SCHOOL OF MANAGEMENT STUDIES

UNIT – I – MERCANTILE LAW – SBAA13202

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 UNIT – I – The Indian contract Act. 1872

INTRODUCTION ABOUT LAW

The rule of conduct imposed by a Govt. to maintain order and fairness is called
law; laws are exacted and backed by authority and power of the state.

THE INDIAN CONTRACT ACT, 1872

The law of contract of India is contains in the Indian Contract Act 1872. This act
is based mainly an English common law. It extends to the whole of India (Except the
state of Jammu & Kashmir) and came into force on the first day of September 1872.
The Act is not exhaustive because, it does not deal with all the Branches of the
law of contract. There are separate set which deal with contracts relating to negotiable
instruments, transfer of properly, state of goods, partnerships, Insurance etc.

Scheme of the Act:

1. General principles of the law of the contract (sec1-75)

2. Specific kinds of contracts

a) Contracts of indemnity and guarantee (124-147)

b) Contracts of Bailment & Pledge (sec 148-181)

c) Contracts of Agency (sec 182-238)

Definition of contract:

According to sec 2(h) of the Indian Contract Act, An Agreement enforceable by law is a
contract”. So, it is clear that a contract is an agreement made between two or more
parties which the law will enforce.

There are two elements in the above definition such as

1. An agreement between two parties

2. Enforceability

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Agreement and two parties:

As per sect 2(e): “Every promise and every set of promises, forming
consideration for each other, is an agreement.” Thus, it is clear that the ‘promises’ is an
agreement.
As per sec 2(b): “A proposal, if it is accepted becomes a promise”, this means
that an agreement is an accepted proposal. So, an agreement comes into existence only
when one party makes a proposal (or offer) to the other party and the other gives his
acceptance there to.
Agreement= offer + Acceptance

Enforceability:

An agreement, to become a contract, should create legal obligation or duty. If

an agreement is incapable of creating legal duty, it is not a contract. So, agreements of
moral, religious or social nature are not contracts, because they do not create legal obligations
between the parties. For eg: inviting a friend to dinner, a father promise to his son for a
gift etc. are of social obligations. As these agreements cannot create legal duties, they
cannot become contracts. But in business agreements, it is assumed that the parties
concerned create legal duties, hence they are contracts.
So, it is clear that an agreement is a wider term than a contract. “All contracts
are agreements but all agreement are not contracts”. To sum up:
Contract = Agreement + Enforceability

Consensus ad-idem:

The essence of an agreement is the meeting the minds of the parties in all this
means that the parties to the agreement must have agreed about the subject-matter of
the agreement in the same sense and the same time, in other word, there should be
consensus ad=idem between the mind of the parties. Unless there is consensus ad-idem,
there should be no contract.

ESSENTIAL ELEMENT OF VALID CONTRACT:

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1. Offer and Acceptance:

There must be a lawful offer and a lawful acceptance of the offer. So, there must
be two parties to an agreement. i.e., one party making the offer and the other party
accepting it. The terms of the offer should be definite and acceptance should be
absolute.

2. Intention to create legal relationship:

Where the two parties, enter into agreement, their intention must be to create
legal relationship between them. If there is no such an intention, there is no contract
between them. Agreements of social, religious or domestic nature cannot make the
legal relationship between the parties.
In case of law of balfour vs. balfour (1919) insisted this point. Balfour vs.
balfour 1919: The husband promised to pay his wife a household allowance of ₤30
every month. Later, the husband failed to pay the amount. The wife sued for the
allowance. Held, she could not recover the amount as the agreement did not create any
legal relationship; hence, there was no contract at all.

But, in business agreements it is assumed that parties concerned create a legal

relationship. Thus, an agreement to buy and sell goods intends to create legal
relationship, there is a contract. But, if the parties have expressly declared their
intention not creates any legal relationship even in the business agreement, such type of
agreement cannot become a contract. The case of Rose & Frank co vs. Corruption

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Bros, in a good illustration on the point.

3. Lawful consideration:

The term “consideration” means an advantages or benefits moving from one

party to the other. It means “something in return”. The agreement between lawful only
when party gives something to the other party and receives something from the other
party. Consideration need not necessarily be in cash on hand. It may be an act or
forbearance not doing something or promise to do or not to do something. But it must
be real and lawful.
4. Capacity of parties:

The parties entering into a contract must have certain capacity. They must be
legally competent to enter into a valid contract. They should not suffer from any
incapacity either on account of status like forgiveness of an account of mutual
deficiency like minors, lunatics or any ground if the parties have no capacity, the
contract entered into by them as void of initio.
5. Free and genuine consent:

It is essential that the parties must be on the same mind and on the same subject.
There should consensus ad-idem between the parties to the contract. The parties should
have a free and genuine willingness in making the contract. The consent should have to
been obtained by force or any other by force or any other coercive methods. The
consent is said to be free of it is not obtained by,
A. coercion

B. undue influence

C. fraud

D. mistake and

E. misrepresentation

6. Lawful object:

The act of a contract and consideration should be lawful an object. Lawful if it

is not prohibited by law. An agreement is lawful when it is not.

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 a) illegal

b) immoral

c) oppose to public policy

7. Certainty and Possibility of Performance:

The terms of meaning of the agreement must be certain and definite, otherwise
the agreement will not be enforceable. For example, if A agrees to sell to B ten tone of
oil; no contract is there because it is not clear what kind of oil is intended to be sold.
An agreement to do an impossible act is not valid. For example, an agreement
between A and B to construct a house in one day cannot become a valid contract,
because, the act of the agreement is not possible.
8. Agreement not declared Valid:

The agreement should not have been expressly declared void by any law,
providing in the country.
9. Legal Formalities:

The agreement may be in oral or written form. It is in writing, it must comply

with the prescribed legal formalities in regard to writing, registration and attestation.
There are some legal formalities also in order to make an agreement legally
enforceable. In some cases the document in which the contract has been written, should
be stamped and registered. Thus the legal formalities should be complied with. Then
only a contract can be enforced in a court of law.

CLASSIFICATION OF CONTRACTS:

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1. On the basis of Validity:

a) Valid Contract:

The contract which is enforceable by law is known as valid contract.Sec.10 of

the Indian Contract act, 1872 explains various legal requirements for a valid contract;
they are: offer and acceptance, capacity of parties, lawful consideration, lawful
agreements, free consent, etc. in short a valid contract is one which posses all the
requirements of legal enforceability.
b) Void Contract and Void Agreement:

It is a contract which has no legal effect. It is unenforceable by law. It is not

enforceable at the option of either party. The void contract is not void ab initio. It is
valid at the time of making it, but it becomes invalid in future. This void contract
cannot be enforced by law.
A valid contract becomes void contract due to the following reasons:

i) Due to impossibility – A valid contract becomes void be impossibility of

performance after the formation of the contract. Illustration: A and B contract to marry
each other. But before the date A goes mad. The contract becomes void.
ii) Due to subsequent illegality – A contract also becomes void be subsequent
illegality.
Illustration: A agrees to sell 100 bottles of wine to B for Rs.1000 within 15 days. But
before delivery, the govt. may prohibit the purchase and sells of wine, if it happened, the
contract becomes void.

c. Voidable Contract:

An agreement which is enforceable by law at an option of one or more of the

parties thereto, but not at the option of the others, is a voidable contract. In short, a
voidable contract is one which is enforceable by law at the option of one of the parties.
Until it is avoided or cancelled by one of the parties, it is a valid contract.
Example: A promises to sell his car to B for Rs.1, 00,000. But his consent has obtained
by use of force. Now the contract is voidable at the option of A. he may cancel it or
accepts it.
Circumstances under which a contract becomes voidable:

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 a) When the consent of one of the parties to the contract is obtained by coercion,
undue influence, misrepresentation or fraud.
b) When one party prevents the other party from perform his duty, and then the
contract becomes voidable at the option of the party so prevented.
Example: A contract with B that A shall white wash B house for
Rs.100. A is really and willing to execute the work accordingly. But B
does not entrust his house for whitewash.
c) When one party fails to carryout promise within the specified period, then the
contract becomes voidable at the option of the promise.
Example: X accepts to sell and deliver 50 days of rice to Y for Rs.10,
000 within one week. But X does not supply the 50 bags of rice within
the specified period. Here, the contract becomes voidable at the option
of Y.
d) Illegal or unlawful agreement:

An agreement is illegal and void if its object or consideration is prohibited by

law or is of fraudulent or it’s against to public policy or morality. An illegal agreement
is void ab initio.
e) Unenforceable Contract:

An unenforceable contract is one which cannot be enforced in a court of law

because of some technical defect such as absence of writing or lapse of time, etc.

2. On the basis of formation:

a) Express Contract: If the terms of a contract are expressly agreed upon (whether by
words, spoken or written) at the time of formation of the contracts, it is called as
express contract. Example: A tells B on telephone that he offers to sell his car for
Rs.1,00,000 and B in reply informs A that he accepts the offer. There is an express
contract.
b) Implied Contract: the contract which is not expressed in written or spoken words,
but is to be inferred from the conduct of the parties is called as implied contract.
Example: There is an implied contract if a person;

i) gets into a public bus

ii) takes a cup of coffee in a hotel

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 ii) permits a porter to lift luggage

c) Quasi Contract: A quasi contract is one which resembles a contract but not possess
all the essentials for a valid contract. But quasi contract is valid contract. It is created
by law and it resembles a contract, such a contract does not arise by virtue of any
agreement, express or implied, between the parties but the law infers or recognizes a
contract under certain special circumstances.
For example: 1) Obligation of finder of last goods to return them to true owner

2) Liability of a person to whom money is paid under mistake, to repay it

back In the above cases, there are no offer, acceptance, agreement etc. but in the
eyes of law
these are considered as quasi contracts. The quasi contract is known as “constructive
contracts”.

d) E-Commerce contract:

An E-Commerce contract is one which is entered into between two parties via
internet.

3. On the basis of performance:

On the basis of performance, the contract can be classified as follows:

1) Executed contract: an executed contract is one, in which both the parties have
fulfilled their obligations and which are completely carried out.

2) Executory contracts: an executory contract is one in which both the parties do

not fulfil their obligations. Example: if A makes a contract with B regarding the
sales of his scooter. As per the terms and conditions. A will deliver his scooter to
B within a specified time; B will pay the price offer one month. Here, at the time
of making the contract, both the parties have to fulfil the obligation henceforth.
This is executory contract.
3) Unilateral contract: if one party has to be fulfilling his obligation and the other
has already fulfilled his obligation, it is known as unilateral contract.
4) Bilateral contract: if both the parties have fulfilled their obligation hence, it is
known as bilateral contract.

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 OFFER AND ACCEPTANCE

OFFER is the first and foremost requirement to make an agreement. An offer is a

proposal by one party to another to enter into a legally binding agreement with him. By
means of an offer, a person signifies his willingness to do some acts in order to get
consent from the other party. By making an offer, a person shows his willingness to
enter into an agreement with other.
Ex: ‘A’ says to ‘B’ will you purchase my house for Rs.2, 00,000. ‘A’ in this
case, is making an offer to ‘B’ as he signifies to ‘B’ his willingness to sell his house to
‘B’ for Rs.2,00,000 in order to get ‘B’s acceptance to buy the house.
The person making the offer is known as the “Offeror”, “Proposer”, “Promisor”
and the person to whom it is made is called the “Offeree”, “Proposee”. If the offeree
accepts the offer he is called the “acceptor” or “Promisee”. The term “offer” is used in
English law and it is known is “proposal” in Indian law.
Types of Offer:

1. Express Offer:

An offer, which is express by words, spoken, or written is called an “Express

Offer”. Ex: “M” says or writes to “N” like, “I am ready to sell my house to you for Rs.1,
00,000” This is an offer.

2. Implied Offer:

If the offer is made by the conduct of the parties, it is called as “Implied Offer”.

Illustration: If a transport company runs buses on a particular route, there is an implied

offer by the transport company to carry passengers for a certain fare.
3. Specific Offer:

Where an offer is made to a definite person it is called a specific offer. It can be

accepted only by the person to whom it is made.
4. General Offer:

A general offer is one which is made to be world at large or public in general

and not to any specific person. Advertisement for tracing a missing person or thing,
seeking valuable. Information relating to a missing person or thing etc., are the best
examples for the general offer. Here the offer can be accepted by anybody if interested

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in the offer. The general offer binds the offeror, the leading case on general offer is
Mrs.Carlill vs. carbolic smoke ball co.
Case law: The carbolic smoke ball company issued an advertisement in which the
company offered to pay of $100 to any person who contracts influenza, after having
used their smoke balls three times daily for two weeks, as per the printed directions.
Mrs.Carlill, on the faith of the advertisement, bought and used the balls according to the
direction, but she contracted influenza. She sued the company for the promised reward.
Held, she could recover the amount as by using the smoke balls she had accepted the
offer.
5. Standing Offer or Tender:

A tender (in response to the advertisement) is an offer. It may be either a

“definite offer” or a “Standing offer”. If a person a tender to supply specified goods or
to tender specified services to the person, who invites the tender, such tender is called
as a “definite offer”.
Ex: ABC Company invites tender for the supply of 100 tables. For this reason,
it means an advertisement (this advertisement inviting tender, is not the offer) JK and
TIRES submit the tenders are definite offer. If the company accepts the J’s offer. It is
meant that is a binding contract between ABC co and C.

If the goods or services are required over a certain period, a person may invite
tenders. Such type of tender to supply goods or to tender services over a certain period,
the tender are called as “Standing Offers”.
6. Counter Offer:

When some changes are made by the offeree in the original made by the
offeror, it is called the “Counter Offer”. Here the offeree does not accept the terms and
conditions of the original offer as laid down by the offeror. He wants to make some
changes in the original offer. This counter offer will not become a contract unless the
conditions given by the offeree are accepted by the offeror.
Ex: “A” offers to sell his cycle to “B” for Rs.2000. This is the original offer.
“B” makes a reply offering to purchase it for Rs.1,500. In this case B’s reply is not
acceptance, but it is only a counter offer.
7. Cross Offer:

If two parties makes an identical offer for the same subject matter to each other,

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it is called cross offer. None of them is aware of the fact that the other party is also
making the offer for the same thing. In the case of cross offers they shall not (Institute
acceptance of one’s offer by the other).
Illustration:

“A” writes to “B”, agreeing to sell his car for Rs.1,50,000 on the sameday,
without knowing this “B” writes to “A”, agreeing to buy A’s car for Rs.1,50,000. Both
the parties are unaware of the letters written by one to the other. This is not regarded as
a contract, because it is meant that both the parties make offers simultaneously; but
there is not acceptance at all moreover there is no consensus add idem.

LEGAL RULES OF A VALID OFFER OR ESSENTIALS:

A valid offer should be in confirming with the following rules:

1. An offer must be capable of creating legal relationship:

A social invitation, even if it is accepted, does not create legal relationship

because it is not so intended. An offer therefore, must be such as would results in a
valid contract when it is accepted.
2. An offer must contain definite terms and conditions:

Terms of contract must be definite and not lose or vague. If the terms of an
offer are vague or indefinite, it acceptance cannot create any contractual relationship.
3. An offer must be communicated:

An offer to be complete must be communicated to the person to whom it is

made.

4. An offer must be made in order to get assent of the other:

An offer must be made with a view to obtain the assent the offer to do
something must be made with a view to obtain the assent of other party addresser and
merely with a view to disclosing the intention of making an offer.
5. A statement of price is not an offer:

A mere statement of price is not an offer to sell some goods or things.

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 ACCEPTANCE

Acceptance refers to an act of giving consent by the offeree. If the offer is

considered as the starting point in a contract, acceptance is the concluding point.
Who can accept?

When an offer is made to a particular person, it can be accepted by him alone. If

it is accepted by any other person, it is not a valid acceptance.
In the case of equal offer, any person can accept it. This was incurred in the
case law of Mr.carlill vs. carbolic smoke ball company.

Essentials/legal rules for a valid acceptance:

The acceptance of an offer must satisfy the following conditions.

1. Acceptance should be absolute and unqualified:

It should be given by the offeree without making any variation or addition to the
original. Offeree, even if there is a slight variation effected by the offeree to the original
offer; it will not be a valid acceptance. If any alteration is made to the original offer
unless the counter offer is accepted by the offered is total, it will not become a valid
acceptance.
2. Acceptance should be communicated:

Acceptance should be communicated to the offers in due course. Mere

acceptance by the offeree without communicating to it the offeror cannot become a
valid acceptance.
In the case of general offer, it is not necessary to communicate the acceptance to the
offered. Mere complying with terms and conditions of the offer will amount to a valid
acceptance this was confirmed in the case law of carlill vs. carbolic smoke ball co.
3. It must be given within a reasonable time

4. It must be in the prescribed mode

5. It must be made by the offeree

6. It must show to fulfil his promise

7. It cannot precede an offer

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 8. It must be made before the lapse or revocation of an offer

9. It must be aware of the proposal at the time of the offer

10. Silence does not imply acceptance

11. Acceptance must be in contractual intention

Communication of Offer and Acceptance and Revocation of Offer

The two very important aspects of a contract are the offer and the acceptance of the offer.
However, in the practical world of business and economics, the communication of the
offer and the acceptance and the timings of these are also very important factors.

Communication of Offer and Acceptance

Now we have seen previously that an offer cannot be revoked after the offeror has
communicated it to the offeree. Then the offer becomes binding, it creates legal relations
between the two parties. So when is the communication complete? Effective
communication of the offer and a clear understanding of it is important to avoid
misunderstanding between all the parties.
If the parties are talking face-to-face this is not a problem. The communication happens
in real time and the offer and acceptance will be communicated on the spot, creating no
confusion.
But often times in business the communication occurs via letters and emails etc. So, in
this case, the timeline of communication is important.
Communication of Offer

Section 4 of the Indian Contract Act 1872 says that the communication of the offer is
complete when it comes to the knowledge of the person it has been made to. So when the
offeree (in case of a specific offer) or any member of the public (in case of a general
offer) becomes aware of the offer, the communication of the offer is said to be complete.
So when two people are talking, face-to-face or via telephone, etc the communication
will be complete as soon as the offer is made. Example if A tells B he will fix his roof
for five thousand rupees, the communication is complete as soon as the words are
spoken.

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Let us take the same example. A writes to B offering to fix his roof for five thousand

rupees. He posts the letter on 2nd July. The letter reaches B on 4th July. So the

communication is said to complete on 4th July.

Communication of Acceptance

According to sec.4 of the Indian Contract Act, the Communication of acceptance is

complete as against the acceptor when it comes to the knowledge of the proposer.

Mode of Acceptance

In case of communication of acceptance, there are two factors to consider, the mode of
acceptance and then the timing of it. Acceptance can be done in two ways, namely

A. Communication of Acceptance by an Act: This would include communication

via words, whether oral or written. So this will include communication via
telephone calls, letters, e- mails, telegraphs, etc.
B. Communication of Acceptance by Conduct: The offeree can also convey his
acceptance of the offer through some action of his, or by his conduct. So say
when you board a bus, you are accepting to pay the bus fare via your conduct.
Timing of Acceptance

The communication of acceptance has two parts. Let us take a look

A. As against the Offeror: For the proposer, the communication of the acceptance
is complete when he puts such acceptance in the course of transmission. After
this it is out of his hand to revoke such acceptance, so his communication will be
completed then. So, for example, A accepts the offer of B via a letter. He posts

the letter on 10th July and the letter reaches B on 14th For B (the proposer) the

communication of the acceptance is completed on 10th July itself.

B. As against the Acceptor: The communication in case of the acceptor is
complete when the proposer acquires knowledge of such acceptance. So in the

above example, A’s communication will be complete on 14th July, when B

learns of the acceptance.

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 REVOCATION OF OFFER

The revocation means, “Taking back” or “withdrawal” By means of revocation

of an offer, the offers is withdrawn or cancels by the offeror. The offer can be revoked
at any time, before the offeree posts the letters of acceptance once the letters of
acceptance is posted by offeree, even if it does not reach the offer, the acceptance is
over then the offer cannot be revoked.
Let us take the same example of before. A accepts the offer and posts the letter

on 10th July.

B gets the letter on 14th July. But for B (the proposer) the acceptance has been

communicated on 10th July itself. So the revocation of offer can only happen before the

10th of July.

Circumstances in which the offer is revoked:

In the following circumstances the offer comes to an end either by revocation or laps of

time.

1. Revocation by giving notice:

The offeror can revoke his offer before it is being accepted by the offeree. Mere
posting of letters of acceptance is considered as the time of acceptance and revocation
should be pursued before passing the letter of acceptance and not after words. More
over the revocation must be communicated to the offeree.
2. Lapse of time:

If the offeror has fined any time within which the offeree has to give his
acceptance, the offeree must act so, if he fails to give his acceptance within the time
limit the offer is invoked by the expiry of the time limit.
3. Non-fulfillment of conditions:

If the offeror has laid down any condition for accepting the offer, the offeree
must fulfill them. If not the after stands revoked.
4. Death or Insanity:

If offeror dies or becomes in same the offer is revoked. But, if the offeror without
having the knowledge of the death or insanity of the offeror gives his acceptance, the

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 executes of the deceased offered is bound to execute the contract.
5. Counter Offer:

If the offeror makes some changes to the original made by the offeror, it is
known as counter offer. Unless the changes are accepted by the offeror the offer stands
revoked.
6. Not following the mode prescribed by the offeror.

