LAW SUPER SUMMARY BOOK

CA Foundation

CA ARUN ANBU

Sensitivity: Internal
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Table of contents:

Chapters Units Page

Unit 1: Nature of Contracts 2
Unit 2: Consideration 13
Unit 3: Other Essential Elements of a Contract 18
Unit 4: Performance of a Contract 32
The Indian Contract
Unit 5: Breach of Contract And Its Remedies 40
Act, 1872
Unit 6: Contingent and Quasi Contracts 45
Unit 7: Contract of Indemnity And Guarantee 50
Unit 8: Bailment And Pledge 56
Unit 9: Agency 65
Unit 1: Formation of the Contract of Sale 75
The Sale of Goods Act, Unit 2: Conditions & Warranties 83
1930 Unit 3: Transfer Of Ownership And Delivery Of Goods 90
Unit 4: Unpaid Seller 99
Unit 1: General Nature of Partnership 108
The Partnership Act,
Unit 2: Relations of Partners 116
1932
Unit 3: Registration And Dissolution Of A Firm 124
The Limited Liability
Partnership Act, 2008 130
The Companies Act,
2013 147
The Negotiable
Instruments Act, 1881 164

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The Indian Contract Act, 1872

Unit 1 – Nature of Contracts

1. Introduction:

The Law of Contract is the most important branch of mercantile law and impacts trade,
commerce, and industry.

• Date of Assent: 25th April, 1872

• Date of Effect: 1st Sept, 1872

• Preamble: The Act defines and amends certain parts of the law relating to contracts.

2. Important Terms:

2.1 Contract (Sec 2(h))

“An agreement enforceable by law.”

Contract = Agreement + Enforceability by law

2.2 Agreement (Sec 2(e))

“Every promise and every set of promises, forming the consideration for each other.”
Agreement = Promise + Consideration

2.3 Promise (Sec 2(b))

“When a person to whom a proposal is made signifies his assent on that proposal, the
proposal becomes accepted. Accepted proposal becomes a promise.”
Promise = Offer/Proposal + Acceptance

3. Difference between Agreement & Contract:

Basis of Agreement Contract

Difference
Definitions Offer + Acceptance Agreement + Legal
Enforceability
Enforceability May/May not be legally enforceable Legally enforceable
by law
Scope Wider (includes both legal and social Narrow (includes only legal
agreement) agreement)
Nature All agreements are not contracts All contracts are agreement

4. Essential Elements of Valid Contract

Sec 10 – “All agreements are contracts if they are made by the free consent of the parties
competent to contract, for a lawful consideration and with a lawful object and are not
expressly declared to be void.”
General essential elements:

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• Two Parties

• Intention to create legal relationship

• Possibility of performance

• Certainty of meaning

• Formality in certain cases

Sec 10 essential elements:

• Agreement

• Free Consent

• Competency of parties

• Lawful consideration

• Legal object

• Not expressly declared as void

4.1 General Essential Elements

4.1.1 Two Parties

A person cannot enter into a contract with himself; a contract involves at least two parties. A
contract can be made by either natural persons or other persons having legal existence.

Case Law: State of Gujarat Vs. Ramanlal S & Co

Facts: When on dissolution of a partnership, the assets of the firm were divided among the
partners, the sales tax officer wanted to tax this transaction.

Judgement: It was held that it was not a sale. The partners being joint owner of those assets
cannot be both buyer and seller.

4.1.2 Intention to create legal relationship

There must be an intention to create a legal relationship between the parties. Social or
domestic agreements are not enforceable in court.

Case Law: Balfour Vs. Balfour

Facts: A husband agreed to pay to his wife certain amount as maintenance every month while
he was abroad. Husband failed to pay the promised amount. Wife sued him for the recovery of
the amount.

Judgement: Wife could not recover the amount as it was a social agreement, and the parties
did not intend to create any legal relations.

4.1.3 Possibility of performance

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The terms of the agreement should be capable of performance. An agreement to do an

impossible act cannot be enforced.

4.1.4 Certainty of meaning

The agreement must be certain, definite, and not vague.

4.1.5 Formalities in certain cases

A contract may be written or spoken. Certain contracts require additional formalities for legal
enforceability.

4.2 Essential Elements under Section 10

4.2.1 Agreement

An Agreement is the first essential element of a valid contract. It is a result of offer and
acceptance. Without an agreement, there is no contract.

4.2.2 Free Consent

Consent means agreeing upon the same thing in the same sense. Consent must be free,
meaning no coercion, undue influence, fraud, misrepresentation, or mistake.

4.2.3 Capacity of parties

A person is competent to contract if:

• He has attained majority

• He is of sound mind

• He is not disqualified by law, i.e., not an insolvent, convict, or alien enemy.

4.2.4 Lawful Consideration

Consideration is something in return (Latin Maxim: Quid pro quo). The consideration must be
lawful.

4.2.5 Lawful object

The object must be lawful, i.e., not prohibited by law or opposed to public policy.

4.2.6 Not expressly declared to be void

The agreement should not be:

• Immoral

• Opposed to public policy

• Injurious

• Forbidden by law

5. Types of Contracts

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Based on Validity/Enforceability:

• Valid

• Void

• Voidable

• Illegal

• Unenforceable

Based on Formation:

• Express

• Implied

• Quasi

• E-Contract

Based on Performance:

• Executed

• Executory

1. Unilateral

2. Bilateral

5.1 Based on Validity/Enforceability

5.1.1 Valid Contract

A Valid Contract is an agreement that is legally binding and enforceable. It must meet all the
essentials of a contract.

5.1.2 Void Contract

Sec 2(j) – “A contract which ceases to be enforceable by law becomes void when it ceases to
be enforceable.”
A contract that is valid at the inception but later becomes void due to an event.
A contract void from inception is Void ab initio (e.g., a contract made with a minor).

5.1.3 Voidable Contract

An agreement enforceable by law at the option of one or more parties but not at the option of
others is a voidable contract.
A voidable contract is a valid contract.
Consent may be obtained by:

• Coercion

• Undue influence

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• Fraud

• Misrepresentation

Options for the aggrieved party:

• Cancel the contract

• Continue if beneficial

Difference between Void and Voidable Contract

Void Contract Voidable Contract

Sec-2(g): Agreement which is not Sec-2(i): Agreement in which one of the two
enforceable by law parties have the option to enforce or rescind it.
Subsequent happening of uncertain Consent is not free
events or change in circumstances
No rights to the parties Aggrieved party has certain rights
Contract cannot be performed at all Contract is valid until the aggrieved party does
not revoke it

5.1.4 Illegal Contract

An agreement that leads to breaking a law or not conforming to societal norms is deemed
illegal by the court.
Illegal contracts are void ab initio.

Difference between Void and Illegal Contract

Void Contract Illegal Contract

Not forbidden by law Forbidden by law
Contracts are not illegal Contracts are always void
Parties are not liable for punishment Parties are liable for punishment
Collateral agreements are enforceable by Collateral agreements are also
law illegal

5.1.5 Unenforceable Contract

Unenforceable contracts are rendered unenforceable due to a technical defect (e.g., filing a
case barred by limitation).

5.2 Based on Formation

5.2.1 Express Contract

The terms are clearly stated orally or in writing.

5.2.2 Implied Contract

Terms are not expressed in written or oral form but inferred by actions or conduct (e.g.,
boarding a bus implies an intent to pay).

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Tacit Contracts: A subtype of implied contracts inferred by conduct, without any spoken or
written words (e.g., using an ATM).

5.2.3 Quasi Contract

Not based on agreement, but created by a court order or under law to prevent one party from
taking unfair advantage of the other (e.g., finder of lost goods must return them to the owner).

5.2.4 E-Contract

A contract formed using electronic devices and means is called an e-contract.

5.3 Based on Performance

5.3.1 Executed Contract

When the parties have performed their obligations, the contract is executed.

5.3.2 Executory Contract

The consideration is to be performed in the future:

• Unilateral Contract – One party has performed, and the other party’s obligation is
outstanding.

• Bilateral Contract – Both parties' obligations or promises are outstanding.

6. Offer/Proposal

Sec 2(a) - “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.”

6.2 Types of Offer

• General

• Counter

• Standing

• Cross

• Specific

6.2.1 General Offer

A General Offer is made to the public at large.

Case Law: Carlill v. Carbolic Smoke Ball Co.

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Facts: A company by the name Carbolic Smoke Ball offered through an Advertisement to pay
100 Pounds to anyone who would contract increasing epidemic Influenza, colds or any disease
caused by cold after taking its Medicine according to the prescribed instructions. It was also
added that 1000 Pounds have been deposited in Alliance bank showing our sincerity in the
matter. One customer Mrs. Carlill used the medicine and still contracted Influenza and hence
sued the company for the reward. The Defendants gave the argument that the offer was not
made with an intention to enter into a legally binding agreement, rather was only to Puff the
sales of the company.

Judgement: In cases of general offers, there is no need for communication of acceptance,

anyone who performs the conditions of the contract is said to have communicated his/her
acceptance, and moreover, the money deposited by the Defendant in Alliance Bank clearly
shows that they intended to create a legally binding relationship.

6.2.2 Specific/Special Offer

A Specific Offer is made to a specific person and can only be accepted by that person.

Case Law: Boulton v. Jones

Facts: wherein the Plaintiff had taken the business of one Brocklehurst, the defendant used to
have business with Brocklehurst and not knowing about the change in ownership of business,
sent him an order for certain goods. The Defendant came to know about the change only after
receiving an invoice, at which point he had already consumed the goods. The Defendant refused
to pay the price, as he had a set off against the original owner, for which the plaintiff sued him.

Judgement: The Judges gave a unanimous judgement holding the defendant not liable.

6.2.3 Cross Offer

When two parties make identical offers to each other without knowledge of the other's offer, it
is a cross offer.
Example: If A offers to sell a car to B for ₹ 2,00,000 and B makes an identical offer to buy the car
from A, it is not an acceptance but a cross proposal.

6.2.4 Counter Offer

A Counter Offer is a qualified acceptance of the original offer, resulting in the original offer
lapsing.
Example: A offers to sell a plot for ₹ 10 lakhs; B counters with ₹ 8 lakhs, terminating A's original
offer.

6.2.5 Standing Offer

An Offer that remains open for acceptance over a period is a standing offer (e.g., tenders for
supply of goods).

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6.3 Essential Elements of Valid Offer

• Capable of creating legal relations

• Certain, definite, and not vague

• Communicated to the offeree

• Made with a view to obtaining the assent of the other party

• May be conditional

• Should not contain a term that, if non-complied with, would amount to acceptance

• May be specific or general

• May be express or implied

• Different from a mere statement of intention, communication of information,

prospectus, advertisement, or statement of price

6.4 Invitation to Offer

An invitation to offer is an attempt to induce offers and precedes a definite offer.

An offer becomes an agreement when accepted, while an invitation becomes an offer upon
public response.
Examples:

1. A magazine displaying an offer

2. College prospectus during admission

3. Display of goods for sale in shop windows

4. Invitation by a company to subscribe for its shares

Difference between Offer & Invitation to offer

Offer Invitation to Offer

Definition Sec 2(a) Expression of willingness to No willingness but information to
do something or not with an induce for offers
intention to obtain assent of other
party
Intention Binding on the offeror No binding factor only inducing
Acceptance Results in contract Leads to negotiation and may lead
to offer
Precedence Offer cannot precede invitation to Invitation precedes the offer
offer

Case Law: Harvey vs. Facie

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Facts: The plaintiffs through a telegram asked the defendants two questions namely, (i) Will you
sell us Bumper Hall Pen? and (ii) Telegraph lowest cash price. The defendants replied through
telegram that the “lowest price for Bumper Hall Pen is £ 900”. The plaintiffs sent another
telegram stating, “we agree to buy Bumper Hall Pen at £ 900”. However, the defendants refused
to sell the property at the price. The plaintiffs sued the defendants contending that they had
made an offer to sell the property at £ 900 and therefore they are bound by the offer.

Judgement: While plaintiffs had asked two questions, the defendant replied only to the second
question by quoting the price but reserved their answer with regard to their willingness to sell.
The mere statement of the lowest price at which the vendor would sell contained no implied
contract to sell to the person who had enquired about the price

7. Acceptance

Sec 2(b) - “When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. The proposal, when accepted, becomes a promise.”

• Offeror – Person who makes the proposal / offer

• Offeree – Person to whom the proposal / offer is made

• Acceptor – Offeree becomes acceptor when assent is given

Sir William Anson: Acceptance is to offer what a lighted match is to a train of gun powder.

7.2 Rules Regarding a Valid Acceptance

7.2.1 Acceptance by the Offeree Only

Acceptance can be given only by the person to whom the offer is made.

• In specific proposals, only the designated person can accept.

• No third party can accept without the offeree's knowledge.

• In general offers, anyone with knowledge can accept.

7.2.2 Must be Absolute and Unqualified

Acceptance must be unconditional and absolute.

• Conditional acceptance amounts to a counteroffer, nullifying the original offer.

Case Law: Neale vs. Merret

Facts: M offered to sell his land to N for £280. N replied purporting to accept the offer but
enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly
instalments of £ 50 each.

Judgement: It was held that N could not enforce his acceptance because it was not an
unqualified one

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7.2.3 Must be Communicated

Acceptance must be communicated to the promisor for it to become a contract.

Case Law : Brogden vs. Metropolitan Railway Co.

Facts: B a supplier, sent a draft agreement relating to the supply of coal to the manager of
railway Co. viz, Metropolitian railway for his acceptance. The manager wrote the word
“Approved” on the same and put the draft agreement in the drawer of the table intending to send
it to the company’s solicitors for a formal contract to be drawn up. By an oversight the draft
agreement remained in drawer.

Judgement: There was no contract as the manager had not communicated his acceptance to
the supplier, B.

7.2.4 Must be in Prescribed Mode

Acceptance must be in the manner demanded by the offeror; if not prescribed, it must be in a
reasonable manner.

7.2.5 Time

Acceptance must be given within the specified time limit or within a reasonable time if none
is stipulated.

• Exception: If the offeror does not object to another mode of acceptance.

7.2.6 Mere Silence is Not Acceptance

Silence cannot imply acceptance unless previous conduct indicates that silence is acceptance.

Case Law: Felthouse vs. Bindley

Facts: F (Uncle) offered to buy his nephew’s horse for £30 saying “If I hear no more about it, I
shall consider the horse mine at £30.” The nephew did not reply to F at all. He told his
auctioneer, B to keep the particular horse out of sale of his farm stock as he intended to reserve
it for his uncle. By mistake the auctioneer sold the horse. F sued him for conversion of his
property.

Judgement: F could not succeed as his nephew had not communicated the acceptance to him.

7.2.7 Implied Acceptance or Acceptance by Conduct

• Implied Acceptance - Fulfills conditions imposed.

• Acceptance by Conduct - Accepts consideration through actions.

8. Communication of Offer and Acceptance

8.1 Communication of Offer

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Communication is complete when it comes to the knowledge of the person to whom it is made.
Example: A writes to B offering a service; communication is complete when B receives the
letter.

8.2 Communication of Acceptance

Communication is complete:

• Against the Proposer: When put in the course of transmission.

• Against the Acceptor: When it comes to the knowledge of the proposer.

Example: A accepts B's offer by letter; communication for B is complete when A posts
the letter.

8.3 Communication of Special Conditions

Special conditions may be conveyed tacitly, with acceptance communicated similarly.

Case Laws:

1. Mukul Datta vs. Indian Airlines

2. Lilly White vs. R. Mannuswamy

9. Revocation of Offer and Acceptance

Communication of revocation is complete:

• Against the Person Making It: When it is put into a course of transmission to the person
to whom it is made.

• Against the Person Receiving It: When it comes to their knowledge.

An offer can be revoked before acceptance is communicated.
Example: Anil sends an offer to Sunil; Anil can revoke before Sunil's acceptance is
communicated.

10. Modes of Revocation of Offer

• Notice of Revocation

• Lapse of Time

• Non-fulfillment of Conditions

• Death or Insanity of the Offeror

• Counteroffer

• Subsequent Illegality

• Not Given in Prescribed Mode

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Unit 2 – Consideration

1. Consideration:

Sec 2(d) – “When at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or promises to do or abstain from doing something, such an act or
abstinence or promise is called consideration for the promise.”
a) Consideration is an act, i.e., doing something.
b) Consideration can be abstinence, i.e., abstaining from doing something.
c) Consideration must be at the desire of the promisor.
d) Consideration may move from the promisee or any other person.
e) Consideration may be past, present, or future.

2. Legal rules regarding Consideration

2.1 Consideration must move at the desire of the promisor

Consideration must be offered by the promisee or a third party at the desire or request of the
promisor.
An act done at the desire of a third party is not consideration.

Case Law: Durga Prasad v. Baldeo

Facts: D (defendant) promised to pay to P (plaintiff) a certain commission on articles which

would be sold through their agency in a market. Market was constructed by P at the desire of the
C (Collector), and not at the desire of the D

Judgement: D was not bound to pay as there was no consideration and hence void

2.2 Consideration may move from promisee or any other person

Consideration may proceed from the promisee or any other person who is not a party to the
contract.
There can be a stranger to consideration, but not a stranger to a contract.

Case Law: Chinnayya vs. Ramayya

Facts: An old lady made a gift of her property to her daughter with a direction to pay a certain
sum of money to the maternal uncle by way of annuity. On the same day, the daughter executed
a writing in favour of the brother agreeing to pay annuity. The daughter did not, however, pay the
annuity and the uncle sued to recover it.

Judgement: There was sufficient consideration for the uncle to recover the money from the
daughter

2.3 Executed and Executory consideration

A consideration consisting of the performance of an act is executed.

When a consideration consists of a promise, it is executory.

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2.4 Consideration may be past, present, or future

• Past consideration – Eg: 'A' performs services for 'B' at his desire. A week later, 'B'
promises to pay. A can sue for recovering the promised money.

• Present consideration – Eg: A cash sale of goods, where consideration is made

immediately.

• Future consideration – Eg: A agrees to supply wheat to B, and B agrees to pay on a

future date.

2.5 Consideration need not be adequate

The value of consideration need not be equal to the value of the promise, act, or abstinence.
However, consideration must have some value that the law recognizes.
Example: X promises to sell a house worth ₹6 lacs for ₹1 lac. The adequacy of price does not
render the transaction void unless there is coercion, undue influence, or fraud.

2.6 Performance of what one is legally bound to perform is not consideration

The performance of an act that one is legally bound to do cannot be consideration.

Such contracts are void for lack of consideration.
However, if a person promises to do more than they are legally bound to, the promise is a good
consideration if it is not opposed to public policy.
Example: A promise to pay a witness is void, as it is without consideration. A promise to pay a
policeman for security is void, as the policeman is already legally bound to provide it.

2.7 Consideration must be real and not illusory

Consideration must have some legal value. If it is legally or physically impossible, it is not
valid consideration.

2.8 Consideration must not be unlawful, immoral, or opposed to public policy

Example: ABC Ltd. promises to give Mr. X a job in a Government bank for ₹50,000. This is void
as it is opposed to public policy.

3. Suit by a third party to a contract

3.1 Doctrine of Privity of Contract

• Only a person who is party to a contract can sue on it.

• A stranger to a contract cannot sue.

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3.2 Exceptions to the Doctrine of Privity of Contract

3.2.1 Trust

In the case of a trust, the contract is between the settler and the trustee. However, a
beneficiary can enforce his right under the trust, even though he is not a party to the contract.

3.2.2 Family Settlement

In a family settlement, members who were not originally parties to the settlement may enforce
the agreement, provided the terms are reduced into writing.
Example: Two brothers X and Y agreed to pay an allowance of ₹20,000 to their mother after
partition of properties. When they later refused, the mother, although a stranger to the
contract, could require them to abide by it in court.

3.2.3 Marriage Contracts

In certain marriage contracts, a provision made for the benefit of a person can be enforced by
that person, even if they are not a party to the agreement.
Example: Mr. X promised his wife’s father to treat her properly or pay her a monthly allowance.
When he mistreated her again, she had the right to sue, even though the contract was made
between Mr. X and her father.

3.2.4 Assignment of a Contract

In the case of assignment, when the benefit under a contract is assigned, the assignee can
enforce the contract, provided the assignment does not involve personal skill.

3.2.5 Acknowledgement or Estoppel

Where the promisor acknowledges himself as an agent of a third party by his conduct, this
creates a binding obligation to that third party.
Example: L gives M ₹20,000 to give to N, and M informs N that he holds the money for him. If M
refuses to pay, N is entitled to recover the amount.

3.2.6 Covenant Running with the Land

In the case of a covenant running with the land, a successor of the seller is bound by certain
duties attached to the land.
Example: If an owner of agricultural land sells adjacent land with a condition that it cannot be
used for industrial purposes, this restrictive covenant binds all successors.

3.2.7 Contracts Entered Into Through an Agent

The principal can enforce contracts entered by his agent if the agent acted within the scope of
his authority and in the name of the principal.

4. Validity of an Agreement Without Consideration

The general rule is that an agreement made without consideration is void. However, there are
certain exceptions.

4.1 Natural Love and Affection

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A written and registered agreement based on natural love and affection between parties
standing in a near relationship is enforceable without consideration.
Conditions:

• Made out of natural love and affection.

• Parties must be in a near relationship.

• Must be in writing.

• Must be registered under the law.

4.2 Compensation for Past Voluntary Services

A promise to compensate a person who has already voluntarily done something for the
promisor is enforceable without consideration.
Conditions:

• The services must have been rendered voluntarily.

• The services must have been rendered for the promisor.

• The promisor must have been in existence when the services were rendered.

• The promisor must have intended to compensate the promisee.

Example: Peter finds Sameer’s wallet and returns it. Sameer promises to pay ₹2,000.
This is a valid contract even without consideration.

4.3 Promise to Pay Time-Barred Debt

A promise in writing, signed by the person making it or their authorised agent, to pay a debt
barred by limitation is valid without consideration.
Example: Pratik promises to pay ₹50,000 to settle a 5-year-old debt. This is a valid contract.

4.4 Agency

No consideration is required to create an agency.

4.5 Completed Gift

For a completed gift, the rule of no consideration no contract does not apply.

4.6 Bailment

Bailment is the delivery of goods for a specific purpose, under a contract that the goods will be
returned or disposed of per the deliverer's directions. No consideration is needed to create a
contract of bailment.

4.7 Charity

If a promisee undertakes liability based on a promise to contribute to charity, the contract is

valid.

Case Law: Kedarnath v. Gorie Mohammad

Facts: The defendant promised ₹100 towards the construction of a town hall. Relying on this,
the Secretary engaged contractors but the defendant refused to pay.

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Judgement: Though the promise was for a charitable purpose and gave no benefit to the
defendant, he was still liable for his promise.

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Unit-3 – Other Essential Elements of Contract

1. Introduction

Conditions to be satisfied by an agreement to be a contract (Sec 10):

• Parties must be competent to contract

• Free consent of parties

• Made for a lawful consideration and with a lawful object

• Not expressly declared as void by law

2. Capacity to Contract

Sec 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."

2.1 Age of Majority

Every person domiciled in India shall attain the age of majority on the completion of 18 years of
age and not before. The laws relating to minor’s agreement/position of minor are:

2.1.1 A contract made with or by a minor is void ab-initio

Case Law: Mohori Bibi vs. Dharmo Das Ghose

Facts: A, a minor, borrowed money from B by mortgaging his house. After becoming a major,
the moneylender sought possession of the house due to default in payment.
Judgment: The mortgage by a minor was void, and B was not entitled to repayment.

2.1.2 No ratification after attaining majority

A minor cannot ratify an agreement on attaining majority because the original agreement is
void ab initio.

2.1.3 Minor can be a beneficiary or can take benefit out of a contract

A minor, though incompetent to contract, can be a beneficiary under a contract.

2.1.4 A minor can always plead minority

A minor can always plead minority, even if they falsely represented being a major.
Rule of Estoppel cannot be applied against a minor.

2.1.5 Liability for necessaries

Necessaries are things essential for a minor, excluding luxuries or costly items.
A person supplying necessaries to a minor is entitled to reimbursement from the minor’s
property but not personal liability.
To render the minor’s estate liable:

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• The contract must be for necessaries.

• The minor must not have sufficient supply of these necessaries.

Example: Shruti, a minor, purchased a laptop for ₹70,000, but her assets could cover
only ₹20,000. The shopkeeper can only recover ₹20,000 from her assets.

2.1.6 Enforceability of a contract by guardian

A guardian can make a valid contract for a minor if it's within his competence and for the
minor's benefit.
Example: A certified guardian, with court sanction, can enforce a contract regarding the
minor’s property.

2.1.7 No specific performance

No court can allow specific performance of a contract with minors as the contract is void.

2.1.8 No insolvency

A minor cannot be declared insolvent because they cannot incur personal liability.

2.1.9 Partnership

A minor cannot become a partner in a firm but can be admitted to the benefits of partnership
with consent from all partners.

2.1.10 Minor can be an agent

A minor can act as an agent and bind the principal, but is not personally liable.
Example: A minor can have a bank account and issue cheques, but is not liable if the cheque
bounces.

2.1.11 Minor cannot bind parent or guardian

A minor cannot bind their parent or guardian even for necessaries, unless they act as their
agent.
Example: Richa, a minor, bought a scooty without her parents’ knowledge, and her parents
cannot be held liable for payment.

2.1.12 Joint contract by minor and adult

In a joint contract by a minor and adult, only the adult will be liable.
Case Law: Sain Das vs. Ram Chand
In a joint purchase, the vendor could enforce the contract against the adult, not the minor.

2.1.13 Surety for a minor

An adult who gives a guarantee on behalf of a minor is liable to the third party.

2.1.14 Minor as Shareholder

A minor cannot be a shareholder as they are incompetent to contract. However, a minor’s

guardian may act on their behalf regarding fully paid shares.

2.1.15 Liability for torts

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A minor is liable for torts (civil wrongs), unless the tort is in reality a breach of contract.
Example: A minor was held liable for failing to return hired instruments.

2.2 Person of Sound Mind

Sec 12 - “A person is said to be of sound mind for the purposes of making a contract if, at the
time, he is capable of understanding it and forming a rational judgement about its effect on
his interests.”
A contract by a person who is not of sound mind is void.

• A person who is usually of unsound mind, but occasionally of sound mind, may make a
contract when of sound mind.

• A person usually of sound mind, but occasionally of unsound mind, may not contract
when of unsound mind.

2.3 Contract by Disqualified Persons

• Foreign Sovereigns and Ambassadors

• Alien enemy

• Convicts

• Insolvent persons

3. Free Consent

3.1 Consent

Sec 13 – "Two or more persons are said to consent when they agree upon the same thing in the
same sense."
Latin Maxim – Consensus ad idem

3.2 Free Consent

Sec 14 - “Consent is said to be free when it is not caused by Coercion, Undue Influence,
Fraud, Misrepresentation, or Mistake.”
Consent is not free when caused by:

1. Coercion (Sec 15) - Voidable

2. Undue Influence (Sec 16) - Voidable

3. Fraud (Sec 17) - Voidable

4. Misrepresentation (Sec 18) - Voidable

5. Mistake (Sec 20, 21, 22) - Void

o Bilateral Mistake

▪ As to subject matter

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▪ Possibility of performance

o Unilateral Mistake

▪ Nature of the contract

▪ As to the identity of the person

4. Elements Vitiating Free Consent

4.1 Coercion

Sec 15 - "Coercion is the committing, or threatening to commit, any act forbidden by the Indian
Penal Code, or unlawfully detaining or threatening to detain any property, to the prejudice of
any person, with the intention of causing them to enter into an agreement."

4.1.1 Essential Ingredients of Coercion:

• Committing or threatening to commit any act forbidden by the Indian Penal Code.

• Unlawfully detaining or threatening to detain property to the prejudice of any person.

• The intention of causing a person to enter an agreement.

• Immaterial whether the Indian Penal Code is in force where the coercion is employed.

• Coercion may proceed from a third party and be directed at a third party.

4.1.2 Effect of Coercion:

• A contract induced by coercion is voidable at the option of the party whose consent
was so obtained.

• If any benefit is received under such a contract, it must be restored.

• A person to whom money or anything was delivered under coercion must repay or
return it.

• The burden of proof in case of coercion lies on the aggrieved party.

4.2 Undue Influence

Sec 16 - "A contract is said to be induced by undue influence where one party, due to the
nature of their relationship, is in a position to dominate the will of the other and uses this
position to gain an unfair advantage."

4.2.1 Essential Ingredients of Undue Influence:

1. Relation between the parties – One party is able to dominate the other when there is a
close relationship.

2. Position to dominate the will – One party is in a position to dominate the will of the
other due to:

o Real and apparent authority

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o Fiduciary relationship (trust and confidence)

o Temporary or permanent effect on a person’s mental capacity

o When the contract is unconscionable (unfair).

Examples:

o Real authority: A father can dominate the will of his son.

o Fiduciary relationship: A solicitor can dominate the will of a client.

o Mental distress: A doctor can dominate the will of a patient enfeebled by

illness.

3. Object to take undue advantage – The person in a position to influence must aim to
take advantage of the other party.

4. Burden of proof – The dominant party must prove they did not use their position to take
unfair advantage.

4.2.2 Power to Set Aside Contracts Induced by Undue Influence:

• A contract induced by undue influence is voidable at the option of the party whose
consent was so obtained.

• The contract may be set aside entirely or partially, depending on the benefit received by
the aggrieved party.
Example: A moneylender advances ₹1,00,000 to B, an agriculturist, and induces him by
undue influence to execute a bond for ₹2,00,000 at 6% interest per month. The court
may set aside the bond, ordering repayment of ₹1,00,000 with reasonable interest.

4.2.3 Difference between Coercion and Undue Influence

Coercion Undue Influence

Nature of action It involves physical force or threat. It involves mental pressure

Involvement of It involves committing or threatening No such illegal act is

criminal action to commit an act forbidden by the committed, or threat is given
Indian Penal Code.
Relationship Relationship between parties is not Some sort of relationship
between parties necessary between the parties is
necessary
Exercised by Coercion can move from a stranger Undue Influence cannot be
whom and can be used upon a stranger exercised by a stranger
Enforceability The contract is voidable at the The contract is either voidable
option of the aggrieved party. or the court may set it aside or
enforce in a modified form
Position of Any benefit already received must The court has discretion to
benefits received be returned once the contract is direct the aggrieved party to
rescinded. return the benefit in whole or in
part.

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4.3 Fraud

Sec 17 – “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 an intent to deceive another party
thereto or his agent, or to induce him to enter into the contract:

• the suggestion, as a fact, of that which is not true, by one who does not believe it to be
true,

• the active concealment of a fact by one having knowledge or belief of the fact,

• a promise made without any intention of performing it,

• any other act fitted to deceive,

• any such act or omission as the law specially declares to be fraudulent.”

