What Are the Basics of a Limited Liability Partnership (LLP)?

Whether you notice them or not, limited liability partnerships are quite common. A lawyer
or accountant often will have the acronym LLP after a list of names, as in “Howser, Hunter &
Smith, LLP.”

LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by
working together while also reducing their liability for the actions of other partners. As with any
legal entity, it is important that you check the laws in your nation (and your state) before getting
too excited. In short, check with a lawyer first. The chances are good that they have firsthand
experience with an LLP.

Understanding the Basics of a Limited Liability Partnership (LLP)

Everything Is Better with Friends
To understand an LLP, it is best to start with the general partnership. A general partnership is a
for-profit entity that is created by a mutual understanding between two or more parties.

This is a very technical way of describing two or more people working together to make money.
A general partnership can be quite informal. All it takes is a shared interest, perhaps a written
contract (though not necessarily), and a handshake.

KEY TAKEAWAYS

• Limited liability partnerships (LLPs) allow for a partnership structure where each
partner’s liabilities are limited to the amount they put into the business.
• Having business partners means spreading the risk, leveraging individual skills and
expertise, and establishing a division of labor.
• Limited liability means that if the partnership fails, then creditors cannot go after a
partner’s personal assets or income.
• LLPs are common in professional business like law firms, accounting firms, and wealth
managers.
Of course, with the informal nature of a general partnership, there is a downside. The most
obvious risk is that of legal liability. In a general partnership, all partners share liability for any
issue that may arise.

For example, if Joan and Ted are partners in a cupcake venture and a bad batch results in people
getting sick, then they can both be personally sued for damages. For this reason, many people
quickly turn general partnerships into formal legal entities like a limited liability
company (LLC). An LLC, like JT’s Cupcake Factory, can stand in for Joan and Ted as a legal
entity and protect their personal assets from being part of any lawsuit.

A More Formal Partnership

In some professions, however, you need something a little more customized than an LLC with a
set structure. Enter the limited liability partnership (LLP). The LLP is a formal structure that
requires a written partnership agreement and usually comes with annual reporting requirements,
depending on your legal jurisdiction.1
As in a general partnership, all partners in an LLP can participate in the management of the
partnership. This is an important point because there is another type of partnership—a limited
partnership—in which one partner has all the power and most of the liability and the other
partners are silent but have a financial stake.1 With the shared management of an LLP, the
liability is also shared—although, as the name suggests, it is greatly limited.

Why an LLP?
Professionals who use LLPs tend to rely heavily on reputation. Most LLPs are created and
managed by a group of professionals who have a lot of experience and clients among them. By
pooling resources, the partners lower the costs of doing business while increasing the LLP’s
capacity for growth. They can share office space, employees, and so on. Most important,
reducing costs allows the partners to realize more profits from their activities than they could
individually.

The partners in an LLP may also have a number of junior partners in the firm who work for them
in the hopes of someday making full partner. These junior partners are paid a salary and often
have no stake or liability in the partnership. The important point is that they are designated
professionals who are qualified to do the work that the partners bring in.

This is another way that LLPs help the partners scale their operations. Junior partners and
employees take away the detail work and free up the partners to focus on bringing in new
business.

Another advantage of an LLP is the ability to bring partners in and let partners out. Because a
partnership agreement exists for an LLP, partners can be added or retired as outlined by the
agreement. This comes in handy, as the LLP can always add partners who bring existing
business with them. Usually, the decision to add requires approval from all of the existing
partners.

Overall, it is the flexibility of an LLP for a certain type of professional that makes it a superior
option to an LLC or other corporate entity. Like an LLC, the LLP is a flow-through entity for tax
purposes. This means that the partners receive untaxed profits and must pay the taxes
themselves. Both an LLC and an LLP are preferable to a corporation, which is taxed as an entity
and its shareholders taxed again on distributions.1

How Limited Is Limited Liability?

The actual details of an LLP depend on where you create it. In general, however, your personal
assets as a partner are protected from legal action.

Basically, the liability is limited in the sense that you may lose assets in the partnership, but not
those outside of it (your personal assets). The partnership is the first target for any lawsuit,
although a specific partner could be held liable if they personally did something wrong.
LLPs Around the World
LLPs exist in many countries, with varying degrees of divergence from the U.S. model. In most
countries, an LLP is a tax flow-through entity intended for professionals who all have an active
role in managing the partnership.

There is often a list of approved professions for LLPs, such as lawyers, accountants, consultants,
and architects. The liability protection also varies, but most countries’ LLPs protect individual
partners from the negligence of any other partner.

Structure of an LLP

A limited liability partnership is a separate legal entity from its members (partners), who are only
liable for the amount of money they invest, plus any personal guarantees. The partnership is
incorporated at Companies House, and can only be used by profit-making businesses.

Partners are required to provide a registered address for the business, and maintain a register of
members. There’s no restriction on the maximum number of partners allowed but there must be at
least two members on incorporation, either individuals or limited companies. It’s also possible to
set up an LLP with one individual and a dormant company.