If the offeror has prescribed any mode to the offeror to communicate the
acceptance the offered is bound to comply with it. On the contrary, if the offeror
chooses a different mode, the offer is considered as revoked, if the offeror has not
prescribed any mode the offeror must follow the usual or reasonable mode.

Revocation of Acceptance

Section 5 also states that acceptance can be revoked until the communication of the
acceptance is completed against the acceptor. No revocation of acceptance can happen
after such date.
Again from the above example, the communication of the acceptance is complete

against A (acceptor) on 14th July. So till that date, A can revoke his/her acceptance, but

not after such date. So technically between 10th and 14th July, A can decide to revoke
the acceptance.

CONSIDERATION

Consideration is a technical term and it means “something in return”. When a

party of an agreement to do something. They must get something in return. This
“something in return” is known as consideration. Ex: ‘A’ wants to sell his car to B for
Rs.50, 000. Car is the consideration for B and the price is the consideration for A.
Sec 2(d) defines consideration as “when at the desire of the promisor, the
promise or any other person has done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such act or abstinence or
promise is called a consideration for the promise.”

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Lawful consideration

Consideration is one of the essential elements of a valid contract. An agreement

without consideration is null and void; such an agreement is not enforceable by law
(However sec 25 of the Indian contract act lays down certain exceptions where there is
no necessary for the consideration even for a valid contract a gratuitous promise will
not create any legal obligation. A promise without consideration cannot be enforced by
law. The “something in return” may be in the form of cash, any goods or services. In
short, the consideration refers to:
a) An act (or).

b) A return promise(or)

c) Some benefit to the promises.

d) Some detriment or loss, or damage to the promisee.

LEGAL RULES AND ESSENTIALS OF A VALID CONSIDERATION:

1. It is required both for formation and discharge of an agreement or contract.

2. It must be lawful

3. It need not be adequate

4. It must be real and not illusory

5. It must move at the desire of the offeror

6. It must be of some value in the eyes of law

7. It may be past, present or future

8. It may be either positive or negative

9. It may be furnished by the promisee or any other person

Exceptions to the rule “No consideration No contracts” or “A contract without

consideration is void”

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1. Love and affection:

If any agreement is made, which is expressed in writing and is made out of

natural love and affection between the parties, standing in near relation to each other
without consideration is void.
In short.

i) The contracting parties should be near relatives for each other.

ii) The agreement should be made out of natural love and affection between one
party.

iii) The agreement should be in written form and it should be registered under the
law for the time being in force.
Ex: “A” out of his love and affection, promises to give his daughter “B” Rs.15, 000
this promise is made in writing and registered. This is a valid contract though there is
no consideration.

2. Compensation for voluntary services:

If there is an agreement to compensate wholly or partly for the voluntary acts

done by another for the promisor, the agreement is valid even the consideration is
absent. Ex:
i. “A” finds B’s purse and gives it to him. “B” promises to give “A” Rs.50. This is
a contract.
ii. “A” supports “B” infant son. “B” promises to pay A’s expenses in so doing.
This is a contract. It is an important point that the past consideration is not at all
a consideration in English law and it should be either present or future
consideration. Under Indian law the past consideration is a valid consideration.
3. Promise to pay a time-barred debt

A promise by a debtor to pay a time-barred debt is enforceable provided it is

made in writing and is signed by the debtor or by his agent generally or specially
authorized in that behalf. A debt is barred by limitation if it remains unpaid or
unclaimed for a period of three years. Such a debt becomes legally irrecoverable.
Ex: D owes C Rs.1,000 but the debt is barred by the Limitation Act. D signs a written
promise to pay C Rs.500 on account of the debt. This is a contract.

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 4. Completed Gift

The rule “No consideration, no contract” does not apply to completed gifts.

5. Agency

No consideration is necessary to create an agency.

6. Charitable Subscription

Where the promisee on the strength of the promise makes commitments, i.e.,
changes his position to his detriment.

Doctrine of Privity of Contract

The Indian Contract Act clearly states that there cannot be a stranger to a contract. This is
explained through the Doctrine of Privity of a Contract.

Doctrine of Privity of Contract or Stranger to Contract

It is a general rule of law that only parties to a contract may sue and be sued on that
contract. This rule is known as the doctrine of privity of contract. Privity of Contract
means relationship subsisting between the parties who have entered into contractual
obligations.
The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to
proceed from a third-party. However, a stranger (third-party) to consideration is
different from a stranger to a contract. The law does not allow a stranger to file a suit on
the contract. This right is available only to a person who is a party to the contract and is
called Doctrine of Privity of Contract. Ex. Peter has borrowed some money from John.
Peter owns a property and decides to sell it to Arjun. Arjun promises to pay John on
behalf of Peter. However, if Arjun fails to pay, then John cannot sue since Arjun is a
stranger to the contract. It is important to note that the Doctrine of Privity has exceptions
which allow a stranger to enforce a claim as given below.

Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a contract can sue on a contract in the
following cases:

20
 1. Trust

2. Family Settlement

3. Assignment of a Contract

4. Acknowledgement or Estoppel

5. A covenant running with the land

6. Contract through an agent

Trust

If a contract is made between the trustee of a trust and another party, then the
beneficiary of the trust can sue by enforcing his right under the trust, even if he is a
stranger to the contract.
Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession
of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and
transfer half of the estate in Ravi’s name, once he becomes 21 years old.

After attaining that age when Ravi didn’t receive the money and asked Arjun
about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held
that a trust was formed with Ravi as the beneficiary for a certain amount and share of the
estate. Hence, Ravi had the right to sue upon the contract between Arjun and his father,
even though he was not a party to it.

Family Settlement, Partition or other family arrangements

If a contract is made under a family arrangement to benefit a stranger (person not a party
to the contract), then the stranger can sue in his own right as a beneficiary of the
contract.
Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as
damages. Eventually, he married someone else, thereby breaching the contract. Nancy
filed a case against Peter which was held by the Court since the contract was a family
arrangement with Nancy as the beneficiary.
Ritika was living in a Hindu Undivided Family (HUF). The family had made a provision
for her marriage. Eventually, the family went through a partition and Ritika filed a suit
to claim her marriage expenses. The Court held the case because Ritika was the

21
beneficiary of the provision despite being a stranger to the contract.

Assignment of a Contract

If a contract is made for the benefit of a person, then he can sue upon the contract even
though he is not a party to the agreement. It is important to note here that nominees of a
life insurance policy do not have this right.
Acknowledgment or Estoppel

If a contract requires that a party pays a certain amount to a third-party and he/she
acknowledges it, then it becomes a binding obligation for the party to pay the third-
party. The acknowledgment can also be implied.
Peter gives Rs. 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be
paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the
amount.

Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of
the sale price, Pankaj was to be paid Rs. 25,000 as his professional charges. Seema
promised to pay Pankaj the amount before taking possession of the property. She made
three payments of Rs. 5,000 each and then stopped paying him. Pankaj filed a suit
against Seema which was held by the Court because Seema had acknowledged her
liability by conduct.
A Covenant Running with the Land

When a person purchases a piece of land with the notice that the owner of the land will
be bound by all duties and liabilities affecting the land, then he can sue upon a contract
between the previous land-owner and a settler even if he was not a party to the contract.
Peter owned a piece of land which he sold to John under a covenant that a certain part of
the land will be maintained as a public park. John abided by the covenant and eventually
sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the
specific plot. When Peter came to know of it, he filed a suit against Arjun. Although
Arjun denied liability since he was not a party to the contract, the Court held him
responsible for violating the covenant.
Contract through an Agent

If a person enters into a contract through an agent, where the agent acts within the scope
of his authority and in the name of the person (principal).

22
 CONTRACTUAL CAPACITY

The parties who enter into a contract must have the capacity to do so. All
persons cannot make a valid contract.
Eligible persons:

A person who is of the age of majority, is of sound mind is not disqualified

from contracting by any law, a make a valid contract. Hence, the persons who are not
competent to contract such as minor, persons of unsound mind and other persons,
disqualified by law.

MINOR:

According to sec 3 of the Indian Majority Act, 1875, ‘A minor is a person, who has not
completed 18 years of age’. In the following two situations, he attains majority offer 21
years of age.
i. If there is any guardian, appointed by the court (or).

ii. If the properties of minor are in superintendence of the court.

Minor’s agreement: The law regarding minor agreement is as follow:

1) An agreement with or by a minor is void and inoperative:

Generally the agreements entered into by a minor are void and the other party cannot
enforce the claim in a court of law. A party who has advanced money or obtainer
mortgage on the properties of a minor cannot recover the amount and the mortage is
void. (Mohiri bibi Vs Dharmados Ghose).
In this case, a minor executed a mortage deed for Rs.20,000 but received only
8,000…later, he filed a case to cancel the agreement and the creditor (the money lender)
claimed the refund of Rs.8000. Held, the agreement is void and the amount cannot be
recovered.
2) Minor can be beneficiary or a promisee or a payee:

In some cases, contracts entered into a minor are voidable and they are enforceable at the
option of the minor and not at time option of the other party. Ex., if a person has
advanced money to a minor it cannot be recovered and the contract is void. On this
contrary, if a minor has advanced any loan to a party, this contract is enforceable at the

23
 option of the minor and the other party cannot refuse to repay the amount. Thus the
contract is voidable. Ex. M aged 17 agreed to buy a second-hand bike for Rs.5,000
from S. He paid Rs.200 as advance and agreed to pay the balance the next day and
collect the bike. When he came with money the next day, S told M that he had changed
his mind and offered to return the advance. S cannot avoid the contract though M may,
if he likes.
3) Valid contract in the case of necessaries:

Some contracts made by the minor are perfectly valid and they can find the minor, if
they are for their “necessaries”. If a person supplies necessaries to a minor or lends
money to the minor to purchase necessary things, or to meet his educational of medical
expenses, such an amount can be recovered. Hence, the contracts by minor with minor
for necessary goods or necessarily services to mine become valid absolutely. His
properties can be held for this purpose, but he is not personally liable for this case.
4) Notification:

Notification means the act of confirming, or make as valid. The minor cannot satisfy his
agreement after attaining the agreement of majority. For eg: A minor borrows Rs.5000
from”A” and executes a promissory note in favor of “A”. After attaining the age of
majority, he executes another promissory note in settlement of the first note. The
secondary promissory note is void.
5) No restitution:

The minor cannot be ordered to make compensation for a benefit obtained under a void
agreement. In other words, if he has received only benefit under a void agreement, he
need not return back the benefit; he need not give any compensation for it.
6) He can always plead minority:

If a minor by misrepresenting this age, makes a contract with another person, he cannot be
sued. Eg: “J” a minor, by fraudulently representing himself to be full age, induced to
“L” sends him for the money. Held, the contract was void and “s” was not liable to
repay the amount. Hence the principle of estoppels is not applicable to minor.
7) No specific performance:

Specific performance means the actual carrying out of the contract as agreed. Since an
agreement by a minor is void, the court will never direct “specific performance” of
such an agreement but a contract entered into by his guardian or his manager of the

24
estates. (Behalf of the minor) can find the minor, if the following conditions are
fulfilled.
a. The contract should be within the authority of the guardian or manager.

b. It should be for the benefits of the minor.

8) Minor as a partner:

Generally a minor cannot become a partner in a partnership firm. But, he may be

admitted to the benefits of an existing partnership firm as a partner, with the consent of
the entire partner. But, his liability is limited.
9) The minor can acts as an agent.

The acts done by the minor as the agent are binding the principal if they are done
within the scope of authority given to him.
10) The minor cannot be declared as insolvent.

a) The partner or guardian, are not capable for agreement. Made by the
minor on though the agreement is for necessaries.
b) The minor is not liable, if he is a surety in a contract of guarantee.

INCAPACITY OF CONTRACT

Thus incapacity makes contracts in valid, and incapacity may be broadly classified into
two:

a) Incapacity arising from status.

b) Incapacity arising from mental deficiency.

Incapacity arising from status:

Person is disqualified to make a valid contract because of this position/status, they are
as follows:

I) Foreign Ambassador:

This person enjoys special status. They are competent to enter into a valid contract. But
they can be sued only if they submit themselves to the judicious of the court. Further
contract gouts permissions are also essentials to suit them.

25
 II) Alien enemy:

An alien is a person who is not a subject of the Republic of India. He may be (i) an alien
friend or (ii) an alien enemy
During normal time, trade can be takes place between trades of two different nations,
but if war breaks out, the enemy countries is regarded as alien enemy, and no contract
can be entered into during the time of war with it. Contracts made before the war may
either be suspended or dissolved.

III) Convicts:

Persons who are undergoing imprisonment cannot make a contract during the
convictions period.
IV) Insolvent:

Persons who are adjudicated as insolvents or bankrupt cannot there after enter into a
contract and all the contracts entered previously by them also comes to an end.
V) Company:

A company cannot enter into a contract which requires physical capacity or physical
entry. The contract entered into by a company will be valid only if its contractual
capacity permits in objects clause of Memorandum of Association.
VI) Married women:

Married women are having capacity to make valid contract, as like their husbands for
their basic requirements. A married woman may sue or be sued in her own name in
respect of her separate property.

INCAPACITY ARISING FROM MENTAL DEFICIENCY

Person who is mentally deficient cannot make a valid contract. The following persons
are having mental deficiency and they are disqualified from making contracts.
i) Minor:

Minor is a person who has not obtained the age of majority as per 20 c (3) of the Indian
Majority Act 1875. The persons who are below the age of 18 years. A minor is
mentally not matured and he is incompetent to make a valid contract.
ii) Idiots:

26
A person who has completely lost his mental powers and who is incapable of forming a
rational judgment is called an idiot. Idiocy is a permanent one. An idiot or a natural
food is a person who has no understanding power. All agreement, other than those for
necessaries of life with idiots is absolutely void.
iii) Lunatics:

A person, whose mental powers are due to some mental strain, is called as a lunatic. It
is not armament as in the case of idiocy. The lunatic will suffer from intervals of sanity
and insanity. In other words, lunatics in some intervals will be of sound mind and the
said intervals are called lucid intervals and in some intervals, they will be of unsound
mind. They can enter into a contract during the lucid intervals.
Persons of unsound mind:

One of the essential conditions of competency of parties to a contract is that they

should be sound mind. According to the contract act, the term soundness refers to.
a) Capacity of understanding the contents of agreement (at the time of making
an agreement).
b) Ability to make a national decision regarding the contract at the time of
making an agreement.
If a person is capable of both, he suffers from unsound mind. A person, who is
usually of unsound mind, but occasionally of sound mind, may make a contract, when
he is of sound mind. A person, who is usually of sound mind, but occasionally of
unsound mind. Cannot make a contract, when he is of unsound mind.

FREE CONSENT

Meaning of “consent” and “free consent”:-

Consent, it means acquiescence or act of assenting to an offer. “Two or more

persons are said to consent when they agree upon the same thing in the same
sense.”(Sec-13).
Free consent, Consent is said to be free when it is not caused by-

1. Coercion as defined in sec. 15, or

2. Undue influence as defined in Sec. 16 or

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 3. Fraud as defined in sec 17 or

4. Misrepresentation as defined in sec 18 or

5. Mistake, subject to the provision of sec- 20,21,22

Coercion

When a person is compelled to enter into a contract by the use of force by the
other party or under a threat, “coercion” is said to be employed.
Coercion includes fear, physical compulsion and menace to goods.

Example: - A threatens to kill B if he does not lend Rs. 1000 to C. B agrees to lend
the amount to C. The agreement is entered into under coercion.

Undue influence

Sometimes a party is compelled to enter into an agreement against his will as a

result of unfair persuasion by the other party. This happens when a special kinds of
relationship exists between the parties such that one party is in a position to exercise
undue influence over the other.

Difference between coercion and undue influence: -

Coercion Undue influence
The consent is given under the threat of an The consent is given by a person who is so

offence (i.e., committing or threatening to situated in relation to another that the other
commit an act forbidden by the Indian penal person is in a position to dominate his will. In
code or detaining or threatening to detain other words, consent is given under moral
property unlawfully.) influence.
Coercion is mainly of a physical character. It Undue influence is of moral character< It
involving mostly use of physical or violent involves use of moral force or mental pressure.
force.
There must be intention of causing any person Here the influencing party uses its position to

to enter into an agreement. obtain an unfair advantage over the other party.
It involves a criminal act. No criminal act is involved.

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Misrepresentation and fraud

A representation, when wrongly made, either innocently or intentionally, is a

misrepresentation. Misrepresentation may be-
1. An innocent or unintentional misrepresentation, or

2. An intentional, deliberate or willful misrepresentation with intent to deceive or

defraud the other party.
The former is called “misrepresentation” and the latter “fraud”.

MISREPRESENTATION

Misrepresentation is a false statement which the person making it honestly believes to

be true or which he does not know to be false. It also includes non-disclosure of a
material fact or facts without any intent to deceive the other party.
Example: - A while selling his mare to B, tells him that the mare is thoroughly sound.
A genuinely believes the mare to be sound although he has no sufficient ground for the
belief. Later on B finds the mare to be unsound. The representation made by A is a
misrepresentation. FRAUD
According to Sec.17”fraud” means and includes any of the following acts committed
by a party to a contract, or with his connivance (intentional active or passive
acquiescence), or by his agent with intent to deceive or to induce a person to enter into
a contract:
1. The suggestion that a fact is true when it is not true and the person making the
suggestion do not believe it to be true.
2. The active concealment of a fact by a person having knowledge or belief of
the fact:

3. A promise made without any intention of performing it;

4. Any other act fitted to deceive;

5. Any such act or omission as the law specially declares to be fraudulent.

Example: - A sells, by auction, to B a horse which A knows to be unsound. A says

nothing to b about horse’s unsoundness. This is not fraud in A.

29
Mistake

Mistake may be defined as erroneous belief about something. It may be a mistake of

law or a mistake of fact.
1. Mistake of law of the country: - example: - A and B enter into a
contract on the erroneous belief that a particular bet is barred by the Indian
Law of Limitation. This contact is not voidable.
2. Mistake of law of a foreign country. Such a mistake is treated as mistake of
fact and the agreement in such a case is void. (Sce-21)
Mistake of fact:

1. BILATERAL MISTAKE:

When both the parties to an agreement are under a mistake as to a

matter of fact essential to the agreement, there is a bilateral mistake.
A) Mistake as to the subject –matter:

Where both the parties to an agreement are working under a mistake relating to the
subject matter, the agreement is void. Mistake as to the subject-matter covers the
following cases:
i. Mistake as to the existence of the subject-matter: -

If both the parties believe the subject matter of the contract to be in existence,
which in fact at the time of the contract is non-existent, the contract is void. Example:
- A agrees to buy from B a certain house. It turns out that the house was dead at the
time of the bargain, though, neither party was aware of the fact. The agreement is
void.
ii. Mistake as to the identity of the subject-matter: -

It usually arises where one party intends to deal in one thing and the other
intends to deal in another. Example: - W agreed to buy from R cargo of cotton “to
arrive ex-peerless from Bombay”. There were two ships of that name sailing. From
Bombay”. There were two ships of that name sailing. From Bombay, one sailing in
October and the other in December. W meant the former ship but R meant the later.
Held. There was a mutual or a bilateral mistake and there was no contract.

30
iii. Mistakes as to the quality of the subject-matter:

If the subject-matter is something essentially different from what the parties

thought it to be, the agreement is void. Example: - table napkins were sold at an
auction by a description “with the crest of Charles I and the authentic property of that
monarch”. In fact, the napkins were Georgian. Held, the agreement was void as there
was a mistake as to the quality of the subject- matter.
iv. Mistake as to the quantity of the subject-matter: -

If both the parties are working under a mistake as to the quantity of the subject-
matter, the agreement is void. Example: - A silver bar was sold under a mistake as to
its weight; There was a difference in value between the weight of the bar as it was and
as it was supposed to be. Held, the agreement was void.
v. Mistake as to the title to the subject-matter: -

Example: - a person took a lease of fishery which, unknown to either party,

already belonged to him. Held, the lease was void.
vi. Mistake as to the price of the subject-matter:

Example: - C wrote to W offering to sell certain property for $ 1250. He earlier

declines an offer from w to buy the same property for $ 2000. W who knew that this
offer of $ 1250 was a mistake for 2250, immediately accepted the offer. Held, W knew
perfectly well that the offer was made by mistake hence the contract could not be
enforced.
vii. Mistake as to the possibility of performing the contract: -

Consent is nullified if both the parties believe that an agreement is capable of

being performed when in fact his is not the case (sec-56, para 1). The agreement, in
such a case, is void on the ground of impossibility.
Impossibility may be—

a. Physical impossibility: - Example:- A contract for the hire of a room for

witnessing the coronation procession of Edward VII was held to be void because,
unknown to the parties, the procession of Edward VII was held to be void because,
unknown to the parties, the procession had already been cancelled.

b. Legal impossibility. A contract is void if it provides that something shall

31
 be done which cannot, as a matter of law, be done.
II. Unilateral Mistake:-

When in a contract only one of the parties is mistaken regarding the subject-
matter or in expressing or understanding the terms or the legal effect of the agreement,
the mistake is a unilateral mistake.
Example: - A buys an article thinking that it is worth Rs.1000 when it is worth
only Rs50. A cannot subsequently avoid the contract.

