BUSINESS LAWS

PAPER 2(SECTION A): BUSINESS LAWS

This capsule on Paper 2-Section A: Business Laws at Foundation, have been dealt with important concepts related to the
formation of the valid contract under the Indian Contract Act, 1872. In this capsule, we have touched upon significant
concepts that are required for making valid contract and the related concepts supported with relevant case laws to have
conceptual understanding of the subject. This chapter is important from examination perspective as its form base for the
understanding of the nature of the contract which constitutes unit 1 of Chapter 1 of the said paper in the Foundation course.
Considering this capsule as summarised version of the unit 1 of chapter 1 will certainly benefit the students to recapitulate
the important points while studying the subject.

CONCEPTS RELATED TO ENTERING OF CONTRACT UNDER

THE INDIAN CONTRACT ACT, 1872
I. Nature of Contract
Law defines the term offer/proposal as –
When one person signifies to another his willingness
to do, or to abstain from doing anything

with a view to obtain the assent of that other

to such act or abstinence

(2) Essentials of the offer/proposal:

Essentials of valid
Offer/proposal

The above situation talks about formation of an agreement. An

agreement is the result of a proposal by one party and its acceptance
by another with the consideration forming the foundation of any
At least two expression of with a view
contract. Therefore, such an offer and its acceptance gives rise to parties-offeror willingness of to obtain the
right & obligation against each other. & offeree parties ‘to do’ assent of the
An Agreement in order to be a Contract, must satisfy the or ‘not to do’ other party
conditions as specified under section 10 of the Indian Contract something
Act, 1872.

Requirement for an agreement to be a contract (3) Mode of offers

made by the free consent Words Written
Act
between parties competent to contract, Oral
Offer Conduct
for a lawful consideration and with a lawful object, and
can be
are not hereby expressly declared to be void made
by

Since section 10 is not complete and exhaustive, so there are certain Omission/Abstinence
others sections which also contains requirements for an agreement
to be enforceable.

Not given by Section 10 but are also considered essentials (4) Classification of Offer
of valid contracts
• Two parties
• Intention to create legal relationship Counter Standing
• Fulfillment of legal formalities General Offer Offer
• Certainty of meaning Offer
• Possibility of performance
Cross
Specific Offer
(1) Meaning of offer/proposal
Offer
As offer is the starting point in the making of an agreement. An offer
is also called as proposal. Thus, for a valid offer, the party making it
must express his willingness 'to do' or 'not to do' something.

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General offer Name of the Facts of the case Decision
offer made to public at large and anyone can accept by performing case laws
the desired act
When he came to know
Special/specific offer of the reward, which
had been announced in
offer made to a specific / ascertained person, & can be accepted his absence, he brought
only by that specified person an action against the
Cross offer defendant to claim this
reward. It was held that
2 parties exchange identical offers in ignorance of each other's since the plaintiff was
offer at the same time. It is not binding ignorant of the offer of
reward, his act of bringing
Counter offer
the lost boy did not
offeree offers to qualified acceptance of the offer subject to amount to the acceptance
modifications and variations in the terms of original offer. Counter- of the offer and therefore
offer amounts to rejection of the original offer he was not entitled to
claim the reward.
Standing / continuing / open offer
An offer of continuous nature which remains open for acceptance Boulton Vs. Boulton had taken Held: Jones is not liable
over a period of time Jones over the business of to pay for the good. It is
one Brocklehurst,
a rule of law that offer
with whom Jones had
Important case laws previous dealings. made to a specific /
Jones sent an order for ascertained person can
Name of the Facts of the case Decision
goods to Brocklehurst, be accepted only by that
case laws
which Boulton supplied specified person.
Carlill Vs. In this famous case, Held, she could recover without informing
Carbolic Carbolic smoke Ball Co. the amount as by using Jones that the business
Smoke Ball advertised in several the smoke balls she had changed hands.
Co. newspapers that a had accepted the offer. When Jones found
reward of £100 would be In terms of Sec. 8 of the out that the goods
given to any person who Indian Contract Act, had not come from
contracted influenza anyone performing the Brocklehurst, he
after using the smoke conditions of the offer refused to pay for
balls produced by the can be considered to them and was sued by
Carbolic Smoke Ball have accepted the offer. Boulton for the price.
Company according Until the general offer is
to printed directions. retracted or withdrawn, (5) Difference between Offer and Invitation to Offer, and
One lady, Mrs. Carlill, it can be accepted by Invitation to Treat
used the smoke balls anyone at any time as it is
as per the directions of a continuing offer. Case laws Facts of the case Decision
company and even then Harvey Vs. In this case, Privy Council Held that the mere
suffered from influenza. Facie briefly explained the statement of the lowest
Lalman Gauri Dutt sent his Held, he was not entitled distinction between an price at which the vendor
Shukla Vs. servant Lalman to trace to the reward, as he offer and an invitation to would sell contained no
Gauri Dutt his missing nephew. He did not know the offer. offer. In the given case, implied contract to sell
then announced that Section 4 of the Indian the plaintiffs through to the person who had
anybody who traced Contract Act states that a telegram asked the enquired about the price.
his nephew would be the communication of defendants two questions
entitled to a certain a proposal is complete namely,
reward. Lalman traced when it comes to the (i) Will you sell us
the boy in ignorance knowledge of the person Bumper Hall Pen? and
of this announcement. to whom it is made. (ii) Telegraph lowest cash
Subsequently when he price.
In Lalman case, the The defendants replied
came to know of the defendant’s nephew
reward, he claimed it. through telegram that the
absconded from home. “lowest price for Bumper
The plaintiff who was Hall Pen is ₤900”. The
defendant’s servant was plaintiffs sent another
sent to search for the telegram stating “we agree
missing boy.
to buy Bumper Hall Pen
After the plaintiff had left at ₤900”. However, the
in search of the boy, the defendants refused to sell
defendant announced the property at the price.
a reward of Rs. 501 to The plaintiffs sued the
anyone who might find defendants contending that
out the boy. The plaintiff they had made an offer to
who was unaware of this sell the property at ₤900
reward, was successful in and therefore they are
searching the boy. bound by the offer.

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(8) Acceptance of an offer
Case laws Facts of the case Decision
General Rule- Offer can be Accepted only by the person or
Mac Pherson The owner of the property It was held that this persons to whom it is made
Vs. Appanna had said that he would not statement did not indicate
accept less than ` 6000/- any offer but indicated Specific Offer-accepted only by that definite person or
for it. only an invitation to offer.
particular group of persons to whom it has been made
Harris Vs. An auctioneer advertised It was held that plaintiff
Nickerson in a newspaper that a sale cannot file a suit against General Offer-Accepted by any person by complying with
of office furniture will be the auctioneer for the terms of the Offer
held on a particular day. his loss of time and
Plaintiff (Harris) with the expenses because the (9) Legal rules for a valid acceptance
intention to buy furniture advertisement was merely
came from a distant place a declaration of intention Absolute and Unqualified
for auction but the auction to hold auction and
was cancelled. not an offer to sell. The Communicated to Offeror
auctioneer (Nickerson) Prescribed Mode
does not contract with
any one who attends the
sale. The auction is only Time limit
an advertisement to sell
but the items are not put Before the lapse of Offer
for sale though persons
who have come to the Relevant Case laws
auction may have the
intention to purchase. Case laws Facts Decision
Pharma- The goods were displayed In this case, it was held Felthouse F offered by letter to buy a Held, F could not
ceutical in the shop for sale with that display of goods Vs. Bindley nephews horse, saying:” If I succeed as his nephew
Society price tags attached on alongwith price tags hear no more about it, I shall had not communicated
of Great each article and self- merely amounts to consider the horse mine. ”The acceptance and there
Britain Vs. service system was there. invitation to treat and nephew did not reply but he was no contract.
Boots Cash One customer selected therefore if an intending told an auctioneer not to sell
Chemists Ltd the goods but the owner buyer is willing to that particular horse as he had
refused to sell. purchase the goods at a sold it to his uncle. By mistake,
price mentioned on the the auctioneer sold the horse.
tag, he makes an offer F sued for conversion against
to buy the goods. Thus, his nephew.
the shopkeeper has the
Carlill Vs. In this famous case In case of a general
right to accept or reject
the same. The contract
Carbolic Carbolic smoke Ball Co. offer, it is not necessary
would arise only when the & Smoke advertised in several to communicate the
offer is accepted. Hence Balls newspapers that a reward acceptance if it is made
there was no contract and Co. of £100 would be given to by acting upon the
customer had no rights to any person who contracted terms of the offer.
sue the owner. influenza after using the
smoke balls produced
by the Carbolic Smoke
(6) Rules as to Valid Offer Company according to
printed directions. One
Intention to create Legal Relationship
lady, Mrs. Carlill, used
the smoke balls as per the
Certain, Definite and not Vague. directions of company and
even then suffered from
Expressed or Implied influenza.
Here company took the
Different from an Invitation to Offer defend that there was
no communication of
Offer must be communicated acceptance of an offer by
Mrs. Carlill and so there
was no contract between
Offer may be conditional.
them.

No term of the non compliance amounting to Acceptance Neale Vs. M offered to sell his land It was held that N
Merret to N for £280. N replied could not enforce his
(7) Acceptance purporting to accept the acceptance because it
offer but enclosed a cheque was not an unqualified
for £ 80 only. He promised one
to pay the balance of £ 200
person to whom Signifies his Proposal is said by monthly installments of
the Proposal is Assent thereto to be Accepted £ 50 each.
made

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Case laws Facts Decision (12) When is communication of acceptance complete?

Brogden vs. Brogden a supplier, sent a Held, that there was As against the Proposer-
Metropolitan draft agreement relating no contract as the
to the supply of coal to the when put in course of transmission to the Proposer
manager had not
Railway Co. manager of railway Co. viz, communicated his As against the Acceptor
Metropolitian railway for
his acceptance. acceptance to the
supplier, Brogden.
when it comes to the knowledge of the Proposer
The manager wrote the
word “Approved” on the (13) Communication of acceptance by post
same and put the draft
agreement in the drawer As against the Proposer- As against the Acceptor
of the table
Intending to send it to when the letter of when the letter reaches the
the company’s solicitors acceptance is posted proposer
for a formal contract to
be drawn up. By an over
sight the draft agreement (14) Acceptance over telephone or telex or fax
remained in drawer.
Offer is made by instantaneous communication-
(10) Rules for Communication of Offer and Acceptance Contract is completed
For Valid Offer and Acceptance When the Acceptance is The Contract is made at the
• Offer must be communicated to the Offeree received by the Offeror, place where the Acceptance is
• Acceptance must be communicated to the received
Offeror
(15) When revocation of offer and acceptance is complete
(11)When communication of offer is complete?
comes to the knowledge of as against the person • when it is put into a
the person to whom it is made who makes it- course of transmission
Communication as against the person • when it comes to his
of an offer is either by words spoken or to whom it is made- knowledge.
complete written, or it may be inferred
from the conduct of the
parties (16) When a Proposal and Acceptance can be revoked?
Relevant Case laws
Proposal Acceptance
Case laws Facts Decision
may be revoked at may be revoked at
Lilly Plaintiff delivered Held, the terms were any time before the any time before the
White Vs. some clothes to unreasonable and communication of its communication of the
Mannuswamy drycleaner for which Plaintiff was entitled acceptance is complete acceptance is complete
she received a laundry to recover full value as against the proposer as against the acceptor
of the saree from the
receipt containing drycleaner.
a condition that in
case of loss, customer The receipt carries
would be entitled special conditions (17)Modes of revocation of offer by
to claim 15% of the and are to be treated
market price of value as having been duly
communicated to the Lapse of Death or Non
of the article, Plaintiff customer and therein a Notice of specified Insanity fulfilment Counter
lost her new saree. tacit acceptance of these Revoca- or of the of Offer
conditions is implied tion reason- Conditions
by the customer’s parties
able time of Offer
acceptance of the receipt

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PAPER 2(SECTION A): BUSINESS LAWS
"This capsule on Paper 2(Section A): Business Laws at the Foundation Level, is in continuation to previous issue of July
month of the Student Journal. In that issue, we have covered important concepts related to "Offer and Acceptance". In
this issue, we are covering other important requirements necessitated for the formation of valid contract under the Indian
Contract Act, 1872. These concepts in summarized forms with supported case laws, will help students to recapitulate
important points while revision of the subject."