Differences between an LLP and other business structures

Traditional partnerships do not receive the same protection as LLPs, and partners can be held
personally liable for debts incurred by the business if it is not incorporated into a LLP.
Additionally, clients engage in business with the partners individually rather than the partnership
as an entity.

Although limited liability partnerships and limited companies may appear to be similar at first
glance, there are significant differences between the two:

• Companies can be limited by guarantee, meaning non-profit organisations can use the
structure. LLPs, on the other hand, are solely for profit-making businesses.
• One person can set up a limited company and fulfil the role of shareholder and director. A
limited liability partnership must consist of at least two ‘designated’ members who take
responsibility for statutory filing and other legal requirements, but there can be an
unlimited number of ‘ordinary’ members.
• Limited companies pay corporation tax but members of limited liability partnerships
pay income tax through self-assessment.
• The internal structure of a limited company is inflexible, whereas that of an LLP can be
changed by its members.
• Limited companies can sell shares to secure capital investment, but limited liability
partnerships do not have shares.

Setting up a limited liability partnership

If you’re thinking of setting up an LLP, here are a few factors to consider:

Formulating an LLP agreement

The limited liability partnership agreement should set out how the business will operate, including
the profit-sharing arrangements, how disputes will be settled, and the responsibilities of members.

Incorporation

You need to choose a business name that is unique and not similar to any other business. A
registered address will need to be included on the incorporation document, as well as:

• Details of the designated members

• Details of other members
• The partnership’s main business activities
• A statement of compliance
• A register of People with Significant Control (PSC)

An LLP can be registered electronically, by post, or using a third party formations company.

Who owns the partnership and what are the partners’ responsibilities?

An LLP is owned by its members who have certain responsibilities, including acting in accordance
with the partnership agreement. Designated members take on additional responsibilities, which
include:

• Registering the partnership for self-assessment, and VAT if applicable

• Keeping proper accounting records
• Preparing and filing annual accounts and an annual confirmation statement with
Companies House
• Informing Companies House of any changes to the business, such as the registered office
or members’ details
• Appointing an auditor if required
• Acting on behalf of the LLP should it be dissolved or wound up

Advantages of forming a limited liability partnership

If you’re thinking of setting up a limited liability partnership, the structure offers a number of
advantages, including:

• Protection of personal assets via limited liability

• Flexibility in terms of management and how profits are shared
 • Members can be companies as well as individuals
• Different levels of membership – you can choose the level of your involvement in the
business
• The partnership can enter into contracts in its own name
• Tax benefits may be available

Are there any drawbacks to setting up an LLP?

• The partnership’s accounts and financial position are available for public view
• It can be costlier to set up an LLP when compared with a traditional partnership
• The administrative costs are generally higher than a ‘standard’ partnership due to additional
accounting and filing requirement.

What is Limited Liability Partnership?

LLP stands for Limited Liability Partnership. Limited liability

partnership definition – It is an alternative corporate business form that
offers the benefits of limited liability to the partners at low compliance
costs. It also allows the partners to organize their internal structure like
a traditional partnership. A limited liability partnership is a legal body,
liable for the full extent of its assets. The liability of the partners,
however, is limited. Hence, LLP is a hybrid between a company and a
partnership. It is not the same as limited liability company LLC.

Salient Features of Limited Liability Partnership

LLP is a body corporate

According to Section 3 of the Limited Liability Partnership Act 2008

(LLP Act), an LLP is a body corporate, formed and incorporated under
the Act. It is a legal entity separate from its partners.

Perpetual Succession
Unlike a general partnership firm, a limited liability partnership can
continue its existence even after the retirement, insanity, insolvency or
even death of one or more partners. Further, it can enter
into contracts and hold property in its name.

Separate Legal Entity

Just like a corporation or a company, it is a separate legal body. Further,

it is completely liable for its assets. Also, the liability of the partners has
certain limitations in their contribution to the LLP. Hence, the creditors
of the LLP are not the creditors of individual partners.

Mutual Agency

Another difference between an LLP and a partnership firm is that

independent or unauthorized actions of one partner do not make the
other partners liable. All partners are agents of the LLP and the actions
of one partner do not bind the others.

LLP Agreement

An agreement between all partners governs the rights and duties of all
the partners. Also, the partners can devise the agreement as per their
choice. If such an agreement is not made, then the Act governs the
mutual rights and duties of all partners.

Artificial Legal Person

For all legal purposes, LLP is an artificial legal person. A legal process
creates it and has all the rights of an individual. It is invisible,
intangible, and immortal but not fictitious since it exists.

Common Seal
If the partners decide, the LLP can have a common seal [Section 14(c)].
It is not mandatory though. However, if it decides to have a seal, then it
is necessary that the seal remains under the custody of a responsible
official. Further, the common seal can be affixed only in the presence of
at least two designated partners of the LLP.