LAWFUL OBJECT AND CONSIDERATION

If an agreement is to be enforced in a court of law, both consideration and object

of the agreement must be lawful. When one of consideration or object is unlawful, the
contract is void. In order to constitute a valid contract, both consideration as well as
object must be lawful; otherwise would be void.
According to section 23 “The consideration or object of an agreement is lawful
unless it is forbidden by law; or is of such a nature that if permitted, it would defeat the
provisions of any law; or is fraudulent; or involves or implies injury to the person or
property of another; or the court regards it as immoral, or opposed to public policy. In
each of these cases, the. consideration or object of an agreement is unlawful is void”.
Section 2(d) of the Indian Contract Act defines consideration as when at the
desire of the promisor, the promise or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing
something, such act or abstinence or promise is described a consideration for the
promise. Example: A agrees to sell his home to B for Rs.10,00,000. Here B's promise to
pay Rs.10,00,000 is the consideration for A's promise to sell the home and A's to sell the
home is the consideration for B’s promise to pay Rs.10,00,000.

When Consideration or Object is Unlawful?

1. If it is forbidden by law:

Law forbids an act for various reasons. If the consideration or the object of an agreement
is doing of such an act which is forbidden by law, the agreement is void. Example: A

32
promises B to drop a prosecution which he has instituted against B for robbery, & B
promise to restore the value of the things taken. The agreement is void, as its object is
unlawful.
2. If it is of such a nature that, if permitted, it would defeat the provisions of
law:

It refers to cases where, there being no express statutory prohibition against a particular
type of contract, the nature of the contract is such that it would be against the spirit of a
particular law, whether enacted or otherwise. Examples: (a) An agreement between
husband and wife to live separately is invalid as being opposed to Hindu Law. (b) An
agreement by the debtor not to raise
3. If it is fraudulent:

It refers to contract which are entered into between parties with an object which is
fraudulent or with a purpose which will in effect promote fraud.
Examples: (a) A, promises to pay Rs 200 to B, if B would commit fraud on C. B agrees.
B’s agreeing to defraud is unlawful consideration for A’s promise to pay. Hence the
agreement is illegal and void.
(b) A, B and C enter into an agreement for the division among them of gains acquired,
or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.
4. If it involves or implies injury to the person or property of another:

If the object of an agreement is to cause injury to the persons or property of another, it is

unlawful. Injury means criminal or wrongful harm. An agreement to commit an assault
is void.
Examples: (a) An agreement by which a debtor, who borrowed Rs 100, promised to do
manual labour without pay for the creditor, so long as the debt was not repaid in full has
been held to be void, as it involved injury to the person of the debtor.
(b) An agreement between some persons to purchase shares in a company, and thus by
fraud & deceit to induce other persons to believe that there is a bonafide market for the
shares, is void.

5. If the court regards it as immoral:

Agreement which are contrary to good morals are illegal and void. If the consideration
for the agreement is an act of sexual immorality the agreement is illegal. Examples: An
agreement for future marriage, after death of first wife is against good morale.

33
6. Where the court regards it as opposed to public policy:

If the court regards it as opposed to public policy, the agreement is void. Public policy
means the policy of the law at a stated time.

VOID AGREEMENTS
A void agreement is one which is not enforceable by law (Sec. 2g). Such an
agreement does not give rise to any legal consequences and is void ab initio.
The following agreements have been expressly declared to be void by the Contract
Act;

1. Agreements by incompetent parties (Sec. 11)

2. Agreements made under a mutual mistake of fact (Sec. 20)

3. Agreements the consideration or object of which is unlawful (Sec. 23)

4. Agreements the consideration or object of which is unlawful in part (Sec. 24)

5. Agreements made without consideration ((Sec. 25)

6. Agreements is restraint of marriage (Sec. 26)

7. Agreements in restraint of trade (Sec. 27)

8. Agreements in restraint of legal proceedings (Sec. 28)

9. Agreements the meaning of which is uncertain (Sec. 29)

10. Agreements by way of wager (Sec. 30)

11. Agreements contingent on impossible events (Sec. 36)

12. Agreements to do impossible acts (Sec. 56)

13. In case of reciprocal promises to do things legal and also other things illegal,
the second set of reciprocal promises is a void agreement. (Sec. 57)

WAGERING AGREEMENTS OR WAGER

A wager is an agreement between two parties by which one promises to pay

money or money’s worth on the happening of some uncertain event in consideration of
the other party’s promise to pay if the event does not happen. Ex. A and B enters into an

34
agreement that A shall pay Rs.100 to B, if it rains on Monday.
Essentials of a wagering agreement

1. Promise to pay money or money’s worth

The wagering agreement must contain a promise to pay money or money’s

worth.

2. Uncertain event

The promise must be conditional on an event happening or not happening. A

wager generally contemplates a future event, but it may also relate to a past
event provided the parties are not aware of its result or the time of its
happening.
3. Each party must stand to win or lose

Upon the determination of the contemplated event, each party should stand to
win or lose. An agreement is not a wager if either of the parties may win but
cannot lose or may lose but cannot win.
4. No control over the event

Neither party should have control over the happening of the event one way or
the other. If one of the parties has the event in his own hands, the transactions
lacks an essential ingredient of a wager.
5. No other interest in the event

Lastly, neither partly should have any interest in the happening or non-
happening of the event other than the sum or stake he will win or lose.
The following transactions are, however, not wagers

1. A crossword competition involving a good measure of skill for its successful

solution.

2. Games of skill

3. A subscription or contribution or an agreement to subscribe or contribute

towards any plate, prize or sum or money of the value
4. Share market transactions in which delivery of stocks and shares is intended to
be given and taken
5. A contract of insurance.

35
Difference between Contract of Insurance and Wagering Agreement
Sl. No. Contract of Insurance Wagering Agreement
1. The assured has an insurable interest in the There is no such interest

subject matter
2. Both the parties are interested in the It is only one of the parties who is

protection of the subject-matter interested in its protection

3. Except life insurance, it is a contract of The amount is fixed

indemnity
4. It is beneficial to the public It do not serve any useful purpose

5. It is based on scientific and actuarial It is just a gamble

calculation of risks.

PERFORMANCE OF CONTRACT

Performance of contract takes place when the parties to the contract fulfill their
obligations arising under the contract within the time and in the manner prescribed. Sec
37 lays down that the parties to a contract must either perform or offer to perform their
respective promises, unless such performance is dispensed with or excused.
Offer to Perform

Sometimes it so happens that the promiser offers his obligation under the
contract at the proper time and place but the promisee does not accept the performance.
This known as “attempted performance” or “tender”. Sec. 38 sums up the position in
this regard thus: where the promisor has made an offer of performance to the promisee,
and the offer has not been accepted, the promisor is not responsible for non-
performance, nor does he thereby lose his rights under the contract.

Requisites of a valid tender / attempted performance

It must be unconditional. Ex. D a debtor offers to pay to C, his creditor, the

amount due to him on the condition that C sells to him certain shares at cost.
This is not a valid tender.

It must be of the whole quantity contracted for or of the whole obligation. Ex. D
a debtor offers to pay to C, his creditor, the amount due in instalments and

36
 tenders the first instalment. The tender is not of the whole amount due and
hence it is not a valid tender. It must be by a person who is in a position and is
willing to perform the promise.

It must be made at the proper time and place. Ex. D owes Rs.1000 C on 1 st of
August with

interest. He offers to pay on 1st July the amount and interest upto 1st July. This
is not a valid tender.
It must be made to the proper person. i.e. to the promisee or his agent. It may be
made to one of the several joint promisees
It must give the reasonable opportunity to the promisee for the inspection of
goods.

CONTRACTS WHICH NEED NOT BE PERFORMED?

A Contract need not be performed—

1. When its performance becomes impossible (sec-56)

2. When the parties to it agree to substitute a new contract or to rescind or alter it

(sec-62).

3. When the promise dispenses with or remits, wholly or in part, the performance of
the promise made to him extends the time for such performance or accepts any
satisfaction for it (sec-63)
4. When the person at whose option it is voidable, rescinds it (sec-64)

5. When the promise neglects or refuses to afford the promisor reasonable facilities
for the performance of his promise
6. When it is illegal.

BY WHOM MUST CONTRACT BE PERFORMED

1. Promisor himself

2. Agent

3. Legal representative

4. Third person

5. Joint person

37
WHO CAN DEMAND PREFORMANCNCE?

It is only the promisee who can demand performance of the promise under a contract.
It makes no difference whether the promise is for the benefit of the promisee or for the
benefit of any other person. Example:- A promises B to pay C a sum of Rs. 500. A
does not pay the amount to c. C cannot take any action against A. It is only B who can
enforce this promise against A. Death of promisee, In case of death of promise, his
legal representatives can demand performance.

DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractual relationship between

the parties. A contract is said to be discharged when it ceases to operate, i.e., when the
rights and obligations created by it come to an end. A contract may be discharged:
1. By performance.

2. By agreement or consent

3. By impossibility of performance

4. By lapse of time

5. By operation of law

6. By breach of contract

I. DISCHARGE BY PERFORMANCE

Discharge by performance takes place when the parties to the contract fulfill
their obligations arising under the contract within the time and in the manner
prescribed.
a) Actual performance: When both the parties perform their promises, the contract is
discharged. Performance should be complete, precise and according to the terms of the
agreement, most of the contracts are discharged by performance in this manner.
b) Attempted performance or tender. Tender is not actual performance but is only an
offer to perform the obligation, under the contract. When the promisor offers to
perform his obligation but promisee refuses to accept the performance.

II. DISCHARGE BY AGREEMENT OR CONSENT

38
 As it is the agreement of the parties which binds them, so by their further
agreement or consent the contract may be terminated. This means a contractual
obligation may be discharged by agreement which may be express or implied.
Example: - A sells a car to B on approval with the condition that it should be returned
within seven days if it is found wanting in efficient functioning. B may return the car
within seven days if it is found wanting. Consent to return the car is given to B at the
time of the formation of the contract.
The various cases of discharge of a contract by mutual agreement are dealt within
(Secs-62):

a) Novation takes place when a new contract is substituted for an existing one between
the same parties, or a contract between two parties is rescinded in consideration of a new
contract between third party. Example: - A owes money to B under a contract. It is
agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A.
The old debt of A to B is an end, and a new debt from C to B has been contracted.

b) Rescission (sec-62): Rescission of a contract takes place when all or some of the
terms of the contract are cancelled. It may occur
i. By mutual consent of the parties, or

ii. Where one party fails in the performance of his obligation.

Example: - A promises to supply certain goods to B six months after date. By that
time, the goods go out of fashion. A and B may rescind the contract.
c) Alternation (sec-62) Alteration of a contract may take place when one or more of
the terms of the contract is/are altered by the mutual consent of the parties to the
contract. In such case, the old contract is discharged. Example: - A enters into a
contract with B for the supply of 100 bales of cotton at his godown No.1 by the first of
the next month. A and B may alter the terms of the contract by mutual consent.

d) Remission (sec-63) Remission means acceptance of a lesser fulfilment of the promise

made. Example :-A owes B Rs. 5000 A pays to B and B accepts, in satisfaction of the
whole debt for Rs.2,000 paid at the time and place at which Rs.5000 were payable. The
whole debt is discharged.
e) Waiver: Waiver takes place when the parties to a contract agree that they shall no

39
 longer be bound by the contract. Consideration is not necessary for waiver.
f) Merger: Merger takes place when an inferior right accruing to a party under a contract
merges into a superior right accruing to the same party under the same or some other
contract. Example:
- P holds a property under a lease. He later buys the property. His rights as a lessee
merge into his rights as an owner.
III. DISHARGE BY IMPOSIBILITY OF PERFORMANCE

If an agreement contains an undertaking to perform an impossibility. It is void.

According toSec-56, impossibility of performance may fail into either of the following
categories.
1. Impossibility existing at the time of agreement, the first paragraphs of sec 56
lays down that “an agreement to do an act impossible in itself if void.
2. Impossibility arising subsequent to the formation of contract. Impossibility
which arises subsequent to the formation of a contract is called post-contractual
or supervening impossibility.
I) DISCHARGE BY SUPERVENING IMPOSSIBILITY:-

1. Destruction of subject-matter of contract.

When the subject-matter of a contract, subject-matter of contract, subsequent to

its formation, is destroyed without any fault of the parties to the contract, the
contract is discharged.
Example: - C let a music hall to T for a series of concerts for certain days. The
hall was accidentally burnt down before the date of the first concert. Held, the
contract was void. A contracted to sell a specified quantity of potatoes to be
grown on his farms. The crop largely failed. Held, the contract was discharged.

2. Non-existence or non-occurrence of a particular state of things. Sometimes,

a contract is entered into between two parties on the basis of a continued
existence or occurrence of a particular state of things. Example: - Aand B
contract to marry each other, before the time fixed for the marriage, A goes
mad. The contract becomes void.

3. Death or incapacity for personal service: - Where the performance of a

40
 contract depends on the personal skill or qualification of a party, the contract is
discharged on the illness or incapacity or death of the party. Example:- An artist
undertook to perform at a concert for a certain price. Before she could do so, she
was taken seriously ill. Held, she was discharged due to illness.

4. Change of law or stepping in of a person with statutory authority:- When

subsequent to the formation of a contract, change of law takes place or the
government takes some power under some ordinance or special Act, as for
example, the Defence of India Act, So that the performance of the contract
becomes impossible, the contract is discharged. Example: - D enters into a

contract with P on 1st March for the supply of certain imported goods in the
month of September of the same year. In June by act of Parliament, the import
of such goods is banned. The contract is discharged.

5. Outbreak of war: - A contract entered into with an alien enemy during is

unlawful and therefore impossible of performance. Example: - A contracts to
take in cargo for B at a foreign port. A’s Government afterwards declares war
against the country in which, the port is situated. The contract becomes void
when war is declared.

Impossibility of performance –not an excuse:-

Impossibility of performance is, as a rule, not an excuse for non-performance.”

In the following cases, a contract is not discharged on ground of supervening
impossibility:
a. Difficulty of performance:

A contract is not discharged by the mere fact that it has become more difficult of
performance due to some uncontemplated events or delays.

Examples: - A sold a certain quantity of Finland timber to B to be supplied between

July and September. Before any timber was supplied, was broke out in the month of
August and transport was disorganized so that a could not bring any timber from
Finland. Held, the difficulty in getting the timber from Finland did not discharge A
from performance.

41
 b. Commercial impossibility:-

A contract is not discharged merely because expectation of higher profits is not realized,
or the necessary raw material is available at higher profits is not realized, or the
necessary raw material is available at a higher price because of the outbreak of war, or
there is a sudden depreciation of currency.

Example: - A promised to send certain goods from Bombay to Antwerp in September,

before the foods were sent, war broke out and there was a sharp increase in shipping rates,
held, the contract was not discharged.

c. Impossibility due to failure of a third person: -

Where a contract could not be performed because of the default by a third person on
whose work the promisor relied, it is not discharged.

Example: - A, a wholesaler, entered into a contract with B for the sale of a certain type
of cloth to be produced by C, a manufacturer of that cloth. C did not manufacture that
cloth. Held, A was liable to B for damages.
d. Strikes, lock out and civil disturbances.

Events such as these do not discharge a contract unless the parties have specifically
agreed in this regard at the time of formation of the contract.

Example: - A agreed to supply to B certain goods to be procured from Algeria. The

goods could not be produced due to riots and civil disturbances in the county, held, there
was no excuse for non-performance of the contract.

e. Failure of one of the objects.

When a contract is entered into for several objects, the failure of one of them does not
discharge the contract. Example: - H & B agreed to let out a boat to H for viewing a
naval review on the occasion of the coronation of Edward VII, and to sail round the fleet.
Owing to the king’s illness the naval review was abandoned but the fleet was assembled.
The boat, therefore, could be used to sail round the fleet. Held the contract was not
discharged.

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IV. DISCHARGE BY LAPSE OF TIME
The Limitation Act, 1963 lays down that a contract should be performed within
a specified period, called period of limitation, if it not performed, and if no action is
taken by the promise within the period of limitation, he is deprived of his remedy at
law. In other words, we may say that that the contract is terminated.
V. DISCHARGE BY OPERATION OF LAW

A contract may be discharged independently of the wishes of the parties, i.e., by

operation of law. This includes discharge.
By death by merge
By insolvency

By unauthorized alteration of the terms of a written agreement. By right and

liabilities becoming vested in the same person
VI. DISCHARGE BY BREACH OF CONTRACT

Breach of contract means a breaking of the obligation which a contract imposes;

it occurs when a party to the contract without lawful excuse does not fulfill his
contractual obligation or by his own act makes it impossible that he should perform his
obligation under it. It confers a right of action for damages on the injure party. Breach
of contract may be:-
1. Actual breach of contract, or

2. Anticipatory or constructive breach of contract.

REMEDIES FOR BREACH OF CONTRACT

When a contract is broken, the injured party (i.e., the party who is not in breach)
has one or more of the following remedies:
1. Rescission of the contract.

2. Suit for damages.

3. Suit upon quantum merit.

4. Suit for specific performance of the contract.

5. Suit for injunction.

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1. RESCISSION

When a contract is broken by one party, the other may sue to treat the contract
as rescinded and refuse further performance. In such a case, he is absolved of all his
obligations under the contract
Example: - A promises B to supply 10 bags of cement on a certain day. B agrees to
pay the price after the receipt of the goods. A does not supply the goods. B is
discharged from liability to pay price.
2. DAMAGES

Damages are a monetary compensation allowed to the injured party is the court
for the loss or injury suffered by him by the breach of a contract.

a) Damage arising naturally- ordinary damages:-

When a contract has been broken, the injured party can be recovering from the
other party such damages as naturally arose in the usual course of things from the
breach.
Example: - A contracts to sell and deliver 50 quintals of Farm wheat to B at Rs. 475 per
quintal, the price to be paid at the time of delivery. The price of wheat rise to Rs 500
per quintal and a refuses to sell the wheat. B claim damages at the rate Rs. 23 per
quintal.

b) Damages in contemplation of the parties special damages;

Damage other than those arising from the breach of contract may be recovered
if such damages may reasonable is supposed to have been in the contemplation of both
the parties as the breach of the contract. Such damages, known as special damages,
cannot be claimed as a matter of right.
Example: - P brought from L some copra cake. He sold it to B who sold it to various
dealers, and they in turn sold it to farmers, who used it for feeding cattle. The copra
cake was poisonous and the cattle fed on it died. Claimed against L the damages and
costs he had to pay to B. Cake were to be used for feeding cattle P could claim
compensation.
c) Vindictive or exemplary damages:-

Damages for the beach of a contract are given by way of compensation for loss

44
suffered, and not by way of punishment for wrong inflicted. Hence, vindictive or
exemplary damages have no place in the law of contract because they are punitive
(involving punishment) by nature. But in case of breach of promise to marry, and
dishonor of a cheque by a banker wrongfully when he possesses sufficient funds to the
credit of the customer, the court may award exemplary damages.
d) Nominal damages:- Where the injured party has not in fact suffered any loss by
reason of the breach of a contract, the damage recoverable by him are nominal, i.e.,
very small, for example a rupee.
These damages merely acknowledge that the plaintiff has case and won.

Example: - A firm consisting of four partners employed B for a period of two years.
After six months two partners retired, the business being carried on by the other two. B
declined to pay damages as he had suffered no loss.
e) Damages for loss of reputation: Damages for loss of reputation in case of breach of
contract are generally not recoverable. An exception to this rule exists in the case of a
banker who wrongfully refuses to honour a customer’s cheque. If the customer happens
to be a tradesman, he can recover damages in respect of any loss to his trade reputation
by the breach.

f) Damages for inconvenience and discomfort

Damage can be recovered for physical inconvenience and discomfort. The

general rule in this connection is that the measure of damages is not affected by the
motive or the manner of the breach.
Example: - A was wrongfully dismissed in a harsh and humiliating manner by
G from his employment. Held. A could recover a sum representing his employment.
Held, a could recover a sum presenting his wages for the period of notice and the
commission which he would have earned during the period; but he could not recover
anything for his injured feelings or for the loss sustained from the fact that his dismissal
made it more difficult for him to-obtain employment.
g) Mitigation of damages:

It is the duty of the injured party to take all reasonable steps to mitigate the loss
caused by the breach he cannot claim to be compensated by the party in default for loss
which he ought reasonable to have avoided that is he cannot claim compensation for

45
 loss which is really due not to the breach but due to his own neglect to mitigate the loss
after the breach.

h) Difficulty of assessment: - Although damages which are incapable of assessment

cannot be recovered, the fact that they are difficult to assess with certainty or precision
does not prevent they aggrieved party from recovering them,
i) Cost of decree: The aggrieved party is entitled, in addition to damages to get the
cost of getting the decree for damages. The cost of suit for damages is in the discretion
of the court.
3) QUANTUM MERUIT

The phrase quantum merit literally means as much as earned. A right to sue on a
quantum merit arises where a contract, partly performed by one party, has become
discharged by the breach of contract by the other party. The right is founded not on the
original contract which is discharged or is void but on an implied promise by the other
party to pay for what has been done.

SPECIFIC PERFORMACNE

In certain cases of breach of contract, damages are not an adequate remedy. The
court may, in such cases, direct the party in breach to carry out his promise according
to the terms of the contract. This is a direction by the court for specific performance of
the contract at the suit of the party not in breach.
4) INJUNCTION

Were a party is in breach of a negative term of contact (i.e., where he is doing

something which he promised not to do), the court may, by issuing an order, restrain
him from doing what he promised not to do. Such an order of the Court is known as an
injunction”.
Example: - W agreed to sing at L’s theatre and, during a certain period to sign nowhere else.
Afterwards W made contract with Z to sign at another theatre and refused to perform the
contract with L. Held W could be restrained by injunction from singing for Z.