CONCEPTS RELATED TO THE ENTERING OF CONTRACT UNDER THE

INDIAN CONTRACT ACT, 1872
I. Consideration
(1) Importance of consideration
Caselaws Facts Decision
Chinnayya An old lady made a It was held that there was
No Consideration,
Rule of Law No Contract vs. Ramayya gift of her property sufficient consideration
to her daughter with for the uncle to recover
a direction to pay a the money from the
certain sum of money daughter.
to the maternal uncle by
(2) Meaning of consideration way of annuity. On the
same day, the daughter
executed a writing in
When at the desire favour of the maternal
of the Promisor- uncle and agreeing
to pay him annuity.
"e daughter did
the Promisee, or any Other Person, not, however, pay the
annuity and the uncle
sued to recover it.

has done or promises to do (4) Suit by a !ird Party on an Agreement (Doctrine of Privity
abstained from does or abstains or abstain from
from doing, or of Contract)
doing, or doing something,
General rule
Such an Act or Abstinence or Promise is called A stranger to a contract cannot sue
Consideration for the Promise

Exceptions to the said rule

(3) Requirements of valid consideration

move at the promisee or

past or present adequacy of
desire of the any other
or future. consideration
promisor person
trusts
not be unlawful, other than the
real and not
immoral, or opposed Promisor’s existing illusory
to public policy obligation
family Acknowledgement
settlement of liability /
Estoppel
Relevant Case Law
Suit can be filed by
!ird Party in following
Caselaws Facts Decision circumstances
Durga D (defendant) promised D was not bound to pay
Prasad v. to pay to P (plainti!) a commission as it was covenant
Baldeo certain commission on without consideration assignment running
of a contract with land
articles which would and hence void.
be sold through their
agency in a market.
Market was constructed contract by
agent
by P at the desire of the
C (Collector), and not
at the desire of the D
(Promisor)

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BUSINESS LAWS
(5) Contracts without consideration
Case Law Facts Decision
Mohori Bibi A, a minor borrowed It was held that a
vs. Dharmo R20,000 from B and as mortgage by a minor
Das Ghose a security for the same was void and B was not
executed a mortgage in entitled to repayment of
Conditions • Agreements made on his favour. He became money.
where account of natural love a major a few months
contract and a!ection later and $led a suit for
without • Promise to pay time the declaration that the
consideration, barred debt mortgage executed by
is enforceable • Promise to compensate him during his minority
• Completed gift was void and should be
• Bailment cancelled.
• Charity
• Agency Sain Das vs. Where there was a It was held that the
Ram Chand joint purchase by two vendor could enforce
purchaser, one of them the contract against the
was a minor major purchaser and not
the minor

Relevant CaseLaw : In Kedarnath Vs. Gorie Mohammad , it was

held that if a promisee undertakes the liability on the promise (3) Position of person of sound mind
of the person to contribute to charity , there the contract shall
be valid. Person who is usually of Unsound Mind but occasionally of
Sound Mind

II. Competency of parties may make a Contract when he is of Sound Mind.

(1) Persons eligible to make a contract

Person who is usually of Sound Mind but occasionally of

Unsound Mind

may not make a Contract when he is of Unsound Mind

Major

(4) Position of agreements with persons of unsound mind

While he is of Unsound Mind While he is of sound mind

sound
mind
• Cannot enter into any • Can enter into a valid
not otherwise Contract contract
disquali$ed • Contract entered during • Liable for such contracts
from this period is altogether
contracting Void
• Cannot be held Liable
thereon

(2) Law relating to Minor’s agreement/ Position of minor (5) Positions of agreements in case of persons of permanently
unsound mind (in case of Idiots)

A person who is permanently of unsound mind

Agreement No estoppel Minor can
is void ab to plead on be admitted
initio minority to bene$t of Any agreement
partnership Cannot enter into and not liable
entered is
any contract thereon
altogether void

In case of supply of
No rati$cation necessaries claim to
on attaining be reimbursed from (6) Positions of agreements in case of Drunken/Intoxicated
majority property of minor person

A Sane Person who is delirious from fever or who is so drunk

Contract by In case of Fraudulent
Guardian Representation of age, cannot contract during such state because
under a minor can plead his
exceptions are minority but required to • cannot understand the terms of a contract,
valid contract return the bene$t
• cannot form a rational judgment as to its e!ect on his interest

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(7) Persons disqualified by law (6) Effect of undue influence

contracts by such person are Void. when agreement caused by undue influence-
• contract is voidable at the option of the party
- Alien enemies whose consent was obtained
Statutes • contract may be set aside
disqualify - Foreign ambassadors
certain persons - Convicts
to enter into - Insolvents Relevant Case Law
contract
- Corporations In Kirpa Ram vs. Sami-Ud-din Ad. Khan, a youth of 18 years of
- Etc. age, spend thrift and a drunkard, borrowed Rs. 90,000 on a bond
bearing compound interest at 2% per mensem (p.m.). It was held
by the court that the transaction is unconscionable, the rate of
III. Free Consent interest charged being so exorbitant.

(1) Meaning of consent

(7) Fraud
In absence of
consent- Fraud includes any of the following acts-
Agreement is
Two or void ab initio suggestion, active promise Any other act or
more as to a fact concealment made act $tted to omission
persons are • they agree upon the which is not of a fact without any deceive as to law
said to have same thing true intention specially
consented, • in the same sense of declared
when- performing to be
it fraudulent
(2) Free Consent
(8) By whom and when fraud is said to be exercised?
Fraud

Undue
In%uence
Misrepresentation
Fraud can be
committed by- { •
•
•
a party to a contract, or
with his connivance or
by his agent

Consent is said

{
Coercion to be free Mistake • another party thereto or
when it is not Act when done
• his agent, or
caused by with intent
• to induce him to enter
to deceive-
into the contract

(3) Agreement caused by coercion

(9) Effects of fraud
• Committing of any act which is
An agreement is forbidden by the IPC
said to be caused • "reatening to commit any act which Right to
by Coercion if is forbidden by the IPC Rescind
there is- • Unlawful detaining of any property
• "reatening to detain any property

Voidable Remedies Right to

contract available performance
(4) Consequences of Coercion

the agreement is a contract

Contract Right to claim
voidable at the option of
induced by damages
the party whose consent
Coercion
was so obtained.

(10) Does mere silence amount to fraud ?

(5) Undue influence General Rule- Mere silence as to facts,

• which is likely to a!ect the willingness of a person,

Contract • Relations subsisting between the Parties • to enter into a contract, -is no fraud
is said to are such that,
be induced • One of the Parties is in a position to
by Undue Dominate the will of the other, and Exceptions-Mere silence as to facts,
In%uence • "e Dominant Party uses that position to
when- obtain an Unfair Advantage over the other • where it is the duty of a person to speak, or
• his silence is equivalent to speech, -silence amounts to fraud

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Relevant Case Law (14) Types of mistake

Caselaws Facts Decision

Mistake
Word vs. H sold to W some Held there was no fraud.
Hobbs pigs which were to his
knowledge su!ering from
fever. "e pigs were sold Mistake of Law Mistake of Fact
‘with all faults’ and H did
not disclose the fact of
fever to W.
Mistake of Bilateral
Peek vs "e prospectus issued Held the suppression of Indian Law Mistake
Gurney by a company did not truth amounted to fraud.
refer to the existence of
a document disclosing Mistake of Unilateral
liabilities. "e impression Foreign Law Mistake
thereby created was
that the company was a
prosperous one, which (15) Bilateral Mistake
actually was not the case.
Regier V. A broker was asked to buy Held that the client was As to Subject
Campbell shares for client. He sold entitled to avoid the Matter
Staurt his own shares without contract or affirm it with
disclosing this fact. a right to claim secret
pro$t made by broker on
the transaction since the
relationship between the As to the As to the As to the As to the As to the As to the
broker and the client was Existence Quantity Quality Price Identity Title
relationship of utmost
good faith.

(11) Misrepresentation (16) Unilateral Mistake

When a person positively states that a fact

Where only A Contract is not Voidable merely
is true when his information does not
one party to the because it was caused by one of the
warrant it to be so
agreement is parties to it being under a Mistake as to
under a mistake Matter of Fact.
When there is a breach of duty by a person
without intention to deceive which brings an
advantage to him, and loss to the other; "e agreement is void where a unilateral
mistake relates to the-
When a party causes the other party to Exception, • Identity of the person contracted
the agreement to make a mistake as to the with, or
subject matter. • Nature of the contract.

(12) Consequences of misrepresentation

(17) Effects of mistake
Voidable Nature of Mistake and the nature of Agreement
contract
In Bilateral Mistake - "e agreement is void.
In Unilateral Mistake -
Remedies • As to identity of the person • "e agreement is void.
available contracted with
• As to the nature of • "e agreement is void.
contract.
• As to other matter. • "e agreement is not void.
Right to Rescind Right to insist upon
the contract performance
(18) Remedies under mistake
(13) Mistake
Obligation of He must restore any bene$t received by
When both the parties aggrieved party him under the contract to the other party
to an agreement - from whom the bene$t had been received
[Section 64].