4.3.1 Essential elements of the fraud

• A false representation or assertion must be made. However, silence, or an active

concealment may also amount to fraud.

• Representation must be related to a fact.

• Representation must be made before the conclusion of the contract with an intention to
deceive.

• The representation or statement should be made with a knowledge of its falsity or

without belief in its truth or recklessly not caring whether it is true or false.

• The other party must have been induced to act upon the representation or assertion.

• The other party must have relied upon the representation and must have been
deceived.

• The other party acting on the representation must have consequently suffered a loss.

4.3.2 Whether silence amounts to fraud

General rule: Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud. A party to the contract is under no obligation to disclose the whole truth
to the other party. ‘Caveat Emptor’ - let the purchaser beware.

Exception 1: Duty of the person to speak – Where the circumstances of the case are such that it
is the duty of the person observing silence to speak. Following contracts come under this
category:

• Fiduciary Relationship - The person in whom confidence is reposed is under a duty to

act with utmost good faith and make full disclosure of all material facts concerning
the agreement, known to him.

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Case Law: Regier V. Campbell Staurt

Facts: A broker was asked to buy shares for a client. He sold his own shares without disclosing
this fact.

Judgement: The client was entitled to avoid the contract or affirm it with a right to claim secret
profit made by the broker on the transaction since the relationship between the broker and the
client was a relationship of utmost good faith.

• Contracts of Insurance - In contracts of marine, fire, and life insurance, there is an

implied condition that full disclosure of material facts shall be made. Otherwise, the
insurer is entitled to avoid the contract.

• Contracts of Marriage - Every material fact must be disclosed by the parties to a

contract of marriage.

• Contracts of Family Settlement - Full disclosure of material facts within the

knowledge of the parties is required.

• Share Allotment Contracts - Persons issuing ‘Prospectus’ at the time of public issue
of shares/debentures by a joint stock company have to disclose all material facts
within their knowledge.

Exception 2: Where the silence itself is equivalent to speech – Mere silence as to facts likely to
affect the willingness of a person to enter into a contract is fraud where his silence is, in itself,
equivalent to speech.

Example:

• A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B

about the unsoundness of the horse. This is not fraud by A.

• B is A’s daughter and has just come of age. Here, the relation between the parties would
make it A’s duty to tell B if the horse is unsound.

• When B says to A – “If you do not deny it, I shall assume that the horse is sound.” A says
nothing. Here A’s silence is equivalent to speech.

4.3.3 Effect of Fraud upon validity of a contract

The following remedies are available to the party defrauded:

• Rescind the contract within a reasonable time.

• Sue for damages.

• Insist on performance of contract on the condition that he is put in the position in

which he would have been if false representation had not been made.

4.4 Misrepresentation

Sec 18 - Misrepresentation means and includes:

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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 anyone claiming under him, by misleading another to his
prejudice or to the prejudice of anyone 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.

4.4.1 Essential elements of misrepresentation

1. The maker of the statement of fact, which is false, believes it to be true, even though
such fact is not justified by the information he possesses.

Example: A makes a positive statement to B that C will be made the director of a company. A
makes the statement on information derived, not directly from C but from M. B applies for
shares on the faith of the statement which turns out to be false. The statement amounts to
misrepresentation, because the information received second-hand did not warrant A to make
the positive statement to B.

2. Breach of duty by a person without the intention to deceive and such breach brings an
advantage to him. If there is an intention to deceive, it becomes fraud.

Examples:

• ‘A’ believed the engine of his motorcycle to be in excellent condition. ‘A’ without getting
it checked in a workshop, told ‘B’ that the motorcycle was in excellent condition. On
this statement, ‘B’ bought the motorcycle, whose engine proved to be defective. Here,
‘A’s statement is misrepresentation as the statement turns out to be false.

• A buys an article thinking that it is worth ₹1000 when in fact it is worth only ₹500. There
has been no misrepresentation on the part of the seller. The contract is valid.

3. A party causes, even though done innocently, the other party to the agreement to make
a mistake as to the subject matter.

4.4.2 Difference between Fraud and Misrepresentation.

Fraud Misrepresentation
Intention There’s an intention to deceive No such intention to deceive the
the other party in case of fraud. other party in case of
misrepresentation.
Knowledge of truth The person suggesting believes The person suggesting believes
that the statement is untrue. the statement is true, though it is
not true.
Recission of the The aggrieved party can The aggrieved party can repudiate
contract and claim repudiate the contract and the contract but cannot claim
of damage claim damages. damages.

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Means to discover The party using the fraudulent Party can always plead that the
the truth act cannot secure or protect injured party had the means to
himself by saying that the discover the truth.
injured party had means to
discover the truth.

4.5 Legal effects of agreements without free consent

General rule:
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 the contract, whose consent was caused by fraud or misrepresentation, may insist
that the contract be performed and that they be put in the position they would have been if the
representation had been true.

Exception 1:
If such consent was caused by misrepresentation or silence amounting to fraud, the contract
is not voidable if the party whose consent was so caused had the means of discovering the
truth with ordinary diligence.
Example: A misrepresents that 750 tons of sugar is produced annually at their factory. B
examines the accounts, which with ordinary diligence should have revealed only 500 tons. B
cannot repudiate the contract based on A's misrepresentation.

Exception 2:
Fraud or misrepresentation that did not cause the party's consent does not render a contract
voidable.
Example: If a seller deliberately conceals a fault, but the buyer does not inspect the goods, the
buyer cannot avoid the contract as they were not deceived by the seller.

4.6 Mistake

Mistake may be defined as an innocent or erroneous belief that leads a party to

misunderstand the other party.

• Bilateral mistake: Both parties to a contract are under a mistake.

• Unilateral mistake: Only one party to the contract is under a mistake.

Types of mistakes:

1. Mistake of Law

o Mistake of Indian Law

o Mistake of Foreign Law

2. Mistake of facts

o Bilateral

▪ Mistake as to subject matter

(Quality/Existence/Identity/Title/Price/Quantity)

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▪ Mistake as to possibility of performance (Legal/Physical)

o Unilateral

▪ Identity of person

▪ Character of written document

4.6.1 Mistake of Law

• Mistake of Indian Law: Does not render a contract void, as ignorance of the law is not
an excuse. However, if the mistake of law was caused by the inducement of another,
the contract may be avoided.

• Mistake of Foreign Law: Treated like a mistake of fact and may avoid the contract.

4.6.2 Mistake of fact

• Bilateral Mistake: Where both parties are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.

• Unilateral Mistake: Where only one party is under a mistake, the contract remains
valid.

5. Legality of Object and Consideration

Sec 23: The consideration or object of an agreement is lawful, unless:

1. It is forbidden by law

2. It would defeat the provisions of any law

3. It is fraudulent

4. It involves injury to another person's person or property

5. The court regards it as immoral

6. It is opposed to public policy

Every agreement with unlawful consideration or object is void.

5.1 Consideration or object forbidden by law

If a contract's object or consideration is prohibited by law, it is not lawful.

Example: A licence given to X by the Forest Department prohibits assigning the licence
without permission, but if X does so in breach, it may still be valid if not prohibited by law.

5.2 Consideration or object defeats the provision of law

A contract that defeats the intention of the law is void.

Example: If A and B agree that B will not plead limitation in debt recovery, it defeats the
Limitation Act and is void.

5.3 Consideration or object is fraudulent

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Fraudulent transactions are void.

Example: A sells goods to B intending to smuggle them outside the country. This is a fraudulent
and void transaction.

5.4 Consideration or object defeats any rule in force

If a contract's object or consideration is against a rule in effect, it is void.

5.5 Consideration or object involves injury to another

A contract involving injury to another person or their property is unlawful.

Example: An agreement to publish a book that violates another's copyright is void.

5.6 Consideration or object is immoral

If the object or consideration is deemed immoral by the court, the contract is void.

5.7 Consideration or object is opposed to public policy

5.7.1 Trading with enemy

Contracts with a person from a country at war with India are void as they are opposed to public
policy.
Example: A contract between India and China during a war is void.

5.7.2 Stifling Prosecution

Contracts that pervert the course of law are void. Only compoundable offences can be settled
through such agreements.

5.7.3 Maintenance and Champerty

• Maintenance: A person promises to maintain a lawsuit in which they have no interest.

• Champerty: A person agrees to assist another in litigation in exchange for a portion of

the proceeds.
Example: A pays B to sue C maliciously – this is maintenance.

5.7.4 Trafficking in Public Offices and Titles

Agreements involving trafficking in public offices are void.

Example: Harish paid for a government job, but the contract is void as it opposes public policy.

5.7.5 Agreements creating monopolies

Agreements intended to establish monopolies are opposed to public policy and are void.

5.7.6 Marriage brokerage agreements

An agreement to negotiate marriage for reward is void as it opposes public policy.

5.7.7 Interference with the course of justice

Agreements that induce a judicial officer to act corruptly are void.

5.7.8 Interest against obligation

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Agreements that create an interest against obligation are void.

Example: An agent secretly accepting compensation from another party without their
principal’s knowledge.

5.7.9 Consideration Unlawful in Part

If the consideration is unlawful in part, the agreement is void unless the legal part can be
severed. If not, the entire contract is void.

6. Void Agreements
• Made by incompetent parties
• Agreements made under Bilateral mistake of fact
• Agreements the consideration or object of which is unlawful
• Agreement the consideration or object of which is unlawful in parts
• Agreements made without consideration
• Agreement in restraint of marriage
• Agreements in restraint of trade
• Agreement in restraint of legal proceedings
• Agreement the meaning of which is uncertain
• Wagering agreement
• Agreements to do impossible Acts

6.1 Agreement in restraint of marriage

Every agreement in restraint of marriage of any person other than a minor, is void.
So, if a person, being a major, agrees for good consideration not to marry, the promise is not
binding and considered as a void agreement.

6.2 Agreement in restraint of trade

An agreement by which any person is restrained from carrying on a trade or practising a legal
profession or exercising a business of any kind is an expressly void agreement.
Exceptions:

1. Sale of goodwill - Where a person sells the goodwill of a business and agrees with the
buyer to refrain from carrying on a similar business within specified local limits, such
an agreement is valid.

2. Outgoing partner - If an outgoing partner makes an agreement with the continuing

partners that he will not carry on any business similar to that of the firm within a
specified period or within specified local limits, it will be valid if the restrictions are
reasonable.

3. Partners - An agreement between partners not to carry on competing business during

the partnership is valid.

4. Service agreements - An agreement where an employee binds himself, during the term,
not to compete with his employer is not in restraint of trade.

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5. Trade combinations

6. Sole/Exclusive dealing agreements and franchise

6.3 Agreement in restraint of legal proceedings

An agreement in restraint of legal proceeding means an agreement:

a) That restricts any party from enforcing rights through a Court.
b) Abridges the usual period for starting legal proceedings.
Such a contract is void.
Exceptions:
a) An agreement to refer disputes to arbitration is valid.
b) Agreements to refer existing/future disputes to arbitration in writing are valid.

6.4 Agreement - the meaning of which is uncertain

An agreement where the meaning is not certain is void.

If the meaning can be made certain, it is valid.
Example: A agrees to sell B “a hundred tons of oil” without specifying the type, making the
agreement void. But if A deals only in coconut oil, it is valid as the meaning can be made
certain.

6.5 Wagering agreement

A wagering agreement involves payment of money based on an uncertain event.

Such an agreement is void unless one party has control over the event.
Essentials:

1. Promise to pay money

2. Conditional on event

3. Uncertainty of the event

4. Two parties standing to win or lose

5. Common intention to bet

6. No interest in the event except for stake

6.5.1 Transactions similar to Wager (Gambling)

1. Lottery - A game of chance. Lotteries are wagers, even if authorized by GOI.

2. Crossword puzzles - As ruled in State of Bombay vs. R.M.D. Chamarbangwala,

crossword puzzles can be wagering transactions if determined by chance.

3. Speculative transactions - Agreements where only the price difference is settled are
gambling.

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4. Horse Race - If the prize is less than ₹500, it is a wager.

6.5.2 Transactions resembling wagering but are not void

1. Chit fund - Chit funds do not qualify as wagers.

2. Commercial/Share market transactions - Where delivery of goods/shares is

intended, it is not a wager.

3. Games of skill - Competitions based on skill, like crossword puzzles or athletic

competitions, are valid under the Prize Competition Act, 1955, provided the prize
does not exceed ₹1,000.

4. Contract of insurance - Insurance contracts are contingent contracts and are valid.

6.5.3 Distinction between Contract of Insurance and Wagering Agreement

Contract of Insurance Wagering Agreement

Meaning It is a contract to indemnify the loss It is a promise to pay money or
money’s worth on the happening or
non- happening of an uncertain
event
Consideration Essence of insurance contract is the There is no consideration between
mutual consideration (premium and the two parties. There is just
compensation amount). gambling for money.
Insurable Insured party has insurable interest in the There is no property in case of
Interest life or property sought to be insured. wagering agreement. There is
betting on other’s life and
properties.
Contract of Except life insurance, the contract of Loser has to pay the fixed amount
Indemnity insurance indemnifies the insured person on the happening of uncertain
against loss. event.
Enforceability It is valid and enforceable It is void and unenforceable
agreement.
Premium Calculation of premium is based on No such logical calculations are
scientific and actuarial calculation of risks. required.
Public They are beneficial to the society They have been regarded as against
Welfare the public welfare.

6.6 Agreements to do Impossible Acts

Such agreements are covered in detail in Unit 4 – Performance of Contract.

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Unit 4 - Performance of Contract

1. Obligations of Parties to Contracts

It is the primary duty of each party to either perform or offer to perform their promise. A
promisor is absolved from this responsibility only when performance can be dispensed with
due to a legal provision or the actions of the other party. Generally, if the promisor dies, their
representative is bound to perform the promise.

2. Effect of Refusal to Accept Offer of Performance

Sec 38 - If a promisor offers performance that is not accepted, they are not responsible for
non-performance. The offer must be:

• Unconditional

• Made at a proper place and time

• Made under circumstances allowing the promisee to ascertain the promisor's ability to
perform

• Allow the promisee to see that what is offered is what the promisor is bound to deliver

3. Effect of Refusal of Party to Perform Wholly

Sec 39 - If a party refuses to perform their promise entirely, the promisee can:

• Terminate the contract

• Indicate interest in continuing the contract

If the promisee continues, they cannot later terminate on this ground. They can still
claim damages for the breach.

4. By Whom a Contract may be Performed

Sec 40 - By the promisor, their agent, or legal representative.
Sec 41 - By third persons.
Sec 42 - In the case of joint promisors.

4.1 Performance by Promisor

Sec 40 - If the intention is for the promise to be performed by the promisor themselves, it must
be done by them. Contracts involving personal skill or diligence must be performed by the
promisor.

4.2 Performance by Agent

If personal consideration is not the basis of the contract, the promisor or their representative
can employ a competent person to perform it.

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4.3 Legal Representatives

If the promisor dies before performing, their legal representatives are responsible, unless the
contract states otherwise. Their liability is limited to the value of the property inherited.

4.4 Third Persons

Sec 41 - If the promisee accepts performance from a third person, they cannot later enforce it
against the promisor. Example: If A owes B ₹100,000, but C pays B ₹60,000 on behalf of A
without A’s knowledge, B can only claim the remaining ₹40,000 from A.

4.5 Joint Promisors

When multiple persons make a joint promise, they must jointly fulfill the promise unless
stated otherwise. If one dies, their legal representatives must fulfill it with the remaining
promisors. Example: If A, B, and C jointly promise ₹6,00,000 to D, their legal representatives
must perform jointly if any of them die.

5. Distinction between Succession and Assignment

Succession Assignment
In case of succession both the burden In case of assignment, the benefit
and benefits attaching to the contract are of the contract can only be
succeeded by process of law assigned but not the liabilities.
Benefit is coupled with a liability
However, the successor's liability is OR when a personal
limited to the extend to the property consideration is involved, then
inherited by him. benefit cannot be assigned.

6. Liability of Joint Promisor & Promisee

6.1 Devolution of Joint Liabilities

Sec 42 - When two or more persons make a joint promise, they must fulfill it jointly during their
lifetimes. After the death of one, their legal representative must perform with the survivors.
After the last survivor's death, the representatives of all must fulfill the promise.

6.2 Any One of Joint Promisors May Be Compelled to Perform

• The promisee can compel any one or more joint promisors to perform the whole promise
unless there’s an express contrary agreement.
Example: A, B, and C jointly promise to pay D ₹3,00,000. D can compel A, B, or C to pay the
full amount.

• If one joint promisor performs the entire contract, they can seek contribution from the
others.
Example: A, B, and C promise to pay D ₹3,00,000. If C can’t pay, A can demand ₹1,50,000
from B after paying the full amount.

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• If a joint promisor defaults on their contribution, the remaining promisors share the loss
equally.
Example: X, Y, and Z jointly promise to pay ₹6,000. If Z pays the full amount but X is
insolvent, Z can claim ₹1,000 from X’s estate and ₹2,000 from Y.

6.3 Effect of Release of One Joint Promisor

Releasing one joint promisor by the promisee does not:

• Discharge the other joint promisors

• Free the released promisor from responsibility to the others.

6.4 Rights of Joint Promisees

Sec 45 - If a promise is made to two or more persons jointly:

• They have the joint right to claim performance during their lifetimes.

• After one’s death, the legal representative of the deceased, along with survivors, can
claim jointly.

• After the last survivor's death, the representatives of all have the right to claim
performance.

7. Time and Place for Performance of the Promise

Sec 46 - If no application is needed and no time is specified:

• Performance should occur within a reasonable time.

Sec 47 - If time is specified without an application:

• Perform during usual business hours on the specified day.

Sec 48 - If an application for performance is needed on a certain day:

• The promisee should apply at a proper place within usual business hours.

Sec 49 - If no application is needed and no place is fixed:

• The promisor should apply to the promisee to appoint a reasonable place for
performance.

Sec 50 - Performance must occur in the manner or at the time prescribed or sanctioned by the
promisee.

8. Performance of Reciprocal Promise

Sec 2(f) - “Reciprocal promises are promises which form the consideration or part of the
consideration for each other.”

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8.1 Promisor Not Bound to Perform, Unless Reciprocal Promise Ready and Willing to
Perform
When a contract consists of reciprocal promises to be performed simultaneously, the
promisor need not perform unless the promisee is ready and willing to perform their promise.
Example: A shopkeeper agrees to give you a product in exchange for money; if either party is
unwilling to perform, the contract ends.

8.2 Order of Performance of Reciprocal Promises

• If the order of performance is fixed by the contract, perform in that order.

• If not expressly fixed, perform in the order the nature of the transaction requires.
Example: A must receive security from B before delivering stock, as the nature of the
transaction requires it.

8.3 Liability of Party Preventing Event on Which the Contract is to Take Effect
If one party prevents the other from performing their promise, the contract becomes voidable at
the option of the party so prevented, who can also claim compensation for any loss.
Example: In a contract for timber, if the seller only cords part of the timber, the buyer can avoid
the contract and claim compensation for losses.

8.4 Effect of Default as to That Promise Which Should Be First Performed

In reciprocal promises, if one party fails to perform their promise, they cannot claim
performance from the other and must compensate for any loss.
Example: If A cannot provide materials for B to make a shoe rack, A cannot claim performance
from B and must compensate B for their loss.

8.5 Effects of Failure to Perform at a Time Fixed in a Contract Where Time is Essential

1. Time is essential: If a party fails to perform by the specified time, the contract becomes
voidable at the option of the promisee.

2. Time is not essential: The contract does not become voidable, but the promisee is
entitled to compensation for any loss caused by the delay.

3. Acceptance of performance at a different time: The promisee cannot claim

compensation for loss unless they notified the promisor of their intention at the time of
acceptance.

8.6 Agreement to Do Impossible Act

An agreement to perform an impossible act is void.

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• Initial Impossibility: If something is impossible at the time of contract, the agreement is

void whether known or unknown to the parties.
Example: B promises ₹5,00,000 for swimming across the Indian Ocean; the agreement
is void.

• Subsequent Impossibility: If an unforeseen event makes performance impossible after

the contract is made, the contract becomes void.
Example: A and B contract to marry, but A becomes mad before the marriage.

8.7 Reciprocal Promise to Do Certain Legal Things and Some Illegal

When parties promise to do certain legal things and some illegal things, the legal promises
form a valid contract while the illegal ones are void.
Example: A sells a house to B for ₹500,000 but also agrees to a payment for using it as a
gambling house; the first promise is valid, the second is void.

8.8 Alternative Promise, One Branch Illegal

If one branch of an alternative promise is legal and the other illegal, only the legal branch is
enforceable.
Example: A agrees to pay B ₹1,00,000 for delivering either rice or smuggled opium; the contract
for rice is valid, while that for opium is void.

9. Appropriation of Payments

When a debtor owes multiple debts to a creditor and makes a payment insufficient to cover all,
the payment is appropriated as follows:

• If a specific debt is indicated, the payment applies to that debt.

• If not indicated, the creditor may apply it at their discretion to any lawful debt due, but
not to a disputed debt.

• If neither party appropriates, payments apply to debts in chronological order; if equal,

they are applied proportionately.

10. Contracts, which need not be performed – with the Consent of both the Parties

10.1 Effect of Novation, Rescission, and Alteration of contract

Sec 62 states that if the parties to a contract agree to substitute a new contract, rescind, or
alter it, the original contract need not be performed.

10.1.1 Effect of Novation

Novation involves substituting a new contract for an existing one, either between the same or
different parties, discharging the old contract. This occurs by mutual agreement.
Example: A owes B ₹ 100,000. A, B, and C agree that C will pay B, discharging A’s liability and
creating a new contract between B and C.

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10.1.2 Effect of Rescission

A contract is discharged by rescission, meaning the parties mutually agree to cancel it without
creating a new contract.

10.1.3 Effect of Alteration of contract

When parties agree to alter a contract, the original contract is rescinded, and it need not be
performed, but the parties remain the same.

Novation Alteration
Novation may be made by changing In case of alteration the terms of the
in the terms of the contract or there contract may be altered by mutual
may be a change in the contracting agreement, but the parties to the
parties. contract will remain the same

In case of Alteration, it is not essential

to substitute a new contract in place
In case of Novation, there is of the old contract, there may be a
altogether a substitution of new change in some of the terms and
contract in place of the old contract. conditions of the original agreement.

10.2 Promisee may waive or remit performance of promise

Every promisee may
• dispense with or remit, wholly or in part, the performance of the promise made to him
• extend the time for such performance
• accept any satisfaction he thinks fit instead of performance.

10.3 Restoration of Benefit under a Voidable Contract

When a contract is voidable and rescinded, the other party need not perform any promise. If the
rescinding party has received a benefit, he must restore it.
Example: An insurance company may rescind a policy for non-disclosure, needing to repay the
premium minus expenses incurred.

10.4 Obligations of Person who has received advantage under Void Agreement or Contract
that becomes Void
When an agreement is found void, anyone who received an advantage must restore it or
compensate the person it was received from.
Example 1: A pays B ₹ 1,00,000 to marry C, who is already dead, making the agreement void; B
must repay A.
Example 2: A sells land to B for ₹ 400,000. B pays ₹ 40,000 as a deposit. If B fails to complete
the sale, A can rescind the contract and retain the deposit, as it’s a security for performance,
not a benefit under the contract.

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10.5 Communication of rescission

Rescission must be communicated similarly to how a proposal is communicated and can be
revoked in the same manner.

10.6 Effects of neglect of promisee to afford promisor reasonable facilities for

performance
If a promisee neglects to provide reasonable facilities for the promisor to perform, the promisor
is excused for any resulting non-performance.
Example: A contracts to repair B’s house, but B fails to indicate where repairs are needed,
excusing A from non-performance.

11. Modes of Discharge of a Contract

• By Performance
• By Mutual Agreement
• By Impossibility of Performance
• By Lapse of Time
• By Operation of Law
• By Breach of Contract
• By Waiver or Remission of Performance by Promisee
• By Neglect of Promisee to Afford the Promisor Reasonable Facilities for Performance
• By Merger of Rights

11.1 Discharge by Performance

Discharge occurs when the parties fulfill their contractual obligations within the specified time
and manner.

1. Actual Performance:
Example: A sells his car to B; the contract ends when B receives the car and pays the
price.

2. Attempted Performance:
Example: A contracts to supply timber, but when B delivers, A refuses acceptance; this
is attempted performance.

11.2 Discharge by Mutual Agreement

If parties agree to substitute a new contract, or to rescind, remit, or alter the existing contract,
the original need not be performed.

11.3 Discharge by Impossibility of Performance

Impossibility can be of two types:

• Initial Impossibility: Existing from the start.

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• Supervening Impossibility: Occurs due to unforeseen changes such as:

• A change in law
• Destruction of essential subject matter
• Non-existence of expected conditions due to personal incapacity
• Declaration of war

11.4 Discharge by Lapse of Time

A contract must be performed within a period prescribed by the Limitation Act, 1963. If not
performed within this period, the promisee loses the legal remedy.

11.5 Discharge by Operation of Law

A contract may be discharged by legal events such as the death of the promisor or insolvency.

11.6 Discharge by Breach of Contract

Failure to perform obligations results in a breach, which can be actual or anticipatory. Both
types discharge the contract, with anticipatory breach occurring when one party repudiates
before performance is due.

11.7 Waiver or Remission of Performance by Promisee

A promisee may dispense with or remit, wholly or partly, the performance of the promise, extend
the performance time, or accept any satisfactory alternative.

11.8 Effects of Neglect of Promisee to Afford Promisor Reasonable Facilities for

Performance
If the promisee neglects to provide reasonable facilities for performance, the promisor is
excused for any non-performance caused by this neglect.

11.9 Merger of Rights

When inferior and superior rights coincide in one person, both rights combine, leading to
discharge of the contract for inferior rights.
Example: A leases land from B, then buys the land; A’s ownership (superior right) terminates the
lease (inferior right).

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Unit 5 – Breach of Contract and Its Remedies

1. Introduction
Breach refers to the failure of a party to perform obligations under a contract. It can be
categorized as:

• Actual breach of contract

• Anticipatory breach of contract

2. Anticipatory Breach of Contract

An anticipatory breach occurs before the time fixed for performance. It can happen in two
ways:

• Expressly (through words spoken or written)

• Impliedly (through conduct)

• Example 1: A informs B on 30th July 2020 that he cannot supply cotton on 14th August
2020, which is an express rejection.

• Example 2: A sells his horse to C on 1st August 2020, breaching the agreement with B,
indicating an anticipatory breach through conduct.

2.1 Effect of Anticipatory Breach

Sec 39 states that if a party refuses to perform or disables themselves, the promisee can
terminate the contract unless they indicate acquiescence in its continuation. The promisee has
the following options:
I. Rescind the contract and sue for damages immediately.
II. Choose not to rescind and hold the party responsible after the performance due date.

3. Actual Breach of Contract

An actual breach occurs at the time when the contract performance is due or during its
performance.

3.1 Remedies Available for Breach of Contract

• Suit for Damages

• Recission of Contract

• Suit for Specific Performance

• Suit for Injunction

• Suit upon Quantum Meruit

4. Suit for Damages

4.1 Compensation for Loss or Damage
Sec 73 states that upon breach, the suffering party is entitled to compensation for any loss or

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damage caused, which naturally arose from the breach or was known to be likely when the
contract was made.

• Compensation can be claimed for:

• Any loss that arises in the usual course of events.
• Loss known to likely result from the breach.

• Special damages can only be claimed if notice was given. The party suffering loss must
take reasonable steps to minimize it.

• No compensation is payable for remote or indirect losses.

Example: Yash agrees to sell and deliver 50 kilograms of rice to Rohan for ₹ 5,000. The amount
is to be paid on delivery. However, he fails to perform the promise. Rohan buys 50 kilograms of
rice from a neighbourhood trader for ₹ 7,500. Rohan can claim compensation from Yash. The
compensation amount is the additional amount that Rohan had to pay to procure the same
quantity of rice of similar quality from the market. In this case, it is ₹2,500.

4.2 Compensation for Failure to Discharge Obligations

If an obligation resembling a contract is incurred and not discharged, the injured party can claim
the same compensation as if a contract had been breached.

4.3 Kind of Damages

• General/Ordinary

• Special

• Vindictive or Exemplary

• Nominal

• Damages for Deterioration Caused by Delay

• Pre-fixed Damages

4.3.1 Ordinary Damages

These damages arise naturally from the breach of contract.

Case Law: Hadley vs. Baxendale

Facts: The crankshaft of P’s flour mill had broken. He gives it to D, a common carrier who
promised to deliver it to the foundry in 2 days where the new shaft was to be made. The mill
stopped working, D delayed the delivery of the crankshaft, so the mill remained idle for another
5 days. P received the repaired crankshaft 7 days later than he would have otherwise received.
Consequently, P sued D for damages not only for the delay in the delivering the broken part but
also for loss of profits suffered by the mill for not having been worked.

Judgement: The court held that P was entitled only to ordinary damages and D was not liable
for the loss of profits because the only information given by P to D was that the article to be

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carried was the broken shaft of a mill and it was not made known to them that the delay would
result in loss of profits

4.3.2 Special Damages

These arise when a party is informed of special circumstances affecting the contract.

• Example: A informs B about the urgent need for a machine; B delays delivery, causing A
to lose a profitable contract.

o A can recover the average profit loss from running the mill but not the loss from
the Government contract since that was not disclosed to B.

4.3.3 Vindictive or Exemplary Damages

Awarded in specific cases:

• For breach of promise to marry

• For wrongful dishonor by a banker of a customer’s cheque

4.3.4 Nominal Damages

Awarded when a breach is proven but no real damage is suffered.

• The amount can be as little as one rupee or even 10 paise.

4.3.5 Damages for Deterioration Caused by Delay

Damages can be recovered for deterioration of goods due to delay, even without notice.

4.3.6 Pre-fixed Damages

If a contract specifies a sum for breach, the aggrieved party can recover reasonable
compensation not exceeding this amount.

• Example: If the penalty is ₹1,00,000 but actual loss is ₹70,000, only ₹70,000 is
recoverable. If loss is ₹1,50,000, only ₹1,00,000 can be claimed.

5. Penalty and Liquidated Damages

• English Law distinguishes between liquidated damages and penalty, whereas Indian
Law does not.

• Liquidated Damages: Genuine pre-estimate of loss due to breach.

• Penalty: Unreasonable sum to compel performance.

5.1 Distinction between Liquidated Damages and Penalty

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• If the sum is excessive compared to probable damage, it is a penalty.

• If a contract states an amount and adds extra for defaults, the additional sum is a
penalty.

• Courts evaluate the facts to discern the nature of the sum.

• Indian Courts focus on reasonable compensation not exceeding the contract amount
and do not distinguish between the two.