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 SCHOOL OF MANAGEMENT STUDIES

UNIT – II – MERCANTILE LAW – SBAA1302

1
 UNIT 2 - Contract of Indemnity and Guarantee - Contract of Bailment and Pledge -
Contract of Agency

CONTRACT OF INDEMNITY
A Contract of indemnity is a direct engagement between two parties whereby one promises
to save another from harm. A contract of indemnity means, “a contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself or by
the conduct of any other person.”

DEFINITION: - As provisions made in section 124 of the Indian Contract Act-1872 says
that, “whenever one party promises to save the other from loss caused to him by the conduct of
the promisor himself or by the conduct of any other person is called a Contract of Indemnity.”
Ex. A contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of a certain sum of Rs.200. This is a contract of indemnity.
A and B goes into a shop. B says to the shopkeeper, “let him (A) have the goods, I will see you
paid”. This is a contract of indemnity.
ESSENTIAL ELEMENTS:- A contract of indemnity is a species of the general contract. As such
it must have all the essential elements of a valid contract. The following are the essentials specific
to the Contract of Indemnity:-
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
Thus it is clear that this contract is contingent in nature and is enforceable only when the loss
occurs. A contract of indemnity may be express or implied.

RIGHTS OF INDEMNITY HOLDER WHEN SUED

The promisee in a contract of indemnity acting within the scope of his authority is entitled to
recover from the promisor so under Section 125 of the Act defines the rights of an indemnity
holder which are as under:-

2
1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect
of any matter to which the promise of indemnity applies.
2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in
bringing or defending it he did not contravene the orders of the promisor and has acted as it
would have been prudent for him to act in the absence of the contract of indemnity or if the
promisor authorised him in bringing or defending the suit.
3. Right of recovering sums:- All the sums which he may have paid under the terms of a
compromise in any such suite if the compromise was not contrary to the orders of the promisor
and was one which would have been prudent for the promisee to make in the absence of the
contract of indemnity.
In another case of Mohit Kumar saha v/s New India Assurance Co.-1997 It was held that the
indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the
Surveyor. Any settlement at the lesser value is arbitrary and unfair and violates art.14 of the
constitution.

CONTRACT OF GUARANTEE

The contract of guarantee may be an ordinary or some different type of guarantee which is
different from an ordinary guarantee. Guarantee may be either oral or written. Basically it means
that a contract to perform the promise or discharge the liability of third person in case of his default
and such type of contracts are formed mainly to facilitate borrowing and lending money.

DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge the

liabilities of a third person in case of his default.
i) The person who gives the guarantee is “Surety”.
ii) The person in respect of whose default the guarantee is given is “Principal debtor”
iii) The person to whom the guarantee is given is “Creditor”.

Ex. S promises to a shopkeeper C that S will pay for the items being bought by P if P does not pay
this is a contract of guarantee. In case if P fails to pay, C can sue S to recover the balance. (Birkmyr
v/s Darnell-1704).

3
 ESSENTIALS: - The following are the essential elements of Guarantee:-

1. Existence of Creditor, Surety, and Principal debtor: - Existence of all the three parties are
required.
2. Concurrence: - A contract of guarantee requires the concurrence of all the three parties viz. the
principal debtor, the creditor and the surety.
3. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for
the liability of the Principal debtor.
4. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example a surety cannot be made liable for a debt
barred by Statute of Limitation.
5. Essentials of a valid contract:- A contract of guarantee must have all the essential elements of a
valid contract. But
i) All the parties must be capable of entering into a valid contract, though the principal debtor may
be a person suffering from incapacity to contract. In such a case, the surety is regarded as the
principal debtor and is liable to pay personally even though the principal debtor (ex., a minor) is
not liable to pay
ii) Consideration received by the principal debtor is sufficient for the surety, and it is not necessary
that it must necessarily result in some benefit to the surety himself. The consideration in such
contract is nothing but anything done or the promise to do something for the benefit of the principal
debtor. The section 127 of the Act clarify as under :-
“Anything done or any promise made for the benefit of principal debtor is sufficient
consideration to the surety for giving the guarantee.”

Ex. A agrees to sell to B certain goods if C guarantees for payment of the price of the goods. C
promises to guarantee the payment in consideration of A’s promise to deliver goods to B. This is
sufficient consideration for C’s promise.
6. Writing not necessary: - A guarantee may be either oral or written (sec.126). It may be either
express or implied
4
7. It should be without misrepresentation or concealment: - Section 142 of the Act specifies that
a guarantee obtained by misrepresenting facts that are material to the agreement is invalid, and
section 143 specifies that a guarantee obtained by concealing a material fact is invalid as well.
Ex. 1. A appoints B for collecting bills to account for some of the bills. A asks B to get a guarantor
for further employment. C guarantees B’s conduct but C is not made aware of B’s previous miss-
accounting by A. B afterwards defaults. C cannot be held liable.
Ex. 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment however, C is
not made aware of the fact that A and B had contracted that B will pay Rs.5/- higher that the market
price. B defaults. C cannot be held liable.

DIFFERENCE BETWEEN INDEMNITY & GUARANTEE

INDEMNITY GUARANTEE
1. In indemnity there are two, one who is There are three parties, Principal debtor,
indemnified and the other indemnifier. surety and the Creditor.

2. It consists of only one contract under which There are three contracts between surety,
indemnifier promises to pay in the event of principal debtor and creditor.
certain loss.
3. The contract of indemnity is made to The object of contract of guarantee is the
protect the promise against some likely loss. security of the creditor.

4. The liability of the indemnifier in a contract In guarantee the liability of surety is only a
of indemnity is a primary one. secondary, when principal debtor default.

NATURE, RIGHTS AND LIABILITIES OF A SURETY

The surety who is entitled to be reimbursed by the principal debtor for the amount paid by him on
his behalf. The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract under section 128. A simple diagram representing the
relationship of parties in contract of guarantee is given below:

5
NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal
debtor which means that on a default having been made by the principal debtor the creditor can
recover from surety the all what he could have recovered from the principal debtor.
Ex. The principal debtor makes a default in the payment of a debt of Rs.10,000/- the Creditor may
recover from the surety the sum of Rs.10,000/- plus interest becoming due thereon as well as the
amount spent by him in recovering that amount.

LIABILITY OF SURETY: - Section 128 of the Contract Act, it is clear that although, the liability
of a surety is co-extensive with that of the principal debtor, he may limit his liability. A guarantee
for a part of the entire debt and a guarantee for the entire debt subject to a limit.
Ex. P owes to C Rs.8,000 on a continuing guarantee given by S. S may have given this guarantee
in either of
(a) ‘I guarantee the payment of the debt of Rs.5,000 by P to C.’
(b) ‘I guarantee the payment of any amount lent by C to P subject to a limit of Rs.5,000.’

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

RIGHT AGAINST PRINCIPAL DEBTOR

1. Right of Subrogation
After the payment of the debt to the creditor, the surety is subrogated to the rights of the creditor
i.e., he has the same rights as those of the creditors. Therefore, he can sue the principal debtor to
exercise those rights. Thus if the surety has performed his promise towards the creditor, all the

6
rights of the principal debtor against the creditor devolve upon him.

2. Right of Indemnity
In every contract of guarantee, there is an implied promise by the principal debtor to indemnify
the surety i.e., to compensate the surety. Therefore, upon the payment of debt of the principal
debtor, the surety becomes entitled to recover from the principal debtor, all the amount including
interest plus costs rightly paid to the creditor under the guarantee. The reason is that the surety is
entitled to full indemnification.

3. Right to be Relieved Earlier

A surety can, even before making any payment, compel the debtor to relieve him from liability by
paying off the debt. But, before doing so, the debt should be ascertained.

RIGHTS AGAINST CREDITOR

1. Rights in Case of Fidelity Guarantee
In case of fidelity guarantee i.e., guarantee as to good behaviour, honesty, etc., of the principal
debtor, the surety can ask the employer to dispense with the services of the employee if the latter
is proved to be dishonest.

2. Before the Payment of the Debt Guaranteed

A surety may, after the debt has become due but before he is called upon to pay, require the creditor
to sue the principal debtor to recover the debt. But, in such cases, the surety must undertake to
indemnify the creditor for any risk, delay or expense resulting there from.
3. Right to Claim Securities
After payment of the debt to the creditor or the performance of the promise of the principal debtor,
the surety can recover all the securities which the creditor had with him either before or after the
contract of guarantee was entered into. This right is available to the surety whether or not he knows
about the existence of such security. He is entitled to all of them.
4. Right of Equities
After paying the amount due to the creditor, the surety is entitled to all equities of the creditor that
he had against the debtor as well as any other person with regard to the debt.

7
5. Right of Set-off
Sometimes, the principal debtor is entitled to certain counter claim or deductions from the loan
obtained from the creditor. In such cases, the surety is entitled to the benefit of such counter claim
or deductions, if the creditor files a suit against the surety.

RIGHTS AGAINST CO-SURETIES

When two or more persons give a guarantee for the same debt, they are called as co-sureties. All
of them are equally liable to the creditor for the payment of the debt to the creditor. The rights of
one co-surety against the other co-sureties are as follows:

1. Right to Contribute Equally

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

Sometimes, one co-surety discharges the entire obligations. In such cases, he can obtain equal
contribution from the other co-sureties.
2. Liability of Co-sureties bound in Different Sums
If the co-sureties are bound in different sums, they are liable to pay equally but not more than the
maximum amount guaranteed by each one of them.
Example: A, B and C are sureties for D, enter into three several bonds, each in a different penalty,
such as A in the penalty of Rs.5,000, B in that of Rs.10,000, C in that of Rs.20,000, conditioned
for D’s duly accounting to E. D failed to the extent of Rs.15,000, A, B and C are each liable to pay
Rs.5,000 each.

CONTRACT OF BAILMENT
Contract of bailment means delivery of goods i.e. moveable property by one person who
is generally the owner thereof, to another person for some purpose. The goods are to be returned
to the owner after accomplished the purpose to take further action as per directions of the owner
of the goods. A.T.Trust Ltd., v/s Trippunhura Devaswomi-1954.

8
DEFINITION:- Section 148 of the Indian Contract Act, A bailment is the delivery of goods by
one person to another for upon a contract that they shall when purpose is accomplished be returned
or otherwise disposed of according to the directions of the person delivering them. In a contract of
bailment, the person who delivers the goods called the “Bailor” and to whom the goods are
delivered is called as “Bailee”.
Ex. 1. A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a contract of
bailment between A and B.
2. A lends a book to B to be returned after the examination. There is a contract of bailment between
A and B.
3. A enters into an agreement with B to deliver his bicycle to him on the condition that it shall be
redelivered to A after two days. It will be a contract of bailment.

ESSENTIAL ELEMENTS CONTRACT OF BAILMENT:-

1. CONTRACT
The first condition is that there must be a contract between the two parties for the delivery of
goods. Such contract may be express or implied, written or oral.
2. DELIVERY OF GOODS
This contract is for the delivery of some movable goods from one person (bailor) to another person
(bailee) or to his authorized agent. If the goods are immovable the contract will not be a contract
of bailment.
3. CHANGE OF POSSESSION
The possession of goods must be affected by such contract. Mere custody without possession is
not a contract of bailment. Ex. A servant who receives certain goods from his master to take to a
third party has mere custody of the goods; possession remains with the master and the servant does
not become a bailee.
4. PURPOSE OF DELIVERY
The delivery of the goods is for temporary purposes. It may be for safe-custody, repair, carriage
or for gratuitous use by the bailee.
5. NUMBER OF PARTIES
There is two parties under such contract e.g., the bailor and bailee. The person delivering the goods
9
is called the bailor and the person to whom the goods are bailed is called the bailee.
6. RIGHT OF OWNERSHIP
In a contract of bailment, the right of ownership remains with an owner (bailor) and is not changed.
If the ownership is transferred, the contract will be a contract of sale and is not of bailment.
7. CHANGE OF FORM
If the goods bailed are altered in form by the bailee, such as cloth is converted into a shirt still, the
contract is one of bailment.

8. REDELIVERY OF GOODS
Under such contract, the goods are redelivered to the bailor or according to his directions upon the
fulfillment of the purpose by the bailee.

9. RIGHT OF REWARD
In a contract of bailment, both the parties bailor and the bailee can get a reward but it depends on
the nature of the transaction.
KINDS OF BAILMENT

1. BAILMENT FOR SAFE-CUSTODY

When the bailor delivers his goods to the bailee only for keeping it. in his safe-custody, the
bailment is said to be bailment for safe-custody.
Illustration; A delivers his camera to B to keep it in his safe-custody for six months. This will be
the bailment for safe-custody.
2. BAILMENT FOR USE
If the bailor delivers, the goods to the bailee to use it. The bailment will be the bailment for use.
Illustration; A delivers his bicycle to B to use it for two days. This will be the example of bailment
for use.
3. BAILMENT FOR REWARD OR NON-GRATUITOUS BAILMENT
Where the bailment is for use or for sate-custody and the bailee or bailor can charge for his services,
then it will be the case of bailment for
Illustration: A delivers his bicycle to B to use it for two days for Rs.50 daily. This will be the
bailment for a reward because Bailor (A) will get a reward for the use of a bicycle.
4. GRATUITOUS BAILMENT

10
Where the bailment is for safe-custody or for use and bailee does not charge anything, the bailment
is a bailment for gratuitous. Illustration: A delivers his bicycle to his friend B to use it for two
days without reward. It will be the case of gratuitous bailment.

5. BAILMENT FOR LOST GOODS

When a person finds out the lost goods of another has the same responsibilities as the bailee has
against the goods the bailor. Such implied bailment will be the case of bailment of lost goods.
Under such conditions, the bailee is entitled to retain the goods until he receives compensation for
the trouble and expenses he has to bear in order to find but the owner of the lost goods.
Ex. A found the lost horse B and redelivered it to B. It will be the bailment for lost goods.
6. BAILMENT FOR PLEDGE
When any moveable goods are given as security for the debt, to creditor by the debtor, it will be
bailment for pledge until the repayment.
Ex. A gets loan from B and hands over his jewels to B as security until the repayment of the loan.
It will be the bailment for pledge.

RIGHTS OF THE BAILOR

1. RIGHT TO GET BACK THE GOODS

The bailor has a right to get back the goods bailed by him as soon as the purpose of bailment is
accomplished. If the bailee fails to do so, he is entitled to get reasonable compensation from the
bailee.
2. RIGHT TO TERMINATE THE CONTRACT
The bailor has a right to terminate the contract of bailment if the bailee does any act with the goods
bailed to him. which is inconsistent with the terms of the contract. For example-bailor gives his
Tonga to bailee for his personal use, but he uses it for carrying passengers.
3. EXPENSES OF SEPARATION
If the bailee has mixed the goods of bailor with someone other goods not belonging to bailor
without the consent of the bailor, the bailor has a right to get from bailee the expenses which he
has to bear for the separation of his goods from others.

4. COMPENSATION FOR GOODS

11
If the bailee has mixed the goods of the bailor with someone other goods not belonging to bailor
without the consent of the bailor and bailors goods cannot be separated from the other goods, the
bailor has a right to get reasonable compensation from bailee tor his goods.

5. COMPENSATION FOR UNAUTHORISED USE

If the bailee make’s any use of the goods bailed, which is not in accordance to the conditions of
the bailment, the bailor has a right to get Compensation from the bailee for any damage arising to
the goods from or during such unauthorized use of the goods.
6. COMPENSATION FOR DELAY IN TIME
According to The Contract Act, the bailee is responsible to return, deliver or to tender the goods
to the bailor at a proper time. If he fails to do the bailor has a right to get compensation from bailee
for any loss, destruction or deterioration of the goods due to such delay in time.
7. RIGHT TO SHARE PROFIT
The bailor has a right to share with bailee any profit earned from the goods bailed if it is so provided
by the contract.

DUTIES OF THE BAILOR

1. TO DISCLOSE FAULTS
The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware,
and which materially interfere with the use of them or expose the bailee to extraordinary risks; and
if he does not make such disclosure, he is responsible for damage arising to the bailee directly
from such faults Sec. 150.
Ex. A lends a horse, which he knows to be vicious to B. He does not disclose the fact that the horse
is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage
sustained.

2. TO REPAY NECESSARY EXPENSES

Where under the contract of bailment, the goods have been carried by the bailee or he has done
some work upon them for the bailor and the bailee has received no remuneration, the bailor must
repay to the bailee necessary expenses incurred by him for the purpose of bailment.
Ex. A is a friend of B and repairs B is television set free of cost. On this repair, he bears Rs. 500

12
actual Expenses due to a replacement of parts. B is bound by law to pay Rs. 500, the actual cost of
repair to A.
3. TO REPAY EXTRA-ORDINARY EXPENSES
When the contract of bailment is for reward but bailee does some work for the benefits of the bailor
and bears extraordinary expenses, the bailor is bound to repay these extraordinary expenses in
excess of the original reward.
Ex. A keeps his bicycle for safe custody with B for reward the bicycle gets punctured without the
negligence of B and B repairs it. Now A is bound to pay these repair expenses to B in excess of
the original amount.
4. TO INDEMNIFY BAILEE
The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the
bailor was not entitled to make the bailment, or to receive back the goods, or to give direction
respecting.
Ex. A gives B’s car for use to C without the permission of B. Later on, B gets compensation from
A. Now C’ has legal right to be indemnified by A.

RIGHTS OF BAILEE

1. TO RECOVER DAMAGES
The bailee is entitled to recover all the damages and losses suffered by the bailee due to the defects
in the goods bailed to him with the knowledge of the bailor.

2. RECOVERY OF EXPENSES
The bailee is also entitled to recover all the expenses incurred for the purpose of bailment and for
providing services to the bailor. Ex. A leaves his horse with the neighbour for safe custody for a
week. B is entitled to recover the expenses incurred by him in feeding the horse.

3. RECOVERY OF COMPENSATION
The bailee can also recover compensation from the bailor for any loss caused to him due to any
defect in the bailor’s title.
4. RIGHT OF ACTION AGAINST THE THIRD PARTY
The bailee has a right to take legal action as an owner of the goods, against the third party who

13
wrongfully deprives the bailee of the use of goods bailed or does them any injury. The
compensation received from such claims must be dealt between the bailor and bailee in accordance
with their respective interests.
5. RIGHT OF LIEN
When the bailee has rendered any service involving the exercise of labour or skill in respect of the
goods bailed, he has in the absence of a contract to the contrary, a right to retain such goods until
he receives due remuneration for the services he has rendered in respect of them. Sec 170.

DUTIES AND LIABILITIES OF THE BAILEE

1. TO TAKE CARE OF GOODS

According to section 151, the bailee is bound to take as much care of the goods bailed to him as a
common person takes off his own goods.
2. EXPENSES OF SEPARATION
If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods,
and goods can be separated or divided, the bailee is bound to bear the expenses of separation or
division, and any damage arising from the mixture. Sec 156.

3. UNAUTHORISED USE OF GOODS

If the bailee makes any use of the goods bailed, which is not according to the conditions of the
bailment, he is liable to make compensation to the bailor for any damage arising to the goods from
or during such use of them. Sec 154.

4. INCONSISTENT ACT
A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard,
to the goods bailee inconsistent with the conditions of the bailment. Sec 153.

5. COMPENSATION
If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods in
such a manner that it is impossible to separate the goods bailed from the other goods and deliver
them back, the bailor is entitled to be compensated by the bailee for the loss of the goods. Sec 157.

6. RETURN OF GOODS
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 It is the duty of the bailee to return or deliver, according to the bailor’s directions the goods bailed,
without demand, as soon as the time for which they were bailed has expired, or the purpose for
which they were bailed has been accomplished; Sec. 160.

7. RETURN OF GOODS AT PROPER TIME

The bailee is responsible to return, deliver or tender the goods to the bailor at a proper time. If he
fails to do so, he is responsible to the bailor for any loss, destruction or deterioration of the goods
from that time. Sec 161.
8. RETURN OF PROFIT
In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or
according to his directions, any increase or profit which may have accrued from the goods bailed
Sec 163.

POSITION OF FINDER OF GOODS

A person who finds goods belonging to another and takes them into his custody is subject to the
same responsibility as a bailee as provided in sec.71. Since the position of the finder of goods is
that of a bailee. He is supposed to take the same amount of care with regard to the goods as is
expected of a bailee under section 151. He is also subject to all duties of a bailee including a duty
to return the goods after the true owner is found.
Section 168 and 169 confer certain rights on the finder of goods which are as under:

1. May sue for specific reward offered: The finder of goods has no right to sue the owner for
compensation or trouble and expenses voluntarily incurred by him to preserve the goods, but he
may retain the goods until he receives such compensation and a specific reward offered by the
owner for return of the goods. Refer sec. 168 of the Act.
2. If true owner is diligence not found or he refuses to pay the lawful charges of the finder of the
goods, the finder may sell it on the following conditions:-
i) When the thing is in danger of perishing or losing part of its value.
ii) When the lawful charges of the finder, in respect of the found goods amount to two-third of its
value.
iii) Right of Lien: He can retain the Lien on the found goods until his expenses on find goods are
15
 paid.
iv) Right to sell the goods found:- Finder of the goods has the right to sell the goods found by him
under certain circumstances provided in section 169 of the act with a reasonable notice
mentioning the intention to sale the goods found.