Obligation of "e person to whom money has been paid

other party or anything delivered by mistake must
are under to a matter of fact the agreement is repay or return it. [Section 72]
a mistake essential to the altogether void.
agreement

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(19) Differences IV. Legality of Object and Consideration
Coercion and Undue influence (1) When there is an unlawful object & unlawful consideration
in an agreement, its effect
Basis of difference Coercion Undue Influence
Nature of action It involves the It involves moral or Consideration or Object of an agreement is unlawful, if-
physical force or mental pressure. forbidden defeats If it is involves immoral
threat. by law provision fraudulent or implies or
Involvement of It involves No such illegal act of any law injury to a opposed
criminal action committing or is committed or a person or to public
threatening to threat is given. property policy
commit any act of another
forbidden by "e "e "e "e "e
Indian Penal Code Agreement agreement agreement agreement agreement
or detaining or is Void. is void. is void. is void is void.
threatening to detain
property unlawfully. (2) Agreements against Public policy
R e l a t i o n s h i p It is not necessary Some sort of
between parties that there must relationship between Interfering with
Trading with the Course of Brokerage
be some sort the parties is
Enemy Justice Contracts
of relationship absolutely necessary.
between the parties.
Exercised by Coercion need not Undue in%uence Restraint
whom proceed from the is always exercised Sti%ing Creating of Legal
promisor nor need it between parties to Prosecution Monopoly Proceedings
be directed against the contract.
the promisor. It
Maintenance Sale/Transfer of
can be used even Restraint of
and Public Offices
by a stranger to the Champerty and Titles. Trade
contract.
Enforceability "e contract is Where the consent
voidable at the is induced by undue Restraint Restrained
of Personal of Parental Restraint of
option of the party in%uence, the Marriage
Liberty Rights
whose consent has contract is either
been obtained by voidable or the
V. Agreements which are expressly declared void
the coercion. court may set aside
or enforce it in a
(1) Law declares following agreement to be either illegal or void
modi$ed form.
Fraud and misrepresentation Agreements by Agreements in Agreements, the
Incompetent Restraint of Legal Meaning of which
Basis of difference Fraud Misrepresentation Parties Proceeding is not Certain
Intention To deceive the other "ere is no such
party by hiding the intention to deceive Reciprocal
truth. the other party. Agreements made Agreements
Promises to do
under a Mutual in Restraint of
Knowledge of "e person making "e person making things Legal
Mistake of Fact Trade and also Illegal
truth the suggestion the statement
believes that the believes it to be
statement is untrue. true, although it is Agreements, the Agreements Agreements
not true. Consideration or
made without Contingent on
Object of which
Recission of "e injured party "e injured party is is Unlawful Consideration Impossible Events
the contract can repudiate the entitled to repudiate
and claim for contract and claim the contract or sue
damages damages. for restitution but Agreements Agreements
in Restraint of in Restraint of Agreements by
cannot claim the way of wager
damages. Trade Marriage
Means to "e party using Party can always
discover the the fraudulent act plead that the (2) Consequences of agreement expressly declared void
truth cannot secure or injured party
protect himself had the means to
Agreements
by saying that the discover the truth. expressly
injured party had declared void Void- ab- initio
means to discover / illegal by the
the truth. Contract Act

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CA FOUNDATION - PAPER 2 (SECTION A) - BUSINESS LAWS
This Capsule deals with the significant concepts covered under units 4, 5 & 6 of Chapter 1 of the Study material of Foundation
Paper 2 - Section A -Business Laws. It is in continuation to units 1, 2, & 3 of the chapter 1 published earlier in July 2020 and
August 2020 edition of the Student Journal. This capsule itemize significant concepts related to “Performance and Breach
of Contract”, and “Special Contracts discussing Contingent and Quasi Contract under the Indian Contract Act, 1872. In
order to have understanding of the related concepts, this capsule will help to revise and retain the important facet of the
legal provisions.

CONCEPTS RELATED TO PERFORMANCE AND BREACH OF CONTRACT AND

SPECIAL CONTRACT UNDER THE INDIAN CONTRACT ACT, 1872
I. Performance of Contract
(1) Meaning of Performance (5) Who may perform the contract

A contract is said
Legal
to be performed Promisor himself Promisor’s Agent
-Either perform, or
Representatives
when the
parties
to the -O"er to
contract
perform their
promises

!ird persons Joint promisors

(2) Types of performance of the Contract

Actual performance Attempted Performance

(6) Liability of joint promisor
• Where a Promisor, • Where a Promisor,
• made an o"er of • made an o"er,
performance, • to the Promisee, General rule-If two or more persons have made a joint promise,
• to Promisee, • and the o"er has not been all of them must jointly fulfill the promise.
• and the o"er has been accepted by the Promisee
accepted by the Promisee
After death of any one of After the death of the last
them- survivor-
(3) Effects of the performance of the contract his legal representative jointly the legal representatives of all
with the survivor/survivors the original co-promisors

Actual • Liability of the Promisor comes to an end

with the performance of the Act, and
Performance • there remains nothing to be done by him (7) Rules as to time and place for performance of the promise

Case where Rule as to performance

Time not specified Within the reasonable time

Attempted • the Promisor is not responsible for non-
Time specified but promise During the usual business
Performance performance, and
• have right to claim. is to be performed without hours on that particular day
promisee’s application

Time specified but promise is !e promisee must apply for

(4) Who may demand performance of contract to performed on promisee’s performance at a proper place
application and within usual business
hours

Legal Place not specified !e promisor must apply

!ird Joint
Promisee Represent-
Party Promisees to the promisee to appoint
ative
a reasonable place for the
performance and to perform
the promise at such place.

Manner for performance !e promise must be

performed in the manner and
at the time prescribed by the
30 January 2021 The Chartered Accountant Student promisee.

10
 BUSINESS LAWS
(8) Is time an essence of Contract? (12) Supervening impossibility

Cases, where- When time is essence of Case Effects

contract Where an act becomes !e contract becomes void when
impossible after the contract is the act becomes impossible.
Parties have Expressly agreed Time is considered to be essence made
of Contract Where an act becomes !e contract becomes void
Non-performance at the Time is considered to be unlawful by reason of some when the act becomes
specified time results in an essence of Contract event beyond the control of unlawful.
injury to the Party promisor
Where the promisor alone Promisor must compensate
Nature and necessity requires Time is considered to be knows about the impossibility the promisee for any loss
the performance of the essence of Contract which might have su"ered on
Contract within the specified account of non-performance
time of the promise.
Where an agreement is Any person who has received
(9) Consequences of Non-performance within the specified time discovered to be void or where any benefit under such
a contract becomes void agreement or contract is
Cases where time is essence Cases where time is not bound to restore it or to make
of the contract essence of a contract compensation to the person
from whom he received it.
• Contract becomes Voidable • Contract does not become
at the option of the Promisee voidable at the option of the
Promisee (13) Discharge of a contract

• If performance beyond the • !e Promisee is entitled Discharge by performance

specified time is accepted to claim compensation for
by the Promisee- any loss occasioned to him
!e Promisee cannot claim by non-performance of the Discharge by mutual agreement
compensation for any loss promise at the agreed time.
caused by non-performance
at the agreed time, unless Discharge by impossibility of performance
at the time of acceptance
,he has given a notice to the
Promisor of his intention to Discharge by lapse of time
claim compensation.

Discharge by operation of law

(10) Impossibility of performance

A contract to do an act which, after the contract Discharge by breach of contract

is made, becomes-

impossible, or, unlawful

by reason of some event which the promisor II. Breach of contract
could not prevent, - becomes void when the act (1) When breach of contract take place?
becomes impossible or unlawful and parties
discharged from performance.
Breach of contract occurs, if any party-

makes
Fails to perform
it impossible
refuses, or his part of the By his act
(11) Impossibility existing at the time of contract or Initial to perform his
contract, or
Impossibility obligation

Case Effects
If the impossibility is known to Such an agreement is void-ab- (2) Effects of the Breach of Contract
the parties initio
If unknown to the parties Such an agreement is void on
the ground of mutual mistake !e aggrieved party is
If known to the promisor only Such promisor must gets a right to proceed
relieved from performing
against the party at fault
compensate for any loss his obligation, and
which such promisee sustains
through the non performance
of the promise.
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BUSINESS LAWS
(3) Types of breach of contract
Case laws Facts Decision
Breach of contract Gibbons A business man whose In the case, it was held
Vs. West credit has su"ered will that a non-trader cannot
Minister get exemplary damages get heavy damages in
Bank even if he has sustained the like circumstances,
Anticipatory breach Actual breach no pecuniary loss. unless the damages are
alleged and proved as
special damages.
breach occuring
before time fixed Refusal to perform
for performance has promise on the
arrived scheduled date III. Special types of Contract

Contingent
(4) Liability for Damages Quasi-Contracts
Contracts
Ordinary
damages
Rules Relating to
Cases deemed as
Pre-fixed Special
Enforcement of
Quasi -Contracts
damages damages Contingent Contracts

Damages for Vindictive or (1) Contingent Contract

deterioration exemplary
caused by delay damages

Contingent contract is
Nominal
damages

(5) Remedies Available

a contract to do or if some event, collateral
not to to such contract, does or
Rescission of Contract do something, does not happen.

Suit upon Quantum Meruit (2) Essentials of a Contingent Contract

Suit for Specific Performance (a) Dependence on future event

Suit for Injunction Dependence on a future event

!e performance of a contingent contract is

Relevant case laws made dependent upon the happening or non-
happening of some event. A contract may be
Case laws Facts Decision
subject to a condition precedent or subsequent.
Hadley Vs. !e crankshaft of P’s !e court held that P
Baxendale flour mill had broken. He was entitled only to
(b) 'Event' referred is collateral to the contract
gives it to D, a common ordinary damages and
carrier who promised to D was not liable for the
deliver it to the foundry loss of profits because Collateral
in 2 days where the new the only information Event
shaft was to be made. !e given by P to D was that !e event on which the
mill stopped working, the article to be carried performance is made
D delayed the delivery was the broken shaft of a to depend, is an event
of the crankshaft so the mill and it was not made collateral to the contract.
mill remained idle for known to them that the
another 5 days. P received delay would result in
the repaired crankshaft 7 loss of profits.
days later than he would (c) !e event must be uncertain
have otherwise received.
Consequently, P sued D Uncertain Event
for damages not only for
the delay in the delivering
of the broken part but
also for loss of profits !e contingent event must be uncertain and should
su"ered by the mill for not be the mere will of the promisor.
not having been worked.

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 BUSINESS LAWS
(3) Rules regarding Contingent contracts

Rule 4 Rule 5 Rule 6

Rule 1 Rule 2 Rule 3
Contract Contracts Agreement
Enforcement Enforcement Contract
contingent upon contingent contingent
of contracts of contracts contingent
the happening upon the non- on impossible
contingent contingent on upon the future
of an uncertain happening of event.
on an event an event 'not- conduct of a
specified event an uncertain
'happening’ happening’ living person
within a fixed specified event
time within a fixed time

(a) Rule 1 regarding contingent contracts (e) Rule 5 regarding contingent contracts

Enforcement of contracts contingent on an

Contract contingent upon the non-happening of an
event 'happening‘ uncertain specified event within a fixed time;

Where a contingent contract is made to do or not to do • Such contract can be enforced by law if before the
anything if an uncertain future event happens, expiry of fixed time-
• Such event does not happen ,or
• it cannot be enforced by law unless and until that • It become certain that such event will not happen.
event has happened.
• If the event becomes impossible, such contracts
become void.
(f) Rule 6 regarding contingent contracts

(b) Rule 2 regarding contingent contracts Agreement contingent on impossible event.

