UNIT I

1. DEFINE BAILMENT? DISCUSS THE RIGHTS AND DUTIES OF BAILOR AND BAILEE.
Ans. Bailment
 Definition of bailment (Section 148): A bailment is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is over, be returned or otherwise disposed of
according to the directions of the persons delivering them.
- Person delivering the good is called ‘bailor’.
- The person to whom they are delivered is called ‘bailee’
- The transaction is called ‘bailment’.
- Examples of bailment are giving cloth to tailor to stick clothes, giving a watch for repairs, giving tyre for
puncture.
- Essential elements of bailment:
a. Delivery of movable goods, by one to another (not being his servant). They are movable goods
only and not money.
The mode of delivery may be actual or constructive. When it is given in hand it is actual and when
they are not given by hand then it is constructive e.g. when good are kept in godown and the keys
are given.
b. Goods delivered for some purpose. If they are delivered without purpose and by mistake then it is
not bailment.
c. The good delivered are to be returned in specie or disposed of according to the directions of the
bailor, either in their original form or in an altered form.

 Kinds of bailment
The kinds of bailment are in two categories
1. Kinds of bailment from the ‘benefit’ point of view.
2. Kinds from ‘reward’ point of view.

1. Kinds of bailment from the ‘benefit’ point of view.

a. Bailment for the exclusive benefit of the bailor. E.g. Bailor leaves goods in the safe custody of the
bailee without any compensation to be paid.
b. Bailment for the exclusive benefit of the bailee. E.g. a loan of some article. A borrows B’s pen for
writing in examination is for the sole benefit of A, the bailee.
c. Bailment for the mutual benefit of the bailor and the bailee. Contract of repair, hire, stitch
clothes. The benefit is to both. One gets benefit of service the other gets charges.
2. Kinds from ‘reward’ point of view.
a. Gratuitous Bailment: It is a bailment in which neither the bailor nor the bailee is entitled to
remuneration. E.g. loan of a book to a friend, depositing of goods for safe custody without charge.
b. Non-gratuitous Bailment: it is also called as a ‘bailment for reward’. E.g. Motor car lent out for hire,
cloth given for tailoring for charges.

 Duties of Bailee
A bailee is the person to whom the goods are delivered. His duties are as follows:
1. Duty to take reasonable care of goods delivered to him.
- Section 151 lays down the duty, thus, “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,

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 take of his own goods of the same bulk, quality and value as the goods bailed”. He must take
responsible care.
- The bailee is not an insurer of goods bailed to him. If in spite of reasonable care, without negligence
on his part the goods are lost or destroyed then he is not liable in respect to any damage.
- If there is no special contract, the standard of reasonable care will apply (Section 152).
- He is not liable for acts of God, fire, lightning, flood, etc.
- He has to take reasonable steps to recover the goods if they have been stolen when they are in his
custody, even though it was not his fault. If he does not take reasonable steps then he is liable.
2. Duty not to make unauthorized use of goods entrusted to him (section 154).
- It is the duty of the bailee to use the goods strictly in accordance with the terms of the bailment.
- If he makes unauthorized use of the goods, he is liable to make compensation to the bailor for any
damages to the goods or during use of them. The liability is absolute. It arises even if he is not
negligent or result of act of God, accident, etc.
- The bailor can also terminate the bailment, if the bailee makes an unauthorized use of goods
(Section 153).
- E.g. A hired a horse for the purpose of riding to the exhibition ground. On the exhibition ground the
horse got frightened and ran into a ditch and injured itself. The bailee of the horse was not to be
blamed for accident. He is not liable for injury. But if he rode the horse not to the exhibition ground
but in different direction contrary to the contract and gets injured then the bailee is liable.
3. Duty not to mix goods bailed with his own goods.
- It is the duty not the mix his goods with those of the bailor, without the bailor’s permission.
- If the goods are mixed with permission of the bailor there is no breach of duty and the bailor shall
have interest, in proportion to their respective shares, in the mixture thus produced ( Section 155).
- If the goods are mixed without permission of the bailor, whether intentionally or unintentionally,
the following rules apply:
a. Where 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 expenses of separation as well as any
damages arising from the mixture (Section 156).
E.g. 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
has 100 bales returned, and B is bound to bear all the expenses incurred in the separation of
the bales, and any other incidental damage.
b. Where the goods mixed cannot be separated, the bailee must compensate the bailor for his
loss (Section 157).
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.
4. Duty to return the goods.
- Section 160 lays down this duty in the following terms: “It is the duty of the bailee to return, or
deliver, according to the bailor’s direction 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. “Where there are several joint bailors, the bailee may return the goods to any one of
the joint owners (Section 165).
- If the bailee fails to return the goods at the proper time, he becomes responsible to the bailor for
any loss, destruction or deterioration of the goods from that time (Section 161). He will be liable
even for acts of God.

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 5. Duty to deliver any accretion (growth) to the goods (Section 163).
- It is the duty of the bailee to deliver to the bailor any natural increase or profit accruing (growing)
from the goods bailed, unless there is a contract to the contrary.
- E.g. A leaves a cow in the custody of B to be taken care of. The cow has given birth to a calf. B is
bound to deliver the calf as well as the cow to A.

 Duty of Bailor
A bailor is the person who delivers the goods. His duties are as follows:
1. Duty to disclose faults in goods bailed.
- Section 150 lays down this duty. It distinguishes between gratuitous bailor and a bailor for reward.
- A gratuitous bailor is bound to disclose to the bailee all those faults in the goods bailed, of which he
is aware and which materially interfere with the use of them, or puts the bailee to extraordinary
risks. If he fails to do so, he will have to pay for such damages. A gratuitous bailor is not liable for
defects he was not aware of. E.g. A lends a horse to B, which he knows is very vicious (cruel, bad).
He does not tell B about it. B rides the horse and is thrown and injured. A is responsible to B for
damage sustained.
- A bailor for reward is responsible for all defects in the goods bailed whether he is aware of the
defects or not, if he does not disclose them to the bailee.
- If the bailor is aware that the goods bailed are dangerous or if there is any fault, then it is his duty
to bring it to the notice of the bailee otherwise he will be liable for all the resulting damages.
2. Duty to repay necessary expenses in case of gratuitous bailment (Section 158).
- If the goods are to be kept or to be carried or to have done upon it by the bailee for the bailor then
the bailee is to receive remuneration, it is the duty of the bailor to repay all the necessary expenses
incurred for the purpose of bailment. Thus if a horse is bailed then the bailor has to pay for its
feeding and other medical expenses if any.
3. Duty to repay any ‘extraordinary’ expenses in case of non-gratuitous bailment.
- Where under the terms of the bailment, the bailee is to receive remuneration for his services, it is
the duty of the bailor to bear extraordinary expenses incurred if any.
- E.g. If a horse is bailed for safe custody and the bailee is the receive Rs. 80 per day as custody
charges, the feeding charges are included. But if the horse falls ill without negligence on his part,
the bailor must repay the bailee the medical expenses incurred for the treatment.
4. Duty to indemnify bailee (Section 164).
- A bailor is also bound to indemnify the bailee for any loss suffered by the bailee, by reason of the
fact that the bailor was not entitled to bail the goods because of the defective title.
- E.g. A gives his neighbour’s scooter to B for use without the neighbour’s permission. The neighbor
sues B and receives compensation. A is bound to indemnify B for his losses.
5. Duty to receive back the goods.
- It is the duty of the bailor to receive back the goods when the bailee return them after the time of
bailment has expired or the purpose if fulfilled.
- If the bailor does not take the deliver or refuses, the bailee can demand compensation for all
necessary expenses of, and incidental to the safe custody.

 Rights of Bailee
1. Enforcement of bailors duties.
- The duties of the bailor are the rights of the bailee. The bailee can enforce the duties of the bailor
as mentioned above. That is
a. Right to claim damages for loss arising from the undisclosed faults in the goods bailed (Section
150).

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 b. Right to claim reimbursement for extraordinary expenses incurred in relation to the things
bailed (Section 158).
c. Right to indemnify for any loss suffered by him by reason of defective title of the bailor to the
goods bailed (Section 164).
d. Right to claim compensation for expenses incurred for the safe custody of the goods if the bailor
has wrongfully refused to take delivery of them after the terms of bailment is over.

2. Right to deliver goods to one of the several joint bailors (Section 165) .
- Where goods have been bailed by several joint owners, the bailee has a right to deliver them to, or
according to the direction of, one joint owner without the consent of all, in the absence of any
agreement to the contrary.

3. Right to deliver goods, in good faith, to bailor without title (Section 166).
- The bailee has a right to deliver the goods, in good faith, to the bailor without title, without
incurring any liability towards the true owner.

4. Right of lien.
- The right to retain possession of the property or goods belonging to another until some debt or
claim is paid, is called the right of lien. The right depends on possession and is lost as soon as
possession of the goods is lost. Lien can be of two types – ‘general and particular’.
- Particular lien means the right to retain only that particular property in respect of which the charge
is due. General lien is the right to retain all the goods of the party until all the claims of the holder
holder against the party are satisfied.
- Bailees right to Particular Lien. Section 170 confers the right of Particular lien upon the bailee.
Provided:
a. The bailee has rendered some service in relation to the thing bailed and must be entitled to
remuneration.
b. The service rendered by him should be one involving the exercise of labour or skill in respect to
the goods bailed, so as to confer an additional value on the article. E.g. A delivers a rough
diamond to B, a jeweler to be cut and polished which is done. B is entitled to retain the
diamond till he is paid for his services. If the bailee does not improve the value of the goods
bailed then he is not entitled to lien on his labour and skill.
c. The services must have been performed in full in accordance with the directions of the bailor,
within the agreed time or a reasonable time. E.g. A gives his watch to be repaired. B promises
to deliver the watch on the third day. But B takes one week to repair it. B is not entitled to
retain the watch until he is paid.
d. There must not be an agreement to perform the service on credit. E.g. A gives cloth to B, a
tailor to make a shirt. B promises to deliver the shirt as soon as it is finished, and to give three
months’ credit for the price. B is not entitled to retain the shirt until he is paid.
e. The goods must be in possession of the bailee. If no possession then no lien.
f. There must not be a contrary to the contract.
The following points need to be kept in mind with connection with the bailee’s particular lien:
a. The bailee retaining the article to enforce his lien cannot charge for keeping it.
b. The bailee cannot exercise his lien for the non-payment of extraordinary expenses. He should
sue for them.
- Bailee’s General Lien
General lien is a right to retain the goods of another as a security for a general balance of account.
General lien is the right to retain all the goods of the party until all the claims of the holder against

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 the party are satisfied. According to section 171, bailees coming within the following categories
have a ‘general lien’ in the absence of a contract to the contrary.
a. Banker: A banker has a general lien on all goods, cash, cheques and securities deposited with
him as banker by a customer, for any money due to him as a banker. If there is any debt to be
paid. His accounts are blocked till he clears the debts due to the bank. But if the valuables and
securities are deposited for a specific purpose, e.g. for safe custody, the banker has no general
lien on them as acceptance of special purpose excludes general lien.
b. Factors: A factor is an agent entrusted with the possession of goods in the ordinary course of
his business for the purpose of sale. He has a general lien on the goods of his principal, if any
money is due to him by his principal whether for advances made or for remuneration.
c. Wharfingers: A wharfinger has a general lien on the goods as regards charges due for the use of
wharf against the owner of the goods.
d. Attorney of High Court: An attorney or solicitor of a High Court has a general lien on all papers
and documents belonging to his client which are in his possession until the fee is paid.
e. Policy Brokers: They can retain the policy of fire or marine insurance for their brokerage.
f. Any other Person, if there is an express contract to that effect.

 Rights of Bailor
1. Enforcement of Bailee’s duties
- The duties of the bailee are the rights of the bailor. The bailor can enforce by suit all the duties of
the bailee as his rights. The bailor has the following rights:
a. Right to claim damages for loss caused to the goods bailed by bailee’s negligence (Section 151).
b. Right to claim compensation for any damages arising from or during unauthorized use of the
goods bailed (Section 154).
c. Right to claim compensation for any loss caused by the unauthorized mixing of goods bailed
with his own goods (Section 155-156).
d. Right to demand return of goods as soon as the time for which they were bailed has expired, or
the purpose for which they were bailed has been accomplished (Section 160).
e. Right to claim any increase in the goods bailed (Section 163).

2. Right to terminate bailment if the bailee uses the goods wrongfully (Section 163).
- The bailor has the right to terminate the bailment, if the bailee does, with regard to the goods
bailed, any act which is inconsistent with the terms of the bailment, although the term of bailment
has not expired or the purpose of bailment has not been accomplished.
- E.g. A gives on hire to B a horse for his own riding. B drives the horse in his carriage. The contract of
bailment is voidable at the option of A.

3. Right to demand return of goods at any time in case of gratuitous bailment (Section 159)
- When the good are lent without reward (i.e. gratuitously), the bailor can demand their return
whenever he pleases even though he lent them for a specified purpose or time and the bailee is not
guilty of wrongful use.
- But if the premature return of goods causes the bailee loss in excess of benefit actually derived by
him from the use of such goods, the bailor must indemnify the bailee for the amount in which the
loss occasioned exceeds the benefit derived.

 Rights of Bailors and bailees against wrong-doers

- If a third person wrongfully deprives the bailee of the use or 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

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 case if no bailment had been made; and either the bailor or the bailee may bring a suit against the
wrong-doer for such deprivation or injury (Section 180).
- Whatever compensation is received from the suit is to be shared between them, according to their
respective interest (Section 181). E.g. If someone takes possession of a coat from a tailors shop, then
either can file a suit. If the tailor files a suit, he shall hand over the recovered amount, after deducting
his tailoring charges, to the owner of the coat.

 Termination of Bailment
A bailment is terminated under the following circumstances.
1. If the bailment is for a specified period, the bailment terminates as soon as the stipulate period
expires.
2. If the bailment is for a ‘specific purpose’, the bailment terminates as soon as the purpose is fulfilled.
3. If the bailee does any act with regard to the goods bailed, which is inconsistent with the terms of
bailment, the bailment may be terminated by the bailor even though the period or purpose is not over
Section 153).
4. A gratuitous bailment can be terminated by the bailor at any time, even before the specified time or
before the purpose is achieved, subject to the limitation that where such termination causes loss in
excess of benefit actually derived by the bailee, the bailor must indemnify the bailee for the amount in
which the loss occasioned exceeds the benefit derived (Section 159).
5. A gratuitous bailment is terminated by the death either of the bailor or of the bailee (Section 162).

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2. DISCUSS RIGHTS AND DUTIES OF A FINDER OF GOODS.
Ans. A finder of goods is under no obligation to take charge of the goods when he comes across. But if he does take
charge of the goods, he becomes responsible for the goods like a bailee in a gratuitous bailment. Section 71
speaks of it, “a person who finds goods belonging to another and takes them into his custody, is subject to the
same responsibility as a bailee”.
1. Duties of Finder
1. Duty to find the owner:
- It is the duty of the finder to make reasonable efforts to find the true owner of the goods. E.g. if a
person has found goods of little value at a public place, he should shout three times in search of the
true owner, and if the goods found are valuable proper advertisement in newspaper etc. should be
given. If the finder fails to do his duty he would be counter liable.

2. Duty to take reasonable care of the goods as a bailee:

- A finder must take as much care of the goods as a man of ordinary prudence would, under similar
cirucmstances, take of his own goods of the same description.
- In spite of good care if the goods are destroyed then he is not liable for any loss.

2. Rights of Finder
1. Right to retain possession of the goods until the true owner is found.
- The finder has right to retain the goods found against the whole world expect the true owner. If
anyone deprives him of the right of possession of the goods, he can maintain an action for trespass.
- He is only a retainer (holder) of the goods till the real owner is found.

2. Right of lien over the goods for expenses (Section 168):

- A finder has a right to retain the goods against the true owner until he receives reasonable
compensation for trouble and expenses incurred by him to preserve the goods and find the owner.
- But he has no right to file a suit against the owner to recover expenses as there is no contract
between them and he has incurred expenses voluntarily and not at the request of the true owner.

3. Right to sue for reward (Section 168):

- The finder can file a suit against the true owner to receiver any rewards, which was offered by the
true owner of the return of the goods, provided he came to know of the reward before actually
finding the goods.
- He may also retain the goods till he receives the reward.

4. Right of sale (Section 169)i:

- If the true owner cannot be found with reasonable diligence, or if refuses, upon demand, to pay the
lawful charges of the finder, the finder may sell the goods in the following cases:
a. When the thing is in danger of perishiong or losign the greater part of its value
b. When the lawful charges of the finder, in respect of the thing found, amounts to two-third of its
value.
- The real owner is entitled to get the balance of sale proceeds, if there is a surplus left after meeting
the lawful charges of the finder.

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3. DISCUSS PLEDGE (PAWN) AND THE RIGHTS AND DUTIES OF THE PAWNEE.
EXPLAIN THE PLEDGE BY NON-OWNERS
Ans. PLEDGE
1. Definition
- The Bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’.
- The bailor in this case is called the ‘pawnor’.
- The bailee is called the ‘pawnee’.
- E.g. A borrows Rs. 100 from B and keeps his watch as security for payment of the debt. The bailment is
called a pledge.
- Pledge is a special kind of bailment as goods are kept with the money lender as security for the
repayment of loan or performance of promise. The bailed goods are returned on discharge of the debt.
- It is concerned only with movable goods, valuables and documents.

2. Distinction between bailment and pledge

PLEDGE BAILMENT
1 As to purpose:
Pledge is the bailment of goods for a In Bailment there is no such purpose. It is other than
specific purpose, i.e. to provide security the purpose of pledge. It may be repairs, safe custody,
for a loan or fulfillment of an obligation etc.
2 As to right of sale:
The pledge has a right of sale on default In bailment there is no right of sale to the bailee. He
after giving notice to the pledger. may retain the goods or sue the bailor for non-payment
of dues.
3 As to right of using the goods
The Pledge has no right to use the goods There is no restriction for a bailee in case of bailment if
pledged. the nature of transaction so requires.

3. Rights of Pawnee
1. Right of retainer (Section 173).
- The pawnee has the right to retain the goods pledged until his dues are paid. He has the right to
retain the goods pledged, 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.
- It can also be called pawnee’s right to particular lien.

2. Right of retainer for subsequent advances (Section 174).

- When the pawnee lends money to the same debtor after the date of the pledge without any
further security, it shall be presumed that the right of retainer over the pledged goods extends
even to subsequent advances. There should not be any contract to the contrary for this provision.

3. Right to extraordinary expenses (Section 175).

- The pawnee has the right to recover from the pawnor extraordinary expenses incurred by him for
the preservation of the goods pledged. But he cannot retain the goods, if such expenses are not
paid.
- He has only the right to sue for extraordinary expenses.

4. Right to sue the pawnor or sell the goods on default of the pawnor (Section 176).

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 - Where a pawnor makes default of the debt or performance of the promise, the pawnee may
exercise either of the following rights:
a. He may bring a suit against the pawnor for the recovery of the amount due to him and retain
the goods pledged as a collateral security,
b. He may himself sell the things pledged, after giving to the pawnor a reasonable notice of his
intention to sell.

In co-connection with the alternative right of sale, the following points must be noted:
a. The requirement of a ‘reasonable notice’ is a statutory obligation and cannot be waived by
agreement. A sale without notice is void, notwithstanding any contract to the contrary.
b. The pawnee cannot sell the goods to himself and if he does so then such a sale is void as
against the pawnor and the pawnor can recover the goods on paying the amount due.
c. If the proceeds of such sale are insufficient to meet the full claim of the pawnee, he may
recover the balane from the pawnor, but if there is surplus, he must pay it over to the pawnor.

4. Duties of pawnee (just like a bailee)

1. To take reasonable care of the goods pledged.
2. Not to make any unauthorized use of the goods pledged.
3. Not to mix the goods pledged with his own goods.
4. Not to do any act in violation of the terms of the contract of pledge and of the provisions of the
Contract Act. E.g. he should not sell the goods pledged witout reasonable notice to the pawnor.
5. To return the goods pledged on receipt of his full dues.
6. To deliver any accretion to the goods pledged.

5. Rights of Pawnor
1. Enforcement of Pawnee’s duties.
- The duties of the pawnee are the rights of the pawnor.
- The pawnor can, therefore, enforce by suit all the duties of the pawnee as his rights.

2. Defaulting pawnor’s right to redeem (Section 177).

- A pawnor, who defaults in payment of the debt amount at the fixed date, has a right to redeem the
debt at any subsequent time before the actual sale of goods pledged.
- Any agreement that the pledge will become irredeemable, if it is not redeemed within a certain
time, would be invalid. Of course, the pawnor redeeming after the expiry of the specified time must
pay to the pawnee, in addition, any expenses which have arisen from his default.

6. Duties of Pawnor
1. To compensate the pawnee for any extraordinary expenses incurred by him (Section 175).
2. To meet his obligations on stipulated date and comply with the terms of contract.

7. Pledge by non-owners
The owners of goods can always make a valid pledge, but in the following cases pledge made by non-
owners will also be valid:
1. Mercantile Agents (Section 178)
- A mercantile agent means an agent having in the customary course of business as such agent
authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to
raise money on the security of goods (Section 2 (9) of the Sale of Goods Act).

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 - A mercantile agent who is, with the consent of the owner, in possession of the goods or the
documents of title to goods, can make a valid pledge of the goods while acting in the ordinary
course of business of a mercantile agent.
- The pawnee has to act in good faith and should not have any notice at the time of pledging that he
has no authority to pledge (Section 178).

2. Person in possession under voidable contracts (Section 178-A)

- A person having possession of goods under a voidable contract can make a valid pledge of the
goods under a voidable pledge of the goods, provided the contract has not rescinded (withdrawn)
at the time of the pledge and the pledgee has acted in good faith and without notice of the
pledger’s defect of title.
- E.g. A purchases a ring from B by exercising coercion and pawns it with C before the contract is
rescinded by B, the pledge is valid. C will get a good title to the ring and B can only claim damages
from A.

3. Pledge having limited interest (Section 179)

- Where a person pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest.
- Thus a person having a lien over the goods may pledge them to the extent of his interest. For
example, A delivers a suit length to B, the tailor master, for making a suit and agrees to pay Rs.
1500 as sewing charges. B pledges the suit with C for Rs. 3000. The pledge is valid to the extent of
B’s interest in the suit, namely, Rs. 1500 (sewing charges). A can recover the suit only on paying Rs.
1500 to C, the pledgee.

4. Seller in possession of goods after sale (section 30(1) of the sale of Goods Act).
- A seller, left in possession of goods sold, is no more owner of the goods, but a pledge created by
him will be valid, provided the pawnee acted in good faith and had no notice of the sale of goods to
the buyer.
- The original buyer can obtain damages from the seller but cannot recover the goods from the
pledgee.

5. Buyer in possession of goods under an ‘agreement to sell” (Section 30(2) of the sale of Goods Act.
- Where a buyer under an ‘agreement to sell’, wherein the goods to become the property of the
buyer on fulfillment of certain conditions or on expiry of some time, obtains possession of goods
with the seller’s consent before eh payment of price and pledges them, the pledge is valid,
provided the pledgee acted in good faith and had no notice of the pledger’s defect in title of the
goods pledged.
- E.g. A agrees to buy a car if his solicitor approves, and obtains possession of the car and pledges it.
The pledge is valid, although at the time of pledge A was not the owner and later on also he does
not become owner as the solicitor disapproves the purchase.