TERMINATION OF BAILMENT
1. ACCOMPLISHMENT OF PURPOSE
When the purpose for which goods were bailed” has been accomplished, the contract of bailment
is terminated and goods are returned to the bailor.

2. EXPIRY OF TIME
When the goods are bailed for a fixed time, the contract of bailment is terminated at the expiry of
the time fixed.
3. DEATH OF THE PARTY
A gratuitous bailment is terminated by the death either of the bailor Sec. 162.
4. BAILEE’S INCONSISTENT ACT
A contract of bailment ‘is voidable (terminated) at the option of the bailee does any act with regard
to the goods bailed’ with the conditions of the bailment.

CONTRACT OF PLEDGE

Section 172 of the Act, pledge is a bailment the delivery of the goods from the ‘pawnor’ to
the ‘pawnee’ which is essential. There must be delivery of the goods i.e. the transfer of possession
from one person to another. The delivery however, be either actual or constructive. Mere
agreement to transfer of possession in future is not enough to constitute a Pledge.
The bailment of goods as security for payment of a debt or performance of a promise is
called "pledge". The bailor is in this case called the "pawnor". The bailee is called "pawnee".

ESSENTIALS OF A VALID CONTRACT OF PLEDGE (SEC.172)

Contract: There must be a contract. The contract may be expressed or implied.
Goods: Pledge can be made of goods only.
Delivery: There must be delivery of goods by one person to another person.
Purpose of delivery:
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  The goods must be delivered for some purpose.
 The purpose must be to deliver the goods as security for
o (a) payment of a debt; or
o (b) performance of a promise.

Return of goods:
 The delivery of goods must be conditional
 The condition shall be that the goods shall be –
o – returned (either in original form or in altered form); or
o – Disposed of according to the directions of the pawnor when the purpose is
accomplished.

RIGHTS OF PAWNEE (SEC.173 AND 176)

1) Right of Retainer [Sec.173]:

Pawnee may retain the goods pledged for –
 (a) payment of the debt or the performance of promise,
 (b) any interest due on the debt; and
 (c) all necessary expenses incurred by him with respect to possession or for preservation
of goods pledged.

2) Retainer for subsequent advances [Sec.174]

 (a) Where the Pawnee lends money to the Pawnor subsequently, after the date of pledge,
it shall be presumed that the he has a right of retainer over the goods already pledged in
respect of the subsequent lending also.
 (b) This presumption can be made invalid only by an expenses provision to that effect.
3) Reimbursement of Expenses [Sec.175]:
Where the Pawnee incurs extraordinary expenses to preserve the goods pledged with him, he is
entitled to receive such amount from the Pawnor.
4) Rights in case of default by Pawnor [Sec.176]
 (a) Suit: Pawnee may institute a suit against Pawnor when there is a default in payment of
debt or performance of promise at the stipulated time.

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  (b) Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as collateral
security, or (b) sell the goods pledged by giving a reasonable notice to the Pawnor.
 (c) Surplus / Deficit on Sale : When there is a surplus on sale, Pawnee shall pay the excess
to the Pawnor. In case of deficit, Pawnor shall be liable for the balance amount.
 (d) No Notice: Where the Pawnee does not give a reasonable notice to the Pawnor, the sale
is valid, but Pawnee is liable to pay damages to Pawnor.
5) Right against true owner of goods [Sec.178A]
 (a) Where the Pawnor has acquired possession of pledged goods, under a voidable contract
u/s 19 or 19A but contract has not been rescinded at the time of pledge, the Pawnee acquires
a good title to the goods, against the true owner.
 (b) The title of Pawnee is good only where – (a) he had no notice of the Pawnor’s defect
in title and (b) he acts in good faith.
Reasonable notice u/s 176 means that a notice of intended sale of the security by the Creditor
within a certain date, so as to afford an opportunity to the Debtor to pay the amount within the
time mentioned in the notice. Notice of sale is essential and a clause in the agreement excluding
the requirement of Notice is inconsistent with the Act & is void and unenforceable.

RIGHTS OF A PAWNOR (SEC.177)

1) Redeem the goods pledged

Meaning of redemption: Right to recover back the goods by making payment of the debt or
performance of promise.
Time for redemption: Where time of redemption is fixed, the pawnor may exercise redemption:
 (a) within the time so fixed; or
 (b) even after expiry of time so fixed, provided –
o the pawnee has not sold the good; and
o the pawnor pays the pawnee all expenses arising on account of his default.
2) Enforce pawnee’s duties: The pawnor has the right to enforce the duties of pawnee, if the
pawnee fails to fulfill his duties.
3) Receive increase in goods: The pawnor has the right to recover from pawnee any increase in
18
goods pledged.

4) Right to receive notice of sales: In case of default by the pawnor to pay the debt or perform
his promise, the pawnee has the right to sell the goods, after giving a reasonable notice to the
pawnor. If the pawnee fails to give notice, the pawnor has the right to recover the loss incurred by
him.

DUTIES OF A PAWNOR (SEC.175)

Pay the debt: The pawnor is liable to pay the debt or perform his promise as the case may be.
Pay deficit on sale: If the pawnee sells the goods due to default by the pawnor, the pawnor must
pay the deficit.
Pay extra – ordinary expenses: The pawnor is liable to pay to the pawnee any extraordinary
expenses incurred by the pawnee for preservation of goods.

Disclose faults in goods: The pawnor is liable to disclose all the faults which
 (a) are material for use of the goods; or
 (b) may put the pawnee to extraordinary risks.
Indemnify the pawnee: If loss is caused to the pawnee due to defect in pawnor’s title to the goods,
the pawnor must indemnify the pawnee.

DUTIES OF A PAWNEE
1) Not to use the goods: The pawnee has no right to use the goods. However, he may use the
goods, if he has been so authorised by the pawnor.
2) Return the goods: The pawnee must return the goods if the pawnor pays the debt or performs
his promise.

3) Take reasonable care: The pawnee must take such care of goods pledged as a man of ordinary
prudence would take care of his own goods.
4) Not to mix goods: The pawnee must not mix his own goods with the goods pledged.
5) Return increase in goods: The pawnee must return to the pawnor any accretion to the goods
pledged with him.

DIFFERENCE BETWEEN PLEDGE & BAILMENT

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 PLEDGE BAILMENT
 Pledge is bailment of goods  Bailment may be for purpose other than by
for a specific purpose, i.e. to provide way of providing security for a loan or
a security for a loan or fulfillment of fulfillment of an obligation. It may be for
an obligation. purpose like repairs, safe custody, etc.
 Pledge is bailment of goods as  Bailment is a delivery of goods by one
security for the payment of debt or for person to another for some purpose upon a
the performance of a promise. contract.
 Moveable property is subject-matter  In the contract of bailment after the
of pledge under the contract Act. accomplishing of the purpose the goods are
to be returned or otherwise disposed of
according to the directions of the Bailor.
 Pawnee, i.e. Pledgee has a right of  There is no right of sale to the
sale of goods pledged on default of Bailee. Bailee may either – (a) retain goods,
Pawnor. He can do so by giving a or (b) sue the Bailor for non – payment of
notice to the pawnor. his dues.
 Pledgee has no right of using goods  Bailee can use the goods bailed as per terms
pledged. of contract.

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 CONTRACT OF AGENCY

An agent is a person employed to do any act for another or to represent another in dealing
with third parties. The person for whom such act is done or who is so represented is called the
principal. Where one person mere gives advice to another in matter of business agency does not
arise because of such advice only does not create an Agency. The following are the various ways
in which a relationship of agency is created:-

TYPES OF AN AGENCY CONTRACT

1. By Express Agreement
A contract of agency can be made orally or in writing (Se.186). Example of a written contract of
agency is the Power of Attorney that gives a right to an agency to act on behalf of his principal in
accordance with the terms and conditions therein.
A power of attorney can be general or giving many powers to the agent or some special powers,
giving authority to the agent for transacting a single act.
2. By Implied Agreement
Implied agency arises from the conduct, the situation or relationship of parties. For ex. Arun and
Prabhu are brothers. Arun lies in Delhi while Prabhu lies in Meerut. Arun with the knowledge of
Prabhu leases Prabhu’s lands in Delhi. Arun realizes the rent and remits it to Prabhu. Arun is the
agent of Prabhu, though not expressly appointed as such. Implied agency includes:
a. Agency by Estoppel (Section 237)
The Doctrine of Estoppel may be stated as where a person by his conduct, or by words spoken or
to act on that belief so as to alter his previous position, he is precluded from denying subsequently
the fact of that state of affairs. For ex. A (Agent) tells T (Third party) within the hearing of P
(Principal) that he (A) is P’s agent. P does not object to this statement of A. Later T supplies
certain goods to A, who pretends to act as an agent of P. P is liable to pay the price to T.

21
b. Wife as Agent
Where a husband and wife are living together, we presume that the wife has her husband’s
authority to pledge his credit for the purchase of necessaries of life suitable to their standard of
living. But the husband will not be liable if he shows that:
(i) he had expressly warned the tradesman not to supply goods on credit to his wife; or
(ii) he had expressly forbidden the wife to use his credit; or
(iii) he already sufficiently supplies his wife with the articles in question; or
(iv) he supplies his wife with a sufficient allowance.
Where the wife lives apart: Wife who is deserted by her husband for no fault of her, has authority
to pledge her husband’s credit for necessaries. The husband cannot escape liability by telling his
wife not to pledge his credit nor even by telling the tradesman not to supply necessaries on credit.

c. Agency of Necessity (Sections 188 and 189):

In certain circumstances, a person who has been entrusted with another’s property may have to
incur unauthorized expenses to protect or preserve it. This is called an agency of necessity.
For example, A sent a horse by railway. On its arrival at the destination, there was no one to receive
it. The railway company, is bound to take reasonable steps to keep the horse alive, was an agent
of the necessity of A.
3. Agency by Ratification (Sections 169-200):
A person may act as an agent on behalf of another without his knowledge or consent, then the
principal is not bound by the contract with the agent in respect of such authority. But the principal
can ratify the agent’s transaction and accept liability. In this way, an agency by ratification arises.
For ex. A may act as P’s agent though he has no prior authority from P. In such a case P may
subsequently either accept the act of A or reject it. If he accepts the act of A, done without his
consent, he is said to have ratified that act and it places the parties in exactly the same position in
which they would have been if ‘A’ had P’s authority at the time he made the contract.

This is ex post facto agency— agency arising after the event. By this ratification, the contract is
binding on principal as if the agent had been authorized before. Ratification will have an effect on
the original contract and so the agency will have effect from the original contract and not on
ratification.

22
 4. Agency by operation of law
Sometimes an agency arises by operation of law. For ex. (i) when a company is formed, its
promoters are its agents by operation of law, (ii) A partner is the agent of the firm for the purpose
of the business of the firm, and the act of a partner, which is done to carry on, in the usual way,
business of the kind carried on by the firm, binds the firm. In all these cases, agency is implied by
the operation of law.

WHO MAY EMPLOY AS AN AGENT:- No person can employ an agent if he does not possess
capacity to contract. So a minor or person of unsound mind cannot become the agent under section
183 of the Indian Contract Act.

According to section 184 of the Act any person can be appointed as an agent but a person who is
not of age of majority and of sound mind cannot be made personally liable for the act done on
behalf of the principal. Minor can create contractual relation but a minor agent cannot be made
personally liable to the principal for the misconduct like an adult agent.

CONSIDERATION: No consideration is required for the creation of an Agency under section

185 of the Act.

CLASSIFICATION OF AGENTS:- On the basis of provisions available in the Contract Act the
following are kinds of Agent in the business of Agency:-

1. Del-Credere Agent:- A del credere agent is one who, in consideration of an extra

commission, guarantees his principal that the persons with whom he enters into contract on
behalf of the principal, shall perform their obligations. He occupies the position of both a
guarantor and an agent.

2. COMMISSION AGENT:- A commission agent is person who purchases and sells goods in
the market on behalf of his employer on the best possible terms and who gets commission for his
labor.
3. FACTOR:- A factor is a mercantile agent entrusted with the possession of goods for the
purpose of selling them. He is entitled to sell the goods in his own name. A factor has a right to
retain the goods for a general balance of accounts.
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4. BROKER:- A broker is an agent who is employed to buy or sell goods on behalf of another. He
is employed primarily to bring a contractual relation between the principal and the third parties.
He is not entrusted with the possession of the goods. He merely brings two parties together and if
the deal is materialized he becomes entitled to the commission.
5. CO-AGENT:- Where several persons are expressly authorized with no stipulation that anyone
or more of them shall be authorized to act in name of the whole body. They have a joint authority
and they are called co-Agents.
6. Sub-Agent:- The sub-agents are usually appointed by the original Agent in the business of
Agency. He works under the control of original Agent.
7. BANKER
The relationship between the banker and the customer is that of debtor and creditor. But there is
a super-added obligation on the part of the banker to pay when called upon to do so by the draft or
order (in the form of a cheque) of the customer. To this extent, a banker is the agent of his
customer.

8. NON-MERCANTILE AGENTS
These include attorneys, solicitors, insurance agents, clearing and forwarding agents and wife, etc.

9. SPECIAL AGENT
A special agent is one who is appointed to perform a particular act or to represent his principal in
some particular transaction, for ex. an agent is employed to sell a house.

10. GENERAL AGENT

A general agent is one who has authority to do all acts connected with a particular trade, business
or employment, for ex. the manager of a firm has an implied authority to bind his principal by
doing anything necessary for carrying on the business of the firm.

11. UNIVERSAL AGENT

A universal agent is one whose authority to act for the principal is unlimited. He has authority to
act for the principal is unlimited. He has authority to bind his principal by any act which he does,
provided the act (i) is legal, and is agreeable to the law of the land.

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RIGHTS OF AN AGENT

1. Right to remuneration (Sec.219) – an agent is entitled to get an agreed remuneration as per the
contract. If nothing is mentioned in the contract about remuneration, then he is entitled to a
reasonable remuneration. But an agent is not entitled for any remuneration if he is guilty of
misconduct in the business of agency (Sec.220).

2. Right of retainer (Sec.217) – an agent has the right to hold his principal’s money till the time his
claims, if any, of remuneration or advances are made or expenses occurred during his ordinary
course of business as agency are paid.

3. Right of lien (Sec.221) – an agent has the right to hold back or retain goods or other property of
the principal received by him, till the time his dues or other payments are made.

4. Right to indemnity (Sec.222) – an agent has the right to indemnity extending to all expenses and
losses incurred while conducting his course of business as agency. For ex. B, at Singapure, under
instructions from A of Calcutta, contracts with C to deliver certain goods to him. A does not send
the goods to B, and C sues B for breach of contract. B informs A of the suit, and A informs him to
defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses.
A is liable to B for such damages, costs and expenses.

5. Right to compensation (Sec.225) – an agent has the right to be compensated for any injury
suffered by him due to the negligence of the principal or lack of skill. For ex. A employs B as a
bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully
put up, and B is in consequence hurt. A must make compensation to B.

6. Right of stoppage in transit – where the agent has bought goods for his principal by incurring a
personal liability, he has a right of stoppage in transit against the principal, in respect of the money
he has paid or is liable to pay. This right of the agent is similar to that of the unpaid seller.

25
DUTIES OF AN AGENT

1) Agent's duty in conducting principal's business (Sec 211):

An agent is bound to conduct the business of his principal according to the directions given
by the principal, or, in the absence of any such directions, according to the custom which prevails
in doing business of the same kind at the place where the agent conducts such business. When the
agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any
profit accrues, he must account for it. For ex. B, a broker in whose business it is not the custom to
sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before
payment, becomes insolvent. B must make good the loss to A.

2) Skill and diligence required from agent (Sec 212):

An agent is bound to conduct the business of the agency with as much skill as is generally
possessed by persons engaged in similar business, unless the principal has notice of his want of
skill. The agent is always bound to act with reasonable diligence, and to use such skill as he
possesses; and to make compensation to his principal in respect of the direct consequences of his
own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly
or remotely caused by such neglect, want of skill or misconduct.
For ex. A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual inquiries as to the solvency of B. B at the time of such
sale is insolvent. A must make compensation to his principal in respect of any loss thereby
sustained.

3) Duty to render proper accounts (Sec 213):

An agent is bound to render proper accounts to his principal on demand.
4) Duty to communicate with principal in case of difficulty (Sec 214):
It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his instructions.

5) Not to deal on his own Account (Sec. 215):

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 If an agent deals on his own account in the business of the agency, without first obtaining
the consent of his principal and acquainting him with all material circumstances which have come
to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows
either that any material fact has been dishonestly concealed from him by the agent, or that the
dealings of the agent have been disadvantageous to him.
For ex. A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on
discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B
has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.

6) Not to make Secret Profits (Sec 216):

Section 216 of the Indian Contract Act,1872 reads as - "If an agent, without the knowledge
of his principal, deals in the business of the agency on his own account instead of on account of
his principal, the principal is entitled to claim from the agent any benefit which may have resulted
to him from the transaction." An Agent, without the knowledge of his principal, should not deal in
the business of agency on his own to make secret profit. For ex. A directs B, his agent, to buy a
certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on
discovering that B has bought the house, compel him to sell it to A at the price he gave for it.
7) Duty to pay sums received for principal (Sec 218):
An agent is bound to pay to his principal all sums received on his account.

8) Not to Disclose Secret:

It is duty of an agent to maintain secrecy of the business of agency and should not reveal the
confidential matters.
9) Protect and Preserve the interests of the Principal in case of death or insolvency(Sec 209):
When an agency is terminated by the principal dying or becoming of unsound mind, the
agent is bound to take on behalf of the representatives of his late principal, all reasonable steps for
the protection and preservation of the interests entrusted to him.
10) Not to delegate authority (Sec 190):
An agent must not, depute another person to do what he has himself undertaken to do.

AUTHORITY OF AGENCY
An agent who acts within the scope of authority conferred by his or her principal binds the principal

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in the obligations he or she creates against third parties. There are essentially three kinds of
authority recognized in the law: actual authority (express or implied), apparent authority, and
ratified authority.

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1. Actual authority
Actual authority can be of two kinds. Either the principal may have expressly conferred authority
on the agent, or authority may be implied.

i) Express actual authority

Express actual authority means an agent has been expressly told he or she may act on behalf of a
principal.

ii) Implied actual authority

Implied actual authority, also called "usual authority", is authority an agent has by virtue of being
reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a
position held by an agent.

For example, partners have authority to bind the other partners in the firm, their liability being
joint and several, and in a corporation, all executives and senior employees with decision-making
authority by virtue of their position have authority to bind the corporation. Other forms of implied
actual authority include customary authority. This is where customs of a trade imply the agent to
have certain powers. In wool buying industries it is customary for traders to purchase in their own
names. Also incidental authority, where an agent is supposed to have any authority to complete
other tasks which are necessary and incidental to completing the express actual authority. This
must be no more than necessary.

2. Apparent or ostensible authority

Apparent authority exists where the principal's words or conduct would lead a reasonable person
in the third party's position to believe that the agent was authorized to act, even if the principal and
the purported agent had never discussed such a relationship.

For example, where one person appoints a person to a position which carries with it agency-like
powers, those who know of the appointment are entitled to assume that there is apparent authority
to do the things ordinarily entrusted to one occupying such a position. If a principal creates the
impression that an agent is authorized but there is no actual authority, third parties are protected
so long as they have acted reasonably. This is sometimes termed "agency by estoppel" or the
"doctrine of holding out", where the principal will be estopped from denying the grant of authority

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if third parties have changed their positions to their detriment in reliance on the representations
made.
 Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade
J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been
termed agency by estoppel and you cannot call in aid an estoppel unless you have three
ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of
your position resulting from such reliance."
 Case. A leading case on this subject is of Lloyds v/s Grace Smith in which it was held that
a principal is liable for the fraud of his agent within the scope of his authority whether the
fraud is committed for the benefit of the Principal or for the benefit of Agent.

PRINCIPALS LIABILITIES TO THIRD PARTIES FOR THE ACT OF THE AGENT

Rights and Liabilities of Principal and Agent in relation to Third Parties

1. acting for a named principal,
2. acting for an unnamed principal,
3. acting for an undisclosed principal.

I. Agent Acting for a Named Principal

The rights and liabilities of a named principal for the acts of his agent may be discussed as below:

1. Acts of an Agent within the Scope of his Authority

If an act is carried on by an agent within his authority, his acts are binding on the principal.
However, the act done should be lawful.
Example: A authorized his agent, B, to collect money on his behalf. B received from C a sum of
money due to A. This receipt of money is binding on A, and C is discharged from his obligation
to pay this amount to A.