5.2 Other Remedies

5.2.1 Rescission of Contract

When a contract is breached by one party, the other party may treat it as rescinded, freeing
them from obligations and entitling them to compensation for damages suffered.

• Example: A promises B to deliver 50 bags of cement but fails on the appointed day. B is
discharged from paying the price.

5.2.2 Quantum Meruit

"Quantum Meruit" means compensation for the value of work done. It applies when the injured
party has completed part of their contractual obligations.

• Conditions:

o The original contract must be discharged.

o The claim must be from a party not in default.

• Nature: Damages are compensatory; quantum meruit is restitutory, restoring the party
to their prior position.

• Claims arise from:

o Void agreements or contracts.

o Work done without a gratuitous intention.

o Implied contracts for services without agreed remuneration.

o Abandonment or refusal to perform the contract.

o Divisible contracts with partial benefits.

o Indivisible contracts performed poorly; the performer can claim the full amount
with deductions for poor work.

• Example: A delivers the first installment of cotton bales but fails to deliver the second. B
must pay for the first 50 bags.

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5.2.3 Suit for Specific Performance

When damages are inadequate for a breach, the court may order specific performance,
compelling the breaching party to fulfill their contractual obligations.

5.2.4 Suit for Injunction

If a party negates contract terms, the court may issue an injunction to restrain them from
breaching the contract.

• Example: N, a film star, contracts to act exclusively for one producer but attempts to
work for another. She can be restrained by an injunction.

5.2.5 Rightful Rescission Entitles to Compensation

A party who rightfully rescinds a contract is entitled to compensation for damages from non-
fulfillment.

• Example: A singer contracts with B to perform but absents herself. B rescinds the
contract and is entitled to compensation for damages incurred.

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Unit 6 – Contingent & Quasi Contracts

1. Contingent Contracts
Sec 31 - “A contract to do or not to do something, if some event, collateral to such contract,
does or does not happen.”
Contingent contracts are those where the promisor performs his obligation only when certain
conditions are met. Examples include contracts of insurance, indemnity, and guarantee.

Essentials of a Contingent Contract

I. Dependence on Event: The performance of a contingent contract depends on the happening
or non-happening of some event or condition.

II. Collateral Event: The event must not be part of the contract. It should neither be
performance promised nor a consideration for a promise.

• Example 1: A agrees to deliver 100 bags of wheat, and B agrees to pay only afterwards.
This is not contingent as B’s obligation is part of the promise.

• Example 2: A agrees to construct a swimming pool for B for ₹200,000, with payment
upon completion. This is not contingent since the event is directly connected to the
contract.

III. Not Just Will of Promisor: The event must be contingent and not merely based on the will
of the promisor.

• Example: If A promises to pay B ₹100,000 if it rains on 1st April, it is contingent because

rain is not A's will.
IV. Uncertainty of Event: If the performance depends on a future event that is certain, it
is not a contingent contract.

• Example: A agrees to sell land after obtaining collector's permission, which is almost
certain. This contract is not contingent.

2. Rules Relating to Enforcement

2.1 Enforcement on Event Happening: A contingent contract to do something if an uncertain
event happens cannot be enforced until the event occurs. If the event becomes impossible, the
contract becomes void.

Example: A contracts to pay B if B marries C, but C dies unmarried. The contract is void.

2.2 Enforcement on Event Not Happening: A contingent contract to do something if an

uncertain event does not happen can be enforced only when the event becomes impossible.

Example: Rohit agrees to pay Mohan ₹10,000 if the Titanic does not return; the contract is
enforceable if the ship sinks.

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2.3 Contingent on Conduct of a Living Person: If contingent on how a person acts, the event
becomes impossible if that person does anything that prevents their action within a time frame.

Example: A agrees to pay B if B marries C, but C marries D, making B's marriage to C

impossible.

Case Law: Frost v. Knight: The defendant promised to marry the plaintiff upon his father's
death, but married another while the father was alive. The promise became impossible, allowing
the plaintiff to sue for breach.

2.4 Contingent on Specified Event Happening Within Fixed Time: Contracts contingent on an
uncertain event within a fixed time become void if the event does not happen by the expiration
or becomes impossible beforehand.

Example: Rohit promises to pay Mohan ₹10,000 if the Titanic returns within a year. It is
enforceable if the ship returns; void if it burns.

2.5 Contingent on Specified Event Not Happening Within Fixed Time: Contracts may be
enforced if the event does not happen after the time fixed or if it becomes certain before that it
will not happen.

Example: Rohit promises to pay Mohan ₹10,000 if the Titanic does not return within a year. The
contract is enforceable if the ship does not return or is burnt.

2.6 Contingent on Impossible Event: Agreements contingent on an impossible event are void,
regardless of the parties’ knowledge of the impossibility.

Example: A agrees to pay B ₹1,00,000 if the sun rises in the west. This is impossible and hence
void.

Contingency When Valid and Enforceable When Void and not enforceable
Happening of an event Event happens Event becomes impossible
Non-Happening of an Event becomes impossible or
event does not happen Event Happens
Happening of an event Event happens within Time Lapses or Event becomes
within specified time specified time Impossible
Non-Happening of an Time Lapses or Event
event within specified becomes Event happens within specified
time Impossible time
Impossible Event Never Always

3. Contingent Contract Vs. Wagering Contract

Basis of difference Contingent contract Wagering contract

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Meaning Contract to do or not to do A wagering agreement is a

something with reference to a promise to give money or
collateral event happening or not money’s worth with reference to
happening an uncertain event happening or
not happening.
Reciprocal promises May not contain reciprocal Consists of reciprocal promises.
promises.
Uncertain event Uncertain event is collateral. Uncertain event is the core
factor.
Nature of contract Contingent contract may not be A wagering agreement is
wagering in nature. essentially contingent in nature
Interest of contracting Contracting parties have interest in Contracting parties have no
parties the subject matter in contingent interest in the subject matter.
contract.
Doctrine of mutuality of Contingent contract is not based A wagering contract is a game,
lose and gain on doctrine of mutuality of lose losing and gaining alone matters
and gain.
Effect of contract Valid Void

4. Quasi Contracts
A quasi or constructive contract rests on the maxim, “No man must grow rich out of another
person’s loss.” Even without a formal contract, certain social relationships create specific
obligations. Quasi contracts operate on principles of equity, justice, and good conscience.

Example: A pays money to B by mistake, which is due to C. B must refund A.

4.1 Cases Deemed as Quasi-Contracts

• Claims for necessaries supplied

• Payment by an interested person

• Obligation of a person enjoying benefit of a non-gratuitous right

• Responsibility of finder of goods

• Money paid by mistake or under coercion

4.1.1 Claim for Necessaries Supplied to Persons Incapable of Contracting

If a person incapable of contracting, or someone legally bound to support them, is supplied with
necessaries suited to their condition, the supplier is entitled to reimbursement from the
incapable person's property.

Example: A supplies B, a lunatic or minor, with necessaries. A can be reimbursed from B’s
property if:
• The goods were supplied to a minor or lunatic.
• They were suitable to the recipient's actual requirements.

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4.1.2 Payment by an Interested Person

A person interested in a payment that another is legally bound to pay can seek reimbursement
for the payment made.

Example: B pays the government on behalf of A to prevent the annulment of B's lease due to A's
arrears. A must reimburse B.

4.1.3 Obligation of Person Enjoying Benefits of Non-Gratuitous Act

If a person lawfully performs an act for another without the intention of it being gratuitous, and
the other enjoys the benefit, they must compensate the provider.

For a suit to succeed, the plaintiff must prove:

• The act was done or the thing was delivered lawfully.
• It was not done gratuitously.
• The other person enjoyed the benefit.

Example: A leaves goods at B’s house by mistake, and B treats them as his own; B must pay A.

Case Law: Shyam Lal vs. State of U.P.

Facts: ‘K’ a government servant was compulsorily retired by the government. He filed a writ
petition and obtained an injunction against the order. He was reinstated and was paid salary but
was given no work and in the meantime government went on appeal.

Judgement: Appeal was decided in favour of government and ‘K’ was directed to return the
salary paid to him during period of reinstatement.

4.1.4 Responsibility of Finder of Goods

A person who finds and takes custody of goods belonging to another has responsibilities akin to
that of a bailee.

The finder must:

• Take proper care of the goods.
• Not appropriate the goods.
• Restore the goods if the owner is found.

Case Law: Hollins vs. Howler L. R. & H. L.

Facts: ‘H’ picked up a diamond on the floor of ‘F’s shop and handed over the same to ‘F’ to keep
till the owner was found. In spite of the best efforts, the true owner could not be traced. After the
lapse of some weeks, ‘H’ tendered to ‘F’ the lawful expenses incurred by him and requested to
return the diamond to him. ‘F’ refused to do so.

Judgement: ‘F’ must return the diamond to ‘H’ as he was entitled to retain the goods found
against everybody except the true owner.

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4.1.5 Money Paid by Mistake or Under Coercion

A person who receives money or anything delivered by mistake or under coercion must repay or
return it.

4.2 Difference between quasi contracts and contracts

Basis of distinction Quasi- Contract Contract

Essential for formation of a Absent Present
valid contract
Obligation Imposed by law Created by consent of the
parties

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Unit 7 – Contract of Indemnity & Guarantee

1. Contract of Indemnity
1.1 Definition
Sec 124 - “A contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person.”

1.2 Parties in a Contract of Indemnity

Indemnifier - Party who promises to indemnify/save the other party from loss.
Indemnified/Indemnity holder - Party who is promised to be saved against the loss.

1.3 Basic Conditions in a Contract of Indemnity

• Existence of loss is essential – unless the promisee has suffered a loss, he cannot hold
the promisor liable.

• Such loss is caused by:

o Conduct of the promisor himself, or

o Conduct of any other person.

• Loss due to an accident not caused by any person, or an act of God/natural event, is
not covered.

• Exception in Case Law: In Gajanan Moreshwar v/s Moreshwar Madan (1942),

decision based on English Law covers every loss whether due to negligence or natural
calamity.

• Contract of Indemnity must fulfill all the essentials of a valid contract.

• A contract of Fire Insurance or Marine Insurance is always a contract of indemnity, but

there is no indemnity in Life Insurance.

1.4 Modes of Contract of Indemnity

• Express contract - When a person expressly promises to compensate the other from
loss.

• Implied contract - Inferred from the conduct of the parties or circumstances.

1.5 Rights of Indemnity Holder When Sued

The promisee (indemnity holder) is entitled to recover from the promisor (indemnifier):

• All damages which he may be compelled to pay in any suit,

• All costs incurred in bringing/defending the suit,

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• All sums paid under terms of any compromise of suit.

The Act is silent about the rights of the Indemnifier, but they are similar to the rights of a
surety under Section 141 of the Indian Contract Act, 1872.

1.6 When Does the Liability of the Indemnifier Commence?

The liability of an indemnifier commences as soon as the liability of the indemnity holder
becomes absolute and certain.

2. Contract of Guarantee
2.1 Definition
Sec 126 - A contract of guarantee is a contract to perform the promise made or discharge the
liability of a third person in case of his default.

2.2 Parties Involved in a Contract of Guarantee

• Surety - Person who gives the guarantee.

• Principal debtor - Person in respect of whose default the guarantee is given.

• Creditor - Person to whom the guarantee is given.

The contract of guarantee is a triplicate agreement:

• A principal contract between the principal debtor and creditor.

• A secondary contract between the creditor and the surety.

• An implied contract between the surety and the principal debtor obligating the debtor to
indemnify the surety.

2.3 Essential Features of a Guarantee

• Principal debt: There must be a principal debtor for the guarantee to be valid.

• Consideration: A guarantee without consideration is void; consideration for the

principal debtor suffices for the surety.

• Existence of a liability: There must be an existing, enforceable liability or promise.

• No misrepresentation or concealment: Any guarantee obtained through

misrepresentation or silence about material circumstances is invalid.

• Writing not necessary: Guarantee may be oral or written.

• Joining of co-sureties: The contract is invalid if a surety imposes a condition requiring

another person to join as a co-surety and they do not join.

2.4 Types of Guarantee:

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1. Specific guarantee: Extends to a single debt/specific transaction; the surety's liability

ends when the guarantee is discharged.

2. Continuing guarantee: Extends to a series of transactions; the surety's liability

continues until revoked.

2.5 Difference between contract of indemnity and guarantee

Point of Contract of indemnity Contract of guarantee

distinction
Parties to the Only 2 parties to the contract – There are 3 parties to the contract –
contract indemnifier and indemnified. creditor, principal debtor, and surety
Nature and The liability of the indemnifier is The liability of the surety is secondary
liability primary and unconditional. and conditional as the primary liability
is that of the principal debtor.
Time of liability Liability arises only on the Liability arises only on the
happening of a contingency. nonperformance of an existing promise
or non-payment of an existing debt.

Time to act The indemnifier need not act at The surety acts at the request of
the request of indemnity holder. principal debtor.
Right to sue Indemnifier cannot sue a third Surety can proceed against principal
third party party for loss in his own name debtor in his own right because he gets
as there is no privity of contract all the right of a creditor after
discharging the debts.
Purpose Reimbursement of loss. For the security of the creditor.
Competency All parties must be competent In case of a contract of guarantee,
to contract to contract. where a minor is a principal debtor, the
contract is still valid.

2.6 Nature and Extent of Surety’s Liability

• The liability of the surety is co-extensive with that of the principal debtor unless
otherwise provided by the contract. This means the surety is liable for what the principal
debtor is liable for.

• The liability of a surety arises only on default by the principal debtor. If there is a
condition precedent for the surety’s liability, the surety is liable only when such
condition is fulfilled.

• Where a debtor cannot be held liable due to any defect in the document, the liability of
the surety also ceases.

• The surety’s liability continues if the principal debtor has not been sued or omitted from
being sued; the creditor has the right to sue the surety directly without first proceeding
against the principal debtor.

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2.7 Liability of Two Persons

Where two persons contract with a third person to undertake a certain liability and also contract
with each other that one shall be liable only on the default of the other (Guarantee), the creditor
cannot sue the guarantor, even if aware of such second contract, because he is not a party to it.
The two debtors shall hold the same liability as per the primary contract.
Example: A and B make a joint and several promissory note to C. A makes it as surety for B, and
C knows this at the time. A's status as surety is no defense against a suit by C upon the note.

3. Modes of Discharge of Surety

I. By Revocation of the Contract of Guarantee

• By revocation of continuing guarantee by notice.

• Revocation by surety's death.

• By novation.

II. By Conduct of the Creditor

• By variance in terms of contract.

• By release or discharge of principal debtor.

• Discharge of surety when creditor compounds with, gives time to, or agrees to sue the
principal debtor.

• Discharge of surety by creditor's act or omission impairing surety's eventual remedy.

III. On Invalidation of Contract of Guarantee

• Guarantee obtained by misrepresentation is invalid.

• Guarantee obtained by concealment is invalid.

• Guarantee on the condition that the creditor shall not act until co-surety joins is invalid
if that person does not join.

3.1 By Revocation of Contract of Guarantee

3.1.1 Revocation by Notice
The continuing guarantee may be revoked at any time by the surety as to future transactions by
giving notice to the creditor. After revocation, the surety shall be liable for only those
transactions that occurred before the notice was given.
Revocation of Specific Guarantee: Only if liability to principal debtor has not accrued.

3.1.2 Revocation by Death

In the absence of any contract to the contrary, the death of the surety operates as a revocation
of a continuing guarantee for future transactions. The surety’s estate remains liable for past
transactions.

3.1.3 Revocation by Novation

The surety under the original contract is discharged if a fresh contract is entered into, either
between the same parties or different parties, with mutual discharge of the old contract.

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3.2 By Conduct of the Creditor

3.2.1 By Variance in Terms of Contract
Any variance in terms between the principal debtor and creditor without the surety’s consent
discharges the surety for all transactions post-variance.

3.2.2 By Release of Principal Debtor

The surety is discharged if the creditor:

• Enters into a fresh contract with the principal debtor, releasing him, or

• Takes any action resulting in the discharge of the principal debtor.

3.2.3 Discharge When Creditor Compounds

• Composition: If the creditor composes with the principal debtor without consulting the
surety, the surety is discharged.

• Promise to Give Time: Allowing the principal debtor more time discharges the surety.

• Promise Not to Sue: If the creditor agrees not to sue the principal debtor, the surety is
discharged.
Cases Where Surety Is Not Discharged:

• When the creditor makes an agreement with a third person to give time to the principal
debtor.

• Mere forbearance by the creditor to sue the principal debtor does not discharge the
surety.

3.2.4 Discharge by Creditor’s Act or Omission

If the creditor performs an act or omits to perform an act inconsistent with the rights of the
surety, the surety is discharged.
In a Supreme Court Case, it was decided that if a bank granted a loan secured by stock and the
goods were lost due to bank negligence, the surety was discharged to the extent of the lost
stock's value.

3.3 By Invalidation of Contract of Guarantee

• Guarantee obtained by misrepresentation made by the creditor is invalid.

• Guarantee obtained by concealment is invalid.

• Guarantee on a contract that the creditor shall not act until a co-surety joins is invalid if
that person does not join.

4. Rights of Surety
I. Rights Against the Principal Debtor

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• Right of Subrogation: The surety, upon payment of all that he is liable for, is invested
with all the rights the creditor has against the principal debtor. This means the surety
steps into the shoes of the creditor.
• Right of Indemnity: In every contract of guarantee, there is an implied promise by the
principal debtor to indemnify the surety. The surety is entitled to recover from the
principal debtor whatever sum he has rightfully paid under the guarantee.

II. Rights Against the Creditor

• Right to Security: A surety is entitled to the benefit of every security the creditor has
against the principal debtor at the time of making the contract of guarantee. It is
immaterial whether the surety is aware of the existence of such security. If the creditor
loses, or without the surety's consent, parts with such security, the surety is discharged
to the extent of the value of the security.
• Right to Set-off: The surety is entitled to the benefit of any set-off or counterclaim
which the principal debtor might possess against the creditor in a suit filed by the
creditor against the surety.
• Right to Share Reduction: The surety has the right to claim a proportionate reduction
in his liability if the principal debtor becomes insolvent.

III. Rights Against Co-sureties

• Right to Contribution: Co-sureties are liable to contribute equally [Sec. 146]. In the
absence of any contract to the contrary, co-sureties must pay each an equal share of
the whole debt or part that remains unpaid.
• Liability of Co-sureties Bound in Different Sums: The principle of equal contribution
is subject to the maximum limit fixed by a surety to his liability. Co-sureties bound in
different sums are liable to pay equally but only up to the specified limit.

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Unit 8 – Bailment & Pledge

1. Bailment

1.1 Definition of Bailment

Sec 148 - Bailment is:

• the delivery of goods by one person to another for some purpose,

• upon a contract, that the goods shall, when the purpose is accomplished, be returned,
or otherwise disposed of according to the directions of the person delivering them.

1.2 Parties to Bailment

• Bailor - The person delivering the goods

• Bailee - The person to whom goods are delivered

1.3 Essential Elements of a Contract of Bailment

1.3.1 Contract

• Bailment is based upon a contract.

• The contract may be express or implied.

• No consideration is necessary to create a valid contract of bailment.

1.3.2 Delivery of Goods

• Bailment is only for moveable goods.

• The delivery of the possession of goods is of the following kinds:

a. Actual delivery – physically handing over goods
b. Constructive delivery – delivery is made by doing anything that has the effect of
putting goods in the possession of the bailee or any authorized person.

1.3.3 Purpose

• The goods are delivered for some purpose.

• The purpose may be express or implied.

1.3.4 Possession

• In bailment, possession of goods changes. Change of possession can happen by

physical delivery or any action that has the effect of placing the goods in the possession
of bailee.

• The change of possession does not lead to change of ownership.

1.3.5 Return of Goods

• Bailee is obliged to return the goods physically to the bailor.

• The goods should be returned in the same form as given or may be altered as per bailor’s
direction.

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• The bailee cannot deliver some other goods, even those of higher value.

1.4 Types of Bailment

I. On the basis of benefit, bailment can be classified into three types:

a. For the exclusive benefit of bailor: Example: The delivery of valuables to a neighbor for safe
custody, without charge.
b. For the exclusive benefit of bailee: Example: The lending of a bicycle to a friend for his use,
without charge.
c. For mutual benefit of bailor and bailee: Example: Giving of a watch for repair.

II. On the basis of reward, bailment can be classified into two types:
a. Gratuitous Bailment: Free of charge; either for the exclusive benefits of bailor or bailee.
b. Non-Gratuitous Bailment: Where both parties get some benefit.

2. Rights & Duties of Bailor

2.1 Duties of Bailor

• Disclose known facts

• Bear necessary expenses

• Indemnify bailee

• Bound to accept goods

2.1.1 Disclose Known Facts

• In case of gratuitous bailment: Bailor must disclose faults in the goods bailed of which
the bailor is aware.

• In case of non-gratuitous bailment: Bailor is responsible for damage, whether or not

aware of such faults.

2.1.2 Bear Necessary Expense

• In case of gratuitous bailment for exclusive benefit of bailor: Bailor must repay
necessary expenses incurred by the bailee.

• In case of non-gratuitous bailment: Bailor liable for extraordinary expenses incurred by

the bailee.

2.1.3 Indemnify Bailee

• Where bailment was gratuitous and terminated before expiry, bailor must compensate
for excess loss or damage suffered by the bailee.

• Indemnify for any loss because bailor was not entitled to make the bailment or receive
back the goods.

2.1.4 Bound to Accept the Goods

When bailee returns goods after bailment, bailor must accept; if refusal, bailee can claim
compensation for necessary expenses incurred.

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2.2 Rights of Bailor

2.2.1 Right to Terminate the Bailment
A contract of bailment is voidable at the option of the bailor if he does any act inconsistent with
conditions of bailment.

2.2.2 Right to Demand Back the Goods

When goods are lent gratuitously, bailor can demand back goods at any time before expiry or
achievement of the object.

2.2.3 Right to File a Suit Against a Wrong Doer

2.2.4 Right to Sue the Bailee

For enforcing all liabilities and duties of the bailee.

2.2.5 Right to Compensation

Bailor has the right to claim compensation for damage caused to the goods bailed because of
unauthorized use or mixing of goods.

3. Rights & Duties of Bailee

3.1 Duties of Bailee

• Take reasonable care of goods

• No unauthorized use of goods

• No mixing of bailor's goods with his own

• Return the goods

• Return any extra profit accruing from goods bailed

3.1.1 Take Reasonable Care of Goods

Bailee shall take care of goods as a man of ordinary prudence would with his own goods.

• Exception: Not responsible for loss or damage if reasonable care taken.

3.1.2 Not to Make Inconsistent Use of Goods

If bailee uses goods inconsistently, he is liable for loss or destruction.

• Bailor can void the contract if bailee makes inconsistent use.

3.1.3 Not to Mix the Goods

If bailee mixes goods with consent: both parties have interest in proportion to their shares.

• Without consent: if goods can be separated, property remains with respective parties;
bailee bears expenses.

3.1.4 Return the Goods

Bailee must return goods without demand upon expiration of time or completion of purpose.

• If default by bailee, responsible for loss, destruction, or deterioration from that time.

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3.1.5 Return on Accretion from the Goods

In absence of contrary contract, bailee must deliver any increase or profit accrued from the
goods bailed.

3.1.6 Not to Set Up Adverse Title

Bailee must hold goods on behalf of and for the bailor and cannot deny the bailor's title.

3.2 Rights of a Bailee

3.2.1 Right to Deliver the Goods
To any one of the joint bailors.

3.2.2 Right to Indemnity

Bailee entitled to indemnification for loss arising from bailor's lack of entitlement to make the
bailment.

3.2.3 Right to Claim Compensation in Case of Faulty Goods

Bailor liable for compensation even if unaware of faults if bailment is for hire.

3.2.4 Right to Claim Necessary Expenses

3.2.5 Right to Apply to Court

To decide title to the goods if claimed by a third party.

3.2.6 Right of Particular Lien

For payment of services.

3.2.7 Right of General Lien

4. Rights of Bailor and Bailee Against Any Wrong Doer

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,
and either the bailor or bailee may bring a suit against a third person for such deprivation or
injury.

5. Termination of Bailment

• On expiry of stipulated period

• On fulfilment of the purpose

• Destruction of the subject matter

• By death in case of gratuitous bailment

• By notice (where bailee acts in a manner inconsistent with terms or where it is

gratuitous bailment)

6. Finder of Lost Goods

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6.1 Right of Finder of Lost Goods to Sue for Specific Reward Offered

• The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred to preserve the goods and find out the owner.

• He may retain the goods against the owner until he receives such compensation.

• If the owner has offered a specific reward for the return of lost goods, the finder may
sue for such reward and retain the goods until he receives it.

6.2 When Finder of Thing Commonly on Sale May Sell It

• Owner cannot with reasonable diligence be found.

• Owner refuses, upon demand, to pay lawful charges of the finder.

• When the thing is in danger of perishing or losing the greater part of its value.

• Lawful charges of the finder in respect of the thing found amount to two-thirds of its
value.

7. Lien

Lien is the right of a person to retain the goods belonging to another until his claim is satisfied
or some debt due to him is repaid.
Types of Lien:

• Particular Lien

• General Lien

7.1 General Lien

• General lien relates to the right to keep possession of goods belonging to another
against the general balance of account.

• Example 1: X becomes insolvent. Y is appointed as the official assignee to recover

value from the assets of X. Here, Y has a general lien on all the assets of X.

• Example 2: A took a loan of Rs. 5 lacs from the bank against a security worth Rs. 7 lacs.
On defaulting to repay the loan, the bank sold the security and recovered only 4 lacs
from the market. The bank can now recover the remaining 1 lac from the general lien on
other assets of A.

7.2 Particular Lien

• Particular lien implies a right of the bailee to retain specific goods bailed for non-
payment of amount.

• Example 1: 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 until he is paid for the services
rendered.

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• Example 2: 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.

7.3 Difference between General lien and particular lien:

General lien Particular lien

Not automatic but recognised
through an agreement. It is automatic.
It can be exercised against goods It comes into play in situations
even without involvement of labour involving exercise of labour or skill in
or skill. respect of goods bailed.
Only such persons as are specified
u/s 171, e.g., Bankers, factors, Bailee, finder of goods, pledgee,
wharfingers, policy brokers etc. are unpaid seller, agent, partner etc. are
entitled to general lien. entitled to particular lien.

8. Pledge

8.1 Definition

• The bailment of goods as security for payment of a debt or performance of a promise

is called pledge.

8.2 Parties to Pledge

• Pawnor - The bailor in a pledge

• Pawnee - The bailee in a pledge

8.3 Essentials of Contract of Pledge

• There shall be a bailment for security against payment or performance of the promise.

• The subject matter of pledge is goods.

• Goods pledged for shall be in existence.

• There shall be the delivery of goods from pledger to pledgee.

9. Rights & Duties of Pawnee

9.1 Rights of Pawnee / Pledgee

• Right to retain the pledged goods:

Pawnee may retain the goods pledged, not only for payment of debt or performance of
the promise, but for the interest of the debt, and all necessary expenses incurred by
him in respect of the possession or preservation of the goods pledged.

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• Right to retention of subsequent debts:

Pawnee has a right to retain the goods pledged towards subsequent advances, subject
to such right being specifically contemplated in the contract.

• Pawnee's right to extraordinary expenses incurred:

Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him
for the preservation of the goods pledged.

• Pawnee's right where pawnor makes default:

If pawnor makes default in payment of the debt or performance at the stipulated time,
pawnee may bring a suit against the pawnor and retain the goods pledged as collateral
security; or sell the thing pledged after giving the pawnor reasonable notice of the sale.
If the proceeds are less than the amount due, the pawnor is still liable for the balance.
If the proceeds exceed the amount due, the pawnee shall pay over the surplus to the
pawnor.

9.2 Duties of Pawnee

• To take reasonable care of the pledged goods.

• Not to make unauthorised use of pledged goods.

• To return goods when the debt has been repaid or the promise has been performed.

• Not to mix his own goods with goods pledged.

• Not to do any act which is inconsistent with the terms of the pledge.

• To return accretion to the goods, if any.

10. Rights & Duties of Pawnor

10.1 Rights of Pawnor

• As a bailor of goods, pawnor has all the rights of the bailor.

• The pawnor also has the right to redemption of the pledged goods:
If a time is stipulated for the payment of the debt or performance of the promise, and
the pawnor makes default, he may redeem the goods pledged at any time before actual
sale, paying any expenses that arose from his default.

10.2 Duties of Pawnor

• To pay the debt or perform the promise.

• To compensate the pawnee for any extraordinary expenses incurred for preserving the
goods.

• To disclose all faults that may put the pawnee under extraordinary risks.

• To indemnify the pawnee if any loss occurs due to a defect in the pawnor's title to
goods.

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• To pay the deficit if the pawnee sells the goods due to default by the pawnor.

11. Pledge by Non-Owners

11.1 Pledge by Mercantile Agent

• A mercantile agent is in possession of goods or documents of title with the consent of

the owner.

• Pledge must be made in the ordinary course of business.

• The pledgee must act in good faith and have no notice of the pledger's defective title.

11.2 Pledge by Person in Possession under Voidable Contract

• If pawnor has possession under a voidable contract, but the contract has not been
rescinded, the pledgee must act in good faith and have no notice of the pledger's
defective title.

11.3 Pledge where Pawnor has Only a Limited Interest

• A pledge is valid to the extent of the limited interest of the pawnor.

11.4 Pledge by a Co-Owner in Possession

• A co-owner may make a valid pledge of goods in his possession.

11.5 Pledge by Seller or Buyer in Possession

• A seller or a buyer (with seller's consent) can make a valid pledge of goods in their
possession.

• The pawnee must act in good faith and have no knowledge of the defect in the
pawnor's title

12. Difference between Bailment & Pledge

Basis of Bailment Pledge

distinction
Meaning Transfer of goods by one person Transfer of goods by one person to
to another for some specific another as security for repayment of
purpose. debt.
Parties Bailor and bailee. Pawnor and pawnee
involved
Purpose For any purpose. As security for payment of a debt or
performance of a promise.
Consideration May be made for consideration or Always made for a consideration.
without consideration.

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Right to sell the Bailee has no right to sell the Pawnee has the right to sell the
goods goods even if charges of bailment goods if the pawnor fails to redeem
are not paid to him. Bailee’s rights the goods.
are restricted to suing the bailor
or exercising lien.
Right to use of Bailee can use the goods only for Pawnee cannot use the goods
goods specified purpose and not pledged.
otherwise.

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Unit 9 - Agency

1. Introduction
A relationship of agency is established when one party (agent) is authorized by another party
(principal) to act on their behalf.