6. Co-owner in possession
- Where there are several joint owners of goods, one of the co-owners in sole possession thereof
with the consent of other co-owners may make a valid pledge of the goods.

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4. DISTINGUISH BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE.
Ans. Distinction between contract of indemnity and guarantee

CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

1 Definition:
A contract, by which one party promises to save A contract of guarantee is a contract to perform the
the other from loss caused to him by the promise, or discharge the liability of a third person in
conduct of the promisor himself or by the case of default (Section 126).
conduct of any other person, is called contract
of indemnity (Sec. 124).
The person who makes good the loss is called The person who gives the guarantee is called the
the ‘indemnifier’ and the person whose loss is ‘surety’ and the person in respect of whose default
made good is called the ‘indemnified’ or the guarantee is given is called ‘the principal debtor’
‘indemnity holder’. and the person to whom the guarantee is given is
called ‘creditor’.
2 Number of Parties:
In a contract of indemnity there are two parties In a contract of guarantee there are three parties –
– the indemnifier and the indemnity holder or the creditor, principal debtor, and surety.
indemnified.
3 Object or purpose:
A contract of indemnity is for the A contract of guarantee is for the security of a debt or
reimbursement (repayment) of loss. good conduct of an employee.
4 Number of contracts:
In indemnity there is only one contract between In a contract of guarantee there are three contracts –
the indemnifier and the indemnity holder or one between creditor and principal debtor; the
indemnified. second between creditor and surety and third
between principal debtor and surety.
5 Nature of Liability:
In a contract of indemnity, the liability of the In a contract of guarantee the liability of the surety is
indemnifier is primary in nature. secondary i.e. the surety is liable only on default of
the principal debtor.
6 Request by the debtor:
In a contract of indemnity, the indemnifier acts In a contract of guarantee, it is necessary that the
independently without any request of the surety should give the guarantee at the request of the
debtor or the third party. debtor.
7 Existing debt or duty:
In a contract of indemnity, in most cases there In a contract of guarantee there is an existing debt or
is no existing debt or duty. duty, the performance of which is guaranteed by the
surety.
8 Right to sue:
In a contract of indemnity the indemnifier In a contract of guarantee, the surety, after he
cannot sue the third party for loss in his own discharges the debt owing to the creditor, can
name, because there is no privity of contract. proceed against the principal debtor in his own right.
He can do so only, if there is an assignment in
his favor, otherwise he must bring the suit
(against the third party) in the name of the
indemnified.

CONTRACT 2 | 11
 UNIT II
5. DEFINE AGENCY AND AGENT? DISCUSS THE MODES OF CREATION OF AGENCY AND TERMINATION OF
AGENCY.
Ans.
A. Agency and Agent
 Agent: 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 acts are done or who is represented, is called ‘principal’.

 Agency: The contract which creates the relationship of ‘principal’ and ‘agent’ is called an agency.
If A appoints B to buy 10 bags of sugar on his behalf, then A is principal and B is agent and the contract
is Agency.
In an agency, the agent is authorized to establish privity of contract between the principal (employer)
and a third party. Agent’s function is to bring about the contractual relationship between the principal
and third parties. He is the connecting link.

 General Rules of Agency:

1. Whatever a person competent to contract may do by himself, he may do through an agent, except
for act involving personal skill and qualifications. If work is personal, then no employee can be
agent or no agent can be employed.
2. He who does through another, does by himself. The acts of the agent are for all legal purposes, the
acts of the principal. Section 226 provides to the same effect. It reads, “Contracts entered into
through an agent and obligations 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.”
E.g. A being B’s agent, with authority to receive money on his behalf, receives from C a sum of
money due to B. C is discharged of his obligation to pay the sum in question to B.

 Test of Agency:
Agency exists “whenever a person has the authority to act on behalf of the other and to create
contractual relationships between that other and third persons”. If there is no relationship created
then there is no agency. Mere giving an advice in matters of business is not an agency. The person has
to act as a representative of the other in business dealings and create contractual relationships.

 No consideration is necessary for the creation of an agency. The fact that the principal has agreed to
be represented by the agent is a sufficient ‘detriment’ (disadvantage, loss) to the principal to support
the contract of agency i.e. support the promise by the agent to act in that capacity. A gratuitous agent
is not bound to do the work, but if he does so he is bound to complete it

 Who is an Agent? Distinction between a servant and independent contractor.

- As explained above an agent is a person employed to do any act for another or to represent
another in dealings with third persons.
- An agent differs from a servant.
a. A servant acts under direct control and supervision of the employer, whereas the agent not
subject to direct control and supervision of the principal. He acts according to his own
discretion.

CONTRACT 2 | 12
 b. A servant does not create relationships between employer and third party, whereas the agent
creates relationship between the principal and third parties.
c. An agent is servant, but servant is generally for some purpose his maters agent. Extent of
agency depends on duties and positions of the servant.
- An agent is different from independent contractor.
a. An independent contractor is employed for certain specified work but the manner and means
is left to his discretion. He is free to do the specified job independently of the employers
control or interference. The main difference between agent and independent contractor is
that the contractor does not represent the employer in relation to other person and as such
cannot bind the employer by contracts entered into with others, the agent on the other hand
represents his employer in relation to other persons and can bind the employer by contract

 Who can employ an Agent (Section 183):

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.
Any person competent to contract may employ an agent and a minor, lunatic, or a drunken person
cannot employ an agent.

 Who can be an Agent?

Section 184 – as between the principal and third party anyone can be an agent. Thus even a minor, a
person of unsound mind can be appointed as an agent. It is so because the act of the agent is the act
of the principal and therefore principal is liable to third parties for the acts of the minor or unsound
mind.
It is a risk, because he cannot hold such an agent liable for misconduct or negligence.

 Kinds of Agents.
1. From the point of view of the extent of their authority.
2. From the point of view of nature of work performed by an agent.

1. From the point of view of the extent of their authority.

a. General Agent: A general agent is one who is employed to do all the acts connected with a
particular business or employment.
E.g. Manager of firm. He can bind the principal by doing anything which falls within the
ordinary scope of that business.
b. Special Agent: A special agent is employed to do some particular act or represent his principal
in some particular transaction.
E.g. An agent employed to sell a motor car. If he does anything outside of it then the principal
is not bound. Act is over, authority is over.
c. Universal Agent: a universal agent is a person who has unlimited authority i.e. who is
authorized to do all the acts which the principal can lawfully do and can delegate. He enjoys
extensive powers to transact every kind of business on behalf of his principal.

2. From the point of view of nature of work performed by an agent.

a. Mercantile Agent: A mercantile agent is one who has authority to either sell goods or to buy
goods or raise money as security of goods. The different types of Mercantile agents are:
1. Factor: A factor is a mercantile agent to whom goods are entrusted for sale. He enjoys
wide discretionary powers in relation to the sale of goods. He sells the goods in his own
name upon such terms as he thinks fit.

CONTRACT 2 | 13
 2. Commission Agent: A commission agent is a mercantile agent who buys or sells goods for
his principal on the best possible terms in his own name and who receives commission for
his labour. He may have possession of goods or not.
3. Del credere Agent: He is one who in consideration of an extra commission, guarantees his
principal that the third persons with whom he enters into contracts on behalf of the
principal shall perform their financial obligations, that is, if the buyer does not pay, he will
pay. Thus he acts as a surety.
4. Broker: he is one who is employed to make contracts for the purchase and sale of goods.
He is not entrusted with property or goods. He simply acts as a connecting link and brings
parties together. If the transaction materializes he gets his commission.
b. Non-Mercantile Agent:
They include advocates, attorneys, insurance agents, wife, etc.

 Extent of Agents authority.

The agent’s authority means his capacity to bind the principal to third parties. The agent can bind the
principal only if he acts within the scope of his authority.
1. Actual authority
2. Ostensible authority
3. Authority in emergency

1. Actual authority
An agent can do all such acts as have been assigned to him either expressly or impliedly and
thereby bind the principal to third parties by acts done within the scope of his ‘actual’ or ‘real’
authority (Sections 186 and 226).
The authority can be expressed or implied (Section 187)

2. Ostensible authority
An agent can also bind the principal to third parties by acts done within his apparent authority
(although the act is in excess of his actual authority); provided the third party acts bona fide and
without knowledge of the limitation of the agent’s apparent authority. It the authority that is
presumed to be with the agent in relation to a particular business ordinarily.
Section 188 says that, “An agent having an authority to do an act or to carry on a business has
authority to do every lawful thing which is necessary in order to do such act, or which is usually
done in the course of conducting such business”.

3. Authority in emergency
An agent has authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss as would be done by person of ordinary prudence in his own case, and under
similar circumstances (Section 189).

 Delegation of Agents authority.

Section 190 “an agent can’t 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 or
from nature of agency, a sub-agent must be employed”.
An agent can’t delegate his authority without the express authority of principal, except in certain
cases. It follows the maxim ‘delegatus nonpotest delegare’ i.e. delegate cannot further delegate.
Exceptions:
1. Principal has expressly permitted delegation of such power.

CONTRACT 2 | 14
 2. When the principal has implied by his conduct, allowed such delegation of authority, e.g. where
the principal knows that the agent intends to delegate his authority but does not object to it.
3. Where by the ordinary custom of trade as sub-agent may be employed.
4. Where the very nature of agency makes it necessary to appoint a sub-agent.
5. Where the acts to be done are purely ministerial and do not involve the exercise of discretion e.g.
clerical or routine work.
6. Where unforeseen emergencies arise rendering appointment of the sub-agent necessary.

 Sub-agent.
- A sub-agent is a person employed by, and acting under the control of, the original agent in the
business of the agency (Section 191). The person employed by the agent is sub-agent.
- The legal effects of appointment of sub-agent depends on him being properly appointed or not.
- When properly appointed: (Section 192)
1. The principal is bound and liable to third parties for the acts of the sub-agent, as if he were an
agent originally appointed by the principal.
2. The agent is responsible to the principal for the acts of the sub-agent.
3. The sub-agent is responsible for his acts to the agent and not to the principal. But in case the
sub-agent is guilty of fraud or wilful wrong, he is directly liable to the principal. The principal
here has a choice to sue the agent or sub-agent.
- Where the sub-agent is improperly appointed. If he is appointed without authority and
justification (Section 193).
1. The principal is not represented by such sub-agent and hence he is not liable for the acts of
the sub-agent.
2. The agent is responsible for the acts of the sub-agent to the principal as well as to the third
parties.
3. The sub-agent is not responsible to the principal at all. He cannot be held liable even for fraud
or wilful wrong. He is responsible only to the agent (his employer).

 Substituted Agents.
Section 194 “when an agent has an express or implied authority of his principal to name another
person to act for the principal and the agent names another person accordingly, such person is not a
sub-agent but a substituted agent of the principal in respect to the business entrusted to him”. The
agent only names the substituted agent and then drops out of the scene.
Section 195 imposes a duty on the original agent to act with reasonable care while naming the
substituted agent. The section says that the agent has to exercise the same amount of discretion as a
man of ordinary prudence would exercise in his own case. If he is selected carelessly, he becomes
liable to the principal for the negligence of the agent so selected.

B. Creation of Agency
An agency can be created in the following ways.
1. Agency by express agreement.
2. Agency by implied contract.
a. Agency by Estoppel
b. Agency by holding out
c. Agency by necessity
3. Agency by Ratification

CONTRACT 2 | 15
1. Agency by express agreement.
Normally agency is created by an express agreement, specifying the scope of the authority of agent. The
agency may, in such a case, be appointed either by word of mouth or by an agreement in writing
(Section 187). However, in certain cases, e.g. to execute a deed for sale or purchase of land, the agent
must be appointed by executing a formal ‘power of attorney’ on a stamped paper.

2. Agency by implied contract.

Implied agency arises when there is no express agreement appointing a person as an agent, but instead
the existence of agency is inferred from the circumstances of the case, or from the conduct of the
parties on a particular occasion, or from the relationship between parties (Section 187). Such an agency
may take the following forms:
a. Agency by Estoppel:
- Such an agency is based on doctrine of estoppel which may briefly be stated as “Where a person
(principal) by his words or conduct has wilfully led another to believe the certain set of
circumstances or facts exists, and that other person has acted on that belief, he (principal) is
estopped or precluded from denying the truth of such statements, although such a state of
things did not in fact exist”.
- Section 237 (Contract Act) also provides the same explanation i.e. “When an agent has, without
authority, done acts or incurred obligations to third persons on behalf of his principal is bound
by such acts or obligations, if he has by his words or conduct induced such third persons to
believe that such acts and obligations were within the scope of the agent’s authority”.
- E.g. T tells M in the presence of N that he (T) is N’s agent. N does not contradict this statement
and keeps quiet. Later on M enters into a transaction with T believing that T is N’s agent. N is
bound by this transaction and he will be estopped from denying the existence of the agency,
even though such an agency did not in fact exist.

b. Agency by holding out:

- Such an agency is based on the ‘doctrine of holding out’ which is part of the law of estoppel.
- In this case also the alleged principal is bound by the acts of the supposed agent, if he has
induced third persons to believe that they are done with his authority. But unlike the agency of
estoppel, an agency by holding out requires some affirmative or positive act or conduct by the
principal to establish agency subsequently.
- Where an employer has been accustomed to pay for goods bought on his behalf by his
employee from P, the employer may be liable for a purchase made in the customary manner,
even though it is made, by the employee fraudulently after he has left the employment. The
employer’s conduct in ‘holding out’ his employee to be his agent (paying for purchases) estops
him from denying that his authority was not still in existence.
- If the agent is ‘held out’ as having only a limited authority to do acts, the principal is not bound
by an act outside the authority.

c. Agency by necessity.
- In certain circumstances the law confers an authority on one person to act as agent for another
without any regard to the consent of the principal. This agency is called ‘agency by necessity’.
- In case of emergency, in which the property or interests of another are in imminent danger, and
it becomes necessary in order to preserve the property or interests, to act before the
instructions of the owner can be obtained. The law assumes the consent of the owner to the
creation of the relationship of principal and agent. The following aspects need to be kept in
mind:

CONTRACT 2 | 16
 a. There should be real necessity for acting on behalf of the principal.
b. It should be impossible to communicate with the principal within the time available.
c. The alleged agent should act bona fide in the interests of the principal.
- Generally, the agency by necessity arises in the following cases:
a. Where the agent exceeds his authority, bona fide, in an emergency. E.g. A consigns fruits to
B at Allahabad with direction to send them immediately to C in Varanasi. On reaching
Allahabad B finds that the fruits are perishing. He sells them in Allahabad itself for the best
price. The sale will bind the principal and the agent cannot be held liable for exceeding his
authority.
b. Where the carrier of goods acting as a bailee, does anything to protect or preserve the
goods, in an emergency, although there is no express authority in that regard. E.g. Master of
ship is entitled, in case of accident and emergency to sell or pledge the goods in order to
save their value and the sale is binding on the principal.
c. Where a husband improperly leaves his wife without providing proper means for her
sustenance. The woman can sell the husbands property for necessities even against her
husband’s wishes.

3. Agency by Ratification
- Ratification means the subsequent adoption and acceptance of an act originally done without
instructions or authority.
- Thus when a principal affirm and adopts the unauthorized acts of his agent, he is said to have ratified
that act and there comes into existence an agency by ratification retrospectively.
- Section 196 deals with the effect of ratification. It provides that ‘where acts are done by one person
on the behalf of the other, but without his knowledge or authority, he may elect to ratify or to
disown such acts. If he ratifies them, the same effects will follow as if they had been performed by
his authority’.
- Ratification has retrospective effect i.e. it relates back to the time of contract. It amounts to ‘prior
authority’.
- Ratification can be expressed or implied in the conduct of the person on whose behalf the acts are
done. A without authority, buys goods for B. Afterwards B sells them to C on his own account. B’s
conduct implies a ratification on the purchase by A for him.
- Essential of a valid Ratification:
1. The agent must purport to act as agent for a principal who is in contemplation.
The agent must expressly contract as an agent for a principal in the knowledge of third parties.
The principal must be named or identifiable or his designation is also sufficent e.g. behalf of VC
or on behalf of my brother.
2. There should be an act capable of ratification.
The act to be ratified should be a legal one. There can be no ratification on illegal act or an act
which is void.
3. The principal must be in existence.
The principal must be in existence at the time of the contract, because rights and duties cannot
be attached to a non-existent person.
4. The principal must be competent to contract.
The principal should have contractual capacity at the time of original contract and at the time of
ratification.
5. The Principal should have full knowledge of material facts.

CONTRACT 2 | 17
 No valid ratification can be done by a person whose knowledge of facts of the case is materially
defective (Section 198). The principal should have full knowledge of material facts and give
unqualified acceptance.
6. Whole transaction must be ratified.
Ratification must be of the whole contract. Once a part is accepted, it is an implied acceptance of
the whole (Section 199). There cannot be partial rejection and partial ratification.
7. Within reasonable time.
The ratification must be done within a reasonable time after a contract is made. If a time is
expressly fixed then it has to ratified within that time.
8. Ratification must not injure a third person.
A ratification cannot be effective where its effect is to subject a third person to damages, or
terminate any right or interest of a third party.

C. Termination of Agency
 An agency can be terminated in any of the following ways
a. By act of the parties
b. By operation of law

A. Termination by act of the parties

An agency comes to an end by act of the parties in the following cases:
1. Agreement:
An agency, like any other, can be terminated at any time by the mutual agreement between
the principal and the agent,
2. Revocation by the Principal (Sections 203 to 207)
- Section 203 empowers the principal to revoke the authority of agent at any time before the
agent has exercised his authority so as to bind the principal, unless the agency is
irrevocable.
- Section 207 revocation can be expressed or implied in the conduct of the principal.
- Revocation of authority by the principal is, however, subject to the following conditions:
a. In the case of a continuous agency, the principal may revoke it for the future. It cannot
be revoked with regard to acts already done in the agency. Reasonable notice should
be given for revocation. If it is not given then the principal is liable to compensate the
agent for damages resulting thereby and be bound be the acts of the agent with
respect to third parties (Sections 204-206)
b. Where an agency has been created for a fixed period and the principal revokes the
authority of the agent before the expiry of the period, without sufficient cause, the
principal is bound to pay compensation to the agent for the resulting loss, even if the
authority is revoked after reasonable notice (Section 205).
3. Renunciation by the Agent
- An agency is terminated by an express renunciation by the agent because a person cannot
be forced to continue as agent against his will. But he must give notice, otherwise he will be
liable to compensate the principal for any damage resulting thereby (Section 206). If the
agent is for a fixed term and if he renounces it without sufficient cause before the expiry of
the period he will have to compensate the principal for the resulting loss, if any (Section
205).

B. By operation of law
- An agency comes to end automatically by operation of law in the following cases:

CONTRACT 2 | 18
 1. Completion of the business of agency (Section 201)
2. Expiry of fixed term.
3. Death of the principal or the agent.
4. Insanity of the principal or the agent.
5. Insolvency of the principal.
6. Destruction of the subject-matter.
7. Dissolution of the company.
8. Principal or agent becomes an alien enemy.
- When termination of an agency takes effect? The termination of the agency takes effect only
when it is becomes known to the agent, and so far as the third parties are concerned
termination of agency takes effect when it is made known to them (Section 208). If the
principal sends the revocation by letter then the revocation has effect not when posted, but
when it is received by agent and the third parties only when it is made known to them.
Knowledge to the third parties is necessary.
- Irrevocable agency: Irrevocable agency is when the authority given to the agent cannot be
revoked. It becomes irrevocable in the following cases:
a. When the agency is coupled with interest (Section 202): where the agent himself has
interest in the subject-matter of agency, the agency is said to be coupled with interest. It is
created to protect the interest of the agent. Agency coupled with interest cannot be
terminated even by death, insanity or insolvency.
b. When revocation would cause the agent personal loss: when the agent has, in pursuance
of his authority, contracted a personal liability, the agency becomes irrevocable and the
principal cannot revoke the authority unilaterally. This is so because the principal cannot
be permitted to defeat rights already established. E.g. A authorized B to buy Rs. 1000 bales
of cotton on account of A and to pay for it out of A’s money remaining in B’s hands. B buys
Rs. 1000 bales of cotton in his own name so as to make himself personally liable for the
price. A cannot revoke B’s authority so far as regards payment for the cotton.
c. When the authority has been partly exercised by the agent (Section 204). Where the
agent has partly exercised his authority, it becomes irrevocable so far as regards such acts
and obligations as arise from acts already done in the agency. E.g. A authorized B to buy
Rs. 1000 bales of cotton on account of A, and to pay for it out of A’s money remaining in
B’s hands. B buys Rs. 1000 bales of cotton in A’s name and so as not to make himself
personally liable for the price. A cannot revoke B’s authority so far as regards buying the
cotton but can revoke B’s authority to pay for the cotton.

CONTRACT 2 | 19
6. DISCUSS RIGHTS AND DUTIES OF AN AGENT.
Ans. Agent: 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 acts are done or who is represented, is called ‘principal’.
A. Rights of the Agent: (Right against the Principal)
An agent has the following rights against the principal. They are:
1. Right to receive remuneration (Section 210-220):
- The agent has the right to receive the agreed remuneration.
- If nothing is agreed then the agent has to get reasonable remuneration for the work done. An agent
can claim a remuneration after having completed his work.
- If the agent has caused misconduct or breach is not entitled to any remuneration and he is also
liable to compensate the principal for any loss caused by the misconduct.
2. Right of retainer (Section 217):
An agent has the right to retain, out of any sums received on account of the principal, all moneys due to
himself in respect to his remuneration, or advances made or expenses properly incurred by him in
conducting the business of agency.
3. Right of lien (Section 221):
An agent has a right to retain goods, papers, and other property, whether movable or immovable, of
the principal received by hi, until the amount due to himself for commission, disbursement and services
in respect of the same has been paid or accounted for to him.
The right of lien of an agent is a particular lien. But by a special contract an agent may have a general
lien also. According to section 171 factors, bankers, attorneys of HC and policy brokers have a ‘general
lien’ in the absence of a contract contrary to it.
4. Right to be indemnified against consequences of lawful acts (Section 222)
An agent has also the right to be indemnified against the consequences of all lawful acts done by him in
exercise of the authority conferred upon him. He cannot claim indemnity of unlawful acts.
5. Right to be indemnified against consequences of acts done in good faith (Section 223)
An agent has also the right to be indemnified against the consequences of an acts done by him in good
faith though it turns out to be injurious to the rights of third persons. E.g. B, at the request of A, sells
goods in possession of A, but which A had no right to dispose of. B does not know this and hands over
the proceeds of the sale to A. Afterwards C, the true owner of the goods sues B and recovers the value
of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C and for B’s
own expenses.
6. Right to compensation (Section 22)
The agent has a right to be compensated for injuries sustained by him due to the principal’s neglect or
want of skill. E.g. 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.
7. Right of stoppage of goods in transit.
An agent has a right to stop the goods in transit to the principal (just like an unpaid seller), if (i) he has
bought goods either with his own money or by incurring a personal liability for the price and (ii) the
principal has become insolvent.

