FORMATION OF CONTRACT

A contract means an agreement which is enforceable by law. An agreement consists of

reciprocal promises between the two parties. In case of contract each party is legally bound
by the promise made by him. A contract or an obligation to perform a promise may arise in
the following way: -
I. By Agreement and Contract- The most common way of making a contract is through an
agreement. The two parties may agree to something through mutual negotiations. When
one party makes an offer and the other accepts the same, there arises an agreement, which
may be enforceable by law.
II. By Standard Form Contract- In the modern age, some persons, institutions or
establishments such as the Railways, insurance Companies, Banks, manufacturers of various
goods, etc. may have to enter into a very large number of contracts with thousands of
persons. They cannot possibly negotiate individually with the persons with whom the
contracts are to be made. Contracts with pre-drafted matters are generally prepared by one
party, which the other has to agree to. As a general rule, such Standard Form Contracts are
as much valid as those entered into through due negotiations
III. By Promissory Estoppel- Sometimes there may be no agreement and contract in strict
sense of the term, but a person making a promise may become bound because of the
application of the equitable doctrine of estoppel.
Contract- According to Section 2h) of the Indian Contract Act, 1872, "An agreement
enforceable by law is a contract. All agreements are not enforceable by law and, therefore,
all agreements are not contracts. Only those agreements which satisfy the essentials
mentioned in Section 10 of the Indian Contract Act, 1872, become contracts. However, all
contracts are agreements.
Agreement- According to Section 2(e): "Every promise and every set of promises forming
the consideration for each other is an agreement.” In an agreement there is a promise from
both sides. For example, A promises to deliver his watch to B and in return B promises to
pay a sum of Rs. 2,000 to A. There is said to be an agreement between A and B. A promise is
a result of an offer (proposal) by one person and its acceptance by the other.
Section 2(b) of the Act, 1872, defines promise as under "When the person to whom the
proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal,
when accepted, becomes a promise."
All such agreements which satisfy the conditions mentioned in Section 10 of the Act, 1872,
are contracts. Section 10 is as under "All agreements are contracts if they are made by the
free consent of parties competent to contract, for a lawful consideration and with a lawful
object and are not hereby expressly declared to be void.
The essentials needed for a valid contract, therefore, are as under-
1- An agreement between the two parties. An agreement is the result of a proposal or
an offer by one party followed by its acceptance by the other.
 2- Agreement should be between the parties who are competent to contract.
3- There should be a lawful consideration and lawful object in respect of that
agreement.
4- There should be free consent of the parties, when they enter into the agreement."
5- The agreement must not be one, which has been expressly declared to be void.3
Contract- According to Section 2(h), of the Act, 1872, contract is an agreement which is
enforceable by law. It is an agreement or set of promises giving rise to obligations which can
be enforced or are recognised by law.
Classification of Contract- Contracts may be classified according to: i) their subject matter;
(i) their parties; (ii) their form (whether contained in deed in writing, whether express or
implied; (iv) their effect whether bilateral or unilateral, whether valid, void or
unenforceable.
- Agreement of sale executed only by vendor and not by purchaser is valid- In India,
an agreement of sale signed by the vendor alone and delivered to the purchaser, and
accepted by the purchaser, has always been considered to be a valid contract. In the
event of breach of the vendor, it can be specifically enforced by the purchaser. There
is, however, no practice of purchaser alone signing an agreement of sale. Thus, the
agreement of sale signed only by the vendor was valid and enforceable by the
purchaser.
Void Agreements- According to Section 2(g), of the Act, 1872, an agreement not
enforceable by law is said to be void. For instance, an agreement by a minor has been held
to be void. Sections 24 to 30 of the Indian Contract Act, 1872, make a specific mention of
agreements which are void. Those agreements include an agreement without consideration,
an agreement in restraint of marriage, and an agreement in restraint of trade.
Voidable contracts- According to Section 2(i), of the Act, 1872, an agreement which is
enforceable by law at the option of one or more of the parties thereto, but not at the option
of the other, is a voidable contract. Thus, a voidable contract is one which could be avoided
by one of the parties to the contract at his option. If such a party does not avoid the
contract, the contract remains valid, but if it prefers to avoid the contract, then the contract
becomes void. For instance, when the consent of a party to a contract has been obtained by
coercion, undue influence, fraud or misrepresentation, the contract is voidable at the option
of the party whose consent has been so obtained.
- Void agreement and voidable contract distinguished- A void agreement is a nullity
from its inception and no rights accrue to any party thereto or his transferee, etc. A
voidable contract, on the other hand, is a contract which can be avoided by one of
the parties thereto. Such a contract remains valid until it has been avoided, but
becomes void only if and when it is avoided.
Illegal agreements- There are certain agreements which are "illegal" in the sense that the
law forbids the very act, the doing of which is contemplated by the agreement. For example,
an agreement to commit a crime or a tort, or an agreement which tends to corrupt public
life, or an agreement to defraud public revenue, is illegal. Such an agreement is patently
opposed to public policy the law forbids making of such agreements.
- An illegal agreement may be distinguished from a mere "void" agreement which may
not be opposed to public policy. For example, an agreement to do an imp08sible act
is void, although there may be nothing in such an agreement which is opposed to
public policy. Whether an agreement can be termed as illegal or not may depends on
the degree to which it is opposed to public policy. For example, an agreement in
restraint of trade is void, but we may not term it as an "illegal agreement as we do
when it is an agreement to commit a crime.
- To distinguish an illegal agreement from other void agreement, it is stated that while
in case of a void agreement a collateral transaction may not also be void, but in case
of an illegal agreement, the collateral transaction is also held void. For example, A
gives money to B to enable him to pay his wagering debt. The wager is the main
transaction which is void, but loan given by A is subsidiary to it, which is not void and
A can recover his money from B. On the other hand, where A gives loan to B to
smuggle goods, smuggling is the main transaction and loan is subsidiary to it. But
loan transaction is also said to be tainted with the same illegality and A will not be
able to recover his money.

PROPOSAL OR OFFER- The term "proposal" has been defined in Section 2(a) of the Indian
Contract. Act, 1872, which defines that When one person signifies to another his willingness
to do or to abstain from doing anything, with a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal. The term proposal used in the Indian
Contract Act is synonymous with the term offer used in English law. The willingness to do or
to abstain from doing something, i.e., the proposal or the offer may be made with a view to
obtaining the assent of the other party thereto. For example- As willingness to sell his radio
set to B for Rs. 500 if B accepts to purchase the same, amounts to proposal by A for the sale
of the radio set.
Offer and Invitation to treat (offer) distinguished- A proposal, or an offer has to be
distinguished from an invitation to offer or treat. Sometimes a person may not offer to sell
his goods, but makes some statement or gives. Some information with a view to inviting
others to make offers on that basis. Inviting persons to an auction, where goods to be
auctioned are displayed, is not an offer for the sale of goods. The offer is made by the
intending buyers in the form of bid. Such an offer (bid), when accepted by the fall of
hammer or in some other customary way, will result in a contract.
- In the same way, the advertisement calling for tenders is not a proposal or offer but
merely an invitation to the contractors for making an offer.
- An advertisement by the auctioneer to sell goods by an auction being an invitation to
treat rather than an offer, he does not incur any liability by not accepting the offer
which is in the form of a bid. An auctioneer is even free to cancel an auction sale
announced by him. In Harris v. Nickerson, the defendant advertised a sale by
 auction. The plaintiff travelled to the advertised place of auction to find that the
defendant had cancelled the auction sale. He brought an action against the
defendant to recover the expenses of his travel. It was held that he was not entitled
to the same as there was as yet no contract between the two parties, which could
make the defendant liable.
- Display of goods either in a show-window or inside the shop and such goods bear
price-tags, would not amount to an offer to sell goods at prices mentioned on the
price tags. It would be mere invitation to treat. In Pharmaceutical Society of Great
Britain v. Boots Cash Chemists Ltd, it was held that if an intending buyer was willing
to purchase the goods at a price mentioned on the tag, he could make an offer to
buy the goods. The shopkeeper had the option to accept the offer or reject the
same. The contract would arise only when the offer was accepted. No customer can
force the shopkeeper to sell the goods at the price mentioned on the tag.
- It was held that the display of articles, even on a "self-service" basis was not an offer
but was merely an invitation to treat. When the customer selected an article and
brought the same to the cash desk that amounted to an offer to buy the goods.
- Harvey v. Facey is an example where the quotation of the price was held not to be
an offer. The defendants in this case, were the owners of a plot of land known as
Bumper Hall Pen The plaintiff being interested in purchasing the pen sent a telegram
to the defendants, "Wil you sell us Bumper Ha Pen Telegraph lowest cash price." The
defendants in reply telegraphed "Lowest price for Bumper Hall Pen, £ 900." The
plaintiffs sent another telegram to the defendants saying, we agree to buy Bumper
Hall Pen for £ 900 asked by you. Please send us your title-deeds." The defendants
refused to sell the land. In a suit, the plaintiffs contended that the second telegram
from the defendants quoting lowest price was an offer and the same had been
accepted by the plaintiffs, and the contract was complete. "The defendants, on the
other hand, contended that quoting the price was not an offer which could be
accepted. The Judicial Committee of the Privy Council held that exchange of the
above stated telegrams had not resulted in a contract. It was observed that the first
telegram had asked two questions, one regarding willingness to sell, and the other
regarding the lowest-price. In reply only lowest price was quoted, and this quoting of
the price was not an offer. The third telegram from the plaintiffs saying, "we agree to
buy" was only an offer and not the acceptance of an offer. Since this offer had not
been accepted, there was no binding contract between the parties.
Intention to create legal relationship- In order that an offer, after acceptance, can result in
valid contract, it is necessary that the offer should be made with an intention to create legal
relationship. Promise in the case of social engagements is generally without an intention to
create legal relationship. Such an agreement, therefore, cannot be considered to be a
contract. Thus, an agreement to go for a walk, to go to a movie, to play some game, or
entertain another person with a dinner, cannot be enforced in a court of law. Sometimes
the parties may expressly mention that it is not a formal or legal agreement, whereas in
some other cases such an intention could be presumed from their agreement.
 - An intention not to create legal relationship may be implied from the circumstances
of the case. In the case of Balfour Vs Balfour, the defendant, who was employed on
a government job in Ceylon, went to England with his wife on leave. For health
reasons the wife was unable to accompany the husband again to Ceylon. The
husband promised to pay £30 per month to his wife as maintenance for the period
she had to live apart. The husband having failed to pay this amount, was sued by the
wife for the same. It was held that there being no intention to create legal
relationship, the husband was not liable.
- The case of Jones v. Padavatton is an illustration of the agreement between a
mother and her daughter. Mrs. Jones persuaded her daughter to leave her job in
Washington and study for the bar in England to become a Barrister. Mrs. Jones
offered to pay her daughter a monthly allowance during her studies for the bar in
England. The daughter reluctantly agreed to the suggestion, left the job and went to
England in 1962. In 1964, Mrs. Jones bought a house in England. The daughter was
allowed to stay in a part of the house, whereas the other part was let out. The rent
received from the part of the house was given to the daughter to cover her
expenses. In 1967, some differences had arisen between Mrs. Jones and her
daughter and Mrs. Jones brought an action to evict her daughter. Till that time the
daughter had not completed her studies for the bar. The daughter contended that in
view of the promise made by her mother, she was legally bound to maintain her
until she completed her studies. It was held that there was nothing to indicate that
there was an intention to create legal relationship between the parties, as was
ev1dent from the fact that neither the agreement was reduced to writing nor the
duration for which she was to be maintained had been mentioned. The mother's
action against the daughter for eviction succeeded.
Offer must be communicated- The emphasis, here is upon the requirement that the
willingness to make a proposal should be "signified". The term signify means to or
communicate to make known It thus requires that the offer must be communicated to the
other person, i.e., the offeree.
Offer-How Communicated- The question as to how an offer is communicated is explained in
Section 3 of the Act, 1872. This Section says that an offer may be communicated by the
offeror by any act or omission by which the offeror-
a. intends to communicate such offer; or
b. which has the effect of communicating the offer.
- An offer may, therefore, be an express offer, i.e., which is made by some positive act
on the part of the offeror, or it may be implied offer, which is inferred from the
conduct of the offeror.
Express and Implied Offers- Section 9 of the Indian Contract Act, 1872 says "In so far as the
proposal or acceptance of any promise is made in words, the promise is said to be express.
In so far as such proposal or acceptance is made otherwise than in words, the promise is
said to be implied." An offer would be an express offer when it is made by words of mouth
or by writing.
 - Implied Offer- As explained in Section 9 above, an offer made otherwise than in
words, is said to be an implied offer. It is an offer inferred from the conduct of the
party. For example, a bid at an auction is an implied offer. A person who boards a
bus or who hires a taxi, thereby he undertakes to pay the fare to his destination,
even though he makes no express promise to do so.
 In Haji Mohd Ishaq v. Mohd. Iqbal, certain goods were supplied by the
plaintiff on his own account to the defendants. The defendants clearly and
unerringly accepted the goods and paid to the plaintiff, a part of the price. A
liability to pay the balance was held to have arisen. The Apex Court ruled that
the defendants by their clear conduct of accepting the goods and never
repudiating any of the numerous letters and telegrams of the plaintiff
demanding the money from them, clearly showed that a direct contract
which in law was called an implied contract by conduct was brought about
between them.
 In Upton Rural District Council v. Powell, fire broke out on the defendant's
farm. Believing that he was entitled to the free services of the Upton Pire
Brigade, he summoned it. The Brigade put out the fire and claimed
compensation for the services. It then turned out that the defendants' farm
was not within the free service zone of the Upton Council, he was held bound
to pay. The Court said "The truth of the matter is that the defendant wanted
the services of Upton; he asked for the services of Upton and Upton, in
response to that request, provided the services. Hence, the services were
rendered on an implied promise to pay for them.
Communication of Offer-When Complete- Section 4 of the Indian Contract Act, 1872 says
that the communication of a proposal is complete when it comes to the knowledge of the
person to whom t is made.
- It, thus, follows that an offer cannot be accepted unless and until it has been brought
to the knowledge of the person to whom it is made. To put it otherwise, A cannot be
said to make an offer to B unless A brings the offer to the knowledge of B. B cannot
be said to have accepted the offer, even if he acts according to the term of the offer.
Thus, acting in ignorance of an offer does not amount to acceptance of the offer.
- If a person has the knowledge of the offer, his acting in accordance with h the terms
thereto amount to the acceptance of the same.
Cross Offers- When the offers made by two persons to each other containing similar terms
of bargain cross each other in post, they are known as cross offers. In Tinn v. Hoffmann, A
wrote to B indicating his willingness to sell 800 tons of iron at 69 sh. per ton. On the same
day, B also wrote to A offering to buy 800 tons of iron at the same rate of 69 sh. per ton. The
two letters crossed each other in post. B brought an action against A for the supply of iron
contending that a valid contract had been created between the two parties It was held that
there were only two cross offers and the offer of neither of the parties having been
accepted by the other, there was no contract which could be enforced.
Specific and General Offers- When the offer is made to a specific or an ascertained person,
it is known as a specific offer, but when the same is not made to any particular person but to
the public at large, it is known as general offer. For instance, an offer to give reward to
anybody who finds a lost dog, is a general offer.
- In Carlill v. Carbolic Smoke Ball Co. the defendants advertised their product
"Carbolic Smoke Ball, a preventive remedy against influenza. ln the advertisement
they offered to pay a sum of E 100 as reward to anyone who contacted influenza,
cold or any disease caused by cold after having used the Smoke Ball three times a
day for two weeks, in accordance with the printed directions. They also announced
that a sum of £ 100 had been deposited with the Alliance Bank to show their
sincerity in the matter The plaintiff (Mrs. Carlill) relying on the advertisement
purchased a Smoke Ball from a chemist, used the same in accordance with the
directions of the defendants, but still caught influenza. She sued the defendants to
claim the reward of £100 advertised by them. It was held that this being a general
offer addressed to all the world had ripened into a contract with the plaintiff by her
act of performance of the required conditions and thus accepting the offer. She was,
therefore, entitled to claim the reward.

Standing, Open or Continuing Offer- An offer which is allowed to remain open for
acceptance over a period of time is known as a standing, open or a continuing offer. For
example, an offer to supply 1,000 bags of wheat from 1st January to 31st December, in
accordance with the orders which may be placed from time to time, is a standing offer As
and when the orders are placed that amounts to acceptance of the offer to that extent.
- Acceptance of a tender for the supply or goods is a kind of standing offer. An
advertisement inviting tenders is merely an invitation for quotations. When the
tender is approved, it becomes a standing offer.
- In Bengal Coal Co. v. Homee Wadia & Co." the defendants (Bengal Coal Co.) agreed
to supply coal to the plaintiffs (Homee Wadia & Co.) up to a certain quantity at an
agreed price for a period of 12 months, as may be required by the plaintiff from time
to time. Before the expiry of the said period of 12 months, the defendants withdrew
their offer to supply further coal, and refused to comply with the orders placed
thereafter. They were sued for the breach of contract. It was held that there was no
contract between the plaintiff and the defendant and, therefore, there could be no
liability for the breach of contract, there was simply a continuing offer to supply coal.
"They were bound to supply coal only as regards orders which had already been
placed, but were free to revoke their offer for the supply of coal thereafter.
- In Union of India v. Maddala Thathaiah, one of the conditions stipulated in the
tender form was that the "Administration reserves the right to cancel the contract at
any stage during the tenure of the contract. It was held that the stipulation whereby
the appellant could cancel the agreement was a valid one, and the appellants were
bound only for the supply of such quantities for which specific orders had already
been placed.
 - In Krishnaveni Constructions v. The Executive Engineer, Panchayat Raj, Darsi,' it
was held that an offer containing a promise to keep the offer open for a certain
period could be withdrawn unless such a promise was supported by consideration.
The condition that a tender cannot be withdrawn before it was accepted, is invalid.

Offer by conduct- It is well-settled that an offer may be accepted by conduct. But conduct
would only amount to acceptance if it is clear that the offeree did the act with the intention
(actual or apparent) of accepting the offer. The Courts must examine the evidence to find
out whether in the facts and circumstances of the case the conduct of the "offeree was such
as amounted to a unequivocal acceptance of the offer made.
Letters of Intent- A letter of intent simply speaking is a prelude to a contract. It is merely a
charter containing the terms and general conditions subject to which a contract would be
governed. A letter of intent merely indicates a party's intention to enter into a contract with
the other party in future.
- In Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, the Supreme Court
observed “The letters merely set out the terms on which the parties were ready to
do business with each other if and when orders were placed and executed. AS soon
as an order was placed and accepted a contract arose. It is true this contract would
be governed by the terms set out in the letters but until an order was placed and
accepted there was no contract."
- A letter of intent, no doubt, may be construed as a letter of acceptance, if such
intention is evident from its terms.

ACCEPTANCE- A proposal, when accepted, results in an agreement. According to Section

2(b)": "When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted, becomes a promise." The
person making the proposal does not become bound thereby until its acceptance. As soon
as his proposal is accepted that is known as promise, whereby both the parties become
bound, When the proposal or acceptance is made in words, the promise is said to be
express. When the proposal or acceptance is made otherwise than in words, the promise is
said to be implied." The offeree is not bound to accept the offer. He is free to reject it or
make it to lapse by non-acceptance. A person inviting tenders may reserve a power to reject
all the tenders. The person submitting the highest tender cannot have a right to have his
tender accepted.
- On Patna Regional Dev. Authority v. Rashtriya Pariyojna Nirman Nigam,' the tender
submitted by the first respondent, who had been black listed for 5 years, was
rejected on the ground that he stood black listed at the time the tender was to be
accepted. It was held that the rejection of the tender was justified and valid.
Effect of Acceptance- A contract is created only after an offer is accepted. Before the
acceptance is made neither party is bound thereby. After the offer has been accepted, it
becomes a promise which, if other conditions of a valid contract are satisfied,' binds both
the parties to the promise. After acceptance, each party becomes legally bound by the
promise made by him through the medium of offer and acceptance of it.
Essentials of a valid acceptance- In order that acceptance of an offer can result in a
contract, the acceptance must satisfy the following requirements: -
i- Acceptance should be communicated by the offeree to the offeror.
ii- Acceptance should be absolute and unqualified.
iii- Acceptance should be made in some usual and reasonable manner, unless the
proposal prescribes the manner of acceptance.
iv- An Acceptance should be made while the offer is still subsisting.

i- Acceptance should be communicated- It means that the offeree must signify his
assent, or communicate the acceptance. The communication of acceptance is
deemed to be made by any act or omission of the party accepting, by which he
intends to communicate such acceptance, or which has the effect of
communicating it. When the parties are face to face, communication could be
oral. When they are at a distant place, communication could be made by post, by
telegram, by a message on phone, through a messenger, or in any other
reasonable manner. Sometimes the conduct of a person might indicate his
assent. For a valid contract the acceptance must be communicated and
moreover, such communication should be made to the offeror.
 Communication must be made by the offeree or his authorized agent
(Only offeree can accept the offer)- In order that the acceptance can be
treated as valid, it is necessary that the same must be communicated to
the offeror either by the offeree, Or by some duly authorized person on
his behalf. lf the communication is made by an unauthorized person; it
does not result in a contract.
 In Powell v. Lee, Powell was one of the candidates for the post of
headmaster of a school. The Board of Managers passed a
resolution selecting him for the post. No communication about
this decision waş made to Powell by the Board. One of the
members of the Board who had not been authorized to
communicate this decision, acting in his individual capacity,
informed Powell about his selection for the post. Subsequently,
the Board of Managers met again and decided t0 cancel the
appointment of Powell and app0int another candidate Parker, in
Powel's place. Powell sued Lee, the Chairman of the Board of
Managers, for the breach of contract. It was held that since the
resolution passed by the Board was not communicated to Powell
by the Board, or any authorized person on its behalf, it could not
give rise to a contract. Powell's action, therefore, failed.
 Communication of acceptance to a wrong person- It has already been
noted that the offeror becomes bound as soon as the letter of acceptance
is posted to him. lf the letter of acceptance is posted at a wrong address
or to a wrong person, that will not bind the offeror.
 Communication of acceptance not needed in acceptance by conduct-In
exceptional cases the terms of the offer may be such that they waive the
requirement of communication of acceptance. In such cases a certain
kind of conduct on the part of the offeree may be treated sufficient to
create a contract. According to Section 8, "Performance of the conditions
of a proposal is an acceptance of the proposal."
 Acceptance of offer by conduct- It is well settled that an offer may be
accepted by conduct. But conduct would only amount to acceptance if it
is clear that the offeree did the act with the intention actual or apparent
of accepting the offer. It is thus well settled that conduct would amount
to acceptance only if it is clear that the offeree did the act with the
intention, actual or apparent, of accepting the offer. Each case must,
therefore, rest on its own facts.
 In M/s. Bhagwati Prasad Pawan Kumar v. Union of India,'
Referring to Section 8 of the Contract Act, 1872, which says of
acceptance by performing conditions of a proposal", the Apex
Court held that if the appellant had accepted the cheques and
encashed them without anything more, the appellant must be
held to have accepted the offer by conduct.
 Implied Acceptance- The acceptance of an offer/promise can be in
express terms and can also be in implied terms.
 Agreement in Sub Silentio- The general rule is that an offer is not
accepted by mere silence on the part of the offeree, yet it does not mean
that an acceptance always has to be given in so many words. Under
certain circumstances, offeree's silence, coupled with his conduct, which
takes the form of a positive act, may constitute an acceptance. It would
be known as an agreement sub silentio. In such a case the terms of the
contract between the parties can be proved not only by their words but
also by their conduct.
 Acceptance by Post/Telegram- Section 4 of the Indian Contract Act, 1872,
explains the following rules when the communication of acceptance is
made by post/telegram
1. The communication of acceptance is complete as against the
proposer, when it is put in the course of transmission to him so as to
be out of the power of the acceptor.
2. The communication of acceptance is complete as against the
acceptor, when it comes to the knowledge of the proposer.
Illustration
B accepts A's proposal by a letter sent by post. The communication of the
acceptance is complete,
 - as against A, when the letter is posted;
- as against B, when the letter is received by A.

 Offeror bound when letter of acceptance (or telegram) is posted to him-

It has been noted above that the communication of acceptance is
complete as against the proposer when the letter of acceptance is posted
to him. The moment the letter of acceptance is posted, the offeror
becomes bound. He becomes bound immediately on the posting of the
letter to him and it makes no difference that the letter is delayed in
transit, or it is even lost in the post and the offeror never receives it.
 In J.K. Enterprises v. State of M.P., the petitioner submitted a
tender to purchase Tendu leaves on l-l-s8. The respondents sent
communication of acceptance by registered cover dated 12-2-93
on the address given by the petitioner. The said letter of
acceptance was, however, returned to the respondents. It was
held that despatch of letter of acceptance had amounted to
acceptance and completion of the contract.
 Acceptor bound when his letter reaches the offeror- It has been noted
above that though the offeror becomes bound when the letter of
acceptance is posted to him, the acceptor himself does not become
bound thereby. In India, an acceptor becomes bound by his acceptance
when his letter of acceptance comes to the knowledge of the offeror.
 Acceptance by Telephone- In Bhagwandas v. Girdhari Lal & Co. the
Supreme Court has held that in the case of telephonic conversation, the
position was the same as in the case where the parties were in the
presence of each other, and the rule of a contract through post did not
apply to such contracts. In case of acceptance sent by post, the contract is
concluded when the letter of acceptance is posted, whereas in the case of
acceptance 6y phone, the contract is deemed to be complete when the
offeror hears the acceptance at his end rather than when the acceptor
speaks the words of acceptance.
 Communication of Acceptance by Telex/Fax- Communication by fax is
also instantaneous and is in fact through, by means of a telephone
connection. The Supreme Court in Bhagwandas Vs. Girdharilal,' has held
that in case of communication by telex, the normal rule would apply and
the contract would be completed only when the acceptance was received
by the offeror. communication by fax, the Bombay High Court in
Quadricon Pvt. Ltd. v. Bajarang Alloys Ltd.," ruled that the normal rule
would apply and the contract would be completed only when the
acceptance was received by the offeror. In case of communications
through the contract is complete only after the message of received by
the acceptor.
ii- Acceptance should be absolute and unqualified- For a valid acceptance it is also
essential that the acceptance should be absolute and unqualified. If offer to sell
my radio to you for Rs. 500 and you convey that you are willing to pay only Rs.
400 for the same, there is no contract in this case. Your willingness to pay Rs. 400
is not acceptance of my offer, it is counter offer by you.5 By your counter offer
you are willing to purchase the radio for Rs. 400 instead of Rs. 500.
 Thus, if in the above illustration, after making a counter offer of Rs. 400,
you have a second thought and now you want to purchase my radio for
Rs. 500 and you write about the same to me, this cannot be considered to
be acceptance at all because my original offer has already lapsed.
 The point may be illustrated by referring to the case of Hyde v. Wrench.
There an offer was made by A to B for the sale of a farm for 1,000
pounds. B rejected this offer and said that he will pay only f950 to which
A did not agree. Thereupon B said that he was willing to pay 1,000
pounds to which also A did not agree. B sued A and contended that there
was a contract by which A was bound. It was held that B had once
rejected A's offer by his counter offer to pay 950 pounds and this made
the original offer to lapse, and therefore, no contract had resulted in this
case.

iii- Acceptance should be expressed in usual/prescribed manner- According to

Section 7(2), the acceptance must be "expressed in some usual and reasonable
manner, unless the proposal prescribed the manner in which it is to be
accepted". It means that if the manner of acceptance has been prescribed by the
proposal, the acceptance has to be in that prescribed manner, otherwise the
same may be made in some usual or reasonable manner.
 Usual and reasonable manner- Usual and reasonable manner of
acceptance means the manner which is usually adopted in a particular
kind of transaction according to the usage or custom of trade. Acceptance
by post, telegram, telephone or through personal messenger may be
considered to be a usual manner of acceptance.
 Prescribed manner- If the proposal prescribes any particular manner of
acceptance, the acceptance must be made in that manner. 1The manner
of acceptance may include the requirement of fulfilment of certain
conditions, such as the payment of an advance. II such conditions are not
fulfilled, there does not arise a valid contract.
 In Chairman-cum-M.D. TN. Tea Plantation Corp. Ltd. v. M/s Srinivasa
Timbers, the respondents had made the highest bid for the grant of a
forest contract by the appellant to them. The bid was accepted subject to
the condition that the respondent would deposit the prescribed amount
and execute the agreement. The respondent failed to fulfil this condition
and the appellant cancelled the contract and returned the earnest money
deposited by the respondent-tenderer. The tenderer accepted the refund
of earnest money without protest. The respondent then challenged the
 decision of the appellant to cancel the contract. It was held that the
contract was subject to conditions which were not fulfilled, and,
therefore, the cancellation of the contract was valid.
 If the terms of offer stipulate entering into agreement within a certain
period after acceptance of tender, then the contract would arise only
when such an agreement is entered into. If the terms of offer also
stipulate that if the required agreement is not entered into, the earnest
money shall be forfeited and the letter of acceptance of tender shall be
deemed to have been cancelled, that is a valid condition.
 If the proposal prescribed a manner in which it is to be accepted and the
acceptance is not made in such manner, then, according to Section 7(2),
“The proposer may, within a reasonable time after the acceptance is
communicated to him, insist that his proposal shall be accepted in the
prescribed manner, and not otherwise: but if he fails to do so, he accepts
the acceptance."
 According to Indian law, therefore, acceptance of the proposal in a
manner different from the prescribed one does not automatically
invalidate the acceptance. It means that in case acceptance is not made in
the prescribed manner, the burden lies on the offeror to raise the
objection within a reasonable time. If he fails to object to such
acceptance, that becomes binding on him.
 So far as English law is concerned, if the manner of acceptance is
prescribed, it is expected that the acceptance will be in the same manner.
In case the deviation from the prescribed manner causes some delay or
other disadvantage to the offeror, he may repudiate the acceptance. If
the offeror wants the acceptance to be made by return of post", that
does not mean exclusively a reply by letter by return of post, but you may
reply by telegram or by verbal message, O Dy any means not later than a
letter written and sent by return of post."
 This may be illustrated by referring to an American case, Eliason v.
Henshaw. In this case the offeror wanted that the acceptance should be
sent by wagon. The offeree, thinking that the acceptance sent by post will
reach earlier, despatched the acceptance by post. The letter in fact
reached after the arrival of the wagon It was held that the offeror was
entitled to treat the acceptance as invalid.

iv- Acceptance should be made while the offer is still subsisting- It is necessary that
the acceptance should be made while the offer is still alive and subsisting.
Acceptance after the lapse of the offer cannot give rise to a contract. Once the
offer has lapsed, an attempt to accept the same would not give rise to any legal
obligation.
Where the Contract is Completed- The contract becomes complete as soon as the
acceptance is made by the offeree and unless otherwise agreed expressly or by
necessary implication by the adoption of a special method of intimation, when the
acceptance of offer is intimated to the offeror.
REVOCATION OF OFFER- Before the offer has been accepted, it can be revoked. After an
offer has been accepted, it ripens into a contract and then it cannot be revoked,
According to Section 5
"A proposal may be revoked at any time, before the communication of its acceptance is
complete as against the prosper, but not afterwards”.
- A prospective" resignation is an offer to quit a post and the same can be withdrawn
before the offer is accepted by a competent authority.
- Withdrawal of Bids- In case of sale by auction, the bids made at the auction are
offers, and the highest offer may be accepted by the auctioneer. In such a case the
sale is complete when the auctioneer announces its completion by the fall of the
hammer or in other customary manner; and until such announcement is made, any
bidder may retract his bid.

Revocation in contracts by post- It has already been noted that according to Section 5, a
proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards. In contracts by post, it has to be
seen, as to at what time the communication of acceptance is complete against the
offeror, because no revocation is possible after such communication has been
completed. A proposes, by a letter sent by post, to sell his house to B. B accepts the
proposal by a letter sent by post. A may revoke his proposal at any time before or at the
moment when B posts his letter of acceptance, but not afterwards.

Modes of revocation of offer- Section 6 mentions various modes of revocation of offer.

The Section is as under: -
"A proposal is revoked
1) by the communication of notice of revocation by the proposer to the other party;
2) by the lapse of the time described in such proposal for its acceptance, or if no time is
so prescribed, by the lapse of a reasonable time, without communication of the
acceptance
3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or
4) by the death or insanity of the proposer.

1) By notice of revocation- An offer ripens into a contract after it is accepted. Before it

has been accepted it creates no legal obligation and, therefore, it may be revoked at
 any time before it is accepted. A proposal may be revoked by the Communication of
notice of revocation by the proposer to the other party" To be effective, the notice
of revocation has to be communicated by the proposer (or his agent) and not by
anybody else. On this point English law is different from Indian law. In India, the
notice of revocation has to be communicated by the proposer only, whereas in
England the offer stands revoked even though the offeree comes to know about the
revocation of offer through some other source and not by a notice by the offeror
himself.
2) By lapse of time- A proposal is revoked by the lapse of the time prescribed in such
proposal for its acceptance, or, if no time is so prescribed, by the lapse of a
reasonable time, without communication of the acceptance.
- Sometimes the parties may expressly fix the time up to which the offer will
remain open.
- Even if no time has been prescribed within which the acceptance can be
made, the offer stands revoked on the lapse of a reasonable time. Non-
acceptance within a reasonable time means an implied refusal by the offeree
to accept the offer.
- In Ramsgate Victoria Hotel Co. v. Montefiore, the defendant, Montefiore,
made an offer to purchase shares in the plaintiff company in June. This offer
was accepted by the plaintiff company by allotting shares to him in
November. The defendant contended that his offer has lapsed and,
therefore, he was not bound to take the shares. It was held that the offer had
lapsed as the same had not been accepted within a reasonable time and the
defendant was not bound to take the shares.

3) By failure to fulfil a condition precedent- When the offer is subject to some

condition precedent, such a condition has got to be fulfilled by the acceptor before
making the acceptance. If the acceptor fails to fulfil the condition precedent to
acceptance, the offer stands revoked. For example, if the offer requires the deposit
of some earnest money, or the execution of some document, etc, these conditions
must be fulfilled.
 Similar would be the position when tenders are invited subject to certain
conditions. In State of M.P. v. Gobardhan Dass," tenders for the sale of
certain goods were invited subject to the condition that 25% amount was to
be paid when the tender was accepted. As tender was the highest and the
same was accepted, but he failed to fulfil this condition
 When an offer has been made subject to a certain condition, the offeror may
subsequently waive the condition. If the offeror has waived the condition and
accepted the offer, that results in a valid contract.

4) By death or insanity of the offeror- An offer is revoked by the death or insanity of

the proposer, if the fact of his death or insanity comes to the knowledge of the
acceptor before acceptance. In India, the death or insanity of the offeror does not
 automatically make the offer to lapse. The offer stands revoked if the fact of death
or insanity comes to the knowledge of the acceptor before acceptance. It means that
if the fact of death or insanity has not come to the knowledge of the offeree while he
accepts the offer, it is valid acceptance giving rise to a contractual obligation.
 In England, the position appears to be different. There, after the offeree
knows about the offeror's death, the offer lapses and cannot be accepted.
 In Dickinson v. Dodds, Mellish, LJ., expressed the opinion (obiter) that on the
death of the offeror, the offer automatically lapses and the same cannot be
accepted even if the offeree is ignorant of the offeror's death.

REVOCATION OF ACCEPTANCE (India)- When the contract is created through post,

according to Section 4, by the posting of the letter of acceptance
i- the proposer becomes bound when the letter of acceptance is posted to him,
ii- but the acceptor becomes bound when the letter of acceptance reaches the
proposer.
Since the acceptor does not become bound immediately on posting his letter of acceptance,
he is free to revoke the acceptance by adopting speedier mode of communication, whereby
his communication of revocation of acceptance may reach earlier than his letter of
acceptance. Section 5 expressly permits the revocation of acceptance through the
following provision: -"An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the acceptor, but not afterwards,"

 Illustration- A proposes by a letter sent by post, to sell his house to B, B

accepts the proposal by a letter sent by post. B may revoke his acceptance at
any time before or at the moment when the letter communicating it reaches
A, but not afterwards.
Revocation of Acceptance (England)- According to English law, once the letter of
acceptance is posted, it binds both the parties and there appears to be no scope of
revocation of acceptance by sending a telegram or through a phone call. Although there is
no English case on the point but the authorities on the subject are of the view that the
posting of the letter of acceptance creates a contract binding on both the parties, and the
letter of acceptance once posted cannot be revoked.

 In India, as it has been noted above, the position is different. Indian law
permits revocation of acceptance after the letter of acceptance has been
posted.
 CONSIDERATION
A/to section 10 of ICA, presence of consideration is one of the essentials of a valid contract.
And a/to section 25, subject to certain exceptions, the general rule in India is that "an
agreement without consideration is void." Consideration means something in return for the
promise. It may be either some benefit conferred on one party or some detriment suffered
by the other.
Section2 (d), Indian Contract Act, 1872 defines consideration as under “When, at the desire
of the promisor, the promisee or any other person has done or abstained from doing, or
does or abstains from doing, or promises to do or to abstain from doing something, such act
or abstinence or promise is called a consideration for the promise”.
The definition requires the following essentials to be satisfied in order that there is valid
consideration: -
1. Consideration to be given 'at the desire of the promisor
2. Consideration to be given 'by the promisee or any other person
3. Consideration may be past, present or future, in so far definition says that the
promisee
i. has done or abstained from doing, or
ii. does or abstains from doing, or
iii. promises to do or t0 abstain from doing, something
4. There should be some act, abstinence or promise by the promisee, which constitutes
consideration for the promise.
 1. Consideration only at the desire of the promisor- It is essential that the
consideration must have been given at the desire of the promisor, rather than
merely voluntarily or at the instance of some third party.
2. Consideration by Promisee or any other person Privity of Consideration- According
to the Indian law, consideration may be given by the promisee or any other person.
ln lndia, there is a possibility that consideration for the promise may move not from
the promisee but a third person, who is not a party to the contract.
 ln England, the position is that consideration must move from the promisee
and nobody else." For example, A promises to give his watch to B and a
consideration of Rs. 2,000 for the same is given to A by X and not by B. This
will not constitute a valid contract in England as consideration for A's promise
in favour of B was not provided by the promisee B himself but by Somebody
else. Such a contract will be valid in India as Section 2(d) clearly provides that
"...at the desire of the promisor, the promisee or any other person may
provide consideration.

PRIVITY OF CONTRACT- The doctrine of privity of contract means that only those persons
who are parties to the contract can enforce the same. A stranger to the contract cannot
enforce a contract even though the contract may have been entered into for his benefit. If
in a contract between A and B some benefit has been conferred upon X, X cannot file a suit
to enforce the contract because A and B are the only parties to the contract, whereas X is
stranger to the contract.

 English Law- In Tweddle v. Atkinson,' it was held that only parties to the
contract can sue each other. In that case the plaintiff, A married a girl, B.
Atter this marriage there was contract in writing between A's father and Bs
father that each would pay a certain sum of money to A and that A will have
the power to sue for such sums. After the death of the two fathers A brought
an action against the executors of B's father to recover the promised amount.
It was held that A could not sue for the same. In the above stated case, the
plaintiff was both a stranger to the contract as well as stranger to
consideration and he could not enforce the claim.
 The rule of privity of contract was reaffirmed by the House of Lords in Dunlop
Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. In Dunlop's case the
appellants (Dunlop Co.), who were manufacturers of motor car tyres, sold
some tyres to one Dew & Co, with an agreement that these tyres will not be
sold below the list price. Dew & Co. in their turn sold some of these tyres to
the respondents (Selfridge & Co.), with an agreement between Dew & Co.
and the respondents. The respondents 8old some tyres below the list price,
and the appellants brought an action against the respondents to recover
damages for the same. The House of Lords held that Dunlop Co. could not
 bring an action against Selfridge and Co. because there was no contract
between the two parties.
 Indian Law- The rule that "privity of contract" is needed and a stranger to the
Contract cannot bring an action is equally applicable in India as in England. In
Jamna Das v. Ram Avtar "A had mortgaged some property to X. A then sold
this property to B, B having agreed with A to pay off the mortgage debt to K,
X brought an action against B to recover the mortgage money. It was held by
the Privy Council that since there was no contract between K and B, K could
not enforce the contract to recover the amount from B.

Exceptions to the rule that a stranger to contract cannot sue

I. Trust of contractual rights or beneficiary under a contract- Indian law has also
recognised this exception. In Khwaja Muhammad Khan v. Husaini Begum, there
was an agreement between the father of a boy and a girl that if the girl (plaintiff
in this case) married a particular boy, the boy’s father (defendant in this case)
would pay certain personal allowance known as Kharchi -i-pandan (betel-box
expenses) or pin money to the plaintiff. The plaintiff married the defendant's son
but the defendant failed to pay the allowance agreed to by him. In an action by
the plaintiff to claim this allowance, the defendant contended that his contract to
pay the allowance had been made only with the plaintiff's father and not with
the plaintiff, she being a stranger to the contract cannot sue. It was held that
since, the basis of the plaintiff's claim being a specific charge on immovable
property in her favour, she was entitled to claim the same as a beneficiary, and
as such, the Common Law rule was not applicable to the facts and circumstances
of the present case.
II. Conduct, Acknowledgment, or Admission- Sometimes there may be no privity of
contract between the two parties, but if one of them by his conduct,
acknowledgment, or admission recognizes the right of the other to sue him, he
may be liable on the basis of the law of estoppel
 In Narayani Devi v. Tagore Commercial Corporation Ltd.,' where there was
no contract between the plaintiff and the defendants but the defendants in
their agreement with the plaintiff's husband had agreed to pay a certain
amount to the plaintiff's husband during his lifetime. It was established that
the defendants had made certain payments to the plaintiff after her
husband's death, in pursuance of the agreement. Apart from that it was
found that the defendants, by their admission had earlier called upon the
plaintiff to execute certain documents in this connection, which implies that
they considered the plaintiff to be entitled to certain rights. It was, therefore,
held that the defendants had created such privity with the plaintiff by their
conduct and by acknowledgment and by admission, that the plaintiff was
entitled to her action even though there was no privity to contract between
 the plaintiff and the two defendants, when the said contract was entered
into.
III. Provision for marriage expenses or maintenance under family arrangement-
Where, under a family arrangement, the contract is intended to secure a benefit
to a third party, he may sue in his own right as a beneficiary. Such an action has
been allowed in many cases where, on the partition of Joint family property
between the male members, a provision is made for the maintenance of the
female members of the family.
 In Sundaraja Aiyangar v. Lakshmiammal, the partition deed between the
male members of the family made a provision for the expenses for the
marriage of the plaintiff, Lakshmiammal, to be contributed by the
defendants, i.e., her father and brothers. She brought an action to enforce
the agreement between the defendants. It was held that even though the
plaintiff was not a party to the contract, yet the contract constituted a
situation like trust in her favour and, therefore, she was entitled to the
amount.
3- Consideration may be Past, Present (Executed) or Future (Executory)- Section 2(d) of the
Indian Contract Act, 1872, recognizes three kinds of consideration, i.e.; Past, Executed and
Executory. It says that when at the desire of the promisor, the promisee or any other person
a) has done or abstained from doing, (the consideration is Past.)
b) does or abstains from doing, (the consideration is Executed or present.)
c) promises to do or to abstain from doing, (the consideration is Executory or Future.)

a) Past consideration- It means that the consideration for any promise was given
earlier and the promise is made thereafter. For example, I request you to find my
lost dog. After you have done the same, if I promise to pay you Rs. 100 for that, it is a
case you Rs. 100 the consideration is your efforts in finding my lost dog and the same
had been done before I promised to pay the amount. This constitutes valid (Past)
consideration under Section 2(d), and therefore the promise is enforceable.
 Past services voluntarily rendered [Section 25(2)]- Indian Contract Act
recognizes only such consideration which has been given at the desire of the
promisor, rather than voluntarily. If consideration has been given voluntarily,
it is no consideration. For example, if my dog has been lost and without any
request from me to find the same, you voluntarily find the dog and deliver
the same to me. This is a case of past services rendered voluntarily. In case I
promise to pay Rs. 100 to you after you have rendered these services, the
question which arises in such a case, can such an agreement be enforced? A
valid contract is, however, created in such a case also because the situation is
covered by Section 252) of the Indian Contract Act, 1872, which is an
exception to the rule that an agreement without consideration is void.
 Section- 25: An agreement made without consideration is void
unless-25(2)- It is a promise to compensate, wholly or in part, a
 person who has already voluntary done something for the
promisor, or 8omething which the promisor was legally
compellable to do.
 The point may be further explained by the following illustrations
i. A finds B's purse and gives it to him. B promises to give A Rs.
50. This is a contract.
ii. A supports B's infant son. B promises to pay A's expenses in
doing. This is a contract.
 English law regarding past consideration- According to English law, past
consideration is no consideration, A promise in lieu of a past act is deemed to
be only expression of gratitude for the benefit already received, rather than
any consideration motivating the other side to make the promise. The case of
Re Mcardle" explains the point. Case is on improvement of house by the wife
voluntarily.
 Past consideration at the promisor's request- Past consideration though
given prior to the promise, but at the request of the promisor, is deemed to
be a good consideration for the promise. It is deemed that when the previous
request was made, the promisor had in mind his promise which he expressed
afterwards. The previous request and the subsequent promise are not
considered to be independent of one another but part of the same
transaction.
 The authority for this point is the case of Lampleigh v. Brathwait."
Thomas Brathwait, the defendant, who was held guilty of murder,
requested Lampleigh, the plaintiff, to obtain pardon for him from the
King. The plaintiff made efforts to secure the pardon, going from one
place to another, at his own expense. In consideration of these
efforts, the defendant promised to pay £ 100 to the plaintiff. The
question was whether the plaintiff had a legal right to recover this
amount. It was held that the plaintiff had a right to enforce the
promise and recover the said amount because for this promise the
consideration, in the form of efforts by the plaintiff to obtain the
pardon, had been there at the earlier request of the defendant.
 On the question of past consideration, there is not much difference
between Indian and English law. Indian law recognizes past
consideration, when the same has been given at the desire of the
promisor." Past act done voluntary is no consideration either in India
or England. In India, however, such a promise in lieu of the past
voluntary services are enforceable because of the exception
mentioned in Section 25(2).

b) Executed or Present Consideration- When one of the parties to the contract has
performed his part of the promise, which constitutes the consideration for the
promise by the other side, it is known as executed consideration. Performance of the
promise by the other side is the only thing now to be done. For example, A makes an
 offer of reward of Rs. 100 to anyone who finds his lost dog and brings the same to
him. B finds the lost dog and delivers the same to A. When B does so, that amounts
to both the acceptance of the offer, which results in a binding contract under which
A is bound to pay Rs. 100 to B, and also simultaneously giving consideration for the
contract. The consideration in this case is "executed".
 Executed consideration may be distinguished from past consideration. In
case of executed consideration, the consideration is provided simultaneously
along with the making of the contract. In the case of past consideration, on
the other hand, consideration is provided prior to the making of the contract.

c) Executory or Future Consideration- When one person makes a promise in exchange

for the promise by the other side, the performance of the obligation by each side to
be made subsequent to the making of the contract, the consideration is known as
executory. For example, A agrees to supply certain goods to B and B agrees to pay
for them on a future date, this is a case of executory consideration.

4- Something, i.e., An Act, Abstinence or Promise by the promisee constitutes

consideration- According to the definition of consideration contained in Section 2(d), when
at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing
something, such "act or abstinence or promise is called consideration for the promise. It
means that if nothing is done in exchange for the promise, i.e., when there is no act,
abstinence or promise, there is no consideration.

Consideration received by one of the joint promisors- When there are several joint
promisors but consideration has been received by only one of them, that is sufficient
consideration so as to bind other joint promisors also. In Andhra Bank v. Anantnath Goel,
the father received a loan from a bank by the deposit of title-deeds of his immovable
property, but the promissory note, to repay the l0an with interest, was signed by the father
and his son jointly, in favour of the bank. It was held that the son was equally liable with his
father on the said promissory note, even though he himself had received no direct
consideration.
Consideration need not be adequate- A contract which is supported by consideration is
valid irrespective of the fact that the consideration is inadequate. According to Explanation
2 to Section 25 of the Contract Act, 1872, “An agreement to which the consent of the
promisor is freely given is not void merely because the consideration is inadequate; but the
inadequacy of the consideration may be taken into account by the Court in determining the
question whether the consent of the promisor was freely given”.

 The parties are free to make any contract of their choice. The adequacy of
the consideration is for the parties to consider at the time of making the
agreement, not for the court when it 18 sought to be enforced. " For
 example, A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to
the agreement was freely given. The agreement contract notwithstanding the
inadequacy of the consideration.
 Although inadequacy of consideration by itself is not a ground for treating
the contract as invalid but it may be a factor which the court may take into
consideration to know whether the consent of a party was free or not. For
example, A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his
consent to the agreement was freely given. The inadequacy of the
consideration is a fact which the Court should take into account in
considering whether or not A's consent was freely given.
 No doubt true that mere inadequacy of consideration, as set out in
Explanation (2) to Section 25 of the Indian Contract Act, 1872, is not relevant,
unless it affects the question of free consent to contract.

Consideration must be real- Although it is not necessary that the consideration should be
adequate, it is, however, necessary that it should be real and should not be unsubstantial.
Promise not to bore the promisor is not enough to constitute consideration.

 In White v. Bluett,' a son used to complain to his father that his brothers had
been given more property than him. The father promised that he would
release the son from a debt if the latter stopped complaining. After the
father's death an action was brought by the executors to recover the debt.
The son contended that the father had made a contract to release him from
the debt in consideration for his promise not to bore his father. It was held
that the promise by the son not to bore his father with complaints in future
did not constitute good consideration for the father's promise to release him,
and, therefore, the son continued to be liable for the debt.

Performance of an existing legal duty is no consideration- In order to constitute proper

consideration, there should be a promise to do something more than what a person is
already bound to do. (Doing of something which a person is already legally bound to do is
no consideration. In Collins v. Godefroy,' A received a subpoena to give evidence in a case.
Thereafter B promised to pay to A some money for the trouble which was to be taken by
him in appearing in that case. A sued B to recover the amount promised by B. It was held
that A having received the subpoena was already under a public duty to give evidence, and
therefore, the promise by B to pay did not constitute consideration for the promise.
Promise to perform an already existing contractual duty- If A is already bound to perform a
particular contractual duty owed to B, B's promise to pay something additional for the same
promise is no consideration. In Stilk v. Myrick two sailors having deserted in the course of a
voyage, the captain of the ship promised to distribute the wages of those two sailors among
the other members of the crew if they would work the ship home. It was held that the
members of the crew being already duty bound to work the ship home, there was no
consideration to pay the additional amount and hence the promise to pay that amount
could not be enforced.

Exceptions when agreement without consideration is valid- Section 25 of the Indian

Contract Act, 1872, as a general rule, declares that an agreement without consideration is
void. The Section, however, mentions the following three exceptions to the general rule.
The provision is as under
"25. An agreement made without consideration is void unless
1) It is expressed in writing and registered under the law for the time being in force for
the registration of documents and is made on account of natural love and affection
between parties standing in a near relation to each other; or unless
2) It is promise to compensate, wholly or in part, a person who has already voluntarily
done something for the promisor, or something which the promisor was legally
compellable to do; or unless
3) It is a promise, made in writing and signed by the person to be charged therewith, or
by his agent generally or specially authorized in that behalf, to pay wholly or in part a
debt of which the creditor might have enforced but for the law for the limitation of
suits.
In any of these cases, such an agreement is a contract.

1. Promise due to natural love and affection [Section 25(1)]- When the promise is
made in favour of a near relation on account of natural love and affection, the same
is valid even though there was no consideration for such a promise, the following
requirements have got too be satisfied in order that the case is covered under this
exception:
a- The parties to the agreement must be standing in a near relationship to each
other
b- The promise should be made by one party out of natural love and affection for
the other.
c- The promise should be in writing and registered.
 "Natural love and affection" between the parties so nearly related is also
needed. If one brother, although not legally bound to do so, transfers half of
his property in favour of another brother, so that they have cordial relations,
that is deemed to have been done out of natural love and affection, and such
an agreement is binding. "But, when there is no love and affection between
the near relations, Section 25(1) would not apply.
 It is further necessary that the agreement should be in writing and the writing
be registered under the law relating to registration of documents.
 2. Compensation for past voluntary services 1Section [25(2)]- The second exception of
Section 25 covers cases where a person without the knowledge of the promisor, or
otherwise than at his request, does the latter some service, and the promisor
undertakes to recompense him for it. The exception also covers a situation where
the promise is for doing something voluntarily "which the promisor was legally
compellable to do."
 Thus, when A finds B's purse and gives it to him and then B promises to pay A
Rs. 50, or A supports B's infant son and B promises to pay A's expenses in so
doing, there is a valid contract in such cases although A's act was a voluntary
one."
 The exception covers situations where the service is rendered voluntarily and
without the promisor's knowledge. It is also necessary that the service must
have been rendered to the promisor and nobody else. This implies that the
act must have been done for a person who is in existence at the time of the
doing of the act, and, therefore, it does not cover expenses incurred by the
promoter of a company before the company came into existence.
 It is further necessary that at the time of the doing of the act, the promisor
must have been competent to contract.

3. Promise to pay a time barred debt- Another situation when an agreement is a valid
contract even without any consideration is a promise to pay a time barred debt.
Section 25(3) requires the following essentials to be satisfied in such a case
a- The promise must be to pay wholly or in part a time barred debt, i.e., a debt of
which the creditor might have enforced payment but for the law for the
limitation of suits.
b- The promise must be in writing and signed by the person to be charged
therewith, or his duly authorized agent.
 On this point English law is also the same.

CAPACITY TO CONTRACT

One of the essentials of a valid contract, mentioned in Section 10, of the Indian Contract Act,
1972, is that the parties to the contract should be competent to make the contract.
According to Section 11 "Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject”.
It means that the following three categories of persons are not Competent to contract
a- A person who has not attained the age of majority, i.e., one who is a minor.
b- A person who is of unsound mind;
c- A person who has been disqualified from contracting by some law.

THE POSITION OF A MINOR

Who is a minor- A person who has not attained the age of majority is a minor. Section 3 of
the Indian Majority Act, 1875 provides about the age of majority. It states that a person is
deemed to have attained the age of majority when he completes the age of 18 years, except
in case of a person of whose person or property a guardian has been appointed by the
Court, in which case the age of majority is 21 years. In such a case, the majority does not
arise till the completion of 21 years of age by the ward, and it is immaterial, whether the
guardian dies or is removed, or otherwi8e cease to, act. In England the age of majority is 18
years.
Nature of a minor's agreement- As noted above a minor is not competent to contract. One
question which arises in case of an agreement by a minor 18, whether the agreement is void
or voidable. The controversy was set at rest by the decision of the Privy Council in Mohori
Bibee v. Dharmodas Ghose,' in 1903. It was held that the agreement by a minor was void.

 The facts of Mohori Bibee's case are as under the plaintiff, Dharmodas
Ghose, while he was a minor, mortgaged his property in favour of the
defendant, Brahmo Dutt, who was a money-lender to secure a loan. At the
time of the transaction, the attorney, who acted on behalf of the money-
lender, had the knowledge that the plaintiff was a minor.
 The minor brought an action against the money-lender stating that he
was a minor when the mortgage was executed by him and, therefore,
the mortgage was void and inoperative and the same should be
cancelled.
 The defendant (money-lender), amongst other points, contended
that: -
a- the minor had fraudulently misrepresented his age, the law of
estoppel should be applied against him.
b- if the mortgage is cancelled as requested by the minor, the minor
should also be asked to refund the loan of Rs. 10,500 which he
had taken.
 The defendant's contentions were rejected. Minor's agreement
was held void, and it was held that the minor could not be asked
to repay the loan taken by him.
Position under English Law- According to the general rule at Common Law, the contract
made by an infant was voidable at his option, The rule was modified by the Infants Relief
Act, 1874, which declares the following three types of contracts as absolutely void
a- Contracts for the repayment of money or to be lent;
b- Contracts for the supply of goods (other than necessaries);
c- Contracts for accounts stated.

Ratification of the minor's agreement- A minor's agreement being void ab initio, it is

incapable of being validated by a subsequent ratification after the minor has attained the
age of majority. The consideration furnished in respect of a transaction during minority
cannot be considered to be a valid consideration for a subsequent promise after attaining
majority and thus no ratification is possible of a promise made by a person during his
minority. A contract by a minor is void. A void contract which is a dead letter cannot be
revived and cannot constitute a valid consideration for a subsequent contract, and,
therefore, a transaction entered into by a minor during minority, cannot be ratified.

 If a person has received a part of the benefit during the minority and a part
after attaining majority, a promise by him to pay for the both, if made after
attaining majority, is with valid consideration and enforceable.
 In Nihalchand v. Mir Jan Mahomed Khan, a contract of lease had been
entered into on behalf of the plaintiff, while he was a minor After attaining
majority, the plaintiff continued with the transaction of lease. t was held that
the plaintiff was entitled to enforce the lease and recover the arrears of rent.

Ratification of acts done on minor's behalf- A minor's agreement being void ab initio,
neither he can himself enter into contract nor authorize an agent to do so on his behalf. As a
minor is incapable of either making a contract himself, or authorizing the same, he cannot
legally ratify an act done on his behalf.
No Estoppel against a minor- Section 115, Indian Evidence Act, which lays down the law of
estoppel is as under, “Where one person has by his declaration, act or omission intentionally
caused or permitted another person to believe a thing to be true, and to act upon such
belief, neither he nor his representatives shall be allowed in any suit or proceeding between
himself and such person or his representative to deny the truth of that thing."

 The question of estoppel came before the Courts in a number of cases. In

Mohori Bibee v. Dharmodas Ghose, the minor misrepresented his age while
taking loan, but the fact that the person taking the loan is a minor was known
to the money-lender.
 From the various decisions of the different High Courts, we find that
consensus is that the law of estoppel does not apply. He is allowed to plead
 minority as a defence to avoid liability under an agreement even though at
the time of making the agreement, he falsely stated that he has attained the
age of majority.
 In Vaikuntarama Pillai v. Authimoolam Chettiar, the Madras High Court has
held that as there is a clear statutory provision that a minor being
incompetent to contract is incapable of incurring any liability for any debt,
the law of estoppel cannot overrule this provision to make him liable.
 The Bombay High Court in Gadigeppa v. Balangowda has followed the above
stated decision of the Madras High Court.
 In Ganganand Singh Vs. Rameshwar singh, The Patna High Court also has
held that the rule of estoppel which rule of evidence, is subject to the
provisions of the Indian Contract Act, which makes an agreement by a minor
void.
 In Khan Gul v. Lakha Singh,' the Lahore High Court also held that the law of
estoppel does not apply against a minor. According to him, the law of
estoppel, which 1s a rule of evidence, is a general law and this has to be read
subject to the special law contained in the Indian Contract Act, according to
which the agreement by a minor is void.

RETURN OF BENEFIT SECURED BY A FRAUDULENT MINOR

English Law-The Doctrine of Restitution- According to English law, if a minor has obtained
undue benefit in any transaction, he is required to restore back the benefit so received by
him, under the equitable doctrine of restitution Under the doctrine he is asked to restore
back the exact things taken by him. It is applicable only to goods or property received by a
minor so long as they can be traced, and are still in his possession, Since, it is difficult to
identify money and to prove whether it is the same money or different one, the doctrine
does not apply to money. Even as regards goods or property, if the same have been
consumed or transferred/and are no more traceable, the doctrine of restitution does not
apply there.
Indian Law: Compensation by a minor- In India, the question of compensation under the
following two kinds of provisions has arisen before the Courts
1. Whether a minor can be asked to pay compensation under Sections 64 and 65,
Indian Contract Act for the benefit obtained by him under a void agreement.
2. Whether a minor can be asked to pay compensation in view of the provisions
contained in Sections 39 and 41, Specific Relief Act, 1877.

1- Compensation under Sections 64, 65 and 70, Indian Contract Act- The question,
whether a minor can be asked to pay compensation to the other party, under
Sections 64 and 65, Indian Contract Act had arisen in Mohori Bibee v. Dharmodas
Ghose. The Law Commission in its view said compensation under Section 65 be
allowed, even if the invalidity of the agreement is because of the fact that a party is
incompetent to contract. It has recommended that an Explanation be added to
 Section 65 to indicate that the Section is applicable where a minor enters into an
agreement on the false representation that he is a major. In spite of the above
stated recommendation by the Law Commission, no amendment has been made in
the Act so far.
 Section 70 of the Indian Contract Act, 1872 recognizes quasi-contractual
liability to compensate a person at whose cost some benefit has been
enjoyed. According to that provision, where a person lawfully does anything
for another person, or delivers anything to him, not intending to do so
gratuitously, and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former n respect of. or to restore, the
thin so done or delivered. The question which arises is- Can a minor who has
enjoyed the benefit as contemplated under Section 70, be required to pay
compensation under that provision. It has been held that Section 70 cannot
be invoked against a minor.

2- Compensation under Specific Relief Act, 1963- Whether a fraudulent minor can be
asked to pay compensation in view of provisions of Sections 39 and 41, Specific
Relief Act, 1877. In Mohori Bibee's case, the minor had applied for the cancellation
of the mortgage deed, executed by him, under Section 39, Specific Relief Act and the
Privy Council considered the question of compensation to be paid by him under
Section 41 of that Act. It was held that since in this case the loan had been advanced
to the minor with the full knowledge of his minority, the question of payment of
compensation t0 such a money-lender did not arise.

On the question of compensation under Section 41, Specific Relief Act, there is a sharp
difference of opinion between two sets of High Courts, one view having been
expressed by the Lahore High Court and another by the Allahabad High Court.

 Lahore High Court view- The question of compensation arose (before the
Lahore High Court in Khan Gul v. Lakha Singh. There the plaintiffs, who had
advanced a sum of Rs. 17,500 to a minor brought an action against him to
recover the amount. The minor was held liable to refund the same. In this
particular case the minor was not the plaintiff but was the defendant. The
Lahore High Court still held that the minor should be asked to pay back the
money. In its view the other party deserves to be compensated by a
fraudulent minor, in equity, irrespective of the fact that the minor is the
plaintiff or the defendant.
 According to the decision in the present case, asking a minor to
return the ill-gotten gain in the form of money, is not the
enforcement of contract, but it is only the restoration of the pre-
contract position. The relief is allowed not because there is a
contract between the parties, but it is because there is no contract
 but one of the parties has unjustly benefited at the cost of the
other.

 Allahabad High Court view- In Ajudhia Prasad v. Chandan Lal, the Full Bench
of the Allahabad High Court considered at length the decision of the Lahore
High Court and expressed entirely the opposite view. As regards the two
points discussed above, i.e., firstly, compensation under the Specific Relief
Act, and secondly, the question of restitution or compensation, the
conclusions were different from those arrived at by the Lahore High Court.
i- Regarding the minor’s responsibility to compensate under Specific
Relief Act, it was held that a minor cannot be asked to give any relief
to the other party when the minor is a defendant in the case. A minor
can be asked to give relief when he himself is plaintiff and wants some
relief for himself. If the minor, who is defendant in a case, is asked to
provide relief, that is contrary to the spirit and language of Section 41,
Specific Relief Act, 1877 and will also amount to enforcing a contract,
which is void.
ii- Regarding the question of paying money compensation by a minor,
the rule laid down in Leslie v. Sheill was followed, and it was held that
a minor may be asked to restore back the property if the same can be
traced, but he cannot be asked to pay money compensation because
that Would amount to enforcing void contract against a minor.
The view expressed by Sir Shadi Lal, C.J. in the Lahore case has been considered to be better,
by Pollock and Mulla." The Law Commission also in its Reports," has preferred the views of
Shadi Lal, C.J. expressed in the Lahore case on both the points discussed above. In other
words, it was in favour of permitting an action against a fraudulent minor irrespective of the
fact whether in the case the minor is the plaintiff or the defendant. It also stated that
requiring a minor to refund the money gain made by him unjustly did not amount to
enforcement of the contract. It recommended a suitable amendment of the Specific Relief
Act for the purpose of clarifying the position.
The Law Commission's views that restoration of status quo ante would not amount to the
enforcement of the void contract against the defendant. The principle applicable to a minor
will also apply to the case of a person of unsound mind. In accordance with the
recommendation of the Law Commission, the principle of compensation has now been
incorporated in Section 33, Specific Relief Act, 1963. This provision now requires the
payment of money compensation by a minor irrespective of the fact whether the minor is
the plaintiff or the defendant in the case.
"Section 33: - Power to require benefit to be resorted or compensation to be made when
instrument is cancelled or is successfully resisted as being void or voidable.

 33(1) On adjudging the cancellation of an instrument, the Court may require

the party to whom such relief is granted, to restore, so far as may be, any
 benefit which he may have received from the other party and to make any
compensation to him which justice may require.
 Through this provision the parties are tried to be put to the pre-contract
position. Moreover, compensation in terms of money is also permitted. In
other words, it means that the rule of English law laid down in Leslie v. Sheill'
is not applicable in India.

Minor's liability for Necessaries- It has already been noted that a minor's agreement is void
ab initio, and he is incapable of making a contract. However, for the necessaries supplied to
a minor, reimbursement is permitted to the person supplying such necessaries This is not on
the basis of any contract between the parties but because it is deemed to be a quasi-
contractual obligation. Chapter V of the Indian contract Act recognizes i.e., Quasi-
contractual relations.

 Section 68 in that Chapter makes a provision for the reimbursement for the
necessaries supplied to a minor. The provision is as under: - If a person,
incapable of entering into a contract, or anyone whom he is legally bound to
support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
 This Section permits reimbursement if: -
i- Necessaries are supplied;
ii- To a person who is incapable of making a contract, e.g., a minor or a
lunatic; or
iii- To a person who is dependent upon such person incapable of making
a contract;
iv- For reimbursement, no personal action can lie against the minor, etc.,
but reimbursement is permitted from the property of such incapable
person.

Illustrations
a- A supplies B, a lunatic, with necessaries suitable to his condition in
life. A is entitled to be reimbursed from B's property.
b- A supplied the wife and children of B, a lunatic, with necessaries
suitable to their condition in life. A is entitled to be reimbursed
from B's property.
 English law also permits an action for the necessaries supplied to a minor
(infant). According to Section 1 of the Infants Relief Act, 1874, all contracts
entered into by infants for goods supplied or to be supplied (other than
contract for necessaries) shall be absolutely void. It means that an infant is
liable to pay for the necessaries supplied to him.
 Regarding the necessaries supplied to a person incompetent to contract
(English) Sale of Goods Act, 1979 makes the following provision- "Where
 necessaries are sold and delivered to a minor or to a person who by reason of
mental incapacity or drunkenness is incompetent to contract, he must pay a
reasonable price for them. "Necessaries" here means goods suitable to the
condition in life of the minor or other person concerned and to his actual
requirements at the time of the sale and delivery.

What are necessaries- According to Section 68, the necessaries supplied to minor "should
be suited to his condition in life." It means such things as may be necessary to maintain a
person according to his condition in life. In Chappel Vs. Cooper, the following statement
explains the position: "Things necessary are those without which an individual cannot
reasonably exist. In the first place, food, raiment, lodging and the like. Again, as the proper
cultivation of the mind is as expedient as the support of the body, instruction in art or trade,
or intellectual, moral and religious information may be a necessity also.

 In Clyde Cycle Co. v. Hargreaves, it has been held that a racing cycle is
necessary for an infant apprentice. Similarly, in Chapple v. Cooper it was
held that an infant widow is bound by a contract for the burial of her
husband as the contract is for a necessity.
 In Kunwarlal Vs. Surajmal, it has been held that the house given to a minor
on rent for living and continuing his studies is deemed to be supply of
necessaries suited to the minor's condition in life, and the rent for the house
can be recovered.
 In Kadar Nath v. Ajudhia Prasad, loan was given to a minor on the mortgage
of his property with a view to saving the minor's on from sale in execution of
a decree. It was held that this loan necessaries suited to the minor's condition
in life, and therefor or though the mortgage was void, the mortgagee had still
a right of lien of the property mortgaged to him by the minor.
 The goods supplied should not only be suited to the minor's
condition in life but they should also be required by him at the
time of supply. If the minor is already having sufficient supply or
goods and does not need them any further, further supply will not
be considered to be necessaries.
 In Nash v. Inman, a minor, who was already having sufficient supply of
clothing suitable to his position, was supplied further clothing by at tailor. It
was held that the price of the clothes so supplied could not be recovered.
 In Ryder v. Wombwell, it was observed that certain things like ear-rings for a
male, spectacles for a blind person, or a wild animal, cannot be considered as
necessaries.
BENEFICIAL CONTRACTS OF SERVICE AND APPRENTICESHIP
Position in England- Under English law, an infant apprenticeship or services because such
contracts are beneficial to him and help him in earning his livelihood. An infant is not liable
for every beneficial contract. The liability is only for contracts of service or apprenticeship.
Contracts analogous to those of service and apprenticeship- A minor is bound by beneficial
contract of service or apprenticeship, any contract analogous there. This may be illustrated
by referring to the decision in Doyle v. White City Stadium Ltd. The plaintiff, who was an
infant, applied for licence as a boxer. A licence was duly granted to him and renewed
thereafter. In accordance with the rules the plaintiff was disqualified in one of the contests
for hitting below the belt and a sum of £ 3,000 due to him was withheld. The infant sued to
recover that amount. It was held that the infant's contract with the Board of Control was so
closely connected with the contract of service that the same was binding against him and,
therefore, he could not recover the amount.
Contract beneficial to infant- Infant's liability is only in respect of those contracts which are
beneficial to him. lf the contract is substantially beneficial to an infant even though there
are some minor disadvantages to him, the contract is binding. If, however, the contract is
not substantially beneficial to the infant, but is prejudicial to his interest, the same is
voidable at his option. The courts have to look to the contract as a whole to decide whether
the contract is to the infant's benefit, or it contains terms which are unreasonably
prejudicial to him.
Position in India- Unlike English law, there are different rules in lndia for contract of service
than those of apprenticeship. Minor's contract of service is void whereas that of
apprenticeship is valid.
Contracts of service- In India also, a contract of service entered into by a minor is void. This
may be explained by referring to Raj Rani v. Prem Adib. It was held that the plaintiff, being a
minor, the contract was void. It was also observed that the contract of service entered into
by the father on behalf of his minor daughter was void for another reason also, that is, the
same was without any consideration because consideration moving from a third party, who
is a minor, is no consideration.
Contracts of apprenticeship- Although Indian law does not make a minor bound by the
contract of service, contracts of apprenticeship are binding under the Indian Apprenticeship
Act, 1850. Since the contracts of apprenticeship are binding against the minor, such
contracts could be validly entered into by a minor's guardian on behalf of the minor.
Contracts of marriage- Contracts of marriage are supposed to be. beneficial to minors and,
therefore, a minor is entitled to enforce them. In Khimji Kuverji v. Lalji Karamsi, the
question before the Bombay High Court was, whether the contract of marriage of a minor
girl entered into by her mother on her behalf with a major boy could be enforced and could
she sue for the breach of contract. The question was answered in the affirmative and her
action was allowed.
  In Abdul Razak v. Mahomed Hussein, the Bombay High Court allowed an
action against a Muslim father, who promised to give his minor daughter in
marriage to the plaintiff, but subsequently there was breach of the contract.
ln this case, after the defendant agreed to give his minor daughter n marriage
to the plaintiff, the plaintiff spent some amount by presenting ornaments and
clothes to the defendant's daughter and incurred certain other expenses in
connection with the agreement for marriage. On the breach of the contract
of marriage, it was held that the plaintiff was entitled to recover the amount
from the defendant under Sections 65 and 73 of the Contract Act.
Contracts of immovable property by the minor's guardian- In a case, Srikakulam
Subrahmanyam v. Kurra Subba Rao, the respondent, a minor agreed to sell through his
guardian and mother certain land to the appellants, for the purpose of liquidating a debt
incurred by the minor's father. The possession of land was also given to the appellant. The
minor then filed a suit to recover back the possession of land. It was held that the minor's
contract entered into through the mother for the purpose of discharging minor's father's
debt was valid and the minor was, therefore, bound by the transaction. It was also observed
that "if the mother and guardian had taken no part at all in the transaction, the respondent
could not have entered into a valid contract to sell the land in suit to the appellants."
Contracts beneficial to a minor- While no liability can be incurred by a minor, he is not
debarred from accepting a benefit. If a minor has advanced mortgage money and there is a
mortgage in his favour, he can sue for enforcement of the contract.

 In Great American Insurance Co. Ltd, V. Madan Lal, the guardian of a minor
affected an insurance against fire in respect of minor's property, The
Insurance Company knew that the owner of the property a minor.
Subsequently, the property insured got destroyed by fire. In action by the
minor against the Insurance Company to claim compensation for loss to the
property, it was pleaded that since the plaintiff was a minor the contract of
insurance was void. It was, however, held that the minor was entitled to
claim the amount.
 A/to section 68- A minor can also be supplied with "necessaries suited to his
condition in life and the supplier of such necessaries is entitled to be
reimbursed from the property of the minor.
 In Karim Khan v. Jaikaran, it has been held that in the case of a Mohamedan
minor, the minor 's mother has a power to contract loan for the minor, and
the minor is bound to pay the same.
 In Raghva Chariar v. Srinivasa, it was held that if there is a mortgage in
favour of a minor and the minor has advanced whole of the mortgage money,
the contract is enforceable by the minor or some person on his behalf.

Position of a minor in Partnership- Partnership arises out of a contract. In Dharam Vir Vs.
Jagan Nath it was held that it is necessary that the parties to the contract of partnership
should be competent to contract. A minor being incompetent to contract cannot become a
partner. If a minor had a full-fledged partner along with other major person, agreement
would be void and the deed containing their contract would be unenforceable even as
between the other major partners.

 A minor cannot become a principal. In a partnership, every partner is deemed

to be a principal, apart from being an agent as well, but since a minor cannot
be a principal, he cannot become a partner for that reason also.
 A/to sec 30(1)- He can, however, accept benefits. ln accordance with that
position of a minor, Section 30, Indian Partnership Act, declares that a minor
may not be a partner in a firm, but with the consent of all the partners for the
time being, he may be admitted to the benefits of partnership.
 A/to section 30(3), such a minor is not personally liable towards the third
parties for any act of the firm but only his share is liable for such acts.
 A/to section 30(5), On attaining majority, such a minor has an option either
to become a partner or not to become a partner and leave the firm. This
option can be exercised by him within a period of six months from the date of
attaining the majority. But if he did not know that he had been admitted to
the benefits of partnership, then he may exercise the option within six
months of his obtaining the knowledge that he had been admitted to the
benefits of partnership. Such option has to be exercised by him by giving a
public notice If he fails to exercise the option either way, then on the expiry
of the above stated period of six months, he automatically becomes a
partner.
 A/to section 30(7)(a), If a minor, who had been admitted to the benefits of
partnership, becomes a partner, his rights and liabilities as that of a minor
continue up to the date on which he becomes a partner, but he also becomes
personally liable to third parties for all acts of the firm done since he was
admitted a to the benefits of partnership. It means that if a minor on
attaining majority has become a partner, his liability towards third parties is
not only for the acts of the firm which were done after he becomes a partner,
but his liability towards the third parties is retrospective for all the acts of the
firm done since the date of his admission to the benefits of partnership.
 A/to section 30(7)(b), his share in the property and profits of the firm shall
be the share to which he was entitled as a minor.
 A/to section 30(8), In case, on attaining majority he elects not to become a
partner, his rights and liabilities shall continue to be those of a minor as
stated above, up to the date on which he gives public notice. His share will
not be liable to any act of the firm which is done after such notice.

Position of a minor in a contract of agency- A minor is incapable of entering into a contract

because an agreement by a minor is void. Therefore, a minor cannot appoint an agent, or in
other words, a minor cannot become a principal. Section 183, therefore, provides that any
person who is of the age of majority and who is of sound mind, may employ an agent.