2. What is Agency?
Agent - A person employed to do any act for another or to represent another in dealings with
third persons.
Principal - A person for whom such act is done or who is represented.
Test of Agency:

• Whether the person has the capacity to bind the principal and make them answerable
to the third party.

• Whether they can establish privity of contract between the principal and third parties.
If the answers are affirmative, there is a relationship of agency.
Rule of Agency: “Qui facit per alium, facit per se” (he who acts through an agent is
himself acting).

3. Appointment and Authorities of Agents

Who may employ an agent?

• Person who has attained age of majority

• Who is of sound mind

Who may be an agent?

• Any person

• Minor or person of unsound mind will not be responsible to the principal

Consideration Not Necessary:

• No consideration is necessary to create an agency.

• Acceptance of the office of an agent is sufficient consideration.

4. Modes of Creation of Agency

• Express appointment

• Implied appointment

• Agency by estoppel

• Agency by necessity

• Agency by ratification

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• Agency by operation of law

4.1 Express Appointment

An authority is said to be express when given by words, spoken or written.
Example: A authorizes B under a power of attorney as caretaker of his house.

4.2 Implied Appointment

Inferred from circumstances or in the ordinary course of dealing.
Example: If a person realizes rent and gives it to the landlord, they impliedly act as the
landlord's agent.

4.3 Agency by Estoppel

When an agent has done acts or incurred obligations without authority, the principal is bound if
they induced third parties to believe in the agent’s authority.
Example: If Mr. P allows Mr. A to buy goods on credit from Mr. S as if Mr. A were Mr. P’s agent, Mr.
P cannot later refuse to pay for those goods.

4.4 Agency by Necessity

Where an agent is authorized to do a certain act, they acquire extra authority in emergencies to
prevent loss to the principal.
Example: Shyam, the caretaker, becomes an agent of necessity for Raja when a fire threatens
Raja's farm while he is away.

4.5 Agency by Ratification

Ratification means approving a previous act done on behalf of another without authority.
Example: X, as Y's agent, purchases goods without Y’s permission, but Y later agrees to accept
responsibility for the purchase.
Essentials of Valid Ratification:

• May be expressed or implied

• Cannot be made by a person with materially defective knowledge of facts

• Ratification includes the whole transaction

• Cannot subject third parties to damages

• Must be made within a reasonable period

• Must be communicated to the other party

• The act must be valid.

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4.6 Agency by Operation of Law

When law treats one person as an agent of another, such as a partner being the agent of the firm
for business purposes.

5. Scope of agent's authority

I. Under normal circumstances

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

II. In emergency

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

Conditions for valid agency during emergency

• Agent unable to communicate with principal

• Actual and definite commercial necessity to act promptly
• Agent acts bonafide for benefit of principal
• Agent adopted the most reasonable and practicable course under the circumstances
• Agent must have been in possession of the goods belonging to his principal and which
are the subject of contract

6. Sub-agents

6.1 Definition
A sub-agent is a person employed by, and acting under the control of, the original agent in the
business of agency.

6.2 When Agent Cannot Delegate

An agent cannot lawfully employ another person to perform acts that he has expressly or
impliedly undertaken to perform personally, unless:

• By the ordinary custom of trade, a sub-agent may be employed, or

• From the nature of the agency, a sub-agent must be employed.

6.3 Exceptions Where an Agent Can Appoint Sub-agent

• Original appointment authorizes such appointment

• Unforeseen emergency arises

• Customs of trade may allow sub-agency

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6.4 Representation of Principal by Sub-agent Properly Appointed

• As regards to third persons, the principal is bound by the acts of the sub-agent.

• The agent is responsible to the principal for the acts of the sub-agent.

• The sub-agent is responsible for his acts to the agent, but not to the principal, except in
cases of fraud or willful wrong.

6.5 Agent’s Responsibility for Sub-agent Appointed Without Authority

Where an agent appoints a sub-agent without authority:

• The agent is responsible for the acts of the sub-agent to both the principal and third
parties.

• The principal is not bound by or responsible for the acts of the sub-agent.

7. Substituted Agent

A substituted agent is a person appointed by the agent to act for the principal in the business of
agency, with the knowledge and consent of the principal. They are not sub-agents; they are
agents of the principal.

7.1 Relation Between Principal and Person Duly Appointed by Agent

Where an agent has express or implied authority to name another person to act for the principal
in the business of agency, such a person is a substituted agent. The principal is bound by their
actions.

7.2 Agent’s Duty in Naming Such Person

In selecting an agent for his principal, an agent must exercise the same amount of discretion as
a man of ordinary prudence. If done so, the agent is not responsible to the principal for the
negligence of the substituted agent.
Example 1: A directs B, his solicitor, to sell his estate by auction and to employ an auctioneer. B
names C, an auctioneer, to conduct the sale. C is not a sub-agent but is A’s agent for the sale.
Example 2: A instructs B, a merchant, to buy a ship for him. B employs a reputable ship
surveyor to choose a ship for A. If the surveyor negligently makes a choice resulting in loss, B is
not responsible, but the surveyor is.

8. Difference between Sub-agent and Substituted agent:

Sub Agent Substituted Agent

A sub-agent does his work under A substituted agent works under the
the control and directions of agent. instructions of the principal.

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The agent not only appoints a sub-

agent but also delegates to him a The agent does not delegate any part
part of his own duties of his task to a substituted agent.
There is no privity of contract Privity of contract is established
between the principal and the sub- between a principal and a
agent. substituted agent
The sub-agent is responsible to the A substituted agent is responsible to
agent alone and is not generally the principal and not to the original
responsible to the principal. agent who appointed him.
The agent is responsible to the The agent is not responsible to the
principal for the acts of the sub- principal for the acts of the
agent. substituted agent.
The sub-agent has no right of The substituted agent can sue the
action against the principal for principal for remuneration due to
remuneration due to him. him.
Sub-agents may be improperly Substituted agents can never be
appointed. improperly appointed.
The agent remains liable for the
acts of the sub-agent as long as The agent's duty ends once he has
the sub-agency continues named the substituted agent.

9. Duties and Rights of an Agent

9.1 Duties of an Agent

9.1.1 Duty to Follow Instructions or Customs

If the principal's instructions are available, the agent must strictly follow them. If not, the agent
should follow prevailing customs.

• If the agent does not follow instructions/customs:

o Loss incurred: Agent must compensate the principal.

o Profit made: Agent must account for it.

9.1.2 Duty of Reasonable Care and Skill

The agent is bound to act with diligence and skill.

• If acted with diligence and skill: No consequences for future losses.

• If did not act with diligence and skill:

o Direct consequences suffered by principal: Agent must compensate.

o Indirect damages: Agent need not compensate.

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9.1.3 Duty to Communicate with Principal

The agent must communicate with the principal and seek instructions in case of any difficulty in
executing his duties.

9.1.4 Duty to Avoid Conflict of Interest

I. If an agent deals on his own account without consent, the principal may cancel the
transaction if:

• Material fact has been dishonestly concealed, or

• Dealings have been disadvantageous to him.

II. If an agent deals on behalf of the principal without knowledge, the principal can claim any
benefits resulting from the transaction.

9.1.5 Duty Not to Make Secret Profits

The agent must not make any secret profit in the business of agency due to the fiduciary nature
of the relationship.

9.1.6 Duty to Render Proper Accounts

The agent must submit accounts supported with vouchers whenever demanded by the
principal.

9.1.7 Duty Not to Delegate

The agent shall not delegate any act he is personally responsible for unless required by the
ordinary custom of trade or the nature of the agency.

9.1.8 Duty to Pay Sums Received to the Principal

The agent must pay all sums received on account of the business of the agency to the principal,
minus any sums due to him.

9.1.9 Duty Not to Use Confidential Information

The agent must not use any confidential information received during the course of the agency
against the principal.

9.2 Rights of an Agent

I. Right to Retain: The agent can retain from sums received:

• All moneys due for advances made.

• Expenses properly incurred.

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• Remuneration payable.

II. Right to Remuneration:

• Remuneration may be per contract or customary in business.

• An agent guilty of misconduct is not entitled to remuneration for that part.

III. Agent’s Lien on Principal’s Property:

In absence of a contract to the contrary, an agent can retain the principal's property until
payment for his commission, disbursements, and services is made.

IV. Right to Indemnity:

• Right of indemnification for lawful acts.

• Right of indemnification against acts done in good faith upon instructions from the
principal.

V. Right to Compensation for Injury:

The principal must compensate the agent for any loss or damage caused by the principal’s
neglect or lack of skill.

9.3 Conditions for Agent’s Right of Lien

• The agent must lawfully be entitled to receive remuneration or commission.

• Property must belong to the principal.

• Property must be received in the agent's capacity during ordinary duties.

• The agent has only a particular lien.

The agent’s right to lien is lost if possession is lost, if waived, or if subject to a contrary
contract.

10. Principal’s Liability to Third Parties

10.1 Principal’s Liability for Acts of the Agent

The principal is liable for the acts of the agent as per authority given in the contract, bearing the
legal consequences.

10.2 Principal Not Bound When Agent Exceeds Authority

In such cases, the part of the contract within authority is binding on the principal.

10.3 Principal Not Bound When Excess of Authority Is Not Separatable

If an agent exceeds authority, and the unauthorized part cannot be separated from the
authorized part, the principal is not bound.

• Unauthorized part separable: Part within authority is binding.

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• Unauthorized part non-separable: Principal is not bound.

• Exception: Principal is liable if they induce belief in third parties that unauthorized acts
were authorized.

10.4 Consequences of Notice Given to Agent

Any notice or information given to the agent has the same legal effect as if given to the principal.

10.5 Effect on Agreement of Misrepresentation or Fraud by Agent

Misrepresentation or fraud by agents in their business affects the principal as if made by the
principal.

Misrepresentations or frauds outside authority do not affect the principal.

11. Personal Liability of Agent to Third Parties

11.1 Agent Cannot Enforce or Be Bound by Contracts

In absence of a contrary contract, agents cannot sue or be sued on contracts made on behalf of
the principal.
Exceptions:

• Sale/purchase for a foreign principal.

• Agent does not disclose the principal’s name.

• Principal is minor/incompetent/non-existent.

• Pretended agent or agent exceeds authority.

11.2 Rights of Parties to a Contract Made by Undisclosed Agent

If an agent makes a contract without revealing he is an agent, the other party has the same
rights against the principal as against the agent.

• If the principal discloses before completion, the other party may refuse the contract if
they would not have entered into it knowing the principal's identity.

11.3 Performance of Contract with Agent Supposed to be Principal

If a contract is made without knowing the other is an agent, the principal can only enforce it
subject to the rights and obligations between the agent and the other party.

11.4 Option of the Third Person to Sue the Agent or the Principal

• If the agent holds himself personally liable, the third party may hold either him or the
principal liable.

• If induced to believe only one will be liable, they cannot later hold the other liable.

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11.5 Liability of Pretended Agent

A person falsely representing himself as an authorized agent is liable for any loss or damage
incurred if his acts are not ratified by the alleged employer.

11.6 Person Falsely Contracting as Agent Not Entitled to Performance

A person contracting as an agent cannot require performance if acting on his own account, not
as an agent.

12. Revocation of Authority

12.1 Mode of Termination of Agency

I. Revocation:
The principal may revoke the authority given to the agent at any time before it is exercised to
bind the principal.

• The principal cannot revoke the authority after it has been partly exercised concerning
acts and obligations already done.

• If there is an express or implied contract for the agency to continue for a specific time,
the principal must compensate the agent for previous revocation or renunciation
without sufficient cause.

• Reasonable notice must be given for revocation; otherwise, damages must be

compensated.

• Revocation and renunciation can be expressed or implied.

II. Renunciation by Agents:

An agent may renounce the business of agency in the same manner as the principal revokes it.

III. Completion of Business:

Agency may terminate upon completion of the assigned business.

IV. Death or Insanity of the Principal or Agent:

Agency terminates upon the death or insanity of either party.

V. Principal's Insolvency:
Agency is terminated if the principal becomes insolvent.

VI. On Expiry of Time:

Agency terminates on the expiry of the time for which the agent was appointed.

12.2 When Agency is Revocable:

If the agent has an interest in the property forming the subject matter of the agency, it cannot be
terminated to the detriment of that interest without an express contract.

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• Example: If A gives authority to B to sell A’s land and pay himself debts owed from the
proceeds, A cannot revoke this authority, nor can it be terminated by A's insanity or
death.

12.3 Effects of Termination:

Termination of the agent's authority does not take effect concerning the agent until known to
him, or concerning third parties until known to them.

12.4 Agent’s Duty on Termination by Principal’s Death or Insanity:

When agency is terminated by the principal's death or unsound mind, the agent must take
reasonable steps on behalf of the principal's representatives to protect and preserve the
entrusted interests.

12.5 Termination of Sub-Agent’s Authority:

The termination of an agent's authority also results in the termination of the authority of all sub-
agents appointed by him, subject to the rules regarding termination of the agent's authority.

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Sale of Goods Act, 1930

Unit 1: Formation of Contract of Sale

1. Introduction

o The Sale of Goods Act, 1930 is an Act to define and amend the law relating to
the sale of goods.

o The Act is not applicable for the sale of immovable properties like land, shops,
or houses; these are covered under the Transfer of Property Act, 1882.

2. Sale and Agreement to Sell (Sec 4)

o Sec 4(1): A contract of sale of goods is a contract whereby the seller transfers
or agrees to transfer the property in goods to the buyer for a price.

o Sec 4(2): A contract of sale may be absolute or conditional.

o Sec 4(3):

▪ Where, under a contract of sale, the property in the goods is transferred

from the seller to the buyer, the contract is called a sale.

▪ When the transfer of property in the goods is to take place at a future

time or is subject to some condition thereafter to be fulfilled, it is called
an agreement to sell.

o Sec 4(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.

Difference between Sale and an Agreement to Sell

Basis of Sale Agreement to sell

difference
Transfer of The property in the goods passes Property in the goods passes to
property to the buyer immediately. the buyer on future date or on
fulfilment of some condition.
Nature of It is an executed contract. It is an executory contract.
contract
Remedies for The seller can sue the buyer for the The aggrieved party can sue for
breach price of the goods because of the damages only and not for the
passing of the property therein to price unless the price was
the buyer. payable at a stated date.
Subsequent loss Liability of the buyer Liability of the seller
or destruction of
goods
Burden of risk Risk of loss is that of the buyer Risk of loss is that of the seller.
since risk follows ownership.
Nature of rights Creates Jus in rem i.e. right against Creates Jus in personam i.e. right
a thing. against a person.

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Right of resale The seller cannot resell the goods The seller may sell the goods
since ownership is with the seller.
In case of The official assignee will not be The official assignee will acquire
insolvency of able to take over the goods but will control over the goods, but the
seller recover the price from the buyer. price will not be recoverable.
In case of The official assignee will have The official assignee will not have
insolvency of control over the goods. any control over the goods.
buyer

3. Elements of Contracts of Sale

I. Two Parties

• The seller and the buyer must be different persons.

II. Subject Matter

• Goods, covering only movable property, can be the subject matter of the contract. May
be existing goods or future goods.

III. Price

• Consideration for the contract of sale should be in money (not in kind). It can be partly
money and partly in kind, but money is essential.

IV. Transfer of Property

• Transfer of property from seller to buyer must take place. General property is
transferred.

V. Absolute or Conditional

• A contract of sale may be absolute or conditional.

VI. Valid Contract

• All other essential elements of a valid contract must be present (e.g., agreement, free
consent, parties are competent, lawful consideration, etc.).

4. Definitions

4.1 Buyer

• Sec 2(1): ‘Buyer’ means a person who buys or agrees to buy goods.

4.2 Seller

• Sec 2(13): ‘Seller’ means a person who sells or agrees to sell goods.

4.3 Goods

• Sec 2(7): “Goods” means every kind of movable property:

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o Other than actionable claims and money.

o Includes stock (bundle of shares), growing crops, grass, and things attached to
or forming part of the land, agreed to be severed before sale or under the
contract of sale.

• Actionable claims are claims enforceable only by an action or suit (e.g., debt). They
can be transferred but not sold.

• Money in circulation cannot be goods, but currency notes and coins not in circulation
and collected by numismatists shall be considered as goods.

• “Goods” include both tangible and intangible goods like goodwill, copyrights,
patents, trademarks, etc.

• Stock and shares, gas, steam, water, electricity, and decree of the court are also
considered goods.

• Fixed Deposit Receipts (FDR) are considered as goods.

Classification of Goods:

1. Existing Goods

o Specific

o Ascertained

o Unascertained

2. Future Goods

3. Contingent Goods

4.3.1 Existing Goods

Existing Goods are those that are in existence at the time of the contract of sale, i.e., owned or
possessed by the seller at that time.

a. Specific Goods

• Goods identified and agreed upon at the time a contract of sale is made.

• Example: ‘A’ had five cars of different models and agreed to sell his ‘Santro’ car to ‘B’.
Here, the sale is for specific goods as the car has been identified at the time of the
contract.

b. Ascertained Goods

• Goods identified in accordance with the agreement after the contract of sale is made.
When from a larger quantity of unascertained goods, the specific number or quantity
contracted for is identified, these goods are called ascertained goods.

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• Example: Raj has 500 apples and decides to sell 200 apples. He must separate them
from the larger set, making these 200 apples the ascertained goods.

c. Unascertained Goods

• Goods not specifically identified or ascertained at the time of making the contract. They
are defined only by description or sample.

• Example: From Raj’s 500 apples, if he decides to sell 200 apples without specifying
which ones, the seller can choose any 200 apples from the lot, classifying these as
unascertained goods.

4.3.2 Future Goods

Future Goods refer to goods that are to be manufactured, produced, or acquired by the seller
after making the contract of sale. A contract for the sale of future goods is always an agreement
to sell.

• Example: P agrees to sell to Q all the milk that his cow may yield during the coming
year. This constitutes a contract for the sale of future goods.

4.3.3 Contingent Goods

Contingent Goods are those whose acquisition by the seller depends upon an uncertain
contingency (an uncertain event). Like future goods, the property does not pass to the buyer at
the time of making the contract.

• Example: A agrees to sell to B a Picasso painting provided he is able to purchase it from

its present owner. This is a contract for the sale of contingent goods.

4.4 Delivery

Sec 2(2) - Delivery means voluntary transfer of possession from one person to another.
Forms of Delivery:

1. Actual Delivery - Goods are physically delivered to the buyer or a third person
authorized to hold the goods on behalf of the buyer.

2. Constructive Delivery - No change in custody; occurs when a person in possession

acknowledges holding goods on the buyer's behalf.
Example: A warehouseman holds goods of A on behalf of B at A’s request.

3. Symbolic Delivery - Delivery of a thing in token of a transfer of something else.

Example: Handing over documents of title to goods, like a bill of lading, constitutes
symbolic delivery.

4.5 Deliverable State

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Sec 2(3) - Goods are in a deliverable state when they are in such a condition that the buyer
must take delivery under the contract.
Example: If A contracts to sell timber and makes bundles, the goods are in a deliverable state
after being prepared.

4.6 Document of Title to Goods

Sec 2(4) - Includes:

• Bill of lading

• Dock-warrant

• Warehouse keeper’s certificate

• Wharfingers’ certificate

• Railway receipt

• Multimodal transport document

• Warrant or order for delivery of goods

• Any document used in business as proof of possession or control of goods.

Difference: A document showing title merely indicates ownership, while a document of
title allows transfer of ownership by endorsement.
Example: A share certificate is a document showing title but not a document of title.

4.7 Mercantile Agent

Sec 2(9) - An agent with authority to sell goods, consign goods for sale, buy goods, or raise
money on the security of goods.
Example: Auctioneers or brokers.

4.8 Property

Sec 2(11) - Property means ownership or general property; it refers to all ownership rights of
the goods, not just special property.
Example: If A pledges goods to B, A has general property, while B has special property to the
extent of the amount advanced.

4.9 Insolvent

Sec 2(8) - A person is insolvent when they cease to pay debts in the ordinary course of business
or cannot pay debts as they become due, regardless of committing an act of insolvency.

4.10 Price

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Sec 2(10) - Price means the money consideration for a sale of goods.

4.11 Quality of Goods

Sec 2(12) - Quality of goods includes their state or condition.

5. Sale Distinguished from Other Similar Contracts

5.1 Sale and Hire Purchase

Hire purchase agreements are governed by the Hire-Purchase Act, 1972. A hire-purchase
agreement means:

• Goods are let on hire with an option for the hirer to purchase.

• Possession of goods is delivered on the condition that the hirer pays agreed amounts in
periodic installments.

• Property in the goods passes upon payment of the last installment.

• The hirer has the right to terminate the agreement before property passes.

Sale Hire purchase

Time of passing Property in the goods is The property in goods passes to the
property transferred to the buyer hirer upon payment of the last
immediately at the time of instalment.
contract
Position of the The position of the buyer is The position of the hirer is that of a
party that of the owner of the bailee till he pays the last instalment
goods.
Termination of Buyer cannot terminate the The hirer may terminate the contract
contract contract and is bound to pay by returning the goods to its owner
the price of the goods. without any liability to pay the
remaining instalments
Burden of Risk of The seller takes the risk of The owner takes no such risk, for if the
insolvency of the any loss resulting from the hirer fails to pay an instalment, the
buyer insolvency of the buyer. owner has the right to take back the
goods
Transfer of title The buyer can pass a good The hirer cannot pass any title even to
title to a bona fide purchaser a bona fide purchaser
from him
Resale The buyer in sale can resell The hire purchaser cannot resell
the goods. unless he has paid all the instalments.

5.2 Sale and Bailment

A bailment is the delivery of goods for a specific purpose under a contract, with the condition
that the goods are to be returned to the bailor once the purpose is accomplished or disposed of
per the bailor's directions.

Sale Bailment

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Transfer of The property in goods is There is only transfer of possession of

property transferred from the seller to goods from the bailor to the bailee for any
the buyer. So it is transfer of of the reasons like safe custody, carriage
general property. etc. So, it is transfer of special property.

Return of The return of goods in The bailee must return the goods to the
goods contract of sale is not bailor on the accomplishment of the
possible purpose for which the bailment was made.

Consideration The consideration is the The consideration may be gratuitous or

price in terms of money non-gratuitous.

5.3 Sale and Contract for Work and Labour

A contract of sale of goods involves selling goods for a price. If no goods are sold and only work
or labor is rendered, it is a contract of work and labor.
Example: Supplying gold to a goldsmith for making an ornament or hiring an artist to paint a
picture.

6. How a Contract of Sale is Made

A contract of sale is created by an offer to buy or sell goods for a price and the acceptance of
that offer.
A contract of sale may be made:

• In writing

• By word of mouth

• Partly in writing and partly orally

• Implied from the parties' conduct

A contract of sale can be absolute or conditional.

Modes of Delivery & Payment:

• Immediate delivery of goods

• Immediate payment and delivery at a future date

• Immediate delivery and immediate payment

• Payment or delivery in installments

• Delivery or payment made at a future date

7. Subject Matter of a Contract of Sale

7.1 Existing/Future/Contingent Goods

Goods forming the subject matter of a contract may be existing goods owned by the seller or

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future goods. If the seller purports to affect a present sale of future goods, it operates as an
agreement to sell.

7.2 Goods Perishing Before Making of Contract

If specific goods perish without the seller's knowledge at the time the contract was made, the
contract is void.
Example: A agrees to sell B 50 bags of wheat, but all are destroyed before the agreement was
made, making the contract void.

7.3 Goods Perishing Before Sale but After Agreement to Sell

If specific goods perish after an agreement to sell but before risk passes to the buyer, the
agreement is avoided or becomes void.

7.4 Perishing of Future Goods

If future goods are specific and are destroyed, it amounts to supervening impossibility, making
the contract void.
Goods Perishing:

• Specific Goods
Before making the contract: Contract is void
Before sale but after agreement: Contract can be avoided

• Future Goods
Before sale and after agreement: Becomes void due to supervening impossibility

8. Ascertainment of Price

8.1 Ascertainment of Price

The price in a contract of sale may be:

• Fixed by the contract

• Agreed to be fixed in a specified manner

• Determined by the course of dealings between the parties

If the price isn't determined, the buyer pays a reasonable price.

8.2 Agreement to Sell at Valuation

If goods are to be sold with a price fixed by a third party:
i. If the third party does not make a valuation, the agreement is avoided. If goods are delivered
and appropriated by the buyer, they must pay a reasonable price.
ii. If a third party is prevented from fixing the price due to one party's fault, the party not at fault
can sue for damages.

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Unit 2 – Conditions and Warranties

1. Introduction

When selling goods, a seller often makes statements to induce a buyer. If these statements are
not part of the contract, they have no legal effect. However, if they are part of the contract and
relied upon by the buyer, they become relevant and legally binding.
Stipulation: A representation that forms part of the contract and affects it.

2. Stipulation as to Time

• I. Stipulation as to Time of Payment

o Mentioned in Contract: Essence of a contract of sale.

o Not Mentioned in Contract: Not essential to the contract of sale.

• II. Stipulation as to Time of Delivery

o Essence of a Contract of Sale.

3. Conditions and Warranties (Sec 12)

• A stipulation in a contract of sale may be a Condition or a Warranty:

o Condition: Essential to the contract; breach allows for contract repudiation.

o Warranty: Collateral to the contract; breach allows for a claim for damages but
not for repudiation.

Key Distinction:

• Condition: Very essential to the contract.

• Warranty: Less essential to the contract.

Examples:

• Breach of Condition:
Prakash purchases a baking oven expected to have 5 trays but receives one with only 2
trays. This breach allows Prakash to reject the oven and receive a refund.

• Breach of Warranty:
Ram buys a Maruti car with a one-year guarantee against manufacturing defects. When
the horn fails, Ram cannot terminate the contract but can claim damages; the
manufacturer can repair or replace the horn.

Basis of Condition Warranty

differences
Meaning A condition is an essential A warranty is a collateral stipulation,
stipulation to the main purpose which is additional to the main
of the contract purpose of the contract

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Right in case of The aggrieved party can The aggrieved party can claim only
breach repudiate (cancel) the contract or damages.
claim damages or both.
Conversion of A breach of condition may be A breach of warranty cannot be
stipulations treated as a breach of warranty treated as a breach of condition
as per Sec 13

4. When Condition is Treated as Warranty

A contract may not be avoided despite a breach of a condition in the following cases:

1. Voluntary Waiver:

o The buyer waives the condition.

o The buyer elects to treat the breach of condition as a breach of warranty.

2. Compulsory Waiver:

o The buyer accepts the goods or part thereof in a non-severable contract.

o Any condition whose fulfillment is excused by law.

5. Express and Implied Conditions and Warranties

• 5.1 Express Conditions:

These are conditions agreed upon between the parties at the time of contract and are
expressly provided in the contract.

• 5.2 Implied Conditions:

These are conditions that are presumed by law to be present in the contract. Implied
conditions are incorporated by law into the contract of sale. They include:

o Condition as to Title

o Sale by Description

o Sale by Sample

o Sale by Sample and Description

o Condition as to Quality or Fitness

o Condition as to Merchantability

o Condition as to Wholesomeness

5.2.1 Condition as to Title:

In every contract of sale, there is an implied condition that the seller has the right to sell the
goods at the time when the property is to pass. This means:

• In the case of a sale, the seller must have the right to sell the goods.

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• In an agreement to sell, the seller must have the right at the time the property is to pass.

If the seller's title is defective, the buyer must return the goods to the true owner and recover
the price from the seller.
Example: If A sells B tins of condensed milk labeled with an infringement of N Company’s
trademark, B can reject the goods and claim damages for reduced value.

5.2.2 Sale by Description:

If there is a contract of sale by description, there is an implied condition that these goods must
correspond with this description. The buyer is not bound to accept goods that do not match the
description, whether the buyer can inspect them or not.
The Act does not define “description,” but it can include:

• Where the class or kind of goods has been specified (e.g., “Egyptian cotton”).

• Where goods are described by certain characteristics essential for identification (e.g.,
specific dimensions).

Example: A ship described as a “copper-fastened vessel” but only partly copper-fastened can
be returned.

5.2.3 Sale by Sample:

When goods are supplied based on a sample, the following conditions are implied:

• The bulk must match the sample in quality.

• The buyer must have a reasonable opportunity to compare the bulk with the sample.

• The goods must be free from any latent defects (hidden defects).

In case of latent defects, the buyer has the remedy to:

• Reject the goods.

• Recover the price.

• Claim damages.

Example 1: If a buyer inspects a smaller parcel of wheat but not the larger one, they can refuse
to take the parcels.
Example 2: Shoes made of special sole contain a hidden defect; the buyer is entitled to a
refund plus damages.

5.2.4 Sale by Sample and Description:

When goods are sold by sample as well as description, the implied condition is that the bulk
must correspond with both the sample and the description.

Example: If oil described as refined sunflower oil contains hemp oil, the goods can be
rejected.

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5.2.5 Condition as to Quality or Fitness:

There is ordinarily no implied condition as to the quality or fitness of goods sold for any
particular purpose. However, there is an implied condition that the goods supplied shall be
reasonably fit for the purpose, provided:

• The buyer has made known to the seller the particular purpose for which the goods are
required.

• The buyer relies on the skill and judgment of the seller.

• The goods must be of a description dealt in by the seller.

Where goods can be used for only one purpose, the buyer need not inform the seller.
Example: A buyer rejects a set of false teeth that are not fit for their mouth and claims a refund.

5.2.6 Condition as to Merchantability:

When goods are bought by description from a seller dealing in such goods, there is an implied
condition that the goods shall be of merchantable quality. Essential requirements include:

• Goods should be sold by description.

• The seller should ordinarily deal in those goods.

Goods must be usable for the purpose for which they are made and should be in a condition
that an ordinary person would purchase and use. They must not be broken, damaged, or flawed.
Example: A buyer finds damaged velvet cloth and establishes a breach of condition as to
merchantability.

5.2.7 Condition as to Wholesomeness:

In the case of eatables and provisions, there is an implied condition that goods shall be
wholesome, in addition to the condition of merchantability.
Example: If milk contains harmful germs leading to illness, the seller is liable for breach of
condition.

5.3 Implied Warranties

The Act outlines several Implied Warranties in a contract of sale, which include:

• Warranty as to Undisturbed Possession

• Warranty as to Non-existence of Encumbrances

• Warranty as to Quality or Fitness by Usage of Trade

• Disclosure of Dangerous Nature of Goods

These implied warranties can be excluded based on the course of dealings between the
parties, the usage of trade, or through an express clause in the agreement.

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5.3.1 Warranty as to Undisturbed Possession

There is an implied warranty that the buyer will have quiet possession of the goods. After
acquiring ownership, the buyer should not face any disturbance from the seller or third parties
claiming superior title. If disturbed, the buyer can seek compensation and damages from the
seller.