B. Duties of an Agent: (Towards the Principal)

An agent has the following duties towards the principal.
1. Duty to follow principal’s direction or customs (Section 211)
The first duty of the agent is to act within the scope of the authority conferred upon him and perform
the agency’s work according to the principal’s directions. If an agent acts otherwise, he must make
good any loss incurred to the principal, and if any profit is got, he has to account for it.

CONTRACT 2 | 20
 E.g. If a principal told the agent to place the goods in a particular warehouse and if he puts it another
warehouse and the warehouse catches fire then the agent is liable for the loss because he did not
follow directions of the principal.
If no instructions are given then follow the customs prevailing in same kind of business at the place
where the agent conducts business. If the agent makes any departure, he does so at his own risk.
2. Duty to carry out the work with reasonable skill and diligence (Section 212)
If he does not work with reasonable sill and diligence, he must make compensation to his principal in
respect of ‘direct consequences’ of his neglect, want of skill or misconduct. But he is not so liable for
indirect or remote losses.
E.g. A, a merchant in Kolkata has an agent in B, in London, to whom a sum of money is paid on A’s
account, with orders to remit. B retains the money for a considerable time. A, in consequence of not
receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it
ought to have been paid, according to the usual rate and for any further direct loss such as loss of
variation of rate of exchange, but nothing further.
3. Duty to render accounts (Section 213)
Is the duty of an agent to keep proper accounts of his principal’s money or property and render them
to him on demand, or periodically if so provided in the agreement.
4. Duty to communicate (Section 214)
It is the duty of an agent, in case of difficulty, to use all reasonable diligence in communicating with his
principal, and in seeking to obtain his instructions, before taking any steps in facing the difficulty or
emergency.
5. Duty not to deal on his own account (Section 215 and 216)
An agent must not deal on his own account in the business of the agency i.e. not himself buy or sell,
without the consent of his principal after disclosing material facts to him.
If the agent violates this rule then the principal may repudiate (reject) the transaction where it can be
shown that any material fact has been knowingly concealed by the agent, or the dealings have been
disadvantageous to the principal. The principal can claim any benefit the agent has received as a result
of the transaction.
E.g. A direct B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that B
has bought the estate for himself, may reject the sale, if he can show that B has dishonestly concealed
material fact or the sale was disadvantageous to him.
6. Duty not to make any profit out of his agency except his remuneration (Sections 217-218)
An agent stand in fiduciary relation to his principal and therefore he must not make any profit (secret
profit) out of his agency. He must pay to his principal all moneys received by him on principal’s account.
7. Duty on termination of agency by principal’s death or insanity (Section 209)
When an agency is terminated by the death of principal or him becoming insane, the agent must take,
on behalf of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him.
8. Duty not to delegate authority (Section 190)
Subject to six exceptions stated earlier, an agent must not further delegate his authority to another
person, but perform the work of the agency himself.

CONTRACT 2 | 21
 UNIT III
7. DISCUSS DEFINITION AND ESSENTIAL OF A CONTRACT OF SALE.
Ans. Sale of Goods: The law relating to sale of goods is contained in the Sale of Goods Act, 1930, which came into
force on 1st July 1930. The Act contains sixty-six sections and extends to the whole of India except the State of
Jammu and Kashmir. A few amendments were made to this act in Sale of Goods (Amendment) Act, 1963. The
general provisions of Indian Contract are applicable here too.

A contract of sale of good results, like any other contract, is an offer by one party and its acceptance by the
other. Thus, it is a consensual transaction. The parties to the contract enjoy unfettered (free, unrestricted)
discretion (will, choice) to agree to any terms they like relating to delivery and payment of price, etc.

The sale of goods law lays down certain positive rules of general application for those cases where the parties
have failed to contemplate (consider, expect) expressly for contingencies (possibilities, incidents) which may
interrupt the smooth performance of a contract of sale, such as destruction of the thing sold, before it is
delivered or the insolvency of the buyer, etc.

 Definition of contract of sale:

- Section 4(1) of the Sale of Goods Act defines a contract of sale of goods as “a contract whereby the
seller transfers or agrees to transfer the property in goods to the buyer for a price”.

 Essential of contract of sale:

1. Two parties:
- There must be two distinct parties to a contract of sale, viz., a buyer and seller, as a person cannot
buy his own goods.
- When students of a hostel take meals with a mess run by themselves on cooperative lines, there is
no contract of sale, the students are ‘undivided joint owners’ of the meals they are consuming. An
‘undivided joint owner’ is different from ‘part-owner’ who is a joint owner with divisible share.
According to Section 4(1) there may be a contract of sale between one part owner and another. E.g.
A and B jointly own a computer. A may sell his ownership in the computer to B, thereby naming B
sole owner of the computer. Similarly, a partner may buy the goods from the firm in which he is a
partner and vice-versa.
- There is only one exception when a person can buy his own property. When a person’s goods are
sold in execution of a decree, he may himself buy them, so as to save them from a transfer of
ownership to someone else.
2. Transfer of property:
- ‘Property’ means ‘ownership’. Transfer of property in the goods is another essential of a contract of
sale of goods. A mere transfer of possession of the goods cannot be termed as sale.
- To constitute a sale the seller must either transfer or agree to transfer the property in the goods to
the buyer.
- Property as used in Sale of Goods act, means ‘general property’ in goods as distinguished from
‘special property’ [section 2(11)].
- If P who owns certain goods pledges them to R, he has general property in the goods, whereas R
(the pawnee) has special property or interest in the goods to the extent of the amount of advance
he has made to the pawnor.

CONTRACT 2 | 22
3. Goods:
- The subject-matter of the contract of sale must be goods. According to section 2(7), ‘goods means
every kind of movable property other than actionable claims and money; and includes stock and
shares growing crops, grass and things attached to or forming part of the land which are agreed to
be severed before sale or under the contract of sale’. Thus goodwill, copyright, patent rights, water,
gas, electricity, decree of court of law, shares, stock are all goods. Grass, tree, growing crops are
goods when they are separated from the land.
- Money is currency and cannot be regarded as goods because it is the medium of exchange through
which goods can be bought. Old and rare coins, however, may be treated as goods and sold as
such.

4. Price:
- The consideration for a contract of sale must be money consideration called the ‘price’. If goods are
sold or exchanged for other goods, the transaction is barter, governed by the Transfer of Property
Act and not a sale of goods under this Act.
- But if goods are sold partly and partly by money, the contract is one of sale.

5. It includes both a ‘sale’ and ‘an agreement to sell’:

- The term ‘contract of sale’ is a generic term and includes both a ‘sale’ and an ‘agreement to sell’.
- Sale – is where property in the goods is immediately transferred at the time of making the contract
from the seller to the buyer (Section 4(3)). It refers to an ‘absolute sale’. There is immediate
conveyance (transfer) of the ownership and mostly of the subject-matter of the sale as well. It is an
executed contract.
- Agreement to sell – where under a contract of sale the transfer of property in goods is to take
place at a future time or subject to some condition thereafter to be fulfilled, the contract is called
‘an agreement to sell’ *Section 4(3)+. It is an executor contract and refers to a conditional sale. E.g.
A agrees to purchase B’s car for Rs. 50,000 provided B stands surety for him with C. It is an
agreement to sell for B. It becomes a sale when the condition is fulfilled by B. E.g. A buys some
furniture for Rs. 12,000 and agrees to pay for that in two monthly installments, the ownership to
pass to him on the payment of second installment. This is an agreement to sell for the furniture
dealer.

6. No formalities to be observed (Section 5):

- The Sale of Goods Act does not prescribe any particular form to constitute a valid contract of sale.
- It can be made by mere offer and acceptance.
- Neither payment nor delivery is necessary at the time of making the contract of sale.
- It can be made orally or in writing or partly oral and partly written or may be implied by the
conduct of the parties.

CONTRACT 2 | 23
8. DISTINGUISH BETWEEN SALE AND AGREEMENT TO SELL.
Ans. The following are the main points of distinction between a ‘sale’ and ‘an agreement to sell’.

SALE AGREEMENT TO SELL

1 Transfer of Property:
In a sale, the property in goods passes to the In an agreement to sell there is no transfer of
buyer immediately at the time of making the property to the buyer at the time of contract. The
Contract. passing of property to the buyer takes place later.
The sell continues to be owner till agreement to sell
It creates a jus in rem i.e. gives right to the buyer become sale.
to enjoy goods as against the whole world. It creates a jus in personam i.e. it gives a right to
either buyer or seller against the other for any
default in fulfilling his part of the agreement.
2 Risk of Loss:
As a general rule, unless otherwise agree, the risk
of loss prima facie passes with property (Section
26).
In case of sale, if the goods are destroyed the loss In case of an agreement to sell where the ownership
falls on the buyer even though the goods may in the goods is yet to pass from the seller to the
never have come into his possession because the buyer, such loss has to be borne by the seller even
property in the goods has already passed to the though the goods are in the possession of the buyer.
buyer.
3 Consequences of breach:
In case of sale, if the buyer wrongfully neglects or In case of an agreement to sell, if the buyer breaks
refuses to pay the price of the goods, the seller his promise, the seller can only sue for damages and
can sue for the price, even though the goods are not for the price, even though the goods are in the
still in his possession. possession of buyer.
4 Right of Resale:
In a sale, the property is with the buyer and as In an agreement to sell, the property in the goods
such the seller cannot resell the goods. If he does remains with the seller and as such he can dispose
so the new buyer having knowledge of the of the goods as he likes and the original buyer can
previous sale does not acquire a title to the sue him for the breach of Contract only. In this the
goods. The original buyer can sue and recover the subsequent buyer gets a good title to the goods,
goods from third person and also seller for irrespective of his knowledge of previous sale.
breach of contract and tort of conversion. The
right to recover the goods from the third person
is lost if the subsequent buyer had bought them
bona fide without notice of the previous sale
(Section 30)
5 Insolvency of buyer before he pays for the
goods:
In a sale, if the buyer is adjudged insolvent before In an agreement to sell, in these circumstances
he pays for the goods, the seller, in the absence (buyer is adjudged insolvent), the seller may refuse
of a ‘right to lien’ over the goods, must deliver to deliver the goods to the Official Receiver or
the goods to the Official Receiver or Assignee. Assignee unless paid for, as ownership has not
The seller is only entitled to a rateable dividend passed to the buyer.
for the price of the goods.

CONTRACT 2 | 24
6 Insolvency of seller if the buyer has already paid
the price:
In a sale, if the seller is adjudged insolvent, the
buyer is entitled to recover the goods from the
Official Receiver or Assignee, as the property in
the goods rests with the buyer.
In an agreement to sell, if the buyer has already paid
the price and the seller is adjudged insolvent, the
buyer can only claim a rateable dividend (as a
creditor) and not the goods because property in
them still rests with the seller.
CONTRACT 2 | 25
9. Define the term goods. What are the different types of goods? Explain perishing goods.
Ans.
1. Definition of goods:
- The subject-matter of the contract of sale must be goods.
- According to section 2(7), ‘goods means every kind of movable property other than actionable claims
and money; and includes stock and shares growing crops, grass and things attached to or forming part of
the land which are agreed to be severed before sale or under the contract of sale’.
- Thus goodwill, copyright, patent rights, water, gas, electricity, decree of court of law, shares, stock are
all goods. Grass, tree, growing crops are goods when they are separated from the land.

2. Different types of goods: Goods can be classified into the following types.
1. Existing goods
a. Specific goods
b. Unascertained goods
2. Future goods
3. Contingent goods

1. Existing goods:
- The goods that are physically in existence and which are in seller’s ownership and/or possession, at
the time of entering the contract of sale are called ‘existing goods’.
- Where seller is the owner, he has the general property in them.
- Where seller is in possession, say, as an agent or a pledgee, he has a right to sell them.
- There are two types of existing goods. They are:
a. Specific goods
Goods identified and agreed upon at the time of the making of the contract of sale are called
‘specific goods’ *Section 2(4)+. Where A agrees to sell to B a particular DVD player bearing a
distinctive number, there is a contract of sale of specific goods.
b. Unascertained goods
The goods which are not separately identified or ascertained at the time of making of the contract
are known as ‘unascertained goods’. They are indicated or defined only by description. E.g. If A
agrees to sell a bag of sugar from 10 tens sacks lying in his godown, it is sale of unascertained
goods because it is not known which bag is to be delivered.

2. Future goods
Goods to be manufactured, produced or acquired by the seller after making of the contract of sale are
called ‘future goods’ *Section 2(6)+. These goods may be either not yet in existence or be in existence
but not yet acquired by the seller. There can be no present sale of future goods. It is only an ‘agreement
to sale’. E.g. A agrees to sell to B all the milk that his cow may yield during the coming year. This is a
contract for sale of future.

3. Contingent goods
Goods, the acquisition of which by the seller depends upon an uncertain contingency are called
‘contingent goods’ *Section 6(2)+. They are a type of future goods and so it is an ‘agreement to sell’ and
not a ‘sale’. The property does not pass at the time of making the contract. The contract of sale of
contingent goods is enforceable only if the event on the happening of which the performance of the
contract is dependent happen, otherwise the contract becomes void.
E.g. A agrees to sell to B a specific rare painting provided he is able to purchase it from present owner.
This is a contract for the sale of contingent goods.

CONTRACT 2 | 26
3. Effect of Perishing of goods:
Section 7 and 8 deal with the effect of perishing of goods on the rights and obligations of the parties to a
contract of sale. Under these sections the word ‘perishing’ means not only physical destruction of the
goods but is also covers:
a. Damage to goods so that the goods have ceased to exist in the commercial sense, i.e. their
merchantable character as such has been lost (although they are not physically destroyed), e.g., where
cement is spoiled by water and becomes almost stone or where sugar becomes sharbat and thus are
unsaleable as cement or sugar.
b. Loss of goods by theft.
c. Where the goods have been lawfully requisitioned by the government.
It may also be mentioned that it is only the perishing of specific and ascertained goods that effects a
contract of sale. Where, therefore, unascertained goods form the subject-matter of a contract of sale, their
perishing does not affect the contract and the seller is bound to supply the goods from wherever he likes,
otherwise be liable for breach of contract. E.g. where A agrees to sell to B ten bales of Egyptian cotton out
of 100 bales lying in his godown and the bales in the godown are completely destroyed by fire, the contract
does not become void. A must supply ten bales of cotton after purchasing them from the market or pay
damages for the breach.
The effect of perishing goods may be discussed under the following head:
1. Perishing of specific goods at or before making of the contract (Section 7):
They are divided into the following sub-heads:
a. In case of perishing of the ‘whole’ of the goods.
- Where specific goods form the subject-matter of a contract of sale (both actual sale and
agreement to sell), and they, without the knowledge of the seller, perish, at or before the time
of the contract, the agreement is void.
- This provision is based either on the ground of mutual mistake as to a matter of fact essential to
the agreement, or on the ground of impossibility of performance, both of which render the
agreement void ab-initio.
- E.g. A sold to B a specific cargo of goods supposed to be on its way from England to Bombay. It
turned out, however, that before the day of the bargain, the ship conveying the cargo had been
cast away and the goods were lost. Neither party was aware of the fact. The agreement was
held to be void.
- E.g. A agrees to sell to B a certain horse. It turns out that the horse was dead at the time of
bargain, though neither party was aware of the fact. The agreement is void.

b. In case of perishing of only ‘a part’ of the goods

Where in a contract for the sale of specific goods, only part of the goods are destroyed or damaged,
the effect of perishing will depend upon whether the contract is entire or divisible. If it is entire (i.e.
indivisible) and part only of the goods has perished, the contract is void. If the contract is divisible,
it will not be void and the part available in good condition must be acceptable by the buyer. E.g.
There was a contract for the sale of a parcel containing 700 bags of Chinese groundnuts of different
qualities. Unknown to the seller 109 bad had been stolen at the time of contract. The seller
delivered the remaining 591 bags and, on the buyer’s refusal to take them, brought an action for
the price. It was held that the contract being indivisible, had become void by reason of the loss of
goods and the buyer was not bound to take delivery of 591 bags or pay for the goods. But if the
grounds were of same quality and weight then the contract would have been divisible and the
buyer could only have avoided the contract as to those goods which had actually perished.

CONTRACT 2 | 27
2. Perishing of specific goods before sale but after agreement to sell (Section 8):
Where there is an agreement to sell specific goods, and subsequently the goods, without any fault on
the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby
avoided i.e. the contract of sale becomes void, and both parties are excused from performance of the
contract. This is based on supervening impossibility of performance which makes a contract void.
Earlier it was void ab-initio here it is become void later.
If the goods are destroyed due to fault of either party, the n the party in default is liable for non-
delivery or to pay for the goods, as the case may be (Sec. 26). Again if the risk has passed to the buyer,
he must pay for the goods, though undelivered.
E.g. A buyer took a horse on trial for 8 days on condition that if found suitable for his purpose the
bargain would become absolute. The horse died on the 3rd day without any fault of either party. Held
the contract, which was in form of an agreement to sell, becomes void and the seller should bear the
loss (Elphich v/s Barnes).

Effects of perishing of future goods: a present sale of future goods always operates as an agreement to
sell [Section 6(3)]. Here the question arises whether section 8 (Perishing of specific goods before sale
but after agreement to sell) applies to a contract of sale of future goods (amounting to an agreement to
sell) as well? The answer is found in the leading case of Howell v/s Coupland, where it has been held
that future goods, if sufficiently identified, are to be treated as specific goods, the destruction of which
makes the contract void. The case is: C agreed to sell H 200 tons of potatoes to be grown on C’s land. C
sowed sufficient land to grow the required quantity of potatoes, but without any fault on his part, a
disease attacked the crop and he could deliver only about ten tons. The contract was held to have
become void.

CONTRACT 2 | 28
10. Explain Price. What are the various modes of fixing the price? Explain Earnest money.
Ans.
1. Definition of Price:
- The money consideration for a sale of goods is known as ‘price’ *section 2(10)+.
- Price is the essential element in every contract of sale of goods, that is, no valid sale can take place
without a price.
- The price should be paid or promised to be paid in legal tender money, unless otherwise agreed. It may
be paid in the form of a cheque, hundi, bank deposit, etc.

2. Modes of fixing the price:

According to Section 9 the price may be fixed by one or the other of the following modes:
1. It may be expressly fixed by the contract itself:
This is the most usual mode of fixing the price. The parties are free to fix any price they like and the
court will not question as to the adequacy of price. But the sum should be definite. Where an
alternative price is fixed, the agreement is void ab-initioas it involves an element of wager (bourke v/s
short). E.g. Where A agrees to sell his cow to B for Rs. 5000 if the cow gives 10kg milk every day but for
Rs. 100 only if it fails to do so, there is a wagering agreement void ab-initio
2. It may be fixed in accordance with an agreed manner provided by the contract:
If may be agreed that the buyer would pay the market price prevailing on a particular date, or that the
price is to be fixed by a third party (i.e. valuer) appointed by the consent of the parties.
But in the following cases where the agreement of the parties as to price is uncertain as to price is
uncertain, price is deemed as ‘not capable of being fixed’ and hence the agreement the agreement is
void ab-initio for uncertainty:
a. If the price is agreed to be whatever sum the seller be offered by any third party;
b. If the price is left to be fixed by one of the contracting parties, expressly. If no price is fixed then the
contract is not void for uncertainty because in that case law usually allows market price prevailing
on the date of the supply of goods as the price bargained for.
3. It may be determined by the course of dealings between the parties.
If the buyer has been previously paying to a particular seller the price prevailing on the date of placing
the order, the course of dealings suggest that in subsequent transactions also the price as on the date
of order will be paid.
4. If the price is not capable of being determined in accordance with any of the above modes, the buyer
is bound to pay to the seller a ‘reasonable price’.
The reasonable price depends on the circumstances of each particular case. Ordinarily, the market
price of the goods prevailing on the date of supply is taken as reasonable price.

3. Agreement to sell at valuation (Section 10):

- Where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation
(estimate) of a third party and such third party fails to fix the price (because he does not want or does
cannot fix the price), the contract becomes void, except as to part of goods delivered and accepted, if
any, under the contract, as regards which the buyer is bound to pay a reasonable price.
- If, however, any one of the two parties, namely the seller or the buyer, prevents the third party from
making the valuation, the innocent party may maintain a suit for damages against the party in fault.
Even though the contract becomes void, yet the party at fault is bound to compensate the other party
for the actual loss suffered by him because of the act of prevention.

CONTRACT 2 | 29
4. Earnest money or deposit:
- Money deposited with the seller by the buyer as security for due fulfillment of the contract is called
‘earnest’ or ‘deposit’. Where the contract is carried through, earnest money counts as part payment and
only the balance of the price is required to be paid.
- But if the contract is cancelled because of the fault of the buyer, the seller is entitled to forfeit it and
where it falls through because of the default of the seller, the buyer is entitled to recover the earnest
money in addition to damages for breach. If on the breach of the agreement by the buyer, the seller
sues him for the breach, the earnest, although forfeited, is to be taken into account as diminishing the
amount of damage (Jaganadhaya v/s Ramanatha).

5. Document of title of goods:

- Any document which is used in the ordinary course of business as proof of the possession or control of
goods, or authorizing either by endorsement or by delivery, the possessor of the document to transfer
or receive goods thereby represented is a document of title of goods [Section 2(4)].
- Document of title is a proof of the ownership of the goods.
- A document of title to goods contains an undertaking on the part of the issuing authority to deliver the
goods to the holder thereof unconditionally.
- Even though it can be transferred by mere delivery or by endorsement, yet it is regarded as ‘quasi
negotiable instrument’ because the title of transferee will not be superior to that of the transferor in the
case of transfer of such document.
- Bill of lading, warehouse keeper’s certificate, wharfinger’s certificate, railway receipt, delivery order,
ectc., are examples of the document of title of goods.

CONTRACT 2 | 30
11. What is condition and warranty? Explain express and implied conditions and warranties.
Ans.
1. Definition of Condition:
- A condition is a stipulation (specification, provision) essential to the main purpose of the contract, the
breach of which gives the aggrieved party a right to repudiate (reject, cancel) the contract itself [section
12(2)].
- He may maintain an action for damages for loss suffered, if any, on the footing that the whole contract
is broken and the seller is guilty of non-delivery (Miller’s Machinery co. Ltd., v/s David Way and Son).

2. Definition of Warranty:
- A warranty is a stipulation (specification, provision) collateral to the main purpose of the contract, the
breach of which gives the aggrieved party a right to sue for damages only and not to avoid the contract
itself [section 12(3)].
Thus we see that condition form the very basis of a contract of sale, the breach of which causes irreparable
damage to the aggrieved party so as to entitle him even to cancel the contract, whereas warranty is only of
secondary importance. A breach of condition may be treated as a breach of warranty, but a breach of
warranty cannot be treated as a breach of condition.