 There is no bar to a minor becoming an agent. An agent is merely a

connecting link between his principal and the third persons, and it is they
who should be competent to contract. An agent may not be competent to
contract. Section 184 provides that as between the principal and third
persons, any person (even a minor) may become an agent. Even if a contract
has been created through the agency of a minor, the principal and the third
person would be bound to each other.
 It has been noted above that a minor is capable of becoming an agent for the
purpose of binding the third person and his principal.
Minor's liability when the same act results in a tort as well as breach of agreement - It has
been noted above that an agreement by a minor is void and, therefore, it a minor makes a
breach of an agreement, he cannot be made liable for the same, On the other hand, when a
minor commits a tort, he is liable for that in the same way and to the same extent as an
adult person.

 Sometimes an act done by a minor may be both a breach of contract as well

as the commission of a tort. For example, a minor misrepresents his age and
fraudulently stating that he is of the age of majority takes a loan from
another person.
 Under the law of contract, the minor cannot be asked to repay the loan as a
minor's agreement is void, but he has also committed fraud for which the
liability for the tort of deceit can possibly be there.
 The question which in such cases arises is: Should we make him liable for
fraud? If we do so, it may also mean enforcement of an agreement, which is
void. On this point, the Courts in Burnard Vs. Haggis, have held that
permitting an action in tort Will result in an indirect enforcement of an
agreement, the law will not permit such an action, because "one cannot
make an infant liable for breach of a contract by changing the form of action
to one ex delicto."
 In Jennings v. Rundall, there a minor, who hired a mare for riding, injured her
by overriding. It was held that he could not be made liable for the tort of
negligence because that would mean making him liable for the breach of
contract of bailment.
 Note- However, if the nature of the act is such that the tort committed by the
minor is totally independent of the breach of obligation under the contract,
the action for the same can lie. This may be illustrated by reference to
Burnard V. Haggis. There a minor hired a mare. It was expressly agreed that
the mare will be used only for riding and not "for jumping and larking." The
mare was made to jump over a fence, she was impaled on it and killed. It was
held that the minor was liable for negligently killing the mare as his act was
totally independent of the contract made by him.
  Burnard Vs. Haggis was followed in the case of Ballet v Mingay, there a
minor hired a microphone and an amplifier. Instead of returning the same to
the owner, the minor passed it on to his friend. It was held that the minors
act of passing it on was altogether outside the purview of bailment and,
therefore, the minor could be made liable for detinue.

THE POSITION OF A PERSON OF UNSOUND MIND- According to Section 11, only a person of
sound mind is competent to contract. It means that if a person is of unsound mind, he is
incompetent to contract just like a minor. He is not capable of transferring any property by a
deed of gift, etc., and a transfer by him would be void ab initio."

 What is a sound mind for the purpose of making a valid contract has been
defined by Section 12 as under "A person is said to be of sound mind for the
purpose of making a contract if, at the time when he makes it, he is capable
of understanding it and of forming a rational judgment as to its effect upon
his interests."
 Soundness of mind is required only at the time of making a contract
 It is possible that a person who is usually of unsound mind, but occasionally
of sound mind, may make a contract when he is of sound mind. It means that
even a person who is usually of unsound mind can make a contract during
lucid intervals, i.e., at such intervals when he is of sound mind. Thus, a
patient in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals. Thus, a sane man, who is delirious from fever or who
is so drunk that he cannot understand the terms of a contract or form a
rational judgment as to its effect on his interests, cannot contract whilst such
delirium or drunkenness lasts.
 In the case of Johiri Vs. Mhila Draupati, it was held that when the property
belonging to a lunatic is transferred by his wife, and the transferee has the
knowledge of the fact of the property belonging to a lunatic, the sale would
be invalid from its inception.
Onus to Prove Unsoundness- It is settled law that onus of proving unsoundness of mind of a
person always rests upon him who alleges such state of mind of person.

FREE CONSENT
What is free consent- One of the essentials of a valid contract mentioned in Section 10 is
that the parties should enter into the contract with their free consent. According to Section
14, consent is said to be free when it is not caused by-
i- coercion, as defined in Section 15; or
ii- undue influence, as defined in Section 16; or
 iii- fraud, as defined in Section 17; or
iv- misrepresentation, as defined in Section 18; or
v- mistake, subject to the provisions of Sections 20, 21 and 22
According to section 19 and 19-A, when consent to an agreement is caused by coercion,
undue influence, fraud or misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused. And a/to section 20, if the consent is
caused by mistake, the agreement is void.
COERCION
According to Section 15, "Coercion is the committing, or threatening to commit, any act
forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any
property, to the prejudice to any person whatever, with the intention of causing any person
to enter into an agreement."
Coercion is said to be there where the consent of a person has been caused either by:
i- committing or threatening to commit any act forbidden by the Indian Penal
Code; or by
ii- unlawful detaining, or threatening to detain any property.
Such an act should be to the prejudice of any per son whatever.

i- Act forbidden by the Indian Penal Code- It has been noted above that if a person
commits or threatens to commit an act forbidden by the Indian Penal Code with
a view to obtaining the consent of the other person to an agreement, the
consent in such a case is deemed to have been obtained by coercion. For
instance, A threatens to shoot B if B does not agree to sell his property to A at a
stated price, B's consent in this case has been obtained by coercion.
 For coercion, it is not necessary that the Indian Penal Code should be
applicable at the place where the consent has been so caused Explanation to
Section 15 makes it clear that to constitute coercion, it is immaterial whether
the Indian Penal Code is or is not in force in the place where the coercion is
employed.
 In Chikkan Ammiraju v. Chikkam Seshamma,' the question before the
Madras High Court was that whether coercion could be caused by a threat to
commit suicide. It was held that a threat to commit suicide amounted to
coercion within the meaning of Section 15 of the Indian Contract Act and
therefore the release deed was voidable. It was observed that the threat to
commit suicide could be considered to an act forbidden by the Indian Penal
Code and also the threat to kill oneself was an act where a person was acting
to his own prejudice and also to the prejudice of his wife and the son, and
thus the requirements of section satisfied.
 ii- Unlawful detaining of property- According to Section 15, coercion could also be
caused by the unlawful detaining, or threatening to detain, any property, to the
prejudice of any person whatever, with the intention of causing any person to
enter into an agreement. For example, if an outgoing agent refuses to hand over
the account, books to the new agent until the principal executes release in his
favour, it is coercion.

To the prejudice of a person- Section 15 requires that there should be committing or

threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful
detaining or threatening to detain, any property to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.

 It means that the act causing coercion should not necessarily be directed
against the contracting party, it is enough that the act is to the prejudice of
any person whatever, and with the intention of causing any person to enter
into an agreement. If, for example, A unlawfully detains B’s son, C, in order to
coerce B to enter into the agreement, the case would be covered within this
Section.
 Apart from that, it is also not necessary that the wrongful act causing
coercion should proceed from the party to the contract. Thus, if in order to
coerce a widow to adopt a child, the relatives of the adopted boy do not
allow the dead body of the widow's husband to be taken out of the home
until the adoption is made, this is coercion.
Threat to strike is no coercion- In Workmen of Appin Tea Estate v. Industrial Tribunal, the
demand of the workers for bonus was accepted after a threat of strike. The question which
had arisen was, whether such a decision between the union of the workers and the Indian
Tea Association could be declared void on the ground that there was coercion. It was held
that because of the doctrine of collective bargaining under the Industrial Disputes Act, the
demand of the workers could be backed by a threat of strike. Such a threat was neither a
threat to commit an offence under the Indian Penal Code, nor was it unlawful detaining or
threatening to detain any property and hence it did not amount to coercion and as such the
agreement was valid.
Statutory compulsion is no coercion- When a statute requires a contract to be entered into,
the consent in such a case is not deemed to be caused by coercion, undue influence, fraud,
misrepresentation or mistake. In Andhra Sugars Ltd. v. State of A.P., if any cane grower
offered to sell his sugarcane to a factory in a certain zone, the factory was bound to accept
the offer under the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act,
1961. It was held that the agreement could not be said to be entered into by the lack of free
consent, and there was no coercion either.
Duress" under English Law- Under Common Law, duress consists in actual violence or threat
of Violence to a person. It only includes fear of loss to life or bodily harm including
imprisonment, but not a threat of damage to goods. The threat must be to do something
illegal, i.e., to commit a tort or a crime There is nothing wrong in threat to prosecute a
person for an offence, or to sue him fora tort committed by him. Moreover, duress must be
directed against a party to the contract, or his wife, child, parent or other near relative, and
also caused by the party to the contract, or within his knowledge.

 Threat to goods is no duress- It has been noted above that the Common Law
recognizes only a threat to man’s person and not to his goods to constitute
duress. This is different from the Indian law where Section 15 of the Indian
Contract Act recognizes unlawful detention, or a threat to detain property as
coercion. In the case of Skeate vs Beale, a landlord threatened to sell his
tenant's goods, having a distress of £ 19-10 sh. against the tenant for rent.
The landlord withdrew this distress in exchange of the tenant paying f 3-7 sh.-
6d, immediately and promising to pay the remaining amount. In an action by
the landlord to recover the sum of 16 pounds-2sh.-6d. from the tenant, the
tenant pleaded that this promise had been obtained under duress by
threatening sale of his property in so far as the distress was wrongful. The
tenant plea was rejected and he was made to pay the amount in accordance
with the promise because threat regarding goods cannot constitute duress.
 In India, in case of coercion not only the contract is voidable under
Section 19, but if some money has been paid or goods delivered
by a party to the contract under coercion, the same is recoverable
under Section 72. The Section reads as under "A person to whom
money has been paid, or anything delivered, by mistake or under
coercion, must repay or return it."
 For example, a railway company refuses to deliver up certain
goods to the consignee, except upon the payment of an illegal
charge for carriage. The consignee pays the Sum charged in order
to obtain the goods. He is entitled to recover so much of the
charge as was illegally excessive.
Difference between Coercion and Duress: -
a- Coercion in India means committing or threatening to commit an act forbidden by
the lndian Penal Code. Duress, under Common Law, consists in actual violence or
threat of violence to a person includes doing of an illegal act against a person,
whether it be a crime or a tort. Thus, unlike coercion, duress is not confined to
unlawful acts forbidden by any specific penal law, like the Indian Penal Code in India.
b- In India, coercion can also be there by detaining or threatening to detain any
property. In other words, in coercion, an act may be directed against a person or his
property. In England, duress is constituted by acts or threats against the person of a
man and not against his property.
c- In India, coercion may proceed from a person who is not a party to the contract, and
1t may also be directed against a person who, again, may be a stranger to the
contract. In England, duress should proceed from a party to the contract and is also
 directed against the party to the contract himself, or his wife, parent, child, or other
near relative.

UNDUE INFLUENCE
If the consent of a party of the contract has been obtained by undue-influence, the consent
is not the free consent which is needed for the validity of a contract. If the consent has been
caused by undue influence. The contract is voidable at the option of the party whose
consent has been so obtained.
Section 16 defines Undue Influence as under:
“Undue influence” defined- (1) A contract is said to be induced by “undue influence” where
the relations subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other and uses that position to obtain an unfair advantage over
the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person
is deemed to be in a position to dominate the will of another—
a) where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or
b) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was not induced
by undue influence shall lie upon the person in a position to dominate the will of the other.
Essentials of undue influence- In order to constitute undue influence, it is necessary to
prove that: -
i- the relations subsisting between the parties are such that one of the parties is in
a position to dominate the will of the other, and
ii- such a person uses his dominant position to obtain an unfair advantage over the
other.
If the necessity to sell property could be proved and there was no evidence that the
purchaser was able to dominate the will of the seller, and apart from that the sale
consideration was reasonable and adequate, it was held that the agreement was not
vitiated by fraud or undue influence.
Person in dominant position and obtaining of unfair advantage- In the following cases, a
person is deemed to be in a position to dominate the will of another: -
a) where he holds a real or apparent authority over the other, or,
b) where he stands in a fiduciary relation to the other; or,
c) where he makes a contract with a person whose mental capacity is temporarily
or permanently affected by reason of age, illness, or mental or bodily distress.

a- Real or apparent authority- If a person has an authority over the other contracting
party, it is expected that he would not abuse that authority to gain an undue
advantage from the other. An employer may be deemed to be having authority over
his employee, an income-tax authority Over the assessee, police or a judicial officer
over the accused, or a licensing authority over the licensee.
b- Fiduciary relation- Fiduciary relation means a relationship of confidence and trust.
When a person reposes confidence in the other, it is expected that he will not be
betrayed if a person betrays the confidence and trust reposed in him and gains an
unfair advantage over the other party in any contract, the Suffering party has an
option to avoid the contract.
- Examples of fiduciary relationship are solicitor and client, trustee and cestui
que trust (beneficiary), spiritual adviser and devotee, medical attendant and
patient," parent and child, husband and wife, master and servant, creditor
and debtor," principal and agent, landlord and tenant, lover and beloved, and
guardian and ward.
- In cases of fiduciary relationship, if the person in a dominant position has
gained undue advantage in any transaction, the burden of proof lies on such
a person to show that the transaction was without undue influence, and in
the absence of such a proof the transaction is liable to be cancelled.
 The rule regarding the burden of proof in such cases is contained in
Section 111, Indian Evidence Act, 1872, which reads as under "Where
there is a question as to the good faith of a transaction between
parties, one of whom stands to the other in a position of active
confidence, the burden of proving the good faith of the transaction is
on the party who is in a position of active confidence.
c- Person in mental or bodily distress- A person is deemed to be in a position to
dominate the will of another also in a situation, where he makes a contract with a
person whose mental capacity is temporarily or permanently affected by reason of
age, illness, or mental or bodily distress. For example, A, a man enfeebled by disease
or age, is induced, by B's influence over him as his medical attendant, to agree to pay
B an unreasonable sum for his professional services. B employs undue influence.
- In Merci Celine D'Souza v. Renie Fernandez, the plaintiff, a mentally infirm
person, incapable of protecting his interest and totally dependent on the
defendants for his existence, gifted his property in favour of the defendants.
It was found that the defendants had obtained an unfair advantage and the
gift deed was not attested by the, two witnesses as required by law. It was
held that the settlement deed of the property was liable to be set aside on
the ground of undue influence.
When there is no domination of will- Every transaction, where the terms are to the
disadvantage of one of the parties, need not necessarily be considered to be
unconscionable. For example, A applies to a banker for a loan at a time when there is
stringency in the money market. The banker declines to make the loan except at an
unusually high rate of interest. A accepts the loan on these terms/This is a transaction in the
ordinary course of business, and the contract is not induced by undue influence.
When the person taking the advantage in a transaction was not in a dominant position
over the other, the presumption of undue influence will not be raised if the transaction
appears to be unconscionable.
- In Shrimati v. Sudhakar R, Bhatkar, the plaintiff was an illiterate lady
managing her properties. The defendant was living in a part of the house
owned by the plaintiff as a tenant. He treated the plaintiff as his mother He
persuaded her to gift her property to him, which she did. The gift deed was
registered in his favour. It was held that mere persuasion by the plaintiff to
the defendant to gift the property did not mean undue influence. There was
nothing to show that he was able to dominate her will. The transaction was
held to be valid as there was no undue influence in this case. Merely because
the parties were nearly related to each other or merely because the donor
was old or of weak character, no presumption of undue influence can arise.
Effect of undue influence- Section 19-A of the Indian Contract Act, 1872, declares that when
consent to an agreement is caused by undue influence, the agreement is a contract voidable
at the option of the party whose consent was so caused.
Second para to Section 19-A incorporates the following provisions: "Any such contract may
be set aside absolutely, or if the party who was entitled to avoid it has received any
benefit thereunder, upon such terms and conditions as to the Court may seem just.” For
example, A, a money-lender, advances Rs. 100 to B, an agriculturist, and, by undue influence
induces B to execute a bond for Ks. 200 with interest at 6 per cent per month. The Court
may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just.

FRAUD
When the consent of a party to the contract has been obtained by fraud, the consent is not
free consent which is necessary for the formation of a valid contract. ln Such a case the
contract is voidable at the option of the party whose consent has been so obtained. Fraud
or deceit is also a tort, for which an action for damages can also lie.
Section 17 defines fraud as follows:
“Fraud” defined- “Fraud” means and includes any of the following acts committed by a
party to a contract, or with his connivance, or by his agent, with intent to deceive another
party thereto of his agent, or to induce him to enter into the contract:
 1) the suggestion, as a fact, of that which is not true, by one who does not believe it to
be true;
2) the active concealment of a fact by one having knowledge or belief of the fact;
3) a promise made without any intention of performing it;
4) any other act fitted to deceive;
5) any such act or omission as the law specially declares to be fraudulent.
Fraud and justice never dwell together. Fraud is a conduct either by letter or words, which
includes the other person or authority to take a definite determinative stand as a response
to the conduct of the former either by words or letter. Fraud and deception are
synonymous.
In Derry v. Peek, what constitutes fraud was described as under: "Fraud is proved when it
is shown that the representation has been made (i) knowingly, or (ii) without belief in its
truth, or (iii) recklessly, carelessly whether it be true or false."
In State of Andhra Pradesh Vs. T Suryachandra Rao, the court explained- "By "fraud" is
meant an intention to deceive; whether it is from any expectation of advantage to the party
himself or from the ill will towards the other is immaterial. The expression "fraud" involves
two elements, deceit and injury to the person deceived. Injury is something other than
economic loss, that is, deprivation of property, whether movable or immovable or of money
and it will include any harm whatever caused to any person in body, mind, reputation or
such others."
In case of S.PC. Naidu v. Jagannath, Fraud, the Court said, "is an act of deliberate deception
with the design of securing something by taking unfair advantage of another. It is a
deception in order to gain by another's loss.
According to Section 17, following are the essentials of fraud: -
i- There should be a false statement of fact by a person who himself does not
believe the statement to be true.
ii- The statement should be made with a wrongful intention of deceiving another
party thereto and inducing him to enter into the contract on that basis.

i- False statement of fact [Section 17(1)]- In order to constitute fraud, it is

necessary that there should be a statement of fact which in not true Mere
expression of opinion is not enough to constitute fraud. Similarly, if A intending
to deceive B, falsely represents that five hundred maunds of indigo are made
annually at A's factory, and thereby induces B to buy the factory, the contract is
voidable at the option of B.
- Representation as to untrue facts may be made by positively stating certain
facts or by conduct. In Edington v. Fitzmaurice, a company was in great
financial difficulties and needed funds to pay some pressing liabilities, The
company raised the amount by issue of debentures. While raising the loan,
the directors stated that the amount was needed by the company for its
 development, purchasing assets and completing buildings. It was held that
the directors had committed a fraud.
Mere silence is no fraud- Mere silence, however, as to facts is no fraud.
Explanation to Section 17, in this connection, incorporates the provision. A
contracting party is not obliged to disclose each and everything to the other
party. If a person is to sell his goods, he is under no duty to disclose the defects in
his goods. If he makes false statement as to the quality of his goods, it would be
fraud, but if he merely keeps silence as regards the defects in them, there is no
fraud. In case of sale of goods, the rule is caveat emptor, i.e., buyer beware,
which means that it is the duty of the buyer to be careful while purchasing the
goods.
- If A sells, by auction, to B, a horse which A knows to be unsound and A says
nothing to B about the horse's unsoundness. This is not fraud in A. Similarly,
if A and B, being traders, enter upon a contract. A has private information of
a change in prices which would affect B's willingness to proceed with the
contract. A is not bound to inform B.
- In Keates v. Lord Cadogan, A let his house to B which he knew was in ruinous
condition. He also knew that the house is going to be occupied by B
immediately. A did not disclose the condition of the house to B. It was held
that he had committed no fraud.
Exceptions to mere silence is no fraud- Although as a general rule, mere silence
or non-disclosure of facts do not amount to fraud, but in some exceptional cases
keeping silence may be deemed to be an act of deception. Explanation to
Section 17, which mentions the rule that mere silence is not fraud also mentions
the following two exceptions-
a- When there is duty to speak, keeping silence is fraud.
b- When silence is, in itself, equivalent to speech, such silence is a fraud.

a- Duty to speak- (Contracts Uberrima Fides- utmost faith)- When the

circumstances of the case are such that, regard being had to them, it is the
duty of the person keeping silence to speak, keeping silence in such a case
amount to fraud. When there is a duty to disclose facts, one should do so
rather than to remain silent. Certain Contracts are contracts uberrima fides.
i.e., contracts of utmost good faith. In such a case, it is supposed that the
party in whom good faith is reposed would make full disclosures and not
keep silent. Suppression of truth in such cases is equivalent to suggestion of
falsehood. For example, contracts of insurance are contracts uberrima fides
(of utmost good faith). Since some of the facts may be in the sole knowledge
of the insured, he must make full disclosures to the insurer.
 In P. Sarojam v. L.I.C. of India, the assured was suffering from a
serious heart ailment. The assured gave false answers to the
 questions in the proposal form so as to conceal his ailment, and
induced the LI.C, to accept the proposal. He died of heart ailment
within a few months after the date of the policy. It was held that in
view of the false answers to the questions given by the assured in the
proposal form, the contract of insurance was vitiated, and the L.I.C.
was, therefore, entitled to repudiate the policy and decline the
payment of the claim thereunder.
 Non-disclosure of facts not-material- Even in case of insurance
contracts, where duty to disclose is generally there, the non-
disclosure of the facts, which are not material and have no bearing on
the risk undertaken by the insurer, does not render the agreement
voidable.
 Marital Status-Non-disclosure- Non disclosure of material facts
relating to parties to marriage has been held to constitute fraud
within the meaning of Section 17 of the Indian Contract Act, 1872.
 In Kiran Bala v. Bhaire Prasad Srivastava, first marriage of the
appellant, Kiran Bala, had been annulled on the ground that
she was of unsound mind at the time of that marriage. She
was married to the respondent, Bhaire Prasad Srivastava, the
second time. The facts of the annulment of the first marriage
on the ground that she was an idiot were not disclosed to the
bridegroom either by the girl or her parents. It was held that it
was not the duty of the bridegroom to find out these facts, but
it was the duty of the girl or her parents not to conceal these
facts. Consent of the bridegroom was held to have been
obtained by fraud, and the second marriage of the appellant
with the respondent was, therefore, annulled by a decree or
nullity under Section 12(1)(c) of the Hindu Marriage Act, 1955.
 In Rajinder Singh v. Pomilla, the Delhi High Court has held that
premarital status of a party to a marriage was a material fact,
which must be disclosed. In that case, the husband, who was a
divorcee, did not disclose the fact of his previous marriage to
his wife and other relatives. It was held that the consent to
marriage had been obtained by fraud and, therefore, the
marriage was liable to be annulled under Section 12 (1)c) of
the Hindu Marriage Act.

b- Silence being equivalent to speech- Sometimes keeping silent as to certain

facts may be capable of creating an impression as to existence of a certain
situation. In such a case, silence amounts to fraud. For example, B says to A-
if you do not deny it, I shall assume that the horse is sound." A says nothing.
Here As silence is equivalent to speech. In this case, the relation between the
parties would make it A’s duty to tell B if the horse is unsound.
Means of discovering the truth- In cases where silence is fraudulent, but the
other party can discover the truth by ordinary diligence, he cannot avoid the
contract. In this connection, the provision in the Indian Contract Act" is as
under "if such a consent was caused by misrepresentation or by silence,
fraudulent within the meaning of Section 17, the contract, nevertheless, is not
voidable, if the party whose consent was so caused had the means of discovering
the truth with ordinary diligence."
- In Shri Krishan v. Kurukshetra University, Shri Krishan, a candidate for the
LL.B. Part I examination of the University did not complete the prescribed
number of lectures which could make him eligible for appearing in the
examination. He, however, filled the examination form for appearing in the
examination without mentioning the fact that his attendance was short. The
University authorities could have discovered the truth by proper scrutiny. The
University wanted to cancel the candidature of the candidate on the ground
of fraud. It was held that there was no fraud in this case as the candidate had
just kept silent as to certain facts and further, the University authorities could
have discovered the truth with ordinary diligence.

Active concealment (Section 17(2))- When there is an active concealment of a

fact by one having knowledge or belief of the fact, that can also be considered to
be equivalent to a statement of fact and amount to fraud. By an active
concealment of certain facts, there is an effort to see that the other party is not
able to know the truth and he is made to believe as true which is in fact not so.
- Illustrations- B, having discovered a vein of ore on the estate of A, adopts
means to conceal, and does conceal, the existence of the ore from A.
Through A’s ignorance, B is enabled to buy the estate on an undervalue. The
contract is voidable at the option of A.
- Illustration- A is entitled to succeed to an estate at the death of B. B dies. C
having received intelligence of B's death, prevents the intelligence reaching A
and thus induces A to sell him his interest in the estate. The sale is voidable at
the option of A.

Promise made without any intention to perform it [Section 17(3)]- When a

person makes a promise, there is deemed to be an undertaking by him to
perform it. If there is no such intention when the contract is being made, it
amounts to fraud. Thus, if a man takes a loan without any intention to repay, or
when he is insolvent, or purchases goods on credit without any intention to pay
for them, there is fraud If, however, there is no such wrongful intention at the
 time of making of the contract, but the promisor does not perform the contract,
it does not amount to fraud.
Any other act fitted to deceive [Section 17(4)]- We have already noted that
either a false statement of fact, or active concealment, or a promise made
without any intention to perform it have been declared to be fraudulent
according to clauses (1), (2) and (3) respectively, to Section 17. Clause (4) further
provides that "any other act fitted to deceive" will also amount to fraud. This
clause is general and is intended to include such cases of fraud which would
otherwise not come within the purview of the earlier three clauses.
Any act or omission which the law declares as fraudulent [Section 17(5)]-
According to Section 17(5), fraud also includes any such act or omission as the
law specially declares to be fraudulent. In some cases, the law requires certain
duties to be performed, failure to do which is expressly declared as a fraud. For
instance, Section 55, Transfer of Property Act, 1882 declares certain kinds of
omissions on the part of the seller or the buyer as fraudulent.
ii- Wrongful intention- In order to constitute fraud, it is necessary hat a person
should intentionally make a false statement with an intent to deceive another
party thereto to induce him to enter into the contract. If the intention to deceit
the other party is absent, there is no fraud. lt may, in such a case be a mere
misrepresentation as defined in Section 18 of the Act.
Contract on the basis of false statement- It is necessary that the false statement
must have been made to induce the other party to enter into the contract. In
case of fraud, the contract is voidable at the option of the party whose consent
has been so obtained.
- If there is a patent defect in an article supplied to a buyer and the buyer
having an opportunity to examine the same, neglects to do so, the supplier
cannot be considered guilty of fraud for not pointing out the defect.
- If a person, while making a contract, clearly states that the other party should
enter into the contract on his own responsibility, he cannot be guilty of fraud.
In Ward v. Hobbs," the seller of pigs sold them without telling the buyer that
they had been suffering from typhoid fever. He, however, mentioned that the
pigs were being sold "with all fault". The disease was conveyed to the other
pigs of the buyer also and many of his pigs died because of that. It was held
that there was no false statement on which the buyer could be deemed to
have relied and, therefore, there was no fraud on the part of the seller.
Statement should be meant for the party misled- It is necessary that the misleading
statement should be meant for the party who is misled.
Proof of Fraud- Fraud is essentially a question of fact, and the person who alleges that has
to prove the same. If the plaintiff seeks the annulment of the decree on the ground of fraud
or misrepresentation, he has to specifically plead the same and mention the circumstances
which can lead to the conclusion of the existence of fraud or misrepresentation.
 MISREPRESENTATION
An innocent misstatement or false statement is known as misrepresentation. Section 18 of
the Indian Contract Act, 1872 defines misrepresentation" as under:
“Misrepresentation” defined- “Misrepresentation” means and includes-
1) the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;
2) any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or any one claiming under him; by misleading another to his
prejudice, or to the prejudice of any one claiming under him;
3) causing, however innocently, a party to an agreement, to make a mistake as to the
substance of the thing which is the subject of the agreement.
Positive assertion, i.e., an explicit statement of fact by a person of that which is not true,
though he believes it to be true amounts to Misrepresentation. There should be a false
statement made innocently, i.e., without any intention to deceive.
When there is a breach of duty whereby the person making a false statement gains some
advantage at the cost of the other party, and the statement though false is made without an
intention to deceive, it also amounts to misrepresentation.
If one party, acting innocently, causes another party to make a mistake as to the substance
of the thing which is the subject of the agreement, there is said to be misrepresentation.
In case of misrepresentation the person making the statement is innocent, and he makes
the statement without any intention to deceive the other party. His statement is false
although he himself believes that the same is true. It is known as innocent
misrepresentation as against fraud, where the person making a false statement knows that
the same is false but makes the same intentionally to deceive the other party and make him
enter into an agreement which he would not have done otherwise. For instance, A sells a
horse to B which is unsound but A himself does not know about this fact. He tells B that the
horse is sound. There is misrepresentation.

Fraud and Misrepresentation distinguished

1- Both in fraud and misrepresentation the statement is false, but in fraud the false
statement is made by a person, who knows that it is false or does not believe in its
truth, whereas in misrepresentation the person making the, statement believes the
same to be true.
2- In fraud, the intention of the person making a false statement is to deceive the other
party and induce him to enter into the contract on that basis. There is no such
wrongful intention in case of misrepresentation. It has been noted in Derry v. Peek,'
 that when the statement, although false, was made without any intention to
deceive, it did not amount to fraud.
3- According to Section 19, when the consent of a party to the contract has been
obtained either by fraud or by misrepresentation, the contract is voidable at the
option of the party whose consent has been so obtained. In other words, the
contractual remedy for both is the same. In case of fraud, however, there is an
additional remedy available to the victim of fraud, i.e., an action for damages under
the law of torts, because fraud is also a tort. No remedy under law of torts is
available if it is an innocent misrepresentation.
4- When there is misrepresentation by one party, the Contract is voidable at the option
of the other party, but no Such remedy is available if the party seeking to avoid the
contract had the means of discovering the truth with ordinary diligence, However,
except in case of fraudulent silence, a person obtaining the consent of the other
party by fraud cannot be allowed to say that the other party could have discovered
the truth with ordinary diligence.

Effect of flaw in consent- Section 19 deals with the effect of flaw in consent caused by
coercion, misrepresentation and fraud and Section 19-A when the consent has been
obtained by undue influence. The relevant provisions contained in these Sections are as
under
Section 19- Voidability of agreements without free consent- When consent to an
agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.
A party to a contract whose consent was caused by fraud or misrepresentation, may, if he
thinks fit, insist that the contract shall be performed, and that he shall be put in the
position in which he would have been if the representations made had been true.
Section 19A- Power to set aside contract induced by undue influence- When consent to an
agreement is caused by undue influence, the agreement is a contract voidable at the option
of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if the party who was entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as to the
Court may seem just.
A/to section 19 when the consent of a party to the contract has been caused by coercion,
misrepresentation or fraud, the contract is voidable at the option of such party. In case of
fraud, apart from avoiding the contract, the person whose consent has been so caused
may also bring an action for damages because fraud is also a tort. Ac/to section 64, When
a person at whose option the contract is voidable rescinds it, he is bound to restore the
benefit, if any, received by him under such a contract.
A/to section 19-A, in case of undue influence also, the contract is voidable at the option of
the party whose consent has been so caused. Any such contract may be set aside either
absolutely or, if the party who was entitled to avoid it has received any benefit thereunder,
upon such terms and conditions as to the court may seem just.
Thus, in case of the flaw in consent one party or the other may have either
i- A right of rescission of the contract, i.e., the contract may be voidable at his
option, or
ii- A right to claim compensation.

i- Right of Rescission of the contract- It has been noted above that when the
consent of a party to the contract has been obtained by coercion,
misrepresentation, fraud or undue influence, rescission of the contract is the
common remedy available in all these cases. The party entitled to rescind a
voidable contract may do so by a notice to the other party, or taking such steps
as may be necessary under the circumstances.

A voidable contract will be avoided only if the party having a right to do so avoids
it. If instead, he affirms the contract then, the contract will be binding on both
the parties. In Car and Universal Finance Co. Ltd. v. Caldwell, the purchaser of a
car committed a fraud against the seller by making the payment through a
cheque which was dishonoured. The seller wanted to avoid the contract and
regain the possession from the buyer, but the buyer was not traceable. The seller
immediately informed the police and also the Automobile Association about the
same. Meanwhile, the purchaser of the car sold it further to A, who had been
acting in good faith. The question was whether A had purchased it after
rescission of the contract by the seller, and if that was so, then A could not have
a good title to the car. It was held that even though the seller could not
communicate the rescission to the purchaser himself, information to the police
and the Automobile Association had resulted in the rescission of the contract
and, therefore, A did not get a good title to the car.

Limits to the right of rescission- The right of rescission of the contract is subject
to the following limitations. In such situations, the law may not permit the
exercise of the right of rescission of contract.
a- When the contract is affirmed- There are two alternatives open to a party
having a right to avoid a contract, either to rescind it, or to affirm it. If the
contract is rescinded, it becomes void and unenforceable. On the other hand,
if it is affirmed, then it is a valid and binding contract against both the parties.
- The affirmation of a contract may be made either expressly or implicitly or
it could be inferred from a person's conduct. In Long v. Lloyd, A sold his lorry
to B by making false representation that the lorry was in "excellent
condition". On the lorry's first journey, B discovered serious defects in the
lorry. He did not rescind the contract, but instead accepted. A’s offer of half
 the cost of repairs. The lorry completely broke in the next Journey and then B
wanted to rescind the contract. It was held that B, by accepting the offer of
sharing the cost of repairs by A had affirmed the contract and he had now no
right to rescind it.

b- Lapse of time- A person having a right to avoid the contract must do so

within a reasonable time. Failing to exerc1se this right in time may mean
affirmation of the contract. If a person transfers his property to another
person while under a spiritual influence, but does not take steps to take back
the property for six years after such influence has ceased, the right to
retrieve the property comes to an end. Similarly, if a person purchasing a
picture on the basis of an innocent but false representation that it has been
painted by a particular renowned artist, wants to avoid the contract after five
years of its purchase, the rescission would not be allowed.
c- Acquisition of a right by a third party- The right of rescission may be gone if
before the contract has been rescinded some third party has acquired a right
in the subject-matter of the contract. There is a possibility that so long as the
contract has not been avoided, there could be creation of an interest in
favour of a third party. For example, in a contract of sale of certain goods
between A and B, A's consent has been obtained by misrepresentation and
so he has a right to avoid the contract. Before A avoids the contract, B sells
those goods to C, while C is acting in good faith and has no notice of the
defective title of B. C has acquired a good title to the goods and A's right of
avoiding the contract and taking back the goods has come to an end.
d- Inability to restore the goods- If restitution in integrum is not possible, there
can be no rescission. For example, A purchases a suit piece from B under a
contract voidable at A's option. A gets the piece converted into a suit. A's
right to avoid the contract cannot be exercised because he will not be in a
position to return the 8uit piece. In a contract of sale of goods if the buyer
has a right to avoid the contract because of breach of a condition, the buyer's
right of rejecting those goods comes to an end if the buyer has accepted
those goods. In such a case, the buyer's only remedy is to claim
compensation by treating the breach of condition as a breach of warranty.
 Section 13(2), (Indian) Sale of Goods Act, 1930 makes the following
provisions in this regard "Where a contract of sale is not severable
and the buyer has accepted the goods or part thereof, the breach of
any condition to be fulfilled by the seller can only be treated as a
breach of warranty and not as a ground for rejecting the goods and
treating the contract as repudiated, unless there is a term of the
contract, express or implied, to that effect."
 In Wallis v. Pratt, the buyer purchased seeds described as "English
sainfoin seeds". The seeds supplied by the seller were of an inferior
and a different variety known as "Giant sainfoin seeds". At the time of
supply of seeds, the buyer could not make out the defect as the two
 varieties were indistinguishable. The defect could be known only after
the seeds had been sown and the crop was ready. The buyer could
claim compensation only. There was no chance of avoiding the
contract and rejecting the goods.
e- Damages in lieu of rescission of contract- The Misrepresentation Act, 1967
(England) has given power to the Courts to grant damages in lieu of
rescission, if in the opinion of the Court it would be just and equitable to do
so. The remedy of damages in lieu of rescission provided here is in respect of
innocent misrepresentation.

ii- Right to claim compensation- Apart from the remedy of rescission of contract,
the remedy of damages or compensation may also sometimes be available to the
parties to the contract, in cases where the consent of one of the parties has been
obtained by coercion, misrepresentation, fraud or undue influence
1- Damages in cases of fraud- It has already been noted that fraud is a tort.
Therefore, a party whose consent has been obtained by a fraudulent
statement, may seek rescission of the contract as a contractual remedy and
may also claim damages under the law of torts.
2- Damages in case of non-fraudulent misrepresentations- It has already been
noted that the (English) Misrepresentation Act, 1967 empowers the court in
case of misrepresentation to allow damages in lieu of rescission of a contract.
3- Duty of a party rescinding the contract to pay compensation- Sometimes a
party entitled to rescind a voidable contract may have already received some
benefit under the contract. Equity demands that if he avoids the contract, he
should also restore the benefit which he may have received from the other
party.
 Section 64 incorporates the following provision in this regard:
"When a person at whose option a contract is voidable
rescinds it, the other party thereto need not perform any
promise therein contained in which he is promisor. The party
rescinding a voidable contract shall, if he has received any
benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from
whom it was received.”
For example, A, a money-lender, advances Rs. 100 to B, an agriculturist, and
by undue influence, induces B to execute a bond for Rs. 200 with interest at 6
per cent per month. The Court may set aside the bond, ordering B to repay
Rs. 100 with such interest as may seem just.

MISTAKE
When the consent of the parties to the contract is caused by mistake, it is not free consent
which is needed for the validity of a contract, One, or both, of the parties may be working
under some misunderstanding or misapprehension of some fact relating to the agreement.
If such a misunderstanding or misapprehension had not been there, probably they would
not have entered into the agreement Such contracts are said to have been caused by
mistake.
Mistake may work in two ways:
i- Mistake in the mind of the parties is such that there is no genuine agreement at
all. There may be no consensus ad idem, i.e., the meeting of the two minds, i.e.,
there may be absence of "consent" as defined in Section 13 and thus no genuine
agreement is constituted between the parties.
ii- There may be a genuine agreement, but there may be mistake as to a matter of
fact relating to that agreement.

I. Mistake, when there is no consensus ad idem or there is absence of consent-

For a valid contract both the parties should have given their consent and the
consent should also be free. According to Section 13: Two or more persons do
not agree to the same thing in the same sense, there is deemed to be no
consent on their part. In other words, there may be absence of meeting of minds
of the parties, or there may be no consensus ad idem. In such cases there arises
no contract which can be enforced.
- In Raffles v. Wichelhaus, the buyer and the seller entered into an agreement
under which the seller was to supply a cargo of cotton to arrive "ex Peerless
from Bombay". There were two ships of the same name, i.e., Peerless and
both were to sail from Bombay, one in October and the other in December.
The buyer had in mind Peerless sailing in October, whereas the seller thought
of the ship sailing in December. The seller dispatched cotton by December
ship but the buyer refused to accept the same. In this case, the offer and
acceptance did not coincide and there was no contract and, therefore, it was
held that the buyer was entitled to refuse to take delivery.

II. Mistake as to a matter of fact essential to the agreement- Section 20 deals with
such mistake. It provides "20. Agreement Void where both parties are under
mistake as to the matter of fact- Where both the parties to an agreement are
under mistake as to a matter of fact essential to the agreement, the agreement is
void.

Illustrations- A agrees to sell to “B” a specific cargo of goods supposed to be on

its way from England to Bombay. It turns out that, before the day of the bargain,
the ship conveying (carrying) the cargo had been cast away and the goods lost.
Neither party was aware of these facts. The agreement is void.
Illustrations- A agrees to buy from 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.

When the type of mistake contemplated in Section 20 is present in an

agreement, the agreement is void. Section 20 requires that
1- Both the parties to the contract should be under a mistake; and
2- Mistake should be as regards a matter of fact;
3- The fact regarding which the mistake is made should be essential to the
agreement.

1- Mistake of both the parties- Section 20 makes the agreement void if

there is mistake on the part of both the parties. For example, A and B
make an agreement for the sale and purchase of a particular horse.
Unknown to both the parties, the horse was dead at the time of the
agreement. Since both the parties are under a mistake, the agreement is
void, If the mistake is a unilateral one, i.e., only one of the parties is
having some mis-impression, the validity of the agreement is not affected
thereby.
o This is made clear by Section 22, which reads as under "22. Contract
caused by mistake of one party as to matter of Fact- A contract is not
voidable merely because it was caused by one of the parties to it
being under a mistake as to the matter of fact."
o In Ayekam Angahal Singh v. The Union of India, there was an auction
for the sale of fishery rights and the plaintiff was the highest bidder
making a bid of Rs. 40,000. The fishery rights had been auctioned for 3
years. The rent, in fact, was Rs. 40,000 per year. The plaintiff sought
to avoid the contract on the ground that he was working under a
mistake and he thought that he had made a bid of Rs. 40,000, being
the rent for all the three years. It was held that since the mistake was
unilateral, the contract was not affected thereby and the same could
not be avoided.

2- Mistake of fact- There should be mistake of fact and not of law The
validity of the contract is not affected by mistake of law Regarding
mistake of law the provision contained in Section 21 is as follows:
o Section 21- Effect of mistake as to law- A contract is not voidable
because it was caused by a mistake as to any law in force in India; but
a mistake as to a law in force in India has the same effect as a mistake
of fact."
 o Illustration- A and B make a contract grounded on the erroneous
belief that a particular debt is barred by the Indian Law of Limitation;
the contract is not voidable."
o Everyone is supposed to know the law of the land. Ignorance of law is
no excuse. If a person wants to avoid the contract on the ground that
there was a mistaken impression in his mind as to the existence of
some law while he entered into the contract, he will get no relief.

3- Mistake essential to the agreement- It is also necessary that the fact

regarding which the mistake is made should be essential to the
agreement. Whether the mistake is regarding a fact essential to the
agreement or not depends on a particular contract.

I- Mistake as to the existence of the subject-matter- If both the parties

to a contract believe in the existence of the subject-matter, which in
fact does not exist, the agreement would be void. The reason is that if
the subject-matter of the contract has already perished, there is
nothing regarding which the contract is being made. For example, in a
contract for the sale of specific cargo, if the ship carrying the same has
been cast away and the goods lost,' or the sale is of a specific horse,
which has already died? the agreement is void, if neither of the
parties was aware of the actual facts.
o Such an agreement is void for another reason also, i.e.,
performance of the agreement is impossible. Section 56
declares that an agreement to do an act impossible in itself is
void.
o Section 7 of the (Indian) Sale of Goods Act, 1930 also declares
that if there is a contract for the sale of specific goods but they
are non-existent at the time of the contract, the contract is
void.
o In Galloway v. Galloway, a man and a woman executed a
separation deed, both of them working under a common
mistaken impression that they were married to each other.
Since the fact of marriage was non-existent, the deed was held
void.
Mistake regarding quality of the subject-matter only- If the parties to
the contract are not mistaken as to the subject-matter, but only
regarding its quality, i.e., when the subject-matter has been clearly
identified although its quality has not been, the agreement would be
valid. In Smith v. Hughes, there was sale of a parcel of oats by sample
by A to B. B refused to accept the oats on the ground that he thought
that the oats were old when in fact they were new. A sued B for
 damages for non-acceptance. lt was held that there was no mistake as
to the identity of the subject-matter, but merely as to the age of oats.
II- Mistake as to the possibility of performance of the contract- It has
already been noticed that if contrary to the belief of the parties the
subject-matter of the contract is not in existence, the agreement is
void. If, for example, there is a contract for the sale of a horse, which
has already died, the agreement is void. One of the reasons for such
an agreement being void is that it is not possible to deliver and
transfer a thing which Is not in existence.
o In Sheikh Brothers Ltd. v. Ochsner, A contracted with B to
grant him a licence to cut, process and manufacture Sisal
growing on A's land. B agreed that he would proces8 sisal and
deliver to A, minimum 50 tons of sisal fibre, manufactured by
him, every month. It was found that the leaf potential of the
land was insufficient for fulfilling contractual requirement, i.e,
producing 50 tons of sisal fibre per month. As such, the
performance of promise by B was physically impossible. The
Privy Council decided the case on the basis of the provisions
contained in Section 20, Indian Contract Act and held that the
agreement was void because of mutual mistake.

III- Mistake as to title- Sometimes the parties may be labouring under a

mutual mistake as to the title to the goods sold. The buyer may
already be the owner of what the seller purports to sell. In fact, there
is nothing which the seller has to transfer. The transfer of ownership
is intended but the same is impossible as the buyer is already the
owner. Such an agreement is void due to mutual mistake.
o In Cooper v. Phibbs," A agreed to take a lease of a fishery from
B. Unknown to both the parties, A was already tenant for life
of the fishery rights and B had no title to the same. The
agreement was set aside on the ground of common mistake.
IV- Mistake as to promise- If there is a mistake because of which the
promise does not reflect the real intention which was there in the
proposed agreement, such an agreement would be void.

V- Mistake as to the identity of the parties- If I intend to enter into

contract with A for the purchase of goods from him and I place the
order accordingly, B cannot accept this offer, and if B supplies me the
goods, I have no obligation to pay to him because never wanted to
make any contract with him.
o In Boulton V. Jones, Jones who used to have business dealings
with Brocklehurst, sent an order to Brocklehurst for the
purchase of certain goods. By the time this order reached,
 Brocklehurst had sold his business to Boulton. Boulton
supplied the goods to Jones, for which the order had actually
been placed with Brocklehurst. Jones refused to pay the price
of the goods to Boulton on the round that he had never placed
an order with Boulton and had never tended to make a
contract with him. Under these circumstances, it was holding
that Jones had never made any contract with Boulton and he
was not hound to pay for the goods.

VOID AGREEMENTS
There are some agreements which have been specifically declared as void by the Indian
Contract Act. Even if such agreements satisfy the conditions of a valid contract, they are not
enforceable. The agreements which have been declared void by the Act are as follows-
1- Agreement of which the consideration or the object is not lawful (Sections 23 and
24).
2- Agreement without consideration. (Section 25).
3- Agreement in restraint of marriage. (Section 26).
4- Agreement in restraint of trade. (Section 27).
5- Agreement in restraint of legal proceedings. (Section 28).
 6- Agreement which is ambiguous and uncertain. (Section 29).
7- Agreement by way of wager. (Section 30).
8- Agreement to do an impossible act. (Section 56).

AGREEMENT IN RESTRAINT OF MARRIAGE

AGREEMENT IN RESTRAINT OF MARRIAGE (SEC. 26)- According to Section 26, every
agreement in restraint of the marriage of any person, other than a minor, is void. An
agreement which restricts a person's freedom to marry, or to marry any person of his choice
is against public policy and is void.
 In Lowe v. Peers,' the promise by a man in favour of Mrs. Catherine Lowe that he
would not marry any person other than Mrs. Lowe, and a further promise to pay
Mrs. Lowe a sum of £ 2,000 if he married somebody else was held to be against
public policy and void.
 Whether the agreement puts a total restraint on the right to marry or only a
partial restraint imposing a restriction on marrying for a certain period, or
marrying a certain person, the agreement is void.
 Lafatunnissa Vs. Shaharbanu, it was held that an agreement containing a
condition in a wakf that a widow would lose her right of maintenance on re-
marriage, is not an agreement in restraint of marriage.
 Similarly, Rao rani Vs. Gulab Rani, it was held that agreement between two co-
widows that any one of them would lose her right to the deceased husband's
estate on re-marriage, is not a restraint on the right of re-marriage.

AGREEMENT IN RESTRAINT OF TRADE

AGREEMENT IN RESTRAINT OF TRADE (SEC. 27)- According to Section 27, "every agreement
by which anyone is restrained from exercising a lawful profession, trade or business of any
kind, is to that extent. void.” An agreement which unnecessarily curtails the freedom of a
person to trade is against public policy. Restraining a person from carrying on a trade
generally aims at avoiding competition and has monopolistic tendency and this is both
against an individual's interest as well as the interest of the society and on that ground such
restraints are discouraged by law,
  Section 27 does not allow any distinction between a total restraint or a partial
restraint. Thus, whether the agreement imposes a total restraint, e.g., it says that
A shall not carry on a trade anywhere in the country during his lifetime, or it
imposes only a partial restraint requiring A not to trade within a certain area or
for a certain duration, the agreement is void.
 In “Madhub Chander v. Rajcoomar Dass," A and B carried on the same Kind of
business in the same locality in Calcutta. B agreed to pay some amount to ‘A’, if A
closed the business in that locality. A closed his business and then brought an
action against B to recover the promised amount. It was held that even though
the restriction was merely a partial one restraining ‘A’ from carrying on a
particular business only in a certain locality, it was still void being in restraint of
trade and, therefore, A was not entitled to recover the amount. Similarly, an
agreement not to carry. On some business for a period of three years, or to close
down a mill for months in a year," is void.
 In England also, an agreement in restraint of trade is void.
 The Bombay High Court in Zaheer Khan v. Percept D. Mark (India) Pvt. Ltd. Held
that a contract restricting a party to contract, his future liberty to carry on his
affair in the manner he liked and with person he chooses, would be a contract in
restraint of trade and hit by Section 27.
 In V.V. Sivaram v. FOSECO India Ltd., the Karnataka High Court, however, held
that disclosure of confidential information obtained by the employee in the
course of his employment, pertaining to several products manufactured in the
employee's company, could be restrained, after the cessation of employment,
such a restraint being not opposed to Section 27.
 A clause prohibiting an employee from disclosing commercial or trade secrets is
held not restraint of trade within the meaning of Section 27.
 It may thus be noticed that in England, all agreements in restraint of trade are
void, unless there is some justification for the restraint making it reasonable.

EXCEPTIONS TO AN AGREEMENT IN RESTRAINT OF TRADE-

I. Sale of Goodwill- When there is sale of business by a person along with its
goodwill, the seller of the business may make an agreement with the buyer
not to carry on the business in competition with the buyer. Such an
agreement, if imposes a reasonable restriction on the seller's right to carry on
the business, is valid, both in India and England.
- Exceptions 1 to Section 27 Indian Contract Act, which permits Such an
agreement on the sale of goodwill, reads as under "Exception 1- Saving of
agreement not to carry on business of which goodwill is sold. One who sells
the goodwill of a business may agree with the buyer to refrain from carrying
on a similar business within specified local limits so long as the buyer, or any
person deriving title to the goodwill from him, carried on a like business
therein provided that such limits appear to the Court reasonable.
 - Thus, an agreement by a person, who sells the goodwill of his business not to
carry on a similar business within specified local limits, so long as the buyer
carries on a similar business, is valid, provided restrictions are reasonable.
- When a person purchases the goodwill of the business, he pays for the right
to carry on a certain type of business, in exchange for an express or an
implied promise by the seller not to carry on that type of business.
- lf the object of the agreement is to protect the right of the buyer of the
goodwill, the restraint is valid. f, on the other hand, the restraint merely aims
at avoiding the competition, the covenant would be invalid.
- Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., an
agreement by a person, who sold his business of manufacturing guns and
ammunition for a huge sum of 2,87,500, not to engage in the business of
manufacturing guns and explosives, etc., either directly or indirectly, for a
period of 25 years was valid. In this case the fact that the Government and
other countries were customers, a Covenant unrestricted as regards space
was necessary for the protection or the company purchasing the business.
The coven ant was not considered to be against the public interest and the
same could be enforced through an Injunction.

II. Exceptions under the Indian Partnership Act, 1932- Notwithstanding the rule
contained in Section 27, Indian Contract Act that an agreement in restraint of
trade is void, such an agreement can be validly made by the partners in four
situations mentioned in Sections 11(2), 36(2), 54 and 55(3) of the Indian
Partnership Act, 1932
a- Section 11(2), Indian Partnership Act, permits the partners of a partnership
firm to make a contract which provides that a partner shall not carry on any
business other than that of the firm while he is a partner. The purpose of
such an agreement is that the partners will not carry on their own business
ignoring the partnership business. Such an agreement is valid and is not hit
by the rule contained in Section 27, Indian Contract Act.
b- Another exception is contained in Section 36(2), Indian Partnership Act.
According to this provision, such an agreement may be made between the
outgoing partner and the remaining partners who continue the business of
the firm. Generally, an outgoing partner is paid his share of the goodwill of
the firm, and it is reasonable that he agrees that he will not carry on a
business Similar to that of the firm. Such an agreement is valid if the
restrictions as regards time for which, and the area within which, a similar
business is not to be carried on, are reasonable.
c- Section 54, Indian Partnership Act, contains another exception to the rule
and permits such an agreement to be made upon or in anticipation of the
dissolution of the firm. The provision is as follows "Partners may, upon or in
anticipation of the dissolution of the firm, mare an agreement that some or
all of them will not carry on a business Similar to that of the firm within a
specified period or within specified local limits; and notwithstanding anything
 contained in Section 27 of the Indian Contract Act, l872, such agreement shall
be valid if the restrictions imposed are reasonable".
When a firm is dissolved, either some of the partners or some
third party may purchase the business as well as goodwill of the
firm. Those partner8 who get such payment for the sale of
goodwill may then agree that they will not carry on a similar
business within a specified period, or within specified local limits.
d- Section 55(3), Indian Partnership Act, contains still another exception to the
rule. The Section reads as under "Any partner may upon the sale of the
goodwill of a firm, make an agreement with the buyer that such partner will
not carry on any business similar to that of the firm within a specified period
or within specified local limit8, and notwithstanding anything contained in
Section 27 of the Indian Contract Act, 1872, such agreement shall be valid if
the restrictions imposed are reasonable."
when a person purchases the goodwill of a business, his interest may
be protected by a covenant by the seller of goodwill that the latter
will not carry on a business similar to the one which has been sold.

Similar is the position when, on the dissolution of the firm, firm's

goodwill has been sold. Thus, there may be an agreement by any
partner, who has received consideration on the sale of goodwill of the
firm, in favour of the buyer of the goodwill, that such partner shall not
carry on a similar business for a certain duration of time or within
specified local limits, such an agreement is valid, if the restrictions
imposed are reasonable.

III. Restraint by a contract of service- An agreement of service under which an

employee agrees that he will serve a particular employer for a certain duration,
and that he will not serve anybody else during that period, is a valid agreement.
During the period of employment, the employer has an exclusive right to avail
the services of his employee and, therefore, a restraint on the employee to serve
somebody else at the same time is reasonable. Such an agreement is not hit by
the doctrine of restraint of trade.
- Therefore, if B contracts with A to serve him faithfully for twelve months as a
clerk, and also agrees not to serve anybody else during that period, A is not
entitled to a decree for specific performance of the contract by B to serve A.
He is, however, entitled to an injunction restraining B from serving a rival
business house as clerk."
- In Charlesworth v. Mac Donald, the defendant agreed to serve as an
assistant to the plaintiff, a physician and a surgeon at Zanzibar, for a period of
three years and not to practise himself during that period. After one year, he
left the plaintiff's service and started his own practice Zanzibar. It was held
that the plaintiff was entitled to restrain the defendant from practising during
the period of agreement in Zanzibar.
 - If an agreement between a company and the person appointed as its
advisory stipulates that he would not carry-on business activities similar to
those carried on by the company, the restraint is not void under Section 27 of
the Contract Act. However, the restraint will be effective only during the
period of appointment of advisory.
- In Fitch Vs Dewes, it was held that employee's freedom to work can be
restrained even after the employment is over, provided the restraint is
reasonable. Thus, an agreement by a solicitor's clerk not to practise within 7
miles of that place after leaving his employment, was held to be valid even
though the restraint was unlimited in point of time.
Garden Leave Clause- The "Garden Leave Clause" operates after the cession of
employment, either upon termination or resignation from service. The Garden Leave
period, in fact, commences after the employee has "served the notice period and has
ceased to be on the rolls of the company." Under this clause, the employee is
prohibited from carrying on any business which competes directly or indirectly with
the whole or any part of the visa processing services or a business similar to the
business of the employer, for a period of three months after serving the notice
period and ceasing to be an employer.
The clause has been held to be hit by Section 27 of the Contract Act, 1872.
The Bombay High Court in V.F.S. Global Services Pvt. Ltd. v. Suprit Roy,
holding the clause as in restraint of trade, said that to obstruct an employee
who has left services from obtaining gainful employment elsewhere was not
fair or proper.

IV. Trade Combinations- Sometimes, the traders or manufacturers combine

together to eliminate competition as between themselves and make agreements
fixing minimum price, regulating the supply of goods and putting profits in a
common pool and dividing the same amongst themselves. Such agreements are
neither void on the ground of being opposed to public policy, nor are they
deemed to be in restraint of trade.
- ln England, such combinations are not valid if they impose excessive restraint
on the freedom of trade, but are valid if the restraint imposed is reasonable
in the interest of the parties as well as the public interest.
- In Fraser & Co. v. The Bombay Ice Manufacturing Co, there was an
agreement between various ice manufacturers fixing minimum price at which
the ice manufactured by them was to be sold. The agreement further
provided that the profits of these various manufacturers will be pooled
together and then distributed in a certain agreed proportion. It was held that
the agreement was valid.

V. Solus agreement- Sometimes the seller or the manufacturer of a certain product

may agree that he will supply the whole of his product to a particular Single
 buyer only, or, similarly, a buyer may agree that he will purchase all his
requirements of a certain commodity from a particular seller or manufacturer
only and none else. Such agreements are called 'solus agreements’.
- In such a case, one party agrees to deal only with the other party and none
else. They are also known as 'exclusive dealing agreement.
- Thus, if the seller agrees to supply all the goods produced by him to a certain
buyer and to nobody else, and the buyer also in turn undertakes to accept
the whole of the quantity produced by the seller, the agreement is valid.
Thus, an agreement to sell, all the salt produced during a certain period to a
particular buyer only," or to sell a certain variety of dhoties manufactured by
the defendant to the plaintiff only and no other person, is not in restraint of
trade.

In the following exceptional cases solus agreements are not valid: -

a- When the buyer does not agree to purchase the whole quantity, he cannot restrain
the seller from selling his surplus to others. Thus, an agreement to sell a certain
quantity of silica sand to the plaintiff every month, and not to sell any sand to four
specified factories, was in restraint of trade so far as it related to restriction on sale
of sand to other factories.
b- When the object of the agreement is to corner goods or to. monopolize trade, or the
restraint is tor an unduly long time, for example, binding a party with such
agreement from generation to generation, the agreement cannot be considered to
be lawful.

Agreement Void only to the extent of restraint- According to section 27, an agreement in
restraint of trade is void only to the extent it imposes restraint. If a part of the agreement
does not impose restraint and the other part does so, the agreement may be void as
regards the second part of it. In Har Bilas v. Mahadeo Prasad, the defendant agreed to
supply a certain quantity of silica sand to the plaintiff every month. He also agreed not to
sell silica sand to four specified factories. lt was held that the whole of the agreement was
not void, it was void only to the extent it restrained the defendant from selling his surplus
silica sand to four specified factories.

AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS

AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS (SEC. 28)- Section 28 states that an
agreement absolutely restraining a party from enforcing his rights through a court of law, or
an agreement which places a limit as to the time within which a right can be enforced, is
void.
Section 28- Agreements in restraint of legal proceedings, void. Every agreement—
 a- by which any party thereto is restricted absolutely from enforcing his rights under or in
respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which
limits the time within which he may thus enforce his rights; or
b- which extinguishes the rights of any party thereto, or discharges any party thereto, from any
liability, under or in respect of any contract on the expiry of a specified period so as to
restrict any party from enforcing his rights, is void to the extent.

Exception 1- Saving of contract to refer to arbitration dispute that may arise— This section
shall not render illegal a contract, by which two or more persons agree that any dispute which
may arise between them in respect of any subject or class of subjects shall be referred to
arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect
of the dispute so referred.

Exception 2- Saving of contract to refer questions that have already arisen- Nor shall this
section render illegal any contract in writing, by which two or more persons agree to refer to
arbitration any question between them which has already arisen, or affect any provision of any
law in force for the time being as to references to arbitration.

This Section makes two kinds of agreements void -

1- Agreement, by one party is absolutely debarred from enforcing his rights through usual legal
proceedings.
2- Agreement, which places a time limit for enforcing a right through legal proceedings.

1- Agreement absolutely restraining legal proceedings- If an agreement restricts a party

thereto absolutely from enforcing his contractual rights by bringing usual legal proceedings,
the same is void. An agreement to oust the jurisdiction of a court is opposed to public policy
and the same is void both in India and England. The agreement is void if restraint is an
absolute one.
- In Tapash Majumdar v. Pranab Dasgupta, a rule of the East Bengal Club authorizing
the Executive Committee of the club to take action against any of its members, who
approached the Court to challenge election process. It was held contrary to Section
28 of the Contract Act, 1872. Holding the rule as contrary to Section 28 and also
opposed to public policy, the Calcutta High Court ruled that no person could be
prevented from approaching the Courts of law when there was justiciable cause.
- In case the parties agree to a partial restriction on the right to go to the Court of law,
such a contract is enforceable Therefore, if two competent courts can possibly deal
with the subject-matter of litigation, it is open to the parties to a contract to agree
that dispute in respect thereof should be adjudicated upon by one of the two
competent courts, and not by the other. Such an agreement which restricts
jurisdiction to only one of the several competent courts is not against public policy
and therefore not void under Section 23.
- In Delhi Bottling Co. Ltd. v. Times Guaranty Financials Ltd, it has been held that
when two courts have jurisdiction, parties are free to vest jurisdiction in one of
those courts only.
- In Dilip Kumar Ray v. Tata Finance Ltd," the parties entered into a hire-purchase
agreement in respect of sale of a Tata Estate Car. The agreement was executed at
 Madras. The parties agreed that all disputes or claims shall be settled at Bombay.
The suit can, therefore, be held only at the place agreed to between the parties, i.e.,
Bombay.
- In order that the agreement stipulating that a particular court alone has jurisdiction
is enforceable, it is further necessary that the agreement should have been properly
entered into.
2- Agreement limiting time for a legal action- According to the Indian Limitation Act, 1963
there is a time limit for various actions. If an agreement between the parties stipulates a
smaller time limit than prescribed under the Indian Limitation Act, the agreement is void
under Section 28. Thus, if an agreement prohibits an action if brought after one year of the
breach of contract, the same is void, because it takes away the right to bring an action after
one year, though the period of limitation for such an action prescribed in the Limitation Act
is 3 years.

Section 28 of the Contract Act has been amended by the Indian Contract (Amendment) Act, 1997.
The new provision contained in Section 28 (b) states that every agreement whereby the right of any
party thereto is extinguished by not bringing an action within a specified period, will also be void
under Section 28.

Exceptions 1- Contract to refer future dispute to arbitration- Exception 1 to Section 28 allows an

agreement to be made between two or more persons by which, they are to refer any dispute which
may arise between them in future to arbitration, and only the amount awarded in such arbitration
shall be recoverable in respect of the dispute so referred.

Exceptions 2- Contract to refer existing questions to arbitration- Exception 2 to Section 28 states

that questions which have already arisen between the parties may be referred by them to
arbitration by a contract in writing. Such an agreement is also valid.

AMBIGUOUS AND UNCERTAIN AGREEMENTS

AMBIGUOUS AND UNCERTAIN AGREEMENTS (SECTION 29)- According to Section 29, agreements
the meaning of which is not certain or capable of being made certain, are void. It is necessary that
there should be no ambiguity about what the parties intend. If the meaning of an agreement is
neither certain, nor capable of being made certain, the agreement is void.

Illustration- A agrees to sell to B "a hundred tons of oil". There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty.

Illustration- A agrees to sell to B "my white horse for rupees five hundred or rupees one thousand",
There is nothing to show which of the two prices was to be given. The agreement is void.

If the meaning of the agreement is certain, or capable of being made certain, the agreement is not
void, but valid. This may be clear from the following illustrations-

a- A agrees to sell to B one hundred tons of oil of a specified description, known as an article of
commerce. There is no uncertainty here to make the agreement void.
 b- A, who is a dealer in coconut oil only, agrees to sell to B "one hundred tons of oil". The
nature of A's trade affords an indication of the meaning of the words, and A has entered into
a contract for the sale of one hundred tons of coconut oil.
c- A agrees to sell to B "all the grain in my granary at Ramnagar. There is no uncertainty here to
make the agreement void.
d- A agrees to sell to B "one hundred maunds of rice at a price to be fixed by C." As the price is
capable of being made certain, there is no uncertainty here to make the agreement void.
- It is well settled that a contract cannot be uncertain. It must not be vague. Its terms
must not be indefinite. It is also settled that a definite price is an essential element
of a binding agreement.

AGREEMENT BY WAY OF WAGER

AGREEMENT BY WAY OF WAGER (SECTION 30)- Section 30 declares wagering agreements as void.
The Section is as follows

- Section 30- Agreement by way of wager void- Agreements by way of wager are
void, and no suit shall be brought for recovering anything alleged to be won on any
wager, or entrusted to any person to abide by the result of any game or other,
uncertain event on which any wager is made.
- Exception in favour of certain prizes for horse racing.
- Section 294-A of the Indian Penal Code not affected- Nothing in this Section shall be
deemed to legalize any transaction connected with horse racing, to which the
provisions of Section 294-A of the Indian Penal Code apply.

What is a wagering agreement- The nature of such an agreement has been explained in case of
Carlill Vs Carbolic Smoke Ball Co, in the following words: - A wagering contract is one by which two
persons, professing to hold opposite views touching the issue of a future uncertain event, mutually
agree that, dependent upon the determination of that event, one shall win from, the other, and that
other shall pay or hand over to him, a sum of money or other stake.

Essentials of a wagering agreement- The essentials of a wagering agreement are-

1- The parties have opposite views regarding an uncertain event.

2- There are chances of gain or loss to the parties on the determination of the event one way
or the other.
3- The parties have no other interest except winning or losing of bet.

1- Opposite views about an uncertain event- If A holding the view that it would rain on 1st
January next and B saying that it will not, agree that if it rains on that day, B will pay Rs. 100
to A, and if it does not rain, A will pay Rs. 100 to B, it is a wagering agreement.
- According to the definition of wager given by Hawkins, J. in Carlill V. Carbolic Smoke
Ball Co., the parties should have opposite views touching the issue of a future
uncertain event but that does not appear to be wholly correct. The opposite views
could be in respect of a past or a present fact or event also. The only thing needed is
that there should be uncertainty in the minds or the parties about the determination
 of the event one way or the other. Thus, the parties may bet as to what the
population of a city is, or, a particular plane had crashed on a particular date or not.
- Similarly, the parties may bet "upon the result of an election which is over, if the
parties do not know in whose favour it has gone."

2- Chances of gain or loss to the parties- There should be a chance of any one party winning
and the other losing, on the determination of the event one way or the other. Thus, if A
agrees to pay B s. 100 if it does not rain on 1st January next, and B agrees to pay A Rs. 100 if
it rains on that day, each party has a chance to win or lose, depending upon the
determination of the event one way or the other.

3- No other interest in the event except the amount of bet- In a wagering contract neither of
the contracting parties have any other interest in that contract than the sum or stake he will
so win or lose, and there is no other real consideration for the making of such contract by
either of the parties.

Prize Money on lottery tickets- Lottery means a scheme for distribution of prizes by draw of lots or
by any other procedure which depends on chance only. The agreement to pay prizes on lottery is an
agreement by way of wager and, therefore, void under Section 30 of the Contract Act.

- In ‘Shekharchand Jain v. Ramnarayan' the question was regarding recovery of prize

on a State Lottery Ticket. It was held that though a state lottery is not illegal, the
same 1s nonetheless in the nature of wager, and, therefore, void. Hence, a person
declared winner of prizé monéy on lottery cannot sue for the recovery of the prize
money.
- Similar was also the decision in Subhash Kumar Manwani v. State of M.P. It has
been held in this case that an agreement to pay prize money on a lottery ticket is a
wagering agreement and, therefore, such an agreement is void under Section 30 of
the Contract Act.

Validity of wagering agreements and collateral transactions- Section 30 declares an agreement by

way of wager as void. It further states that "no suit shall be brought for recovering anything alleged
to be won on any wager, or entrusted to any person to abide the result of any game or other
uncertain event on which any wager is made.

- In Badridas Vs. Kothari Vs. Meghraj Kothari,' A and B entered into wagering
transactions in shares. B became indebted to A. B then executed a promissory note
in favour of A to pay the amount as well as interest thereon. It was held that ‘A’
could not recover the amount.
- Though a wagering agreement is void and unenforceable, it is not forbidden by law
and therefore the object of a collateral agreement is not unlawful under Section 23
of the Contract Act. Thus, agreements collateral to wagering agreements are not
void.
- In “Gherulal Parakh Vs Mahadeodass," the appellant and the respondent entered
into partnership for carryıng on wagering transactions. The respondents, who
incurred some loss on behalf of the firm, brought an action against the appellant to
recover his share of the loss. The claim was allowed by the Supreme Court
 - Similarly, in ‘Gulam Mustaffakhan v. Padamsi,' it was held by the Nagpur High Court
that when two partners make a contract, even of a wagering nature, and one of the
parties satisfies his and his co-partner's liability, such a partner can legally claim
indemnity from the other.

CONTINGENT CONTRACTS

What is a contingent contract- According to Section 31, a contingent contract 1s a contract to do or

not to do something, if some event, collateral to such contract, does not happen.

When the contract is dependent or conditional upon the happening or non-happening of a certain
future event, the contract is contingent. For example, A contracts to pay B Rs. 10,000 if B's house is
burnt, this is a contingent contract. The payment of the amount is contingent on the happening of a
collateral event, i.e., the burning of the house. All contracts of insurance or indemnity aim at
payment of money only after a certain event happens, or the loss is caused, and, therefore, they are
contingent contracts.

A wagering agreement is also a contingent contract, but that type of contingent contract has been
specifically declared to be void by Section 30.

Contingent Contract- Section 31 of the contract Act, which defines a contingent contract as a
contract to do or not to do something, it some event, collateral to such contract, does or does not
happen. The point to note is that the uncertain event on the happening of which the contract is
conditional must be collateral to the contract and must not form part of the consideration. The
condition may be a condition precedent or a condition subsequent.

In Harbaksh Singh Gill v. Ram Ratan,' the vendor agreed to sell his half share in the property in
dispute, but the sale deed was to be executed after a month of the partition of the property and
separation of his share. The vendor undertook to get his share separated but failed to get that done.
It was held that the contract was not a contingent one and the same was, therefore, not frustrated
by the vendor's own wrong or failure to get his share separated. The vendee was held entitled to
obtain an injunction restraining the vendor from transferring the property to somebody else.

When the performance of the contract is not dependent on the happening of some event collateral
to the contract, it is an absolute contract and it must be performed unconditionally.

If the contingency of a contract was neither pleaded by the defendant in the written statement
nor argued before the trial court, the plea about the same cannot be raised in appeal.

Enforcement of contingent contract- The following are the rules governing the enforcement of the
various: -
I- Contracts contingent on an event happening- Contingent contracts to do or not to do
anything if an uncertain future event happens cannot be enforced by law unless and until
that event has happened. If the event becomes impossible, such contracts become void.
- Illustrations- A makes a contract with B to buy B's house if A survives C. This
contract cannot be enforced by law unless and until C dies in A's life-time.
- Illustration- A makes a contract with B to sell a horse to B at a specified price, if C, to
whom the horse has been offered refuses to buy him. The contract cannot be
enforced by law unless and until C refuses to buy the horse.
- Illustration- A Contracts to pay B a sum of money if B marries C. C dies without being
married to B. The contract becomes void.

II- Contracts contingent on the event not happening- Contingent contracts to do or not to do
anything if an uncertain future event does not happen, can be enforced when the happening
of that event becomes impossible, and not before. For example, A agrees to pay B a sum of
money if a certain ship does not return. This ship is sunk. The contract can be enforced when
the ship sinks."

III- Contract contingent on the future conduct of a living person- If the future event on which a
contract is contingent is the way in which a person will act at an unspecified time, the event
shall be considered to become impossible when such person does anything which renders
impossible that he should so act within any definite time, or otherwise than under future
contingencies.

- Illustration- A agrees to pay Ba sum of money if B marries C. C marries D. The

marriage of B to C must now be considered impossible, although it is possible that D
may die, and that C may afterwards marry B.

IV- Contracts contingent on happening of specified event within fixed time- Contingent
contracts to do or not to do anything, if a specified uncertain event happens within a fixed
time, become void if, at the expiration of the time fixed, such event has not happened, or if,
before the time fixed, such event becomes impossible.'
- Illustration- A promises to pay B a sum of money if a certain ship returns within a
year. The contract may be enforced if the ship returns within the year, and becomes
void if the ship is burnt within the year.

V- Contracts contingent on not happening of specified event within a fixed time- Contingent
contracts to do or not to do anything if a specified uncertain event does not happen within a
fixed time, may be enforced by law when the time fixed has expired and such event has not
happened, or, before the time fixed has expired, if it becomes certain that such event will
not happen. For example, A promises to pay Ba sum of money if a certain ship does not
return within a year. The contract may be enforced if the ship does not return within the
year, or is burnt within the year.

VI- Agreements contingent on impossible event- Contingent agreements to do or not to do

anything, if an impossible event happens, are void, whether the impossibility of the event is
known or not to the parties t0 the agreement at the time when it is made."
 - Illustrations- A agrees to pay B 1,000 rupees if two straight lines should enclose a
space. The agreement is void.
- Illustration- A agrees to pay B, 1,000 rupees if B will marry A's daughter, C. C was
dead at the time of the agreement. The agreement is void.

PERFORMANCE OF CONTRACT

Every contract consists of reciprocal promises. Each party to a contract is bound to perform
the promise made by him. According to Section 37 "The parties to a contract must either
perform or offer to perform, their respective promises, unless such performance is
dispensed with or excused under the provisions of this Act, or of any other law."
The parties to the contract have a duty to-
i- perform, or
ii- offer to perform, their respective promises.
According to Section 38, as has been explained below, just like actual performance, an offer
of performance (or tender) by the promisor discharges a promisor from his obligation under
a contract. Thus, if A offers to perform his part of the promise, but the other party, B, does
not avail of such performance, A would be discharged from his obligation under the
contract.
The parties to a contract, however, need not perform their promises in case
i- such performance is dispensed with; or
ii- excused under the provisions of this Act, or of any other law.
According to Section 63 of the Indian Contract Act, 1872, the promisee may dispense with
the performance of the promise by the promisor. In such a case, the promisor nee not
perform the promise. For example, A promises to paint a picture 1or B, B afterwards forbids
him to do so. A is no longer bound to perform the promise.
Sometimes, according to the provisions of this Act or some other law, the promisor may be
excused from performing the contract. For instance, according to Section 56, if after the
making of a contract, its performance becomes impossible or unlawful, the contract
becomes void, and the same need not be performed. Thus, if A and B contract to marry each
other, but before the time fixed for marriage, A goes mad, the contract becomes void.
Offer of performance or tender- When the promisor is willing to perform the contract and
he offers to perform the same, the promisee has a duty to accept the performance of the
contract. If the offer of performance is not accepted by the promisee, the promisor cannot
be blamed for the non-performance of the contract. In such a case, the promisor does not
incur any liability for non-performance, nor does he lose his rights under the contract
Not providing reasonable facilities for the performance of the contract to the promisor by
the promisee also excuses the promisor from the performance of the contract.
Section 67, which contains a provision in this regard, is as under
- "67. Effect of neglect of promisee to afford promisor reasonable facilities for
performance. If any promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise, the promisor is
excused by such neglect or refusal as to any non-performance caused
thereby.,
- Illustration- A contracts with B to repair B's house. B neglects or refuses to
point out to A the places in which his house requires repair. A is excused for
the non-performance of the contract, if it is caused by such neglect or refusal.
- An offer of performance is known as "Tender' under English law.

The essentials of a valid offer of performance or Tender, and the effect thereof have been
mentioned in Section 38, which is as follows: -
- "38- Effect of refusal to accept offer of performance- Where a promisor has
made an offer of performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance, nor does he
thereby lose his rights under the contract.