5.3.2 Warranty as to Non-existence of Encumbrances

This warranty ensures that the goods are free from any charge or encumbrance not declared to
the buyer before or at the time of the contract. An encumbrance can be a mortgage or any claim
on the property.

• Example: If A sells a car to B while it is pledged to C for a loan, B can either ask A to
clear the loan or pay it and then sue A for recovery.

5.3.3 Warranty as to Quality or Fitness by Usage of Trade

An implied warranty concerning quality or fitness for a specific purpose may be derived from
the usage of trade between the parties.

5.3.4 Disclosure of Dangerous Nature of Goods

If goods are inherently dangerous or likely to cause harm, the seller has a duty to inform the
buyer. Failure to disclose such dangers can result in the seller being liable for damages.

• Example: If Y sells a disinfectant with a defective cap that can cause injury, Y is liable for
damages if the buyer is harmed.

6. Caveat Emptor

Caveat Emptor, meaning "let the buyer beware," implies that the buyer must ensure the goods
meet their intended use. Section 16 clarifies that there are no implied warranties regarding the
quality or fitness of goods unless explicitly stated.

Exceptions to Caveat Emptor

• Fitness as to Quality or Use

• Goods Purchased under Patent or Brand Name

• Goods Sold by Description

• Goods of Merchantable Quality

• Sale by Sample

• Goods by Sample as well as Description

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• Trade Usage

• Seller Actively Concealing a Defect or Guilty of Fraud

6.1 Fitness as to Quality or Use

There is an implied condition that goods must be reasonably fit for a particular purpose if:

• The buyer has made known to the seller the purpose of the purchase.

• The buyer relies on the seller’s skill and judgment.

• The goods are of a description typically supplied by the seller.

Example: An order for trucks intended for heavy traffic in a hilly area resulted in trucks that
broke down, indicating a breach of condition regarding fitness.

Case Law: Priest vs. Last

Facts: P, a draper, bought a hot water bottle from a chemist, asking if it could withstand boiling
water. The chemist confirmed it was suitable. However, the bottle burst when hot water was
poured into it, injuring P's wife.

Judgment: The chemist was held liable for damages because he knew the bottle was
purchased for that specific purpose.

Goods for Multiple Purposes

If the item can be used for only one specific purpose, the buyer does not need to inform the
seller of that purpose. However, if the item can serve multiple purposes, the buyer must
communicate the intended use to hold the seller accountable.

Case Law: Bombay Burma Trading Corporation Ltd. vs. Aga Muhammad

Facts: Timber was purchased explicitly for use as railway sleepers but was found unfit for this
purpose.

Judgment: The court ruled that the contract could be avoided due to the goods' unsuitability.

6.2 Goods Purchased under Patent or Brand Name

No implied condition exists regarding the fitness of goods purchased under a patent or brand
name.

6.3 Goods Sold by Description

There is an implied condition that the goods must correspond with their description; if not, the
seller is responsible.

6.4 Goods of Merchantable Quality

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When bought by description from a seller who deals in those goods, there is an implied
condition of merchantable quality. If the buyer has examined the goods, the rule applies only if
defects are not detectable through ordinary examination.

6.5 Sale by Sample

The seller is liable if the bulk does not match the sample provided.

6.6 Goods by Sample as well as Description

If goods do not match either the sample or description, the rule of Caveat Emptor does not
apply.

6.7 Trade Usage

An implied warranty can arise from trade usage, and deviations from this usage mean Caveat
Emptor is not applicable.

Example: In readymade garment business, there is an implied condition by usage of trade that
the garments shall be reasonably fit on the buyer.

6.8 Seller Actively Concealing a Defect or Guilty of Fraud

Caveat Emptor does not apply when a seller misrepresents the goods or conceals defects. In
such cases, the buyer can avoid the contract and claim damages.

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Unit 3: Transfer of Ownership and Delivery of Goods

1. Introduction

The sale of goods involves the transfer of ownership from the seller to the buyer. A contract of
sale includes three key stages:

• Passing of Property: Transfer of ownership.

• Delivery of Goods: Transfer of possession.

• Passing of Risk: Risk of loss or damage to goods.

Generally, risk follows ownership, meaning the party who owns the goods at the time they are
lost or damaged bears the burden. In cases where goods are damaged by a third party, the
owner is entitled to take legal action.

2. Passing of Property

• Passing of property refers to the transfer of ownership, distinct from possession

(which only provides a right to use the goods).

• Once ownership is transferred, the buyer assumes the risk, even if the goods remain
with the seller.

Factors Affecting Transfer of Property:

1. Identification of Goods:

o Ownership of unascertained goods (goods that have not been identified or set
aside) cannot pass to the buyer until they are ascertained.

2. Intentions of the Parties:

o The time of transfer depends on the parties' intentions, which can be inferred
from the contract's terms, the conduct of the parties, and circumstances of
the case.

2.1. Passing of Property for Specific or Ascertained Goods

Ownership of specific or ascertained goods passes to the buyer at the time both parties
intend, determined by:

• Contract terms

• Conduct of the parties

• Circumstances of the case

Where no clear intention is expressed, rules in Sections 20 to 24 of the Sale of Goods Act
apply.

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Stages in Passing of Property:

2.1.1 Specific Goods in a Deliverable State (Sec 20)

• In an unconditional sale of specific goods that are in a deliverable state, ownership

passes when the contract is made, even if payment or delivery is postponed.
Example: X buys a TV, asks for home delivery. The TV becomes X's property when the
contract is made.

2.1.2 Specific Goods to be Put in a Deliverable State (Sec 21)

• If the seller must perform an action to make the goods deliverable, ownership passes
once the action is completed and the buyer is notified.
Example: Peter buys a laptop. The seller installs an operating system before delivering
it. Ownership transfers only after installation and notification.

2.1.3 Specific Goods, Seller to Ascertain the Price (Sec 22)

• If goods are in a deliverable state but the seller must do something (e.g., weigh,
measure) to ascertain the price, ownership transfers once the action is completed,
and the buyer is informed.
Example: Vikas buys wallpaper. Ownership passes once the seller measures the wall,
calculates the price, and notifies Vikas.

2.2. Goods Must Be Ascertained

For unascertained goods, ownership does not transfer until the goods are identified or
appropriated to the contract.

Rules for Passing of Property in Unascertained Goods:

1. Sale by Description:

o When unascertained goods are sold by description, ownership passes when

the goods are set aside (appropriated) for the buyer with mutual consent.

2. Delivery to the Carrier:

o When goods are delivered to a carrier for transmission to the buyer (without
reserving the right of disposal), ownership passes once the goods are handed
over.
Example: A book ordered by M is sent via courier. Once dispatched, ownership
transfers to M, who bears the risk of loss during transit.

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2.3. Goods Sent on Approval or ‘On Sale or Return’ Basis

Ownership passes when:

• The buyer approves the goods.

• The buyer retains the goods without rejection after the agreed time period or within a
reasonable time if no period is specified.

• The buyer does something equivalent to accepting the goods (e.g., pledging or using
them).

Example: B receives jewellery on a sale or return basis but pledges it to a third party. The act
of pledging is equivalent to acceptance, and ownership transfers to B.

2.3.1 Sale for Cash Only or Return

If the condition for sale is payment of cash, ownership transfers only upon payment.

Example: A delivers jewellery to B with a condition that it remains A's property until B pays
cash. B pledges the jewellery without paying. Since ownership hasn't transferred, A can recover
the jewellery.

2.4. Reservation of Right of Disposal

In some cases, the seller may reserve the right to retain ownership until certain conditions are
fulfilled. Even if goods are delivered, ownership remains with the seller until the conditions are
met.

Example: X sends furniture to a company but instructs the driver not to deliver until payment is
made. Ownership passes only upon payment.

Circumstances for Reservation of Right of Disposal:

1. Delivery to a Carrier:

o If goods are shipped with a bill of lading or railway receipt made out in the
seller's name, the seller retains ownership until payment is made.

2. Bill of Exchange:

If the seller draws a bill of exchange for the price and sends the bill along with a bill of lading,
ownership remains with the seller if the buyer doesn't accept or pay.

3. Risk Prima Facie Passes with Property

Sec-26: Unless otherwise agreed, goods remain at the seller’s risk until the property is
transferred to the buyer. Once the property is transferred, the goods are at the buyer’s risk,
even if delivery has not been made.

• Risk is generally transferred along with property, unless there’s a different agreement
between the parties.

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• Example: If an antique painting gets damaged by an auctioneer before ownership is

transferred to the buyer, the seller bears the loss, as the ownership has not passed.

3.1 Exception to the Rule that ‘Risk Follows Ownership’

• If delivery is delayed due to the fault of either the buyer or seller, the party at fault
bears the risk for any loss that wouldn’t have occurred otherwise.

• The duties and liabilities of the seller or buyer as bailee remain unchanged, even
when the risk passes to the buyer.

Example: ‘A’ sold 100 bales of cotton to ‘B’. B failed to take delivery of all the bales, causing
some to spoil. B must bear the loss because of his default in accepting the delivery.

4. Transfer of Title by Non-Owners

4.1 Sale by Person Not the Owner

Sec 27: When goods are sold by someone who is not the owner and without the owner’s
authority, the buyer does not acquire a better title to the goods than the seller had.

• The rule is stated in the maxim ‘Nemo dat quod non habet’, meaning ‘No one can give
what he has not got’.

• If a person buys goods from someone who doesn’t own them, the buyer will not acquire
ownership if the seller didn’t have the right to sell them.

Example: If A sells stolen goods to B, B gets no title, even if he bought the goods in good faith.
The true owner can reclaim the goods.

Example: P, under a hire purchase agreement, sells a vehicle to Q. Q, though a bona fide
purchaser, doesn’t get ownership of the vehicle, only the same right as P had.

4.2 Exceptions to the Rule that Non-owner Cannot Convey a Better Title to the Buyer

Cases where a Non-Owner can convey a better title to bona fide purchaser of goods for
value:

• Sale by a Mercantile Agent

• Sale by one of the Joint Owners

• Sale by a person in possession under a voidable contract

• Sale by one who has already sold but continues to be in possession

• Sale by buyer obtaining possession before property has been vested in him

• Effect of Estoppel

• Sale by an Unpaid Seller

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• Sale under the Provisions of Other Acts

4.2.1 Sale by a Mercantile Agent

The sale by a mercantile agent of the goods for document of title to goods would pass a good
title if:

• He was in possession of the goods/documents with consent of the owner,

• He was acting in the ordinary course of business, and

• The buyer has acted in good faith and has no notice, at the time of the contract of sale,
of the fact that the seller had no authority to sell.

4.2.2 Sale by One of the Joint Owners

Where any one of several joint owners has the possession of the goods with the permission of
the other co-owners, the property in goods is transferred to the buyer if:

• The person buys these goods in good faith, and

• Has no notice, at the time of the contract of sale, of the fact that the seller has no
authority to sell.

Example: A, B, and C are three brothers and joint owners of a TV and VCR. With the consent of
B and C, the VCR was kept in possession of A. A sells the TV and VCR to P, who buys it in good
faith and without notice that A had no authority to sell. P gets a good title to the VCR and TV.

4.2.3 Sale by a Person in Possession under Voidable Contract

When a seller who has obtained goods under a voidable contract sells the goods; the buyer will
get a good title to the goods he has bought provided that the contract has not been rescinded
until the time of sale.

Example: X fraudulently obtains a diamond ring from Y. This contract is voidable at the option
of Y. But before the contract could be terminated, X sells the ring to Z, an innocent purchaser. Z
gets the good title, and Y cannot recover the ring from Z even if the contract is subsequently set
aside.

4.2.4 Sale by One Who Has Already Sold the Goods but Continues in Possession

When even after selling the goods, the seller continues to be in possession of the
goods/documents of title to them, he may sell them to a third person. If such person obtains the
delivery in good faith and without notice of previous sale, he will get a good title to the goods.

Example: During IPL matches, P buys a TV set from R. R agrees to deliver the same to P after
some days. Meanwhile, R sells the same to S at a higher price, who buys in good faith and
without knowledge about the previous sale. S gets a good title.

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4.2.5 Sale by Buyer Obtaining Possession Before the Property in the Goods Has Vested in
Him

Where the buyer obtains possession of the goods before property in them has passed to him,
he may sell, pledge, or dispose of the goods to a third person. If such person obtains delivery in
good faith and without notice of the lien or other right of the original seller, he will get a good
title to the goods.

Example: A took a car from B on this condition that A would pay a monthly instalment of ₹5,000
as hire charges with an option to purchase it by payment of ₹1,00,000 in 24 instalments. After
the payment of a few instalments, A sold the car to C. B can recover the car from C since A had
neither bought the car nor had agreed to buy the car.

4.2.6 Effect of Estoppel

Where the owner is estopped by his conduct from denying the seller’s authority to sell, the
transferee will get a good title as against the true owner.

Example: ‘A’ said to ‘B’, a buyer, in the presence of ‘C’ that he (A) is the owner of the horse. But
‘C’ remained silent though the horse belonged to him. ‘B’ bought the horse from ‘A’. Here, the
buyer (B) will get a valid title to the horse even though the seller (A) had no title to the horse.

4.2.7 Sale by an Unpaid Seller

Where an unpaid seller, who has exercised his right of lien or stoppage in transit, resells the
goods, the buyer acquires a good title to the goods as against the original buyer.

4.2.8 Sale Under the Provisions of Other Acts

• Sale by an Official Receiver or Liquidator of the Company will give the purchaser a
valid title.

• Purchase of goods from a finder of goods will get a valid title under certain
circumstances.

• A sale by pawnee can convey a good title to the buyer.

5. Performance of the Contract of Sale

The performance of a contract of sale implies:

• Delivery of goods by the seller.

• Acceptance of the delivery of goods and payment of price for them by the buyer.

5.1 Delivery

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Delivery means the voluntary transfer of possession from one person to another. Physical
possession is not always necessary; if possession is taken through unfair means, there is no
delivery.

Types of Delivery:

• Actual Delivery: Transfer of physical possession.

• Symbolic Delivery: Delivery of something as a token.

• Constructive Delivery: Delivery by acknowledgment.

5.2 Duties of Seller and Buyer

• Duty of Seller: To deliver the goods.

• Duty of Buyer: To accept the goods and pay for them. Delivery, acceptance, and
payment should align with the terms of the Contract of Sale.

5.3 Payment and Delivery are Concurrent Conditions

Unless otherwise agreed, delivery of goods and payment of the price are concurrent
conditions:

• The seller shall be ready and willing to give possession of the goods in exchange for the
price.

• The buyer shall be ready and willing to pay the price in exchange for possession of the
goods.

5.4 Rules Regarding Delivery of Goods

5.4.1 Delivery Delivery may be made by:

• Anything agreed upon as delivery.

• Any action that puts the goods in the possession of the buyer or someone authorized to
hold them.

5.4.2 Effect of Part Delivery A part-delivery in progress has the same effect as delivering the
whole, unless intended to sever it from the whole.

Example: Goods sold in a lot at a godown, part delivered, constitutes delivery of the whole.

5.4.3 Buyer to Apply for Delivery The seller is not obliged to deliver until the buyer applies for
delivery unless there's an express contract.

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5.4.4 Place of Delivery Depends on the contract:

• Goods sold delivered at their location at the time of sale.

• Goods to be sold delivered at the location at the time of agreement.

• Goods not yet in existence delivered where they will be manufactured.

5.4.5 Time of Delivery If no time is fixed for sending the goods, they must be sent within a
reasonable time.

5.4.6 Goods in Possession of a Third Party No delivery occurs unless a third person
acknowledges to the buyer that they hold the goods on the buyer's behalf.

5.4.7 Time for Tender of Delivery Delivery must be demanded or tendered at a reasonable
hour.

5.4.8 Expenses for Delivery The seller bears all expenses to put the goods into a deliverable
state unless agreed otherwise.

5.4.9 Delivery of Wrong Quantity

• Lesser quantity: Buyer may reject but must pay at the contract rate if accepted.

• Larger quantity: Buyer may accept part and reject the rest or reject the whole; if the
whole is accepted, payment is at the contract rate.

• Mixed goods: Buyer may accept in accordance with the contract and reject the rest or
reject the whole.

5.4.10 Instalment Deliveries Buyers do not have to accept deliveries in instalments unless
agreed in the contract.

5.4.11 Delivery to Carrier Delivery to a carrier for transmission is prima facie deemed delivery
to the buyer.

5.4.12 Deterioration During Transit Liability for deterioration incidental to transit falls on the
buyer, even if the seller agrees to deliver at their own risk.

Example: If rust appears on iron rods during transport and does not affect merchantability, the
buyer must accept them.

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5.4.13 Buyer’s Right to Examine Goods The buyer has the right to ensure the goods conform to
the contract and the seller must allow a reasonable opportunity for examination unless
specified otherwise.

5.5 Rule Related to Acceptance of Delivery of Goods

Acceptance occurs when the buyer:

• Intimates to the seller that he has accepted the goods.

• Acts inconsistently with the seller’s ownership.

• Retains the goods after a reasonable time without rejecting them.

5.6 Buyer Not Bound to Return Rejected Goods

If the buyer refuses to accept the goods, he need not return them; it suffices to inform the seller
of the refusal.

5.7 Liability of Buyer for Neglecting or Refusing Delivery of Goods

If the seller is ready to deliver and the buyer does not take delivery within a reasonable time, the
buyer is liable to the seller for:

• Any loss due to neglect or refusal.

• A reasonable charge for care and custody of the goods.

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Unit 4 – Unpaid Seller

1. Unpaid Seller:

A seller of goods is considered an Unpaid Seller when:

I. The whole of the price has not been paid or tendered, giving the seller an
immediate right of action for the price.
II. A bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition has not been fulfilled due to dishonour of
the instrument or other reasons.

2. Rights of an Unpaid Seller:

• Right to Lien: The unpaid seller has a right to retain possession of the goods until
payment is made.

• Right of Stoppage in Transit: The seller can stop the goods in transit if the buyer
becomes insolvent.

• Right of Re-sale: The seller can resell the goods if the buyer defaults.

• Right to Withhold Delivery: If the property has not passed to the buyer, the seller has
the right to withhold delivery.

3. Right of Unpaid Seller Against the Goods:

i. Rights against Goods:

• When property in goods has passed to the buyer
• When property in goods has not passed to the buyer

ii. Rights against Buyer

3.1 Seller’s Lien

The unpaid seller of goods in possession of them is entitled to retain possession until
payment or tender of the price. This right can be exercised in the following cases:

• Where goods have been sold without credit (i.e., on cash sale)
• Where goods have been sold on credit, but the term of credit has expired
• Where the buyer becomes insolvent

The seller’s lien is a possessory lien, meaning it can be exercised as long as the seller remains
in possession of the goods. The right of lien is exercised only to recover the unpaid price, not
any other expenses.

3.1.1 Part Delivery

If an unpaid seller has made part delivery, they may exercise their lien on the remainder,
unless the circumstances indicate an agreement to waive the lien.

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3.1.2 Termination of Lien

The unpaid seller loses their right of lien when:

i. Goods are delivered to a carrier or bailee for transmission to the buyer without
reserving the right of disposal.
ii. Buyer or agent lawfully obtains possession of the goods.
iii. The seller waives the right of lien.
iv. By Estoppel (if the seller leads third parties to believe that the lien does not exist).

Once the seller has parted with the goods, the lien cannot be exercised, except when the seller
has obtained a decree for the price of the goods.

3.2 Right of Stoppage in Transit

Sec 50: When the buyer becomes insolvent, the unpaid seller who has parted with
possession of the goods has the right of stopping them in transit, allowing them to resume
possession of the goods and retain them until payment or tender of the price.

Essentials:

• Goods are in transit

• Buyer is insolvent
• Seller has parted with the goods
• Seller is unpaid

3.2.1 Duration of Transit

Goods are in transit from the time they are delivered to a carrier or bailee until the buyer or their
agent takes delivery.

• If the buyer rejects the goods, the carrier retains possession, and the transit is not ended.

• Goods delivered to a ship chartered by the buyer: It depends on whether the master of the
ship holds the goods as a carrier or as an agent of the buyer.

• Part delivery: The seller can stop the remainder in transit unless the part delivery implies the
seller has given up possession of the entire goods.

3.2.2 End of Transit

The transit ends when:

• Buyer or bailee obtains delivery

• Buyer obtains delivery before arrival
• Carrier acknowledges to the buyer that they hold the goods
• Carrier wrongfully refuses to deliver to the buyer

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• Goods are delivered to the carrier hired or ship chartered by the buyer
• Part delivery ends transit for the remaining goods.

3.2.3 Effecting Stoppage in Transit

• By taking actual possession of the goods

• By giving notice to the carrier not to deliver the goods

To be effective, notice must be given in such a manner that the carrier can reasonably
communicate it to their servant or agent in time to prevent delivery.

Upon receiving notice, the carrier must re-deliver the goods according to the seller’s directions,
with the seller bearing the cost of redelivery.

The main intention of stoppage in transit is to secure payment due, not to recover other
expenses.

3.3. Distinction between Right of Lien and Right of Stoppage in Transit

Right of Lien Right of Stoppage in Transit

The essence of a right of lien is to retain The essence of a right of stoppage in transit
possession is to regain possession
To exercise the right of lien the seller must be To exercise the right of stoppage in transit
in possession of the goods. i. Seller should have parted with the
possession
ii. Possession should be with a carrier
iii. Buyer should not have acquired the
possession

Can be exercised even when the buyer is not Can be exercised only when the buyer is
insolvent insolvent.
Comes to an end when goods go out of the Comes to an end as soon as the goods are
possession of the seller. delivered to the buyer

Right of stoppage in transit begins when the right of lien ends. Thus, the end of the right of lien is
the starting point of the right of stoppage in transit.

3.4 Effects of Sub-sale or Pledge by Buyer

I. The right of lien or stoppage in transit is not affected by the buyer selling or pledging the
goods, unless the seller has assented to it.
Example: A sold goods to B in Mumbai, and the goods were handed over to the railways for
transmission. B sold the goods to C, but then B became insolvent. A can still exercise the right
of stoppage in transit.

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Case Law: Mount D. F. Ltd. vs Jay & Jay (Provisions) Co. Ltd

Facts: A sold goods to B with the understanding that the price would be paid from B's sale
proceeds to customers. B sold the goods to C, but failed to pay A. A tried to exercise his right of
lien to stop delivery to C.

Judgement: The Court held that A had assented to B’s resale to C, defeating A’s lien.

II. The seller loses the right to lien or stoppage when:

• The seller assents to the sub-sale or pledge.
• The document of title is transferred from the seller to the buyer.

III. When the buyer transfers a document of title to a person who buys the goods in good faith:
• If the transfer is by sale, the right of lien or stoppage is defeated.
• If the transfer is by pledge, the unpaid seller’s right of lien or stoppage is exercised subject to
the pledgee’s rights.

3.5 Effect of Stoppage

When the seller exercises the right of stoppage in transit, the contract of sale is not rescinded.
The contract remains in force, and the buyer can demand delivery upon payment of the price.

3.6 Right of Re-sale

The unpaid seller can exercise the right to re-sell the goods under these conditions:

• Goods are of perishable nature

• Seller has exercised the right of lien or stoppage in transit
• Property in goods has not passed to the buyer
• Notice of intention to re-sell is given to the buyer
• Right of resale is reserved in the contract of sale

3.6.1 Where Goods are of a Perishable Nature

If the goods are perishable, the seller need not inform the buyer of the intention to resell.

3.6.2 Notice of Re-sale

When the seller gives notice to the buyer of their intention to resell, and the buyer fails to pay
within a reasonable time, the seller may resell the goods.
Upon resale:
• The seller may recover the difference between the contract price and resale price from the
original buyer as damages.
• If the resale price is higher, the seller may retain the profit.

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If the seller resells without notice:

• They cannot recover the loss suffered on resale.
• Any profit on resale must be returned to the original buyer.

3.6.3 Re-sale After Exercising Lien or Stoppage in Transit

If an unpaid seller resells after exercising lien or stoppage in transit, the subsequent buyer
acquires good title, even if the original buyer was not given notice of the resale.

3.6.4 Express Right of Re-sale in Contract

If the right of re-sale is expressly reserved in the contract, the seller may resell on the buyer's
default without giving notice.
• The seller can recover damages from the original buyer, even without notice of resale.

3.6.5 Where Property in Goods Has Not Passed

If the property in the goods has not passed to the buyer, the seller can withhold delivery. This
right is similar to lien and is called “Quasi-lien”, where both ownership and possession
remain with the seller.

4. Rights of Unpaid Seller Against the Buyer

The unpaid seller has certain rights against the buyer when the buyer fails to fulfill their
obligations under the contract. These rights include:

• Suit for Price

• Suit for Damages for Non-acceptance

• Repudiation of Contract before Due Date

• Suit for Interest

4.1 Suit for Price

• i. Property has passed to the buyer:

If the property in the goods has passed to the buyer and the buyer wrongfully neglects or
refuses to pay the agreed price, the seller may sue the buyer for the price of the goods.

• ii. Price payable on a certain day irrespective of delivery:

If the contract stipulates that the price is payable on a certain date irrespective of the
delivery of goods, and the buyer wrongfully refuses to pay, the seller may sue for the
price, even if the property in the goods has not passed or the goods have not been
appropriated to the contract.

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4.2 Suit for Damages for Non-acceptance

If the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue
the buyer for damages due to non-acceptance.

4.3 Repudiation of Contract Before Due Date

If the buyer repudiates the contract before the delivery date, the seller can treat the contract
as rescinded and sue for damages for breach, in accordance with the rule of anticipatory
breach of contract.

4.4 Suit for Interest

• If there is a specific agreement regarding interest, the seller may recover interest from
the buyer.

• In the absence of an agreement, the seller may charge interest on the price when it
becomes due, notifying the buyer.

• The court may also award interest at a suitable rate on the price in a suit by the seller
from the date of the tender of goods or the due date of payment.

5. Remedies of Buyer Against the Seller

The buyer has remedies against the seller in the event of breach, such as:

• Damages for Non-delivery

• Suit for Specific Performance

• Suit for Breach of Warranty

• Suit for Anticipatory Breach

• Suit for Interest

5.1 Breach of Contract by Seller

The seller may breach the contract by:

• Failing to deliver the goods at the prescribed time or manner.

• Repudiating the contract.

• Delivering non-conforming goods, leading to the buyer rejecting or revoking

acceptance.

5.2 Rights of the Buyer

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5.2.1 Damages for Non-delivery

If the seller wrongfully refuses to deliver the goods, the buyer may sue for damages for non-
delivery.

5.2.2 Suit for Specific Performance

If the seller breaches the contract, the buyer may ask the court for specific performance. This
remedy applies when:

• The contract is for the sale of specific and ascertained goods.

• The court's power to order specific performance is subject to the Specific Relief Act of
1963.

• Damages would not be an adequate remedy.

5.2.3 Suit for Breach of Warranty

When there is a breach of warranty by the seller, or if the buyer elects to treat a breach of
condition as a breach of warranty, the buyer cannot reject the goods solely for that reason. The
buyer can:

• Use the breach of warranty to reduce or extinguish the price.

• Sue the seller for damages.

5.2.4 Repudiation of Contract Before Due Date

When either party repudiates the contract before delivery:

• The other party may treat the contract as subsisting and wait until the date of delivery.

• Or, they may treat the contract as rescinded and sue for damages.

5.2.5 Suit for Interest

If there is no contract to the contrary, the court may award interest on the price in a suit for the
refund of the price due to a breach by the seller, from the date of payment by the buyer.

6. Auction Sale

An auction sale is a public sale where individuals gather to place bids, and the property is sold
to the highest bidder. It is governed by certain rules that ensure the fairness and transparency of
the process.

6.1 Rules w.r.t Auction Sale:

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I. Goods Sold in Lots

• Each lot is treated as a separate contract of sale, meaning the sale of each lot is
considered independently of the others.

II. Completion of the Contract of Sale

• The sale is completed when the auctioneer announces its completion by the fall of the
hammer or any other customary method.

• Until such an announcement is made, a bidder may retract their bid.

III. Reserving the Right to Bid

• The seller may reserve the right to bid, either expressly or through someone on their
behalf. In such cases, the seller or a designated person may bid during the auction.

IV. Sale Not Notified to be Subject to a Right to Bid by the Seller

• If the auction sale does not notify that the seller has the right to bid, it is illegal for the
seller or anyone employed by the seller to place a bid.

• The auctioneer cannot knowingly accept such a bid, and any sale made in contravention
of this rule is considered fraudulent by the buyer.

V. Reserved Price

• An auction may be subject to a reserve price (also known as an upset price), which is
the minimum price the seller is willing to accept for the goods. The goods will not be
sold below this price.

VI. Pretended Bidding

• If the seller engages in pretended bidding to artificially raise the price, the sale is
voidable at the option of the buyer. This means the buyer can cancel the sale if they
discover that fake bids were used to inflate the price.

7. Inclusion of Increased or Decreased Taxes in Contract of Sale

The impact of changes in taxes after a contract of sale has been made is governed by the
following principles:

• If the tax is imposed or increased after the contract is made:

o The seller can add the increased amount to the contract price and is entitled to
recover it from the buyer.

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• If the tax is decreased or remitted:

o The buyer can deduct the reduced amount from the contract price and cannot
be sued for paying less.

• These provisions apply unless the contract contains a specific stipulation that states
otherwise. The parties are free to agree on terms regarding the handling of taxes in the
contract.

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The Partnership Act, 1932

Unit 1 – General Nature of Partnership

1. Definitions (Sec 4)

1. Partnership: The relationship between individuals who agree to share the profits of a
business conducted by all or any of them acting for all.

2. Partners and Firm: Individuals entering into a partnership are termed ‘partners,’ and the
collective entity is known as ‘a firm.’

3. Firm Name: The name under which the business operates is called the ‘Firm name.’

2. Elements of Partnership

2.1 Association of Two or More Persons

• Persons Involved: Partnership must involve at least two persons.

• Legal Capacity:

o A firm itself cannot be a partner as it is not considered a legal person.

o A minor cannot be a partner but can be admitted to the benefits of partnership

with the consent of all partners.

• Maximum Number: The maximum number of partners is limited to 50 under the

Companies Act, 2013.

2.2 Agreement

• Voluntary and Contractual: Partnership is formed through a voluntary, contractual

agreement.

• Nature of Agreement: Can be express (oral or written).

2.3 Business

• Business Definition: Includes trade, occupation, and profession.

• Profit Motive: The primary objective is to earn profits.

2.4 Agreement to Share Profits

• Profit Sharing: Partners must agree on how profits will be shared.

• Loss Sharing: An agreement to share losses is not required to establish a partnership.

2.5 Business Carried on by All or Any of Them Acting for All

• Conduct of Business: The business must be conducted by all partners or by some

partners acting on behalf of all.

• Mutual Agency: Partners act as principals and agents for each other.