Enforcement of contracts contingent on an event 'not- • A contingent agreement to do or not to do anything, if

happening‘ an impossible event happens, is void.
• !e impossibility of the event may be or may not be
known to the parties to the agreement at the time
• Where a contingent contract is made to do or not do
when they entered into it.
anything
• if an uncertain future event does not happen
• it can be enforced only when the happening of that
event becomes impossible and not before. IV. Quasi-Contract

(1) Meaning
Quasi
Contract
(c) Rule 3 regarding contingent contracts

Contract contingent upon the future conduct of a In the

living person absence
upon
person for of a
• Where, the future event on which a contract is contract.
the benefit
contingent is the way in which a person will act at an An of another.
unspecified time. obligation
• In such a case, the event shall be considered to have imposed by
become impossible when such person does anything law.
which renders it impossible that he should so act
within any definite time or otherwise than under
further contingencies. (2) Features of a Quasi- Contract
Imposed by Law

(d) Rule 4 regarding contingent contracts Obligation is a duty and not the promise of a party

!e right is always a right to money

Contract contingent upon the happening of an
uncertain specified event within a fixed time;
Right is available against specific person
• Such type of contracts become void if before the
expiry of fixed time- Suit for breach may be filed same as of a complete contract
• Such event does not happen, or
• Such events becomes impossible.

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13
BUSINESS LAWS
(3) Difference between quasi contracts and Contingent (d) Type iv of quasi-contracts
contract
Basis of Quasi- Contract Contingent Contract • A person who finds goods
distinction Responsibility belonging to another, and takes
of a finder them into his custody
Essential !e essentials for the Present of goods • there such person is subject to the
for the valid formation of a valid same responsibility as a bailee
contract contract are absent
Obligation Imposed by law Created by the consent of
the parties (e) Type v of quasi-contracts

Liability for money paid or thing delivered

(4) Types of quasi-contracts by mistake or under coercion
• A person to whom money has been paid, or anything
i Claim for necessaries supplied to persons incapable of delivered by mistake, or
contracting • under coercion
• must repay or return it.
ii Right to recover money paid for another person

(5) Remedy on breach of quasi-contract

iii Obligation of a person enjoying benefits of non-gratuitous act

When the • there the injured party is entitled

iv Responsibility of a finder of goods obligation to receive the compensation same
created by the as defaulted party had contracted
quasi-contract is to discharge as it had broken his
Liability for money paid or thing delivered by mistake or not discharged- contract.
v under coercion

(a) Type i of quasi-contracts

Relevant case laws
• If necessaries are supplied to Case laws Facts Decision
Claim for
a person who is incapable of
necessaries ShyamLal ‘S’ a government servant !e appeal was
contracting, e.g. minor or a person
supplied to vs. State of was compulsorily retired decided in favour of
of unsound mind-
persons U.P by the government. He the government and ‘S’
• the supplier is entitled to claim
incapable of filed a writ petition and was directed to return
their price from the property of
contracting- obtained an injunction the salary paid to him
such a person.
against the order. He was during the period of
reinstated and was paid reinstatement
salary but was given no
(b) Type ii of quasi-contracts
work and in the mean
time government went on
appeal.
Right to recover money paid for another person
Hollins vs. H’ picked up a diamond Held that ‘F’ must return
• A person who has paid a sum of money which another Howler L. R. on the floor of ‘F’s shop the diamond to ‘H’ as he
is obliged to pay- & H. L., and handed over the was entitled to retain
• Such person is entitled to be reimbursed by that other same to ‘F’ to keep till the goods found against
person. the owner was found. In everybody except the
spite of the best e"orts, true owner.
Provided, the payment has been made by him to the true owner could
protect his own interest not be traced. After the
lapse of some weeks, ‘H’
tendered to ‘F’ the lawful
(c) Type iii of quasi-contracts expenses incurred by him
and requested to return
Obligation of a person enjoying benefits of the diamond to him. ‘F’
non-gratuitous act refused to do so.

• Such an obligation/right to recover arises “where a Trikamdas T’ was traveling without !e suit was decreed in
person lawfully does anything for another person, vs. Bombay ticket in a tram car and his favour.
or delivers anything to him not intending to do so Municipal on checking he was asked
gratuitously and such other person enjoys the benefit Corporation to pay R5/- as penalty to
thereof, compound transaction.
• the latter is bound to make compensation to the T filed a suit against the
former in respect of, or to restore, the thing so done corporation for recovery
or delivered. on the ground that it was
extorted from him.

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BUSINESS LAWS
CA FOUNDATION - PAPER 2A - BUSINESS LAWS
In this capsule, we have summarized the important concepts of the Unit 1 and 2 of the Chapter 2: The Sale of Goods
Act, 1930. From Examination point of view, this chapter comprises of around 12 to 14 marks of the paper. In this
chapter, students are tested with conceptual understanding of the legal provisions, as well application of the important
concepts in the simple practical scenarios. This capsule will help the students to revise and retain essentials of some
of the important definitions and various requirements in the formation of the Contract of Sale.

THE SALE OF GOODS ACT, 1930

2. Goods [Section 2(7)] and related terms
Primer to the Sale of Goods Act, 1930
Other Also
Goods than includes
• Sale of goods is one of the specific forms of contracts recogni ed
and regulated by law in India. M e a n s Actionable Stock &
• It is an Act to define and amend the laws relating to the sale of every kind claims Shares
goods. of movable
property
• It came into force on 1st uly, 1930. Growing
• The provisions of the Act are applicable to the sale of ONL crops
movable properties and the Act is not applicable to immovable “Goods” include both Money in
properties. tangible goods and circulation Grass, and
• It extends to the whole of India. intangible goods
T h i n g s
attached to
‘Actionable claims’ are claims, which or forming
can be enforced only by an action / suit. part of land
Formation of the Contract of Sale Ex: debt. A debt is not a movable which agreed
property or goods. to be severed
Framework
3. Classification of Goods
Contract of Sale
Broadly classified as Goods

Transfer of Essentials of Existing Future Contingent

Agreement Goods Price Valid contract Goods Goods Goods
property

Specific Ascertained Unascertained

Buyer Seller Existing Future Contingent
Goods Goods Goods
Specific classification of goods
Money
Immediate Yet to be consideration
transfer transferred
(sale) (Agreement Goods in existence
to sale) Specific Ascertained Unascertained at the time of the
contract of sale;
Existing Goods
(Section 6) or
Goods owned /
Important Terminologies possessed/ acquired by
the seller at the time of
1. Buyer and Seller Types of existing contract of sale
goods
A person who buys or agrees to buy goods [Section
2(1)].
Buyer • Goods identified & agreed upon at the time a
Specific contract of sale is made
Goods • Ex: Samsung Galaxy S7 Edge, IFB washing
• A person who sells or agrees to sell goods machine of 7 kg
[Section 2(13)].
Seller • Ex: On 1st June 2021, A agrees to sell 100 bales of • Goods which are identified in accordance with the
cotton to B for Rs. 1000. Here, A is a Seller and B agreement after the contract of sale is made.
Ascertained • Ex: “A” owns 10 Maruti Cars. “B” contracts with
is a Buyer. Goods “A” to buy one out of them. After the contract,
“A” keeps out one car to be given to “B”.
• Goods which are not specifically identified
or ascertained at the time of making of the
Unascertained
contract
goods • Ex: “A” owns 10 Maruti Cars. “B” contracts with
“A” to buy any one car out of them.

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 BUSINESS LAWS
Future Goods Contingent Goods 7. Property [Section 2(11)]
[Section 2 (6)]. [Section 6(2)] Property means
• Goods to be • The acquisition of which
 manufactured or • by the seller
 produced or • depends upon an uncertain ownership in goods/ and not merely
 acquired contingency (uncertain event) General Property a special property
• by the seller after making • Ex: P contracts to sell 500
the contract of sale pieces of particular item 8. Price [Section 2(10)]
• Ex: 1000 quintals of provided the ship which is
potatoes to be grown in Mr. bringing them reaches the
A's field. port safely. Money consideration for a sale of goods

4. Delivery – Meaning [Section 2(2)]

Essential
It is the value expressed in requirement to
of goods monetary terms make a contract
voluntary from one of sale of goods
transfer of person to Delivery
possession another
Sale and agreement to sell [Section 4]
[Link] of Contract of Sale of goods
5. Types of Delivery
It is a
(i) the seller transfers, or (ii) agrees to transfer
contract
- the property in goods to the buyer for a price
whereby
Constructive
delivery 2. Mode for contract of sale of goods
• Goods physically • delivery of a
delivered to the • without any thing in token A contract for the sale of goods may be either through
buyer. change in of a transfer of
• Ex: A shop- the custody something else Where the transfer
keeper sold one or actual • Ex: Key of a Where the of the property in
Apple Smart possession of warehouse property in the goods
watch to B. the thing. containing the goods
• Ex: A ware- goods is handed Agreement take place at
Sale to sell a future time
houseman over to buyer. is transferred
holding the from the subject to
goods of A seller to the fulfillment of
agrees to hold buyer some condition
them on behalf
of B, at A’s
request. Symbolic An agreement to sell becomes a sale-
Actual delivery
delivery when the time elapses or the conditions are
fulfilled subject to which the property in the
goods is to be transferred. [Section 4(4)]

3. Differences in Sale and Agreement to Sell

6. Document of title to goods [Section 2(4)]
Basis of difference Sale Agreement to sell
either by Transfer of Immediately Future Date or
endorsement or property fulfillment of condition
by delivery,
Nature of contract Executed Executory
the possessor of Remedies for Sue for price Sue for damages only
for authorizing the document to breach and not for price
or purporting to transfer or receive Liability of parties Liability of the buyer Liability of the seller
authorize, goods thereby
represented Burden of risk Buyer Seller
“Document Nature of rights Jus in rem Jus in personam
of title to Right of resale Seller cannot re-sell Seller may re-sell
goods Ex Bill of lading, dock the goods
Proof of the
warrant, warehouse
possession or Insolvency of O!cial Assignee O!cial Assignee
keeper’s certificate,
control of goods seller • not be able to take • acquire control
or wharfinger’s certificate,
over the goods over the goods
railway receipt, warrant,
• will recover the • the price will not be
an order of delivery of
price from the recoverable.
goods
buyer.
Insolvency of O!cial Assignee O!cial Assignee
buyer • control over the • no control over the
goods. goods.