2. Acts of an Agent Exceeding his Authority

It can be discussed under two heads as shown below:

i. Where the work can be separated – Where an agent exceeds his agency to do the work of the
principal, the principal is bound by that part of the work which is within his authority if it can be
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separated from the part of the work which is beyond his authority
Example: A, owner of a ship and cargo, authorizes B to procure an insurance policy for Rs.4,000
on the ship. B procures a policy for Rs.4,000 on the ship and another for Rs.6,000 on the cargo. A
is bound to pay the premium for the policy on the ship, but not the premium for the policy on the
cargo.
ii. Where the work cannot be separated – When an agent does more than what he is authorized
to do, and such act cannot be separated from that which is within his authority, the principal is not
bound by the transaction. He is in such a case entitled to repudiate the whole transaction. So if the
agent does something in excess of his powers, the transaction is not binding on the principal.
Example: A authorized B, an agent to buy 500 sheeps. But B purchased 500 sheeps and 200 lambs,
for a sum of Rs.6,000. In this case, the principal may repudiate the whole transaction.

3. Notice Given to Agent

The principal is bound by the notice given to the agent in the course of business. Thus, the
knowledge of the agent is the knowledge of the principal.

However, if the knowledge is not acquired by the agent in the course of his employment, it cannot
be imputed to the principal. Further, if the agent had committed a fraud on the principal, the rule
of this section will not apply.
Example: X engaged Y’s agent to insure him against loss of eye-sight for $500 in case of total
loss of eye-sight and $250 in case of loss of only one eye. At the time of the insurance, it appeared
that X was in fact a one-eyed man. Held, the knowledge of the agent that X was one-eyed man
should be attributed to the company and that X could recover $500 when he lost the other eye.

4. Liability by Estoppel
The principal is liable for the unauthorized acts of the agent, if the principal has created an
impression on the third party by his conduct, that the agent has the authority to do such acts.
Example: A, an owner of a house held out that B, the auctioneer had authority to sell the house.
B sold the house by auction to a third party for an amount less than the amount authorized by A.
It was held that the purchaser is not affected by A’s instructions to the auctioneer not to sell below
a certain price.

5. Liability for Misrepresentation or Fraud

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The principal is liable for the misrepresentation or fraud committed by his agent while acting in
the course of his business. It is immaterial whether the misrepresentation or fraud has been
committed for the benefit of the principal or of the agent himself.

Example: A offered to buy a residential flats consisting of number of flats in it and enquired C,
the property manager of B, whether all the tenants were paying their rents regularly. C informed
A that the tenants were paying rents regularly with immaterial exceptions. This statement turned
out to be false. B was held liable for fraud because his agent (property manager) who knew the
real facts had made a false statement.

II. Agent Acting for an Unnamed Principal

When an agent contracts, as an agent for a principal but does not disclose his name, the principal
is liable for the contract of the agent. But the unnamed principal should be in existence at the time
of the contract and the acts must be within the scope of agent’s authority.
Example: A appointed B as his agent to purchase some goods. B entered into an agreement with
C for purchasing those goods. B signed the agreement as a broker “to my principal” but did not
disclose the name of the principal. Here, B is not personally liable because he contracted in the
capacity of an agent.
However, the agent is personally liable if he declines to disclose the identity of the principal when
asked by the third parties.

III. Agent Acting for an Undisclosed Principal

In case of an agent acting for an undisclosed principal, the mutual rights and liabilities of the agent,
principal and the third party are as follows:
1. Rights and Liabilities of Agent
Here agent contracts in his own name. So he is bound by the contract. He is personally liable to
the third party also. On such contracts, he can sue and be sued in his own name because in the eyes
of law he is the real contracting party. In such cases, the principal and the agent have their
respective rights against each other.
2. Rights and Liabilities of Third Party
If the third party has discovered that there is a principal, he may file a suit against the principal, or
his agent or both. In such a case, the third party must allow the principal, the benefit of all payments

32
received by him from the agent.
Example: A sold 100 bales of cotton to B on credit. Afterwards, A discovered that B was acting
as an agent of C. In this case, A may sue either B or C, or both for the performance of the contract.

3. Rights and Liabilities of Principal

The principal has the right to intervene and require the performance of the contract from the third
party. In such cases, the other party may sue either the principal or the agent or both. The principal
if he likes may also require the performance of the contract from the other party. But in such a
case, he should allow, the benefit of all payments made by the third party to the agent, to the third
party.

Example: A contracted with B, a shopkeeper, to purchase furniture. A advanced a part payment

of the price to B. Afterwards, A discovered that B is the agent of C. In this case, C may ask A to
perform the contract. But he must account for the advance money received by his agent B.

TERMINATION OF AGENCY
Termination of agency means putting end to the legal relationship between principal and
agent. Section 201 to 210 of the Indian Contract Act 1872 lay down the provision relating to the
termination of Agency. The following may the reasons which can be responsible for the
termination of the Agency:

33
 1) By the act of the parties -
i) By agreement - The Contract of Agency can be terminated at any time by
mutual agreement between the principal and agent
ii) By revocation of the principal (Sec. 201) - The Principal revoke agency at
any time by giving notice to the agent
iii) By Renunciation or revocation of an agent (Sec 206) - Renunciation
which means withdrawing from responsibility as Agent. Like Principal, Agent can also
renounce the agency. The agent must give to his Principal reasonable notice of
renunciation. Otherwise, he will be liable to make good for the damage caused to the
principal for want of such notice.

2) By operation of law –
i) By the performance or completion of agency (Sec. 201) - Agency can
become to an end after the completion of work for which the agency is created.
ii) By expiry of the time - Agency can also be terminated by the expiry of
time. if the agency is created for the specific period, it is terminated after the expiry of
the time.
iii) Death or insanity of principal or agent (Sec. 209) - An agent, duty to
terminate the contract of agency on the death of the principal. In other words, Agency
comes to an end on the death or insanity of the principal or agent.
iv) Insolvency of principal (Sec 201) – An insolvent or bankrupt is a person
who is unable to run the business due to Excess of liabilities over assets. In this way, if
the principal becomes an insolvent agency can be terminated.
v) Destruction of the subject matter - If this subject matter of the agency is
destroyed agency comes to an end. For ex. An agency is created for sale of an Airplane if
the Airplane caught fire before the sale the agency comes to an end. In this contract
Airplane is the subject matter.
vi) Principal becoming an alien enemy - If the Principal becomes an alien
enemy the contract of agency comes to an end.

vii) Dissolution of company or firm - A Firm or company may be regarded as

a Principal in the contract of Agency. If the company or firm is dissolved the agency
comes to an end.
Termination of sub-agent’s authority (Sec. 210) – The termination of an agent’s authority puts an
end to the sub-agent’s authority.
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 1

SCHOOL OF MANAGEMENT STUDIES

UNIT – III – MERCANTILE LAW - SBAA1302

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UNIT – III - SALES OF GOODS ACT, 1930

Meaning of Contract of Sale of Goods:-

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer
the property in goods to the buyer for a price. There may be a contract of sale between one
party owner and another

Sale:-

A contract of sale, means the property in the goods in transferred from the seller to the
buyers the contract is called a Sale.
Agreement to sell:-

Agreement to sell refers the transfer of the property in the goods is to take place at a future
time or subject to some conditions thereafter to be fulfilled the contract is called an
agreement to sell.

Essentials of a contract of sale:-

1. Two parties: - There must be two distinct parties i.e., a buyer, a seller, to effect a
contract of sales and they must be competent to contract.
2. Goods: - There must be some goods the property in which is or is to be transferred
from the seller to the buyers. The goods which form the subject matter of the contract of
sale must be movable, Transfer of immovable property is not regulated by the sale of
goods Act.,
3. Price: - The consideration for the contract of sale, called price, must be money, when
goods are exchanged for goods, it is not a sale but barter.

4. Transfer of general property: - There must be a transfer of general property as

distinguished from special property in goods from the seller to buyer.
5. Essential elements of a valid contract: - All the elements of a valid contract must
be present in the contract of sale.

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Contract of sale how made:-

No particular form is necessary to constitute a contract of sale. If is, like any other contract,
made by the ordinary method of offer by one party and its acceptance by the other party.
It may be made in writing or by word of mouth or by both.

Sale and Agreement to sell – Distinction:-

1. Transfer of property:-

a. In a sale, the property in the goods passes from the seller to his buyer
immediately so the seller is no more the owner of his goods sold.
b. In an agreement to sell, the transfer of property in the goods is to take place at a
future time or subject to certain conditions being fulfilled so that the seller
continuous to be owner.
2. Risk of Loss:-

a. In a sale in the even of the goods being destroyed the loss falls on the buyer.

b. In an agreement to sell, if the goods are destroyed, the loss falls on the seller.

3. Nature of Contract:

a. A sale is an executed contract

b. Whereas an agreement to sell is an executed contract

4. Consequences of breach:-

a. In a sale, if there is a breach of contract by the buyer, the seller can sue for rice.
b. In an agreement to sell, the seller can sue only for damages and not for his
payment of the price.
5. Right to resell:-

a. In a sale, the seller can’t resell the goods

b. In an agreement to sell, without prior notice of the resell, he is not bound to do

so.
6. Insolvency of Buyer:-

a. In a sale, if the buyer becomes insolvent before he pays for the goods, must
return them to the official Receiver or Assignee.
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b. In an agreement to seller, the seller is not bound to part with the goods until he
is paid for.

7. Nature of Rights:-

a. The buyer acquires a right against the whole work

b. In agreement to seller, he secures right against a particular individual

8. Insolvency of seller:-

a. In sale the buyer can recover identical goods from official receiver or assignee
of the seller.

Hire Purchase

A hire purchase agreement is a contract where by the owner of the goods lets them on hire
to another person called hirer or hire purchaser on payment rent to be paid in installments
and upon an agreement that when a certain number of such installments is paid, the
property in the goods will pas to hirer.

Subject-matter of Sale

‘Goods’ form the subject of a contract of sale. They mean every kind of movable property
other than actionable claims and money, and include stock and shares, growing crops,
grass and things attached to or forming part of the land which are agreed to be served
before sale or under the contract of sale.

Classification of Goods

I. Existing goods: -Existing goods are owned and possessed by the seller at the time of
sale. These goods may be specific ascertained or unascertained
II. Future goods:-Future goods is which the seller does not posses at the time of
contract and which will be acquired manufactured or produced by him at some future date
III. Contingent goods: - Contingent goods refer to the acquisition of which by the seller
depends upon a contingency which may or may not happen.

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Price- The price is a contract of sale must be expressed in money.

1. It may me fixed by the contract itself or

2. It may be left to be fixed in an agreed meaner

3. It may be determined from the course of dealing between the parties

Transfer of Property

Transfer of property is goods from the seller to the buyer is the main object of a
contract of sale

There are 3 stages in the performance of a contract of sale of goods by a seller viz.,
Transfer of property in the goods -> ownership
1. Transfer of possession of the goods ->delivery

The property in goods passes from the seller to the buyer for the following reasons:-

1. Risk follows ownership

2. Action against third parties

3. Insolvency of the seller or the buyer

4. Suit for price.

Passing or property:-

The primary rules for ascertaining when the property in goods passes to the buyer are as
follows
1. Goods must be ascertained

2. Intention of the parties

Performance of Contract Meaning:-

Performance of a contract of sale means as regards the seller delivery of the goods to the
buyer, and as regards the buyer, acceptance of the delivery of the goods and payment for
them, in accordance with the terms of the contract of sale.

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Rules as to delivery of goods:-

1. Mode of delivery

2. Delivery and payment concurrent conditions

3. Effect of part delivery

4. Buyer to apply for delivery

5. Place of delivery

6. Time o delivery

7. Goods in possession of a third party

8. Cost of delivery

9. Delivery of wrong quantity:-

a. Delivery of goods less than contracted for

b. Delivery of goods in excess of the quantity

c. Delivery of goods contracted fixed with other goods

10. Instalment deliveries

11. Delivery to carrier or wharfinger

Rights of the buyer:-

1. Right to have delivery as per contract

2. Right to reject the goods

3. Right to repudiate

4. Right to notice of insurance

5. Right to examine

6. Rights against the seller for breach of contract:-

a. Suit for damages

b. Suit for price

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c. Suit for specific performance

d. Suit for breach of warranty

e. Suit for contract before due date

f. Suit for interest

Duties of Buyer:-

1. Duty to accept the goods and pay for them in exchange for possession

2. Duty to apply for delivery

3. Duty to demand delivery at a reasonable hour

4. Duty to accept instalment delivery and pay for it

5. Duty to take risk of deterioration in the course of transit.

6. Duty to intimate the seller where he rejects the goods

7. Duty to take delivery

8. Duty to pay price

9. Duty to pay damage for non acceptance

Rights of an unpaid
Seller Meaning
A seller of goods is deemed to be an unpaid seller

1. When the whole of the price has not been paid or tendered

2. When a bill of exchange or other negotiable instrument has been received as a

conditional payment and the condition on which it was received has not been fulfilled by
reason of the dishonoured of the instrument or otherwise.
As against the goods

1. It is available to the unpaid seller when

a. The foods have been sold without any stipulation as to credit

b. The goods have been sold on credit, but the term of the credit has expired

c. The buyer becomes insolvent

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2. Right of stoppage in transit

The seller may resume possession of the goods, as long as they are in the course of transit
and may retain then until payment or tender of the price.
The right o of stoppage in transit either by taking actual possession of the goods, or by
giving notice of his claim to the carrier or other bailee in whose possession the goods are.
3. Right of re-sale

the unpaid seller can re-sell the goods

i. Where the goods are of a perishable nature

ii. Where he has exercised his right of lien or stoppage in transit and given notice to the
lawyer of his intention to re-sell the goods and the lawyer has not within a reasonable time
paid the price
iii. Where the seller expressly reserves a right of resale in case the buyer should make
default.
4. Right of withholding delivery

When the property in goods has not passed to the buyer, the unpaid seller has, in addition
to his other remedies a right of withholding delivery similar to and co- extensive with his
rights of lien and stoppage in transit where the property has passed to the buyer.
As against the buyer personally:-

1. Suit for price:-

Where under a contract of sale the property in the good has passed to the buyer and the
buyer wrongfully neglects or refuses to pay for the goods according to the terms of the
contract, the seller may suit him for price of the goods.

2. Damage for non acceptance: - where the buyer wrongfully neglects or refuses to pay
for the goods, the seller may sue him for damages for non- acceptance.
3. Repudiation of contact before due date:- when the buyer in a contract of sale
repudiates the contract before the date of delivery, the seller may either treat the
contract as subsisting and wait till the date of delivery, or he may treat the contract as
rescinded and sue for damages for the breach.
4. Suit for interest: - The seller can recover interest on price from the date on which the
payment become due, if there is a special agreement to the effect.

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5. Auction Sale: - A sale by auction is a public sale where different in tending buyer’s
tries to outbid each other. The goods are ultimately sold to the highest bidder. The law on
auction sales is contained in see by of the sale of goods act.

CONDITIONS AND WARRANTIES

Conditions

Sec.12 (2) of the Sale of Goods Act, 1930 defined as, “A condition is a stipulation essential
to the main purpose of the contract, the breach of which gives rise to a right to treat the
contract as repudiated”.
Characteristics of Conditions

1. A condition is a stipulation or term regarding goods forming part of the contract of

sale and it is not a mere expression of opinion or commendatory statement (i.e., statement
of praise).
2. A condition is a stipulation in a contract of sale essential to the main purpose of the
contract. It goes to the very root of the contract and forms the very foundation of it.
3. The breach of a condition gives the aggrieved party the right to treat the contract as
repudiated, and also entitles him to claim damages.
4. If a condition in a contract of sale is broken, no doubt, the aggrieved party can treat
the contract as repudiated and reject the goods. But he has also an alternative option. That
is, he can treat the breach of condition as a breach of warranty and can claim only damages
without rejecting the goods.
Warranties

Sec.12 (13), of the Sale of Goods Act, 1930 defined as, “A warranty is a stipulations
collateral to main purpose of the contract, the breach of which gives rise to only claim for
damages but not to a right to reject the goods and treat the contract as repudiated”.

Characteristics of Warranty

1. A warranty is a stipulation or term regarding goods forming part of the contract of

sale, and is not a mere expression of opinion or statement of commendation or praise.
2. A warranty is a stipulation or term, which is not essential to the main purpose of the
contract and is only collateral (i.e., incidental, subsidiary or minor) to the main purpose of
the contract. In short, it is only of secondary importance.
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3. The breach of a warranty gives the aggrieved party only the right to sue for damages,
and not the right to repudiate the contract. It may be noted that the measure of damages for
breach of warranty is the estimated loss directly or naturally resulting in the ordinary
course of events from the breach.

Express and implied conditions and warranties

Express conditions and warranties are those which are agreed upon between the parties at
the time of the contract.

Implied conditions

 Conditions as to title

 Sales by description the sample

 Condition as to quality or fitness

 Condition as to merchantability

 Sale by sample

 Condition implied by custom

 Condition as to wholesomeness

Implied warranties

 Warranty of quiet possession

 Warranty of freedom from encumbrances

 Warranty as to quality or fitness by usage of trade

 Warranty to disclosure dangerous nature of goods

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Difference between Condition and Warranty

S. No. Condition Warranty

1 Relation to main purpose: it is an essential It is subsidiary to the main purpose of

to the main purpose of the contract the contract

2 Rights of aggrieved party: Breach of Breach of warranty entitles the

condition gives the aggrieved part a right to aggrieved party to claim damages only
repudiate the contract and to get
damages
3 Treating condition as warranty: Under A warranty cannot become a condition
certain circumstances as breach of
condition may be treated as a breach of
warranty
4 Legal effect of breach: Breach of Breach of warranty will not affect the
condition will affect the legality of the legality of contract
contract
5 Discharge of breach: In case of breach of In case of breach of warranty the
condition the aggrieved party is free to aggrieved party is not free to discharge
discharge of his promise. of his promise.

CAVEAT EMPTOR

It is originated from the Latin Word. It means “let the buyer beware”, i.e., a contract of sale
of goods, the seller is under no duty to reveal unflattering truths about the goods sold.
Therefore, when a person buys some goods, he must examine them thoroughly.
Exceptions

 Fitness for buyer’s purpose

 Sale under a patent or trade name

 Usage of trade

 Consent by fraud.

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UNIT – IV – MERCANTILE LAW – SBAA1302

1
 UNIT – IV - PARTNERSHIP ACT, 1932

DEFINITION AND NATURE OF PARTNERSHIP

A Partnership is defined by the Indian Partnership Act, 1932, as “the relations between persons
who have agreed to share profits of the business carried on by all are any of them acting for all”
which gives three minimum requirements to constitute a Partnership, viz:
 There must be an agreement entered into orally or in writing by the persons who desire to
form a Partnership,
 The object of the agreement must be to share the profits of business intended to be carried
on by the Partnership, and
 The business must be carried on by all the partners or any of them acting for all of them.

DEFINITION OF “PARTNERSHIP”, “FIRM”, AND “FIRM NAME”

Partnership” is the relation between persons who have agreed to, share the profits of a business
carried on by all or any of them acting for all. Persons who have entered into partnership with one
another are called individually “partners” and collectively “a firm”, and the name under which
their business is carried on is called the “firm name”.

NATURE OF PARTNERSHIP FIRM

According to Section 4 of the Indian Partnership Act 1932, "Partnership is a relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all."
Persons who have entered into partnership with one another are called individually ‘partners’ and
collectively ‘a firm’ and the name under which their business is carried on is called the ‘firm
name’.

CHARACTERISTICS
1. Two or more Persons
Minimum number of persons to start a partnership is two however there is no maximum limit on

the number of partners according to the Indian Partnership Act. But the Indian Companies Act
has restricted the number of partners in a Banking Business to ten and for any other business it is

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Agreement among Partners

Partnership comes into existence by an agreement among the partners willing to enter into a
partnership. The agreement can be written or oral. Partnership is not the result of any operation of
Law. It is the result of an agreement on the basis of which the rights and duties of the partners
are defined.
2. Business
The purpose of a Partnership firm is to carry on a business. The business must be legal. Any
agreement to share the profits of an illegal business is not partnership. Also joint ownership of a
property cannot be termed as partnership. The business must be continuous in nature. Coming
together for a single venture is not partnership.
3. Agreement to share profits
In a Partnership business the main aim of the partners is to carry on some business for the
purpose of earning profits. They share the profits or losses of the business among themselves
according to a predetermined ratio. If there is no agreement over the profit sharing ratio these are
to be shared equally. A person not having the right to share profits cannot be called partner. But,
the partners can agree that one or more partners among is not liable to share the losses.
4. Business is to be carried on by all or any of them acting for all
Each partner has the right to participate in the proceedings of the business. The business can be
carried by any one or more of them or by all of them. Some partners may be sleeping i.e. they
are not actively involved in the activities of the firm. Each partner is an agent as well as a
principal. As an agent he can bind all the other partners by his acts. As a principal he is bound by
the acts of the other partners.

REGISTRATION OF A PARTNERSHIP FIRMS

The partnership act does not provide for the compulsory registration of firms. It has left it to the
option of the firms to get them registered. For the firms to get registered, the application must
state the following:
a) The firm’s name,
b) The place or principal place of business of the firm,

c) The names of any other places where the firm carries on business,

3
d) The date when each partner joined the firm,
e) The names in full and permanent addresses of the partners, and
f) The duration of the firm.

PARTNERSHIP DEED
Partnership deed is a document in writing containing the various terms and conditions as to the
relationship of the partners to each other. Partnership deed may contain the following
information:
1. Name of the partnership form.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner.
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.