Every such offer must fulfil the following conditions: - Essentials of a valid tender
A. The tender must be unconditional;
B. The tender must be made at proper time and place;
C. The promisee must be given an opportunity to ascertain that the goods are
according to the contract; and
D. If there are a number of joint promisees, the offer of performance may be made in
favour of any of them.

A. The tender must be unconditional- The offer to perform the contract must be
unconditional [sec 38(1)]. If the promisor offers to pay only a part of the sum due but
says that it should be considered to be a full payment, he is imposing a condition,
and, therefore, this cannot be considered to be a valid tender.
 - Payment by cheque is deemed to be subject to encashment, and therefore, it
is only a conditional tender. When the tender is a conditional one, the
promisee can lawfully refuse to accept the same.
B. The tender must be at proper time and place- It is further necessary that the tender
must be at proper time and place, with an opportunity to the promisee to ascertain
that the promisor will make proper performance.
- So that the tender is deemed to be a valid one, it is further necessary that it
"must be made at a proper time and place, and under such circumstances
that the person to whom it is made may have a reasonable opportunity of
ascertaining that the person by whom it is made is able and willing there
and then to do the whole of what he is bound by his promise to do [38(2)]."
- It is also necessary that the person to whom the tender is made should be
provided with a reasonable opportunity of ascertaining that the person
making the tender is able and willing there and then to do the whole of what
he is bound by his promise to do.

C. The promisee must be given an opportunity to ascertain that the goods are
according to the contract- Another requirement of a valid tender is that, if the offer
is an offer to deliver anything to the promisee, the promisee must have reasonable
opportunity of seeing that the thing offered is the thing which the promisor is bound
by his promise to deliver [38(3)].
- For example, A contracts to deliver to B at his warehouse, on the 1 st March,
1873, 100 bales of cotton of a particular quality. In order to make an offer of
a performance with the effect stated in this Section, A must bring the cotton
to B's warehouse on the appointed day under such circumstances that B may
have a reasonable opportunity of satisfying himself that the thing offered is
cotton of the quality contracted for and that there are 100 bales.
- The Sale of Goods Act contains a similar provision, in respect of a contract of
sale of goods in Section 41(2) of SOGA.

D. An offer of performance to one of the joint promisees is a valid tender- When there
are several joint promisees, an offer to one of several joint promisees has the same
legal consequences as an offer to all of them.
- It means that when there are more than one joint promisees, an offer of
performance to one of them will be treated as a valid tender.
Performance on the death of a party- If a party to the contract dies before he has
performed the contract that, by itself, does not put an end to the obligation to perform the
same. Promisees bind the representatives of the promisors in case of the death of such
promisors before performance, unless contrary intention appears from the contract." For
example, A promises to deliver goods to B on a certain day on payment of Rs.
representatives are bound to deliver the goods to B and B is bound to pay Rs. 1,000 to A's
representatives."
- If the performance of the contract requires personal skill, or the contract is
based on the personal confidence between the parties, there is a
presumption that the contract should be performed personally by the parties
themselves. Such a contract cannot be enforced against the representatives
of the deceased party. For example, A promises to paint a picture for B by a
certain day at a certain price. ‘A’ dies before the day. The contract cannot be
enforced either by A's representatives or by B.

Performance of reciprocal promises- Sections 51 to 54 deal with the performance of

reciprocal promises. The rules contained in these Sections are as under
1- Contracts requiring simultaneous performance- According to Section 51, "When a
contract consists of reciprocal promises to be simultaneously performed, no
promisor need perform his promise unless the promisee is ready and willing to
perform his reciprocal promise."
- When the parties agree that the performance of the contract by each party is
to be simultaneous, it is necessary that in exchange for the performance of
the contract by one party, the other party should also be in a position to give
simultaneous performance, i.e., he should be ready and willing to perform his
reciprocal promise. A/to section 32 SOGA, in a contract of sale of goods,
unless otherwise agreed, the delivery of the goods and the payment of the
price are concurrent conditions, that is to say, the seller shall be ready and
willing to give possession of the goods to the buyer in exchange for the price
and the buyer shall be ready to pay the price in exchange for possession of
the goods.
This may be further explained through the following illustrations: -
a- A and B contract that A shall deliver goods to B to be paid for by B on delivery. A
need not deliver the goods, unless B is ready and willing to pay for the goods on
delivery. B need not pay for the goods unless A is ready and willing to deliver them
on payment.
b- A and B contract that A shall deliver goods to B at a price to be paid by instalments,
the first instalment to be paid on delivery. A need not deliver, unless B is ready and
willing to pay the first instalment on delivery. B need not pay the first instalment,
unless A is ready and willing to deliver the goods on payment of the first instalment.

2- When the order of performance expressly fixed by the contract- When the order in
which reciprocal promises are to be performed is expressly fixed by the contract,
they shall be performed in that order; and where the order is not expressly fixed by
 the contract, they shall be performed in that order which the nature of the
transaction requires [sec 52].
- Illustrations- A and B contract that A shall build a house for B at a fixed price.
A's promise to build the house must be performed before B's promise to pay
for it.
- Illustrations- A and B contract that A shall make over his stock-in-trade to B
at a fixed price, and B promises to give security for the payment of the
money. A's promise needs not be performed until the security is given, for
the nature of the transaction requires that A should have security before he
delivers his stock.

3- One party preventing the other from performing his reciprocal promise- According
to Section 53 "When a contract contains reciprocal promises, and one party to the
contract prevents the other from performing his promise, the contract becomes
voidable at the option of the party so prevented; and he is entitled to compensation
from the other party for any loss which he may sustain in consequence of the non-
performance of the contract”.
The party, who has been prevented from performing the contract has two remedies
i) He may avoid the contract, and
ii) may claim compensation for the loss suffered by him due to the non-
performance of the contract.
For example, A agrees to remove the waste rock lying at B's mine, and B agrees to
supply a crusher to do the job. If B provides a crusher of an inadequate capacity due
to which the work has to be stopped, A would be entitled to sue B to recover
compensation for the expenses incurred by him and also for the loss of profits.

Similarly, when A and B contract that B shall execute certain work for a thousand
rupees, B is ready and willing to execute the work accordingly, but A prevents him
from doing so. The contract is voidable at the option of B, and if he elects to rescind
it, he is entitled to recover from A compensation for any loss which he has incurred
by its non-performance."

4- Non-perfornmance of a reciprocal promise by the party who is to perform first-

When the parties have decided about the order of performance, and one of the
parties is to perform his promise first, and the other thereafter, then the non-
performance by one who is to perform it first disentitles him from claiming
performance from the other, and also renders him liable to pay compensation to the
other party for any loss arising out of the non-performance of the contract [section
54].

Illustrations- A hires B's ship to take in and convey, from Calcutta to Mauritius, a
cargo to be provided by A, B receiving a certain freight for conveyance. A does not
provide any cargo for the ship. A cannot claim the performance of B's promise, and
 must make compensation to B for the loss which B sustains by the non-performance
of the contract.

Illustrations- A contracts with B to execute certain builder's work for a fixed price, B
supplying the scaffolding and timber necessary for the work. B refuses to furnish any
scaffolding, or timber, and the work cannot be executed. A need not execute the
work, and B is bound to make compensation to A for any loss caused to him by the
non-performance of the contract.

In Mohammed v. Pushpalatha, there was an agreement between the appellant-

tenant and the respondent- landlord, whereunder, the tenant agreed to pay higher
rent on reconstruction of the tenanted premises with toilet facility. The premises
was reconstructed but without toilet. The Apex Court held the tenant not liable to
pay higher rent even though put in possession of reconstructed premises until the
toilet was constructed and possession thereof was given to the tenant.

Reciprocal promise to do things legal and also other things illegal- Sometimes, persons
may reciprocally promise, firstly to do certain things which are legal, and secondly, under
specified circumstances, to do certain other things which are illegal, the question which in
such cases arises is regarding the validity of such a promise. The answer depends on the fact
whether legal and illegal promises are severable or not. If they are severable, then the first
set of promises is a contract, but the second is a void agreement [section 57, this section is
supplemental to section 24].
- But if the illegal part of the agreement cannot be separated from the legal
one, and the two constitute an integral whole, the whole of the agreement is
void.
- For example, A and B agree that A shall sell B a house for 10,000 rupees, but
that if B uses it as a gambling house, he shall pay 50,000 rupees for it. The
first set of reciprocal promises, namely, to sell the house and to pay 10,000
rupees for it, is a contract.
- The second set is for an unlawful object, namely, that B may use the house as
a gambling house, and is a void agreement. But, when the legal and illegal
parts are inseparable, the whole agreement is void. Thus, if a married woman
agrees to live in adultery and also agrees to render certain services as a
housekeeper, for a consolidated remuneration of Rs. 50 per month, the
lawful and unlawful parts are inseparable, and the whole of the agreement is
void, and the plaintiff will not be entitled to recover even for the services as a
housekeeper."
Alternative promises of which one branch is legal and the other illegal- Section 58 provides
that in the case of an alternative promise, one branch of which is legal and the other illegal,
the legal branch alone can be enforced.
- Illustration- A and B agreed that A shall pay B 1,000 rupees, for which B shall
afterwards deliver to A either rice or smuggled opium. This is a valid contract
to deliver rice, and a void agreement as to the opium.

DISCHARGE OF CONTRACT

When an agreement, which was binding on the parties to it, ceases to bind them, the
contract is said to be discharged. A contract may be discharged in the following ways:
A. By Performance of the contract
B. By Breach of the contract.
C. By Impossibility of performance
D. By Agreement and Novation

A. Discharge by performance- Each party to a contract is bound to perform his part of the
obligation. After the parties have made due performance of the contract, their liability
under the contract comes to an end. In such a case, the contract is said to be discharged
by performance.

B. Discharge by breach of contract- When a party having a duty to perform a contract fails
to do that, or does an act whereby the performance of the contract by him becomes
impossible, or he refuses to perform the contract, there is said to be a breach of
contract on his part. On the breach of contract by one party, the other party is
discharged from his obligation to perform his part of the obligation.

 The breach of contract may be either: -

- Actual, i.e., non-performance of the contract on the due date of
performance, or
- Anticipatory, i.e., before the due date of performance has come.
- For example, A is to supply certain goods to B on 1st January. On 1st January,
A does not supply the goods. He has made actual breach of contract. On the
other hand, if A informs B on 1st December that he will not perform the
contract on 1st January next, A has made anticipatory breach of contract.
Anticipatory breach of contract- Anticipatory breach of contract means the repudiation of a
contract by one party to it before the due date of its performance has arrived. Section 39,
which contains law relating to anticipatory breach of contract, reads as under “When a
party to a contract has refused to perform, or disabled himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he has
signified, by words or conduct, his acquiescence in its continuance.”
Anticipatory breach of contract could be made by the promisor, either by refusing to
perform the contract, or disabling himself from performing the contract in its entirety,
before the due date of performance has arrived.
Illustration (a) to Section 39- A, a singer, enters into a contract with B, the manager of a
theatre to sing at his theatre two nights in every week during the next two months, and B
engages to pay her 100 rupees for each night performance. On the sixth night, A wilfully
absents herself from the theatre. B is at liberty to put an end to the contract.
The above illustration to Section 39 may create a misapprehension that in this case
absenting on one of the nights is only partial refusal to perform the contract and not
failure to perform the contract in its entirety.
In Sooltan Chund v. Schiller, it was observed that even absence on one night in this
illustration would be breach of the contract in its entirety.
Effect of anticipatory breach of contract- According to section 39, when the promisor has
made anticipatory breach of contract, "the promisee may put an end to the contract, unless
he has signified by words or conduct his acquiescence in its continuance."
lt means that on the anticipatory breach of contract by one party, the other party has two
alternatives open to him, viz.,
i. He may rescind the contract immediately, i.e., he may treat the contract at an end,
and may bring an action for the breach of contract without waiting for the appointed
date of the performance of the contract.
ii. He may not put an end to the contract but treat it as still subsisting and alive and
wait for, the performance of the contract on the appointed date.

i. Election to rescind the contract- On anticipatory breach of contract by the promisor,

the promisee has a right to treat the contract at an end, even though the due date of
performance has not yet arrived. When the promisee accepts the repudiation of the
contract even before the due date of performance and elects to treat the contract at
an end, he is discharged from his obligation to perform the contract, and also gets a
right to bring an action for the breach of contract, if he so likes, even before the due
date of performance has arrived.
- In Hochster v. De La Tour, the defendant engaged the plaintiff on 12th April,
1852, as a courier to accompany him on the tour of Europe. The tour was
agreed to begin on 1st June, 1852. On 11th May, 1852, the defendant wrote
to the plaintiff informing him that he had changed his mind and declined to
 take the services of the plaintiff. On 22nd May, 1452, the plaintiff brought an
action against the defendant for the breach of contract. It was held that a
party to an executory contract may make a breach of contract before the
actual date of performance, and the plaintiff, in such a case, is entitled to put
an end to the contract and he can bring an action even before the actual date
of performance has arrived. The plaintiff's action, therefore, succeeded.

ii. Election to keep the contract alive- Anticipatory breach of contract by one party
doe6 not automatically put an end to the contract. It has already been noted above
that on the anticipatory breach by one party, the other party can exercise the option
either to treat the contract at an end, or, to treat it as still alive and subsisting until
the due date of performance comes.
- In a case SC pointed out that, “Breach of contract by one party does not
automatically terminate the obligation under the contract the injured party
has the option either to treat the contract as still in existence, or to regard
himself as discharged. If he accepts the discharge of the contract by the other
party, the contract is at an end. If he does not accept the discharge, he may
insist on performance".
- Illustration- A, a singer, enters into a contract with B, the manager of a
theatre, to sing at his theatre two nights in every week during the next two
months, and B engages to pay her at the rate of 100 rupees for each night.
On the sixth night, A wilfully absents herself. With the assent of B, A sings on
the seventh night, B has signified his acquiescence in the continuance of the
contract and cannot now put an end to it, but is entitled to compensation for
the damage sustained by him through A's failure to sing on the sixth night.
When the contract is kept alive by the promisee, the promisor may perform the same in
spite of the fact that he had earlier repudiated it. If the promisor still fails to perform the
contract on the due date, the promisee will be entitled to claim compensation on the basis
of the breach of the contract on the agreed date of performance.
In case the promisee has elected to keep the contract alive and subsisting, it is just possible
that before the due date of performance, some event happens because of which the
promisor gets excused from the performance of the contract. The promisor can take
advantage of such a situation and he will be discharged from the performance of the
contract.
- The case of Avery v. Bowden illustrates the point where the promisee elects
to keep the contract alive, and the promisor, in spite of his earlier repudiation
of the contract, is discharged from liability because of supervening
circumstances before the date of performance arrives.

C- Discharge by impossibility of performance- If the performance of a contract is

impossible, the same is void, both in India and England.
Section 56, deals with this question. The first paragraph of Section 56 provides that an
agreement to do an act impossible in itself is void. The second paragraph provides that a
contract to do an act, which becomes unenforceable, if the act becomes (a) impossible; or
(b) for reason of some event which the promiser could not prevent.
This Section also provides that it becomes so unenforceable when the act becomes
impossible or unlawful.

Initial Impossibility- Section 56 says "An agreement to do an act impossible in itself is

void.” The object of making any contract is that the parties to it would perform their
respective promises. If a contract is impossible of being performed, the parties to it will
never be able to fulfil their object, and hence such an agreement is void.
For example, A agrees with B to discover treasure by magic. The performance of the
agreement being impossible, the agreement is void." Similarly, an agreement to bring a
dead man to life is also void.
Section 56 is based on the maxim, "les non cogit ad impossibilia” which means "the law
does not compel a man to do what he cannot possibly perform.”
Impossibility here means not only physical impossibility, but also legal impossibility. If there
is no possibility of the performance of the contract because it would be unlawful to do that,
the agreement is void. Such cases also fall under Section 23 which declares that every
agreement of which the object or consideration is unlawful is void. For example, A contracts
to marry B, being already married to C, and being forbidden by the law to which he is
subject to practise polygamy. The arrangement by A to marry B is void.
Sometimes, the fact that the performance of the contract is impossible or unlawful may be
within the knowledge of the promisor, but the promisee may not be knowing about the
same, such a promisor must compensate the promisee for the loss sustained by the
promisee resulting from the non-performance of the contract.
- The law on the point is contained in Section 56 (para 3) which reads as
under- “Where one person has promised to do something which he knew, or,
with reasonable diligence might have known, and which the promisee did not
know, to be impossible or unlawful, such promisor must make compensation
to such promisee for any loss which such promisee sustains through the non-
performance of the promise."
- For example, if a married man knowing that he cannot marry again promises
to do so, he is bound to compensate the other party for the breach of
promise
Subsequent impossibility- The performance of the contract may be possible when the
contract is entered into but because of some event, the performance may subsequently
become impossible or unlawful.
Section 56 (para 2) makes the following provision regarding the validity of such contracts
"A contract to do an act which after the contract is made, becomes impossible or, by reason
of some event which the promisor could not prevent, unlawful, becomes void when the act
becomes impossible or unlawful."
It means that every contract is based on the assumption that the parties to the contract will
be able to perform the same when the due date of performance arrives. If because of some
event, the performance has either become impossible or unlawful, the contract becomes
void.
Section 56 explains this point with the help of the following illustrations:
- A and B contract to marry each other. Before the time is fixed for the
marriage, A goes mad. The contract becomes void.
- A contract to take in cargo for B at a foreign port. A's Government afterwards
declares war against the country in which the port is situated. The contract
becomes void when war is declared.
- A contract to act at a theatre for six months in consideration of a sum paid in
advance by B. On several occasions, A is too ill to act. The contract to act on
those occasion becomes void.
The doctrine of frustration- When the performance OI the contract becomes impossible,
the purpose which the parties have in mind is frustrated. lf the performance becomes
impossible, because of a Supervening event, the promisor is excused from the performance
of the contract. This is known as doctrine of frustration under English law, and is covered by
Section 56 of the lndian Contract Act.
The basis of the doctrine of frustration was explained by the Supreme Court decision of
Satyabrata Ghose v. Mugneeram in the following words "The essential idea upon which the
doctrine (of frustration) is based is that of impossibility of performance of the contract; in
fact, impossibility and frustration are often used as interchangeable expressions. The
changed circumstances make the performance of the contract impossible and the parties
are absolved from the further performance of it as they did not promise to perform an
impossibility.”
In Taylor v. Caldwell, it was held that when the contract is not positive and absolute, but
subject to an express or implied condition, e.g., a particular thing shall continue to exist,
then in such a case, if the thing ceases to exist, the performance of the contract is deemed
to be impossible and the parties are excused from performing the contract. In this case, A
agreed with B to give him the use of music hall and gardens for holding concerts on four
different dates. B agreed to pay a rent of £ 100 for each of the four days. Before the date of
performance arrived, the music hall was destroyed by fire. B sued A for the breach of the
contract. It was held that the contract had become void because of the perishing of the hall
without any fault on the part of A. The performance of the contract had become impossible
and, therefore, A was not liable for the non-performance of the contract.

Death or incapacity of a party- When the nature of the contract requires the personal
performance of the contract by a particular person, the contract is deemed to be
conditional upon the continued life or good health of the person so that it is possible for him
to perform the contract.
- Thus, in case of contract based on personal skill or confidence of the parties,
the death of a party in such a case, puts an end to the contract, and,
therefore, the representatives cannot be made liable to perform such a
contract. For example, A promises to paint a picture for B by a certain day at
a certain price. A die before the day. The contract cannot be enforced either
by A's representative or by B.
- In Robinson v. Davison', the defendant's wife, who was an eminent piano
player, promised to play piano at a concert on a particular day. She was
unable to give her performance due to illness. t was held that the
performance of the contract depended on the continued good health of the
defendant's wife and the contract was discharged due to her illness. The
defendant could not be made liable to pay compensation for the non-
performance of the contract.
Frustration by virtue of Legislation- Where, a law promulgated after the contract is made,
makes the performance of the agreement impossible, the agreement becomes void.
Frustration due to change of circumstances- The doctrine of frustration has been extended
to those cases, where there was no physical impossibility of performance of the contract,
but because of the change in circumstances the adventure was frustrated or by the iteral
performance of the contract the main object of the contract could not be fulfilled.
- The case of Krell V. Henry explains the point. In this case, the defendant
agreed to hire the plaintiff's flat for June 26 and 27, 1902, the days on which
the coronation procession of Edward VII was to pass along a particular road.
Due to the King's illness, the procession was cancelled. On the defendant's
refusing to pay the balance of the agreed rent, the plaintiff sued him for the
same. It was observed that viewing of the procession was the foundation of
the contract, and by the cancellation of the procession, the purpose of the
contract could no longer be achieved, and as such, the parties were
discharged from performing their further obligations. Consequently, the
plaintiff was held not entitled to recover the balance of the agreed rent.
Position in India- In India also, impossibility does not mean merely physical impossibility to
perform the contract, it also includes situations where the performance of the contract may
not be literally impossible, but because of changed circumstances, the performance would
not fulfil the object which the parties had in mind.
No frustration by mere likely delay in performance- In order that the doctrine of frustration
is applicable, it is necessary that the performance should become unlawful or impossible.
The event should be such that the object of the parties is thereby totally upset. Merely likely
delay in performance does not amount to impossibility. The doctrine does not apply where
there is merely a likely delay in the performance of the contract.
Impossibility does not mean mere commercial difficulty- A distinction is drawn between the
happening of an event which makes the performance of the contract impossible, beyond
the control of the promisor and an event which makes the performance only difficult or
more expensive. The nature and the terms of the contract may help in deciding whether the
performance has become impossible, or merely commercially difficulty.
- In a case it was held that merely because the procurement of the goods
becomes difficult due to a strike in the mill, or there 1s a rise in prices, or a
person will not be able to earn the expected amount of profits, it is not
enough to frustrate the contract.

Restoring benefit received under an agreement discovered to be void or contract

becoming void- Section 65 permits such restoration of the benefit, is as under “When an
agreement is discovered to be void, or when a contract becomes void, any person who has
received any advantage under such agreement, or contract is bound to restore it, or to
make compensation for it, to the person from whom he received it.
Illustrations- A pays B 1,000 rupees, in consideration of B's promising to marry C, A's
daughter. C is dead at the time of promise. The agreement is void, but B must repay A 1,000
rupees.
Illustration- A contracts B to deliver to him 250 maunds of rice before the first of May. A
deliver 130 maunds only before that day, and none after. B retains the 130 maunds after the
first of May. He is bound to pay A for them
Illustration- A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her a hundred
rupees for each night's performance. On the sixth night, A wilfully absents herself from the
theatre, and B, in consequence rescinds the contract. B must pay A for the five nights on
which she had sung.
Illustration - A contracts to sing for B at a concert for 1,000 rupees which are paid in
advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the
profits which B would have made if A had been able to sing, but must refund to B 1,000
rupees paid in advance.
It has been noted above that Section 65 covers two kinds of situations, firstly, when a
contract becomes void, and secondly, when an agreement is discovered to be void. An
agreement is discovered to be void, if the same was void ab initio, but that fact was not
known to the parties when they made the agreement. If any advantage has been received
under such an agreement, that has to be restored back. Section 65 cannot be taken
advantage of by the parties who knew from the beginning that the agreement was void.
In case of Pratap Singh Vs. Ram Charan, contract of partnership was discovered to be void
for not being in writing, hence received amount has to be returned with compensation.

D- Discharge by agreement and novation (Section 62)- Sections 62 and 63 deal with
contracts in which the obligation of the parties to it may end by the consent of the parties.
Novation- Novation means substitution of an existing contract with a new one. When, by an
agreement between the parties to a contract, a new contract replaces an existing one, the
already existing contract is thereby discharged, and in its place the obligation of the parties
in respect of the new contract comes into existence.
- Section 62 contains the following provision in this regard rescission and
alteration of contract- "62- Effect of novation- If the parties to a contract
agree to substitute a new contract for it or to rescind or alter, the original
contract need not be performed."
Novation is of two kinds: -
i- Novation by change in the terms of the contract; and
ii- Novation by change in the parties to the contract.

i- Change in the terms of the contract- The parties to a contract are free to alter
the contract which they have originally entered into. If they do s0, their liability
as regards the original agreement is extinguished, and in its place, they become
bound by the new altered agreement. For example, A Owes B 10,000 rupees, A
enters into an agreement with B, and gives B a mortgage of his (A's) estate for
5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and
extinguishes the old. In this illustration, the parties to the contract remain the
same but there is substitution of a new contract with altered terms in place of
the old one. It may be noted the novation is valid when both the parties agree to
it. As the parties have a freedom to enter into a contract with any terms of their
choice, they are also free to alter the terms of it by their mutual consent.

ii- Change in the parties to the contract- It is possible that by novation an

obligation may be created for one party in place of another. If under an existing
contract, A is bound to perform the contract in favour of B, the responsibility of A
could be taken over by C. Now instead of A being liable towards B, by novation C
becomes liable towards B. For example, A owes money to B under a contract. It is
agreed between A, B and C that B shall thenceforth accept C as his debtor,
instead of A. The old debt of A to B is at an end and new debt from C to B has
been contracted.
 - It may be noted here that in such cases, there should be consent of all the
three persons, viz., the person who wants to be discharged from the liability,
the person who undertakes to be liable in place of the person discharged,
and the person in whose favour the performance of the contract is to be
made. Thus, if A and B agree that in place of A, now C will be liable, but C
does not consent to it, there would be no novation. For example, A owes B
1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to credit C
with 1,000 rupees in his books, but C does not assent to the agreement. B still
owes C 1,000 rupees and no new contract has been entered into.
- In Godan Namboothiripad v. Kerala Financial Corpn- The respondent
corporation granted a loan of Rs. 1,26,900 to one Gopinath Menon for the
purchase of a bus. Gopinath Menon defaulted in payment of instalments. As
a consequence of that, the bus was seized by the respondent corporation.
Thereafter, the appellants requested the respondent corporation to release
the vehicle and undertook to pay the balance of the amount due from the
debtor, i.e., Gopinath Menon. It was held that there was novation in this case
as a result of which the liability of the original debtor had come to an end and
the liability of the appellants had come into existence to pay the outstanding
dues.
Statutory Substitution of Parties- The general rule is that all the parties to the subsisting
contract must consent to the novation of the contract. But there is an exception to this rule,
that when a Statute vests certain assets of the State in a statutory corporation and provides
that as a consequence, the rights and obligations of the State relating to such assets shall
stand transferred to such statutory corporation.

Remission of performance (Section 63)- Section 63 enables the promisee to agree to

dispense with or remit performance of promise.
The Section reads as under 63- Promisee may dispense with or remit performance of
promise- Every promisee may dispense with or remit, wholly or in part, the performance of
the promise made to him, or may extend the time for such performance, or may accept
instead of it any satisfaction which he thinks fit."
Illustrations- A promises to paint a picture for B. B afterwards forbids him to do so. A is no
longer bound to perform the promise.
Illustrations- A owes B 5,000 rupees, C pays to B 1,000 rupees, and B accepts them in
satisfaction of his claim on A. This payment is a discharge of the whole claim.
Illustrations- A owes B, under a contract, a sum of money, the amount of which has not
been ascertained. A without ascertaining the amount, gives to B and B, in satisfaction
thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever
may be its amount.
The Section permits a party, who is entitled to the performance of a contract
1- to dispense with or remit, either wholly or in part, the performance of the contract;
or
2- extend the time of performance; or
3- accept any other satisfaction instead of performance.

1- Dispensing with or remitting performance- The promisee has been authorized, by

the above stated provision, to remit or dispense with the performance of the
contract without any consideration. He may fully forego his claim, or may agree to a
smaller amount in full satisfaction of the whole amount. Thus, if A promises to paint
a picture for B, B may forbid him to do so, or if A owes Rs. 5,000 to B, B may accept
from A only Rs. 2,000 in satisfaction of the whole of his claim. In such cases, A is
discharged. It means that if B agrees to accept Rs. 2,000 in lieu of Rs. 5,000 from A,
he cannot thereafter ask A to pay the balance of Rs. 3,000.
- It has been held in “Union of India v. Navilakha," that acceptance of
payment under protest may not mean accord and satisfaction under Section
63. Certain goods sent through Central Railway got damaged for which the
respondent’s claimed compensation from the Railway. The Railway sent
cheque along with letter stating that the said "Payment was in full and final
satisfaction of the claim and the cheque should be sent back if it is not
acceptable to you. The claimants accepted the cheques under protest as part
payment, and communicated the protest to the Railway, stating that if the
railways have any objection to the cheques being accepted as part payment,
should inform the claimants within 10 days. The railways did not reply and
then the cheques were encashed. It was held that encashment of the
cheques in Such a case did not amount to accord and satisfaction under
Section 63, and, therefore, the claimants were entitled to claim the balance
amount of compensation.
- Accepting performance from a third party- The promisee, if he so likes, may
accept performance from a third party, and while accepting such
performance, he may agree to forego his claim in part. Once the promisee
accepts a smaller amount in lieu of the whole of his claim, the promisor
would be thereby discharged. This is clear from Illustration (c) to Section 63,
which is as follows: A owes B 5,000 rupees. C pays B 1,000 rupees, and B
accepts them in satisfaction of his claim on A. This payment is a discharge of
the whole claim.

2- Extending the time of performance- Section 63 permits the promisee to grant

extension of time for the performance of the contract, and no consideration 1s
needed for the same. The extension of time must be by a mutual understanding
between the parties. A promisee cannot unilaterally extend the time of performance
for his own benefit.
 - Thus, if a certain date of delivery of goods has been fixed in a contract of sale
of goods and the seller fails to supply the goods on such date, the buyer
cannot unilaterally extend the time of delivery so as to claim compensation
on the basis of rates prevailing on the extended date. He will be entitled to
compensation only on the basis of the rates prevailing on the actual date of
performance. For a valid extension of time, the agreement between the two
parties should be there. Thus, if the buyer wrote to the seller extending the
time of performance and the seller neither replied to that letter nor did he
supply the goods within the extended time, it was held that by a mere letter
from the buyer the time of supply of goods did not get extended.
- If the promisee grants the extension of time, he becomes bound thereby.
Therefore, if the creditor allows sometimes for making the payment to a
debtor, he cannot bring an action against the debtor to recover the debt, and
if such an action is brought, it will be dismissed by the court as being
premature.

3- Accepting any other satisfaction instead of performance- Section 63 permits the

promisee to accept any other satisfaction in lieu of agreed performance, and this
would discharge the promisor. For example, A owes B, under a contract, a sum of
money, the amount of which has not been ascertained. A, without ascertaining the
amount gives B, and B, in satisfaction thereof, accepts the sum of 2,000 rupees. This
is a discharge of the whole debt, whatever may be its amount.
- Accord and Satisfaction-Payment of Lesser than Amount Due- Accepting
some other satisfaction instead of actual performance is known as the
principle of "Accord and Satisfaction" under English law, and this results in
the discharge of obligation under the contract.
- It is thus settled position that payment of lesser than the amount due, would
not ordinarily amount to satisfaction of the debt.

Discharge by Neglect- Section 67 says that the promisor is excused of performing his part of
the contract if the promisee either neglects or refuse to afford the promisor reasonable
facilities for the performance of his promise. But where the obligation on the part of the
promisee is not a condition precedent for the promisor to perform his part, he is not
excused by virtue of Section 67.

QUASI CONTRACTS OR CERTAIN RELATIONS

RESEMBLING THOSE CREATED BY
 CONTRACT

Chapter V (Sections 68-72) of the Indian Contract Act, 1872 deals with "certain relations
resembling those created those obligations which are known as "Quasi Contracts" under
English law.
In various situations a person is obliged to compensate another although the basis of this
obligation is neither a contract between the parties, nor any tort on the part of the person
who is bound to compensate. The basis of the obligation is that no one should have unjust
benefit at the cost of the other. If A gets unjust enrichment at the cost of B, A has an
obligation to compensate B for the same. For instance, A and B jointly owe 100 rupees to C.
A alone pays the am0unt to C and B, not knowing this fact, pays 100 rupees over again to C.
C is bound to repay the amount to B.

In an action for unjust enrichment, the following essentials have to be proved by contract".
It incorporates
1. The defendant has been "enriched" by the receipt of a "benefit.
2. The enrichment is "at the expense of the plaintiff.
3. The retention of the enrichment is "unjust".
An action for a quasi-contract resembles a contractual action in so far as such an action is
against a certain person or certain persons, who have got the unjust benefit. Such an action,
it may be further noted, is for a liquidated sum of money.
The Indian Contract Act deals with the following quasi-contractual obligations:
A. Clam for necessaries supplied to a person incompetent to contract. (Section 68).
B. Reimbursement of money paid, due by another (Section 69).
C. Obligation of person enjoying benefit of non-gratuitous act (Section 70).
D. Responsibility of finder of goods. (Section 71).
E. Liability of a person getting benefit under mistake or coercion (Section 72).

A -Claim for necessaries supplied to a person incompetent to contract- Where one person
supplies necessaries suited to the condition in life of a person, who is incompetent to
contract (for example, minor or lunatic), or to anyone whom such incompetent person is
legally bound to support for example, to a lunatics’ wife or children), the person furnishing
such supplies is entitled t0 a reimbursement from the property of such incompetent person.
Section 68 contains the following provisions in this regard- “Claim for necessaries supplied
to person incapable of contracting, or on his account- If a person, incapable of entering
into a contract, or anyone whom he is legally bound to support, is supplied by another
person with necessaries suited to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.
Illustrations: -
- A supplies B, a lunatic, with necessaries suitable to his condition in life. A is
entitled to be reimbursed from B's property.
- A supply the wife and children of B, a lunatic, with necessaries suitable to
their condition in life. A is entitled to be reimbursed from B's property."

B - Reimbursement of money paid, due by another- Section 69 contains the following

provision in this regard: "69- Reimbursement of person paying money due by another in
payment of which he is interested- A person who is interested in the payment of money
which another is bound by law to pay, and who therefore pays it, is entitled to be
reimbursed by the other
Illustration- B holds lands in Bengal, on a lease granted by A, the zamindar. The revenue
payable by A to the Government, being in arrear, his land is advertised for sale by the
Government. Under the revenue law, the consequence of 8uch sale will be annulment of Bs
lease, B, to prevent the sale and the consequent annulment of his own lease, pays to the
Government the sum due from A. A is to make good to ‘B’ the amount so paid.
For the application of this Section, the following two essentials are to be there:
i- One person is interested in the payment of money, and therefore, he pays it,
while,
ii- another person is bound by law to pay the same, but he fails to pay
The person so making the payment is entitled to be reimbursed by the person who was
bound to pay.
i- One should have interest in making payment- The person, reimbursement must
have an interest in making the payment. The purpose of making the payment
should be bona fide protection of his interest by the plaintiff. This provision in
India is wider than that in English law. In England, the person making the
payment must have been compelled by law to pay the debt or discharge the
liability of the other person. In India, it is enough that there is an interest of the
plaintiff in making the payment.

Section 69 has been explained by an illustration, according to which if a landlord

is in arrears of some land revenue to the Government, and the tenant, in order
to avoid the sale of that land by the Government and consequential cancellation
of the lease in favour of the tenant, makes the payment of the land revenue, he
is entitled to recover the money so paid, from the landlord. The landlord was
bound to pay the land revenue, and the tenant has an interest in making the
payment, because otherwise there is a fear of his lease being cancelled, and
therefore, the tenant can make a claim under Section 69.
 One person making voluntary payment of another person's debt, without having
any interest in the payment, cannot seek reimbursement from the other.

ii- Another person should be bound by law to pay- It has been noted above that
for this Section to be applicable, the plaintiff should have an interest in the
payment, and the defendant should be bound by law to pay the same. The
provision is based on the principle that the plaintiff, having discharged the
defendant's debt, is entitled to be reimbursed by him. If the plaintiff is not
merely interested but he himself is bound to pay and also pays, he cannot have
an action against the defendant.

C- Obligation of person enjoying benefit of non-gratuitous act- According to Section 70

"Where a person lawfully does anything or another person, or delivers anything to hm, not
intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter
is bound to make compensation to the former in respect of, or to restore, the thing so done
or delivered."
For the application of this Section, the following conditions are to be satisfied-
a- A person should lawfully do something for another person, or should deliver
something to him,
b- The person making the payment or delivering the thing must not do so gratuitously,
i.e., he should expect payment for the same and
c- The other person should enjoy the benefit of this payment or the delivery of the
thing.
When all the above conditions are satisfied, the person receiving the benefit becomes
bound to pay compensation to the person conferring the benefit."

A- Doing of something or delivering anything to another person- When a person does

something for another person or delivers anything to him not intending to do so
gratuitously, he is entitled to claim compensation for the same from such other person.
 Thus, if A, a tradesman, leaves goods at B's house by mistake and B treats the goods
as his own, B is bound to pay A for them.
 If goods were purchased by a Govt Officer, without any indication that the same was
done gratuitously, the Govt. could be made liable to pay for the same under Section
65, lndian Contract Act.
 Whether, after doing the work of rendering the services, the plaintiff entitled to
recover from the defendant any remuneration for the act or services, would depend
on the plaintiff's intention at the time of doing the work. If he intended to act
gratuitously, he cannot recover anything. Otherwise, compensation for the work
done can be claimed.
B- No intention to do the act gratuitously- When the person doing the act does not intend
to do it gratuitously. But expects payment for the same on doing such act, he can ask for
Compensation under Section 70.
 If the intention is to do the act gratuitously, nothing can be recovered for the
same. For instance, A saves B's property from fire. If the circumstances show that
A intended to do it gratuitously (without any payment), A is not entitled to
compensation from B.
 Similarly, when a person purchases property for a close relative living in a foreign
country and agrees to collect the rents and deposit the same in the latter's
account and there is nothing to prove that he would charge for such services, he
is not entitled to recover any remuneration for such services.

C- Enjoyment of benefit by the defendant is necessary- For an action under Section 70,
one of the essentials which has got to be proved is that the defendant enjoyed the
benefit of the work done or the thing delivered to him by the plaintiff. If a person
accepts the benefit of the work done, it can raise a presumption that the work was not
intended to be done gratuitously.
 To make a person liable for enjoying the benefit, it has to be proved that the
defendant had a choice of accepting or rejecting the benefit and he preferred to
accept the same.

Unjust benefit to the defendant necessary- Section 70 is founded on the principle that one
should not gain unjust enrichment at the cost of the other. If there is no unjust gain
obtained in any transaction, Section 70 has no application.
Application of Section 70 against the Government- Section 70 prevents unjust enrichment
and it applies as much to individuals as to corporations and Government. If the services
rendered or goods supplied to the Government are under a purported contract, which does
not materialize because of non-fulfilment of the formalities prescribed in Article 299 of the
Constitution (Section 175, Govt. of India Act, 1935), the Government can still be made liable
to compensate for the same under Section 70 of the Contract Act, if it has enjoyed the
benefit of what has been done under the purported contract.
 In State of West Bengal v. B.K. Mondal & Sons, the respondents constructed
certain structures including a Kutcha Road, guardroom, office, kitchen and
storage sheds at the request of some officers of the appellant, i.e., the State of
West Bengal for the use of the Civil Supplies Department of the Government. The
respondent claimed a sum of Rs. 19,325 for these works. It was held that the
appellant having accepted the benefit of the structures Constructed for it, was
liable under Section 70 to pay for the same.
Section 70 cannot be invoked against a minor- It has been held that no action can be
brought against a minor to recover compensation from him under Section 70. "The minor is
excluded from the operation of Section 70 for the reason that his case has been specifically
provided for by Section 68. Besides, in the case of a minor, even the voluntary acceptance of
the benefit of work done or thing delivered which is the foundation of the claim under
Section 70 would not be present, and so, on principle, Section 70 cannot be invoked against
a minor."

D -Responsibility of finder of goods- Section 71 contemplates still another quasi-contractual

situation, i.e., when a person is a finder of goods. A "finder of goods" is "a person who finds
goods belonging to another and takes the goods into his custody." Although as between the
finder and the owner of the goods, there is no contract, yet the following responsibility has
been fixed by Section 71, on the finder of goods.
The Section 70 is reads as follows- A person who finds goods belonging to another, and
takes them into his custody, is subject to the same responsibility as a bailee.
The position of the finder of goods is similar to that of a bailee. Ac/to section 151, or
instance, like a bailee of goods, the finder is bound to take as much care of the goods as a
man of ordinary prudence would, under similar circumstances, take of his own goods of the
same bulk, quality and value as the goods found by him.
Similarly, a/to section 156 and 157, he should not mix the goods found by him with his own
goods.
A/to section 160, he, like a bailee, is bound to return the goods to the true owner, if he can,
after a reasonable search be found.
A/to section 161, If, because of his default, the goods are not returned to the true owner, or
there is any loss, destruction or deterioration of the goods, the finder must compensate the
owner for the same.
The finder of goods has been authorized to sell the goods found by him. Section 169,
which confers such an authority. Under Section 169, the finder of the goods has the power
to sell them-
when-
1- the owner of the goods cannot with reasonable diligence be found or if he refuses,
upon demand, to pay the lawful charges of the finder; and
2- either the thing found is in danger of perishing or of losing the greater part of its
value, or, in case the goods are not of perishable nature, but the lawful charges of
the finder, in respect of the thing found, amount to two-thirds of its value.
NOTE- If the situation is not covered by Section 169 and the finder sells the able diligence be
found, goods, he can be made liable for conversion.

Finder's right of lien and compensation- The finder of the goods has no right to sue the
owner for compensation for the trouble and expense voluntarily incurred by him to
preserve the goods and to, find out the owner; but he may retain the goods against the
owner until he receives such compensation; and where the owner has offered a specific
reward for the return of goods lost, the finder may sue for such reward, and may retain the
goods until he receives it [SECTION 168].
- Even if no specific reward has been offered, but, if after the goods are found,
the owner promises to pay something to the finder for his services, the finder
can enforce this promise under Section 25 (2). For example, A finds B's purse
and gives it to him. B promises to pay A's expenses in so doing. It is a valid
contract and A can recover the amount from B.

Finder is bailee only against the true owner- It may be noted that the position of the finder
of goods is that of a bailee only against the true owner of the goods, and he is bound to
return the goods to the owner as owner's title is better than his. Finder's title is better than
everybody except the true owner. Thus, if the finder of a jewel gives the jewel to a jeweller
for being valued, he has a right to recover its value from the jeweller, if the latter, refuses to
return the same.

E -Liability of a person getting benefit under mistake or coercion- Section 72 covers a

situation where money has been paid, or anything delivered, by one person to another
either by mistake or under coercion.
According to this Section 72, "A person to whom money has been paid, or anything
delivered, by mistake or under coercion, must repay or return it."
The Section has been explained by the following illustrations-
- A and B jointly owe 100 rupees to C. A alone pays the amount to C, and B, not
knowing this fact, pays 100 rupees over again to C. C is bound to repay the
amount to B.
- A railway company refuses to deliver up certain goods to the consignee
except upon the payment of an illegal charge for carriage. The consignee pays
the sum charged in order to obtain the goods. He is entitled to recover so
much of the charge as was illegally excessive.

REMEDIES FOR BREACH OF CONTRACT

When one of the parties makes a breach of contract, the following remedies are available to
the other party
1- Damages: Remedy by way of damages is the most common remedy available to the
injured party. This entitles the injured party to recover compensation for the loss
suffered by him due to the breach of contract, from the party who causes the breach.
Sections 73 to 75 incorporate the provisions in this regard.
2- Quantum Meruit- When the injured party has performed a part of his obligation under
the contract before the breach of contract has occurred, he is entitled to recover the
value of what he has done, under this remedy.
3- Specific Performance and injunction- Sometimes a party to the contract instead of
recovering damages for the breach of contract may have recourse to the alternative
remedy of specific performance of the contract, or an injunction restraining the other
party from making a breach of the contract. Provisions regarding these remedies are
contained in the Specific Relief Act, 1963.

I- DAMAGES-
Section 73 of the Indian Contract Act, 1872, makes the following provision regarding the
right of the injured party to recover compensation for the loss or damage which is caused to
him by the breach of contract.
- “Section 73- Compensation for loss or damage caused by breach of
contract-When a contract has been broken, the party who suffers by such
breach s entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of
it.”
- Such compensation is not to be given for any remote and indirect loss or
damage sustained by reason of the breach.
- Compensation for failure to discharge obligation resembling those created
by contract- When an obligation resembling those created by contract has
been incurred and has not been discharged, any person injured by the failure
to discharge it is entitled to receive the same compensation from the party in
default, as if such person has contract to discharge it and had broken his
contract.

In action for damages for the breach of contract, there arise two kinds of problems-
i- Firstly, it has to be determined whether the loss suffered by the plaintiff is
proximate consequence of the breach of contract by the defendant. The person
 making the breach of contract is liable only for the proximate consequences of
the breach of contract. He is not liable for the damage which is remotely
connected with the breach of contract. In other words, the first problem is the
problem of "Remoteness of Damage".
ii- If it is found that a particular damage is the proximate result of the breach of
contract rather than too remote, the next question which arises is: - How much
compensation is to be paid for the same? This involves determining the quantum
of compensation. This, in other words, is the problem "Measure of Damages".

Remoteness of Damage- The following statement, in the case of Hadley v. Baxendale? is

considered to be the basis of the law to determine whether the damage is the proximate or
the remote consequence of the breach of contract.
“Where two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be such as may fairly and reason ably be considered either arising
naturally, i.e., according to the usual course of things, from such breach of contract
itself, or Such as may reasonably be supposed to have been in the contemplation of
both the parties, at the time they made the contract."
The provision contained in Section 73 (para 1) is similar to rule contained in the above
stated judgment in Hadley v. Baxendale.
The rule in Hadley v. Baxendale consists of two parts. On the breach of a contract such
damages can be recovered
(1)- as may fairly and reasonably be considered arising naturally, i.e., according to the usual
course of things from such breach; or,
(2)- as may reasonably be supposed to have been in the contemplation of both the parties
at the time they made the contract.
The principle stated in the two branches of the rule is virtually the rule of "reason able
foresight". The liability of the party making the breach contract depends on the knowledge,
imputed or actual, of the loss likely to arise in case of breach of contract. The first branch of
the rule allows damages for the loss arising naturally, i.e., in the usual course of things from
the breach. The parties are deemed to know about the likelihood of such loss. The second
branch of the rule deals with the recovery of more loss which results from the special
circumstances of the case. Such loss is recoverable, it the possibility of the same was
actually within the knowledge of the parties, particularly who makes a breach of the
contract, at the time of making of the contract.

(1)- First branch of the rule in Hadley v. Baxendale: Damage arising in the usual course of
things- Under this branch of the rule, compensation can be claimed for any loss or damage
that arose in usual course of things from the breach of contract.
In Hadley v. Baxendale, the facts were as under- The plaintiff's mill had been stopped due
to the breakage of a crankshaft. The broken shaft had to be sent to the makers at Greenwich
as a pattern for preparing the new one. The defendants, who were common carriers, agreed
to carry the broken shaft to Greenwich. Owing to the defendants' negligence, the delivery of
the shaft was delayed. The plaintiffs brought an action to recover damages for the loss of
profits arising out of the delay. It was held that it could not be contemplated that the mill
would be stopped in the usual course of things, by sending the shaft, as the millers might
have another shaft in reserve. Moreover, the special circumstances were not communicated
by the plaintiffs to the defendants. The plaintiffs were, therefore, not entitled to recover the
loss.
In Victoria Laundry (Windsor) Ltd, v. Newman Industries Ltd. the plaintiffs were carrying on
business as launderers and dyers. They wanted to expand their business and for that
purpose, they needed a boiler of a much greater capacity than the one they already had.
The defendants agreed to supply them the boiler needed by them by June 5, 1949. They
delayed the performance by 5 months, and supplied the boiler only on November 8, 1949.
The plaintiffs brought an action to recover damages for the loss of profits during June 5 and
November 8, 1949/ The claim included the loss due to certain highly lucrative dyeing
contracts which they could have obtained from the Government. (It was held that the
defendants had the knowledge of the fact that the plaintiffs were launderers and they
needed the boiler immediately, and some loss of profits could be anticipated. But the
defendants did not know that the plaintiffs could have "highly lucrative contracts", and the
loss on that account could not be anticipated. The liability of the defendants was considered
to be only for the loss as could normally be expected under the circumstances.
Delay in carriage of goods meant for sale- If the carrier causes the delay in delivering the
goods at the destination, he can be made liable to pay the difference between the prices
prevailing on the agreed date of delivery and that date on which the goods are actually
delivered, because the loss arising on account of difference in prices on different dates can
be considered to be arising naturally, i.e., according to the usual course of things from the
breach.
- In Wilson v. Lancashire and Yorkshire Railway, the plaintiff, who was a cap
manufacturer, gave a consignment of cloth meant for manufacturing caps to
the defendants for carriage. The defendants made a delay in the delivery or
the cloth at the destination. The plaintiff could not execute the orders for
caps as the season for the same had passed. It was held that the plaintiff
could claim only the difference between the value of the cloth between the
agreed date of delivery and the actual date of delivery of the consignment.
The plaintiffs, however, were not entitled to recover compensation for the
loss of profits due to the caps not having been prepared and sold.
- In ‘Koufos Vs. C. Czarnikow Ltd' the respondents were sugar merchants,
chartered a ship, Heron II, belonging to the appellant for carrying sugar from
Constanza to Basrah. The delivery of the cargo was delayed due to the
negligence of the appellant. In the meantime, the price of sugar had fallen.
 The respondents claimed a sum of £ 3,800 by way of compensation, that
amount being the difference between the price of sugar when it ought to
have been delivered and when it was actually delivered. It was held by the
House of Lords that the appellant was presumed to know that the prices of
such articles were liable to fluctuate, and, therefore, the respondents were
entitled to recover compensation claimed by them.
Compensation for mental anguish- In Ghaziabad Development Authority v. Union of
India," it has been held by the Supreme Court that mental anguish cannot be a head of
damages for breach of ordinary commercial contract.
when monetary compensation is not adequate relief- In Sandeep Cement (P) Ltd. v. Union
of India, the petitioner transported coal through the respondent railway. 13,320 Metric Tons
of coal transported in one of the wagons was not delivered at the destination. The
consignment consisted of 'mineral coal which was a scarce commodity and not easily
available in the market/ It was held that monetary compensation would not be adequate
relief in this case and a writ of Mandamus was issued directing the Railway Administration
to deliver the goods in kind.

Breach of promise to marry- In a breach of promise to marry, there results injury to feelings
and disappointment and for that exemplary damages may be claimed. In Prema v. Mustak
Ahmed, the Gujarat High Court held that, as in England, in India also the normal rule of the
damages being compensatory does not apply in a breach of promise to marry. In this case,
exemplary damages were allowed to the plaintiff, Miss Prema, in the action against the
defendant, Mustak Ahmed.
- In Laxminarayan v. Sumitra, after the engagement, husband continued to
promise to marry the girl and had sexual contact with her, as a consequence
of which she became pregnant. Then he refused to marry her. It was held
that she was entitled to damages on various counts, such as physical pain,
agony, indignity, chances of marriage becoming dim and social stigma, ln this
case Rs. 30,000/- awarded by the lower court, was affirmed by the M.P. High
Court.

Claim by stranded passengers- In Hobbs v. L & S.W. Ry., due to the negligence of the
defendant railway company, the plaintiff and his family were set down at a wrong Railway
station. Neither any nearby hotel accommodation nor any conveyance was available to
them, and they had therefore to walk several miles in rain. The plaintiff was entitled to
substantial damages for inconvenience to the family.
- If the carrier does not take a person up to the destination, the passenger may
also be allowed to claim hotel charges and also the expenses incurred on the
 alternative conveyance." A stranded passenger can claim expenses for
ordinary conveyance, and not a special costly conveyance, unless there is an
urgency in his reaching the destination as in the case of a doctor
Damages for pre-contract and wasted expenditure- Sometimes, the expenditure incurred
by one party to the contract before the contract was entered into is wasted. If it was in the
contemplation of the parties that the event of breach of contract, the pre-contract
expenditure would be wasted, compensation can be claimed for the same.
- Such compensation was allowed in Anglia Television Ltd. v. Reed. In this
case, the plaintiffs intended to make a film of a play for television. The
defendant, Robert Reed, agreed to play the leading role. The defendant made
a breach of contract. Before the contract with the defendant for playing the
said role was made, the plaintiffs had incurred expenditure by arranging for
the place where the play was to be filmed, and engaging director, a designer
and a state manager. The plaintiffs brought an action for damages. The claim
was not for any loss of profits, but it was to recover compensation for the
wasted expenditure amounting to £ 2,750. This sum included both pre-
contract as well as post-contract expenditure. It was held that the plaintiff
wasted expenditure irrespective of the fact that a substantial portion of it
had been incurred before the contract was entered into. The basis of the
decision was that it was within the contemplation of the parties that on the
breach of contract, the expenditure incurred in respect thereof would be
wasted.
(2)- Second branch of the rule in Hadley v. Baxendale: More loss arising from the special
circumstance- If the loss on the breach of a contract does not arise naturally, Le according
to the usual course of things but it arises due to some special circumstances, the person
making the breach of contract can be made liable for the same provided that those special
circumstances were brought to his knowledge at the time of making the contract If he had
no knowledge of the special circumstances which result in the particular loss, he cannot be
made liable for the same.
In British Columbia Saw Mill Co. Ltd. v. Nettleship, the plaintiffs delivered to the
defendant, a carrier, certain cases of machinery meant for the erection of a saw mill
at Vancouver, for being shipped there. Due to the negligence of the defendant, one
of the cases containing some material parts of the machinery was lost, as a
consequence of which the proposed saw mill could not be erected. The plaintiff sued
the defendant to recover damages not only in respect of the parts of the machinery
lost, but also for the loss of profits occurring due to the machinery mot being erected
in time. It was held that as the defendant was a mere carrier, who had no knowledge
of the purpose to be served by the goods to be transported by it, he was not liable
for the loss of profits claimed by the plaintiff. His liability was only to pay damages to
cover the cost of the parts of the machinery lost.
 In Smeed v. Foord, the defendant promised to deliver a threshing machine to the
plaintiff for the known purpose of threshing wheat in the field. The defendant failed
to supply the machine. Another machine not being available, the plaintiff was
obliged to carry the wheat and stack it. While the wheat was stacked, it was
damaged by rainfall. After being damaged by rainfall. After being threshed, wheat
had to be kiln dried. In the meantime, the price of wheat. While the having fallen, it
fetched less price than the one which would have been received if this delay had not
been there. It was held that it could be foreseen that if the machine was not
supplied, the wheat would have to be stacked and it could get damaged by rainfall,
and the plaintiff was held entitled to recover the expenses of stacking the wheat,
loss by damage due to rainfall and the expense of drying the wheat. No
compensation was, however, allowed for loss arising from the fall in the market
price, on the ground that neither that was the natural result of the breach of
contract.

Measure of Damages- After it has been established that a certain consequence of the
breach of contract is proximate and not remote and the plaintiff deserves to be
compensated for the same, the next question which arises is: What is the measure of
damages, for the same, or in other words, the problem is of the assessment of
compensation for the breach of contract.
Damages are compensatory in nature. The object of awarding damages to the
aggrieved party is to put him in the same position in which he would have been if the
contract had been performed.
In a contract of sale of goods, the measure of damages is the difference between the
contract price and the market price on the date of the breach of contract. For
instance, A agrees to supply Ba watch on 1st January for Rs. 1,000. If A fails to supply
the watch and the market price of the watch on that date is Rs. 1,200, B will be
entitled to recover from A Rs. 200 as damages. The reason is that the loss suffered by
the buyer is Rs. 200 because due to the rise in the market price of the watch, he will
have to pay that much extra if he purchases the watch from the market.
Similarly, if the buyer (B) refuses to take the watch on the due date, the seller will
also be entitled to recover the difference between the contract price and the market
price on 1st January. For instance, the market price of the watch on that date is Rs.
800, A's loss is Rs. 200 in respect of the transaction, because from another customer
A can get only Rs. 800, whereas B had promised to pay Rs. 1,000 for the same. A can
recover Rs. 200 from B.
It has been noted above that on the breach of contract of sale, the damages are
ascertained as on the date of breach of contract. Thus,
 i- if the buyer makes a breach of contract, the seller can claim damages as arising
on the date of breach of contract, and it is not necessary that the seller should
resell the goods on that date;
ii- Similarly, if the seller makes a breach of contract, the buyer can claim damages
as arising on the date of breach of contract, and it is not necessary that the buyer
should re-purchase the goods on that date.

Actual re-sale by the seller not necessary- In Jamal v. Moola Dawood Sons & Co . the Privy
Council has held that the proper measure of damages is the difference between the contract
price and the market price on the date of the breach of the contract irrespective of the fact
that the seller does not again sell the goods on that day, but sells the same on a subsequent
date and the actual loss to him is different from the difference in the prices on the date of
the breach of contract.
In Union of India v. Commercial Metal Corporation, Commercial Metal Corporation
agreed to supply 200 metric tons of leaded bronze ingots to the Union of India. The
Corporation supplied only 163 metric tons. The Union of India sued the said
corporation to recover compensation for the breach of contract arising out of the
short supply of the commodity to the extent of 37 metric tons. The Corporation tried
to avoid the liability by pleading that the Government had not actually repurchased
the subject goods at a higher price and had thus incurred no loss. The Delhi High
Court rejected this plea and it was held that even if the buyer did not repurchase the
goods on the breach of contract by the seller, the damages equivalent to the
difference between the market price and the contract price on the date of the
breach of contract could be claimed.
Damages when goods have fixed market price- Sometimes, the market price for certain
goods may be fixed one and not subject to any fluctuation, that is, there may be no
difference between the contract price and the market price. The question arises in such case
is can the seller recover damages from the buyer on the basis of being deprived of the profit
which he would have made, had the buyer taken the goods?
In W.L. Thompson Ltd. v. Robinson (Gunmakers) Ltd., the seller was held entitled to
recover the loss of profits even though the contract and the market price was the
same. In this case, the plaintiffs were dealers in Vanguard cars. They sold one car to
the defendants. On the due date, the defendants refused to accept the car. Even
though there was no difference between the contract price and the market price,
the sellers were held entitled to recover compensation equivalent to the profit they
would have made had the buyer taken the car. The sellers had been able to sell one
car less due to the breach of contract by the buyers and, therefore, they could
recover the loss of profit on that account.
Loss of profit on a sub-contract- When the seller does not supply the goods to the buyer
and the buyer is not able to earn certain amount of profit which he could have made by
supplying the goods further under a sub-contract, the buyer is not entitled to recover the
loss of expected profit, but his right is only to recover the difference between the contract
price and the market price only.
The position would be clear from the following illustration: - A contracts to deliver
50 maunds of saltpetre to B on the first of January, at a certain price, B afterwards,
before the first of January, contracts to sell the saltpetre to C at a price higher than
the market price on the first of January. A break his promise. In estimating the
compensation payable by A to B, the market price on the first of January, and not the
profit which would have arisen to B from the sale to C, is to be taken into account.
But if the fact of sub-Contract has been brought to the knowledge of the other party, then
the loss arsing out of the non-performance of the sub-contract consequent on the breach of
contract by the promisor, can be claimed.
The following illustration explains the point- A having contracted with B, to supply B
with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time,
contracts with C for the purchase of 1,000 tons of iron at 80 rupees a ton, telling C
that he does so for the purpose of performing his contract with B. C fails to perform
his contract with A, who cannot procure other iron, and B, in consequence rescinds
the contract. C must pay to A 20,000 rupees, being the profit, which A would have
made by the performance of his contract with B.
Damages in case of delivery by instalments- When the goods are to be delivered by
instalments, the measure of damages is the difference between the contract price and the
market price of a particular instalment, on the final date of performance of that instalment.
Liquidated damages and penalty- Sometimes, the parties to a contract, at the time of
making the contract agree to the amount of compensation payable in the event of the
breach of contract. The amount of compensation payable, which has been agreed
beforehand, may be either liquidated damages or penalty. If the compensation to be paid
on the breach of contract is the genuine pre-estimate of the prospective damages, it is
known as liquidated damages. If the compensation agreed to be paid in the event of breach
of contract is excessive and highly disproportionate to the likely loss, viz., the amount is
fixed in terrorem, with a view to discouraging breach of contract, it is known as penalty.
According to English law, if the amount of compensation agreed to by the parties is
by way of liquidated damages, the plaintiff will be entitled to recover the agreed
amount of compensation, neither more nor less than that, without the plaintiff
having to prove the exact amount of loss suffered by him by the breach of contract.
On the other hand, if the compensation agreed upon is in the nature of penalty, the
plaintiff will be indemnified to the extent of the actual loss suffered by him.
In Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co. Ltd., the plaintiffs,
Dunlop Pneumatic Tyre Co., who were the manufacturers of motor-car tyres and
tubes, etc. sold some of these goods to the defendants. The defendants agreed not
to sell those goods further below the manufacturer's list price. They also agreed to
pay Euro 5 by way of liquidated damages for every tyre, tube, etc. sold below the list
 price. It was held by the House of Lords that the sum of compensation payable on
the breach of the agreement was the genuine pre-estimate of damages, and
therefore, liquidated damages.

If the 'agreed damages are highly excessive, and that high sum is agreed to be paid
whether the breach results in a small or a heavy loss, the sum so fixed would be
considered to be in terrorem and will be deemed to be penalty rather than
liquidated damages. In Ford Motor Co. v. Armstrong," the defendant, wh0 was a
retail dealer of the cars and car parts manufactured by the plaintiff company, agreed
not to sell any car or its parts below the company's list price. He further agreed that
for every breach of this agreement, the amount of damages payable will be £ 250,
that being the agreed damage which the manufacturer will sustain. It was held that
in this case the amount of compensation fixed for the breach was an arbitrary one,
and it stipulated payment of such high damages even for a trifling breach, it was,
therefore, a penalty."

If the parties to an agreement agree to a certain sum by way of liquidated damages,

the damages payable will not exceed that sum even though the actual loss suffered
by the plaintiff exceeds the amount so fixed. In Cellulose Acetate Silk Co. Ltd. v.
Widnes Foundry (1925) Ltd., A agreed to supply certain machinery to B within a
period of 18 weeks. It was further agreed that if there was any delay in the delivery
of the machinery, A will be liable to pay compensation at the rate of 20Euro each
week's delay. There was a delay of 30 weeks and according to the agreement, the
compensation would have amounted to £ 600. B, however, claimed 5,850, which he
contended was the actual loss suffered by him by the non-delivery of the machinery
in time. It was held that since the parties must have known that the actual likely loss
was much more than 20 for every week of delay, but had still preferred to fix £ 20 a
week as damages, the damages payable must be limited to the agreed amount.

Nominal Damages- In the absence of any concrete material to show the extent of damages
suffered by the plaintiff, resort will have to be to the maxim of nominal damages.
The Karnataka High Court in M/s. Vikas Electricity Service v. Karnataka Electricity
Board, said that merely because the plaintiff called to produce evidence sufficient to
ascertain the extent of damage he suffered, he could not be denied damages. The
Court explained that technically “the law requires not damage, but an injuria or
wrong.”
Sometimes, the Court said, Law presumes or implies damages in very breach of
contract or in every tortious invasion of a legal right" and that would justify an award
or nominal damages in such cases without proof of actual loss. In the instant case, to
the claim of Rs. 50,500/ as damages, made by the plaintiff, the Hon'ble High Court
 awarded Rs. 25,000/- as the plaintiff could not produce sufficient evidence to
ascertain his actual loss.
Holt C.J. in Ashby v. White observed that nominal damages might be awarded
where the fact of the loss was shown but the necessary evidence as to its amount
was not given.

Entitlement of compensation for breach of contract- Section 74 of the Indian Contract Act,
1872 emphasizes that in case of breach of contract, the party complaining of the breach is
entitled to receive reasonable compensation whether or not actual loss is proved to have
been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the
compensation named in the contract is by way of penalty, consideration would be different
and the party is only entitled to reasonable compensation for the loss suffered. Burden is
on the other party to lead evidence for proving that no loss is likely to occur by such breach.
When the parties agree to the amount of compensation payable in the event of the breach
of contract, the position in India is governed by the following provision contained in
Section 74 of the Indian Contract Act: -
“Compensation for breach of contract where penalty stipulated for- When a contract has
been broken, if a sum is named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to
have been caused thereby, to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for.”

Exception- When any person enters into any bail-bond, recognizance or other instrument of
the same nature, or, under the provisions of any law, or under the orders of the [Central
Government] or of any [State Government], gives any bond for the performance of any
public duty or act in which the public are interested, he shall be liable, upon breach of the
condition of any such instrument, to pay the whole sum mentioned therein.

Illustrations: -

a- A contract with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A fail to
pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not
exceeding Rs. 1,000, as the Court considers reasonable.
b- A contract with B that, if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000.
A practise as a surgeon in Calcutta. B is entitled to such compensation; not exceeding Rs.
5,000, as the Court considers reasonable.
c- A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain
day. He forfeits his recognizance. He is liable to pay the whole penalty.
d- A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent. at the end
of six months, with a stipulation that, in case of default, interest shall be payable at the
rate of 75 per cent. from the date of default. This is a stipulation by way of penalty, and
B is only entitled to recover from A such compensation as the Court considers
reasonable.
 e- A, who owes money to ‘B’ a money-lender, undertakes to repay him by delivering to him
10 maunds of grain on a certain date, and stipulates that, in the event of his not
delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20
maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable
compensation in case of breach.

The rule contained in Section 74 provides that when the parties have mentioned in the
agreement the amount or compensation to be paid in the event of breach, the injured party
is entitled to receive from the party who has broken the contract reasonable compensation
not exceeding the amount named in the contract. Mention of specific amount
compensation does not necessarily entitle the plaintiff to claim that sum, u the actual
amount is to determine by the Court.
For example, A gives B n bond for the repayment of Ra. 1,000 with interest at 12 per
cent at the end of six months, with a stipulation that, in case of default, interest shall
be payable at the rate of 76 per cent from the date of default. This is stipulation by
way of penalty, and B is only to recover from A such compensation as the Court
considers reasonable.
In M/s. Ganga Maruthi V, Nagaraj," the plaintiff, a dealer in television sets, sold a
black and white T.V, set to the defendant on 6.2.90 on credit and the defendant
agreed to pay for the same in 36 equal monthly instalments of Rs, 236/ per month
and Rs. 100/- for every default in payment of instalments. The defendant paid only 5
instalments and did not pay anything thereafter in spite of repeated demands. The
plaintiff filed a suit for the recovery of penalty of Rs. 3100, i.e., Rs. 100/- for default
of each of the 31 remaining instalments, apart from the amount of instalment due. It
was held that keeping the provision of Section 74 in view, the plaintiff may be
awarded interest Rs. 10/- for every instalment, i.e., a total of Rs. 310/ only, apart
from the amount agreed to be paid by 31 remaining instalments.
Sometimes, the contract may stipulate the payment in instalments with the condition that
on default of any of the instalments, the whole of the amount will immediately become
payable. The Supreme Court in K.P. Subbarama Sastri v, K.S. Raghvan,' decided that
whether such a clause is by way of liquidated damages or penalty has to be determined by
the Court in the background of various relevant factors.
If, in any contract, the compensation agreed upon by the parties is a genuine pre-estimate
of the compensation, i.e., it is not by way of penalty, the Court will enforce the agreement
as such.
Similarly, if A undertakes to repay Ba loan of Rs. 1,000/- by five equal monthly
instalments, with a stipulation that in default of any instalment, the whole shall
become due. This stipulation is not by way of penalty and the contract may be
enforced according to its terms.
Forfeiture of earnest money under a contract for the sale of property movable or
immovable, t the amount is reasonable, does not fall within Section 74, but if the amount
to be forfeited is unreasonable, Section 74 applies.
In Delhi Development Authority v. Grihsthapna Co-op. Group Housing Society
Ltd.," the Supreme Court has held that forfeiture of earnest money on account of
non-payment of legal enhanced premium of land allotted to the depositor of the
earnest money, is not illegal.

No Forfeiture of Advance if Contract Becomes Frustrated- It is well settled that where the
performance of the contract becomes impossible within the meaning of Section 56 of the
Contract Act, 1872, forfeiture of any advance paid would be improper.
- In Thiriveedhi Channaiah v. Gudipudi Venkata Subba Rao, the parties
entered into an agreement of sale and purchase of land. The purchaser
advanced a sum of money towards part payment of sale price and agreed
therein that on his default to pay the balance of sale consideration, the said
amount of advance would be forfeited. Before the deed of sale could be
executed the State issued a notification under Section 4 of the Land
Acquisition Act, 1894, for the acquisition of the said land. The Apex Court
held that the performance of the agreement had become impossible and, in
such circumstances, forfeiture of advance paid would be improper.

II- QUANTUM MERUIT-

Ordinarily, if a person, having agreed to do some work or render some services, has done
only a part of what he was required to do, he cannot claim anything for what he has done
When a person agrees to complete some work for a lump sum, non-completion of the work
does not entitle him to any remuneration even for the part of the work done.
But the law recognizes an important exception to this rule by way of an action for Quantum
Meruit. Under this action, if A and B have entered into a contract, and A, who has already
performed a part of the contract, is then prevented by B from performing the rest of his
obligation under the Contract, A can recover from B reasonable remuneration for whatever
he has already done.
This action is not an action for compensation for the breach of contract by the other side. It
is an action which is alternative to an action for the breach of contract. This action in
essence is one of restitution, putting the party injured by the breach of contract in a position
in which he would have been, had the contract not been entered into. It merely entitles the
injured party to be compensated for whatever work he may have already done, or whatever
expense he may have incurred.
Where one party has absolutely refused to perform, or has rendered himself incapable of
performing his part of the contract, he puts it in the power of the other party either to sue
for the breach of it or to rescind the contract and sue on quantum meruit for the work
actually done."
It may be noted that this remedy is available only for the part of the work done by the party
other than the one making a breach of contract. If the party making a breach of the contract
has done a part of the work in connection with it, he cannot claim anything in respect
thereof under this remedy.

The essentials of an action of quantum meruit are as follows : -

i- One of the parties makes a breach of contract, or prevents the performance of it
by the other side.
ii- The party injured by the breach of the contract, who has already performed a
part of it, elects to be discharged from further performance of the contract and
brings an action for recompense for the value of the work he has already done.
For instance, if A agrees to deliver B 500 bags of wheat and when A has already delivered
100 bags, B refuses to accept any further supply, A can recover from B the value of wheat
which he has already delivered.
In De Bernardy v. Harding the defendant, who was to erect and let seats to view the funeral
of the Duke of Wellington, appointed the plaintiff as his agent to advertise and sell tickets
for the seats. The plaintiff was to be paid a commission on the tickets sold by him. The
plaintiff incurred some expense in advertising for the tickets but before any tickets were
actually sold by him, authority to sell tickets was wrongfully revoked by the defendant. It
was held that the plaintiff was entitled to recover the expenses already incurred by him, an
action for quantum meruit.
The remedy by way of quantum meruit is not a contractual remedy although in some cases
the remedy is available on the breach of contract T by a party to it. The real nature of the
remedy is quasi-contractual.
The remedy has, therefore, been held to be available when the work has been done by
the plaintiff' under a void agreement.
In Cravan-Ellis v. Cannon Ltd., the plaintiff was appointed managing director of a
company and he was to be paid certain remuneration for his services. The
agreement of his appointment was void because contrary to the requirement of the
Articles of Association. The plaintiff, however, continued to render the services to
the company. It was held that though the contract was void and the plaintiff could
not claim anything on that basis, he was still entitled to recover for the services
rendered by him on his claim on the quantum merit.

Principle of "Quantum Meruit"- The principle of quantum meruit is often applied where for
some technical reason a contract is held to be invalid. Under such circumstances an implied
contract is assumed, by which the person for whom the work is to be done contracts to pay
reasonably for the work done, to the person who does the work. The provisions of Section
70 of the Contract Act, 1872 are based on the doctrine of quantum meruit.
A person who does work or who supplies goods under a contract, if no price is fixed,
is entitled to be paid a reasonable sum for his labour and the goods supplied.
lf the work is outside the contract; the terms of the contract can have no application;
and the contractor is entitled to be paid a reasonable price for such work as was
done by him. If a party to a contract has done additional construction for another
not intending to do it gratuitously and such other has obtained benefit, the former is
entitled to compensation for the additional work not covered by the contract.

Sufferance of Damages- A person is entitled to receive compensation in terms of money

only if he has actually suffered damages or loss on account of breach of contract by the
other party and not otherwise. Sufferance of damage or loss is held to be an essential pre-
condition for the award of compensation by way of damages. At thus follows that
compensation cannot be awarded where no loss or damage has been suffered at all.

CONTRACTS OF INDEMNITY AND GUARANTEE

Contract of Indemnity- According to dictionary meaning, indemnity is protection against
loss, in the form or a promise to pay, or payment for loss of money, goods, etc. It is a
security against, or compensation for loss, etc. For instance, A contracts to indemmify B
against the consequences of any proceedings which C may take against B in respect of a
certain sum of 200 rupees. This is a contract of indemnity. In a contract of indemnity, the
person who promises to indemnity is known as indemnifier", and the person in whose
favour such a promise is made is known as indemnified" or indemnity holder.
According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means a
contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself or by conduct of any other person. This provision
incorporates a contract where one party promises to save the other from loss which may be
caused, either
i- by the conduct of the promisor himself; or
ii- by the conduct of any other person.
This definition covers indemnity for loss caused by human agency only. It does not deal with
those classes of cases where the indemnity arises from loss caused by events, or accidents
which do not or may not depend upon the conduct of the indemnifier or any other person,
or by reason of liability incurred by something done by the indemnified at the request of the
indemnifier.
Insurance contract, if contract of indemnity-
India- It has been noted above that Section 124 recognizes only such contract a contract of
indemnity where there is a promise to give another person from loss which may be caused
by the conduct of the promisor himself or by conduct of any other person. It does not cover
a promise to compensate for loss not arising due to human agency.
Therefore, a Contract of insurance is not covered by the definition of Section 124.
Thus, if under a contract of insurance, an insurer promises to pay compensation in
the event of loss by ire, such a contract does not come within the purview of Section
124. Such contracts are valid contracts, as being contingent contracts as defined in
Section 31
In United India Insurance Company v. M/s. Aman Singh Munshilal, the cover notes
stipulated delivery to the consigner. Moreover, on its way to the destination the
goods were to be stored in a godown and thereafter to be carried to the destination.
While the goods were in the godown, the goods were destroyed by fire. It was held
that the goods were destroyed during transit, and the insurer was liable, as per the
insurance contract.
England- Under English law, the word indemnity carries a much wider meaning than given
to it under the Indian Contract Act. It includes a contract to save the promisee from a loss,
whether it be caused by human agency or any other event like an accident and fire. Under
English law, a contract of insurance (other than life insurance) is a contract of indemnity.
The Indian Contract Act does not specifically provide that there can be implied contract of
indemnity. But, in case of Secretary of state Vs. Th BOI ltd, The Privy council has however,
recognized an implied contract of indemnity also.

Rights of the indemnity holder- In a suit against the indemnity holder, he may have been
compelled to pay damages, and incurred costs, etc) In his own turn, he can bring an action
against the promisor (indemnifier) to recover damages and costs, etc. paid by him, if the
indemnifier has promised an indemnity in such a case.
The provision in this regard is contained in Section 125, which reads as under: -
Rights of indemnity-holder when sued- The promise in a contract of indemnity, acting
within the scope of his authority, is entitled to recover from the promisor—
(1) all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted as it would
have been prudent for him to act in the absence of any contract of indemnity, or if
the promisor authorized him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contrary to the orders of the promisor, and was one
which it would have been prudent for the promisee to make in the absence of any
contract of indemnity, or if the promisor authorized him to compromise the suit.

