ascertained goods were in a deliverable state. On the order being placed by the respondent, the seller
was required to load the goods on the lorry and dispatch the same to Hyderabad. One of the terms of
the contract provided that the seller would not be liable for any future loss of goods and that goods
were being dispatched at the risk of the respondent. Respondent had also obtained insurance and paid
the policy premium. He intended that the goods to be treated as his own, so that in the event of loss, he
could validly claim the insurance amount. Weighment of goods at Hyderabad or collection of
documents from the bank on payment at Hyderabad were immaterial. It was held that the property in
goods had already passed at Kerala and it was not dependent upon the payment of price or delivery of
goods to the respondent. The Supreme Court held that having regard to the evidence on record which
indicated that on the order placed by respondent, the stocks were loaded into the trucks for dispatch to
Hyderabad with the clear stipulation that the dispatch was at the risk of the purchaser and seller had no
liability with regard to future losses. Goods were insured and premium paid. Court held that the sale
took place in the State of Kerala and not at Hyderabad.

SPECIFIC GOODS IN A DELIVERABLE STATE, WHEN THE SELLER HAS TO DO ANYTHING THERETO IN
ORDER TO ASCERTAIN PRICE.

Sec. 22 provides:

“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”.

Sec. 22 also corresponds to English rule on the subject. Lord Blackburn on Sale (p 185) says’

“Where anything remains to be done to the goods for the purpose of ascertaining the price as
by weighing, measuring or testing the goods, where the price is to depend on the quantity or quality of
the goods, the performance of those things, also, shall be a condition precedent to the transfer of the
property, although the individual goods be ascertained and they are in the state in which they ought to
be accepted.”

Where the contract is for sale of trees, property in trees cannot pass unless and until the trees
are felled and ascertained. In Seath & Co. v. Moore, (1886) 11 App. 350, appellant was entitled to cut
teak tress of more than 12 inches from earth. It was held that it would be necessary to ascertain which
trees fell within the said description and until that was done, the property could not pass.

In Sagar Warehousing Corporation v. Pawan Hans Helicopters Ltd., AIR 2009 Del 8 (DB), in a
contract of sale of specific and ascertained good, the property was to pass to the buyer only upon
payment of sale consideration. Half of the sum i.e, Rs. 45000 out of Rs. 90,000 was paid. It was held that
the property in goods had not passed to the buyer and continued to vest in the seller.

In Summons v. Swift, (1826) 5 B & C 857, the contract was for sale of a stack of bark at certain
price per ton. Agents of seller and buyers were required to get the bark weighed to ascertain its price.
Part of the bark was weighed and taken away. Before the remaining bark could be weighed, it was
carried away by flood. The dispute was whether the seller or buyer would be responsible for the loss. It
was held that the seller would bear the loss.

II SALE OF UNASCERTAINED GOODS AND APPROPRIATION

Sec. 18 provides: “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.” In Lauri & Morewood
v. John Dubin & Sons, P.S.N.S. Ambalavama Chettiar & Co. v. Express Newspapaers Ltd., AIR 1968 SC
741, contract was for sale of 200 quarters out of 618 quarters of maize lying in the warehouse. Buyer
obtained delivery order for 200 quarters. Since the buyer had not paid the price seller stopped delivery.
The question considered by the court was whether the property in goods passed to the buyer on giving
the delivery order. Court held that since the portion to the buyer had not been separated from 618
quarter lying in the warehouse, the property in the goods did not pass to the buyer.

The rule is contained in Sec. 23(1) which states:

“Where there is a contract for the sale of unascertained or future goods by description and
goods of that description are 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 goods thereupon passes to the buyer. Such assent may be express or implied, and may be
given either before or after the appropriation is made.”

In case of sale of unascertained goods or future goods by description in a deliverable state,

property in goods passes to the buyer when the goods are unconditionally appropriated to the buyer.
The goods are first to be ascertained and then put in a deliverable state. Thereafter they must be
unconditionally appropriate to the contract. Appropriation must be made with the consent of both the
parties. The consent may be express or implied and may be given either before or after the
appropriation.

In Healey v. Howlett & Sons, (1917) 1 KB 337, contract was for the sale of 20 boxes of mackerel
(fish) by defendants in Ireland to plaintiff in London. Defendants sent 122 boxes of mackerel to their
agent in Holyhead to supply to the buyers including plaintiff. After receiving the boxes at Holyhead,
agents separated 20 boxes to be supplied to plaintiff and sent them to plaintiff. On account of delay in
transport from Ireland to Holyhead, the fishes contained in the boxes were rotten. Plaintiff refused to
pay the price. It was held that appropriation took place when the agents separated 20 boxes in
Holyhead. But the fish had already become rotten before appropriation could be made. As such plaintiff
was not responsible for the risk or loss. Plaintiff was not liable to pay the price.

Appropriation to be valid must be made with the consent of both the parties –seller and buyer
and may be express or implied. The consent may be implied from the conduct of the parties. In
Pignataro v. Gilory & Sons, (1919) 1 KB 459, defendants sold 140 bags of rice to the plaintiff on Feb 12,
1918. Delivery to be taken within the next fortnight. Rice was unascertained at that time. Plaintiff sent
the price money by cheque on Feb 22, 1918. Plaintiff sent to the defendant delivery order for 125 bags
which were at chambers’ wharf. Defendant informed plaintiff that the remaining 15 bags were at
defendant’s place of business and asked him to collect the same. Plaintiff did not collect the bags for
three weeks. When plaintiff went to collect the bags, they were stolen not on account of negligence of
the defendants. It was held that the appropriation of the rice bags had been made to the contract with
the consent of both the parties and that the defendants were not liable for the loss because the
property in the goods had passed to the plaintiff.

In Shogu Finance Ltd. v. Hudson, (2002) 2 WLR 867, a dealer of motor cars agreed to sell a car to
a fraudster who produced a stolen driving licence as proof of his identity. The dealer sent to the
claimant finance company the said licence and the draft hire purchase agreement signed by the
fraudster using the name in the driving licence. The finance company approved the sale. After paying
10% of the price, partly by cash and partly by cheque, the fraudster drove off the car. He sold it to the
defendant the next day. Defendant purchased the car in good faith. When the fraud was discovered,
the finance company sued the defendant. Defendant contended that he purchased the car in good faith
and acquired good title in view of Sec. 27 of the Hire Purchase Act, 1964. The Court held that the
fraudster had no title to the vehicle and could not therefore pass on a good title to the defendant
despite the purchase of car by defendant in good faith.

DELIVERY TO CARRIER

Sec. 23(2) provides:

“Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or
other bailable (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 appropriate the goods to the contract.”

In free on board contract, in the absence of special agreement, property and risk in goods does
not pass from the seller to the buyer till the goods are actually put on the board. – Colley v. Overseas
Exporters Ltd., (1921) All ER 596. Under a free on rail contract, the seller undertakes to deliver the
goods into railway wagons or at the station (depending upon the practice of the railway) at his own
expense, and (commonly) to make such contract with the railway on behalf of the buyer as is reasonable
in the circumstances. Prime facie, the time of delivery free on railway fixes the point at which the
property and risk pass to the buyer. In M/s. Marwar Tent Factory v. Union of India, AIR 1990 SC 1753,
tenders were invited on Mar 13 1968 for supply of tents by Director General of Disposal. Under the
contract, 19,100 tents were to be supplied at the cost of Rs. 225/- for each tent. Supply of tent was
subject to inspection by the inspector at the premises of the firm and after his approval the tents were
to be despatched to the cosignee as per term of deliver f.o.r. 95% of price was to be paid on proof of
dispatch and production of the inspection note and the remaining 5% to be paid after receipt of the
goods in good condition by the consignee. A consignment of 1500 tents was despatched on Oct 14,
1968. The consignee (Commandant C.O.D.) reported that he received on 1276 tents. Therefore, while
paying the price, price of 224 tents was deducted. The court had to decide as to when the property in
tents passed. The trial court held that the risk was that of the appellant until the goods reached the
consignee. Supreme Court held that as per terms of the contract, delivery f.o.r. Jodhpur, the property in
goods passed immediately to the buyer when the seller delivered the goods and loaded the same in the
railway station at Jodhpur for transmission to the buyer. Commandant, C.O.D. Kanpur was therefore
held liable for the price of 224 tents.

III SALE OF GOODS ON APPROVAL OR “ON SALE OR RETURN”

 Sec.24: “When goods are delivered to the buyer on approval or “on sale or return” or other
similar terms, the property therein passes to the buyer—

a) When he signifies his approval or acceptance to the seller or does any other act, adopting the
transaction;
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 fixation of a reasonable time.