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BUSINESS LAWS
4. Contract of sale – elements must co-exist
Procedure for conduct of Contract of Sale
[Section 5]
Nature of 1. Process
Two parties: Consideration: contract of sale:
Buyer & Seller Price in money May be absolute
or conditional a contract of sale is made by

Delivery of
Fulfil other an o#er to by acceptance
goods: Transfer for a price
Subject matter: essential Buy/sell of such o#er
of property i.e
Movable goods elements of a
ownership to
Valid contract
take place

2. Mode of delivery and Payment

Sale Distinguished from other Similar The contract may provide

Contracts
1. Sale and Hire Purchase

Basis of difference Sale Hire- Purchase for the immediate delivery of the goods or immediate
payment of the price or Both
Time of passing Immediately On payment of last
property instalment or
Position of the Buyer is like that of Position of the hirer
party owner is like that of bailee for the delivery or payment by instalments
till final payment
or
Termination of the buyer cannot The hirer may
contract terminate the terminate the
that the delivery or payment or both shall be
contract and bound contract by returning postponed.
to pay price the goods
Burden of Risk of risk of seller Owner takes no risk
insolvency of the and has right to take
buyer back the goods 3. Mode for entering into contract of Sale
Transfer of title The buyer can pass a Hirer cannot pass
good title to a bona any title even to a A contract of
fide purchaser bonafide purchaser sale may be
made in-
Resale The buyer can Hirer cannot, unless
all installments paid

2. Sale and Bailment words of partly in writing implied from

writing mouth and partly by the conduct of
Basis of difference Sale Bailment word of mouth the parties
Transfer of Transferred from Transfer of
property seller to buyer possession of goods
from bailor to bailee
Return of goods Not possible Bailee must return the
goods to the Bailor on Subject matter of Contract of Sale [Section
accomplishment of 6, 7, & 8]
the purpose
Consideration It is the Price in It may be gratuitous 1. Goods which form the subject matter of a contract of sale
terms of money or non-gratuitous.
Existing goods
existing goods that are acquired, owned or possessed by the seller
3. Sale and contract for work and labour
Future goods
Basis of difference Sale Contract for work
the acquisition of which by the seller depends upon a contingency
and labour
which may or may not happen
Nature of Contract It’s a contract in No goods are sold,
which some goods and there is only the Whereby a contract of sale the seller purports to e#ect a present
are sold or are to be doing or rendering of sale of future goods, the contract operates as an agreement to sell
sold for a price some work of labour. the goods

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 BUSINESS LAWS
2. Nature of contract of sale with respect to perishing goods
Stipulation as to time of Payment and time
Perishing Goods Future Goods of delivery [Section 11]
Where there is a contract for the Stipulation as to the Stipulations as to time
If the future goods time of payment of delivery are usually
sale of specific goods,
are specific and the essence of the
• no knowledge to the seller contract
• at the time when the
• contract was made, goods the destruction are not deemed to be of Delivery of goods
perished or become so damaged of such goods the essence from the terms must be made
• Contract is void amount to of the contract of sale, without delay
supervening unless terms of contract
Where there is an agreement to sell impossibility state otherwise.
specific goods,
• without any fault on the part of
the seller or buyer
• before the risk passes to the buyer
contract Conditions and Warranties with reference
becomes void
• and subsequently the goods to the goods [Section 12]
perishes or become so damaged 1. Meaning -Condition and Warranty
• agreement can be avoided or
becomes void. Condition Warranty
is a stipulation is a stipulation
essential to the main purpose co-lateral to the main purpose
Ascertainment of price [Section 9] of the contract, of the contract,
the breach of which gives rise the breach of which gives rise
fixed by the contract, or
to a right to treat the contract to a claim for damages
as repudiated. but not to a right to reject the
goods and treat the contract
agreed to be fixed in a manner provided by the contract, or
as repudiated.

determined by the course of dealings between the parties. 2. Differences

Point of Condition Warranty

Where price is not determined, the buyer shall pay the seller a differences
reasonable price
Meaning A stipulation A stipulation
essential to the collateral to the
main purpose of the main purpose of the
Agreement to sell at valuation [Section 10] contract. contract.
Right in case of Repudiate or claim Claim only damages
Where there is an breach damages or both
agreement to sell goods on such third party
the terms that the price is cannot or does not Conversion of A breach of condition A breach of warranty
to be fixed by the valuation make such valuation, stipulations may be treated as a cannot be treated as
of third party; and breach of warranty. a breach of condition.

3. Waiver of conditions [Section 13]

if the goods or any
part thereof have
been delivered to, and the agreement is Voluntary Waiver Compulsory Waiver
appropriated by, the buyer, thereby avoided.  Waives performance of contract  Non-severability of contract
he shall pay a reasonable  Elect to treat condition as  Fulfilment of conditions excused
price therefore. warranty by law

Where such third party is the party not in fault

prevented from making may maintain a suit for Mode of Conditions and Warranties
the valuation by the fault damages against the
of the seller or buyer, party in default.

Ex: P is having two bikes. He agrees to sell both of the bikes to may be either
‘Conditions’ and express or
S at a price to be fixed by the Q. He gives delivery of one bike ‘Warranties’
immediately. Q refuses to fix the price. As such P ask S to return implied
the bike already delivered while S claims for the delivery of the
second bike too. In the given instance, buyer S shall pay reasonable
price to P for the bike already taken. As regards the Second bike,
the contract can be avoided.

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BUSINESS LAWS
1. Express and Implied Conditions-Meaning 5. Sale by sample [Section 17]
• Agreed upon between the parties at the time of Sale by sample
Express contract and
conditions • are expressly provided in the contract.
bulk shall buyer shall have goods shall be free
• Which are presumed by law to be present in the contract. correspond with the a reasonable from any latent
sample in quality opportunity of defect i.e. a hidden
Implied • an implied condition may be negated or waived by an comparing the bulk defect.
conditions express agreement.
with the sample

Ex: A company sold certain shoes made of special sole by sample

2. Implied Conditions-Types for the French Army. The shoes were found to contain paper not
discoverable by ordinary inspection. Held, the buyer was entitled
to the refund of the price plus damages.
Implied Conditions

6. Sale by sample as well as by description [Section 15]

Condition as to title Condition as to description
Sale by sample bulk of the goods supplied shall correspond
as well as by both with the sample and the description
description
Sale by sample Sale by sample as well as In case the goods correspond with the sample
by description but do not tally with description or vice versa
or both, buyer can repudiate the contract.
Condition as to quality
or fitness
Condition as to Ex: A agreed with B to sell certain oil described as refined
merchantability sunflower oil, warranted only equal to sample. The goods tendered
Condition as to
wholesomeness were equal to sample but contained a mixture of hemp oil. B can
reject the goods.

3. Condition as to title [Section 14]

7. Condition as to quality or fitness [Section 16(1)]
Condition as to title-
In every contract of sale, the goods
the first implied condition supplied shall be
on the part of the seller is
reasonably fit for the
purpose for which the
buyer wants them, provided
in case of sale in case of an the stated Condition as to
agreement to sell quality or fitness
are fulfilled
• The buyer should have made known to the seller the
right to sell the particular purpose for which goods are required.
right to sell the goods at the time
goods • The buyer should rely on the skill and judgement of
when the property the seller.
is to pass.
• The goods must be of a description dealt in by the
seller, whether he be a manufacturer or not
Ex: A purchased a tractor from B who had no title to it. After 2
months, the true owner spotted the tractor and demanded it Ex: ‘A’ bought a set of false teeth from ‘B’, a dentist. But the set was
from A. Held that A was bound to hand over the tractor to its not fit for ‘A’s mouth. ‘A’ rejected the set of teeth and claimed the
true owner and that A could sue B, the seller without title, for the refund of price. It was held that ‘A’ was entitled to do so as the only
recovery of the purchase price. purpose for which he wanted the set of teeth was not fulfilled.

4. Sale by description [Section 15]

8. Condition as to Merchantability [Section 16(2)]
Contract of sale of goods the goods shall correspond Condition as to Merchantability
by description with the description
• Goods should be bought by description.
• The seller should be a dealer in goods of that description.
• Exception: If the buyer has examined the goods, there shall be
no implied condition as regards defects which such examination
there is an implied condition that ought to have revealed.

Ex: A ship was contracted to be sold as “copper-fastened vessel”

Ex: A bought a black velvet cloth from C and found it to be
but actually it was only partly copper-fastened. Held that goods
damaged by white ants. Held, the condition as to merchantability
did not correspond to description and hence could be returned or
was broken.
if buyer took the goods, he could claim damages for breach.

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 BUSINESS LAWS
9. Condition as to wholesomeness 10. Implied Warranties-Types

• In the case of eatables and

provisions, Implied Warranties
Condition as to • in addition to the implied
wholesomeness condition as to merchantability,
• there is another implied
condition that the goods shall warranty as to warranty as to
be wholesome. undisturbed quality or fitness
possession by usage of trade

Ex: A supplied F with milk. The milk contained typhoid germs. F’s Warranty as to non- disclosure of dangerous
wife consumed the milk and was infected and died. Held, there was existence of encumbrances nature of goods
a breach of condition as to fitness and A was liable to pay damages.

11. Implied warranty

Warranty as to Warranty as to Warranty as to Disclosure

undisturbed non-existence of quality or fitness of dangerous
possession encumbrances by usage of trade nature of goods

buyer shall have the goods shall An implied the goods are
and enjoy quiet be free from warranty as to dangerous in
possession of the any charge or quality or fitness nature and
goods. encumbrance for a particular
purpose may
be annexed or the buyer is
attached by the ignorant of the
If the buyer having danger,
in favour of any usage of trade
got possession of
third party not
the goods, is later
declared or known
on disturbed in his the seller must
to the buyer
possession, Ex: Shares warn the buyer
purchased from of the probable
broker expected to danger.
he is entitled to be free from bad
before or at the
sue the seller for deliveries
time the contract If there is a breach
the breach of the
is entered into. of warranty, the
warranty.
seller may be
liable in damages.
Ex: A Purchased
Ex: S sells a car
a second hand Ex : Lid of
which was given
typewriter which disinfectant
as security by Y
happened to be powder to be
against a loan
stolen opened with care.

2. Required conditions when doctrine is not attracted:

Caveat Emptor [Section 16]
1. Meaning of doctrine • Buyer had made known to the seller
the purpose of his purchase, and
It is the duty Conditions
• buyer relied on the seller’s skill and
of the buyer to be
judgement, and
to examine satisfied
• seller’s business to supply goods of
the goods that description
Let the thoroughly
buyer before he buys
beware General rule them in order to
Caveat 3. Exceptions to Doctrine of caveat Emptor:
satisfy himself
Emptor
that the goods
will be suitable Exceptions
for his purpose • Fitness as to quality or use
Ex: A purchases a horse from B. A needed for which he is • Goods purchased under patent or brand name
the horse for riding but he did not mention buying them. • Goods sold by description
this fact to B. The horse is not suitable for • Goods of Merchantable Quality
riding but is suitable only for being driven in • Sale by sample
the carriage. Caveat emptor rule applies here • Goods by sample as well as description
and so A can neither reject the horse nor can • Trade Usage
claim compensation from B. • Seller actively conceals a defect or is guilty of fraud

The Chartered Accountant Student July 2021 33

20
 BUSINESS LAWS
Ca fouNDatioN - PaPer 2a - BuSiNeSS lawS
In this capsule, we have summarized the important concepts of the Unit 3 and 4 of the Chapter 2: The Sale of Goods
Act, 1930. From Examination point of view, this chapter comprises of around 12 to 14 marks of the paper. In this
chapter, students are tested with conceptual understanding of the legal provisions, as well application of the important
concepts in the simple practical scenarios. This capsule will help the students to revise and retain essentials of some
of the important provisions related to transfer of ownership, delivery of goods and unpaid seller.

the Sale of GooDS aCt, 1930

(I) Provisions related to transfer of Ownership Different stages of Goods while passing of property under this
[Section 18-26] category:
Specific Goods in Property in goods passes to the buyer
(i) Stages involved in transfer of ownership:
Deliverable Stage when the contract is made

Passing of Delivery Passing of irrespective of time of the payment or

property of Goods Risk delivery or both.

Example: X buys a Washing Machine and asks for home delivery.

Passing of Property !e washing machine immediately becomes the property of X.