TYPES OF PARTNERS

FIGURE.1. TYPES OF PARTNER

4
 i. Active Partner
A partner who takes an active part in the conduct of the partnership business is known as an
active partner. Though every partner is entitled to manage its affairs, all may not do so.
ii. Sleeping Partner or Dormant Partner
Such a partner contributes capital and shares in the profits or losses of the firm but does not
take part in the management of the business. He may not be known as a partner to the outsiders;
yet he is liable to third parties to an unlimited extent as any other partner.
iii. Nominal Partner
Such a partner neither contributes any capital nor is he entitled to manage the affairs of the
business. He only lends his name to the firm because on the strength of his name and reputation,
the firm may attract additional business and raise funds easily. A nominal partner, however, is
liable for all the acts and debts of the firm as if he were a real partner, though he does not get any
share in the firm’s profit.

iv. Partner in Profits only

When a person joins a firm as a partner on the condition that he is entitled to a specified share
of the firm’s profit only, he is called a partner in profits only. It means that he will not be called
upon to bear any portion of the losses sustained. He will, however, be liable to third parties for
all the debts of the firm like any other partner. Such partners usually do not take part in the
management of the business.
v. Partner by Estoppel
In case, a person represents him/ her by words or actions or has allowed him to be represented
as a partner of the firm, even though he is not a partner, he is called partner by estoppels. Such a
partner cannot deny his liability, if outside party lends money to the firm supposing him to be a
partner.
vi. Partner by Holding out
When a person is declared as a partner and he does not deny this even after becoming aware
of it, he becomes liable to the third party, who lends money or credit to the firm on the basis of
such a declaration.
vii. Secret Partner
A secret partner is one whose association is not known to the general public. Other than this

distinct feature, he is like rest of the partners in all respects.

5
 viii. Minor Partner
Under the Indian Majority Act, person who has not completed 18 years of age is a minor.
However, he will continue to be a minor till he completes 21 years if a guardian has been
appointed to the minor. He can be admitted to the benefits of partnership.
Partnership arises as a result of contract. But a minor has no contractual capacity. Though a
partnership cannot be created with a minor as a partner, a minor can be admitted to the
benefits of a partnership which is already in existence. The consent of all partners is a
‘must’ for such admission.

RIGHTS AND DUTIES OF PARTNERS

Rights of a Partner

1. Right to take part in business

Every partner has a right to take part in the management of the business.
2. Right to be consulted
Every partner has the right to be consulted in all the matters concerning the firm. The decision of
the majority will prevail in all the routine matters. But, where the matter is of fundamental
importance such as admission of a new partner, change in the nature of business etc., decision
must be unanimous.
3. Right of access to books, record and document
Every partner has the right of access to all records and books of accounts, and to examine and
copy them.
4. Right to share profit
Every partner is entitled to share the profits in the agreed ratio. If no profit- sharing ratio is
specified in the deed, they must be shared equally.
5. Right to receive interest
A partner has the right to receive interest on loans advanced by him to the firm at the agreed
rate, and where no rate is stipulated, interest @ 6% p.a. allowed.
6. Right to be indemnified
Every partner has the right to be indemnified by the firm for all acts of other partners in the ordinary
course of the business. He has a further right to receive back any amount spent by him

on behalf of the firm. Only thing is he must have acted prudently.

6
7. Right to use partnership property for the business
Every partner has the right to use partnership property for the purpose of the partnership.
8. Right to retire
Every partner has a right to retire as per the terms of the deed or with the consent of the other
partners. In case of partnership at will, he can retire at any time by giving prior notice to the
other partners.

9. Right to continue
Every partner has the right to continue in the firm. He cannot be expelled except in accordance
with the Partnership Deed.

Duties of Partner

1. Duty to carry on business

Every partner has to carry on the business of the firm to the maximum advantage of all the
partners.
2. Duty to be true
Every partner must be true, just and faithful to one another. There must be utmost good faith
and fair dealings.
3. Duty to render true accounts
A partner is bound to keep and render true and full accounts of the partnership. He must
produce relevant vouchers for the expenses incurred by him and hand over to the firm all
amounts which have come into his hands as a partner.
4. Duty to indemnity the firm
Every partner must indemnify the firm for any loss caused by his fraud or willful negligence
in the conduct of the business.
5. Duty to share the loss
Every partner is bound to share the losses in the agreed ratio in the absence of an agreed ratio,
it must be borne equally.
6. Duty to claim remuneration
No partner, including a managing partner is entitled to any remuneration (salary or
commission), for the work done by him, unless there is an agreement to the contrary.
7. Duty not to use firm’s property for personal use
7
 The partnership property belongs to all partners. But a partner should not use the partnership
property for his private purposes.
8. Duty not to carry on competing business
No partner can carry on a competing business. If he does so, he should surrender to the firm
all profits earned by him in such business. No partner is allowed to earn secret profit.
9. Duty to act within scope of his authority
A partner must act within the scope of his authority.
10. Duty to consult other partners before assigning or transferring his interest in
partnership
No partner can assign or transfer without the consent of all other partners his interest in the
firm to any other person so as to make him a partner thereof.

IMPLIED AUTHORITY OF A PARTNER

Every partner has the implied authority to bind the firm and other partners by his acts done in
the name of the firm, in the ordinary course of the firm’s business and with the intention to bind
the firm.
A partner has the implied authority to do the following acts on behalf of his firm:
(i) To buy, sell and pledge goods on behalf of the firm.
(ii) To raise loans on the security of such assets.
(iii) To receive payments of debts due to the firm.
(iv) To accept, make an issue bills of exchange, promissory notes, etc., on behalf of the firm.
(v) To engage servants for the firm’s business.
(vi) To take on lease a premises on behalf of the firm.
However, a partner has no implied authority, unless otherwise expressed in the partnership
deed, are:
(a) To submit a dispute relating to the firm to arbitration.
(b) To compromise or relinquish any claim or a portion of claim made by the firm.
(c) To withdraw a suit or proceeding filed on behalf of the firm.
(d) To admit any liability in a suit or proceeding against the firm.
(e) To open a bank account on behalf of the firm in his own name.
(f) To acquire or purchase immovable property for and on behalf of the firm

8
 (g) To transfer or sell immovable property belong to the firm; and
(h) To enter into partnership with others on behalf of the firm.

RECONSTITUTION OF A FIRM
Incoming Partners

1. Introduction/Admission of a partner Sec.31

Section 31 of the Act states that a new partner can be admitted to a partnership firm only
a) with prior consent of all partners or
b) In accordance with a contract entered into by the existing partners.
Liability of an incoming partner
While the Act makes partners jointly liable for all acts of the firm, Section 31(2) clarifies that a
newly admitted partner is not liable for any act done by the firm before the date on which he/she
became a partner.
The Act does not permit a minor to become a partner in a firm, till he/she attains majority, but
permits him/her to be admitted to the benefits of the partnership. On attaining majority, a minor
has the right to elect whether or not to become a partner in the firm.
While a newly admitted partner is only liable for the firm’s acts which are done after he/she
was admitted to partnership subject to a contract to the contrary, a minor, on becoming partner
after attaining majority, also becomes liable for all of the firm’s acts done after the date on which
the minor got admitted to the benefits of the partnership.

Outgoing Partners
2. Retirement of a Partner Sec. 32, 36, 37
Any partner of a partnership firm may want to retire, at any time, for any reason such as bad
health etc. Section 32(1) of the Act states that a partner can retire:
a) with prior consent of all other partners
b) In accordance with the terms of any agreement existing between the partners.
c) Where the partnership is at will, by giving notice in writing to all the other partners of
d) his intention to retire.
Naturally, the retirement of a partner leads to a change in capital contribution and profit
sharing ratios between the continuing partners.
Liability of retiring partner (Sections 32(2) to 32(4))

9
 Section 32(2) allows a retiring partner to escape his/her liability, in respect of acts done by
the firm before the date of retirement, by an agreement with the continuing partners and the
concerned third party having the right to enforce such liability.
Section 32(3) of the Act provides that a retired partner is liable to a third party for all acts
done by the firm in respect of such third party even after the date of his/her retirement unless a
public notice has been given of the partner’s retirement. Section 32(4) of the Act requires such
notice to be given either by any continuing partner or the retired partner.

Rights of a retiring partner

a. To carry on competing business
Section 36(1) of the Act permits a retired partner to carry on, post-retirement, a business
competing with that of the firm from which he/she has retired and the right to advertise such
business. In order to protect the firm’s interest, the aforesaid right to compete is subject to the
following restrictions:

(a) the retired partner does not use the firm’s name
(b) the retired partner does not represent himself/herself to be still carrying the firm’s
business; and,
(c) The partner must not solicit persons who were the firm’s customers before his/her
retirement.
Further, Section 36(2) permits a firm’s partners to enter into an agreement with any partner to
the effect that on ceasing to become a partner, he/she will not carry on any business, similar to the
firm’s business, for a specified period or within specified local limits. Such agreements are
treated to be valid even though agreements in restraint of trade are void under Section 27 of the
Indian Contract Act, 1872.
b. Right to share subsequent profit
At the time of retirement, the retiring partner can re-claim his/her share of capital contributed
in the firm through a settlement of accounts with the continuing partners. Section 37 of the Act
clarifies that if no such settlement takes place at the time of retirement and the firm continues to
use the retired partner’s capital for its business, the retired partner shall be entitled to claim, even
after his/her retirement, either:
(a) 6% interest per annum on the amount of his share in the firm’s property or

10
 (b) such share of the firm’s profits which are attributable to his share of capital in the firm

3. Expulsion of Partner
Partners of a firm may want to expel any particular partner for various reasons such as
misconduct, not taking interest in the firm’s business etc. Under Section 33(1) of the Act,
expulsion of a partner is permissible only if:
1. The power of expulsion of a partner should be conferred by a contract between the
partners.
2. The power should be exercised by a majority of the partners
3. The power should be exercised in good faith (majority not enough) The test of good
faith is:

(a) that the expulsion must be in the interest of the partnership;

(b) that the partner to be expelled is served with a notice; and
(c) That he is given an opportunity of being heard.

Irregular Expulsion
If the expulsion of a partner does not satisfy the aforesaid 3 conditions simultaneously, it will
be considered as an irregular expulsion and shall not be effective against the expelled partner. In
such case, the expelled partner may claim to be reinstated as a partner or claim refund of his/her
share of capital and profits in the firm.

Regular Expulsion
Where a partner is expelled subject to the satisfaction of the conditions, his expulsion would
be regular. The rights and liabilities of an expelled partner are the same as those of a retired
partner.
4. Insolvency of a Partner
Section 34(1) of the Act states that if any partner of a partnership firm has been adjudicated as
insolvent by the competent authority/court:
he/she ceases to remain partner in the partnership firm from the date of order of
adjudication
Section 34(2) of the Act clarifies that the insolvent partner’s estate shall not be made

11
liable for the firm’s acts which are done after the date on which the order of insolvency was
passed.
The firm also does not remain liable for any act of the insolvent partner which is done
by him/her after being declared insolvent.
5. Death of a Partner
Death of any partner of a firm may occur naturally or due to disease, accident etc. Section
42(c) of the Act provides that death of any partner will lead to the dissolution of the firm i.e. end
of the partnership unless there is an existing contract between the partners providing for
continuation of the partnership.

6. Transfer of a partner’s share

The act permits any partner of a partnership firm to transfer his/her interest in the firm to any
other person either absolute or partial by sale or conditionally i.e. in the form of a mortgage or by
creation of a charge on the interest. Section 29 of the act clarifies that in case of such transfer of
interest, the transferee has the right to receive the transferor’s share of profits in the firm.
However, the transferee cannot:
a. interfere in the conduct of the business of the firm, or
b. require accounts of the firm, or
c. Inspect the books of the firm.

MODES OF DISSOLUTION
a. Dissolution of Firm

Dissolution of Partnership is different from the dissolution of partnership firm. It is due to the
fact that when the relation present between all partners, comes to an end, it is known as
dissolution of firm. On dissolution of firm, partnership business comes to an end. Its assets are
realized and the creditors are paid off. The business cannot be continued after dissolution of
partnership firm.
For ex. A, B and C are partners in a business. If all the three partners decide to dissolve, it is
known as “dissolution of the firm”.
b. Dissolution of partnership
Dissolution of partnership means the termination of the original partnership agreement. A

12
partnership is dissolved by insolvency, retirement, expiry or completion of the term of
partnership. The business will continue after dissolution of partnership. For example: A, B and C
are partners in a business. If ‘A’ retires, ‘B’ and ‘C’ can continue the business which is known as
dissolution of partnership.

Dissolution of Firm
Dissolution of firm based on with the order of the court and without the order of the court is
represented below:

Dissolution of a firm may take place in two ways:

a. without the order of the court and
b. By order of the court.

13
a. Without the order of the court

i. Dissolution by agreement or mutual consent (Sec 40)

A firm may be dissolved when all the partners agree to close the affairs of the firm. Just as
a partnership is created by contract, it can also be terminated by contract.

ii. Compulsory dissolution (Sec 41)

any of the partners adjudged an insolvent (or if all the partners become insolvent) it is
necessary to dissolve the firm.
By the happening of any event which makes it unlawful for the business of the firm to be
carried on, or for the partners to carry it on in partnership.

iii. Dissolution on the happening of certain contingencies (Sec 42)

Dissolution of partnership itself may involve the dissolution of the firm unless parties agree
to continue it otherwise, it will take place.
a. On the expiry of a specified period in case of partnership for a fixed term.
b. On the completion of a particular adventure for which it has been formed
c. in case of particular partnership.
d. On the death of a partner.
e. On the retirement of a partner.
f. On the insolvency of a partner.
In all the above cases if the business is not continued by the remaining partners, dissolution
of the firm takes place automatically.

iv. By notice of dissolution (Sec 43)

In the case of partnership at will when any partner gives in writing to all the other
partners indicating his intention to dissolve the firm, the firm will be dissolved.

b. Dissolution by the order of Court (Sec 44)

The court may order for the dissolution of the firm on the following grounds:

(i) Insanity of Partner

On the application of any of the partner, court may order for the dissolution of the firm if a
partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the

14
 partnership but it will be a ground for dissolution at the instance of other partners.
(ii) Incapacity of Partner
If a partner has become permanent incapable of discharging his duties and obligations, then
court may order for the dissolution of firm on the application of any of the partner. For ex.
where a partner is imprisoned for a long period of time the court may dissolve the partnership.
(iii) Misconduct of Partner
If any partner other than partner suing is responsible for any loss to the firm, which amounts
to misconduct and prejudicially affects the carrying on of business then the court may order
for the dissolution of the firm.
(iv) Constant breach of agreement by partner
The court may order for the dissolution of the firm if the partner other than the suing partner
is found guilty for constant breach of agreement regarding the conduct of business or the
management of the affairs of the firm and it becomes impossible to continue the business with
such partner.
(v) Transfer of Interest
When any of the partner other than the suing partner transfers whole of its share to the third
party for permanently.

(vi) Continuous/Perpetual Losses

The court may order for dissolution, if the firm is continuously suffering losses and there is
no more capital available for the future growth of the firm.

(vii) Any other Just and Equitable ground

The court may order for dissolution on any other ground which court think is just, fair and
equitable. e.g. loss of total confidence between the partners.

THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 (LLP)

LLP is an alternative corporate business form which offers the benefits of limited liability to the
partners at low compliance costs. It also allows the partners to organize their internal structure
like a traditional partnership. A limited liability partnership is a legal entity, liable for the full
extent of its assets. The liability of the partners, however, is limited. Hence, LLP is a hybrid
between a company and a partnership. But it should not be confused with limited liability

15
 company.
SALIENT FEATURES OF LLP
LLP is a body corporate

According to Section 3 of the Limited Liability Partnership Act (LLP Act), 2008, an LLP is a
body corporate formed and incorporated under the Act. It is a legal entity separate from its partners.

Perpetual Succession
Unlike a general partnership firm, a limited liability partnership can continue its existence even
after the retirement, insanity, insolvency or even death of one or more partners. Further, it can enter
into contracts and hold property in its name.
Separate Legal Entity
Just like a corporation or a company, it is a separate legal entity. Further, it is completely liable
for its assets. Also, the liability of the partners is limited to their contribution in the LLP. Mutual
Agency
Another difference between an LLP and a partnership firm is that independent or unauthorized
actions of one partner do not make the other partners liable. All partners are agents of the LLP and
the actions of one partner do not bind the others.

LLP Agreement
The rights and duties of all partners are governed by an agreement between them. Also, the
partners can devise the agreement as per their choice. If such an agreement is not made, then the Act
governs the mutual rights and duties of all partners.
Artificial Legal Person
For all legal purposes, an LLP is an artificial legal person. It is created by a legal process and has
all the rights of an individual. It is invisible, intangible and immortal but not fictitious since it
exists.
Common Seal
If the partners decide, the LLP can have a common seal [Section 14(c)]. It is not mandatory though.
However, if it decides to have a seal, then it is necessary that the seal remains under the custody of a
responsible official. Further, the common seal can be affixed only in the presence of at least two
designated partners of the Limited Liability Partnership.

16
 Limited Liability
According to Section 26 of the Act, every partner is an agent of the LLP for the purpose of the
business of the entity. However, he is not an agent of other partners. Further, the liability of each
partner is limited to his agreed contribution in the Limited Liability Partnership. It provides liability
protection to its partners.

Minimum and Maximum Number of Partners in an LLP

Every Limited Liability Partnership must have at least two partners and at least two individuals
as designated partners. At any time, at least one designated partner should be resident in India.
There is no maximum limit on the number of maximum partners in the entity.
Business Management and Business Structure
The partners of the Limited Liability Partnership can manage its business. However, only the
designated partners are responsible for legal compliances.

Business for Profit Only

Limited Liability Partnerships cannot be formed for charitable or non-profit purposes. It is
essential that the entity is formed to carry on a lawful business with a view to earning a profit.
Investigation
The power to investigate the affairs of a Limited Liability Partnership resides with the Central
Government. Further, they can appoint a competent authority for the same.
Compromise or Arrangement
Any compromise or arrangement like a merger or amalgamation needs to be in accordance with
the Act.
Conversion into LLP
A private company, firm or an unlisted public company can convert into an LLP in accordance
with the provisions of the Act.
E-F filing of Documents
If the entity is required to file any form/application/document, then it needs to be filed in an
electronic form on the website www.mca.gov.in. Further, a partner or designated partner has to
authenticate the same using an electronic or digital signature.

17
DIFFERENCES BETWEEN LLP AND COMPANY

Features LLP Company

Compulsory registration required with the
Compulsory registration
Registration ROC. Certificate of Incorporation is
required with the ROC
conclusive evidence.
Name of a public company to end with
Name to end with “LLP””
Name the word “limited” and a private company
Limited Liability Partnership”
with the words “private limited”
Private company should have a minimum
Capital contribution Not specified. paid up capital of Rs. 1 lakh and Rs.5
lakhs for a public company.
Legal entity status Is a separate legal entity. Is a separate legal entity.
Liability of Limited to the extent of the Limited to the extent of the unpaid
shareholders/ LLP contribution to the LLP. capital.
partners
No. of shareholders / Minimum of 2. No maximum. Minimum of 2. In a private company,
Partners maximum of 50 shareholders
Foreign Nationals as Foreign nationals can be Foreign nationals can be shareholders.
shareholder / Partner partners.
Taxability Income tax is levied at the rate The income of domestic companies is
of 30%+ surcharge+cess. taxed at 30% + surcharge+cess.
Quarterly Board of Directors meeting,
Meetings Not required. annual shareholding meeting is
mandatory.
Annual statement of accounts
Annual Return and solvency & Annual Annual Accounts and Annual Return to
Return has to be filed with be filed with ROC.
ROC.

18
 Required, if the contribution is
Audit above Rs.25 lakhs or if annual Compulsory, irrespective of share capital
turnover is above Rs. 40 and turnover.
lakhs.
Foreign investment in LLPs
has been allowed on May 11, Foreign investment allowed on automatic
2011, but it is restricted to or approval basis on various sectors in
only those sectors where accordance with FDI policy. There are
100% foreign investment for percentage restrictions, and performance
Foreign Investment companies is permitted, and linked conditions, such as minimum
which do not have any capitalization in various sectors. For
performance linked details, refer to latest FDI Circular.
conditions. All foreign
investment in LLP on
approval basis.

Differences between LLP and Partnership

BASIS LLP PARTNERSHIP

Meaning Limited Liability Partnership is Partnership refers to an arrangement

a form of business operation wherein two or more person agree to
which combines the features of carry on a business and share profits
a partnership and a body & losses mutually.
corporate.

Governed by Limited Liability Partnership Indian Partnership Act, 1932

Act, 2008

Registration Mandatory Optional

Charter document LLP Agreement Partnership deed

19
Liability Limited to capital contribution, Unlimited
except in case of fraud.

Contractual capacity It can sue and be sued in its It cannot enter into contract in its
name. name.

Legal Status It has a separate legal status. Partners are collectively known as
firm, so there is no separate legal
entity.

Name of firm Name containing LLP as suffix Any name

Maximum partners No limit 100 partners

Property Can be held in the name of the Cannot be held in the name of firm.
LLP.

Perpetual Succession Yes No

Audit of accounts Mandatory, only if turnover Not mandatory

and capital contribution
overreaches 40 lakhs and 25
lakhs respectively.

Relationship Partners are agents of LLP Partners are agents of firm and other
only. partners as well.