• Case Law: K D Kamath & Co. - Essential conditions for partnership:

o Agreement to share profits and losses.

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o Business conducted by all or any partners acting for all.

o Exclusive power or control by one partner does not negate partnership if the
essential conditions are met.

• Example: Co-owners sharing rent from land without a business operation do not form a
partnership.

Summary of Partnership Elements:

• Association: Involves two or more persons.

• Agreement: Partnership arises from an agreement.

• Business: Must be an operational business.

• Profit Sharing: Agreement to share profits.

• Conduct: Business conducted by all or any partners acting for all.

3. True Test of Partnership

To determine the existence of a partnership, the following criteria must be met:

1. Agreement to Share Profits: There must be an agreement to share the profits of a

business.

2. Business Conducted by All or Any of Them Acting for All: The business must be
conducted by all or some partners acting on behalf of all.

3. Agreement Between All Persons Concerned: There must be an agreement between

all parties involved.

3.1 Agreement

• Creation by Agreement: Partnership is created through an agreement, not by mere

status.

• Example: Members of a Hindu Undivided Family or a Burmese Buddhist husband and

wife running a family business are not considered partners in a partnership simply
because they are family members.

3.2 Sharing of Profit

• Essential Element: Sharing of profit is crucial for forming a partnership but serves only
as prima facie evidence, not conclusive evidence.

• Not Conclusive Evidence:

o Lender of Money: A lender receiving a share of profits or interest does not

become a partner.

o Servant or Agent: Remuneration linked to profits does not create a

partnership.

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o Widow or Child of Deceased Partner: Receiving an annuity does not imply

partnership.

o Previous Owner: Receiving payment for goodwill or a share of the business

does not establish partnership.

• Cumulative Effect: Determining partnership involves evaluating all relevant facts,

including agreements (written or verbal), real intentions, conduct of the parties, and
surrounding circumstances.

3.3 Agency

• Mutual Agency: Each partner acts as both a principal and an agent for the other
partners, binding all partners to acts done on behalf of the firm.

• Case Law: Santiranjan Das Gupta Vs. Dasyran Murzamull (SC)

o Factors for No Partnership:

▪ Lack of recorded terms and conditions of the partnership.

▪ Absence of accounts maintained and open to inspection by both

parties.

▪ No partnership account with a bank.

▪ No formal intimation to relevant authorities about the partnership.

4. Partnership Distinguished from Other Forms of Organisation

4.1 Partnership Vs. Joint Stock Company

Basis Partnership Joint Stock Company

Legal status No legal personality distinct Separate legal entity distinct from its
its constituent members. members
Agency Every partner is an agent of A member is not an agent of the other
the other partners as well as members or of the company.
of the firm.
Distribution of Distributed among the There is no such compulsion to distribute its
profits partners according to terms profits among its members.
of partnership deed.
Extent of Liability of the partners is Limited liability – limited by shares or limited
liability unlimited. by guarantee.
Property The firm’s property is the In a company, its property is separate from
‘joint estate’ of all the that of its members
partners.
Transfer of A share in a partnership Unrestricted in case of public companies. In
shares cannot be transferred private companies, it shall be subject to
without the consent of all provisions contained in the Articles.
the partners.

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Management In the absence of express Members are not entitled to take part in
agreement to contrary, all management unless they are appointed as
partners are entitled to directors. They, however enjoy right of
participate in management attending general meeting and voting where
they can decide questions such as
election of directors, appointment of
auditors, etc.

Registration Not compulsory Comes into existence only after it is

registered under the Companies Act, 2013.

Winding up Can be dissolved at any Either wound up by the NCLT or its name is
time if all the partners struck off by the ROC.
agree.
Number of Restricted by the Public Co. – May have any number of
members Companies Act, 2013 and members but not less than 2. Private Co. –
Rules thereon to 50 Minimum 2 members and maximum 200.
Can also be formed as One Person
Company.
Duration of Death, retirement, or Perpetual succession
existence insolvency of a partner
results in the dissolution of
the firm.

4.2 Partnership Vs. Club

Basis Partnership Club

Definition An association of persons formed An association of persons formed
for earning profits from a business with the object of promoting some
carried on by all or any one of them beneficial purposes, and not for
acting for all. earning profit.
Relationship A partner of a firm is an agent for A member of a club is not agent of
other partners. other members.
Interest in the Partner has interest in the property A member of club has no interest in
property of the firm. property of club.
Dissolution A change in partners of the firm A change in membership of a club
affect its existence. does not affect its existence.

4.3 Partnership vs. Hindu Undivided Family

Basis Partnership Hindu Undivided Family

Mode of creation By an agreement. Right in business is created by birth in
the family.
Death of a Leads to the dissolution of Does not give rise to dissolution of the
member partnership. family business.

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Management All the partners are equally The right of management of joint
entitled to take part in the family business generally vests in the
partnership business. Karta.
Authority to bind Every partner can, by his act, Karta or manager, has the authority to
bind the firm. contract for the family business and
the other members.
Liability The liability of a partner is Only the liability of Karta is unlimited,
unlimited. and other coparceners are liable only
to extent of their share in profits of
family business.
Calling for A partner can bring a suit On separation of the joint family, a
accounts on against firm for accounts, member is not entitled to ask for the
closure provided he also seeks the account of family business.
dissolution of the firm.
Governing Law ndian Partnership Act, 1932 The Hindu Law.
Minor’s capacity A minor cannot become a A minor becomes a member of the
partner, though he can be ancestral business by the incidence of
admitted to benefits of birth.
partnership.
Continuity A firm gets dissolved by death A Joint Hindu family has continuity till
or insolvency of a partner. it is divided.
Number of Should not exceed 50. Members may be unlimited in
Members number.
Share in the Each partner has a defined In a HUF, no coparceners have a
business share by agreement between definite share. The share fluctuate.
the partners.

4.4 Partnership Vs. Co-Ownership or joint ownership

Basis Partnership Co-Ownership

Formation Partnership always arises out of a Co-ownership may arise either from
contract, express or implied agreement or by the operation of law,
such as by inheritance.
Implied A partner is the agent of the other A co-owner is not the agent of other
agency partners co-owners.
Nature of There is a community of interest Co-ownership does not necessarily
interest which means that profits and losses involve sharing of profits and losses.
must have to be shared.
Transfer of A share in the partnership is A co-owner may transfer his interest/
interest transferred only by the consent of rights in property without consent of
other partners. other coowners.

4.5 Partnership vs. Association

Partnership Association

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Partnership means and involves

setting up relation of agency Association evolves out of social
between two or more persons who cause where there is not necessarily
have entered into a business for a motive to earn and share profits.
gains, with the intention to share The intention is not to enter in a
profits of such a business. business for gains

5. Kinds of Partnership

With regard to Duration:

• Partnership at Will

• Partnership for a Fixed Period

With regard to the Extent of Business:

• Particular Partnership

• General Partnership

5.1.1 Partnership at Will

• Definition: A partnership with no fixed duration and no provision for determining its
end.

• Conversion: A partnership with a fixed term becomes a partnership at will if continued

after the term expires.

• Dissolution: Can be dissolved by any partner by providing notice in writing to all other
partners.

5.1.2 Partnership for a Fixed Period

• Definition: A partnership established for a specific duration as per a contract.

• Termination: Ends upon the expiry of the fixed period.

5.1.3 Particular Partnership

• Definition: A partnership formed for a specific adventure or undertaking.

• Dissolution: Dissolved upon completion of the specific adventure or undertaking.

5.1.4 General Partnership

• Definition: A partnership with no defined scope, involving a general business.

• Liability: All partners are liable for all actions of the partnership.

5.2 Partnership Deed

• Formalities: No specific formalities required; can be written or verbal.

• Document: The written document outlining the terms and conditions is called the
partnership deed.

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• Imm. Property: If involving immovable property, the deed must be stamped and
registered.

5.2.1 Contents of a Partnership Deed

• Name of the Partnership Firm

• Names of All Partners

• Nature and Place of Business

• Date of Commencement

• Duration

• Capital Contribution

• Profit Sharing Ratio

• Admission and Retirement of Partners

• Interest Rates on capital, drawings, and loans

• Settlement of Accounts in case of dissolution

• Salaries or Commissions payable to partners

• Expulsion Provisions for breach or fraud

6. Types of Partners

• Active or Ostensible Partner

• Nominal Partner

• Sub-partner

• Partner in Profits Only

• Sleeping or Dormant Partner

• Outgoing Partner

• Incoming Partner

• Partner by Holding Out

6.1 Partner by Holding Out

• Definition: A person who, by agreement or representation, is considered a partner

and must give public notice to absolve liabilities upon retirement.

• Case Law: Example: A manager (A) who is presented as a partner but remains silent is
liable as a partner by holding out when creditors act based on this representation.

6.2 Sleeping or Dormant Partner

• Definition: A partner who does not actively participate in the business but shares in
profits and losses and is liable to third parties.

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• Notice: Not required to give public notice of their retirement.

6.3 Nominal Partner

• Definition: A person who lends their name to the firm without real interest or
participation in the business.

• Liability: Liable to third parties but not entitled to share in profits.

6.4 Partner in Profits Only

• Definition: A partner who shares profits only and is not liable for losses but is still
responsible to third parties.

6.5 Incoming Partner

• Definition: A person joining an existing firm with the consent of all existing partners.

• Liability: Not liable for actions of the firm before joining.

6.6 Outgoing Partner

• Definition: A partner leaving a firm while the remaining partners continue business.

• Liability: Remains liable to third parties until public notice of retirement is given.

6.7 Partner by Holding Out (Sec 28)

• Definition: A person who represents themselves as a partner or allows others to do so,

and is bound by such representation.

• Liability: Applies to those who have represented themselves or allowed others to

represent them as partners.

• Example: S retired from a firm but didn't give notice, remaining liable to creditors who
lent based on his continued representation as a partner.

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Unit 2 – Relations of Partners

1. Relation of Partners to One Another

1.1 General Duties of Partners

• Carry on the Business for the greatest common advantage of the firm and its
partners.

• Utmost Good Faith: Partners must act with the highest level of honesty and integrity in
dealings with each other.

• Full Disclosure: Partners must provide complete information on all matters affecting
the firm. For example, a partner must disclose all material facts in transactions
involving the sale or purchase of a share.

1.2 Duty to Indemnify for Loss Caused by Fraud

• Indemnity for Fraud: Each partner must compensate the firm for losses caused by their
fraud in the business. The fraudulent partner is responsible for the consequences of
their actions.

1.3 Determination of Rights and Duties of Partners by Contract

• Contractual Rights and Duties: Rights and duties can be defined by contract, whether
express or implied. These contracts can be altered by mutual consent.

• Restraint of Trade: Agreements may include clauses that restrict partners from
engaging in other businesses while being part of the firm.

1.4 Rights of the Partners in Relation to Conduct of the Business

1. Right to Take Part in Business: Partners have the right to participate in the business
unless restricted by a contract.

o Limited Management Power: If management is limited by contract, the court

generally won't intervene unless there is a breach of trust or illegality.

2. Right to Be Consulted: Differences in business matters should be determined by the

majority view. Changes to the business nature require unanimous consent.

3. Right of Access to Books: All partners, including sleeping partners, have the right to
access, inspect, and copy the firm’s books. This right must be exercised in good faith.

4. Rights of Legal Heirs/Representatives: In case of a partner’s death, their heirs or legal

representatives have the right to access and inspect the firm’s books.

1.5 Mutual Rights and Liabilities

1. Right to Remuneration:

o No Automatic Remuneration: Partners are not entitled to extra remuneration

beyond their share of profits unless expressly agreed upon or customarily
practiced.

2. Right to Share Profits:

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o Profit and Loss Sharing: Profits and losses are shared per the agreement; in
absence, equally. Profit-sharing does not correlate with capital contribution.

3. Interest on Capital:

o Interest Entitlement: Partners are entitled to interest on capital only with an

express agreement, practice, custom, or statutory provision. Without such
terms, no interest is payable.

4. Interest on Advances:

o Interest on Advances: Partners who advance extra funds are entitled to claim
interest at 6% per annum unless agreed otherwise. Interest continues even after
dissolution until payment.

5. Right to Be Indemnified:

o Indemnification: Partners are entitled to be indemnified for payments and

liabilities incurred in ordinary and proper business conduct or in emergencies
to protect the firm.

6. Right to Indemnify the Firm:

o Indemnity for Neglect: Partners must indemnify the firm for any losses due to
their willful neglect in managing the firm’s business.

2. Partnership Property

2.1 The Property of the Firm

• Firm Property: Includes:

o Property, Rights, and Interests contributed by partners.

o Property Acquired for the firm's business.

o Goodwill of the business.

• Determination: Whether something is firm property depends on the intention or

agreement of the partners.

• Conversion: Partners can agree to convert personal or separate property into

partnership property.

2.1.1 Goodwill

• Definition: Value of a business’s reputation beyond normal profits.

• Part of Firm Property: Goodwill can be sold separately or with other properties.

• Non-Compete Agreement: On selling goodwill, a partner may agree not to engage in

similar business within specified limits.

2.2 Application of the Property of the Firm

• Purpose: Firm property must be used exclusively for the firm’s business.

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• Proprietary Interest: During the partnership, no partner has a proprietary interest in

the firm’s assets.

3. Personal Profit Earned by Partners

1. Profit from Firm Transactions:

o Account and Pay: Partners must account for and pay any personal profit derived
from firm transactions or use of firm property.

o Example: Partner A, selling his own stock to the firm at a profit, must account for
that profit to the firm.

2. Profit from Competing Business:

o Account and Pay: Partners must account for and pay profits from competing
businesses.

o Example: Partner A, running a competing salt import business, must account for
those profits to the firm.

4. Rights and Duties of Partners after a Change in the Constitution of the Firm

1. Change in Constitution: Rights and duties remain the same after:

o New Partner(s) join.

o Some Partner(s) leave.

o Change in Business activities.

o Continuation Post Term expiry.

2. Fixed Term Firm: If a firm continues beyond its fixed term, mutual rights and duties
remain unchanged.

3. New Adventures: If the firm engages in new adventures or undertakings, the rights and
duties remain as before, unless otherwise agreed.

5. Relation of Partners to Third Parties

5.1 Partner as Agent of the Firm

• Agency: A partner is the firm’s agent for business purposes.

• Limitations: The rule applies to business transactions, not personal dealings between
partners.

5.2 Implied Authority of Partner as Agent

• Implied Authority: Acts done to carry on the firm’s usual business bind the firm.

• Section 22: Acts must be done in the firm’s name or in a way that indicates an intention
to bind the firm.

• Limitations:

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o Arbitration, Banking Accounts, Compromises: Restrictions on implied

authority for specific actions.

o Immovable Property: Restrictions on acquiring or transferring property.

o Partnership Formation: Restrictions on entering new partnerships.

5.3 Extension and Restriction of Partners’ Implied Authority

• Contractual Modifications: Implied authority can be extended or restricted by

agreement.

• Conditions for Restrictions:

o Third party knowledge of restrictions.

o Third party ignorance of partnership context.

5.4 Partner’s Authority in an Emergency

• Emergency Authority: Partners can take necessary actions to protect the firm from
loss, acting with ordinary prudence, which binds the firm.

6. Effect of Admissions by a Partner

• Admission/Representation: Evidence against the firm if made in the ordinary course

of business.

• Limitations: An admission by a partner doesn’t bind the firm if the partner’s authority is
limited and the other party is aware of this restriction.

o Example: X, a partner, makes an inaccurate representation about a spare part,

resulting in liability for both X and Y.

7. Effect of Notice to Acting Partner

• Notice: Given to a partner who habitually acts in the business operates as notice to the
firm.

• Exception: Not applicable in cases of fraud committed by or with the consent of that
partner.

o Example: R, knowing a car is stolen, still makes the purchase; all partners are
liable to the real owner X.

8. Liability to Third Parties

8.1 Liability of a Partner for Acts of the Firm

• Joint and Several Liability: Each partner is jointly and severally liable for acts done
while being a partner.

• Act of Firm: Includes any act or omission that gives rise to enforceable rights against the
firm.

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o Example: Partners were liable for trademark infringement damages, even after
the firm’s dissolution.

8.2 Liability of the Firm for Wrongful Acts of a Partner

• Firm’s Liability: For losses caused by a partner’s wrongful acts if done:

o In the ordinary course of business, or

o With authority of the partners.

• Negligence: All partners are liable for negligent acts of a partner in the ordinary course
of business.

o Example: Partners held liable for injury due to negligence in a coal mine.

8.3 Liability of Firm for Misapplication by Partners

• Misapplication: Firm is liable if:

o A partner misapplies money or property received from a third party within his
apparent authority, or

o The firm, while holding money or property, is misapplied by a partner.

• Scope of Authority: If a partner receives money beyond his authority, the firm is liable
only if the money is in their possession or control.

o Example: Firm liable for A’s unauthorized sale of a car in a parking business.

9. Rights of Transferee of a Partner’s Interest

• Transfer of Share: A share in a partnership is transferable like other property, but the
transferee has limited rights.

During Continuance of Partnership:

o Not Entitled: To interfere with business, require accounts, or inspect books.

o Entitled: To receive the share of profits from the transferring partner.

On Dissolution/Retirement:

o Entitled: To receive the share of assets and an account from the dissolution
date.

• Partner Agreement: Transferring a share does not make the transferee a partner unless
other partners agree.

10. Minors Admitted to the Benefits of Partnership

10.1 Rights of the Minor

1. Profit Share: Right to the agreed share of profits.

2. Access to Records: Can inspect and copy the firm's accounts.

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3. Legal Action: Can sue for accounts or payment of his share only upon severing his
connection with the firm.

4. Election on Majority:

o Become Partner: Can elect to become a partner within 6 months of attaining

majority and will then be entitled to the same share as before.

o Not Become Partner: If he elects not to become a partner, his share is not liable
for any acts of the firm after the date of public notice of his decision.

10.2 Liabilities of the Minor

• Before Majority:

o Liability: Limited to his share in profits and property of the firm.

o Personal Liability: None for the firm’s debts incurred during minority.

o Insolvency: Cannot be declared insolvent; if the firm is insolvent, his share

vests in the Official Receiver/Assignee.

• After Majority:

o Becoming Partner: Becomes personally liable for all acts of the firm done since
being admitted to benefits.

o Not Becoming Partner:

▪ Public Notice: Must give public notice of not becoming a partner to

avoid liability for post-notice acts of the firm.

▪ Rights: Entitled to sue for his share of the property and profits.

11. Legal Consequences of Partner Coming In and Going Out

11.1 Introduction of a Partner

• Consent Required: Must have consent from all existing partners.

• Liabilities:

o Typically, liabilities start from the date of admission unless otherwise agreed.

o A new partner’s agreement to assume old firm’s liabilities requires creditor

consent.

o Simply agreeing to assume liabilities doesn’t automatically make creditors’

claims enforceable against the new partner.

11.2 Retirement of a Partner

• Definition: When a partner ceases membership without dissolving the firm or its
relations.

• Liabilities:

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o Post-Retirement: Continues to be liable for acts done until public notice is

given.

o Pre-Retirement: Remains liable for acts before retirement unless agreed

otherwise with third parties.

o Partnership at Will: Notice of intention to retire is sufficient for relief from

partnership duties.

11.3 Expulsion of a Partner

• Conditions:

o Power of expulsion must be in the partnership contract.

o Must be exercised by a majority and in good faith.

o Good faith includes expulsion being in the partnership’s interest, providing

notice, and opportunity to be heard.

11.4 Insolvency of a Partner

• Effect: Partner ceases to be a partner on the adjudication date.

• Firm’s Status: Firm may or may not be dissolved; partners can agree otherwise.

• Liability:

o The estate is not liable for firm acts after the adjudication date.

o Firm is not liable for acts of the insolvent partner after the adjudication date.

11.5 Liability of Estate of Deceased Partner

• General Rule: Death of a partner typically results in dissolution.

• Contractual Agreement: If the firm is not dissolved by death, the deceased’s estate is
not liable for acts post-death.

o Example: If goods are delivered after a partner’s death, the estate is not liable
for the debt.

12. Rights of Outgoing Partner to Carry on Competing Business

• Allowed:

o Carry on competing business and advertise.

• Not Allowed:

o Use the firm’s name, represent as carrying on the firm’s business, or solicit the
firm’s previous customers.

• Agreement: May include reasonable restrictions on competing business for a specified

period or locality.

13. Right of Outgoing Partner to Share Subsequent Profits

• Entitlement:

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o Profits: Share in profits attributable to the use of his share of firm property.

o Interest: If not settled, entitled to interest at 6% per annum.

• Purchase Option: If an option to purchase is exercised, no further share of profits is

due.

o Example: Estate of a bankrupt partner or a retired partner can claim profits until
final settlement.

14. Revocation of Continuing Guarantee by Change in Firm

• Effect of Changes: Changes in the firm’s constitution typically revoke a continuing

guarantee for all future transactions, unless stated otherwise in the agreement.

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Unit 3 – Registration and dissolution of firm

1. Registration of Firms

1.1 Application for Registration (Sec 58)

• Optional Registration: The registration of a partnership is optional but can be done as

per Section 58 of the Indian Partnership Act, 1932.

• Application Process:

o Form: Submit a statement in the prescribed form.

o Fee: Accompanied by the prescribed fee.

o Contents of the Application:

▪ Firm's name

▪ Principal place of business

▪ Other business locations

▪ Date each partner joined

▪ Full name and address of each partner

▪ Duration of the firm

o Signatures: Signed by all partners or their authorized agents.

o Verification: Each signature must be verified as prescribed.

o Alterations: Subsequent changes in the firm's details must also be registered.

o Name Restrictions: Firm name cannot include words like ‘Crown’, ‘Emperor’,
‘Imperial’, etc., unless the State Government consents in writing.

1.2 Registration

• Registrar’s Duties:

o Recording: If the Registrar is satisfied with compliance, he records the

statement in the Register of Firms.

o Certificate: Issues a Certificate of Registration.

o Name Usage: The firm must use (Registered) immediately after its name once
registered.

• Suit Filing: Registration can occur even after a suit has been filed, provided the suit is
withdrawn, registration is completed, and a fresh suit is filed.

• Completion: Registration is deemed complete upon delivery of the application form to

the Registrar; recording in the register is routine.

1.3 Late Registration on Payment of Penalty

• Time Limit: Statement must be sent within one year of the firm's constitution.

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• Penalty: If delayed, registration is allowed on payment of ₹100 per year of delay or part
thereof.

2. Consequences of Non-Registration

2.1 No Suit in Civil Court by Firm or Co-Partners

• Restrictions:

o The firm or its partners cannot bring an action against a third party for breach of
contract unless:

▪ The firm is registered.

▪ The suing persons are or have been shown in the Register of Firms.

2.2 No Relief for Set-Off of Claim

• Claim Restrictions: If a third party brings an action against the firm, neither the firm nor
its partners can claim a set-off if the suit is valued over ₹100 or pursue other
proceedings.

2.3 No Legal Action by Aggrieved Partner

• Legal Action: A partner of an unregistered firm cannot bring legal action against the firm
or other partners.

2.4 Third Party’s Right to Sue

• Rights: A third party can still sue the firm even if it is unregistered.

2.5 Exceptions – Rights Not Affected by Non-Registration

• Unaffected Rights:

o Third Party Actions: Rights of third parties to sue the firm or partners.

o Dissolution & Settlement: Rights to sue for dissolution or settlement of

accounts of a dissolved firm.

o Insolvent Partner: Powers of Official Assignees or Receivers to release property

and bring action.

o Set-Off: Rights to sue or claim a set-off if the suit value does not exceed ₹100.

o Legal Representatives: Rights of heirs or legal representatives of a deceased

partner to sue for accounts or realization of firm property.

3. Dissolution of Firm

3.1 Meaning of ‘Dissolution of the Firm’

• Definition: The dissolution of a partnership refers to the termination of the legal

relationship between all partners of a firm.

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o Complete Dissolution: Involves discontinuation of the legal relationship

between all partners, leading to the firm's end.

o Partial Dissolution: Occurs when one or more partners retire, die, become
insolvent, or are incapacitated. In such cases:

▪ The partnership relationship between the affected partner(s) and the

remaining partners ends.

▪ The firm may continue with the remaining partners if they choose to do
so.

3.2 Dissolution of Firm Vs. Dissolution of Partnership

Basis of Dissolution of Firm Dissolution of Partnership

Difference
Continuation of It involves discontinuation of It does not affect continuation of
business business in partnership. business. It involves only
reconstitution of the firm.
Winding up It involves winding up of the firm It involves only reconstitution and
and requires realization of assets requires only revaluation of assets
and settlement of liabilities. and liabilities of the firm.
Order of court A firm may be dissolved by the order Dissolution of partnership is not
of the court. ordered by the court.
Scope It necessarily involves dissolution of It may or may not involve
partnership. dissolution of firm.
Final closure of It involves final closure of books of It does not involve final closure of
books the firm. the books of the firm.

3.3 Modes of Dissolution of a Firm

3.3.1 Dissolution without the Order of the Court or Voluntary Dissolution

1. Dissolution by Agreement

o A firm can be dissolved:

▪ With the consent of all partners.

▪ In accordance with a contract between the partners.

2. Compulsory Dissolution

o A firm is compulsorily dissolved:

▪ When all partners or all but one are adjudicated as insolvent.

▪ If an event occurs that makes it unlawful for the firm to continue its
business.

o If the firm engages in multiple activities, the illegality affecting one activity does
not necessarily lead to dissolution of the entire firm.

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3. Dissolution on Happening of Certain Contingencies

o A firm can be dissolved on the occurrence of:

▪ Expiry of a fixed term if the firm was constituted for a specific duration.

▪ Completion of a specific venture or undertaking.

▪ Death of a partner.

▪ Adjudication of a partner as insolvent.

4. Dissolution by Notice of Partnership at Will

o In a partnership at will, any partner can dissolve the firm by giving written notice
to all other partners.

▪ Date of Dissolution:

▪ If a date is specified in the notice, dissolution is effective from

that date.

▪ If no date is specified, dissolution is effective from the date of

communication of the notice.

3.3.2 Dissolution by the Court

A court may dissolve a firm at the suit of a partner on the following grounds:

1. Insanity/Unsound Mind

o If a partner (other than a sleeping partner) becomes of unsound mind, the court
may dissolve the firm on the application of other partners or the next friend of
the insane partner.

o Temporary sickness is not a ground for dissolution.

2. Permanent Incapacity

o If a partner, other than the one filing the suit, becomes permanently incapable of
performing their duties due to physical disability or illness, the court may
dissolve the firm.

3. Misconduct

o If a partner’s conduct unreasonably affects the firm’s business, the court may
order dissolution considering the nature of the business.

4. Persistent Breach of Agreement

o If a partner willfully or continuously breaches agreements related to

management or conduct of business, making it impractical for other partners to
continue, the court may dissolve the firm.

o Examples include embezzlement, erroneous accounts, holding excessive cash,

or refusal to show accounts.

5. Transfer of Interest

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o If a partner transfers their entire interest to a third party or allows their share to
be sold for recovery of land revenue, the court may dissolve the firm at the
request of other partners.

6. Continuous/Perpetual Losses

o If the firm’s business can only be carried on at a continuous loss, the court may
order dissolution.

7. Just and Equitable Grounds

o Grounds include:

▪ Deadlock in management.

▪ Partners not communicating or agreeing.

▪ Loss of substratum (essential basis) of the business.

▪ Gambling by a partner on the stock exchange.

4. Consequences of Dissolution

4.1 Liability for Acts of Partners Done After Dissolution

• Liability: Partners remain liable for any act done by any of them that would have been
considered an act of the firm before dissolution until public notice of dissolution is
given.

o Objectives:

▪ Protect third parties who were unaware of the dissolution.

▪ Protect partners from liabilities related to third parties.

o Exceptions: No liability for acts by:

▪ The estate of a deceased partner.

▪ An insolvent partner.

▪ A dormant partner not known to third parties.

4.2 Right of Partners to Have Business Wound Up After Dissolution

• Rights:

o Partners or their representatives can apply the firm's property to pay off debts
and liabilities.

o Surplus should be distributed among partners or their representatives according

to their rights.

4.3 Continuing Authority of Partners for Purposes of Winding Up

• Authority: Partners continue to have authority to:

o Wind up the firm’s affairs.

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o Complete unfinished transactions.

o However, the firm is not bound by acts of a partner adjudicated as insolvent.

4.4 Mode of Settlement of Partnership Accounts

• Settlement Rules:

o Losses:

▪ Paid from profits first.

▪ Then from capital.

▪ If needed, partners pay individually in their profit-sharing ratio.

o Assets:

▪ Applied to pay firm’s debts first.

▪ Next, pay partners due from capital.

▪ Residue divided in profit-sharing ratio.

4.5 Payment of Firm Debts and Separate Debts

• Joint Debts:

o Firm’s property is used to pay the firm's debts first.

o Any surplus is used to pay partners' separate debts or returned to them.

• Separate Debts:

o Partner’s property is used to pay their separate debts first.

o Remaining property is used to pay firm debts.

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The Limited Liability Partnership Act, 2008

1. Introduction

• Notification and Enactment Timeline:

o 9th January 2007: The Ministry of Law and Justice notified the LLP Act, 2008.

o 12th December 2008: The LLP Bill was passed in the Parliament.

o 7th January 2009: The President of India assented to the LLP Bill.

• Scope: The LLP Act, 2008 is applicable throughout India.

• Structure: The LLP Act, 2008 consists of 81 sections and 4 schedules:

o First Schedule: Defines mutual rights and duties of partners and LLP, including
default provisions where there is no formal agreement.

o Second Schedule: Governs the conversion of a firm into an LLP.

o Third Schedule: Covers the conversion of a private company into an LLP.

o Fourth Schedule: Deals with the conversion of an unlisted public company into
an LLP.

• Administration: The Ministry of Corporate Affairs and the Registrar of Companies (ROC)
oversee the administration of the LLP Act, 2008. The Central Government can frame and
amend the Rules related to the Act.

• Inapplicability: The Indian Partnership Act, 1932 does not apply to LLPs.

1.1 Need for New Form of Limited Liability Partnership

• Purpose: The LLP model offers the advantages of both limited liability and partnership
flexibility.

• Features:

o Limited Liability: Each partner's liability is limited to their contribution in the

business.

o Flexibility: LLPs provide a flexible business structure, making them suitable for
small enterprises and venture capital investments.

o Common Use: LLPs are often utilized by professional businesses, such as law
firms, accounting firms, and wealth management companies.

2. Limited Liability Partnership – Meaning and Concept

• Definition: As per Section 2(n) of the Act, a Limited Liability Partnership (LLP) is a
partnership formed and registered under this Act.