Under Sec. 24, in case of sale of goods on approval or “on sale or return” property in goods passes in any
of the following ways:

1. APPROVAL OR ACCEPTANCE BY BUYER: When goods are delivered to the buyer on approval or
on sale or return or other similar terms, the property in goods passes to buyer when he signifies
his approval or acceptance to the seller.—Sec. 24(a)
2. WHEN BUYER DOES ANY OTHER ACT ADOPTING THE TRANSACTION.—It is not in every case that
buyer must approve or accept when goods are delivered to him for approval or sale or return.
Property may also pass when he does any other act adopting the transaction. In Perkins v. Bell,
(1803) 1 QB 193 (CA), the contract was for the sale of a quantity of barley. Under the contract,
the plaintiff had to give delivery of barley at a certain railway station. Plaintiff supplied the
goods accordingly. Defendant inspected a sample and then sent it to a third party which
rejected it on the ground that it was not in accordance with the contract. The defendant sought
to reject the barley on the ground that it was not according to the sample. Court held that by
sending to the third party, he had adopted the transaction which amounted to acceptance and
as such he could not reject the goods.
The paramount consideration in a contract sale is the intention of the parties. Parties may
therefore exclude the operation of the above rule by express provision in the contract. In
Weiner v. Gills, (1906)2 KB 574, plaintiff, a manufacturing jeweler, delivered some property to a
person named ‘Huhn’ “on sale for cash only or return”. The jewellery was to remain the
property of the seller until it was settled or discharged. Huhn delivered the jewellery to one
Longman who pledged it with the defendant, in good faith. Plaintiff moved against the
defendant for return of the jewellery. Court held that jewellery had not passed to Huhn under
the terms of the contract and therefore plaintiff was entitled to recover the jewellery from the
defendant.
3. THE BUYER RETAINS THE GOODS WITHOUT GIVING NOTICE OF REJECTION: When goods are
delivered to the buyer on approval or on sale or return or other similar term, the property
passes to the buyer if he does not signify his approval or acceptance to the seller, but retains the
goods without giving notice of rejection, if a time is fixed for return of goods, on expiration of
the time and if no time is fixed, on the expiration of a reasonable time.
In Poole v. Smith’s car Sale (Balham) Ltd., (1952) 2 All ER 482, plaintiff, a car dealer delivered
two second-hand cars to the defendant “on sale or return”. One car was bought by the
defendant and paid the price of that car within a month. He retained the second car also. He
neither bought it or returned it, in spite of reminders. Plaintiff issued notice to the effect that if
the car is not returned within three days, the car would be deemed to have been purchased by
him. The car was not returned within three days. After considerable time, defendant rejected
the car in bad condition. Plaintiff refused to take the car and brought the action for recovery of
 price. Court held that since the defendant failed to return the car within a reasonable time, the
property in the car had passed to the defendant and he was liable to pay the price.

In Amies v. Jal, AIR 1924 Bom 41, the contract was for sale of a car. The contract provided for payment
of price by monthly instalments and in case of default of payment, the seller would be entitled to get
back the car. He was not required to refund the money already received. Court held that the intention
of the parties was that until the full price was paid, the property in good would not pass to the buyer.

RESERVATION OF THE RIGHT OF DISPOSAL

Sec. 23(2) provides that, where in pursuance of the contract, the seller delivers the goods to the
buyer or to a carrier or other bailee for the purpose of transmission to the buyer, he is deemed to have
unconditionally appropriate the goods to the contract provided that the seller does not reserve the
right of disposal. S. 25 applies where the seller reserves the right of disposal. According to S. 25,
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 a case,
notwithstanding the delivery of 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.
2. Where the goods shipped or delivered to railway administration for carriage by railway and by 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 the 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 retins the bill of
lading or railway receipt, the property in the goods does not pass to him.

It is clear from the section that in case of sale of specific goods, where seller reserves the right of
disposal even though he delivers the goods to a carrier or other bailee for transmission to the buyer, the
property in the goods does not pass to the buyer until conditions imposed by the seller are fulfilled. In
Shepherd v. Harrison, (1869) LRQ 4 B 196, the goods (cotton) were shipped at the risk of the buyer but
the bill of lading was to be delivered to the order of the seller. Through his agent, bill of lading endorsed
in blank and bill of exchange were delivered to the buyer. Buyer retained the bill of lading but returned
the bill of exchange without accepting it. It was held that the property in the goods did not pass.

Where the seller of goods draws on the buyer for the price and transmits the bill of exchange
together with the bill of lading or railway receipt, the buyer is bound to return the bill of lading or
railway receipt if he does not honour the bill of exchange. If he wrongfully retains the bill of lading or
railway receipt, the property in the goods does not pass to him. In Borrow v. Coles, (1811) 3 Comp. 92,
in a contract of sale of 100 bags of coffee, seller drew a bill of exchange upon the buyer and endorsed it
to the plaintiff. Plaintiff annexed it to the bill of lading after making an endorsement that if the buyer
accepts and pays the bill of exchange, coffee be delivered to him. Buyer accepted the bill of exchange
and detached it from the bill of lading which was endorsed to him. But he did not pay the bill of
exchange. It was held that the property in coffee did not pass to him and the plaintiff was entitled to
recover the coffee from the defendant.

The clear intention of Sec. 25 is to pass title in the goods to the buyer and not anybody else and
if any payment is made by any person other than the buyer that would be payment deemed to have
been made on behalf of the buyer. Otherwise the railway receipt or bill of lading would be deemed to
have been wrongfully detained as per sub section thereof. The bill of exchange, has to be honoured by
the buyer and the title in goods passes to him on his satisfying that condition. If any person acts without
buyer’s lawful authority, he would be answerable to the bailor (the buyer) for safe custody thereof.

PASSING OF RISK

Risk prima facie passes with the property is a well-recognized rule contained in Sec. 26. Section
provides:

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.

In Martinean v. Kitching, (1872) LR 7 QB 436, Lord Blackburn observed that the risk of loss
prima facie is in the person when the property is passed. But the two i.e., property and risk are not
inseparable. There may be situations wherein the property is in one and the risk in the other. Thus
prima facie, risk passes with the property. Exceptions to this rule are:

1. The paramount consideration is the intention of the parties. Sec, 26 starts with the words
“unless otherwise agreed..”. That means the parties by agreement may separate the risk from
the ownership of the property. They may provide that the property shall be at the risk of the
buyer even though the property in goods may not have passed to him. They may also provide
that property in goods may remain at the risk of the owner, even though he may have delivered
the same to someone for being sold. (Pigantato v. Gilory and Sons)
2. In case of contract of supply of goods at a distant place, the seller may not take the
responsibility of risk of goods during the transit. The contract may therefore provide that even
though the property in goods may not have passed to the buyer, goods shall be at the risk of
the buyer during the transit. (Sec. 40)
3. Yet another exception is contained in proviso to Sec. 26. 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. In Demby Hamilton and Co.
Ltd. v. Burden (Endeavour Wires Ltd.), (1949) All ER 435, defendant entered into a contract with
the plaintiff for purchase of 30 tons of apple juice. In order to deliver the juice, plaintiff crushed
the apples and put the juice in casks ready for deliver to the defendant. On account of delay in
 taking delivery by the defendant, the juice became putrid and had to be thrown away. It was
held that the buyer was liable for the loss.
4. The second proviso to Sec. 26 says that nothing in Sec. 26 shall affect the duties and liabilities of
either seller or buyer as a bailee of the goods of the other party. This is based on Sections 151
to 181 of the Indian contract Act. Sec. 151 provides that in all cases of bailment, the bailee is
bound to take as much care of the goods bailed to him as a man of ordinary prudence would,
under similar circumstances, take of his own goods of the same bulk, quality and value as the
goods bailed. If a bailee fails to take such care of the goods, he will be liable for the loss even
though he is not owner of the goods or the property in goods has not passed to him.

CHAPATER V

TRANSFER OF TITLE

NEMO DAT QUOD NON HABET

A person cannot confer a better title than that he has. A person who has in his possession
stolen goods, he cannot pass a good title to the buyer. Similarly, a person obtains goods by fraud cannot
pass a good to the buyer. This principle has been incorporated in Sec. 27 of the Sale of Goods act, 1930:

“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.”

In Lee v. Bayes, (1856) 18 CB 599, the auctioneer sold a horse in public auction. The horse was a
stolen one. Auctioneer did not know of that fact. It was held that the buyer did not obtain a better title
and the real owner could recover the horse from the buyer.

In Farquharson Brs. V. King & Co., (1902) AC 325, a buyer purchased a ring from a finder of the
ring who despite considerable efforts failed to discover the owner of the ring. The real owner could
recover the ring from the buyer even though the buyer had purchased it without knowledge that the
seller was merely a finder.

In Rameshwar v. Tara Singh, AIR 1958 Raj. 850, a person mortgaged his lorry to another – C.
The mortgagee allowed the mortgagor (B) to keep the lorry and allowed him to run it on hire to pay off
the mortgage money to C. B sold it to a third person –A, who either knew of the mortgage or by making
enquiries, could have known about it. The mortgagee did not know of this transaction or did he do
anything to encourage it. It was held that the principle of nemo data quod habet as incorporated in Sec.
27 will apply and that the sale is subject to the rights of C.