3. Express and Implied Conditions and Warranties:

- Conditions and warranties may be either express or implied.
- They are expressed when they are inserted or put in the contract.
- They are implied when the law presumes their existence in the contract automatically though they are
not put in express words.
A. IMPLIED CONDITIONS
Unless otherwise agreed, the law incorporates into a contract of sale of goods the following implied
conditions:
1. Condition as to title [section 14(a)].
- In every contract of sale, the first implied condition on the part of the seller is that, in the case of
a sale, he has the right to sell the goods and that, in the case of agreement to sell; he will have a
right to sell the goods at the time when the property is to pass.
- Normally, the seller has the right to sell the goods if either he is the owner of the goods or he is
owner’s agent. If the `seller’s title turns out to be defective the buyer is entitled to reject the
goods and to recover his price.
- E.g. R purchased a car from D and used the same for several months. D had no title to the car
and, therefore, R was compelled to return the car to the true owner. R sued D to recover back
the price which he had already paid. He want entitled to recover the whole of the price paid by
him despite the fact that he had used the car for some months (Rowland v/s Divall).
- Where a seller having no title to the goods at the time of the sale, subsequently acquires the
title (paying off the true owner) before the buyer seeks to repudiate the contract, that title feeds
the defective titles of both the original and subsequent buyers and it will then be too late for the
buyer to repudiate the contract (Pattern v/s Thomas Motors).

2. Condition in a sale by description.

- Where there is a contract of sale of goods by description, there is an implied condition that the
goods shall correspond with the description (Section 15). Lord Blackburn observes that ‘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’.

CONTRACT 2 | 31
 - The description may be in terms of the qualities or characteristic of the goods, e.g. long staple
cotton, Kalyan wheat, sugar C-30, basmati rice or may be brand name or type of packing, etc.
- E.g. where a contract for the supply of ‘new singers car’ and one of the cars supplied had run a
considerable mileage was not new, there was breach of condition on the part of the seller and
the buyer could reject the car.

3. Condition in a sale example (Section 17).

- When under a contract of sale, goods are to be supplied according to a sample agreed upon, the
implied conditions are:
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, which would not be apparent on reasonable
examination of the sample.

4. Condition in a sale by sample as well as by description (Section 15).

- When goods are sold by sample as well as by description, there is an implied condition that the
bulk of the goods shall correspond both with the sample and with the description.
- If the goods supplied correspond with the sample and not the description or vice versa, the
buyer is entitled to reject the goods.

5. Condition as to fitness or quality.

- Ordinarily, in a contract of sale there is no implied condition or warranty as to quality or fitness
for any particular purpose of goods supplied; the rule of law being ‘caveat emptor’ that it let the
buyer beware. But an implied condition is deemed to exist on the part of the seller that the
goods supplied shall be reasonably fit for the purpose for which the buyer wants them, if the
following conditions are fulfilled:
a. The buyer, expressly or impliedly, should make known to the seller the particular purpose
for which the goods are required;
b. The buyer should rely on the seller’s skill or judgment;
c. The goods sold must be of a description which the seller deals in the ordinary course of his
business, whether he be the manufacturer or not.
- The purpose need not be told expressly if the goods are fit for one particular purpose only or if
the nature of goods itself tells the purpose by implication. E.g. when a buyer buys a tinned fruit
juice, it is implied from the nature of the product that he wants to consume it, but finds out that
it contained poisonous matter, there is a breach of implied condition as to the fitness and the
seller is liable in damages.
- Sometimes the implied purpose can be made known from the usage of the trade e.g. mobiloil
for a scooter implies ‘two T’s mobiloil’.
- The trade mark or patent may give implied condition of the fitness for any particular purpose.

6. Condition as to merchantability [Section 16(2)].

- This condition is implied only where the sale is by description. We have already seen that there
is an impleid condition in such cases, as per section 15, that the goods should correspond with
the description. This sub-section lays down another implied condition in such cases, that is, that
the goods should be of ‘merchantable quality’. But for making this condition applicable, not only
that the sale must be by description, but the following conditions must also be satisfied:
a. The seller should be a dealer in goods of that description, whether he be the manufacturer
of not ;

CONTRACT 2 | 32
 b. The buyer must not have any opportunity of examining the goods or there must be some
latent defect in the goods which would not be apparent on reasonable examination of the
same.
- If the buyer had an opportunity of making the examination but he avoids to examine, or if he
has examined the goods, there is no implied condition as to merchantability as regards defect
which such examination ought to have revealed [Section 16(2)].
- Merchantable quality means the goods are of such quality and in such condition that a
reasonable man, acting reasonably, would accept them under the circumstances of the case in
performance of his offer to buy those goods…E.g. where the underwear supplied contained
certain chemicals which would cause skin disease to a person wearing it was held not of
merchantable quality and could be rejected (Grant v/s Australian Knitting Mills Ltd)

7. Condition as to wholesomeness.
- This condition is implied only in a contract of sale of eatable and provisions. In such cases the
goods supplied must not only answer to description and be merchantable but must also be
wholesome, i.e. free from any defect which renders them unfit for human consumption.
- E.g. A bought milk from B, a diary owner. The milk was contaminated with germs of typhoid
fever. A’s wife drank and got infected and died of it. A was liable in damages (Frost v/s
Aylesbury Diary Co. Ltd)

B. IMPLIED WARRANTIES
Unless otherwise agreed, the law also incorporates into a contract of sale of goods the following implied
warranties:
1. Warranty of quiet possession [Section 14(b)].
- In every contract of sale, the first implied warranty on the part of seller is that “the buyer shall
have and enjoy quiet possession of the goods”.
- If the quiet possession is disturbed by a person who has superior right than that of the seller, the
buyer can claim the damages from the seller.
- This arises because the seller’s title to the goods is defective.
- E.g. a lady bought a second hand type writer and got it repaired and used it for some time.
Unknown to the parties the type writer was a stolen one and had to be returned to its real
owner. She was held entitled to recover from the seller for the breach of warranty damages
both the price and cost of repair.

2. Warranty of freedom from encumbrances [Section 14(c)].

- The goods must be free from any charge or encumbrances in favour of any third party not
declared or known to the buyer before or at the time when the contract was made.
- If afterwards it is found that there are any such charges or encumbrances and the buyer has to
discharge of the same, then there is breach of warranty and the buyer is entitled to damages.
- There is breach only when the buyer discharges the amount of encumbrances, and he had no
notice of that at the time of the contract of sale.
- If the buyer was aware of such encumbrances then he is bound by the same and not entitled to
claim compensation.
- E.g. A, the owner of the watch, pledges it with B. After a week A obtains possession of the watch
from B for some limited purpose and sells it to C. B approaches C and tells him about the pledge
affair. C has to make payment of the pledge amount to B. there is breach of warranty and C is
entitled to claim compensation from A.

CONTRACT 2 | 33
3. Warranty of disclosing the dangerous nature of goods to the ignorant buyer.
- The third implied warranty on the part of the seller is that in case the goods sold are of
dangerous nature he will warn the ignorant buyer of the probable danger.
- If there is breach of this warranty the buyer is entitled to claim compensation for the injury
caused to him.
- E.g. C purchases a tin of disinfectant powder from A. A knows that the lid of the tin is defective
and if it is opened without special care it may be dangerous, but tells nothing to C. C opens the
tin in the normal way whereupon the disinfectant powder flies into her eyes and causes injury. A
is liable in damages to C as he should have warned C of the probable danger.

CONTRACT 2 | 34
12. WRITE SHORT NOTE ON DOCTRINE OF CAVEAT EMPTOR AND ITS EXCEPTIONS
Ans.
1. Doctrine of Caveat Emptor:
- The maxim of caveat emptor means “let the buyer beware”.
- It is the duty of the buyer to be careful while purchasing goods of his requirements. The buyer must
examine the goods thoroughly and must see that the goods he buys are suitable for the purpose for
which he wants them. If the goods turn out to be defective or do not suit the purpose, the buyer cannot
hold the seller liable for the same, as there is no implied undertaking by the seller that he shall supply
such goods as suit the buyer’s purpose.
- In the absence of any enquiry from the buyer, the seller is not bound to disclose every defect in goods of
which he may be aware.
- E.g. A buys horse from B. A needed the horse for riding but he did not mention this fact to B. The horse
is not suitable for riding but is suitable only for being driven in carriage. Caveat emptor being the rule. A
can neither reject the horse nor can he claim any damages.

2. Exceptions to the rule of Doctrine of Caveat Emptor:

1. Where the seller makes a misrepresentation and the buyer relies on it, the doctrine of caveat emptor
does not apply. Such a contract being voidable at the option of the innocent party, the buyer has a right
to cancel the contract.
2. Where the seller makes a false representation amounting to fraud and the buyer relies on it, or where
the seller actively conceals a defect in the goods so that the same could not be discovered on a
reasonable examination, the doctrine of caveat emptor does not apply. Such a contract is voidable at
the option of the buyer and the buyer is entitled to avoid the contract and also claim damages.
3. Where the goods are purchased by description and they do not correspond with the description the
doctrine of caveat emptor will not apply.
4. Where the goods are purchased by description from a seller who deals in such class of goods and they
are not of ‘merchantable quality’, the doctrine of caveat emptor does not apply. But the doctrine is
applicable if the buyer has examined the goods, as regards defect which such examination out to have
revealed.
5. Where the goods are bought by sample, the doctrine of caveat emptor does not apply if the bulk does
not correspond with the sample, or if the buyer is not provided an opportunity to compare the bulk with
the sample, or if there is any hidden or latent defect in the goods.
6. Where the goods are bought by sample as well as description and the bulk of the goods do not
correspond both with the sample or description, the buyer is entitled to reject the goods
7. Where the buyer makes known to the seller the purpose for which he requires the goods and relies
upon the seller’s skill and judgment but the goods supplied are unfit for the specified purpose, the
principle of doctrine of caveat emptor does not apply and he is liable in damages.
8. Where the trade usage attaches an implied condition or warranty as to quality or fitness and the seller
deviates from that, the doctrine of caveat emptor does not apply and the seller is liable in damages
[Section 16(3)].

CONTRACT 2 | 35
13. WHAT IS THE IMPORTANCE OF KNOWING THE EXACT TIME OF PASSING OF PROPERTY?
Ans. The precise moment of time at which property in goods passes from the seller to the buyer is of great
importance from various points of view. They are:
1. Risk ‘prima-facie’ passes with property:
- As a general rule the risk of the loss of goods is prima-facie in the person in whom property is.
- Section 26 provides to the same effect, thus “unless otherwise agreed, the goods remain at the sellers
risk until the property therein is transferred to the buyer, but when the property therein is transferred
to buyer, the goods are at the buyer’s risk whether delivery has been made or not.”
- E.g. A buys goods from B and property has passed to him, but the goods remain in B’s warehouse.
Before delivery of goods to A, there is fire in B’s warehouse and all the goods are destroyed. A must bear
the loss and pay the price of goods to B, if he has not paid it so far.
- An exception to this rule is that, where delivery of the goods 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.
2. Action against third parties:
- If after the contract of sale, the goods have been damaged by a third party, it is only the person in whom
the property vests who can take action against the wrongdoer.
3. Suit for price:
- Generally speaking the seller can only sue for the price if the property in goods has passed to the buyer.
4. Insolvency of the seller or the buyer:
- In the event of insolvency of either the seller or buyer, the answer to the question whether the Official
Receiver or Assignee can take over the goods or not, shall depend upon whether the property of goods
was with the party who has become insolvent.
- For example, if the seller becomes insolvent before giving delivery of the goods but the property in
goods has already passed to the buyer who has paid the price, the Official Receiver can have no claim
against the goods.

CONTRACT 2 | 36
14. WHAT ARE THE RULES REGARDING TRANSFER OF PROPERTY?
Ans. The transfer of property is under two heads:
1. Transfer of property in specific or ascertained goods
2. Transfer of property in unascertained and future goods.

1. Transfer of property in specific or ascertained goods

- Where there is a contract for the sale of specific or ascertained goods the property in them is
transferred to the buyer at such time as the parties to the contract intend to be transferred.
- For the purpose of ascertaining (knowing) the intention of the parties regard shall be had to the terms of
the contract, the conduct of the parties and the circumstances of the case [Section 19(1)].
- Thus in the case of specific goods, the transfer of property takes place when the parties intend to pass it.
The parties may intend to pass the property at once at the time of making of the contract or when the
goods are delivered or when the goods are paid for.
- If the intention of the parties cannot be judged from their contract or conduct or other circumstances
that the rules laid down in sections 20, 21, 22, 24 apply.
a. When goods are in a deliverable state (Section 20):
Where there is an unconditional (i.e. not subject to any conditions precedent to be fulfilled by the
parties) contract for the sale of specific goods in a deliverable state, the property in the goods
passes to the buyer as soon as the contract is made, and is immaterial whether the time of
payment of the price or the time of delivery of the goods, or both are postponed.
E.g. A buys a bicycle for Rs. 2000 on a month’s credit and asks the shopkeeper to send it to his
house. The shopkeeper agrees to do so. The bicycle immediately becomes the property of A.
b. When goods have to be put into a deliverable state (Section 21)
Where there is a contract for the sale of specific goods and the seller is bound to do ‘something’ to
the goods for the purpose of putting them into a deliverable state, the property does not pass until
such thing is done and the buyer has notice thereof.
The ‘something’ means acts such as packing, loading on rail or ship, polishing, etc., in order to give
them finished shape.
E.g. A agrees to sell to B the whole of turpentine oil lying in a cistern. It is further agreed that the oil
is to be put into casks by A and then B is to take them away. Some of the casks are filled in the
presence of B, but before any are removed or the remainder filled, the whole is destroyed
accidentally by fire. B must bear the loss of oil which had been put into the casks because in all
these casks the property has passed to him as nothing further remained to be done to them by the
seller. But the property in the casks not filled up remained in the seller, at whose risk they
continued (Rugg v/s Minett)
c. When the goods have to be measured etc., to ascertain price (Section 22)
When 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.
E.g. A sold to B 289 bales of goat skins, each bale containing five dozens, and the price was for
certain sum per dozen skins. It was the duty of A to count the goat skins in each bale. Before A
could do the same, the bales were destroyed by fire. Held that the property in the goods has not
passed to the buyer (i.e. B) as something still remained to be done by the seller (i.e. A) for
ascertaining the price, and as such the loss caused by fire had to be borne by the seller (i.e. A).
d. When goods are delivered on approval (Section 24)
When goods are delivered to the buyer on approval or ‘on sale or return; or on other similar terms,
the property therein passes to the buyer:

CONTRACT 2 | 37
 i. When he signifies his approval or acceptance to the seller or does any other act adopting the
transaction, e.g. uses the goods, pledges the goods or resells them;
ii. If he does not signify his approval or acceptance to the seller but retains the goods, without
giving notice of rejection, beyond the time fixed for the return of goods, or if no time has been
fixed, beyond a reasonable time.
E.g. A delivered a horse to B on the terms of ‘sale or return, within 8 days’. The horse died on the
third day without any fault on the part of B. Held, A was to bear the loss as the horse was still his
property when it perished.
E.g. A delivered a horse to B on trial for 8 days. B continued to retain the horse even after the
expiry of 8 days without giving notice of rejection to A. B had automatically become the owner of
the horse on the expiry of 8 days.

2. Transfer of property in unascertained and future goods.

- As the rule relating to transfer of property in unascertained and future goods is contained in Section 18
and 23.
- These sections provide that where the goods contracted to be sold are not ascertained or where they
are future goods, the property in goods does not pass to the buyer unless and until the goods are
ascertained or unconditionally appropriated to the contract so as to bring them in a deliverable state,
either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Such
assent may be expressed or implied, and may be given either before or after the appropriation is made.
- Until goods are ascertained or appropriated there is merely ‘an agreement to sell’.
- The process of ascertaining or appropriation consists in earmarking or setting apart goods as subject-
matter of the contract. It involves separating, weighing, measuring, counting or similar acts done in
relation to goods with an intention to identify and determine the specific goods to be delivered under
the contract.
- Essentials of a valid appropriation
1. The appropriation must be of goods answering the contract description, both as to quality and
quantity.
2. The appropriation must be intentional and not just an accident or mistake.
3. The appropriation must be made either by the seller with the assent of the buyer or by the buyer
with the assent of the seller. Assent of the other party is thus necessary; whether before or after the
appropriation is made; for a valid appropriation.
4. The appropriation must be unconditional, i.e. the seller should not reserve to himself the right of
disposal of the goods until and unless certain conditions are fulfilled.
- Delivery to carrier [Section 23(2)]: A seller is deemed to have unconditionally appropriated the goods to
the contract where he delivers the goods to a carrier or other bailee for the purpose of transmission to
the buyer, and does not reserve the right of disposal.
- Reservation of right of disposal (Section 25): Reservation of the right of disposal means reserving a right
to dispose of the goods until certain conditions (like payment of the price) are fulfilled. When the seller
reserves such a right the property in the goods does not pass until those conditions are fulfilled. The
seller may reserve such a right expressly while making a contract or while making appropriation of
unascertained goods.

CONTRACT 2 | 38
15. Explain rule of transfer of title on sale and Transfer of title by non-owners.
Ans. Transfer of Property
1. Rule of Transfer of title on Sale
- The general rule relating to the transfer of title on sale is that “the seller cannot transfer to the buyer of
goods a better title than he himself has”.
- If the title of the seller is defective the buyer’s title will also be subject to the same defect. Section 27
defines the same as “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..”. It is based on the rule “nemo det quod non habet” which means that no
one can give what he has not got.
- The general rule is to protect the interest of the true owner and is necessary in the larger interest of
society.
- A buyer cannot get a good title to the goods unless he purchases the goods from a person who is the
owner thereof or who sells them under the authority or with the consent of the owner.

2. Transfer of title by non-owners

The above general rule as to title is subject to the following exceptions where the buyer gets a better title
to the goods than what the seller himself possesses:
1. An authorized sale by a mercantile agent (Section 27)
- A mercantile agent means an agent having in the customary course of business as such agent
authority either to sell goods or to consign goods for the purpose of sale, or to buy goods, or to
raise money on the security of goods [Sec. 2(9)].
- As a rule a mercantile agent having an authority to sell goods conveys a good title to the buyer.
- As per provisions of Section 27 a mercantile agent can convey a good title to the buyer even though
he sells without any authority from the principal to do so, provided the following conditions are
satisfied:
a. He should be in possession of the goods or documents of title to the goods in his capacity as
mercantile agent and with the consent of the owner.
b. He should sell the goods while acting in the ordinary course of business,
c. The buyer should act in good faith without having any notice, at the time of the contract, that
the agent has no authority to sell.
2. Transfer of title by estoppel (Section 27)
- In the words of Lord Halsbury: “Estoppel arises when you are precluded from denying the truth of
anything, when you have precluded from denying the truth of anything, which you have
represented as a fact, although it is not a fact”.
- Estoppel means that a person who by his conduct or words leads another to believe that certain
state of affairs existed, would be estopped from denying later on that such a state of affairs did not
exist. Therefore when a true owner of the goods by his conduct or words or by any act or omission
leads the buyer to believe that the seller is the owner of the goods or has the authority to sell
them, he cannot afterwards deny the seller’s authority to sell. The buyer gets a better title than
that of the seller.
- In reference to sale of goods, estoppel may arise in any of the following ways:
a. The owner standing by, when the sale is effected.
b. Still more, by his assisting the sale.
c. By permitting goods to go into the possession of another with all the insignia of possession
thereof and apparent title.
d. If he has otherwise acted or made representations so as to induce the buyer to alter his
position to his prejudice.

CONTRACT 2 | 39
3. Sale by a joint owner (Section 28)
- If one of several joint owners of goods has the sole possession of them by permission of the co-
owners, the property in the goods is transferred to any person who buys them from such joint
owner in good faith without notice of the fact that the seller has no authority to sell.
- This is an exception to the rule of ‘no one can give what he has not got’.
- E.g. A, B and C are three brothers. They own a cow in common. B and C entrust the work of looking
after the cow to A and leave the cow in A’s possession. A sells the cow to D. D purchases bona fide
for value. D gets a good title.
4. Sale by person in possession under voidable contract (Section 29)
- When a person has obtained possession of the goods under a voidable contract and before the
contract is cancelled he sell it. The buyer of such goods acquires a good title to them provided he
has acted in goods faith and without notice of the seller’s defect of title.
- E.g. A, by misrepresentation induces B to sell and deliver to him a cow. A sells the cow to C before B
has rescinded or cancelled the contract. C purchases the cow in good faith and without notice of
the seller’s defective title. C acquires a good title.
5. Sale by seller in possession after sale (Section 30[1])
- Where a seller after having sold the goods, continues to be in possession of the goods or of the
documents of title to them and again sells or pledges them either himself or through a mercantile
agent, he will convey a good title to the buyer or pledgee provided the buyer or pledgee acted in
good faith and without notice of the previous sale.
6. Sale by buyer in possession after ‘agreement to buy’ (Section 30[2])
- Where a buyer has agreed to buy the goods and has obtained possession of the same or the
documents of title to them with the consent of the seller, resells or pledges the goods either
himself or through a mercantile agent, he will convey a good title to the buyer or the pledgee
provided the person receiving the goods has acted in good faith and without notice of any lien or
other rights of the original seller in respect of those goods.
7. Resale by an unpaid seller (Section 54[3])
- Where an unpaid seller, who has exercised his right of lien or stoppage in transit, resells the goods
(of which ownership has passed to the buyer) the subsequent buyer acquires a good title thereto as
against the original buyer, even though the resale may not be justified in the circumstances i.e.
notice of the resale has been given to the original buyer.
8. Exceptions under other Acts
- Other Acts also contain some provisions under which a non-owner may pass to the buyer a better
title than he himself has. For example:
a. Sale by finder of lost goods under certain circumstance (See Sec. 169, The Indian Contract Act)
b. Sale by pawnee or pledge under certain circumstances (Sec. 176, The Indian Contract Act).
c. Sale by Official Receiver or Assignee in case of insolvency of an Individual. These persons are
not owners of the properties they deal in, but convey a better title to the buyers than they
themselves possess.
d. Under Negotiable Instruments Act, a holder in due course gets a better title than what his
endorsers had.

CONTRACT 2 | 40
16. DEFINE THE TERM DELIVERY OF GOODS AND EXPLAIN THE MODES AND RULES OF DELIVERY OF GOODS.
Ans. Delivery of Goods. It is the duty of the seller to deliver the goods and the duty of buyer is to accept and pay for
them, as agreed in the contract.
1. Definition of delivery of goods
- Delivery of goods means voluntary transfer of possession of goods from one person to another [section
2(2)].
- If transfer of possession of goods is not voluntary i.e. forced or by theft, there is no delivery.

2. Modes of delivery of goods

1. Actual delivery: The goods are physically handed over to the buyer by the seller or his agent.
2. Symbolic delivery: The goods remain where they are, but the means of obtaining possession of goods
is delivered. E.g. key of godown where the goods are stored, transfer a document of title.
3. Constructive delivery or delivery by attornment: Such a delivery takes place when the person in
possession of the goods of the seller acknowledges in accordance with the seller’s order that he holds
the goods on behalf of the buyer and the buyer assented to it.

