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Notes Notes
Chart for Understanding
Chapter 5: 5.1 5.2 Agreement

The Indian Contract

Act, 1872 Offer by
Offeror
Acceptance
by Offeree
Offer must
be definite
It must be
unconditional
Definitions [2]
Legal Relationship
Sec Definition The parties must intend to create a legal relationship. Agreements of social or domestic nature
Proposal do not contemplate legal relationship, so they are not contracts.
When one person signifies to another,
a. his willingness to do or to abstain from doing anything, Chart for Understanding
2(a)
b. with a view to obtaining the assent of that other to such act or
Example of Legal Relationship
abstinence,
he is said to make a proposal.
Promise
a. When the person to whom the proposal is made signifies his assent
2(b)
thereto, the proposal is said to be accepted.
b. A proposal, when accepted, becomes a promise. Husband promising his wife to buy A promises B to build House for A in exchange
Promisor & Promisee her a ‘necklace’ on occasion of her of money is contract and therefore create legal
2(c) a. The person making the proposal is called the “promisor”, birthday is not a contract. relationship
b. The person accepting the proposal is called the “promisee”
Consideration Lawful consideration
When, at the desire of the promisor, the promisee or any other person has: The agreement must be supported by a lawful consideration. Consideration means ‘something in
2(d) a. done or abstained from doing, or does or abstains from doing, or return’. ‘Something in return’ may be an act or abstinence. But it must be real and lawful.
b. promises to do or to abstain from doing, something,
such act or abstinence or promise is called a consideration for the promise Chart for Understanding
Agreement
Every promise and every set of promises, forming the consideration for Example of Lawful consideration
2(e)
each other, is an agreement.
Void Agreement
2(g)
An agreement not enforceable by law is said to be void
Contract
2(h) Giving money in exchange of goods Bringing stars from sky is not real. Hence cannot be
An agreement enforceable by law is a contract.
bought is lawful consideration. considered as lawful consideration.
Voidable Contract
An agreement which is enforceable by law at the option of one or more of
2(i)
the parties thereto, but not at the option of the other or others, is a Capable Parties
voidable contract. The parties to an agreement must be capable of entering into a contract. A person is considered
Void Contract incompetent if he is (a) not 18 or not above 18 years of age (b) of unsound mind (c) disqualified
2(j) A contract which ceases to be enforceable by law becomes void when it from contracting by any law to which he is subject.
ceases to be enforceable.
Chart for Understanding
Essentials of Valid Contract [10] Example of Incompetent parties
Agreement
In order to constitute a contract, there must be an agreement in first place. An agreement in
turn is composed of two elements-offer and acceptance. Thus there must be at least two
parties-one making the offer and another accepting it. The terms of offer must be definite and
Not 18 or not above 18 Person of Person Disqualified by
the acceptance must be absolute and unconditional.
years of age unsound mind law

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Lawful Purpose Creation of
The object of agreement must be lawful. Legal
5.3 5.4 Obligation:
Chart for Understanding
One in Other:
Example of Lawful Purpose

Contract or Agreement to do Impossible Act is Void [56]

Meaning
C pays fees to his Lawyer for fighting his case is L asks M to kill D in exchange of 50,000 Rs is Contingent agreements to do or not to do anything if an impossible event happens, are void,
a lawful purpose Unlawful purpose even if the impossibility of the event is known or not known to the parties at the time when
agreement is made.

Free Consent Compensation shall be given when fact is known

The consent of the parties must be free and genuine i.e. not induced by coercion, undue If a person promises to do particular act:
influence, fraud or misrepresentation.  knowing that such act is impossible or unlawful &
 the person to whom such promise is made does not know the fact that such act is
Chart for Understanding unlawful or impossible
than the promisor must make compensation for any loss which the promisee has sustained due
Example of Free Consent
to non-performance of the promise.

Examples
A agrees to pay B 1,000 rupees if two-straight lines should enclose a space. The
agreement is void.
A made proposal to B asking his consent in Z forced X to sign a promissory note at the point
writing without any pressure, is free consent of pistol, is not Free Consent A agrees to pay B 2,000 rupees if B will marry A’s daughter C. C was dead at the time of
the agreement. The agreement is void.

Valid Agreement
The agreement not expressly declared void or illegal by law. The terms of agreement must be Uncertain Agreement [29]
certain and capable of performance. Agreements,
Chart for Understanding a. the meaning of which is not certain, or
b. not capable of being made certain, are void.
Example of Valid Agreement
Chart for Understanding
Example of Uncertain Agreement

D agrees to sell C garments. The type, quality, value etc. are A Promises B to bring rainfall through
not discussed. The agreement cannot be enforced as terms magic. Such agreement cannot be
are uncertain. enforced
A agrees to sell to B “all the grain in A’s A agrees to sell to B “my white house for Rs.
granary at Ramnagar @ 40 per Kg.” There 5 cr or Rs. 10 cr”. There agreement shows
Legal formalities is no uncertainty here to make the two prices making it uncertain. So
agreement void. agreement is void.
Where nature of agreement is such that it requires compliance of certain formalities, such
requirements should be fulfilled. A contract may require registration in addition of being in
writing. However as regards to legal effects, an oral contract has same weightage as a contract in
writing.

Distinction Between Agreement & Contract

Basic Agreement Contract

Meaning:

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Notes Notes
Classification of Contracts [2 and 9] Boulton Vs. Jones

Creation Basis Execution Basis Enforceability Basis 5.5 5.6

1. J offered to purchase 50
feet leather from Z
Executed Contract Valid Contract
Express Contract
In which both the parties
Contract by Spoken or written
fulfilled their obligations. 2.Z sold his
words. Void Contract business to
B
Implied Contract Executory Contract
In which both the parties not Void Agreement
Contract by conduct of
person or circumstances of fulfilled their obligations.
cases. Voidable Contract 3.B supplied to leather to J but J refuses to accept the
Contract leather. Held that where an offer is made to a specified
Partly Executed and Partly
Executory Contract Illegal Agreement person only that person can accept such offer.

Offer or Proposal Fact of The Case

Rules of Valid Offer or Proposal a. J offered to purchase 50 feet leather from Z.
1. Offer Must Be Communicated b. Z in meantime sold his business to B.
c. So instead of Z, B supplied to leather to J.
Carlill Vs. Carbolic Smoke Ball Co. d. J refused to accept the leather.
Mrs. Carlill Question
1.It advertised to give Can J refuse such offer?
used smoke
reward of $100 to
balls but Decision Of Court
person who contracted
contracted
influenza, after using its It was held that where an offer is made to specified person(Z), it is a specific offer. Only that
influenza
Smoke balls person can accept such specific offer, as it is special and exclusive to him. J can refuse to accept
2.She claimed the leather as he had not made offer to B.
reward but
Company resisted
3.Court held that Mrs Lalman Shukla Vs. Gauri Dutt
Carlill was entitled to a
reward

1. G’s told same to her munim L

Fact of The Case 1. G’s Nephew was missing 2. L went to search the boy
L claimed the reward for
a. A pharmaceutical Company advertised that it would give a reward of $100 to any person who 3. G issued handbills offering finding the boy 4. L found the boy &
contracted influenza, after using its Smoke balls for certain period according to the directions. reward of Rs. 501 to anyone It was held that L is not brought him home.
b. Mrs. Carlill bought these smoke balls and used them as directed but contracted influenza. She who trace the boy eligible for reward as he was
unaware of the public offer
claimed reward but Company resisted. and acted without knowing
Question the same.
Whether Company’s resistance to give reward is tenable?
Decision Of Court
It was held that the advertisement did not require any communication of compliance of the
condition, it was not necessary to communicate the same. Mrs Carlill was entitled to a reward of
$100 as she had performed the condition for acceptance. Fact of The Case
a. G’s nephew was missing.
b. L who was Munim of G went in search of missing boy.
c. Meanwhile G issued handbills offering reward of Rs. 501 to anyone who trace the boy.
d. L found boy and brought him home.
Question
Whether L is eligible to receive reward?
Decision Of Court
It was held that the reward for missing the child cannot be claimed by a person who traced the
child without any knowledge of the announcement. L shall not be eligible to receive reward.

2. Communication of Complete Offer/Proposal

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Handerson Vs. Stevenson Question
Can Mr. X & Mrs. X claim damages?
Conditions were 5.7 5.8 Decision Of Court
printed on back of It was held that the terms of contract concluded before entering the room. Any terms reviled
1.X purchased ticket. It excluded
steamer ticket
after accepting the contract will be considered void and ineffective. Hence Mr. X & Mrs. X can
company from
liability of loss of claim damages.
luggage

2.X’s Luggage was

Parker Vs. S.E. Rail Co.
lost
X is entitled to recover 2. Terms and
the damages 1. P deposited his bags in the condition of
as nothing written on cloakroom at a railway station receipt had
front of the ticket to and accepted receipt for same limited liability of
draw attention bags up to $ 10

2. P’s bag was lost

4. P will only receive $ 10
Fact of The Case as attention to condition
a. X purchased steamer ticket for travelling from Dablin to White Haven was attracted.
b. The conditions were printed on back of the ticket. One of the condition excludes company
from liability of the any loss, injury or delay to passenger or their luggage
3. He claimed the actual value
c. There was nothing written on front of the ticket to draw attention of the passenger at of the bag amounting to $24
conditions on the back of the tickets
d. X’s Luggage was lost due to negligence of servants of the shipping company
Question Fact of The Case
Whether X is entitled to recover the damages? a. P deposited his bags in the cloakroom at a railway station.
Decision Of Court b. On the face of the receipt the words “See Back” are printed.
It was held that there was nothing written on front of the ticket to draw attention of the c. One of the conditions printed on back was “the liability of the railway company shall be
passenger at conditions on the back of the tickets. Where a written document is presented to a limited to $ 10 for any package.”
party for acceptance, a reasonably sufficient notice shall be given of the presence of terms and d. P’s bag was lost. He claimed the actual value of the bag amounting to $24.
conditions. Therefore X is entitled to recover the damages. Question
Can P claim $ 24 for lost Bag?
Olley Vs. Malborough Court Ltd. Decision Of Court
It was held that If the person receiving the ticket did not see or know that there was any writing
on the ticket, he is not bound by the conditions. Decision was in the favour of P.
2.They found a notice
on the wall excluding 3. Offer Must not be Burden on Offeree
owner’s liability for loss An offer must not be burden on offeree to communicate his decision. An offer must not contain
by theft of articles any term the non-compliance of which amounts to acceptance.
1.Mr. X & Mrs. X hired
3. Mr. X &
hotel room
Mrs. X ‘s Felth house Vs. Bindley
Luggage was
stolen
4.X is entitled to 1. A offer to sell white
recover the damages horse to B. if no reply is
as terms reviled after given within 7 days A will
accepting the assume that contract is
contract being executed.
B did not reply on
4. A cannot enforce contract
as his assumption was wrong matter

Fact of The Case

3. A thought B
a. Mr. X & Mrs. X hired room in hotel accepted the contract
b. When they entered the room they found a notice on the wall disclaiming the owner’s liability
for any loss arising by theft of articles.
c. Some of their items were stolen

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Fact of The Case Pharmaceutical Society of Great Britain Vs. Boot Cash Chemist Ltd.
a. A wrote to B “I will sell you my horse for Rs. 500. If I do not receive reply by next Sunday,
I shall assume that u have accepted the offer.” 5.9 5.10
b. B did not reply.
1.A self-service
Question
system was there for
Can A enforce the contract? purchasing goods.
Decision Of Court
It was held that A cannot enforce the contract as offer must not be burden on offeree to Goods displayed in the shop
communicate his decision. An offer must not contain any term the non-compliance of which with price tags. 2.A customer
amounts to acceptance. Display of goods was not selected the
4.Held an offer. The Price tag on goods but shop
customer the goods is invitation to owner refuses
4. Cross offer do not Conclude a Contract can’t sue offer to sell it.
Two offers which are identical in all respect made by two persons to each other ignorance of Shopkeeper
each other’s offer known as “Cross Offer”. Cross offer do not conclude a contract.

3.Customer wanted
Chart for Understanding to sue shop keeper

Example of Cross Offer

Fact of The Case

a. Goods displayed in the shop with price tags.
b. A self-service system was there for purchasing goods.
A agrees to sell something to B B offers A to Buy same thing on
c. One customer selected the goods but shop owner refuses to sell it.
on certain terms same terms
Question
5. Counter Offer Whether the display of goods amounts to offer? Can customer sue shop keeper?
A counter offer amounts to rejection of the original offer. Decision Of Court
It was held that the display of goods was not an offer. The Price tag on the goods is invitation to
offer. Shopkeeper can refuse to sale good on basis of price tag. Hence customer can’t sue
Chart for Understanding
shopkeeper.
Example of Counter Offer
Harris Vs. N. Nickerson

X came
1.Auctioneer from a
advertised in a distant
Seller offers to sell her house for Buyer receives the offer and gives Seller a newspaper for sale of place for
$150,000, to be paid in 60 days counter offer of $140,000, payable in 45 days office furniture the auction

6. Offer Vs. Invitation to Offer Vs. Intention to Offer 4. X cannot

enforce the Advertisement made by 2. The auction
Offer/Proposal Invitation to Offer Intention to Offer auctioneer was merely was cancelled.
contract
Offer is final expression of If a person without expressing his final The declaration of the expression of intention and
willingness to make a willingness proposes certain terms on statement indicating offer not an offer
person bound by his offer which he is willing to negotiate, it is may be made or invited in
if the other person called as invitation to offer and not future does not amount to
3. X wanted to sue
accepts it. offer. offer. auctioneer
Example: Example: Example:

Fact of The Case

a. An auctioneer advertised in a newspaper that a sale of office furniture will be held on a
particular day.
b. Mr. X with intention to buy furniture came from a distant place for the auction but the
auction was cancelled.
Question

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Whether Mr. X can enforce auction or contract? Chart for Understanding
Decision Of Court
An offer must be distinguished from mere expression of intention. It was held that 5.11 5.12 Example of above rule
advertisement made by auctioneer was merely expression of intention and not an offer which
could be accepted by travelling to the place of intended sale. L sends letter to M , offering to sell his house. L
asks M to reply by telegram. M shall then reply
only through telegram
Revocation of Offer / Laps of Offer
A proposal is revoked due to following reasons
4. Acceptance in reasonable time
Communication of notice of revocation by the proposer to the other party; The acceptance must be given within a reasonable time and before the offer lapses

By the lapse of the time prescribed in such proposal for its acceptance. 5. Mere silence is not acceptance
The acceptor should expressly accept the offer. Acceptance can be implied also. Acceptance
If no time is so prescribed, by the lapse of a reasonable time, without
must be given only by that person to whom it is made, that too only after knowing about the
communication of the acceptance;
offer made to him.
By the failure of the acceptor to fulfill a condition precedent to acceptance. 6. Acceptance by conduct
Acceptance has to be signified either in writing or by word of mouth or by performance of some
By the death or insanity of the proposer, if the fact of the death or insanity comes act. The last of the method, namely ‘by some act’ has to be understood as acceptance by
to the knowledge of the acceptor before acceptance. conduct.
Example of above rule
Acceptance Tradesman receives an order from a customer, and the order is executed
accordingly by the trader, there is an “acceptance by conduct” of the offer made
Meaning [2(b)] by the customer. The trader’s subsequent act signifies acceptance.
A proposal or offer is said to have been accepted when the person to whom the proposal is
made signifies his assent to the proposal to do or not to do something.
Who Can Accept?
Rules governing acceptance
In Case of Specific Offer In Case of General Offer
1. Acceptance must be absolute and unqualified
As per section 7 of the Act, Acceptance is
 Valid only when it is absolute and unqualified and
 Is also expressed in some usual and reasonable manner unless the proposal prescribes the
manner in which it must be accepted. Only that particular person or group of Any person if:
person to whom the specific offer has been a. He has the knowledge of the offer and
made and none else. b. He fulfils the term and conditions of the offer.
Chart for Understanding
Example of above rule Mode of Acceptance

Express Acceptance Implied Acceptance

A offers B to buy his motorcycle at Rs A offers B to buy his motorcycle at Rs 50,000. But in
Expressly acceptance in writing. Execute any act result in implied in acceptance.
50,000. B accepts it. Such acceptance is exchange of A’s offer B asks A to buy his Cycle for Rs 10000.
absolute and unqualified Such acceptance is not absolute and unqualified
Legal Rules for Valid Acceptance [7]
2. The acceptance must be communicated General rules relating to Acceptance
To conclude a contract between the parties, the acceptance must be communicated in some
perceptible form. Any conditional acceptance no acceptance. Further when a proposal is 1. Absolute & Unqualified Acceptance
accepted, the offeree must have the knowledge of the offer made to him. The acceptance must The offeree should assent to all the terms of the offer. There must be no variation or reservation
relate specifically to the offer made. i.e. acceptance must be unconditional.

3. Acceptance must be in the prescribed mode

Where the proposal prescribes the mode of acceptance, it must be accepted in that manner.
Where the proposal does not prescribe the manner, then it must be accepted in a reasonable
manner.

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Notes Notes
d. Mr. B who was the member of the managing committee & also the friend of Mr. A informed
2. Acceptance Must be Communicated Mr. A that he has been selected.
Brodgen Vs. Metropolitan Rly. Co. 5.13 5.14 e. In meantime managing committee changed the decision and appointed other person.
Question
Whether communication by Mr. B amounts to acceptance? Dose it amounts to valid contract?
Decision Of Court
1. Draft agreement was sent It was held that there was no contract between the parties as there was no authorised
to the manager of a Railway
Company for his approval
communication made by the school authority, the person who informed him about his
appointment was not authorised to perform such act, and there was no intention to create a
contract on the part of the body, the managers.
2. Manager
approved letter
but did not 4. Manner of Acceptance
dispatch.
Manner of Acceptance

No Manner of Prescribed manner of

3. Contract cannot be said as concluded
Acceptance Acceptance
because Manager has not communicated
acceptance
The offer must be accepted 1. The offer must be accepted in specified manner.
in some usual and 2. If the offer is not accepted in the prescribed manner, the offeror
Fact of The Case reasonable manner. may reject acceptance within a reasonable time.
a. A draft agreement relating to the supply of coal was sent to the manager of a Railway
Company for his approval. 5. Time Limit for Acceptance
b. The manager put the words “approved” on the agreement. However the manager forgot to
dispatch approved copy of the agreement. Time Limit of Acceptance
Question
Whether the contract is concluded without communicating acceptance? The offer Does not The offer Prescribe
Decision Of Court Prescribe the Time Limit the Time Limit
It was held that there was no contract as the Manager had not communicated his acceptance to
proposer. The offer must be accepted in The offer must be accepted within
reasonable time. prescribed time.
3. Acceptance by Whom?
Powell Vs. Lee
Ramsgate Victoria Hotels Vs. Montefiore
A person applied for shares in a company in June. He cannot be bound by the
1.A school advertised Mr. A was
for filling a vacancy for selected
allotment made late in November since delay of 6 months in acceptance of
the post of Headmaster in the application for shares was unreasonable.
interview
6. Acceptance Must Be Given Before offer Lapses or Revoked
2. Decision not
B was not authorised to communicated to 1. Acceptance can be given only to an existing offer.
4. Committee perform such act. Hence A 2. An offer open for a limited period can be accepted only before expiry of period.
changed the 3. An offer can be revoked before acceptance.
contract is void
decision
4. Acceptance is not valid if it is given after the offer is lapsed or revoked.
5. Acceptance cannot be given before the communication of offer is complete.
3. B (A’s Friend) informed
A that he was selected 7. Mode of Acceptance
but committee changed 1. By any act and
the decision
2. By omission, intending thereby to, to communicate to the other or which has the effect of
communicating it to the other.
Fact of The Case
a. A school advertised for filling a vacancy for the post of Headmaster.
b. Managing committee interviewed many people and selected Mr A.
c. However, the decision of the managing committee was not communicated to Mr. A.

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Notes Notes
Communication of Acceptance and Revocation [4] Consideration
5.16 Meaning [2(d)]
Communication of Acceptance 5.15
“When at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing or promises to do or abstain from doing something,
Against offeror Against the Offeree such an act or abstinence or promise is called consideration for the promise.”