Justifying the exceptions to the principle of nemo dat quod non habet, Lord Denning in
Bhishopsgate Motor Finance Corporation v. Transport Brakes Ltd. (1949) 1 KB 332, observed:
“In the development of our law, two principles have striven for mastery. First is nemo
dat quod non habet, no one can give a better title than that he himself possesses—for
protection of property.
 The second is for protection of commercial transactions – the person who takes goods in good
faith and for value without notice, should get better title”

Thus, in the interest of trade and business, justice and equity requires that law should also
protect the interests of a person who buys in good faith, for value and without notice of any defect in
the title of the goods. Sec. 27 therefore recognizes the principle of nemo dat quod non habet along
with certain exception to this general rule:

EXCEPTIONS TO THE PRINCIPLE OF NEMO DAT QUOD NON HABET

1. ESTOPPEL. The general principle of nemo dat quod non habet will not apply where the seller is
not the owner of the goods but the “owner of the goods is by his conduct precluded from
denying the seller’s authority to sell”. In Pickard v. Sears, Lord Denman observed that “where
one by his words or conduct wilfully causes another to believe in the existence of a certain state
of thing and induces him to act on this belief, so as to alter his previous position, the former is
precluded from averring against the latter a different state of things at the same time”.
In other words, a party who negligently or culpably stands by and allows another to contract on
the faith and understanding of a fact which he can contradict cannot afterwards dispute that in
an action against the person whom he has himself assisted in deciding. (Gregg v. Wells, (1889)
10 A and E 90.

Sec. 115 of the Evidence Act on Estoppel provides:

“Where one person has by his declaration, act or omission intentionally caused or
permitted another person to believe a thing to be true, and to act upon such belief, neither he
nor his representative shall be allowed in any suit or proceeding between himself and such
person or his representatives to deny the truth of that thing”.

In Filler v. Glyn Mills, Cury & Co., (1914) 2 KB 577, plaintiff gave some share certificates
to the stock brokers and allowed them to keep the certificates for sale. The certificates were in
the name of the seller who sold them to the plaintiff and also contained an endorsement of
transfer executed by the seller. The stock broker abused their position and took an advance by
pledging the said certificates. The plaintiff sued the pledgee but his action was dismissed on the
ground that he was estopped from setting up his title against them.
The principle of estoppel also applies where there is an omission to perform one’s duty. In
Mercantile Bank of India Ltd. v. Central Bank of India Ltd., (1938) 1 All ER 52, a merchant
obtained some advance money by pledging railway receipts. The bank gave back the railway
receipts to the merchant for clearing the goods in usual course of business without impressing
upon their stamp of pledge. The merchant took advantage of this and repledged the said railway
receipts with the Mercantile Bank. On coming to know that the railway receipts were already
pledged with the Central Bank, Mercantile Bank contended that by returning the receipts to the
merchant without stamp, the Central Bank was estopped from saying or claiming that the
receipts were subject to their pledge. Privy Council rejected the contention on the ground that
 impressing the stamp of pledge was not a legal duty of the Bank. Title of the Mercantile Bank on
the railway receipt was subject to the title of the Central Bank.
The mere handing over of a chattel to another does not create an estoppel. There will be no
estoppel unless the doctrine of ostensible ownership applies, e.g when the owner gives the
recipient a document of title or invests with indicia of ownership.
2. SALE BY A MERCANTILE AGENT: The second exception to the principle of nemo data quod non
habet is sale by a mercantile agent. This exception is contained in Sec. 27 which provides:
“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 authorized by
the owner of the goods to make the same”.
Another proviso to the said proviso says that the above proviso will apply only when 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. Thus, in order to attract the proviso to Sec. 27, the following conditions must
be satisfied:
a) The sale was made by a mercantile agent
b) The mercantile agent must be in possession of the goods or of a document of title to the
goods
c) The mercantile agent must be in possession of the goods with the consent of the owner
d) The mercantile agent must be acting in the ordinary course of business
e) The buyer who purchases goods from the mercantile agent must do so in good faith and
must not have, notice at the time of the contract that the seller had no authority to sell.

Acting in the ordinary course of business as a mercantile agent means 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 person to suppose that anything wrong is being done. In Heap v.
Motorists Advisory Agency Ltd., (1921) 1 KB 221, a broker obtained possession of plaintiff’s car by
falsely representing that he wanted it for a purchaser. Subsequently, he sold the car as a salesman of a
firm of motor car engineers. It was held that the sale was not effected in the ordinary course of
business.

In Satdium Finance Ltd. v. Robbins, (1962) 2 All ER 633(CA), defendant wanted to sell his Jaguar car. He
left it with a dealer named Palmer to find a purchaser. He left the ignition key with the agent for
controlling the sale of the car. He, however, forgot to take the registration book which was in the dash
board. The dealer sold the car to the plaintiff finance company who let the car on hire purchase to one
Grossman. Because of the default in payment of the first instalment, plaintiff sought to take possession
of the car. Before this, defendant took possession of the car. Plaintiff brought an action against the
defendant. It was held that the mercantile agent had not sold the car acting in the ordinary course of
business because the registration book had been obtained unlawfully by the dealer.

3. SALE BY ONE OF JOINT OWNERS: This exception is described in Sec. 28 of the Act, which reads:
“If one of several joint owners of goods has the sole possession of them by permission of the co-
owners, the property in goods in transferred to any person who buys them of such joint owners
in good faith and has not at the time of the contract of sale notice that the seller has no
authority to sell.”
 In order to attract Sec. 28, (1) the sale must be by one of the joint owners, (2) who has sole
possession of goods, (3) with the permission of the co-owners; and (4) the buyer buys in good
faith has no notice at the time of the contract that the seller has no authority to sell.
4. SALE BY A PERSON IN POSSESSION UNDER A VOIDABLE CONTRACT. Sec, 29 of the Act says:
“When the seller of goods has obtained possession thereof under a contract voidable under Sec.
19 or 19-A of the Indian Contract Act, 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 sellers defect of title.
Sec. 19 of the Contract Act provides that when the consent to an agreement is caused by
coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was so caused. Sec. 19-A provides that when consent to an agreement is
caused by undue influence, the agreement is a contract voidable at the option of the party,
whose consent was so obtained. Phillips v. Brooks, (1919) 2 KB 243.
5. SALE BY SELLER IN POSSESSION AFTER SALE. This exception is contained in Sec. 30(1):
“Where a person having sold goods, continue 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 person making the delivery or transfer were expressly authorized
by the owner of the goods to make the same.”
In order to attract Sec. 30(1), it is necessary that the goods must be in possession of the seller
even after he has sold the goods. He must be in passion of the goods as seller and in any other
capacity as a hirer or a bailee.
6. SALE BY BUYER IN POSSESSION AFTER SALE. Sec. 30(2) says:
“where a person, having brought or agreed to buy goods, obtains, with the consent of the seller,
possession of the goods or documents of title to the goods, the delivery or transfer by that
person or by a mercantile against 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
the effect as if such lien or right did not exist”.
Sec. 30(2) applies when a person has bought or agreed to buy goods. It will not apply in case of
hire purchase agreement.
7. RESALE OF GOODS BY AN UNPAID SELLER AFTER EXERCISE OF THE RIGHT OF LIEN OR
STOPPAGE IN TRANSIT: According to Sec. 54(3) of the Act, where an unpaid seller who has
exercised his rights 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 buyer.
8. SALE BY FINDER OF GOODS: Sec. 169 of Indian Contract Act provides that “When a thing which
is commonly be the subject of sale is lost, if the owner cannot with reasonable diligence be
found or, if he refuses upon demand, to pay the lawful charges of the finder, the finder may sell
it:
i) When the thing is in danger of perishing or of losing the greater part of its value, or
ii) When the lawful charges of the finder, in respect of the thing found, amount to two-
thirds of its value.
 9. SALE BY PAWNEE IN CASE WHERE PAWNER MAKES DEFAULT IN PAYMENT: Sec. 176 of the
Contract Act provides that if the pawner makes default in payment of the debt, or performance,
at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee
may bring a suit against the pawner upon the debt or promise, and retain the goods pledged as
a collateral security; or he may sell the thing pledged; on giving the pawner reasonable notice of
the sale.
Thus, if the conditions of Sec. 176 are satisfied the pawnee may sell the thing pledged and as a
result of such sale, the buyer will acquire a good title to the goods.

CHAPTER VI
PERFORMANCE OF THE CONTRACT
Duties of Seller and Buyer
Sec. 31 contains the general duties of seller and buyer. It provides:
“It is the duty of the seller to deliver the goods and the buyer to accept and pay for, in
accordance with the terms of the contract of sale.”
The words “in accordance with the terms of the contract” show that everything depends upon the
intention of the parties and that may be gathered from the contract itself. Parties may include as many
terms as they like—Calcutta Co. v. De Mattos (1863) 32 LJQB 328. They may waive the reciprocal
promise or modify it, as they like—Sooltan v. Schillers, 4 Cal. 252.