Limited Liability

According to Section 26 of the Act, every partner is an agent of the LLP

for the purpose of the business of the entity. However, he is not an agent
of other partners. Further, the liability of each partner has limitations to
his agreed contribution to the LLP. It provides personal liability
protection to its partners.

Minimum and Maximum Number of Partners in an LLP

Every Limited Liability Partnerships must have at least two partners and
at least two individuals as designated partners. At any time, at least one
designated partner should be resident in India. There is no maximum
limit on the number of maximum partners in the entity.

Business Management and Business Structure

The partners of the LLP can manage their business. However, only the
designated partners are responsible for legal compliances.

Business for Profit Only

Limited Liability Partnerships cannot be formed for charitable or non-

profit purposes. It is essential that the entity is formed to carry on a
lawful business with a view to earning a profit.
Investigation

The power to investigate the affairs of an LLP resides with the Central
Government. Further, they can appoint a competent authority for the
same.

Compromise or Arrangement

Any compromise or arrangement like a merger or amalgamation needs

to be in accordance with the Act.

Conversion into LLP

A private company, firm, or an unlisted public company or a small

business can convert into an LLP in accordance with the provisions of
the Act.

E-Filing of Documents

If the entity is required to file any form/application/document, then it

needs to be filed in an electronic form on the website www.mca.gov.in.
Further, a partner or designated partner has to authenticate the same
using an electronic or digital signature.
Q: What are the advantages of an LLP?

Ans: Advantages of forming an LLP are as follows

• Organized
• Operates based on an agreement
• Offers flexibility without imposing detailed legal and procedural
requirements
• Easy to form
• Offers limited liability to all partners
• Has a flexible capital structure
• Is easy to dissolve

Q2. Explain Goods. What are essentials of Contract of sale? How it

is different from agreement to sell?
A. 2 Goods’ have been defined under Sec 2(7) of the Sale of Goods Act, 1930, to
include every kind of movable property, including stocks, shares, crops, grass,
severable objects, etc. It is supplemented by the definitions of movable and
immovable property under Sec 3(36) and Sec 3(26) of the General Clauses
Act, 1897.

Definition Of “Goods”
‘Goods’ is defined as per Section 2 (7) of the ‘Act’ as. “Every kind of movable
property other than actionable claims and money; and includes stock and
shares, growing crops, grass, and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale.”

Definition Of “Movable Property”

As per section 3(36) of the General Clauses Act 1897, “movable property” is
defined as “property of every description except immovable property.” Section
3(26) of the same Act reads as, “Immovable property shall include land, benefits
to arise out of land, and things attached to the earth, or permanently fastened
to anything attached to the earth.”
Hence, a conjoint reading of the two sections gives us a clear definition that
anything that is attached to the land maybe termed as “movable property”,
provided that there is an element of severability involved. The element of
severability is important while deciding on the nature of the property, and this
element can be established by ascertaining the nature of the property, intention
of the parties and the terms of the contract between them. For instance,
timber falls under the ambit of “goods” as per S.2(7) because timber trees are
severed from the land for the purpose of sale and hence they become a
commercial commodity.
In the case of Tata Consultancy Services v. State of Andhra Pradesh it was
held that property as per Sale of Goods Act means general property over the
goods and not merely a specific property. The usage of the word ‘includes’
further expands the definition, as it includes in the definition not only goods of
the prescribed nature but it also imports those things that are specifically
provided by the interpretation clause.
Difference Between The English Law And The Indian Law
In English law as per S. 61(1) of the Sale of Goods Act 1979, “goods” include
personal chattels which can be further divided into “choses in possession” and
“choses in action”. As per the English law only the former is included in the
definition of “goods” whereas the latter which include commodities like shares,
debentures, bills of exchange, and other negotiable instruments are excluded
from the definition as they all are actionable claims.On the other hand in India,
the definition as elucidated in S.2(7) is much wider in scope than the English
definition as it includes stocks and shares as within the scope of “goods”.
The following discussion primarily focuses on the point that whether certain
types of commodities can be included within the definition of “goods” or not.

• Electricity as “goods”: Inclusion of intangible energy within the definition

of goods
Electricity does not come under the definition of “goods” as per English
law.There have been judicial decisions in England where electricity has been
referred to as ‘thing’ and an ‘article’ and also as ‘tangible personal property’, but
there has been no judicial decision which includes electricity within the definition
of ‘goods’ for the purpose of Sale of Goods Act. Moreover, the legal possession
of electrical energy is a challenging proposition as “it is capable of being kept
or stored only by changing the physical or chemical state of other property
which is itself the subject of possession.”
In India however, the situation is quite different. In the Calcutta High Court case
of Associated Power Co. v. R.T. Roy it was held that electricity comes under
the ambit of ‘goods’ under the article 366 (12) of the Constitution as well as S.
2 (7) of the ‘Act’. This proposition was affirmed in a Madras High Court case
where the learned judge held that electricity was under the definition of ‘goods’
since it is capable of delivery, and it does not matter whether it is a tangible or
intangible form of energy. The Law Commission of India in its 8th report
proposed that electricity and water should be included in the definition of ‘goods’
under S. 2(7) of the ‘Act’. Meanwhile, the Supreme Court while discussing about
the definition of ‘goods’ as mentioned in the Madhya Pradesh Sales Tax Act (2
of 1959), found that the definition included all kinds of movable property. The
court further held that:

“The term “movable property” when considered with reference to “goods” as defined for
the purposes of sales tax cannot be taken in a narrow sense and merely because electric
energy is not tangible or cannot be moved or touched like, for instance, a piece of wood
or a book it cannot cease to be movable property when it has all the attributes of such
property……It can be transmitted, transferred, delivered, stored, possessed etc., in the
same way as any other movable property.”
However, Pollock & Mulla, in their commentaries, have expressed their
concerns over the applicability of the ‘Act’ for electricity because, there is no
contractual obligation on part of the public authority to supply ‘electricity’, rather
it is a statutory obligation on part of the authority providing these ‘goods’.The
supply of such commodities would not amount to a ‘sale’ for the purposes of the
‘Act’. As a result, any breach or failure on part of the public body to supply
electricity would be dependent upon the terms of the statute governing the
public body.
Thus, on one hand it can be said that ‘electricity’ comes under the definition of
‘goods’ however the applicability of the ‘Act’ in case of sale of electricity is a
dubious proposition.

• Exclusion of Lottery tickets from the definition of “goods”

As per Black’s Law Dictionary, ‘lottery’ is defined as ‘a chance for a prize for a
price’. For the purposes of the ‘Act’ lottery tickets are clearly a movable property,
however it has been a matter of debate that whether they are an actionable
claim as defined under S.3 of Transfer of Property Act, 1882.
In the Supreme Court case of H. Anraj v. Government of T.N.it was held that a
lottery ticket primarily involved two rights: (1) the right to participate in the draw
and (2) the right to win the prize, depending on chance. In that case it was held
that the former right was a “transfer of a beneficial interest in movable goods”
and hence was a sale within the meaning of Art 366 (29-A)(d) of the Constitution
whereas the latter right was a chose in action and thus not “goods” for the
purpose of levy of sales tax.

However, the ruling of this decision was challenged in a later Supreme Court
verdict of Sunrise Associates v. Government of NCT of Delhi. It was held that sale
of a lottery ticket amount to a sale of an actionable claim. The conclusion of the
Court was based on the reasoning that there was no difference between right
to win and right to participate in a lottery draw, as no purchaser pays the
consideration for a right to participate in the draw, instead he pays it for the right
to win.
Thus, the classification by H. Anraj case (supra) of the right to participate as
right in praesenti and the right to win as a right in futuro, was incorrect as both
these rights are in futuro. As a result the earlier judgment was overruled to that
extent and “lottery tickets” were excluded from the definition of “goods”.
• Conundrum surrounding Software programs
In the case of TCS v. State of Andhra Pradesh the Supreme Court held that
a software program on a CD or a floppy drive would be a “good” for the
purposes of levy of sales tax. A software program is a collection of
instructions or commands that are given to a computer to perform a given
task.The main area of debate is that “Do software programs – being
intellectual creations of human mind – be treated as “goods” for the
purposes of the ‘Act’ or not?”
One of the landmark cases in this regard was the case of St Albans City
and District Council v. International Computers Ltd where Sir Iain Glidewell
observed that a hardware device has no use of its own unless it is
supplemented with a software and it was only because of necessity that
software was contained in a physical medium like a disk or a floppy
furthermore, in case the disk is sold and there is a defect with the
program, then there would be a prima facie liability against the disk
manufacturer as well. Thus, he held that the tangible disk and the
software program both will be included within the definition of “goods”.
In the TCS case (supra) a special mention was given to ‘canned software’,
where it was held by the learned judge that once a software is uploaded
on a medium like a CD or a floppy drive, it ceases to be a work of
intellectual creation. This is primarily because each of these mediums
becomes a marketable commodity in itself.“Marketability” of a commodity
was the determining factor whether it is a “good” or not. It has also been
held that “operational software” which was uploaded on a hard-disk does
not lose its character as a tangible good.
 It has also been a matter of debate as to inclusion of computer software
within the definition of “goods” as defined in section 2 of the Uniform
Commercial Code, 1952. It is argued that since “custom designed”
computer software is a product of a labor intensive process and it must
be considered as a service rather than a good. However, sale of most of
the software programs resemble sales of any other consumer product
available for consumption, and it is usually sold through separate pre-
existing packages. On the other hand contracts for providing data
processing services have been held to be contracts for services rather
than contracts for “goods”.
With the help of the above discussion it is clear that despite of being an
intangible commodity, “computer software” can be included in the
definition of “goods” for the purposes of the ‘Act’.