(1) Consideration is the doing or not doing of something which the promisor desires to be
done or not done.
(2) Consideration must be at the desire of the promisor.
When acceptance is put in When acceptance comes to (3) Consideration may move from one person to any other person.
course of transmission. knowledge of offeror. (4) Consideration may past present or future.
(5) Consideration be not adequate, but should be real.
Communication of Revocation
Essentials of Valid Consideration
Against Maker Against Acceptor
1. Consideration Must Move at Desire of Promisor
Durga Prasad Vs. Baldeo
When revocation is put in course of When revocation comes to knowledge
transmission. of acceptor. Fact of The Case
a. D spent some money for renovation of market on request of collector.
b. After such renovation, a shopkeeper of the market promised to pay commission to D on
Time Limit for Revocation [5] sale affected by him.
c. On non-performance of such promise by the shopkeeper, D sued him for recovery of
Revocation Of Time Limit for Revocation money.
Offer Before communication of acceptance is complete against offeror. Question
Acceptance Before communication of acceptance is complete against offeree. Whether D can recover money?
Decision Of Court
Concept Analyser It was held that there was no consideration as money was not spent by plaintiff at request of
Date of receipt Date of the defendants, but at instance of third person viz. the collector, thus the contract was Void.
Revocation / posting of Receipt of
Which is Valid?
Of Letter of letter of
Acceptance Revocation
1st May 2012 5th May 2012 A shopkeeper of
Offer Offer is valid the market
(By Offeree) (By Offeree)
promised to pay
5th May 2012 1st May 2012 1. D spent some money
Offer Revocation of Offer is Valid. commission to
for renovation of market
(By offeree) (By Offeree) D on sale
on request of collector
affected by him.

2nd May 2012 2nd May 2012 2. Shopkeeper did not

Offer
(By Offeree) (By offeree) perform Promise.

1st May 2012 5th May 2012

Acceptance Acceptance / Contract is Valid 3. As money was not
(By Offeror) (By Offeror)
spent by shopkeeper D sued
5th May 2012 1st May 2012 but by collector so him for
Acceptance Revocation of Acceptance is valid.
(By offeror) (By Offeror) contract between D recovery
and shopkeeper was of money
void
2nd May 2012 2nd May 2012
Acceptance
(By Offeror) (By Offeror)

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Chinnaya Vs. Rammaya Fact of The Case
a. A client promised to pay an additional amount to his lawyer if the lawyer wins the suit for him.
Fact of The Case 5.17 5.18 b. The suit was successful.
a. A (an old lady) made contract with R (her daughter), that whole of the property shall be Question
gifted to R, if R agrees to pay annuity to C (sister of A). Whether lawyer is entitled to additional amount for winning suit?
b. R made a contract with C agreeing to pay her the annuities. Decision Of Court
c. On death of A, R refused to pay annuity to C on ground that nothing was received from C as It was held that the promise was void for want of consideration. The lawyer was under a pre-
consideration for annuity & agreement between C & R was void. existing contractual obligation to render the best of his services under the original contract.
Question
Whether the contention of R is valid? 4. Consideration Must Be Lawful
Decision Of Court
The agreement will be void if consideration furnished by any party is unlawful.
It was held that consideration need not necessarily move from promisee, it may move any other
person. Hence contention of R is not valid.
5. Consideration must be Real and not Illusory
Consideration received by party must be of some value. Consideration must not be
2.R made a illusionary. (i.e. existing only in name)
contract with
1.A made contract with R that C agreeing to
whole of the property shall be gifted pay her the
to R, if R agrees to pay annuity to C 6. Natural love and affection
annuities
A written and registered agreement based on natural love and affection between the
parties standing in near relation to each other is enforceable even without
3.On death of consideration.
Consideration need not move A, R refused
from promisee, it may move any to pay Rajlukhy Devi Vs. Bhoothnath
other person. So contention of R annuity to C
Is not valid
4.R
contended 1.Due to frequent quarrels
that nothing between husband and wife. Fed
5.Contention of R is was received up Husband agreed to pay some
not valid. R had to from C so money to wife
pay annuity agreement
between C & 2. Agreement is made
R was void in writing and
registered

2. Adequacy of Consideration is not Required 3.Such agreement is void as

1. There must be consideration in every contract. there was no love and
affection.
2. However, adequacy of consideration is not required.
3. Even if it is proved that such consideration is inadequate, the contract is not void.
4. The fact of inadequacy of consideration shall be given due weightage while determining
whether the consent of the promisor was freely given or not.
Fact of The Case
3. Consideration must be Different from Promisee’s Existing Obligation a. There are frequent quarrels between husband and wife.
b. One-day husband got fed up with his wife and agreed to pay a sum of money as maintenance
Ramachandra Chintaman Vs. Kaluraju
to his wife.
c. This agreement is made in writing and registered.
The suit
Question
was Whether the agreement is valid?
successful Decision Of Court
1. Client promised to pay additional Lawyer ask for
It was held that such agreement is void as there was no love and affection.
amount to his lawyer if he wins additional amount
7. Compensation for past voluntary services
Lawyer cannot ask for A promise to compensate, wholly or in part, a person who has already voluntarily done
additional amount as was
something for the promisor is enforceable under Section 25(2).
under a pre-existing
contractual obligation The following are the essential factors for this condition
(i) The services should have been rendered voluntary.
(ii) The services must have been rendered for the promisor.

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Notes Notes
(iii) The promisor must be in existence at the time when services were rendered. d. P sold certain tyres to S. S resold the tyres at price below the listed price.
(iv) The promisor must have intended to compensate the promisee. e. D instituted suit against S.
5.19 5.20 Question
8. Promise to pay time bared debt Whether suit by D is maintainable?
Where a promise in writing signed by the person making it or by his authorised agent is Decision Of Court
made to pay a debt barred by limitation it is valid without consideration [25 (3)] It was held that Dunlop was a third party to the contract between the retailer and the
distributor, therefore there could be no enforcement. Therefore suit by D is not maintainable.
9. Agency
According to Section 185 of the Indian Contract Act, no consideration is necessary to Exceptions of privity to contract
create an agency. Chart for Understanding

10. Completed gift Exceptions

In case of completed gifts the rule no consideration no contract does not apply.
Explanation (1) to Section 25 states nothing in this section shall affect the validity as
between the donor and donee of any gift actually made. Thus gifts do not require
any consideration.

11. Guarantee Marriage and family Assignment of

Creation of Trust Acknowledge
In the contract of guarantee, consideration received by the principal debtor shall arrangements Contract
Beneficiary is not a ments
be sufficient consideration for the surety. Where a marriage or An assignee can
party to the The person
agreement creating family settlement is who becomes exercise all rights
12. Bailment a trust. However the made, the person who is an agent of a which could be
beneficiary is a beneficiary under such third party by exercised by the
No consideration is required for Gratuitous bailment.
allowed to sue the settlement is entitled to acknowledge assignor previously,
trustee for sue even though he may ment can be even if the assignee
Privity of Contract enforcement of be a party to such sued by such was not a party to the
trustee’s duties. settlement. third party. original contract.
Meaning
1. The general rule is that parties to contract can only sue.
2. That means the person who is not the party to the contract cannot sue.
Capacity of Parties
Effects of Minor’s Agreement
Dunlop Pneumatic Tyre Co. Vs. Selfridge and Co.
1. Void Ab Initio
2.contract 1. A minor is incompetent to contract.
1. D entered in provides that P
2. Therefore any agreement made by minor is void ab initio.
contract to sell shall not sell
certain tyres to P the tyres 3. The agreement with minor does not have any legal effect.
below the price

Mohori Bibi Vs. Dharamodas Ghose

4. Held that D was a third party 2. P sold certain tyres to S.
to the contract therefore there S resold the tyres at price
could be no enforcement below the listed price
1. He was paid a certain
amount for mortgage
the property

3. D instituted suit against S

A minor entered into 2. Mortgagee filed a suit
agreement for mortgage of for recovery of money
property

Fact of The Case 3. Held that money advanced to

a. D entered in contract to sell certain tyres to P. minor can’t be recovered as
b. The contract provides that P shall not sell the tyres below the price. contract with minor is void
c. In addition to this contract provides that at time of resale P also impose the same condition
on retailers.

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Notes Notes
Fact of The Case 3. Rule of Estoppel
a. A minor entered into agreement for mortgage of property. 1. The rule of estoppel does not apply to agreement of minor, because it can amount to
b. He was paid a certain amount for mortgage the property. 5.21 5.22 enforcing void agreement.
c. Afterwards the mortgagee filed a suit against the minor for recovery of money paid to minor. 2. Thus rule of estoppel does not apply against minor.
Question
Can mortgagee recover money? 4. No rectification by Minor
Decision Of Court 1. The agreement entered by minor cannot be ratified by him after attaining
It was held that Money advanced to minor cannot be recovered. As per Sec 10 and 11 of Indian majority.
contract Act the Minor Contract is absolutely void. 2. If minor wants to pay for the goods after attaining majority such agreement
shall be void for want of consideration.
2. Agreement for Benefit of Minor
1. The agreement creating obligation for minor is void as per Mohori Bibi Vs. 5.Liability of Guardian
Dharamodas Ghose. 1. The guardian shall not be liable for the act of the minor.
2. Thus the agreement for benefit of minor are valid as it does not create any 2. The contract made by guardian on behalf of minor shall be valid if:
legal obligation. a. The contract is for benefit of minor.
3. Therefore the agreement for benefit of minor can be enforced by minor. b. The guardian has the authority to enter into such agreement.
4. If the other party to the obligation failed to perform its obligation the minor
can claim restitution. 6. Liability of Minor for Necessities
The minor shall be liable for the necessities supplied to him or any other person
Khan Gul Vs. Lakha Singh dependant on minor.
Conditions
a. The liability is for only necessities of life depending on social status of minor.
1. K gave Loan to L, on b. The minor is not already in possession of such necessities.
misunderstanding that he was c. The minor shall not be personally liable.
major.
7. Position of Minor in Other Contracts
1. The minor cannot be guarantor.
2. K filed a suit 2. Minor can be member if shares are fully paid up.
for recovery of 3. Minor can be apprentice provided he is of at least 14 years of age.
money 4. Minor cannot become a partner in a firm. However he can be admitted for
benefits of partnership.
3. held that minor shall not
be personally liable.
His estate shall be used to
Person of Unsound Mind
recover Loan
Unsound Mind consist of

Fact of The Case

a. L, a minor fraudulently showed him as major.
b. K gave him Loan, on misunderstanding that he was major.
Afterwards K filed a suit against L for recovery of Loan given to him.
Lunatics Idiots Drunken or intoxicated
Question
A lunatic is a person who An idiot is a person who persons
Can K recover money?
is mentally deranged due has completely lost his A drunken or intoxicated
Decision Of Court
to some mental strain or mental powers. He does person suffers from
 The court may grant the relief to the other party who entered into the agreement with minor temporary incapacity to
other personal not exhibit understanding
on the basis of a misrepresentation made by the minor. contract, i.e. at the time
experience. He suffers of even ordinary maters.
 If the minor received some consideration under the agreement the court may grant from intermittent when he is so drunk or
Idiocy is permanent
restitution to the other party. intervals of sanity and intoxicated that he is
whereas lunacy denotes
 However minor shall not be personally liable, means the restitution shall be made only to insanity. He can enter periodical insanity with incapable of forming a
such extent as the estate of minor has been benefited. into contracts during the lucid intervals. An rational judgment. The
 The power of the court to grant relief is discretionary in nature. period when he is of agreement f an idiot, like position of a drunken or
 The court shall not grant relief if the other party had the knowledge of the fact that it was sound mind. that of a minor, is void. intoxicated person is
entering into an agreement with a minor. similar to that of a lunatic.

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Agreements entered into by persons of unsound mind are void Some Important Points
Persons of unsound mind are liable for necessities supplied to them or to anyone whom they are 1. It is immaterial whether Indian penal code (IPC) is or is not in force in the place where the
legally bound to support. But even in such cases, no personal liability attaches to them. It is only 5.23 5.24 coercion is employed [Explanation to Section 15]
their estate which is liable. 2. It is not required that coercion must proceed from the party to the contract. It may proceed
Burden of Proof from a third person also
The burden of proof that the person is of unsound mind lies on the party who challenges validity 3. It is not necessary that coercion be immediately directed against the party whom it is
of contract intended to induce to enter into a contract. It may be directed against any third person
whatever.
4. Coercion must be done to induce the other party to enter into a contract
Person Disqualified Under Law
Threat to commit suicide
Disqualified Person
Calcutta High Court held that “One committing suicide places himself or
herself beyond the reach of the law, and necessarily beyond the reach of any
Alien Enemy Convict Foreign Diplomats punishment too. But it does not follow that suicide is not forbidden by the
Indian Penal Code, Section 306 of the IPC punishes abetment of suicide,
Section 309 punishes an attempt to commit suicide. Thus, suicide as such is
no crime, as indeed it cannot be, But its attempt is; its abetment too is. So it
may very well be said that the Indian Penal Code does forbid suicide.”
1. Existing contract is 1. Existing contract is 1. Right to sue
suspended till war is suspended till conviction others is
is over. available
Undue Influence (16)
over.
2. New contract cannot be 2. New contract cannot be 2. With approval Condition of Undue Influence
entered till war is over. entered till conviction is of CG.
3. Above 2 can be over. Party is in dominant position
executed with CG’s 3. Above 2 can be executed
approval with CG’s approval Party uses its dominant
position

Dominant party obtains

Free Consent unfair advantage
Meaning
Section 13 Section 14 Burden of Proof
Two or more persons are said to have Consent is free when it is not caused by Unconscionable 1. The burden of proof is on dominant party.
consented when they agree upon the same coercion, undue influence, fraud, transaction 2. The dominant party has to prove that undue influence was
thing in the same sense (Consensus-ad-idem). misrepresentation or mistake. not employed.
1. The burden of proof is on the weaker party.
Any other
2. The weaker party has to prove that undue influence was
Coercion (15) transaction
employed.
Coercion
No Undue Influence
Every transaction where the terms are disadvantages to one party is not necessarily influenced
Under Indian Penal Unlawful detention of by undue influence. If contract is made in the ordinary course of business there is no undue
Code property
influence.

Distinction Between Coercion & Undue Influence

Basis Coercion Undue Influence

1. Actually committing offence under IPC 1. Actually detaining property Governing

2.Threatening to commit offence under IPC 2. Threatening to detain the property Section

With intention to causing person to enter

Meaning
into agreement

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Silence as fraud
General Rule Mere silence which likely to affect the willingness of the party is not fraud.
Intention 5.25 5.26
a. Where there is fiduciary relationship i.e. trust on other party and party is silent
when it requires to speak about matters affecting contract.
Exceptions
b. When silence is equivalent to speech.
c. Partial disclosure of truth which deceives the other party is a fraud.
Punishment
Essentials of Misrepresentation (18)

Parties

Only parties The party But the misrepresentation Other party acted
to the thinks that he represent was made innocently as per contract
contract shall makes ation is and not to deceive unknown of
Relationship
be involved. representation false other party misrepresentation
Between Parties

Consequences of Coercion, Fraud, Misrepresentation (19)

Legal Effect 1. Contract is voidable at the option of the aggrieved party.
Contract is 2. The party, However, may also insist that the contract should be
Voidable performed and that he should be put in the same position in which he
would have been, if the representation made had been true.
1. But a person who had the means of discovering the truth with ordinary
Restitution diligence cannot avoid a contract on the ground that his consent was
Contract Not caused by misrepresentation.
Voidable 2. Where a party to a contract perpetrates fraud or misrepresentation, but
the other party is not, in fact, misled by such fraud or misrepresentation,
the contract cannot be avoided by the latter.
1. As to the consequences of the recession of voidable contracts,
Essentials of Fraud (17) 2. The party rescinding voidable contract should, if he has receive any
Meaning Restoration of
benefit there under from the other party to the contract,
Fraud includes any of the following acts committed by a party to a contract, or with his Benefit
3. restore such benefit so far as may be applicable,
connivance or by his agent with intent to deceive another party thereto or his agent, or to 4. to the person from whom, it was received.
induce him to enter into the contract.
Mistake (20 to 22)
Representation of fact which is not true.
1.The contract is not voidable.
Mistake of law 2.Mistake as to foreign law is Bilateral Mistake
The active concealment of a fact by one having knowledge or belief of the fact. mistake of fact. 1.Both party at
mistake
Unilateral Mistake 2.If mistake is
A promise made without any intention of performing it. Mistake material
1.Only 1 party at mistake
2.Contract is not voidable 3.Contract is void
Voidable as to a. Mistake as to
Any other act fitted to deceive.
1.False identity of other party subject matter
2.Entering in to contract on b. Mistake as to
Mistake of Face inducement and without his possibility of
Any such or omission as to law specially declared to be fraudulent. performance
fault

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Difference Between Unilateral & Bilateral Mistake Legality of Object & Consideration
5.27 5.28
Basis Unilateral Mistake Bilateral Mistake Unlawful Object
An agreement, the object or consideration of which is unlawful, is void. Agreement or
Meaning consideration is unlawful in following situations

When it is forbidden by law

Section
If permitted then will defeat the provisions of any law

Effect Fraudulent

Involves injury to the person or property of another

Difference Between Void & Voidable Contract

Basis Void Contract Voidable Contract Immoral

Meaning / Opposed to public policy

Definition

Object or Consideration against Public Policy

Agreement Example
An agreement made with an alien enemy in time of war is illegal on the
Status ground of public policy. This is based upon one of the two reasons:
either that the further performance of the agreement could involve
Agreements of trading
commercial intercourse with the enemy, or that the continued
with enemy
existence of agreement would confer upon the enemy an immediate or
Rights future benefit. Contracts which are entered into the intention of the
parties can or cannot be carried out by postponing performance till the
end of hostilities.
Where the consideration in an agreement is to commit a crime, the
Performance of Agreement to commit a agreement is opposed to public policy. The Court will not enforce such
Contract crime an agreement. Likewise an agreement to indemnify a person against
consequence of his criminal act is opposed to public policy and hence
unenforceable.
An agreement the object of which is to interfere with the
Agreements which
administration of justice is unlawful, being opposed to public policy.
interfere with
1. Interference with the course of justice
Reason administration of justice
2. Stifling prosecution
3. Maintenance and champerty.
(a) Agreement restricting enforcement for rights: An agreement which
wholly or partially prohibits any party from enforcing his rights under or
Agreements in restraint
in respect of any contract is void to that extent.
Effect of legal proceedings
(b) Agreements curtailing period of limitation: Agreements which
curtail the period of limitation prescribed by the Law of Limitation are
void because their object is to defeat the provisions of law.
Agreements for the sale or transfer of public officers and titles or for
Trafficking in public
the procurement of a public recognition like Padma Vibhushan or Parm
Damages offices and titles
Veer Chakra for monetary consideration are unlawful, being opposed to
public policy.
Agreements tending to If a person enters into an agreement whereby he is bound to do

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create interest opposed something which is against his public or professional duty, the Burden of Proof
to duty agreement is void on the ground of public policy. 1. Party supporting agreement must prove that, restraint is reasonably necessary for protection
Agreements in restricting Agreements which unduly restrict the personal freedom of the parties 5.29 5.30 of his interest.
personal liberty to it are void as being against public policy. 2. Party challenging agreement must prove that restraint is injurious to the public.
Every agreement in restraint of the marriage of any person, other than
Agreements in restraint
a minor, is void (Section 26). This is because the law regards marriage Exceptions
of marriage
and married status as the right of every individual.
An agreement by which a person, for a monetary consideration, Sale of Goodwill
promises in return to procure the marriage of another is void, being Agreement restraining seller of goodwill from carrying on
Marriage brokerage
opposed to public policy. Similarly, an agreement to pay money to the same business is valid if:
agreements
parent or guardian or a minor in consideration of his/her consenting to a. Seller carrying on similar business.
give the minor in marriage is void, being opposed to public policy. b. the restriction apply within specified local limits.
Agreements interfering Any agreement which interferes with the performance of martial duties
with martial duties is void, being opposed to public policy.
Agreements to defraud Restriction on Existing partner
An agreement the object of which is to defraud the creditors or the Agreement may provide that while continuance of business
creditors or revenue
revenue authorities is not enforceable, being opposed to public policy. partner shall not carry on any other business
authorities Exceptions to
An agreement which interferes with the liberty of a person to engage Section 27
Agreements in restraint
himself in any lawful trade, profession or vacation is called an Restriction on Outgoing Partner
of trade
“agreement in restraint of trade.” 1. shall not carry on similar business.
An agreement, the meaning of which is not certain, is void, but where 2. restriction in specified local limit for specified time.
Agreement the meaning
the meaning thereof is capable of being made certain, the agreement is
of which is uncertain
valid.
A promise to give money or money's worth upon the determination or Restriction in Case of Sale of Goodwill of Firm
Wagering agreement ascertainment of an uncertain event in which the parties have no 1. Any partner shall not carry on similar business.
interest. 2.restriction in specified local limit for specified time.