• Characteristics:

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o Legal Status: LLP is a new form of legal business entity with limited liability.

o Corporate Vehicle: It functions as an alternative corporate business vehicle.

o Internal Flexibility: Provides partners with the flexibility to organize their internal
structure.

o Liability: The LLP itself is liable for the full extent of its assets, while the liability
of individual partners is limited.

• Small Limited Liability Partnership (Section 2(1)(ta)):

o Criteria:

▪ Contribution Limit: Does not exceed ₹25 lakh or such higher amount,
up to ₹5 crore, as may be prescribed.

▪ Turnover Limit: Does not exceed ₹40 lakh or such higher amount, up to
₹50 crore, as may be prescribed, based on the Statement of Accounts
and Solvency for the preceding financial year.

▪ Additional Requirements: May include other criteria and terms as

prescribed.

2.1 Partners

• Definition: According to Section 2(1)(q), a partner in an LLP is any person who becomes
a partner in the LLP in accordance with the LLP agreement.

• Eligibility:

o Individuals: Any individual or body corporate can be a partner in an LLP.

o Ineligible Individuals:

▪ Unsound Mind: An individual found to be of unsound mind by a

competent court and whose finding is still in force.

▪ Undischarged Insolvent: An individual who is an undischarged

insolvent.

▪ Pending Insolvency Application: An individual who has applied to be

adjudicated as an insolvent and whose application is pending.

2.2 Minimum Number of Partners

• Requirement: Every LLP must have at least 2 partners.

• Consequence of Insufficient Partners:

o If the number of partners falls below 2 and the LLP continues to carry on
business for more than 6 months with fewer than 2 partners, the single partner
carrying on business will be personally liable for the LLP’s obligations incurred
during that period.

2.3 Designated Partners

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• Definition: According to Section 2(1)(j), a designated partner is any partner designated

as such pursuant to Section 7 of the LLP Act, 2008.

• Requirements:

o Minimum Number: Every LLP must have at least 2 designated partners who are
individuals, with at least one being a resident in India.

o Bodies Corporate: If all partners are bodies corporate, or if there are both
individuals and bodies corporate, at least 2 individuals, either partners or
nominees of bodies corporate, must act as designated partners.

o Residency: A resident in India is defined as someone who has stayed in India for
at least 120 days during the financial year.

• Designation:

o Incorporation Document: If the incorporation document specifies certain

individuals as designated partners, they will be designated as such upon
incorporation. If it states that all partners are to be designated partners, then
every partner will be a designated partner.

o Change in Designation: Any partner can become or cease to be a designated

partner according to the LLP agreement.

• Consent and Filing:

o Prior Consent: An individual must give prior consent to act as a designated

partner in the form and manner prescribed.

o Filing with Registrar: The LLP must file the particulars of each designated
partner with the Registrar within thirty days of their appointment.

o Eligibility Conditions: Designated partners must meet prescribed conditions

and requirements.

• Identification Number:

o DPIN: Every designated partner must obtain a Designated Partners Identification

Number (DPIN) from the Central Government.

o Applicable Provisions: Sections 153 to 159 of the Companies Act, 2013 apply
mutatis mutandis to the issuance of DPIN.

2.4 Characteristics of LLP

2.4.1 LLP as a Body Corporate

• Definition: An LLP is a body corporate formed and incorporated under the LLP Act,
2008. It is a legal entity distinct from its partners.

• Includes:

o Companies as defined in Section 2(20) of the Companies Act, 2013.

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o LLPs registered under the LLP Act.

o LLPs incorporated outside India.

o Companies incorporated outside India.

• Excludes:

o Corporation sole.

o Co-operative societies registered under any law.

o Any other body corporate specified by the Central Government.

2.4.2 Perpetual Succession

• Definition: LLPs continue their existence regardless of changes in partners. Death,

insanity, retirement, or insolvency of partners does not affect the LLP's existence.

2.4.3 Separate Legal Entity

• Definition: An LLP is a separate legal entity. It is liable for its assets, but the liability of its
partners is limited to their agreed contributions. Creditors’ claims are against the LLP,
not individual partners.

2.4.4 Mutual Agency

• Definition: Partners in an LLP act as agents of the LLP but not of each other. No partner
is liable for the actions of other partners unless authorized. Each partner’s acts bind the
LLP, not other partners.

2.4.5 LLP Agreement

• Definition: The mutual rights and duties of partners in an LLP are governed by their
agreement. In the absence of an agreement, the LLP Act, 2008 provisions apply.

2.4.6 Artificial Legal Person

• Definition: An LLP is an artificial legal person created by law. It has rights similar to
those of a natural person, but cannot perform certain human functions such as being
sent to jail, taking oaths, marrying, divorcing, or practicing certain professions.

2.4.7 Common Seal

• Definition: An LLP may have a common seal, but it is not mandatory. If chosen, it must
be kept under the custody of a responsible official and affixed in the presence of at least
two designated partners.

2.4.8 Limited Liability

• Definition: The liability of LLP partners is limited to their agreed contributions, which
can be tangible or intangible.

2.4.9 Management of Business

• Definition: Partners manage the LLP's business. However, only designated partners are
responsible for ensuring legal compliance.

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2.4.10 Minimum and Maximum Number of Partners

• Minimum: An LLP must have at least 2 partners and at least 2 designated partners, with
at least one being a resident of India.

• Maximum: There is no limit on the number of partners in an LLP.

2.4.11 Business for Profit Only

• Definition: LLPs must be formed for the purpose of carrying on a lawful business with a
view to earning profit. LLPs cannot be established for charitable or non-economic
purposes.

2.4.12 Investigation

• Definition: The Central Government has the power to investigate the affairs of an LLP by
appointing a competent authority.

2.4.13 Compromise or Arrangement

• Definition: Any compromises or agreements, including mergers and amalgamations,

must follow the provisions of the LLP Act, 2008.

2.4.14 Conversion into LLP

• Definition: Firms, private companies, and unlisted public companies can convert into
LLPs following the provisions of the LLP Act, 2008.

2.4.15 E-Filing of Documents

• Definition: All forms or documents required to be filed under the LLP Act must be
submitted electronically on the Ministry of Corporate Affairs' website (www.mca.gov.in)
and authenticated by a partner or designated partner using an electronic or digital
signature.

2.4.16 Foreign LLPs

• Definition: A foreign LLP is one that is formed, incorporated, or registered outside India
but establishes a place of business within India.

2.5 Advantages of LLP Form

• Organized Operation: Operates based on an agreement.

• Flexibility: Offers flexibility without extensive legal and procedural requirements.

• Ease of Formation: Simple to form.

• Limited Liability: All partners benefit from limited liability.

• Flexible Capital Structure: Adaptable capital structure.

• Ease of Dissolution: Simple to dissolve if needed.

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3. Incorporation of LLP

3.1 Incorporation Document

1. Subscription: For incorporation, two or more persons must subscribe their names to
an incorporation document for carrying on a lawful business with the intention to earn
profit.

2. Filing: This document must be filed with the Registrar of the State where the LLP's
registered office will be located, along with the prescribed fees.

3. Statement:

o A statement in the prescribed form must be filed, affirming compliance with

the LLP Act and related rules.

o This statement should be made by an advocate, company secretary,

chartered accountant, cost accountant, or anyone subscribing their name to
the incorporation document.

4. Document Form: The incorporation document must be in the prescribed form.

5. Contents of the Incorporation Document:

o Name of the LLP

o Address of the LLP's registered office

o Proposed business activities

o Names and addresses of proposed partners

o Names and addresses of proposed designated partners

o Any other prescribed information

6. Penalty for False Statement: If a person knowingly makes a false statement or does
not believe it to be true, they may face:

o Imprisonment up to 2 years

o A fine ranging from ₹10,000 to ₹5 lakhs

3.2 Incorporation by Registration

• Procedure: Upon filing the incorporation document and fulfilling the requirements, the
Registrar will:

o Register the document within 14 days

o Issue a certificate signed and sealed by the Registrar, confirming the LLP's
incorporation.

• Evidence: The certificate serves as conclusive evidence of the LLP's incorporation.

3.3 Registered Office of LLP and Change Therein

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1. Requirement: Every LLP must have a registered office for receiving communications
and notices.

2. Service of Documents: Documents can be served on the LLP or its

partners/designated partners by:

o Post (certificate of posting, registered post, or other prescribed methods)

o At the registered office or any other address declared for the purpose.

3. Change of Office: An LLP can change its registered office location and must file a
notice of such change with the Registrar. The change is effective only upon filing.

4. Penalty for Contravention: If the LLP contravenes this section, it and its partners may
face a penalty of ₹500 per day, up to a maximum of ₹50,000.

3.4 Effect of Registration

Upon registration, the LLP:

• Can sue and be sued

• Can acquire, own, hold, develop, or dispose of property

• Can have a common seal if it chooses

• Can perform lawful acts that bodies corporate may do

3.5 Name

• Requirements: The LLP’s name must end with “Limited Liability Partnership” or “LLP.”

• Prohibitions: The name cannot be:

o Undesirable

o Identical or too similar to any other LLP, company, or registered trademark

under the Trade Marks Act, 1999.

3.6 Reservation of Name

• Application: File e-Form 1 to apply for name reservation for a proposed LLP or a name
change for an existing LLP.

• Validity: Upon payment and if the Registrar approves, the name is reserved for 3
months from the date of intimation.

3.7 Change of Name of LLP

• Inadvertent Similarity: If an LLP is registered with a name too similar to another LLP,
company, or registered trademark, the Central Government may direct the LLP to
change its name.

• Compliance: The LLP must comply with the direction within 3 months. If it fails, the
Central Government will allot a new name, which the Registrar will record.

• Notification: Within 15 days of a name change, the LLP must notify the Registrar and
update its name in the LLP agreement.

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3.8 Steps to Incorporate LLP

1. Name Reservation: Applicant shall file e-Form 1 for ascertaining the availability and
reservation of the name of the LLP.

2. Incorporate LLP: File e-Form 2 to incorporate the LLP, including details of the LLP,
partners, and designated partners.

3. LLP Agreement: To be filed with the Registrar in e-Form 3 within 30 days of

incorporation, as required under Section 23.

4. Partners and Their Relations

4.1 Eligibility to be Partners

• Incorporation: On incorporation, the individuals who subscribed their names to the

incorporation document are automatically partners of the LLP.

• Additional Partners: Any other person may become a partner in accordance with the
LLP Agreement.

4.2 Relationship of Partners

• Governing Document: The mutual rights and duties of partners and between the LLP
and its partners are governed by the LLP Agreement.

• Absence of Agreement: If no agreement exists, rights and duties are determined by the
First Schedule.

• Filing: The LLP Agreement and any changes must be filed with the Registrar in the
prescribed form and manner.

• Pre-Incorporation Agreement: Agreements made before incorporation must be ratified

by all partners after the LLP is incorporated.

4.3 Cessation of Partnership Interest

1. Voluntary Cessation:

o A partner may cease their partnership by:

▪ Following an agreement with other partners, or

▪ Providing written notice of at least 30 days if no agreement exists.

2. Involuntary Cessation:

o A partner ceases to be a partner upon:

▪ Death or dissolution of the LLP,

▪ Being declared of unsound mind by a competent court,

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▪ Applying or being declared insolvent.

3. Notice and Effect:

o A former partner remains liable to third parties as if they were still a partner
unless:

▪ The third party has notice of the partner’s cessation, or

▪ Notice has been delivered to the Registrar.

4. Rights and Liabilities:

o A former partner remains liable for obligations incurred during their tenure.

o Entitlements:

▪ Capital contribution,

▪ Share in accumulated profits (after deducting losses) up to the cessation

date.

o Restrictions: A former partner cannot interfere in the management of the LLP.

4.4 Registration of Changes in Partners

1. Partner's Responsibility:

o Inform the LLP of changes in name or address within 30 days.

2. LLP's Responsibility:

o File notice with the Registrar for:

▪ Changes in a partner’s name or address,

▪ A person becoming or ceasing to be a partner, within 30 days.

3. Notice Details:

o Form and Fees: Must be in the prescribed form and accompanied by the
prescribed fees.

o Signature: Signed by a designated partner and authenticated.

o Consent: For incoming partners, the notice must include a statement of

consent, signed and authenticated.

4. Penalties:

o Contravention of Section 25(2): LLP and Designated Partner - ₹10,000

o Contravention of Section 25(1): Partner - ₹10,000

5. Filing by Departing Partner:

o A departing partner may file the notice if:

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▪ They believe the LLP will not file it, and

▪ The Registrar will obtain confirmation from the LLP unless the LLP files
the notice within 15 days.

o If no confirmation is received, the Registrar will register the notice filed by the
departing partner.

5. Extent and Limitation of Liability of LLP and Partner

5.1 Partner as Agent

• Agent of LLP: Every partner of an LLP acts as an agent of the LLP for business purposes,
but not as an agent for other partners.

5.2 Extent of Liability of LLP

• Liability Exceptions: The LLP is not bound by a partner’s actions if:

o The partner is acting without authority,

o The third party knows or should know that the partner lacks authority.

• LLP Liability: The LLP is liable if a partner:

o Commits a wrongful act or omission in the course of business,

o Acts with the LLP's authority.

• Obligations: All obligations of the LLP, whether contractual or otherwise, are solely the
LLP’s.

• Meeting Liabilities: Liabilities are met from the property of the LLP.

5.3 Extent of Liability of Partner

• No Personal Liability: A partner is not personally liable solely by being a partner.

• Personal Liability: Partners are personally liable for their own wrongful acts or
omissions, but not for those of other partners.

5.4 Holding Out

1. Liability for Representation:

o A person representing or permitting themselves to be represented as a partner is

liable if:

▪ They represent themselves or permit representation as a partner,

▪ Credit is given to the LLP based on this representation.

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2. LLP Liability:

o The LLP is liable to the extent of the credit received or any financial benefit
derived from such representation.

3. Post-Death Representation:

o Continued use of a deceased partner’s name does not make their legal
representative or estate liable for acts of the LLP done after death.

5.5 Unlimited Liability in Case of Fraud

• Fraudulent Intent:

o If the LLP or its partners act with the intent to defraud creditors or for fraudulent
purposes, the liability is unlimited.

• LLP Liability:

o The LLP is liable to the same extent as the partner unless it proves the act was
done without knowledge or authority of the LLP.

• Punishment:

1. Criminal Penalty:

▪ Imprisonment for up to 5 years,

▪ Fine between ₹50,000 and ₹5 lakhs.

2. Compensation:

▪ LLP and partners may be liable to pay compensation for losses caused,
unless the partner acted fraudulently without LLP knowledge.

5.6 Whistle Blowing

1. Reduced Penalty:

o The Court or Tribunal may reduce or waive penalties if:

▪ The partner or employee provides useful information during

investigation,

▪ Information leads to conviction under this Act or others.

2. Protection:

o Partners or employees cannot be discharged, demoted, suspended,

threatened, or harassed for providing or causing information to be provided.

6. Financial Disclosures

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6.1 Maintenance of Books of Account, Other Records, and Audit

• Proper Books of Account:

o LLP must maintain proper books relating to its affairs for each year.

o Accounting methods: Cash basis or accrual basis.

o Follow double entry system of accounting.

o Books to be kept at the registered office for the prescribed period.

• Statement of Account and Solvency:

o Prepare as at the last day of each financial year (F.Y.).

o To be prepared within 6 months of the end of the F.Y.

o Must be signed by the designated partners.

o File with the Registrar every year within the prescribed time.

• Audit of Accounts:

o Must be audited in accordance with the prescribed rules.

o Central Government (CG) may exempt any class of LLPs through notification in
the Official Gazette.

• Failure to Comply:

o LLP: Fine not less than ₹25,000 and up to ₹5 lakhs.

o Designated Partner: Fine not less than ₹10,000 and up to ₹1 lakh.

• Failure to File Statement of Solvency:

o LLP and Designated Partners: ₹100 per day of default, subject to a maximum of
₹1,00,000 for LLP and ₹50,000 for designated partners.

6.2 Accounting and Auditing Standards

• Central Government may, in consultation with the National Financial Reporting

Authority:

o Prescribe accounting standards.

o Prescribe auditing standards.

• Recommendations are based on the Institute of Chartered Accountants of India.

6.3 Annual Return

• Filing:

o Every LLP must file an annual return with the Registrar within 60 days of the
end of its financial year.

o The return must be authenticated, in the prescribed form, manner, and

accompanied by the prescribed fee.

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• Punishment for Failure to Comply:

o LLP: Minimum ₹100 per day, maximum ₹1 lakh.

o Designated Partner: Minimum ₹100 per day, maximum ₹50,000.

• Financial Year:

o Runs from 1st April of a year to 31st March of the following year.

o For LLPs incorporated after 30th September, the financial year may end on 31st
March of the next year.

7. Conversion into LLP

• Firm to LLP: Section 55 - In accordance with Chapter X and Second Schedule.

• Private Company to LLP: Section 56 - In accordance with Chapter X and Third

Schedule.

• Unlisted Public Company to LLP: Section 57 - In accordance with Chapter X and

Fourth Schedule.

1. Certificate of Registration

• Registrar will:

o Verify that the firm, private company, or unlisted public company has complied
with the provisions of the applicable Schedules, this Act, and the rules.

o Register the documents and issue a certificate of registration in the form

determined by the Registrar.

o The certificate will state that the LLP is registered under this Act from the date
specified.

2. LLP to Inform the Registrar

• LLP must:

o Inform the concerned Registrar of Firms or Registrar of Companies within 15

days of registration.

o Provide details of the conversion and particulars of the LLP in the prescribed
form and manner.

3. Effects of Conversion

• Upon conversion:

o Partners of the firm, shareholders of the private or unlisted public company, and
the LLP will be bound by the provisions of the relevant Schedules.

o The effects of conversion will be as specified in the applicable Schedules.

4. Effect of Registration

• LLP:

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o Will be registered under this Act by the name specified in the certificate of
registration.

o All tangible and intangible property, assets, interests, rights, privileges,

liabilities, and obligations of the firm or company will be transferred to the LLP
without further assurance, act, or deed.

o The firm or company will be deemed dissolved and removed from the records of
the Registrar of Firms or Registrar of Companies.

8. Foreign LLP

• Central Government Rules:

o Establishment of a place of business by foreign LLP within India.

o Carrying on business in India by applying provisions of the Companies Act, 2013

or a regulatory mechanism with modifications as prescribed.

9. Winding Up and Dissolution

• Winding Up: Can be voluntary or by the Tribunal.

• Circumstances for Tribunal Winding Up:

o LLP decides to wind up by the Tribunal.

o Number of partners reduced below 2 for more than 6 months.

o LLP unable to pay its debts.

o LLP acted against sovereignty, integrity of India, security of the State, or

public order.

o Default in filing Statement of Account and Solvency or Annual Return for 5

consecutive financial years.

o Just and equitable grounds.

• Central Government Rules: For winding up and dissolution of LLP.

10. Miscellaneous

10.1 Business Transactions of Partner with LLP

• A partner may:

o Lend money to and transact other business with the LLP.

o Have the same rights and obligations with respect to the loan or transactions as
a non-partner.

10.2 Application of Provisions of the Companies Act

• Central Government may, by notification:

o Direct that provisions of the Companies Act, 2013 apply to any LLP.

o Apply provisions with exceptions, modifications, and adaptations as specified.

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• Notification Procedure:

o Laid in draft before each House of Parliament for 30 days.

o If both Houses disapprove or agree on modifications, the notification will be

adjusted accordingly.

10.3 Establishment of Special Courts

• Central Government may establish or designate Special Courts for speedy trial of
offences under this Act.

• Special Court Composition:

o Sessions Judge or Additional Sessions Judge for offences with imprisonment of 3

years or more.

o Metropolitan Magistrate or Judicial Magistrate of the first class for other

offences.

o Until designation, Courts under section 435 of the Companies Act, 2013 will act
as Special Courts.

10.4 Procedure and Powers of Special Court

• Offences under this Act to be tried by Special Court in the area of the registered office.

• Special Court may try:

o Offences other than those under this Act.

o Offences punishable with imprisonment for up to 3 years in a summary way,

with certain provisions for longer terms.

10.5 Appeal and Revision

• High Court may exercise powers under Chapters XXIX and XXX of the Code of
Criminal Procedure, 1973, as if a Special Court within its jurisdiction were a Court of
Sessions.

10.6 Electronic Filing of Documents

• Documents can be filed electronically in prescribed manner and conditions.

• Electronic documents certified by digital signature are admissible in evidence as

original documents.

10.7 Registration Offices

• Central Government to establish registration offices for:

o Exercising powers and discharging functions under this Act.

o Registration of LLPs.

• Registrars and other officials appointed for registration and related functions.

• Powers, duties, and conditions of service for Registrars as prescribed.

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• Seal for document authentication as directed by the Central Government.

10.8 Payment of Additional Fee

• Documents or returns filed late may incur an additional fee.

• Different fees may be prescribed for various classes of LLPs or documents.

11. Distinction between LLP and Partnership Firm

Basis LLP Partnership firm

Regulating Act The Limited Liability Partnership The Indian Partnership Act, 1932.
Act, 2008.
Body corporate It is a body corporate. It is not a body corporate
Separate legal It is a legal entity separate from its It is a group of persons with no
entity members separate legal entity.
Creation By a legal process called By an agreement between the
registration under the LLP Act, partners
2008
Registration Registration is mandatory Registration is voluntary
Perpetual The death, insanity, retirement or Death, insanity, retirement or
succession insolvency of the partner(s) does insolvency of the partner(s) may
not affect existence of LLP affect its existence. It has no
perpetual succession
Name Name of the LLP to contain the No guidelines. The partners can
word limited liability partners (LLP) have any name as per their choice.
as suffix.
Liability Liability of each partner limited to Liability of each partner is
the extent to agreed contribution unlimited. It can be extended up to
except in case of willful fraud. the personal assets of the partners.
Mutual agency Each partner can bind the LLP by Each partner can bind the firm as
his own acts but not the other well as other partners by his own
partners. acts
Designated At least 2 designated partners and There is no provision for such
partners at least one of them shall be partners under the Partnership Act,
resident in India. 1932.
Common seal It may have its common seal as its It may have its common seal as its
official signatures. official signatures.
Legal Only designated partners are All partners are responsible for all
compliances responsible for all the the compliances and penalties
compliances and penalties under under the Act.
this Act.
Annual filing of LLP is required to file: i) Annual Partnership firm is not required to
documents statement of accounts ii) file any annual document with the
Statement of solvency iii) Annual registrar of firms
return every year.
Foreign Foreign nationals can become a Foreign nationals cannot become a
partnership partner in a LLP partner in a partnership firm

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Minor as Minor cannot be admitted to the Minor can be admitted to the

partner benefits of LLP. benefits of the partnership with the
prior consent of the existing
partners.

12. Distinction between LLP and Limited Liability Company

Basis LLP Limited Liability Company

Regulating Act The Limited Liability Partnership The Companies Act, 2013.
Act, 2008
Members/ Partners The persons who contribute to The persons who invest the
LLP are known as partners of money in the shares are known
the LLP. as members of the company.
Internal governance Governed by contract Regulated by statute (i.e.,
structure agreement between the Companies Act, 2013).
partners.
Name To contain word “Limited To contain word “limited” and
Liability partnership” or “LLP” Pvt. Co. to contain the word
as suffix. “Private limited” as suffix
No. of members/ Minimum – 2 members Private company: Minimum – 2
partners Maximum – No such limit on the members Maximum 200
members in the Act. members
Public company: Minimum – 7
members Maximum – No such
limit on the members.
OPC – One member
Members Members of the LLP can be Members can be organizations,
individuals/or body corporate trusts, another business form or
through the nominees individuals.
Liability of members/ Limited to the extent of agreed Limited to the amount unpaid on
partners contribution in except in case the shares held by them.
intention is fraud
Management Managed by the partners Managed by the partners
including the designated including the designated
partners authorized in the partners authorized in the
agreement agreement.
Minimum number of Minimum 2 designated Pvt. Co. – 2 directors, Public co.
directors/ designated partners. – 3 directors
partners

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THE COMPANIES ACT, 2013

1. Introduction

• The Companies Act, 2013 replaced the Companies Act, 1956.

• The Act contains 470 sections and 7 schedules, divided into 29 chapters.

• It aims to improve corporate governance, simplify regulations, strengthen minority

investors' interests, and introduces whistle-blower protections and provisions for
class action suits.

1.1 Applicability

• Companies incorporated under this Act or previous company laws.

• Insurance Companies, except where inconsistent with the Insurance Act, 1938 or the
IRDA Act, 1999.

• Banking Companies, except where inconsistent with the Banking Regulation Act,
1949.

• Companies engaged in generation or supply of electricity, except where inconsistent

with the Electricity Act, 2003.

• Companies governed by any Special Act currently in force.

• Body corporates incorporated by any Act, as specified by the Central Government.

2. Company: Meaning and its Features

2.1 Meaning of the Term ‘Company’

• Sec-2(20): “Company means a company incorporated under this Act or any previous
company law.”

• According to Professor Haney, a company is an incorporated association, an artificial

person with perpetual succession and a common seal.

2.2 Features of a Company

2.2.1 Separate Legal Entity

• A company has a separate legal status from its members, owning its capital and
assets.

• It can own property, have a bank account, raise loans, incur liabilities, and enter into
contracts.

• Members do not have an insurable interest in the company's property.

• Case Law: Macaura v. Northern Assurance Co. Limited (1925)

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• Facts: Macaura (M) was the holder of nearly all (except one) shares of a timber
company. He was also a major creditor of the company. M insured the company’s timber
in his own name. The timber was lost in a fire. M claimed insurance compensation.
• Judgement: The Court held that the insurance company was not liable to him as no
shareholder has any right to any item of property owned by the company, for he has no
legal or equitable interest in them.

2.2.2 Perpetual Succession

• The company continues to exist despite changes in its membership or the death of
members until it is wound up as per the Act.

2.2.3 Limited Liability

• Limited Liability Company: Members’ liability is limited to the nominal value of their
shares.

• Company Limited by Guarantee: Members are liable only to the extent of their
guarantee, applicable upon liquidation.

• Unlimited Company: Members have unlimited liability.

2.2.4 Artificial Legal Person

• A company is an artificial person created by law, with rights similar to an individual, but
cannot perform natural actions like being sent to jail or marrying.

• It acts through directors and can authenticate formal acts using a common seal.

2.2.5 Common Seal

• The common seal is the official signature of a company. The Companies Amendment
Act, 2015 made the common seal optional, allowing authorization by two directors or a
director and the Company Secretary.

3. Corporate Veil Theory

3.1 Corporate Veil

• The corporate veil separates the company's identity from its members, shielding them
from liability for the company's actions.

Case Law: Salomon Vs. Salomon and Co Ltd.

Facts: Salomon incorporated a company named ‘Salomon & Co. Ltd., with seven
subscribers consisting of himself, his wife, four sons and one daughter. This company took
over the personal business assets of Salomon for £38,782 and in turn, Salomon took 20,000

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shares of £1 each, debentures worth £10,000 of the company with charge on the company’s
assets and the balance in cash. His wife, daughter and four sons took up one £1 share each.
Subsequently, the company went into liquidation due to general trade depression. The
unsecured creditors to the tune of £7,000 contended that Salomon could not be treated as
a secured creditor of the company, in respect of the debentures held by him, as he was the
managing director of one-man company, which was not different from Salomon and the
cloak of the company was a mere sham and fraud.

Judgement: It was held that upon incorporation; a company gets legality of its own and
manage it. Even though the hands receiving the profits may be the same and the same
person manage the company. The company in the eyes of law is not an agent of the people
who own it or manage it therefore Salomon & Co. are separate person. Hence, Salomon
being a secured debenture holder is entitled to a repayment prior to other creditors.

3.2 Lifting of Corporate Veil

• Lifting the Veil involves disregarding the company’s separate legal personality to
address underlying realities.

3.2.1 To Determine the Character of the Company

Case Law: Daimler Co. Ltd. vs. Continental Tyre & Rubber Co.

Facts: A company was formed in England (Continental Tyre & Rubber Co.) for the purpose of
selling tyres made by a German Company. The German Company held the entire share capital
of the English Company and majority directors of the company were German residents. During
the First World War, the English Company commenced an action to recover trade debt from
other English Company (Daimler Co. Ltd.). To which the other company refused to pay the
amount.

Judgement: It was held that the corporate personality of the company be ignored and persons
in ultimate control of the company shall be considered and in this situation the persons
controlling the company i.e., Continental Tyre & Rubber Co. were enemies and hence the
amount is not payable.

3.2.2 To Protect Revenue/Tax

Case Law: Dinshaw Maneckjee Petit

Facts: The assessee earned huge income by way of dividends and interest. So, he opened some
companies and purchased their shares in exchange of his income by way of dividend and
interest. This income was transferred back to assessee by way of loan.

Judgement: It was held that the company was not a genuine company at all but merely the
assessee himself disguised under the legal entity of a limited company. Court decided that the
private companies were a sham and the corporate veil was lifted to decide the real owner of the
income.

3.2.3 To Avoid a Legal Obligation

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Case Law: Workmen of Associated Rubber Industry ltd., v. Associated Rubber Industry Ltd.

Facts: ‘A Limited’ purchased shares of ‘B Limited by investing a sum of ₹4,50,000. The dividend
in respect of these shares was shown in the profit and loss account of the company, year after
year. It was considered for the purpose of calculating the bonus payable to workmen of the
company. Sometime in 1968, the company transferred the shares of ‘B Limited’, to ‘C Limited’ a
subsidiary, wholly owned by it. Thus, the dividend income did not find place in the Profit & Loss
Account of ‘A Limited’, with the result that the surplus available for the purpose for payment of
bonus to the workmen got reduced.

Judgement: It was found that the sole purpose for the formation of the company was to use it
as a device to reduce the amount to be paid by way of bonus to workmen. Thus, the Supreme
Court brushed aside the separate existence of the subsidiary company.

3.2.4 Formation of Subsidiaries to Act as Agents

Case Law: Merchandise Transport Limited vs. British Transport Commission

Facts: A transport company wanted to obtain licences for its vehicles, but could not do so if
applied in its own name. It therefore, formed a subsidiary company, and the application for
licence was made in the name of the subsidiary. The vehicles were to be transferred to the
subsidiary company.

Judgement: It was held that the parent and the subsidiary were one commercial unit and the
application for licences was rejected.

3.2.5 Company Formed for Fraud/Improper Conduct or to Defeat Law

Case Law: Gilford Motor Co. vs. Horne

Facts: An employee entered a contract with his employer that he will not solicit the customers
of the employer after leaving the employment. After leaving the employment he incorporates a
company along with his wife and starts soliciting customers of the employer.

Judgement: The courts held that the purpose of formation of the company was to avoid a legal
obligation arising from a contract which was not permissible. Therefore, the company was
restrained from soliciting the customers of the employer.