 PAYMENT AND DELIVERY ARE CONCURRENT CONDITION: Section 32 provides:

“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”.

Thus, payment and delivery are concurrent conditions, subject to agreement between the
parties. Parties may, by agreement, modify it or change. In case of sale on credit, seller may agree to
deliver the goods irrespective of payment of price that may be deferred. In Purvanchal Cables and
Conductors Private Ltd. v. Assam Electricity Board and Another, (2012) 7 SCC 462, appellant Board
placed orders for supply of ACSR of different specifications in three quarterly phases, in June, September
and December, 1992. Supplier initially made delivery on 16-9-1992, 25-9-1992 and 30-3-1993. The
entire process of supply was completed by 12-10-1993. Supplier received payment only in September
and October, 1993. Seller raised demand for interest on delayed payment. Buyer did not accept the
demand. The trial court allowed the claim. In appeal, the High Court dismissed the suit as not
maintainable and no amount was due on the date of institution of the suit, as per the court. The seller
raised the ground of novation at the Supreme Court. Supreme Court held that novation was raised for
the first time in the Supreme Court and therefore it cannot be permitted.

DELIVERY

Sec. 33 provides: “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 possession of the buyer or of any
person authorized to hold them on his behalf.”
DELIVERY MAY BE OF THREE KINDS—(1) Actual delivery; (2) Symbolic delivery; and (3) Constructive
delivery.

1. ACTUAL DELIVERY: When the actual or physical delivery of goods is made by the seller to the
buyer, the delivery is said to be actual.
2. SYMBOLIC DELIVERY: When the goods are put in the possession of the buyer or his authorized
agent without making any change in their actual possession, the delivery is said to be symbolic.
E.g., by giving the key of the godown where the specific goods sold are kept (Gough v. Evrard
(1863) 159 ER 1.). In Milgate v. Kibble, (1984) 133 ER 1073, the seller handed over the inner key
of a warehouse and kept the outer key with himself. Without the outer keys, there was no
access to the goods. Such delivery will not amount to symbolic delivery. In the case of cargo at
sea in a ship, handing over the bills of lading to the buyer amounts to symbolic delivery of the
goods.
3. CONSTRUCTIVE DELIVERY: When without any change in the physical or actual custody of the
goods, there takes place a change in the legal character of the goods. The seller agrees to hold
the goods for the buyer. Similarly where the goods are in the possession of the bailee who
holds them for seller but after the sale of goods, the bailee still agrees to hold the goods for the
buyer. Constructive delivery takes place from the bailor to the buyer while the goods remaining
with the bailee.

EFFECT OF PART DELIVERY

Under Sec. 34, delivery of part of goods, in progress of the delivery of the whole, has the same
effect, for the purpose of passing of property in such goods. 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. In Hammond v.
Anderson, (1803) 1 B and PNR 69, the contract was for sale of specific goods lying in a wharf. The buyer
paid the price. The seller directed the wharfinger to deliver the goods to the buyer. After weighing the
goods, buyer took away a part of the goods. The Court held that it amounted to the delivery of the
whole of the goods.

But in Barney v. Poyntz(1883) 4 B and AD 568, a parcel of hay was sold by the seller to the
buyer. With the permission of the seller, the buyer took away a part of the hay. It was held that it did
not amount to a delivery of the whole. Park J., held that, “Here the intention of both the parties was to
separate the part delivered from the residue, and the vendee took possession of part only”.

BUYER TO APPLY FOR DELIVERY

Sec. 35 provides that apart from any express contract, the seller of goods is not bound to deliver
them until the buyer applies for delivery. Until the buyer applies for delivery of goods, the buyer will
have no cause of action—Sivayya v. Ranganayakulu, AIR 1935 PC 67.

RULES AS TO DELIVERY

1. PLACE OF DELIVERY: As per Sec. 36(1), Where the goods are to be delivered at a place other
than where they are or where they are to be manufactured or produced, under express
provision of the contract, the seller is entitled to a reasonable notice of the buyer’s choice of
place.—Grenor v. Lachmi Narain (1869) 24 Cal. 8.
 2. TIME OF DELIVERY: Under Sec. 36(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. What is reasonable time is a question of fact. The rule in S.
36(2) will not apply where a time for delivery of goods has been fixed under the contract. In
Nagnath Kanwar & Sons v. M/s. Govindram Shyam Sunder, AIR 2004 Bom. 271, plaintiff
entered into a contract with the defendant for supply of rice and placed order. No time was
fixed for sending the goods. The seller conveyed his inability to deliver the goods due to non-
availability of railway wagons. He subsequently rescinded the contract on that ground. It was
held that the seller did not dispatch goods within a reasonable time and the buyer was entitled
to damages for non-delivery of goods.
3. DELIVERY OF GOODS IN POSSESSION OF THIRD PERSONS: Sec. 36(3) states: Where the goods at
the time of sale are in possession of a third person, there is no delivery by the seller to the buyer
unless and until such third person acknowledges to the buyer that he holds the goods on behalf
of the seller. The proviso to Sec. 36(3) makes it clear that this sub-section will not affect the
operation of the issue or transfer of any document of title to the goods.
4. REASONABLE HOUR OF DELIVERY: 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.—Sec. 36(4)
5. EXPENSES OF AND INCIDENTAL TO PUTTING THE GOODS IN A DELIVERABLE STATE. Unless
otherwise agreed, the expense of and incidental to putting the goods into a deliverable state
shall be borne by the seller—Sec. 36(5).

DELIVERY OF WRONG QUANTITY

Sec. 37 provides for the following situations:

1. SHORT DELIVERY. The general rule is that “every contract for certain quantity of goods is prima
facie an entire contract for that quantity and so delivery of anything falling short of specified
quantity will not constitute sufficient delivery. Sec. 37(1) provides that “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. The buyer may, however, claim damages for the breach of warranty under Sec. 59(1). In
this sense, Sec. 37(1) supplements Sec. 59(1). The principle of de minimis non curat lex may
also be noted. A slight deficiency will not entitle the buyer to reject the goods. Ahmadi J. in
dudhia Forest Co-operative Society v. Mohamed & Co., 1980 Guj. 272 observed:
“…….a slight deficiency in the quantity will not entitle the buyer to reject the goods or claim
damages on the principle of de minimis non curat lex because some flexibility in such contracts
of goods in bulk is unavoidable and trivial shortfall in quantity must be overlooked. If, however,
the difference is substantial, the buyer would be justified in resorting to Sec. 37(1) of the Sale of
Goods Act”.
In Suresh Kumar Rajendra Kumar v. K. Assan Koya and Sons, AIR 1990 Ker. 20, the Kerala High
Court held that a shortage of 522 kgs. Out of a quantity of 16,000 kgs to be supplied under the
contract is only a slight deficiency which comes within the de minimis rule and therefore the
defendant would not be justified in rejecting the goods even under Sec. 37(1).
Where the buyer accepts part delivery and makes over-payment, he must be deemed to be
ready and willing. If the supplier on the other hand insists payment at a higher rate than agreed,
he cannot be said to be ready and willing and his act amounts to breach of contract. He is liable
 to refund extra-payment along with interest—Pravara Sahakari Sakhar Karkhana v. The Express
Industrial Corporation, AIR 2002 Bom. 185.
2. DELIVERY IN EXCESS OF CONTRACT QUANTITY: Under Sec. 37(2), where the seller delivers to
the buyer a quantity of goods larger than he contracted to sell, the buyer has the following
options:
a) He may accept the goods included in the contract and may reject the rest; or
b) He may accept the whole of the goods so delivered and in that case he shall pay for them at
the contract rate; or he may reject the whole.
In Cunliffe v. Harrison, 6 Exch. 903, the seller contracted to sell 10 hogsheads of claret but
sent 15. It was held that the buyer was entitled to reject the whole. Where the excess is so
small, the position is different. In such cases, the buyer cannot reject the whole. In Shipton
Anderson & Co. v. Well Bros. (1912) 1 KB 574, the contract was for 4950 tons of wheat.
Seller supplied excess quantity of only 55 lbs and did not claim its price. Court held that the
buyer was not entitled to reject the whole.
3. DELIVERY OF MIXED GOODS: As per Sec. 37(3) where the seller delivers 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 he
may reject the whole. In Nicholson v. Bradfield Union, (1986) LR 1 QB 62, in a contract for
supply of coal, the seller sent coal partly in accordance with the contract and partly of different
quality and both are mixed together. It was held that the buyer could reject the whole.
Where, however, the goods mixed are of a different nature and there is no confusion in
distinguishing them, the buyer cannot reject the whole. In Faul v. Pim, (1922) 2 KB 360, 2813
French tons of maize were sold and were to be shipped. The ship arrived with 2813 tons of
maize along with 58 tons of tobacco, which was not included in the bill. The tobacco was
smuggled without the knowledge of the seller.
The rules in respect of delivery of wrong quantity are subject to any usage of trade, special
agreement or course of dealing between the parties. Sec. 37(4).