When can an indemnifier be made liable? Can he claim to be indemnified before he is

demnified? According to English Common Law, no action could be brought against the
indemnifier until the indemnity-holder had suffered actual loss. This Situation created a
great hardship in those cases where the indemnity-holder was not in a position to meet the
claim out of his pocket. Relief was provided to the indemnity-holder in such cases by the
Court of Equity. According to the rules evolved by the Court of Equity, it was no, more
necessary for the indemnity-holder to be demnified before he could be indemnified. In
other words, the indemnity-holder can now compel the indemnifier to save him from the
loss in respect of liability against which indemnity has been promised.
There has been a difference of opinion between various High Courts in India as to whether
the indemnity-holder can claim indemnity before he has actually suffered the loss.
According to the view expressed by the Lahore and Nagpur High Courts, a person
must be demnified before he can be indemnified, i.e., no indemnity can be claimed
until the indemnity-holder has already actually suffered the loss.
The High Courts of Bombay, Calcutta, Madras, Patna, and Allahabad" have
expressed a different view, and they are in favour of the application of law similar to
the one recognized in England by the Court of Equity. According to the decisions of
these courts, an indemnity-holder can compel the indemnifier to indemnify even
before the indemnity-holder has actually suffered the loss.

Contract of Guarantee- Section 126 of the Indian Contract Act, 1872, defines a Contract of
guarantee as under: -
“Contract of guarantee”, “surety”, “principal debtor” and “creditor”- A “contract of guarantee” is a
contract to perform the promise, or discharge the liability, of a third person in case of his default.

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

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

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

A guarantee may be either oral or written.

For example, A takes a loan from a bank. A promise to the bank to repay the loan. B also
makes a promise to the bank saying that if A does not repay the loan "then I will pay." In this
case, A is the principal debtor, who undertakes to repay the loan, B is the surety, whose
liability is secondary because he promises to perform the same duty in case there is default
on the part of A. The bank in whose favour the promise has been made is the creditor.
The object of a contract of guarantee is to provide additional security to the creditor in the
form of a promise by the surety to fulfil a certain obligation, in case the principal debtor fails
to do that.
In every contract of guarantee, there are three parties, the creditor, the principal debtor
and the surety. There are three contracts in a contract of guarantee. First, the principal
debtor himself makes a promise in favour of the creditor to perform a promise, etc.
Secondly, the surety undertakes to be liable towards the creditor if the principal debtor
makes a default. Thirdly, an implied promise by the principal debtor in favour of the surety
that in case the surety has to discharge the liability of the default of the principal debtor, the
principal debtor shall indemnify the surety for the same. When a borrower and a guarantor
both sign an agreement in favour of a bank, they are jointly and severally liable under that
contract.
Surety- A surety is a person who comes forward to pay the amount in the event of the
borrower failing to pay the amount. In the event of a decree in favour of the creditor against
the principal borrower, the wings of the decree can also be extended against the sureties as
their liability is coextensive with the principal debtor. But when a suit against the principal
debtor was dismissed for default and the decision became final, there being no liability
surviving against the debtor, the surety's liability gets automatically terminated."

Main Features of Contract of Guarantee-

i- The contract may be either oral or in writing- According to Section 126, a guarantee
may be either oral or written. On this point, the position in India is different from
that in England. According to English law, for a valid contract of guarantee, it is
necessary that it should be in writing and signed by the party to be charged
therewith.
ii- There should be a principal debt- A contract of guarantee pre-supposes a principal
debt or an obligation to be discharged by the principal debtor. The surety undertakes
to be liable only if the principal debtor fails to discharge his obligation. If there is no
such principal debt, but there is a promise by one party in favour of another for
compensating in a certain situation, and the performance of this promise is not
dependent upon the default of somebody else, it is a contract of indemnity. Thus,
 when A and B go to a shop, A purchases goods and B tells the seller “If A does not
pay you, I will', it is a contract of guarantee. On the other hand, if A is not the
principal debtor, but only B makes a promise to the shopkeeper to pay, for instance,
B tells the shopkeeper Let him (A) have the goods, I will be your paymaster, it is a
contract of indemnity.
iii- Benefit to the principal debtor is sufficient consideration- As in any other contract,
the consideration is also needed for a contract of guarantee. For the surety's
promise, it is enough that the creditor had done something for the benefit of the
principal debtor. Benefit to the principal debtor constitutes a sufficient consideration
to the surety for giving the guarantee, "This is clear from Section 127, which reads
as under "Anything done, or any promise made for the benefit of the principal
debtor may be a sufficient consideration to the surety for giving the guarantee."
Illustrations- B requests A to sell and deliver to him goods on credit. A agrees
to do so, provided C will guarantee the payment of the price of the goods. C
promises to guarantee the payment in consideration of A's promise to deliver
the goods. This is sufficient consideration for C's promise.
Illustration- A sells and delivers goods to B. C afterwards requests A to
forbear to sue B for the debt for a year, and promises that if he does so, C will
pay for them in default of payment by B. A agrees to forbear as requested.
This is a sufficient consideration for C's promise.
If the promise of a person making the guarantee is not on the basis of any benefit to
the principal debtor but independent of it, for instance, it is made subsequent to the
benefit conferred by A upon B, it cannot be deemed to be a valid contract. The
subsequent promise is deemed to be without consideration. This is clear from
Illustration (c) to Section 127, which is as follows: A sells and delivers goods to B. C
afterwards, without consideration, agrees to pay for them in default of B. The
agreement is void.
iv- Consent of the surety should not have been obtained by misrepresentation or
concealment- The misrepresentation or concealment of any material facts
concerning the transaction. If the guarantee has been obtained that way, the
guarantee is invalid. The position is explained by Sections 142 and 143, which are as
under-
Section 142- Guarantee obtained by misrepresentation invalid- Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or with his knowledge
and assent, concerning a material part of the transaction, is invalid.
Section 143- Guarantee obtained by concealment invalid- Any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances, is invalid.
Illustrations (a) A engages B as clerk to collect money for him. B fails to account for
some of his receipts, and A in consequence calls upon him to furnish security for his
duly accounting. C gives his guarantee for B‟s duly accounting. A does not acquaint C
with B‟s previous conduct. B afterwards makes default. The guarantee is invalid.
Illustrations (b) A guarantees to C payment for iron to be supplied by him to B to the
amount of 2,000 tons. B and C have privately agreed that B should pay five rupees
 per ton beyond the market price, such excess to be applied in liquidation of an old
debt. This agreement is concealed from A. A is not liable as a surety.

According to the above stated provision, obtaining a person's consent to act as a surety
either by misrepresentation, or keeping silence as to material circumstances, renders such a
contract invalid. Keeping silence as regards material circumstances, which could affect the
surety's mind to stand as surety or not, would render the guarantee void. Thus, if a cashier
has been found guilty of embezzlement, but this fact is not disclosed when a surety has
been made to guarantee the future conduct of the cashier. The surety will not be liable as
such, under these circumstances.

Distinction between Contracts of Indemnity and Guarantee-

i- There are two parties in a contract of indemnity, the indemnifier and the indemnity-
holder, or indemnified. There are three parties in a contract of guarantee, the
creditor, the principal debtor and the surety.
ii- Contract of indemnity consists of only one contract under which the indemnifier
promises to indemnity the indemnified in the event of a certain loss. There are three
contracts in a contract of guarantee. One contract is between the principal debtor
and the creditor in respect of a certain promise or obligation undertaken to be
performed by the principal debtor. By a second contract, the surety undertakes to
perform the same obligation which the principal debtor has undertaken, in case the
principal debtor makes a default. The third contract, which is an implied one, is
between the principal debtor and the surety.
iii- The object of a contract of guarantee is the security of the creditor. It presupposes a
principal debtor and a certain debt or an obligation for which the principal debtor is
primarily liable. A contract of indemnity is made to protect the promisee against
some likely loss.
iv- In a contract of guarantee, the liability of the surety is only a secondary one. Surety's
liability arises only when the principal debtor makes a default. The liability of the
indemnifier in a contract of indemnity primary one. He undertakes to be liable when
the contemplated situation is there.
v- In a contract of guarantee, after the surety had discharged his liability and paid to
the creditor, he steps into the shoes of the creditor and he can realize the payments
made by him, from the principal debtor. In a contract of indemnity, the loss falls on
the indemnifier and, therefore, after the indemnifier had indemnified the indemnity-
holder, he cannot recover the amount from anybody.
vi- In England, a contract of guarantee should be in writing, whereas a contract of
indemnity may be either oral or in writing. There is no such distinction in India. In
India, whether it is a contract of indemnity or guarantee, the same may be either
oral or in writing.
Liability of Surety: Its Nature and Extent- According to Section 128, "The liability of the
surety is coextensive with that of the principal debtor, unless it is otherwise provided by the
contract."
The provision that the surety's liability is coextensive with that of the principal debtor
means that his liability is exactly the same as that of the principal debtor. It means that on a
default having been made by the principal debtor, the creditor can recover from the surety
all what he could have recovered from the principal debtor. For instance, the principal
debtor makes a default in the payment of a debt of Rs. 10,000/-. The creditor may recover
from the surety the sum of Rs. 10,000/- plus interest becoming due thereon as well as the
amount spent by him in recovering that amount.
If the principal debtor's liability is reduced, e.g., after the creditor has recovered a part of
the sum due from him out of his property, the liability of the surety is also reduced
accordingly".
If the principal debtor's liability is affected by illegality, so is also that of the surety.
Therefore, where the liability of the principal is held to be not enforceable on the ground of
the contract being illegal, there is no question of surety being made liable.
If the principal debtor happens to be a minor and the agreement made by him is void, the
surety too cannot be made liable in respect of the same because the liability of the surety
is coextensive with that of the principal debtor. It has been held in an English case, that the
guarantee of the loan or an overdraft to an infant is void, because the loan to the infant
itself is void.

Creditor can sue the surety without exhausting remedies against the principal debtor- The
liability of the surety is joint and several with the principal debtor. It has already been noted
that according to Section 128, "the liability of the surety is coextensive with that of the
principal debtor, unless it is otherwise provided by the contract." It means that if the
principal debtor makes a default, i.e., he fails, to perform his obligation, the-creditor can sue
either the principal debtor, or the surety or both of them. The creditor can sue the surety
even though he has not exhausted his remedies against the principal debtor.

Prior action against principal debtor not necessary- In Ram Bahadur Singh v. Tehsildar
Bisli, it was held that the guarantors cannot insist that creditor must first proceed against
the principal borrower and not the guarantor. In other words, it is open to the creditor to
proceed for making recovery against the guarantors without first proceeding against the
principal borrower.
Prior action against pledged goods not necessary- It has been held in State Bank of India v.
Gautmi Devi Gupta, that if there is a decree in favour of the creditor bank in his favour,
certain goods have been hypothecated, it is not necessary that the decree holder bank
should proceed to recover the decretal amount first from the hypothecated goods and then
proceed against the surety. Even without proceeding against the hypothecated property,
the bank can proceed against the surety.
The liability of the principal debtor and the surety is joint and several. The creditor
can, therefore, sue either both of them together or either of them individually. If
after an action against both, the creditor obtains a decree against both of them, he is
free to enforce the decree in the first instance against the surety. When the creditor
files a suit against both the principal debtor and the surety, and the suit against the
principal debtor is dismissed, that would not automatically discharge the surety from
liability, and the suit can proceed against the surety.

Limit on surety's liability by contract- It has already been noted that Section 128 declares
that the liability of the surety is coextensive with that of the principal debtor, unless it is
otherwise provided by the contract. It means that if the contract between the parties so
provides, surety's liability may not be there to the full extent as that of the principal debtor
but smaller than that. Thus, if the surety undertakes to be liable to the extent of £250, his
liability is limited to that extent.
In Aditya Narayan Chauresia v. Bank of India, it has been held by the Patna High
Court that if the guarantors bind themselves up to a certain maximum limit, their
liability cannot go beyond that. In the instant case, the guarantors undertook to be
liable up to a maximum of Rs. 25,000 plus interest payable thereon. It was held that
their maximum liability could not extend beyond that limit. They were, therefore,
held liable for the part of the debt only.

Condition that there shall be a co-surety- Sometimes, there may be a condition in a contract
of guarantee that there shall be a co-surety also. Where a person gives a guarantee upon a
contract that the creditor shall not act upon it until another person has joined in it as co-
surety, the guarantee is not valid if that other person does not join. It means that in such a
contract, liability of the surety is dependent on the condition precedent that a co-surety will
join. The surety can be made liable under such a contract only if the co-surety joins,
otherwise not.

Liability of co-surety- It has been noted above that the liability of sureties is coextensive
with that of the principal debtor. It implies that the creditor can proceed against the
principal debtor or the surety, at his discretion, unless it is otherwise provided in the
contract. The same principle is applicable with regard to the rights and liabilities of the co-
sureties. Since the liability of the co-sureties is joint and several, a co-surety cannot insist
that the creditor should proceed either against the principal debtor or against any other
surety before proceeding against him.
In State Bank of India v. G.J. Herman, it has been held that when there is a composite
decree against the principal debtor and the sureties, the creditor has the discretion to
decide against whom he wants to proceed. Neither the court nor a co-surety can insist that
the creditor should first proceed against another surety before proceeding against him.

Continuing Guarantee- A guarantee which extends to a series of transactions is called a

"continuing guarantee." Such guarantee may be in respect of a series of transactions during
a fixed period, e.g., for one year.
The surety may either guarantee the conduct of the principal debtor in respect of a
particular transaction, for example, he guarantees the repayment of loan of Rs.
5,000 which the principal debtor may have taken from the creditor, or he may
undertake to be answerable for the conduct of the principal debtor in respect of a
series of transactions. The former is known as Specific Guarantee', whereas the latter
is known as 'Continuing Guarantee."
Illustrations of continuing guarantee-
- A guarantees payment to B, a tea dealer, to the amount of £ 100, for any tea
he may from time-to-time supply to C. B supplies C with tea to the above
value of £ 100 and C pays B for it. Afterwards, B supplies C with tea to the
value of £ 200. C fails to pay. The guarantee given by A was a continuing
guarantee, and he is accordingly liable to the extent of £ 100.
- A guarantees payment to B of the price of five sacks of flour, to be delivered
by B to C and to be paid for in a month. B delivers five sacks to C. C pays for
them. Afterwards, B delivers four sacks to C which C did not pay for. The
guarantee given by A was not a continuing guarantee, and accordingly he is
not liable for the price of the four sacks.
The surety has been empowered to revoke a continuing guarantee as to future transactions,
by giving a notice to the creditor. His liability in respect of the transactions which have
already been made continues to exist, whereas his liability for the future transactions comes
to an end. Unless there is a contract to the contrary, the death of a surety also automatically
puts an end to the continuing guarantee, as regards future transactions.

Discharge of surety from liability- When the liability of surety, which he had undertaken
under a contract of guarantee, is extinguished or comes to an end, he is said to be
discharged from liability.
The modes of discharge of a surety, as recognized by the Indian Contract Act, are as under:
A- By revocation by the surety (Section 130)- According to Section 130 - A continuing
guarantee may at any time be revoked by the surety, as to future transactions, by notice
to the creditor."
This Section permits revocation of guarantee by the surety:
i- when it is a continuing guarantee; and
ii- as regards future transactions only.
This can be done by a notice by the surety to the creditor in that regard. Once notice
revoking guarantee is issued, the liability of the surety would fasten only up-to that
date and not thereafter. The following illustration make it clear that when the surety
gives a notice of revocation, his liability continues to exist for the transactions already
made, but is revoked as regards future transactions, i.e., the transactions made
subsequent to the notice.
A (surety), in consideration of B's (creditor) discounting at A's request, bill of
exchange for C guarantees to B, for twelve months, the due payment of all such bills
to the extent of 5,000 rupees. B discounts bill for C (P Debtor) to the extent of 2,000
rupees. Afterwards, at the end of three months, A revokes the guarantee. This
revocation discharges C from all liability to B for any subsequent discount. But A is
liable to B for the 2,000 rupees, on default of C.
Revocation as to future transactions is possible, when there are separate distinct
transactions contemplated in the contract. When the consideration is single and indivisible,
for instance, where a continued relationship is established on the faith of a certain
guarantee, no revocation of the same is possible. Thus, if a servant is employed on the basis
of a guarantee as to his good conduct, the guarantee is not revocable so long as the servant
continues in service.
Again, where the surety has entered into a continuing guarantee agreement in terms that it
is to continue and remain in operation for all subsequent transactions, it would not be open
to him to turn around and revoke the guarantee.
B- By surety's death (Section 131)- According to Section 131 - "The death of a surety
operates, in the absence of any contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions."
The effect of the death of the surety is that it results in automatic revocation of the
continuing guarantee as to future transactions. There may, however, be no
revocation of guarantee on the death of the surety, if there is a contract to that
effect. For example, in a contract of guarantee, it is stipulated that on the death of
the surety, his property or his legal representatives will be responsible for such
liability. In such a case, the guarantee is not revoked even if the surety dies.

C- By variance in the terms of contract (Section 133)- If there is any variance in the terms
of the contract between the principal debtor and the creditor, without the consent of
the surety, the surety gets discharged as regards transactions subsequent to such a
change. The reason for such a discharge is that the surety agreed to be liable for a
 contract which is no more there, and he is not liable on the altered contract because it is
different from the contract made by him.
Section 133, which makes a provision in this regard, is as follows: "Any variance,
made without the surety's consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to transactions
subsequent to the variance."
Section 133 has been explained with the help of the following illustrations:
a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards, B
and C contract, without A's consent that B's salary shall be raised and that he
shall become liable for one-fourth of the losses on overdrafts. B allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from
his suretyship by the variance made without his consent, and is not liable to
make good this loss.
b) A guarantees C against the misconduct of B in an office to which B is appointed
by C, and of which the duties are defined by Act of the Legislature. By a
subsequent Act, the nature of the office is materially altered. Afterwards, B
misconducts himself. A is discharged by the change from future liability under his
guarantee, though the misconduct of B is in respect of a duty not affected by the
later Act.
c) C agrees to appoint B as his clerk to sell goods at yearly salary, upon A's
becoming surety to C for B's duly accounting for money received by him as such
clerk. Afterwards, without A's knowledge or consent, C and B agree that B should
be paid by a commission on the goods sold by him and not by a fixed salary. A is
not liable for subsequent misconduct of B.

D- By release or discharge of the principal debtor (Section 134 )- The provision concerning
the discharge of the surety on the release or discharge of the principal debtor as
contained in Section 134 and its illustrations, is as under:
Section-134- Discharge of surety by release or discharge of principal debtor-The surety is
discharged by any contract between the creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
Illustrations
a. A gives a guarantee to C for goods to be supplied by C to B. C supplies
goods to B, and afterwards B becomes embarrassed and contracts with
his creditors (including C) to assign to them his property in consideration
of their releasing him from their demands. Here B is released from his
debt by the contract with C, and A is discharged from his suretyship.
b. A contract with B to grow a crop of indigo on A's land and to deliver it to B
at a fixed rate, and C guarantees A's performance of this contract. B
diverts a stream of water which is necessary for irrigation of A's land, and
thereby prevents him from raising the indigo. C is no longer liable on his
guarantee.
 c. A contract with B for a fixed price to build a house for B within a
stipulated time, B supplying the necessary timber. C guarantees A's
performance of the contract. B omits to supply the timber; C is discharge
from suretyship”.
It has already been noted that according to Section 128, the liability of the surety is
coextensive with that of the principal debtor. Therefore, if by any contract between the
creditor and the principal debtor, the principal debtor is released, or by any act or omission
of the creditor, the principal debtor is discharged, the surety will also be discharged from his
liability accordingly.
A/to section 138, where there are co-sureties, a release by the creditor of one of them does
not discharge the others.

E- When creditor compounds with, gives time to, or agrees not to sue the principal
debtor (Section 135)- (Section 135 mentions further circumstances when a contract
between the creditor and the principal debtor can result in the discharge of the surety.
The Section is as under: "135. Discharge of surety when creditor compounds with, gives
time to, or agrees not to sue, principal debtor-A contract between the creditor and the
principal debtor by which the creditor makes a composition with, or promises to give
time to, or not to sue, the principal debtor, discharges the surety, unless the surety
assents to such contract."
According to this Section, a contract between the creditor and the principal debtor
discharges the surety in the following three circumstances -
i- When the creditor makes composition with the principal debtor;
ii- When the creditor promises to give time to the principal debtor; and
iii- When the creditor promises not to sue the principal debtor.

It may be noted that in the above stated circumstances, the surety is discharged if the
creditor and the principal debtor make such contract without the consent of the surety.
If such a contract is made with the consent of the surety, he would not be discharged.

i- Creditor compounding with the principal debtor- When the creditor makes
compositions with the principal debtor without the consent of the surety, this means
variation in the original contract. Its obvious consequence, therefore, is the
discharge of the surety from the liability. For example, A borrows Rs. 10,000 from B.
C stands as a surety as regards the repayment of loan by A to B. Thereafter, A and B
agree that A may repay Rs. 5,000 instead of Rs. 10,000. C is thereby discharged from
liability as a surety.
ii- Creditor promising to give time to the principal debtor- Promise to give time to the
principal debtor means extending the period of payment which was not
contemplated in the contract of guarantee. The surety expects that the creditor will
take the performance from the principal debtor without any delay. If the creditor
 causes the delay by giving more time to the principal debtor and then this would
delay the surety's action for reimbursement against the principal debtor, and,
therefore, such an arrangement works to the prejudice of the surety. When the
creditor gives time to the principal debtor without the consent of the surety, the
surety is discharged even though the extension of time is for the benefit of the
surety.
The reason for such discharge was thus explained by the Privy Council in
Mahanth Singh v. U Ba Y: - "A surety is discharged if the creditor, without his
consent, either releases the principal debtor or enters into a binding
agreement with him to give him time. In each case, the ground of discharge is
that the surety's right to pay the debt at any time and after paying it, to sue
the principal in the name of the creditor is interfered with."

In Kurian v. The Alleppey C.C.M.S. Society, the creditor filed a suit against
the debtor for the recovery of some money due from the debtor. Then there
was a compromise between the two parties to the suit according to which
the debtor was allowed to pay the decretal money within nine months from
the date of compromise. This happened without the knowledge or consent of
the surety. It was held that this arrangement meant giving time to the debtor
within the meaning of Section 135, and the surety was, therefore, discharged
from his liability.

Agreement by the creditor with the principal debtor to take the payment in
instalments instead of in lump sum, amounts to giving time to the principal
debtor and that results in the discharge of the surety.

For the discharge of the surety under Section 135, it is necessary that there
should be a contract between the creditor and the principal debtor whereby
the creditor gives time to the principal debtor. Where a contract to give time
to the principal debtor is made by the creditor with a third person and not
with the principal debtor, the surety is not discharged. For example, C, the
holder of an overdue bill of exchange drawn by A as surety for B, and
accepted by B, contracts with M to give time to B, A is not discharged.

iii- Creditor promising not to sue the principal debtor- A contract between the creditor
and the principal debtor whereby the creditor promises not to sue the principal
debtor, also results in the discharge of the surety. The surety has a right to sue soon
after the payment becomes due, the creditor will take action against the principal
debtor to recover the same. Therefore, the promise by the creditor not to sue the
principal debtor is inconsistent with the right of the surety, and, therefore, this
results in the discharge of the surety.
Mere forbearance to sue not enough- Although a promise by the creditor not to sue the
principal debtor discharges the surety, but a mere forbearance to sue on his part does not
discharge the surety. By mere forbearance to sue, the right to sue can still be exercised.
Section 137 explains the position in this regard in the following words: "137.
Creditor's forbearance to sue does not discharge surety-Mere forbearance on the
part of the creditor to sue the principal debtor, or to enforce any other remedy
against him does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.
Illustration- Bowes C a debt guaranteed by A. The debt becomes payable. C does not
sue B for a year after the debt has become payable. A is not discharged from his
suretyship."
Forbearance to sue until the end of the period of limitation- Sometimes, there is
forbearance to sue the principal debtor by the creditor for such a long time that because of
the law of limitation, the action against the principal debtor becomes time barred. In such a
case, the question which arises is that whether the surety is discharged in such a situation?
Under English law, in such a situation, the surety is not discharged. There are two reasons
for it. Firstly, even though the action becomes time barred, it does not result in the
complete extinction of the debt. Secondly, even though the creditor's right of action against
the principal debtor may not be possible, "the surety can himself set the law in operation
against the debtor".
The majority of the High Courts in India in their decisions have also adopted the same
position and held that even though by forbearance to sue by the creditor, the action against
the principal debtor is time barred, the surety is not discharged thereby.\

F- By creditor's act or omission impairing surety's eventual remedy (Section 139)- Section
139 incorporates the rule that when the act or omission on the part of the creditor is
inconsistent with the interest of the surety, and the same results in impairing surety's
eventual remedy against the principal debtor, the surety is discharged thereby.
Section 139 is as follows: "139. Discharge of surety by creditor's act or omission
impairing surety's eventual remedy. If the creditor does any act which is inconsistent
with the right of the surety, or omits to do an act which his duty to the surety
requires him to do, and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged."
In M.R. Chakrapani v. Canara Bank, the property hypothecated to the bank was sold by the
principal debtor. The surety immediately furnished the particulars of the sale to the bank,
but the bank took no steps either to trace and seize the property or failed to take any action
against the principal debtor by lodging a complaint with the police or filing a case in a
criminal court for tracing and attachment of property and recovering the dues. It was held
that the surety was discharged due to inaction of the bank.
In Union Bank of India, Bombay v. S.B. Mehta, A, a principal debtor, at the time of taking
loan from a bank executed a demand promissory note, an agreement of hypothecation of
goods and other documents in favour of the said bank, and B stood as surety for the loan
granted by the bank to A. The bank sued A and B to recover the amount of loan. It was
found that the goods which were the subject matter of hypothecation had been disposed of
by A (the principal debtor) due to inaction and negligence on the part of the plaintiff bank.
Due to that, B's remedy to proceed against A had come to an end, and, therefore, it was
held that B was discharged as surety towards the plaintiff bank.
G- By loss of the security by the creditor (Section 141) - According to Section 141, the
surety is entitled to all the securities which the creditor has against the principal debtor
at the time when the contract of suretyship is entered into. If the creditor loses, or,
without the consent of the surety, parts with such security, the surety is discharged to
the extent of the value of the security. For instance, the seller of the goods allows the
buyer to take away the goods without insisting for the payment of the price for the
same, the surety who guarantees the payment of the price by the buyer, is discharged
from his liability.

It may be noted that if the creditor does not lose the securities but they are lost without
his fault, the surety is not discharged thereby. For instance, when the hypothecated
goods are lost without any fault of the creditor, that does not discharge the surety.

Discharge of Principal Debtor without creditor's fault does not discharge the surety-
According to Section 141, the surety is discharged if the principal debtor gets discharged
due to the fault of the creditor. If there is no voluntary act of the creditor in the discharge of
the principal debtor, the surety continues to be liable in spite of discharge of the principal
debtor.

RIGHTS OF SURETY- A surety has certain rights against the principal debtor, the creditor and
the co-sureties. His rights against each one of them are being discussed hereunder:

Rights against the Principal Debtor

1. Right of Subrogation (Section 140)- When the principal debtor makes a default in the
performance of his duty, and on such a default, the surety makes the necessary payment
or makes performance of all what he is liable for, he becomes invested with all the rights
which the creditor had against the principal debtor. In other words, the surety steps into
the shoes of the creditor and by an action against the principal debtor, he can recover
 from him all that, which could have been recovered by the creditor. This is known as
surety's right of subrogation.

Section 140, which contains this right, is as follows: "140. Rights of surety on
payment or performance. Where a guaranteed debt has become due, or default of
the principal debtor to perform a guaranteed duty has taken place, the surety, upon
payment or performance of all that he is liable for, is invested with all rights which
the creditor had against the principal debtor."

2. Right of indemnity against the principal debtor (Section 145)- In a contract of

guarantee, when the principal debtor makes a default, the surety has to make the
payment to the creditor. This payment is made by him on behalf of the principal debtor.
After making such payment, he can recover the same from the principal debtor. Such a
claim can be made by the surety only in respect of the sums he has rightfully paid under
the guarantee, but not the sums which he has paid wrongfully.
Section 145- Implied promise to indemnify surety- In every contract of guarantee, there
is an implied promise by the principal debtor to indemnify the surety, and the surety is
entitled to recover from the principal debtor whatever sum he has rightfully paid under
the guarantee, but no sums which he has paid wrongfully."

Surety's right of indemnity is only in respect of the payments, rightfully made by him.
This point may be explained by the following illustration: B is indebted to C, and A is
surety for the debt. C demands payment from A, and on his refusal, sues him for the
amount. A defends the suit, having reasonable ground for doing so but he is
compelled to pay the amount of the debt with costs. He can recover from B the
amount paid by him for costs, as well as the principal debt.

If there is no justification for the surety to make some payment, i.e., the amount has
been paid by him wrongfully, he cannot claim any indemnity in respect of such
payment.

In C.K. Aboobacker v. K.P. Ayishu, it has been held by the Kerala High Court that a
guarantor is liable for any payment or performance or any obligation only to the
extent the principal debtor has defaulted. According to Section 145, after the surety
has paid the amount, the principal debtor should indemnify the surety for everything
the surety has rightfully paid under the contract of guarantee.

Right against the Creditor

Right to securities with the creditor (Section 141)- It has been noted above that after the
surety has performed his duty under the contract of guarantee, he is subrogated to all the
rights which are available to the creditor against the principal debtor Section 141 makes a
further provision in that regard, according to which a surety is entitled to the benefit of
every security which the creditor has against the principal-debtor at the time when the
contract of suretyship is entered into. It is, however, not necessary that at the time of
making the contract, the surety should be aware of the securities which the creditor had. It
becomes the duty of the creditor not to lose or part with such securities belonging to the
principal debtor which he possesses at the time of making of the contract of guarantee. If
the creditor, without the consent of the surety, loses or parts with such securities, this is an
act prejudicial to the interest of the surety and he is discharged thereby.
Section 141, which makes a provision in this regard is as under: - 141. Surety’s right to
benefit of creditor’s securities- A surety is entitled to the benefit of every security which the
creditor has against the principal debtor at the time when the contract of suretyship is
entered into, whether the surety knows of the existence of such security or not; and if the
creditor loses, or, without the consent of the surety, parts with such security, the surety is
discharged to the extent of the value of the security.”

Right of the surety who guarantees a part of the debt- Where a surety has guaranteed only a part
of the debt and he pays the same, although creditor's claim has not yet been fully recovered, can the
surety be entitled to part of the securities which are with the creditor?

On this question, there is a difference of opinion between the High Courts-

According to one view expressed by the Bombay High Court in Goverdhandas v. Bank of
Bengal, the creditor cannot be asked to part with any part of the same until his claim has
been fully satisfied.

The contrary view has been expressed by the Madras High Court in Bhushayya v.
Suryanarayana. It was held in this case that when a part of the claim of the creditor has
been satisfied, but the surety has done all he was required to do under the contract, he is
entitled to the benefit of the securities in proportion to that. It may be submitted that the
view expressed by the Bombay High Court appears to be a better one.

The object of Section 141 appears to be that the creditor should not lose or part with the
securities and he should preserve them for the benefit of the surety, rather than asking the
creditor to part with them in favour of a surety, when a portion of his claim has yet to be
met.

Right against the Co-sureties

Right of contribution against co-sureties (Sections 146 & 147)- Section 146 makes the following
provision regarding the liability of the co-sureties when there are two or more co-sureties for the
same debt.

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

The duty of the co-sureties is to contribute equally. This is so when they are co-sureties for the same
debt. It is immaterial that they have undertaken a duty either jointly or severally, or under the same
or different contracts, or with or without the knowledge of each other. For instance, A, B, and C are
sureties to D for the sum of 3,000 rupees lent to E. ‘E’ makes default in payment. A, B and C are
liable, as between themselves, to pay, 1,000 rupees each.

Contract to the contrary- The co-sureties are free to agree that as between themselves their liability
shall not be equal, but according to certain other proportions. For instance, A, B and C are sureties to
D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C, that A is to be
responsible to the extent of one quarter, B to the extent of one quarter, and C to the extent of one-
half. ‘E’ makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250
rupees and C 500 rupees. N

Contribution- Sometimes one of the co-sureties may have paid more than his share of liability to the
creditor. When that is so, he can claim contribution from his co-sureties in accordance with the
above stated provision. For example, A, B and C are co-sureties to D for the sum of Rs. 1,000 lent to
E. By a contract between them, they decide that for this debt the liability of A, B and C shall be Rs.
250, Rs. 250 and Rs. 500, respectively. ‘E’ makes a default. D recovers the whole of Rs. 1,000 from A.
A can claim contribution of Rs. 250 from B and Rs. 500 from C

Co-sureties bound in different sums (Section 147)- Sometimes the sureties may fix the maximum
sum up to which their liability can go. There may be different limits as to the amount for which the
sureties are to be liable.

According to Section 147, "Co-sureties who are bound in different sums are liable to pay
equally as far as the limits of their respective obligations permit."

This may be explained by the following Illustrations: -

a- A, B and C as sureties for D, enter into three several bonds each in different penalty, namely, A in
the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned
for D's duly accounting to E. D makes default to the extent of 30,000 rupees. A, B and C are each
liable to pay 10,000 rupees.
b- A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely,
A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees
conditioned for D's duly accounting to B. D makes default to the extent of 40,000 rupees. A is
liable to pay 10,000 rupees, and B and C 15,000 rupees each.
c- A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely,
A in penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned
for D's duly accounting to E. D makes default to the extent of 70,000 rupees. A, B and C have to
pay each the full penalty of his bond.

Release of a co-surety from liability- There is a possibility that one of the co-sureties may be
released from the liability while the other co-sureties may still be liable.
 In Anil Kumar v. Central Bank of India, two persons, A and B stood as co-sureties in favour
of a bank in respect of loan granted to certain principal debtors. The surety A informed the
bank that the principal debtors were likely to wind up their business and, therefore, he
withdrew the guarantee. The other surety, B, did not take any such step. It was held that the
co-surety A stood released from the liability, and only co-surety B was liable for repayment
of loan along with the principal debtors.

BAILMENT AND PLEDGE

Bailment consists in delivery of goods, i.e., movable property, by one person, who is generally the
owner thereof, to another person for some purpose. The goods are to be returned to their owner
after the purpose is accomplished, or they are to be disposed of according to the directions of the
person delivering them. For example, when you take a fan on hire, or give your suit for dry-cleaning,
or give a watch for repairs, or give a parcel to a carrier for being transported to some place, there is
bailment in each case.

In a contract of bailment, the person who delivers the goods is called the "bailor", and the person to
whom the goods are delivered is called the "bailee".

Section 148 of the Indian Contract Act, 1872, defines bailment as under:

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

Essentials of Bailment-

1- Delivery of goods for s0me purpose;

2- Return of the goods after the purpose is achieved, or their disposal according to the bailor's
directions.

1- Delivery of the goods for some purpose

Delivery" means transfer of possession of the goods from one person to another. Delivery need not
always be actual. It may sometimes be a constructive or symbolic delivery. Section 149 recognizes
other than actual delivery also. It provides

“The delivery to the bailee may be made by doing anything which has the effect of putting
the goods in the possession of the intended bailee or of any person authorized to hold them
on his behalf"

Transferring of the key of the godown may be deemed to be delivery of the goods Explanation to
Section 148 gives an illustration of constructive Theory. According to this provis1on If a person
already in possession of the goods of other contracts to hold them as a bailee, he thereby becomes
the bailee, and the owner becomes the bailor of such goods, although they may not have been
delivered by way of bailment." For example, A sells his watch to B. Instead of delivering the watch to
B, A is asked to continue keeping the watch with him for one month on B's behalf. After this
arrangement, A is the bailee of the watch. The watch was already in the possession of A. Earlier he
was having it as himself the owner, but now he holds the same as a bailee for B. A finder of goods is
also deemed to be the bailee of those goods.

In Jagdish Chandra Trikha v. Punjab National Bank, the plaintiff's father had entrusted a box
containing 480 tolas, i.e., about 5600 grams gold ornaments and jewellery to the defendant
Bank at Peshawar (now in Pakistan) before the partition of the country. The jewellery box
was locked, wrapped and sealed when delivered. A proper receipt describing the contents of
the box was given by the Bank. It was found that when the jewellery box was delivered to
the plaintiff in Delhi, it was not in the same condition as it was delivered at Peshawar. The
plaintiff claimed the gold ornaments and jewellery deposited with the bank or their value
amounting to Rs. 3,72,400. It was held that the position of the Bank was that of a bailee and
it failed in its duty to take due care of the goods and return them to the plaintiff, The Bank
was held liable to pay the sum of Rs. 3,72,400 along with simple interest @ 12% p.a. from
the date of the institution of the suit till the date of realization of the amount.

If a person assumes the custody of another person's goods, even without any formal arrangement,
this is sufficient to constitute bailment.

In Ultzen v. Nichols, the plaintiff went to the defendant's restaurant for the purpose of
dining there. When the plaintiff entered the restaurant, a waiter took the plaintiff's coat
from him without being requested to do so, and hung it on a hook behind the plaintiff.
When the plaintiff wanted to leave, he found that the coat had been lost. It was held that
the defendant was the bailee of the coat as his servant had assumed the possession of the
same and he was, therefore, liable for its loss which was due to his negligence

If the owner maintains control over the goods, there is no bailment- When a person keeps his
goods in the premises of another person but himself continues to have the control over them, this is
not sufficient delivery for being considered to be bailment. In Kaliaporumal Pillai v. Visalakshmi,' a
lady took her old jewels to a goldsmith for being melted and being converted into new jewels. Every
evening she used to receive the half-made jewels, put the same into a box and lock the same. She
allowed the locked box to remain in the premises of the goldsmith but kept the key in her
possession. One night the jewels were stolen. It was held that there was no bailment as she had not
handed over the possession of the jewels to the goldsmith, and, therefore, the goldsmith could not
be made liable for the loss.

Similar woud be the position if a locker in a safe deposit vault is given by a bank to a customer and
the customer is also given one such key of the locker, without which the locker cannot be opened. In
such a case, although the locker may be in the premises of the bank, the person who has kept his
valuables in the locker has control over such goods, and there is no bailment of such goods to the
bank.

There can be bailment without a contract- Can there be a bailment, when a person obtains the
possession without a contract of bailment? In Ram Gulam-v. Govt. of U.P., the Allahabad High Court
expressed the view that obligation of a bailee can arise only out of a contract of bailment and not
otherwise. The point of decision in the above case that a bailment cannot arise without a contract,
does not appear to be convincing. The law itself recognizes the finder of goods as bailee. In some
subsequent cases, it has been held that bailment can be there even without a contract.
 In State of Gujarat v. Memon Mahomed, the Supreme Court has also expressed the view
that there is a possibility of bailment even without a contract.

2- Return of the goods after the purpose is achieved-

The delivery of the goods, in a bailment, is only for some purpose e.g., for safe custody, for carriage,
or for repair, etc. When the purpose is accomplished, the goods are to be returned or otherwise
disposed of according to the directions of the person delivering them.

As stated by Section 148, the goods "shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them." In every bailment,
the same thing is to be returned either in the same form or in an altered form. When the cloth is
given for being stitched into a suit, or gold for being converted into ornaments, or wheat for being
converted into flour, there is bailment in each case.

Hiring of Locker-Not Bailment- In Atul Mehra v. Bank of Maharashtra,' the Punjab and Haryana
High Court held that mere hiring of locker of bank would not constitute bailment as provided under
Section 148. In the instant care, it was not possible for the Bank to know the quantity, quality and
the value of the goods that was allegedly kept in the locker.

Bailor's duty when goods bailed are defective

Bailor's duty of disclosure- Section 150 mentions the following duty of a bailor in respect of the
goods bailed by him.

1- The/ bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is
aware, and which materially interfere with the use of them, or expose the bailee to
extraordinary risks; and if he does not make such disclosure, he is responsible for the
damage arising to the bailee directly from such faults
2- If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or
was not aware of the existence of such fault in the goods bailed.

Gratuitous bailment- First para (Section 150) imposes a duty on the bailor of defective goods which
interfere with the use of them, or expose the bailee to extraordinary risks. He is bound to disclose
those faults in the goods which create the risk and of which he is aware. If he fails to make such
disclosure, he responsible for damage arising to the bailee directly from such fault This duty is of
gratuitous bailor or the bailor without reward, because when the bailor bails the goods for reward,
he is liable for the damage caused by the defective goods even though he 1s not aware of the defect
in them.

For example, A lends a horse, which he knows to be vicious, to B. He does not disclose the
fact that the horse is vicious. The horse runs away B is thrown and injured. A is responsible
to B for the damage sustained
Bailment for reward- Second para (Section 150) deals with bailment of goods for reward. According
to this provision, when the goods are bailed for hire, the bailor is liable for the damage caused to the
bailee by the defective goods, whether the bailor is aware of the existence of faults in the goods or
not

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

In Hyman v. Nye & Sons," the plaintiff hired a carriage and horses from the defendant for a
particular journey. The carriage being defective, it was upset and the plaintiff was injured thereby.
The defendant was held liable for the injury to the plaintiff.

DUTIES OF BALEE

A bailee has to observe the following duties: -

i- Duty to take reasonable care of the goods bailed. (Sec 151-152)

ii- Duty not to make unauthorized use of the goods bailed. (Sec 153-154)
iii- Duty not to mix bailor's goods with his own goods (Secs 155-157).
iv- Duty to return the goods on fulfilment of the purpose. (Secs 159-161, 165-167).
v- Duty to deliver to the bailor increase or profit on the goods bailed (Section 163).

1- Duty to take reasonable care of the goods bailed (Sec 151-152)- According to Section 151, In all
cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man
of ordinary prudence would, under similar circumstances, take of his own goods of the same
bulk, quality and value as the goods bailed." This Section lays down a uniform duty of care for
every kind of bailment, whether the same is for reward, or is merely gratuitous.

Bailee should act as a prudent man- In Union of India v. Udho Ram & Sons, certain goods were
consigned by M/s Radha Ram Sohan Lal from Calcutta to Delhi by rail, and the Railway Receipt was
endorsed in favour of the plaintiffs, M/s Udho Ram and Sons. Some of the articles out of this
consignment, having been stolen during transit, the same were not delivered to the plaintiffs The
plaintiffs brought an action to recover compensation for the same. The question which had arisen in
this case was, could the railway authorities be considered to be negligent and guilty of failing to
take due care as prescribed by Section 151, Indian Contract Act? It was held that the railway did not
take due care. They did not prove from record that the railway protection polices which escorted the
train was sufficient in strength. The defendants were held liable.

According to Section 151, the bailee should take such care of the goods as a man of ordinary
prudence would take of his own goods. If the bailee has not acted like an ordinary prudent
man, he cannot be excused by pleading that he had taken similar care of his own goods also,
and his goods, have also been lost or damaged along with those of the bailor, or that the
bailor had the knowledge that his goods were being kept in a negligent manner.

Liability of bailee to pay compensation for damaged goods- Where owner of vehicle had given
vehicle for repair to automobile workshop. Vehicle was allowed by workshop owner to be driven by
a person having no driving licence at the time of its repair. It amounted to unauthorized use by
bailee. Accident had occurred causing death of third party. Owner was entitled to recover damages
from bailee. Victim was also entitled to get compensation from bailee. Further, held that since
owner had entrusted vehicle to workshop owner and accident happened when vehicle was being
repaired, Insurance Company would also be liable to pay compensation.

Agreement exempting bailee from liability- Whether a bailee can make a special contract to exempt
himself from liability arising under Section 151 came in for consideration in some cases. The
consensus appears to be in favour of the view that such a contract can be made. The M.P. High Court
in Central Bank of India v. Grains & Gunny Agencies following Calcutta" and Madras' High Court
decisions and the view of the majority of the judges on this point in the PC. Decision has held that a
contract exempting a bailee from liability for any loss or damage due to the fault, carelessness or
negligence of its staff binds the parties and is not unlawful as it is not hit by Section 23 of the
Contract Act. According to facts in Central Bank of India v. Grains & Gunny Agencies, there was
found to be negligence of the bailee's (pledgee banks) staff resulting in loss of goods and there was
no agreement exempting the bailee from such liability, the bailee was held liable.

Bailee not liable when he takes due care- According to Section 152 the Indian Contract Act, 1872
"The bailee, in the absence of any special contract, is not responsible for the loss, destruction or
deterioration of the thing bailed, if he has taken the amount of care of it described in Section 151."

Section 151 describes the amount of care which a bailee is supposed to take. If he has taken
due care, he will not be liable for any loss which may be caused to the goods bailed to him. If
due care has not been taken and there is damage to the goods as a consequence of his
negligence, he will be answerable for the same When he is negligent, he cannot avoid the
liability by pleading that his own goods have also been damaged along with the goods
bailed, or the bailor was aware that the goods bailed were being kept in a negligent manner.

Bailee is required to take care of goods bailed to him as a man of ordinary prudence.
Therefore, the bailee is not liable for the loss due to destruction of goods in accidental fire.

If the bailee has taken due care and the damage to the goods is because of the circumstances
beyond his control, he Will not be liable for the loss. Thus, if the food grains stored in the bailees
godown are damaged by unprecedented floods in the town, the bailee cannot be made liable for the
loss. In Union of India v. United India Fire, etc. Insurance Co. Ltd cotton bales belonging to the
consignee company were unloaded by the consignee company itself and kept outside the railway
goods sheds and covered with tarpaulin. The company had provided watchmen and the Railway
protection staff was also there to take care of these goods. 13 days after the unloading of the said
bales, the cotton bales caught fire for unknown reasons. The railway staff took all possible steps to
extinguish the fire. It was held that the railway authorities could not be held liable for negligence
under these circumstances.

In Sunder Lal v. Ram Sarup, a wooden shop was hired under a written agreement that the shop will
be returned in the same condition, and the hirer will be liable for any loss or damage to it. The shop
was burnt by the mob during the communal riots in the city. It was held that since the destruction of
the shop was due to no negligence on the part of the hirer, he was not liable for the loss.

2- Duty not to make unauthorized use of the goods bailed (Secs- 153 & 154)- When the goods have
been bailed for a particular purpose, the bailee is supposed to use them only for that purpose
 and none else. If he makes unauthorized use of the goods bailed, there are two remedies
available to the bailor
i- The bailor may terminate the bailment. (Section 153).
ii- The bailor may recover compensation for the loss caused due to unauthorized use of
goods. (Section 154).

i- Termination of bailment- According to Section 153, if the bailor finds that the bailee is
making such use of the goods which is inconsistent with the conditions of bailment, he may
terminate the bailment and claim back the goods. Section 153 is as follows "153.
Termination of bailment by bailee's act inconsistent with conditions”- A contract of bailment
is voidable at the option of the bailor, if the bailee does any with regard to the goods bailed,
inconsistent with the conditions of the bailment.
Illustration- A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage.
This is, at the option of A, a termination of the bailment."
ii- Damages for loss due to unauthorized use- If the bailee makes such use of the goods which
is contrary to the Conditions of bailment, he is liable to make compensation to the bailor for
any damage to the goods due to unauthorized use. Such a liability arises even if the
unauthorized use was being made with care. Section 154, which makes a provision in this
regard, is as under
"154. Liability of bailee making unauthorized use of goods bailed- If the bailee makes any
use of the goods bailed, which is not according to the conditions of the bailment, he is liable
to make compensation to the bailor for any damage arising to the goods from or during such
use of them.
Illustration- A lends a horse to B for his own riding only. B allows C, a member of his
family, to ride the horse, C rides with care, but the horse accidentally falls and is
injured. B is liable to make compensation to A for the injury done to the horse.
Illustration- A hires a horse in Calcutta from B expressly to march to Banaras, A rides
with due care, but marches to Cuttack instead. The horse accidentally falls and is
injured. A is liable to make compensation to B for the injury to the horse."

3- Duty not to mix bailor's goods with his own goods (Secs- 155-157)

Mixture of goods with bailor's consent- A bailee should not mix the bailor's goods with those of his
own without the bailor's consent. If the bailor consents, the bailee may mix the bailor's goods with
those of his own, and in such a case, the bailor and the bailee shall have an interest in the mixed
goods in proportion to their respective shares.

Section 155 makes the following provision in this regard "155. Effect of mixture, with bailor's
consent, of his goods with bailee's- If the bailee, with the consent of the bailor, mixes the goods of
the bailor with his own goods, the bailor and the bailee shall have an interest in proportion to their
respective shares, in the mixture thus produced."

Mixture of goods without bailor's consent- When the bailee mixes bailor's goods with those of his
own without the consent of the bailor, depending upon the nature of the goods, there are two
possibilities

i- Bailor's and the bailee's goods can be separated.

ii- Bailor's and the bailee's goods cannot be separated.
 i- When the mixed goods can be separated- When the goods mixed can be separated, the
bailor and the bailee remain the owners in accordance with their respective shares. The
bailee is responsible to bear the expense of separation or division of the goods and also
for any damage arising from the mixture. Section 156, which contains a provision in this
regard, is as under
156. Effect of mixture without bailor's consent when the goods can be separated-
If the bailee, without the consent of the bailor, mixes the goods of the bailor with his
own goods, and the goods can be separated or divided, the property in the goods
remains in the parties respectively, but the bailee is bound to bear the expense of
separation or division, and any damage arising from the mixture.

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

ii- When the mixed goods cannot be separated- In case, the nature of the goods is such
that the bailor's goods cannot be separated from those of the bailee, it is deemed to be
the loss of goods and the bailor can recover compensation for the same from the bailee.

Section 157 makes the following provision in this regard: "157. Effect of mixture, without bailor's
consent when the goods cannot be separated- If the bailee, without the consent of the bailor, mixes
the goods of the bailor with his own goods in such a manner that it is impossible to separate the
goods bailed from the other goods, and deliver them back, the bailor is entitled to be compensated
by the bailee for the loss of the goods.

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

4- Duty to return the goods on the fulfilment of the purpose (Secs. 160 & 161, 165-167)-
According to Section 160: It is the duty of the bailee to return, or deliver according to the
bailor's directions, the goods bailed, without demand, as soon as the time for which they were
bailed has expired, or the purpose for which they were bailed has been accomplished.

Since the bailment of the goods is either for a certain purpose or a certain period, the bailee is
bound to return the goods to the bailor as soon as the time for which they were bailed has expired,
or the purpose of bailment has been accomplished.

According to Section 161 "If, by the default of the bailee, the goods are not returned, or delivered or
tendered at the proper time, he is responsible to the bailor for loss, destruction or deterioration of
the goods from that time."

lf a bailee is not in a position to deliver back the goods, for instance, when they are lost due to the
fault of his "servants, the responsibility for such loss is that of the bailee.
A bailee is liable for the loss due to non-return or non-delivery of goods if that is due to his fault. JA
bailee is excused from returning the subject-matter of the bailment to the bailor or his agent where
the subject-matter was taken away from him by the authority of law exercised through regular and
valid proceedings. In J.K. Oil Mills v. Union of India," the appellants gave a consignment of mustard
oil to the respondents for being transported from Kanpur to Calcutta. After the tank wagon
containing the oil had safely reached Calcutta, it was suspected to be adulterated and was,
therefore, seized by the Food Inspector under lawful orders of the competent authority under the
Calcutta Municipal Act. On examination, the oil was found adulterated and the same was destroyed
under the orders of the Calcutta High Court. It was held that the loss, damage or destruction of the
goods was not due to the misconduct of the Railway administration or its servants, and the
respondents were not liable for the failure to deliver the goods back to the appellants.

In case, there is no negligence on the part of the bailee, or the goods are lost due to bailor's own
default, the bailee cannot be made liable for the same.

A gratuitous bailment is terminated by the death either of the bailor or of the bailee (sec 162).' If
such a situation occurs, the bailee or his representatives must return the goods to the bailor or his
representatives, as the case may be.

Return when bailment by several joint owners- A/to section 165- If several joint owners of goods
bail them, then, the bailee may deliver them back to, or according to the directions of, one Joint
owner without the consent of all, in the absence of any agreement to the contrary.

Return of goods to the bailor, when he has no title to them- According to Section 166, "if the bailor
has no title to the goods, and the bailee, in good faith, delivers them back to or according to the
directions of the bailor, the bailee is not responsible to the owner in respect of such delivery." It
means that even if the bailor of the goods has no title to the goods and somebody else claims a
better title, the bailee cannot be made liable for the return of the goods to the bailor. The bailee's
duty to return the goods is to the bailor only and nobody else. The bailee has no right to refuse to
return the goods to the bailor by pleading jus terrtii, i.e., the title of a third person being better than
that of the bailor. The third person who claims better title than that of the bailor, may take their
delivery from the bailee only through a Court of law.

According to Section 167, if a person other than the bailor, claims the goods bailed, he may apply to
the Court to stop the delivery of the goods to the bailor, and to decide the title to the goods.

Bailor's lack of title may cause some loss to the bailee, e.g., in an action by the third party to recover
those goods, he may be involved in the litigation. According to Section 164, "the bailor is responsible
to the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to
make the bailment, or to receive back the goods, or to give directions respecting them."

5- Duty to deliver to the bailor increase or profit on the goods bailed (Section 163)- According to
Section 163, "in the absence of any contract to the Contrary, the bailee is bound to0 deliver to
the bailor, or according to his directions, any increase or profit which may have accrued from the
goods bailed. "For instance, A leaves a cow in the custody of B to be taken care of. The cow has a
calf. B is bound to deliver the calf as well as the cow to A.
According to Section 163, accretions in respect of the goods bailed are part of the bailed goods
and hence such accretions do not belong to the bailee, and, therefore, they have to be handed
over to the bailor when the goods bailed are returned.
 Rights of Bailee
The bailee of the goods has the following rights under the Act-
i- Right to recover necessary expenses incurred on bailment (Section 158).
ii- Right to recover compensation from the bailor. (Section 164)
iii- Right to have a lien on the goods bailed. (Secs. 170-171).
iv- Right of suit against a wrongdoer. (Section 180).

i- Right to recover necessary expenses incurred on bailment (Section 158)- When under a
contract of bailment, some remuneration is to be paid to the bailee for services he renders
in respect of them, he has a right to recover the same, or to exercise the right of lien in
respect of such goods until he receives the necessary payment.

Even when the bailment is gratuitous, i.e., the bailee is to receive no remuneration for the service
rendered by him, he is nonetheless entitled to recover from the bailor necessary expenses incurred
by him for the purpose of the bailment.

Section 158 makes the following provision in this regard: "Where, by the conditions of the
bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee
for the bailor and the bailee is to receive no remuneration, the bailor shall repay to the bailee the
necessary expenses incurred by him for the purpose of the bailment."

For instance, A leaves his horse with his neighbour, B, for safe custody for one week. B is entitled to
recover the expenses incurred by him in feeding the horse.

ii- Right to recover compensation from the bailor (Section 164)- Sometimes the bailor may not
be entitled to make the bailment, or to receive back the goods. This may result in some loss
to the bailee. The bailee is entitled to recover from the bailor such loss as may be caused
due to the above stated reason.

The provision in this regard is contained in Section 164, which reads as under- "164. Bailor's
responsibility to bailee- The bailor is responsible to the bailee for any loss which the bailee may
sustain by reason that the bailor was not entitled to make the bailment, or to receive back the
goods, or to give directions respecting them."

iii- Right of lien on the goods bailed (Secs. 170 and 171)- Lien is the right of the bailee under
which the bailee can retain the goods of the bailor, and refuse to deliver them to the bailor,
until his due remuneration for services in respect of the goods bailed, or the amount due is
paid.

The Act recognizes two kinds of lien:

a- Particular lien; and

b- General lien.

The right of 'particular lien' entitles the bailee to retain those very goods for the services regarding
which the remuneration is due. The general lien' entitles the bailee to retain the goods of the bailor
for a general balance of account.
When the bailee incurs some expenses for preserving the goods from deterioration during lien, he
can recover the same from the owner of the goods

When the bailee loses his possession of the goods, his right of lien is lost thereby.

a- Particular lien (Section 170)- Section 170 contains the following provision with regard to the
bailee's right of particular lien.

"170. Bailee's particular lien- Where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in
the absence of a contract to the contrary, a right to retain. Such goods until he receives due
remuneration for the services, he has rendered in respect of them.

Particular lien means the right of the bailee to retain those goods which have been baled and in
respect of which some service involving the exercise of labour or skill has been rendered but the
remuneration for the same has not been paid. This right can be exercised so long as the
remuneration in respect of those goods has not been paid.

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

If the bailee has agreed not to exercise the right of lien, or has waived his right, he cannot exercise
the same. For example, A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the
coat as soon as it is finished, and to give a three months' credit for the price. B is not entitled to
retain the coat until he is paid.

The right of lien is a right to retain p0Ssession of the goods, and therefore, this right can be exercised
so long as the bailee continues in possession. Once the bailee parts with the possession, his right of
lien comes to an end. If the bailee's right of lien has ended by parting with the possession, it is not
revived if he happens to get the possession again. This may be explained by the case of Eduljee v.
Cafe John Bros., relating to the contract of sale of goods. In this case, the seller sold a second-hand
refrigerator, and also delivered the same to the buyer. After sometime there was some trouble in
the refrigerator and two parts of the same were taken out and sent to the seller for repair. The
seller, to whom the price had not been paid, wanted to exercise the right of lien over these parts. It
was held that the seller's right of lien had come to an end when he had delivered the refrigerator to
the buyer, and this right was not revived by his getting the possession of some parts of it again.

The right of lien contained in Section 170 is available "in the absence of a contract to the contrary.
The parties by an agreement may exclude this right. It means that the bailee may, if he so likes,
waive his right of lien.

The right of particular lien has been recognized not only in favour of a bailee (under Section 170) but
in some other cases 'also, which are as under:

- Lien of finder of goods. (Section 168).

- Pawnee's or pledgee's lien. (Secs. 173-174)
- Agent's lien. (Section 221)
- Unpaid seller's lien. (Section 47, Sale of Goods Act, 1930).
- Partner's lien. (Section 52, Indian Partnership Act, 1932).

b- General lien (Section 171)- Section 171 confers a right of general lien in favour of certain kinds
of bailees.
The provision is as under "171. General lien of Bankers, Factors, Wharfingers, Attorneys and Policy
Brokers- Bankers, wharfingers, attorney of a High Court and policy-brokers may, in the absence of a
contract to the contrary, retain, as a security for a general balance of account any goods bailed to
then; but no other persons have a right to retain, as a security for such balance, goods bailed to
them, unless there is an express contract to that effect."

It has been noted above that a particular lien is a right to retain those very goods in respect of which
some services, etc. are rendered by the bailee. On the other hand, general lien entitles the bailee to
retain goods of the bailor "for a general balance of account". According to this right, the bailee may
retain not only those goods of the bailor in respect of which some particular services are rendered,
but also other goods in the possession of the bailee belonging to the bailor.

The right of general lien has been conferred on the following kinds of bailees:

1) Bankers;
2) Factors;
3) Wharfingers;
4) Attorneys of a High Court; and
5) Policy-brokers.

The right is available to the above categories of bailees only and none else, "unless there is an
express contract to that effect". It means that the parties may, by an express contract between
themselves, confer the right of general lien on a bailee, who has otherwise got only a right of
particular lien.

1) General lien of Bankers- According to Section 171, bankers can exercise general lien, i.e., they
can retain as a security, goods bailed to them, for a general balance of account. This right is
available in the absence of a contract to the contrary.

When a banker has advanced money to another, he has a lien on all securities which come into his
hands for the amount of his general balance, unless there is an express Contract or circumstances to
the contrary. Therefore, if cheques or other securities have been deposited with a bank, he can
exercise lien over them.

The banker's lien is a general lien and he can retain the goods for the satisfaction of a debt other
than the one for which the goods are pledged.

The bank, therefore, can retain the pledged ornaments if the debtor had not cleared another loan
advanced to the petitioner.

If, however, the bank knows that the securities belong to a third person and not its customer, he
cannot exercise the right of lien in respect of them.

If a customer has different accounts with a bank, the bank has a right to combine the two accounts
for the purpose of general lien. For instance, if money is due from the customer on loan account and
there is a balance in the customer's favour on the current account, the banker may treat the two
accounts as one.

Lien over money- It has been noted above that the right of lien is in respect of goods bailed. Strictly
speaking, money is not goods and the deposit of money with the bank is not bailment, but following
the rules of English law, various High Courts in India have decided that a banker can exercise lien
over money deposited with it.
 In Punjab National Bank v. Satyapal, money has been held to be a species of goods over
which lien may be exercised. "Similarly, citing English decisions of Misa v. Currie," and Union
Bank of Australia v. Murray,' it has been observed by the Sind High Court in Mercantile
Bank v, Rochaldas' that "money is a species of goods over which lien may be exercised.

The bank cannot exercise lien over money under Section 171. Section 171 is confined to lien
on papers, securities and other goods deposited with the bank.

No lien over goods given for a special purpose- If there is an express contract between the parties
contrary to the statutory right of general lien, the right is thereby excluded. When the goods are
given for a special purpose inconsistent with the right of general lien, the goods can be used only for
such special purpose rather than for the general lien.

2) General lien of Factors- A factor is a mercantile agent within the meaning of Section 2 (9) of the
Sale of Goods Act. A factor is an agent entrusted with the possession of goods of his principal for
selling them. He has a right of general lien over the goods belonging to his principal, which are in
his possession, for the general balance of account. According to this right, the principal's goods
can be retained by the factor until the balance of account due to the factor from the principal
has been paid.

In case of general lien, a factor can retain the principal's goods with him until the general
balance of account due to him has been paid. This lien, however, can be exercised by him only in
respect of such goods which came to him in his capacity as a factor.

In Dixon Vs. Stansfeld, the plaintiffs used to have various kinds of dealings with the
defendants, who carried on business as merchants, factors, ship and insurance brokers and
general merchants. The plaintiffs requested the defendants to get a policy on the insurance
of a ship for a certain voyage. The defendants took necessary insurance policy but then
refused to hand the same over to the plaintiffs, claiming general hen over the same. It was
held that the defendants could not exercise the right of general lien over the policy because
the same had not come to their hands in their capacity as factors.

3) General lien of Wharfingers- Wharf means a loading stage alongside a sea or a river for loading
and unloading vessels. Wharfinger means a person who owns, or has the care of, a wharf. A
wharfinger has a lien over the goods of his customer, until his wharfage, i.e., the charges for the
use of the wharf, are paid to him. His claim of general lien is valid only in respect of those goods
which he received in his capacity as a wharfinger.

4) General lien of Attorneys- According to Section 171, the attorneys of the High Court also have
got a right of general lien. This right is presumed to be available to the Advocates and other legal
practitioners" The right can be exercised in respect of the documents, etc. belonging to the
client which are with him. He can retain them until his fees for the professional services and
other costs and expenses incurred by him for a client are paid to him. If a solicitor is discharged
by the client, the client cannot take back his documents until the costs incurred by the solicitor
and his other charges are paid to him. If he has not been discharged by the client, but he
 otherwise refuses act for the client or is unable to work 1or him, i.e., he stops his practice the
right of lien does not exist.

The Supreme Court has held in R.D. Saxena v, Balaram Prasad Sharma,' that an Advocate
has no lien over files and papers and documents entrusted by his client in connection with
the litigation.

5) General lien of Policy-brokers- A policy-broker means a person who acts as an insurance agent to
effect marine insurance. He is one of the persons mentioned in Section 171, having a right of
general lien. He can exercise such a right until the balance of account due to him from a client
has been paid.

Right of suit against a wrongdoer (Section 180)- When the goods have been bailed, if a third person
wrongfully deprives the bailee of their use or possession, or causes an injury to the goods, the bailee
can sue such third person for wrong to the goods. It may be noted that not only the bailee but the
bailor also can bring an action against such third party. The provision in this regard is contained in
Section 180, which is as follows

"180. Suit by a bailor or bailee against wrongdoer- 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 case if no bailment had been made, and
either the bailor or the bailee may bring a suit against a third person for such deprivation or injury”.

If a person fraudulently or forcibly takes away the goods from the bailee, the bailee has a
right to recover the same. In Purushottam Das Banarasi das Vs Union of India, A obtained
delivery of certain goods from the railway on a forged railway receipt. A pledged the goods
to B.

Position of finder of goods- According to Section 71, a person who finds goods belonging to another
and takes them into his custody, is subject to the same responsibility as a bailee. Since the position
of the finder of goods is that of a bailee, he is supposed to take the same amount of care with regard
to the goods as 18 expected of a bailee under Section 151. He is also subject to all the duties of a
bailee, including a duty to return the goods after the true owner is found. f he refuses to return, he
could be made liable for conversion. Moreover, if by his default in returning the goods, there is some
loss, destruction or deterioration of the goods, he will be liable for the same

Sections 168 and 169 confer certain rights on the finder of goods. The provisions are as under

"168. Right of finder of goods May sue for specific reward offered- The finder of goods has no right
to sue the owner for Compensation for trouble and expense voluntarily incurred by him to preserve
the goods and to find out the owner, but he may retain the goods against the owner until_ he
receives such compensation, and where the owner has offered a specific reward for the return of
goods lost, the finder may sue for such reward, and may retain the goods until he receives it."

169. When finder of thing commonly on sale may sell it- When a thing which is commonly the
subject of sale is lost, if the owner cannot with reasonable diligence be found; or if he refuses upon
demand, to pay the lawful charges of the finder, the finder may sell it-

(1)- When the thing is in danger of perishing or losing the greater part of its value; or
 (2)- When the lawful charges of the finder, in respect of the thing found, amount to two-
third of its value.

The rights conferred by these provisions are

i- Right of lien. (Section 168).

ii- Right of claiming the reward, if announced by the owner. (Section 168).
iii- Right to sell the goods found. (Section 169).

i- Right of lien (Section 168)- According to Section 168, a finder of goods has no right to sue
the owner for trouble and expense voluntarily incurred by him to preserve the goods and to
find the owner. He has, however, the right of particular lien in respect of those goods. He
may retain the goods against the owner until he receives compensation for the trouble and
expense voluntarily incurred by him to preserve the goods and to find the owner

ii- Right of claiming the reward, if announced by the owner (Section 168)- In addition to that,
where the owner has offered a specific reward for the return of goods lost, the finder may
sue for such reward, and also may retain the goods until he receives it.

A/to section 25(2), If the goods have already been found voluntarily, and then the
owner of the goods promises to compensate the finder for his past voluntary
services, the contract is binding and the owner is bound to pay the promised
amount. For example, A finds B's purse and gives it to him. B promises to pay A Rs.
50. This is a contract, and B is bound to pay the amount^ Jol
iii- Right to sell the goods found (Section 169)- The finder of the goods has also been given the
right to sell the goods found by him under certain circumstance mentioned in Section 169.
Such a right is available to the finder of the lost goods when the following conditions are
satisfied-
a- If the owner of the goods cannot with reasonable diligence be found, or if he refuses,
upon demand, to pay the lawful charges of the finder; and
b- When the thing is in danger of perishing or losing the greater part of its value, or when
the lawful charges of the finder in respect of the thing found, amount to two-thirds of its
value.

PLEDGE
Pledge- According to Section 172, The bailment of goods as security for payment of a debt
of
performance of a promise is called pledge. The bailor is in this case called pawnor. The
bailee is called the pawnee.
Pledge or Pawn is a kind of bailment of goods with a special purpose. The goods pledged or
pawned serve as security for the payment of a debt or performance of a promise. The
person pledging the goods is known as the Pawnor and the person with whom the goods are
pledged is Known as the 'Pawnee or "Pledgee.

Bailment and Pledge distinguished

1- Bailment is a wider term. It includes pledge. Pledge is a kind of bailment, where the goods are
delivered by one person to another as security for payment of a debt or performance of a
promise. It means that if the goods serve as security, it is pledge, whereas when the goods are
given for Some other purpose, for example, a watch is given for repairs, it is bailment (other
than pledge))
2- In case of bailment, if the bailor does not pay the lawful charges due to the bailee in respect of
services, etc. rendered by the bailee, the bailee can exercise lien over the goods bailed, i.e., he
can retain them until the necessary payment is made to him In case of pledge, the pledgee has
not only a right to retain the goods pledged until the repayment of debt or performance of the
promise, etc., but in the event of default by the pawnor n payment of the debt, or performance
of the promise at the stipulated time, he may even sell the goods, after giving a due notice of
sale to the pawnor.

Essentials of pledge- In order to constitute a valid pledge, the following requirements must be
satisfied

a- There should be bailment of goods, i.e., the delivery of goods from one person to another.
b- The purpose of such bailment is to make the goods bailed serve as security for the payment of a
debt, or performance of a promise

a- Delivery of goods- Since pledge is a bailment, the delivery of the goods from the pawnor to the
pawnee is a must. There must be delivery of the goods, i.e., the transfer of possession from one
person to another. The delivery may however, be either actual or constructive Mere agreement
to transfer possession in future is not enough to constitute a pledge. In Revenue Authority v.
Sudarsanam Pictures, it has been held that an agreement wherein, the producer of a film agrees
to deliver final prints of the film under production, when the same are ready, to a financier-
distributor in return for the finance provided by the latter, is not pledge because there is no
delivery of the goods.

Delivery of the goods may be either actual or constructive. Doing of something which has the effect
of putting the pawnee or his agent in possession of the goods may be treated as delivery" Handing
over the key of a godown in which the goods are lying, or the transfer of a document of title, like a
bill of lading or a railway receipt, which represents particular goods amounts to the delivery of
goods.

In the case of Morvi Mercantile Bank v. Union of India, the delivery of a railway receipt was
considered to be enough to constitute delivery of the goods represented by that railway receipt, for
the purpose of pledge.

If the goods are in the possession of a third person, there is deemed to be no delivery of the goods
unless and until the third person acknowledges to the transferee that he holds the goods on behalf
of the transferee. After such an acknowledgment, the third person becomes the transferee's agent
for holding the goods, and, therefore, the transferee is deemed to be having the possession through
such third party. Sometimes even the bailor may hold the possession of the goods pledged in trust
for the bailee. The moment an arrangement is made that the bailor is to hold the goods on the
bailee's behalf, there is constructive delivery of the goods to the bailee and, thus, it is a valid pledge.
In Bank of Chittoor v. Narasimhulu,' the bailor of a cinema projector and other accessories requested
the bailee bank to allow the pledged goods to remain in his possession and promised to hold the
same in trust for the bailee, and also further promised to hand over the possession of the same to
the bank whenever demanded. It was held that there was constructive delivery. The transaction
was, therefore, a valid pledge.

b- Purpose of pledge is security for payment of debt, etc- In a transaction of pledge, the purpose
for which the goods are bailed is that the bailed goods should serve as security for the payment
of a debt, or performance of a promise When some goods are pledged, the pawnee becomes a
secured creditor and he has a prior claim over the goods pledged than other creditors.

Hypothecation and Pledge distinguished

Hypothecation as such has not been defined in the Contract Act but the same has been recognized
by usage since long. In pledge there is delivery of goods from one person to another as security for
payment of debt or performance or a promise. In hypothecation, on the other hand, the possession
of the movable property is retained by the owner and certain rights in that property are transferred
to the person in whose favour the property is hypothecated.

In case of pledge, since the pledgee has got the possession of the goods, in the event of default by
the pawnor, apart from other rights, the pledgee has a right of lien over the goods, i.e., he may
retain the goods pledged until payment of the debt, or performance of the promise, etc. In case of
hypothecation, since the possession of the goods remains with the owner, the hypothecatee cannot
have the right of lien. He may sell the property in default.

If an agreement empowers the hypothecatee to take possession of the goods and then sell the same
in case of default of payment, he can proceed in accordance with the agreement to sell the goods,
without the intervention of the Court.

Who can pledge- Ordinarily, it is the owner of the goods, or any person authorized by him in that
behalf, who can pledge the goods. If a servant has the custody of the goods, or a tenant gets the
possession of a furnished house, the servant cannot pledge the goods, nor can a tenant pledge the
furnishing materials in his possession. A person obtaining the goods fraudulently does not have any
right to pledge them.

In Purshottam Das v. Union of India," A obtained the possession of certain goods from the railway
on the basis of a forged railway receipt and then pledged the goods to B. It was held that the pledge
by A was not valid, and B did not get any rights in the goods as a pledgee, and hence the railway
authorities could recover the goods from B.

In the following exceptional cases, a person who is neither the owner, nor having the authority from
the owner for pledging the goods, but having possession with the owner's consent can make a
pledge and confer rights on the pledgee, The exceptions recognized are as follows

1- Pledge by a mercantile agent. (Section 178).

2- Pledge by person in possession under voidable contract. (Section 178A).
3- Pledge by a person with a limited interest. (Section 179).
 4- Pledge by seller in possession after sale. [Section 30 (1), Sale of Goods Act.]
5- Pledge by buyer in possession after sale. [Section 30 (2), Sale of Goods Act.]

1) Pledge by mercantile agent (Section 178)- A mercantile agent having possession of the goods
with the consent of the owner but having no authority to pledge them can make a pledge
provided the pledgee or pawnee is acting in good faith. NOTE- This exception is similar to the
one recognized by Proviso to Section 27, Sale of Goods Act, 1930. That provision relates to sale
by a mercantile agent.

For the application of this provision, the following essentials are to be satisfied

i- The pledge should be by a mercantile agent.

ii- The mercantile agent should have obtained the possession of the goods or documents of
title in his capacity as a mercantile agent and with the consent of the owner.
iii- He must pledge the goods while acting in the ordinary course of his business of a
mercantile agent.
iv- The pledgee should have acted in good faith and without notice that such a mercantile
agent did not have an authority to pledge.

i- Pledge should be by mercantile agent- Here the expression "mercantile agent" has the
same meaning as assigned to it by the Sale of Goods Act/ According to Section 2 (9) of that
Act, "mercantile agent" means a mercantile agent having in the customary course of
business as such agent authority either to sell goods, or to consign goods for the purpose of
sale, or to buy goods, or to raise money on the security of goods.

ii- Possession of mercantile agent with owner's consent- Although the mercantile agent may
not have been authorized to pledge the goods, yet he must have obtained the possession of
the goods or the documents of title to the goods with the consent of the owner of those
goods. Moreover, such possession must have been obtained in his capacity as a mercantile
agent, and not in any other capacity. If, however, the mercantile agent has not got the
possession as such agent but in a different capacity, a pledge made by him will not be a valid
one.

It has been noted above that when a mercantile agent is in possession of the goods
or documents of title with the consent of the owner, he can make a valid pledge of
those goods, or of the documents of title representing the goods.

According to Section 24 of SOGA, "document of title to goods" includes a bill of

lading, dock warrant, ware housekeeper's certificate, wharfinger's certificate,
railway receipt, warrant or order for the delivery of goods and any other document
used in the ordinary course of business as proof of the possession or control of
goods, or authorizing or purporting to authorize, either by endorsement or by
delivery, the possessor of the document to transfer or receive goods thereby
represented.
iii- Pledge by the mercantile agent in the ordinary course of the business- lt is further
necessary that the pledge must have been made by the mercantile agent while he is acting
in the ordinary course of business of a mercantile agent. Thus, if a mercantile agent asks his
friend to pledge the goods instead of himself doing the same, it will not be a valid pledge.

iv- Pledgee acting in good faith- In order that the pledge by a mercantile agent can be
considered to be valid, it is also necessary that the pledgee should have acted in good faith
and without notice that such a mercantile agent did not have an authority to pledge. If the
pledgee is aware of the fact that the mercantile agent does not have any such authority and
he is not acting in good faith, he cannot take advantage of this provision.

2) Pledge by person in possession under a voidable contract (Section 178-A)- Section 178-A
recognizes another exception to the rule that either the owner or his duly authorized agent can
pledge the goods. According to this exception, a person who has obtained the possession of the
goods under a voidable contract, a pledge by him before the contract has been rescinded, to a
pledgee acting in good faith and without notice of the pawnor's defect in title, confers a good
title on the pledgee.

Section 178-A reads as under "178-A. Pledge by person in possession under voidable contract-
When the pawnor has obtained possession of the goods pledged by him under a contract voidable
under Section 19 or Section 19-A but the contract has not been rescinded at the time of the pledge,
the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of
the pawnor's defect of the title."