3. Rules to delivery of goods

1. Delivery may be either actual or symbolic or constructive (Section 33).
- Delivery is doing anything which the parties agree shall be treated as delivery or which has the
effect of putting the goods in the possession of the buyer or of any other person authorized to hold
them on his behalf.
2. Delivery and payment are concurrent conditions (Section 32).
- Unless otherwise agreed, delivery of the goods and payment of the price must go hand in hand.
- The seller should be ready and willing to deliver the goods to the buyer in exchange for the price
and the buyer should be willing and ready to pay the price for the goods.
3. Effects of part delivery, when property in goods is to pass on delivery (Section 34).
- A delivery of part of the goods, in progress of the delivery of the whole, has the same effect, for the
purpose of passing the property of goods, as a delivery of the whole.
- But if part of the goods is delivered with the intention of severing (cutting, splitting) it from the
whole, it is not regarded as delivery of the whole of the goods and the property is deemed to pass
to the buyer in that portion of the goods only which has been delivered. E.g. If in a contract for a
stack of hay the buyer is permitted to remove only a part of it, this does not amount to delivery of
the whole as it shows the intention to separate the part from the whole.
4. Buyer to apply for delivery (Section 35).
- Even though the seller has the duty to deliver the goods according to the contract, he is not bound
to deliver them until the buyer applies for delivery.
- The buyer has to demand the delivery.
5. Time of delivery (Section 36 [2] and [4]).
- If time is fixed then the seller has to deliver it in time fixed. If there is no fixed time then it has to be
delivered in reasonable time and reasonable hour.
6. Place of delivery (Section 36[1]).
- The place of delivery may be stated in the contract of sale, and where it so stated, the goods must
be delivered at the named place during business hours on a working day.
- If the no place is mentioned in the contract, the following rules need to be followed:
a. In the case of ‘sale’, the goods are to be delivered at the place at which they are at the time of
the sale.
b. In ‘an agreement to sell’ the goods are to be delivered at the place where they are at the time
of the agreement to sell.

CONTRACT 2 | 41
 c. In case of future goods, the goods are to be delivered at the place at which they are
manufactured or produced.
7. Delivery of goods where they are in possession of third party (Section 36[3]).
- If the goods at the time of sale are in the possession of 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 his behalf. It is constructive delivery and requires the consent of all the parties, the seller,
the buyer and third person having possession.
8. Expenses of delivery (Section 36[5]).
- Unless otherwise agreed, the expenses of delivery are to be borne by the seller.
9. Delivery of wrong quantity or different quality (Section 37).
- It is the duty of the seller to deliver goods strictly in accordance with the terms of the contract. A
defective delivery than that contracted entitles the buyer: to reject the whole; to accept the whole;
to accept what he ordered and reject the rest.
10. Installment deliveries (Section 37[40]).
- Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof installments.
11. Delivery to carrier or wharfinger (Section 39).
- Where the seller is authorized or required to send the goods to the buyer, delivery of the goods to
a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer, or
delivery of the goods to a wharfinger for safe custody, is prima facie deemed to be a delivery of the
goods to the buyer.
- The seller enters into reasonable contract with the carrier on the safety of the goods on behalf of
buyer, and if he fails to do so, and the goods are lost or damaged, the buyer may decline to treat
the delivery to carrier or wharfinger as delivery to himself.
- If it is to be sent by sea, then it has to be insured. The seller must inform the buyer and if the seller
fails to do so, the goods shall be at his risk.
12. Liability of buyer for neglecting or refusing to take delivery of goods (Section 44).
- When the seller is ready and willing to deliver the goods and request the buyer to take delivery, and
the buyer does not within a reasonable time after such request take delivery of the goods, he
becomes liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and
also for a reasonable charge for the care and custody of goods.

4. Acceptance of delivery by buyer

The mere fact that the buyer has taken the delivery of the goods does not amount to acceptance of them.
According to section 42 the buyer is deemed to have accepted the goods in either of the following
circumstances:
1. When he intimates to the seller that he has accepted the goods after examining and testing them.
2. When he does any act in relation to the goods which is inconsistent with the ownership of the seller,
e.g. consumes, pledges, or resells..
3. When after the lapse of a reasonable time, he retains the goods without intimating the seller that he
has rejected them.

CONTRACT 2 | 42
17. DEFINE UNPAID SELLER AND THE RIGHT OF UNPAID SELLER.
Ans. Unpaid Seller and his rights.
1. Definition of unpaid seller
- The seller of goods is deemed to be unpaid seller –
a. Where the whole of the price has not been paid or tendered.
b. Where a bill of exchange or other negotiable instrument has been received as a conditional
payment, i.e. it is subject to realization thereof, and the same has been dishonored.
- The term seller here includes any person who is in the position of a seller, as, for instance, an agent of
the seller to whom the bill of lading had been endorsed, or a consignor or agent who has himself paid,
or is directly responsible for, the price (Section 45).

2. The characteristics of Definition of unpaid seller

1. He must sell goods on cash terms and not on credit, and he must be unpaid.
2. He must be unpaid either wholly or partly. Even if a small part of the price remains unpaid, he is deemed
to be unpaid seller.
3. He must not refuse to accept payment when tendered.

3. Rights of an unpaid seller

An unpaid seller has two fold rights. They are:
1. Rights of the unpaid seller against the goods
2. Rights of the unpaid seller against the buyer personally.

1. Rights of the unpaid seller against the goods

An unpaid seller has the following rights against the goods notwithstanding the fact that the property in
the goods has passed to the buyer:
A. Right of lien
B. Right of stoppage of goods in transit
C. Right of resale

A. Right of lien
- Lien is the right to retain possession of goods and refuse to deliver them to the buyer until the
price due in respect of them in paid or tendered.
- The unpaid seller in possession of goods sold is entitled to exercise his lien on the goods in the
following cases:
a. Where the goods have been sold without any stipulation (condition) as to credit;
b. Where the goods have been sold on credit but the term of credit has expired;
c. Where the buyer becomes insolvent, even though the period of credit may not have yet
expired. He can hold the goods as security for the price. By the insolvency of the buyer, his
stipulations as to credit are put to an end and the seller has the right to say, “I will not
deliver the goods until I see that I get my price paid.
- The unpaid seller’s lien is a possessory lien i.e. the lien can be exercised as long as the seller
remains in possession of goods. Transfer of property in the goods or document of title does not
affect the exercise of this right, provided he has possession of goods. It is a right to withhold
delivery.
- Section 46(2) provides: Where the property in goods has not passed to the buyer, the unpaid
seller has, in addition to his other remedies, a right of withholding delivery similar to and
coextensive with his rights of lien and stoppage in transit where the property has passed to the
buyer.

CONTRACT 2 | 43
 - Right of lien can be exercised only for non-payment of the price and not for any other charges
i.e. maintenance of custody charges.
- The right of lien extends to all the goods and the buyer has no right to claim delivery to part of
the goods.
- When lien is lost?
Once the possession is lost, the lien is lost. The cases are:
a. When he delivers the goods to a carrier or other bailee for the purpose of transmission to
the buyer without reserving the right of disposal of the goods
b. When the buyer or his agent lawfully obtains possession of the goods;
c. When the seller expressly or implied waives of his right to lien.

B. Right of stoppage of goods in transit

- The right to stoppage in transit means the right of stopping further transit of the goods while
they are with a carrier for the purpose of transmission to the buyer, resuming possession of
them and retaining possession until payment or tender of the price.
- It is retaining of goods even when the seller has parted with the possession of the goods
- When can this right be exercised (Section 50)?
An unpaid seller can exercise this right only when:
a. The buyer becomes insolvent.
b. The property has passed to the buyer.
c. The goods are in the course of transit i.e. neither with the seller nor the buyer, the carrier
must not be buyer’s or seller’s agent because in the eyes of law if it is with the agent of the
seller then the goods are still in possession of seller and if he is agent of buyer then it is
delivered.
- Duration of transit (Section 51)
It is important to know when the transit begins and when it comes to an end.

According to Section 51, goods are deemed to be in course of transit from the time when they
are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the
buyer or his agent takes delivery of them. Thus the transit continues till the goods are not
delivered to the buyer or his agent. They are in transit even if they are rejected by the buyer.

The transit is deemed to be at an end and the seller cannot exercise his right of stoppage in the
following cases:
a. When the buyer or his agent takes delivery after the goods have reached destination.
b. When the buyer or his agent obtains delivery of the goods before their arrival at the
appointed destination.
c. When the goods have arrived at their destination and the carrier acknowledges to the buyer
or his agent that he holds the goods on his behalf.
d. When the goods have arrived at their destination but the buyer instead of taking delivery
requests the carrier to carry the goods to some further destination and the carrier agrees to
take them to the new destination.
e. When the carrier wrongfully refuses to deliver the goods to the buyer of his agent.
f. When part delivery of the goods has been made to the buyer with an intention of delivering
the whole of the goods, transit will be at the end for the remained or the goods also which
are yet in the course of transit.
- How right of stoppage in exercised (Section 52)?
The unpaid seller may exercise his right of stoppage in transit either:

CONTRACT 2 | 44
 a. By taking actual possession of the goods;
b. By giving notice to the carrier or other bailee in whose possession the goods are. This notice
is given to the person in actual possession or his principal. After receiving notice it is the
duty of the principal or agent not to deliver the goods to the buyer or he will be held liable
for conversion.
- Effects of sub-sale or pledge by buyer upon right to lien and stoppage in transit
The unpaid seller’s right of lien or stoppage in transit is not affected by any sale or other
disposition (e.g. pledge) which the buyer might have made.
But there are two exceptions when these rights are affected. They are
a. When the seller has assented to the sale or other disposition which the buyer has made.
b. When a document of title to goods has been issued or transferred to a buyer, and the buyer
transfers the document to a person who takes the document in good faith and for
consideration, then, the transfer by way of sale, the unpaid seller’s right of lien or stoppage
in transit is defeated and if the transfer was by of pledge, the unpaid seller’s right of lien and
stoppage can only be exercised subject to the rights of the pledgee.

C. Right of resale
- The right of resale is a very valuable right given to an unpaid seller.
- In the absence of this right, the unpaid seller’s other right against the goods, namely, lien and
stoppage in transit would not have been of much use because these rights only entitle the
unpaid seller to retain the goods until paid by the buyer.
- But the seller is not bound to keep the goods indefinitely, especially when the goods are
perishable. Section 54 therefore gives to the unpaid seller a limited right to resell the goods in
the following cases:
a. Where the goods are of perishable nature;
b. Where such a right is expressly reserved in the contract in case the buyer should make a
default
c. Where the seller has given a notice to the buyer of his intention to resell and the buyer does
not pay or tender the price within a reasonable time.
- If on resale there is loss to the seller, he can recover it from the defaulting buyer. If there is
surplus then the seller can keep it because the buyer cannot be allowed to take advantage of his
own wrong. If no notice of resale is given to the buyer then the right of seller to claim loss or
retain surplus is reversed i.e. the seller cannot recover the loss from the buyer and is under
obligation to hand over the surplus, if any, to the buyer, arising out of resale. Giving notice is
very important to make the buyer liable for the breach of contract. Notice gives the person an
opportunity to pay the price or if he cannot pay then to supervise the sale to see that the same
is properly made.

2. Rights of the unpaid seller against the buyer personally.

The unpaid seller, in addition to his rights against the goods as discussed above, has the following three
rights of action against the buyer personally:
a. Suit for price (Section 55).
Where the buyer wrongfully neglects or refuses to pay the price according to the terms of the
contract, the seller is entitled to sue the buyer for price, irrespective of the delivery of goods. Where
the goods have not been delivered, the seller would file a suit for price normally when the goods
have been manufactured to some special order and thus are unsalable otherwise.

CONTRACT 2 | 45
b. Suit for damages for non-acceptance (Section 56).
- Where the buyer wrongfully neglects or refuses to accept and pay the goods, the seller may sue
him for damages for non-acceptance. The sellers remedy in this case is a suit for damages rather
than an action for the full price of the goods.
- According to section 73 of Indian Contract Act, the measure of damages is the estimated loss
arising directly and naturally from the buyer’s breach of contract.
- Where the goods have a ready market the principle applicable is that the seller may recover
from the buyer damages equal to the difference between the contract price and the market
price on the date of breach of contract. If there is no difference, then only nominal damages can
be recovered.
- Where goods do not have ready market, the measure of damages will depend on the basis of
profit lost.

c. Suit for special damages (Section 61)

- This section entitles the seller to sue the buyer for ‘special damages’ also for such loss ‘which
the parties knew when they made the contract, to be likely to result from the breach of it’.
- It also entitles the seller to get interest at a reasonable rate on the total unpaid price of the
goods sold, from the time it was due until it is actually paid (Telu Ram Jain v/s Aggarwal &
Sons).

CONTRACT 2 | 46
18. BUYERS RIGHT AGAINST SELLER.
Ans. Buyer and his rights. The buyer has the following rights against the seller for breach of contract:
1. Suit for damages for non-delivery (Section 57)
- Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the
seller for damages for non-delivery.
- The damages are assessed according to section 73.
2. Suit for specific performance (Section 58)
- Where there is breach of a contract for the sale of specific or ascertained goods, the buyer may file a
suit for the specific performance of the contract. This remedy is discretionary and will only be granted
when damages would not be an adequate remedy, for instance, the subject-matter of the contract is
rare goods, say, a picture by a dead painter.
3. Suit for damages for breach of warranty (Section 59)
- Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat
breach of condition as breach of warranty, the buyer is entitled to file a suit for damages if the price has
already been paid. But if the buyer has not yet paid the price he may ask the seller for a reasonable
reduction in price.
4. Suit for rescission of contract and for damages for breach of ‘condition’.
- The breach of ‘condition’ entitles the buyer to treat the contract as repudiated [Section 12(2)].
Accordingly, where there is a breach of ‘condition’ by the seller, the buyer is entitled to file a suit for
rescission of the contract. He may claim damages for loss suffered on the footing that the whole
contract is broken and the seller is guilty of non-delivery
5. Suit for recovery of the price together with interest (Section 61)
- If the buyer has already paid the price of the goods to the seller and the goods are not delivered or they
are stolen one, he can sue the seller for the refund of the price and also for the interest at reasonable
rate from the date of payment to the date of refund.

CONTRACT 2 | 47
19. WHAT IS AUCTION SALE? EXPLAIN IT RULES.
Ans. In an auction sale, the auctioneer invites bids from prospective purchasers and sells the goods to the highest
bidder.

Section 64 lays down the rule for the auction sale. They are:
1. Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate
contract of sale.
2. The sale is complete when the auctioneer announces its completion by the fall of the hammer or in other
customary manner, say, by saying words like ‘one, two, three’ or ‘going, going, gone’ and until such
announcement is made, any bidder may retract his bid. The auctioneer is also not bound to accept the
highest bid if he feels that it is much below his expectation.
A notice of offer to auction is ‘an invitation to an offer’. The bid is the offer and the fall of hammer
constitutes the acceptance.
3. The seller or any one person on his behalf can bid at the auction, provided such a right to bid has been
expressly reserved at the time of notifying the auction sale. If the seller makes use of pretended bidding to
raise the price without expressly notifying about the same, the sale may be treated as fraudulent by the
buyer and he may avoid the contract on that ground.
4. The sale may be notified to be subject to a reserved or upset price. It is price below which the auctioneer
will not sell, and if he by mistake knocks down the lost for less than the reserved price, no valid contract
comes into existence and he can refuse to deliver the goods to the highest bidder.
Where the sale is ‘without reserve’ the goods must be sold to the highest bidder, irrespective of the bid
amount. But it is only a usage or custom of trade because otherwise the auctioneer is free to accept or
reject any offer or bid made to him.
5. A ‘knock out’ agreement between intending buyers not to bid against each other is not illegal.
6. The auctioneer cannot sell goods on credit or accept payment by means of bill of exchange. He cannot be
compelled to accept a cheque for the purchase price.

CONTRACT 2 | 48
 UNIT IV
20. EXPLAIN DISSOLUTION OF PARTNERSHIP AND FIRM AND ITS CONSEQUENCES
Ans. Dissolution of Partnership and Firm
 The Indian Partnership Act distinguishes between:
a. Dissolution of Partnership
b. Dissolution of Firm

a. Dissolution of partnership: ’When one or more partners cease to be partners of the firm but others
continue the business in partnership is called ‘dissolution of partnership’.
b. Dissolution of Firm: Section 39 provides that the dissolution of partnership between all the partners of
a firm is called ‘dissolution of firm’.
It necessarily follows that if the firm is dissolved, then the partnership too dissolves. But dissolution of
partnership may or may not involve dissolution of the firm.

 Modes of Dissolution of a Firm: A firm may be dissolved in the following ways:

a. By agreement (Section 40): A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners. Partnership is created by contract, and dissolved by
contract.
b. By notice (Section 43): Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm. Once a notice is given it
cannot be withdrawn without the consent of other partners.
c. On the happening of certain contingencies (Section 42): Subject to contract between the partners, a
firm is dissolved:
i. If constituted for a fixed term, by the expiry of that term.
ii. If constituted to carry out one or more adventures or undertakings, by the completion thereof.
iii. By the death of a partner
iv. By the adjudication of a partner as an insolvent.
d. By Compulsory Dissolution (Section 41): A firm is compulsorily dissolved under any of the following
circumstances:
i. When all the partners, or all the partners but one, are adjudged insolvent
ii. When some event has happened which makes it unlawful for the business of the firm to be carried
on or for the partners to carry it on in partnership (when any partner, who is citizen of foreign
country, and becomes an alien enemy due to war). Where, however, a firm is carrying on more
than one adventures or undertakings, the illegality of one or more shall not of itself cause the
dissolution of the firm in respect of its lawful adventures or undertakings.
e. By Dissolution by the Court (Section 44): Dissolution of a firm by the court is necessitated when there
is a difference of opinion between the partners regarding the matter of dissolution. E.g. If one partner
has become insane or dead the other might want to continue, but the others might want to dissolve.
Intervention of court becomes necessary.
Section 44 enumerates various grounds on which petition can be made to the court:
a. Insanity
b. Permanent Incapacity
c. Misconduct
d. Persistent breach of agreement
e. Transfer of interest
f. Continuous loses

CONTRACT 2 | 49
 g. Just and equitable ground e.g. partners are not speaking to each other.

 Consequences of Dissolution:
1. Continuing liability of partners after dissolution (Section 45): The partners continue to be liable as
such to third parties for any act done by any of them which would have been an act of the firm if done
before the dissolution, until public notice is given of the dissolution. Notice must be given to the
Registrar of Firms, in case of registered firms, in the local Official Gazette and in at least one vernacular
newspaper circulating in the district where the firm’s principal place of business is situated (Sec. 72).
2. Continuing authority of partners for purpose of winding up (Section 47): After the dissolution of the
firm the authority of each partner to bind the firm, and other mutual rights and obligations of the
partners, continue so far as may be necessary for the following two purposes:
a. To wind up the affairs of the firm, e.g., disposing of the property, realizing amount due from
debtors and paying to creditors and so on;
b. To complete transactions begun unfinished at the time of the dissolution, e.g. taking delivery of the
goods ordered before dissolution and paying for them.
The firm however is not bound by such acts of a partner who has been adjudicated insolvent.
3. Right of partners to enforce winding up (Section 46): On the dissolution of a firm every partner or his
representative is entitled to have the property of the firm realized and applied in payment of the debts
and liabilities of the firm, and to have the surplus distributed among the partners or their
representative’s according to their rights.
4. Liability to share personal profits (Section 50): So long as the affairs of the dissolved firm are in process
of winding up, it is still the duty of every partner not to make any personal profit out of the transactions
concerning the firm. A partner should account for all the benefits derived by him and must share it with
other partners.
5. Return of Premium (Section 51): Where a partner has paid a premium on entering into partnership for
a fixed term, the firm is dissolved before the expiry of that term, such a partner shall be entitled to
repayment of ‘rateable amount of premium’ for the unexpired period except where the dissolution has
been caused by death of a partner, misconduct of the partner, mutual agreement of all the partners
containing no provision for the return of premium.
6. Rights where partnership contract is rescinded for fraud, etc. (Section 5): A contract of partnership
like any other contract may be rescinded on the ground of fraud or misrepresentation. The partner has
right to claim damages for fraud. The Section also give other rights:
a. He has right of lien on the surplus of the assets of the firm remaining after the debts of the firm
have been paid and for any capital contribution by him.
b. He is entitled to rank as a creditor of the firm in respect of any payment made by him towards the
debts of the firm.
c. He has also the right to claim indemnity from the partners guilty of the fraud or misrepresentation
against all the debts of the firm.
7. Right to impose restrictions: In the absence of an agreement to the contrary, each partner or his
representative is entitled to restrain the other partners from carrying on a similar business in the name
of the firm or from using the property of the firm for their own benefit, until the affairs of the firm are
wound up (Section 53).
The partners in anticipation of or upon dissolution of firm, can agree that some of all of them will not
carry on a business similar to that of the firm within a specified period or within specified local limits.
Such agreement is valid and not void on grounds of restraint of trade (Section 54).

CONTRACT 2 | 50
 Mode of Settling Accounts upon dissolution:
The settlement of accounts between partners upon dissolution of a firm is to be affected in the manner
provided for in the partnership agreement.
In absence of any agreement the following needs to be followed:
a. Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if
necessary by the partners individually in the proportions in which they were entitled to share profits.
E.g. If A, B, C are three partners in a firm. Their capital contribution are A = Rs. 20,000, B = 5000, C =
1000. They share profits equally. Upon dissolution it is found that realizable assets are Rs. 30,000 and
debts are Rs. 10,000. Thus after paying debts, assets available for partners are worth Rs. 20,000 and as
such there is a capital deficiency of Rs. 6000. Each partner must contribute Rs. 2000 each.
b. The assets of the firm, including any sums contributed by the partners to make up deficiencies of
capital, shall be applied in the following manner and order:
1. In paying the debts of the firm to third parties.
2. In paying to each partner rateably what is due to him from the firm for advances as distinguished
from capital.
3. In paying to each partner rateably what is due to him on account of capital.
4. The residue, if any, shall be divided among the partners in the proportions in which they were
entitled to share profits.

Firms debts v/s Private debts: Where both debts due from the firm and debts due from a partner in his
individual capacity exits, the following rules are to be followed as stated in Section 49;
a. The property of the firm shall be applied for payment of the firm’s and debts first, and if there is any
surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him.
b. The separate property of any partner shall be applied first in the payment of his separate debts, and
the surplus, if any, may be utilized in the payments of the debts of the firm.

Loss arising from insolvency of a partner: When a partner is unable to contribute towards the deficiency of
his capital account he is said to be insolvent and the loss arising out of his insolvency is called ‘capital loss’.
In the absence of any contract to the contrary, such a capital loss is to be borne by other solvent partner in
their capital ratio.

Sale of Goodwill after Dissolution: The rules are as follows:

a. While winding up the affairs of the firm after dissolution, the good will shall, subject to contract
between the partners, be included in the assets, and it may be sold either separately or along with
other property of the firm.
b. After the sale of Good will any partner of the dissolved firm i) can carry on a business competing with
that of the buyer of the goodwill ii) can advertise such business. But an agreement to the contrary can
be made provided they are reasonable.
c. In the absence of a contract to the contrary, the seller of goodwill, that is, partners of the dissolved firm
cannot i) use the firm name, ii) represent themselves as carrying on their business of the old firm, iii)
cannot solicit the customers of the old firm.