• Passing of Ownership Specific Goods to be put in Deliverable Stage

• If the property has When there is a contract for the sale of specific
Passing of passed to the buyer, the
property goods;
implies- RISK in the goods sold
is that of the buyer and
NOT of the seller seller is bound to do something to the goods for
putting them into deliverable state;

the property does not pass until such thing is done

and buyer has notice thereof.
Rules regarding transfer of property in goods
Depends on two basic factors:

Identification of goods Intention of parties Example: X purchased a laptop and asks for home delivery but
that laptop does not have a Windows operating system installed.
!e property transfers to X only after shopkeeper installed OS
Property in goods is making the laptop ready for delivery and intimated the buyer
Goods must be ascertained
transferred at the time- about it.
in order to pass the
• when parties intend it to
property in goods to buyer
be transferred

Specific Goods • Contract for sale of specific goods

Ascertaing of intention shall • seller is bound to weigh, measure,
Goods must be specific in a Deliverable
be on the basis of- test or do something for purpose of
and ascertained to acquire Stage when
• terms of contract ascertaining price
the ownership right on the seller has to do
• conduct of the parties, and • then the Property in goods passes to
goods by buyer anything to put
• circumstances of the case the buyer
it in deliverable
stage • only when such thing is done and
buyer has notice of it.
Primary Rules: For determination of passing of property from seller
to Buyer
1. Passing of Property in Case of Specific or Ascertained Goods Example: A sold carpets to the Company which were required
to be laid. !e carpet was delivered to the company’s premises
Transferred at but was stolen before it could be laid. It was held that the carpet
such time as the was not in deliverable state as it was not laid, which was part of
parties intend it the contract and hence, the property had not passed to the buyer
to be transferred company.
Conduct of
Passing of the Parties
Property in case
of Specific or 2. Sale of Unascertained Goods
Circumstances
Ascertained Goods of the Case
Ascertainment of
intention depends on When there no property is unless the
is a sale of transferred to goods are
Unascertained
Goods, the buyer ascertained

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21
BUSINESS LAWS
Rules in respect of passing of property under this category

Sale of unascertained or
future goods by description

!e goods to Goods Unconditionally !e !e assent !e assent

match with must be in appropriated appropriation may be may be given
description deliverable (seller does not must be by express or before or
and quality state reserve the right seller with the implied after the
of disposal until assent of the appropriation
certain conditions buyer or vice
are fulfilled, like versa
payment of price)

Delivery to the Carrier Example: X sends furniture to a company by a truck and instructs
the driver not to deliver the furniture to the company until the
payment is made by company to him. !e property passes only
Seller delivers the goods when the payment is made.
for the purpose of
to the buyer or carrier or
transmission and
other bailee
Risk Prima Facie passes with Property

the goods are does not reserve the right Until the property therein is transferred to the buyer
appropriated of disposal,
the goods remain at the seller’s risk

Example: A bill of lading of railway parcel is made out in the name

of the buyer and is sent to him, the ownership in the goods passes
from the seller to the buyer. In case the goods are subjected to when the property therein is transferred to the buyer
accidental loss or by theft, the seller will not be liable.
the goods are at the buyer’s risk whether delivery has
been made or not.
3. Goods sent on Approval or “Sale Or Return”

PASSING OF PROPERTY
If delivery is delayed by the fault of the seller or the buyer
When he signifies his approval or acceptance
Retains goods without giving notice of rejection the goods remain at the risk of the party in default
(seller or buyer as per the case)
Does something to the goods which is
equivalent to acceptance
!e duties and liabilities of the seller or the buyer as bailee of
goods for other party

Example: A sends to B a water motor on approval or return in will not be a"ected even when risk has passed.
March, 2020. B to return it after trial in August, 2020. !e water
motor has not been returned within a reasonable time, and
therefore, A is not bound to accept it and B must pay the price. Example: A bids for an antique painting at a sale by auction.
After the bid, when the auctioneer struck his hammer to signify
acceptance of the bid, he hit the antique which gets damaged. !e
4. Reservation of Right of Disposal loss will have to be borne by the seller, because the ownership of
goods has not yet passed from the seller to the buyer.
the seller may by the terms of
the contract or appropriation,
Where there is a
contract for the sale
of specific goods
or where goods reserve the right of disposal of
are subsequently the goods
appropriated to the
contract
until certain conditions are
fulfilled

30 December 2021 The Chartered Accountant Student

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 BUSINESS LAWS
(II) Transfer of Title by Non Owners (Section 27-30) Types of Delivery

Symbolic
delivery
Where goods are who does not have
buyer does not Actual Constructive
sold by a person the authority or
acquire a Delivery Delivery
who is not the with the consent of
good title
owner; and the owner
Types of
delivery

Example: P, the hirer of vehicle under a hire purchase agreement, Duties of seller and Buyer
sells them to Q. Q, though a bona fide purchaser, does not acquire
the ownership in the vehicle. At the most he acquires the same
right as that of the hirer. Duty of Duty of
the the
seller buyer to accept
to deliver the
and pay for
goods
NEMO DAT Sale by a Mercantile Agent them
QUOD NON
HABET – No one Sale by one of the joint owners
can give what he
has not got. Sale by a person in possession under voidable Rules regarding Delivery of Goods
contract
Exceptions:
Sale by a person who has already sold goods Delivery to
Part Instalment
but continues in possession thereof carrier/
delivery deliveries
wharfinger
E"ect of Estoppel

Sale by an unpaid seller

Buyer to apply Delivery of Deterioration
Sale by a buyer obtaining possession before the for delivery wrong quantity during transit
property vested in him

Sale under provisions of other Acts Buyer's right

Expenses of
Place of delivery to examine
delivery
the goods
Examples: 1. A, B, and C are three brothers and joint owners of a
T.V and VCR and with the consent of B and C, the VCR was kept
in possession of A. A sells the T.V and VCR to P who buys it in
Goods in
good faith and without notice that A had no authority to sell. P Time for
possession of a
gets a good title to VCR and TV. delivery
third party
2. During IPL matches, P buys a TV set from R. R agrees to deliver
the same to P after some days. In 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. Examples: 1. Certain goods lying at wharf were sold in a lot. !e
seller instructed the wharfinger to deliver them to the buyer who
had paid for them and the buyer, thereafter, accepted them and
took away part. Held, there was delivery of the whole.
(III) Performance of the Contract of Sale (Section 2. A agrees to sell 100 quintals of wheat to B at ` 1,000 per quintal.
31-44) A delivers 1,100 quintals. B may reject the whole lot or accept only
Meaning of delivery 1,000 quintals and reject the rest or accept the whole lot and pay
for them at the contract of sale.

voluntary Rule Related to Acceptance of Delivery of Goods

transfer of
Definition of possession from
Delivery one person to Acceptance is deemed to take
another
place when the buyer-
intimates to the does any act to retains the goods
seller that he the goods, which after the lapse of
had accepted the is inconsistent a reasonable time,
goods; or with the without intimating
ownership of the to the seller that he
seller; or has rejected them.

The Chartered Accountant Student December 2021 31

23
BUSINESS LAWS
(IV) Unpaid Seller (Section 45-61) Example: A sold certain goods to B for a price R50,000 and
allowed him to pay the price within one month. B becomes
insolvent during this period of credit. A, the unpaid seller, can
UNPAID SELLER exercise his right of lien.
1. !e Whole price has not been paid or tendered and the
seller has an immediate right of action for the price (ii)
2. When a bill or exchange or other negotiable instrument
has been received as conditional payment and it has been Buyer or agent
dishonoured. lawfully obtains By waiver
the goods

Example: P sold some goods to R for R60,000 and received

Delivers goods By Estoppel
a cheque for a full price. On presentment, the cheque was
to carrier (by conduct or
dishonoured by the bank. P is an unpaid seller.
or bailee Termination behaviour)
of Lien
Rights of an Unpaid Seller

Rights of an Example: A sold a car to B for R1,00,000 and delivered the same
unpaid Seller to the railways for the purpose of transmission to the buyer. !e
railway receipt was taken in the name of B and sent to B. Now A
cannot exercise the right of lien.
Against Goods Against the Buyer

2. Right of stoppage in transit:

(i)
Property in Property in Goods
Suit for Price
Goods has passed has not passed to
Right of the right of
to the buyer the buyer stopping the to regain the to retain them
stoppage
goods while possession till the full
in transit they are in and price is paid
Suit for Damages means transit,
Lien Withholding
Delivery

Suit for Interest (ii)

Stoppage in Right of stoppage in
Lien transit is exercised only
transit
when the following
conditions are fulfilled
Resale Stoppage in
transit
!e seller He must !e !e !e
must be have goods are buyer has right is
Resale unpaid. parted in transit. become subject to
with the insolvent. provisions
possession of the Act.
of goods.
Right of Unpaid Seller against the Goods
1. Seller’s Lien
(iii) !e goods are deemed to be in
(i) course of transit
RIGHT TO RETAIN
POSSESSION
UNTIL PAYMENT:
Goods in the course

from the time when they are

delivered to a carrier or other bailee
Where goods sold without stipulation
of transit

as to credit (Cash Sales) for the purpose of transmission

to the buyer,

Goods sold on credit, but terms

of credit expired until the buyer or his agent in
that behalf takes delivery of them

Buyer becomes insolvent

(ceases to pay debt in the ordinary from such carrier or other bailee.
course of business)

32 December 2021 The Chartered Accountant Student

24
 BUSINESS LAWS
(iv)
When does the transit come to an end?
When the buyer Buyer obtains Where the carrier If the carrier Where goods Where the part Where the
or other bailee delivery before or other bailee wrongfully are delivered delivery of the goods are
obtains delivery. the arrival acknowledges to the refuses to to the carrier goods has been delivered to a
of goods at buyer or his agent that deliver the hired by the made to the ship chartered
destination he holds the goods as goods to the buyer buyer, the transit by the buyer,
soon as the goods are buyer. will come to the transit
loaded on the ship, an end for the comes to an
unless the seller has remaining goods end.
reserved the right of which are yet
disposal of the goods. in the course of
transmission.