20
 SCHOOL OF MANAGEMENT STUDIES

UNIT – V – MERCANTILE LAW – SBAA1302

1
 UNIT – V - THE NEGOTIABLE INSTRUMENTS ACT, 1881

Negotiable Instrument

A Negotiable Instrument (NI) is a written contract evidencing a right to receive money and it
may be transferred by negotiation i.e., either by delivery or by endorsement. The term negotiable
instrument literally means a document transferable by delivery.
Sec.13 (1) of the Negotiable Instrument Act states that, a Negotiable Instrument means a
promissory note, bill of exchange or cheque payable either to order or bearer.

Essential features of Negotiable Instruments / Characteristics / Nature / Requisites

1. Freely Transferable - The property in the NI passes from one person to another by delivery.
2. Title of holder free from all debts - A person taking an instrument bonafide and for value,
known as holder in due course gets the instruments free from all defects of the title of the
transferred.
3. Right to file suit - The transferee for NI is entitled to file a suit in his own name for
enforcing any right or claim on the basis of the instruments.
4. Notice of Transfer - It is not necessary to give notice of transfer of NI to the party liable to
pay.
5. Number of transfer - These instruments can be transferred in infinitum till they are at
maturity.
6. Rule of Evidence - These instruments are in writing and signed by the parties. They are used
as evidence of the fact of indebtedness because they have special rules of evidence.
7. Exchange - These instruments relate to payment of certain money in legal tender. The parties
to these instruments know for certain (by whom, to whom, how much, when and where) the
liabilities or claims will mature.

2
PRESUMPTIONS

1. Consideration - Every negotiable instrument bearing a date is presumed to have been made
for consideration.
2. Time of Transfer - Every accepted bill was made within a reasonable time after its date and
before its maturity.
3. Date - Every negotiable instrument was made or drawn on the date it bears

4. Stamping - A promissory notes, bill of exchange or cheque must be duly stamped.

5. Proof of protest - In a suit instruments which has been dishonoured, the court shall,
on proof of protest, presume the fact of dishonour, unless and until such fact is
disproved. PARTIES TO NEGOTIABLE INSTRUMENTS
1. Drawer - The maker of a NI is called ‘drawer’.

2. Drawee – The person on whom the instrument is drawn.

3. Acceptor - He is a person who accepts the instruments. The drawee becomes the acceptor after
accepting the instrument (but sometimes a stranger may accept on behalf of the drawee).
4. Payee - Payee is a person to whom the sum stated in the instrument is payable. The drawer or
any other person may also be the payee. In the latter case, he is called payee for honour.
5. Holder - He is either the original payee or any other person to whom the payee has endorsed
the instrument. In case of the bearer cheque, the bearer is the holder.
6. Endorser - When the holder endorses the instrument to anyone else, he becomes the
endorser.
7. Endorsee - The person to whom the instrument is endorsed is known as endorsee.

8. Endorsee in case of need - The person to who resort may be had in case of need i.e., when
the bill is dishonoured either by non-acceptance or by non-payment.
9. Acceptor for honour - Further, any person may voluntarily become a party to a bill as an
acceptor. A person who, on refusal by the original drawee to accept the bill or to furnish
better security when demanded by the notary, accepts the bill in order to safeguard the
honour of the drawer or any endorser is called acceptor for honour.

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10. Holder in due course - According to Sec. 8 of the Negotiable Instruments Act, a holder of a
negotiable instrument is ‘a person entitled in his own name to the possession thereof and to
receive or recover the amount due thereon from the parties thereto’. Thus, a person who has
obtained the possession of an instrument by theft or under a forged endorsement is not a
holder in due course, as he is not entitled to recover the amount of the instrument.
PROMISSORY NOTE

Sec.4 of the NI Act defines; a promissory note is an instrument in writing (not being a bank note
or a currency note) containing an unconditional undertaking signed by the maker, to pay a certain
sum of money to or the order of certain person or to the bearer of the instrument. The format of a
promissory note is given below:

FIGURE 1. PROMISORY NOTE - FORMAT

Essential features of a promissory note

1. The promissory note must be in writing

2. It must contain an express promise or clear undertaking to pay

3. The promise to pay must be definite and unconditional

4. It should be signed by the maker

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 5. The amount must be certain

6. The promise should be to pay money

7. The payee must be certain

8. It should bear the required stamping

9. It should be dated
BILL OF EXCHANGE
According to Sec.5 of the NI Act, a bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker directing a certain person to pay a certain sum of
money only to, or to the order of certain person or to the bearer of the instrument. The format of
bill of exchange is given below:

FIGURE 2. BILL OF EXCHANGE

Essential features of a Bill of Exchange

1. A bill of exchange is an instrument in writing

2. The instrument must contain an order to pay, which is express, certain and unconditional

3. The drawer must be certain

4. The drawee must be certain

5. The payee must be certain

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6. The instrument must be duly signed by the drawer

7. The amount of the money to be paid must be certain

8. The payment must be in terms of money

9. The money must be payable to a definite person or according to his order

10. The bill may be payable on demand or after a specified or definite period of time

11. It must be properly stamped as prescribed by the Indian Stamp Act

12. It must be dated. The date of the bill is necessary for the calculation of the due date
of bill.
DIFFERENCE BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE
Basis Bill of Exchange Promissory Note
No. of Parties There are 3 parties in the case There are only 2 parties to

of bill of exchange a promissory note

Order and Promise A bill contains an A promissory note contains
unconditional order an unconditional
undertaking or promise
Nature of A bill arises usually upon the A promissory note is based on

Relationship basis of a creditor – debtor a debtor – creditor

Relationship relationship
Acceptance A bill needs to be accepted to A promissory note is
make it valid. The drawee put signed by the maker only
his signature as acceptor No
such acceptance is
required
Nature of Liability The liability of the drawer of a The liability of the maker of
bill is secondary and a promissory note is
conditional; the drawee or the primarily and absolute
acceptor is primarily because he himself is the
liable main debtor

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Immediate The drawer of an acceptance The maker of a note stands in
relations bill stands in immediate immediate relation with the
relation with the acceptor payee
and the payee
Notice to prior When a bill is dishonoured Notice of dishonour need not
parties either by non-payment due be given to the maker of a
notice of dishonour must be promissory note
given by the holder must be
given by the holder to all
prior parties
Sets Foreign bills are drawn in Promissory notes are not so

sets drawn
Protest Foreign bills must be No such protest for
protested for dishonour when dishonour is required for
such protest is required by the foreign promissory note
law of the place where
they are drawn
Conditional A bill may be accepted The maker of the promissory
Acceptance conditionally note cannot attach any such
condition
to it
Acceptor for The acceptor for honour can It cannot be paid for
honour even make the payment of a honour
bill
Payable to the A bill may be payable to the A note cannot be made
maker himself maker himself when the drawer payable to the maker himself
and the payee are one
and the same person

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CHEQUE

Sec.6 of the NI Act, defines, a cheque is a bill of exchange and not expressed to be
payable otherwise than on demand.
A cheque is an unconditional order in writing drawn on a banker signed by the drawer,
requiring the banker to pay on demand a sum certain in money to or to the order of a
specified person or bearer and which does not order any act to be done in addition to the
payment of money. The specimen of a cheque is given below:

FIGURE 3. CHEQUE SPECIMEN

Essential characteristics of Cheque

1. A cheque must be an instrument in writing

2. A cheque must contain an order to pay money only

3. The order in the cheque must be unconditional

4. A cheque must be signed by the maker or drawer

5. The sum payable must be certain

6. A cheque is always payable on demand

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7. The cheque must be drawn on a specified banker

8. The payee of a cheque must be certain

9. A cheque should bear a date

10. Delivery of the cheque is essential. The stamp duty on cheque was abolished in India
in the year 1927, therefore now a cheque need not be stamped.

DISTINCTION BETWEEN A CHEQUE AND A BILL OF EXCHANGE

Basis Cheque Bill of Exchange
Drawee A cheque is always drawn on a A bill may be drawn on any one,
specified banker only including a banker
Payable on demand A cheque is always payable on A bill may be drawn payable on
demand demand or on the expiry of a
certain period after date or sight
Payable to the A cheque is always payable on A bill cannot be drawn payable
bearer on demand demand and may be payable to to the bearer on demand
bearer or order
Acceptance A cheque requires no A bill must be accepted before
acceptance payment can be claimed
Days of Grace No days of grace are allowed In the case of time bills three
days of grace are allowed from
the due date for calculating the
maturity of the bill
Supposition A cheque can be crossed either In case of a bill, there is no such
generally and specially presumption
Crossing A cheque can be crossed either A bill cannot be crossed
generally and specially
Stamping A cheque does not require any A bill must be properly stamped
stamp

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Countermanding A payment of a cheque can be The payment of a bill cannot be
countermanded by the drawer countermanded by the drawer
Circulation A cheque is not intended for A bill may be circulated by
circulation but for immediate endorsing it
drawer
Discounting A cheque cannot be discounted A bill can be discounted and
rediscounted with the banks

Statutory protection The banker is protected if he A bill must be noted and

pays a cheque under a forged protested when it is dishonoured
endorsement
Noting and A cheque need not be noted and A bill must be noted and
protesting protested when protested when it is dishonoured
dishonoured
Sets Cheques are not issued in sets Foreign bills are generally
drawn sets of three or four
ary liability The drawer of a cheque is The drawer or the acceptor of a
primarily liable for payment bill is primarily liable on it

DISTINCTION BETWEEN A CHEQUE AND A PROMISSORY NOTE

Basis Cheque Promissory Note

No. of Parties A cheque has three parties A promissory note had two
parties only
Order and promise A cheque contains an A promissory note contains an
unconditional order to the unconditional undertaking by the
banker to pay the money debtor to pay the money
Drawee The drawee is a specified A promissory note may be
banker, i.e., the drawee of a executed either by a banker or by
cheque always a banker a non-banker

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Payable on demand A cheque is always payable It may be payable either on
on demand demand or after a certain period
Bearer of order A cheque may be payable to A promissory note cannot be
order or to bearer made payable to the bearer on
demand
Crossing A cheque can be crossed There is practice of crossing a
promissory note
Stamping A cheque does not require It must be properly stamped
any stamp
Days of grace Grace days are not allowed A grace period of three days is
because it is always payable allowed
on demand
Discounting A cheque is not discounted A promissory note can be
discounted and rediscounted with
banks

HOLDER

He is either the original payee or any other person to whom the payee has endorsed the
instrument.

HOLDER IN DUE COURSE

Any person who for consideration becomes the possessor of the instrument payable to the
bearer for valuable consideration before maturity of instrument in good faith without
knowledge about its bad title.

Privileges of Holder in due course

The holder in due course is not liable until all the prior parties are held liable.

The holder in due course gets a good title even if it defective but without knowledge of
such defect.

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Every holder in presumed to be holder in due course though such presumption is
reputable.
The principle of estoppels is applicable to the deniers of the bonafide title of the
instruments and or the holder in due course can set up the plea of estoppels.
If the instruments are without consideration or obtained by illegal means, he gets only a defective
title but the subsequent holders may get the privileges.

DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

Holder Holder in Due Course
He takes it subjects to all defects & He takes the instrument for free from all

equities defects
Consideration is not necessary Acquires the instruments for valuable

consideration

He could acquire the possession after the He should have acquired possession of the
amount mentioned in it became payable instrument before the amount mentioned in
it became payable
He can take the instrument with notice of He should not have noticed any defect in the

defects instruments
It is sufficient if he entitled to the He must have possession of the instruments

possession of the instruments

NEGOTIATION

According to Section 14 of Negotiable Instrument Act 188 "When a promissory note, bill of
exchange or cheque is transferred to any person, so as to constitute the person the holder thereof,
the instrument is said to be negotiated.

Modes of Negotiations

Negotiation may take place (i) by delivery (ii) by endorsement and delivery.

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(i) Negotiation by Delivery

According to Section 47 Subject to the provisions of Section 58 of the Negotiable Instrument

Act, 1881 a promissory note, bill of exchange or cheque payable to bearer is negotiable by
delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to
take effect except in a certain event is not negotiable (except in the hands of a holder for value
without notice of the condition) unless such event happens. Ex.
(a) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for
B. The instrument has been negotiated.
(b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A’s
banker, who is at the time the banker of B, directs the banker to transfer the instrument to B’s
credit in the banker’s account with B. The banker does so, and accordingly now

possess the instrument as B’s agent. The instrument has been negotiated, and B has become the
holder of it.
(ii) Negotiation by Endorsement and Delivery

According to Section 48 of the said Act Negotiation by endorsement, Subject to the provisions of
Section 58, a Promissory Note, bill of exchange or cheque payable to order, is negotiable by the
holder by endorsement and delivery thereof.

ENDORSEMENT

Endorsement means signing at the back of the instrument for the purpose of negotiation. Section
15 of the Negotiable Instrument Act 1881 defines endorsement is the act of the signing a cheque,
for the purpose of transferring to the someone else, is called the endorsement of Cheque. The
person who endorses is called “endorser” and the person to whom the instrument is endorsed is
called the “endorsee”. The endorsement is usually made on the back of the cheque. If no space is
left on the Cheque, the Endorsement may be made on a separate slip to be attached to the
Cheque.
Types of Endorsement

There are six Kinds of Endorsement i) Endorsement in Blank / General ii) Endorsement in Full /
Special iii) Conditional Endorsement iv) Restrictive Endorsement v) Endorsement Sans
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Recourse vi) Facultative Endorsement.
(a) Endorsement in Blank / General

An endorsement is said to be blank or general when the endorser puts his signature only on the
instrument and does not write the name of anyone to whom or to whose order the payment is to
be made.
(b) Endorsement in Full / Special

An endorsement is 'special' or in 'full' if the endorser, in addition to his signature also mention the
name of the person to whom or to whose order the payment is to be made. There is direction added
by endorse to the person specified called the endorsee, of the instrument who now becomes its
payee entitled to sue for the money due on the instrument.

(c) Conditional Endorsement

The conditional endorsement is negotiation which takes effect on the happening of a stated
event, or not otherwise. Section 52 of the Negotiable Instrument Act 1881 provides - The
endorser of a negotiable instrument may, by express words in the endorsement, exclude his own
liability thereon, or make such liability or the right of the endorsee to receive the amount due
thereon depend upon the happening of a specified event, although such event may never happen.
Where an endorser so excludes his liability and afterwards becomes the holder of the instrument
all intermediates endorsers are liable to him. Ex.
(a) The endorser of a negotiable instrument signs his name, adding the words “without
recourse”. Upon this endorsement, he incurs no liability.
(b) A is the payee and holder of a negotiable instrument. Excluding personal liability by an
endorsement, “without recourse”, he transfers the instrument to B, and B endorses it to C, who
endorses it to A. A is not only reinstated in his former rights but has the rights of an endorsee
against B and C.
(d) Restrictive Endorsement

Restrictive endorsement seeks to put an end the principal characteristics of a Negotiable

Instrument and seals its further negotiability. This may sound a little unusual, but the endorsee is
very much within his rights if he so signs that its subsequent transfer is restricted. This prevents
the risk of unauthorized person obtaining payment through fraud or forgery and the

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drawer losing his money.
(e) Endorsement Sans Recourse

Sans Recourse which means without recourse or reference. As such a when the property in a
negotiable instrument is transferred sans recourse, the endorser, negatives his liability and
excludes himself from responsibility to all subsequent endorsees. It is one of the commonest form
of qualified endorsement and virtually prohibits negotiation since the endorser says in effect.

(f) Facultative Endorsement

Facultative Endorsement is an endorsement where the endorser waives some right to which he is
entitled. For example, the endorsee is liable to give notice of dishonor to the endorser and
normally failure to give notice will absolve the endorser from his liability.

CROSSING OF CHEQUE
There are two types of cheques, open cheques and crossed cheques. Open Cheque is one which is
payable in cash across the counter of a bank. A crossed cheque is one, on which two parallel
transverse lines with or without the words "& Co." are drawn. The crossing of cheque gives a
direction to the drawee bank to not pay the mentioned amount at the counter, instead the payment
should be done through a bank. Thus crossing is a direction to the drawee banker to pay the
amount of money on a crossed cheque through a banker so that the party who obtains the
payment of the cheque can be easily traced.

Importance of Crossing of Cheque

A crossed cheque cannot be encashed by the bearer but can only be collected from the drawee
bank in the bank account. (Sec. 123 and 126 of the Negotiable Instruments Act) Therefore,
Crossing of cheque provides protection and safeguard to the issuer of the cheque. In case of a
crossed cheque one can easily detect who encashed the said cheque, unlike the case of non-
crossed cheque. Hence, Crossing protects both payer and the payee of the cheque. Also, both
bearer and order cheques can be crossed. The specimen of crossing of cheque is given below:

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 FIGURE 4. SPECIMEN OF CROSSING OF CHEQUE

There are two types of crossing called General crossing and special crossing. Another type of
crossing Known as 'restrictive crossing' is developed out of business usage.
1) General crossing

Section 123 of the Negotiable Instruments Act has defined General Crossing – “where a cheque
bears across its face an addition of the words ‘And Company’ or any abbreviation thereof,
between two parallel transverse lines or of two parallel transverse lines simply, and either
with or without the words ‘not negotiable’, that addition shall be deemed to be a crossing of
cheque and the cheque shall be deemed to be crossed generally”.

FIGURE 5. SPECIMEN OF GENERAL CROSSING OF CHEQUE

A cheque is considered to be generally crossed in the following cases:

When there are two transverse parallel lines marked across the face of cheque

When the cheque bears an abbreviation “& Co.” between the two transverse parallel lines

When the cheque bears the words “Not Negotiable” written between the two parallel lines

When the cheque bears the words “A/c. Payee” between the two transverse parallel lines.

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2) Special crossing

A cheque is said to be specially crossed when a particular bank’s name is written in between the
two transverse parallel lines on the cheque.
According to the Section 124 of the Negotiable Instruments Act, Special Crossing is defined as,
the cheque which “bears across its face an addition of the name of a banker, with or without the
words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed
to be crossed specially and to be crossed to that banker”.
In a special crossed cheque, the amount written in cheque is payable by the drawee only, and
only to the bank named in the crossing.

FIGURE 6. SPECIMEN OF SPECIAL CROSSING

3) Restrictive crossing

In addition to the two statutory types of crossing discussed above, there is another type which
has been adopted by commercial and banking usage. In this type of crossing the words, "A/c
payee" are added to the general or special crossing.
Not negotiable Crossing of Cheque

The effect of writing ‘not negotiable’ crossing of cheque is that the cheque can be transferred but
transferee will not be able to acquire a better title to the cheque. Thus, such a cheque is deprived
of its essential feature of negotiability. The payment of such a cheque is not made unless the
bank named in the crossing of cheque is presenting the cheque.

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BOUNCING/DISHONOUR OF CHEQUE

A cheque is said to be honoured, if the banks give the amount to the payee. While, if the bank
refuses to pay the amount to the payee, the cheque is said to be dishonoured. In other words,
dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to the payee.
Whenever the cheque is dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’
to the payee banker specifying the reasons for dishonour. The payee banker provides the memo
and the dishonoured cheque to the payee. The payee has an option to resubmit the cheque within
three months of the date specified on the cheque after fulfilling the reason for the dishonour of
cheque.
Moreover, the payee has to give a notice to the drawer within 30 days from the date of receiving
“Cheque Return Memo” from the bank. The notice should state that the cheque amount will be
paid to the payee within 15 days from the date of receipt of the notice by the drawer. However, if
the drawer fails to make a fresh payment within 30 days of receiving the notice, the payee has
the right to conduct a legal proceeding against the defaulter as per Section 138 of the Negotiable
Instruments Act.

Reasons for Dishonour of Cheque

1. If the cheque is overwritten.

2. If the signature is absent or the signature in the cheque does not match with the specimen
signature kept by the bank.
3. If the name of the payee is absent or not clearly written.

4. If the amount written in words and figures does not match with each other.

5. If the account number is not mentioned clearly or is altogether absent.

6. If the drawer orders the bank to stop payment on the cheque.

7. If the court of law has given an order to the bank to stop payment on the cheque.

8. If the drawer has closed the account before presenting the cheque.

9. If the fund in the bank account is insufficient to meet the payment of the cheque.

10. If the bank receives the information regarding the death or lunacy or insolvency of the
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 drawer.
11. If any alteration made on the cheque is not proved by the drawer by giving his/her signature.
12. If the date is not mentioned or written incorrectly or the date mentioned is of three months
before.

Dishonour of Cheque - Consequences

When the cheque is dishonoured, a ‘cheque return memo’ is offered by the bank to the payee
stating why the cheque has been bounced. The payee can resubmit the cheque if he believes that it
will be honoured second time. The payee can prosecute the drawer legally if the cheque is
bounced again.
The Negotiable Instrument Act, 1881 is applicable for the cases related to dishonour of cheques.
In accordance with section 138 of this act, dishonour of cheque is a criminal offence and is
punishable with monetary penalty or imprisonment up to 2 years or both.
1. Penalty

If a cheque is bounced, then a penalty is levied on both drawer and payee by their respective
banks. The person will additionally have to pay late payment charges if the dishounoured
cheque is against repayment of a loan.
2. Damage to Credit History

Your credit history is negatively impacted if a cheque is dishonoured since your payment
activities are reported to the credit bureaus by the financial institutions. The lenders will trust
you if you have a good credit score. In order to have a good credit score, it’s a good practice
to avoid your cheques from being bounced. Your good payment activities will help you build
good CIBIL score and benefit you at the time of lending money from financial institutions.

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