CONTRACT 2 | 51
21. DEFINE PARTNERSHIP, EXPLAIN THE ESSENTIAL ELEMENTS OF A PARTNERSHIP AND TEST OF PARTNERSHIP.
Ans. The law of partnership is contained in the Indian Partnership Act, 1932, which came into force on 1st October
1932. Section 39 dealing with effects of non-registration of firms came into existence on 1st October 1933.

 Definition of Partnership:
Section 4 of the Indian Partnership Act, 1932 defines ‘partnership’ in the following terms: “Partnership is
the relation between persons who have agreed to share the profits of a business carried on by all or any of
them acting for all”.

 Essential Elements of Partnership:

a. There must be a contract (Contract).
b. Between two or more persons (Association of two or more persons).
c. Who agree to carry on business (Carrying on Business).
d. With the object of sharing profits (Sharing of profit).
e. The business must be carried on by all or any of them acting for all (Mutual Agency)

a. There must be a contract (Contract).

- Partnership is the result of a contract. It is not dependent on status, operation of law or
inheritance. Thus at the death of father who was a partner in a firm, the son can claim share in
partnership property but cannot become a partner. He has to enter into a contract with the
others.
- Section 5 says that, “the relationship of partnership arises from contract and not from status”.
- Contract may be oral or written.
b. Between two or more persons (Association of two or more persons).
- Since partnership is the result of contract, at least two persons are necessary to constitute a
partnership.
- There is no mention of maximum number. But Section 11 of the Companies Act, 1956 speaks of
more than 10 persons for banking and 20 persons for any other business would be illegal.
- Only persons competent to contract can enter into contract of partnership.
- Persons may be natural or artificial. A company as a legal person can enter into a contract of
partnership as per its Memorandum of Association.

c. Who agree to carry on business (Carrying on Business).

- The third essential element of a partnership is that the parties must have agreed to carry on
business.
- Business is referred to as trade, occupation or profession. A charitable work is not a partnership.
- If two person buy a shop and give it out on lease and share profit is not partners as they never
carried out any business. They are only co-owners.
- Business must be carried out, means there should be a continuity or repetition of acts.
- An agreement to carry on business at a future time does not result in partnership unless that time
arrives and the business is commenced.

d. With the object of sharing profits (Sharing of profit).

- The essential element provides that the agreement to carry on business must be with the object
of sharing profits amongst all the partners.
- Therefore, the aim of the business should be to earn profit. Thus there can be no business if there
is not profit and done only for charitable purpose.

CONTRACT 2 | 52
 - Sharing of losses is not necessary. There is no need to agree that they would share the losses. One
or two persons can agree to bear all the losses of the business. Yet the liability of all to outsiders
shall be unlimited because there cannot be ‘limited partnerships’.
- The sharing of profit does not make a person a partner especially:
a. A lender of money to persons engaged or about to engage in any business.
b. A servant or agent as remuneration.
c. A widow or child of a deceased partner as annuity (pension, allowance)
d. A previous owner or part-owner of the business as consideration for the sale of goodwill or
share thereof, does not itself make the receiver a partner, with the persons carrying on the
business.

e. The business must be carried on by all or any of them acting for all (Mutual Agency)
- The fifth element in the definition of a partnership provides that the business must be carried on
by all the partners of any (one or more) of them acting for all, that is, there must be mutual
agency.
- Thus every partner is both an agent and principal for himself and other partners i.e. he can bind
and be bound of his acts and other partners in the ordinary course of business.
- The partners carry on the business on behalf of others.
- The liability of one partner for the acts of his co-partner is in truth the liability of a principal for
the acts of his agent.

 Test of partnership
- There is no single test of partnership.
- In one case there may be sharing of profits but may not be any business.
- In other case there may be business but there may not be sharing of profits.
- In other case there may be both business and sharing of profit but the relationship between the
persons sharing the profits may not be that of principal and agent.
- Therefore, all the elements should co-exist in order to constitute a partnership.

CONTRACT 2 | 53
22. HOW IS PARTNERSHIP FORMED? EXPLAIN A PARTNERSHIP DEED AND ITS MAIN CONTENTS AND
REGISTRATION OF A FIRM.
Ans.
 The basic facts that need to be kept in mind by those who want to enter into an agreement of partnership.
1. The successful working of a partnership depends upon mutual confidence and utmost good faith
among the partners because each is an agent of the other and binds them to the fullest extent of their
fortunes. Never choose a partner in haste. It is like marry in haste and repent at leisure.
2. All the essentials of a valid contract are necessary.
3. The mutual rights and obligations of partners must be discussed in detail and should be put in writing
in the form of partnership deed. Oral deed cannot be depended upon even though it is valid.
4. The partnership should be registered as soon as it is formed with the Registrar of Firms of the area.

 Partnership Deed:
- The document in which the respective rights and obligations of the members of a partnership are set
forth is called a ‘partnership deed’.
- It should be drafted with care and signed by all the partners.
- It should be stamped in accordance with the Indian Stamp Act.
- Each partner should have a copy of the deed.
- The firm should be registered and copy of the deed should be filed at the time of registration with the
Registrar of Firms to be able to enforce the conditions laid down in the deed.

The Deed should cover the following points:

1. The name of the firm and names and addresses of all the partners who compose it.
2. Nature of business and the place it will be carried out.
3. Date of commencement of partnership.
4. The duration of partnership.
5. The amount of capital to be contributed by each partner and the methods of raising finance in future if
so required.
6. The ratio of sharing profits and losses.
7. Interest on partners’ capital, partners’ loan, and interest, to be charged on drawings.
8. Salaries, commission etc., if any, payable to partners.
9. The methods of preparing accounts and arrangement for audit and safe custody of case, etc.
10. Division of task and responsibility. i.e. the duties, powers and obligations of all the partners.
11. Rules to be followed in case of retirement, death and admission of a partner.
12. Expulsion of partners in case of gross breach of duty or fraud.
13. The circumstances under which the partnership will stand dissolved.
14. Arbitration in case of disputes among the partners.

 Duration of partnership
1. Partnership at will: If the deed does not have any duration of their partners then it is partnership at will
(Section 7). Partnership at will is that the partners do not fix any term of partnership and are free to
break their relationship at their sweet will. There is no definite period. Can be dissolved by any partner
by giving notice.
2. Particular partnership: When a partnership is formed for a particular period or for a particular venture
(Scheme, project) is called ‘particular partnership’. In such a case the partnership is automatically
dissolved at the end of the venture or time. Only if all the partners agree then it can be dissolved
before it.

CONTRACT 2 | 54
23. DISCUSS THE VARIOUS KINDS OF PARTNERS. EXPLAIN MINOR AS PARTNER.
Ans. KINDS OF PARTNERSHIP
 Kinds of partnership
1. Active or actual partner: Persons who take an active part in the conduct of the partnership business.
They are full-fledged members.
2. Sleeping or dormant partners: they are those who merely put in their capital and do not take active
part in the conduct of the partnership firm. They do share the profits and losses, have a voice in
management, but their relationship is not disclosed to the general public. They are liable to the third
parties for all acts of the firm.
3. Silent Partners: They are those who by agreement with other partners have no voice in the
management of the partnership business. They share the profit and losses, are fully liable for the debts
of the firm and may take active part in the conduct of the business.
4. Partners in profit only: A partner who has stipulated (agreed) with other partners that he will be
entitled to a certain share of profits without being liable for the losses. He has no voice in the
management of the business. But his liability to the third party will be unlimited.
5. Sub-partner: When a partner agrees to share his share of profit in a partnership firm with an outsider,
such an outsider is called a sub-partner. Such a person has no rights against the firm nor is he liable for
the debts of the firm.
6. Partner by Estoppel or holding out: If a person represents to the outside world by words or written or
by his conduct that he is partner in a certain partnership firm, he is then estopped from denying his
being a partner and is liable as a partner to the firm to anyone who has on the faith of him granted
credit to the firm. He has no agreement, no sharing in profits and losses, no say in the management,
may not be knowing exact place of business but he is responsible as he has hold out as a partner. He
may also be called ‘quasi partner’ or ‘nominal partner’.

 MINOR ADMITTED TO THE BENEFITS OF PARTNERSHIP.

- Partnership is based on mutual consent and, therefore, only those who possess the capacity to
contract can be partners in a partnership firm.
- An agreement by a minor is void ab-initio but he can derive benefit under it.
- A minor cannot be a full-fledged partner, he can almost be admitted to the benefits of a partnership.
- Section 30 of Partnership Act thus provides that though a minor cannot be a partner in a firm, with the
consent of all the partners for the time being, he may be admitted to the benefits of partnership by an
agreement executed through his guardian with the other partners.
- The following points must be kept in mind:
a. A minor can be admitted to the benefits of a partnership with the consent of all the partners.
b. There must be a partnership in existence before a minor can be admitted to its benefits.
c. There cannot be a partnership will all minors.
d. If a minor is made a full-fledged partner under the terms of a partnership deed, the deed would be
invalid not only regards the minor but also in regards to other partners. Since the deed also
becomes void ab-initio due to minor. The others cannot enforce it.

 Section 30 lays down that the rights and liabilities of a minor who has been admitted to the benefits of
partnership are as follows:
i. The minor is entitled to receive his agreed share of the property and of the profits of the firm.
ii. The minor has the right of inspecting and taking copies of the books of accounts of the firm. He has
no right in respect to books other than the accounts, as they may contain secrets and open to real
partners only.

CONTRACT 2 | 55
 iii. The minor is not personally liable to third parties for the debts of the firm, but his liability is limited
only up to his share in the partnership assets and profits. His private property cannot be made
liable for payment of debts.
iv. The minor cannot take part in the conducting of the business as he has no representative capacity
to bind the firm.
v. The minor cannot bring about any suit against the partners or an account or payment of his share
of the property or profits except when he severs his connection with the firm.
vi. On attaining majority or on knowing that he had been admitted to the benefits of partnership,
whichever date be later, the minor must decide within six months whether he would nor would
not like to be partner in the firm and give public notice of his decision.
vii. When the minor becomes a partner either by his own choice or by his failure to give notice within
the specified time, he becomes personally liable to the third parties for all the debts and
obligations of the firm retrospectively from the date of his admission to the benefits of
partnership. His share in profit and property will be the same.
viii. When a minor chooses to become a partner:
1. His rights and liabilities continue to be those of a minor up to the date of his giving public
notice.
2. His share is not liable for any acts of the firm done after the date of the public notice.
3. He is entitled to sue the partners for his share of the property and profit in the firm.

ix. If after attaining majority but before choosing to become a partner the minor represents or
knowingly permits himself to be represented as a partner in the firm, he will be personally liable to
anyone who has on the faith of such representation granted credit to the firm on the ground of
‘holding out’.

 REGISTRATION OF FIRM
 Before the Indian Partnership Act, 1932, there was no provision for registration of firm in India as a
result that when any liability arose the partners would deny their membership. Therefore, there was a
demand for compulsory registration as existing in England but due to large number of small
partnerships firms working in India, where registration may not produce much public benefit, the
present Act was made optional. Let us now take look at the various aspects of Registration of Firm:

 Time of Registration
Registration may take place at any time during the continuance of the partnership firm. If any person
wants to institute a suit, the registration should be effected before the suit or the court will not
entertain the suit. If suit is filed before registration, then withdraw the suit, get it registered and file a
fresh suit.

 Procedure of Registration (Section 58)

The procedure for registration is very simple. An application in the prescribed form along with the
prescribed fee has to be submitted to the Registrar of Firms of the State in which any business of the
firm is situated. The application must be signed by all the partners, or by their agents specially
authorized in this behalf. The details necessary are:
1. The name of the firm.
2. The place or principal of business of the firm.
3. The names of any other place where the firm carries on business.
4. The date when each partner joined the firm.
5. The names in full and permanent addresses of the partners.

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 6. The duration of the firm.
When the registrar is satisfied with the provisions he shall record an entry of the statement in a
register called Register of Firms and file the statement (Section 59). Later, if there is any change then it
should be notified to the Registrar who shall make the necessary changes in the Register of Firms. He
should be informed if any partner ceases to be partner by death, expulsion, retirement, insolvency, or
when any one is added or a minor being admitted or when the firm is dissolved.
If any person knowingly or without belief in its truth signs any statement, amends statement, notice or
intimation containing false information to be supplied to Registrar, he shall be punished with
imprisonment which may extend to three months or with fine or with both.

 Effects of Non-Registration (Section 69)

An unregistered firm and its partners suffer from the following disabilities:
1. No suit in a civil court by a partner against the firm or other co-partners:
If any disputes arise and the dispute is based on the rights arising from contract (partnership deed)
or by Partnership Act, then a partner in unregistered firm cannot institute a suit to settle the
disputes. However, criminal proceedings can be brought against the other. If a partner steals or set
fire to the property then he can be prosecuted under criminal law.
2. No suit in a civil court by firm against third parties:
An unregistered firm cannot file a suit against a third party, to enforce any rights arising out of
contract e.g. for the recovery of the price of goods supplied. Criminal proceedings can be brought.
A suit for dishonor of cheque due to insufficient funds can be brought. Suit by a third party against
a firm is allowed.
3. The firm or its partners cannot make a claim of set-off or other proceedings based upon a
contract:
If a third party sues the firm to recover a sum of money, the firm cannot claim a set-off i.e. the firm
cannot say that the third party also owes some money to the firm and the same should be
adjusted against the claim in question. Again if an unregistered firm institutes a suit for the
reduction of rent from the landlord, such a suit is not maintainable as it falls under ‘other
proceedings’.

Exceptions: Non-registration of a firm does not, however, affect the following rights, namely:
1. The right of third parties to sue the firm or any partner.
2. The right of the partners to sue for the dissolution of the firm or for the accounts of a dissolved
firm or for the realization of the property of a dissolved firm.
3. The power of an Official Assignee or Receiver or the Court, as the case may be, to realize the
property of an insolvent partner and to bring an action therefore, if necessary, on behalf of the
insolvent.
4. The rights of firm or partners of firm having no place of business in India.
5. The right to sue or claim a set-off if the value of suit does not exceed Rs. 100 in value.

 Register of Firms:
The Register of Firms maintained at the Registrar of Firms’ office contains complete and up-to-date
information about each registered firm regarding all matters likely to affect the interests of those
persons who propose to deal with the firm (Section 64).
The Registrar is bound to amend the entry in the Register, if directed by Court as decision taken
(Section 65).
The Register of Firm is open for inspection after paying required fee (Section 66) and is bound to give a
copy when requested on payment of prescribed fee (Section 67).

CONTRACT 2 | 57
 It is conclusive proof of the truth of the matters contained therein as against the parties signing the
statements on the basis of which the Register is prepared. The third party can challenge the fact of
statement and prove it false (Section 68). The third party can prove he is partner in the firm even if his
name is not in the register.

 Property of Firm:
Section 14 provides that subject to contract between the partners, the property of the firm includes all
property and rights and interest in property originally brought into the stocks of the firm, or acquired
or purchased or otherwise by the firm for the purse of the firm or business.
If a partner bring immovable property as capital to the firm, that becomes the property of the firm.
Property purchased is also property of the firm even if it is purchased on a partners own name, unless
a contrary intention appears from the conduct of the partner concerned.

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24. DISCUSS THE MUTUAL RIGHTS AND DUTIES AND LIABILITIES OF PARTNERS.
Ans. Section 11(1) states that “subject to the provisions of this Act, the mutual rights and duties of the partners of a
firm may be determined by contract between the partners, and such contract may be express or may be implied
by a course of dealing. Such contract may be varied by consent of all the partners and such consent may be
express or may be implied by a course of dealings”.
 Rights of Partners:
1. Right to take part in the conduct of the business (Section 12a)
2. Right to be consulted (Section 12c)
3. Right to access to books (Section 12d)
4. Right to share the profits (Section 13b)
5. Right to interest on capital (Section 13c)
6. Right to interest on advances (Section 13d)
7. Right to indemnity (Section 13e)
 Duties of Partner:
There are two types of Duties. They are:
A. Absolute Duties
B. Qualified Duties

A. Absolute Duties
These duties are imposed by the law and are not subject to a contract to the contrary. They are
mandatory and applicable to all the members.
1. Duty to carry on the business to the greatest common advantage (Sec. 9)
2. Duty to be just and faithful inter-se (Sec. 9) – mutual trust and confidence.
3. Duty to render true accounts (Sec. 9).
4. Duty to provide full information (Sec. 9).
5. Duty to indemnify for loss caused by fraud (Sec. 10).
6. Duty to be liable jointly and severally (Sec. 25).
7. Duty not to assign his interest (Sec. 29)

B. Qualified Duties
These duties are those which depend on contract between the partners and if it is not in the contract
then the duties laid down by the Indian partnership Act will be applicable.
1. Duty to attend diligently to his duties (Section 12b).
2. Duty to work without remuneration (Section 13a).
3. Duty to contribute to the losses (Section 13b).
4. Duty to indemnify for willful neglect (Section 13f).
5. Duty to use firm’s property exclusively for the firm (Section 15).
6. Duty to account for personal profits derived (Section 16a).
7. Duty not to compete with the business of the firm (16b).

 Liabilities of Partners to Third Parties

They are divided into three categories.
1. Liability of a partner for acts of the firm.
2. Liability of the firm for wrongful acts of partner.
3. Liability of the firm for misappropriation by partners.

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1. Liability of a partner for acts of the firm.
Section 25 – Every partner is liable, jointly with all the other partners and also severally, for all the acts
of the firm done while he is a partner. Their liability is unlimited. The third party can sue all the partners
together or can sue them separately.

2. Liability of the firm for wrongful acts of partner.

Section 26 – a partner by wrongful act or omission in the ordinary course of business of a firm, or with
authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is
liable, as the partner. If it is a fraud then the person committing the fraud is liable and not the other
partners.

3. Liability of the firm for misappropriation by partners.

Section 27 – where a partner acting within his apparent authority receives money or property from a
third party and misapplies it or a firm in the due course of its business receives money or property from
a third party, and the same is misapplied by any of the partners while it is in custody of the firm, the
firm is liable to make good the loss.

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25. DISCUSS THE RELATIONSHIP OF PARTNERS TO THIRD PARTIES.
EXPLAIN THE EXPRESS AND IMPLIED AUTHORITY OF PARTNERS.
ANS. A partnership being a mutual agency between the partners, entails that each partners is both a principle and
agent. They are bound to each other in carrying on the trade. Third party therefore can make all the partners
liable if the partner has acted within the scope of his express or implied authority.

 Express Authority of a Partner

When a partner is expressly authorized by an agreement of all the partners to do certain acts on behalf of
the firm, it is called express authority of a partner.
The firm is bound by all the acts of a partner done within the scope of his express authority even if the acts
are not within the scope of the partnership business.

 Implied Authority of Partner

 The firm is also bound by all acts of a partner done within the scope of his implied authority. An
implied authority is made out of the circumstances of the case.
 The acts which are usually done in the course of the proper conduct of the business come within the
scope of his implied or apparent or ostensible authority.
 Section 19 (1) and 22 define the scope of the implied authority of a partner. They are:
a. The act should be done for carrying on the business of the kind carried on by the firm.
b. The act should be done in the usual way of such business.
c. The act must be done in the firm name or in any other manner expressing or implying an intention
to bind the firm.
Thus the acts done beyond the scope of the business do not come under implied authority.
 In case of trading or commercial firm, a partner in the exercise of his implied authority, can bind the
firm by any of the following acts:
1. Buying and selling goods, on behalf of the firm, in which the firm deals.
2. Receiving payments of the debt due to the firm and giving valid receipts for them.
3. Contracting debt and paying debt on behalf of the firm.
4. Settling accounts with person dealing with the firm.
5. Employing servants for the partnership firm.
6. Drawing cheques, accepting or endorsing bills of exchange and promissory notes in the name of
the firm
7. Pledging movable property of the firm.
8. Suing on behalf of the firm and defending suits in the name of the firm.

 Statutory Restrictions on implied authority (Section 19(2)).

Certain acts have been statutorily excluded from the scope of implied authority and the firm cannot be
bound or made liable by such acts unless the usage or custom of trade permits him or all the partners
expressly authorize him. Thus the partner cannot:
1. Submit a dispute relating to the business of the firm to arbitrariness.
2. Open a banking account on behalf of the firm in his own name.
3. Compromise or relinquish any claim or portion of a claim by the firm
4. Withdraw a suit or proceeding filed on behalf of the firm.
5. Admit any liability in a suit or proceeding against the firm.
6. Acquire immovable property on behalf of the firm.
7. Transfer immovable property belonging to the firm.
8. Enter into partnership on behalf of the firm.

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 Extension or restriction of partner’s implied authority (Section 20)
The partners by contracting among themselves extend or restrict implied authority of any partner. If
the partner acts after his authority is restricted, such act binds a firm vis-à-vis third party
notwithstanding any such restriction unless the third party has the knowledge of the restriction.
In an emergency a partner can do all such acts for the purpose of protecting the firm from loss as
would be done by a person of ordinary prudence and such act binds the firm (Section 21).

CONTRACT 2 | 62
 UNIT V
26. WHAT IS NEGOTIABLE INSTRUMENT? GIVE DEFINITION, CHARACTERISTICS AND EXAMPLES OF NEGOTIABLE
INSTRUMENTS.
Ans. The law regards Negotiable Instruments is contained in Negotiable Instruments Act, 1881. It deals with three
kinds of Negotiable Instruments. They are: Promissory Notes, Bills of Exchange, and Cheques.
 Definition: Negotiable means ‘transferable by deliver’ and the word Instrument means ‘a written document
by which a right is created in favor of some person’. Negotiable Instruments literally means ‘a written
document transferable by delivery’.
 According to Section 13 of the Negotiable Instruments Act, “a negotiable Instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer”. It can be made
payable to two or more jointly or to one of the two or one or some of several payees.
a. Payable to order: A note, bill or cheque is payable to order which is expressed to be ‘payable to a
particular person or his order’. E.g. Pay A or order, Pay to the order of A, Pay A and B and order. But
it should not have any words prohibiting transfer e.g. Pay to A only. This is valid agreement, but not
a negotiable Instrument.
b. Payable to bearer: it means ‘payable to any person whosoever bears it. E.g. Pay to A or bearer, Pay
A or B or bearer, Pay bearer. Suppose a cheque is payable to A and A endorses it merely by putting
his signature on the back and delivers it to B with the intention of Negotiating it (without making it
payable to B or B’s order). The instrument in B’s hand is bearer instrument.
 Section 31 of the Reserve Bank of India Act: The above definition is subject to provision of Section 31 of
the RBI Act, 1934, which as amended by the Amendment Act of 1946, provides that:
1. No person in India other than the RBI or Central Government can make or issue a promissory note
‘payable to bearer’.
2. No person in India other than the RBI or Central Government can draw or accept a bill of exchange
‘payable to bearer on deman’.
3. A cheque ‘payable to bearer on demand’ can be drawn on a person’s account with a banker.
The effect of the above provision is that:
1. A promissory note cannot be originally made ‘payable to bearer’, no matter whether it is payable
on demand or after a certain time. It must be made ‘payable to order’ initially. However, on being
endorsed in blank it can become ‘payable to bearer’ or ‘payable to bearer on demand’.
2. A bill of exchange may be originally made ‘payable to bearer’ but it must be payable otherwise than
on demand (say payable after three months after date) in that case. If it is ‘payable on demand’ then
it must be made ‘payable to order’. However on being endorsed it becomes ‘payable to bearer on
demand’.
3. A cheque drawn on a bank can be originally made ‘payable to bearer on demand’ and it shall be
valid. In fact cheques are always payable on demand.
This is prevent private persons from infringing on the monopoly of ‘Note Issue’ of the RBI and
Government. The currency notes contain ‘I promise to pay the bearer the sum of rupees 10, 50, 100,
500..’ The general public is therefore prohibited to issue such notes or bills. Section 32 of RBI Act, 1934
makes it an offence and declares them illegal and unenforceable at law.
 A most comprehensive definition of Negotiable Instruments is given by Thomas: “A Negotiable
Instruments is one which is, by a legally recognized custom of trade or by law, transferable by the
delivery or by endorsement and delivery in such circumstances that, i) the holder of it for the time being
may sue on it in his own name, ii) the property passes in it passes, free from equities, to a bona fide
transferee for value, notwithstanding any defect in the title of the transferor”.