4. Classes of Companies under the Act

4.1 On the basis of liability

4.1.1 Company Limited by Shares

• A company where the liability of its members is limited to the amount unpaid on their
shares.

• Shareholders are liable only to the extent of unpaid amounts on their shares. Their
personal property cannot be used for the company’s debts.

4.1.2 Company Limited by Guarantee

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• Liability is limited to the amount members agree to contribute in the event of winding
up.

• Case Law: Narendra Kumar Agarwal vs. Saroj Maloo (SC)

o Facts: Dispute over membership rights and obligations in a company limited by

guarantee.

o Judgement: Members’ liabilities are capped at the agreed amount in the

memorandum. The right to refuse transfer of membership differs from
companies limited by shares.

4.1.3 Unlimited Company

• No limit on the liability of its members.

• Members are liable for the entire amount of the company's debts and liabilities. This
liability ends when they cease to be a member.

• Members can be called upon to contribute only during winding up.

4.2 On the basis of members

4.2.1 One Person Company (OPC)

• Definition: A company with only one member.

• Paid-up Capital: No minimum limit prescribed.

• Nominee:

o Name of the nominee must be indicated in the memorandum.

o Nominee becomes a member in case of death or incapacity of the sole

member.

o Prior written consent of the nominee is required and must be filed with the
Registrar of Companies (ROC) at incorporation.

o Nominee can withdraw consent.

o The sole member can change the nominee's name by notifying the company,
which will inform the ROC. This change is not an alteration of the memorandum.

• Eligibility:

o Only a natural person who is an Indian citizen, resident or otherwise, can

incorporate or be a nominee.

o Resident: Must have stayed in India for at least 120 days during the preceding
financial year.

o No person can incorporate more than one OPC or be a nominee in more than
one OPC.

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o Minors cannot be members or nominees, nor hold shares with a beneficial

interest.

• Restrictions:

o Cannot be incorporated or converted into a company under Section 8 of the Act.

o May be converted to private or public companies post-incorporation.

o Cannot carry out Non-Banking Financial Investment activities, including

investments in securities of any body corporate.

• Penalties:

o Fine up to ₹10,000 for contravention.

o Additional fine up to ₹1,000 for each day the contravention continues.

4.2.2 Private Company

• Definition: A company which, by its articles:

o Restricts the right to transfer shares.

o Limits the number of members to 200 (excluding OPCs).

o Prohibits any invitation to the public to subscribe for its securities.

• Joint Shareholding: Two or more persons holding shares jointly are treated as a single
member for this clause.

• Exclusions from Member Count:

o Persons in the employment of the company.

o Former employees who were members while employed and continue as

members post-employment.

Significant Points:

• No minimum paid-up capital requirement.

• Maximum number of Members: 200 (except OPCs).

• No invitation to subscribe to securities.

• OPCs can only be formed as a Private Company.

• Minimum number of Members: 2 (except OPCs).

• Restricted right to transfer shares.

• A Small Company is a Private Company.

Small Company:

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• Definition: A company (other than a public company) with:

o Paid-up share capital not exceeding ₹2 crores.

o Turnover for the immediately preceding financial year not exceeding ₹20 crores.

• Exceptions:

o Holding companies or subsidiary companies.

o Companies under Section 8.

o Companies governed by any Special Act.

• Increased Limits: Paid-up capital and turnover limits for a small company may be
increased up to ₹10 crores and ₹100 crores, respectively.

4.2.3 Public Company

• Not a private company and has no minimum paid-up capital requirement.

• Maximum number of members is unlimited.

• Shares are freely transferable.

• Minimum number of members is 7.

• Subsidiary of a public company is deemed a public company.

4.3 On the basis of control

4.3.1 Holding and Subsidiary Companies

• Holding Company: Controls one or more other companies (subsidiaries).

• Subsidiary Company: Controlled by a holding company, either through board

composition or voting power.

• Examples:

o B Ltd. controls the board of A Ltd.; thus, A Ltd. is a subsidiary.

o B Ltd. holds >50% of A Ltd.’s share capital; A Ltd. is a subsidiary.

o C Ltd., a subsidiary of B Ltd., is also a subsidiary of A Ltd. if B Ltd. is a subsidiary

of A Ltd.

4.3.2 Associate Company

• A company where another company has significant influence (at least 20% voting
power) but is not a subsidiary.

• Joint Venture: Arrangement with joint control and rights to net assets.

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• Shares held in fiduciary capacity are not counted for determining the associate
relationship.

4.4 On the basis of access to capital

4.4.1 Listed Company

• Has securities listed on a recognized stock exchange.

• Example: Tata Motors Limited is a listed company with shares on NSE and BSE.

4.4.2 Unlisted Company

• Any company not listed on a stock exchange.

4.5 Other Companies

4.5.1 Government Company

• A company where at least 51% of paid-up share capital is held by the Central
Government, State Governments, or both.

• Subsidiaries of such companies are also deemed government companies.

4.5.2 Foreign Company

• Incorporated outside India, with a place of business or conducting business activities

in India.

4.5.3 Formation of Companies with Charitable Objects (Section 8 Company)

• Section 8 of the Companies Act, 2013: Deals with formation of companies to promote
charitable objects like commerce, art, science, sports, education, research, social
welfare, religion, charity, environment protection, etc.

• Objectives:

o Apply profits or other income to promote its objects.

o Prohibit payment of any dividend to its members.

• Registration: The Central Government may register such companies with limited
liability without adding "Limited" or "Private Limited" to its name, based on conditions it
deems fit.

• Privileges and Obligations: Upon registration, the company enjoys the same privileges
and obligations as a limited company.

Revocation of Licence:

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• Grounds for Revocation:

o Contravention of any requirements or conditions specified.

o Fraudulent conduct or actions violative of the company’s objects or prejudicial

to public interest.

• Process:

o Central Government must provide written notice and opportunity to be heard

before revocation.

o Upon revocation, "Limited" or "Private Limited" is added to the company's

name in the register.

• Post-Revocation Actions:

o Amalgamation with another Section 8 company with similar objects.

o Winding up of the company.

Penalties:

• For the Company: Minimum ₹10 lakhs, Maximum ₹1 crore.

• For Directors and Officers in Default: Minimum ₹25,000, Maximum ₹25 lakhs. If
proven fraudulent, liability extends to action under Section 447.

4.5.4 Dormant Company

• Eligibility for Dormant Status:

o Inactive company.

o Company formed and registered for:

▪ A future project.

▪ To hold an asset or intellectual property.

▪ No significant accounting transactions.

• Inactive Company:

o Not carrying on any business or operation.

o No significant accounting transactions during the last 2 financial years.

o No filing of financial statements and annual returns during the last 2 financial
years.

• Significant Accounting Transactions: Excludes:

o Payment of fees to the ROC.

o Payments to fulfill legal requirements.

o Allotment of shares to meet legal requirements.

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o Payments for office maintenance and record keeping.

4.5.5 Nidhi Companies

• Declared as such by the Central Government, focusing on mutual benefit.

4.5.6 Public Financial Institutions (PFI)

• Includes institutions like LIC and others notified by the Central Government.

• Conditions:

o Established by or under Central/State Act.

o At least 51% of paid-up capital held by Central or State Governments or both.

5. Mode of Registration/Incorporation of a Company

5.1 Promoters

• Definition: Under Section 2(69), promoters are:

o Named in the prospectus or identified in the annual return.

o Have control over the company's affairs (as shareholder, director, etc.).

o Whose advice or instructions the Board follows.

• Role: Conceive the idea of forming the company and take necessary steps for
registration.

• Exclusions: Professionals like solicitors, bankers, accountants are not considered

promoters.

5.2 Formation of Company

• Public Company: Requires 7 or more persons.

• Private Company: Requires 2 or more persons.

• One Person Company: Requires 1 person.

• Process: Subscribe to the Memorandum of Association and comply with registration

requirements.

5.3 Incorporation of Company

1. Filing Documents:

o MOA and AOA signed by subscribers.

o Declaration by person involved in formation and named in AOA.

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o Declaration from subscribers and first directors (no criminal convictions,

correct information).

o Address for correspondence.

o Particulars of subscribers (name, address, nationality, proof of identity).

o Particulars of First Directors (name, DIN, address, nationality, proof of

identity).

o Interests of first directors in other entities and their consent to act.

2. Certificate of Incorporation:

o Issued by Registrar confirming the company’s incorporation.

3. Corporate Identity Number (CIN):

o Allotted by Registrar, serves as a unique identity.

4. Maintenance of Documents:

o Copies of documents must be kept at the registered office until dissolution.

5. False Information:

o Liable for fraud under Section 447 if false or incorrect information is provided.

6. Post-Incorporation Fraud:

o If proved, promoters and directors may be liable for fraud.

7. Tribunal Orders:

o Regulate management, unlimited liability, remove company from register,

wind up company, or other orders as deemed fit.

o Opportunity to be heard must be given, and transactions considered.

Simplified Proforma for Incorporating Company Electronically (SPICe)

• SPICe+ Form: Simplifies the company registration process.

5.4 Effect of Registration

• Company Status: Becomes a body corporate with perpetual succession, capable of

acquiring, holding, and disposing of property, contracting, and legal actions.

• Case Laws:

1. Hari Nagar Sugar Mills Ltd. vs. S.S. Jhunjhunwala: Company becomes a legal
entity separate from incorporators.

2. State Trading Corporation of India vs. Commercial Tax Officer: Company

acquires separate legal existence on registration.

3. Spencer & Co. Ltd. vs. CWT Madras: Each company remains a separate juristic
entity.

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4. Heavy Electrical Union vs. State of Bihar: Central Government’s shareholding

doesn’t alter company’s status.

5.5 Effect of Memorandum and Articles

• Binding: MOA and AOA bind the company and members as if signed by them.

6. Classification of Capital

• Capital: Refers to share-capital, the total capital divided into shares.

• Share: Represents an interest in the company, measured by a sum of money.

6.1 Nominal or Authorised Capital

• Definition: Maximum share capital a company can raise as per its memorandum.

6.2 Issued Capital

• Definition: Part of the authorised capital offered for subscription, including non-cash
considerations.

6.3 Subscribed Capital

• Definition: Capital subscribed by the members.

6.4 Called-up Capital

• Definition: Part of capital called for payment.

6.5 Paid-up Capital

• Definition: Total amount paid or credited as paid up on issued shares.

7. Shares

Definition:

• Share: Defined under Section 2(84) of the Companies Act, 2013 as a unit of the share
capital of a company and includes stock. It represents a proportion of the shareholder's
interest in the company's assets.

Key Points:

• Shares are movable property transferable as per the company's articles.

• Distinctive Number: Every share must have a unique number.

• Interest Measurement: Reflects the shareholder’s interest in the company’s assets

based on the amount paid up relative to the total capital.

Types of Share Capital:

1. Equity Share Capital:

o Equity Shares: Capital not classified as preference share capital.

o With Uniform Voting Rights: Standard shares with equal voting rights.

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o With Differential Voting Rights: Shares with varying voting rights and dividends.

▪ Example: Tata Motors introduced 'A' equity shares in 2008 with fewer
voting rights but higher dividends, known as shares with differential
voting rights (DVRs).

2. Preference Share Capital:

o Preference Shares: Carry preferential rights to dividends and capital

repayment.

o Rights:

▪ Dividends: Preferential right to fixed or calculated dividend amounts.

▪ Repayment: Preferential right to repayment on winding up.

o Additional Rights:

▪ May include rights to participate in surplus beyond the preferential

amounts.

▪ Private Companies: Section 43 does not apply if the company’s

memorandum or articles specify otherwise.

8. Memorandum of Association (MOA)

Definition:

• MOA: Defines the company's constitution and scope of powers. It is the foundational
document for the company's establishment.

8.1 Object of Registering a Memorandum of Association:

• Scope of Operations: Limits the company's activities to those specified in the MOA.

• Transparency: Informs stakeholders about the company's powers and activities.

• Contractual Limitations: Any contract or trade beyond MOA's scope is ultra vires and
void.

• Forms:

o Table A: MOA for a company limited by shares.

o Table B: MOA for a company limited by guarantee without share capital.

o Table C: MOA for a company limited by guarantee with share capital.

o Table D: MOA for an unlimited company.

o Table E: MOA for an unlimited company with share capital.

8.2 Contents of the Memorandum:

1. Name Clause:

o Public Limited Company: Name must end with ‘Limited’.

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o Private Limited Company: Name must end with ‘Private Limited’.

o Section 8 Company: Name can include terms like ‘Foundation’, ‘Forum’,

‘Association’, etc., and ‘Electoral Trust’ if applicable.

o Government Company: Must end with ‘Limited’.

o One Person Company (OPC): Name must include ‘One Person Company’.

2. Registered Office Clause:

o Specifies the State where the registered office is located.

3. Object Clause:

o Describes the company’s objectives and necessary activities.

o Changes in activities must be reflected in the company’s name within 6 months.

4. Liability Clause:

o Limited by Shares: Liability limited to unpaid share amounts.

o Limited by Guarantee: Liability limited to the amount undertaken for

contribution in winding-up.

5. Capital Clause:

o Details the authorized capital and share division.

o Not required for companies without share capital.

6. Association Clause:

o Subscribers must take at least one share and specify the number of shares
taken.

7. Nomination Clause:

o For OPCs: Names the person to take over in the event of the subscriber’s death.

8.3 Signatories to the Memorandum:

• Printing & Signing: Must be printed, numbered, and signed by at least 7 persons (2 for
private companies, 1 for OPC) in the presence of a witness.

• Signatory Details: Include address, description, and occupation of signatories and

witness.

• Ineligibility of Minors: Minors cannot sign; their guardian can subscribe on their behalf,
but in a personal capacity.

9. Doctrine of Ultra Vires

Definition:

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• Ultra Vires: Means "beyond (their) powers." Refers to acts performed beyond the
authority granted to the company or its agents.

Key Points:

• Legal vs. Authorized: An act can be legal in itself but still be ultra vires if it exceeds the
company's powers as defined in the Memorandum of Association (MOA) or statute.

• Effect of Ultra Vires Acts:

o Acts that are ultra vires are null and void.

o Neither the company nor the contracting party can enforce such acts.

o These acts cannot be ratified by shareholders.

• Possible Regularization:

o Acts ultra vires the directors' powers can be ratified by shareholders.

o Acts ultra vires the articles can be addressed by amending the articles.

o Irregular acts within the company's power but done improperly can be validated
by shareholders.

Case Law: Ashbury Railway Carriage and Iron Company Limited v. Riche

• Facts: The company’s objects included making railway carriages, mechanical

engineering, and mining. The directors contracted for a railway line construction in
Belgium, which was beyond the scope of the objects.

• Judgement: The contract was void. The term "general contractors" was interpreted
narrowly, and the act was beyond the company’s powers.

10. Articles of Association

Definition:

• Articles of Association (AOA): Internal regulations and rules for managing a company’s
affairs, complementing the MOA.

Key Points:

• Purpose: Regulates the internal management, rights, and obligations of members and
directors.

• Functions: Provides guidelines for management, accounts, and audit procedures.

10.1 Contents of the Articles:

• Regulations: Must cover management and operations as prescribed by rules.

• Additional Matters: Companies may include extra provisions as needed for their
management.

10.2 Entrenchment Provision:

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• Purpose: Makes certain amendments to the AOA harder or impossible to pass.

• Creation:

o Can be included at formation or by amendment.

o Requires consent of all members for a private company or a special resolution

for a public company.

• Notice: Companies with entrenchment provisions must notify the Registrar.

10.3 Forms of Articles:

• Forms: Articles should be in forms specified in Tables F, G, H, I, and J in Schedule I.

• Adoption of Model Articles: Companies may adopt regulations from model articles,
which will apply if not excluded or modified in the registered articles.

Basis of Memorandum of Association Articles of Association (AOA)

Difference (MOA)
Objectives Defines and delimits the objectives Lays down the rules and regulations
of the company. for the internal management of the
company. AOA determine how
objectives of company are to be
achieved.
Relationship Defines relationship of company Define relationship between
with outside world. company and its members.
Alteration Can be altered only under certain Can be altered simply by passing a
circumstances and in manner special resolution.
provided in the Act.
Ultra Vires Acts done by company beyond the Acts ultra-vires the articles can be
scope of MOA are ultra-vires and ratified by a special resolution of the
void. These cannot be ratified even shareholders, provided they are not
by unanimous consent of all beyond provisions of MOA.
shareholders.

11. Doctrine of Indoor Management

11.1 Doctrine of Constructive Notice

• Definition: The doctrine of constructive notice presumes that individuals dealing with a
company are aware of the contents of documents such as the Memorandum of
Association (MOA) and Articles of Association (AOA), regardless of whether they have
actually read them.

• Implication: If a person enters a contract that is beyond the company's powers as

defined by its MOA or outside the authority of its directors, they cannot enforce it against
the company.

11.2 Doctrine of Indoor Management

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• Definition: The doctrine of indoor management (also known as the Turquand Rule)
protects external parties dealing with a company from being affected by internal
irregularities of the company.

• Case Law: Royal British Bank vs. Turquand

o Facts: The company issued a bond that exceeded the borrowing limits set by its
AOA. The bank sued for repayment, and the company argued that the bond was
invalid due to the exceeded limits.

o Judgement: The court upheld the bond’s validity, stating that the bank was not
required to inquire into the internal workings of the company, as the AOA were
publicly available.

11.3 Exceptions to the Doctrine of Indoor Management

11.3.1 Actual or Constructive Knowledge of Irregularity

• Rule: The doctrine does not apply if the person dealing with the company has actual or
constructive knowledge of irregularities within the company.

• Example: In Howard vs. Patent Ivory Manufacturing Co., the directors issued
debentures to themselves without obtaining the necessary shareholder approval. They
were held accountable as they should have known the requirement.

11.3.2 Suspicion of Irregularity

• Rule: If there are grounds for suspicion about a transaction, the person must make
reasonable inquiries. Failure to do so negates the protection of the doctrine.

• Example: Anand Bihari Lal vs. Dinshaw & Co. - A transfer of property was invalidated
because the transferee failed to verify the authority of the accountant handling the
transaction.

• Case Law: Haughton & Co. v. Nothard, Lowe & Wills Ltd.

o Facts: A director made a contract involving funds from one company to pay a
debt of another.

o Judgement:The court held that the situation was unusual, and the company
should have made inquiries about the director's authority.

11.3.3 Forgery

• Rule: The doctrine does not cover transactions involving forgery. Forgery invalidates a
document as there is no consent, making the transaction void.

• Case Law: Ruben v. Great Fingall Consolidated

o Facts: A share certificate was issued with forged signatures of directors. The
transferee argued that the company should be estopped from denying the
document's validity.

o Judgement: The court held that the doctrine of indoor management does not
apply to forgery, and thus the certificate was invalid.

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CH 7 - THE NEGOTIABLE INSTRUMENTS ACT, 1881

1. Introduction:

• The main objective of the Negotiable Instruments Act, 1881 is to legalise the system
by which instruments can pass from hand to hand by negotiation like goods.

• The Act was introduced on 1st March, 1881 and applies to the whole of India.

• The Act does not affect the Reserve Bank of India Act, 1934 or any local usage related
to instruments in oriental languages.

• The Act has been amended several times. The most recent amendments were:

o Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,

2002

o Negotiable Instruments (Amendment) Act, 2015

o Negotiable Instruments (Amendment) Act, 2018, which came into effect from
September 1, 2018.

2. Meaning of Negotiable Instruments:

• A Negotiable Instrument is an instrument that is freely transferable from one person

to another by delivery or by indorsement and delivery.

• The property in such an instrument passes to a bonafide transferee for value.

Types of Negotiable Instruments:

1. Promissory Note

2. Bill of Exchange

3. Cheque

2.1 Essential Characteristics of Negotiable Instruments:

• Must be in writing.

• Should be signed.

• Freely transferable from one person to another.

• Holder's title is free from defects.

• Can be transferred any number of times until satisfied.

• Must contain an unconditional promise or order to pay money.

• The sum payable, time of payment, and payee must be certain.

• The instrument should be delivered.

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3. Promissory Note

Section 4 of the Negotiable Instruments Act, 1881 provides provisions relating to promissory
note.

3.1 Meaning of Promissory Note:

A promissory note is:

• An instrument in writing (not being a bank note or currency note).

• Contains an unconditional undertaking, signed by the maker.

• To pay a certain sum of money to, or to the order of, a certain person, or to the bearer
of the instrument.

3.2 Parties to a Promissory Note:

• Maker/Drawer: The person who makes the promise to pay. He is the debtor.

• Payee/Drawee: The person to whom the amount on the note is payable.

3.3 Essential Characteristics of a Promissory Note:

• Must be in writing.

• Contains an express promise to pay.

• The promise should be definite and unconditional.

• Must be signed by the maker.

• The promise is to pay money only.

• The sum to be paid must be certain.

• Maker and payee must be certain, definite, and different persons.

• Must be properly stamped, and the stamp must be cancelled by the maker's signature,
initials, or otherwise.

4. Bill of Exchange

4.1 Meaning of Bill of Exchange:

As per Section 5 of the Negotiable Instruments Act, 1881, a Bill of Exchange is:

• An instrument in writing.

• Contains an unconditional order.

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• Signed by the maker.

• Directs a certain person to pay a certain sum of money.

• Payable only to, or to the order of, a certain person or the bearer of the instrument.

4.2 Parties to the Bill of Exchange:

• Drawer: The maker of the bill of exchange.

• Drawee: The person directed by the drawer to pay, and is liable for payment.

• Payee: The person named in the instrument to whom, or to whose order, the money is
directed to be paid.

4.3 Essential Characteristics of Bill of Exchange:

• Must be in writing.

• Contains an express order to pay.

• The order must be definite and unconditional.

• Drawer, drawee, and payee must be certain.

• The drawer must sign the instrument.

• The sum must be certain.

• The order must be to pay money only.

• Must be stamped.

4.4 Process of Bill of Exchange:

1. Mr. Sam (drawer) sells goods to Mrs. Reeta (drawee) and draws a BoE.

2. The BoE is delivered to Reeta and accepted unconditionally by her.

3. On maturity, the drawer presents the instrument to the drawee for payment.

4. The drawer receives payment and the transaction is completed.

Basis Promissory Note Bill of Exchange

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Definition A promissory note is an instrument in Bill of exchange is an instrument in

writing (not being a bank note or a writing containing an unconditional
currency note) containing an order, signed by the maker,
unconditional undertaking signed by directing a certain person to pay a
the maker, to pay a certain sum of certain sum of money only to, or the
money only to, or to the order of, a order of, a certain person or the
certain person, or to the bearer of the bearer of the instrument.
instrument.
Nature of There is a promise to pay money There is an order for making
instrument payment
Parties Only 2 parties – Maker and Payee 3 parties – Drawer, drawee, and
payee
Acceptance Does not require acceptance Needs to be accepted by the
drawee
Payable to Cannot be made payable to bearer Can be drawn payable to the
bearer bearer. However, it cannot be
payable to bearer on demand.

5. Cheque

Section 6 of the Negotiable Instruments Act, 1881 provides provisions relating to bills of
exchange.

5.1 Meaning of Cheque:

• A cheque is:

o A bill of exchange.

o Drawn on a specified banker.

o Payable otherwise than on demand.

o Includes:

▪ Truncated cheque: A cheque whose electronic image substitutes

further physical movement.

▪ Cheque in electronic form: A cheque drawn and signed electronically

using a digital signature.

5.2 Parties to a Cheque:

• Drawer: Person who draws the cheque (Debtor). His liability is primary and
unconditional.

• Drawee: The specific bank on whom the cheque is drawn.

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• Payee: Person named in the cheque to whom, or to whose order, the money is directed
to be paid. The payee may be the drawer or a third party.

• Drawee in case of need: A person named in the bill or any endorsement as a backup
for payment if the drawee does not pay.

5.3 Essential Characteristics of a Cheque:

• Must fulfill all characteristics of a bill of exchange.

• Must be drawn on a specified banker.

• Payable on demand.

Note: All cheques are bills, but not all bills are cheques.

6. Acceptor and Acceptor for Honor:

• Acceptor: The drawee who has signed and delivered the bill.

• Acceptor for Honor: A third party who undertakes to accept and pay a bill of exchange
dishonored by non-acceptance or non-payment. Also known as acceptance supra
protest.

6.1 Essentials of Valid Acceptance for Honor:

1. Holder must consent to acceptance for honor.

2. The bill must have been noted or protested.

3. Acceptance for honor can be made by someone not already liable.

4. Acceptance must be written on the bill.

5. It must be for the whole amount due.

6. Acceptance must be for the honor of a party already liable.

7. Must be made before the bill is overdue.

8. Stranger paying for honor must declare before a Notary Public who they are paying for,
and the Notary must record this declaration.

7. Holder and Holder in Due Course:

7.1 Holder:

• A person entitled to possession of a promissory note, bill of exchange, or cheque, and

to receive or recover the amount due. If lost or destroyed, the holder is the person
entitled at the time of loss.

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7.2 Holder in Due Course:

• A person who, for consideration, became the possessor of a promissory note, bill of
exchange, or cheque before it became payable and without having sufficient cause to
believe any defect existed in the title of the person from whom they received it.

Example: If X’s acceptance on a Bill of Exchange for ₹1 lakh is forged, ‘A’ who takes the Bill in
good faith and for value before it’s payable can be a holder in due course. However, if a
signature is forged, the instrument is a nullity and cannot be enforced.

8.1 Essentials to Become a Holder in Due Course (HDC):

• The holder must have paid valuable consideration (cannot be a gift or inherited).

• The holder must acquire the instrument before maturity.

• The holder must obtain the instrument in good faith.

• The instrument must be complete and regular on its face.

• The holder must receive the instrument as a holder.

9. Classification of Negotiable Instruments

9.1 Different Classifications

I. Bearer and Order Instrument

• Bearer Instrument: Payable to the person in possession of the instrument. Negotiated

by mere delivery. Examples include:

o Payee's name is blank or specified as "or bearer."

o Last indorsement is blank.

• Order Instrument: Payable to a specific person or their order. Negotiated by

indorsement and delivery. Examples include:

o Payable to a named person or their order.

o Last indorsement is in full.

II. Inland and Foreign Instrument

• Inland Instrument: Drawn or made in India and payable in India, or drawn on a person
resident in India.

• Foreign Instrument: Not an inland instrument.

III. Inchoate and Ambiguous Instruments

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• Inchoate Instrument: Incomplete, often left blank for certain details.

o Signer provides a blank instrument with authority to complete it.

o Holder in due course can recover the amount covered by the stamp affixed.

• Ambiguous Instrument: Vague and cannot be clearly identified as either a bill of

exchange or a promissory note.

9.2 Maturity of Negotiable Instruments

• A note or bill not expressed as payable on demand is due on the third day after its
specified payment date, allowing for three days of grace.

9.3 Negotiation (Transfer) of Negotiable Instruments

Negotiation by Delivery

• Bearer Instruments: Negotiable by delivery. Exceptions:

o If delivered on condition (e.g., only effective on a certain event), it is not

negotiable unless the condition occurs.

Negotiation by Indorsement

• Order Instruments: Negotiable by indorsement and delivery.

• The contract remains incomplete and revocable until delivery.

Mode of Negotiation:

1. Order Instruments: By indorsement and delivery.

2. Bearer Instruments: By delivery:

o Actual Delivery: Physical handover.

o Constructive Delivery: Delivered to the agent or representative.

9.4 Delivery When Effective Between the Parties

• Immediate Relation: Delivery must be made by or authorized by the party making,

accepting, or endorsing the instrument.

• Holder of the Instrument: It can be shown that delivery was conditional or for a
special purpose.

10. Dishonour of Cheques for Insufficiency of Funds

10.1 Dishonoured Due to Insufficiency of Funds (Sec 138)

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• If a cheque is returned unpaid due to insufficient funds or exceeding the agreed

amount, the drawer is deemed to have committed an offence.

• Penalties: Imprisonment up to 2 years, fine up to twice the cheque amount, or both.

• Conditions for Penalty:

o Presented within 3 months or its validity period.

o Payee/holder notifies the drawer within 30 days of dishonour.

o Drawer fails to pay within 15 days of receiving the notice.

• Exceptions: Cheques given as gifts, security, or for illegal considerations are

excluded.

10.2 Presumption in Favor of Holder

• When dishonoured, it is presumed that the cheque was received for the discharge of a
debt or liability.

10.3 Defense Not Allowed

• It is not a defense that the drawer had no reason to believe the cheque might be
dishonoured.

11. Presentation of Instruments

11.1 Presentment for Acceptance

• A bill payable after sight must be presented to the drawee for acceptance within a
reasonable time. If the drawee cannot be found, the bill is dishonoured.

11.2 Presentment of Promissory Note for Sight

• Must be presented to the maker within a reasonable time.

11.3 Drawee's Time for Deliberation

• Drawee has 48 hours (excluding public holidays) to consider acceptance.

11.4 Presentment for Payment

• Must be presented to the respective party (maker, acceptor, drawee) for payment.

11.4.1 Hours for Presentment

• During business hours or banking hours.

11.4.2 Instruments Payable After Date or Sight

• Must be presented at maturity.

11.4.3 Promissory Notes Payable by Installments

• Presented on the third day after each installment’s due date.

11.4.4 Instruments Payable at a Specified Place

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• Must be presented at the specified place.

11.4.5 Instruments Payable at a Specified Place and Not Elsewhere

• Presented at that place.

11.4.6 No Exclusive Place Specified

• Presented at the place of business or usual residence.

11.4.7 No Known Place of Business or Residence

• Presented wherever the party can be found.

11.4.8 Presentment of Cheque to Charge Drawer

• Must be presented at the bank before the relationship between the drawer and bank is
altered.

11.4.9 Presentment for Other Parties

• Within a reasonable time after delivery.

11.4.10 Instruments Payable on Demand

• Presented within a reasonable time after receipt.

11.4.11 Presentment by Agent or Representative

• Can be made by a duly authorized agent, legal representative, or assignee.

11.4.12 Excuse for Delay

• Delay due to circumstances beyond control is excused. Presentment must be made

when the cause of delay ceases.

12. When Presentment Is Unnecessary

• Presentment is not required if:

o The drawer or acceptor prevents it.

o The drawer engages to pay regardless of non-presentment.

o The drawer makes partial payments or promises to pay after maturity.

o The drawer cannot suffer damage from lack of presentment.

12.1 Liability of Banker

• A banker must compensate the holder for loss due to negligent or improper handling of
a bill.

13. Rules of Compensation

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• Holder: Entitled to the amount due plus expenses.

• Endorser: Entitled to amount paid with interest, plus expenses.

• Different Places: Compensation may be calculated based on the current rate of

exchange.

• Drawing a Bill: The holder may draw a bill upon the liable party for compensation.

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