Maintenance & Champerty Agreement in Restraint of Legal Proceeding (28)

“Maintenance” is an agreement to give assistance, financial or otherwise, to Meaning
another to enable him to bring or defend legal proceeding when the person Agreement restricting enforcement for rights
giving assistance has got no legal interest of his own in the subject-matter. An agreement which wholly or partially prohibits any party from enforcing his rights under or in
“Champerty” is an agreement whereby one party is to assist another to bring respect of any contract is void to that extent.
an action for recovering money or property, and is to share in the proceeds of Agreements curtailing period of limitation
the action. Under the English Law, both these agreements are void. If the Agreements which curtail the period of limitation prescribed by the Law of Limitation are void
object of a contract is just to assist the other party in making a reasonable claim because their object is to defeat the provisions of law.
arising out of a contract and them to have a fair share in the profit, the contract
is valid. Exceptions
The agreement referring future dispute or present dispute to arbitrator is not void.
Partly Unlawful Agreements
If the agreement can be segregated Wagering Agreements (30)
(a) The lawful part will be enforced.
(b) The unlawful part cannot be enforced. Meaning
If the agreement cannot be segregated the whole agreement shall be A promise to give money or money's worth upon the determination or ascertainment of an
considered as void. uncertain event in which the parties have no interest.

Essentials
Void Agreements- Agreement in Restraint of trade (27)
Meaning Promise to pay money or money’s worth
The agreements in restraint of trade are void agreements. The wagering agreement must contain a promise to pay money or money’s worth.
An agreement which
Uncertain event
(a) interferes with the liberty of a person The promise must be conditional on an event happening or not happening. A
(b) to engage him in any unlawful trade, profession or vacation wager generally contemplates a future event, but it may also relate to a past event
(c) is called an “agreement in restraint of trade.” provided the parties are not aware of its result or the time of its happening.

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Each party must stand to win or lose Enforcement of Contingent Contracts on Happening of Event (32)
Upon the determination of the contemplated event, each party should stand to Contingent contracts to do or not to do anything if an uncertain future event happens cannot be
win or lose. An agreement is not a wager if either of the parties may win but 5.31 5.32 enforced by law unless and until that event has happened. If the event becomes impossible,
cannot lose or may lose but cannot win. such contracts become void.
No control over the event Illustrations
Neither party should have control over the happening of the event one way or the (a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot be
other. If one of the parties has the event in his own hands, the transaction lacks an enforced by law unless and until C dies in A’s lifetime.
essential ingredient of a wager. (b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse
has been offered, refuses to buy him. The contract cannot be enforced by law unless and
No other interest in the event. until C refuses to buy the horse.
(c) A contracts to pay B a sum of money when B marries C. C dies without being married to B.
The contract becomes void.
LOTTERY
A lottery, which is a game of chance, is a wagering agreement. An agreement to buy a ticket for Enforcement of Contingent Contracts on Non Happening of Event (Sec 33)
a lottery is also a wagering agreement. Section 294-A of the Indian Penal Code, 1960 provides Contingent contracts to do or not to do anything if an uncertain future event does not happen
that anyone who keeps any office or place for the purpose of drawing any lottery (other than a can be enforced when the happening of that event becomes impossible, and not before.
State lottery or a lottery authorised by the State Government) shall be punished with Illustrations
imprisonment for a term which may extend to six months, or with fine, or with both. If the A agrees to pay B a sum of money if a certain ship does not return. This ship is sunk. The contract
lottery is authorised by the Government, the persons conducting the lottery will not be can be enforced when the ship sinks.
punished, but the lottery remains a wager all the same.
The following transactions are, however, not wagers Contingent contract Become Impossible due to Future Conduct of Person (34)
A crossword competition involving a good measure of skill for its successful If the future event on which a contract is contingent is the way in which a person will act at an
solution. But if prizes of a crossword competition depend upon the unspecified time, the event shall be considered to become impossible when such person does
correspondence of the competitor’s solution with a previously prepared anything which renders it impossible that he should so act within any definite time, or otherwise
solution kept with the editor of a newspaper, it is a lottery and a wagering than under further contingencies.
transaction competitions in games of skill are not wagers provided the Illustrations
amount of prize does not exceed Rs. 1000. A agrees to pay B a sum of money if B marries C.
A subscription or contribution or an agreement to subscribe or contribute C marries D. The marriage of B to C must now be considered impossible, although it is possible
toward any plate (a cup or other prize for a race or other contest), prize or that D may die and that C may afterwards marry B.
sum of money of the value of Rs. 500 or above to be awarded to the winner
or winners of a horse race (Exception to Section 30). Contingent Contracts Depending on Happening of Specific Event in Specific Time
Contingent contracts to do or not to do anything if a specified uncertain event happens within a
Share market transactions in which delivery of stocks and shares is intended fixed time become void if, at the expiration of the time fixed, such event has not happened, or if,
to be given and taken.
before the time fixed, such event becomes impossible.

Effect of Wagering Agreement

(i) Wagering agreements have been expressly declared to be void in India. In the State of
When contingent on specified event not happening within fixed time.
Contingent contracts to do or not to do anything if a specified uncertain event does not happen
Maharashtra and Gujarat they have been declared to be illegal.
(ii) Suit to recover money deposited. Money deposited with a person (called stakeholder) to within a fixed time may be enforced by law when the time fixed has expired and such event has
be paid to the party winning upon a wager cannot be recovered by the winner. On the not happened, or, before the time fixed has expired, if it becomes certain that such event will
other hand, the loser can recover his deposit from the stakeholder. But were the not happen.
stakeholder pays the money to the winner, the loser cannot recover it from him. Illustrations
(iii) Collateral transactions. Since wagering agreements are void, transactions collateral to (a) A promises to pay B a sum of money if a certain ship returns within a year. The contract
them are not affected. However, in the State of Maharashtra and Gujrat, the wagering may be enforced if the ship returns within the year, and becomes void if the ship is burnt
agreements have been declared to be illegal. within the year.
(b) A promises to pay B a sum of money if a certain ship does not return within a year. The
Contingent Contracts (31) contract may be enforced if the ship does not return within the year, or is burnt within
Definition the year.
A contingent contract is a contract to do or not to do something, if some event collateral to such
contract, does or does not happen e.g. contract of indemnity or of insurance. Agreement Contingent on Impossible Event is Void (36)
Contingent agreements to do or not to do anything if an impossible event happens, are void,
E.g.: A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.
whether the impossibility of the event is known or not to the parties to the agreement at the
time when it is made.

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Illustrations Liability for money paid or thing delivered by mistake or under coercion (72)
(a) A agrees to pay B 1,000 Rs if two-straight lines should enclose a space. The agreement is "A person to whom money has been paid, or anything delivered, by mistake or
void. 5.33 5.34 under coercion must repay or return it
(b) A agrees to pay B 1,000 Rs if B will marry A’s daughter C. C was dead at the time of the In each of the above cases, contractual liability is the creation of law and does
agreement. The agreement is void. not depend upon any mutual agreement between the parties.

Quasi Contracts Performance of Contract

Meaning Meaning
In a contract, a promisor voluntarily undertakes an obligation in favour of the promisee. When a (a) Parties to the contract must either perform or offer to perform their respective promises
similar obligation is imposed by law upon a person for the benefit of another even in the unless such performance is dispensed with or excused under the provisions of the Contract
absence of a contract. Such contracts are the quasi-contracts. These are based upon principles of Act or of any other law. Promises bind the representatives of the promisor in case of death
equity, justice and good Conscience. of such promisor before performance, unless a contrary intention appears from the
contract.( Section 37).
Features (b) So it may be concluded that it is necessary for a party who wants to enforce the promise
made to him, to perform his promise for himself or offer to perform his promise. Only
after that he can ask the other party to carry out his promise.
Such a right is always a right to money generally to a liquidated sum of money.

By whom contract must be performed?

It does not arise from any agreement of the parties concerned, but is imposed by
the law Contract can be performed by

It is a right against a particular person so looks like a contractual right

Types of Quasi Contract

Claim for necessaries supplied to persons incapable of contracting (68) Promisor himself Agent Representatives: Third Person Joint
The supplier is entitled to claim their price from the property of such a person. promise has to be Where Generally upon the Where a promisee promisors
Same is the case if money has been advanced for the purchase of necessaries. performed by the personal death of promisor, the accepts Where 2 or
e.g. minor or a person of unsound mind promisor where consideratio legal representatives of performance from a more
Right to recover money paid for another person (69) the contracts are n is not the the third party he persons
A person who has paid a sum of money which another is obliged to pay, is entered into for foundation deceased are bound by cannot afterwards jointly
entitled to be reimbursed by that other person provided the payment has been performance of of a the promise unless it is enforce it against promise,
made by him to protect his own interest. personal skills, or contract, a promise for the promisor. Such a promise
diligence or the performance involving performance, where must be
Obligation of a person enjoying benefits of non-gratuitous act (70)
personal promisor or personal skill or ability accepted by the performed
Where, a person does some act or delivers something lawfully to another
confidence, it his of the promisor. promisor has the jointly
person with the intention of receiving payments for the same, in such a case,
becomes representati However the liability of effect of discharging unless a
the other person is bound to make payment if he accepts such services or
absolutely ve can the legal promisor though he contrary
goods or enjoys their benefit
necessary that the employ a representative is has neither intention
Responsibility of a finder of goods (71)
promisor competent limited to the value of authorized nor appears
"A person who finds goods belonging to another and takes them into his
performs it person to property inherited by ratified the act of from
custody is subject to the same responsibility as a bailee."
himself. perform it. him from the promisor. the third party. contract.
Therefore, he is required
a. To take proper care of the thing found as his own goods
b. Not to appropriate it to his own use,
c. To restore it to the owner when the owner is traced. Time and place for performance of the promise (46 to 50)
Right of finder The law on the subject is contained in Sections 46 to 50 provisions whereof are summarised
a. Finder is entitled to retain it against whole world. below:
b. Finder has lien for express incurred in preserving goods & finding true 1. If no time is specified in a contract for the performance of the promise, the promise must be
owner. performed within a reasonable time. (46)
c. However he cannot file suit for recovery of this money. 2. If a promise is to be performed on a specified date but the hour is not mentioned the
d. It he can claim recovered. If it was offered. promisor may perform it at any time during the usual hours of business, on such day. (47)
e. If true owners refuses to pay lawful charge he May Sale. 3. When no place is fixed for the performance of a promise, it is the duty of the promisor to ask
f. When goods are of perishable nature. the promise to fix a reasonable place for the performance of the promise. (49)
g. When lawful charge amount to two third of its values or more.

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4. Where promisor has not undertaken to perform the promise without an application by the 2 or
promise, and the promise is to be performed on a certain day it is the duty of the promisee more 1 of them His legal
to apply for performance at a proper place and within the usual hours of business. (48) 5.35 5.36 person
dies representative
making shall perform
promise
Performance of reciprocal promises (51 to 53)
1. General observations: where contract is consist of two promises which are consideration for
If joint promisors don’t discharge their obligation as per section 42 then provisions will be as
each other than promises are called reciprocal promises.
follows as per Section 43:
2. Simultaneous performance of reciprocal promises or one after other. (51)
3. Performance of reciprocal promise where the order of performance is expressly fixed (52)
Promisee may compel any one or more of such joint promisors to perform the
4. Performance of reciprocal promise when the order of performance is fixed by implication
whole of the promise.
(implied order).
5. Effect of one party preventing another from performing promise (53): Then contract
becomes voidable at the option of the party prevented.
When one of the joint promisors is made to perform the whole contract, he can
call for a contribution from others.
Reciprocal promise to do legal and illegal things (57)
When persons reciprocally promise,
a. first to do certain things which are legal and If any of the joint promisors makes a default in making his contribution the
b. secondly, under specified circumstances, to do certain other things remaining joint promisors must bear the loss arising from such a default in
which are illegal, equal shares.
the first set of promises is a contract, but the second is a void agreement.

Distinction between Secession and Assignment This rule does not apply in case of promise made by Principal debtor and surety to promisee. If
Secession Assignment surety pays anything he can recover from the debtor but if principal debtor pays anything to
creditor he cannot recover this from surety as he is just discharging his own liability.
If original debtor is a single person then promisee will have to file suit against all the legal heirs
on the death of debtor not to any of them.
Unlike succession, the assignor can assign only Section 44:
When the benefits of a contract are given by the assets to the assignee and not the liabilities. Where two or more persons have made a joint promise, a release of one of such joint promisors
succession then both burden and benefits Because when a liability is assigned, a third by the promisee does not discharge the other joint promisor or joint promisors neither does it
attaching to the contract are passed to the party gets involved in it. The debtor cannot free the joint promisors so released from responsibility to the other joint promisor or promisors.
successor. through assignment relieve himself of his Also release of one joint holder does not release the other holders.
liability to creditor.
Appropriation of Payments (59 to 61)
Effect of refusal to accept offer of performance (38) (i) Application of Payment where debt to be discharged is indicated [59]:
When offer is not accepted promisor is not responsible to fulfil his promise. Such offer must fulfil Then payment must be applied accordingly. The Latin maxim is quick quid soivitur, sovitur
certain conditions which are as follows, namely; secundum modum solventis. The meaning of this maxim is that whatever is paid, is paid
according to the intention or manner of the party paying.
It must be unconditional
(ii) Application of payment where debt to be discharged is not indicated [60]:
The offer is made at a proper time and place under such circumstances that the At the discretion of creditor for any lawful debt whether its recovery is or is not discovered by
person to whom it is made may have a reasonable opportunity of ascertaining that the law in force for the time being as to the limitation of suits.
the person by whom it is made is able and willing to do what he is bound to do,
then and there. (iii) Application of payment where neither party appropriates [61]:
if the offer is an offer to deliver anything to the promisee, then the promisee must Application of money to discharge of the debts in order of time, whether they are or are not
have a reasonable opportunity of seeing that the thing offered is the thing that the barred by the law in force. If the debts are of equal standing the payment shall be applied in
promisor is bound by his promise to deliver. discharge of each proportionately."

Liability of Joint Promisor (42 to 44)

If two or more persons have made a joint promise, ordinarily all of them during their life-time
must jointly fulfil the promise. After death of any one of
them, his legal representative jointly with the survivor or survivors should do so. After the death
of the last survivor the legal representatives of all jointly must fulfill the promise.

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Notes Notes
Discharge of Contract Outbreak of war can consist of
(i) By emergency legislation controlling prices or relaxing restrictions of trade.
5.37 5.38 (ii) By prohibiting or restraining transaction with alien enemy.
By Laps of By Operation
Time of Law
What is not Supervening impossibility
Cases
By Mutual By Breach of
Agreement Contract
Commercial
Impossibility
By By remission;
Impossibility By Accord or
of Performance Satisfaction Default by 3rd
party
By By Neglect or
Performance Discharge refusal Strikes, Riots &
Civil
Disturbances

Discharge by Impossibility of Performance (56 & 73) Self-Induced

Agreements become void when it becomes impossible to perform them due to a variety of Impossibility
reasons. This is known as “impossibility of performance” and dealt with by section 56 of the
Act
Partial Failure of
Objects or Partial
Impossibility existing at the time of contract Impossibility
If the impossibility is known to the parties Void
If the impossibility is unknown to the parties Void
promisee can
claim for Discharge by Mutual Agreement (62 & 63)
damages on
If impossibility known to the promisor only or he should have known with his
account of Novation (62)
due diligence
non- a. Substitute new contract by old
performance. b. Liability under contract can be transferred to 3rd party
with the consent

Supervening impossibility Alteration (62)

When performance of promise become impossible or illegal by occurrence of an unexpected a. It should be done mutually
event or a change of circumstances beyond the contemplation of parties the contract becomes b. If such alteration is made by single party contract
void. Supervening impossibility can arise due to a variety of circumstances as stated below become void

Reasons of Supervening impossibility Remission (63)

Discharge by
a. Acceptance of lesser amount or lesser degree of
Mutual
performance for full discharge.
Agreement
b. Restriction in specified local limit for specified time.

Rescission (62)
a. Both parties agree to rescind
Accidental Nonexistence Incapacity to If there is b. One party fails to perform his obligation other party may
If there is
destruction of or non- perform a any rescind.
occurrence of contract of any
the subject Change
a particular personal Outbreak
matter of the in Law Waiver
state of services. of war
contract. Means dispute with performance; for this
things. 1. Neither agreement.
2. Nor consideration is necessary.

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Discharge by Operation of Law Liability to pay vindictive or exemplary damages
These are awarded for following
Effect of failure to perform at a time fixed in a contract where time is essential 5.40
5.39
1. Contract is voidable at the option of promisee.
2. Contract cannot be avoided when time is not essential. For breach of promise to marry; and

Discharge by Operation of Law For wrongful dishonour by a banker of his customer's cheque.( A trader is
assumed to have bigger losses than a non-trader)
Death

Insolvency
Liability to pay nominal damages
Unauthorised Where the plaintiff has proved that there has been a breach of contract but he has
Alteration not in fact suffered any real damage. It is awarded just to establish the right to
decree for the breach of contract.
Merger of Rights
Damages for deterioration caused by delay
It can be recovered from carrier even without notice. Deterioration not only means
physical damages but also mean loss of special opportunity for sale.
Discharge by Breach of Contract
Meaning of Breach Liquidated damages and penalty
Sometimes parties to a contract stipulate at the time of its formation that on the breach of the
contract by either of them, a certain specified sum will be payable as damages. Such a sum may
Consequence of amount to either “liquidated damages” or a “penalty”.
Breach “Liquidated damages” represent a sum, fixed or ascertained by the parties in the
contract, which is a fair and genuine pre-estimate of the payable loss that might
ensue as a result of the breach, if it takes place.
Kinds of Breach (39) A “penalty” is a sum named in the contract at the time of its formation, which is
Actual Breach Anticipatory Breach disproportionate to the damage likely to accrue as a result of the breach. It is
 One party refuses or fails to do his  It occurs when the party declares his intention of not fixed up with a view to securing the performance of the contract.
part of the promise performing the contract before the performance is due
 It may take place ,(expressly or  It may take place by ,(expressly or impliedly) The rules for determining whether a stipulation is by way of a penalty or by way of liquidated
impliedly) – (a) Refusing to perform his promise under the contract, damages are as follows:
(a) On due date of performance or 1. The parties to a contract may use the words “Penalty” or “liquidated damages”
(b) During the course of (b) By his act disabling himself from performing the interchangeably. It must ascertain whether a sum is in truth a penalty or liquidated damages.
performance promise before due date of performance 2. The essence of a penalty is the payment of money stipulated is to compel the performance
of the contract by providing something by way of punishment if the contract is not
Remedies for Breach of Contract performed. The essence of liquidated damages is genuine per-estimate of damage, which
Rescission (39) seems likely to be caused should the breach occur.
a. When a contract is broken by one partly, 3. The sum stipulated is a penalty if-
b. the other party may treat the contract as rescinded. (a) It is extravagant or unconscionable (unreasonable) in amount compared with the
c. In such a case aggrieved party is absolved of all his obligations under the greatest loss which could conceivably be proved to have followed from the breach;
contract and (b) The breach consists of not paying a sum of money by a certain time and the sum
d. is entitled to compensation for any damages that he might have suffered. fixed is greater than the sum to be paid.
4. When a single lump-sum is made payable on the occurrence of one or more of several
events, some of which may occasion serious and other trifling damage, there is a
Suit for Damages presumption that the sum is a penalty.
Special damages
Where a party to a contract receives a notice of special circumstances affecting the contract, he Payment of interest
will be liable not only for damages arising naturally and directly from the breach but also for The largest number of cases decided under Section 74 relate to stipulations in a contract
special damages. providing for payment of interest. “The following rules are observed with regard to payment of
interest:
1. Payment of interest in case of default.
2. Payment of interest at higher rate-