(v) Rights of Unpaid Seller against the Buyer

Stoppage in Rights of • Suit for price

transit unpaid seller • Suit for damages for non-acceptance
against the • Repudiation of contract before due date
By taking actual
buyer • Suit for interest
possession of goods
by giving notice to the
carrier not to deliver Breach of Contract by Seller
the goods.
Breach of contract by seller, where he-

(vi)
Fails to deliver the goods at the time or in manner prescribed
Exceptions When the seller has assented to the sale,
where unpaid mortgage or other disposition of the goods made
seller’s right by the buyer
of lien and Breach of contract by seller, where he-
stoppage in When a document of title to goods has been
transit are transferred to the buyer and the buyer transfers
defeated the documents to a person who has bought goods
in good faith and for value Repudiates the contract

Example: A entered into a contract to sell cartons in possession of

Breach of contract by seller, where he-
a wharfinger to B and agreed with B that the price will be paid to A
from the sale proceeds recovered from his customers. Now B sold
goods to C and C duly paid to B. But anyhow B failed to make the Deliver non-conforming goods and buyer rejects and
payment to A. A wanted to exercise his right of lien and ordered revokes acceptance
the wharfinger not to make delivery to C. Held that the seller had
assented to the resale of the goods by the buyer to the sub-buyers.
As a result, A’s right to lien is defeated.
Right of Buyer in case of breach of contract by seller

3. Right of re-sale
Damages for
non-delivery
Where an unpaid
Where he gives seller who has
Where the
notice to the buyer exercised his right Suit for specific
goods are of a
of his intention to of lien or stoppage performance
perishable nature
re-sell the goods in transit resells
the goods
Rights of Suit for breach
buyer of warranty
A re-sale by the
seller where a Where the
right of re-sale property in goods Repudiation of
is expressly has not passed to contract before
reserved in a the buyer due date
contract of sale

Suit for
interest

The Chartered Accountant Student December 2021 33

25
BUSINESS LAWS
Legal Rules of Auction Sale
Example: A’ agreed to sell a rare painting of Mughal period to
‘B’. But on the due date of delivery, ‘A’ refused to sell the same. In
this case, ‘B’ may file a suit against ‘A’ for obtaining an order from • Where goods are sold in lots
the Court to compel ‘A’ to perform the contract (i.e. to deliver the • Completion of the contract of sale
painting to ‘B’ at the agreed price). • Right to bid may be reserved
Rules • Where the sale is not notified by the seller
(V) Auction Sale (Section 64) • Reserved price
Meaning • Pretended bidding

Example: P sold a car by auction. It was knocked down to Q who

the was only allowed to take it away on giving a cheque for the price
property and signing an agreement that ownership should not pass until the
mode of cheque was cleared. In the meanwhile till the cheque was cleared,
selling is sold to
the highest Q sold the car to R. It was held that the property was passed on
property by the fall of the hammer and therefore R had a good title to the car.
Auction inviting bids bidder
sale is Both sale and sub sale are valid in favour of Q and R respectively.
publicly and

34 December 2021 The Chartered Accountant Student

26
BUSINESS LAWS
CA FouNdAtIoN - PAPer 2A - BuSINeSS LAwS

This capsule on Paper 2A: Business Laws at Foundation level covers the concepts of Unit 1 of the Indian Partnership
Act, 1932 which is Chapter 3 of this paper. It covers significant concepts explained in a graspable manner for rational
understanding of legal provisions. This will help the student to understand and retain the important aspects of the legal
provisions. This capsule in fact, is in short notes which aids to revise the subject in the examination condition and can be
referred a day before examination. This is relevant for the November 2022 examination.

CHAPter 3: tHe INdIAN PArtNerSHIP ACt, 1932

uNIt 1: GeNerAL NAture oF PArtNerSHIP

1. Definition of ‘Partnership’, ‘Partner’, ‘Firm’ and ‘Firm name’

relation who agreed carried on by

of a acting
Partnership between to share the
business
all or any of
for all
persons profits them

individually 'Partners’

Persons who
have entered into 'a firm'
collectively
partnership with one
another are called

the name under

which their business 'firm name'
is carried on

2. Elements of Partnership

• association of 2 or more persons AGREEMENT

ASSOCIATION TO SHARE • Sharing of profits is must
• persons recognised by law can enter into
OF PERSONS an agreement of partnership PROFITS

BUSINESS • Binding contract of mutual agency

• partnership must be the result of an
CARRIED ON BY between the partners
AGREEMENT agreement
ALL OR ANY OF • Partner is the principal as well as the
• Agreement may be express or implied
THEM ACTING agent for all other partners.
• Agreement may be oral or in writing
FOR ALL

BUSINESS • Existence of business

• Acquisition of gains

24 August 2022 The Chartered Accountant Student

27
 BUSINESS LAWS
3. True Test of Partnership Basis of Partnership Joint Stock Company
difference
Registration For a partnership, firm Company is created
registration is not com- by registration under
agreement pulsory. Companies Act, 2013.
between all Winding up A partnership may be A Company is wind up
the persons dissolved by any part- by NCLT or its name is
concerned ner at any time if all the struck o" by the ROC.
partners agree.
Number of Number of partners: Private company:
Existence of membership maximum-100 (As minimum- 2, maxi-
partnership, when per Section 464 of the mum- 200
Companies Act, 2013)
Present limit is 50 Public Company: min-
[As per Companies imum- 7, maximum-
share the profits (Miscellaneous) Rules, No limit
of business 2014]
One person compa-
ny: 1
Duration of Firm does not have Company has perpetual
business was existence perpetual succession. succession.
carried on by all
or any of them II. Partnership Vs Club

Basis of Difference Partnership Club

Objective Profit Not profit
Relationship Partners Members
4. Partnership distinguished from other forms of Interest in the Yes No
Organisation property

I. Partnership Vs Joint Stock Company Dissolution Change in partners Change in members

a"ect existence don’t a"ect existence
Basis of Partnership Joint Stock Company
difference III. Partnership Vs Hindu Undivided Family (HUF)
Legal status Not a legal entity Is an artificial legal per- Basis of Partnership HUF
son. (Saloman Vs Salo- difference
man)
Mode of An agreement. Status means its creation
Agency Partner is an agent of A member is not an creation by birth in the family.
firm and other part- agent of company or of
ners. other members. Death of a Ordinarily leads to Does not give rise to
member the dissolution of dissolution of the family
Distribution !e profits of the firm !ere is no such com- partnership. business.
of profits are distributed as per pulsion to distribute
the Partnership Deed. the profits among the Management All the partners are Generally vests in the
members. Dividend is equally entitled to Karta, the governing
declared out of profits. take part. male member or female
member of the family.
Extent of Liability of members is Liability of the mem-
Authority to Every partner can, !e Karta or the manager,
liability unlimited. bers can be limited by
bind by his act, bind the has the authority to
shares or by guarantee.
firm. contract for the family
!ere can be unlimited
business and the other
liability also.
members in the family.
Property !e firm’s property is Company’s property is
Liability Liability of a partner Only the liability of the
the “Joint Estate” of all separate from that of
is unlimited. Karta is unlimited, and the
the partners. its members who can
other coparcener are liable
receive it back only in
only to the extent of their
the form of dividends
share in the profits of the
or refund of capital.
family business.
Transfer of A share in Partnership Shares of a private lim-
Calling for A partner can bring On the separation of the
shares cannot be transferred ited company can be
accounts on a suit against the joint family, a member
without the consent of transferred with ease.
closure firm for accounts, is not entitled to ask for
all the partners.
provided he account of the family
Management Partners can take part Only director members also seeks the business.
in management of a can take part in man- dissolution of the
firm. agement. firm.

The Chartered Accountant Student August 2022 25

28
BUSINESS LAWS
Basis of Partnership HUF IV. Partnership Vs Co-Ownership or joint ownership
difference
Basis of Partnership Co-ownership
Governing Governed by the Governed by the Hindu difference
Law Indian Partnership Law.
Act, 1932. Formation It arises out of a Arise either from
contract. agreement or by the
Minor’s A minor cannot A minor becomes a
operation of law, such as
capacity become a partner, member of the ancestral
though he can business by the incidence by inheritance.
be admitted to of birth. He does not
Implied A partner is the agent A co-owner is not the
the benefits of have to wait for attaining
agency of the other partners. agent of other co-owners.
partnership, only majority.
with the consent of Nature of !ere is community Co-ownership does
all the partners. interest of interest which not necessarily involve
Continuity Subject to a Has the continuity till it is means that profits and sharing of profits and
contract between divided. !e status of HUF losses must have to be losses.
the partners, gets is not thereby a"ected by shared.
dissolved by death the death of a member.
or insolvency of a Transfer of A share in the A co-owner may transfer
partner. interest partnership is his interest or rights in
transferred only by the property without
Number of Should not exceed Unlimited in number. the consent of other the consent of other co-
Members 50. partners. owners.
Share in the Each partner has No coparceners have a
business a defined share definite share.
by virtue of an
agreement between
the partners.

5. Kinds of Partnership

Partnership

With regard to the extent

With regard to duration
of the business

Particular General
Partnership at will Partnership for a fixed period
Partnership Partnership

organised for
no fixed period no provision partnership
comes to an end any particular constituted with
has been agreed made as to the created for a
on the expiry of adventure or respect to the
upon for the determination of particular period
the fixed period undertaking the business in general
duration; and the partnership. of time
partnership

6. Types of Partners

Types of Partners

Active or Outgoing Sleeping or Partner in Incoming Partner by

Nominal Sub-partner
Ostensible Partner Dormant Profits only Partner Holding out

26 August 2022 The Chartered Accountant Student

29
 BUSINESS LAWS
Active or
Sleeping or
Actual or Nominal Partner in Incoming Outgoing Partner by
Dormant
Ostensible Partner profits only partner partner holding out
Partner
partner

When a person
Lend his represent
admitted as
name to the A partner himself, or
Entitled to a partner
firm who leaves
share the into an
a firm in
become a profits only already
a partner by which the
partner by existing Knowingly
agreement, Without rest of the
agreement, firm with permits
and having any partners
and the consent himself,
real interest continue
of all the
in firm to carry on
existing
business. to be
partners.
represented as
Not entitled Not liable a partner in a
to share the for the firm (when in
profits losses fact he is not)

remains he is liable,
actively does not Does not take Not liable liable to like a partner
participates actively take part in the for any third parties in the firm
in the part in the conduct of the act of the for all acts
conduct conduct business Liable to firm done of the firm
to anyone
of the of the the third before his until public
who on the
partnership partnership parties for admission as notice is
Liable to faith of such
business all acts of a partner. given of his
third parties representation
the profits retirement.
for all acts has given
only credit to the
of the firm
firm.

The Chartered Accountant Student August 2022 27

30
buSiNeSS lawS
fouNdatioN-PaPer 2a-buSiNeSS lawS
This capsule on Paper 2A: Business Laws at Foundation level covers the concepts of the Limited Liability Partnership
Act, 2008 which is Chapter 4 of this paper. It covers significant concepts explained in graspable manner for
rational understanding of legal provisions. This will help the student to understand and retain the important
aspects of the legal provisions. This capsule is, in fact are short notes which aids to revise the chapter in the
examination condition and can be referred a day before examination. This is relevant for the May 2023 examination.

CHaPter 4: liMited liability PartNerSHiP aCt, 2008

(iii) Designated Partner [Section 2(j)]
I. LIMITED LIABILITY PARTNERSHIP- MEANING
AND CONCEPT
1.
“Designated
New form of legal business entity with limited liability partner” any partner
means designated as
such pursuant to
Alternative corporate business vehicle section 7.

Allows the partners the $exibility of organising their

internal stucture (iv) Foreign LLP [Section 2(m)]

LLP itself will be liable for the full extent of its assets
formed,

Foreign
Liability of the partners will be limited LLP Outside
incorporated
means or India
LLP which establishes
a place of business
2. Important De!nitions registered within India.
(i) Body Corporate [Section 2(d)]

• a LLP registered under this (v) Limited Liability Partnership [Section 2(n)]:
It means a company Act;
as de!ned in clause
(20) of section 2 of the • a LLP incorporated outside
Companies Act, India; and
2013 and includes • a company incorporated LLP means
outside India
a partnership formed and registered
under LLP Act, 2008.