• Exclusion of ‘Money’ from the definition

Money is specifically excluded from the definition of “goods” under S.2(7)
of the ‘Act’, because it is the medium of exchange used at the time of sale
of goods. Hence, money is not regarded as a “chattel but as something ‘sui
generis’”. However, a coin which was intended to be sold as an item of
curiosity will be said to be a “good”, as it was passed on as a commodity
and not as a currency.
Conclusion
Through the course of this research paper I have tried to identify some of the
major controversies surrounding certain commodities and their inclusion in the
definition of “goods” as per S.2(7) of the ‘Act’. The discussion helped to prove
that “electricity” (even being an intangible good) comes under the ambit of
goods, while on the same hand lottery tickets (being movable goods per se) are
excluded because they are “actionable claims”. This helps us to show that being
a movable property in itself is not a conclusive proof of being a “good”. Also, the
debate on software programs elucidated the importance on “marketability”
aspect of “goods”.

Hence, it evident that due to rapid developments in science and technology, the
definition of goods cannot be compartmentalized into straight jacket distinctions
and the scope of this section will expand over time.
Q3. Rights of Unpaid Seller. Explain?

A3. Rights of Unpaid Seller Against Goods

An unpaid seller has certain rights against the goods and the buyer. In this article, we
will refer to the sections of the Sale of Goods Act, 1930 and look at the rights of an
unpaid seller against goods namely rights of lien, rights of stoppage in transit etc.

Rights of Lien

Seller’s Lien (Section 47)

According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an unpaid
seller, who is in possession of the goods can retain their possession until payment.
This is possible in the following cases:

1. He sells the goods without any stipulation for credit

2. The goods are sold on credit but the credit term has expired.
3. The buyer becomes insolvent.
Subsection (2) specifies that the unpaid seller can exercise his right of lien
notwithstanding that he is in possession of the goods acting as an agent or bailee for
the buyer.

Part-delivery (Section 48)

Further, Section 48 states that if an unpaid seller makes part-delivery of the goods,
then he may exercise his right of lien on the remainder. This is valid unless there is an
agreement between the buyer and the seller for waiving the lien under part-delivery.

Termination of Lien (Section 49)

According to subsection (1) of Section 49 of the Sale of Goods Act, 1930, an unpaid
seller loses his lien:

• If he delivers the goods to a carrier or other bailee for transmission to the buyer
without reserving the right of disposal of the goods.
• When the buyer or his agent obtain possession of the goods lawfully.
• By waiver.
Further, subsection (2) states that an unpaid seller, who has a lien, does not lose his
lien by reason only that he has obtained a decree for the price of the goods.

Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means
that an unpaid seller has the right to stop the goods while they are in transit, regain
possession, and retain them till he receives the full price.

If an unpaid seller has parted with the possession of the goods and the buyer becomes
insolvent, then the seller can ask the carrier to return the goods back. This is subject
to the provisions of the Act.

Duration of Transit (Section 51)

Goods are in the course of transit from the time the seller delivers them to a carrier or
a bailee for transmission to the buyer until the buyer or his agent takes delivery of the
said goods.

Some scenarios of the transit ending:

• The buyer or his agent obtain delivery before the goods reach the destination. In
such cases, the transit ends once the delivery is obtained.
• Once the goods reach the destination and the carrier of bailee informs the buyer
or his agent that he holds the goods, then the transit ends.
• If the buyer refuses the goods and even the seller refuses to take them back the
transit is not at an end.
• In some cases, goods are delivered to a ship chartered by the buyer. Depending
on the case, it is determined that if the master is functioning as an agent or
carrier of the goods.
• If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer
or his agent, the transit ends.
• If a part-delivery of the goods has been made and the unpaid seller stops the
remaining goods in transit, then the transit ends for those goods. This is
provided that there is no agreement to give up the possession of all the goods.
How Stoppage is Affected (Section 52)
There are two ways of stopping the transit of goods:

1. The seller takes actual possession of the goods

2. If the goods are in the possession of a carrier or other bailee, then the seller
gives a notice of stoppage to him. On receiving the notice, the carrier or bailee
must re-deliver the goods to the seller. The seller bears the expenses of the re-
delivery.
Effect of Stoppage
Even if the unpaid seller exercises his right of stoppage in transit, the contract stays
valid. The buyer can ask for delivery of the goods after making the payment.

Right of Lien vs. Rights of Stoppage in Transit

Rights of Stoppage in
Right of Lien
Transit

Essence Retain possession Regain possession

The carrier or other

Who has the
bailee. The buyer
possession of the The seller.
should not have
goods?
received the goods.
 The right can be
Not a mandatory exercised only when
Buyer insolvent
requirement the buyer becomes
insolvent.

In simple words, the right of stoppage in transit begins when the right of
lien ends.

Pledge by the Buyer (Section 53)

Unless the seller agrees, the right of lien or stoppage is unaffected by the buyer
selling or pledging the goods. The principle is simple: the second buyer cannot be in
a better position that the seller (first buyer). However, if the buyer transfers the
document of title or pledges the goods to a sub-buyer in good faith and
for consideration, then the right of stoppage is defeated.