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From the date of the bond From the date of default
A stipulation for increased interest A stipulation for increased interest from the date of
All cost for defending or bringing any suit if worked as a prudent person.
from the date of the bond, and not default may be a stipulation by way of penalty. When it is 5.41 5.42
from the date of default, is always in so, relief is granted against it. Whether such a stipulation
the nature of a penalty, and relief is is penal is a question of construction dependent on the All sums which he may have paid under the terms of any compromise of any such
granted against it. terms of the contract and the circumstances of each case. suit, if the compromise was not contrary to the orders of the promisor and was
one which it would have been prudent for the promisee to make in the absence of
Payment of compound interest on default any contract of indemnity, or if the promisor authorised him to compromise the
At the same rate as simple interest At the rate higher than simple interest suit.
A stipulation in a bond for payment of A stipulation in a bond for the payment of
compound interest on failure to pay simple compound interest at a rate higher than that of Guarantee
interest at the same rate as was payable upon simple interest is a penalty and would be Meaning of Certain Terms
the principal is not a penalty. relieved against.
Guarantee (126)
Suit for specific performance A contract of guarantee is a contract to perform the promise made or discharge
Where damages are not an adequate remedy in the case of breach of contract, the court may in liability incurred by a third person in case of his default.
its discretion on a suit for specific performance direct in party in breach, to carry out his promise
according to the terms of the contract. Implied promise to indemnify surety (145)
"In every contract of guarantee there is an implied promise by the principal
Suit upon Quantum Meruit debtor to indemnify the surety; and the surety is entitled to recover from the
The phrase ‘quantum meruit’ literally means “as much as earned” or “according to the quantity principal debtor whatever sum he has rightfully paid under the guarantee, but
of work done”. A person who has begun a civil contract work and has to later stop the work no sums which he has paid wrongfully.
because the other party has made the performance impossible, is entitled to receive
compensation on the principle of ‘Quantum Meruit’. Consideration in case of a guarantee (127)
"Anything done, or any promise made, for the benefit of the principal
Following are instances where ‘quantum meruit’ may arise debtor may be a sufficient consideration to the surety for giving the
Where the work has been done and accepted under a contract which is subsequently discovered guarantee".
to be void. In such a case, the person who has performed his part of the contract is entitled to
recover the amount for the work done and the party, who receives and accepts the benefit Nature of surety's liability (128)
under such contract, must make compensation to the other party.
"The liability of the surety is co-extensive with that of the principal debtor,
Where a person does some act or delivers something to another person with the intention of unless it is otherwise provided by the contract."
receiving payment, the other person is bound to make payment if he accepts such services or When the liability of the debtor is discharged, the liability of the surety is
goods or enjoys the benefits. automatically discharged. However, a surety's liability to pay the debt is not
Where the contract is divisible and where a party performs a part of the contract and refuses to discharged even if the creditor omits to sue the principal debtor since the
perform the remaining part, the party in default may sue the other party who enjoyed the surety is separately liable on the promise of guarantee.
benefit of the part performance.
Continuing Guarantee (129)
Suit for injunction 1. "A guarantee which extends to a series of transactions is called a
Where a party to contract giving negative effect to terms of contract, the court may by issuing an "continuing guarantee" (129)
"injunction order" restrain him from doing what he promised not to do. 2. "The continuing guarantee may at any time be revoked by the surety as to
future transactions, by notice to the creditor". (130)
Contract of Indemnity & Guarantee 3. But where a continuing relationship is established on the faith of a
Introduction (124) guarantee the guarantee cannot be annulled during the continuance of
that relationship.
"A contract by which one party promises to save the other from loss caused to him by the
4. "The death of the surety operates, in the absence of any contract to the
conduct of the promisor himself, or the conduct of any other person is called as contract of
contrary, as a revocation of a continuing guarantee, so far as regards
indemnity". It is a type of contingent contract.
future transactions." (131)
Rights of indemnity-holder when sued if acting in scope of his authority (125)
Discharge of Surety
All damages which he may be compelled to pay in any suit in respect of any matter Cases Particulars
to which the promise to indemnify applies; Variation in Terms of By variance made without surety's consent in terms of contract,
Agreement [133] between principal debtor and creditor.

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Guarantee When Invalid (142 to 144)
By any contract between the principal debtor and the creditor by
1. When guaranty has been obtained by means of miss-representation made directly by the
Contract Releasing which the principal debtor is released or by any act or omission of the 5.43 5.44 creditor or made with his knowledge and assent concerning a material part of the
Principal Debtor [134] creditor the legal consequence of which is the discharge of the
transaction. (142)
principal debtor.
2. When the creditor has obtained any guarantee by means of keeping silence as to material
Where, however, a contract to give time to the principal debtor is circumstances. (143)
Extension of Time to
entered into by the creditor with a third person and not with principal 3. Silence means an intentionally concealment as different from a mere nondisclosure thereof.
Principal Debtor [136]
debtor, the surely will not be discharged. There must exist some element of fraud.
Where a creditor makes a composition (i.e., settlement) with, or 4. When a contract of guarantee is entered into on the condition that the creditor shall not act
Settlement of Principal
promises to give time to the principal debtor, or promises not to sue upon it until another person has joined in it as co-surety and that other party fails to join as
Debtor [135]
the principle debtor, by a contract. such. (144)
Release of 1 Co-surety Further if there are co-sureties, a release by the creditor of one of
does not release other them does not discharge the other co-surety or co-sureties.
Co-surety [138] Distinction Between Contract of Indemnity & Contract of Guarantee
When the creditor does any act which is inconsistent with the rights Basis Indemnity Guarantee
Creditor act inconsistent
of the surety or omits to do any act which his duty to the surety
with Surety [139]
requires him to do.
Specific Guarantee: Meaning
Notice of Revocation by It can be revoked only if the liability of principal debtor has not arisen.
Surety Continuing Guarantee:
It can be revoked only in case of future transaction.

Right of surety against principal debtor and/or creditor Parties

1) Against principal debtor:
Nature of
1. Where a guarantee debt has become due on default of the debtor and surety is required to Liability of
pay it then he comes in the shoes of creditor. Indemnifier &
2. Surety is entitled to the benefit of every security which the creditor has against the principal surety
debtor at the time when the contract of surety ship was entered into whether or not the
surety was aware of the existence of such security.
3. In every contract of guarantee, there is an implied promise by the principal debtor to
indemnify the surety; and the surety is entitled to recover from the principal debtor Number of
whatever sums he has rightfully paid under the guarantee but not sum which he has paid Contracts
wrongfully. (145)
4. However surety can claim money only when he has actually paid not at the execution of
promissory note only.
Nature of
2) Against creditor: contract
1. On payment of the amount by surety or performance of all that he is liable for, the surety is
subrogated to all the right that the creditor had against the debtor. (140)
2. Security has the right over every security which debtor has provided to creditor whether it is
in the knowledge of surety or not. If creditor has lost something of that than surety's liability
will get reduced upto that amount. But not so in case creditor has parted with that security
subsequent to the contract of guarantee.
3. At the time before the guaranteed debt has become due and before the surety is called Rights
upon to pay the amount he has guaranteed, he has the right to require the creditor to sue
for and recover the guaranteed debt. Such a right is described as a right to file a " Quia timet
action" against the debtor. However, in such a case, the surety must undertake to indemnify
the creditor for the risk, delay and expense which he may incur in doing so. Sanderson v.
Contingent or
Aston- where a surety has guaranteed the fidelity of person and he finds that such a person
Existing Liability
is persistently dishonest, he can call upon the creditor to dismiss him from his service.
4. Surety is entitled to plead any set-off which the principal debtor may have against the
creditor.

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Contract of Bailment Bailor’s Rights & Duties
Meaning
A bailment is defined under Section 148, as: 5.45 5.46 Bailor
 an act whereby goods are delivered by one person to another
 for some purpose on a contract
 that the goods shall, when the purpose is accomplished, be returned or otherwise Rights Duties
disposed of according to the directions of the person delivering them.
 The person who delivers the goods is known as the "bailor" and the person to whom the 1. To enforce bailee's duties: such as right 1. Disclose risk bearing fault in goods. If not
goods are delivered is known as the 'Bailee' to claim compensation and damages: disclosed bailor shall be liable for damages.
a. For loss caused to goods 2. The bailor must reimburse to bailee for
A bailment may be gratuitous or for reward. extraordinary expenses in any case of any
b. For loss caused by unauthorised use of
1. A person who has custody without possession is not a Bailee. bailment.
the goods
2. A constructive delivery may also amount to delivery for bailment. 3. The bailor also reimburse ordinary
c. Arising out of mixing the goods of the
bailor with his own goods. expenses in case of gratuitous bailment.
2. To terminate the contract of bailment: if 4. The bailor shall indemnify bailee for any
The Essential Characteristics of Bailment
the bailee does any act inconsistent with the loss cause due to defective title.
conditions of the bailment. 5. In case of Gratuitous bailment indemnify
Contract of Bailment • There must be a contract
3. To demand back goods: In case of bailee for any loss suffered in case of
• Contract must be expressed or implied.
gratuitous bailment premature termination of bailment.
4. To claim increase or profit from goods 6. Receive goods back after completion of
Goods • Bailment can be made of goods only.
bailed. purpose. If not received back Bailor will be
personally liable for damages to goods.
• The delivery must be from one person
Delivery to other.
• There must be delivery for some
purpose. Bailee’s Rights & Duties
• The purpose must be agreed between
Purpose of Delivery Bailee
parties.
• The purpose can be expressed or
implied.
• The delivery of goods must be
purpose. Rights Duties
Return or Disposal conditional of return.
of goods • The goods must be returned or 1. To enforce bailor's duties and claim 1. Not to make an unauthorised use of
disposed in agreed manner a. Compensation for non-disclosure of the goods bailed.
• purpose. known defects. 2. Not to mix the goods bailed with his
b. To claim indemnification for any loss own goods, without consent.
Different forms of Bailment or damage for defective title of the 3. If he does so then Bailee will bear the
bailor. expenses of separation or losses.
Forms of Bailment 2. To deliver goods to one of several 4. To return the goods bailed on the
joint owners expiration of the period of bailment.
3. Delivery of goods to bailor without 5. accomplishment of the purpose of
title bailment without making any demand
4. Right of action against third parties: made.
If a third person wrongfully deprives 6. To deliver to the bailor any increase or
Bailee. profit accruing from the goods.
Delivery of goods by Goods given to a Hiring Delivering goods Delivering goods Delivering 5. Right of lien: Right to retain the 7. Not to do anything inconsistent with
one person to another friend for his own of to a creditor to for repair with goods for goods until the charges due are paid. the conditions of bailment.
to be held for the use without any goods serve as security or without carriage
bailor's use charge for a loan remuneration
Rights and duties of a finder of good (71,168,169)
Finder may claim compensation for the trouble and expenses incurred by him to
preserve the goods and to find out the true owner.
If the owner refuses to pay compensation then may retain the goods until he
receives it. But he cannot make a suit for this.

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If any reward has been announced by the owner he has a right to claim such
Agency
reward. He can even sue for the reward. 5.48 Meaning
5.47
It is the relationship between two person where one person is employed (Known as Agent) by
Normally he cannot sale the goods but when real owner is not found out with another (known as Principal) to act on behalf of that later with the third person.
reasonable diligence, or if owner refuses to pay lawful charges then he can sale in
the market if it normally sold in the market. Salient features of agency (183-185 & 226)
Basis
He can sale goods when the article is in danger of being perished or losing the
Agent can render the principal answerable to a third person. A person does not
greater part of its value;
therefore become an agent of another merely because he is named as his agent
unless the above mentioned characteristic is present.
He can sale goods when the lawful charges of the finder amounts to two-thirds or
Consideration not necessary
more of the value of the article found
The existence of consideration is not at all necessary for its validity (185)
Capacity to employ an agent
Pledge Only a person who has contractual capacity (a major and a person of sound mind)
Meaning can lawfully employ and agent. (183)
It is the bailment of goods as security for payment of debt or performance of a promise. When Capacity to become an agent
goods have been pledged, the bailor is called the pawner and bailee the pawnee. In case of Any person can become an agent irrespective of whether he has contractual
pledge no transfer of any interest in property takes place; but a special right to property is capacity or not but a person who is not of the age of majority and of sound mind
carved out in favour of the pledge, i.e. he has right to dispose of the property in certain cannot be agent so as to be responsible to his principal.
circumstances.

Pawnee's Rights (173 & 176) Modes of creation of agency relationship (187, 189, 196, 214, 237)
Pawnee's right of retainer (173) Agency by actual authority:
Not only for the payment of the debt or the performance of the promise, A contract of agency may be express (with spoken or written words) or
but also for the recovery of the interest on the debt and other expenses implied (from the circumstances of a case things spoken or written or the
for preservation of goods ordinary course of dealing).
Pawnee's right of retention in regard to subsequent advances (174) Agency by ratification (196)
Subject to contrary, pawnee would not be entitled to retain the goods to Where a person acts for someone but without his knowledge or authority
subsequent advances made by the pawnee. and the other person subsequently accepts or ratifies the act agency be
ratification arises and ratifier is bound by the act as if he had expressly
Pawnee's right to extraordinary expenses incurred (175) authorised the person to do the act on his behalf.
Expenses for preservation of the goods pledged but no special right to Agency by ostensible authority
retain the goods for such expenses. But he can take the action for such The conduct of the principal may give rise to a scope for an inference that an authority has been
expenses. conferred upon an agent even though no authority in fact was given. In such as situation the
Pawnee's right where pawnor makes default (176) agent contracts within his ostensible authority and the principal is bound to third parties for the
The pawnee may bring a suit against the pawnor upon the debt or the acts of his agent. Agency by ostensible authority may happen in two ways.
promise, and retain the goods pledged as a collateral security; or he may i) By estoppel
sell the thing pledged on giving the pawnor a reasonable notice of the If a person permits or represents another to act on his behalf, so that a
sale. These two remedies are the alternatives not the cumulative. reasonable person would infer that the relationship of principal and agent
If receipts are less then the debt amount then pawnee may make a suit had been created, then he will be stopped from denying his agent’s
for the balance if more then he will have to refund back the money. authority and getting himself relived from his obligation to a third party by
proving that no such relationship in fact existed. A principal cannot
privately limit or revoke an authority which he has allowed his agent
Pawnor's right to redeem (177) publicly to assume.
If there is a time limit for the payment of the debt and pawnor make default,, ii) By cohabitation
he may redeem the goods pledged at any subsequent time before the goods Where a married woman is cohabiting with her husband, there is a
are sold, but in that case, he must pay, in addition, any expenses occasioned by presumption of fact that she has authority to pledge his credit for
the default. necessaries.
The period for a suit against a pwanee to recover the things pledged is 3 years iii) By Holding out
from the date of pawnee's refusal to do so after demand (The Limitation Act- Principal is bound by the act of agent if on the earlier occasion, he has
1963) made other person to believe that such acts are done with his authority.

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iv) Agency by necessity: Extent of Agent's Authority (188, 189 & 229)
Under certain circumstances, a person may be compelled to act as a agent
to the other without requiring the consent of the principal. To constitute a 5.49 5.50
valid agency of necessity, following condition must be satisfied. In normal circumstances
(a) There is no opportunity to communicate with his principal within An agent having an authority to do an act or business has authority to do every lawful thing
the time available. which necessary for the purpose, usually done in the course of conducting such business (188)
(b) There should have been actual and definite commercial necessity Above may be expressly excluded by mutual contract.
for the agent to act promptly.
(c) The agent should have acted bonafide and for the benefit of the In emergency:
principal. To do all such acts for the purpose of protecting his principal from loss as would be done by a
(d) The agent should have adopted the most reasonable and person of ordinary prudence, in his own case, under similar circumstances. (189)
practicable course under the circumstances, and
(e) The agent must have been in possession of the goods belonging to Notice to an agent:
his principal and which are the subject of contract. If any information is obtained by an agent or any notice is given to him in the course of the
business of agency it will be deemed to have been obtained by or given to the principal (229).
(v) Actual authority and apparent authority:
1. Actual authority results from a manifestation of consent that he should
represent or act for the principal made by the principal to agent
himself. It may be express or implied Obligations cast on agent (Duties of an agent) (209 to 218)
2. Apparent authority is where it results from a manifestation made by
Duty in conducting principal's business
the principal to third parties. It involves the assumption that there is in
fact no authority at all. Under this where a principal represents, or is According to the directions given by the principal, or in the absence of any such
regarded by law as representing, that another has authority, he may be directions, according to the custom which prevails in doing business of the
bound as against a third party by the acts of that other person within same kind at the place where the agent conducts such business. When agent
the authority which that person appears to have, though he had not acts otherwise, if loss incurred to be borne by agent and if profit incurred to be
given. This emphasis to the relationship between principal and third given to principal.
party. Requirement as to skill and diligence
He is required to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business, unless the principal
Rules regarding ratification (197 to 200) has notice of his lack of skill. Agent is always bound to act with reasonable
1. Ratification must be by a person of whom the agent professes to act. Ratification can't be diligence and such skill as he possesses and to make compensation to his
done for any act for which any principals is not permissible. principal in respect of direct consequences of his own neglect, want of skill or
misconduct (212)
2. Ratification can be made only by a person who was in existence at the time of the act which
Agent's duty to account
was subsequently sought to be ratified.
To render proper accounts to his principal whenever demanded by the latter
3. A valid ratification relates back to the actual date of the act ratified. (213)
4. Ratification may either be express of it may even be implied in the conduct of the person on Payment of money
whose behalf the acts are done (197) To pay to principal all sums received on his account (218). Even in case of
money received in illegal or void contract.
5. No valid ratification can be made by a person whose knowledge of the facts of the case is
materially defective (198) Duty to communicate:
In case of difficulty, an agent must use reasonable diligence to establish contact
6. Ratification cannot be done for a part of the act if it is so done then it will amount the with his principal, to obtain his instructions (214).
ratification for full. (199)
7. One cannot ratify an act done without his authority if affecting 3 rd person (200). Right of the Agent (217 to 225)
8. An illegal act cannot be ratified. Also a ratification cannot be made of a transaction which is Right of lien on principal's property
void ab initio. If the amount due to himself for commission, disbursement and services has
9. Where an act has to be performed within a certain limit the ratification also must be made not been paid or accounted for him. It may be avoided by the express
within that time limit. agreement this right is there only when possession of the goods is lawfully
acquired by the agent. (221)
10. Ratification may be made of an act done by an agent in excess of his authority. Right to be indemnified
Right to be indemnified against consequences of lawful acts in exercise of the
authority conferred upon him. (222)

Right to be indemnified against consequences of acts in good faith (223)

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Notes Notes
Prohibition of Law 4. If the principal discloses himself before the contract is completed the third party may refuse
Notwithstanding any express or implied promise in this regard, an agent to fulfil the contract, if the can show that had he known the true position, he would not
cannot claim to be indemnified against the consequences of an act which he 5.51 5.52 entered into the contract.
does but which is prohibited under the penal law of the country (224)
Injury Compensation
Principal's Liabilities for Agent's Act
Compensation for injury caused by principal (225)
When agent act within the scope of his authority
Right of retainer The principal is liable for the acts of the agent done within the scope of his actual
An agent has to account for to his principal the balance of money received by or apparent authority. Where there are specific restrictions on the authority of
him as agent after the deduction (retaining)of moneys due to himself from the agent, then the principal is not bound by it.
the principal on account of his remuneration and expenses etc. (217) When the agent exceeds his authority
Right to remuneration Principal is not liable but where that excess is separable from the total act then
For the agreed upon or the normal remuneration in that business. He can upto the extent of the authority principal is liable.
detain the money received on account of sale etc. (219). But an agent who is Principal is bound by notice given to agent
guilty of misconduct in the business of the agency is not entitled to any Provided notice is given in the course of the business and in the course of
remuneration in respect of that part of the business of the agency which he employment. This rule will not apply if agent is out to commit a fraud on the
has is counted. (220) principal.
Liability of principal by estoppel
A principal is liable where he has by words or conduct induced a belief in the
When Agent is Personally Liable? (230 & 231)
contracting party that the act of the agent was within the scope of his authority.
(1) When there is an express agreement for so.
Here the liability of the principal is not based on any real authority, but is by
(2) When he does not have authority for what he has done or he represents himself as having estoppel.
that authority which he does not have. Liability for misrepresentation or fraud by an agent
If acting within the scope of his actual or apparent authority during the curse of
(3) When contract is entered into by a person apparently in the character of agent, but in
reality on his own account, he is not entitled to require performance of it. (236) the agency business irrespective of the fraud is committed for the benefit of the
principal or that of the agent.
(4) In circumstances given by Section 230 Where the Principal is unnamed
 Where the contract expressly provides for the personal liability of the agent When an agent discloses the existence of the principal but does not disclose the
name of the principal. If however the agent refuses to disclose the identity of his
 When the agent signs a negotiable instrument in his own name without making it; clear principal he will become personally liable on the contract.
that he is signing as agent.
 Where the agent worked for a foreign principal. Irrevocable Agency (202 & 204)
 Where the agent acts for a principal who cannot be sued on account of his being a 1. Where the agency is coupled with interest (202) - This rule is applicable only when the
foreign Sovereign, Ambassador, etc. agency is created of the protection of the interest of the agent, it does not apply where the
(5) Where according to use of trade in certain kinds of businesses, agents are personally interest arises after creation of agency.
liable. 2. Where the agent has incurred personal liability - Principal cannot revoke the agency so as
to leave the agent to bear the liability and the losses in the contract.
(6) Where the agent has himself an interest in the subject-matter of the agency. Interest not 3. Where the agent has partly exercised the authority
only of remuneration but some special type of interest should be there. In the case of an
agency coupled with such interest it cannot be revoked even by the insanity or death of
the principal. Sub–agent (19)
Meaning
A “sub-agent” is a person employed by, and acting under the control of the original agent in the
Undisclosed Principal business of the agency (Section 19). This means he is the agent of the original agent. The relation
Where an agent, having authority to contract, makes the contract in his own name, concealing of the sub-agent to the original agent is, as between themselves, that of the agent and principal.
not only the name of his principal but also the fact that there is a principal, his principal is called
'undisclosed principal.' In this case mutual rights and liabilities of the parties are:
1. Agent is personally liable to third party. Exception
2. If the third party comes to know the existence of the principal before obtained judgment Section 190 provides that an agent may appoint a sub-agent and delegate the work to him if-
against the agent, he may sue either the principal or the agent or both. 1. There is a custom of trade to that effect, or
3. Third party is entitled to be placed in the same situation as if the agent had been the 2. The nature of work is such that a sub-agent is necessary.
contracting party. thus the third party is not put to any disadvantage by principal's
intervention; 3. There are some more exceptions recognised by the English Law. These exceptions are
also recognised in India and are as follows:

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Notes Notes
4. Where the principal is aware of the intention of the agent to appoint a sub-agent but
does not object to it.
5. Where unforeseen emergencies arise rendering appointment of a sub-agent necessary. 5.53
Chapter 3: 3.1
6. Where the act to be done is purely ministerial not involving confidence or use of
discretion.
7. Where power of the agent to delegate can be inferred from the conduct of both the
The Indian Partnership Act,
principal and the agent.
8. Where the principal permits appointment of a sub-agent.
1932
Relationship between principal and sub-agent
As a general rule, an agent cannot delegate his authority to a sub-agent. But in certain GENERAL NATURE OF PARTNERSHIP
exceptional cases, he is permitted to do so. In such cases, the delegation of authority to a sub- Meaning & Nature of Partnership
agent in proper. In all other cases, the appointment of a sub-agent is improper. The legal relation Partnership is the relation between persons who have agreed to share the profits of a business
between the principal and the sub-agent depends upon the crucial question, as to whether the
carried on by all or any of them acting for all (Section 4)
appointment of the sub-agent is proper or improper.