A voidable contract is a valid contract until it has been rescinded and becomes void after the same
has been rescinded. If the pawnor has obtained the possession of the goods under a voidable
contract, but the contract has not yet been rescinded, the pledgee is capable of having a good title
to such goods. Thus, if a person has obtained the possession of goods by fraud, misrepresentation,
coercion or undue influence, he could make a valid pledge of the goods, if the same is done before
the contract has been rescinded. If the goods have been pledged before the contract has been
rescinded, the rights of the person entitled to rescind the contract are affected thereby.

In Phillips v. Brooks Ltd., a person, North, went to the plaintiff's shop and selected some
jewellery He falsely represented himself to be "Sir George Bullough", a man of credit, and
thereby persuaded the plaintiff to take the payment by cheque, and hand over the ring
immediately. The cheque was subsequently dishonoured, Before the plaintiff could avoid the
contract on the ground of fraud by North, North had pledged the ring to the defendant. The
defendant had taken the ring in good faith and without any notice of the fact that the goods
with North (pawnor) were under a voidable contract. It was held that the pledge was valid.

It may be noted that this exception is applicable if the pawnor is in possession of the goods under a
voidable contract. lf the pawnor has stolen the goods or has obtained possession under a void
agreement, the pawnee will get no rights in that transaction.

It is further necessary that the pledgee must be acting in good faith and without any notice about
the pawnor's defect in title.
3) Pledge by a person with a limited interest (Section 179)- A person having a limited interest in
the goods, for instance, a pledgee, may pledge the goods. According to 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. In such a case, the pawnee's right is limited to the extent of the pawnor's interest
in the goods. It is immaterial that the pawnee had no notice that the pawnor had only a limited
interest. Thus, if, for example, A pledges the goods to B for Rs. 5,000 and B makes a sub-pledge
of those goods for Rs. 8,000, A gets a right to take back those goods by paying Rs. 5,000 only.

4) Pledge by seller in possession after sale [Section 30 (1), Sale of Goods Act]- After the seller has
sold certain goods and the property (ownership) in respect of them has passed to the buyer, the
seller has no right to deal with such goods. But according to Section 30 (1), Sale of Goods Act, if
the seller after selling the goods, continues or is in possession of the goods or the documents of
title in respect of the goods, then any sale or pledge or other disposition of the goods by him or
a mercantile agent on his behalf, will convey a good title to the transferee, provided that the
transferee is acting in good faith and without any notice of the previous sale.

5) Pledge by buyer in possession after sale [Section 30 (2), Sale of Goods Act]- A buyer of the
goods, who may have obtained the possession of the goods, but has not yet become the owner
of those goods, cannot deal with such goods. According to Section 30 (2), Sale of Goods Act,
however, if a buyer has obtained the possession of the goods or the documents of title with the
consent of the seller, the delivery or transfer by such a buyer or a mercantile agent on his behalf,
by way of sale, pledge or other disposition will convey a good title to the transferee, provided
that the transferee is acting in good faith and without notice of any lien or other rights of the
original seller in respect of those goods.

RIGHTS OF PLEDGEE OR PAWNEE (SECS. 173 TO 176)- A pawnee has the following rights under the
Act

1- Right to retain the goods pledged. (Secs. 173 and 174).

2- Right to recover extraordinary expenses incurred by him. (Section 175).
3- Rights of suit to procure the debt, etc., and sale of the pledged goods. (Section 176).

1- Right to retain the goods pledged (Secs. 173 and 174)- Sections 173 and 174 make the following
provision regarding the pawnee's right of retaining the goods pledged to him
173. Pawnee's right of retainer-The pawnee may retain the goods pledged, not only for
payment of the debt or the performance of the promise but for the interests of the debt, and all
necessary expenses incurred by him in respect of the possession or for the preservation of the
goods pledged.
174. Pawnee not to retain for debt or promise other than that for which goods pledged.
Presumption in case of subsequent advances.
According to the above stated provision, the right of a pawnee to retain the goods pledged shall
be not only for the payment of the debt, or the performance of the promise, but he can also
exercise this right for the interest on the debt and all necessary expenses incurred by him in
respect of the possession or for the preservation of the goods pledged.
 Although, ordinarily, a pawnee can retain the goods pledged only as a security for that debt or
promise for which they are pledged, but there is a presumption that if there are subsequent
advances, they are also the part of the original debt, and the pawnee may retain the goods to
recover subsequent advances also. This is merely a presumption which could be rebutted by a
contract to the contrary.
The pawnee is bound to redeliver the goods after he gets what is due to him.

2- Right to recover extraordinary expenses incurred by pawnee (Section 175)- According to

Section 175, the pawnee is entitled to receive from the pawnor extraordinary expenses incurred
by him for the preservation of the goods pledged. Section 175 confers an additional right, i.e., a
right to receive from the pawnor extraordinary expenses incurred by him for the preservation of
the goods. For example, if the pawnee has to arrange for a bank locker for the safety of the
goods or he spends some amount for insuring them against theft, etc., he can recover such
expenses from the pawnor He can enforce this right by filing a suit.

3- Right of suit to recover the debt, etc., and sale of the pledged goods (Section 176 )- This Section
confers the following rights on the pawnee, on the pawnor's default in fulfilling his promise: -
a- he may bring a suit against the pawnor upon the debt or promise, and retain the goods
pledged as a collateral security; or
b- he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
a- Right of suit against pawnor- A pawnee has a right to recover the debt by filing a suit against the
pawnor. Section 176 does not require any notice to the pawnor before the institution of the suit.
Apart from filing a suit, the pawnee has also a right to retain the goods pledged as a collateral
security. When the pawnee sues for the recovery of the debt, it is expected that on the
satisfaction of the debt, he will return the security.

Pawnee can opt to file a suit and also to retain the pledged goods- Section 176 provides for
pawnee's right when the pawnor makes default. The pawnee has been empowered- (i) to bring a
suit against the pawnor on the debt, and to retain the goods pledged as a collateral security, or (ii) to
sell the pledged goods after giving a reasonable notice to the pawnor.

In State Bank of India v. Smt. Neela Ashok Naik, it has been held that if an F.D.R. has been
pledged with a Bank, the Bank is not obliged to adjust the instalments of repayable
instalments of loan against the F.D.R. He may retain F.D.R. as such, and bring a suit to
recover the loan.

Pledged goods if lost or damaged- If the pledged goods have been lost or damaged due to the fault
of the pawnee, for instance, he fails to take due care of the goods as are required by Section 151 of
the Contract Act, he will lose his claim against the pawnor to that extent In Central Bank of India v
Grains and Gunny Agencies," due to the negligence of the pledgee bank, the pledged goods were
lost. The Bank was requested by the pawnor to sell away the goods and realize the balance, but the
Bank failed to do so. Moreover, now the Bank was not in a position to redeliver the goods on the
satisfaction of its claim. It was held that the Bank was liable for the loss of the goods and, therefore,
he was not entitled to succeed in his claim against the pawnor.
 In Lallan Prasad v. Rahmat Ali A borrowed from Ba sum of Rs 20,000 and in return gave a
promissory note and aeroscrapes of the value of Rs. 35,000 as a collateral security, to B. B
brought an action against A to recover back the loan, but himself was not in a position to
return back the security, i.e., the aeroscrapes, the same having been sold by B. It was held
that since B was not in a position to return the goods, he was not entitled to any decree
against A.

b- Right of sale of the pledged goods- If the pawnor makes a default in the payment of the debt, or
performance of duty, as agreed, the pawnee has also the right to sell the thing pledged, on
giving the pawnor reasonable notice of the sale. A sale made by the pawnee without giving a
reasonable notice to the pawnor is void. A sale without prior notice to the pawnor will confer
only limited rights to the buyer of such goods. Such a buyer steps into the shoes of the pledgee.
A sale by the pledgee atter a reasonable prior notice to the pawnor is valid, and confers a good
title on the buyer of such goods.
However, Section 176 does not require specification of the date, time and place.
In Sunderlal Saraf v. Subhas Chand Jain, the Madhya Pradesh High Court held that what was
required by Section 176 was sending a reasonable notice of the sale.

Since this Section did not speak about sending the notice of intending sale on a particular date, time
and place and, therefore, if the date, time and place were not mentioned in the notice, would not
render the said notice ineffective or in contravention to Section 176 of the Act, the Court ruled.

Pawnor's right to redeem (Section 177)- The pawnor has right to redeem the goods pledged, i.e.,
take back the goods from the pawnee on payment of the agreed debt, or performance of the
promise in accordance with the agreement. He can exercise the right to redeem before the pawnee
has made an actual sale of the goods, Section

177, which confers this right on the pawnor, is as follows: 177. Defaulting pawnor's right to
redeem- If a time is stipulated for the payment of the debt, or performance of the promise, for
which the pledge is made, and the pawnor makes default in payment of the debt or performance of
the promise at the stipulated time, he may redeem the goods pledged at any subsequent time
before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have
arisen from his default."

Generally, the pawnor may redeem the goods on the payment of the debt, or the
performance of the promise, for which the pledge is made, at a stipulated time. But the Act
does not place any time limit for redemption. The pawnor may redeem the goods even at
any subsequent time, before the pawnee has made an actual sale of them. The right of
redemption is extinguished only when the pawnee makes actual sale of goods by virtue of
his right under Section 176 of the Act. So long the sale does not take place, the pawnor is
entitled to redeem the goods on payment of the debt.

The pawnee himself cannot become the owner of the goods merely because the pawnor has
not got them redeemed within the specific time. The pawnee "has only a right to retain the
goods until his claim for the money advanced thereon has been satisfied, with a power to
sell the goods pledged...The pawnee acquires a right, after notice, to dispose of the goods
pledged. This amounts to his acquiring only a "special property in the goods pledged. The
general property (ownership) therein remains in the pawnor and wholly reverts to him on
the payment of the debt or performance of the promise."
Accretions to the pledged goods- In Standard Chartered Bank v. Custodian, the Apex Court ruled
that accretions to the goods pledged constitute part of the pled transaction. Thus, if shares and
debentures are pledged, any bonus shares issued and dividend and interest paid will constitute part
of the securities pledged and they can also be retained as security by the pawnee. Accretions are not
to be delivered back separately but they are to be returned along with the main property which has
been pledged when the redemption takes place.

Right of redemption of the goods thus also includes a right to any accretion to the goods
pledged. If a debtor pledges his shares of a certain company with a Bank, and during the
period of pledge, the company issues bonus shares and right shares, the pawnor on
redemption will be entitled to such bonus and right shares also.

Legal Heir's Right to Redeem- In case of death of a pawnor, the pledge made by him, can be
redeemed by his legal heirs on meeting the liabilities concerning the pledge. In State Bank of India v.
Mangalabai G. Deshmukh the Bombay High Court held that the legal heirs of the deceased borrower
were entitled to redeem the ornaments pledged by the deceased on payment of loan amount with
interest. It was further held that the legal heirs were not required to produce the Letter of
Administration to redeem the pledged ornaments.

AGENCY

Section 182 defines the terms "Agent" and "Principal" as follows: An agent is a person employed to
do any act for another or to represent another in dealings with third person. The person for whom
such act is done, or who is so represented, is called the “principal”.

In an agency one person (principal) employs another person (agent) to represent him or to act on his
behalf, in dealings with a third person. The act of the agent binds the principal in the same manner
in which he would be bound if he does that act himself.

The agent may be expressly or impliedly authorized to do an act on behalf of the principal. lf l
authorize my agent to sell my house to a third person and he does so, I become bound for the sale of
the house to the third person in the same way as if l myself contracted to sell the house to the third
person. The agent is only a connecting link between his principal and the third person. According to
section 226, contracts entered into through an agent and obligation arising from the acts done by an
agent, may be enforced in the same manner, and will have the same legal consequence, as if the
contract had been entered into and the acts done by the principal in person.

Explaining the definition of agent as stated in Section 182, Dhavan, J. observed: - According to this
definition, an agent never acts on his own behalf but always on behalf of another. He either
represents his principal in any transactions or dealings with a third person, or performs an act for the
principal. In either case, the act of the agent will be deemed in law to be not his own but of the
principal.
If the employee had reason to believe that his employer was acting on behalf of the Corporation, a
contract of agency might be inferred.

Different kinds of Agents

Depending on the kind of authority given to the agent to act on behalf of the principal, the agents
are of various kinds.

1- Auctioneers- An auctioneer is an agent whose business is to sell goods or other property by

auction, i.e., by open sale. The authority vested in him is to sell the goods only, and not to give
warranties on behalf of the seller, unless expressly authorized in that behalf. He is a mercantile
agent within the meaning of Section 2(9) of the Sale of Goods Act. [Proviso to sect- 27 SOGA
and Section 178 of ICA]- If the owner of the goods puts him in possession of the goods, although
the authority to sell has not been conferred in him, a buyer in good faith from such an
auctioneer will get a good title in respect of the goods. Thus, if he has been authorized to sell the
goods only subject to a reserved price but he sells the same to an innocent and bona fide buyer
below the reserved price, the buyer will get a good title in respect of such goods.

2- Factors- A factor is a mercantile agent who is entrusted with the possession of the goods for the
purpose of sale." He has also the power to sell goods on credit and also to receive the price from
the buyer. If the owner has put a tactor in possession of the goods or the document of title but
without authorizing him to sell the goods, the sale of goods by him will convey a good title to a
bona fide buyer. According to Section 171 of the Contract Act, a factor has right of general lien
over the goods belonging to his principal, which are in his possession, for the general balance of
account.
3- Brokers- A broker is an agent who has an authority to negotiate the sale or purchase of goods on
behalf of his principal, with a third person. Unlike a factor, he himself has no possession of the
goods. He merely makes the two parties to enter into a contract. He gets his commission
whenever any transaction materializes through his efforts.
4- Del Credere Agents- Generally, the function of an agent is over after a contract is established
between his principal and a third person. He is not answerable to his principal for the failure of
the third person to perform the contract. A del credere agent constitutes an exception to this
rule. He is a mercantile agent, who, on the payment of some extra commission, known as del
credere commission guarantees the performance of the contract by the third person. lf in such a
case the third person, for instance, fails to pay for the goods supplied to him, the principal can
bring an action against the del credere agent for the same. The liability of the del credere agent,
like that of a surety, is secondary and the same arises if the third person fails to pay to the
principal what is due under the contract.

Some features of a contract of agency: -

a- The principal should be competent to contract. (Section 183).

b- The agent may not be competent to contract. (Section 184).
c- No consideration is necessary to create an agency. (Section 185)
a- The principal should be competent to contract (Section 183)- According to 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."

In an agency, it is necessary that the principal and the third person should be competent to contract.
If a person is not competent to contract and, therefore, is incapable of making a contract, he cannot
make a contract through an agent either. A person can do only such thing through an agent which he
is himself personally capable of doing. Therefore, if the principal is a minor or of unsound mind, he is
incapable of being bound through the acts of his agent. Although a minor himself cannot appoint an
agent, there is nothing in Section 183, which prohibits the guardian of a minor from appointing an
agent for him.

b- The agent may not be competent to contract (Section 184)- Section 184 makes the following
provision regarding the capacity of an agent "As between the principal and a third person, any
person may become an agent, but no person who is not of the age of majority and of sound
mind can become an agent, so as to be responsible to his principal according to the provisions in
that_ behalf herein Contained."

The capacity of an agent could be looked from two angles, Firstly, the capacity of the agent to act on
behalf of the principal, so as to bind his principal and the third person. Secondly, his capacity to bind
himself by a contract between himself and his principal.

So far as the agent's capacity to bind the principal and the third person is concerned, for that any
person may become an agent. It means that even if an agent is a minor or otherwise incompetent to
contract, he is capable of creating a valid contract between his principal and the third person. In this
context, the agent is only a connecting link between the two parties. So far as the agent's capacity to
bind himself to the principal is concerned, for that it is necessary that the agent should also be
competent to contract. Section 184 therefore, provides that no person who is not of the age of
majority and of sound mind can become an agent, so as to be responsible to his principal according
to the provisions in that behalf herein contained. Thus, if an agent is a minor, through him a valid
contractual relationship will be created between the principal and the third person, though such an
agent will not himself be responsible for his acts to his principal.

c- No consideration is necessary to create an agency (Section 185)- Section 185 provides that no
consideration is necessary to create an agency. The law does not require any consideration as
such for the validity of a contract of agency.

Modes of Creation of Agency-An act done by an agent on behalf of the principal binds the principal
towards a third person. The relationship of Principal and Agent between the person represented and
the person representing has to exist in order that the principal's liability towards the third person,
arises. In the following situations, the principal is bound by the acts of the agent, i.e., in such
situations, the agent has the power to bind his principal:

1- By actual authority being conferred on the agent to act on behalf of the principal. Such
authority may be either express or implied;
2- By agent's authority to act on behalf of the principal in a situation of Emergency
3- By the conduct of the principal, which creates an agency on the basis of the Law of Estoppel;
 4- By ratification of the agent's act by the principal, even though the same has been done
without the principal's prior authority;
5- By presumption of agency in Husband-Wife relationship.

1- Acts done with Principal's Actual Authority- A principal is bound by the acts done by his agent
with his authority. The authority of an agent may be expressed or implied (section 186). Section
187 defines express and implied authority as under

Express Authority- An authority is said to be express when it is given by words spoken or written

Implied Authority- An authority is said to be implied when it is to be inferred from the

Circumstances of the case; and things spoken or written, or the ordinary course of dealing. For
instance: A owns a shop in Serampore, living himself in Calcutta, and visiting the shop occasionally.
The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the
purpose of the shop and of paying for them out of A's funds with A's knowledge. B has an implied
authority from A to order goods (on credit) from C in the name of A for the purposes of the shop.

Extent of Implied Authority- Section 188 explains the extent of the authority of an agent as follows:

"188 Extent of agent's authority-An agent having an authority to do an act has authority to do every
lawful thing which is necessary in order to do such act. An agent having an authority to carry on
business has authority to do every lawful thing necessary for the purpose, or usually done in the
course of conducting such business.

Illustrations- A constitutes B his agent to carry on his business of a ship builder. B may purchase
timber and other materials, and hire workmen for the purpose of carrying on the business."

Implied authority of an agent means such authority which has not been conferred by the express
words, but which can be inferred from the circumstances of the case, or the course of dealing
between the parties, or the usage of the particular trade. An agent employed to sell a horse has an
implied authority to give a warranty that the horse is sound, an agent having authority to receive
goods on behalf of the principal has an implied authority to acknowledge the payment due," an
agent having an authority to make a bet has an implied authority to make the payment if the bet is
lost," or an agent having been authorized to sell artificial manure has an implied authority to warrant
as to the proportion of its ingredients.

The agent's implied authority depends on the nature of business which the agent has been
authorized to transact. When the agent exercises the authority vested in him, the principal is bound
thereby.

If an agent has implied authority to do an act, the principal is bound towards the third person when
the agent exercises such authority. The principal continues to be bound for the same even if he has
prohibited or restricted the agent from doing the act, unless the third person knows of the
restriction. The termination of authority of an agent does not have effect as regards third persons
until it becomes known to them (section 208).

2- Agent's authority in an Emergency (Section 189)- Section 189 explains an agent's authority in an
emergency, as under "189. Agent's authority in an authority in an emergency, to do all such acts
 for the purpose of protecting his principal from loss as would be done by a person of ordinary
prudence in his own case, under similar circumstances.
Illustrations- An agent for sale may have goods repaired if it be necessary.

3- Principal bound by Estoppel- Sometimes the agent has neither express nor implied authority to
do an act on behalf of the principal, but the principal by his conduct creates an impression in the
mind of the third person that the agent has an authority to act on his behalf/ln such a case, the
principal is liable towards the third person for the acts done by the agent, on the ground of the
application of the law of estoppel. The basis of the action is what appears to the third person to
be an authority, i.e., apparent or ostensible authority conferred on the agent.

Section 237- Liability of principal inducing belief that agent's unauthorized acts were
authorized- When an agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by such acts or obligations if he has
by his words or conduct induced such third persons to believe that such acts and obligations
were within the scope of the agent's authority."
Illustration- A consigns goods to B for sale, and gives him instructions not to sell under a
fixed price. C, being ignorant of B's instructions, enters into a contract with B to buy the
goods at a price lower than the reserved price. A is bound by the contract.

In Arnmagas Ltd. v. Mundogas- Ostensible authority comes about where the principal by words or
conduct has represented that the agent has the requisite actual authority, and the party dealing with
the agent has entered into a contract with him in reliance on that representation.

4- Principal bound by Ratification- It has also been noted that when the agent does an act for
which, he does not have any authority, the principal is not bound for the same. To this there is
an exception when the principal may be bound even for acts done without any authority. If the
principal ratifies, i.e., accords subsequent approval to an act done without his authority, but on
his behalf, the principal would be bound in respect of such act.

RATIFICATION (SECTIONS 196-200)

Section 196 makes the following provision regarding the right of a person to ratify an act which has
been done on his behalf, and also regarding the effect of ratification: -

"196. Right of person as to acts done for him without his authority. Effect of ratification - Where
acts are done by one person on behalf of another, 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."

When an act has been done by one person on behalf of another, though without his authority or
knowledge, the person on whose behalf the act is done has the following options

Either: - i- To disown the act; or ii- To ratify the same.

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

If a person falsely represents that he is an agent of another, the principal may ratify the act even
though the same was done without his authority. On ratification, the principal becomes bound by
the act. If the principal does not ratify the act but disowns it, the pretended agent is personally liable
to the third person, who had entered into the contract on the basis of the misrepresentation made
by the pretended agent.

It has been noted above that the person on whose behalf an unauthorized act has been done has an
option to ratify the act. Ratification means according approval to the act by a person on whose
behalf the act is done., If the act done on behalf of a person, although without the knowledge or the
authority of that person is ratified, the person ratifying the act becomes the principal and the person
who has done the act becomes the agent, although no such relationship, in fact, existed at the time
of doing the act.

ESSENTIALS OF VALID RATIFICATION

i- The act should be done on behalf of another person. (Section 196).

ii- The principal should be in existence, and competent to contract when the act is done.
iii- Ratification may be express or implied. (Section 197).
iv- Ratification should be with full knowledge of the facts. (Section 198).
v- Ratification should be of the whole transaction. (Section 199).
vi- Ratified acts should not be injurious to third person. (Section 200).
vii- Ratification should be made within a reasonable time.

i- Act done on behalf of another (Section 196)- According to Section 196, for the act to be
ratified, it is necessary that the same has been done on behalf of the person who seeks to
ratify the same. A person cannot ratify an act done on behalf of his wife. Similarly. if an
agent acts on his own account, such an act cannot be ratified by another person.

ii- Principal should be in existence and competent to contract- So that ratification is valid, it
becomes necessary that the principal must have been in existence, and also competent to
contract," at the time the act purported to be ratified was done. Thus, if a contract is
purported to be made on behalf of a company which has not yet been formed, the company
cannot ratify the contract after coming into existence.

It is also necessary that the act must have been done on behalf of a principal, who was capable of
making the contract when the act was done. lf an agent purports to make a contract on behalf of a
principal, who at that time is himself incapable of making that contract, the principal cannot validate
that contract by subsequent ratification. Similarly, a minor's agreement being void ab initio, a minor,
on whose behalf a contract is made, cannot subsequently ratify the contract and validate it.

iii- Ratification may be express or implied (Section 197)- According to Section 197, ratification
may be express or may be implied in the conduct of the person on whose behalf the acts are
done.
 This may be explained by the following illustrations-
a) A without authority, buys goods for B. Afterwards, B sells them to C on his own
account. B's conduct implies a ratification of the purchase made for him by A.
b) A, without B's authority, lends B's money to C. Afterwards, B accepts interest on
the money from C. B's conduct implies a ratification of the loan.

iv- Ratification with full knowledge of facts (Section 198)- According to Section 198, no valid
ratification can be made by a person whose knowledge of the facts of the case is materially
defective.

v- Ratification of the whole transaction (Section 199)- According to Section 199, a person
ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of
which the act formed a part. The object of this provision is that no principal may ratify only
those parts of the transaction which are favourable to him, and disown others. If he makes a
ratification, it is deemed to be the ratification of the whole of the act.

vi- Ratified act should not be injurious to a third person (Section 200)- If ratification of an act
done without the authority of a person would result in injury to the interest of a third
person, the ratification would be invalid.

Section 200 makes the following provision in this regard- "200. Ratification of unauthorized act
cannot injure third person- An act done by one person on behalf of another, without such other
person's authority, which if done with authority, would have the effect of subjecting a third person
to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made
to have such effect."

Illustrations- A holds a lease from B, terminable on three months' notice. C, an unauthorized person,
gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.

vii- Ratification within a reasonable time- In order that ratification is valid, it is necessary that
the same must be done within a reasonable time. Delay in ratification could prejudice the
interest of the third person and, therefore, undue delay in ratification should not be there.

Effect of Ratification: - The doctrine of Relating Back When the principal ratifies an act, which has
been done on his behalf but without his authority or knowledge, the same effects follow as if the act
had been performed with the principal's prior authority (section 200).

The validity of the act relates back to the time of the doing of the act. In Risbourg v. Bruckner,' the
act of the agent which had been done without the principal's authority was ratified by the latter. It
was held that on ratification, a valid contract between the principal and the third person was created
from the date when the agent had done the act, and, therefore, the agent could not be made
personally liable because the agent's position had become the same as in the case of a previously
authorized act.

The effect of ratification of a contract entered into by the agent without the principal's prior
authority is, that the contract is deemed to have been made when the agent made the agreement
rather than the date of ratification by the principal of that agreement.
Revocation of offer before ratification- It has been noted above that upon ratification of a contract
by the principal, its execution relates back to the time when the contract was entered into by the
agent. lf A enters into an agreement with B (agent) on 1st January, and B's principal ratifies the same
on 1st February, the date of making of the contract for all purposes is deemed to be 1st January. A
question has arisen in a number of cases that, if A wants to revoke his offer before B's principal has
ratified the contract, can he do so? The question was answered in the negative in Bolton Partners v.
Lambert, and it was held that in spite of the fact that A seeks to revoke the offer, B's principal can
ratify the agreement entered into between A and B. In other words, as stated in the above
illustration, the contract between A and B's principal is deemed to be made on 1st January, and A
cannot, therefore, revoke his offer after that.

In Bolton Partners v. Lambert, A offered to purchase some Sugar Works belonging to a company.
The company's managing director, purporting to act on behalf of the company, but within any
authority, accepted this offer. Before the company had ratified the acceptance made by the
managing director, A withdrew his offer. The company still ratified the agreement. It was held that
ratification related back to the making of the agreement between A and the company's agent, A
could not withdraw his offer, and he was bound by the ratification

The position would be different if the agent purports to make the Contract 'subject to ratification by
the principal, or the other contracting party knows about the limitation of the agent's authority. In
such a case, the date of the making of the contract is the date of ratification, and there can possibly
be revocation of the offer before ratification.

5- Agency in Husband-Wife relationship

Agency by Co-habitation- A married woman cohabiting with her husband is presumed to have the
power to pledge the credit of her husband for necessaries. She may receive the supply of goods and
services which may be required for the domestic use or which may be of use to her husband, herself
or the children. If such goods or services are necessary, according to the condition of life of that
family, the husband becomes bound to pay for them.

The implied authority to the wife to bind the husband arises when the husband and wife are
cohabiting. If they are living separately, there is presumed to be no such authority in wife to pledge
the credit of her husband. It is further necessary that the husband and wife must be living in a
domestic establishment. If the husband and wife are living in a hotel, where they have been working
as manager and manageress respectively, i.e., when the two are not living in a domestic
establishment, the husband cannot be made liable for the purchases made by the wife.

If the third person gives credit to the wife only,' or when the husband revokes the authority by giving
a notice to a third person, he is not bound by the wife's act.

Agency of Necessity- Even though the husband and wife were not living together, for instance, when
either the husband deserted his wife, or the wife started living separately because of some
justifiable reason, the common law recognized the right of the wife to pledge the credit of the
husband in respect of necessaries Suitable to the style of living to which she was accustomed. Such
agency was presumed to exist when the husband was neither supporting her, nor she had her own
sufficient means to support herself. Since 10, the Courts have been empowered by the Matrimonial
Proceedings and Property Act, 1970, to order the maintenance of wife and children if the husband
wilfully neglects to maintain them, and, therefore, the wife s agency of necessity has been abolished.
 DUTIES OF AGENT

1- Duty not to delegate his duties (Section 190)- When an agent has undertaken to perform
certain duties personally, he is not allowed to delegate his duties to another person. The rule is
contained in the maxim Delegatus non potest delegare which means that an agent to whom
some authority has been delegated cannot further delegate that authority to another person.
The relationship of principal an agent is based on confidence and trust. When the principal has
reposed trust in a particular agent, the agent cannot substitute another person in his place. ln
other words, an agent cannot employ a sub-agent to get the work done through him. An agent,
who has undertaken to do some work personally cannot employ a sub-agent to do the same.
This rule, however, is subject to certain exceptions.

Section 190 contains the following provision in this regard: "190. When agent cannot delegate- An
agent cannot lawfully employ another to perform acts which he has expressly or impliedly
undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may or
from the nature of the agency, a sub-agent must, be employed”.

But there are certain exceptions to this rule. Exceptional situation when a sub-agent can be validly
appointed- An agent can employ a sub-agent in the following exceptional cases

i- When there is a custom of trade to that effect, the agent may employ a sub-agent,
ii- A When the nature of agency so requires, an agent must employ a sub-agent. For
instance, an agent authorized to recover some amount from a third person by filing a
suit must engage a lawyer for the purpose, or when an agent has been authorized to
purchase or sell goods in a foreign country, he must engage a sub-agent for doing the
work.
iii- When an act does not require personal skill, the same may be
got done through a sub-agent. For instance, if an agent has been appointed to weigh
coal lying at a place, or to transport goods from one place to another, he may get the
work done from a sub-agent.
iv- When the principal expressly or impliedly, agrees to the appointment of a sub-agent for
doing certain work, which has been otherwise assigned to the agent, a sub-agent may be
validly appointed.

Sub-agent defined- According to Section 191, a "sub-agent" is a person employed by, and acting
under the control of, the original agent in the business of agency.

Position when sub-agent properly appointed- Where there is proper delegation of authority by the
agent to the sub-agent or the appointment of the sub-agent is valid, the position is governed by the
provision of Section 192 which reads as under

"192. Representation of principal by sub-agent properly appointed- Where a sub-agent is properly

appointed, the principal is so far as regards third persons, represented by sub-agent, and is bound
by and responsible for his acts, as if he were an agent originally appointed by the principal.

Agent's responsibility for sub-agent- The agent is responsible to the principal for the acts of the
sub-agents.

Sub-agent's responsibility- The sub-agent is responsible for his acts to the agent, but not to the
principal, except in cases of fraud or wilful wrong.
The acts of the sub-agent bind the principal towards third persons- When the sub-agent is properly
appointed, he gets vested with the power to represent the principal, and, therefore, for the acts of
such a sub-agent, the principal becomes bound towards third persons. In such a case, the principal is
represented by and is responsible for the acts of the sub-agent towards third persons as if such sub-
agent was originally appointed by the principal. It means that the act of the sub-agent would bind
the principal in the same way as an act of any duly appointed agent.

Responsibility of the Agent or Sub-agent towards the principal- There is privity of contract only
between

i- Sub-agent and the Agent, and

ii- Agent and the Principal.

Therefore, the sub-agent is responsible to the agent, but he is not directly responsible to the
principal. Similarly, the agent is responsible to the principal for the acts of the sub-agent. There is no
privity of contract between the sub-agent and the principal and, therefore, he is not personally
responsible to the principal, and(for the acts of the sub-agent, the responsibility of the agent
towards the principal arises When the principal appoints an agent to do some work and the agent
prefers to get the work done from the sub-agent, it becomes the agent's responsibility to see that
the sub-agent properly performs his duties and, therefore, the agent is responsible for the same to
the principal.

Although as a general rule, the sub-agent is responsible for his wrongs to the agent, but not to the
principal because there is no contractual relationship between the principal and the sub-agent, this
rule does not apply when the sub-agent commits a tort. In case of tortuous acts like fraud or wilful
wrong committed by the sub-agent, the sub-agent becomes directly answerable to the principal.' In
case of fraud and wilful wrong, the principal has a choice to bring an action against the agent or the
sub-agent.

Position when sub-agent not properly appointed- When an agent makes improper delegation of his
authority, i.e., when the appointment of the sub-agent is not covered by any of the exceptions, the
agent is responsible both to the third person and the principal. Section 193 makes the following
provision in this regard

193. Agent's responsibility for sub-agent appointed without authority- Where an agent, without
hawing authority to do so, has appointed a person to act as sub-agent, the agent stands towards
such person in the relation of a principal to an agent, and is responsible for his acts both to the
principal and to third person, the principal is not represented by or responsible for the acts of the
person so employed, nor is that person responsible to the principal."

When the agent makes the appointment of a sub-agent without having an authority to do so, the
principal is not represented by or responsible for the acts of the sub-agent. It means that for the acts
of the sub-agent, the principal will not be bound towards any third person. The sub-agent is also not
responsible for his acts to the principal. For the acts of the sub-agent, it is the agent who is
responsible towards the third person as well as the principal. Between the agent and the sub-agent,
the position is considered to be that of the principal and agent, and, therefore, the agent is
answerable for the acts of the sub-agent.
Substituted Agent- Like a sub-agent, the appointment of a substituted agent is made by an agent. A
sub-agent is the agent of the agent, whereas a substituted agent is an agent of the principal, though
he is not appointed by the principal himself but through the efforts of an agent. An agent, having
been so authorized by the principal, may name a person (substituted agent) to act for the principal
in the business of agency. A substituted agent is the agent of the principal. There is a privity of
contract between the principal and the substituted agent. The principal becomes bound by the acts
of the substituted agent towards third person, and the substituted agent is directly responsible
towards the principal.

Section 194 explains the relation between the principal and the substituted agent. The
provision is as follows “194. Relation between principal and person duly appointed by an
agent to act in business of agency- Where an agent, holding an express or implied authority
to name another person to act for the principal in the business of the agency, has named
another person accordingly, such person is not sub-agent but an agent of the principal for
such part of the business of the agency as is entrusted to him.

A substituted agent is himself responsible towards the principal.

Agent's duty in appointing a substituted agent- While selecting a substituted agent for the principal,
the agent must exercise due care. Section 195 explains the nature of an agent's duty in this regard. It
has been noted above that when the agent exercises due care in selecting a substituted agent for his
principal his responsibility is over. The agent is not responsible for the acts of negligence of the
substituted agent.

This may be explained by the following illustrations-

a- A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of good
reputation to choose a ship for A. The surveyor makes the choice negligently, and the ship
turns out to
be unseaworthy and is lost. B is not, but the surveyor is responsible to A.

Sub-agent and Substituted agent distinguished- One thing common between a sub-agent and a
substituted agent, is that their appointment is made by the agent and not by the principal. The
points of distinction between the two are as under:

a) A sub-agent is the agent's agent, whereas a substituted agent is the principal's agent, in
conducting the agency work. A sub-agent is responsible for his acts to the agent, and the agent
in his turn is responsible for the sub-agent's acts to the principal. A sub-agent is not responsible
to the principal, except in case of fraud or wilful wrong. A substituted agent is directly
responsible to the principal for his acts.
b) After appointing a sub-agent, the agent continues to be responsible for the acts of the sub-agent
towards the principal. An agent's responsibility, on the other hand, is over when he names a
substituted agent. He then goes out of the picture.

2- Duty to follow principal's directions (Section 211)- According to Section 211, an agent has a duty
to follow the directions given to him by the principal. As stated in this Section:
 i- An agent is bound to conduct the business of his principal according to the directions
given by the principal; or,
ii- If there are no such directions, the agent should conduct the business according to the
custom which prevails in doing business of the same kind at the place where the agent
conducts such business.

When the agent does not act as stated above, if any loss is sustained by the principal. he must make
it good to his principal, and if any profit accrues, he must account for it

Illustrations- (a) A, an agent, engaged in carrying on for B a business, in which it is the custom to
invest from time to time, at interest, the money which may be in hand, omits to make such
investment. A must make good to ‘B’ the interest usually obtained by such investment.

Illustration- (b) B, a broker, in whose business, it is not the custom to sell on credit, sells goods of A
on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B
must make good the loss A.

It is clear from illustration (b) above that when the agent does not act according to the principal's
directions or the custom, as the case may be, he will be liable for the loss caused to the principal
even though the same could not have been anticipated at the time of the doing of the act.

An advocate being an agent of his client has to follow the instruction and directions given by his
client. If he acts in a manner contrary to the directions given by his client, or against the custom, or
practice of his profession and any loss is caused to his client thereby, he must make good such loss.

A banker has a duty of secrecy towards his customer. Such duty is a legal duty arising out of contract,
and is not a mere moral duty. Breach of this duty, therefore, renders him liable towards his customer
if some loss is thereby caused to the latter.

If in any particular case, there are neither any express instructions given to the agent, nor is there
any custom to guide him, the agent is to do the act to the best interest of his principal.

3- Duty to show proper skill and care (Section 212)- The agent is supposed to take due care and
act with reasonable diligence in the matter of agency. Section 212 makes the following provision
in this regard: -

"212. Skill and diligence required from agent- An agent is bound to conduct the business of the
agency with as much skill as is generally possessed by persons engaged in similar business,
unless the principal has notice of his want of skill. The agent is always bound to act with
reasonable diligence, and to use such skill as he possesses; and to make compensation to his
principal, in respect of the direct consequences of his own neglect, want of skill, or misconduct
but not in respect of loss or damage which are indirectly or remotely caused by such neglect,
want of skill or misconduct."

The provision has been explained by the following illustrations- A, an agent for the sale of goods,
having authority to sell on credit, sells to B on credit, without making the proper and usual enquiries
as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his
principal in respect of any loss thereby sustained.

In Keppel v. Wheeler, the principal instructed an estate agent to find a buyer for his estate. The
agent communicated an offer of a prospective purchaser who was willing to buy the estate for £
6,150. Before the contract for sale was concluded, the agent got an offer of £6,750 from another
buyer. The agent did not communicate about the second offer to the principal. It was held that the
agent did not show proper skill and care in the matter and, therefore, he was liable to pay damages
to his principal for the loss suffered by him.

4- A Duty to render proper accounts (Section 213)- Another duty of the agent is to render proper
accounts to his principal on demand. This means that he should maintain proper accounts of the
sums belonging to the principal which are in his hands, he should not mis-utilize and
misappropriate them, and on demand from the principal, he should render true accounts to his
principal.

5- Duty to communicate with principal (Section 214)- According to 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.

6- Duty not to deal on his own account (Secs. 215 & 216)- An agent is under a duty not to deal on
his own account in the business of agency, unless the principal consents thereto. If in any
transaction, an agent deals on his own account without the principal's prior consent, the
principal has the following two rights: -
i- To repudiate the transaction by showing either-
a- that any material fact has been dishonestly concealed from him by the agent; or
b- that the dealings of the agent have been disadvantageous to him. (Section 215).
ii- To claim from the agent any benefit which may have resulted to him from the
transaction (Section 216).

7- Duty to pay sums received for principal (Secs. 217 and 218)- Another duty of the agent is to pay
to his principal all sums received by him on principal's account. Before making such payments to
his principal, the agent is, however, entitled to make such deductions out of the same as are
lawfully due to him. According to Section 217, an agent may retain, out of any sums received on
account of the principal in the business of the agency, all moneys due to himself in respect of
advances made or expenses properly incurred by him in conducting such business and also such
remuneration as may be payable to him for acting as agent.

8- Rights of Agent and Duties of Principal- The Act confers a number of rights on an agent, and
imposes some corresponding duties on the principal. They are as follows:
a- Right to Remuneration (Section 219)- Section 219 contains the following provision
regarding agent's right to remuneration for the act done on behalf of the principal: "219.
When agent's remuneration becomes due- In the absence of any special contract, payment
for the performance of any act is not due to the agent until the completion of such act; but
an agent may detain moneys received by him on account of goods sold, although the
whole of the goods consigned to him for sale may not have been sold, or although the sale
may not be actually complete."

According to the above stated provision, an agent's remuneration does not become due to
him until the completion of the act assigned to him. This rule is subject to any special
contract between the principal and the agent. If the parties have agreed that the agent will
 be entitled to commission when he finds a purchaser, who is ready and willing to purchase
the property, the agent becomes entitled to the commission on doing that.

Agent's efforts should be effective cause for the transaction- If the agent's efforts are the
effective cause of making the contract, the agent is entitled to his commission. Therefore,
when a broker is instrumental in purchase of land by the municipality, the broker is entitled
to his commission.
If the agent's efforts are not the effective cause of the materialization of the
transaction, he will not be entitled to any commission.
Although as a general rule, an agent cannot claim his remuneration unless he has
completed the act assigned to him, but the rule does not apply when the agent is to
sell the goods. In such a case, according to Section 219, the agent has a right to
detain his principal's money received by him on account of goods sold in order to
recover his remuneration, although the whole of the goods consigned to him for sale
may not have been sold, or although the sale may not be actually complete. The law,
therefore, entitles him to remuneration on the basis of the work done, from time to
time.

No remuneration for the business misconducted (Section 220)- An agent who is guilty of
misconduct in the business of the agency, is not entitled to any remuneration in respect of
that part of the business which he has misconducted.
Illustrations- A employs B to recover 1,000 rupees from C. Through B's misconduct, the
money is not recovered. B is entitled to no remuneration for his services, and must make
good the loss.

b- Right to retain sums (Secs. 217 and 218)- A/to section 218, The agent has a duty to pay to
his principal all sums received on principal's account. But according to section 217, he has
also a right to retain, out of any sums received on account of the principal in the business of
the agency, all money due to himself in respect of advances made or expenses properly
incurred by him in conducting such business and also such remuneration as may be payable
to him for acting as agent. Similarly, according to 219, when an agent sells his principal's
goods, he may detain moneys received, for his remuneration on account of the goods sold
by him.
c- Right of lien on principal's property (Section 221)- According to Section 221, in the absence
of any contract to the contrary, an agent is entitled to retain goods, papers, and other
property, whether movable or immovable, of the principal received by him, until the amount
due to himself for commission, disbursements and services in respect of the same has been
paid or accounted for to him.

A purchasing agent can exercise lien over the goods purchased for his principal until the
amount due to him for such purchases has been paid. Such right is, however, subject to an
agreement to the contrary. Moreover, such a right is lost, when the agent parts with the
possession of the goods.

d- Right to be indemnified (Secs. 222-224)-

Indemnity for lawful acts (Section 222)- According to Section 222, the employer of an agent is
bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of
the authority conferred upon him.

Illustrations (a) B, at Singapure, under instructions from A of Calcutta, contracts with C to

deliver certain goods to him. A does not send the goods to B and C sues B for the breach of
contract. B informs A of the suit and A authorizes him to defend the suit. B defends the suit,
and is compelled to pay damages and costs and incurs expenses. A is liable to B for such
damages, costs and expenses.

Illustrations (b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with
C for the purchase of 10 casks of oil for A. Afterwards, A refuses to receive the oil and C sues
B. B informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and
has to pay damages and costs and incurs expenses. A is liable to B for such damages, costs
and expenses.

Indemnity for civil wrongs (Section 223)- Apart from the right of indemnity against the
consequences of all lawful acts done by the agent, the agent is also entitled to indemnity against the
consequences of an act done in good faith, even though the act causes an injury to the rights of third
persons, for example, it is a tort

Section 223 contains the following provision in this regard: 223. Agent to be indemnified
against consequences of acts done in good faith- Where one person employs another to do
an act, and the agent does the act in good faith, the employer is liable to indemnify the
agent against the consequences of that act, though it causes an injury to the rights of third
persons.

Illustrations- B, at the request of A, sells goods in the possession of A but which A had no
right to dispose of. B does not know this and hands over the 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."

When an agent commits a tort in the course of doing an act on behalf of the principal, both
principal and agent are deemed to be tortfeasors.

No indemnity in case of criminal offences (Section 224)- It has been noted above that when the
employer employs an agent to commit an act which amounts to a tort, he is bound to indemnify the
agent against the consequence thereof, Section 224, however, makes it clear that when the agent
commits a crime at the instance of the principal, the agent cannot claim indemnity from the
principal against the consequences of the crime, even though the principal has expressly or impliedly
promised to indemnify him. Section 224 is as follows:

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

i. ‘A’ employs B to beat C, and agrees to indemnify him against all consequences of the act. B
thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify B
for those damages.
ii. B, the proprietor of a newspaper, publishes, at A's request, a libel upon C in the paper, and A
agrees to indemnify B against the consequences of the publication and all costs and
 damages of any action in respect thereof. B is sued by C and has to pay damages, and also
incurs expenses. A is not liable to B upon the indemnity."

e -Right to compensation for damages due to principal's neglect (Section 225)- According to Section
225, the principal must make compensation to his agent in respect of injury caused to such agent by
the principal's neglect or want of skill.

Termination of Agency (Ss. 201-210)- Section 201 mentions various modes of the termination of
agency of an agent. The Section is as follows-

Section 201- Termination of agency- Various modes of the termination of agency as provided in this
Section are as follows-

1) By revocation of agent's authority;

2) By renunciation of the business of agency by the agent,
3) By the completion of the business of agency,
4) By the death or insanity of either the principal or the agent,
5) By insolvency of the principal.

Rules of revocation of authority- It has been noted above that one of the modes of the termination
of agency is the revocation of agent's authority by the principal, The revocation of agent’s authority
can be made by the principal subject to the following rules:

1)- Revocation may be express or implied (Section 207)- According to Section 207, revocation of
agency may be either expressed or implied in the conduct of the principal. For example, A empowers
B to let A's house. Afterwards, A lets it himself. This is an implied revocation of B's authority.

It is a trite that a contract of Vakalatnama can be withdrawn by the client at any time.

2)- No revocation of agency when agent has interest in the subject-matter (Section 202)- According
to Section 202 “Where the agent has himself an interest in the property which forms the subject-
matter of the agency, the agency cannot, in the absence of an express contract, be terminated to
the prejudice of such interest”.

When the authority of an agent is "coupled with interest", the authority conferred on the agent
cannot be revoked to the prejudice of the agent's interest. This is, however, subject to an express
contract to the contrary.

Illustration- A consigns 1,000 bales of cotton to B, who has made advances to him on such cotton,
and desires B to sell the cotton, and to repay himself out of the price, the amount of his own
advances. A cannot revoke his authority, nor is it terminated by his insanity or death.

Whether the agency can be revoked by the principal or not depends on the fact whether agency
creates an interest in favour of the agent or not. lf no such interest has, in fact, been created, mere
assertion in the contract that the power of attorney is irrevocable is not enough. Even if it has been
described as irrevocable, the agency may still be revoked, if no interest has been created in favour of
the agent.

3)- Revocation possible before the authority has been exercised (Section 203)- According to Section
203, the principal may, save as otherwise provided by the last preceding Section (i.e., Section 202)
revoke the authority given to his agent at any time before the authority has been exercised so as to
bind the principal. It means that when the agent has already exercised the authority conferred upon
him by the principal, the revocation of the same is not possible.

Revocation when authority has been partly exercised (Section 204)- When the authority
has been partly exercised by the agent, there can be no revocation of agency as regards such
acts and obligations as arise from the acts already done. The provision in this regard is
contained in Section 204, which is as under

"204. Revocation where authority has been partly exercised- The principal cannot revoke
the authority given to his agent after the authority has been partly exercised so far as
regards such acts and obligations as arise from acts already done in the agency.

Illustrations- A authorizes B to buy 1,000 bales of cotton on account of A and to pay for it out of A's
money remaining in B's hands. B buys 1,000 bales of cotton in his own name, so as to make himself
personally liable for the price. A cannot revoke B' authority so far as regards payment for the cotton.

Illustrations- A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A's
money remaining in B's hands. B buys 1,000 bales of cotton in A's name, and so as not to render
himself personally liable for the price. A can revoke B's authority to pay for the cotton."

4)- Principal to compensate, if there is premature revocation without justification (Section 205)-
When the agency has been created for a fixed time by an express or implied contract, its premature
revocation by the principal will make him liable towards the agent, unle8s the revocation has been
made with any sufficient cause. Section 205 makes the following provision in this regard:

205. Compensation for revocation by principal revocation by principal, renunciation by agent-

Where there is an express or implied contract that the agency should be continued for any period of
time, the principal must make compensation to the agent, or the agent to the principal, as the case
may be, for any previous revocation or renunciation of the agency without sufficient causes.”

5)- Principal should give reasonable notice of revocation (Section 206)- According to Section 206,
when the principal having justification to do so revokes the authority, he must give reasonable
notice of such revocation to the agent, otherwise he can be made liable to make good any damage
which may be caused to the agent.

6)- Termination of agency terminates sub-agency also (Section 210)- According to Section 210, the
termination of the authority of an agent causes the termination of the authority of all sub-agents
appointed by him
7)- Agent's duty on termination of agency by principal's death or insanity (Section 209)- When an
agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to
take, on behalf of the representatives of his late principal all reasonable steps for the protection and
preservation of the interests entrusted to him.

8)- Time from which the termination of agent's authority becomes effective (Section 208)-
According to Section 208, "the termination of the authority of an agent does not, so far as regards
the agent, take effect before it becomes known to him so far as regards third persons, before it
becomes known to them."

The termination of the agency does not become effective immediately. It takes effect

i. against the agent, when the fact of termination becomes known to him and
ii. against third persons, when it becomes known to them.

Section 208 clearly provides that termination of an agent's authority is not to take place unless
communicated to him and will not affect the third party unless it becomes known to him.

Renunciation of agency by the agent- As the principal can, revoke the agent's authority, so also the
agent can renounce the agency. Section 206 requires that the agent must give his principal
reasonable notice of renunciation otherwise he will be liable to make good any damage caused to
the principal for want of such notice. Section 207 further mentions that like revocation, the
renunciation may also be express or may be implied in the conduct of the agent. According to 205,
where, however, there is a contract that the agency should be continued for any fixed period, and
the agent makes renunciation, without any sufficient cause, prior to the expiry of the stipulated
time, he must compensate the principal for any loss caused to him by the premature renunciation.

INDIAN PARTNERSHIP ACT, 1932

The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October, 1982.
The present Act superseded the earlier law relating to Partnership, which was contained in Chapter
XI of the Indian Contract Act, 1872. The Act is not exhaustive. A Partnership arises from a contract,
and therefore, such a contract is governed not only by the provisions of the Partnership Act in that
regard, but also by the general law of contract in such matters. It has been expressly provided in the
Partnership Act that the unrepealed provisions of the Indian Contract Act, 1872, save in so far as
they are inconsistent with the express provisions of this Act, shall continue to apply." Thus, the rules
relating to offer and acceptance, consideration, free consent, legality of object, etc. as contained in
the Indian Contract Act are applicable to a contract of partnership also.

Nature of Partnership- Partnership is a form of business organisation, where two or more persons
join together for j0intly carrying on some business. It is an improvement over the Sole-trade
business, where one single individual with his own resources, skill and effort carries on his own
business. Due to the limitation of the resources of only a single person being involved in the sole-
trade business, a larger business requiring more investment and resources than available to a sole-
trader, cannot be thought of in such a form of business organisation. In a Partnership, on the other
hand, a number of persons could pool their resources and efforts and could start a much larger
business. In case of loss also the burden gets divided amongst various partners in a Partnership.

Any two or more persons can join together for creating Partnership. Section 11 of the Companies
Act, 1956 imposes a limit as to the maximum number of persons in a partnership. n a partnership for
the purpose of carrying on banking business, there can be a maximum of 10 partners, whereas if the
partnership is for carrying on any other business, there can be a maximum of 20 partners. If the
number of members in any association exceeds the above-stated limits, that must be registered as a
Company under the Companies Act, otherwise that will be considered to be an illegal association. n
a private Company there can be a maximum of 50 members, whereas in case of a public Company
there is no such limit to the maximum number Therefore, if a much larger business than could be
afforded by only 10 or 20 persons, is sought to be carried on, a Company works out to be a better
form of business organisation than partnership. A Company, as a form of business organisation may
be better than a partnership in another way also. It is an artificial person, distinct from its members,
and has much longer life than that of a partnership, whereas the partnership being nothing but an
aggregate of all the partners, partnership has a much smaller span of life than a Company. In the
case of a Company, the liability of a member (shareholder) is limited to the extent of the amount of
shares purchased by him, whereas in case of partnership, the liability of every partner is unlimited.

In certain respects, a partnership is a more suitable form of business organisation than a Company.
For the creation of partnership just an agreement between various persons is all what is required,
whereas in the case of a Company, there are a lot of procedural formalities which have to be gone
through before a Company is created. For the day to day running of the business, maintenance of
the accounts, holding of meetings, distribution of profits and numerous other things a Company is
subject to a lot of statutory control, whereas the partners are their own masters for regulating their
affairs. Even for the dissolution of partnership, a mere agreement between the partners is enough,
but that is not so in the case of a Company, which can be wound up only atter a certain set
procedure is followed.

DEFINITION OF PARTNERSHIP- Section 4 of the Indian Partnership Act, 1932 defines ‘Partnership’ as
under: “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.”

The Calcutta High Court explained the term "Partnership" in The Registrar of Firms, Societies and
Non-Trading Corporation, West Bengal& another v Tarun Manna & others and according to the
Court the partnership is the relation between persons created by contract whereby the parties to
such contract have agreed to share the profits of a business with further condition that the proposed
business must be carried out by all or any of them acting for all. Therefore, the first condition of
existence of a partnership is that there must be an agreement by the partners to share the profits of
a business. The other condition is that such business must be agreed to be carried on by all or any of
them acting for all.

Essentials of Partnership- According to Section 4, the following essentials are necessary to constitute
a 'partnership.

1- There should be an agreement between the persons who want to be partners.

2- The purpose of creating partnership should be carrying on of business.
3- The motive for the creation of partnership should be earning and sharing profits
4- The business of the firm should be carried on by all of them or any of them acting for all, i.e., in
mutual agency.

When all the above elements are present in a certain relationship that is known as 'partnership’.
Persons who have entered into partnership with one another are called individually 'partners'/and
collectively 'a firm and the name under which their business is carried on is called the firm name.

The essentials of partnership are being discussed in some detail hereunder: -

1- An Agreement- Partnership arises from an agreement between two or more person for the
creation of this relation. Agreement here means a contract. This element indicates voluntary
contractual nature of partnership. Some associations may be created without an agreement e.g.,
the association between certain persons may arise from status as in the case of members of a
Joint Hindu Family or the joint heirs in the above illustrations cannot be called partners, the main
reason being that their association is not the result of an agreement between those persons. To
make the things further clear, Section 5 expressly provides that 'the relation of partnership
arises from contract and not from status. Thus, it is the element of agreement which
distinguishes a partnership from various other relationships like members of a Joint Hindu
Family, joint owners or joint heirs.

As stated above, existence of a "contract" is a sine qua non of relationship of partnership. Such a
contract can be either express or implied.

There can be no quarrel with the proposition that co-ownership is not the same thing as partnership.
The mere fact that the legatees or donees under a will or a deed inter-vivos, as the case may be,
happen to have common interest in something which is divisible amongst them, would not make
them partners. But, if such persons continue the business either after the death of the testator or
when the inheritance falls, as the case may be, it could not be postulated that there was no
partnership.

They are not precluded from carrying on such a business. When the business is continued, there is
an implied agreement amongst the various individuals having a common interest in the business.

PERSONS' capable of becoming partners- The agreement to form partnership has to be between
two or more persons. Since the creation of partnership itself requires a contract between persons,
such persons, therefore, must be competent to contract. A minor or a person of un-sound mind,
who are not competent to contract, cannot become partners. There is nothing which prevents a
person incomcompetent to contract from accepting any benefit and hence the business organisation
permits a minor to be admitted to the benefits of partnership. Such minor has a right to such share
of property and profits as may be agreed upon.

H.U.F as a Partner- An H.U.F. cannot become a partner of a Partnership Firm. Section 4 of the
Partnership Act, 1932 speaks of "persons" who enter into partnership with one another. lt can only
be individuals and not a body of persons, who can be a partner.

Referring to Section 4 of the Partnership Act, 1932 which defines the term partnership, the Court
said that even if a person nominated by the H.U.F. joined a partnership, the partnership would be
between the nominated person and the other partners of the firm. An H.U.F. being a fluctuating
body of individuals, could not enter into a partnership with other individual partners.

If a Karta or any other member of the H.U.F. joins a partnership, he can do so only as an individual.
His rights and obligations vis-a-vis other partners are determined by the Partnership Act and not by
Hindu Law. Whatever may be the relationship between an H.U.F. and its nominee-partner, in a
partnership, neither the H.U.F. nor any member of the H.U.F. can claim to be a partner, where the
karta of an HUF enters into a partnership agreement with a stranger, the Karta alone in the eye of
law is the partner.... Within the partnership, the Karta is a partner like any other partner with whom
he has entered int0 a partnership agreement individually.

In Chandrakant Manilal Shah v. Commissioner of Income-tax, it has been held by the Supreme
Court that the undivided members of a HUF (Hindu Undivided Family) can enter into a contract and
form partnership with Karta. It is possible that the coparcener may enter into partnership with Karta
by contributing only his skill and labour, rather than contributing any asset or money

Partnership firm as a partner- Partnership can arise between 'persons'. A partnership firm is not a
legal person and, therefore, a firm as such is not capable, of entering into partnership with another
firm or individuals." The partners of a firm can, however, enter into partnership in their individual
capacity with another individual.

Relation of partnership- A pure and simple act of entrustment of the stridhan to the husband does
not attract any of the essential ingredients of a partnership as defined in the Act. If any person has
no right to a share in profits, he cannot claim to be a partner. A partnership firm is neither a person
nor a legal entity and as such it cannot be a partner or a member of partnership.

Company as a partner- The Partnership Act permits partnership between any two or more persons.
Such persons may be either natural or artificial. Thus, a partnership could be formed between a
number of companies. Though formation of a partnership with a Company being a partner is a
possibility under the Partnership Act, but there would be practical difficulties in the working of such
partnership from the point of view of the provisions of the Companies Act.

Insolvent as a partner- The Partnership Act does not directly mention that only a solvent person can
become a partner but Section 34, however, states that when a partner is adjudicated insolvent, he
ceases to be a partner in view of this provision, only such person wh0 is not insolvent can become a
partner The reason for such a provis1on is that the interests of the third parties do not suffer when
they want to enforce their rights against various partners. Hence, a person who has been
adjudicated insolvent cannot become a partner, and if he is solvent when he becomes a partner, he
ceases to be a partner, if and when he is adjudicated insolvent.
2- Carrying on of Business- The object of every partnership must be carrying on a business and
sharing its profits. It may be any business which is not unlawful. The Act defines business as
including every trade, occupation or profession. The definition is not exhaustive and is capable of
including any kind of commercial activity aimed at earning profits.

Purchasing goods for self-consumption- When the goods are purchased for the purpose of re-sale, it
is a business transaction. But if a number of persons join together to make a bulk purchase of certain
goods and divide the very goods amongst themselves with a view to having the benefit of bulk
purchase, such persons cannot be called partners although each one of them stands to gain
something because purchasing goods without any idea of selling them is not carrying on business.

In Cooper V. Eyre there was an agreement between Eyre and Co. and three other persons that Eyre
& Co. would purchase some oil and distribute the same between itself and the other three persons
and others would then pay for the oil to Eyre and Co. at the purchase price, The purchase was made
only in the name of Eyre & Co.

Eyre & Co. became bankrupt and the seller of oil sued the other three persons, who had
shared the oil to recover the price of oil. It was held that the oil in this case was not meant
for re-sale and, therefore, there was no business being carried on by Eyre & Co. and others
and hence there was no partnership between them. Since Eyre & Co. had purchased the oil
on its own account and not as agent or partner of the other three persons, the other
persons could not be made liable for the same.

On the other hand, if a number of persons agree to purchase cotton jointly on joint account, and
thereafter resell the same and then share the profits or losses as may arise from the same, this
amounts to carrying on of business, and a partnership is created between such persons [Birdichand
Vs. Harakchand].

Business should be lawful- The business which the partners agree to carry on must not be unlawful
or opposed to public policy.

Business should be 'carried on'- It is further necessary that the business must be carried on by all the
partners or any of them acting for all of them. Carrying on of a business involves a series of
transactions. Merely a single isolated transaction of purchases and sale by a number of persons does
not mean carrying on of the business. For example, A and B jointly purchase a building for a sum of
Rs. 2,00,000 and after sometime they sell the building for Rs. 3,00,000 and share the gain of Rs.
1,00,000 equally. This transaction is not thee carrying on of the business between A and B and,
therefore, they are not partners.

Particular Partnership [Section 8)- According to Section 8, there can be Particular partnership
between partners whereby they engage in particular adventures or undertaking. Thus, persons can
be partners in the working out of a coal-mine or the production of a film because although that may
be a single adventure but. the same requires a series of transactions and continuous relationship.

If this length of period, and the scope of the business are defined with reference to a particular
season or to particular quantities of commodity, then we have a particular partnership. If in the
agreement itself the period and the scope are not precisely defined, then we may call it a general
partnership.
In K. Jaggaiah v. Kokumanu, the plaintiff and the two defendants joined together and obtained a
contract for the maintenance of a road. There was held to be partnership in the road building
activity. Such activity though arising out of a single contract was spread over a particular period and
the firm had to employ certain workers, supervise the work, prepare the bills and finalise the work
and get the approval from the Government and finally receive the bills, and all that meant carrying
on of business this length.

3- Sharing of profits- The object of every partnership must be to carry on business for the sake of
profits and to share the same Therefore, clubs or societies which do not aim at making profits
are not partnerships. The term profits has not been defined in the Act. It means net gain i.e., the
excess of returns over outlay.

Although sharing of profits is one of the essential elements of every partnership but every
person who shares the profits need not always be partner. For example, I may pay a share of
profits to the manager of my business instead of paying him fixed salary so that he takes more
interest in the progress of the business, such person sharing the profits is simply my servant or
agent but not my partner. At one time it was thought that a person who shared the profits must
incur the liability also as he was deemed to be a partner. This rule was laid down in Grace v
Smith. This principle was confirmed in 1793 in Waugh Vs. Carver. In 1860 this question came for
consideration before the House of Lords in Cox y Hickman. In that case it was laid down that the
persons sharing the profits of a business do not always incur the liability of partners unless the
real relation between them is that of partners.

Section 6- Mode of determining existence of partnership- In determining whether a group of

persons is or is not a firm, or whether a person is or is not a partner in a firm regard shall be had
to the real relation between the parties, as shown by all relevant facts taken together.

Section 6 gives a caution that for determining whether there is partnership between certain
persons or not, the real relation between the parties and all the relevant facts have to be taken
into consideration.
Explanation 1 makes the position further clear by stating that sharing of profits between certain
persons does not of itself make such person’s partners.
Explanation 2 mentions four particular instances where a per son may be sharing the profits
with another, or may be getting some payment contingent upon or varying with the profits and
still the real relation between the persons thus sharing the profits may not be that of partners.

The instances given in the Explanation are of:

i)- the money-lender,
ii)- the servant or the agent,
iii)- the widow or child of a deceased partner, and
iv)- the seller of goodwill,

who may be sharing the profits and yet may not be partners.

i- Money-lender sharing the profits- The position may also be explained by the decision of the
Privy Council in Mollow March & Co, v, Court of Wards. In that case a Hindu Raja advanced
large sums of money to a firm. The Raja was given extensive powers of control over the
 business and he was to get commission in profits until the repayment of his loan with 12
percent interest thereon. It was held that the Raja could not be made liable for the debts
contracted by the firm while the said agreement was in force, because the intention in the
agreement was not to create partnership but simply to provide security to Raja, who had
lent money to the firm.

ii- Servant or Agent sharing the profits- Sometimes a share in the profits may be given to a
servant or agent in the business so that he can take more interest in the business. Such a
person sharing the profits in the capacity does not thereby become a partner.

In McLaren v. Verschoyle, an assistant in a firm of brokers was paid a share in the

profits over and above his salary. At times he signed some letters and documents on
behalf of the firm. It was held that such a servant only acted as an agent for the firm
and the mere fact that he shared the profits did not make him a partner in the firm.

Similarly, in Munshi Abdul Latif v. Gopeswar," A, who had undertaken to load and
unload Railway wagons for a limited Company, appointed B to do that job, B was to
be paid 75 per cent of the profits and was also liable for the losses, if any. It was held
that the relationship between A and B was that of principal and agent and not
partners.

In Walker v Hirsch, it was held that though he shared the profits, he was having the
capacity of a servant only, He was not a partner and could not seek dissolution of
the firm.
iii- Widow or child of a deceased partner sharing profits- Sometimes on the death of a partner
the widow or the child of the deceased partner may be given a share of profits in accordance
with an agreement which may have been entered into between the partners. Such widow or
child does not become the partner merely because he or she is sharing the profits in the
business,
In Holme v. Hammond, it was held that the executors, though sharing the profits of
a had not become partners and, therefore, they could not-be made liable.

There is no bar to the widow or the son of a deceased partner to enter into partnership after
the death of the deceased, but a clear agreement to that effect has to be proved.

iv- Seller of goodwill sharing the profits- A person selling the goodwill of his business may be
entitled to share the profits of a business in consideration for the sale of goodwill, such a
person will not become a partner merely because he is sharing the profits with the person
carryıng on such business. In Pratt v. Strick, a doctor sold the goodwill of medical practice
and entered into an agreement with the buyer of the goodwill that he would help such
buyer to introduce patients for 3 months and he would be entitled to half the share of
profits and incur half the expenses. It was held that the doctor had not become a partner
with the person to whom the goodwill was sold.

Salaried Partners- Although sharing the profits is a necessary element in the creation of
partnership, there is a possibility that a partner may not get the payment contingent on the
 profits. He may be paid salary or a fixed sum periodically say every month or every year, in
lieu of profits.
In R.N. Kothare v. Hormasjee, there was an agreement between two partners that one of
them was to get a salary of Rs. 500/- p.m. in lieu of profits, and moreover, he was not
responsible for any loss or liability of the firm. It was held that there was a valid partnership
in which one of the partners was a 'salaried partner’.

4- Mutual Agency- Existence of mutual agency is also essential to constitute partnership-

According to Section 4 of the Partnership Act, 1932, the partnership business must be carried on
by all or any of them acting for all.

It enables any partner to carry on the business on behalf of others. Every partner, therefore, can
bind other partners by his act done on behalf of the firm. Every partner can be the agent of any
other partner and the relationship is that of mutual agency. For example, a partnership consists
of A and B. A may enter into a contract on behalf of the firm and thereby make B bound by the
agreement. In this transaction A is the agent and B the principal. Similarly, B may borrow money
for the firm and A would be bound thereby. In this transaction B acts as agent and A is bound as
principal. We thus find every partner occupies the dual position, that of the principal and agent.
He is agent in so far as others are bound by his acts and he is also the principal in so far as he is
bound by what is done by the others. This existence of mutual agency 1s t0 be there in every
partnership.

In Cox v. Hickman,' we have already noted that although the trustees were managing the
business of Smith and Son but they did not thereby become partners. The reason is that the
trustees were merely agents of Smith & Son but they were not the principals and thus there was
no mutual agency. Smith & Son were principals and business still belonged to Smith & Son and
not to trustees. Similarly, if the servant of agent is paid remuneration out of profits, such a
person constitutes merely an agent of the person with whom he is sharing the profits. Since such
a servant or agent does not occupy the position of a principal, there is no mutual agency and
thus the servant or agent sharing the profits cannot be termed as a partner.

Duration of partnership- Partners are free to decide as to how long partnership between them shall
continue. It may be partnership for a fixed term, say for 2 years or years, or it may be until the
completion of certain adventures or undertakings, for instance, until the production of a firm.
Sometimes the agreement may stipulate about the determination (end) of partnership on the
happening of certain events, e.g., if the business runs into loss for consecutively five years. When the
partners have not decided about the duration of partnership, such a partnership is known as
partnership at will.

Partnership at will- According to Section 7, “Where no provision is made by contract between the
partners for the duration of their partnership or for the determination of their partnership, the
partnership is partnership at will'.

According to the above definition, a partnership is deemed to be "a partnership at Will in the
following two situations

i- When no provision is made in the partnership agreement as to its duration, and

 ii- When there is no provision in the partnership agreement as to its determination (coming
to an end) of partnership.

If the partnership agreement makes a provision for its duration, or where a provision is made for its
determination, it is not partnership at will. The provision regarding the duration of the partnership
contract, may be either express or implied

If the duration of partnership has been fixed but the partnership is made t0 continue thereafter
without specifying any fixed duration for the same, then subsequently it becomes a partnership at
will.

When the duration of partnership cannot be found either by, any express provision in the
partnership agreement or by implication, then it would be a partnership at will.

If an agreement between the partners Contemplates that the partnership could continue till there
are two partners', it is not a partnership at will.

Madras High Court in Kangamal v. Theatre Abirami, Partnership Concern,' held that Section 7 of the
Partnership Act, 1932 makes it clear that two conditions must be satisfied for holding that a
partnership is a partnership at will. The first condition is that there should be no provision in the
contract between the parties for the duration of the partnership and the second one being that
there shall not be any provis1on for the determination of the partnership

Further, it has been held that the partnership at will would stand dissolved on exercise of discretion
of one partner. Since in a partnership at will the partnership can be ended at the sweet will of any of
the partners.

The following provisions of the Partnership Act in this regard may be noted: -

a- Where a partnership is at will, a partner may retire by giving a notice to all the other
partners of his intention to retire.
b- 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. The firm is dissolved as
from the date mentioned in the notice as to the date of dissolution or, if no date is so
mentioned, as from the date of the communication of the notice.

Although a partnership at will could be dissolved by a mere notice but that does not debar a partner
from filing a suit for dissolution. In such a case the service of the summons will be deemed to be the
communication of notice for dissolution and the firm shall stand dissolved when the summons is
served.

When the partnership is not at will, neither a person can retire nor can he seek dissolution of the
partnership firm, just by giving a notice to the other partners to that effect.

ln Moss v. Elphick,' an agreement between the two partners provided that the partnership
shall be terminated by mutual arrangement only. One of the partners sought the dissolution
of the firm by a notice to the other partner contending that it was a partnership at will. It
was held that the partnership was not at will and the same could not, therefore, be
terminated by notice.

In M.O.H. Uduman v. M.O.H. Aslum," the partnership deed contained a clause to the effect
that "the partnership shall continue between the remaining partners unless all the partners
'mutually agree' to determine the relationship. Considering this clause, the Apex Court held
 that the partnership was not At Will' and that it could not be dissolved by a partner by giving
notice to the remaining partners.

If the partnership agreement contemplates that the partnership will continue till completion of the
Job, i.e., completion of particular venture of a certain construction work it was held that the
partnership was not a partnership at will and it stood dissolved on the completion of the said
venture.

Determination of partnership- When there is a partnership of two partners, absence of one

automatically gives room of determination of partnership under Section 7 of the Act itself.

Distinction between Partnership and Joint Family

a- The basis of partnership 16 a, contract between persons. No partnership can arise without a
contract. The relation of members of Joint Hindu Family is based on the status of persons, i.e., a
person becomes its member by virtue of hi8 being born in the particular family.
b- When a new partner has to be introduced into a partnership firm, Consent of all the partners is
needed for the same. No such consent is needed for the addition of a member into the joint
Hindu family. A person becomes the member of the family on being born in that family.
c- There is mutual agency between the partners of a partnership firm, and the act done by any of
the partners binds the firm, whereas there is no such mutual agency between the members of a
joint Hindu family. The Karta of the joint Hindu family has all the powers to act on behalf of the
family and he is the only person who can represent the family.
d- The liability of a partner is not only joint liability or limited to his share in the partnership
business, the liability is several liability also. Such liability is unlimited and even a partner's
personal property can be attached for the partnership debts. The liability of the coparaceners,
on the other hand is limited only to the extent of their shares in the family business.
e- A partnership is dissolved by the death of a partner but that is not so in the case of joint Hindu
family.

Distinction between Partnership and Company

a- A partnership firm does not have a separate legal personality. A company is a legal entity

different from its members.

b- A partnership firm means all the partners put together, if all the partners cease to be partners,
e.g., all of them die or become insolvent, the partnership firm gets dissolved. A company being a
person different from the members, the members may come and go but the company's life i not
affected thereby.
c- The shareholder of a company can transfers his share to anybody he likes, but a partner cannot
substitute another person in his place unless all the other partners agree to the same. Similarly,
on the death of the member of a company his legal representatives will step into his shoes for
the purpose of the rights in the company, but on the death of a partner his legal
representatives do not get substituted in his place in partnership.
d- The minimum number of members in partnership is two and maximum in case of partnership
carrying on banking business is 10 and in case of any other business is 20, In the case of a private
company, the minimum number is 2 and the maximum is 50, whereas in the case of a public
 company the minimum number of members should be 7 but there is no limit to the maximum
number and, therefore, any number of persons can hold shares in a public company.
e- The liability of the members of a company, is limited but the liability of the partners 1s
unlimited.

Distinction between Partnership and Co-ownership

The following points of distinction between the two may be noted: -

a- A partnership arises from an agreement between certain persons, but persons may become co-
owners or Joint owners of some property even without an agreement. For instance, on the
death of A, his property may devolve to B and C and thus make B and C as the co-owners of the
property.
b- The purpose of a partnership is the carrying on of business and sharing the profits, whereas
persons may become co-owners of the property without engaging themselves in any business.
c- In the partnership business there is mutual agency between the partners and the act done by
any partners binds the others There may be no mutual agency between the co-owners, and the
act of one co-owner does not bind the others.
d- A partner cannot transfer or sell the whole of his share to an outsider so as to substitute an
outsider in his place. A co-owner, on the other hand, has a right to transfer his part of the share
to anybody he likes.

RELATIONS OF PARTNERS INTER SE

Chapter III (Sections 9 to 17) of the Indian Partnership Act contains provisions concerning 'Relations
of partners to one another, i.e., the rights and duties of the partners as between themselves.

Section 11 of the Act contains the general rule that the mutual rights and duties of the partners are
to be determined by their mutual agreement. The provision is as under:

11. Determination of rights and duties of partners by contract between the partners-

(1) Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm
may be determined by contract between the partners, and such contract may be expressed
or may be implied by a course of dealing.

Such contract may be varied by consent of all the partners, and such consent may be
expressed or may be implied by a course of dealing

(2) Agreements in restraint of trade- Notwithstanding anything contained in Section 27 of

the Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on
any business other than that of the firm while he is a partner.

As it has been noted above, this section incorporates the general principle that the mutual rights and
duties of the partners may be determined by a contract between themselves. They may themselves
decide that how much investment or labour is to be put by whom, or whether a partner will be
entitled to any remuneration, apart from sharing the profits, or what will be the profit-sharing ratio,
etc. Such contract may be expressed or may be implied by a course of dealing., The mutual rights
and duties which may have been agreed upon between the partners may be subsequently varied by
the consent of all the partners. Such variance or change in the mutual rights and duties may also be
made either expressly or by an implied consent through a course of dealing between the partners.

The Madras High Court ruled that dissolution of the firm can be initiated only if the majority of the
partners agreed to do so.

Agreement in restraint of trade- Section 112 gives the liberty to the partners to make a contract
that a partner shall not carry on any business other than that of the firm while he is a partner.
Although according to Sec. 27 of the Indian Contract Act, agreement in restraint of trade is void, but
such an agreement entered into between the partners as stated above will be valid [exception-to-
section 27 ICA]

The right of the partners to make any contract to regulate their mutual rights and duties 1s subject
to the provisions of the Partnership Act. For instance, certain duties of the partners are incorporated
in Sections 9 and 10, which have to be adhered to by all the partners and they are not subject to
contract between the partners. Thus, the disabilities suffered by the partners of an unregistered
firm, as envisaged by Section 69, are binding on every partnership and the partners cannot agree
contrary to those provisions. Similarly, the provision Contained in Section 41 regarding compulsory
dissolution of a firm on the happening of certain events is binding on every firm. In the same way,
the right of the partners to file a suit for the dissolution of a firm under section 44, is not subject to
contract between the partners. Section 11, which permits partners to make any contract for
regulating their mutual relations, is subject to the provisions of the Act.

