Course: Mercantile Law (460)

Semester: Spring, 2019

Level: BA/B. Com

ASSIGNMENT No. (Units: 5–9)

Q. 1 What is a partnership? Explain in detail the rights and duties of partners in a

partnership agreement under the Partnership Act 1932. (20)

A partnership is a form of business where two or more people share ownership, as well as the
responsibility for managing the company and the income or losses the business generates. That
income is paid to partners, who then claim it on their personal tax returns – the business is not
taxed separately, as corporations are, on its profits or losses.
There are three types of partnerships:

• General partnership
• Limited partnership
• Joint venture
Rights of Partners:
Broadly, the provisions of the Act regarding rights, duties and powers of partners are as
under:
(a) Every partner has a right to take part in the conduct and management of business.

(b) Every partner has a right to be consulted and heard in all matters affecting the business of the
partnership.

(c) Every partner has a right of free access to all records, books and accounts of the business, and
also to examine and copy them.

(d) Every partner is entitled to share the profits equally.

(e) A partner who has contributed more than the agreed share of capital is entitled to interest at the
rate of 6 per cent per annum. But no interest can be claimed on capital.

(f) A partner is entitled to be indemnified by the firm for all acts done by him in the course of the
partnership business, for all payments made by him in respect of partnership debts or liabilities
and for expenses and disbursements made in an emergency for protecting the firm from loss
provided he acted as a person of ordinary prudence would have acted in similar circumstances for
his own personal business.

(g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to have the
partnership property used exclusively for the purposes of the partnership.
(h) A partner has power to act in an emergency for protecting the firm from loss, but he must act
reasonably.

(I) every partner is entitled to prevent the introduction of a new partner into the firm without his
consent.

(J) Every partner has a right to retire according to the Deed or with the consent of the other partners.
If the partnership is at will, he can retire by giving notice to other partners.

Every partner has a right to continue in the partnership.

(l) A retiring partner or the heirs of a deceased partner are entitled to have a share in the profits
earned with the aid of the proportion of assets belonging to such outgoing partner or interest at six
per cent per annum at the option of the outgoing partner (or his representative) until the accounts
are finally settled.

Duties of Partners:
(a) Every partner is bound to diligently carry on the business of the firm to the greatest common
advantage. Unless the agreement provides, there is no salary.

(b) Every partner must be just and faithful to the other partners.

(c) A partner is bound to keep and render true, proper, and correct accounts of the partnership and
must permit other partners to inspect and copy such accounts.

(d) Every partner is bound to indemnify the firm for any loss caused by his willful neglect or fraud
in the conduct of the business.

(e) A partner must not carry on competing business, nor use the property of the firm for his private
purposes. In both cases, he must hand over to the firm any profit or gain made by him but he must
himself suffer any loss that might have occurred.

(f) Every partner is bound to share the losses equally with the others.

(g) A partner is bound to act within the scope of his authority.

(h) No partner can assign or transfer his partnership interest to any other person so as to make him
a partner in the business.

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Q. 2 explain in detail the modes of dissolution of partnership under the Partnership Act
1932. Also, list down the various types of partners. (20)
Modes of dissolution of “Partnership Firm”
1. Dissolution by Agreement
A partnership may be dissolved with the consent of all the partners, or it may be dissolved in
accordance with a contract among the partners to this effect.

2. Dissolution by Notice
Where a partnership is at will, the firm may be dissolved to any partner giving notice in writing to
all the other partners of his intention to dissolve the firm and the firm is dissolved as from the date
mentioned in the notice. If the date of dissolution is not mentioned in the notice, then from the date
of the communication of the notice.

3. Contingent Dissolution
A partnership firm may be dissolved on the happening of the following events
I. At the expiry of the period fixed for the partnership firm.
Ii. At the completion of the adventure or undertaking for a particular object for which the
partnership was formed.
iii. Where a partner has become incapable of performing his partnership duties properly. Since the
partner is unable to fulfill on of the important classes of the partnership agreement that is to devote
his time, energy, efforts and capabilities to the success of the partnership firm, the firm in
dissolved.
Iv. On the death or retirement of a partner.
V. By the adjudication of a partner as an insolvent.
vi. When the partnership itself has been declared as insolvent.