Where a sub-agent properly appointed: Essential Elements of partnership

(a) The principal is bound by the acts of the sub-agent if the sub-agent were an
agent originally appointed by the principal (192. Para 1) Business carried by all or
Agreement of two or Sharing profit of
(b) The agent is responsible to the principal of the acts of the sub-agent (192, one
more person business
Para 2)
Where a sub-agent is not properly appointed.
Where an agent, without having authority to do so, has appointed a sub-agent, It must be agreement The agreement must be The business must be
the agent is responsible for the acts of the sub-agent to the principal and to between two or more to share profit of carried on by all or any
the third parties. The principal, in such case, is not represented by of person business one of them acting as all
responsible for the acts of the sub-agent, nor is the sub-agent responsible to
the principal. (Section 193)

Termination of Agent's Authority

Revocation of authority by the principal

Renunciation of agency by the agent.

Agreement of Two or More Persons
 The partnership is creation of the mutual agreement.
 The nature of the partnership is voluntary and contractual.
Completion of the business of agency.  The agreement shall be expressed agreement.
 It may also be implied by act done by partners from the consistent
course of conduct is followed.
Death or insanity of either party, e.g., the principal or the agent.  The agreement can be oral or in writing.

Sharing of Profits of Business

Insolvency of the principal. 1. First, there must exist a business. For the purpose, the term ‘business’
includes every trade, occupation and profession. The existence of
business is essential.
2. Therefore there can be no partnership where there is no intention
to carry on the business and to share the profits thereof.
3. Secondly, there must be an agreement to share profits.

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Notes The profits of the firm must be There is no such compulsion to Notes
Business Carried by All or Any of Them Distribution of distributed among the partners distribute its profits among its
3.2 1. This is the cardinal principle of the partnership law. Profits according to the terms of the members. Some portion of the 3.3
2. An act of one partner in the course of the business of the firm partnership deed. profits, but generally not the entire
is in fact an act of all partners. profit, becomes distributable
3. Each partner carrying on the business is the principal as well among the shareholders only when
as the agent for all the other partners. dividends are declared.
4. Therefore, note that the true test of partnership is mutual In a partnership, the liability of the On the other hand, the liability of a
agency rather than sharing of profits. Extent of partners is unlimited. shareholder is limited to the
5. If the element of mutual agency is absent, then there will be Liability amount, if any, unpaid on his
no partnership. shares, in the case of a company
6. Sharing of profits is only prima facie evidence which can be limited by shares; but in the case of
rebutted by a stronger evidence. a guarantee company, the liability is
limited to the amount for which he
has agreed to be liable.
Mutual Agency
Payment of Each partner is liable for debts of a In case of company the members of
 Existence of Mutual Agency which is the cardinal principle of
debts of firm incurred in the course of the the company does not pay the
partnership law, is very much helpful in reaching a conclusion in this
business from business of the firm and these debts liabilities from their personal assets
regard.
personal can be recovered from his private even if the debts of the company are
 Each partner carrying on the business is the principal as well as an property. property, if the joint estate is not paid out of funds of company
agent of other partners. insufficient to meet them wholly. except in case of unlimited
 So, the act of one partner done on behalf of firm, binds all the partners. company.
The firm’s property is that which is But in the case of a company, its
True Test of Partnership the “joint estate” of all the partners property is separate from that of its
1. The sharing of profits or of gross returns accruing from property by persons holding joint or Property as distinguished from the ‘separate’ members who can receive it back
common interest in the property would not by itself make such persons partners. estate of any of them and it does not only in the form of dividends or
2. Where there is an express agreement between partners to share the profits of a business belong to a body distinct in law from refund of capital.
and the business is being carried on by all or any of them acting for all, there will be no its members.
difficulty in determining the existence or otherwise of a partnership. Transfer of A share in a partnership cannot be A shareholder may transfer his
3. But the task becomes difficult when either there is no specific agreement or the agreement Shares transferred without the consent of shares, subject to the provisions
is such as does not specifically speak of partnership. In such case cumulative effect of all all the partners contained in its Articles.
surrounding cases shall be taken to understand the relation of the partnership. In the absence of an express But members of a company are not
4. A receipt of share of profit from the business or payment contingent upon earning of the agreement to the contrary, all the entitled to take part in the
profit will not make the receiver a partner in case of following businesses: Management partners are entitled to participate in management unless they are
a. a lender of money to persons engaged or about to the engaged in any business, the management. appointed as directors, in which
b. a servant (e.g., manager of a firm) or agent as his remuneration, case they may participate.
c. widow or child of a deceased partner, Number of In the case of firms carrying on A private company may have as
d. a previous owner of part of the business as the consideration for the sale of the goodwill Partners business other than banking, the many as 50 members but not less
or share thereof. number must not exceed 20 and in than two and a public company may
the case of banks such number must have any number of members but
Partnership & Joint Stock Company not exceed 10 not less than seven.
Basis Partnership Joint Stock Company
A firm is not a legal entity i.e., it has A registered company is a judicial Partnership & Club
Personality no legal personality distinct from the person distinct from its members. Basis Partnership Club
personalities of its constituent On the other hand, partnership is also A club is an association of persons
members. an association of persons but formed formed with the object not of
In a firm, every partner is an agent of A member is not an agent of the Meaning with the object of earning profit. earning profit, but of promoting
Agency the other partners, as well as of the other members or of the company, some beneficial purposes such as
firm. therefore his actions do not bind improvement of health or providing
either other members or the recreation for the members, etc.
Company. Partners are the agent of partnership. Unlike a partner, a member of a club
In case of non payment of dues to is not the agent of other members
Partners creditors by partnership, partners will nor is he liable to a creditor of the
become personally liable. club

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Notes Interest in Partner has interest in the property of A member of a club has no interest A share in the partnership is Co-ownership may be dissolved at the Notes
Property firm. in the property of the club. Transfer of transferred only by the consent of will of co-owners; also a co-owner may
3.4 Change in Change in the partners affects the Also, the change in the membership share other partners. transfer his interest or rights in the 3.5
Partner/ partnership and results in to new one. of a club does not affect its property without the consent of other
Member. existence. co-owners.

Partnership Vs HUF Partnership & Association

Basis Partnership HUF (1) Partnership means and involves setting up relation of agency between two or more persons
Creation of The relation of partnership is created Right in the joint family is created by who have entered into a business for gains, with the intention to share the profits of such a
relation necessarily by an agreement. status i.e. birth in family. business; but partnerships does not exist between members of a charitable society or
Death of Death of a partner ordinarily leads to But the death of a member of the religious association or an improvement scheme or building corporation, etc.
Partner of the dissolution of partnership. Hindu undivided family does not give (2) Partnership does not exist between members of a mutual insurance society.
member rise to dissolution of the family (3) In a trade combine or protection association, the relation between the members is not that
business. of partnership.
But in the case of a partnership, all The right of management of joint
Management the partners are equally entitled to family business generally vests in the Types of Partners
take part in the partnership business. Karta, the governing male member of
the family. Types of Partners
Authority to In partnership, every partner can, by In the joint family, the Karta or the
Bind the firm his act, bind the firm. manager, has the authority to
contract for the family business. Agreement of two or Sharing profit of Business carried by all
In a partnership, the liability of a but in a Hindu undivided family, only more person business or one
partner is unlimited. the liability of the Karta is unlimited,
Liability and the other copartners are liable Who has become a 1. When person knowingly 1. A sub-partnership may arise
only to the extent of their share in the partner by agreement represents himself as when, consequent upon an
profits of the family business. partner agreement between a
A partner can bring a suit against the On the separation of the joint family, 2. who actively
partner in a firm and a
Calling of firm for accounts, provided he also a member is not entitled to ask for participates in the
Accounts seeks the dissolution of the firm. account of the family business. conduct of the 2. Partnership by ‘holding stranger,
partnership. out’ is also known as 2. the latter is vested with
Governing Law A partnership is governed by the Joint Hindu family business is
Partnership Act. governed by the Hindu Law. partnership by interest jointly with that
3. while a partner who estoppel.
In a partnership, a minor cannot In Hindu undivided family business, a partner so far as his share in
become a partner, though he can be minor becomes a member of the does not take an active the firm is concerned.
part in the conduct of 3. Where a man holds
Position of admitted to the benefits of ancestral business by the incidence of 3. Such an agreement will not
the business of the firm himself out as a partner,
Minor partnership, only with the consent of birth. He does not have to wait for
or allows others to do it. render the stranger a
all the partners. attaining majority. is called a sleeping
(dormant) partner. partner of the main firm.
A firm subject to a contract between A Joint Hindu Family has the
4. he is then stopped from 4. A sub-partner can claim the
Continuity the partners gets dissolved by death continuity till it is divided. The status
or insolvency of a partner. of Joint Hindu Family is not thereby 4. A person who lends his denying the character agreed share from the
affected by the death of a member. name to the firm, he has assumed and actual partner, but he can
without having any upon the faith of, which have no right against the
Partnership & Co-Ownership real interest in it is creditors may be main firm to take part in or
Basis Partnership Co-Ownership called a nominal presumed to have to interfere with its business
Partnership always arises out of a Co-ownership may arise either from partner. acted. or to examine its account.
Creation contract, express or implied. agreement or by the operation of law,
such as by inheritance.
In partnership, there is community Co-ownership does not necessarily
The rule enunciated in Section 28 is also applicable to a former partner who has retired from the
Interests of interest. It means that profits and involve sharing of profits and losses.
firm without giving proper public notice of his retirement. In such cases a person who, even
losses must have to be shared.
subsequent to the retirement, give credit to the firm on the belief that he was a partner, will be
In the case of partnership, a partner In the case of a co-ownership, a co-
entitled to hold him liable.
Agency is the agent of the other partners. owner is not the agent of other co-
owners.

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Notes Notes
Minors Position in Partnership RELATION OF PARTNERS
Concept Analysis:
3.6 Mutual Rights of Partners 3.7
Questions Options Right to take part in the conduct of the Business
1. Can minor enter in to agreement? Yes / No 1. Every partner has the right to take part in the business of the firm.
2. Whether minor is bound by contract? Yes / No 2. This is because partnership business is a business of the partners and their management
3. Can a minor be partner in firm? Yes / No powers are generally coextensive.
4. Can minor share profits only from partnership? Yes / No 3. Now suppose this management power of the particular partner is interfered with and he
has been wrongfully precluded from participating therein, can the Court interfere in these
Rights & Liabilities of Minor if Added for Partnership: circumstances? The answer is in the affirmative. The Court can, and will, by injunction,
restrain other partners from doing so.
Minor in Partnership 4. You should also note in this connection that a partner who has been wrongfully deprived
of the right of participation in the management has also other remedies, e.g., a suit for
dissolution, a suit for accounts without seeking dissolution, etc.
(i) A minor partner has a right to his agreed (i) The minor’s share is liable for the 5. It is quite common to find a term in partnership agreements, which gives only limited power
share of the profits of the firm. acts of the firm, but he is not of management to a partner or a term that the management of the partnership will remain
personally liable for any such act. with one or more of the partners to the exclusion of others. In such a case, the Court will
(ii) He can have access to, inspect and copy normally be unwilling to interfere with the management.
the accounts of the firm. (ii) Within 6 months of his attaining Right to be consulted
majority or on his obtaining 1. Where any difference arises between the partners with regard to the business of the firm,
(iii) He can sue the partners for accounts it shall be determined by the views of the majority of them, and every partner shall have
knowledge that he had been
or for payment of his share but only when the right to express his opinion before the matter is decided.
admitted to the benefits of
severing his connection with the firm, and 2. But no change in the nature of the business of the firm can be made without the consent
partnership, whichever date is later,
not otherwise. of all the partners [Section 12 (c)].
he may give public notice.
3. This means that in routine matters, the opinion of the majority of the partners will prevail.
(iv) On attaining majority he may within 6 4. Of course, the majority must act in good faith and every partner must be consulted as far
(iii) If he fails to give such notice he
months elect to become a partner or not as practicable.
shall become a partner in the firm on 5. You should note that the aforesaid majority rule will not apply where there is a change in
to become a partner.
the expiry of the said six months. the nature of the firm itself. In such a case, the unanimous consent of the partners is
(v) If he elects to become a partner, then needed.
(iv) If the minor becomes a partner: Right of access to books
he is entitled to the share to which he was a. He becomes personally liable 1. Every partner whether active or sleeping is entitled to have access to any of the books of
entitled as a minor. to third parties since he was the firm and to inspect and take out copies thereof [Section 12 (d)].
admitted. 2. The right must, however, be exercised bona fide.
(vi) If he does not, then his share is not b. His share in the property and
Right to remuneration
liable for any acts of the firm after the date the profits of the firm remains 1. No partner is entitled to receive any remuneration in addition to his share in the profits of
of the public notice served to that effect. the same. the firm for taking part in the business of the firm.
2. But this rule can always be varied by an express agreement, or by a course of dealings, in
which event the partner will be entitled to remuneration.
Where the minor decides to sever his connection with the firm his rights and liabilities will be as
3. Thus a partner can claim remuneration even in the absence of a contract, when such
follows.
remuneration is payable under the continued usage of the firm.
(i) His rights and liabilities continue to be those of a minor up to the date of giving public notice.
4. In other words, where it is customary to pay remuneration to a partner for conducting the
(ii) His share shall not be liable for any acts of the firm done after the date of the notice.
business of the firm he can claim it even in the absence of a contract for the payment of
(iii) He shall be entitled to sue the partners for his share of the property and profits. It may be
the same.
noted that such minor shall give notice to the Registrar that he has or has not become a
5. It is not uncommon for partners, in actual practice, to agree that a managing partner will
partner.
receive over and above his share, salary or commission for the trouble that he will take
while conducting the business of the firm.
Right to share Profits
1. Partners are entitled to share equally in the profits earned and so contribute equally to the
losses sustained by the firm [Section 13 (b)].
2. The amount of a partner’s share must be ascertained by enquiring whether there is any
agreement in that behalf between the partners.
3. If there is no agreement then you should make a presumption of equality and the burden
of proving that the shares are unequal, will lie on the party alleging the same.
4. There is no connection between the proportion in which the partners shall share the profits
and the proportion in which they have contributed towards the capital of the firm.

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Notes Interest on Capital Right to dissolve the firm Notes
1. Suppose interest on capital subscribed by the partner is payable to him under the A partner has the right to dissolve the partnership with the consent of all partners (Section
3.8 partnership deed, then in such a case, the interest will be payable only out of profits. 40). But where the partnership is at will the firm may be dissolved by any partner giving notice 3.9
2. As a general rule, interest on capital subscribed by partners is not allowed unless there is in writing to all other partners of his intention to dissolve the firm
an agreement or usage to that effect. (Section 40).
3. The principle underlying this provision of law is that regards the capital brought by a partner
in the business, he is not a creditor of the firm but an adventurer. Duties of Partners
4. The following elements must be present before a partner can be entitled to interest on Partners are bound to carry on the business of the firm
moneys brought by him in the partnership business (i) to the greatest common advantage,
(i) an express agreement to that effect, or practice of the particular partnership or (ii) to be just and faithful to each other and
(ii) any trade custom to that effect; or (iii) to render to any partner or his legal representative a true account and full information of
(iii) a statutory provision which entitles him to such interest. all things affecting the firm (Section 9).
Interest on advances Every partner is liable to indemnify the firm for any damage caused to it by reason of his fraud
1. Suppose a partner makes an advance to the firm in addition to the amount of capital to be in the conduct of the business of the firm (Section 10).
contributed by him, then in such a case, the partner is entitled to claim interest thereon 1. Every partner is bound to attend diligently to his duties relating to the conduct of the firm’s
@6% per annum [Section 13 (d) ]. business [Section 12 (b)].
2. While interest on capital account ceases to run on dissolution, the interest on advances 2. A partner is not, however, normally entitled to remuneration for participating in the
keep running even often dissolution and up to the date of payment. conduct of the business [Section 13 (a)].
3. From the discussion so far, you will notice that the Partnership Act makes a distinction 3. He is also bound to let his partners have the advantage of his knowledge and skill.
between the capital contribution of a partner and the advance made by him to the firm. All the partners are liable to contribute equally to the loss sustained by the firm.
4. The advances are regarded as loans which should bear interest while capital bears interest A partner must indemnify the firm for any loss caused to it by willful neglect in the conduct of
only when there is an agreement to this effect. the business of the firm [Section 13 (f)].
Right to be indemnified If a partner derives any profit for himself from any transaction of the firm or from the use of
1. Every partner has the right to be indemnified by the firm in respect of payments made and the property or business connection of the firm or firm’s name then he is bound to account for
liabilities incurred by him in the ordinary and proper conduct of the business of the firm. that profit and refund it to the firm [Section 16 (a)].
2. This right is also available in the performance of an act in an emergency for protecting the
If a partner carries on business of the same nature as and competing with that of the firm, then
firm from any loss, if the payments, liability and act are such as a prudent man would make,
he must account for and pay to firm all profits made by him in the business [Section 16 (b)]. The
incur or perform in his own case, under similar circumstance [Section 13 (e)].
firm will not be liable for any loss.
Right to stop admission of a new partner
1. Every partner has the right to prevent the introduction of a new partner in the firm without
the consent of all the existing partners.
Property of Partnership Firm
2. Where a partner is introduced into the firm, he is not liable for any act of the firm done The expression ‘property of the firm’, also referred to as ‘partnership
before he became a partner (Section 31). property’, ‘partnership assets’, ‘joint stock’, ‘common stock’ or ‘joint estate’,
Right to retire denotes all property, rights and interests to which the firm, that is, all partners
Every partner has the right to retire with the consent of all the other partners and in the case collectively, may be entitled.
of a partnership being at will, by giving notice to that effect to all the other partners [Section The property which is deemed as belonging to the firm, in the absence of any agreement between
32 (1)]. the partners showing contrary intention, is comprised of the following items:
Right not to be expelled (i) all property, rights and interests which partners may have brought into the common stock as
Every partner has the right not to be expelled from the firm by any majority of the partners their contribution to the common business;
(Section 33). (ii) all the property, rights and interest acquired or purchased by or for the firm, or for the
Right of outgoing partner to carry on competing business purposes and in the course of the business of the firm; and goodwill of the business.
An outgoing partner may carry on business competing with that of the firm and he may
advertise such business, but Important FAQ’s:
without using the firm name or representing himself as carrying on the business of the firm or
Whether a particular property is or is not ‘property’ of the firm, how can it be determined?
soliciting the custom of persons who were dealing with the firm before he ceased to be a
Ans: It ultimately depends on the real intention or agreement of the partners. Thus, the mere
partner [Section 36 (1)].
fact that the property of a partner is being used for the purposes of the firm shall not by itself
Right of outgoing partner to share subsequent profits
make it partnership property, unless it is intended to be treated as such. Partners may, by an
1. Where any partner has died or ceased to be a partner, and
agreement at any time, convert the property of any partner or partners (and such conversion,
2. the surviving or continuing partners carry on the business of the firm with the property of
if made in good faith, would be effectual between the partners and against the creditors of the
the firm without any final settlement of accounts as between them and the outgoing
firm) into a partnership property.
partner of his estate,
3. the outgoing partner or his estate has at his or his representative’s option, the right to such
share of the profit made since he ceased to be a partner as may be attributable to the use
of his share of the property of the firm or to interest @ 6% per annum on the amount of
his share in the property of the firm [Section 37].