As has been noted above, Secti1ons 9 and 10 contain certain duties by which all the partners are
bound and the duties cannot be negatived by a contract between the partners. Sections 12 to 17
contain various other mutual rights and duties of the partners. Each one of those sections has been
made subject to contract between the partners. It means that the rights and duties incorporated in
Sections 12 to 17 are to be applied to the partners, if they have not made any contract to the
contrary For instance, the partners have agreed to the proportion in which they will be sharing
profits and losses, then their agreement will prevail, but if the partners have not agreed to anything
on the points, then according to Section 13(b) the partners are entitled to share equally in the profits
earned, and shall contribute equally to the losses sustained by the firm.

RIGHTS OF THE PARTNERS- Various rights and duties of the partners contained in Sections 12 to 17
are 'subject to contract between the partners.

1. Right to take part in the conduct of the business [Section-12(a)]- According to Section 12(a),
every partner has a right to take part in the conduct of the business. Since the business of
partnership belongs to all the partners, every partner is entitled to take part in the conduct of
the business. The partners are free to provide in their agreement that only some of them will
take part in the conduct of the business and certain other partners will not. If such a right is
wrongfully denied to a partner, he can seek the enforcement of the right through a court of law.
If the right to manage the business has been conferred on only some of the partners, they alone
will be entitled to this right.

2. Right to express opinion [Section 12(c)]- Section 120) contains the following provision with
regard to the right of a partner to express the opinion in the partnership matters
 12 (c)-any difference arising as to ordinary matters connected with the business may be
decided by a majority of the partners, and every partner shall have the right to express his
opinion before the matter is decided, but no change may be made in the nature of the
business without the consent of all the partners.

According to the above-stated provision, when there is difference of opinion between the partners,
majority of the partners cannot ignore the minority and take decisions without consulting them. The
difference of opinion may be either (i) as to ordinary matters connected with the business, or (ii)
matters of fundamental importance.

When the difference of opinion pertains to an ordinary or routine matter connected with the
business, the same may be resolved by a decision of the majority of the partners. But before the
matter is decided every partner must be provided with an opportunity to express his opinion.

The power of the majority has to be exercised in good faith. If, for instance, the majority of the.
partners decide to expel a partner without sufficient cause, the expulsion would be set aside.

When the matter is not an ordinary or a routine matter but is of fundamental importance, consent of
all the partners is needed. Admission of a new partner to the firm or a change in the nature of the
business are the matters of this nature This provision being subject to contract between the
partners, they may decide that in all matters it is the decision of majority which will prevail.

3. Right to have access to books of the firm. [Section 12(d)]- According to Sec. 12(d), every partner
has a right to have access to and to inspect and copy any books of the firm. This right is available
to both active and dormant partners. This right is not only in respect of books of accounts but in
respect of any books of the firm. A partner could exercise this right either personally or by
engaging an agent for the purpose.

4. Right to share profits [Section 13(b)]- Every partner has a right to share the profits. (Generally,
the partners provide in their agreement as to what will be the proportion in which they will
share the profits. For example, in a firm of three partners, it may be agreed that the profit-
sharing proportion will be 2/4: 1/4: 1/4. According to Section 13(b), in the absence of any such
agreement, the partners are to share the profits equally and also to contribute equally to the
losses sustained by the firm. If any partner alleges that their shares are unequal, he has to prove
an agreement to that effect.

Since every partner is entitled to share the profits, no other remuneration, as a general rule, 1s to be
paid to a partner for the management of the firm's business. The rule contained in this regard in
Section 13(a) is that a partner is not entitled to receive remuneration for making part in the conduct
of the business unless otherwise agreed. Thus, lt is only if the partners so agree, a partner may be
entitled to additional salary, commission, etc. for the efforts made by him in running the business of
the firm.

5. Right to interest on capital and advances [Section 13(c) & (d)]- Generally, no interest on capital
subscribed by the partners is to be given because the partners share the profits of the business
of the firm. In case the partners agree that interest on capital is to be given, according to Sec.
13(c), such interest shall be payable only out of profits. In case a partner makes any payment or
advance beyond the amount of capital he has agreed to subscribe, he is entitled to interest
thereon at the rate of six per cent per annum, according to Sec. 13(d).
6. Right to indemnity [Section 13(e)- According to Sec. 13(e), he is entitled to claim indemnity for
the same. The indemnity can be claimed for the acts done by a partner in the ordinary and
 proper conduct, of the business and also for doing some act in an emergency for the purpose of
protecting the firm from the loss.

DUTIES OF THE PARTNERS- Sections 9 and 10 incorporate certain duties of the partners which are
not subject to contract between the partners, whereas certain duties have been provided from
Sections 12 to 17, each one of those provisions has been made 'subject to contract between the
partners. The duties of the partners as incorporated in these sections are being explained below.

Section 9 mentions a number of duties by which all the partners are bound. lt provides

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

The duties as contained in this provision are:

i. To carry on the business to the greatest common advantage,

ii. To be just and faithful to each other,
iii. To render true accounts, and
iv. To render full information of all things affecting the firm.

It has already been noted that unlike Sections 12 to 17, the duties mentioned in this section and also
Section 10 have not been made subject to contract between the partners. Therefore, if the partners
agree against the observance of these duties, the agreement will not be valid.

i- Duty to carry on the business to the greatest common advantage- Partnership is based upon
mutual confidence and trust. It is, therefore, necessary that no partner should gain any
personal advantage at the cost of others. This provision is to be read with Sec. 16(a) of the
Act according to which if a partner derives any profit for himself from any transaction of the
firm, or from the use of the property or business connection of the firm or the firm name, he
shall account for that profit and pay it to the firm. Thus, if a partner makes any secret profit
out of any transaction of the firm or instead of procuring a contract to the advantage of
partnership firm makes the contract in his own name, or instead of selling the firm's goods
to a third party purchases them at a lower price himself, or instead of purchasing goods from
the market sells his own goods to the firm and thereby gains personal advantage, he cannot
keep that benefit with himself. He is bound to account for that profit to the firm.

In Bentley v. Craven, a firm which had been established for refining Sugar consisted of four
partners. One of the partners, who was considered to be expert in the job, was authorised to
purchase sugar for the firm for refining. Instead of purchasing sugar from the market he
supplied his own Sugar, which he had purchased earlier at much lower price and thus made
considerable profit. He did not disclose this fact to other partners that he was making profit
in the was entitled to recover the profit thus made by this partner particular transaction. It
was held that the firm was entitled to recover the profit thus made by this partner.
ii- Duty to be just and faithful to each other- Another duty mentioned in Section 9 is that the
partners must be just and faithful to each other. Persons enter into partnership with others
on the basis of their mutual confidence and trust. There is mutual agency between the
partners and every partner is the agent of all others and he can bind them to an unlimited
 extent. Every partner is, therefore, expected to be just and faithful to his c0-partners. The
partners must perform their functions with utmost fairness. Thus, Sec. 38 provides that even
if the contract between the partners authorised the expulsion of a partner, the fellow
partners must exercise this power in good faith Similarly, when a partner purchases the
share of another partner or a working partner is acting on behalf of a sleeping partner, or
there is a transaction in which a partner is likely to gain an advantage at the cost of others,
there is a need for good faith. If a partner gains any personal advantage at the cost of other
partners, he is accountable for the same. In case a partner is guilty of a conduct which
destroy mutual confidence, e.g., one partner commits adultery with another partner's wife,
that can be a ground on which the court may order dissolution of the firm.

iii- Duty to render true accounts- Rendering true accounts is another duty which is imposed by
Section 9, Every partner is, therefore, bound to keep and render true and complete accounts
of all the partnership moneys with him. He also must make these accounts available to the
other partners because every partner has a right to have access to and to inspect and copy
any of the books, including the account books of the firm. The partnership funds in the
hands of a partner must be spent by him properly for the purpose of the firm's business, and
the partner concerned should keep proper vouchers in respect of the expenses. He should
not mix up his money with that of the firm nor should he wrongly spend or misappropriate
the firm's money, otherwise he will be accountable for the same towards the firm.

iv- Duty to render full information of all things affecting the firm [Section 9]- Every partner is
an agent of the firm According to the law of agency, information to the agent is deemed to
be information to the principal. Sec. 9, therefore, makes it incumbent on every partner to
pass on full information of all things affecting the firm to his other fellow partners.
Concealment of the facts by a partner renders him liable to others Thus, if a partner having
full knowledge of material facts with regard to the partnership assets purchases the share of
a co-partner without making full disclosure of the facts to the other, the contract is voidable.

v- Duty to indemnify for fraud [Section 10]- Section 10 contains the following provision
incorporating the duty of a partner to indemnify the firm for the loss caused to the firm due
to his fraud
10. Duty to indemnify for loss caused by fraud- Every partner shall indemnify the firm for
any loss caused ta it by his fraud in the conduct of the business of the firm.
If a partner commits a fraud against a third party while acting in the ordinary course of
business of the firm, the third party can make the firm liable for the same. Section 10
entitles the firm to recover Indemnity from the partner guilty of fraud because of which the
firm had to suffer the loss.

It is no possible for a partner to negative his liability towards the firm for lose ensure to the firm due
to his fraud. This section in absolute terms provides that every partner shall indemnify the firm for
any loss caused to the firm by him fraud in the conduct of the business of the firm and leaves no
scope for the guilty partner to contract himself out of such liability.

vi- Duty to be diligent (Sections 12-b and 13-f)- A/to section 12 (b) every partner is bound to
attend diligently to his duties in the conduct of the business. And a/to section 13(f), a
 partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct
of the business of the firm.

vii- Duty to properly use the firm's property Sections 14 and 15- According to section 14,
Subject to contract between the partners, the property of the firm includes all property and
rights and interest in property originally brought into the stock of the firm, or acquired, by
purchase or otherwise, by or for the firm for the purposes and in the course of the business
of the firm, and includes also the goodwill of the business. Unless the contrary intention
appears, property and rights and interest in property acquired with money belonging to the
firm are deemed to have been acquired for the firm.

And according to section 15, Subject to the contract between the partners, the property of
the firm shall be held and used by the partners exclusively for the purposes of the business.

According to the above-mentioned provision, the property of the firm not only includes what is
originally brought into the stock of the firm but also whatever is subsequently acquired, by purchase
or otherwise. Partners may bring in immovable property also into the common stock and that
becomes the property of the firm. Even if the property contributed by one partner be an immovable
property, no document, registered or otherwise, is required for transferring the property to
partnership.

Section 14 of the Partnership Act, 1932 expressly declares that property exclusively belonging to a
person, on his entering into partnership with others, does not become a property of the partnership
merely because it is used for the business of the partnership, in the absence of an agreement to the
contrary.

Thus, such /property will become property of the partnership only if there is an agreement, express
or implied, that the property was, under the partnership agreement, to be treated as the property 0f
the partnership."

In Arm Group Enterprises Ltd, v. Waldorf Restaurant, there being no agreement to show that the
property, was to be treated as property of partnership, on entering into partnership by the
proprietor, the Apex Court held that the said property would not become the property of the
partnership.

In S.V. Chandra Pandian v. S.V. Sivalinga Nadar,' the Apex Court indicated that entire property
whether brought in by the partners on constitution of the partnership or acquired in the course of
business of the Firm, would constitute property of the firm. The Court further said that "during the
subsistence of the partnership, partners are entitled to an undefined share in such property but after
dissolution and settlement of accounts, partners are entitled to proportionate share in residue of the
property."

Property of the firm includes its goodwill and assets.

Agreement to treat as property of firm is essential- Mere use by firm does not make property the
property of firm. Where there was partnership entered into for constructing and running of cinema
theatre. One partner had contributed land and other have put up construction. There was no clause
in deed showing intention to treat land, structure, equipment as firm's property It was held in Jai
Narayan Misra Vs. Hashmathunnissa Begum, that the property belonging to a person in the
absence of an agreement to the contrary did not become the property of the partnership merely
because it was used for the business of the partnership. lt would become property of the
partnership only if there is an agreement, express or implied, that the property under the agreement
of partnership to be treated as the property of the partnership.

viii- Duty not to earn personal profits or to compete [Section 16]- The partnership business belongs
to all the partners jointly. It is therefore, expected of every partner that he will act to the greatest
common advantage rather than acting for personal profit at the cost of other partners. He should
also not engage in a competing business. Section 16 contains the following provision as regards
such duty.

16. Personal profits earned by partners-Subject to contract between the partners

(a) if a partner derives any profit for himself from any transaction of the firm, or from the
use of the

property or business connection of the firm or the firm name, he shall account for that
profit and pay it to the firm;

(b) If a partner carries on any business of the same nature as and competing with that of
the firm, he shall account for and pay to the firm all profits made by him in that business.

A partner is the agent of the firm for the purpose of the business of the firm. According to the rules
of the law of agency, no agent can deal on his own account in the business of agency without the
consent of the principal. If an agent, without the consent of his principal, deals in the business of
agency on his own account instead of on account of his principal, the principal is entitled to claim
from the agent any benefit which may have resulted to him from the transaction. Section 16(a)
makes every partner accountable to the firm for any personal profit made by him

i- from any transaction of the firm,

ii- from the use of the property or business connection of the firm,
iii- from the use of the firm name.

Similarly, if a partner, without the knowledge of the other co-partners, directly or indirectly, himself
purchases the property of the firm and thereby gains some benefit, he has to account for that
benefit to the firm.

In Gordon v. Holland, a partner sold the land belonging to the firm to a bona fide purchaser and
then repurchased that land himself, it was held that all the benefits made by this partner on re-
purchase of the land had to be given to the firm.

Profits earned in competing business- A partner is supposed to devote himself solely to the business
of the firm and not carry on a competing business. lf a partner carries on any business of the same
nature as and competing with that of the firm, he shall account for and pay to the firm all profits
made in the competing business.

Effect of change in the firm- Sometimes, after certain rights and duties of the partners are in
existence certain changes might occur in the firm A question may arise as to what is to be the
position of the rights and duties after the change.
Section 17 incorporates the following provision to explain the position in such a case

17. Rights and duties of partners. Subject to contract between the partners

a- a change in the firm-Where a change occurs in the constitution of a firm, the mutual rights
and duties of the partners in the reconstituted firm remain the same as they were
immediately before the change, as far as may be

b-after the expiry of the term of the firm, and where a firm constituted for a fixed term
continues to carry on business after the expiry of that term, the mutual rights and duties of
the partners remain the same as they were before the expiry, so far as they may be
consistent with the incidents of partnership at will; and

c-where additional undertakings are carried out Where a firm constituted to carry out one or
more adventures or undertaking.

This section changes contemplates 3 kinds of changes in a partnership firm: -

a- Change in the constitution of the firm. A change in the constitution of the firm occurs either
when a new partner is admitted or a partner ceases to be a partner by retirement, expulsion,
insolvency or death.
b- Business continued after the expiry of the term- Partners may have originally agreed to
carry on the business only for a fixed term, e.g., they become partners for a term of 5 years.
It is possible that in spite of the completion of the term of 5 years, partners do not close
down the business, but continue to run the same.
c- Carrying out additional undertakings- A firm may have been constituted to carry out one or
more adventures or undertakings but subsequently the partners may decide to carry out
some more adventures or undertakings.

In all such cases, in spite of these changes, the mutual rights and duties of the partners
continue to be the same as they were existing earlier. This rule is, however, subject to
contract, between the partners. The partners may, by a contract vary their rights and duties
when one or the other of the changes stated above take place.

RELATIONS OF PARTNERS TO THIRD PARTIES

The relation between partners on the one hand and the third parties on the other hand is
founded on the principal contained in Section 18, which reads as under
18. Partner to be agent of the firm- Subject to the provisions of this Act, a partner is the
agent of the firm for the purposes of the business of the firm.
For the purposes of the business of the firm, a partner is an agent of the firm. It means that
a firm, i.e., all the partners of the firm are bound by the act of a partner as any principal
would be bound by the act of his agent. Mutual agency between the partners is one of the
essentials to create partnership. Every partner having the capacity to act as firm's agent, the
act done by any partner renders the whole firm liable towards a third party. Relations of
partners to third parties are thus founded on the principle of mutual agency between the
partners.
According to Mr: Justice Story, a partner virtually embraces the character of both a principal
and agent.
Chapter IV (Section 18 to 30) of the Indian Partnership Act contains provisions concerning
the Relations of partners to third parties. These provisions have been classified and
discussed under the following subheads
I. Nature and extent of liability of the Firm for the acts of a partner. (Sections 18-27);
II. Doctrine of Holding Out, creating the liability of a "Non-partner, (Section 28);
III. Rights of transferee of a partner's interest. (Section 29); and
IV. Position of a 'Minor' admitted to the benefits of partnership. (Section 30).

NATURE AND EXTENT OF LIABILITY OF THE FIRM FOR THE ACTS OF A PARTNER (Sections
18-27)
The question of liability of the firm for the acts of a partner is being discussed under the
following sub-heads:
(A)- Nature of liability of the partners towards third parties (Section 25), and
(B)- The kind of acts for which the partners are liable which are as follows
1. Liability for the acts done within the authority of a partner. (Sections 18, 19, 20 and
22). Such authority may be either express or implied authority.
2. Liability when a partner acts in emergency. (Section 21);
3. Liability on ratification of a partner's act,
4. Liability for admission made by a partner. (Section 23);
5. Liability on notice to an acting partner. (Section 24);
6. Liability for torts and wrongful acts. (Section 26); and
7. Liability for misapplication of money or property. (Section 27).
Generally speaking, all partners of a firm are equally responsible for any act performed by
any of them. They are to sink and swim together

A- The nature of liability of the partners towards third parties [Section 25]- Section 25.
contains the following provision to explain the nature of liability of the partners of a firm:
25. Liability of a partner for acts of the firm- Every partner is liable, jointly with all the
other partners and also severally, for all acts of the firm done while he is a partner.
A principal is liable for the act of his agent done by him on his behalf. As regards the nature
of liability of the partners, Section 25 states that every partner is jointly and severally liable
for all acts of the firm done while he is a partner.
If a partner retires on 1.4.1982 and the act of the firm is done on 1.3.1985, Section 25
cannot be applied to make such retiring partner liable for an act done after he has retired.
Joint and Several Liability- The liability of all the partners is joint and several even though
the act of the firm may have been done by one of them. Thus, a third party, can bring an
action against any one of them severally or against any two or more of them jointly. No
individual partner can plead that action should be brought against others also. If any partner
has to pay for more than his share of liability, he can subsequently claim contribution from
his fellow partners.
Liability for acts of the firm- According to Section 2(a), an act of a firm means any act or
omission by all the partners or by any partner or agent of the firm which gives rise to a right
enforceable by or against the firm. It may be a contract or a wrongful act, for example,
fraud, negligence, mis-application of money or any tort. In India, the liability of the partners
for contracts as well as for torts is joint and several. In Engand, the partners are liable Jointly
in respect of contracts but they are liable jointly and severally in respect of torts.
Liability for acts while a person is a partner- The basis of the liability of the partners being
mutual agency as between them, the liability of the partner, therefore, arises for such acts
which are done while a person is a partner. A partner, therefore, cannot be made liable for
an act of the firm which may have been done before he was introduced to partnership.
Similarly, there can be no liability for the acts of the firm done after a person has ceased to
be a partner.
A partner is liable to pay the tax arrears due from the partnership firm pertaining to the
period while he was a partner. The liability of a partner, once arisen, does not come to an
end merely because he ceases to be a partner".
The liability as mentioned in this section is of all the partners whether they are active or
dormant.
Liability is unlimited- The liability of all the partners is not only joint and several but is also
unlimited. It is the discretion of the third party to bring an action against some or all the
partners. The third party may, therefore, bring an action against anyone of the partners for
the whole amount of his claim. As between the partners themselves, the partner paying for
more than his share of the responsibility may claim contribution from the others.

B- The kind of acts for which the partners are liable-

1- Acts done within the authority of a partner (Sections 18, 19, 20 and 22)- A partner
being an agent of the firm, his acts bind the firm provided that the partner is acting
within the authority vested in him. As in a contract of agency, the authority of the
partner may also be either express or implied.
Express Authority- An authority is said to be express when it is given by words spoken or
written.
Implied Authority- An authority is said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or written, or the ordinary course of dealing,
may be accounted circumstances of the case. For instance, A is authorised to recover Rs.
5,000 from B. In this case A has the implied authority to file a suit. In the context of
partnership, the scope of implied authority has been explained by Section 19(1) as under
the recovery of the amount."
.... the act of a partner which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm. The authority of a partner to bind the firm
conferred by this section is called his implied authority'.

Depending on the nature of the business some of the authority may be deemed to be
vested in a partner so that the business can be properly and efficiently run. Such an
authority is known as implied', 'apparent', ordinary or ostensible authority in such a case the
firm will be bound to the third parties even though for such an act no specific express
authority has been conferred on the partner. For an act to be covered within the implied
authority, it is necessary that-
i- the act should be done in relation to the partnership business, and
ii- the act should be done in usual way, in relation to a business of the kind carried
on by the firm.
If it is a firm of sugar merchants, sale and purchase of sugar is within the implied authority
of any of its partners. Similarly, a partner in a firm of bankers may accept deposits, grant
loans, draw, endorse or accept a negotiable instrument and thereby bind the firm. But, if a
partner in a firm of sugar merchants accepts deposits, or a partner in a firm of banker’s
purchases sugar, the acts will be outside the authority of the partner and the firm will not be
bound by such an act.
When a partner has implied authority to do something, the firm will be bound by such an
act even though the partner may be acting in fraud of his co-partners.
Acknowledgement of a debt by a partner-falls within his implied authority. Thus, an
acknowledgement of the debt of the firm by its partner is binding on the firm and the
remaining partners.

Mode of exercising authority [Section 22]- Section 19 1) which defines implied authority, is
subject to the section of Section 22. ln order to bind the firm, the act of a partner must be
done in a manner mentioned in Section 22. The provision is as follows:
22. Mode of doing act to bind the firm- In order to bind a firm, an act or instrument done
or executed by a partner or other person on behalf of the firm shall be done or executed
in the firm name, or in any other manner expressing or implying an intention to bind the
firm.
According to the provision contained in Section 22, for an act falling within the implied
authority of a partner, the firm will be bound if the act or instrument done or executed by a
partner has been done or executed
i- in the name of the firm; or
ii- in a manner expressing or implying an intention to bind the firm.
When a partner does an act or executes an instrument in his own name only and not on
behalf of the firm, and there appears to be no express or implied intention to bind the firm,
the firm will not be bound by that. The third party, in such a case, is deemed to be acting
only on the personal credit of the dealing partner, who alone will be liable for such a
transaction
Scope of S. 19(1)- Where business in commodity carried by managing partners not
mentioned in partnership-deed, then such partners cannot justify their action on the basis
of "implied authority" under Section 191) of Act.
Restrictions on the implied authority- The scope of the implied authority of a partner has
been limited through statutory restrictions contained in Section 19(2)) A limit on the implied
authority of a partner could also be imposed through an agreement between the partners,
as permitted by Section 20.
Statutory restrictions on implied authority [Section 19(2)]- Section 19(2) which imposes
restrictions on the implied authority of a partner is as follows:
(2) In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to
(a)- submit a dispute relating to the business of the firm to arbitration,
(b)- open a banking account on behalf of the firm in his own name,
(c)- Compromise or relinquish any claim or portion of a claim by the firm,
(d)- withdraw a suit or proceeding filed on behalf of the firm,
(e)- admit any liability in a suit or proceeding against the firm acquire immovable
property on behalf of the firm,
(g)- transfer immovable property belonging to the firm, or
(h)- enter into partnership on behalf of the firm.
Section 19(2) gives the list of light acts regarding which a partner does not have an implied
authority unless there is a usage or custom of trade to the contrary. For example, a partner
does not have any implied authority to acquire immovable property on behalf of the firm or
to transfer immovable property belonging to the firm Such an act can be done by a partner
only if either he has been expressly authorised by the other Co-partners to do that act on
behalf of the firm, or there is usage or custom of trade permitting him to do the same.

Extension or restriction of implied authority by agreement (Section 20)- Section 20 enables

the partners to extend or restrict the implied authority of a partner, The provision is as
follows
20. Extension and restriction of partner's implied authority- The partners in a firm may, by
contract between the partners, extend or restrict the implied authority of any partner.
The partners may agree to extend the implied authority of a partner, i.e., authorise him to
do something for which he does not have implied authority. The firm will be bound by such
an act of a partner.
The implied authority may be restricted by an agreement between the partners. When a
restriction has been imposed on the implied authority of a partner, such a restriction is not
binding on the third party unless the third party has the knowledge of the restriction. There
is a difference between the statutory restrictions which have been imposed by Sec. 19(2) on
the implied authority of a partner and the restrictions on the implied authority which may
be imposed under Sec. 20 by a contract between the partners. The statutory restrictions are
effective against all the third parties as they are deemed to be having the knowledge of the
restrictions. The third parties, however, cannot be presumed to be having the knowledge of
the restrictions which the partners may impose by a contract between themselves, and,
therefore, a third party can be bound by a restriction imposed under Sec. 20 if he had the
actual knowledge of such a restriction.

2- Partner's authority in an emergency [Section 21]- Sometimes even if a partner does not
have either express or implied authority to act on behalf of the firm, his act can bind the
firm if the same has been done in a situation of emergency as described in Section 21.
The section reads as under
- 21, Partner's authority in an emergency- A partner has authority in an
emergency to do all such acts for the purpose of protecting the firm from
loss as would be done by a person of ordinary prudence, in his own case,
acting under similar circumstances, and such acts bind the firm.
Section 21 confers an authority on a partner in emergency for doing all such acts for the
purpose of protecting the firm from loss as would be done by a person of ordinary prudence
in his own case. For such an act the firm would be bound towards the third party The
authority conferred by this section is similar to the authority conferred upon an agent under
section 189 of the Indian Contract Act.
3- Ratification of a partner's act- The relation between various partners being that of
principal and agent, the rules of the law of agency are applicable in such a case also.
Even if a partner has acted without any authority, if the act is subsequently ratified by
the other partners, the act will become binding on them. For instance, a partner A,
without any authority, borrows Rs. 10,000 from B. A's act is ratified by the other
partners. Thereafter, they become bound to pay that sum to B.

4- Admission made by a partner [Section 23]- According to Section 23, an admission or

representation made by a partner concerning the affairs of the firm is evidence against
the firm if it is made in the ordinary course of business. This is so because every partner
is the agent of the firm for the firm's business. For example, admission by one partner
regarding making of a contract, execution of a document, payment of money, supply of
goods or financial condition of the firm, will be evidence against all the other partners, It
is, of course, necessary that such admission or representation must have been made in
the ordinary course of business.
An admission and representation made by a partner is simply evidence against the firm.
Evidence can be given to disprove such admissions or representations made by a partner as
they do not constitute conclusive proof of the matters admitted or represented d

5- Effect of notice to an acting partner [Section 24]- According to Section 24, Notice to a
partner who habitually acts in the business of the firm of any matters relating to the
affairs of the firm operates as notice to the firm, except in the case of a fraud on the
firm committed by or with the consent of the partner.
Section 24 also embodies another general principle of the law of agency Notice to an agent
concerning the matters of agency is deemed to be a notice to the principal. Section 24
provides that notice to a partner who habitually acts in the business of the firm of any
matters relating to the affairs of the firm operates as a notice to the firm.
Such a notice binds only such partners who are there at the time when the notice was given
Therefore, if some notice had been given earlier, it will not bind a partner who is introduced
as a partner after such notice. Similarly, an outgoing partner cannot ordinarily be bound by a
notice relating to subsequent matters. However, if a public notice of dissolution of a firm or
ceasing of a partner to be a partner has not been given, the partners continue to be liable.
In order that notice to one partner operates as a notice to the whole firm, it is necessary
that the notice must have been given to a partner who habitually acts in the business of the
firm. Notice to a dormant or a sleeping partner would, therefore, not be considered to be a
notice to others.
Exception- If a fraud has been committed on the firm by or with the consent of a particular
partner, notice to such a partner regarding that matter is not deemed to be a notice to the
firm If in any particular matter an agent is himself party to the fraud, he cannot be
presumed to be passing the agent does not serve as notice to the principal.
6- Liability for torts and wrongful acts [Section 26]- A principal is vicariously liable for the
torts and other wrongful acts committed by his agent in the course of the business of
agency (Sec 238 of ICA). Every partner being an agent of the firm for the business of the
firm, the same principle has been recognised by the Indian Partnership Act also.
Section 26 specifically provides regarding such liability. It states that where by the wrongful
act or omission of a partner loss or injury is caused to any third party, or any penalty is
incurred, the firm is liable therefor to the same extent as the guilty partner. The wrongful
acts may be tort, fraud, negligence or misapplication of money or misappropriation of
property.
According to well-settled rule of Law of Torts, a master is vicariously liable for the wrongs of
his servant done in the course of employment. Similar rule is applicable in the case of
principal and agent also. Since the relationship between the partners is that of principal and
agent, the same kind of liability for partners has been incorporated in Section 26.

7- Liability for misapplication of money or property by a partner [Section 27]- Section 27

recognises the liability of the firm for a particular kind of wrong done by a partner, i.e.,
misapplication of money or property. The provision is as follows
27. Liability of the firm for misapplication by partners, Where-
a- a partner acting within his apparent authority receives money or property from a
third party and misapplies it; or
b- a firm in the course of its business receives money or property from a third party and
the money or property is misapplied by any of the partners while it is in the custody
of the firm, the firm is liable to make good the loss.
In this section, two kinds of cases of misapplication of money or property have been
mentioned-
(a) when the money or property has been received by a partner and he misapplies the same
without accounting for it to the firm; and
(b) when the money or property has been received by the firm from third party and the
same is misapplied by any of the partners.
In either case the firm is liable to make good the loss to the third party.

a- Section 27(a)- Liability for money or property received by a partner who misapplies the
same- According to Section 27(a), when a partner acting within his apparent authority
receives money or property from a third party and misapplies the same, the firm is liable
for that. In Willett v. Chambers, one of the partners of a firm of solicitors and
conveyancers received money from a client for being invested on a mortgage and
misapplied the same. The other partner who was ignorant of this fraud was also held
liable along-with the guilty partner.
 To make the firm liable for the act of a partner, it is necessary that such a partner
while receiving money or property from a third party acted within his apparent
authority. If the act done is outside such authority the firm cannot be made liable for
the same.

If the money or the property has been received by á partner not in the ordinary course
of business of the firm but only in his personal capacity then also the firm cannot be
liable for the same. In British Homes Corporation Ltd. v. Patterson, if one of the
partners of a partnership firm obtained a cheque payable to himself and not in the name
of the firm. It
was held that for the misappropriation of such a cheque which had been received by
him in his personal capacity, the other partner could not be made liable.
b- Section 27(b)- Liability of misapplication of money or property received by a firm and
misapplied by a partner- Where the firm in the 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 the custody of the firm, the firm can be made liable towards the third party to make
good the loss. In ‘Ex parte Buddulph, one of the partners of a firm of bankers withdrew
the trust money and misapplied the same. All the partners of the firm were held liable to
make good the loss.

THE DOCTRINE OF HOLDING OUT [Section 28]

Generally, a person who is not a partner in the firm cannot be made liable for an act of the
firm. In certain cases, however, a person who is not a partner in the firm may be deemed to
be a partner or held out to be a partner for the purpose of his liability towards a third party.
The basis of liability of such a person is not that he was himself a partner or was sharing the
profits or was taking part in the management of the business, but the basis is the application
of the law of estoppel because of which he is held out to be a partner or is deemed to be a
partner by 'holding out'.
The doctrine of holding out is a branch of the law of estoppel. According to the law of
estoppel, if a person, by his representation, induces another to do some act, which he
would not have done otherwise, then the person making the representation is not allowed
to deny what he asserted earlier.
Therefore, if a person who is not a partner, by his representation, creates an impression in
the mind of the third party that he is a partner, on the basis of which the third party gives
credit to the firm, the person making such a representation will be held out to be a partner.
For example, a partnership firm consists of A, B and C. D, who is not a partner, makes a
representation to X that he is also a partner and on the faith of this representation X gives
credit to the firm. In this case, X can make D liable on the basis of holding out and D is
estopped from denying that he is a partner in the firm.
Section 28(1) for the application of the doctrine of holding out, the presence of the
following essentials is required-
i- The person sought to be made liable under the doctrine of holding out either has
himself represented, or knowingly permitted somebody else to represent, that
he is a partner in the firm.
ii- The third party, who wants to bring an action, must have acted on the faith of
the representation and given credit to the firm.

i- Representation- In order to make a person liable under the doctrine of holding out,
it has to be proved that either he himself made a representation or knowingly
permitted such a representation to be made by someone else. In other words, there
has to be a representation by a person by words spoken or written or by his conduct
that he is a partner in the firm. When the third party has acted on the
representation, the section creates the liability whether the person representing
himself or represented to be a partner does or does not know that the
representation has reached the person so giving credit. The presence of the two
essentials, Le., the representation by one person about the fact of his being a
partner and the acting by a third party on the faith of the representation are enough
to create liability under the doctrine.

Knowingly permitting the representation to be made- The liability under the

doctrine of holding out arises when a person has either made a representation that
he is a partner or knowingly permitted such a representation to be made by
someone else. In case of Munton Vs. Rutherford, one Beckwith published a
statement in a newspaper that he and Mrs. Rutherford had formed a partnership.
The statement was false and Mrs. Rutherford did not know about the same. It was
held that Mrs. Rutherford was not liable as a partner by estoppel or holding out.
Mere carelessness in allowing oneself to be represented may not necessarily mean
that he has knowingly permitted himself to be represented as a partner. In Oriental
Bank of Commerce v. M/s. S.R. Kishore & Co., a person, who was not a partner not
only represented himself to be a partner, but he signed the partnership deed,
actively participated in various transactions of the firm, and signed various
partnership documents from time to time. It was held that he was Iiable for the acts
of the firm on the basis of the principle of "holding out”.

ii- Acting on the faith of representation and giving credit- In order to entitle a person
to bring an action under the doctrine of holding out, it has to be shown that he acted
on the faith of the representation and gave credit to the firm. The estoppel can be
relied- upon only by the person to whom the representation has been made, and
wh0 has acted upon the faith of it. For example, D, who is not actually a partner in
the firm consisting of A, B & C represents to X that he is also a partner in that firm.
 On the faith of that representation, X gives credit to the firm. X can make D liable
under the doctrine of holding out. But if Y, who does not know of the representation
gives credit to the firm of A, B C, he cannot make D liable.

Liability for Torts- The liability under the-doctrine of holding out arises when the person
acting on the faith of the representation has given credit to the firm. If the basis of the
action is the tort committed by one of the partners, the doctrine of holding out does not
apply in such a case.
Position of a retired Partner- When a partner retires, the relation of partnership between
the retiring and the other partners comes to an end. If a third party who knew of the
existence of this relationship does not know that the relationship has come to an end and
gives credit to the firm, he can make the retiring partner also liable. Similarly, if he gives
credit to the retiring partner thinking him to be still a partner, he can make the continuing
partners liable. In other words, from the point of view of the third parties, the mutual
agency which had earlier come unto existence is still presumed to be continuing until public
notice of retirement is given. Sec. 32(3) provides that "notwithstanding the retirement of a
partner from a firm, he and the partners continue to be liable as partners to third parties
for any act done by any of them which would have been an act of the firm if done before
the retirement, until public notice is given of the retirement."
Such public notice may be given either by the retired partner or by any partner of the
reconstituted firm [section- 32(4)].
No public notice is needed on the retirement of a dormant partner, i.e., a partner who is not
known as Such to third parties, because the Partnership Act further provides that a retired
partner is not liable to any third party who deals with the firm without knowing that he was
a partner [Proviso to sec 32(3)].

Death of a partner- On the death of a partner, there is automatic dissolution of a firm unless
there is a contract to the contrary between the partners- Sec 42[c]. When there is a contract
between the partners by virtue of which the firm is not dissolved, viz., the remaining
partners continue the business-the fact that the business of the firm is continued in the old
firm name, does not of itself make the legal representatives or the estate of the deceased
partner liable for an act of the firm done after his death- Section 28(2) and Proviso to
section 45(1). The position of the legal representatives of a deceased partner is different
from that of a retired partner, as the former will not be liable for the acts of the firm done
after the death of the partner even though no public notice of partner's death is given,
whereas a retiring partner will continue to be liable for the acts of other partners until
public notice of retirement is given.
POSITION OF A MINOR ADMITTED TO THE BENEFITS OF PARTNERSHIP [SECTION 30]-
Section 30 contains the provision regarding the position of a minor admitted to the benefits
of partnership.
Minor's admission to the benefits of partnership- The agreement by a minor is void, but he
is capable of accepting benefits. In consonance with this position of law. Section 30(1)
provides that a minor may not be a partner in a firm, but with the consent of all the partners
for the time being, he may be admitted to the benefits of partnership. There can be no
partnership of all minors, but a partnership between persons competent to contract must
exist before a minor can be admitted to its benefits.
Minor's position during minority- The minor thus admitted has a right to such share of the
property and of the profits of the firm as may be agreed upon- Section 30(2). He, however,
cannot go to the court of law to enforce his rights in respect of such share so long is
removed when he is severing his connection with the firm- Section 30(4). He can also have
access to any of the accounts of the firm and can inspect and copy them- section 30(2). In
this matter, his position is different from a partner of the firm. A partner has a right to have
access to and to inspect and copy any of the books of the firm [sec 12(d)], whereas a minor
right has been limited to accounts only. It was considered undesirable to allow a person
other than a real partner to have access to the secrets of the firm.
Every partner is jointly and severally liable for all acts of the firm. Moreover, his liability is
unlimited and can extend to his personal property. A minor, on the other hand, is not
personally liable for any such act. It is only his share which is liable for the acts of the firm
[Sec 30(3)].
Option on attaining majority- According to Section 30(5), at any time within six months of
his attaining majority or of obtaining knowledge that he had been admitted to the benefits
of partnership, whichever date is later, he can elect to become or not to become a partner.
Such option is exercised by giving a public notice under S. 72 of the Act. If he remains silent
and fails to give such a notice, there is a presumption that he wants to be a partner and on
the expiry of the said six months, he shall become a partner in the firm.
Sometimes without the knowledge of a minor, his guardian may have accepted his
admission to the benefits of a partnerships and the minor may have remained ignorant of
his admission to the benefits of partnership even after he has attained majority. According
to Section 30(6), the burden of proving the fact that such person had no knowledge of such
admission until a particular date after the expiry of six months of his attaining majority shall
lie upon the person asserting that fact. Such cases would presumably be decided by the
general rule contained in Sec. 101, Indian Evidence Act.
For the purpose of exercise of option under Section 30(5), it is necessary that the firm must
be in existence when the minor attains the age of majority.
Minor's position if he becomes a partner [Section 30(7)]- We have seen above that such a
minor becomes a partner in the firm
i- when he himself elects to become a partner, or
ii- fails to give the required public notice of his intention to become or not to
become a partner within the specified time.
Towards the creditors of the firm, he becomes personally liable for all the acts of the firm,
not from the date of his attaining majority, nor from the date of his becoming a partner but
retrospectively from the date of his admission to the benefits of partnership {sec 30(7)}. His
position under English law is different and there his liability does not extend retrospectively
from the date of his admission to the benefits of partnership, but is only from the date of his
attaining majority
Minor's position if he elects not to become a partner [Section-30(8)]- When he elects not
to become a partner, his rights and liabilities continue to be the same as that of a minor up
to the date of his giving public notice. His liability as regards his share in the firm continues
only up to the date of the notice." Thereafter, neither his share in the firm is liable, nor
there arises any question of his personal liability.
Application of doctrine of holding out on minor's attaining majority [Section 30(9)]-
According to Section 30(9), if after attaining majority, he represents or knowingly permits
himself to be represented as a partner in the firm, his liability on the ground of holding out
can still be there.

INCOMING AND OUTGOING PARTNERS

Chapter V (Sections 31 to 38) of the Indian Partnership Act contains provisions with regard
to 'Incoming and Outgoing partners
INCOMING PARTNERS
Section 31 contains the following provision about the 'introduction of a partner into an
already existing partnership firm.
Section 31- Introduction of a partner-(1) Subject to contract between the partners and to
the provisions of Section 30, no person shall be introduced as a partner into a firm without
the consent of all the existing partners,
(2) Subject to the provisions of Section 30, a person who is introduced as a partner
into a firm does not thereby become liable for any act of the firm done before he
became a partner.
Sub-section (1) deals with the modes of introduction of a partner whereas sub-section (2)
talks about his liability.
Modes of introduction of a partner: -A new partner can be introduced into a firm in the
following ways:
i- With the consent of all the existing partners
ii- In accordance with a contract between the partners,
iii- In accordance with the provisions of Sec. 30.

i- Introduction with the consent of all the partners- The relationship between the
partners is based upon mutual confidence and trust. For the harmonious working of
a partnership, it becomes necessary that a new partner should not be introduced
without the consent of all the partners. This section, therefore, provides the general
rule that no person shall be introduced as a partner into the firm without the
consent of all the existing partners.
ii- Introduction in accordance with a contract between the partners- The rule stated
above is subject to contract between the partners. If a contract between the
partners permits the introduction of a new partner even without the consent of all
the existing partners, that can possibly be done. For example, the contract provides
the majority of the partners shall be competent to admit a new partner or anyone of
them may nominate a partner or appoint his successor, a new partner could be
introduced accordingly.
In Byrne v. Reid,' A, B, C and D were four partners and they, in their partnership deed,
authorised A to admit his son, S into partnership when S had attained the age of twenty-one
years. After S attained the age of twenty-one years, A nominated him as a partner in
accordance with the partnership deed and he accepted the nomination, but the other
partners refused to recognise him as a partner. It was held that the son on accepting the
nomination had become a partner.
It may be noted that a person does not become a partner merely by his nomination. He has
an option to become a partner or not." He becomes a partner when after nomination he
expressly or impliedly agrees to the same.
iii- A minor admitted to the benefits of partnership becoming a partner- A minor
admitted to the benefits of partnership can become a partner according to the
procedure mentioned in Section 30(5). When a minor was admitted to the benefit of
partnership, he may make an election, within 6 months of his attaining the majority
or obtaining knowledge that he had been admitted to the benefits of partnership,
whichever date is later, and give a public notice whether he became a partner or not.
If he opts to become a partner by such notice, he becomes a partner of the firm. If
he fails to give such notice within the above-stated time, then on the expiry of such
time, he automatically becomes a partner. It may be noted that in case of such a
minor becoming a partner, the consent of other partners is not required.
Liability of an Incoming Partner- It has already been observed that according to Section 25
"Every partner is liable for all the acts of the firm done while he is a partner. Section 31(2)
confirms this rule and states an incoming partner "does not thereby become liable for any
act of the firm done before he became a partner". It is clear that as a general rule the
liability of an incoming partner begins from the date of his joining the firm. Nothing can
however, prevent a partner from agreeing to be liable for the acts done before his
admission. If he makes such an agreement with his co-partners, the same will be binding
only between him and the co-partners and the third parties cannot take advantage of such
an agreement. The creditors can make him liable if they can show that the incoming partner
had agreed with them, expressly or impliedly, for being liable towards them for the acts
done before his admission. The basis of liability for the past acts, in such a case, will be the
agreement rather than the fact of his admission as a partner.
In Central Bank of India v. Tarseema Compress Wood Mfg. Co., after a 4th partner was
admitted to a partnership firm, which earlier consisted of only three partners. The fourth
partner in this case had undertaken liability which existed prior to his joining the firm and he
was, therefore, held to be jointly and severally liable in respect of such liability.
The position of a minor becoming a partner under Sec. 30 is, however, different. His liability
towards third parties does not commence from the date of his becoming a partner, but it
relates back to the date of his admission to the benefits of partnership [sec 30(7)(a)].

Introduction of new partner-Liability of incoming partner in respect of pre-existing debts-

New-partner could be held liable if he had assumed liability and creditor had accepted him
as debtor. Documents on record showed that new partner had acknowledged pre-existing
liability and was also trying to clear the dues.

OUTGOING PARTNERS
Sections 32 to 38 deal with different ways in which a partner may cease to be a partner and
his rights and liabilities thereafter. These provisions pertain to situations when the outgoing
partner ceases to be a partner, but the firm is not dissolved and it continues with the
remaining partners. A partner may cease to be a partner in the following ways: -
a- By Retirement,
b- By Expulsion,
c- By Insolvency, and
d- By Death.

a- Retirement of a Partner [Section 32]- Retirement here means voluntary withdrawal of a

partner from the firm, as opposed to expulsion, when a partner is made to quit. It covers
such cases where on the withdrawal of a partner from the firm, the firm is not dissolved
 but the business of the firm is continued with the remaining partners. firm, as opposed
to expulsion, when a partner is made to quit.
How can a partner retire- According to Section 32(1), a partner may retire
a) with the consent of all the other partners;
b) in accordance with an express agreement by the partners; or
c) where the partnership is at will, by giving notice in writing to all the other partners of
his intention to retire.
(a) With the consent of all the other partners- A partner can retire with the consent of all
the other partners. Such consent may be express or implied.
(b) In accordance with express agreement by the partners- In case the agreement between
the partners themselves Condones the requirement of the consent of them all, a partner
may retire accordingly. For instance, the partnership deed provides that a partner may
retire with the consent of the majority of other partners or by giving one year's notice a
partner can retire in accordance with such an agreement.
(c) In partnership at will by a notice to others- In case of partnership at will,' a partner may
retire by giving a notice in writing to all the other partners of his intention to retire.3(In a
partnership at will, a partner has also a right to get the firm dissolved by giving a notice in
writing to all the other partners of his intention to dissolve the firm [sec-43].
In case of partnership at will, a partner could also retire either under Section 32(1(a)
with the consent of all the other partners or under Section 32(1)(b) in accordance
with an express agreement by the partners.
Notice of retirement by a partner given to that partner who habitually acts in business of
the firm would operate as notice to the Firm. It is because firm inasmuch includes all
partners, the notice would not be said to be defective.
In Usha Gopirathnam v. Shri P.S. Ranganathan" a partner gave notice, by letter, written to
another partner who habitually was acting in business of the firm, expressly stating that he
was desirous of retiring from the firm and that his accounts also be settled by assessing
assets and liabilities of the firm. It was held to be clear expression of his intention to retire.

Firm not dissolved on retirement of a partner- On retirement, a partner ceases to be a

partner but the other partners can still continue to carry on the business of the firm, and the
partnership between the remaining partners can still continue So that the partnership
between the remaining partners can continue after the retirement of a partner, it is
necessary that after such a retirement there must be at least two remaining partners
between whom the partnership is now to continue. Thus, if all the partners, or all except
one, retire, the firm has to be dissolved.
His position after retirement. The question arises regarding liability of a retiring partner for
the acts of the firm done
i- before his retirement,
ii- after his retirement.

i- Liability for acts done before retirement [Section 32(2)]- Every partner is liable for
all acts of the firm done while he is a partner. "If liability has arisen during the period
while a person was a partner, such liability does not come to an end by his
retirement According to Section 32(2), however, this is a possibility of discharge of
the outgoing partner from liability for the past acts Section 32(2) is as follows

“A retiring partner may be discharged from the liability to any third party for acts
of the firm done before his retirement by an agreement made by him with such
third party and the partners of the reconstituted firm and such agreement may be
implied by a course of dealing between such third party and the reconstituted firm
after he had knowledge of the retirement.
The above-mentioned procedure for discharge of a retiring partner from liability is by way of
novation. Novation means substitution, with the creditor's consent, of a new debtor for an
old one. This is done by substituting a new contract in place of an old one, thereby
discharging the liability of the original debtor and creating that of a new one in his place. It is
essential that the creditor must agree to such a substitution. For example, X has a right of
action against the partners A, B & C. A retires and then X agrees to make only B & C liable. A
is thereby discharged from his liability. Sub-sec. (2) to Sec. 32 requires that for the proper
discharge of the retiring partner from liability, there should be a contract between all the
three parties viz., the outgoing partner, the members of the reconstituted firm and the
creditor. Mere agreement between the outgoing and the continuing partners that only the
continuing partners will be liable for all the past acts does not discharge the outgoing
partner from his liability towards the creditor. The concurrence of the creditor also must be
there to such a contract. Such an agreement need not always be express, it may be implied.
In M/s. PP.M. Sankaralinga Nadar Sons v. Dr. D. Rajkumar it has been held that under
Section 32(2) of the Act a retired partner can be discharged from his liability only by way of
an agreement entered into between him and the other partners along with third parties so
as to discharge him from all the liabilities to the firm.

Liability for acts done after retirement [Section 32(3) & (4)- Section 32, sub-sections (3) and
(4) contain the following provisions on the subject
(3)-Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for an act done by any of them
which would have been an act of the firm if done before the retirement, until
public notice is given of the retirement:
 Provided that a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner
(4) Notice under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.
By retirement a person ceases to be a partner. 'The third parties can still presume mutual
agency between the outgoing and the continuing partners until a public notice of retirement
is given. Section 32(3), therefore, provides that in the absence of a public notice, the
outgoing partner and the continuing partners continue to be liable for the act of each other
towards third parties. In order to avoid such liability, it is in the interests of both the retiring
and the continuing partners that public notice be given. It has, therefore, been provided in
sub-sec. (4) that such a notice may be given either by the retired partner or any partner of
the reconstituted firm.
Public Notice- According to Section 72, a public notice means a notice in the Official Gazette,
in at least one vernacular newspaper circulating in the district where the firm to which it
relates has its place or principal place of business, and if the firm is registered, to the
Registrar of Firms concerned.
There is a presumption that a person who was known to be a partner continues to be so
known to the third parties until the notice of retirement is given.

Retirement of a dormant partner- Proviso to Sec. 32(3) states that "a retired partner is not
liable to a third party who deals with the firm without knowing that he a partner.
If a dormant partner i.e., a person who is not known to be a partner retires, he is not liable
for the acts of the firm done after his retirement even though no notice of retirement has
been given. he basis for this provision is that if a person was not known to be a partner to a
third party, there is no need of notifying to such third party about his retirement either. The
need for notice arises if a person who was known to be a partier and his creditor does not
know about his retirement but still continues to believe that he is a partner and gives credit
on that belief
A person who is not known to be a partner in a firm cannot be said to owe any duty to give
notice of his retirement to persons who do not know that he has been a partner, The
proviso to Section 32(3) is to the effect that even where there is á failure to give public
notice, a retired partner will not be liable to a third party who did not know of such person
being a partner and deals with the firm after such retirement.
The case of Tower Cabinet Co. Ltd. v. Ingram, explains this point. In that case Ingram and
Christmas were partners in a firm known as Merry's. The partnership was dissolved but
Christmas carried on the business in the same firm name. Public notice of the dissolution of
the firm was not given. Christmas placed an order on the old notepaper for the purchase of
some furniture from Tower Cabinet Co. Tower Cabinet Co. sued Ingram to make him liable
on the basis of holding out. It was held that Ingram was not liable as Tower Cabinet
Company had no knowledge that Ingram was a partner before the date of dissolution. The
mere fact that the retiring partner did not see to the destruction of the old notepapers
bearing his name could not make him liable to the creditors with whom communications
were made on one such notepaper.

ii- Expulsion of a partner [Section 33]- It has been expressly provided by Section 33 that
"a partner may not be expelled from a firm by any majority of the partners, save in
the exercise in good faith of powers conferred by contract between the partners."
According to the provision, the expulsion of a partner is possible, in exceptional cases, when
the following two conditions are satisfied
a- The power to expel has been conferred by a contract between the partners, and
b- Such a power has been exercised in good faith.
No expulsion is possible unless a power to that effect has been conferred by a contract. This
power must be exercised in good faith for the general interest of the whole firm. If the
power to expel has been exercised bona fide the same cannot be challenged in a court of
law.
Expulsion of a partner, who has been held guilty of an offence, has however, been
considered to be justified. In Carmichael v. Evans, the power to expel existed against any
partner who was addicted to scandalous conduct detrimental to the partnership business or
was guilty of any flagrant breach of duties relating a partnership business. One of the
partners was convicted for travelling without a ticket, and he was given a notice of expulsion
by the other partner. It was held that the notice of expulsion given under these
circumstances was justified.

Liability of an expelled partner- As regards liability. towards third parties for act of the firm
done either before or after expulsion, the position, of the expelled partner is exactly the
same as that of a retired partner. It means that
I. he continues to be liable for the acts of the firm done before his expulsion, unless he
is discharged from liability by following the procedure mentioned in Section 32(2);
and
II. he can be made liable towards third parties for the acts of the firm done after
expulsion unless a public notice of the expulsion has been given."

iii- Insolvency of a partner [Section 34]- According to Section 34(1): - Where a partner
in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which
the order of adjudication is made, whether or not the firm is thereby dissolved."
An insolvent is not allowed to continue as a partner and, therefore, a person who is
adjudicated insolvent ceases to be a partner on the date on which order of adjudication is
made. Whether on adjudication of a partner as insolvent, the firm is also dissolved or not
depends upon the contract between the partners. According to Sec. 42(d), unless the
partners agree otherwise, a firm is dissolved by the adjudication of a partner as insolvent.
His liability after adjudication- According to Section 34(2), of the Indian Partnership Act,
1932, where the firm is not dissolved on the adjudication of a partner as insolvent and the
other partners agree to continue the business, the estate of the insolvent partner is not
liable for an act of the firm after the date of adjudication. In his case, he is absolved from
liability for future acts even though no public notice of his being adjudicated insolvent is
given. His position is, therefore, different from the retired or the expelled partner, whose
liability for the acts of the firm continues unless a public notice of retirement or expulsion is
given.

iv- Death of a partner [Section 35]- Although on the death of a partner, a firm is
dissolved but, if the other partners so agree, the firm may not be dissolved [sec-
42(c)] and the business of the firm may be continued with remaining partners. As
regards the liability of his estate for the acts of the firm done after his death, the
position is the same as in the case of an insolvent partner.

If the firm is not dissolved on the death of a partner, the estate of the deceased
partner is not liable for acts of the firm done after his death (section- 35).

RIGHTS OF OUTGOING PARTNER- After a partner-ceases to be a partner, the question of the

following rights of the outgoing partner or his legal representatives generally arises
1- Right to carry on a competing business; and
2- Right to share subsequent profits until the amount due to him has been paid.

1- Right to carry on a competing business-

According to Section 36- Rights of outgoing partner to carry on competing business-
(1) An outgoing partner may carry on a business competing with that of the firm and he
may advertise such business, but, subject to contract to the contrary, he may not-
a- use the firm name,
b- represent himself as carrying on the business of the firm; or
c- solicit the custom of persons who were dealing with the firm before he ceased to
be a partner.
(2) Agreements in restraint of trade- A partner may make an agreement with his
partners that on ceasing to be a partner, he will not carry on any business similar to
that of the firm within a specified period or within specified local limits; and
notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872,
such agreement shall be valid if the restrictions imposed are reasonable.
This Section deals with the right of the outgoing partner with regard to some other business
which he may like to carry on. Sub-sec. (1) states that an outgoing partner, whether he
leaves the firm by retirement, expulsion or insolvency, has a right to carry on a business
competing with that of the firm. He may also advertise such business. This right to carry on
the competing business is, however, subject to three restrictions:
i- He cannot use the name of the firm for his business.
ii- He cannot represent himself as carrying on the business of the firm and,
therefore, he is not allowed to mislead the public by misrepresenting that he is
still carrying on the firm's business.
iii- He cannot solicit the customers or persons who were dealing with the firm. He
cannot approach the old customers to persuade them to be diverted towards his
business. It has been noted above that he can advertise his own business /and if
the old customers of themselves prefer to come to him, there is no bar to his
attending to them.
The above-stated restrictions on the outgoing partner are necessary to protect the interest
of the firm which he leaves.
These restrictions are subject to contract between the outgoing and the other partners.
Restriction on competing business- The remaining partners may sometimes like to have
greater protection of their interest rather than merely imposition of the abovesaid
restrictions on the outgoing partner in view of this position. Section 36(2) permits an
agreement being made between the outgoing partner and the Continuing partners whereby
the outgoing partner be restrained from carrying on business similar to that of the firm.
Such an agreement has been declared to be valid and constitutes an exception to the rule
contained in Sec. 27, Indian Contract Act which declares an agreement in restraint of trade
as void.
It is, however, necessary that
1- the agreement restraining the outgoing partner from carrying on a similar business
should stipulate that such a business will not be carried on for a specified period or
within specified local limits
2- and the restriction imposed should be reasonable.

(2) Right to share subsequent profits- When a partner ceases to be a partner by retirement,
expulsion, insolvency or death, his share in the property of the firm may not be immediately
paid to him and the firm may continue the business without any final settlement of accounts
between the outgoing partner or his estate and the others.
Section 37 gives an option to the outgoing partner or the representative of the deceased
partner, who has not been paid his share of the property, either-
- to claim such share of the profits made since he ceased to be a partner as
may be attributable to the use of his share of the property of the firm; or
 - to claim an interest at the rate of 6% per annum on the amount of his share
in the property of the firm.
DISSOLUTION OFA FIRM
Dissolution of partnership means coming to an end of the relation known as partnership,
between various partners. When one or more partners cease to be partners but others
Continue the business in partnership, there is dissolution of partnership between the
outgoing partners on the one hand and remaining partners on the other. The remaining
partners as between themselves still continue as partners. For example, when the firm
consists of A, B and C and A retires, there is dissolution of partnership between A and others
but partnership as between B and Cis not dissolved. In such a case, there is dissolution of
partnership between some of the partners only, but there is no dissolution of the firm.
According to Section 39, when the dissolution of partnership between all the partners of the
firm occurs, this is called dissolution of the firm. For example, when in a firm consisting of A,
B and C all of them cease to be partners with one another, it amounts to dissolution of the
firm
Modes of dissolutions [Section 40-44]- A firm may be dissolved in the following ways:
1- By agreement.
2- Compulsory dissolution.
3- On happening of certain contingencies.
4- By notice.
5- By the court.

1- Dissolution by agreement [Section 40]- A firm may be dissolved either-

i- with the consent of all the partners, or
ii- in accordance with a contract between the partners.
As partners can create partnership by making a contract as between themselves, they are
also similarly free to end this relationship and thereby dissolve the firm by their mutual
consent. Sometimes there may have been a contract between the partners indicating as to
when and how a firm may be dissolved, a firm can be dissolved, in accordance with such a
contract. For instance, it the contract between the partners provides that on a 6 months-
notice by a partner the firm may be dissolved, then in accordance with this contract, partner
could give 6 months-notice and get the firm dissolved.

2- Compulsory dissolution [Section 41]- Section 41 mentions certain events on the

happening of which there is compulsory dissolution of the firm. Such dissolution is
compulsory and if the partners want to continue in partnership by agreeing to the
contrary, they cannot possibly do that, Section 41 is as under
Section 41. Compulsory dissolution- A firm is dissolved
 (a) by the adjudication of all the partners or of all the partners but one as insolvent,
or
(b) by the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership
Provided that, adventure or undertaking is carried on by the firm, the illegality of one
or more shall not of itself cause the dissolution of the firm in respect of its lawful
adventures and undertakings.

According to Section 41, therefore, compulsory dissolution occurs under the following
circumstances
i- When all the partners or all except one are adjudicated insolvent, the firm is
compulsorily dissolved. We have already noted that (section-34) when a partner is
adjudicated insolvent, he ceases to be a partner.
ii- If the business of the firm though lawful when the firm came into existence,
subsequently becomes unlawful, there has to be dissolution of the firm. This
provision is based on the rules of the law of contract. For a valid contract the object
and consideration have to be lawful as defined in Section 23, Indian Contract Act.
Sec. 56 of the Contract Act further provides that when the contract to do an act
becomes unlawful after making the contract, such a contract becomes void. For
example, a number of persons join together as partners to sell liquor in a certain
area. Subsequently, the Government imposes prohibition in that area and the sale of
liquor is banned. As soon as the sale of liquor in that area becomes unlawful, the
firm is dissolved.

Proviso to section 41(b)- If the firm was carrying on more than one adventures or
undertakings, the illegality of one or more of them shall not of itself result in the dissolution
of the firm in respect of those adventures or undertakings which are still lawful.
There is also compulsory dissolution of the firm if some event happens because of which it
becomes unlawful for the partners to continue as partners with each other. For example,
two partners reside and carry-on-trade in two different countries. If war breaks out between
these two countries and further commercial intercourse between the two partners thereby
becomes against public policy and thus unlawful, there is compulsory dissolution of the firm.
3- Dissolution on happening of certain contingencies [Section 42]- Section 42 mentions
certain contingencies on the happening of which the firm is dissolved, unless there is a
contract to the contrary. Unlike the dissolution under Section 41, which is compulsory,
the dissolution contemplated under Section 42 is not compulsory. Even on the
happening of the contingencies mentioned in Section 42, partners may agree that the
firm will not be dissolved, but the business of the firm will be continued as before. The
contingencies mentioned in the Section are: -
 i- Expiration of the partnership term
ii- Completion of the adventure.
iii- Death of a partner; and
iv- Insolvency of a partner.

i- Expiration of the partnership term- When the partnership had been constituted for
a fixed term, it continues obviously for the contemplated term and would be
dissolved on the expiry of such term. If the partners so like they may agree to the
contrary and continue the business even beyond that time. Such an agreement may
be express or implied. If a fresh term is not stipulated, then it will be considered to
be a partnership at will.
ii- Completion of the adventure. -Partnership created for some specific adventures or
undertakings comes to an end on the completion or such adventures or
undertakings. Thus, when the partnership was created specifically for carrying out
contract of construction of a road and the road was completed on 24.7.63 and final
bill prepared on 18.2.65. the partnership stood dissolved on 18.2.65.
There can, however, be an agreement by which the partnership may not be dissolved and
the business may be continued for some other adventures or undertakings after the
completion of the earlier ones.
iii- Death of a partner- Death of a partner results in the dissolution of the firm unless
the remaining partners agree to the contrary Section 42 of the Partnership Act, 1932
provides that a firm-stands dissolved on the death of a partner.
In Pawan Nandlal Agrawal v. Asian Dye Chemicals subsequent to the death of a partner,
the defendant firm entered into an agreement with a mother firm. A suit was filed after the
death of a partner, showing that the firm continued to exist and the other party to the suit
also considered it to be a partnership firm. The Court thus, ruled that where there is a
contract to the contrary express or implied, among the partners, a firm would not stand
dissolved automatically on the death of one of its partners.
This provision in Section 42 1s applicable when there are more than two partners in a firm,
where on the death of one of them the others may agree to still continue the same old firm
without its being dissolved. If there are only two partners and they agree that on the death
of one of them, the firm would not be dissolved but will continue with the surviving partner
and the heir of the deceased partner, the agreement is meaningless because on the death
of one of them there remains only one partner.
If the heir of the deceased partner is to carry on the business in partnership with the
surviving partner, it will be a new partnership for which an agreement between the two
persons to create partnership has to be entered into.
iv- Insolvency of partner- When a partner is adjudicated insolvent, he ceases to be a
partner. The firm is also dissolved unless there is an agreement between the
remaining partners to the contrary. This provision has to be read along-with Sec. 41-
a which states that when all or all except one partner become insolvent, there is
compulsory dissolution of the firm. If, therefore, there are only two partners and one
of them is adjudicated insolvent, there is compulsory dissolution under Section 41
and there is no question of there being a contract to the contrary making the firm to
continue.

4- Dissolution by notice in "Partnership at will" [Section 43]- When the partnership is at will
as defined in Section 7, the partners are not bound to remain as partners or continue
the partnership for any fixed period. According to Section 43, such a firm may be
dissolved by any partner giving notice in writing to all the other partners of his intention
to dissolve the firm. "The notice must clearly and in unambiguous terms indicate the
intention of the partner giving notice/to dissolve the firm. Dissolution by a notice under
this section will be valid even though one of the partners to whom the notice is given is
insane. A notice for dissolution once given cannot be withdrawn unless the other
partners agree to the same.
The notice for dissolution is a statutory requirement, and therefore, the requirements of
Section 43 have to be satisfied.
Although a partnership at will can be dissolved by a notice, there is, however, nothing which
prevents the dissolution of such partnership under the other provisions of the Act. Thus, a
partnership at will could also be dissolved by mutual consent, insolvency or death of a
partner.

5- Dissolution by the court [Section 44]- Section 44 mentions certain grounds on which a
suit can be filed for the dissolution of a firm. A suit for the dissolution for the firm, may
be filed, by the innocent partners and not by the partner whose conduct, is the subject-
matter for the suit.
The need for dissolution by the court arises when all the partners do not want the
dissolution. It may be noted that Section 44, which permits a partner to invoke the
jurisdiction of the court for the dissolution of the firm, is not subject to contract between
the partners permitted under Section 11. Therefore, a partner can always file a suit for the
dissolution of the firm if his case is covered under Section 44.
Even when there is a valid ground for filing the suit for dissolution and a partner accordingly
files the suit, the court is not bound to decree dissolution as this section clearly provides
that “At the suit of a partner, the Court may dissolve the firm.”
The grounds which justify the filing of suit by a partner for the dissolution of the firm as
mentioned in Section 44 are as under: -
a- Unsoundness of mind- When a partner becomes of unsound mind, a suit for the
dissolution of the firm can be filed. Such a suit may be filed either on behalf of the
partner who has become of unsound mind, or by any other partner.
b- Permanent incapacity to perform duties- When a partner becomes permanently
incapable ft performing his duties as a partner that is a good ground for applying to
the court for the dissolution of the firm. When the incapacity is not permanent, the
court would-not grant relief. In Whitwell v. Arthur, one partner filed a suit for the
dissolution of the firm when the other suffered from the paralytic attack and was
thereby incapacitated from performing his duties as a partner. It was found from
medical evidence that the incapacity was not likely to be permanent as the
defendant's health was improving. The court did not grant the dissolution of the
firm.
c- Conduct injurious to the partnership business-When a partner is guilty of conduct
which is likely to affect prejudicially the carrying on the business of the firm, the
court may dissolve the firm on that ground. Misconduct need not be with regard to
the partnership business, but the conduct should be such as should prejudicially
affect the
partnership business. Conviction for a breach of trust, or the adultery by one
partner, with another partner's wife" are grounds for the dissolution of the firm.
d- Persistent breach of partnership agreement- When a partner wilfully and
persistently commits breach of agreements relating to the management of the
affairs of the firm, or so conducts himself in matters relating to the firm's business
that it is not reasonably practicable for the other partners to carry on the business in
partnership with him, a suit for the dissolution of the firm may be filed.
e- Transfer of the whole of a partner's interest- When a partner has transferred the
whole of his interest in the firm to a third party, it can be a ground on which the
court may dissolve the firm. Similar would be the position when a partner has
allowed his share to be charged under the provisions of the Civil Procedure Code, or
has allowed it to be sold in the recovery of the arrears of land revenue or any dues
as arrears of land revenue It is necessary that the transfer must be of the whole of
the partner's interest rather than merely a part of it.
f- When the business can be carried on only at a loss- The object of every partnership
is to make profits. If it appears that the business of the firm cannot be carried on
except at a loss, any of the partners may apply to the court for the dissolution of the
firm.
g- When dissolution is just and equitable- The court has been given very wide power
of dissolution. Apart from ordering the dissolution of the firm on the grounds stated
above, the court has been vested with the power of dissolving the firms on any other
ground which renders it just and equitable that the firm should be dissolved. In
Abbot v. Crump, adultery by one partner with another partner's wife was held to be
a good
 ground for the dissolution of the firm by the court.

Court has jurisdiction where cause of action arises- It may be noted that a suit for
dissolution and accounts can be maintained in a Court within whose jurisdiction cause of
action has arisen in whole or in part, though that Court has no Jurisdiction over the assets of
the firm which are immovable properties.

Liability for acts done after dissolution [Section 45]- It has been noted above that when a
partner ceases to be a partner by retirement or expulsion, his liability for the acts of the firm
done after such retirement or expulsion, towards the third parties can still arise until a
public notice of the fact is given [section- 32(3) and 33(2)]. Section 45 incorporates a similar
provision in case of dissolution. It states that notwithstanding the dissolution of a firm, the
partners continue to be liable as such to third parties for any act done by any of them which
would have been an act of the firm if done before the dissolution, until public notice is given
of the dissolution.
Public Notice- According to Section 72, a public notice means a notice in the Official Gazette,
in at least one vernacular newspaper circulating in the district where the firm to which it
relates has its place or principal place of business, and if the firm is registered, to the
Registrar of Firms concerned. Such a notice may be given by any partner [sec 45(2)].
A/to Proviso of section 45(1), in the following cases, the liability of the partners does not
arise after the date of dissolution even though no public notice of dissolution of the firm has
been given
i. When a partner dies, his estate is not liable for the acts done after his death.
ii. The position of a partner who is adjudicated insolvent is similar to that of a deceased
partner. In his case also, no public notice is needed and his estate is not liable for the
acts done after the dissolution of the firm.
iii. No public notice is needed in case of a retired partner who was not known to be a
partner to the third party dealing with the firm. This provision is similar to the one
contained in proviso to Section 32(3).
It is thus well settled that where a partner has retired from the partnership firm and a public
notice of his retirement, as mandated under Section 72 of the Indian Partnership Act, 1932,
was not given, the retiring partner would be liable for acts of the reconstituted firm.
Continuing authority of partners for the purposes of winding up (Section 47)- By dissolution
of the firm, the partners cease to be partners with one another and, therefore, the mutual
agency which existed between them to act on behalf of each other to continue to carry on
the business of the firm also comes to an end. But after dissolution, the winding up of the
affairs of the firm has got to be done. For example, the contracts already entered into have
to be performed, amount due to the creditors has got to be paid, amount due from the
firm's debtors has got to be realised, joint property has got to be disposed of and converted
into cash. Moreover, capital contributed by the partners has to be refunded Sometimes for
realising the debts suit may have to be filed. A/to section 47, although mutual agency
between the partners comes to an end for the purpose of making fresh transactions or
continuing the business, but the authority of each partner to bind the firm, and other
mutual rights and obligations of the partners, continue notwithstanding the dissolution, so
far as may be necessary to wind up the affairs of the firm and to complete transactions
begun but unfinished at the time of the dissolution”. Thus, although a partner cannot place
fresh order for the goods, but he can take delivery of the goods ordered before dissolution
and pay for them.

When a partner dies during the pendency of a suit, there is no necessity of the legal
representatives of the deceased partner to be brought on record, because under Section 47,
on the death of a partner the remaining partners may represent the dissolved firm including
the interest of the deceased partner to recover any debt due to the firm.
Proviso to Sec. 47 states that the rule of the existence of mutual agency between the
partners for the purpose of winding up does not apply in the case of an insolvent partner,
and the firm is in no case bound by the acts of a partner who has been adjudicated
insolvent) However, any person who has after the adjudication represented himself or
knowingly permitted himself to be represented as a partner with the insolvent, can be made
liable as a partner, under the doctrine of holding out.
Right to have business wound up [Section 46]- By dissolution, the relation of partnership
between various partners comes to an end. Thereafter, there has to be winding up of the
affairs of the firm. That includes realisation of the assets of the firm and also paying off all
the liabilities, and then to distribute the surplus, if any, amongst the partners. On the
dissolution of a firm, every partner or his representative has a right to see that the affairs of
the firm are properly wound up. He has a right to have a property of the firm applied in
payment of the debts and liabilities of the firm, If, on the dissolution of the firm, the debts
and liabilities of the firm remain unsatisfied, each partner continues to be exposed to the
risk of being made jointly and severally liable for the same towards third parties. A/to
section 46, to avoid any such situation every partner or his representative has been made
entitled, as against all the other partners or their representatives, to have the property of
the firm applied in payment of the debts and liabilities of the firm, and then there is
distribution of the surplus amongst the partners or their representatives according to their
rights. The right contained in this section is also known as the partner's general lien over the
surplus assets of the firm.
Mode of settlement of accounts [Section 48]- Section 48 mentions the mode of the
settlement of accounts between the partners on the dissolution of the firm. The rules as
stated in this section are applicable when the partners have not made an agreement on
these points. The rules which emerge from this section are as under: -

1. Losses are to be shared equally- In Nowell v. Nowell, A and B had contributed unequal
amount of £ 1929 and £ 29 respectively towards the capital. They had agreed to share
the profits and losses equally. A deficiency of £ 500 in capital having arisen, it was held
that the same was to be shared equally between A and B.
2. On the dissolution of the firm, if the amount available is sufficient to meet all the claims
of the partners and the third parties, there is no problem. If, on the other hand, the
amount available is insufficient, the payments are to be made in a certain order. Section
48(2) provides that the amount available is to be utilised for making payments in the
following order;
i. Making payments for the debts of the firm to the third parties;
ii. If some partners have given advance over and above the capital, then the
amount is to be utilised in making payment to each one of them rateably;
iii. Making payment to each partner rateably what is due to him on account of
capital;
iv. The residue, if any, is deemed to be profit and the same is to be divided among
the partners in the proportions in which they were entitled to share profits.
For the purpose of ascertaining the share of a retiring or an outgoing partner, the relevant
date is the date on which he ceased to be a partner.
It has, however, been held that parties pursuant to an agreement, may not adhere to the
modes prescribed in Section 48 of the Partnership Act, 1932.

Personal profits earned after dissolution [Section 50]- We have already noted Section
16(a), according to which no partner can make a personal gain out of any transaction of the
firm or the use of the name, property or business connection of the firm. If he makes any
such gain, he shall account for that to the firm. A similar duty is contained in Section 50 on
the dissolution of a firm by the death of a partner. Therefore, a partner making personal
profits after dissolution and before winding up has to account for those profits. The reason
is that until there is winding up, all the partners continue to be the owners of the firm and
also the joint property and, therefore, n0 partner can gain any personal advantage by the
use thereof for his personal gain.
Section 53 of the Act empowers the partners or their representatives to restrain any other
partner or his representative from carrying on the similar business in the firm name or from
using any of the property of the firm for his own benefit, until the affairs of the firm have
been completely wound up.
Return of premium on pre-mature dissolution [Section 51]- When a person is admitted as a
partner to an already established business, he has generally to pay some consideration
known as premium to secure the right of becoming and remaining a partner in the firm.
If a person pays premium to become a partner for a certain specified period, but the
partnership ends before the expiry of that term, he is entitled to refund of premium. How
much premium is to be refunded will depend on the term on which he became a partner
and the length of time during which he was a partner.
It may be noted that the return of the premium or part thereof is allowed when a person
became a partner for a fixed term, and there is dissolution of partnership before the expiry
of that term. Therefore, there is no question of return of premium it the partnership was at
will.
In the following exceptional cases, even though the partnership is for a fixed term, there will
be no refund of premium on its premature dissolution: -
i. When the dissolution of partnership occurs by the death of a partner, there is to be
no refund of premium unless there is an express stipulation in a contract between
the partners. But if a person knowing himself to be in a dangerous state of health
and suffering from a fatal disease conceals this fact and receives the premium, it is a
case of fraud and the premium will have to be refunded.
ii. When the dissolution of the firm is mainly due to the misconduct of the partner who
paid the premium, he is not entitled to any refund.
iii. When the dissolution is by an agreement but the agreement does not contain any
provision for the return of premium or any part thereof, nothing is to be returned.

Right to restrain from use of firm name or firm property [Section 53]- Not only during the
continuance of the firm but even after dissolution, a partner cannot use the firm's property
or firm's name for personal benefit, until the affairs of the firm have been completely
wound up. Section 53 empowers a partner or his representative, to restrain any other
partner or his representatıve from carrying on a similar business in the firm's name or from
using any of the property of the firm for his own benefit, until the affairs of the firm have
been completely wound up. This rule is subject to a contract between the partners to the
contrary. However, where a partner or his representative has bought the goodwill of the
firm, he can use the firm name.
In Rajendra Kumar Sharma v. B. K. Sharma, it has been held that in the absence of a
contract between the partners, after the dissolution of the firm and before its winding up,
no partner can use the property of the firm for his own benefit without the consent of the
other partners.
Agreement in restraint of trade on dissolution [Section 54]- On the dissolution of the firm,
one of the partners sometimes may purchase the business, or sometimes the business may
be sold to a third party. The partners may, upon on anticipation of the dissolution of the
firm, make an agreement that some or all of them will not carry on a business similar to that
of the firm within specified period or within specified local limits Notwithstanding the rule
contained in Sec. 27 of the Indian Contract Act, 1872 that an agreement in restraint of trade
is void, such an agreement has been declared to be valid by Section 54, if the restrictions
imposed are reasonable.
Sale of Goodwill after dissolution [Section 55]- Goodwill being an asset of the firm, on the
dissolution of a partnership firm, the same may be sold either separately or along-with
other property of the firm.
Goodwill- “Goodwill" is described "a thing very easy to describe, very difficult to define." It
is generally considered to be an asset of the partnership.