• a corporation sole;
• a co-operative society
registered under any law for the
time being in force; and (vi) LLP Agreement [Section 2(o)]:
• any other body corporate (not
but does not being a company as de!ned in
include between the partners which determines the
clause (20) of section 2 of the of the LLP; or mutual rights and duties
Companies Act, 2013 or a LLP of the partners and
as de!ned in this Act), which Any
the Central Government may, written
by noti!cation in the Official agreement
Gazette, specify in this behalf.
between the LLP their rights and duties
and its partners in relation to that LLP
(ii) Business [Section 2(e)]

(vii) Partner [Section 2(q)]

• every trade,
• profession,
• service and Partner, in relation to a LLP
“Business” • occupation
includes
• except any activity which the Central
Government may, by noti!cation, • means any person who becomes a partner in the LLP
exclude. • in accordance with the LLP agreement

26 January 2023 The Chartered Accountant Student

31
 buSiNeSS lawS
(viii) Small Limited Liability Partnership [Section 2(ta)] 5. Minimum number of partners (Section 6)
(i)
the contribution of which, does not exceed
`25 Lacs or such higher amount, not exceeding
`5 Crore, as may be prescribed; and Every LLP shall have at least two
partners

Small LLP
means
(ii)
the turnover of which, as per the person,
which meets such the Statement of Accounts and the LLP who is the only
other requirements and Solvency for the carries on partner of the LLP
If at any time during the time
as may be prescribed, immediately preceding F/Y, the number of business for
and ful!ls such terms does not exceed `40 Lacs more than 6 shall be liable
partners of a personally for
and conditions as or such higher amount, not LLP is reduced months while
may be prescribed. exceeding `50 Crore, as may the number is the obligations
below 2 of the LLP incurred
be prescribed; or so reduced,
during that
period.

3. Non-applicability of the Indian Partnership Act, 6. Designated partners (Section 7)

1932
Save as otherwise provided,
the provisions of the Indian
Partnership Act, 1932
Designated partners • in case of LLP,
(Section 7) • where all the partners are
• at least two bodies corporate or
• who are individuals • in which one or more
• at least one of them shall partners are individuals
be a resident in India. and bodies corporate,
shall not apply to a LLP.
• Resident in India: A • at least two individuals
person who has stayed in who are partners of such
India for a period of not LLP or
4. Partners (Section 5) less than 120 days during • nominees of such bodies
the F/Y. corporate
• shall act as designated
Who can be a partner partners.
in LLP?

7. Characteristic of LLP
Any Individual; or Body Corporate

Body Perpetual Separate Mutual

However, an individual Corporate Succession Legal Entity Agency
shall not be capable of
becoming a partner of a
LLP, if—

he has been found to be of LLP Arti!cial Common Limited

unsound mind by a Court Agreement Legal Person Seal Liability
of competent jurisdiction
and the !nding is in force;

Minimum
he is an undischarged Management and Business for
insolvent; or Maximum Investigation
of Business number of Pro!t Only
Partners
he has applied to be
adjudicated as an insolvent
and his application is
pending Compromise Conversion E-Filing of Foreign
or
Arrangement into LLP Documents LLPs

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8. Advantages of LLP form 2. Incorporation by registration (Section 12)

is organized and operates on the basis of an agreement

• The Registrar shall retain the incorporation document
and shall, within a period of 14 days—
• register the incorporation document; and
provides $exibility without imposing detailed legal and • give a certificate that the LLP is incorporated by the
procedural requirements name speci!ed therein.

easy to form
%e certi!cate issued shall be signed by the Registrar
and authenticated by his official seal.

all partners enjoy limited liability

%e certi!cate shall be conclusive evidence that the LLP

is incorporated by the name speci!ed therein
$exible capital structure

easy to dissolve 3. Registered office of LLP and change therein

(Section 13)
Registered Manner of Change in Default
II. INCORPORATION OF LLP office sending Registered office
1. Incorporation Document (Section 11) • All
• change the • LLP and its
• by post place of its every partner
Incorporation Two or more persons associated for carrying on a communications under a registered • shall be liable
document lawful business with a view to pro!t shall subscribe and notices certi!cate office and to a penalty
their names to an incorporation document; may be of posting • file the notice of `500 for
• %e incorporation document shall be !led in such addressed or of such change each day
manner and with such fees, as may be prescribed • by • with the during which
with the Registrar of the State in which the and shall be
registered Registrar in the default
registered office of the LLP is to be situated; and received. post or such form and continues,
Statement to be !led: • by any manner and • subject to a
â %ere shall be !led along with the other • subject to such maximum of
incorporation document, a statement in the manner conditions `50,000
prescribed form,
â Made by either an advocate, or a Company
as may be
Secretary or a Chartered Accountant or prescribed and
a Cost Accountant, who is engaged in the • any such
formation of the LLP and change shall
â By any one who subscribed his name to the take e&ect only
incorporation document, upon such
â %at all the requirements of this Act and the !ling.
rules made thereunder have been complied with,
â In respect of incorporation and matters
precedent and incidental thereto. 4. E"ect of registration (Section 14):
l %e incorporation document shall—
• be in a form as may be prescribed;
• state the name of the LLP; suing and
• state the proposed business of the LLP; being sued;
• state the address of the registered office of the LLP;
• state the name and address of each of the
persons who are to be partners of the LLP on
incorporation; doing and
• state the name and address of the persons who acquiring,
su&ering such owning, holding
are to be designated partners of the LLP on
incorporation; other acts and On registration, and developing or
• contain such other information concerning the things as body a LLP shall, by disposing of property,
proposed LLP as may be prescribed. corporate may its name, be whether movable or
lawfully do and capable of immovable, tangible
l If a person makes a statement as discussed su&er
above which he— or intangible;
lknows to be false; or
ldoes not believe to be true, shall be having a
punishable common seal,
â with imprisonment for a term which may if it is decided
extend to 2 years and to have one
â with !ne which shall not be less than `10,000 and
but which may extend to `5 Lakhs.

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5. Name (Section 15) 2. Cessation of partnership interest (Section 24)
(i)

Every limited No LLP shall be in accordance with

liability partnership registered by a name an agreement with
shall have either the which, in the opinion the other partners
words as the last of the Central A person may or,
words of its Government cease to be a
name. is— partner of a
LLP
by giving a notice in
writing of not less
“limited liability undesirable; or in the absence of
than 30 days to the
partnership” or agreement with the
identical or too other partners of his
other partners,
nearly resembles intention to resign
the acronym “LLP”
to that of any other as partner.
limited liability
partnership or
(ii)
a company or a
registered trade
mark of any other on his death or
person under the dissolution of the
Trade Marks Act, LLP; or
1999.

A person shall
cease to be a
partner of a LLP—
6. Reservation of name (Section 16)
if he has
A person may apply in applied to be if he is declared
such form and manner and adjudged as to be of
accompanied by such fee • name of a proposed LLP; or unsound mind
an insolvent
as may be prescribed to the • name to which a LLP proposes or declared as by a competent
Registrar for the reservation to change its name. an insolvent. court; or
of a name set out in the
application as—

(iii)

• that the name to be reserved

Registrar may, if he is is not one which may be the person has notice that the former partner has
satis!ed, subject to the rules rejected on any ground ceased to be a partner of the LLP; or
prescribed by the Central Former partner
• reserve the name for a period
Government in the matter is to be regarded
of 3 months from the date of
as still being a
intimation by the Registrar.
partner of the
LLP unless— notice that the former partner has ceased to be a
partner of the LLP has been delivered to the Registrar.
III. PARTNERS AND THEIR RELATIONS
1. Eligibility to be partners (Section 22)
(iv)
the persons who subscribed
their names to the
incorporation document and
On the incorporation %e former
of a LLP, partner shall partner is not to the to any which he
be discharged to the LLP or other other incurred
from any partners person while being
any other person by and in obligation or a partner.
accordance with the LLP
agreement.

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buSiNeSS lawS
(v) (iii)

in case of death or insolvency of the Former partner if he has reasonable Registrar

Former partner shall former partner, person entitled to his may himself cause to believe that shall obtain a
receive share shall be entitled to receive from !le with the LLP may not !le con!rmation to
the LLP— Registrar the the notice with the this e&ect from
notice Registrar the LLP

his right to share in the accumulated

an amount equal to the pro!ts of the LLP, determined as at the
capital contribution date the former partner ceased to be Where no Registrar shall
actually made to the LLP a partner. con!rmation is register the
given by the LLP notice made by a
within 15 days former partner
after the deduction of
accumulated losses of the
LLP. IV. FINANCIAL DISCLOSURES
1. Maintenance of books of account, other records
(vi) and audit, etc. (Section 34)
(i)
Former partner or maintain
%e LLP proper books of
shall- account
shall not have any
right to interfere in the
management of the LLP.
a person entitled to his
share in consequence of
relating to for each year of
the death or insolvency of
its a&airs its existence
the former partner

3. Registration of changes in partners (Section 25):

(i) on cash basis according to
or accrual basis double entry system
and of accounting
In case of
of any within a contravention,
Every inform change period of
partner such partner
the LLP in his 15 days shall be liable
shall name or of such to a penalty of maintain the
address change. ` 10,000. same at its
registered
(ii) office

A LLP shall for such period

as may be
prescribed.

(ii)
where a person becomes where there is any change in the
or ceases to be a partner, name or address of a partner, such
Every LLP in such
shall- form statement
be signed

!le a notice with the Registrar !le a notice with the

within 30 days from the date he Registrar within 30 days by the
becomes or ceases to be a partner of such change. within 6 prepare a as may be
months Statement prescribed, designated
from the of Account and partners of
end of each and the LLP.
!nancial Solvency
year,
Notice !led with the Registrar shall be signed
by the designated partner of the LLP
for the said !nancial
In case of contravention, LLP and its every designated partner year as at the last day of
shall be liable to a penalty of `10,000. the said !nancial year

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 buSiNeSS lawS
(iii)

Every LLP shall !le

%e accounts of LLP shall be audited in
accordance with prescribed rules.

• within the prescribed time,

• the Statement of Account and Solvency as prepared
• with the Registrar
• every year
• in such form and manner %e CG may, exempt any class /s of LLP from
the requirements by noti!cation in the Official
• and accompanied by such fees as may be prescribed Gazette.

(iv) V. WINDING UP AND DISSOLUTION

Any LLP which fails to comply the provisions related to
the !ling of Statement of Account and Solvency- (i)

The winding up of an LLP may be either

Such LLP and its designated partners-
• shall be liable to a penalty of `100 for each day during
which such failure continues, voluntary
• subject to a maximum of `1 lakh for the LLP and
• `50,000 for every designated partner.
or by the Tribunal
(v)

its every (ii)

Any LLP which designated

such LLP shall be • if the LLP decides;
fails to comply with partner shall
punishable with be punishable • if, for a period of more than six months,
the provisions of !ne -not less than the number of partners of the LLP is
sub-section (1), with !ne- not
`25,000, but may less than reduced below two;
sub-section (2) and extend to `5 lakh,
sub-section (4), `10,000, but • if the LLP is unable to pay its debts;
may extend to
Circumstances • if the LLP has acted against the interests
`1 lakh.
of the sovereignty and integrity of
in which LLP India, the security of the State or public
2. Annual return (Section 35): order;
may be wound
• if the LLP has made a default in filing
up by Tribunal with the Registrar the Statement of
Account and Solvency or annual
within 60 days return for any 5 consecutive !nancial
duly of closure of its years; or
authenticated !nancial year. • if the Tribunal is of the opinion that it
with the is just and equitable that the LLP be
Every LLP shall !le Registrar wound up.
an annual return

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