There are two exceptions to make note of:

a. The seller agrees to resale, mortgage or other disposition of the goods

If the seller agrees to the buyer selling, pledging or disposing of the goods in any
other way, then he loses his right to lien.

b. Transfer of the document of title of goods by the buyer

When the seller transfers the document of title of goods to the buyer and the buyer
further transfers it to another buyer who purchases the goods in good faith and for a
price, then:

• If the last mentioned transfer is by way of sale, the original seller’s right of lien
and stoppage is defeated.
• If the last mentioned transfer is by way of a pledge, the original seller’s right of
lien or stoppage can be executed subject to the rights of the pledgee.
Right of Resale (Section 54)

The right of resale is an important right for an unpaid seller. If he does not have this
right, then the right of lien and stoppage won’t make sense. An unpaid seller can
exercise his right of resale under the following conditions:

• Goods are perishable in nature: In such cases, the seller does not have to
inform the buyer of his intention of resale.
• Seller gives a notice to the buyer of his intention of resale: The buyer needs to
pay the price of the goods and ask for delivery within the time mentioned in the
notice. If he fails to do so, then the seller can resell the goods. He can also
recover the difference between the contract price and resale price if the latter is
lower. However, if the resale price is higher, then the seller keeps the profits.
• Unpaid seller resells the goods post exercising his right of lien or
stoppage: The subsequent buyer acquires a good title to the goods even if the
seller has not given a notice of resale to the original buyer.
• Resale where the right of resale is reserved in the contract of sale: If
the contract of sale specifies that the seller can resell the goods if the buyer
defaults, then the seller reserves his right of sale. He can claim damages from
the original buyer even if he does not give a notice of resale to him.
• Property in the goods has not passed to the buyer: The unpaid seller can
exercise his right of withholding delivery of goods. This is similar to the right
of lien and is called quasi-lien.

Q4. How contract of sale is performed ?

A4. The Sale of Goods Act 1930, was a part of the Indian Contract Act 1872 and got separated
from it on 1 July 1930. This was applicable for the whole of India except the state of Jammu and
Kashmir, but now it is also applicable on Jammu and Kashmir after it was declared as Indian
territory in 2019. Earlier in the period of 1930, The Sale of Goods Act was “The Indian Sale of
Goods Act” later in 1963 on 23 September the act was amended and named as “The Sale of Goods
Act 1930”. It is still applicable in India after being amended in 1963.
According to the Sales of Goods Act 1930, the performance of the contract of sale comes under
chapter IV from Section 31 to Section 44 it is described how the goods are being displaced and
how their possession are being transferred from one person to another voluntarily. There are
basically two parties for the agreement, one is the seller and the other one is the buyer. The seller
sells the goods and the buyer buys the goods. There are some criteria on the basis of selling and
buying which takes place, which we are going to discuss in this article.

Who is a seller

The definition of the seller is given in Section 2(13) of the Sale of Goods Act, 1930. The seller can
be defined as a person who agrees to sell goods.

Rights of the Seller (Section 31)

• He can reserve the rights of the goods until and unless payment of goods is done.
• He can assume that the buyer has accepted the goods or not.
• He will only deliver the goods when the buyer would apply for the delivery.
• He can make the goods delivered in instalments when so agreed by the buyer.
• He can have the possession of the goods until the buyer hasn’t paid for the goods.
• He can stop the delivery of goods and resume possession of the goods unless and until
the payment is done for the goods.
• He can resell the goods under certain conditions.
• He can bring the goods back if it is not delivered to the buyer.
• He can sue the buyer if the buyer fails to make the payment on a certain day, in terms
of the contract.

Duties of seller

• He should make an arrangement for the transfer of property to the buyer.

• He should check whether the goods are delivered properly or not.
• He should give a proper title to the goods which he has to pass to the buyer.
 • He should deliver the goods according to the terms of the agreement.
• He should ensure that the goods supplied should be agreed to the implied condition and
warranties.
• He should keep the goods in a deliverable state and deliver the goods when the buyer
asks for it.
• He should deliver the goods within a specific time fixed in the contract.
• He should bear all the expenses for which the good should be delivered.
• He should deliver the goods as said by the buyer in the contract in an agreed quantity.
• To deliver the goods in instalments only when the buyer wants.
• He should make arrangements for the goods while they are in the custody of the carrier.

Who is a buyer?

The definition of the buyer is given in Section 2(1) of the Sale of Goods Act, 1930. The buyer can
be defined as a person who buys goods from the seller.

Rights of the Buyer (Section 31)

• He should get the delivery of the goods as per contract.