INSTALMENT DELIVERIES
The general rule is that the buyer is not bound to accept delivery of goods thereof by
instalments. This is, however, subject to contrary intention of the parties.—Sec. 37(1)
Sec. 37(2) provides
“ 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 or the buyer
neglects or refused 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 the contract is a repudiation of the whole contract, or whether
is a severable breach giving rise to a claim for compensation, but not a right to treat the whole
contract as repudiated.”
In such cases, the question is whether one party is set free by the reason of the other. The real
matter for consideration is whether the acts or conduct of one do not amount to an intimation
 of an intention to abandon and altogether to refuse performance of the contract.—Freeth v.
Burth, (1874) LR 9 CP 208. Two tests are to be applied in such cases:
1) The ratio quantitatively of the goods which the breach bears to contract as a whole; and
2) The decree of probability or improbability of repeat of such a breach. (Maples Flock Co. v.
Universal Furniture Products, (1933) All ER 15).

DELIVERY TO CARRIER OR WHARFINGER:

Sec. 39(1) incorporates a general principle that delivery to a carrier or wharfinger is prima facie
deemed to be a delivery to the buyer. When the seller makes delivery of goods to carrier or wharfinger,
a fiction is created or a presumption arise that delivery to the carrier or wharfinger is prima facie
deemed to be a delivery to the buyer. This fiction or presumption has been created for fixing the
responsibility if the goods are lost or damaged during transit (Sri Ram Krishna Commercial Society Ltd.
v. State of Andhra Pradesh, AIR 1961 AP 86.

Sec. 39(2) further provides that “unless otherwise authorized 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 other circumstances of the case. If the seller omits to do so and if 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 him or may hold the seller
responsible in damage.

In Clarke v. Hutchins, (1811) 14 East 475, the carrier had made it clear to the seller that if the
value of the package exceeded five pounds, they would be responsible only if the notice of the same
was given. The packages delivered by the seller exceeded the value of five pounds, without notice. The
packages were lost in transit. The sellers were held liable for the loss because in view of the negligence
of the seller, the buyer had no remedy against the carrier.

DUTY OF SELLER WHEN GOODS ARE SENT BY A ROUT INVOLVING SEA TRANSIT.

Sec. 39(3) deals with the position. The nature of the duty of the seller depends upon the nature of the
contract. Commonly contracts involving sea routes are the following kinds:

1. C.I.F. CONTRACTS
2. F.O.B. CONTRACTS
3. Ex-Ship Contracts

1. C.I.F. CONTRACTS: The term C.I.F. means cost, insurance and freight. “CIF contract is one which
is commonly resorted to by persons dealing in international trade. In the case of such contracts
the cost of goods, insuranges and the freight in respect of the goods in question up to the place
of destination have to be borne by the buyer”—Mysore State Co-operative Marketing Society
Ltd. v. Ko Moung Gyi and Sons, AIR 1974 Mys. 20.
Under the CIF contract, the seller has to fulfil the following obligations: (See Biddeli Brothers v.
E. Clemens Horst Co., (1911) 1 KB 214).
a) To ship at the port of shipment of goods of description mentioned in the contract
 b) To obtain contract of affreightment under which goods are to be delivered at the
destination
c) To insure the goods upon terms current in the trade
d) To make out an invoice; and
e) To tender those documents to the buyer
The last obligation is very important. The seller with all reasonable dispatch shall forward
and “tender to the buyer these shipping documents, namely, the invoice, bill of lading and
policy of insurance” at the place of destination or at the residence of place of business of
the buyer if no place is mentioned in the contract.—Johnson v. Taylor Bros & Co. Ltd., 102-
AC 144.

In Chao v. British Transfer and Shippers Ltd., (1954) 1 All ER 779, Delvin J. detailed the obligations of the
seller as follows:
“A CIF contract puts a number of obligations on the seller, some of which are in relation to the
goods and some of which are in relation to the documents. So far as the goods are concerned, the seller
must put on the board at the port of shipment goods that are in conformity with the contract
description. He must also forward documents and those documents must also comply with the
contract. If he commits breaches, they may, in one sense overlap, in that they flow from the same act.
If there is a late shipment, as there was, in this case, the date of the shipment being part of the
description of the goods, the seller has not put on board goods which conform to the contract
description, and, therefore, he has broken that obligation. He may or may not break the obligation to
send forward a correct bill of lading. In such a case, a seller knows that he cannot send forward a bill of
lading which conforms with the contract and, at the same time, describes accurately the date of
shipment, and therefore, in that sense, it is true to say that the same act necessarily causes breaches of
two independent obligations.”

2. F.O.B. CONTRACTS: F.O.B means free on board. It is the duty of the seller to deliver the goods
on board at his own risk. Thereafter his liability ends and property and risk in goods pass to the
buyer. Cardie J. observed in Colley Overseas v. Exporters, (1921) All ER 596:
“In the absence of special agreement, the property and risk in goods does not in case of an f.o.b.
contract, pass from the seller to the buyer till the goods are actually put on board.”
In that case, a contract for sale of some unascertained leather goods f.o.b. Liverpool, the goods
remained at the dock because the buyers never named a definite ship for putting the goods on
board. The seller brought an action against the buyers for price but the same was rejected on
the ground that the goods having not been put on board of the ship, the property in the goods
did not pass to the buyer.

This principle is contained in Sec. 39(3). The section also provides that it is also the duty of the seller to
give notice to the buyer to insure the goods during their transit. If the seller commits a breach of this
duty, the goods shall remain at the risk of the seller during sea transit.

DISTINCTION BETWEEN C.I.F. AND F.O.B. CONTRACTS

In the case of C.I.F. contracts, in the absence of a special contract, the seller is bound to do certain things
such as making an invoice of the goods sold, shipping the goods at the port of shipment procuring a
contract of insurance under which the goods would be delivered at the destination and so on. In the
case of F.O.B. contracts, the goods are delivered free on board the ship. Once the seller has placed the
goods on board at his cost and thereby handed over possession of the goods to the ship in terms of the
bill of lading or other documents, the responsibility of the seller ends and the delivery of the goods to
the buyer is deemed to be complete. From that stage, the goods are at the risk of the buyer.

3. EX-SHIP CONTRACTS: Under an Ex-ship contract, it is the duty of the seller to deliver the goods
to the buyer from the ship which arrives at the port of delivery. It is the duty of the seller to pay
the freight or otherwise to release the ship owner’s lien and to furnish the buyer with an
effectual direction to the ship to delivery. Until this is done the buyer is not bound to pay for
the goods. As the goods are not at the buyer’s risk during the voyage, the seller cannot insure
the goods at the buyer’s risk. In Yangtsze Insurance Association v. Luckmangee, 1918 AC 585,
the contract was for the sale of “200 tons of India first class Teak squares at Rs. 175 per ton ex-
ship. The first instalment of logs were shipped on board at Colombo but they were lost in
transit. The seller had got the logs insured. The buyer brought an action to enforce the policy.
The action was dismissed on the ground that the property in goods had not passed to the buyer.
The seller had got the goods insured for his own purpose and for his own motion and the buyer
could not take advantage of that until the property in goods passed to him.

RISK WHERE GOODS ARE DELIVERED AT A DISTANT PLACE

The general principle is that risk prima facie passes with the property. That is to say, property
and risk go together. When goods are dispatched to a distant place, there is an exception. The
exception was explained in Bull v. Robinson, (1854) 10 Ex. 342, as follows:
“A manufacturer who contracts to deliver manufactured article at a distance place must, indeed
stand the risk of an extraordinary or unusual deterioration, but.. the vendee is bound to accept the
article if only deteriorated to the extent that it is necessarily subject to in its course of transit from one
place to other, or in other words, that he is subject to and must bear the risk of deterioration necessarily
upon the transmission”
Sec. 40 of the Sale of Goods Act contains a similar provision, which states:
“Where the seller of goods agrees to deliver them at his own risk at a place other than 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.”
In Suresh Kumar Rajendra Kumar v. K. Assan Koya & Sons, AIR 100- Ker. 20, the question was
whether the buyer was entitled to reject the quantity of rice when out of 16000 bags, the rice supplied
by railway was 522 kgs. Less and 40 bags of rice were slightly wet. The Kerala High Court held that a
shortage of 522 kgs. Of rice out of an agreed quantity of 16,000 kgs. And the slight wetness of 40 bags of
rice can reasonably be characterized as deterioration in the quantity and quality necessarily incidental to
the course of transit.
In Beer v. Balken, (1877) 46 LJQB 677, rabbits were sent from London to Brighton. When
dispatched at London they were sound and saleable but when arrived at Brighton, they became unfit for
human consumption and unsaleable. The Court held that the buyer was entitled to reject the goods
because in case of perishable goods it is the duty of the seller to ensure that the goods are
merchantable when they reach their destination.
BUYER’S RIGHT OF EXAMINATION OF THE GOODS
Sec. 41 provides:
1. Where the 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 had 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 tender delivery of goods to the buyer, he is bound, on
request, to afford the buyer a reasonable opportunity of ascertaining whether they are in
conformity with the contract.