4. Compulsory Dissolution
The following are the grounds for a compulsory dissolution of a partnership firm
I. When all the partners or all but one have been adjudicated to be insolvent by a Court of law.
ii. Where such an event has happened which makes it unlawful to carry on the partnership business.
5. Dissolution by Court
Where a partner files a suit, the court may dissolve the partnership on the following grounds
I. Where one of the partners has become of unsound mind that is mad.
ii. Where a partner is guilty of misconduct a breach of contract in the matter of running the
partnership business.
iii. Where a partner intentionally commits a breach of contract in the matter of running the
partnership business.
iv. Where a partner transfer his share in the partnership without the consent of all the other partners.
v. Where the interest of a partner in the firm has been charged by the court from his debts.
vi. Where it is reasonably certain the at the partnership cannot be carried on except at a loss.
vii. When any partner becomes permanently incapably of performing his duties as a partner or
mad.
viii. On another grounds considered fit by the court of law. Breach contract by any partner
misconduct of partners.
Any partner transfer of share to any other person without the consent of other partners or others
grounds court thanks fit.

Kinds of Partners
1. Active or managing partner:
A person who takes active interest in the conduct and management of the business of the firm is
known as active or managing partner.

He carries on business on behalf of the other partners. If he wants to retire, he has to give a public
notice of his retirement; otherwise he will continue to be liable for the acts of the firm.

2. Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the management
of the business. Such a partner only contributes to the share capital of the firm, is bound by the
activities of other partners, and shares the profits and losses of the business. A sleeping partner,
unlike an active partner, is not required to give a public notice of his retirement. As such, he will
not be liable to third parties for the acts done after his retirement.

3. Nominal or ostensible partner:

A nominal partner is one who does not have any real interest in the business but lends his name to
the firm, without any capital contributions, and doesn’t share the profits of the business. He also
does not usually have a voice in the management of the business of the firm, but he is liable to
outsiders as an actual partner.

Sleeping vs. Nominal Partners:

It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping partner
contributes capital shares profits and losses, but is not known to the outsiders.

A nominal partner, on the contrary, is admitted with the purpose of taking advantage of his name
or reputation. As such, he is known to the outsiders, although he does not share the profits of the
firm nor does he take part in its management. Nonetheless, both are liable to third parties for the
acts of the firm.
4. Partner by estoppel or holding out:
If a person, by his words or conduct, holds out to another that he is a partner, he will be stopped
from denying that he is not a partner. The person who thus becomes liable to third parties to pay
the debts of the firm is known as a holding out partner.

There are two essential conditions for the principle of holding out : (a) the person to be held out
must have made the representation, by words written or spoken or by conduct, that he was a partner
; and (6) the other party must prove that he had knowledge of the representation and acted on it,
for instance, gave the credit.

5. Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm and would
not be liable for its losses, he is in own as partner in profits only.

6. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering into a contract,
he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a person who has
not attained the age of 18 years) cannot be one of the parties to the contract. But under section 30
of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership’, with
the consent of all partners. A minor partner is entitled to his share of profits and to have access to
the accounts of the firm for purposes of inspection and copy.

Q. 3 Explain in detail the key points of following concepts under the Negotiable Instruments
Act 1881: (20)
i. Promissory note
The Negotiable Instruments Act, 1881 recognizes three kinds of negotiable instruments. Promissory
notes are one of them. Under these notes, one person basically promises to pay a sum of money to
another. They are one of the most common negotiable instruments in use these days. In this article,
we’ll see promissory notes meaning.
Parties to Promissory Notes

Every promissory note always comprises of three important parties. These include the maker, the
payee as well as the holder. Even endorsers and endorsees can be parties in certain cases.

1) The maker: This is basically the person who makes or executes a promissory note and pays the
amount therein.

2) The payee: The person to whom a note is payable is the payee.

3) The holder: A holder is basically the person who holds the notes. He may be either the payee or
some other person.
 ii. Bill of exchange
Bills of exchange are some of the most common types of negotiable instruments. Although they are
similar to promissory notes, several differences exist between them. An introduction to bills of
exchange and a note on their features can help us understand these differences.
Section 5 of the Negotiable Instruments Act, 1881 defines bills of exchange. According to this
definition, a bill of exchange is an instrument in writing containing an unconditional order.
Furthermore, the bill’s maker directs a certain person to pay some money either to a specific person
or its bearer.

This definition is similar to that of promissory notes but there are some differences between them.
Hence, the essential elements, parties, and rules governing these two negotiable instruments are
different.

arties to Bills of Exchange

The following parties play a role in bills of exchange:

1) Drawer: This is basically the person who draws the bill.