• He can reject the goods if the quality and quantity are not as specified in the contract.
• To deny the contract when goods are delivered in instalments without any agreement to
the effects.
• The seller should inform him when the goods are to be sent by sea route, so that the
buyer may arrange for their insurance.
• He can examine the goods for checking whether they are in the agreement with the
contract.
• If he has already paid he can sue the seller for recovery of the price if the seller fails to
deliver the goods.
• He can also sue the seller for damages or the seller’s wrongful neglect or the seller
refuses to deliver the goods to the buyer.
• He can sue the seller for damages for breach of a warranty or for breach of a condition.
• He can sue the seller for the damages of breach of contract.
Duties of the Buyer

• He should accept the delivery of goods when the seller is prepared to make the delivery
as per the contract.
• To have possession on it he should pay the price for the goods as per the contract.
• He should apply for the delivery of the goods.
• He can ask to deliver the goods at a particular time.
• He should accept delivery of the goods in instalments and pay for it according to the
contract.
• He should bear the risk of failure of delivery of goods if the delivery point is a distant
place.
• He should pay the price on the transfer of possession of the goods as given in the term
of the contract.
• He has to pay for not accepting the goods.

Delivery

Section 33 of the Sale of Goods Act, 1930 defines delivery as a voluntary transfer of possession
from one person to another. It is also the process of transporting goods from a source location to a
predefined destination. Cargo (physical goods) are primarily delivered via roads and railroads on
land, shipping lanes on the sea and airline networks in the air.

The basic elements of delivery are:

• There must be two parties.

• One party out of those two parties should have the possession of the goods.
• One party should transfer possession to the other.
• This should be done voluntarily.

Mode of delivery
 • When the seller transfers the possession of the goods to the buyer or to a person who is
authorised on behalf of the buyer its called physical or actual delivery.
• If the actual delivery is not done and only the control of the goods is transferred, then it
is called symbolic delivery. In this case, neither physical nor symbolic delivery is made.
• In constructive delivery, the individual possessing the products recognizes that he holds
the merchandise for the benefit of, and at the disposal of the purchaser. Constructive
delivery is also called attornment.

Constructive delivery may be effected in the following three ways.

• Where the seller, after having sold the goods, agrees to hold them as bailee for the buyer
• Where the buyer, who is already in possession of the goods as bailee of the seller, holds
them as his own, after the sale, and
• Where a third party, for example, a carrier/transporter, who holds the goods, as bailee
for the seller, agrees and acknowledges holding them for the buyer.

Rules regarding delivery

• The delivery and payment of price are concurrent conditions unless the two parties
agree.
• If the intention of the seller is to deliver the goods in parts then the delivery is called a
valid delivery. But if goods are delivered in parts and the seller is not intending to
contract fully then there is a breach of contract.
• If a part-delivery of the goods is made in progress of the delivery of the whole, then it
has the same effect for the purpose of passing the property in such goods as the delivery
of the whole. However, a part-delivery with the intention of severing it from the whole
does not operate as the delivery of the remainder (Section 34).
• According to Section 35 of Sale of Goods Act 1930 unless there is a contract to the
contrary then the buyer must apply for delivery. But if it is mentioned in the contract
that the seller has to deliver the goods then the seller has to deliver without the
permission of the buyer.
• If no place is decided for the delivery of the goods that, they are to be delivered at a
place at which the seller and the buyer are in the time of sale.
 • There should be an appropriate time for the delivery.
• The expenses of delivery are to be carried out by the seller unless there is a contract to
the contrary.

If the seller delivers the wrong quantity of goods to the buyer then the following cases may take
place:

• If the quantity of goods is less as per the contract then the buyer can reject the goods.
• If the quantity of goods is more than that of contract than the buyer can keep the number
of goods as per the contract and reject the rest or he may also reject the total.
• If the goods ordered are mixed with the goods of different descriptions( i.e. goods with
a different title or different quality), the buyer may reject the goods or accept the goods.
• If there is no contract for the instalment delivery, the seller cannot force the buyer to
accept the instalment delivery.
• The buyer has the right to check and examine the goods.
• If the buyer once accepted the goods then he cannot reject the goods.
• If the buyer refuses to take the delivery then he would be responsible for it.

According to Section 36(3) of the Sale of Goods Act 1930, if at the time of delivery the goods are
in possession of a third party then there will be no delivery unless and until the third party tells the
buyer that the goods are being held on his behalf. This section would not create any impact on the
transfer of title of the goods.

Who is an Unpaid seller?

As defined by Section 45 of Sale of Goods Act, 1930, a person has sold some goods and has not
got the whole price and if the transaction is done through negotiable instruments like cheque, bill
of exchange and a promissory note, then the person can be said as an unpaid seller.

Illustration- If A is a seller and he delivers the goods to B and transfers the possession, and
if B hasn’t paid the sum then A becomes an unpaid seller.
Rights of an unpaid seller

Section 46 of the Sale of Goods Act 1930, discusses the rights of an unpaid seller. This can be of
two types:

• Against the goods – jus in rem ( right against property)

• Against the buyer – jus in personam (right against the person)

Right against the goods

• Right to a lien which means the seller has the right on the possession over the goods.
• Right to stoppage in transit which means the seller can call up the carrier transporter
and tell not to deliver the goods.
• Right to resale means the seller can again sell the goods as he has the possession of the
goods.

And the rights like the right to lien, the right to stoppage in transit and the right to resale are also
applicable for the agreement which is made for sale.