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Notes Notes
Goodwill Rights & Duties of Partners after Change in the Constitution of the Firm
Goodwill may be defined as the value of the reputation of a Change may occur in one of the four ways, namely:
3.10 business house in respect of profits expected in future over and (i) where a new partner or partners come in, 3.11
above the normal level of profits earned by undertaking belonging (ii) where some partner or partners go out, i.e., by death or retirement,
to the same class of business. (iii) where the partnership concerned carries on business other than the business for which it
When a partnership firm is dissolved every partner has a right, in was originally formed,
the absence of any agreement to the contrary, to have the goodwill (iv) where the partnership business is carried on after the expiry of the term fixed for the purpose.
of business sold for the benefit of all the partners.
A goodwill is a part of the property of the firm, it can be sold Rules in case of change in the constitution of the firm:
separately or along with the other properties of the firm. Any Rules Example
partner may upon the sale of the goodwill of a firm, make an Where a change occurs in the constitution of the firm in any of
agreement with the buyer that such partner will not carry on any the first three ways mentioned above, the mutual rights and
business similar to that of the firm within a specified period or duties of the partners in the reconstituted firm remain the same
within specified local limits and notwithstanding anything as they were before the change as may be.
contained in Section 27 of the Indian Contract Act, 1872 such
Where a firm constituted for a fixed term continues to carry on
agreement shall be valid if the restrictions imposed are reasonable.
the business after the expiry of the term, the mutual rights and
duties of the partners remain the same as they were before the
Personal Profits Earned by Partners expiry, so far as they may be consistent with the incidents of
Where a partner derives any profit for himself from any transaction of the firm or partnership at will. Some provisions have been held to be
from the use of the property or business connection of the firm or firm name, he inconsistent with the incidents of partnership at will, e.g., the
must account for that profit and pay it to the firm. provision in the deed that a partner desiring to retire shall give
Example: notice of his intention of the same at a certain time before hand.
Where the firm constituted to carry out one or more ventures or
undertakings, carries out other ventures or undertakings, the
mutual rights and duties of the partners in respect of the other
adventures of the undertaking are the same as of those in respect
of the original adventures.
Where a partner derives any profit for himself from any transaction of
the firm or from the use of the property or business connection of the Partners as Agent of Firm (Sec 18 to 30)
firm or firm name, he must account for that profit and pay it to the firm.  The partner indeed virtually embraces the character of both a principal and an agent.
This rule is also subject to a contract between the partners. He is under  So for as he acts for himself and in his own interest in the common concern of the
no obligation whatever to account for the profits of a non competing partnership, he may properly be deemed a principal.
business, even though his connection with the firm may enable him to  So far as he acts for his partners, he may properly be deemed an agent.
push his private trade better.  The principal distinction between him, and a mere agent is that he has a community of
Example: interest with other partners in the whole property and business and liabilities of partnership,
whereas an agent as such has no interest in either.
 The rule that a partner is the agent of the firm for the purpose of the business of the firm,
cannot be applied to all transactions and dealings between the partners themselves.
 It is applicable only to the act done by partners for the purpose of the business of the firm.

A deed of partnership may contain a clause that some or all the partners are
Implied Authority of Partner of Firm
not to carry any business other than that of the firm during the continuance
 A partner has implied authority to bind the firm by all acts done by him in all matters
of partnership [Section 11(2)]. A breach of such a provision may entitle the
connected with the partnership business and which are done in the usual way and are not in
other partner to recover damages from the defaulting partner, but it will
their nature beyond the scope of partnership.
not give rise to any occasion for accounting to his copartners for the profits
earned unless the business is shown to be in rivalry with the business of the  You must remember that an implied authority of a partner may differ in different kinds of
firm. business. For example, it may be usual for one partner of a firm of bankers to draw, accept
Example: or endorse a bill of exchange on behalf of the firm, but the same may be unusual, for one of
a firm of solicitors to do so, for it is no part of the ordinary business of a solicitor to draw,
accept or endorse bills of exchange.
 If partnership be of a general commercial nature, he may pledge or sell the partnership
property; he may buy goods on account of the partnership; he may borrow money, contract
debts and pay debts on account of the partnership; he may draw, make, sign, endorse,
transfer, negotiate and procure to be discounted, promissory notes, bills of exchange,
cheques and other negotiable papers in the name and on account of the partnership.

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Notes Liability for tort or wrongful act Notes
Acts Beyond the Implied Authority (Sec 19)
If there is no usage or custom of trade to the contrary, the implied authority of the partner does The firm is liable to the same extent as the partner for any loss or
3.12 not empower him to: injury caused to a third party by the wrongful acts of a partner, if 3.13
(a) submit a dispute relating to the business of the firm to arbitration as it is not the ordinary they are done by the partner while acting:
business of partnership firm to enter into a submission for arbitration : (a) in the ordinary course of the business of the firm
(b) open a bank account on behalf of the firm in his own name; (b) with the authority of the partners.
(c) compromise or relinquish any claim or portion of a claim by the firm against a third party 1. If the act in question can be regarded as authorised and as
(i.e., an outsider). falling within either of the categories mentioned in Section
(d) withdraw a suit or proceedings filed on behalf of the firm; 26, the fact that the method employed by the partner in
(e) admit any liability in a suit or proceedings against the firm; doing it was unauthorised or wrongful would not affect the
(f) acquire immovable property on behalf of the firm; question.
(g) transfer immovable property belonging to the firm; and 2. Furthermore, all the partners in a firm are liable to a third
(h) enter into partnership on behalf of the firm. party for loss or injury caused to him by the negligent act of
a partner acting in the ordinary course of the business. For
example, one of the two partners in coal mine who acted as
Acts in Emergency
a manager was guilty of personal negligence in omitting to
Each partner can bind the firm by all of his acts done in an emergency, with a view to protecting
have the shaft of the mine properly fenced. As a result
the firm from any loss, provided he has acted in the same manner as a man of ordinary prudence thereof, an injury was caused to a workman. The other
would have acted in the like circumstances. partner was held responsible for the same.
Admission by Partner Liability for misappropriation by a partner
Section 27 provides that
 Partners, as agents of each other can make binding admissions but only in relation to
partnership transaction and in the ordinary course of business. (a) when a partner, acting within his apparent authority,
 an admission or representation by a partner will not however, bind the firm if his authority receives money or other property from a third person and
on the point is limited and the other party knows of the restriction. misapplies it or
(b) where a firm, in the course of its business, received money
or property from a third person and the same is misapplied
Notice to an Acting Partner by a partner, while it is in the custody of the firm, is liable to
1. The notice to a partner, who habitually acts in business of the firm, on matters relating to make good the loss.
the affairs of the firm, operates as a notice to the firm except in the case of a fraud on the firm
committed by or with the connivance of that partner.
2. Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just Right of Transferee of a Partner’s Share [Sec 29]
as a notice to an agent is notice to his principal. The rights of such a transferee who receives partner’s share are as follows:
(1) During the continuance of partnership, such transferee is not entitled
3. This notice must be actual and not constructive. It must be received by a working partner and
(a) to interfere with the conduct of the business,
not by a sleeping partner. It must further relate to the firm’s business. Only then it would
(b) to require accounts, or
constitute a notice to the firm.
(c) to inspect books of the firm.
Liability to Third Parties [Sec 25-27] (d) He is only entitled to receive the share of the profits of the transferring partner and he
Contractual liability is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the
accounts.
1. Every partner is liable jointly with other partners also (2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee
severally for the acts of the firm done while he is a partner. will be entitled, against the remaining partners:
2. The expression ‘act of firm’ connotes any act or omission by (a) to receive the share of the assets of the firm to which the transferring partner was
all the partners or by any partner or agent of the firm, which entitled, and
gives rise to a right enforceable by or against the firm. (b) for the purpose of ascertaining the share, he is entitled to an account as from the date
3. Again in order to bring a case under Section 25, it is necessary of the dissolution.
that the act of the firm, in respect of which liability is brought
to be enforced against a party, must have been done while
he was a partner.
Legal Consequence of Partners Coming in and Going Out
Introduction of new partner (Section 31)
1. no new partners can be introduced into a firm without the
consent of all the existing partners.
2. The liabilities of the new partner ordinarily commence from
the date when he is admitted as a partner.
3. The new firm, including the new partner who joins it, may
agree to assume liability for the existing debts of the old firm,

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Notes and creditors may agree to accept the new firm as their Liabilities of an outgoing partner Notes
debtor and discharge the old partners.
1. As we have already stated earlier, a retiring partner
3.14 4. The creditor’s consent is necessary in every case to make the
continues to be liable to third party for acts of the firm after 3.15
transaction operative.
his retirement until public notice of his retirement has been
5. Novation is the technical term in a contract for substituted
given either by himself or by any other partner. But the
liability, of course, not confined only to case of partnership.
retired partner will not be liable to any third party if the latter
6. But a mere agreement amongst partners cannot operate as
deals with the firm without knowing that the former was
Novation. Thus an agreement between the partners and the
partner [Section 32 (3) and (4)].
incoming partner that he shall be liable for existing debts will
2. As regards the liability for acts of the firm done before his
not ipso facto give creditors of the firm any right against him.
retirement, the retiring partner remains liable for the same,
Retirement of a partner (Section 32) unless there is an agreement made by him with the third
party concerned and the partners of the reconstituted firm.
A partner may retire:
Such an agreement may be implied by a course of dealings
a. with the consent of all the other partners; between the third party and the reconstituted firm after he
b. by virtue of an express agreement between the partners; or had knowledge of the retirement [Section 32 (2)].
c. in the case of a partnership at will, by giving notice in writing
Expulsion of a partner (Section 33)
to all other partners of his intention to retire.
A partner may not be expelled from a firm by a majority of
Such a partner, however, continues to be liable to the third party
partners except in exercise, in good faith, of powers conferred by
for acts of the firm after his retirement until public notice of his
contract between the partners.
retirement has been given either by himself or by other partners.
But the retired partner will not be liable to any third party if the It is, thus, essential that: (i) the power of expulsion must have
latter deals with the firm without knowing that the former was existed in a contract between the partners; (ii) the power has
partner [Sub-Sections (3) and (4)]. been exercised by a majority of the partners; and (iii) it has been
exercised in good faith. If all these conditions are not present,
Right of outgoing partners
the expulsion is not deemed to be in bonafide interest of the
1. An outgoing partner may carry on business competing with business of the firm.
that of the firm and he may advertise such business, but
The test of good faith as required under Section 33 (1) includes
subject to contract to the contrary, he cannot use the name
three things :
of the firm [Section 36(1)].
2. Although this provision has imposed some restrictions on an (a) that the expulsion must be in the interest of the
outgoing partner, it effectively permits him to carry on a partnership.
business competing with that of the firm. (b) that the partner to be expelled is served with a notice.
3. However, the partner may agree with his partners that on his (c) that he is given an opportunity of being heard.
ceasing to be so, he will not carry on a business similar to that
Insolvency of a partner (Section 34)
of the firm within a specified period or within specified local
limits. 1. When a partner in a firm is adjudicated an insolvent, he
4. Such an agreement will not be in restraint of trade if the ceases to be a partner on the date of the order of
restraint is reasonable [Section 36(2)]. A similar rule applies adjudication whether or not the firm is thereby dissolved.
to such an agreement of sale of the firm’s goodwill [Section 2. His estate (which thereupon vests in the official assignee)
53(3)]. ceases to be liable for any act of the firm done after the date
5. On the retirement of a partner, he has the right to receive of the order, and the firm also is not liable for any act of such
his share of the property of the firm, including goodwill. a partner after such date (whether or not under a contract
6. An outgoing partner, where the continuing partners carry on between the partners the firm is dissolved by such
business of the firm with the property of the firm without any adjudication).
final settlement of accounts with him, is entitled to claim 3. You must also note that ordinarily but not invariably, the
from the firm such share of the profits made by the firm, insolvency of a partner results in dissolution of a firm; but the
since he ceased to a partner, as attributable to the use of his partners are competent to agree among themselves that the
share of the property of the firm. In the alternative, he can adjudication of a partner as an insolvent will not give rise to
claim interest at the rate of 6% per annum on the amount of dissolution of the firm.
his share in firm’s property (Section 37).
7. However, if by a contract between the partners, an option
has been given to the surviving or continuing partners to
purchase the interest of the outgoing partner and the option
is duly exercised, the outgoing partner or his estate will not
be entitled to any further share of the profits. (Section 37).

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Notes Death of a partner (Section 35) Notes
Consequence of Non – Registration
1. Where under a contract a firm is not dissolved by the death Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty for
3.16 of a partner, the estate of the deceased partner is not liable non-registration of firms. But the Indian Partnership Act does not make the registration of firms 3.17
for acts of the firm after his death. compulsory nor does it impose any penalty for non-registration. But there are some disabilities as
2. Ordinarily, the effect of the death of a partner is the follows:
dissolution of the partnership, but the rule in regard to the
dissolution of the partnership, by death of partner is subject (i) The firm or any other person on its behalf cannot bring an action against the third party for
to a contract between the parties and the partners are breach of contract entered into by the firm, unless the firm is registered and the persons
competent to agree that the death of one will not have the suing are or have been shown in the register of firms as partners in the firm.
effect of dissolving the partnership as regards the surviving (ii) If an action is brought against the firm by a third party, then neither the firm nor the partner
partners unless the firm consists of only two partners. can claim any set off, if the suit be valued for more than Rs. 100 or pursue other proceedings
3. In order that the estate of the deceased partner may be to enforce the rights arising from any contract.
absolved from liability for the future obligations of the firm, (iii) A partner of an unregistered firm (or any other person on his behalf) is precluded from
it is not necessary to give any notice either to the public or bringing legal action against the firm or any person alleged to be or to have been a partner in
the persons having dealings with the firm. the firm. But, such a person may sue for dissolution of the firm or for accounts and realisation
Revocation of continuing guarantee by change in the firm of his share in the firm’s property where the firm is dissolved.
(Section 38)
Important FAQ’s:
Section 38 of the Indian Partnership Act provides that a
Qu. A & Co. is registered as a partnership firm in 1970 with A, B and C as partners. In 1971, A dies.
continuing guarantee given to a firm or to third party in respect
In 1972, B and C sue X in the name and on behalf of A & Co., without fresh registration. Now the
of the transaction of a firm is, in the absence of an agreement to
first question for our consideration is whether the suit is maintainable.
the contrary, revoked as to future transactions from the date of
Ans:
any change in the constitution of the firm. You should note that
the above rule is subject to an agreement to the contrary. The
agreement, if any, to the contrary required to displace the effect
of Section 38, must be clear.

REGISTRATION AND DISSOLUTION OF FIRM

Mode of Affecting Registration [Sec 58]
When the partners decide to get the firm registered, as per the provisions of Section 58 of the
Partnership Act, they have to file the statement in the prescribed form. The statement must be
accompanied by the prescribed fee stating:
(i) the firm’s name,
(ii) the principal place of business,
Dissolution of Firm [Sec 39-47]
 The ‘Dissolution’ of firm means the discontinuation of the jural relation existing between all
(iii) the names of its other places of business,
(iv) the date of joining of each partner, the partners of the firm.
(v) the names in full and the permanent addresses of the partners, and  But when only one of the partners retires or becomes incapacitated from acting as a partner
(vi) the duration of the firm. due to death, insolvency or insanity, the partnership, i.e., the relationship between such a
The aforesaid statement is to be signed by all the partners or by their agents specially authorised partner and others is dissolved, but the rest may decide to continue. In such cases, there is in
in this behalf. Each partner so signing it shall also verify it in the manner prescribed. practice, no dissolution of the firm.
Subsequent alterations as alterations in the name, place, constitution, etc., of the firm that may
 The particular partner goes out, but the remaining partners carry on the business of the firm.
occur during its continuance should also be registered.
 In the case of dissolution of the firm, on the other hand, the whole firm is dissolved. The
partnership terminates as between each and every partner of the firm.
When a Registration is Complete?
 When the Registrar is satisfied that the provisions of Section 58 have been duly complied with,
he shall record an entry of the statement in a Register called the Register of Firms and shall Reasons for Dissolution of Firm
file the statement. As a result of any agreement between all the partners (i.e.,
 Then he shall issue a certificate of Registration. dissolution by agreement).
 However, registration is deemed to be complete as soon as an application in the prescribed Example:
form with the prescribed fee and necessary details concerning the particular of the
partnership is delivered to the Registrar.
 The recording of an entry in the register of firms is a routine duty of Registrar.

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Notes By the adjudication of all the partners, or of all the partners Notes
Consequence of Dissolution
but one, as insolvent (i.e., compulsory dissolution) Continuing liability until public notice
3.18 Example: In spite of dissolution of the firm, partners continue to be liable for 3.19
any act done by any of them, which would have been an act of the
firm if done before the dissolution, until public notice is given of the
dissolution.