2) Drawee: In contrast to the drawer, the drawee is the person in whose favour the bill is drawn.

3) Acceptor: This is the person who accepts a bill of exchange. Generally, the acceptor is the drawee
but a stranger may accept it too.

4) Payee: Either the drawee or a stranger may be a payee, which is the person to whom bills are
payable.

5) Holder: This is generally the payee of the bill. It could also be some other person to whom the
payer endorses the bill. In case of bearer bills, the bearer himself is the holder.

6) Endorser: The holder becomes an endorser when he endorses the bill to another person.

7) Endorsee: This is the person to whom a bill is endorsed by the endorser.

iii. Endorsement
 Endorsement

When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker,
for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or
so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument,
he is said to endorse the same, and is called the "endorser".

Blank endorsement:

If the endorser signs his name only, the endorsement is said to be in blank and it becomes payable
to bearer.

Blank endorsement can be converted to full endorsement by writing name of endorsee. This can
be done by holder without his signatures by writing name above the endorser’s signatures.

Special or Full endorsement

If the endorser also directs to pay to a certain person or to his order, endorsement is said to be be
‘in full’ or special endorsement. Eg. “Pay to Mr. Kuber or order”.

Conditional endorsement

The endorser puts some condition alongwith endorsement. Say, pay to Miss Zira or order on her
attaining the age of 21 years.

iv. Holder in due course

A holder in due course is one possessing a check or promissory note, given in return for something
of value, who has no knowledge of any defects or contradictory claims to its payment. Such a
holder is entitled to payment by the maker of the check or note.

The following is an example of a state statute dealing with a holder in due course:

"(a) Subject to subsection (c) and Section 7-3-106(d), "holder in due course" means the holder of
an instrument if:

(1) The instrument when issued or negotiated to the holder does not bear such apparent evidence
of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its
authenticity; and

(2) The holder took the instrument

1. for value,
2. in good faith,
3. without notice that the instrument is overdue or has been dishonored or that there is an uncured
default with respect to payment of another instrument issued as part of the same series,
4. without notice that the instrument contains an unauthorized signature or has been altered,
5. without notice of any claim to the instrument described in Section 7-3-306, and

Q. 4 Define and distinguish between condition and warranty under the Sale of Goods Act
1930. Under what circumstances a breach of condition is to be treated as breach of
warranty? (20)

Difference Between Condition and Warranty

n a contract of sale, the subject matter is ‘goods’. There are millions of sale transactions which
occur in the normal course, all around the world. There are certain provisions which need to
be fulfilled because it is demanded by the contract. These prerequisites can either be a
condition and warranty. The condition is the fundamental stipulation of the contract of sale
whereas Warranty is an additional stipulation.

In other words, condition is the arrangement, which should be present at the time of happening of
another event. Warranty is a written guarantee, issued to the buyer by the manufacturer or seller,
committing to repair or replace the product, if required, within specified time. Check out this
article, in which we have presented the difference between condition and warranty in sale of goods
act.

Definition of Condition

Certain terms, obligations, and provisions are imposed by the buyer and seller while entering into
a contract of sale, which needs to be satisfied, which are commonly known as Conditions. The
conditions are indispensable to the objective of the contract. There are two types of conditions, in
a contract of sale which are:

• Expressed Condition: The conditions which are clearly defined and agreed upon by the
parties while entering into the contract.
• Implied Condition: The conditions which are not expressly provided, but as per law, some
conditions are supposed to be present at the time making the contract. However, these
conditions can be waived off through express agreement. Some examples of implied
conditions are:
• The condition relating to the title of goods.
• Condition concerning the quality and fitness of the goods.
• Condition as to wholesomeness.
• Sale by sample
• Sale by description.

Definition of Warranty

A warranty is a guarantee given by the seller to the buyer about the quality, fitness and performance
of the product. It is an assurance provided by the manufacturer to the customer that the said facts
about the goods are true and at its best. Many times, if the warranty was given, proves false, and
the product does not function as described by the seller then remedies as a return or exchange are
also available to the buyer i.e. as stated in the contract.
A warranty can be for the lifetime or a limited period. It may be either expressed, i.e., which is
specifically defined or implied, which is not explicitly provided but arises according to the nature
of sale like:

• Warranty related to undisturbed possession of the buyer.