Thus, there can be no valid acceptance unless and until the buyer is given a right of inspection to
ascertain ‘when such condition has been complied with which is in the contemplation of both the
parties to such a contract, and no final acceptable so as irrevocable to rest the property in the buyer can
take place before he has exercised the right. Under Sec. 42, a 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 reasonable time he retains the goods without intimating to the seller
that he has rejected them.

Sec. 41(1) however imposes a duty upon the seller to provide an opportunity to the buyer to
examine the goods in case has not previously examined them. The opportunity has to be given to the
buyer to ascertain whether the goods are conformity with the contract.

BUYER NOT BOUND TO RETURN REJECTED GOODS

When buyer rejects the goods, it is the duty of the seller to collect them. But this is subject to
contractual intention expressed by the parties in their contract. But the buyer has to intimate to the
seller that he has rejected the goods. Sec. 43 states: “Unless otherwise agreed, where goods are
delivered to the buyer and he refuses to take delivery, and the buyer does not within a reasonable time
after such request take delivery of the goods, he Is not bound to return them to the seller. It is sufficient
if he intimates to the seller that he refuses to accept them.

LIABILITY OF THE BUYER FOR NEGLECTING OR REFUSING DELIVERY OF GOODS

Under Sec. 44, when the seller is ready and willing to deliver the goods ad 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, and also for a reasonable
charge for the care and custody of the goods.

In Charter v. Sullivan, (1957) 1 All ER 809 (CA), the contract was for a sale of car by plaintiff to
the defendant. Plaintiff tendered the car to the defendant. He refused to take delivery of the car.
Plaintiff resold the car to another customer and had to suffer some losses. Plaintiff therefore brought an
action against the defendant to recover the damages. Court held that defendant was liable to pay
damages to the plaintiff.
 For application of Sec. 44, it is necessary that the seller must be ready and willing to deliver the
entire goods and not merely part of the goods. Where the property in goods has not passed to the
buyer, buyer’s refusal or neglect to take delivery within the reasonable time may entitle the seller to
repudiate the contract. But if the property in goods has passed with buyer, mere neglect by the buyer
to take delivery of goods does not entitle the seller to repudiate the contract.

CHAPTER VII

RIGHTS OF UNPAID SELLER AGAINST GOODS

Definition of “Unpaid seller”: Sec. 45(1) has defined the term in the following words:

“The seller of a 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
dishonor of the instrument or otherwise”.

The definition has been widened in Sec. 45(2) by providing:

“ in this Chapter, the term “seller” includes any person who is in the position of seller as for
instance, an agent of the seller on whom the bill of lading has been endorsed or a consignor or agent
who has himself paid, or directly responsible for the price”.

RIGHTS OF UNPAID SELLER

Under Sec. 46, an unpaid seller has the following rights against the goods:

1. Unpaid seller’s lien

2. Stoppage in transit
3. Right of resale
4. Right to withhold delivery of goods

UNPAID SELLER’S LIEN: Sec. 47 (1) provides an unpaid seller’s lien in the following three cases:

a) WHERE GOODS HAVE BEEN SOLD WITHOUT ANY STIPULATION AS TO CREDIT. It was stated in
Miles v. Corton, (1834) 2 C & M 504, as follows:
“The general rule of law is where there is a sale of goods, and nothing is specified as to delivery
or payment, although everything may have been done so as to divest the property out of the
vendor, and to be thrown upon the vendee all risk attendant upon the goods, still there results
to the vendor out of the original contract a right to retain the goods until the payment of the
price”.
This rule seems to have been incorporated in Sec. 47(1)(a).
b) WHERE THE GOODS HAVE BEEN SOLD ON CREDIT, BUT THE TERM OF THE CREDIT HAS EXPIRED:
During the term of the credit, he right of lien cannot be exercised. The right of lien can be
exercised only after the term of credit has expired.
 c) WHERE THE BUYER BECOMES INSOLVENT: The right of lien can also be exercised when he
becomes insolvent. A person is said to be insolvent who has ceased to pay his debts in the
ordinary course of business or contract to pay his debts as they become due, whether he has
committed any act of insolvency or not.

The scope of unpaid seller’s lien has been widened by providing under Sec. 47(2) that the seller may
exercise his right of lien notwithstanding that he is in possession of the buyer’s goods as agent or bailee
for the part delivery.

Under Sec. 48, where an unpaid seller has made part delivery of the goods, he may exercise his
right of lien on the remainder, unless circumstances show an agreement to waive the lien.

TERMINATION OF UNPAID SELLER’S LIEN

An unpaid seller’s lien may be terminated in any one of the following ways:

1. BY DELIVERY OF THE GOODS TO A CARRIER OR OTHER BAILEE: Under Sec. 49(1)(a), an unpaid
seller loses his lien 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. The right of lien
lasts so long as the seller is in possession of goods. Since delivery to carrier or other bailee is
generally deemed to be a delivery to the buyer, seller loses his possession once he delivers the
goods to carrier—See Valpy v. Gibson (1847) 4 CB 837.
2. ON BUYER OR HIS AGENT OBTAINING POSSESSION. Under Sec. 49(1)(b) the unpaid seller of
goods loses his lien thereon when the buyer or his agent lawfully obtain possession of the
goods. In Kendal v. Marschall Stevens & Co. (1883) 1 QBD 356 (CA), the goods sold were sent to
a forwarding agent who was to send the goods to the ultimate destination as per instructions of
the buyer. Meanwhile the purchaser having become insolvent, the seller sought to exercise lien
over the goods. It was held that right of lien was lost when the goods were delivered to the
forwarding agent.
3. BY WAIVER OF LIEN. The unpaid seller of goods also loses his lien therein by waiver thereof.
(Sec. 49(1)(c)). The waiver may be express or implied. A seller is deemed to have waived his
right of lien where he wrongfully refuses to deliver the goods, or deals with the goods in a
manner inconsistent with the mere right to have possession of goods, or claims to keep them on
the basis of some other ground that his right of lien. In Gurr v. Cuthbert, (1843) 12 LJ EX 309,
the contract was for the sale of a stack of hay for 86 pounds. The hay was to be taken away by
the buyer by a certain date. Buyer removed a part before that date by making a part payment.
Two months after that the seller cut up and used the remainder. In the action brought by the
buyer, it was held that by cutting and using the remainder the seller had waived his lien.

According to Sec. 47(1), the unpaid seller of goods, who is in possession of goods, is entitled to retain
possession of goods until payment or tender of the price. If the buyer pays or tenders the price, the lien
comes to end. But as provided in Sec. 49(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. Again, under Sec.
53(1), subject to the provisions of the Act, the unpaid seller’s right of lien is not affected by any sale or
other disposition of the goods which the buyer may have made, unless the seller assented thereto.
RIGHT OF STOPPAGE IN TRANSIT

Under Sec. 46(1), subject to the provisions of the Act and any law for the time being in force,
notwithstanding that the property in the goods may have passed to the buyer, in case of insolvency of
the buyer, the seller has a right of stopping the goods in transit after he has parted with their
possession. This right can be exercised only when the buyer has become insolvent. The seller must also
have parted with possession of the goods. This right can be exercised by the seller irrespective of
whether the property in goods has passed to the buyer.

Sec. 50 states: 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”

DURATION OF TRANSIT

Transit begins the moment the goods are delivered by the vendor to the carrier to be carried to
the purchaser. The transit ends when the goods arrive at the destination and delivered to the purchaser
or his agent, or when the carrier holds them as warehouseman for the purchaser and no longer as
carrier only.

In Kendal v. Marshall Stevens & Co., (1883) 11 QBD 356, seller sold goods to a buyer and sent to
a forwarding agent who was to send them to the ultimate destination, to be instructed by the buyer.. In
the meantime, the buyer became insolvent. Seller sought to stop the goods in transit. It was held that
right of stopping the goods in transit came to an end the moment the forwarding agent who held them
for the buyer.

The relevant rules are contained in Sec. 51 of the Act, which provides:

1. Goods are deemed to be in the course of transit from the time 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 goods before their arrival at the
appointed destination, the transit ends.
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 is deemed to be at an end, even if the seller has refused to receive them back.
5. When the 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 buyer.
6. Where the carrier or other bailee wrongfully refused 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.