Rights against the buyer

• The seller has the right to sue the buyer for the price if the seller has already sold the
goods and the buyer hasn’t paid the sum.
• The seller has the right to sue for the damages, for e.g. if the seller has sent the carrier
for the delivery and the buyer isn’t available to receive the delivery and the goods
returned back by the carrier to the seller then he can sue the buyer for damages like the
packing of goods, transportation charges and so many.
 • If the buyer hasn’t paid the price of the goods to the seller after the delivery within a
stipulated time period as given the contract, then the seller can sue for the interest on
the buyer.

Q5. What is condition and warranty? Explain its differences.

A5. In a contract of sale, the subject matter is ‘goods’. There are millions of sale
transactions which occur in the normal course, all around the world. There are
certain provisions which need to be fulfilled because it is demanded by the
contract. These prerequisites can either be a condition and warranty.
The condition is the fundamental stipulation of the contract of sale
whereas Warranty is an additional stipulation. In other words, condition is the
arrangement, which should be present at the time of happening of another event.
Warranty is a written guarantee, issued to the buyer by the manufacturer or seller,
committing to repair or replace the product, if required, within specified time.
Check out this article, in which we have presented the difference between
condition and warranty in sale of goods act.

Content: Condition Vs Warranty

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

BASIS FOR
CONDITION WARRANTY
COMPARISON

Meaning A requirement or event that A warranty is an assurance

should be performed before given by the seller to the
the completion of another buyer about the state of the
action, is known as product, that the prescribed
Condition. facts are genuine.
 BASIS FOR
CONDITION WARRANTY
COMPARISON

Defined in Section 12 (2) of Indian Section 12 (3) of Indian Sale

Sale of Goods Act, 1930. of Goods Act, 1930.

What is it? It is directly associated It is a subsidiary provision

with the objective of the related to the object of the
contract. contract.

Result of breach Termination of contract. Claim damages for the

breach.

Violation Violation of condition can Violation of warranty does

be regarded as a violation not affect the condition.
of the warranty.

Remedy available to Repudiate the contract as Claim damages only.

the aggrieved party well as claim damages.
on breach

Definition of Condition

Certain terms, obligations, and provisions are imposed by the buyer and seller
while entering into a contract of sale, which needs to be satisfied, which are
commonly known as Conditions. The conditions are indispensable to the objective
of the contract. There are two types of conditions, in a contract of sale which are:
 • Expressed Condition: The conditions which are clearly defined and agreed
upon by the parties while entering into the contract.
• Implied Condition: The conditions which are not expressly provided, but as
per law, some conditions are supposed to be present at the time making the
contract. However, these conditions can be waived off through express
agreement. Some examples of implied conditions are:
o The condition relating to the title of goods.
o Condition concerning the quality and fitness of the goods.
o Condition as to wholesomeness.
o Sale by sample
o Sale by description.

Definition of Warranty

A warranty is a guarantee given by the seller to the buyer about the quality, fitness
and performance of the product. It is an assurance provided by the manufacturer to
the customer that the said facts about the goods are true and at its best. Many
times, if the warranty was given, proves false, and the product does not function as
described by the seller then remedies as a return or exchange are also available to
the buyer i.e. as stated in the contract.

A warranty can be for the lifetime or a limited period. It may be either expressed,
i.e., which is specifically defined or implied, which is not explicitly provided but
arises according to the nature of sale like:

• Warranty related to undisturbed possession of the buyer.

• The warranty that the goods are free of any charge.
• Disclosure of harmful nature of goods.
• Warranty as to quality and fitness

Key Differences Between Condition and Warranty

The following are the major differences between condition and warranty in
business law:

1. A condition is an obligation which requires being fulfilled before another

proposition takes place. A warranty is a surety given by the seller regarding
the state of the product.
2. The term condition is defined in section 12 (2) of the Indian Sale of Goods,
Act 1930 whereas warranty is defined in section 12 (3).
 3. The condition is vital to the theme of the contract while Warranty is
ancillary.
4. Breach of any condition may result in the termination of the contract while
the breach of warranty may not lead to the cancellation of the contract.
5. Violating a condition means violating a warranty too, but this is not the case
with warranty.
6. In the case of breach of condition, the innocent party has the right to rescind
the contract as well as a claim for damages. On the other hand, in breach of
warranty, the aggrieved party can only sue the other party for damages.

Conclusion

At the time of agreeing to the contract of sale, both the buyer and seller puts some
stipulations regarding payment, delivery, quality, quantity, etc. These stipulations
can be either condition or warranty, which depends on the nature of the contract.
Every contract of sale has some implied conditions and warranties.

The Principle of Caveat Emptor deals with the implied conditions and warranties.
The term caveat emptor refers, ‘let the buyer beware’ i.e. it is not the duty of the
seller to reveal all the defects in the goods and so he should not be held responsible
for the same. The buyer should satisfy himself completely before purchasing a
product. However, there are certain exceptions to this rule.