• The warranty that the goods are free of any charge.
• Disclosure of harmful nature of goods.
• Warranty as to quality and fitness

Key Differences Between Condition and Warranty

The following are the major differences between condition and warranty in business law:

1. A condition is an obligation which requires being fulfilled before another proposition takes
place. A warranty is a surety given by the seller regarding the state of the product.
2. The term condition is defined in section 12 (2) of the Indian Sale of Goods, Act 1930
whereas warranty is defined in section 12 (3).
3. The condition is vital to the theme of the contract while Warranty is ancillary.
4. Breach of any condition may result in the termination of the contract while the breach of
warranty may not lead to the cancellation of the contract.
5. Violating a condition means violating a warranty too, but this is not the case with warranty.
6. In the case of breach of condition, the innocent party has the right to rescind the contract
as well as a claim for damages. On the other hand, in breach of warranty, the aggrieved
party can only sue the other party for damages.
When condition to be treated as warranty
(1) Subsections (2) to (4) and (7) below do not apply to Scotland and subsection (5) below
applies only to Scotland
(2) Where a contract of sale is subject to a condition to be fulfilled by the seller the buyer may
waive the condition, or may elect to treat the breach of the condition as a breach of warranty
and not as a ground for treating the contract as repudiated
(3) Whether a stipulation in a contract of sale is a condition, the breach of which may give
rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give
rise to a claim for damages but not a right to reject the goods and treat the contract as
repudiated, depends in each case on the construction of the contract; and a stipulation may be
a condition, although called a warranty in the contract.
(4) Where a contract of sale is not severable and the buyer has accepted the goods or part of
them, the breach of a condition to be fulfilled by the seller can only be treated as a breach of
warranty, and not as a ground for rejecting the goods and treating the contract as repudiated,
unless there is an express or implied term of the contract to that effect.
(5) In Scotland, failure by the seller to perform any material part of a contract of sale is a
breach of contract, which entitles the buyer either within a reasonable time after delivery to
reject the goods and treat the contract as repudiated, or to retain the goods and treat the failure
to perform such material part as a breach which may give rise to a claim for compensation or
damages.
(6) Nothing in this section affects a condition or warranty whose fulfilment is excused by
law by reason of impossibility or otherwise.

Q. 5 Explain in detail the rights of the workers as per the Factories Act 1934 and the
Workmen Compensation Act 1923.
(20)

Definitions. - In this Act, unless there is anything repugnant in the

subject or context. -

• (a) "adolescent" means a person who has completed his fifteenth but has not completed his
seventeenth year ;
• (b) "adult" means a person who has completed his seventeenth year ;
• (c) "child" means a person who has not completed his fifteenth year ;
• (d) "day" means a period of twenty-four hours beginning at mid-night;
• (e) "week" means a period of seven days beginning at mid-night on Saturday night;
• (f) "power" means electric energy, and any other form of energy which is mechanically
transmitted and is not generated by human or animal agency ;
• (g) "manufacturing process" means any process -
o (i) for making, altering, repairing, ornamenting, finishing or packing, or otherwise
treating any article or substance with a view to its use, sale, transport, delivery or
disposal, or
o (ii) for pumping oil, water or sewage, or
o (iii) for generating, transforming or transmitting power;
• (h) "worker" means a person employed directly or through an agency whether for wages
or not in any manufacturing process, or in cleaning any part of the machinery or premises
used for a manufacturing process, or in any other kind of work whatsoever, incidental to
or connected with the subject of the manufacturing process, but does not include any person
solely employed in a clerical capacity in any room or place where no manufacturing process
is being carried on ;
• (j) "factory" means any premises, including the precincts thereof, whereon ten or more
workers are working, or were working on any day of the preceding twelve months, and in
any part of which a manufacturing process is being carried on or is ordinarily carried on
with or without the aid of power, but does not include a mine, subject to the operation of
the Mines Act, 1923 (IV of 1923) :
• (k) "machinery" includes all plant whereby power is generated, transformed, transmitted
or applied.
 • (l) "occupier" of a factory means the person who has ultimate control over the affairs of
the factory:
Provided that where the affairs of a factory are entrusted to a managing agent, such agent
shall be deemed to be the occupier of the factory ;
• (m) where work of the same kind is carried out by two or more sets of workers working
during different periods of the day, each of such sets is called a "relay" and the period or
periods for which it works is called a "shift"; and
• (n) "prescribed" means prescribed by rules made by the Provincial Government under this
Act.