HOW STOPPAGE OF TRANSIT IS EFFECTED

Sec. 52 provides the mode or way of stopping the goods in transit, as follows:

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. Notice may be given to the person in actual possession of the goods or to his
principal. In the latter case, notice shall be given at such time and in such circumstances that
principal, by the exercise of reasonable diligence, may communicate it to his servant or agent in
time to prevent delivery to the buyer.
2. When notice of stoppage is given by the seller to the carrier or other bailee in possession of the
goods, he shall re-deliver the goods according to the directions of the seller. Expenses of such
redelivery has to be borne by the seller.

END OF TRANSIT

The transit is deemed to come to an end in the following ways:

1. When buyer obtains delivery before goods reach their destination. Under Sec. 51(2), transit
comes to an end if the buyer or his agent in that behalf obtains delivery of the goods before
their arrival at the appointed destination.
2. By carrier or other bailee acknowledging to the buyer that he holds goods on his behalf. Under
Sec. 51(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 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 of the goods may have been indicated by the buyer.
3. Delivery by a ship chartered by the buyer: Under Sec. 51(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 agent of the buyer. If the
circumstances show that the goods have been delivered to a ship chartered by the buyer and
the master is holding as an agent of the buyer, the transit comes to an end.

CASES IN WHICH TRANSIT DOES NOT COME TO AN END

Transit does not come to an end in the following cases:

1. Rejection by the buyer: In case where the goods are rejected by the buyer and the goods remain
in possession of the carrier or agent, the transit is not deemed to have come to an end even if
the seller has refused to take back the goods. In Bolton v. L.Y. Co, (1866) LR 1 CP 481, only part
of the goods were accepted by the buyer and the remaining goods were rejected. The seller on
his part also refused to take delivery of the goods. In the meanwhile, the buyer became
bankrupt and the seller exercised his right of stoppage in transit. He was held to be entitled to
do so, as the transit had not come to an end.
 2. Part delivery: where part delivery of the goods has been made to the buyer or his agent, 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.

EFFECT OF SUB SALE BY BUYER

The unpaid seller’s right of lien or retention or stoppage in transit is not affected by any sale or
other disposition of the goods the buyer may have made, unless the seller has assented thereto. In
Mordaunt Brothers v. British Oil and Cake Mills Ltd., (1910) 2 KB 502, the contract was for the sale of
some oil which formed part of the oil stored by the sellers. The buyers sold the said oil to the plaintiffs
and handed over to them a delivery order to receive the oil from the seller. Seller made certain
deliveries to the plaintiff but thereafter they stopped deliveries as the buyers did not pay. It was held
that the sale of oil by the buyers to the plaintiffs had not affected the seller’s right of lien or stoppage of
goods in transit.

Sec. 53(1) contains the relevant rule which provides as follows:

“Subject to the provisions of this Act, the upaid 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”.

Explanation—The rule contained in Sec. 53(1) is subject to the following proviso:

“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 or, the unpaid seller’s right of lien or stoppage in transfer 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.

Under Sec. 53(2), where the transfer is by way of pledge the unpaid seller may require the
pledgee to have the amount secured by pledge satisfied in the first instance, as far as possible, out of
other goods or securities of the buyer in the hands of the pledgee and available against the buyer.”

3. RIGHT OF RESALE: Under Sec. 46(1)(c), subject to the provisions of the Act and of any law for
the time being in force, notwithstanding that the property in goods may have passed to the
buyer, the unpaid seller of goods as such, has by implication of law “a right of resale as limited
by this Act”.
Right of resale is a limited right. It may be available in the following cases:
a) Where the goods are of a perishable nature,
b) Where the unpaid seller who has exercised his right of lien or stoppage in transit gives
notice to the buyer of his intention to resell, the unpaid seller may, if the buyer does not pay
within a reasonable or tender the price, re-sell the goods within a reasonable time and
recover from the original buyer damages for any loss by his breach of contract. The buyer is
not entitled to any profit which may occur on resale or any damages. The buyer gets a good
title on such resale even if no notice was given to the original buyer.
 c) Where the seller expressly reserves a right of resale in case the buyer should make a default,
and on the buyer making a 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.
4. RIGHT OF WITHHOLDING DELIVERY OF GOODS. In addition to above remedies, the unpaid seller
has also a right of upholding delivery similar to and co-extensive with his right of lien and
stoppage in transit, the right of withholding delivery of goods is available where the property in
goods has not passed to the buyer.

CHAPTER VII

REMEDIES FOR SELLER/BUYER AGAINST BUYER/SELLER FOR BREACH OF THE CONTRACT

SUITS FOR THE BREACH OF CONTRACT

SUITS BY SELLER AGAINST BUYER:

1. SUIT FOR PRICE: Under a contract of sale, property in goods passes to the buyer but he
wrongfully neglects or refuses to pay the price, the seller may sue him for the price. Seller can
sue the buyer only after the property in the goods has passed to the buyer. In Colley v.
Overseas Exporters, (1931) All ER 596, contract of sale was for some unascertained leather
goods to the buyer f.o.b. Liverpool. Seller sent the goods. But since buyer did not name the
ship, the goods were not put on the ship. Seller sued the buyer for price. It was held that the
seller was entitled to price because the property in goods had not passed to the buyer. Except
in the case of an agreement under which payment has to be made on a certain day, the seller is
not entitled to sue the buyer for price before the goods pass to him. But the seller can sue the
buyer for damages.
Where sale price is payable under a contract on a certain date irrespective of delivery and the
buyer wrongfully neglects or refused to pay, the seller may sue for the price although the
property in goods has not passed to the buyer. In Dunlop v. Grate, (1945) 2 C & K 153, the
contract was for the sale of a quantity of iron to be delivered between March 3 and April 30 as
per requirement of the buyer and the price was to be paid on April 30. Only a part of the goods
was supplied by April 30, as the buyer did not require more. Seller sued the buyer and the court
held that the Seller was entitled to get payment for the whole.
If there is a specific dispute regarding the delivery of goods on a particular date, the plaintiff
who sues for price has to lead evidence in support thereof. If he fails to prove delivery of goods,
he will not be entitled to recover the price—Gujarat Agro Oil Enterprises Ltd. v. Arind H. Pathak,
AIR 1993 Guj. 47.
2. DAMGES FOR NON ACCEPTANCE: Under Sec. 56, if the buyer wrongfully neglects or refuses to
accept and pay for goods, the seller may sue him for damages for non-acceptance. Sections 73
and 74 of the Indian Contract Act contains the principles for assessing damages. Under Sec. 73,
when a contract is broken, the party who suffers by the breach is entitled to receive from the
party who caused the breach for any loss or damage caused. In estimating the loss or damage,
the means by which the inconvenience caused by the non-performance of the contract must be
taken into account. Plaintiff is not entitled to claim damages to mitigate any loss consequent
upon the breach caused by his own neglect. The loss to be assessed is loss at the date of the
breach. If the plaintiff could have done something which mitigated the damage, the defendant
is entitled to the benefit of it.
 In Suresh Kumar Rajendra Kumar v. Assan Koya & Sons, AIR 1990 Ker. 20, Buyer rejected the
rice supplied by the seller and the seller sold the goods through his agents. Plaintiff had taken
all necessary steps necessary in the ordinary course of business, but could not realize the price
which he would have received under the contract. Kerala High Court held that the plaintiff was
entitled to claim the difference between the contract price and the price fetched on the sale of
rice.

SUITS BY THE BUYER AGAINST THE SELLER

1. DAMAGES FOR NON-DELIVERY: Under Sec. 57, if the seller wrongfully neglects or refuses to
deliver the goods to the buyer, buyer may sue the seller for damages for non-delivery. The true
measure of damage in such case would be the difference between the contract price and the
market price at the time of breach. ‘Market price’ means “the value in the market,
independently of any circumstances peculiar to the plaintiff (buyer)’. Where the seller is guilty
of breach of contract to deliver any goods, the buyer may be entitled to the following remedies:
a) He may sue for damages for non-delivery under Sec. 57
b) In case the price has been paid by the buyer, he may recovery it in a suit for money had and
received for a consideration which has totally failed.
If the buyer fails to prove the alleged damage caused due to the short supply of goods, and
has not served on the seller a notice under Sec. 55 of the Contract Act, the buyer cannot
claim damages.
2. REMEDY FOR BREACH OF WARRANTY: Sec. 59 deals with remedy for breach of warranty. It
provides:
1) Where there is a warranty by the seller, or where the buyer selects 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.
3. SPECIFIC PERFORMANCE: Under Sec. 58, subject to the provisions of Chapter II of Specific Relief
Act, 1877, in a suit for breach of contract to deliver specific or ascertained goods, the Court may,
on the application of the plaintiff, direct that the contract shall be specifically performed by the
defendant, without given an option to the defendant to retain the goods by paying damages.
Court usually delivers such an order where payment of damages would not give adequate relief
to the plaintiff. In Behuke v. Bede Shipping Co., (1927) 1 KB 649, the contract was for the sale of
an old ship to a German ship-owner. Though the ship was old, its engine and boilers were new.
The ship could be registered immediately in Germany. Thus the ship was of peculiar value to the
buyer. The court therefore granted the decree of specific performance.