To this rule, there are some exceptions. Even where notice of

By the business of the firm becoming unlawful (i.e., dissolution has not been given, there will be no liability for
compulsory dissolution). subsequent acts of other partners in the case of:
Example: (a) the estate of a deceased partner
(b) an insolvent partner, or
(c) a dormant partner, i.e., a partner, who was not known as a
partner to the person dealing with the firm.
Example:
Subject to agreement between the parties, on the happening
of certain contingencies, such as:
(i) efflux of time;
(ii) completion of the venture for which it was entered into;
(iii) death of a partner; Rights to enforce winding up
(iv) insolvency of a partner. On a partnership being dissolved, any partner or his
representative shall have right, against the others
In case of death, it is to be noted that a contrary agreement (i) to have property of the firm applied in payment of the
may be made by the partners only if their number exceeds debts of the firm, and
two. If there are only two partners the only result of either’s (ii) to have the surplus distributed amongst the partners or
death will necessarily be the dissolution of the firm. their representatives according to their respective rights.
Example:
By a partner giving notice of his intention to dissolve the firm,
in case of partnership at will and the firm being dissolved as
from the date mentioned in the notice, or if no date is
mentioned, as from the date of the communication of the
notice.
Example: Extent of continuing authority of the partners after dissolution
The authority of a partner to bind the firm and other mutual rights
and obligations continue:
(i) so far as may be necessary to wind up the firm,
(ii) to complete the unfinished transactions pending at the date
By intervention of court in case of: of dissolution and no other.
(i) a partner becoming of unsound mind; Settlement of partnership accounts:
(ii) permanent incapacity of a partner to perform his In settling the accounts of a firm after dissolution, the following
duties as such; rules, laid down by Section 48 of the Indian Partnership Act, subject
(iii) misconduct of a partner affecting the business; to an agreement by the partners, must be observed.
(iv) wilful or persistent breaches of agreement by a 1. Losses including deficiencies of capital are to be paid first out of
partner; profits then out of capital and lastly by the partners individually
(v) transfer or sale of the whole interest of a partner; in the proportions in which they were entitled to share profits.
(vi) improbability of the business being carried on save at For example, X and Y were partners sharing profits and losses
a loss; equally and X died. On taking partnership accounts, it
(vii) the Court being satisfied on other equitable grounds transpired that he contributed Rs. 6,600 to the capital of the
that the firm should be dissolved. firm and Y only Rs. 400. The assets amounted to Rs. 2,000. The
deficiency (Rs. 6,600 + Rs. 400 – Rs. 2,000 i.e. Rs. 5,000) would
have to be shared equally by Y and X’s estate.
2. The assets of the firm, including any sums contributed by the
partners to make up deficiencies of capital, must be applied in
the following manner and order :
(a) in paying the debts of the third parties;

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Notes Notes
(b) in paying to each partner rateably what is due to him from

3.20
the firm for advances as distinguished from capital;
(c) in paying to each partner rateably what is due to him on
Chapter 2: 2.1
account of capital and;
(d) in distributing the residue, if any, among partners in the
proportions in which they were entitled to share profits.
The Sale of Goods Act, 1930
Personal profits earned after dissolution (Section 50)
Where a firm is dissolved by the death of a partner and the surviving
partners or the surviving partners along with the representatives of FORMATION OF THE CONTRACT OF SALE
the deceased partner carry on business of the firm, any personal Definition (Sec 2)
profits by them, before the firm is fully wound up, must be
accounted for by them to other partners. Buyer ‘Buyer’ means a person who buys or agrees to buy goods.
Thus a lease expiring on the death of a partner, which is renewed [2(1)] [Not only the person who buys but also the one who agrees to buy
by the surviving partners, before final winding up, belongs to the is a buyer.]
partnership. Seller ‘seller’ means a person who sells or agrees to sell goods.
[2(13)] [not only a person who sells but also a person who agrees to sell.]
Goodwill on dissolution (Section 55)
What the purchaser of goodwill acquires is: Goods [2(7)]  “Goods” means every kind of movable property other than actionable
(i) the right to carry on the same business under the old name and claims and money; and
(ii) to represent himself to the customers of the old firm as the successor  includes stock and shares, growing crops, grass, and things attached to
in the business of the old firm. or forming part of the land, which are agreed to be severed before sale
The partners selling the goodwill of a firm can: or under the contract of sale.
(i) carry on a similar business; ‘Actionable claims’ are claims, which can be enforced only by an action or
(ii) also compete with the business sold by them to purchaser and suit, e.g., debt. A debt is not a movable property or goods.
(iii) advertise their business in such manner as they deem fit, but, subject
to an agreement to the contrary, they cannot use the firm name, Goods
represent themselves as carrying on the old business, and solicit the
customers of the old firm.
Include Excludes
Mode of Giving Public Notice (Sec 72)
In every case where the public notice of any matter in respect of partnership firm Actionable Claims
is required to be given under this Act, it must be given by publication in the For e.g. Debts
Official Gazette and in at least one vernacular newspaper circulating in the district Stock & Shares Growing Crops
where the firm to which it relates, has its place or principal place of business.
In the case of registered firms, apart from the aforesaid notification, a notice is
also required to be served on the Registrar of Firms under Section 63 where the Money
matters relate to
(a) the retirement or expulsion of a partner, or Grass Things attached to land
(b) dissolution of the firm, or
(c) the election, on attaining majority, to be or not to be a partner, by a person
Existing Goods [6] Existing goods are such goods as are in existence at the time of the
who as a minor, was admitted to the benefits of partnership.
contract of sale, i.e., those owned or possessed by the seller.
Example:

Future Goods [2(6) Future goods means goods to be manufactured or produced or acquired
by the seller after making the contract of sale.
Example:

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Notes Notes
Specific Goods means goods identified and agreed upon at the time the contract of a sale Basis Document of Title Document Showing Title
has been made.
2.2  Specific goods may be distinguished from ‘generic’ or unascertained’ 2.3
goods defined only by description and not identified and agreed upon. Meaning
 Ascertained goods have been held to mean goods identified in
accordance with the agreement after the contract of sale has been
made.
 For e.g. Medicine as per the need
Example
Goods in Goods are said to be in a deliverable state when they are in such a condition
Deliverable State that the buyer would, under contract, be bound to take delivery of them.
Example:

Mercantile Agents [Sec 2(9)]

It means an agent having in the customary course of business as such agent an
authority either to sell goods or to consign goods for the purpose of sale or to buy
goods or to raise money on the security of the goods. Examples of such kind of agents
are auctioneers, factors, brokers, etc.
Delivery – Forms & Derivatives
Delivery means voluntary transfer of possession by one person to another [2(2)]. As a general Property [Sec 2(11)]
rule, delivery of goods may be made by doing anything, which has the effect of putting the goods It means the general property (right of owner-ship-in goods) and not merely a special property.
in the possession of the buyer, or any person authorised to hold them on his behalf. Delivery Note that the ‘general property’ in goods is to be distinguished from a ‘special property’. It is
may be of three kinds, which may be enumerated as follows: quite possible that the general property in a thing may be in one person and a special property
Delivery in the same thing may be in another e.g., when an article is pledged. The general property in a
thing may be transferred, subject to the special property continuing to remain with another
person i.e., the pledgee who has a right to retain the goods pledged till payment of the
Actual Symbolic Constructive
stipulated dues.
Delivery Delivery Delivery
General Property Special Property
When it is affected The absolute ownership usually of personal A property right or qualified interest
without any change property with the right of complete dominion in property (such as the interest of a bailee,
in the custody or over it including the incidental rights of pledgee, lawful possessor, a conditional
It is actual When there is a delivery in token actual possession of possession, of use and enjoyment, and of vendee prior to full payment, or a lienholder)
when the of a transfer of something else, the things as in the disposition or alienation subordinate to the absolute, unconditional or
goods are i.e., delivery of goods in case of case of delivery by general property or ownership.
delivered to transit may be made by handing attornment
the buyer over documents of title to goods. (acknowledgement) Insolvent [Sec 2(8)]
A person is said to be insolvent when he ceased to pay his debts in the ordinary
Document of Title of Goods course of business, or cannot pay his debts as they become due, whether he has
 Examples of such documents are bill of lading, dock warrant, warehouse keeper’s certificate, committed an act of insolvency or not.
wharfinger’s certificate, railway receipt, warrant, an order of delivery of goods.
 The list is only illustrative and not exhaustive. Any other document which has the above Contract of Sale
characteristics also will fall under the same category.
 Though a bill of lading is a document of title, a mate’s receipt is not; it is regarded at law as
merely an acknowledgement for the receipt of goods. Contract of Sale
 A document amounts to a document of title only where it shows an unconditional
undertaking to deliver the goods to the holder of the document. Definition Scope

Document of title to goods” includes bill of lading, dock-warrant, warehouse keeper’s A contract of sale of goods is a 1. It is wider term than sale.
certificate, wharfingers’ certificate, railway receipt, multimodal transport document, warrant or contract whereby the seller 2. It includes "proper sale" &
order for the delivery of goods and any other document used in the ordinary course of business transfers or agrees to transfer "agreement to sale also".
as proof of the possession or control of goods or authorising or purporting to authorise, either the property in goods to the 3. It can be absolute or
by endorsement or by delivery, the possessor of the document to transfer or receive goods buyer for a price. conditional
thereby represented by it.

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Notes Notes
Essentials of Contract of sale Passing of The property in the goods passes to Since property in the goods does not
Risk the buyer and along therewith the pass to the buyer, the risk also does
2.4 At least 2 Buyer &
risk. not pass to him. 2.5
parties Seller It is an executed contract. i.e. contract It is an executory contract, i.e.
Executed / for which consideration has been contract for which consideration is to
Executory paid. be paid at a future date.
Subject Goods Liability in A subsequent loss or destruction of Such loss or destruction is the liability
matter case of Loss the goods is the liability of the buyer. of the seller.
Remedy in The seller can sue the buyer for the The aggrieved party can sue for
Essentials of Price Money paid or case of Breach price of the goods because of the damages only and not for the price,
Contract of Sale Promised by Buyer passage of the property therein to the unless the price was payable at a
buyer. stated date.
Breach on the part of the seller gives The seller, being still the owner of the
Transfer of From buyer to Remedy in the buyer double remedy; a suit for goods, may dispose of them as he
property seller case of breach damages against the seller and a likes, and the buyer’s remedy would
by Seller proprietary remedy of recovering the be to file a suit for damages only.
Type of Absolute & goods from third parties who bought
Contract Conditional them.

Formalities of Contract of Sale Sale & Hire Purchase

Basis Sale Higher Purchase
There may be immediate delivery Where under a contract of sale the The contract of transfer of goods from
of the goods. Definition property in the goods is transferred one person to another for payment in
from the seller to the buyer, the instalments, which together if added
There may be immediate contract is called a sale. resembles the sale price of goods, and
on payment of last instalment the
payment of price, but it may be
ownership is transferred.
agreed that the delivery is to be Transfer of Property in the goods is transferred The goods passes to the hirer upon
made at some future date Ownership to the buyer immediately at the time payment of the last instalment.
of contract.
There may be immediate delivery Position of The position of the buyer is that of The position of the hirer is that of a
Contract of of the goods and an immediate Buyer / Hirer the owner of the goods. bailee till he pays the last instalment.
Sale payment of price. The buyer cannot terminate the The hirer may, if he so likes, terminate
Termination of contract and is bound to pay the the contract by returning the goods to
Contract price of the goods. its owner without any liability to pay
It may be agreed that the delivery the remaining instalments.
or payment or both are to be The seller takes the risk of any loss The owner takes no such risk, for if the
made in installments. Risk of Seller resulting from the insolvency of the hirer fails to pay an instalment the
buyer. owner has right to take back the
goods.
It may be agreed that the delivery Passing of Title The buyer can pass a good title to a The hirer cannot pass any title even to
or payment or both are to be bonafide purchaser from him. a bona fide purchaser.
made at some future date. Levy of Tax Tax is levied at the time of the Tax is not liveable until it eventually
contract. ripens into a sale.

Sale and Agreement to Sale Sale and Bailment

Basis Sale Agreement to Sale Basis Sale Bailment
Where under a contract of sale the Where under a contract of sale the Where under a contract of sale the A ‘bailment’ is the delivery of goods
property in the goods is transferred transfer of the property in the goods is property in the goods is transferred for some specific purpose under a
Definition from the seller to the buyer, the to take place at a future time or Definition / from the seller to the buyer, the contract on the condition that the
contract is called a sale. subject to some condition thereafter Meaning contract is called a sale. same goods are to be returned to the
to be fulfilled, the contract is called an bailor or are to be disposed of
agreement to sell. according to the directions of the
bailor.

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The property in goods is transferred There is only transfer of possession Section 10 provides for the determination of price by a third party.
Transfer of from the seller to the buyer. of goods from the bailor to the bailee  Where there is an agreement to sell goods on the terms that price has to be fixed by the
2.6 Property for any of the reasons like safe third party and he either does not or cannot make such valuation, the agreement will be 2.7
custody, carriage, etc. void.
Generally the return of goods in The bailee must return the goods to  In case the third party is prevented by the default of either party from fixing the price, the
Return of Goods contract of sale is not possible. the bailor on the accomplishment of party at fault will be liable to the damages to the other party who is not at fault.
the purpose for which the bailment  However, a buyer who has received and appropriated the goods must pay a reasonable
was made. price for them in any eventuality.
Consideration The consideration is the price in The consideration may be gratuitous
terms of money. or non-gratuitous. Stipulation as to Time
 As regard time for the payment of price, unless a different intention appears from the terms
Subject Matter of Contract of Sale [Sec 6] of contract, stipulation as regard this, is not deemed to be of the essence of a contract of
(1) The subject matter of contract must always be goods. The goods may be existing or future sale.
goods.  But delivery of goods must be made without delay. Whether or not such a stipulation is of
(2) Like an ordinary contract, a Contract of Sale of Goods can also be made with regard to the the essence of a contract depends on the terms agreed upon.
goods, the acquisition of which by seller depends upon a contingency, which may or may  Price for goods may be fixed by the contract or may be agreed to be fixed later on in a
not happen. Thus, a Contract for Sale of certain cloth to be manufactured by a certain mill is specific manner. Stipulations as to time of delivery are usually the essence of the contract.
a valid contract. Such contacts are called Contingent Contracts.
(3) When the seller purports by his contract of sale to effect a sale of future goods, the contract
CONDITION & WARRANTY
will operate only as an agreement to sell the goods and not as sale.
Meaning & Difference
Destruction of Subject Matter of Contract Basis Condition Warranty
Goods not existing at the time of contract [Sec 7] A condition is a stipulation essentialWarranty is a stipulation collateral to
 If at the time a contract of sale is entered into, to the main purpose of the contract, the main purpose of the contract, the
 the subject-matter of a contract being specific goods, Meaning the breach of which gives right to breach of which gives rise to a claim
 which without the knowledge of the seller have been destroyed or so repudiate the contract and to claim for damages but not to a right to
damaged as not to answer to the description in the contract, damages. reject the goods and treat the contract
 and then the contract is void ab initio. as repudiated.
 The Section is founded on the rule that where both the parties to a Rights of The aggrieved party can repudiate the The aggrieved party can claim only
contract are under a mistake as to a matter of fact essential to a Aggrieved contract or claim damages or both in damages in case of breach of
contract, the contract is void. party the case of breach of condition. warranty.
Goods perishing after the contract is made [Sec 8] Breach of A breach of condition may be treated A breach of warranty cannot be
 Where there is an agreement to sell specific goods and the goods, Condition as a breach of warranty. treated as a breach of condition.
 subsequently without any fault of the seller or the buyer perish or
suffer such damages When Condition is to be considered as Warranty?
 as not to answer to the description in the agreement before the risk Provision Example
passes to the buyer, Where the buyer altogether waives the performance of
 the agreement becomes void (Section 8). the condition there, a party may for his own benefit,
It may be noted that this would apply only if the risk had not passed to waive a stipulation.
the buyer. Generally speaking risk passes with property i.e., when the
property in the goods sold has passed to the Buyer, there, the Buyer Where the buyer elects to treat the breach of the
bears the risk of subsequent destruction of, or damage to the goods. condition thus, as one of a warranty. That is to say, he
may only claim damages instead of repudiating the
Ascertainment of Price [Sec 9 & 10] contract.
‘Price’ means the monetary consideration for sale of goods [Section 2
(10)]. By virtue of Section 9, the price may be Where the contract is non-severable and the buyer has
(1) fixed by the contract, or accepted either the whole goods or any part thereof.
(2) agreed to be fixed in a manner provided by the contract, e.g., by a Acceptance means acceptance as envisaged in Section 72
valuer, or
(3) determined by the course of dealings between the parties. Where the fulfillment of any condition or warranty is
When it cannot be fixed in any of the above ways, the buyer is bound to pay to the seller a excused by law by reason of impossibility or otherwise.
reasonable price. What is a reasonable price is a question of fact in each case (Section 9).

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Notes Notes
Express and Implied Conditions and Warranties Condition as to quality or fitness [Section 16]
 ‘Conditions’ and ‘Warranties’ may be either express or implied.  Ordinarily, there is no implied condition as to the quality or fitness of
2.8  They are “express” when the terms of the contract expressly state them. the goods sold for any particular purpose. 2.9
 They are implied when, not being expressly provided for.  However, the condition as to the reasonable fitness of goods for a
 Express conditions are those, which are agreed upon between the parties at the time of particular purpose may be implied if the buyer had made known to
contract and are expressly provided in the contract. the seller the purpose of his purchase and relied upon the skill and
 The implied conditions, on the other hand, are those, which are presumed by law to be judgement of the seller to select the best goods and the seller has
present in the contract. ordinarily been dealing in those goods.
 It should be noted that an implied condition may be negated or waived by an express  Even this implied condition will not apply if the goods have been sold
agreement. under a trademark or a patent name.
 Following conditions are implied in a Contract of Sale of Goods unless the circumstances of
the contract show a different intention. Conditions as to wholesomeness.
In the case of eatables and provisions, in addition to the implied condition
Condition as to title [Section 14(a)] as to merchantability, there is another implied condition that the goods
In every contract of sale, unless there is an agreement to the contrary, shall be wholesome.
the first implied condition on the part of the seller is that
(a) in case of a sale, he has a right to sell the goods, and Implied Warranties
(b) in the case of an agreement to sell, he will have right to sell the
goods at the time when the property is to pass. Warranty as to Undisturbed Possession
In simple words, the condition implied is that the seller has the right to An implied warranty that the buyer shall have and enjoy quiet possession
sell the goods at the time when the property is to pass. of the goods. That is to say, if the buyer having got possession of the
If the seller’s title is defective, the buyer must return the goods to the goods, is later on disturbed in his possession, he is entitled to sue the
true owner and recover the price from the seller. seller for the breach of the warranty.
Sale by description [Section 15]
Warranty as to non-existence of encumbrances
 Where there is a Contract of Sale of Goods by description, there is an
implied condition that the goods correspond with the description. An implied warranty that the goods shall be free from any charge or
 This rule is based on the principle that “if you contract to sell peas, encumbrance in favour of any third party not declared or known to the
you cannot compel the buyer to take beans.” buyer before or at the time the contract is entered into.
 The buyer is not bound to accept and pay for the goods which are
Disclosure of dangerous nature of goods
not in accordance with the description of goods.
There is another implied warranty on the part of the seller that in case
Sale by sample [Section 17] the goods are inherently dangerous or they are likely to be dangerous to
In a contract of sale by sample, there is an implied condition that- the buyer and the buyer is ignorant of the danger, the seller must warn
the buyer of the probable danger. If there is breach of this warranty, the
(a) the bulk shall correspond with the sample in quality;
seller will be liable in damages.
(b) the buyer shall have a reasonable opportunity of comparing the
bulk with the sample, and Warranty as to quality or fitness by usage of trade [Section 16(4)]
(c) the goods shall be free from any defect rendering them un- An implied warranty as to quality or fitness for a particular purpose may
merchantable, which would not be apparent on reasonable
be annexed by the usage of trade.
examination of the sample. This condition is applicable only with
regard to defects, which could not be discovered by an ordinary
examination of the goods. But if the defects are latent, then the
buyer can avoid the contract. Caveat Emptor
 In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let
Sale by sample as well as by description [Section 15]
the buyer beware’.
Where the goods are sold by sample as well as by description the implied  When sellers display their goods in the open market, it is for the
condition is that the bulk of the goods supplied must correspond both buyers to make a proper selection or choice of the goods.
with the sample and the description. In case the goods correspond with  If the goods turn out to be defective he cannot hold the seller
the sample but do not tally with description or vice versa, the buyer can liable.
repudiate the contract.  The seller is in no way responsible for the bad selection of the
buyer.
 The seller is not bound to disclose the defects in the goods which
he is selling.