3. Reference to time of day. - Reference to time of day in this Act are references to Standard Time
which is five hours ahead of Greenwich Mean Times ,

Provided that for any area, in which Standard Time is ordinarily observed the Provincial
Government may make rules: -

• (i) specifying the area,

• (ii) defining the local mean time ordinarily observed therein, and
• (iii) permitting such time to be observed in all or any of the factories situated in the area.

4. Seasonal factories. -

(1) For the purposes of this Act, a factory, which is exclusively engaged in one or more of the
following manufacturing processes, namely, cotton ginning, cotton or cotton jute pressing, the
decortication of groundnuts, the manufacture of coffee indigo, lac, rubber, sugar (including gur)
or tea or any of the aforesaid processes, is a seasonal factory :

Provided that the Provincial Government may, by notification in the Official Gazette, declare any
such factory in which manufacturing processes are ordinarily carried on for more than one hundred
and eighty working days in the year, not to be a seasonal factory for the purposes of this Act.

(2) The Provincial Government may, by notification in the Official Gazette, declare any specified
factory in which manufacturing processes are ordinarily carried on for more than one hundred and
eighty working days in the year and cannot be carried on except during particular season or at
times dependent on the irregular action of natural forces, to be a seasonal factory for the purposes
of this Act.

5. Power to apply provisions applicable to factories to certain other places -

(1) The Provincial Government may, by notification in Official Gazette, declare that all or any of
the provisions of this Act applicable to factories shall apply to any place wherein a manufacturing
process is being carried on or is ordinarily carried on whether with or without the use of power
whenever five or more workers are working therein or have worked therein on any one day of the
twelve months immediately preceding.
(2) A notification under sub-section (1) may be made in respect of any one such place or in respect
of any class of such places or generally in respect of all such places.

(3) Notwithstanding anything contained in clause (j) of section 2, a place to which all or any of the
provisions of this Act applicable to factories are for the time being applicable in pursuance of a
declaration under sub-section (1) shall, to the extent to which such provisions are so made
applicable but not otherwise, deemed to be a factory.

6. Power to declare departments to be separate factories. - The Provincial Government may,

by order in writing, direct that the different departments or branches of a specified factory shall be
treated as separate factories for all or any of the purposes of this Act.

7. Power to exempt on a change in the factory. - When the Provincial Government is satisfied
that, following upon a change of occupier of a factory or in the manufacturing process carried on
therein, the number of workers for the time being working in the factory is less than twenty and is
not likely to be twenty or more on any day during the ensuing twelve months, it may by order in
writing exempt such factory from operation of this Act :

Provided that any exemption so granted shall cease to have effect on and after any day on which
twenty or more workers work in the factory.

7-A. Exemption from certain provisions of the Act. - The provisions of section 14, clause (b) of
sub-section (1) of section 15, sections 16, 17, 18, 21, 22, 23, 25 and sub-section (3) of section 33Q
shall not apply in the first instance to any factory wherein not more than 19 workers are working
or were working on any one day of the 12 months immediately preceding :

Provided that the Provincial Government may, by notification in the official Gazette, apply all or
any of the said provisions to any such factory or class of such factories.

8. Power to exempt during public emergency. - In any case of public emergency the Provincial
Government may, by notification in the Official Gazette, exempt any factory from any or all of the
provisions of this Act for such period as it may think fit.

9. Notice to Inspector before commencement of work. -

(1) Before work is begun in any factory after the commencement of this Act, or before work is
begun in any seasonal factory each season, the occupier shall send to the Inspector a written notice
containing -

• (a) the name of the factory and its situation,

• (b) the address to which communications relating to the factory should be sent,
• (c) the nature of the manufacturing processes to be carried on in the factory,
• (d) the nature and amount of the power to be used,
• (e) the name of the person who shall be the manager of the factory for the purposes of this
Act, and
• (f) such other particulars as may be prescribed for the purposes of this Act.
(1-A) In respect of all factories which come within the scope of this Act for the first time on the
commencement4 of the Factories (Amendment) Ordinance, 1972, the occupier shall send a written
notice to the Inspector containing particulars specified in sub-section (1) within 30 days of such
commencement.

(2) Whenever another person is appointed as manager the occupier shall send to the Inspector a
written notice of the change, within seven days from the date on which the new manager assumes
charge.

(3) During any period for which no person has been designated as manager of a factory under this
section, or during which the person designated does not manage the factory, any person found
acting as manager or if no such person is found, the occupier himself, shall be deemed to be the
manager of the factory for the purposes of this Act.