CONTRACT 2 | 63
 Characteristics of a Negotiable Instruments
These are the following essential characteristics of Negotiable Instruments which makes them different
from other chattel:
1. Easy Negotiability: They are transferable from one person to another without any formality. It passes
by endorsement or delivery.
2. Transferee can sue in his own name without giving notice to the debtor: A bill, note or a cheque
represents a debt, i.e. an ‘actionable claim’ and implies the right of the creditor to recover something
from his debtor. He can recover his amount on his own or transfer his right to another. If he transfers,
the transferee has the right to sue without giving notice to the debtor of the fact that he has become
the holder.
3. Better title to a bona fide transferee for value: A bona fide transferee of a Negotiable Instrument for
value (Technically called as a holder in due course) gets the Instrument ‘free from all defects’. He is not
affected by any defect of title of the transferor or any prior party. The general rule ‘nobody can transfer
a better title than that of his own’ does not apply to Negotiable Instruments.
4. Presumptions: Certain presumptions apply to all negotiable instruments. Section 118 and 119 lay down
the following presumptions, unless the contrary
a. That every Negotiable Instrument was made, drawn, accepted, endorsed, or transferred for
consideration.
b. That every Negotiable Instrument bearing a date was made or drawn on such date.
c. That every bill of exchange was accepted within a reasonable time after its date and before its
maturity.
d. That every transfer of a negotiable instrument was made before its maturity.
e. That the endorsements appearing upon a negotiable instrument were made in the order in which
they appear thereon;
f. That a lost Negotiable Instrument was duly stamped.
g. That the holder of Negotiable Instrument is a holder in due course; but this presumption would not
arise where it is proved that the holder has obtained the instrument from its lawful owner, or from
any person in lawful custody thereof.
h. That the instrument was dishonored, in case a suit upon a dishonored Instrument is filed with the
court and the fact of ‘protest’ is proved.

 Examples of Negotiable Instruments

The following instruments have been recognized as negotiable Instruments:
1. Bills of exchange
2. Promissory notes
3. Cheques
4. Government promissory notes
5. Treasury bills
6. Dividend warrants
7. Share warrants
8. Bearer debentures
9. Port Trusts or improvement Trust Debentures
10. Hundis
11. Railway bonds payable to bearer

 Examples of Non-Negotiable Instruments

1. Money orders
2. Postal orders

CONTRACT 2 | 64
 3. Fixed deposit receipts
4. Share certificates
5. Letters of Credit

 Examples of Quasi-Negotiable Instruments

1. Bills of lading
2. Dock warrants
3. Railway receipts
4. Wharfinger certificates

CONTRACT 2 | 65
27. GIVE DEFINITION, CHARACTERISTICS OF PROMISSORY NOTE.
Ans. Promissory Note
 Definition: According to Section 4 “a Promissory Note is an instrument in writing (not being a bank note or
a currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of
money only to, or to the order of, a certain person, or to the bearer of the instrument”.

The following facts are important as regards promissory note:

1. A promissory note payable ‘only to a particular person’ is valid if it satisfies the requirements of the
definition, but it shall not be a Negotiable Instrument within the meaning of the Negotiable
Instruments Act as its transferability is restricted.
2. Section 31 of the Reserve Bank of India Act, 1934, says that “No person in India other than the RBI or
Central Government can make or issue a promissory note ‘payable to bearer’. Thus the words ‘or to
the bearer of the instrument’ included in the above definition have become redundant and ineffective.
They should have been deleted.
3. Bank Notes (i.e. promissory notes issued by a banker payable to bearer on demand) and currency
notes (issued by RBI) are excluded from the definition of a promissory note because both of them are
treated as money.
4. The person who makes the promise to pay is called the ‘maker’. He is the debtor and must sign the
document. The person to whom payment is to be made (i.e. the creditor) is called the ‘payee’.

 Essentials of a Promissory Note:

1. It must be in writing: It has to be in writing. An oral promise is not promissory note. The writing may be
in any paper or book. It may be in pencil or ink, including typing or printing. It must have the words ‘I
promise to pay’. The word promise need is not necessary.
2. It must contain a promisor or undertaking to pay: there must be a promise or undertaking to pay. E.g. I
am liable to pay or I owe Mr. B the sum of Rs. 100 are not promissory notes as there is no promise or
undertaking to pay.
3. The promise to pay must be unconditional: it must be an unconditional promise to pay. It should not
depend on happening or non-happening of some uncertain event. E.g. I promise to pay Mr. B the sum
of Rs. 1000 after my marriage to C is not a promissory note. But it is not conditional if it is made
payable at particular place or after a specified time. E.g. I promise to pay B seven days after the death
of C is not conditional as C is certain to die.
4. It must be signed by the maker: The promissory note should be duly signed and duly authenticated.
The signature may be in any part of the instrument and need not be necessarily at the bottom. It may
be in ink or pencil or thumb impression if illiterate.
5. The maker must be a certain person: The Instrument must indicate with certainty who is the person or
are the persons engaging himself or themselves to pay. I Alok Nath promise to pay.
6. The payee must be certain person: The payee too must be certain person. A note is valid even if name
is misspelt or by designation only provided he can be ascertained by evidence.
7. The sum payable must be certain: for a valid promissory note it is also essential that the sum of money
promised should be certain and definite. Must not be capable of contingent additions or subtractions.
E.g. I promise to pay Rs. 500 and all other sums which shall be due to him is not valid.
But it does not indefinite merely because: there is promise to pay the amount with interest, provide the
rate of interest is stated. Or the amount is to be paid at an indicated rate of exchange or according to
the course of exchange or the amount is payable by instalments, even with a provision that on default
being made in payment of an instalment the balance unpaid shall become due.
8. The amount payable must be in legal tender money of India: A document containing a promise to pay
a certain amount of foreign money or to deliver a certain quantity of goods is not a promissory note.

CONTRACT 2 | 66
 Similarly a promise to pay paddy either in the alternative or in addition to money does not constitute a
promissory note.
9. Other Formalities: There should be the place where it is made and the date on which it is made but
their omission will not render the Instrument invalid. The words ‘value received’ is essential because
consideration is necessary and presumed until the contrary is proved. It should be properly stamped by
the Indian Stamp Act and duly cancelled.

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28. GIVE DEFINITION, CHARACTERISTICS OF BILL OF EXCHANGE.
Ans. Bill of Exchange
 Definition: According to Section 5 “a Bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to,
or to the order of, a certain person, or to the bearer of the instrument”.

The following two facts are to be noted:

1. Although a bill of exchange directing to pay ‘only to a particular person’ is valid if it satisfies the
requirements of the definition but it shall not be a Negotiable instrument within the meaning of the
Negotiable Instruments Act as it its transferability is restricted.
2. Although a bill of exchange may be originally drawn’ payable to bearer’ but in such a case it must be
payable otherwise than on demand (say, three months after date). In other words a bill cannot be
drawn ‘payable to bearer on demand’ (RBI Act, Section 31).

 Parties to the bill of exchange:

- There are three parties to a bill of exchange, viz., drawer, drawee, payee.
- The person who makes the bill is called ‘drawer’. The person who is directed to pay is called ‘drawee’.
The person to whom the payment is made is ‘payee’. If it is endorsed, then the one who is in possession
of it is called ‘holder’. The holder must present it to the drawee for his acceptance.
- There need not be three person to fit here. One person may fill any two positions. E.g. Drawer and
payee. If it is drawn ‘pay to me or my order’. Or Drawee and Payee. When the bill is endorsed in favour
of the drawee. Drawer and Drawee. When one draw bill upon himself.
- Sometimes the name of another person may be mentioned in a bill of exchange as the person who will
accept the bill, if the original drawee does not accept it. It is called ‘drawee in case of need’.

 Essentials of a Bill of Exchange

To be a valid bill of exchange an instrument must comply with the requirements of the definition given in
Section 5, which are as follows:
1. It must be in writing.
2. It must contain an order to pay.
3. The order must be unconditional.
4. The drawer, drawee and payee must be certain. Rule ‘where liability lies, no ambiguity must lie’.
5. The sum payable must be certain.
6. The bill must contain an order to pay money only.
7. It must comply with the formalities as regards date, consideration, stamps.

 Special benefits of bill of exchange

The special benefits of using bills of exchange in the world of commerce are as follows:
1. A bill of exchange is a double secured instrument. If the bill is dishonoured by the acceptor, the holder
or the payee may look to the drawer of the bill for payment.
2. In case of immediate need of money a bill can be dismounted with a bank by the payee.
3. Two separate trade debts can be discharged by a bill of exchange. E.g. If A buys goods on credit from B
for Rs. 1000 to be paid three months after date and B buys goods on credit from C on similar terms for
similar amount, an order by B to A to pay the sum of Rs. 1000 to C will discharge two separate trade
bills.

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Rs. 1000 New Delhi, 25 August
2008

Three months after date pay to C or order the sum of rupees one thousand only, for value received.

To
Mr. A Accepted Revenue Stamp
Sardar Bazar, Delhi Sign sign

CONTRACT 2 | 69
29. DISTINCTION BETWEEN A PROMISSORY NOTE AND BILL OF EXCHANGE.
Ans.
A PROMISSORY NOTE. BILL OF EXCHANGE.
1. Number of parties:
In a promissory note there are two parties. The In a bill of exchange, there are three parties. The
maker of the note and the payee. drawer, drawee, payee.
2. The maker of the note cannot be payee:
In a promissory note the maker of the note In a bill of exchange the drawer and the payee may
cannot be the payee as the same person cannot be one and the same person as when the bill is
be promisor and promisee. drawn ‘pay to me or my order’
3. Promise and Order:
In a promissory note there is a promise to make In a bill of exchange there is an order for making
the payment. the payment.
4. Acceptance:
A promissory note requires no acceptance as it is The drawer of a bill of exchange is generally the
signed by the person who is liable to pay. creditor of the drawee and therefore it must be
accepted by the drawee before it can be presented
for payment.
5. Nature of Liability:
The liability of the maker of a promissory note is The liability of a drawer of a bill of exchange is
primary and absolute. secondary and conditional. It is only when the
acceptor does not honour the bill that the liability
of the drawer arises as a surety.
6. Makers position:
The maker of a promissory note stands in The maker in a bill of exchange stands in
immediate relation with the payee. immediate relation with the acceptor and not the
payee.
7. Payable to bearer:
A promissory note cannot be drawn payable to A bill of exchange can be drawn payable to bearer
bearer. provided it is not drawn ‘payable to bearer on
demand’.
8. Notice of dishonor:
In case of dishonor of a promissory note no In case of dishonor of a bill of exchange, notice of
notice is necessary to the maker. dishonor must be given by the ‘holder’ to all prior
parties who are liable to pay (including the drawer
and endorsers)
9. Application of certain provisions:
The provisions relating to presentments for The provisions relating to presentments for
acceptance, acceptance, acceptance supra acceptance, acceptance, acceptance supra protest
protest and drawing of bill in set are not and drawing of bill in set are applicable to a bill of
applicable to a promissory note. exchange.

CONTRACT 2 | 70
30. GIVE DEFINITION, CHARACTERISTICS OF CHEQUE, HUNDI.
Ans. Cheque.
 Definition: According to Section 6 as substituted by the Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002, “A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form”.
Explanation I: For the purpose of this Section, the expression:
a) A cheque in the electronic form means a cheque which contains the exact mirror image of a paper
cheque, and is generated written and signed in a secure system ensuring the minimum safety standards
with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
b) A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by
the clearing house or by the bank whether paying or receiving payment, immediately on generation of
an electronic image for transmission, substituting the further physical movement of the cheque in
writing.
Explanation II: For the purpose of this section, the expression clearing house means the clearing house
managed by the Reserve Bank of India.

 Characteristics of a cheque
a. A cheque is always drawn on a bank.
b. A cheque is always payable on demand.
c. A cheque may be written on a paper or it may be in the electronic form.
d. A cheque may be authenticated by the hand written signature or by the digital signature.

 Distinction between a cheque and Bill of exchange.

CHEQUE BILL OF EXCHANGE

1 A cheque is always drawn on a bank.
2 A cheque can only be drawn payable on demand.
3 A cheque drawn ‘payable to bearer on demand’ is
valid
4 A cheque does not require any acceptance by the
drawee before the payment can be demanded.
5 A cheque does not require any stamp.
6 A cheque does not require any grace period as it
is payable on demand.
7 A cheque can be crossed.
8 A cheque can be countermanded by the drawer.
9 In a cheque there is no system of Noting and
Protest.
A Bill of exchange may be drawn on any
person, including a bank.
A Bill of exchange may be drawn payable on
demand or on the expiry of a certain period
after date or sight.
A Bill of exchange drawn ‘payable to bearer
on demand’ is no valid and illegal.
A Bill of exchange requires acceptance by
the drawee before he can be made liable
upon it.
A Bill of exchange must be properly
stamped.
In a Bill of exchange, three grace days are
allowed while calculating the maturity date
in the case of ‘time bills’(bills drawn payable
after the expiry of a certain period)
A Bill of exchange cannot be crossed.
A Bill of exchange cannot be countermanded
by the drawer.
In a Bill of exchange there is a system of
Noting and Protest.

CONTRACT 2 | 71
 10 A drawer of a cheque will not be discharged by A drawer of Bill of exchange is discharged
delay of the holder in presenting it for payment, from liability, if it is not duly presented for
unless though the delay, the drawer has been payment.
injured.

HUNDIS
 Definition: Hundis are negotiable instruments written in Hindustani language. Sometimes they are in the
form of promissory notes but usually they are like bills of exchange in form and substance. The provisions
of the Negotiable Instruments Act apply to hundis unless there is a local usage of the contrary. They are
quite popular among the Indian Merchants from the very old days.

 Types of Hundis
a. Darshani Hundi: It is one payable at sight like a ‘demand bill’. It must be presented for payment within
a reasonable time of its receipt by the holder. If loss is caused to the drawer by delay in presentment it
falls on the holder.
b. Maidi or Muddati Hundi: It is one payable after a specified period of time like a ‘time bill’.
c. Shah jog Hundi: This is a hundi made payable by the drawer only to a Shah. A shah means a respectable
person of worth and substance in the Bazar. It may be Darshani or Maidi. It may be transferred from
one to another merely by delivery, but it is payable only to a respectable person.
d. Nam Jog Hundi: Where the Hundi is made payable to or to the order of specified person it is called a
Nam Jog Hundi. Such a hundi can be endorsed like a bill of exchange payable to order.
e. Jokhmi Hundi: The term Jokhmi means ‘against risk’. A Jokhmi Hundi is a combination of bill of
exchange and insurance policy. Such a hundi implies a condition that the money shall be payable by the
drawer only in the event of the safe arrival of the goods against which the Hundi is drawn.
f. Certain General Terms: Hundis payable to the order are known as ‘Firman Jog Hundi’. Hundis payable
to bearer are known as ‘Dhani Jog Hundi’. A Hundi when paid and cancelled is called a ‘Khokha’. The
duplicate of a Hundi, when original is lost is called ‘Peth’. The duplicate of a duplicate Hundi is called
‘Perpeth’.

CONTRACT 2 | 72
 UNIT VI
31. IN WHAT DIFFERENT WAYS MAY A NEGOTIABLE INSTRUMENT BE DISHONORED? WHAT ARE THE DUTIES OF A
HOLDER OF A DISHONORED BILL?
Ans. A negotiable instrument may be dishonored by
a) Non-acceptance or (bill of exchange)
b) Non-payment (promissory note, bill of exchange or cheque)

a) Dishonor by Non-acceptance
A bill of exchange is said to be dishonored by non-acceptance in the following cases:
1. When the drawer or one of the several drawees (not being partners) makes default in acceptance
upon being duly required to accept the bill. It may be recalled that the drawee may require 48 hours’
time (exclusively of public holidays) to consider whether he will accept or not.
2. Where the presentment for acceptance is excused and the bill is not accepted i.e. remains unaccepted.
3. Where the drawer is incompetent to contract.
4. Where the drawee is makes the acceptance qualified.
5. If the drawee is a fictitious person or after reasonable search cannot be found (Sect 61).

b) Dishonor by Non-payment
A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of
the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required
to pay the same (Section 92).
Also a promissory note or bill of exchange is dishonored by non-payment when presentment for payment is
excused expressly by the maker of the note or acceptor of the bill and the note or bill remains unpaid at or
after maturity (Section 76).

 Effects of Dishonor:
- As soon as the negotiable instrument is dishonored (either by non-acceptance or non-payment) the
holder becomes entitled to sue the parties liable to pay them.
- The maker of the note, acceptor and drawer of the bill, drawer of the cheque and all the endorsers are
liable severally and jointly to a holder in due course.
- The holder must however, give ‘notice of dishonour’ to all the parties against whom he intends to
proceed. He may also have the instrument ‘noted and protested’ before a Public Notary.

 Notice of Dishonor:
- It is the formal communication of the dishonor of the instrument.
- It is given to the party sought to be made liable and therefore, it serves as a warning to the person that
he could be made liable.

- Notice by whom?
 Notice of Dishonor should be given by the holder or by some party of the instrument who remains
liable thereon (section 93).
 The person receiving the notice should forward to all the prior parties within reasonable time to
render them liable to himself. He cannot sue unless he has served the notice.
 He cannot sue anyone whom he has not given notice.
 If there are several persons, there is no need that all give notice to a certain person. If one gives
the other can take advantage of it.

CONTRACT 2 | 73
  Notice can also be given by the authorized agent of the person who is bound to give the notice.
 When an instrument is deposited with an agent for presentment and is dishonored, he himself
can give a notice to prior parties on behalf of the holder.

- Notice to whom?
 Notice must be given to all the parties (other than the maker of them) to whom the holder seeks
to make liable or to their duly authorized agents.
 Where there are two or more person jointly liable as drawers or endorsers, notice to any one of
them is sufficient.
 No notice need to be given to the maker of a note, or acceptor of a bill or drawee of the cheque
who are the principle debtors and have themselves dishonored the instruments (Sec. 93).
 In case of death, notice has to be given to the legal representative or, where he has been declared
insolvent, it must be given to the Official Assignee (Sec. 94).
 If the party to whom the notice of dishonor is dispatched is dead, but the party dispatching the
notice is ignorant of his death, the notice is sufficient to bind the estate of the deceased (sec. 97).

- Mode of giving Notice?

 According to Section 94 the notice of dishonor must be oral or written.
 If it is written it may be sent by post. A notice duly addressed and posted is good even though it
may be miscarried.
 The notice may be in any form but the language must indicate that the instrument is dishonored
and in what way it was dishonored and the recipient will be liable.
 It should be given within a reasonable time after the dishonor, at the place of business or at the
residence of the party.
 What is reasonable time? It depends on the nature of the instrument, the usual course of dealing
with respect to similar instruments and the distance and in calculating time, public holidays
should be excluded (Sec. 105).
 If the same place then reach the next day of dishonor and if far away then send by post the next
day.
 If the notice has to be given to his own prior parties then again it should be within a reasonable
time after the receipt of the notice.

- When Notice of dishonor is not necessary?

 Notice of dishonor is not necessary, i.e. the parties are liable without any notice of dishonor in the
following
1. When it is dispensed with by the parties to the notice. If he writes that ‘notice of dishonor is
waived’ or ‘no notice of dishonor is required’.
2. When the drawer of a cheque has countermanded (cancelled) payment, no notice of dishonor
is required to the charge the drawer.
3. When the party charged could not suffer damage for want of notice. E.g. If the cheque is
dishonored because the drawer had closed his account with the banker.
4. When the party entitled to notice cannot, after due search, be found; or the party bound to
give notice is, because of some justifiable reason (e.g. death, accdent) unable to give it.
5. When the drawer also happens to be acceptor.
6. In the case of a promissory note which is not negotiable. Since it is not negotiable, the payee
need not to endorse it, and if it is endorsed, the endorsee cannot have any claim against the
maker of the note or the endorser. Therefore, no one in prejudiced for want of notice.

CONTRACT 2 | 74
 7. When the party entitled to notice promises to pay unconditionally the amount due on the
instrument after the dishonor and with full knowledge of the facts.

- Consequence of not giving Notice of dishonor.

 If notice is not, where required to give to all the parties than cannot sue.
 The drawer or endorser who has not received notice is discharged not only on the bill or note but
also in respect of the original consideration.

- Noting
 Noting is an authentic and official proof of presentation and dishonor of a negotiable instrument.
 It is recording the fact of dishonor on the dishonored instrument or on a paper attached thereto
for the purpose.
 Noting in case of cheque is not required as the bank gives the proof with reasons for refusing
payment.
 In case of promissory note or bill of exchange has been dishonored by non-acceptance or non-
payment the holder has to get it noted by a Public Notary upon the instrument or upon a paper
attached thereto, or partly upon each.
 Here the person takes it to the Notary who makes a demand for acceptance or payment upon the
drawee or acceptor or maker formally and on his refusal to do so notes the same on the bill or
note.
 Noting must be made within a reasonable time after dishonor and must specify i) the date of
dishonor, ii) the reason assigned for such dishonor, iii) the notary’s charges.

- Protest
 Protest is a formal certificate of dishonor issued by the Notary Public to the holder of the bill or
note, on his demand.
 Protest can be made for bills only. When the acceptor of the bill of exchange has become
insolvent, or his credit has been publicly peached, before the maturity of the bill, the holder may,
within a reasonable time, cause a Notary Public to demand better security of the acceptor, and on
its being refused, may within a reasonable time cause such facts to be noted and certified as
aforesaid. Such certificate is called a protest for better security.
 It enables the bill to be accepted for honor.
 Contents of protest:
1. The instrument itself or a literary transcript of the instrument and of everything written or
printed thereupon.
2. The name of the person for whom and against whom the instrument has been protested.
3. The fact and the reasons for dishonor i.e. refused to give it or did not answer or that he could
not be found.
4. The place and time of dishonor.
5. The signature of the Notary Public.
6. In case of acceptance for honor or payment for honor, the names of the persons by whom
and for whom it is accepted or paid.