REMEDIES AVAILABLE TO BOTH BUYER AND SELLER

1. SUIT FOR REPUDIATION OF CONTRACT BEFORE DATE OF ANTICIPATORY BREACH: In Hochster v.

De la Tour, (1853) 2 E & B 678, it was held that where one of the parties repudiates the contract
 before the time of performance under the contract, the other party becomes entitled to sue for
damages for the date of performance of the contract was due. The defendant had employed
the plaintiff to go on tour with him as his Assistant from June 1. On May 11, defendant
informed the plaintiff that his services were not required. Plaintiff filed the suit to recover
damages for breach of contract before the actual date (June 1). The court held that the plaintiff
could sue for damages before the arrival of the time of performance of the contract.
The law was expounded in Frost v. Knight, (1887) LR 5 Ex. 322: “The promisee if he pleases may
treat the notice of intention as inoperative and await the time when the contract is expected
and then hold the other party responsible for all consequences of non-performance; but in 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 things proper treat repudiation of the
other party as a wrongful putting an end of the contract and may atonce bring his action and he
will be entitled to such damage as would have arisen from the non-performance of the contract
on the appointed time, subject to abatement.
Sec. 39 of the Contract Act incorporates this principle. Sec. 60 of the Sale of Goods Act also
contain the same principle when it says: “Where either party to a contract of sale, repudiates
the contract before the date of deliver the other party 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.
2. INTEREST BY WAY OF DAMAGES AND SPECIAL DAMAGES: Sec. 61 of the Act provides:
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 case of a breach of the
contract on the part of the seller from the date on which the payment was made.

Under Sec. 61 the Court is empowered to award interest, even where the contract contains no
stipulation as to interest. In M/s. M.K.M. Moosa Bhai, Amin Koya v. Rajasthan Textile Mills, AIR 1974
Raj. 194, the contract contained no stipulation for payment of interest. Plaintiff sued the defendant for
price and interest thereon. District Judge disallowed interest. In appeal the High Court accepted the
contention of the appellant and allowed interest at the rate of 6 percent per annum.

CHAPTER IX

AUCTION SALE

Auction sale means sale to the public by auction. Auction sale as provided under Sec. 64 can be
divided into the following heads:

1. Each lot a separate contract

 2. Completion of contract in auction sale
3. Right to reserve a bid by or on behalf of the seller
4. Auction sale subject to a reserved or upset price
5. Effect of Pretended bid to raise the price

EACH LOT A SEPARATE CONTRACT. Under Sec. 64(1) in the case of sale by auction where goods
are put for sale in lots, each lot is prima facie deemed to be subject of a separate contract of sale. In the
case of auction of goods put for sale in lots, a presumption arises that each lot is subject of a separate
contract. If the parties have a contrary intention, the presumption can be rebutted. When a single
purchaser bids several lots, the presumption is not rebutted. The presumption can be excluded only by
clear evidence of contrary intention.

COMPLETION OF CONTRACT IN AUCTION SALE: Sec. 64(2) provides that in the case of sale by
auction, the sale is complete when the auctioneer announces its completion by the fall of the hammer
or in the customary manner, and until such announcement is made, any bidder may retract his bid.

In Payne v. Cave, (1789) 3 TR 148, it was held that a bidden can revoke his bid at any time before
the hammer falls or the property is finally knocked down. In Jorawarmal Champamal v. Joyagopaldas
Ghanshyamdas, (1922) 43 Mad LJ 132, before the property was knocked down, the bidder came to know
that the property in question was subject to mortgage. He therefore revoked the bid. The owner sued
him. The Court dismissed the suit on the ground that the bid was only an offer and could be revoked at
any time before it was accepted by knocking down the property in his favour. As held in Union of India
v. Bhimsen Walaiti Ram, AIR 1971 2295.

Under Sec. 64(2), the sale is complete at the fall of hammer or by an announcement of the close
of sale by the auctioneer. Until such announcement is made any bidder may revoke his bid. If a bidder
revokes before the fall of the hammer, his security cannot be forfeited.

RIGHT TO RESERVE A BID BY OR ON BEHALF OF THE SELLER: The general principle in sale is that
the buyer and seller are two different persons because a person cannot buy his own goods. Auction sale
is an exception to this rule. Under Sec. 64(3) in the case of a sale by auction, seller may expressly
reserve a right to bid for himself or on behalf of himself. If such a right is reserved, a bid may be made
by the seller or on behalf of the seller. This exception or the provision in Sec. 64(3), is applicable only
when the sale is notified subject to a right to bid on behalf of the seller. Sec. 64(4) states that if such a
right is not reserved, sale to seller or on behalf of the seller will be treated as fraudulent. When sale is
notified subject to a bid by seller, either the seller himself may himself make the bid or employ one
person to bid on his behalf. If he employs more than one person to bid. It will amount to fraud.—
Thornet v. Haynes (1896) 1 S.M. & W. 367

AUCTION SALE SUBJECT TO A RESERVED OR UPSET PRICE: Sec. 64(5) enables an auction by sale
may be notified subject to a reserved or upset price. The seller may reject the highest bid if it is below
the reserved or upset price. It is to protect the property of the seller against collusion by the bidders in
an auction sale. In M/s. Jai Bhawani Timber v. State of M.P., AIR 1922 MP 250, the Court held that an
agreement between the bidders to form a ring or ‘knock-out’ i.e. refrain from bidding in competition
with each other in order to depress the price is neither illegal nor immoral. An upset price is fixed to
protect the auctioneer and the seller. In Barry v. Davies, (2000) 1 WLR 1962, plaintiff attended an
auction at the defendants auction house and bid 200 each for two new engine analysers. The bid was
not subject to any reserve price or upset price. The auctioneer withdrew the machines from sale as he
found the bid too low. Plaintiff sued the defendant for damage. The Court of Appeal held that an
auction sale without a reserve apart from the seller and the purchaser, there was collateral contract
between the auctioneer and the highest bidder that the auctioneer would sell to the bidder. Lord
Denning M.R. observed in Chelmsford Auctions v. Poole, that there are three contract on a sale by
auction:

1. Between the owner (vendor) and the highest bidder (purchaser)

2. Between the owner (vendor) and the auctioneer
3. A collateral contract between the auctioneer and the highest bidder (purchaser)

The first is a simple contract to which the auctioneer is not a party. The auctioneer’s rights and liabilities
come under the other two contracts.

PRETENDED BIDDING TO RAISE THE PRICE AND ITS EFFECT: Under Sec. 64(6), in the case of a
sale by auction, if the seller makes use of pretended bidding to raise the price, the sale is voidable at the
option of the buyer. Under Sec. 64(3), seller may either himself or by employing a person can reserve
expressly a right to make a bid. This right is given to the seller to protect his property. But he cannot
misuse this right for enhancing the price of the goods. If he does so, the sale will be voidable at the
option of the buyer.

An auctioneer can set his terms and conditions of the auction. Such terms and conditions would
be binding to an auction sale. (M. Lachia Setty & Sons Ltd. v. The Coffee Board, Bangalore, (1980) 4 SCC
636. The seller does not bind himself to accept the highest bid or any bid. He is not bound to assign any
reasons for his decision. In Shabbir Ahmad Khan v. Central Bank of India, AIR 2008 AP 85, several assets
were being sold in auction. Sale was subject to confirmation of secured creditor. Secured creditor
decline to confirm the same as the guarantors were not served notice. AP High Court held that the
decision of the secured creditor was not illegal.

CHAPTER X

ADDITION OR DEDUCTION OF AMOUNT OF INCREASED OR DECREASED TAXES IN CONTRACT OF SALE

Sec. 64A was inserted by the Amendment Act, 1941, so as to include sales and purchase tax in
addition to customs and excise duty. Sec. 64A is in two parts—(a) dealing with the case of an increase in
duty and conferring the right on the seller to recover the amount of increased duty from the buyer and
(b) making provision regarding the correlated case of a reduction in the duty with corresponding right to
the buyer to obtain the benefit of reduction. In Bihar State Electricity Board v. M/s Usha Martin
Industries, AIR 1997 SC 2489, the Supreme Court was considering an appeal from the Patna High Court
holding that the charge levied by the Electricity Board for supply of electricity to M/s Usha Martin
Industries was excessive as the uniform tariff was not reduced even when Excise Duty on electricity was
abolished. SC allowed the appeal, set aside the impugned judgment of the High Court and held that
since there was no provision for reduction of tariff on lowering or abolition of excise duty, Sec. 64A
cannot apply since the intention of the parties was different.

Sub sec. (2) of Sec. 64A stipulates that provisions of 64A (1) would apply to taxes on sale and
purchase of goods. In Akuli Charan Das v. State of Orissa, AIR 2007 Ori 97, the Orissa High Court held
that increase or new imposition of royalty would have to be borne by the State being the ultimate buyer
buyer.