REGISTRATION OF FIRMS
Chapter VII ((Sections 56 to 71) deals with the registration of partnership firms. The Act
does not make the registration of partnership firms compulsory in lndia nor does the Act
impose any penalties for non-registration. However, certain disabilities are provided in
Section 69 of the Act for unregistered firms and their partners.
Procedure for Registration- Sections 58 and 59 deal with the procedure for the registration
of a firm.
Effects of Non-Registration [Section 69]- Section 69 contains the provision describing the
effects of registration of a partnership firm
69. Effect of non-registration-(1) No suit to enforce a right arising from a contract
or conferred by this Act shall be instituted in any Court by or on behalf of any
person swing as a partner in a firm against the firm or any person alleged to be or
to have been a partner in the firm unless the firm is registered and the person
suing is or has been shown in the Register of Firms as a partner in the firm.
(2) No suit to enforce a right arising from a contract shall be instituted in any court
by or on behalf of a firm against any third party unless the firm is registered and
the persons suing are to have been shown in the Register of Firms as partners in
the firm.
(3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or
other proceedings to enforce a right arising from a contract, but shall not affect-
(a) the enforcement of any right to sue for the dissolution of a firm or for accounts
of a dissolved firm or any right or power to realise the property of a dissolved firm,
or
(b) the powers of an official assignee, receiver or Court under the Presidency
Towns Insolvency Act, 1919, or the Provincial Insolvency Act, 1920 to realise the
property of an insolvent partner.
 (4) This section shall not apply-
(a) to firms or to partners in firms which have no place of business in the territories
to which this Act extends, or whose place of business in the said territories are
situated in areas to which, by under Section 56, this Chapter does not notification
apply, or
(b) to any suit or claim of set-off not exceeding one hundred rupees.

It may be noted that the Partnership Act neither makes the registration of a firm
compulsory nor does it impose any penalties for non-registration. However, it
provides certain disabilities for an unregistered firm and the partners of such a firm
or the partners whose names have not been shown as registered partners even
though the firm is registered.
Sec. 69(1) provides that no suit can be instituted to enforce rights arising from a
contract or conferred by the Partnership Act by any partner against his co-partners
or against the firm. Similarly, according to Section 69(2), no suit can be instituted to
enforce any right arising from a contract by an unregistered firm against any third
party. Sub-section (3) also provides that the disability mentioned in sub-sections (1)
and (2) shall also apply to a claim of set off or other proceedings to enforce a right
arising from a contract.
The idea behind making these provisions is that in their own interest, the partners
may get the firm registered and thereby the interest of the third parties with whom
the firm may be dealing may be protected. Certain exceptions, where the disabilities
do not apply, have been stated in Section 69, sub-sections (3) & (4).
Applicability- A partner of an erstwhile unregistered partnership firm cannot bring a suit to
enforce a right arising out of a contract falling within the ambit of Section 69 of the
Partnership Act. What is prohibited under Section 69 of the Act is enforcement of contract
of partnership, provisions of the Partnership Act, 1932 and enforcement of right arising
from a contract (between the firm and third party) and not the rights conferred under the
other enactments.
Applicability of bar of Section 69(2)- Section 69(2) of the Partnership Act, 1932 seeks to
achieve and the interest sought to be protected, the bar must apply to a suit for contract
entered into by the enforcement of right arising from an unregistered firm with a third party
in the course of business dealings with such third party.
Bar of Section 69 is basically in respect of suits which are filed by partnership firm for
the purpose of enforcing contracts against the defendants. It is not any enforcement
of any contract as between the plaintiff and the defendant.
Partnership (Section 69). Registration is optional but for the purposes of the suit,
registration is mandatory. Subsequent registration has no effect on the pending suit. A
partner of an unregistered firm cannot sue the firm or his present or past co-partners for
the enforcement of any right. Action of an unregistered firm is liable to be dismissed and
cannot be rectified by subsequent registration.
a- Suits between partners and the firm- According to Section 69(1), no suit to enforce a
right arising from a contract or conferred by the Partnership Act can be instituted in any
Court unless the following two requirements are satisfied:
(i) the partnership firm is registered; and
(ii) the partners filing the suit have been shown in the Register of
Firms as the partners of the firm.
Thus, there should be registration of a firm, and the persons suing are or have been shown
in the Register of Firms as partners in the firm.
This provision bars a suit between partners or between partners and the firm if the firm is
unregistered. Even if the firm is registered, only such partners can sue whose names appear
in the Register of Firms.
In Mahendra Singh Chaudhary v. Tej Ram Singh, one of the partners of the firm, i.e.,
'A' brought an action for injunction. The said firm was unregistered. It was held that
the suit brought by A was on behalf of the firm, and the firm being unregistered, the
suit was not maintainable under Section 69.
If the name of a partner on the date of the suit is not shown in the Register of the Firms, the
suit was filed is not maintainable. Also, when the name of the person signing the plaint and
claiming as partner in the firm, is not shown in the Register of firms, the firm though
registered, the suit by the firm was held not maintainable.
In Sapna Ganglani v M/s. R.S. Enterprise, in a suit seeking enforcement of contract by the
partnership firm, the plaint filed by authorised signatory of firm who was not a partner but
the authorisation was given to him by the partners of the said firm, was held to have valid
authority even if signed by only one of the partners of the firm.
Suit only by an authorised person- In Popular Automobiles v. G.K. Channi, the suit was
filed on behalf of the firm. The plaint was signed by the manager of the firm. No power of
attorney was given to him by the firm to verify and sign plaint on behalf of the firm, nor his
name appeared in the Register of Firms as a partner. It was held that the suit was bad for
non-compliance of mandatory provision contained in Sec. 69(2) requiring the filing of the
suit by a partner or an authorised person. Such suit is liable to be dismissed. Such defect
cannot be cured by subsequent incorporation of verification and signatures by a partner.
It may be submitted that the abovesaid decisions of the A.P. and Madras High Court,
which consider the plaint which was invalid to be validated after registration do not
seem to be convincing. The plaintiff will have to file a fresh suit for the same cause of
action.
b- Suits between the firm and the third parties- According to Section 69(2), if the firm is
unregistered, no suit to enforce a right arising from a contract can be instituted by the
firm or its partners against a third party. Sub-section (2) also requires two conditions to
be fulfilled before a suit can be instituted against a third party:
i) the firm must be a registered firm; and
ii) the persons suing must be shown in the Register of Firms as partners of the firm.
To enforce the rights against third parties, it is not enough that the firm is registered, it is
further necessary that "the person suing is or has been shown in the Register of Firms as a
partner in the firm [sec 69 (1&2)].
In Muthu Kumaraswami v. Kumar Textiles, it has been held that the provision
contained in Sec. 69(2) is mandatory, and registration of the firm is a condition
precedent to its right to institute a suit. Even if the defendant does not raise an
objection, the provision contained in Section 69 cannot be flouted.
In Gandhi & Co. Vs. Krishna Glass Pvt. Ltd., it was held that if the name of one of the
partners had not been shown in the Register of Firms, the suit filed by the
partnership firm must fail.
If a suit is filed by the partners of a firm which is not registered on the date of the institution
of the suit, the same would be hit by the provisions of Section 69(2) of the Partnership Act,
and shall be dismissed.
Sub-section (2) of Section 69 has been held to be a penal provision, which deprives the
plaintiff of its right to get its case examined on merits by a court.

Registration of Partnership Deed- Section 69(2) of the Partnership Act, 1932 says of the
following requirements for maintaining a suit against any third party. These are: - that the
firm filing the suit must be a registered firm, and that the suing in the name or on behalf of
the firm are shown as partners in the Register of Firms.
Section 69(2), thus, does not require that the partnership deed must also be registered to
enable the firm to file a suit against a third party.
In J.K. Finance & Chit Funds v. R. Surya Kumar, a suit filed by the plaintiff, a
registered firm, represented by one of its partners for the recovery of money on the
basis of a promissory note from the respondents, was dismissed by the trial Court on
the ground that the plaintiff could not produce a registered copy of the partnership
deed. Setting aside the judgment of the trial Court, the Andhra Pradesh High Court
ruled that Section 69(2) did not require the registration of the partnership deed of a
registered firm.
Action based on Tort- If the action against a third party is not based on contract but on tort,
fraud or any other wrongful act, the same is not hit by Section 69(2) and the action for the
same is maintainable. Thus, when the action relates to wrongful detention of property, the
action being founded on tort rather than contract, the same is maintainable. Similarly, a suit
for the recovery of the price of goods obtained by fraud is also maintainable as the action in
such a case does not arise out of contract.

Prosecution in terms of other statutes: - What Section 69 of the Partnership Act, 1932
prohibits is institution of a suit by an unregistered firm in its own name for enforcement of
the rights arising from a contract. However, nothing contained in Section 69 bars
prosecution by an unregistered firm in terms of Section 138 of the Negotiable Instruments
Act, 1881.
In Intrajit Gogoi v. Auto Sales and Service Station, the appellant issued a cheque
addressed to the respondent firm which was dishonoured. The firm gave a notice of
demand for payment and the drawer failed to make payment. The firm-initiated
prosecution of the drawer in terms of Section 138 of the Negotiable Instruments Act,
1881. The Guwahati High Court held that Section 69 of the Partnership Act, 1932 did
not bar the institution of criminal prosecution against the drawer of the cheque as
accused for dishonour of the said cheque.
Action based on Statutory provision- It may be noted that the disability is there in respect
of a right arising out of a contract If the right is not based on contract but arises from a
statutory provision, the bar under Section 69(2) is not applicable to the same. The right to
file a suit for eviction of a tenant under Transfer of Property Act is a statutory right and,
therefore, an eviction suit can be filed by an unregistered firm.

Arbitration proceedings not barred under Section 69- Section 69 puts a bar on the
enforcement of contract by an unregistered firm. It has been held by the Supreme Court in
Kamal Pushpa Enterprises v. D.R. Construction Company, that bar under Section 69 has no
application to proceedings before the arbitrator Proceedings for enforcement of the
arbitration award is not a right under contract. Such proceedings are not barred under
Section 69, more so, when the unregistered firm is the defendant.
Suit against infringement of trade mark not barred under Section 69(2)- In Haldiram
Bhujiawala v. Anand Kumar Deepak Kumar,' that a suit for perpetual injunction to restrain
the defendant from infringing plaintiff's trade mark and passing defendant's goods as those
of the plaintiff, and a claim of damages in that regard, is not barred by Section 69(2). Such
right does not arise out of contract. In such a case there is enforcement of a statutory right
arising under the Trade Mark Act. The right does not arise out of contract.
No disability against third parties- As is obvious from sub-sec. (2), the disability is against an
unregistered firm or its partners but it is not against the third party. Therefore, a third party
is not barred from bringing an action against an unregistered firm.
Section 69 does not debar defending of any proceedings by an unregistered firm.
In Kantilal Jethalal Gandhi v. Ghanshyam Ratilal Vyas, it has been held that as Section 69,
clauses (1) & (2) do not bar an action by a third party against the firm, the bar under Section
69(1) & (2) does not operate against suit for recovery of debt due and payable to an
unregistered dissolved firm.
In Raptakos Brett & Co. Ltd. v. Ganesh Property, it has been held that if an action is not
based on contract but on a statutory right, the same is not hit by Section 69(2) of the
Partnership Act.
Claim of set-off or other proceedings- According to sub-section (3), the disabilities
mentioned above also apply to a claim of set-off or other proceedings to enforce a right
arising from a contract. For example, if a third party brings an action against the firm to
recover some money, the firm cannot say that the third party also owes some money to the
firm and, therefore, the claim of third party should be adjusted against the claim of the firm,
which means the unregistered firm cannot claim a set-off.
Disabilities also apply to other proceedings- The disabilities mentioned in sub-sections (1)
and (2) also apply to 'other proceedings' to enforce a right arising from a contract. In Messrs
Gappulal Gordhandas v. Messrs Chunilal Shyam Lal, it has been held that if an unregistered
firm brings an action for the reduction of rent against its landlord, such a suit to enforce a
right arising out of a contract of tenancy is not maintainable because the suit falls under the
disability mentioned in sub-section (3).
Other proceedings include arbitration proceedings- In Jagdish Chand Gupta v. Kajaria
Traders (India) Ltd., the question arose whether the term 'other proceedings' covers
arbitration proceedings also. The Supreme Court answered the question in the affirmative.
In that case an agreement between two partners was that in case of any dispute between
them, the matter will be referred to arbitration. In accordance with the agreement, one of
the partners appointed an arbitrator to which the other did not agree. An action was
brought to enforce the agreement and the appointment of the arbitrator. The disagreeing
partner contended that such a right of the other partner was not enforceable as the firm
was unregistered. The Supreme Court held that the suit was not maintainable.

Suit for Damages- Section 69 of the Partnership Act, 1932 bars suits to enforce rights arising
from contracts. It has no application to suits for damages for misconduct committed by any
partner of the firm. In Chandrayya Mutwayyatrabatti v. Sidram Gaupat Ingale, a
partnership deed was executed between seven partners including the plaintiff and the
defendant on 22-4-1984. On 10-11-1986 the plaintiff came to know that the defendant had
broken the lock of the shop of the firm and put his own lock. The plaintiff thereon lodged a
police complaint and also filed a special civil suit for recovery of amount as valuation of
articles/goods the defendant had taken away.
The Bombay High Court held that the suit was not barred by Section 69 of the Partnership
Act, 1932 on the ground that the firm was for misconduct committed by one of the breaking
the lock of the shop and taking away certain articles lying therein. The suit of this nature,
the Court said, was not barred by Section 69.
It is well settled that the bar enacted by Section 69 of the Partnership Act, 1932 does not
affect the maintainability of an application under Section 9 of the Arbitration and
Conciliation Act, 1996. The Apex Court in Firm Ashok Traders v. Gurumukh Das Saluja," said
that the right conferred by Section 9 of A and C Act, 1996 could not be said to be one arising
out of a contract.
Bar under Section 69 of the Partnership Act, 1932 is basically in respect of suits which are
filed by the firm for the purpose of enforcing contracts.
Unregistered firm can make reference to arbitration without intervention of Court- The
word 'proceeding' in Section 69(3) does not cover a reference to arbitration aliunde the
Court. This would be clear from the provisions of Section 69 itself that proceedings
contemplated by it are proceedings in Court. Proceedings covered by sub-sections (1) and
(2) are proceedings in the Court. Therefore, it is implicit that proceedings contemplated by
sub-section (3) are also proceedings filed in Court and the reference to arbitration without
intervention of the Court is not prohibited by the section.
Clause (3) of Section 69 of the Indian Partnership Act, 1932 provides that the provisions of
sub-sections (1) and (2) of Section 69, which bar the institution of suits by an unregistered
firm, shall not affect-
(a) the enforcement of any right to sue
- for the dissolution of a firm; or
- for accounts of a dissolved firm; or
- for any right or power to realise the property of a dissolved firm; or
(b) the powers of an official assignee receivers or Court under the
Presidency-towns Insolvency Act, 1909 or the Provincial Insolvency Act,
1920
- to realise the property of an insolvent partner.

Sub-section (3), however, introduces certain exceptions to the disability imposed by sub-
sections (1) and (2). These exceptions clearly enable the enforcement of right to sue for the
dissolution of a firm or for accounts of a dissolved firm or any right or power of firm to
realise the property of a dissolved firm. Thus, a suit for accounts of a dissolved firm or for
realizing the assets of a dissolved firm is not barred under the provisions of sub-sections (1)
and (2) of Section 69 of the Partnership Act by reasons of the exceptions contained in sub-
section (3) of Section 69 of the Partnership Act. If the right to claim the relief is restricted to
the accounts of a dissolved firm or any other right or power to realize the property of the
dissolved firm then non-registration of the firm is no bar to a petition for reference of
disputes to arbitration.
In case a cheque issued in favour of a partner of an unregistered firm, in his name, is
dishonoured, a suit filed by him, not on behalf of the firm, but through his power of attorney
holder, has been held maintainable and not barred by Section 69(2) of the Partnership Act,
1932.

Burden of Proof-Whether Firm Registered- Section 69 of the Act, 1932 refuses to recognise
the right of a partnership firm to sue third parties unless it is a registered firm. Those who
are desirous to avail the facility provided under the law, to sue in the name of or on behalf
of a partnership firm, must establish the basic facts that the suit is maintainable.
The Andhra Pradesh High Court in A.P. Co-op Wool Spg. Mills Ltd. v. G.M. & Co. Wool
Merchants, ruled; “It is only the plaintiff who can plead and prove that the firm is a
registered firm, if at all it is, and therefore the burden to plead and prove that the plaintiff is
a registered firm and therefore is entitled to maintain the suit against a third party, is always
on the firm in view of the legislative mandate under Section 69(2) of the Partnership Act-
otherwise the cause of action for such a suit is not complete."
Exceptions- The disabilities discussed above are not applicable to the unregistered firm in
the following exceptional cases: -
I. Suit for dissolution, etc. [Sec. 69(3)(a)]- Sec. 44 mentions certain circumstances
under which on the suit of a partner the court may dissolve a firm. Sec. 69(3)(a)
permits a suit even by the partners of an unregistered firm to sue for the dissolution
of a firm or for the accounts of a dissolved firm. In case the firm has already been
dissolved, the partners of the unregistered firm can realise the property of the
dissolved firm. The right includes enforcing a claim arising from contract prior to
dissolution. The disability for non-registration works only during the subsistence of
the partnership. After the firm is dissolved, it is not the disability mentioned in sub-
sections (1) and (2) of Sec. 69 which governs the position, but it is the provisions of
Sec. 69(3)(a) which operate giving the partners power to "realise the property of the
dissolved firm'.
In Biharilal Shyamsunder v. Union of India, the plaintiffs claimed damages for non-delivery
of a bale of cloth despatched from Ahmedabad to Muzaffarpur through railway. The said
action was brought after the dissolution of the firm which was unregistered. It was held by
the Patna High Court that the partners of the dissolved firm are entitled to bring the suit for
compensation from the railway for non-delivery of the consignment of cloth.
If a firm is unregistered, a suit by a partner for the rendition of accounts without a prayer for
the dissolution of the firm is not maintainable.
Likewise, a suit for realisation of outstanding or property of an unregistered firm got
dissolved, as a result of death of a partner, was held not barred by Section 69 of the
Partnership Act, 1932.

II -Suit on behalf of an insolvent partner [Sec. 69(3)(b)]- Sec. 69(3)(b) mentions another
exception when an action would be brought on behalf of an insolvent partner against an
unregistered firm. It provides that an official assignee, receiver, of Court have a power to
bring an action to realise the property of the insolvent partner.
Dismissal of suit under Section 69(1) is no bar to a subsequent suit under Section 69(3)(a)-
A Ramesh Kumar Bhalotta v. Lalit Kumar Bhalotta, a partner of an unregistered firm filed a
suit against the firm claiming declaration of share, proper administration of firm and
rendition of the accounts of the firm. The suit was dismissed as barred under Section 69(1).
The same partner subsequently filed another suit praying for the dissolution of the firm, and
the accounts of the dissolved firm. It was held that the subsequent suit was maintainable as
it was permissible under Section 69(3)(a) and dismissal of the earlier suit was no bar to the
present suit. Moreover, the suit was not barred under Order 2, Rule 2 of the C.P.C., as the
cause of action under the two suits was different,
Effect of subsequent registration- The question as to whether the subsequent registration
of the firm would cure the initial defect in the filing of the suit arose for consideration in
D.D.A. v. Kochhar Construction Work. The Court held that in view of the clear provision of
the Act, it was not possible to subscribe to the view that subsequent registration of the firm
may cure the initial defect, because the proceedings were ab initio defective as they could
not have been instituted since the firm in whose name the proceedings were instituted was
not a registered firm on the date of the institution of the proceedings.
Suit filed in individual capacity- In Kishore Kumar v. Navin Chandra, it has been held that if
a suit has been filed in the individual capacity by a person who had been a partner of the
dissolved firm against another person who had also been a partner of the dissolved firm, the
bar under Section 69(2A) would not be attracted.

III- Suit where provisions relating to Registration of Firms do not apply [Sec. 69(4)(a)]-
Sec, 69(4)(a) exempts such firms from the operation of the provisions of this section
whose place of business is not in India or whose place of business is in such areas,
where because of notification under Sec. 56, this Chapter does not apply.

IV- When value of the suit does not exceed Rs. 100 [Sec. 69(4)(b)]- Sec. 69(4)(b) provides
an exception for firms having small claims. If the value of the suit does not exceed
Rs. 100/-, an unregistered firm or its partner can bring an action against the third
party.
Registration subsequent to the filing of the suit- If the firm is not registered on the date of
the filing of the suit, the suit is liable to be dismissed. In view of the mandatory provisions of
Sec. 69 making registration a condition precedent to the institution of the suit, registration
of the firm subsequent to institution of the suit cannot cure the defect. When a suit has
been dismissed on grounds of non-registration, a fresh suit after the registration of the firm
is maintainable. The same is not barred as res judicata as the dismissal of a suit because of
non- registration is not a decision of the case on its merits.
In Atmuri Mahalakshmi v. Jagadesh Traders,' the Andhra Pradesh High Court has
held that if the firm is not registered when the suit is filed, but it gets registered
during the pendency of the suit, the plaint already filed can be treated as valid from
the date of registration of the firm. The Court followed a decision of the Madras High
Court where it had been held that when the registration has been carried out, the
requirements of the Legislature are fulfilled and there is no reason in equity why
from the moment of registration, a suit previously filed should not be allowed to go
on.
It may be submitted that the abovesaid decisions of the A.P. and Madras High Courts, which
consider the plaint which was invalid to be validated after registration do not seem to be
convincing. The plaintiff will have to file a fresh suit for the same cause of action.
 THE SALE OF GOODS ACT, 1930

The present Act came into force on 1st July, 1930. Until that date the law relating to sale of
goods was contained in Chapter VII (Sections 76 to 123) of the Indian Contract Act, 1872.
(Section 65 of the Act repealed Chapter VII of the Contract Act 1872.
The Law Commission of India, with Shri M.C. Setalvad as its Chairman, submitted its report
(8th report) on the Sale of Goods Act on March 1, 1958 suggesting some minor changes to
give effect to the judicial decisions since 1930. To give effect to the suggested changes, the
Indian Sale of Goods Amendment) Act, 1963 No. 38 of 1963) was passed on 22nd
September, 1963. One of the amendments made is the deletion of the word Indian from the
title of the enactment, The Indian Sale of Goods Act, 1930. Now the title of the enactment is
The Sale of Goods Act, 1930.
The Indian Act is based mainly on the (English) Sale of Goods Act, 1893). An agreement to
sell becomes sale on fulfilment of the conditions or when the time provided in the
agreement elapses Essential features that distinguishes the contract of sale from an
agreement to sell is that in a contract of sale the property in the goods is transferred from
the seller to the buyer immediately. Whereas in an agreement to sell property it is
transferred on a future date/dates. In a "contract of sale", the main object is the transfer of
property and delivery of possession of the property, whereas the main object in contract for
work is not the transfer of property but it is one for work and labour.

Definition of Contract of Sale- Section 4(1) defines a contract of sale as under: - A contract
of sale of goods is a contract whereby the seller transfers or agrees to transfer the
property in the goods to the buyer for a price.
The essentials to constitute such a contract are: -
 - It is a contract between the two parties, one known as the seller and the
other the buyer.
- The subject-matter of a contract is "goods
- The seller should transfer or agree to transfer the property (ownership) in the
goods to the buyer.
- The transfer of property (ownership) in the goods from the seller to the
buyer is for consideration known as “price"
To prove valid sale under the Sale of Goods Act, there must be cogent and convincing
evidence of: i- agreement between the competent parties, (ii) The price of the goods, and
(iii) passing of property in the goods. Unless all these ingredients of sale are duly proved,
mere entry or endorsement made by the registering authority under Section 31 of the
Motor vehicles Act showing transfer of ownership of the vehicle does not amount to
sufficient proof of sale of that vehicle. Thus, to constitute a transaction of sale of goods, the
essential ingredients of sale under the Sale of Goods Act have to be proved.
1- Contract between the seller and the buyer- It is a contract between a seller and a
buyer. The seller means a person Who seis or agrees to sell and the buyer means a
person who buys or agrees to buy the goods [section 2(1) of SOGA].
The seller and the buyer should be two different persons. However, there may be a contract
of sale between one part-owner and another." A partner and the firm may also sell goods to
each other-in the same way, when a person goods are being sold in execution of a decree,
he himself may purchase them. In case of sale by auction, the Act permits a seller of goods
to reserve a right of himself making a bid at the auction and purchasing his ow goods.
Contract under Statutory Compulsion- Sometimes a contract may not be entered into by
the normal process of negotiation, but under a statutory compulsion. When the goods are
supplied under a statutory compulsion whether that results in sale or not, is the question
which has arisen in a number of cases.
In New India Sugar Mills v. Commissioner of Sales Tax, Bihar J.C. Shah and J.L.
Kapur, JJ. in their majority decision held that supply of sugar by a sugar factory in
compliance with the orders of the Sugar Controller of India under Sugar and Sugar
Products Control Order, 1946 did not result in a contract of sale of goods, and hence
that transaction could not be subject to Sales Tax. Hidayatullah, J. in his dissenting
opinion, however, observed that in such a case, there was implied contract of sale
between the parties. In his view, "a compelled sale is nevertheless a sale"
In a later decision in Vishnu Agencies v. Commercial Tax Officer, the Supreme Court
overruled its earlier decision in the New India Sugar Mills case, expressed its
agreement with the dissenting judgment of Hidayatullah, J. in that case, and held
that the transaction of supply of cement by a distributor to a permit holder in terms
of the provisions of West Bengal Cement Control Act and the West Bengal Cement
Control Order amounts to sale, and the same is eligible to Sales Tax.
 In Andhra Sugars Ltd. v. State of A.P., it has been held by the Supreme Court that in
case of sale under the compulsion of a statute, the consent is not deemed to be
caused by the coercion, undue influence, fraud, misrepresentation or mistake. In
that case, if any canegrower offered to sell his sugarcane to n factory in a certain
zone, the factory was bound accept the offer under the Andhra Pradesh Sugarcane
regulation of Supply and Purchase) Act, 1961. It was held that in Buch a Case, even
though there was legal compulsion for the factory to mako the agreement, the
validity of the agreement was not affected on ground of absence of free consent,
and such an agreement boing a contract of sale within the meaning of Section 4 of
the Sale of Goods Act, the State could validly pose purchase tax on the purchase of
sugarcane.
Similarly, in a decision of the Supreme Court in Coffee Board, Karnataka v
Commissioner of Commercial Taxes,' it has been held that the compulsory delivery
of coffee by the coffee growers to the Coffee Board constitutes a sale, and not
compulsory acquisition, and the State can impose Purchase tax on the same.

Formalities- The Sale of Goods Act does not prescribe the observance of any formalities for
creating a contract of sale. It rather expressly provides that such a contract may be made
either orally or n writing or partly orally and partly in writing or may be even implied.
The above stated position is subject to the provisions of any law for the time being in force".
For example, when shares are sold from one person to another, the provisions of the
Companies Act have got to be observed. The process of transfer of shares is not deemed to
be complete until the transfer has been registered with the Company".
Performance- The parties are free to provide as to when the performance of the contract by
each side will be made. They may provide that the delivery of the goods will be made either
immediately or by instalments or on some future date. Similarly, regarding the payment of
price, too, the contract may require either immediate payment, or payment by instalments
or the payment on some future date [section 5(1)].

2- Goods- The subject-matter of a contract of sale of goods: Sec. 2(7) of the Act defines the
same as under:
Goods means every kind of movable property other than actionable claims and money;
and includes stock and share, growing crops, grass, and things attached to or forming part
of the land which are agreed to be severed before sale or under the contract of sale.
The Act deals with the sale of goods, i.e., movable property. The sale of immovable property
is dealt with in the Transfer of Property Act, 1882.
Stock and Shares and growing crops, etc. are goods- Certain things have been specifically
included in the term "goods by the Act. It includes i- Stock and shares, growing crops, grass,
and ii- things attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale.
It may be noted that according to Section 3 of the Transfer of Property Act, 1882,
"immovable property" does not include standing timber, growing crops or grass. These
things, therefore, are movable property and thus goods. Standing timber has to be
distinguished from trees, the former being movable and the latter being immovable
property.
It may be relevant here to note the definition of the term "immovable property as contained
in Section 3(26) of the General Clauses Act, 1897. According to that provision, immovable"
property shall include land, benefits to arise out of land, and things attached to the earth, or
permanently, fastened to anything attached to the earth. Section 3 of the Transfer of
Property Act defines "attached to the earth", which means
i. a rooted in the earth, as in the case of trees and shrubs;
ii. embedded in the earth, as in case of walls or buildings; or
iii. attached to what is so imbedded for the permanent beneficial enjoyment of that to
which it is attached
Thus, chattels or goods, which have been attached permanently for the beneficial
enjoyment of land constitute immovable property. It has been held that the boiler engine
and decorator which are fixed and embedded in the factory building as a factory are
immovable property
If an oil engine is attached to the earth and the attachment lasts only so long as the engine
is used, and it can be detached and shifted to some other place when it is not used, such an
engine is not immovable property.
It may be noted that the things attached to or forming part of the land, though immovable
property, fall within the definition of goods, if they are agreed to be severed before sale or
under the contract of sale. Thus, trees, or doors and windows could be severed from the
land, and sold as goods. Similarly, a building could be demolished and the debris sold as
goods.
Water, Electricity and Gas- In the Commissioner of Sales Tax, Madhya Pradesh v. Madhya
Pradesh Electricity Board," the Supreme Court has held that although electric energy is not
tangible or cannot be touched like a piece of wood or book, it is “goods" as it can be
transmitted, transferred, delivered, stored, possessed in the same way as any other
movable property
The Calcutta High Court in Associated Power Co. Ltd. Ram Taran Roy, has held that
electric energy is included in the term "goods". The High Court disagreed with
Pollock and Mulla, who considered the inclusion of the term electrical energy in the
term goods as doubtful.
Electronic T.V. Signals are goods- It has been held in Jabalpur Cable Network Pvt. Ltd, v.
E.S.P.N. Software India Pvt. Ltd., electronic T.V, signals are in the form of energy just like
electricity and are "goods" which can be the subject-matter of sale. Supplying TV signals is
sale of goods as defined in Section 2(7) of the Sale of Goods Act. Such signals constitute
movable property
Railway Receipts- Railway receipt issued to the consignor of goods is held to be a document
of title to goods within the meaning of Section 24 of Sale of Goods Act, 1930.
Lottery Tickets- In H. Anraj_v. Govt. of Tamil Nadu, it has been held by the Supreme Court
that lottery tickets are goods.
Incomplete Film- In State of T.N. v. Thiru Murugan Bros, sale of an incomplete film has
been held to be gods and the transaction is liable to sales tax.
Actionable Claims and Money are not Goods- The definition of the term "Goods" as
contained in Section 2(7) specifically provides that actionable claims and money are not
goods and therefore, their transfer is not governed by the provisions of the Sale of Goods
Act.
Fixed Deposit Receipt is goods- In State Bank of India v. Smt. Neela Ashok Naik, it has been
held that fixed deposit receipt is "goods". It may be pledged as collateral security. If the
bank loan is not repaid, the bank may retain it as a collateral security and file suit for
recovery of loan.
The fixed deposit receipts (FDR) are goods within the meaning of Section 176 of the
Indian Contract Act, 1872 read with Section 21 of the Sale of Contract Act.
Actionable Claims- The transfer of actionable claims has been dealt with by Chapter VIII
(Sections 130 to 137) of the Transfer of Property Act 1882, and, therefore, the transfer of
the same has been specifically excluded by the Sale of Goods Act. Section 3 of the Transfer
of Property Act defines actionable claim as under
"Actionable claim" means a claim to any debt, other than a debt secured by
mortgage of immovable property or by hypothecation or pledge of movable
property, or to any beneficial interest in movable property not in the possession,
either actual or constructive, of the claimant, which the civil Courts recognise as
affording grounds for relief, whether such debt or beneficial interest be existent,
accruing, conditional or contingent.”
An actionable claim, therefore, means: either
i- any unsecured debt, or
ii- any beneficial interest in movable property, not in the possession of the claimant.
Money- Money means the recognised currency in circulation, and for obvious reasons it is
not subject-matter of sale of goods. Money constitutes consideration for the sale of goods,
rather than itself being goods old and rare coins," however, are goods, and they can be sold
or purchased as such.
Different kinds of goods- Goods which form the subject-matter of any contract of sale can
be classified into various categories.
Existing or Future Goods- According to Section 6(1), the goods may be either existing goods
or future goods.
Existing goods are such goods as are owned or possessed by the seller at the time of making
of contract. For example, the seller agrees to supply sugar which is lying in his godown, such
sugar will be considered to be existing goods.
According to Section 2(6), "future goods" means goods to be manufactured or produced or
acquired by the seller after making of the contract of sale. An agreement to supply wheat
which has yet to be grown, or watches which have yet to be manufactured, or machinery
which has to be imported, or cloth which has to be purchased from the market is a contract
in respect of future goods. The Act permits a contract for sale of goods the acquisition of
which by the seller depends upon a contingency which may or may not happen [section
6(2)].
Section 6(3) provides that where by a contract of sale, the seller purports to affect a present
sale of future goods, the contract operates as an agreement to sell the goods.

Specific or Unascertained Goods- Existing goods may be furth er classified into specific
goods and unascertained goods
According to Section 2(14), "Specific Goods" means those goods which have been identified
and agreed upon at the time of contract of sale; if the exact thing which is the subject-
matter of the contract is known to the parties, it is known as specific goods. For example, A
has a number of horses and out of them he sells his white horse to B, the particular horse
being identified and agreed upon at the time of the contract, the same is considered to be
specific goods. For specific goods, it is necessary that such goods must be identified and
agreed upon at the time of making of the contract and not subsequently.
If the goods are not identified and agreed upon at the time of making of the contract, they
are known as unascertained goods. For example, A having 1,000 bags of wheat in his
godown sells only 100 bags to B without specifying those which he wants to deliver to B, it is
a sale of unascertained goods. It becomes relevant to see whether the goods are specific or
unascertained when we want to know as to when does the property in the goods pass from
the seller to the buyer. In case of specific goods, there is a possibility of the property in the
goods passing to the buyer at the time of making of the contract, whereas in the case of
unascertained goods, the property in the goods does not pass to the buyer unless and until
the goods are ascertained.
In Vijay Minerals Pvt. Ltd. v. Bikash Chandra Deb there was a contractor the sale of
Manganese and Iron Ores which were excavated and raised for delivery from mines
ex pit mouth. In other words, any ores were sold and to be delivered as had been
 excavated and raised. It was held to be sale of specific goods. In this case, the sale
was of specific goods and specific performance of the contract could be granted.

3- Transfer of Property (ownership) in the Goods- ln every contract of sale there is to be

transfer of property in the goods from the seller to the buyer According to the Sale of
Goods Act, property means general property in the goods rather than mere 'special
property. The term general property means ownership and special property means only
some of the rights, e.g., the rights of possession and use. If under a contract the
ownership in the goods is transferred from one person to another, it may be a contract
of sale, but when mere right of possession is transferred, the transaction may be by way
of hire or pledge.
A Contract of sale of goods is a contract whereby the seller either transfers the property
(ownership) or agrees to transfer the property in the goods to the buyer. Transfer of
property, i.e., the ownership in the goods from the seller to the buyer, is the essence of the
contract. The transfer of property in the goods may be there either at the time of making of
the contract or at a later time According to Sec. 4, sub-sec (3), if the property is transferred
at the time of the making of the contract, the contract is known as a sale. But if, on the
other hand, the transfer of property in the goods is to take place at a future time or subject
to some conditions thereafter to be fulfilled, the contract is called an agreement to sell. In
an agreement to sell, it may be provided that the ownership will pass either on the lapse of
a certain time or on the fulfilment of specified conditions. For example, the agreement
entered into on first January may say that the ownership will pass after two months, or on
the payment of the price, or when the goods are delivered. According to Sec. 4, sub-sec. (4),
an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled
subject to which the property in the goods is to be transferred.

4- Price- Consideration for the contract of sale has to be price'. According to Section 2(10),
'price means the money consideration for a sale of goods. If the consideration is not in
terms of money, it may be a contract other than that of sale.

Modes of determination of price- The price is an essential element in every contract of sale
of goods. The same may be fixed by one or the other of the following modes:
1) It may be fixed by the contract itself.
2) It may be fixed in accordance with an agreed manner The parties may not themselves fix
the price but may leave it to be determined according to the manner agreed. it may, 1or
example, be agreed that the market price prevailing on the date of the supply of goods
will be the price to be paid, or the price as determined by a third party will be the price
for the goods.
In Aluminium Industries Ltd. v. Minerals and Metals Trading Corpn., the agreement
stipulated that the price prevailing on the date of delivery will be the price to be paid by the
buyer. The seller then demanded increased price which occurred due to delayed delivery. It
was held that the seller was at fault in delaying delivery of the goods and, therefore, he
could not compel the buyer to pay increased price of the goods.
3) It may be determined by a course of dealing between the parties. When the parties have
neither themselves fixed the price nor agreed upon some manner 1or determining the
same, we may have to look to their course of dealing. For example, if the buyer has been
previously paying to a particular seller the price prevailing on the day of the supply of
goods, the course of dealing suggests that in subsequent transactions also, the
prevailing market price will be paid.
In the same way, if the agreement envisages fixation of the price by the buyer corporation,
the price fixed by a committee of such corporation will be the price payable by the buyer,
and the seller has to accept the same.
Where the price is not determined according to any of the above-stated manner, the buyer
shall pay a reasonable price to the seller.
Valuation by a third party- It has been noted above that one of the modes of determination
of the price may be by the valuation being made by a third party. Section 10(1) provides
that if a third party who is supposed to make valuation cannot or does not make such
valuation, the agreement is thereby avoided. However, in such a case, if the buyer has
already received the goods or part thereof and appropriated them, he is bound to pay
reasonable price for the same.
A/to sec 10(2), in case the third party, who is to make valuation, is prevented from doing so
by the fault of either the seller or the buyer, the party not in fault may maintain an action
for damages against the party in fault.

Effect of Goods Perishing

1) Goods perishing before making of contract- According to Section 7: Where there is a
contract for the sale of specific goods, the contract is void if the goods without the
knowledge of the seller have, at the time when the contract was made, perished or
become so damaged as no longer to answer to their description in the contract.
Where there is a contract for the sale of specific goods, i.e., the goods and the specific
goods, which form subject-matter of the contract, have perished or become so damaged
that they no longer answer to their description in the contract, the contract is void. This
provision is not applicable when the contract is not for the sale of specific goods but for
unascertained goods. Thus, if A agrees to sell to B 1,000 bags of cement lying in his godown
and unknown to A the whole of the cement has been damaged by rain water, the
agreement is void. A/to section 56 of ICA, when the subject-matter has perished at the time
of making of the contract, the performance of the contract is impossible, and, therefore,
such an agreement is void. Similar would be the effect when there is a common mistake as
to the existence of the subject-matter of the contract.
If any party has received any advantage under such an agreement, he is bound to restore.it,
or to make compensation for it, to the person from whom he received it [sec 65 of ICA].
For the application of the above stated proviso, the specific goods, which constitute the
subject-matter of the contract of sale, should perish or be damaged in such a way that they
no longer answer to their description in the contract. For example, if there is a contract to
sell a particular horse, and unknown to the seller the horse was dead at the time of making
of the contract, the contract is void/Similarly, when there is an agreement to sell 100 bags
of cement lying in the seller's godown and if unknown to the seller the cement had become
converted into stones by rains at the time of the contract, the agreement is void, as the
cement no longer answers to its description given in the contract. Similarly, the goods which
have been stolen without any possibility of being recovered back are deemed to have been
perished for the purpose of the above stated provision
2) Goods perishing before sale but after agreement to sell- According to Section 8, when
there is an agreement to sell specific goods and subsequently the goods without any
fault on the part of the seller or buyer perish or become so damaged as no longer to
answer to their description in the agreement before the risk passes to the buyer, the
agreement is thereby avoided. This provision is applicable when the goods sold are
specific and there is merely an agreement to sell. Section 8, it may be noted, deals with a
contract which is valid when made but becomes void from the time when the goods
perish or get damaged. Moreover, under this section, the contract will be avoided if the
goods perish, etc. after making an agreement to sell and before sale. If there has been a
sale, i.e., the property in the goods has passed to the buyer or the risk has passed to the
buyer, the contract will not be avoided. Thus, if a buyer took a horse on a trial for 8 days
and the horse died within the period without any fault of the buyer, the contract, which
was in the form of an agreement to sell, became void and the seller could not recover
the price of the horse from the buyer.

Sale distinguished from Analogous Contracts

A. Sale distinguished from an agreement to sell- A 'Contract of Sale' is a generic term and
includes both an actual sale, where the ownership in the goods passes to the buyer
immediately when the contract is made, and an agreement to sell, where the ownership
in the goods is to pass subsequent to the making of the contract. The important points
of distinction between a sale and an agreement to sell are as follows:

i- If the property in the goods passes from the seller to the buyer at the time of making of
the contract, it is known as sale but if the passing of the property in the goods is
postponed until some future time or fulfilment of certain conditions, it is an agreement
to sell. lt means that in case of sale, the buyer becomes the owner of the goods at the
 time of making of the contract whereas in an agreement to sell, he is to become the
owner of the goods at a later time.
ii- If after making the contract there is loss or damage to the goods, the question may arise
as to which of the two parties has to bear the loss to the goods. According to the general
rule contained in Section 26, the goods are at the risk of the person who is their owner
at the relevant time It means that in the case of sale, since the ownership in the goods
has passed to the buyer, the loss to the goods has to be borne by the buyer. On the
other hand, in the case of an agreement to sell, while the seller is still the owner of the
goods, the loss has to be borne by him.
iii- In case of sale, i.e., where the property in the goods has passed to the buyer, if he
wrongfully neglects or refuses to pay, tor the goods according to the terms of the
contract, the seller may sue him for the price of the goods. In case of an agreement to
sell, the seller being still the owner of the goods can dispose them of and, therefore, if
the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may
sue him for damages for non-acceptance.
iv- Sale is an executed contract, where there is a contract plus a conveyance, whereas an
agreement to sell is termed as executor contract, as it is a contract pure and simple. In
case of sale, if the seller breaks the engagement to deliver the goods or sells the goods
to a third party, the buyer may sue the seller not only for the breach of a contract but
may also sue him for the torts of conversion and detinue. The buyer has also a right in
rem. In case of sale in many cases, he may follow the goods into the hands of third
parties. If there is a breach of agreement to sell by the seller, then the buyer has only a
right in personam, i.e., only a personal remedy against the seller.
B- Contract of sale distinguished from Hire-purchase Agreement
In a contract of sale, the seller transfers or agrees to transfer the property in the goods to
the buyer for a price. A hire- purchase there is no such agreement. A hire-purchase
agreement is a contract of hire and it may eventually ripen into a sale.
According to See. 2(c), Hire-Purchase Act, 1972, "hire-purchase agreement means an
agreement under which goods are let on hire and under which the hirer has an option to
purchase them in accordance with the terms of the agreement and includes an agreement
under which:
- the possession of the goods is delivered by the owner to a person on
condition that such person pays the agreed amount in periodical instalments,
and
- the property in the goods is to pass to such person on the payment of the last
of such instalments, and
- such person has a right to terminate the agreement at any time before the
property so passes.
Under such a contract, the article is let to the hirer and he has to pay a certain sum of
money by a number of instalments. On the payment of the last instalment, the hirer has an
option to purchase the article in question and when he exercises such an option there is
considered to be sale of the article, the hirer becomes the buyer and the property in the
goods passes to him. As noted above, until the hirer exercises his option to purchase on the
payment of the last instalment, it continues to be a contract of hire. In such an agreement,
therefore, if the hirer so likes, he may terminate the bailment by returning the article to its
owner without any liability to pay the remaining instalments. Similarly, if the hirer makes a
default in payment of any instalment, the owner has a right to immediately resume the
possession of the article. The nature of a hire-purchase agreement was explained by the
Supreme Court in the following words "A hire-purchase agreement has two elements (1)-
element of bailment, and (2) element of sale, in the sense that it contemplates an
eventual sale. When all the terms of the agreement are satisfied and the option is
exercised, a sale takes place of the goods which till then had been hired.
No agreement to buy in a hire-purchase agreement- A hirer in a hire-purchase agreement
is not the buyer, who buys or agrees to buy. He is a person who has merely an option to
buy.

C- Sale distinguished from Barter or Exchange- In sale, consideration must be

consideration known as 'price If goods are given in exchange for goods, it is known as
barter or exchange. In Aldridge v. Johnsone,' it has been held that when the two articles
to be exchanged with one another are valued and the difference o the amount is also
paid in cash, the transaction may be termed as sale.

D- Sale distinguished from Gift- In case of gift as in sale, there is a transfer of ownership in
the goods from one person to another, but in gift the transfer is gratis, i.e., without any-
consideration, whereas in the case of sale, the transfer has to be money consideration
only.
E- Sale distinguished from Contracts of Bailment and Pledge- Unlike the contract of 8ale,
there is no transfer of property in the goods from the person to another in contracts of
bailment and pledge bailment, the goods are delivered by one person to another for a
specific purpose and the goods are to be returned alter the purpose contemplated
under the contract has been fulfilled Pledge is a kind of bailment where the goods are
delivered as a security for the loan which may be taken by the pledger, the goods are to
be returned back when the loan has been repaid. In case of sale when the goods are
delivered in performance of the contract, there is no question of their being returned to
the seller.
F- Sale distinguished from a contract for work and labour- In a 'contract of sale', the main
object is the transfer of property and delivery of possession of the property, whereas
the main object in a 'contract for work' is not the transfer of the property but it is one
for work and labour.
Sale by Pawnee of Goods- Where the Bank, in the course of banking business, has sold the
goods pledged with it, it would be covered within the meaning of the term "Sale" of goods
under Section 2(13) of the Sale of Goods Act, 1930.
In State Bank of Travancore v. Commercial Tax Officer, the Bank sold, in public
auction, goods/ornaments/ bullion pledged with the Bank in realisation of security,
in exercise of its rights as a pledgee. It was held to be "sale" within the meaning of
Section 2(13) of the Sale of Goods Act, 1930) It was held to be involving transfer of
general property in goods/ornaments/bullion, by pledgee Bank to the buyer and
there was held to be a contract between the Bank and the buyer.

AUCTION SALE- A sale by auction is a sale where various intending buyers make their offers
to purchase the goods by making successive bids. The sale is complete when the auctioneer
announces its completion by the fall of hammer or in other customary manner. In a sale by
auction, the contract is completed with the acceptance of the bid, and the property in the
goods also passes to the buyer at that time.
Failure to deposit purchase money in time- If an auction sale requires a payment of
purchase money on the auction date, failure to pay the same by the auction purchaser
would automatically result in cancellation of the auction sale.
In Jagdish Radhakisan Vs. Ramesh, Wagh the court directed auction of certain property and
required payment of 25% of the purchase money on the date of the auction. The auction
purchaser failed to deposit the required amount on the same day l 0.30 p.m. As directed by
the court. On the next day, the auction purchaser deposited the full amount of purchase
money and the executing court accepted the same. lt was held that the non-payment of
26% of purchase money in time resulted in automatic cancellation of aucti0n Bale. The
payment on the next day could not validate the sale.

CONDITIONS AND WARRANTIES

In a contract of sale of goods there may be various stipulations. Such stipulations may be
either conditions or warranties. If Stipulation is essential to the main purpose of the
contract, it is called a condition. On the other hand, if the stipulation is not essential to the
main purpose of the contract but is only of secondary importance, or as Sec 12(3) as puts as
collateral to the main purpose of the contract, is called a warranty. For example, a lady
orders for a red saree, it being agreed between her and the seller that it will be sent by a
registered parcel, and that she will pay the price by 15th January, the day of her marriage. In
this illustration, the stipulations regarding the colour of the saree as well as the date of
supply are essential to the main purpose of the contract and are conditions, whereas
stipulations regarding the time of payment of the price and the mode of despatch of the
goods are not essential to the main purpose of the contract but are only collateral, they are
warranties.
Whether a stipulation in a contract of sale is a condition or a warranty depends in each case
on the construction of the contract [sec 12(4)]. For example, A agrees to supply a suit to B
by 15th November, which the latter wants to wear on the day of his marriage to be held on
16th November, the time of the delivery of the suit is a condition. On the other hand, if the
suit which A agrees to deliver to B by 15 th November 15 required by the buyer to be used in
the following winter Season, the time of delivery is a warranty. A stipulation may be a
condition though called a warranty in a contract.
Stipulations as to time- According to Section 55 of the Indian Contract Act, if the time of
the performance of the contract so the essence of the contract and the promisor makes a
delay in the performance of the contract, the contract is voidable at the option of the
promisor. On the other hand, if the time of performance is not o the essence of the
contract, the delayed performance by the promisor entities the promisee to claim damages
only for the loss occasioned to him.
Section 11 provides as under, “Unless a different intention appears from the terms
of the contract, stipulations as to time of payment are not deemed to be of the
essence of a contract of sale, whether any other stipulation as to time is of the
essence of the contract or not depends on the terms of the contract."
It may be noted that the general rule stated in Section 11 is that the time of payment of the
price is not deemed to be of the essence of the contract. Therefore, if the buyer makes a
delay in the payment of the price, the seller cannot avoid the contract on that account but
he can only claim compensation for the same. The parties are, however, free to express a
different intention in their contract. They may make the time of the payment of the price as
of the essence of the contract. For example, the contract may provide that the buyer must
pay the price by a stipulated date, otherwise the goods will not be supplied to him. In such a
case, the parties have made the time of payment of the price as of the essence of the
contract and the delay in payment by the buyer would enable the seller to avoid the
contract. Where the time is of the essence of the contract and the same has been extended,
the extended date is also of the essence of the contract.
Consequences of the breach of a Condition or a Warranty- Since a condition is a stipulation
essential to the main purpose of the contract its breach by one party entitles the other to
treat contract, as repudiated. For example, if the seller makes a breach of condition, the
buyer may reject the goods. Similarly, if the breach is made by the buyer, the seller may
treat it as a breach of contract and not perform his own part of the obligation. Thus, if a lady
orders a red saree asking the seller to deliver it by 15th January so that she can wear it on
16th on the occasion of her wedding, but the seller supplies a black saree instead of a red
one or supplies the saree on 18th January, there is a breach of condition, the lady buyer can
treat the contract as repudiated, she can reject the goods and sue the seller for improper
performance.
 A warranty is a stipulation collateral to the main purpose of the contract, its breach
is not considered to be serious. The breach of a warranty by one party entitles the
other only to claim damages rather than avoiding the contract [sec-12(3)]. Thus, for
example, the buyer agrees to pay the price in advance by 15th Dec and the goods are
to be delivered on 15th January, but the buyer makes payment late, say on 25th
December the seter's remedy in such a case 18 to claim compensation, because,
according to Sec. 11, the time of payment of price is generally deemed to be a
warranty.

Breach of condition and warranty- The breach of warranty gives a right to claim for
damages but not to a right to reject the goods and treat the contract as repudiated.
Options to the buyer on breach of condition by the seller- When there is a breach of
condition by the seller, the buyer may: -
i. treat the contract as repudiated;" or
ii. waive the condition; or
iii. treat the breach of condition as. a breach of warranty
Ordinarily, the buyer's remedy, on a breach of condition by the seller, is treating the
contract as repudiated and rejecting the goods. However, if the buyer so likes, he may give
up his right of rejecting the goods and waive the condition. When the buyer waives the
condition, he accepts the goods without bringing any action against the seller.
Another option open to the buyer is to treat the breach of condition as a breach of
warranty. In such a case, he accepts the goods instead or rejecting them and can claim
damages as if there was a breach of warranty only. Although on a breach of condition by the
seller, the buyer has a right to reject the goods but he is not bound to exercise this right. He
can instead, have recourse to a smaller remedy of claiming compensation by treating the
breach of condition as a breach of warranty. For example, A agrees to supply B 1000 bags of
first quality wheat, at the rate of Rs. 100/- per bag but supplies only second quality wheat,
the price of which is Rs. 90/ per bag. There is a breach of condition by the seller and the
buyer can reject the goods, but if the buyer so likes, he may treat it as a breach of warranty,
accept the second quality wheat and claim compensation at the rate of Rs. 10/- per bag.
Breach of Condition to be treated as a breach of Warranty- Section 13 of the Sale of Goods
Act, 1930, provides that breach of a condition is treated as a breach of warranty in the
following cases: -
a- a when the buyer waives the condition or elects to treat it as breach of warranty and not
as a ground for treating the contract as repudiated; or
b - When the contract is not severable and the buyer has accepted the goods or part
thereof.
Sec. 13(1) leaves it to the volition of the buyer to treat the breach of condition as a breach
of warranty. Under the circumstances mentioned in Sec. 13, sub-sec. (2), even though there
is a breach of condition by the seller, the buyer has no right of repudiating the contract but
his only remedy is a claim for damages by treating the breach of condition as a breach of
warranty. When the contract of sale is not severable and the buyer has accepted the goods
or part thereof the breach of condition has got to be treated as a breach of warranty. The
idea behind the provision is that when the buyer has a choice of either accepting or
rejecting the goods and he chooses to accept them, his right of rejection can no more be
exercised.
According to Section 42, the buyer is deemed to have accepted the goods
i. when he intimates to the seller that he has accepted them; or
ii. when the goods have been delivered to him and he does an act in relation to them
which is inconsistent with the ownership of the seller, for example, on receiving a
watch sent by the seller, he pledges it, sells it or starts using the same; or
iii. when, after the lapse of a reasonable time, he retains the goods without intimating
to the seller that he has rejected them.

Remedy for Breach of Warranty- Section 59(1) says the buyer is not by reason of breach of
warranty entitled to reject the goods, but he may
a- set up against the seller the breach of warranty in diminution or extinction of the price, or
b -sue the seller for damages for breach of warranty.

Performance may be excused- If due to impossibility or otherwise, the fulfilment of a

condition or a warranty is excused by law, there is no liability for the non-performance of
the condition or the warranty, as the case may be [sec 13(3)]. Reference may also be made
to Sec. 56, Indian Contract Act, 1872. impossibility of performance and Sections 62-67,
Indian Contract Act, regarding contracts which need not be performed.

Liability of the Seller under Law of Torts- Apart from the right to reject the goods or to claim
compensation under the Sale of Goods Act for breach of a condition or warranty on the part
of the seller, the buyer has also got a right to claim compensation under the law of torts if
by his negligence the seller delivers some dangerous goods to the buyer which causes some
harm to him.

Implied Conditions and Warranties- Parties may expressly provide any conditions or
warranties in their contract. Apart from what may be provided by the parties in the
contract, certain conditions and warranties, as provided in Sections 14 to 17, are impliedly
there in every contract of sale of goods. A/to sec 16(4) and also section 62 of this Act says
that, the implied conditions and warranties provided in the Act are binding in every contract
of sale unless they are inconsistent with any express conditions and warranties agreed to by
the parties. The implied conditions and warranties recognised by the Act are being
discussed below.

Implied Conditions
1- Implied Condition as to Title-Sec. 14(a)- A/to this section, in every contract of sale,
there is an implied condition on the part of the seller that in the case of sale, he has a
right to sell the goods and in the case of an agreement to sell, he will have a right to sell
the goods at the time when the property in them is to pass.
Generally, a person who is the owner of the goods or who is owner's agent may sell the
goods. If a person has no title to the goods or otherwise does not have a right to dispose of
certain goods, the buyer of such goods has a right to reject them and to claim back the price
if the same has already been paid and refuses to pay if the price has not been paid till then.
In Rowland v. Divall, the plaintiff purchased a motor car from the defendants and used the
same for several months. The defendant had no title to the car and, therefore, the plaintiff
was compelled to give It up to the true owner. The plaintiff sued the defendant to recover
back the price which he had already paid. It was held that even though the buyer had used
the car tor some months, he was entitled to recover back the whole of the price paid by him
as consideration had totally failed. Similarly, if the buyer having bought the goods from a
seller takes the delivery of the same but is compelled to pay the price to the true owner, he
is not bound to pay the price to his seller, who sold the goods without having a right to sell
the same.
If the goods bear labels infringing the trade, mark of a third person, the seller has no right to
sell them.

2- Implied Condition in Sale/by Description-Sec. 15- When the goods are sold
by/description, there is an implied condition that the goods supplied shall correspond
with the description.
In case the goods are not in accordance with the description, there is a breach of Implied
condition and the buyer has a right to reject them. He has, however an option under Section
13, to accept the goods by treating the breach of condition as a breach of warranty and
claim damages.
The description may be regarding the class or kind of the goods, e.g. First quality wheat or
B-30 sugar or long staple cotton, weight or measurements of the goods or the condition of
the goods sold or the type of packing, etc.
In Varley v Whipp, there was a contract for the sale of a second-hand reaping machine
which the buyer had not seen. The seller described it as a new machine. After delivery, the
buyer found that the machine was not in accordance with the description given by the
seller. It was held that the buyer was entitled to reject the machine. Similarly, when there
was a Contract for the supply of 'new Singer cars and one of the cars supplied having
already run a considerable mileage was not new, there is a breach of contract on the part of
the seller and he is held liable to compensate the buyer for the same.

In Acors Ltd. v. E.A. Ronaasen & Son, the seller agreed to supply a quantity of staves of
timber which were to be of half inch thickness. Some of the staves were not of the required
thickness. It was, held by the House of Lords that the buyers were entitled to reject the
goods.
In Re Moore & Co. Ltd. and Laundauer & Co., it was held that the mode of packing may
constitute a part of the description of the goods.
In Manbre Saccharine Co. v. Corn Products Co., it was held that the size of the bag
constituted a part of the description of the goods and the size of the bag could be important
to the purchase because of the sub-contract or otherwise. Similarly, if, according to the
contract, tea is to be supplied to the buyer in chests, each chest containing 80 Ibs and the
seller tenders’ chests of tea, each chest containing 76 lbs there is a breach of contract which
entitles the buyer to reject the goods.
Date of the arrival of the ship at its destination may also be a part of the description of the
goods to be supplied.

3- Implied Condition in Sale by Sample as well as Description Sec. 15- “When the goods
are sold by sample as well as description, it is not sufficient that the bulk of the goods
corresponds with the sample if the goods do not also correspond with the
description.”
Sometimes there may be a difference between the sample shown and the description of the
goods. In such a case, the fact that the goods supplied conform to the sample but the not
agree with the description entitle the buyer to reject the goods because the fundamental
condition in every contract is that the goods should correspond to the description.
In Wallis v. Pratt, there was a contract of sale by sample of seed described as "English
sainfoin but when the crop was ready, it was discovered that the seed supplied
and the ample shown were not of "English sainfoin" seed but of giant sainfoin seed. Tt was
held that there was a breach of condition and the buyer was entitled to recover damages.
Two implied Conditions, being exceptions to the rule of Caveat Emptor
The rule of Caveat Emptor [Sec. 16]- Sometimes the goods purchased by the buyer may not
suit the particular purpose. The question which in such a case arises is, whether the buyer
can reject the goods. The section provides that, as a general rule, there is no implied
warranty or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale. It is the rule contained in the maxim caveat emptor, which
means buyer beware. According to this rule, the buyer himself should be careful while
purchasing the goods and he should himself ascertain that the goods, suit his purpose. If the
goods are subsequently found to be unsuitable for his purpose, he cannot blame the seller
for the same, as there is no implied undertaking by the seller that he shall supply such goods
as to suit the buyer purpose. For example, A purchases a horse from B. A need the horse for
riding but he does not mention this, to B. The horse is not suitable for riding but is suitable
only for being driven in a carriage. A can neither reject the horse nor can he claim any
compensation from B.
In re Andrew Yule & Co., the buyer ordered for hessian cloth without specifying the purpose
for which he wanted the same. It was in fact needed for packing. Because of unusual smell,
it was unsuitable for the purpose. It was held that the buyer had no right to reject the same,
even if it did not suit his purpose.
Section 16 also incorporates the following two exceptions to the rule of caveat emptor,
which are two further implied conditions: -
4- lmplied Condition as to Quality or Fitness [being first exception to the rule of Caveat
Emptor-Sec. 16(1))- To this rule there is an exception. If the following requirements as
mentioned in Sec. 16 (1) are satisfied, there is considered to be an implied condition
from the side of the seller that the goods supplied shall be reasonably fit for the purpose
for which the buyer wants: -
- The buyer, while purchasing the goods, expressly or impliedly makes Known
to the seller the particular purpose for which the goods are required by him
so as to show that the buyer relies on the seller's skill or judgment,
- and to the goods supplied are of such a description which it is in the course of
the seller's business to Supply.
lt the buyer tells the seller the purpose for which the goods are required by him, the rule of
caveat emptor does not apply and it becomes the seller’s duty to Supply the goods suitable
for the purpose mentioned by the seller. Thus, in the case of Andrew Yule & Co., the buyer
had informed the seller that he needed the hessian cloth for packing purpose, he could
reject the cloth if he found that the same was unsuitable for that purpose.
The purpose may be made known to the seller, expressly or impliedly.
In Priest v Last, the plaintiff went to the defendant, a chemist, and asked for a hot-water
bottle. The defendant sold him an American rubber bottle, saying that it would stand hot
but not boiling water. The plaintiff had purchased the bottle for his Wife and while she was
using it, it burst and injured her. Since the bottle was not fit tor being used as a hot-water
bottle the particular purpose for which the buyer had purchased it, the defendant was held
liable to pay compensation for the breach of the implied condition.
In Chaproniere v. Mason, the buyer purchased a bun from a bakery, and as he tried to bite
it, his teeth struck on a stone in the bun as a consequence of which one of his teeth was
broken and an abscess formed in the jaw. Such a bun was held to be unsuitable for the
purpose of eating i.e., the purpose for which the buyer had purchased the same. Moreover,
the fact that the buyer had purchased the bun from a particular bakery was sufficient to
show that the buyer had relied on the seller's skill and Judgment
In Frost v. Aylesbury Dairy Co., the plaintiff purchased milk from a milk dealer tor his
family's use. The milk contained typhoid germs, the plantiff's wife was infected by it and
died. Here the purpose for which the milk was to be used was, by implication, made known
to the seller. Since the milk was unfit for human consumption, there was a breach of implied
condition for which the defendant was held liable.
In Grant v. Australian Knitting Mills Ltd., the plaintiff purchased two underwear’s from a
retailer who dealt in that type of goods. The underwear’s contained certain chemicals and
he contracted dermatitis by wearing them. It was held by the Privy Council that the buyer
had made known to the seller, impliedly, the purpose for which he wanted the garments
and relied on the seller's skill or judgment. There was a breach of implied condition that the
goods shall be reasonably fit for a certain purpose, and, as such, the seller was liable to the
buyer in damages.
It may be noted that the implied condition discussed above is that the goods shall be
suitable for a particular purpose. It does not mean that they shall be suitable for every
buyer. If they are generally suitable for a normal buyer and would not have caused any
harm to him but cause harm to a particular buyer due to the buyer over sensitiveness, the
seller cannot be blamed for the same.
In Griffith's v. Peter Conway Ltd.," the plaintiff bought a Harris tweed coat and caught
dermatitis by using it. It was found that the plaintiff had caught the disease as her skin was
abnormally sensitive and a normal wearer would not have been effect by using the coat. It
was held that the plaintiff could not claim any compensation because there was no implied
condition-that the goods shall suit an abnormal buyer like the plaintiff.
The implied condition of fitness is applicable not only to the goods which are sold, it is also
applicable to the goods which are supplied under a contract of sale.

No Implied Condition when the Sale under Patent or Trade Name Proviso to Sec. 16(1)- The
buyer buys an article by specifying its patent or other trade name, there is no implied
condition of the fitness of the goods for any particular purpose. Since the buyer defines the
goods by mentioning the trade name, the seller's only undertaking is that the goods shall be
of the same trade name as demanded by the buyer.
The proviso is applicable when the buyer buys by mentioning a trade name and does not at
all rely on the skill and judgment of the seller as to the fitness of the goods for any particular
purpose. If the buyer mentions the trade name but still relies on the skill and judgment of
the seller as regards the suitability of the goods for any particular purpose, the implied
condition of fitness is applicable in such a situation.
5- Implied Condition of Merchantable Quality [being second exception to the rule of
Caveat Emptor-Sec. 16(2)]- It has been noted above in Sec. 15 that when the goods are
bought by description, there is an implied condition that the goods supplied shall answer
that description. According to this Sub-sec., there is a further implied condition in such a
case and that is that the goods supplied shall be of merchantable quality. Where-
a) the goods are bought by description,"
b) from a seller-who deals in the goods of that description (whether he is the
manufacturer or producer or not),
there is an implied condition that the goods shall be of merchantable quality.
The terms 'merchantable quality’ has not been defined in the Act. It means that the article
is of such quality and in such Condition that reasonable man acting reasonably would after a
full examination accept it. If the goods are not saleable in the market as the goods of a
certain description, they are not of merchantable quality.
In Grant v. Australian Knitting Mills Ltd., the underwear’s contained certain
chemicals which could cause Skin disease to a person wearing them next to skin, it
was held that because of such a defect, the underwears were not of merchantable
quality
Even when the goods are purchased by their trade name and the implied condition as to
their quality or fitness is not there, another implied condition as to merchantable quality
could still be invoked.
In Morelli v. Fitch and Gibbons, the plaintiff asked for and purchased a bottle of "Stone's
Ginger Wine" from the seller. While the buyer was trying to open the bottle with a
corkscrew, the bottle broke due to some defect in the bottle and his hand was cut. It was
held that in this case, there was a sale of goods by description, the bottle was not of
merchantable quality and the buyer is entitled to claim damages.
In Jackson v. Rotax Motor and Cycle Co., the defendants-ordered for some 600 motor horns
of varying description. Some of the horns were dented and badly polished and the
defendants rejected the whole of the consignment. It was held that the defects in the horns
is unmerchantable and the buyers were entitled to reject the whole consignment although
all the pieces were not defective.
In Shivallingappa Shankarappa Mendse v. Balakrishna and son, thbuyer ordered for the
best quality 'toor dhal'. The dal was loaded in rain and by the time it reached the
destination, it became damaged by moisture. lt was held that since the damaged toor dhal
could not be sold as that of best quality as it was no longer of merchantable quality. The
buyer having taken the delivery as the seller refused to take them back, he was entitled to
claim damages from the seller.

Condition Negatived when the goods Examined by the Buyer-Proviso to Sec. 162)- Sec. 41
of the Act entitles the buyer to have an opportunity to examine the goods before he can be
called upon to accept them. Such an opportunity will enable the, buyer to ascertain whether
the goods are in conformity with the contract. Merely taking of the delivery of the goods by
the buyer does not imply that he has accepted them.
According to the proviso to Sec. 16(2), where the buyer has examined the goods, there shall
be no implied condition as regards defects which such examination ought to have revealed.
It means that the implied condition of merchantability will be excluded when the buyer has
examined the goods and the defect in the goods was a patent one. ln case of latent defects,
the buyer is still protected in spite of the fact he has examined the goods.
As noted above, the proviso divides the defects into two kinds, patent and latent. Patent
defects are those which can be found on examination by a person of ordinary prudence with
the exercise of due care and attention. If a merchant possessed of ordinary skill, using due
care and diligence, would not have thought of the existence of the particular defect which
gives rise to action, such-a defect would be latent or hidden one as distinguished from a
patent defect.
To exclude the working of implied condition, even if he examines them cursorily, the implied
condition is not applicable. Thus, in Thornett and Fehr v. Beers and Sons, there was sale of a
number of barrels of vegetable glue. The buyers having an opportunity to examine the
barrels examined them only from outside for want of time. The buyers subsequenty found
that the glue was not of merchantable quality and this defect could have been discovered if
the barrels had been examined properly from inside. It was held that since the buyers had
examined the goods and the defect in the goods was a patent one, they were not entitled to
sue the sellers for the same.
Implied condition is negatived on examination if the defect is a patent one. In case of latent
defects, the implied condition of merchantability continues in spite of the examination of
the goods by the buyer. If the defect in the underwears purchased by the plaintiff could not
be discovered when they were purchased and it could be known when they were put to use
the defect being a latent one, the buyers could claim compensation when they caused him
skin disease and thus were found to be of unmerchantable quality.
Liability for all the Natural Consequences- When the seller makes a breach of such an
implied condition, he is liable for all the natural consequences of such a breach. In Jackson
v. Watson, the plaintiff purchased a tin of salmon from the defendant. The contents of the
tin being poisonous and unfit for human consumption, the plaintiff’s wife died by consuming
a part of the contents of that tin. It was held that the defendant was liable to compensate
the plaintiff for loss of service of his wife due to her death.

6- Implied Conditions in a Sale by Sample-Sec. 17- A/to section 17(1), a contract of sale is
by sample when there is a term in the contract, express or implied, to that effect.
The purpose of a sample is to present to the eye the real meaning and intention of the
parties with regard to the subject-matter of the contract which owing to the imperfection of
language, it may be difficult or impossible to express in words.
 According to Sec. 17(2), there are three implied conditions in a contract of sale by sample:
i. The first implied condition is that the bulk shall correspond with the sample in quality.
A contract of sale by sample implies an undertaking by the seller that the goods to be
supplied will be similar to the sample, If the goods supplied do not correspond with the
sample, it amounts to a breach of implied condition by the seller and the buyer, in such
a case, is entitled to reject the goods. If the buyer, instead of rejecting accepts the goods
or a part thereof when the contract is not severable, then is only remedy is to claim
damages because in such a case, the breach of a condition is to be treated only is a
breach of warranty.
ii. Another implied condition in a sale by sample is that the buyer shall have a reasonable
opportunity of comparing the bulk sample to satisfy himself that the goods supplied are
in accordance with the sample. If the seller does not afford an opportunity to the buyer
to compare the bulk with the sample at a proper and convenient time, the buyer has a
right to repudiate the contract. The right to inspect the goods need not always be
exercised before taking the delivery of the goods in buyer could not examine the goods
before taking the delivery and the buyer had taken the delivery in the form in which
they arrived, the buyer may exercise his right of inspection after taking the delivery. Of
course, he must examine the goods within a reasonable time after taking the delivery
failing which ne will be deemed to have accepted the goods as they are. If on exercising
this right of examining the goods, the buyer finds that the goods are not in conformity
with the sample, he may reject them.
iii. There is another implied condition in a sale by sample and that is that the goods shall be
free from any defect, rendering them unmerchantable. It means that it is not enough
that the goods correspond with the sample. It is further necessary that the goods should
not have been rendered unmerchantable because of some latent defect in the sample. If
the buyer takes the delivery of the goods after examining and satisfying himself that
they correspond to the sample, he subsequently discovers that because of certain latent
defect in them as well as the sample, the goods are unmerchantable, he can still reject
them or bring an action against the seller to claim compensation.
In Godley v. Perry, a retailer purchased from a wholesaler a number of toy catapults in a
sale by sample. The retailer sold one of those catapults to a boy and when the boy tried to
play with it, because of manufacturing defect therein, the boy was injured. The retailer was
held bound to pay compensation to the boy and in his turn, he sued the wholesaler to claim
indemnity from him. It was found that the retailer had examined the sample and a
reasonable examination on his part could not reveal this defect. It was held that under these
circumstances, the wholesaler was bound to indemnity the retailer for the loss suffered by
the latter.
Implied Warranties
i. Implied Warranty of Quiet Possession-Sec. 14(b)- In a contract of sale unless the
circumstances of the case show different intention, there is an implied warranty that the
buyer shall have and enjoy possession of the goods. It means that the buyer s possession
of the goods will not be disturbed.
 If the seller sells goods which he does not have a right to sell and a third person claiming a
superior title brings an action against the buyer to recover those goods, the buyer can sue
his seller for the breach of this implied warranty. In Mason v. Burmingham, the plaintiff
purchased a second-hand typewriter for £ 20 from the defendant. She thereafter spent a
sum of £ 11-10 sh. for getting it overhauled and putting it in order. Unknown to the parties,
the typewriter was a stolen one and the plaintiff was compelled to return the same to its
owner. In an action by the plaintiff against the defendant, it was held that the defendant
had made a breach of warranty implied in a contract of sale of goods that the buyer shall
have and enjoy quiet possession of the goods. The plaintiff was entitled to recover not only
the sum of f 20, the price paid for the typewriter, but also the sum of £ 11-10 sh., the
amount spent on overhauling, as the same was the loss arising naturally in the usual course
of things.
ii. Implied Warranty against Encumbrances-Sec. 14(c)- There is implied warranty that the
goods sold shall be free from any charge or encumbrance in favour of any third party. If
there is a charge or encumbrance on the goods sold and the buyer has to discharge the
same, he is entitled to get compensation for the same from the seller. If the charge or
encumbrance of the goods is known to the buyer at the time of the contract of sale, he
becomes bound by the same and does not have any right to claim compensation for
discharging the same.

Exclusion of implied Terms and Conditions- Sec. 62 of the Act provides that those rights,
duties or liabilities which might arise under a contract by implication of Jaw may be
negatived or varied-
- by express agreement between the parties; or
- by course of dealing between the parties; or
- by usage, if the usage is such as to bind both the parties to the contract.
Parties are free to make any agreement they like and "there is no rule of law to prevent
parties from making any bargain they please". As regards conditions and warranties, Section
16(4) lays down that an express warranty or condition does not negative a warranty or
condition implied by this Act unless inconsistent therewith. That means that when the
parties expressly agree to such stipulation and the same are inconsistent with the implied
conditions and warranties, the express conditions or warranties will prevail and the implied
ones, mentioned in Sections 14 to 17 would be negatived.