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 It is the duty of the buyer to satisfy himself before buying the goods that the goods will The primary rules relating to the passing of property in the sale of goods are:
serve the purpose for which they are being bought. (1) No property in the goods is transferred to the buyer, unless and until the goods are
2.10  If the goods turn out to be defective or do not serve his purpose or if he depends on his ascertained. 2.11
own skill or judgement, the buyer cannot hold the seller responsible. (2) Where there is a contract of sale of specific or ascertained goods, property passes to the
buyer at the time when parties intend to pass it. For the purpose of ascertaining intention
Exception: of the parties regard shall be had to the terms of contract, conduct of parties, and
circumstances of the case. Where the intention of the parties cannot be ascertained, rules
Provision Example
contained in Sections 20 to 24 shall apply.
 Where the buyer makes known to the seller the particular purpose for
which the goods are required, Important FAQ’s:
 so as to show that he relies on the seller’s skill or judgement and the 1. When the property for the specific goods passes to the buyer?
goods are of a description which is in the course of seller’s business to Ans:
supply, a. Where there is an unconditional contract for the sale of specific goods in a deliverable state,
 it is the duty of the seller to supply such goods as are reasonably fit for property in the goods passes to the buyer when the contract is made (Section 20).
that purpose [Section 16(1)] b. Deliverable state means such a state that the buyer would under the contract be bound to
In case where the goods are purchased under its patent name or brand take delivery of the goods.
name, there is no implied condition that the goods shall be fit for any c. If the goods are not in a deliverable state, property does not pass until such a thing is done
particular purpose. [Section 16(1)]. to put the goods in a deliverable state. This ‘something’ may mean packing the goods,
testing, polishing, filling in casks etc.
Where the goods are sold by description there is an implied condition that d. It should be noted that the property shall not pass when the goods are made in deliverable
the goods shall correspond with the description. [Section 15]. state but shall pass only when the buyer has notice of it (Section 21).
e. But where they are in deliverable state, but the seller is bound to weigh, measure, test or do
some other act or thing for the purpose of ascertaining the price, the property does not pass
 Where the goods are bought by description from a seller who deals in until such act or thing is done.
goods of that description there is an implied condition that the goods f. When the seller has done his part the property passes even if the buyer has to do something
shall be of merchantable quality. for his own satisfaction. (Section 22).
 But where the buyer has examined the goods this rule shall apply if the
defects were such which ought to have been revealed by ordinary 2. How do you transfer property in unascertained goods?
examination [Section 16(2)] Ans:
Until goods are ascertained, there is merely an agreement to sell. The ascertainment of goods
Where the goods are bought by sample, this rule of Caveat Emptor does
and their unconditional appropriation to the contract are the two preconditions for transfer of
not apply if the bulk does not correspond with the sample [Section 17].
property from seller to buyer in case of unascertained goods. A seller is deemed to have
unconditionally appropriated, where he delivers the goods to the buyer or to a carrier or other
Where the goods are bought by sample as well as description, the rule of bailee for the purpose of transmission to the buyer (Section 23).
Caveat Emptor is not applicable in case the goods do not correspond with
both the sample and description [Section 15]. 3. What do you mean by appropriation of goods?
Ans: Appropriation of goods involves selection of goods with the intention of using them in
An implied warranty or condition as to quality or fitness for a particular performance of the contract and with the mutual consent of the seller and the buyer.
purpose may be annexed by the usage of trade and if the seller deviates The essentials are:
from that, this rule of Caveat Emptor is not applicable. (a) The goods should conform to the description and quality stated in the contract.
(b) The goods must be in a deliverable state.
Where the seller sells the goods by making some misrepresentation or (c) The goods must be unconditionally (as distinguished from an intention to appropriate)
fraud and the buyer relies on it or when the seller actively conceals some appropriated to the contract either by delivery to the buyer or his agent or the carrier.
defect in the goods so that the same could not be discovered by the buyer (d) The appropriation must be made by:
on a reasonable examination, then the rule of Caveat Emptor will not apply. (i) the seller with the assent of the buyer; or
In such a case the buyer has a right to avoid the contract and claim (ii) the buyer with the assent of the seller.
damages. (e) The assents may be express or implied.
(f) The assent may be given either before or after appropriation.

TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS 4. When the property in goods sent on approval or “on sale or return business”?
Ans: When the goods are delivered to the buyer on approval or on sale or return or other similar
Transfer of Ownership [Sec 18 – 24]
terms the property passes to the buyer:
Passing of property implies passing of ownership. If the property has passed to
(i) when he signifies his approval or acceptance to the seller,
the buyer, the risk in the goods sold is that of buyer and not of seller, though the
(ii) when he does any other act adopting the transaction, and
goods may still be in the seller’s possession.
(iii) if he does not signify his approval or acceptance to the seller but retains goods beyond a
reasonable time (Section 24).

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Notes Notes
Sale for cash only or Return Exceptions: In the following cases, a non-owner can convey better title to the bona fide
It may be noted that where the goods have been delivered by a person on “sale or return” on purchaser of goods for value.
2.12 the terms that the goods were to remain the property of the seller till they are paid for, the 2.13
property therein does not pass to the buyer until the terms are complied with, i.e., cash is paid Sale by a Mercantile Agent
for. A sale made by a mercantile agent of the goods for document of title to
A buyer under a contract on the basis of ‘sale or return’ is deemed to have exercised his option goods would pass a good title to the buyer in the following circumstances;
when he does any act exercising domination over the goods showing an unequivocal intention to namely;
buy, e.g., if he pledges the goods with a third party. Failure or inability to return the goods to the (a) If he was in possession of the goods or documents with the consent
seller does not necessarily imply selection to buy. of the owner;
(b) If the sale was made by him when acting in the ordinary course of
Reservation of Right to Disposal business as a mercantile agent; and
 Where there is contract of sale of specific goods or where the goods have been (c) If the buyer had acted in good faith and has at the time of the
subsequently appropriated to the contract, the seller may, by the terms of the contract or contract of sale, no notice of the fact that the seller had no authority
appropriation, as the case may be, reserve the right to dispose of the goods, until certain to sell (Section 27).
conditions have been fulfilled.
 In such a case in spite of the fact that the goods have already been delivered to the buyer or Sale by one of the joint owners
to a carrier or other bailee for the purpose of transmitting the same to the buyer, the If one of the several joint owners of goods has the sole possession of them
property therein will not pass to the buyer till the condition imposed, if any, by the seller with the permission of the others, the property in the goods may be
has been fulfilled. transferred to any person who buys them from such a joint owner in good
faith and does not at the time of the contract of sale have notice that the
Example: seller has no authority to sell (Section 28).
If the goods are shipped or delivered to a railway administration for carriage and by the bill of Sale by a person in possession under a voidable contract
lading or railway receipt, as the case may be, the goods are deliverable to the order of the seller A buyer would acquire a good title to the goods sold to him by a seller who
or his agent, then the seller will be prima facie deemed to have reserved to the right of disposal. had obtained possession of the goods under a contract voidable on the
Where the seller draws a bill on the buyer for the price and sends to him the bill of exchange ground of coercion, fraud, misrepresentation or undue influence provided
together with the bill of lading or (as the case may be) the railway receipt to secure acceptance that the contract had not been rescinded until the time of the sale
or payment thereof, the buyer must return the bill of lading, if he does not accept or pay the bill. (Section 29).
And if he wrongfully retains the bill of lading or the railway receipt, the property in the goods
does not pass to him. Sale by one who has already sold the goods but continues in possession
It should be noted that Section 25 deals with “conditional appropriation” as distinguished thereof
from ‘unconditional appropriation’ dealt with under Section 23(2). If a person has sold goods but continues to be in possession of them or of
the documents of title to them, he may sell them to a third person, and if
such person obtains the delivery thereof in good faith and without notice
Passing of Risk
of the previous sale, he would have good title to them, although the
Original The general rule is, “unless otherwise agreed, the goods remain at the seller’s risk
property in the goods had passed to the first buyer earlier. A pledge or
Risk Rule until the property therein is transferred to the buyer, but when the property
other disposition of the goods or documents of title by the seller in
therein is transferred to the buyer, the goods are at the buyer’s risk whether
possession are equally valid [(Section 30(1)].
delivery has been made or not” (Section 26).
Exception a. It provides that where delivery of the goods has been delayed through the
to Original fault of either buyer or seller, the goods are at the risk of the party in fault as Sale by buyer obtaining possession before the property in the goods has
Rule regards any loss which might not have occurred but for such fault. (Sec 26) vested in him
b. Parties may by special agreement stipulate that ‘risk’ will pass sometime after Where a buyer with the consent of the seller obtains possession of the
or before the ‘property’ has passed. goods before the property in them has passed to him, he may sell, pledge
c. The duties and liabilities of the seller or the buyer as bailee of goods for the or otherwise dispose of the goods to a third person, and if such person
other party remain unaffected even when the risk has passed generally. obtains delivery of the goods in good faith and without notice of the lien
or other right of the original seller in respect of the goods, he would get a
Transfer of Title good title to them [(Section 30(2)].
 In general the seller sells only such goods of which he is the absolute owner.
 But sometimes a person may sell goods of which he is not the owner, then the question Effect of Estoppel
arises as to what is the position of the buyer who has bought the goods by paying price. Where the owner is estopped by the conduct from denying the seller’s
 The general rule regarding the transfer of title is that the seller cannot transfer to the buyer authority to sell, the transferee will get a good title as against the true
of goods a better title than he himself has. owner. But before a good title by estoppel can be made, it must be shown
 If the seller is not the owner of goods, then the buyer also will not become the owner i.e. the that the true owner had actively suffered or held out the other person in
title of the buyer shall be the same as that of the seller. question as the true owner or as a person authorized to sell the goods.
 This rule is expressed in the Latin maxim “Nemo dat quod non habet” which means that no
one can give what he has not got.

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Notes Delivery of wrong quantity Example: Notes
Sale by an unpaid seller
1. In case of tender of lesser quantity of goods, the buyer may
Where an unpaid seller who had exercised his right of lien or stoppage in
either accept the same and pay for it at the contract rate or
2.14 transit resells the goods, the buyer acquires a good title to the goods as
reject it [Section 37(1)]. 2.15
against the original buyer [Section 54(3)].
2. In case of excess delivery the buyer may accept or reject the
delivery, if he accepts the whole of the goods, he shall pay
Sale under the provisions of other Acts for them at the contract rate [Section 37(2)].
(i) Sale by an Official Receiver or Liquidator of the Company will give the 3. In case the seller makes a delivery of the goods contracted
purchaser a valid title. mixed with goods of a different description, the buyer may
(ii) Purchase of goods from a finder of goods will get a valid title under accept the relevant goods and reject the rest or reject the
certain circumstances. whole [Section 37(3)].
4. Mixing of goods with inferior quality does not amount to a
mixing of goods of different description.
Rules Regarding Delivery of Goods (Sec 33-39) Instalment deliveries Example:
Effect of Part Delivery Example: Unless otherwise agreed, the buyer is not bound to accept
A delivery of part of goods, taking place in the course of the delivery in installments. The rights and liabilities in cases of
delivery of the whole, has the same effect for the purpose of delivery by instalments and payments there on may be
passing the property in such goods as delivery of the whole. But determined by the parties of contract (Section 38).
such part delivery, with the intention of severing it from the Delivery of carrier Example:
whole will not operate as a delivery of the remainder, it will be Subject to the terms of contract, the delivery of the goods to the
construed as part delivery only (Section 34). carrier for transmission to the buyer, is prima facie deemed to be
Buyer to Apply for Delivery Example: delivery to the buyer [Section 39(1)].
The seller of the goods is not obliged to deliver them until the Deterioration during transit Example:
buyer has applied for delivery, unless otherwise agreed (Section Where goods are delivered at a distant place, the liability for
35). deterioration necessarily incidental to the course of transit will
fall on the buyer, though the seller agrees to deliver at his own
risk (Section 40).
Place of delivery Example:
If there is no contract to the contrary, goods must be delivered at Buyer’s right to examine the goods Example:
Where goods are delivered to the buyer, who has not previously
the place where they were at the time of sale, and the goods
examined them, he is entitled to a reasonable opportunity of
agreed to be sold are required to be delivered at the spot at
which they were lying at the time the agreement to sell entered examining them in order to ascertain whether they are in
into or if not then in existence, at the place where they would be conformity with the contract. Unless otherwise agreed, the seller
manufactured or produced [Section 36(1)]. is bound, on request, to afford the buyer a reasonable
opportunity of examining the goods (Section 41).
Time of delivery Example:
When the time of sending the goods has not been fixed by the
parties, the seller must send them within a reasonable time Acceptance of Delivery of Goods
[Section 36(2)]. Acceptance is deemed to take place when the buyer:
(a) intimates to the seller that he had accepted the goods; or
Time for tender of delivery Example: (b) does any act to the goods, which is inconsistent with the ownership
Demand or tender of delivery may be treated as ineffectual of the seller; or
unless made at a reasonable hour. What is reasonable hour is a (c) retains the goods after the lapse of a reasonable time, without
question of fact [Section 36(4)]. intimating to the seller that he has rejected them (Section 42).
 Ordinarily, a seller cannot compel the buyer to return the
Expenses for delivery Example: rejected goods; but the seller is entitled to a notice of the
The expenses of and incidental to putting the goods into a rejection.
deliverable state must be borne by the seller, in the absence of a  Where the seller is ready and willing to deliver the goods and
contract to the contrary [Section 36(5)]. requests the buyer to take delivery, and the buyer does not take
delivery within a reasonable time, he is liable to the seller for any
loss occasioned by the neglect or refusal to take delivery, and
also reasonable charge for the care and custody of the goods
(Sections 43 and 44).

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Notes Notes
UNPAID SELLER Right of resale
Definition And Meaning The unpaid seller can exercise the right to re-sell the goods under the
2.16 following conditions: 2.17
According to Section 45(a) of the Sale of Goods Act, 1930, the seller of
goods is deemed to be an ‘Unpaid Seller’ when- (i) When the goods are of a perishable nature. In such a case the buyer
(a) the whole of the price has not been paid or tendered and the need not be informed of the intention of re-sale.
seller had an immediate right of action for the price. (ii) When he gives notice to the buyer of his intention to re-sell the goods
(b) A bill of exchange or other negotiable instrument was given as and the buyer does not within a reasonable time pay or tender the
payment, but the same has been dishonoured, unless this price.
payment was an absolute, and not a conditional payment.
Any person who is in a position of a seller, is also a seller, and may exercise the rights conferred Rights of unpaid seller against the buyer
upon an ‘unpaid seller’ in above said circumstances. For instance, an agent of the seller, to
An unpaid seller can enforce certain rights against the goods as well as against the buyer
whom bill of lading has been endorsed, is in the position of seller and may exercise rights of
personally. The rights of the seller against the buyer personally are called rights in personam and
‘unpaid seller’.
are in addition to his rights against the goods. The right in personam are as follows:
Suit for Price (Sec 55):
Rights of Unpaid Seller (a) Where property has passed to the buyer and he wrongfully neglects or
refuses to pay for the goods, the seller may sue him for the price of
Rights Of Unpaid Seller
the goods [Section 55(1)].
(b) Where property has not passed under the contract of sale and the price
Rights Against the Rights Against the is payable on a certain day irrespective of delivery and the buyer
Goods Buyer wrongfully neglects or refuses to pay such price, the seller may sue him
for the price although the property in the goods has not passed and the
1. Right of lien 1. Suit for Price (Sec 55) goods have not been appropriated to the contract [Section 55(2)].
2. Right of stoppage in transit 2. Suit for damages for non- acceptance (Sec 56)
Suit for damages for non-acceptance (Section 56):
3. Right of resale 3. Repudiation of contract before due date (Sec 60)
Where the buyer wrongfully neglects or refuses to accept and pay for the
4. Suit of Interest [Sec 61 (2) (d)]
goods, the seller may sue him for damages for non-acceptance. As regards
measure of damages, Section 73 of the Indian Contract Act, 1872, applies.
Right Against the Goods
Right of Lien: Repudiation of contract before due date (Section 60):
He has a right of lien on the goods for the price while he is in possession, until Where the buyer repudiates the contract before the date of delivery, the
the payment or tender of the price of such goods. The right of lien can be seller may treat the contract as rescinded and sue damages for the breach.
exercised by him in the following cases only: This is known as the ‘rule of anticipatory breach of contract’.
Suit for interest [Section 61(2)(d)]:
(a) where goods have been sold without any stipulation of credit;
Where there is specific agreement between the seller and the buyer as to
(b) where goods have been sold on credit but the term of credit has expired;
interest on the price of the goods from the date on which payment
or
becomes due, the seller may recover interest from the buyer. If, however,
(c) where the buyer becomes insolvent.
there is no specific agreement to this effect, the seller may charge interest
on the price when it becomes due from such day as he may notify to the
Right of stoppage in Transit buyer.
When the unpaid seller has parted with the goods to a carrier and the
buyer has become insolvent, he can exercise this right of asking the
carrier to return the goods back, or not to deliver the goods to the Difference between Right of Lien And Right of Stoppage in Transit
buyer.
Basis Right of Lien Right of Stoppage in Transit
However, the right of stoppage in transit is exercised only when the following conditions are The essence of a right of lien The right of stoppage in transit is right to regain
fulfilled: Possession is to retain possession. possession.
(a) The seller must be unpaid.
(b) He must have parted with the possession of goods. Seller should be in In stoppage in transit
(c) The goods are in transit. possession of goods under (i) seller should have parted with the
Difference in
(d) The buyer has become insolvent. lien. possession
Possession
(e) The right is subject to provisions of the Act. (ii) possession should be with a carrier &
(iii) buyer has not acquired the possession.
Right of lien can be Right of stoppage in transit cannot be claimed
Claiming Right exercised even when the in cases other than insolvency.
buyer is not insolvent.

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Notes Notes
Right of stoppage in transit Thus the end of the right of lien is the starting Suit for recovery of price
Starting &
begins when the right of lien point of the right of stoppage in transit.
Ending Under Section 61, the buyer has a right to recover the money paid to the seller where the
2.18 ends.
consideration for payment of it has failed. For example, where the buyer is deprived to goods by
2.19
their true owner, he may recover the price for breach of the condition as to title.
Effect of Sub-Sale or Pledge by buyer [Sec 53]
The unpaid seller’s right of lien or stoppage in transit is not affected by any further sale or other
Seller’s right against the buyer in case of breach of contract (Sections 55 and 56)
disposition of the goods by the buyer.
For example, An oil merchant A sold 100 tins of oil to B without appropriating any particular oil Suit for the price
to the contract. B sold 60 tins out of it to C and gave delivery order addressed to A. C lodged the
delivery order with A requesting him to “await” his orders. Meanwhile B became insolvent and Where the property in the goods has passed to the buyer or he has wrongfully neglected or
thus A became the unpaid seller. A claiming his right of lien refused to make delivery to C. It was refused to pay for the goods according to the terms of the contract, the sellers may sue him for
held that A was entitled to do so. the price of goods. Further, where the price is payable under the contract on a certain day
However, the unpaid seller’s above right is subjected to the following two exceptions: irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller
(a) when the seller has assented to the sale, mortgage or other disposition of the goods made may sue him for the price even if the property in the goods has not passed and the goods have
by the buyer [Sub-Section (1)]. not been appropriated to the contract (Section 55).
(b) when a document of title to goods has been transferred to the buyer and the buyer Damages for non-acceptance
transfers the documents to a person who has bought goods in good faith and for value
(price). Where the buyer wrongfully neglects or refuses to accept and pay for the goods, then the seller
may sue him for damages for non-acceptance (Section 56).
Rights of Parties in Case of Breach of Contract
Buyer’s Right Against Seller In Case of Breach of Contract (Sec 57-59) Auction Sale
An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the
Suit for non-delivery property is sold to the highest bidder. An auctioneer is an agent governed by
1. Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer the Law of Agency. When he sells, he is only the agent of the seller. He may,
may sue the seller for damages for non-delivery [Section 57]. however, sell his own property as the principal and need not disclose the fact
2. Where there is an available market for the goods in question, prima facie the measure of that he is so selling.
damages would be contract price minus market price at the date of the breach. Under Section 64 of the Sale of Goods Act, 1930, in the case of an auction:
3. If, however, there is no such market, the measure of damage would be the estimated loss (a) Where goods are put for sale in lot, each lot is prima facie deemed to be subject matter
naturally resulting from the breach. of a separate contract of sale;
4. Thus, if the goods contracted for are not obtainable, then the purchaser may purchase (b) The sale is complete when the auctioneer announces its completion by the fall of
similar goods and may claim from the seller the difference in price. hammer or in any other customary manner and until such announcement is made, any
5. If he does not purchase such similar goods but has during the contract period settled bidder may retract from his bid;
contracts for the same kind of goods with other persons, the rates at which those contracts (c) Right to bid may be reserved expressly by or on behalf of the seller and where such a
were settled might afford a basis for ascertaining the damages. right is expressly reserved, but not otherwise, the seller or any one person on his behalf
6. Where, on breach of contract, the goods are irreplaceable in the market, the proper may bid at the auction;
measure of damages is the profits which the buyer would have made if the contract had (d) Where the sale if not notified to be subject to the right of the seller to bid, it shall not be
been carried out. lawful for the seller to bid himself or to employ any person to bid at such sale, or for the
auctioneer knowingly to take any bid from the seller or any person representing him. Any
Suit for specific performance [Section 58] sale contravening this rule may be treated as fraudulent by the buyer;
Where property has passed to the buyer, he also can exercise another right, viz., a right to sue (e) The sale may be notified to be subject to a reserve or upset price; and
for specific performance and its limits regulated by the Specific Relief Act, 1877. In such cases (f) If the seller makes use of pretended bidding to raise the price, the sale is voidable at the
the court may, in its discretion grant a decree ordering the seller to deliver those specific or option of the buyer.
ascertained goods which formed the subject-matter of the contract.
Suit for damages for Breach of warranty [Section 59]
Where there is a breach of warranty by the seller or where the buyer elects or is compelled to
treat any breach of condition on the part of the seller as a breach of warranty, the buyer is
entitled to reject the goods but the buyer may:
(a) set up against the seller the breach of warranty in diminution or extinction of the price; or
(b) sue the seller for the breach of warranty.
The measure of damage for breach of warranty is the estimated loss or damage arising directly
or naturally from the breach, which is prima facie the difference between the value of the goods
at the time of the delivery and the value they would have had, if the goods had answered to the
warranty.

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