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32. IN WHAT DIFFERENT WAYS MAY A NEGOTIABLE INSTRUMENT BE DISCHARGED?
WHEN IS A NEGOTIABLE INSTRUMENT SAID TO BE DISCHARGED?
Ans. The term ‘discharge’ in relation to negotiable instruments has two connotations i.e.
a) Discharge of the instrument
b) Discharge of one or more parties from liability on the instrument.

a) Discharge of the instrument

A negotiable instrument is said to be discharged when it becomes completely useless i.e. no action on that
will lie, and it cannot be negotiated further. When a negotiable instrument is discharged, the rights against
all the parties thereto comes to an end, and no party, even the holder in due course, can claim the amount
of the instrument from any party.
The instrument is discharged in following cases:
1. When the party primarily liable on the instrument (maker of note, acceptor of bill, drawee bank) makes
the payment in due course to the holder at or after maturity (Sec. 78).
2. When a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his
own right, the instrument is discharged (Sec. 90).
3. When the party primarily liable becomes insolvent, the instrument is discharged and the holder cannot
make any other prior party liable thereon.
In case of insolvency, the acceptor or maker is unable to pay and it is only on refusal to pay that the
instrument is deemed to be dishonored and prior parties can be made liable thereon.
4. An instrument stands discharged when primary party liable is discharged by material alteration in the
instrument (Sec. 87) or by lapse of time making the debt time barred under the Limitation Act.
5. When the holder cancels the instrument with an intention to release the party primarily liable thereon
from the liability, the instrument is discharged and ceases to be negotiable (Sec. 82).

b) Discharge of one or more parties from liability on the instrument.

A party is said to be discharged from his liability when his liability on the instrument comes to an end.
When only some of the parties to a negotiable instrument are discharged, the instrument continues to be
negotiable and the undischarged parties remain liable on it.
One or more are discharged in the following ways:
1. By cancellation (Section 82a):
- When the holder of a negotiable instrument deliberately cancels the name of any of the party (by
drawing a line through his name) liable on the instrument with an intent to discharge him from
liability thereon, such party and all endorsers subsequent to him, who have a right of action
against the party whose name is so cancelled, are discharged from liability.
- If an endorsers name is cancelled then all the endorsers subsequent to him will be discharged but
those prior to him will remain liable.
- In Section 40 if the holder, without the consent of the endorser, destroys or impairs the
endorser’s remedy against a prior party, the endorser is discharged from liability.
- If discharge is done under mistake, or without the authority of the holder it would be inoperative
and will not discharge any party.

2. By release (Section 82b):

- If the holder of a negotiable instrument releases any party to the instrument by any method other
than cancellation of names (i.e. by separate waiver or agreement, remission), the party so
released and all parties subsequent to him, who have a right of action against the party so
released are discharged from liability.

CONTRACT 2 | 76
3. By payment (Section 82c and 78):
- When the party primarily liable on the instrument makes the payment in due course to the holder
at or after maturity all the parties to the instrument stand discharged, because the instrument as
such is discharged by such payment.

4. By allowing drawee more than 48 hours to accept (Section 83):

- If the holder of a bill of exchange allows the drawee more than 48 hours, exclusively of public
holidays, to consider whether he will accept the same, all previous parties not consenting to such
allowance are thereby discharged from liability to such holder.

5. By taking qualified acceptance (Section 86):

- If the holder of a bill agrees to a qualified acceptance all prior parties whose consent is not
obtained to such an acceptance are discharged from liability.

6. By not giving notice of dishonor:

- Any party to a negotiable instrument (other than the party primarily liable) to whom notice of
dishonor is not sent by the holder is discharged from liability as against the holder, unless the
circumstances are such that no notice of dishonor is required to be sent.

7. By non-presentation for acceptance of bill (Section 61):

- When a bill or exchange is payable certain period after sight, its holder must present it for
acceptance to the drawee within a reasonable time after it is drawn. If he makes a default in
making such presentment the drawer and all endorsers who were liable towards such a holder are
discharged from their liability towards him.

8. By delay in presenting cheque (Section 84):

- It is the duty of the holder of a cheque to present it for payment within reasonable time of its
issue. If he fails to do so and in the meantime the bank fails causing damage to the drawer, the
drawer is discharged as against the holder to the extent of the actual damage suffered by him.

9. By Material Alteration (Section 87):

- A material alteration of a negotiable instrument renders the same void. It discharges the
instrument itself, and all the parties thereto at the time of making such alteration and not
consenting to the change discharged from liability thereon (Section 87).
- But persons who become parties to the instrument after the alteration are liable under the
instrument as altered. In other words those who take an altered instrument cannot complain
(Section 88).
- What constitutes a material alteration? When the alteration is ‘material’, the validity of the
instrument comes into question. It is anything which has the effect of altering the legal relations
between the parties or the character of the instrument or the sum payable amount.
The following are material alteration:
a. Any alteration in date, sum payable, time of payment and place of payment.
b. Alteration by addition of a new party to the instrument.
c. Alteration of the rate of interest.
d. Tearing off the material part of the instrument.
Non material alteration are:
a. Alteration made for the purpose of correcting a mistake or a clerical error.
b. Alteration made to carry out the common intention of the original parties (Section 87).

CONTRACT 2 | 77
 c. Alteration made before the instrument is issued.
d. Alteration made with the consent of the parties liable on the instrument.
e. Conversion of bearer cheque into an order cheque.
f. Filling blanks in the case of inchoate or incomplete instruments (Section 20). E.g. putting date
on the undated cheque.
g. Conversion of blank endorsement into an endorsement in full (Section 49).
h. Making qualified acceptance (Section 86).
i. Crossing of an uncrossed cheque (Section 125)
j. Alteration which is the result of an accident e.g. mutilation by washing, eaten by ants/rats,
etc.

10. By negotiation back of a bill (Section 90):

- When a bill of exchange comes back to the acceptor by process of negotiation and he becomes its
holder, it is called as ‘negotiation back’. If a bills of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, all rights of action thereon are extinguished.

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33. WHAT IS CROSSING OF CHEQUE? TYPES OF CROSSING OF CHEQUES? WHAT IS THE EFFECT OF CROSSING A
CHEQUE
Ans. Cheques and Crossing
 There are two types of cheques.
a) Open or uncrossed cheques.
b) Crossed cheques.

a) Open or uncrossed cheques.

An open cheque is payable at the counter of the drawee bank on the presentation of the cheque.
If it falls in the wrong hands then the person can take the payment of an open cheque and it is difficult
to trace him or her.
b) Crossed cheques.
A crossed cheque is payable only through a collecting banker and not directly at the counter of the
bank.
It is much more secure as the cheque amount is credited to the account of the payee of the cheque.
A cheque is said to be crossed when two parallel transverse lines, with or without any words are
drawn on the left hand top corner of the cheque.
If the person who holds the cheques does not have an account then he can open one or deposit it or
he can obtain payment by endorsing the cheque in favour of some person who has got an account in
any bank.

 Types of crossing
There are two types of crossing.
a. General Crossing
b. Special Crossing

a. General Crossing
When a cheque has on its face two parallel transverse lines, on the left hand top corner without any
words or with words ‘an company’ or ‘& Co’ or an ‘not negotiable’ written in between these two
parallel lines, it is called general crossing.

When a cheque is crossed generally, the Banker on whom it is drawn shall not pay it otherwise than to
a banker (Section 126). The holder may get the cheque collected through some bank of his own choice.

b. Special Crossing
Where a cheque bears across its face two parallel transverse lines, with the name of a Banker, either
with or without the words ‘not negotiable’.

When a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to
the banker to whom it is crossed, or his agent for collection (Section 126).

CONTRACT 2 | 79
It is to be presented to the banker mentioned or the agent of the Bank. This is more secure.
Account Payee or Restrictive Crossing:
- To give still more protection to the payee of a cheque the practice of restrictive crossing is also
prevalent in the business community.
- It can be made in cases of ‘general’ or ‘special’ crossing by adding the words: A/c Payee, Account
Payee only, A/c Ramanbhai Parmar only, A/c Payee only State Bank of India.
- The effect of this that the collecting banker is supposed to credit the amount in the payee only
and nobody else.
- This cheque can be further transferred, but the liability of the collecting banker is enhanced in
case he credits so crossed to any person other than the payee and the endorsement in favour of
last payee is proved forged. The banker will be held guilty of negligence and not entitled to
protection given under Section 131. Thus the banker has to make proper enquiries as to the title
of the last endorsee from the original payee named in the cheque.
- If it is A/C payee then it has to go to the person named and to no one else – RBI.

‘Not Negotiable’ Crossing:

- Not negotiable can be written in both types of crossing i.e. general and special.
- Such cheque cannot be given a better title than that of the transferor (i.e. cannot become the
holder in due course).
- It is to provide better protection to the holder or drawer of a cheque, because even if such a
cheque goes to wrong hands and from there it is transferred to holder in due course, the true
owner will not lose his claim against such and endorsee.

WHO CAN CROSS A CHEQUE?

- Crossing of an uncrossed cheque does not amount to a material alteration so as to affect the
validity of the instrument. Section 125 permits the crossing being made even after issue of a
cheque in the following ways:
1. Where a cheque is uncrossed, the holder may cross it generally or specially.
2. Where a cheque is crossed generally, the holder may cross it specially.
3. Where a cheque is crossed generally or specially, the holder may add the words ‘not
negotiable’.
4. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
especially to another banker as his agent for collection.
- Crossing once made becomes a material part of the cheque and only the drawer of the cheque is
entitled to cancel or open the crossing by writing the words ‘Pay Cash’ and cancelling the crossing
with his full signature.
- Any change should be authenticated by the full signature of the drawer.

LIABILITY OF A BANKER:
- The relationship between the banker and customer primarily is that of debtor and creditor.
- The banker has to honor the customer’s cheque unless there are valid reasons for refusing
payment of the same.
- In case if the banker dishonors it without justification he is liable to compensate the customer (i.e.
drawer) for the loss or any damage caused by such default (Section 31).
- The banker, in case of wrongful refusal to pay and if liability arises, is liable to the drawer only and
not to the payee of the cheque. The payee has no right to action against the banker for refusing to
honor the cheque as there is no privity of contract between him and the banker.

CONTRACT 2 | 80
- The rule of awarding damages: in case of wrongful dishonor of cheque, a non-trader customer is
entitled only to general damages for such monetary loss which he might have actually suffered.
But a trader or businessman customer is entitled to get general damages and special damages
also for loss of credit or reputation in the market and even without proving the actual loss
suffered by him. The rule is that ‘smaller the amount of the cheque wrongfully dishonored the
larger the amount of damages’.

WHEN BANKER ‘MUST REFUSE’ PAYMENT OF HIS CUSTOMERS CHEQUES:

- There are some cases when a banker must refuse payment of his customer’s cheques without
incurring any liability. They are as follows:
1. When customer countermands payment: when a customer issues instructions to the banker
not to honour a particular cheque issued by him, the banker is bound to comply with such
instruction. The countermand must be given in sufficient time before the bank makes the
payment. Oral countermand is enough. But any payment is made by mistake after a due
notice of countermand the payment is not good against the drawer, nor is the bank entitled
to a refund from the payee, and the banker will have to bear the loss caused by such
payment.
2. Garnishee order: It is a prohibitory order by any court attaching money in customer’s
account, the banker is bound to dishonor the customer’s cheque. But any payment is made by
mistake after a garnishee order, he will have to bear the loss himself. He cannot recover from
the payee who gets the payment of an otherwise valid cheque.
3. Death, insolvency or insanity of the customer: when a banker receives a notice that his
customer has died, or has been adjudicated insolvent or has become insane, his authority to
pay cheques drawn by the customer stands revoked and therefore he must not pay the
cheques. But any payment is made by mistake after a due notice of countermand the
payment is not good against the drawer, nor is the bank entitled to a refund from the payee,
and the banker will have to bear the loss caused by such payment.
4. Notice of assignment: when the banker receives a notice of assignment of his credit balance
from a customer, he must refuse payment of the cheques drawn by the customer. The banker
liable if payment made after receipt of such a notice.
5. Defective Title of the party: When the banker becomes aware of the defective title of the
person presenting the cheque e.g. he is a thief, the banker must not honour the cheque.
6. Loss of cheque: When the customer has informed the banker about the loss of the cheque, he
must not pay it. In case the payment of such a cheque is made by mistake it is not good
against the drawer but the banker can recover from the wrong payee, if traceable, as he is not
entitled to possession and payment of the cheque.
7. When the cheque is irregular: When there is material alteration in the cheque or the
signature of the drawer does not tally with the specimen signature kept in the bank, the
banker must dishonor the customer’s cheque. In case the payment of such a cheque is made
by mistake the banker can recover from the wrong payee, if traceable, otherwise he will have
to bear the loss himself.
8. Closing of Account: on receipt of the ‘notice of closing the account’ from the customer, the
banker must not pay the customer’s cheque. If the banker makes payment of any cheque
after the receipt of such a notice, he will have to bear the loss himself.

WHEN BANKER ‘MAY REFUSE’ PAYMENT OF HIS CUSTOMERS CHEQUES:

- There are some cases when a banker may refuse payment of his customer’s cheques without
incurring any liability. In these cases, if payment is refused, the banker shall not be liable for

CONTRACT 2 | 81
 damages, and if payment is actually made, the court will decide as to whether the payment made
is good against the drawer (customer) or not, taking into account the various facts of the case.
They are as follows:
1. Where the cheque is post-dated and is presented before the ostensible (supposed) date.
If a banker pays a post-dated cheque, the payment is good against the drawer provided the
cheque is not countermanded until the stated date. It is a great risk by the bank. Bank can be
made liable for damages to the customer if he is not able to meet the customer’s order.
2. When the balance to the credit of the customer’s account is insufficient to meet the cheque
and there is no overdraft arrangement.
3. When the funds of the customer in the hands of the banker are not properly applicable to the
payment of such cheque. If the funds are earmarked for some specific purpose by the
customer, or he is entitled to a set-off in respect of them, the said funds are not available for
honoring the cheque and the banker may refuse the payment.
4. When the cheque is not properly presented. It is presented in a branch, where the customer
has no account, or cheque is presented after banking hours.
5. Where the cheque is not presented within a reasonable time of its issue. Ordinarily a cheque
is valid for six months after this date the cheque is considered as ‘stale’ and the banker may
dishonor.
6. When the cheque is of doubtful validity i.e. drawn on a paper different from what is issued by
the bank, the bank may refuse payment.

VARIOUS PROTECTIONS TO THE PAYING BANKER

- The Negotiable Instruments Act provides special protection to a banker who honors his
customer’s cheques.
- The reasons for the protection is that even though the banker is responsible for the signature of
the drawer, he cannot be presumed to have any special knowledge about the payee or other
holders of the instrument.
- As such a paying banker acting in good faith and in the ordinary course of business should not be
saddled with responsibility if the payee’s title is subsequently found defective or wanting. The
cheques have to be honored or rejected promptly and the banker does not have time, nor
necessary experience to enable him to enquire or investigate about the identity of the person
who presents the cheque for payment.
- Protection in case of order cheques:
Section 85(1) provides protection to the paying banker in case of order cheques as follows:
“Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the
drawee is discharged by ‘payment in due course’”. A banker is not liable if he makes payment in
good faith and without negligence even though later it may be that it was forged. This is
exemption to the general rule that ‘a forged endorsement is no endorsement at all’. Usually the
banker get the identity of the holder of an order cheque verified by some responsible person of
the bank. The verifiable will be liable to the original payee and not the banker.
- Protection in case of bearer cheques:
Section 85(2) provides protection to the paying banker in respect to bearer cheques as follows:
“Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by
payment in due course to the bearer thereof, notwithstanding any endorsement whether in full
or in blank appearing thereon, and notwithstanding that any such endorsement purports to
restrict or exclude further negotiation”. It means that if a cheque is originally issued as a bearer
cheque, the banker may ignore any endorsement on the cheque. He shall be discharged by

CONTRACT 2 | 82
 payment in due course to the bearer. Because once a bearer cheque always remains a bearer
cheque.
- No protection when the drawer’s signature is forged:
A banker is not protected even in payment in due course if the drawer’s signature is forged, and
as such if he makes payment on forged signature, he cannot debit the customer’s account with
such payment and will have to bear himself the loss so caused. There is exception if the customer
has been negligent and his negligence was the proximate cause of the wrong payment, e.g. if the
customer did not inform the bank immediately on becoming aware of the forgery.
- Protection to the Collecting Banker:
A collecting bank is one who receives the payment of a crossed cheque on behalf of his customer.
Section 131 grants protection to the collecting banker and states that “a banker who has in good
faith and without negligence received payment for a customer of a cheque crossed generally or
specially to himself shall not, in case the title to the cheque proves defective, incur any liability to
the true owner of the cheque by reason only of having received such payment”.
The banker should have to prove that:
a. He acted in good faith and without negligence
b. The cheque was already crossed before it reached his hands
c. He received the payment on behalf of a ‘customer’ not on his own account i.e. he acted as an
agent for collection and not in the capacity of holder for value.
The banker is liable if he proceeds of an ‘account payee crossed cheque’ to be credited to any
account other than the payee and the endorsement in favour of the last payee is proved forged.
- Rights of Holder against Banker:
The liability of a banker for wrongful refusal to pay a cheque is only towards the customer (i.e. the
drawer) and not towards the payee of the cheque. The holder has no right of action against the
banker for refusing to pay the cheque because there is no privity of contract between him and the
banker. But the holder is entitled to enforce payment from the banker in the following two cases:
1. Where the holder does not present the cheque within a reasonable time of its issue and on
account of the delay the drawer suffers actual damage by the failure of the bank and is
therefore discharged to the extent of such damage, then the holder can prove his debt to the
extent of such discharge against the banker in insolvency proceedings. The holder is such case
shall be a creditor, in place of such drawer, of such banker opt the extent of such discharge
and can recover the amount from him (Section 84).
2. Where a banker pays a cheque crossed generally over the counter or a cheque crossed
specially otherwise than to the banker to whom the same is crossed, he is liable to the true
owner of the cheque for any loss he may sustain owing to the cheque having been so paid
(Section 129). Of course the banker can recover from the wrong payee, if traceable.

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34. WHAT IS BOUNCING OF A CHEQUE AND THE LAW REGARDS BOUNCING OF CHEQUES?
Ans. A cheque is said to be bounced or dishonored by non-payment when the drawee of the cheque makes default in
payment upon being duly required to pay the same.

This is present in Negotiable Instruments Act, 1881 whose heading is “Penalties in case of Dishonor of Certain
Cheques for insufficiency of Funds in the Accounts”. It has Five Sections (138-142). Later new sections were
added in Negotiable Instruments (Amendemnt and Miscellaneous Provisions) Act, 2002 (Feb. 6, 2003) (143 to
147).

The salient features of the provisions of Section 138 to 147 are: The drawer of the dishonored cheque shall be
deemed to have committed an offence and shall, without prejudice to any other provision of the Negotiable
Instruments Act, be punished with imprisonment for a term which may extend to two years or with fine or both.
But before this, following requirements need to be satisfied:
1. The cheque should have been dishonoured due to insufficiency of funds.
2. The cheque should have been issued by the drawer in favour of another person for the discharge of legally
enforceable debt or other liability, in whole or part.
3. The cheque should have been presented to the bank within a period of six months from the date on which it
is drawn or within the period of validity.
4. The payee or the other holder in due course of the cheque should have made a demand for the payment of
the said amount of money by giving a notice in writing to the drawer within 30 days of the receipt of the
information by him from the bank regarding the return of the cheque as unpaid or bounced.
5. The drawer of such cheque should have failed to make the payment of the same amount of money to the
payee within 15 days’ time of the receipt of the said notice of demand. If he does not pay within the 15
days, the cause of action arises on 16th day.
6. The payee or the holder in due course of the cheque dishonored should have made a written complaint of
the offence to a Court not subordinate to that of a Metropolitan Magistrate or a First Class Judicial
Magistrate, within one month of the date on which the cause of action arose under the said provision.
Recent Amendments
1. The Court can try the case summarily notwithstanding anything contained in the Code of Criminal
Procedure 1973 and the provisions of Sections 262 to 265 of Cr.PC. shall, as far as may be, apply to such
trials:
Provided that in the case of any conviction in a summary trial, it shall be lawful for the Magistrate to pass a
sentence of imprisonment for a term not exceeding one year and an amount not exceeding Rs. 5000.
Provided further that when at the commencement of, or in the course of, summary trial, it appears to the
Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one
year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the
Magistrate shall, after hearing the parties, record an order to that effect. After making such an order, the
Magistrate can recall any witnesses and proceed to hear or rehear the case in accordance with the
provisions of Cr.PC.
2. The trial of a case shall be continued from day to day until its conclusion. However, if the court finds the
adjournment of the trail beyond the following day to be necessary, it can adjourn the case by making a
written order citing the reasons for such adjournment.
3. Every trial shall be concluded within six months from the date of filing the complaint. However this
provision is not mandatory but only directory.
4. A magistrate issuing summons to an accused or a witness may direct a copy of summons to be served
through speed post or private courier.

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5. Where an acknowledgement (alleging) to be signed by the accused or the witness has been received the
court may declare that the summons have been duly served. If it is returned saying that the person refused
to accept it the court may consider it effected.
6. The evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions,
be read in evidence in any enquiry, trial or other proceedings under the Cr.P.C. If the accused wants to
contradict the evidence then he can ask for cross examination.
7. If the bank’s memo slip shows that it was dishonored, the court shall presume that there was insufficient
funds, unless and until such fact is disproved by the accused drawer.
8. Every offence of cheque bouncing is compoundable i.e. compromised.

Offence by Companies
- If the person committing an offence under the aforesaid provision is a company (Managing Director,
Executive Director, Finance Director) of the company it shall be deemed to be guilty of offence and shall be
liable to be proceeded against and punished accordingly.
- If it was due to neglect of Managing Director or others then they shall be deemed guilty of the offence and
proceeded against, but not liable if prove that it was without his knowledge or he had exercised due
diligence to prevent the commission of the offence.
- Only such person will be liable who was in-charge of and was responsible to the company for the conduct
of the business of the company.
- When a company commits the offence of cheque bouncing their liability is joint and several. Without
impleading its directors or officers who are responsible a company alone cannot be prosecuted. The person
can be prosecuted without making a company party to the prosecution.
- In an appeal in the case of Sadanandan Bhadran v/s Madhavan Sunil Kumar, the Supreme Court held that
the payee of a cheque cannot initiate prosecution for an offence under Section 138 of the Negotiable
Instruments Act, 1881 for bouncing of the cheque for the second time, if he had not initiated such a
prosecution on the earlier cause of action which arose in his favour as a result of his earlier notice in writing
duly given to the drawer for the first dishonor of the cheque. There cannot be more than one cause of
action in respect of a single cheque.
- In a landmark judgment that could considerably reduce the misuse of penal provisions relating to the
growing phenomenon of dishonored cheques, the Supreme Court held that a person who gives a ‘stop
payment instruction’ to his bank immediately after issuing a cheque against a debt or liability cannot
escape prosecution (Modi Cements Ltd. v/s Shri Kuchil Kumar Nandi).
- When the cheque is dishonored, the surety cannot be prosecuted for the same under Section 138 because
only the drawer of the dishonoured cheque shall be deemed to have committed an offence under that
Section. The liability of the surety of a dishonored cheque can be enforced only in a civil court.

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