TRANSFER OF PROPERTY AND TITLE

Transfer of Property in the Goods- Transfer of property in the goods from the seller to the
buyer is the essence of the contract of sale. It has been noted in Section 4 that in such a
contract, the seller either transfers or agrees to transfer the property is the goods to the
buyer for a price. Sometimes the property or the ownership in the goods may be transferred
when the contract has been entered into and sometimes at a later time. The point of time
when the ownership passed from the seller to the buyer becomes important in various
situations, e-g., if after the contract the goods are destroyed or damaged, the part who is
the owner of the goods at the time will have to bear the loss. If the property in the goods
has already passed, the buyer will have to bear the loss but if the seller still continues to be
the owner, the loss will have to be borne by him, as stated in Sec. 26. Similarly, if either
party to the contract becomes insolvent after the making of the contract, it may have to be
seen as to whom of those parties was the owner at the time of the insolvency in order to
decide as to whether the goods should be considered to be part of the assets of the
insolvent or the other party.
For the purpose of transfer of property, goods may be divided into two classes, Le., specific
or unascertained.
In Vijay Minerals Pvt. Ltd. v. Bikash Chandra Deb there was a contract for the sale of
Manganese and Iron Ores which were excavated and raised for delivery from mines ex pit
mouth. In other words, only such Ores were sold and to be delivered as had been excavated
and raised. It was held to be sale of specific goods.
NOTE- Section 19, 20, 21, 22 and 24 provide the rules regarding the transfer of property in
specific goods. Section 18, 23 and 25 provide the rules regarding the transfer of property in
unascertained or future goods.
Transfer of Property in Specific Goods- The rules regarding transfer of property in specific
goods have been mentioned in Sections 19, 20, 21, 22 and 24 of the Act.
1- Property transferred as intended-Sec. 19- Where there is a contract for the sale of
specific or ascertained goods, the property in them is transferred to the buyer at such time
as the parties to the contract Intend it to be transferred. Although the parties are free to
express their intention of the time of passing of property, but they in fact seldom do so.
According to Sec. 19(2), if the parties do not expressly mention anything, their
intention could be inferred from their contract. For determining the intention to the
parties, regard shall be had to the terms of the contract, the conduct of the parties
and the circumstances of the case.
Transfer of Motor Vehicle- In Vasantha Vishwanathan v. V. K. Elayalwar, it has been held
by the Supreme Court that in a transaction of sale of a motor vehicle, the property in the
vehicle is not passed on to the transferee on the day when the order of transfer of
registration 18 passed by the Regional Transport Authority. Section 31 of the Motor Vehicles
Act simply prescribes the procedure for entering the factum of transfer in the registration
certificate, which is an act posterior to the transfer.
The transfer of ownership in the vehicle will be governed by Section 19 of the Sale of Goods
Act, according to which the transfer of property (i.e., ownership) in the vehicle will take
place at such time as the parties to the contract intend it to be transferred.
Ownership of movable property- The ownership of a movable property 18 not dependent
upon the entries in the registration certificate. The act of transfer of owner in the
registration certificate in terms of Section 31 of the M.V. Act, 1939 or in terms of Section 50
of the M.V Act 1988 is required to be performed by the transferee.
In Sagar Warehousing Corpn. v. Pawan Hans Helicopters Ltd. there was an
agreement for the sale of 19 Helicopters. In terms of the agreement, property was to
pass only upon payment of the sale consideration. In view of the statutory provision
contained in Section 19, the Delhi High Court held that part payment of the sale
consideration, would not have the effect of transferring the property to the buyer.
But, where the seller of the goods has accepted deferred payment as mode of
payment of consideration, the property in the goods is said to have passed to the
buyer.

Sale by giving physical possession of goods- In a sale, goods may be delivered by giving
physical possession without the necessity of transferring the title document of goods.
Transfer of document of title to the goods is one of the methods whereby delivery of the
goods is affected. Delivery may be physical also.
2- Specific Goods in a Deliverable State-Sec. 20- If specified goods in a deliverable state are
delivered, the property in the goods passes.
According to Sec. 20, “Where there is an unconditional contract for the sale of specific
goods in deliverable state, the property in the goods passes to the buyer when the
contract 15 made, and it is immaterial whether the time of payment of the price or the
time of delivery of the goods, or both, is postponed.”
If the contract between the parties satisfies the following conditions, the property passes
at the time of making of the contract:
a. The goods are specific.
b. The goods are in a deliverable state.
c. The contract is an unconditional one.
On the fulfilment of these conditions, the property would pass even though the delivery of
the goods or the payment of the price, or both, is postponed.
In order that Section 20 is attracted, two conditions have to be fulfilled: (i)- the contract of
sale is for specific goods which are in a deliverable state; and (ii)- The contract is an
unconditional contract. If these two conditions are satisfied, Section 20 becomes applicable.
lf the contract is a conditional one, the property would not pass at the time of the making of
the contract. Sections 21 and 22 deal with conditional contracts whether the seller is to fulfil
the condition of either putting the goods in a deliverable state under Sec. 21 or to weigh,
measure, test, etc. the goods in order to ascertain the price according to Sec-22. The
property in such a case would pass only when that condition is fulfilled and the buyer has
notice thereof.
Deliverable state, according to Sec. 28, means such state of things that the buyer would
under the contract be bound to take their delivery. For example, A purchases a table which,
according to the contract, has to be polished by the seller before delivery, the table is not in
a deliverable state. lt will become in a deliverable state when the same has been polished.
The property in such a case would not pass at the time of the making of the contract.
Presumption under Section 20- Under the Sale of Goods Act, where there is a contract for
the sale of unascertained goods, no property in the goods is transferred to the buyer unless
and until the goods are ascertained. 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 intended it to be transferred and for ascertaining the intention of the
parties’ regard shall be had to the terms of the contract, the conduct of the parties and the
Circumstances of the case. In order to attract the presumption in Section 20 of the Sale of
Goods Act, the goods must be in a deliverable state. The goods at the loading point must be
ascertainable and in a deliverable state.
In Taring v. Baxtor, a contract for the sale of a certain stack of hay was entered into
on January 6. The price was to be paid on February 4, but the stack was not to be
removed until May 1 The stack was accidentally destroyed by fire on January 20. It
was held that in this case, the property in the goods had passed to the buyer even
though the payment of the price and the delivery of the goods were postponed and,
therefore, i.e., when his bid is accepted the buyer should bear the loss.
In a sale by auction the contract is complete with the acceptance of the bid, and the
property in the goods also passes to the buyer at that time. In the case of Ganganagar Sugar
Mills Ltd. v. M/s. Rameshwar Das Tara Chand, there was auction of a specific lot of sugar
bags. The Sugar was in deliverable state. It was held that the contract had been completed
on the acceptance of the bid, and the property in the goods had also passed to the buyer at
that time

3 -Specific goods not in a Deliverable State-Section 21- According to Sec. 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.”
When the contract is for the sale of specific goods but the goods at the time of the contract
are not in a deliverable state, the property in such goods passes when the goods are put in a
deliverable state and the buyer has notice thereof. For example, a seller agrees to sell the
whole amount of Sugar lying in his godown but according to the terms of the contract he
has to get it packed in bags. The property in sugar will not pass to the buyer until the seller
has packed the sugar into bags and the buyer gets notice of the same. If part of the goods
has been put in a deliverable state within the knowledge of the buyer and before the
remainder could be put in a deliverable state, the whole lot is destroyed by fire, the
property in those goods which have been put in a deliverable state has passed to the buyer
and he must bear the loss in respect of them.
Notice to the buyer -When the goods are not in a deliverable state at the time of the
making of the contract, merely putting of the goods in a deliverable state would not result in
the transfer of property in the goods from the seller to the buyer. It is further necessary that
the buyer must have notice thereof. What is required is that the fact of the goods being put
in a deliverable state must come to the knowledge of the buyer, it is immaterial whether the
fact comes to his knowledge by an information given to him by the seller or in any other
way. The idea behind the rule is to enable the buyer to know as to the point of time when
the property in the goods passes to him because on the passing of the property, the goods
are considered to be at his risk.

4 -Specific Goods to be Weighed, etc. by the Seller-Sec. 22- According to Sec. 22

“Where there is in 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.”
In the contract o sale of specific goods, the seller may be bound to weigh, measure or test or
do something else to ascertain the price of the goods. In such a case, the property in the
goods does not pass until the seller has done all that and the buyer has notice thereof.
In Simmons v. Swift, there was a contract for the sale of a stack of bark at £ 9-5 S.
per ton, the bark was to be weighed by the seller's and buyer's agents. Part of the
bark was weighed and taken away by the buyers. But before the remainder could be
weighed, it was carried away by floods. It was held that the loos for the un-weighed
portion, which was carried away by floods, fell upon the seller as the property
therein had not passed to the buyer.
In Zagury v. Furnell, there was a contract for the sale of 289 bales of goat Skins, each
bale containing 5 dozen. Before the seller could see the bale contained the specified
number a/to usage of trade, the bales were destroyed by fire. It was held that the
property in the goods had not passed to the buyer as something still remained to be
done by the seller, and, therefore, the seller could not sue the buyer for the price.
The loss of the goods had to be borne by the seller.
For the application of this section, something must remain to be done by the seller, i.e.,
weighing measurement, etc. and the property does not pass until the seller has done that
and the buyer has the notice of the same. If the seller has done all what he was required to
do and nothing remains to be done by him, Sec. 22 is not applicable and the property may
pass at the time of the making of the contract, under Section 20.
5- Goods Delivered on Approval or on Sale or Return-Sec. 24- Section 24, which deals with
goods delivered to the buyer on approval, provides as under
“When goods are delivered to the buyer on approval or on Sale or return or other similar
terms, the property therein passes to the buyer-
a- when he signifies his approval or acceptance to the seller or does any other act
adopting the transaction;
b -If he does not signify his approval or acceptance to the seller but retains the
goods without giving notice of rejection, then if a time has been fixed for the
return of the goods, on the expiration of such time, and, if no time has been fixed,
on the expiration of a reasonable time.
When the goods are sold on approval, on sale or return basis or on trial, the delivery of the
goods may be made to the buyer but that does not result in the transfer of property in the
goods to the buyer. The property in such a case passes when one or the other of the
following conditions are satisfied:
1. When the buyer signifies to the seller that he has approved or accepted the goods. As
soon as the approval or acceptance is conveyed, the buyer becomes the Owner of the
goods. Thus, if A takes a horse from B on 1st January on approval for 8 days, A has a right to
return the horse within 8 days if he does not approve it, but it on 2nd January, A informs B
that he has approved the horse, he becomes its Owner on that day.
2.The property in such goods also passes to the buyer when the buyer adopts the
transaction. Adopting the transaction consists in doing some act on the part of the buyer
which indicates that he considers himself as the owner of the goods and then deals with
them in that capacity. For example, A purchases a suit on approval and starts using it, or,
purchases a suit piece on approval and gives it to his tailor for being made into a suit, or
purchases a watch on approval and subsequently either pledges it or resells it, in all such
cases there is adoption of the transaction by A and the property in the goods passes to him
when anyone of the above stated acts has been done by him.
Kirkham v. Attenborough, Kirkham, a manufacturing jeweller, delivered some
jewellery to one Winter on sale or return. Winter pledged the jewellery with
Attenborough, a pawnbroker. The price of the jewellery remaining unpaid, Kirkham
brought an action against Attenborough to recover the goods. It was held that when
Winter pledged the jewellery, he had adopted the transaction. Since by adoption
Winter had become the Owner, sale by him conveyed a good title to Attenborough
and the goods, therefore, could not be recovered from him. The only remedy with
the seller was to claim its price from Winter. C
In Genn v. Winkel,' the plaintiff gave some diamonds to the defendant on sale or
return basis. On the same day, the defendant gave those diamonds to X on sale or
return, X gave them to Y and from him they were lost. It was held that since the
 defendant transferred the diamonds further, he had thereby adopted the
transaction and the property in them had passed to him, and he was, therefore,
bound to pay for them.
3. When the goods are sold on approval and the buyer neither signifies his approval nor
does he give any notice of rejection within the time fixed for the return of the goods or, if
no such time is fixed, within a reasonable time but retains the goods beyond Such time, the
property in the g0ods passes to him. Thus, if I take a horse on trial for 8 days and within
those 8 days, I neither communicate my acceptance nor rejection of the horse to the seller
but continue to retain the horse, I will automatically become the Owner of the horse on the
expiry of this period of 8 days. The property will however, pass when the stipulated period
expires and not before that
An Elphick v. Barnes, the buyer took a horse on trial for 8 days The horse died within this
time without the fault of the buyer. It was held that the property in the horse had not yet
passed to the buyer and, therefore, the seller could not recover the price from him.
Transfer of Property in unascertained or Future Goods-Ss. 23 and 25- Where there is a
contract for the sale of unascertained or future goods, the property therein does not pass at
the time of making of the contract. The property in unascertained goods cannot pass until
the goods are ascertained [sec-18]. Similarly, if the subject-matter is future goods [sec 2(6)],
the contract operates as an agreement to sell [sec- 6(3)], i.e., the buyer does not become
the owner at the time of making of the contract.
After the goods have been ascertained, the property in them will pass when the parties
intend it to pass [sec 19(3(]. If the parties have expressed the intention, the property in
them passes in accordance with the provisions of Sec. 23, which is as under
Section 23 (1) Where there is a contract for the sale of unascertained or future
goods by description and goods of that description and in n deliverable state are
unconditionally appropriated to the contract, either by the seller with the assent of
the buyer or by the buyer with the assent of the seller, the property in the goods
thereupon passes to the buyer. Such assent may be expressed or implied, and may
be given either before or after the appropriation is made.
(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer
or to a carrier as other bailees (whether named by the buyer or not) for the
purpose of transmission to the buyer, and does not reserve the ng of disposal, he is
deemed to have unconditionally appropriated the goods to the contract.
As required by Sec. 231), the property in respect of unascertained future goods sold by
description passes to the buyer when the following conditions are satisfied
1) There is appropriation of the goods to the contract either by the seller or by the
buyer
2) The appropriation of the gods is made by one party with the assent of the other, i.e.,
if the seller makes the appropriation, it must be with the buyers assent and vice-
versa.
 3) The goods appropriated to the contract are of the same description as given in the
contract and are in a deliverable state, and
4) The appropriation is unconditional.

1- Appropriation- Appropriation of the goods to the contract means doing of any act by the
parties which indicates that certain goods are to be assigned to a particular contract, i.e.,
certain goods are considered to be meant for the performance of a particular contract. For
example, a seller agrees to supply me a wrist watch which he has yet to manufacture, and
after manufacturing some watches, he despatches one of them to me, that particular watch
has been appropriated to the contract, by the seller.
Similarly, when there is a contract to supply 100 bags out of the 1,000 bags of cement lying
in the seller's godown, if the seller subsequently puts some mark of buyer's name on 100
bags, or otherwise indicates to the buyer that which 100 bags would be delivered to him, or
despatches 100 bags to the buyer, there has been appropriation of the goods to the
contract. Generally, the appropriation is to be made by the seller. In some cases, however,
the appropriation may have to be made by the buyer. For example, B has 1,000 bags of
wheat belonging to A lying in his godown and if A agrees to sell 100 bags of wheat o B
permitting B to select 100 bags out of the 1,000 bags of A which are already in B’s
possession, the appropriation of the goods to the contract would, in this case, be made by
B, the buyer When the goods are destroyed before the appropriation could be made, the
loss has to be borne by the seller as no property in them is deemed to have been passed.
Thus, for example, out of a big heap of coal, only 10 tons are to be supplied to a buyer, the
seller having a duty separate and despatch the coal, if before the seller could separate and
despatch the 10 tons, the whole of the lot is destroyed by fire, the seller will have to bear
the loss for the same as the property in the goods has passed to the buyer.
In United India Ins. Co. v. Jameela Beevi, there was sale of a motor vehicle (jeep). The price
stipulated in the agreement was Rs. 10,000 out of which Rs. 2,000 had been paid by the
buyer immediately and the document containing the agreement of sale stipulated
registration in the name of the buyer, after the balance of Rs. 8,000 was paid. It was also
agreed that: (1) until the entire price is paid, the ownership in the vehicle shall not pass to
the buyer, and (2) the seller was to execute the requisite papers after the payment of the
balance of the price. Before the above said conditions were fulfilled, there was an accident,
and the question arose as to who was the owner of the vehicle for the purpose of liability of
the insurance company. It was held that since the requisite conditions necessary for the
transfer of property had not yet been fulfilled, the seller was the owner of the vehicle at the
time of the accident
2 -Assent to the Appropriation- Appropriation of the goods to the contract is not enough.
The appropriation by one party has got to be coupled with the assent of the other party
thereto. If the seller makes the appropriation, the buyer's assent to it, and if the buyer
makes the appropriation, the seller's assent to it, is necessary. Unless the assent of the
other party has been obtained, the appropriation is incomplete and since the property is not
deemed to have passed until such an assent has been obtained) the party making the
appropriation may change the appropriation by using those goods for some other contract
and appropriating some other goods to this contract.
The assent to the appropriation may be expressed or implied, and may be given
either before or after the appropriation has been made. ln case one party has made
the appropriation but the other party has not assented to it, the property in the
goods does not pass.

3- Appropriation of the Goods of Contract Description and in a Deliverable State- For the
passing of property in unascertained goods, it is further necessary that the goods which are
subsequently appropriated to the contract are of the same description as given in the
contract and also in a deliverable state If the goods of a different description or those not in
a deliverable state are appropriated to the contract, no property would pass by such an
appropriation. For example, A agrees to supply 100 bags of first quality wheat' to B, which
he has yet to purchase from the market.
Subsequently, A purchases and despatches to B 100 bags second quality wheat. The
property in-100 bags of wheat woud not pass to B as the goods appropriated to the
contract are of a description differs from given in the contract. Similarly, if A's contract
with B is to supply 1000 litres of oil contained in tins of 10 litres each, the goods
appropriated not being in a deliverable state, the property in them is not transferred to
buyer.

4 -Unconditional Appropriation- It is also necessary that the appropriation of the goods to

the Contract should be unconditional. If goods are appropriated to the contract but the
appropriation is a conditional one, the property in the goods does not pass on such an
appropriation. When the seller keeps apart certain goods for being supplied to a buyer
but requires him to pay before he can take their delivery, or sends a V.P.P parcel to the
buyer, or after despatching the goods to the buyer's destination refuses to endorse or
part with the Railway receipt or the bill of lading or other documents until the buyer
pays the price, the appropriation is not unconditional in such a case, it is deemed that
the seller has reserved the right of disposal of goods until certain conditions are fulfilled.
Where the seller has reserved the right of disposal according to Sec. 25(1),
notwithstanding the delivery of the goods to a buyer, or to a carrier or other bailee for
the purpose of transmission to the buyer the property in the goods does not pass/until
the buyer pays for It and receives the same. Similarly, if the condition set by the seller is
that the buyer cannot obtain the goods or documents of title, etc. until he has paid for
the goods, the property in such goods would pass when the buyer pays for them.
Section 23(2) gives an example of unconditional appropriation Where, in pursuance of the
contract, the seller delivers the g0od5 to the buyer or to a carrier or other bailee for the
purpose of transmission to the buyer without reserving the right of disposal, he is deemed
to have unconditionally appropriated the goods to the contract.

Misdelivery of Goods- When the seller places the goods safely on board at his own cost, the
liability of the seller ceases and he would have no insurable interest in goods. Hence, in such
case, the insurance company is absolved of liability to reimburse the loss.
Risk follows Property Sec. 26- When there is any loss or damage to the goods after making
the contract, the question which generally arises is as to which of the two parties is to bear
the loss. In this regard, the general rule contained in Sec. 26 is that goods are at the risk of
the person in whom the property in the goods vests. The section 26 reads as under:
Unless otherwise agreed, the goods remain at the seller's risk until the property therein is
transferred to the buyer, but when the property therein is transferred to the buyer, the
goods are at the buyer's risk whether delivery has been made or not
Provided that where delivery has been delayed through the fault of either buyer or
seller, the goods are at the risk of the party in fault as regards any loss which might
not have occurred but for such fault:
Provided also that nothing in this section shall affect the duties or liabilities of
either seller or buyer as a bailee of the goods of the other party.
The general rule contained in Sec. 26 states that the loss is to be borne by the owner. It
provides that if the property in the goods has not yet passed to the buyer, the loss has to be
borne by the seller, but if the property has been transferred to the buyer, such loss has to
be borne by the buyer. This rule operates whether the delivery of the goods has been made
or not. Who is to bear the loss is not to be decided on the fact to who is in possession of
goods, but the deciding factor is, who is the owner of the goods at the time when the loss to
the goods occurs.
Three exceptions to the general rule that the owner has to bear the loss, have been
mentioned in Sec. 26 itself. In those exceptional cases, the loss may have to be borne by the
person other than the owner. The exceptions are:
a) The parties may express their intention which is contrary to the above stated rule. The
section begins with the words "Unless otherwise agreed.” Thus, the parties may intend
that though the property has not passed and the seller is still the owner of the goods but
the loss or damage to the goods, if any, will have to be borne by the buyer, or, they may
provide that even though the property in the goods has passed to the buyer, the goods
are at the seller's risk.
In Bevington v. Dale, furs were delivered to a customer on approval', They were stolen by
burglars. According to a custom of the fur trade, the goods were to be at the risk of the
person who ordered them on approval. It was held that even though the property in the
goods had not passed to the buyer, he was still bound to pay the invoice price to the seller.
Similarly, in Rutter v. Palmer, the owner of a motor-car deposited the same with the keeper
of a garage for sale on commission basis. One of the terms on which the car was deposited
was that the same was to be on customer's risk. The car having been subsequently damaged
by the garage keeper's servant, it was held that the garage keeper was protected by the
above stated clause and was, therefore, not liable.

b) The second exception to the rule that the owner has to bear the loss is contained in the
first proviso to Sec. 26. It provides that the delivery of the goods has been delayed due
to the fault of either the buyer or the seller and there has occurred some loss to the
goods due to such a delay, the party at fault has to bear the loss. To make a party liable
under this proviso, it has to be shown that the delay in the delivery of the goods was due
to his fault and also there was a causal connection between the fault and the loss to the
goods "Fault", according to Sec. 25, means wrongful act or default. If the delay has not
been due to the fault of a party, he cannot be made liable.
In Demby Hamilton & Co. Ltd. v. Barden, the sellers agreed to supply 30 tons of apple juice
by samples. The sellers crushed 30 tons of apples at once and filled them in casks. After
some instalments had been delivered, the buyer refused to take further deliveries. The
apple juice became putrid. It was held that the property in the goods was still with the
sellers but the loss had to be borne by the buyer.

C) The second proviso to Sec. 26 mentions another exceptional situation when the person
other than the owner may be responsible for loss to the goods. It provides that the seller or
the buyer may not be the Owner of the goods but, if he is in their possession, he may be
responsible in his capacity as the bailee of the goods. Sec. 151, Indian Contract Act, imposes
a duty of care on every bailee. It states
In all cases of bailment, the bailee is bound to take as much care of the goods bailed to
him as a man of ordinary prudence would, under similar circumstances, take of his own
goods of the same bulk, quality and value as the goods bailed.
If, therefore, a seller continues in possession of goods the property in which has passed to
the buyer, he is bound to take due care of those goods as mentioned in Sec. 151 of the
Contract Act in his capacity as a bailee. If he negligently allows the goods to be lost,
damaged or stolen, he will be liable for the loss even though the buyer is the owner of such
goods.
Similarly, a buyer getting possession of goods before he became the owner would be
responsible for any loss or damage to the goods which might have been occasioned due to
his negligence. The liability of the buyer or seller might also arise if he makes an
unauthorised use of goods or without the consent of the other party, who is the owner of
the goods, mixes his own goods with those of the other party.
 TRANSFER OF TITLE
Nemo dat quod non habet-Sec. 27- When the seller himself is the owner of the goods which
he sells or he is somebody’s agent to dispose of the goods, he conveys a good title in the
goods to the buyer. Difficulty arises when the seller is neither himself the owner nor has, he
any such authority from the owner to sell the goods, e.g., a person finds goods lying on the
road and sells them, or a thief sells the goods after he has stolen them, or a person
purchases the goods on credit or hire-purchase basis and disposes them of, or a person
continuing in possession of the goods which he has already sold resells the goods. The
question which in such cases arises: is Should the rights of the owner of the goods be
protected and he be entitled to recover back the possession of the goods from one to whom
they have been sold, or, should the buyer who might have bought them in good faith and
for value be protected and allowed to retain the goods defeating the rights and the title of
the real Owner?
In regard to the above question, the general rule contained in Sec. 27 is as follows
Subject to the provisions of this Act and of any other law for the time being in force,
where goods are sold by a person who is not the owner thereof and who does not sell
them under the authority or with the consent of the owner, the buyer acquires no better
title to the goods than the seller had.
Section 27, as a general rule to protect the interest of the owner when it provides that
where the 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 to
the goods than the seller had. This rule is derived from the maxim "nemo dat quod non
habet", which means that nobody can give what he himself not got, i.e., a seller cannot
convey a better title than that of his own, the title of the seller is defective, the buyer's title
will also be subject to the same defect. It means is that the buyer cannot acquire a superior
title to that of the seller.
Exceptions to the rule- General rule contained in Sec. 27 is "subject to the provisions of this
Act and of any other law for the time being in force" Various exceptions to this rule have
been mentioned in this Act and the Indian Contract Act and in those exceptional situations,
the seller of the goods may not be having a good title to the goods, yet the buyer of the
goods gets a good title to them. The exceptions are: -
- Sale under the implied authority of the owner, or transfer of title by estoppel.
(Sec. 27).
- Sale by a mercantile agent. (Proviso to Sec. 27).
- Sale by one of joint owners. (Sec. 28).
- Sale by a person in possession under a voidable contract. (Sec-29),
- Sale by the seller in possession of goods, the property in which has passed to
the buyer. 1Sec. 30(1)].
 - Sale by the buyer in possession of the goods before the property in them has
passed to him. (Sec. 30(2)].
- Re-sale of the goods by an unpaid seller after he has exercised the right of
lien or stoppage in transit. [Sec. 54(3)).
- Sale by finder of goods, (Sec. 169, Indian Contract Act).
- Sale by a pawnee when the pawnor makes a default in payment. (Sec. 176,
Indian Contract Act).
- Sale in market overt-exception recognised in England.

1 -Transfer of Title by Estoppel-Sec. 27- The law of estoppel may apply against the owner
of the goods and he may not be allowed to deny the seller B authority to sell. The rule
contained in Sec 27 are as under: “Unless the owner of the goods is by his conduct
precluded from denying the seller's authority to sell.”
Because of application of rule of estoppel against him, he may not be able to assert that the
seller of the goods did not have a right to sell and, thus, the buyer may have a good title
even though the seller of the goods did not actually have the right to sell them. When the
owner of the goods by his act or omission makes the buyer to believe that the seller of
those goods has a right to sell them, subsequently, he cannot deny the existence of such a
right in the seller. Thus, if the agent sells the goods within his apparent authority, the buyer
of those goods gets a good title and the owner cannot recover those goods from the buyer.

2 -Sale by a Mercantile Agent Proviso to Sec. 27- Sale by a mercantile agent constitutes an
exception to the rule contained in Sec. 27. If a mercantile agent has an authority to sell
the goods and he does so, no difficulty arises because according to the general rule, an
agent having the authority to sell them can convey a good title. The difficulty arises
when the mercantile agent disposes of the goods without having an authority to do so.
Proviso to Sec. 27 states that when a mercantile agent is in possession of the goods or of
the document of title to the goods with the consent of the owner, a sale made by him
conveys a good title to the buyer provided the buyer acts in good faith and without
notice that such a mercantile agent did not have an authority to sell. For the application
of this proviso, the following conditions are to be satisfied: -
i -that the seller is a Mercantile Agent
ii -the said Mercantile Agent got the possession of the goods or documents of title to the
goods with the consent of the owner, and in his capacity as a mercantile agent;
iii -while selling the goods, he must have been acting in the ordinary course of his
business of a Mercantile Agent,
iv -the buyer of the goods must have acted in good faith without having any notice that
such a Mercantile Agent did not have an authority to sell.
A/to section 2(9), Mercantile Agent is one who is having in the customary course of
business as such Agent's authority either to sell the goods, or to consign them for the
purpose of sale, or to buy goods, or to raise money on the security of the goods.
In Folks v. King," an Agent was entrusted a car by the owner to sell the same subject to a
reserve price. Contrary to the authority, the agent sold the car below the reserve price to a
bona fide purchaser and misappropriated the proceeds. It was held that since the buyer had
purchased the car from the mercantile agent in good faith, he had a good title.
The mercantile agent should be in possession of the goods or of the documents of title to
them with the consent of the owner, although he has no authority to sell them. If he has
obtained the possession of the good without the consent of the owner, for example, the
goods have been obtained by theft, he cannot convey a good title.
In Pearson v. Rose & Young Ltd. the plaintiff gave possession his motor car to Hunt,
a Mercantile Agent, to know if the same could be sold. He did not actually authorise
Hunt to sell the same. Hunt took the registration book relating to the car from the
plaintiff by trick and then sold the car without the plaintiff's authority or knowledge.
Hunt sold the car to X. X sold it to Y and Y sold the same to the defendants. The
plaintiff sued the defendants to claim damages for conversion on the ground that
Hunt had no authority to sell and, therefore, no good title could be passed to any
subsequent transferee. lt was observed that though Hunt got possession of the car
as a Mercantile Agent but not the registration book. The sale of a second-hand car
without the registration book could not be considered to be "in the ordinary course
of business". It was held that for passing a good title, Hunt should have obtained the
possession of the car as well as registration book with the consent of the owner, in
the absence of which Hunt was not able to pass a good title to his transferee or the
subsequent buyers.
lt is also necessary that the Mercantile Agent must have obtained the possession of the
goods or the documents of title in his capacity as a Mercantile Agent and hot in any other
capacity. If he is in possession in any other capacity, he cannot convey a good title. For
example, it I am going out for a week and I leave my valuables with my neighbour for the
purpose of safe custody and the neighbour, who also happens to be an auctioneer, disposes
of those valuables by auction, the buyer will not acquire a good title to them because the
seller did not get the possession in his capacity as a Mercantile Agent but as a neighbour or
a bailee.
The sale must have been made by him when he was acting in the ordinary course of
business of a Mercantile Agent. The mercantile agent must sell them in-a proper way during
business hours, at a proper place and (in the usual way) of his normal business so that it
does not arouse a suspicion that the sale was being wrongly made. lf an auctioneer sells the
goods without an auction; the buyer will not get a good title. Similarly, if a Mercantile
Agent, instead of selling the goods during business hours, at a business place, sells the
goods secretly and at an odd time for a much lower than the normal price, the buyer will
not get a good title.
In order that the sale by a Mercantile Agent is valid within this proviso, it is necessary that
the buyer must have acted in good faith and without any notice that the seller had no
authority to sell the goods. The burden of proving that the buyer was acting in good 1aith
and without notice is upon the buyer himself.

3 - Sale by one of the Joint Owners Sec. 28- Sale by one of the joint owners constitutes
another exception to the rule of nemo dat quod non habet. According to Sec. 28, if one of
the several joint owners is in sole possession ft the goods with the permission of the other
co-owners, a sale by him will convey a good title to the buyer who buys in good faith and at
the time of buying has no notice of the fact that such a joint owner has no authority to sell.
4 - A. Sale by a person in possession under a Voidable Contract Sec. 29- According to
Section 19 and 19-A of the Contract Act, if the consent of a party to the contract has been
obtained by coercion, fraud, misrepresentation or undue influence, the contract is voidable
at the option of the party whose consent has been so obtained. Section 29 provides that a
person has obtained the possession of some goods under a contract which is Voidable under
Section 19 or 19-A of the Contract Act and he sells those goods before the contract has been
avoided by the party entitled to do so, the buyer of such goods acquires a good title to
them. Itis, however, necessary that such a buyer must have purchased the goods in good
faith and without notice of the seller's defect of title,
This section does not apply to a contract which is void and not voidable, or where the seller
has no title at all, for example, he has obtained the goods by theft.
5 -Sale by the Seller in Possession-Sec. 30(1)- If a seller has sold the goods and the property
in the goods has passed to the buyer, the seller cannot deal with such goods. If he is still in
possession of the goods and deals with them, the buyer can sue him for the tort of
conversion. Sec. 30(1), however, provides that if a seller having sold the goods is still in
possession of the goods or of the documents of title to them, the delivery or transfer of the
goods of title under any sale, pledge or other disposition thereof by the seller or by a
Mercantile Agent on his behalf will convey a good title to the buyer provided the buyer has
been acting in good faith and he has no notice of the previous sale.

6 -Sale by the Buyer in Possession-Sec, 30(2)- Section 30(2) deals with a case where the
buyer is in possession the goods but the property in them has not passed to him says that if
a buyer has obtained the possession of the goods or the documents of title to them with
the consent of the seller or other disposition thereof to any person will convey a good title
to the transferee provided the person receiving the goods was acting in bonafide and
without any notice as regards any lien or other right of the original seller in respect of those
goods.
Buyer means a person who buys or agrees to buy. Even if a person has agreed to buy
conditionally, he can convey a good title.
A person who takes the goods on hire-purchase cannot be considered to be a person who
has "agreed to buy" the goods and, therefore, a sale of goods by him does not convey a
good title to the buyer.
In Belsize Motor Supply Co. v. Cox, Belsize Motor Supply Co. let out a taxi-cab to
Alfred Burgess Ltd. under the hire-purchase agreement and the latter were to pay an
amount of £ 374 in twelve monthly installments. Before all instalments were paid,
Alfred Burgess Ltd. Pledged the vehicle with Cox. Cox was held liable for conversion
of the taxi-cab because Alfred Burgess Ltd. was not a person who had agreed to buy
and, therefore, they could not convey a good title to Cox.

7 -Resale by an Unpaid Seller-Sec. 54(3)- According to Sec. 54(2), if an unpaid seller has
exercised the right of lien or stoppage in transit and the buyer does not pay him, he may
resell the goods after a notice to the buyer. If such a notice is not given, the seller is neither
entitled to claim from the buyer any loss if the goods bring lower than the contract price nor
can he retain the benefit if the goods are sold at a higher price. According to Sec. 54(3),
when an unpaid seller has exercised his right of lien or stoppage in transit and resells the
goods, the buyer acquires good title thereto as against the original buyer, notwithstanding
that no notice of the resale has been given to the original buyer.
8 -Sale by Finder of Goods-Sec. 169, Indian Contract Act- According to Sec. 71, Indian
Contract Act, the finder of goods is subject to the same responsibility as the bailee He is to
take due care ft the goods while they are in his possession and also to return them when
their owner has been found. According to Sec. 169 of the Indian Contract Act, however, if
the owner cannot with a reasonable diligence be found or if he refuses upon demand, to
pay the lawful charges of the finder, the finder may sell the goods,
- when the thing is in danger of perishing or of losing the greater part of its
value, or
- when the lawful charges of the finder, in respect of the thing found, amount
to two-thirds of its value.
When the finder of goods sells them under the circumstances stated above, the buyer of
such goods gets a good title to them.

9 -Sale by Pawnee Sec. 176, Indian Contract Act- Normally, the pawnee of the goods is
under a duty to return them if the debt secured by such goods is paid back to him. He may
regain such goods until the debt and interest thereon and all necessary expenses incurred
by him in respect of the possession or for the preservation of the goods pledged are paid to
him. According to Sec. 176, Indian Contract Act, if the pawnor makes a default in the
payment of the debt, the pawnee may either sue him for the debt or may sell the goods
pledged on giving the pawnor reasonable notice of the sale. Upon such a sale being made by
the pawnee, the buyer of such goods acquires a good title to them.
10 Sale in Market Overt- English Law recognises an exception to the rule of section 27,
according to which on the sale of goods in market overt, according to the usage of the
market, the buyer acquires a good title to the goods, provided he buys them in good
faith and without notice of any defect or want of title on the part of the seller [section
22(1)]. Such sale means sale in the open market by a person who generally deals in such
goods. The buyer's title is protected in case of such a sale though the seller may be liable
the tort of conversion.

RIGHTs OF UNPAID SELLER AGAINST THE GOODS

It has already been observed that the seller and the buyer are bound to perform certain
duties. If either party does not perform his duty in the proper way, he can be made liable. In
case the buyer does not accept to pay for the goods, the unpaid seller, apart from having a
right to avoid the contract or having a right to sue the buyer for the breach of contract, can
exercise the following rights against the goods:
1. Lien
2. Stoppage in transit
3. Re-sale
Unpaid Seller- The right against the goods can be exercised only by an un paid seller as
defined in Sec. 45. An unpaid seller is a person to whom the whole of the price has not been
paid or tendered, or if the price was paid through a bill of exchange or another negotiable
instrument the same has been dishonoured [sec 45(1)]. If the negotiable instrument had
been received as a conditional payment, i.e., subject to the realisation thereof, and the
condition cannot be fulfilled if the same has been dishonoured, the seller is deemed to be
an unpaid seller.
A seller is an un paid one when the whole of the price has not been paid to him. It means
that when only a part of the price has been paid (and not the whole of it), the seller is an
unpaid seller. If the price has been tendered by the buyer but the seller has wrongfully
refused to take the same, he is not an unpaid seller.
The position of the seller's Agent may sometimes be the same as that of the seller for the
purpose of the exercise of rights conferred by this Act. For example, an Agent of the seller
to whom the bill of lading has been endorsed or a consignor or Agent who has himself paid,
or is directly responsible for the price, can exercise the rights of an unpaid seller.
Un-paid Seller's Rights- Notwithstanding that the property in the goods may have passed to
the buyer, the un paid seller can exercise the following rights against the goods-
I -a lien on the goods for the price while he is in possession of them, (Secs, 47-49)
II -a right of stopping the goods in transit, while the goods are in transit and the buyer has
become insolvent; (Secs. 50-52)
III -a right of re-sale of the goods. (Sec. 54).
1. LIEN- The right of lien is one of the rights against the goods which the unpaid seller can
exercise. Lien means retaining the goods or refusing to deliver them until the price in
respect of them has been paid by the buyer. By this right, the seller can refuse to deliver the
goods to the buyer until the payment, of the price, even though the ownership in the goods
has already passed to the buyer. By a mere exercise of this right, the contract of sale of
goods is not automatically rescinded. According to Sec. 47, this right can be exercised in the
following situations:
i- When the goods have been sold without any stipulation as to credit, i.e., the sale of the
goods has been on cash basis. It has already been observed under Sec. 32 that if there is no
agreement to the contrary, the payment of the price and the delivery of the goods are
concurrent conditions. It means that if the goods have not been sold on credit, the seller
expects that the buyer shall pay the price against the goods. The seller can refuse to deliver
them to the buyer, or in other words, he can exercise the right of lien over the goods, if the.
buyer is not ready and willing to pay the price in exchange for the goods.
ii -When the goods have been sold on credit, the seller can exercise the right of lien on the
expiry of the period of credit. As soon as the period or credit expires, the price becomes
due and the seller can exercise the right of lien thereafter. For example, on 1st January, A
sells a horse to B, the buyer having a right to take the delivery at any time he likes and the
price is payable on 1st March. If the buyer has not taken the delivery of the horse by 1st
March and he demands the delivery after this date, the seller can refuse to part with the
hor8e until the buyer pays for them.
iii -The seller can also exercise the right of lien when, before the delivery of the goods to
him, the buyer becomes insolvent. Even though the seller had sold the goods on credit and
the period of credit has not yet expired but the buyer has become insolvent, the seller's
right of lien can be exercised. When the goods are sold on credit, the presumption is that
the buyer shall maintain his solvency. If that condition can no more be satisfied, the seller is
entitled to the exercise of this right.
The buyer is insolvent, according to Sec. 28, when he has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due whether he has
committed an act of insolvency or not.
The lien is a right to retain the possession It is, therefore necessary that the seller is still in
possession of the goods. Transfer of title does not affect the exercise of this right, rather it is
a right which is exercised after the property in the goods has passed to the buyer. If the
seller has handed over the delivery order to the buyer but the buyer has not yet got the
delivery, actual or constructive, the seller may exercise the right of lien. It is, however,
necessary that the transfer of the delivery order to the buyer should seller had waived his
right of lien. If the delivery order is transferred to the buyer under circumstances which
indicate the waiver of the right of lien, the right comes to an end.
The right of lien means a right to detain the goods until the price is paid It presupposes that
the seller is continuing in possession of the goods. If the seller has delivered the goods to
the buyer, he cannot claim back the goods for that purpose of exercising the right of lien.
Lien is a right which can be exercised in respect of all those goods which are with the seller.
If the buyer has made part payment, of the price, he cannot insist that proportionate
amount of goods should be delivered to him.
The right of lien can be exercised if the seller is still in possession of the goods even though
his capacity is not that of the seller but only that of an Agent or bailee for the buyer. If the
goods have not been actually delivered to the buyer but by an arrangement between the
seller and the buyer, the goods are to continue in the possession of the seller so that the
seller holds those goods on behalf of the buyer. There is constructive delivery of the goods
to the buyer as stated in Sec. 33, but since the seller of have been made under the
circumstances as to show that the is still in possession of the goods, although his capacity is
only that of a bailee of the buyer, he can exercise the right, of lien. For example, the seller
sells his goods on 1st January and the buyer instead of taking the delivery of the goods
requests the seller to keep goods in his warehouse till 1st March, the buyer agreeing to pay
the warehouse charges for the two months, the seller can exercise his right of lien in respect
of such goods.
The basis of the right is the non-payment of the price and therefore if the buyer is willing to
pay the price, there is no question of exercise o the right of lien. If the buyer pays the price,
the right of lien which might have existed earlier is terminated. It may, however, be noted
that the right of lien is a right which can be exercised only for the non-payment of the price.
It some other charges, for example, the warehouse charges, are due to the seller, he cannot
exercise the right of lien. For the recovery of such charges, the seller's only remedy is a
persona action against the buyer.
Therefore, if the goods are delivered by the seller to the buyer or his Agent or to a carrier or
some other bailee for the purpose of transmission to the buyer, the right of lien comes to an
end. Once this right has come to an end, it cannot be revived even if the seller gets the
possession of the same goods again.
Lien and Part Delivery- According to Sec. 48, if the seller has delivered a part of the goods,
he can exercise his right of lien over the remainder unless the part delivery was made under
such circumstances as to Show that he had waived the right of lien. Sometimes delivery of
the part may operate as delivery of the whole and in such a case, it may be presumed that
the seller has waived his right of lien over the goods which have not yet been delivered. If,
for example, out of 100 bags of wheat which were to be supplied by the seller to the buyer,
20 have already been delivered to the buyer, the seller may exercise his right of lien over
the other 80 bags. If, however, the buyer gets the whole of the goods weighed but takes
away only a part of them, the delivery of the part of the goods in such a case would operate
as delivery of the whole and the seller's right of lien over the remaining goods would come
to an end. Similarly, if an essential part of the machinery has been delivered by the seller to
the buyer, the seller cannot exercise his right of lien over the remaining parts.

Termination of lien- The unpaid seller's right of lien may be lost in any of the following
ways:
a. By payment of price-The right of lien comes to an end when the seller ceases to be an
unpaid seller, i.e., when the buyer pays or tenders the price to the seller. It has been
noted under Sec. 47(1) that the unpaid seller is entitled to exercise his right of he until
payment or tender of the price in respect of certain goods, the payment or tender of the
price therefore, terminates the seller's right to retain the goods. Merely obtaining the
decree does not mean the payment of the price and, therefore, Sec 49(2) states that an
unpaid seller, having a lien on the goods, does not lose his lien by reason only that he
has obtained a decree for the price of the goods.
b. By delivery to the carrier-Since the right of lien is a right to retain the posses5sion 8o
long as the seller continues in possession, the right would obviously come to an end
when the seller loses the possession. The seller loses the possession 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. Whereas the right of stoppage in
transit begins when the seller parts with the possession of the goods by delivering them
to a carrier or some other bailee for the purpose of transmission to the buyer. Thus,
delivery of the goods to a carrier or other bailee for the purpose of transmission to the
buyer results in the end of lien.
For the termination of the lien, the delivery to the carrier or some other bailee must
have been made without reserving the right of disposal of the goods. If the seller has
reserved the right of disposal, i.e., a right of not delivering the goods to the buyer until
he fulfils the required condition generally that condition being the payment of the price,
the seller can exercise his right of lien.

c. By the buyer obtaining possession of the goods-When the buyer or his Agent lawfully
obtains the possession of the goods, the right of lien comes to an end. If the buyer at the
time of the contract of sale is already in possession of the goods, although as a bailee for
the seller, the seller cannot exercise the right of lien in respect of those goods. If the
buyer once obtains the possession, the right of lien comes to an end, and such a right
cannot be exercised even if the seller again gets back the possession of those goods.
Where a refrigerator after being sold was delivered to the buyer and since it was not
 functioning properly, the buyer delivered two of its parts to the seller for repairs, it was
held that the seller could not exercise his lien over those parts.
d. By waiver- Unpaid seller's right of lien is also lost by waiver thereof According to Sec.
46(1)a), an unpaid seller gets his right of lien by implication of law. A party to a contract
may waive his rights, expressly or impliedly, according to Sec. 62. Sec. 49(1)c) expressly
provides that the right of lien comes to an end by waiver thereof. Such a waiver may be
presumed when the seller allows a period of credit to the buyer, or delivers a part of the
goods to the buyer or his Agent under the circumstances which show that he does not
want to exercise his right of lien, or, When the seller assents to a sub-sale which the
buyer may have made.
e. By disposition of the goods by the buyer- According to Sec 53, the unpaid sellers right
of lien, or stoppage in transit is not affected by any sale or other disposition of the goods
by the buyer. This general rule is subject to two exceptions:
i- when the seller himself assents to a sub-sale or other disposition of the goods by
the buyer;
ii- when the buyer having lawfully obtained possession of document of title to the
goods transfers the same to a transferee in good faith and for consideration and
the transfer is by way of sale.
In the above stated two exceptional cases, the unpaid sellers right of lien comes to an-
end.

STOPPAGE IN TRANSIT- It is one of the rights which an unpaid seller can exercise against the
goods, his right means that when the goods have already been delivered to a carrier for
being transmitted to the buyer, the carrier for the seller’s request is to deliver the goods
back to the seller and not to deliver to the buyer even though the buyer might have got the
possession of document of title to the goods/Under such a right, therefore, the unpaid seller
regains the possession of the goods after they had once been delivered io a carrier for the
purpose of transmission to the buyer. The exercise of this right, according to Sec. 64, does
not result in the rescission of the contract or reverting of the property in the good in the
seller. lt only means that the seller after getting back the goods from the carrier has a right
to retain them until the buyer pays for them. If the buyer still tails to pay, the unpaid seller
may even resell those good.
For the purpose of exercise of this right, the following conditions are to be satisfied:
- Seller should be an unpaid seller as defined in Sec. 45.
- The buyer should be insolvent within the meaning of Sec 28, i.e., a person
who has ceased to pay his debts in the ordinary course of business, or cannot
pay his debts as they become due, whether he has committed an act of
insolvency or not.
- The goods should be in transit.
The goods are in transit from the moment they are delivered to a carrier for the purpose of
trans mission to the buyer. It is, however, necessary that the carrier must have got the
possession of the goods in his capacity as a carrier. This might take the goods for
transmission in carrier to different capacities:
i- The carrier may be the buyer's Agent. When the possession has been received by the
carrier as the buyer's Agent, there is no question of exercise of right of stoppage in
transit because when the buyer or his Agent has received possession of the goods,
the seller cannot exercise any right in respect of them;
ii- The carrier may be the seller's Agent. If the carrier is the seller's Agent, then the
seller himself is deemed to be in constructive possession of the goods and he can
exercise even the right of lien in respect of them,
iii- The carrier may be neither the buyer's agent nor the seller's agent but may be
holding the goods as a carrier. If he is in possession of the goods in that capacity,
then the right of stoppage in transit can be exercised by the seller.
Duration of Transit- The right of stoppage in transit can be exercised so long as the goods
are in transit. It becomes important, therefore, to know as to what is the duration of transit,
i.e., when the transit begins and when it comes to an end. Sec. 51 provides the rules
regarding the same. According to sub-sec. (1), the goods are deemed to be in the course of
transit from the time when they are delivered to a carrier or other bailee for the purpose of
transmission to the buyer. The transit continues until the buyer or his Agent in that behalf
takes delivery of them from such carrier or other bailee. It means that so long as the goods
are with a carrier, the transit continue. The position was explained by Cave J.
“The moment that the goods are delivered by the vendor to a carrier to be carried to the
purchaser the transitus begins. When the goods have arrived at their destination and have
been delivered to the purchaser or his Agent, or when the carrier holds them as
warehouseman for the purchaser and no longer as carrier only, the transitus is at an end.
The destination may be fixed by the contract of sale or by directions given by the purchaser
to the vendor.”
In order that right of stoppage in transit can be validly exercised, the carrier carrying the
goods must be a middleman rather than either the buyer’s Agent or the seller's Agent. If the
carrier is the buyer's Agent, he would defeat the right of stoppage in transit. On the other
hand, if he is the seller's Agent, the seller’s Agent can exercise even the right of lien over
those goods. Sec. 51, sub-sec. (5) provides that when the goods are delivered to a ship
chartered by the buyer, it 1s a question depending on the circumstances of each case
whether they ape in the possession of the master as a carrier or as Agent of the buyer. In
Schotmans v, Lancashire & Yorkshire Ry. Co., there was delivery of the goods by the seller
on board a ship belonging to the buyer. The bill of lading was also taken in the buyer's order.
It was held that in this case it amounted to the delivery of the goods to the buyer so that the
seller was precluded from exercising his right of stoppage in transit.

When Transit comes to an end: -

i- When the buyer takes delivery- According to Sec. 51, sub-sec (1), the goods are
deemed to be in transit from the time they are delivered to the carrier or other bailee
for the purpose of transmission to the buyer, until the buyer or his Agent in that behalf
takes delivery of them from such carrier or other bailee When the buyer or his agent
takes actual possession of the goods, the right of stoppage comes to an end.
It is not necessary that the buyer or his Agent takes the possession after the goods have
reached the destination According to Sec. 51, sub-sec (2), if the buyer or his Agent in that
behalf obtains delivery or the goods before their arrival at the appointed destination, the
transit is at an end. Although the seller may have indicated a certain destination to which
the goods are to be carried, it is open to the buyer to make arrangement with the carrier
and have delivery of the goods before they arrive at the appointed destination and thus
make an end to the seller's right of stoppage in transit.
ii- When the carrier or the other bailee acknowledges to the buyer- According to Sec. 51,
sub-sec (8), if, after the arrival of the goods at the appointed destination, the carrier or
other bailee acknowledges to the buyer or his Agent that he holds the goods on his
behalf and continues in possession of them as the bailee for the buyer or his Agent, the
transit is at an end. When the carrier or other bailee acknowledges to the buyer that he
is holding the goods on the buyer's behalf, there is deemed to be constructive delivery
of the goods to the buyer and he becomes the buyer's Agent in holding the goods, and
that obviously puts an end to the seller's right of stoppage in transit. An
acknowledgment on the part of the carrier that he holds the goods for the buyer is
essential, but if he indicates that he would deliver the goods to the buyer or his Agent on
freight being paid, that is not enough. In Whitehead v. Anderson, on arrival of the ship,
the assignee of the buyer, who had become insolvent, went to take the delivery of the
timber. They only saw and touched the timber. The captain refused to deliver the same
until the freight had been paid. The seller subsequently gave a notice of stoppage in
transit. It was held that neither the buyer's assignee had taken the actual possession,
nor had the captain of the ship contracted to hold the timber as the buyer's Agent, the
seller's right of stoppage in transit had not come to an end.
Sometimes the buyer may request a carrier to carry the gods to some further
destination. In such a case, upon the receipt of the fresh instructions by the carrier from
the buyer, when he agrees to take them to the new destination, the original transit is
deemed to be at an end and the seller cannot exercise his right to stoppage in transit.

iii- When the carrier wrongfully refuses to deliver the goods to the buyer. If the buyer
wants to take the delivery when it ought to have been made to him but the carrier
wrongfully refuses to deliver the same, the transit is at an end The carrier by his
wrongful act of refusing to deliver the goods cannot extend the period of transit. If the
carrier refuses to deliver the goods on an ineffectual notice of stoppage in transit, the
transit is at an end, because he has a duty to stop the goods in transit only when a
proper notice has been duly served on him.
Effect of part delivery- According to Sec. 51, sub-sec. (7), when a part delivery of the goods
has been made by the carrier to the buyer or his Agent, the seller may still exercise the right
to stoppage in transit over the remainder of the goods. If the goods are sent partly by one
route and partly by another and the buyer takes the delivery of the goods sent by one route,
the seller is entitled to exercise his right of stoppage over the goods coming through
another route but if the part-delivery of the goods was made to the buyer in the
circumstances which show an agreement on the part of the seller to give up his right against
the whole of the goods, the right of stoppage in transit on the remainder of the goods come
to an end. It, in other words, means that the right of stoppage in transit, when waived,
comes to an end.
Effect of rejection of goods by the buyer- If, after the arrival of the goods at their
destination, the buyer refuses to take their delivery, the question which in such a case arises
is, whether the transit has come to an end. According to Sec. 51, sub-sec, (4), if the goods
are rejected by the buyer and the carrier or other bailee continues in possession of them,
the transit is not deemed to be at an end. The position would be the same even if the seller
has refused to receive them back It has already been observed that the transit continues
until the buyer or his Agent actually takes delivery, or there is a constructive delivery when
the carrier or some other bailee acknowledges to the buyer that he holds the goods on his
behalf, it is a necessary that if the buyer does not himself take the goods and also does not
want the carrier to hold the same for him, i.e., when he expressly refuses to take their
delivery, they should be deemed to be still in transit.
How the right is exercised- The Act does not prescribe any particular form or mode of
exercise of the right of stoppage in transit The only thing required is that the unpaid seller
may either take actual possession of the goods, or give a notice of his claim to the carrier or
other bailee in whose possession the goods are [sec 52(1)]. The seller is thus to express his
intention countermanding the delivery. By such a notice, a carrier may be forbidden to
deliver the goods to the buyer or his Agent, and may be required to deliver the goods to the
seller or his order.
Notice of stoppage may be given either to the person in actual possession of the goods or to
his principal. In order that the notice to the principal is effectual, it shall be given at such
time and in such circumstances that the principal, by the exercise of reasonable diligence,
may communicate it to his servant or Agent in time to prevent a delivery to the buyer his
provision implies a duty of the principal, if notice is given to him, to use reasonable diligence
in communicating the notice to his Agent. If such a duty to communicate exists and the
principal makes a default and as a consequence thereof, the insolvent buyer is able to take
the delivery of the goods, the carrier would be liable for conversion.
After a proper notice has been duly received by the carrier, he has a duty not to deliver the
goods to the buyer but to redeliver them to the seller [sec 52(2)], failing which he can be
made liable for conversion. The vendor by stopping the goods in transitus does not thereby
regain the property in them, nor does he thereby cancel the sale,' he gets only a right of
possession of the goods. In view of this right of the unpaid seller, the carrier has the duty to
protect this right. If by mistake he delivers the goods to the buyer, the seller can make both
the carrier and the buyer liable for conversion.
According to Sec. 52(2), the expenses of re-delivery of the goods are to be borne by the
seller. On exercise of the right of stoppage, the seller's duties towards the carrier are, the
1ssue of proper directions as to how and where and to whom the goods are to be delivered,
the payment of freight, if any due, and also the expenses of redelivery.
Effect of sub-sale or pledge- Sometimes the buyer may dispose of the goods purchased by
him although neither he has obtained their possession nor has paid for them. In such a case,
the question which generally arises is that whether the unpaid seller can exercise his right of
lien or stoppage in transit in respect of those goods. The general rule, as provided in Sec. 53,
is that unpaid seller's right of lien or stoppage in transit is not affected by any sale or other
disposition of the goods which the buyer might have made. It means that if the buyer
disposes of the goods for which he has not yet paid, the seller may exercise his right of lien
or stoppage in transit, as the case may be, and the person to whom the goods were
disposed of by the buyer will not have any night in respect of those goods. For example, A
sells certain goods to B and delivers them to a carrier for transmission to B. Before the
goods reach their destination, A comes to know that B has become insolvent. In the
meanwhile, B agrees to sell those goods to C. The sale of the goods by B to C will not affect
the right of A to stop them in transit. There are two exceptional cases when the right of
unpaid seller may be affected by disposition of the goods which the buyer might have made.
The exceptions are: -
a. When the seller has assented to the sale or other disposition which the buyer may have
made. If the seller himself assents to such a sale or other disposition by the buyer, the
law of estoppel applies against him and he is estopped from denying the buyer's right to
dispose of the goods and is thus precluded from exercising his right of lien or stoppage
in transit against the sub-buyer or the pledgee.
Seller's assent to the sub-sale or pledge is essential in order to deprive him of the rights
against the goods and the assent must have been made in such a way that it indicates that
the seller intends to waive his right against the goods.
b. The second exception to the rule is contained in the proviso to Sec. 53(1). According to
the proviso, where-
(i)- the buyer has lawfully obtained the possession of the document of title to the go0ds;
and
(ii)- the buyer then transfers the document of title to another person; and
(iii)- the transferee takes the document of title in good faith and for consideration,

The rights of the unpaid seller would be affected thereby. If the transfer by such buyer is by
way of sale, the unpaid seller's right of lien or stoppage in transit is defeated. But if such a
transfer is by way of pledge or other disposition for value, the unpaid seller can exercise his
rights of lion or stoppage in transit subject to the rights of the transferee. For example, A
sells certain goods to B and also sends the document of title to B. Before B pays for the
goods, he sells those very goods to C, who takes them in good faith. If B become insolvent, A
cannot exercise his rights against the goods because B has transferred by way of sale the
document of title pertaining to those goods. But, on the other hand, if B has pledged the
document of title of C for Rs, 6,000/, A can exercise his rights subject to the rights of C, i.e.,
A cannot exercise his rights so as to affect the interests of C. If A Wants to exercise his rights,
he may pay to C, the pledgee, a sum of Ra. 6,000/, i.e., the amount secured by the pledge
and then exercise his rights,
In order that the transferee's rights are to be protected and unpaid seller's rights affected, it
is necessary that the transferee must have taken the document of title in good faith. When
the buyer knows that the document of title to him is being transferred by an insolvent, who
has not paid for the goods, he cannot be said to be acting in good faith.
Distinction between Lien and Stoppage in Transit
1. The right of lien consists in retaining the possession of the goods. This right presupposes
that the seller has not parted with the possession of the goods. In the case of stoppage in
transit. On the other hand, the seller can regain the possession of the goods from the carrier
to whom they might have been delivered for the purpose of transmission to the buyer. This
right, therefore, means taking back the possession after the seller has already parted with.
2. Once the seller loses the possession, whether by delivering the goods to the buyer or hi8
Agent or to a carrier or some other bailee for the purpose of transmission to the buyer, the
right of lien comes to an end. On the other hand, the right of stoppage in transit comes into
existence after the seller has already delivered the goods to a carrier for the purpose of
transmission to the buyer
3. Right of stoppage in transit cannot be exercised unless the buyer has become insolvent.
The right of lien can be exercised even if the buyer is not insolvent. There are however,
some common points between these two rights:
- Both these rights can be exercised when the seller is an un paid seller.
- These rights can be exercised after the property in the goods has passed to the
buyer.

Re-sale- This is a very valuable right given to an unpaid seller after he has exercised his right
of lien or stoppage in transit. After exercising the right of lien or stoppage in transit, the
seller has a right to retain the goods until the buyer pays the price. If within A reasonable
time atter the exercise of such a right, the buyer does not pay the price, the unpaid seller
may re-sell them, under any of the following Circumstances:
- where the goods are of perishable nature. [Sec. 54(2); or
- where the unpaid seller who has exercised his right of lien or stoppage in
transit gives notice to the buyer of his intention to re-sell. Section 54(2)]; or
 - where the seller expressly reserves a right of re-sale in case the buyer should
make default. (Sec. 54(4)].
Notice of re-sale- Before making a re-sale, the unpaid seller is required to give a reasonable
notice of re-sale to the buyer. No such notice is, however, required if the goods are of a
perishable nature. Such a notice gives an opportunity to the buyer either to fulfil his part of
the obligation by making an arrangement lor the payment of the price and have the goods,
or if he cannot pay, then the loss on re-sale is to be ultimately borne by the buyer. Notice of
re-sale should be reasonable. It must be given within a reasonable time after the breach of
contract and should also give him a reasonable opportunity of either fulfilling the contract
or supervising the sale.
Loss or Profit on re-sale- On re-sale, the seller may either suffer loss, i.e., by the re-sale, the
seller may obtain less price than the original buyer had agreed to pay, or he may make
profit, by obtain higher amount than the original buyer had agreed to pay. The question
which arises is, can the seller recover such loss from the original buyer, or can he retain the
profit made on resale. In this context, Section 54(2) provides that if the re-sale is properly
made, i.e., after due notice to the buyer (except when the goods are of a perishable nature,
and within a reasonable time, the unpaid seller can recover from the original buyer damages
for any loss occasioned by his breach of contract, but the buyer shall not be entitled to any
profit which may Occur on re-sale.
On re-sale, the seller is entitled to recover the loss occasioned from the original buyer
because such loss had occurred due to the buyer's failure to perform his part of the
obligation. Thus, if for certain goods, the original buyer had agreed to pay Rs. 20,000 but on
re-sale, the seller recovers only Rs. 15,000, he can recover the loss of Rs. 5,000 from the
original buyer.
On re-sale if the seller makes profit, i.e., he recovers more than the contract price agreed to
be paid by the original buyer, the seller can retain that himself, and he is not obliged to pay
that to the original buyer. Thus, if the original buyer had agreed to pay Rs. 20,000 for certain
goods, and the re-sale fetches Rs. 25,000, the seller can retain the profit of Rs. 5,000 with
himself.
lt may be noted that the seller's right to recover damages, in the event of loss on re-sale,
and to retain the surplus, in case of profit on re-sale is subject to the condition that the
notice of re-sale was given to the original buyer (except when the goods are of a perishable
nature) According to Section 54(2), if such notice is not given, the unpaid seller shall not be
entitled to the profit. if any. on re-sale.
It has been noted above that on re-sale, the unpaid seller can recover the loss, if any,
occasioned by such re-sale, from the original buyer. For being entitled to such damages, the
seller is under a duty to make the re-sale within a reasonable time. If the seller makes undue
delay in making re-sale and suffers more loss than he would have suffered if the re-sale had
been made within a reasonable time, he would be entitled to claim compensation equal to
the difference between the contract price and the market price on the date when the re-
sale ought to have been made.
If the delay in reselling the goods is not due to the fault on the part of the seller, e.g., the
buyer from time to time requested for the extension of time for making the payment, and
ultimately did not pay and thus there was some delay in re-selling the goods, the delay in
making the re-sale is not unreasonable.
Measure of damages on re-sale- According to Section 54(2), on the re-sale being properly
made, the unpaid seller can recover from the original buyer damages for any loss
occasioned by his breach of contract. The loss which, in such a case, is occasioned to the
seller is the difference between the contract price and the re-sale price, and the measure of
damages, therefore, is the difference between the contract price and the re-sale price. But
in other cases, the damages are governed by the provision contained in Section 73 of the
Indian Contract Act, according to which the measure of damages is the difference between
the contract price and the market price prevailing on the date of breach of contract, Since
the re-sale is to be made after giving notice to the buyer, the re-sale may not be made on
the date of breach of contract and on re-sale, the seller may recover different price than
prevailing on
the date of breach of contract.
It may be observed that the criterion of allowing difference between the contract price and
re-sale price is followed by applying Section 54(2) of the Sale of Goods Act, if the re-sale has
been properly made. if the re-sale has not been properly made, then the damages are
allowed according to the formula under Section 73 of the Indian Contract Act, i.e., the
difference between the contract price and the market price, is allowed by way of damages.
Title of the new buyer- The question which in such a case arises is: can a seller, who has
ceased to be the owner of the goods, by re-sale convey a good title to the new buyer?
Although the general rule contained in Sec. 27 of the Act is nemo dat quod non habet, i.e., a
seller cannot convey a better title to his buyer than that of his own, Sec. 54(3) provides an
exception to that rule and states that on a re-sale of the goods, the buyer acquires a good
title to the goods as against the original buyer, notwithstanding that a notice of the re-sale
has been given to the original buyer. It means that even though the unpaid seller himself is
not the owner of the goods, nor does he have any authority from the owner to sell the
goods and even though he does not give a notice of re-sale to the buyer, the new buyer will
acquire a good title to the goods. The absence of notice, when so required, affects the right
of the unpaid seller himself only as discussed above, i.e., in that case neither he would be
entitled to recover loss which might have been occasioned on re-sale, nor would he be
entitled to retain the surplus, if the goods are sold at more than the contract price.
Sec. 54(1) provides that subject to the provisions of this section, a contract of sale is
not rescinded by the mere exercise of his right of lien or stoppage in transit by an
unpaid seller, Sec. 54(4) provides that where the seller expressly reserves the right of
re-sale in case the buyer should make a default and then re-sell the goods, the
original contract of sale is thereby rescinded.
 SUITS FOR BREACH OF CONTRACT
Suits by the Seller against the Buyer
a. Suit for price- The buyer has a duty to pay the price in accordance with the contract.
Apart from exercising rights against the goods, if the buyer does not pay for them, the
seller may sue the buyer to recover the price.
Where the property in the goods has passed to the buyer and he wrongfully neglects or
refuses to pay for the goods according to the terms of the contract, the seller may Sue him
for the price of the goods [sec 55(1)]. For an action for price, it is necessary that the
property in the goods must have passed to the buyer and then there must have been a
wrongfully neglect or refusal on the part of the buyer to pay the price. that means failure on
the part of the buyer to pay the price after the same has become payable. When the seller
has performed or offered to perform all conditions precedent to the payment of the price
but the buyer does not pay the price, he is deemed to have wrongfully" neglected or
refused to pay the price If the goods have been sold on credit; the price would become
payable only on the expiry of the period of credit, and, therefore, no action for the recovery
of the price can be brought by the seller until the expiry of that period
The right of the seller to recover the price, after the property has passed to the buyer, can
be exercised irrespective of the fact that no delivery of the goods has yet been made to the
buyer. When the buyer has obtained the possession of the goods, the seller's sole remedy is
an action for price. On the other hand, if the goods have not yet reached the po8session of
the buyer, the seller has, in addition to the right of recovery of price under Sec, 55, certain
rights against the goods as mentioned in the previous chapter.
When the contract requires the payment of the price "on a day certain irrespective of
delivery, the buyer is bound to pay the price on the stipulated day. On the buyer wrongfully
neglecting or refusing to pay the price, the seller may sue him for the same. Such an action
for price can lie even though the property in the goods has not yet passed to the buyer and
the goods have not been appropriated to the contract [sec 55(2)]. Thus, when the price of
iron, to be supplied between 3rd March and 30th April, was to be paid by 30th April, the
seller could recover the price on 30th April, even though the whole of iron was not delivered
and even though the undelivered part was not specifically appropriated to the contract.

b. Suit for damages- At has been noted above that the buyer has a duty to accept the
goods and pay for them in accordance with the contract (sec 31)." On failure to pay the
price, one of the remedies available to the seller is to sue the buyer for price [sec 55].
Suit for the price can lie against the buyer when the property in the goods has passed to
the buyer or the price is to be paid on a day certain.
According to Sec. 56, where the buyer wrongfully neglects or refuses to accept and pay for
the goods, the seller may Sue him for damages for non-acceptance. Such a suit generally
arses when the property in the goods has not yet passed to the buyer. The seller being still
the owner of the goods can dispose them of and recover from the buyer damages for the
loss accruing to him in accordance with the rules regarding damages contained in Section 73
of the Indian Contract Act.
The seller's remedy under the present section is a suit for damages rather than an action for
the full price of the goods. In Bungo Steel Furniture v. Union of India, there was a contract or
the supply of steel bins to the Govt. of India by the appellants. The Govt. Wrongfully
terminated the contract before the bins had been actually manufactured. "It was held that,
in this case, since the property in the goods has not yet passed to the buyer (Govt.), the case
was not covered by Sec. 55 and an action for the recovery of the price could not lie but
appellants were entitled to recover damages from the Govt. for wrongfully refusing to
accept the goods.
Measure of damages- The parties may fix the amount of damages payable. by the contract
itself. If the parties have fixed the amount of damages payable on the breach of the contract
by either of the parties, the case will be governed by the provisions of Sec. 74 of the Indian
Contract. In that case the party complaining of the breach of contract will be entitled to
receive from the party who has broken the contract, reasonable compensation not
exceeding the amount of compensation agreed to between the parties.
In cases no compensation has been agreed between the parties, the damages are to be
assessed in accordance with the provisions of Sec. 73 of the Contract Act. According to that
provision, the injured party is entitled to receive from the party making a breach of contract
compensation for the loss or damages to him, which naturally arose in the usual course of
things as a result of the breach. n a contract of sale of goods, therefore, the damages would
be assessed on the basis of the difference between the contract price and the market
price prevailing on the date of the breach of the contract
For example, a buyer having made a contract for the purchase of a certain radio set for Rs.
500/- wrongfully neglects or refuses to accept and pay for the radio set. In case the market
price of the radio set on the date of the breach of the contract is Rs 4004, the seller can
recover from the buyer damages amounting to Rs. 100- as that is the difference between
the contract price and the market price on the date of the breach of the contract and that is
the loss which naturally arose in the usual course of things
The position under the English Law is similar to that in India. Section 60 of the English Act,
which makes a provision in this regard.

Suits by the Buyer against the Seller

1. Damages fer non-delivery- Sections 55 and 56 deal with the rights of the seller of goods
by way of suits against the buyer either for the recovery of the price or for the non-
acceptance of the goods. The seller's duty as stated in Sec. 31 is to deliver the goods to the
buyer in accordance with the terms of the contract. “When the seller wrongfully neglects or
refuses to deliver the goods to the buyer, the buyer may Sue him 1or damages for the non-
delivery of the goods [sec 57].”
The measure of damages in this case also would be the same as for breach of any other
contract and the rules contained in Sections 73 and 74, Indian Contract Act will apply.

2. Suit for specific performance- Damages sometimes may not be an adequate remedy, for
instance, when the subject-matter of the contract is rare good, say, the picture of a dead
painter Section 58 entitles the buyer to bring an action for the specific performance of the
contract. It means that instead of permitting the seller to retain the goods and (pay
damages for the non-delivery of the goods, the court may pass a decree directing the seller
to specifically perform the contract, i.e., to deliver those very goods which constitute the
subject-matter of the contract.
A suit for specific performance under Section 58 cannot lie unless the contract is for
the delivery of specific or ascertained goods and also there is a possibility of specific
performance as stated in Chapter II of the Specific Relief Act, 1963.
It may be noted that the suit for specific performance permitted by sec. 58 covers
the case of a purchaser only. No suit for specific performance can be brought by the
seller.

Remedy for breach of warranty- According to Section 12(3), the breach of warranty gives
rise to a claim for damages but not a right to reject the goods and treat the contract as
repudiated. dt has been stated in Section 13 that even when there is a breach of condition,
the buyer may treat that as a breach of warranty, or, when the buyer accepts the goods or a
part, the buyer is bound to treat the breach of condition as a breach of warranty. It means
that when the breach of condition is treated as a breach of warranty, the remedy available
to the buyer is an action for damages
Section 59 explains as to how the buyer may exercise his right of claiming damages, on the
breach of warranty by the seller. He may
- set up against the seller the breach of warranty in diminution or extinction of
the price; or
- sue the seller for damages for breach of warranty.
When there is a breach of condition and the buyer intends to treat it as a breach of
warranty, he is duty bound to give a notice of his intention to the seller. If the buyer
accepted the goods which did not strictly conform to the agreed specifications and
consumed the same, without either rejecting them, or giving a notice to the seller indicating
an intention to treat it as a breach of warranty, it was held that the same amounted to the
waiver of the condition by the buyer, and the buyer was not entitled to withhold the
payment of the full price, by invoking Section 59.
Damages for the breach of warranty are to be ascertained in accordance with the provisions
of Section 73, Indian Contract Act. Thus, damages which naturally arose in the usual course
of things can be recovered. If a person buys a tin of salmon and his wife dies because the
contents of the tin were unit lor human consumption, he may recover from the seller
reasonable medical and funeral expenses and also a reasonable amount for the loss of
services of his wife. In Mason v. Burningham, the buyer purchased a second-hand typewriter
for20 euros and subsequently spent £11 10s. on getting it overhauled. The typewriter
turned out to be stolen property and the buyer had to return the same to its owner. It was
held that the buyer was entitled to recover from the seller not only the sum of £ 20 paid by
him to the seller by way or price but also the sum of £11 10s. spent by him on its
overhauling.

Interest by way of damages- Section 73, Indian Contract Act, not only allows damages for
the loss "which naturally arose in usual course of things" but also special damages for such
loss "which the parties knew when they made the contract to be likely to result from the
breach of it." Section 61 preserves the right of the parties to a contract of sale to recover
special damages, and also recognises the well-established right of the parties to recover
interest by way of damages.
Seller's right of interest on price- The parties may agree as to when the price is payable. The
buyer is bound to accept the goods and pay for them in accordance with the contract. If the
buyer does not pay the price in time and wrongfully delays the payment of the same, the
Court may award interest on price, i.e., the principal amount payable by way of price.
Interest is to be paid on the amount of the price was payable, from the date when
the price was payable at such rate as the court thinks just. Thus, the Court may order
interest on the price from the date of tender of the goods if no date of payment of
price has been decided, or from the date when the price was payable in terms of the
contract- sec 61(10(a).
 Under Section 61(2), the court has a very wide discretion to award interest as it
thinks fit on the amount of the price from the date when payment was to be made.
The seller would be entitled to interest from the date of delivery of goods up to the
date of payment even in the absence of the contract for the payment of interest.
Section 61 (2)(a) gives discretion to the court to award interest in the absence of a contract
to the contrary. Such payment of interest can be made in a suit for the recovery of price or
damages, and not otherwise. lt has been held in Multimetals Ltd. v. Suryatronics Pvt. Ltd.,"
that proceedings for the winding up of a company are not covered under Section 61 (2)(a),
i.e., it is not a suit for the recovery of money. Therefore, the petitioner for winding up
proceedings of a company cannot claim interest on the goods implied under Section 61 (2)
(a) of the Sale of Goods Act.
Buyer's right of interest or refund of price- When the buyer has already paid the price of
the goods to the seller but the seller fails to perform his part of the contract, the buyer is
entitled to the refund of the price. Similarly, when the consideration for the payment made
has failed, the buyer can recover back the price [sec 61(1)]. Thus, if the seller delivers a
stolen car to the buyer and takes its price, and then the buyer is compelled to return the car
to the true owner, the buyer is entitled to recover from the seller the price paid by him.
In his suit for refund of the price, the buyer is also entitled to interest on the amount of the
price from the date of the payment of the price to the date of the refund of the same. [ sec.
61(2)]
In State Trading Corporation v. Tara Jewellers, due to Government ban on export, a
contract for the purchase of silver for export was frustrated. In a claim for the refund of the
price as well as interest thereon, the Calcutta High Court allowed the refund as well as
interest 69% p.a. from the date of suit till refund date.
If the buyer pays the price in advance but the seller makes a breach of contract, the buyer
will be entitled to interest on the amount of the price paid by him."

Anticipatory breach of contract- Anticipatory breach of contract means breach of contract

before the due date of performance has arrived. If, for example, a contract to supply certain
goods has been entered into on 1st January according to which the goods were to be
delivered on 1st March, and the seller before 1st March informs the buyer that he would
not supply the goods on the due date of performance, it is known as anticipatory breach of
contract. Anticipatory breach of contract could be committed by the promisor either by
disabling himself from performing or refusing to perform the same, before the due date.
According to Sec. 60, ‘Where either party to a contract of sale, repudiates the contract
before the date of delivery, the other may either treat the contract as subsisting and wait
till the date of delivery, or he may treat the contract as rescinded and sue for damages for
the breach.”
NOTE- The above stated rule is similar to the one contained in Sec. 39, Indian Contract Act.
The rule was stated by Cockburn, C.J. in Frost Vs. Knight.
When the promisor makes an anticipatory breach of contract, the promisee has two options
- He may treat the contract as rescinded and bring an action even before the
due date of performance has arrived;
- He may not rescind the contract but treat the same as still subsisting and
alive and wait till the due date of performance
In such a case, the promisor, in spite of his earlier repudiation may perform
the contract or may sometimes be discharged from performing the contract
when some event such as the impossibility of the performance of the
contract arises.
For example, A agrees to supply B 500 bags of sugar on 1st March. If on 1st February, A
informs that he will not supply those 500 bags of sugar to B, A has committed anticipatory
breach. One option with B is to file a suit against A by considering it to be a breach of the
contract without waiting till 1st March. Supposing B exercises this option, the court will
grant him compensation on the basis of the loss suffered by B in accordance with the prices
prevailing on 1st February. The other alternative open to B is to treat the contract as still
allowed to perform the contract, i.e., supply 500 bags of sugar on 1st March and B will be
bound to accept the same. If in such a case, some event in the meanwhile happens excusing
‘A' from performing the contract, A may take advantage of the same. For instance, if by
order, on 28th February, the Govt. bans the sale of sugar in the open market, A may take
the plea that the supply of sugar in the open market has become illegal and therefore he is
excused from performing the contract.
In case the contract is kept alive and A does not perform the contract and also there is
nothing which can excuse him from performing the same on 1st March, then A is bound to
pay damages calculated on the basis of the prices prevailing on 1st of March.