Contract Law (Law College)

BBA-15
Vardhaman Mahaveer Open University, Kota
Legal Aspects of Business

BBA-15
Vardhaman Mahaveer Open University, Kota
CONTENTS
Legal Aspects of Business
Unit No. Name of Unit
Unit - 1 Meaning and Essential of Contract
Unit - 2 (Proposal) Offer and Acceptance
Unit - 3 Capacities of Parties
Unit - 4 Consideration
Unit - 5 Free Consent
Unit - 6 Legality of object and Consideration and Agreements
Opposed to Public Policy
Unit - 7 Void Agreement and Contingent Contract
Unit - 8 Performance of a Contract
Unit - 9 Discharge of a Contract
Unit - 10 Remedies for Breach of Contract
Unit - 11 The Sale of Goods Act, 1930 (I)
Unit - 12 The Sale Of Goods Act, 1930 (II)
Unit - 13 The Negotiable Instruments Act, 1881 (Part – I)
Unit - 14 The Negotiable Instruments Act, 1881 (Part – II)
Unit - 15 Introduction to the Companies Act
Unit - 16 Consumer Protection Act

Unit - 1 : Meaning and Essential of Contract
Structure of Unit:
1.0 Objectives
1.1 Introduction
1.2 Sources of Mercantile Law
1.3 Introduction of Indian Contract Act
1.4 Important Facts About Indian Contract Act
1.5 Definition of Contract
1.6 Related Terminology
1.7 Distinguish Between Agreement and Contract
1.8 Essentials of Contract
1.9 Classification of Contract and Agreement
1.10 Distinguish Between Contract and Void Agreement
1.11 Distinguish Between Void Agreement and Void Contract
1.12 Distinguish Between Void Contract and Voidable Contract
1.13 Distinguish Between Void Agreement and Illegal Agreement
1.14 Distinguish Between Executed and Executory Contract
1.15 Summary
1.16 Self Assessment Questions
1.17 Reference Books
1.0 Objectives
After studying this unit you will learn
 Meaning and Importance of law
 Meaning and sources of Mercantile law
 Important facts about Indian Contract Act
 Formation of Indian Contract Act
 Definition and essentials of Contract
 Different types of agreement & contraDistinguish between various types of agreement
1.1 Introduction
“Ignorantia juris non excusat” or “ignorantia legis neminem excusat” this maxima stands for “ignorance
of the law does not excuse” or “ignorance of the law excuses no one” is a legal principle holding that a
person who is unaware of a law may not escape liability for violating that law merely because he or she was
unaware of its content. Therefore, every person must be aware about the laws in which he deals with.
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior.
Laws are made by governments, specifically by their legislatures. The formation of laws themselves may be
influenced by a constitution (written or unwritten) and the rights encoded therein. The law shapes politics,
economics and society in countless ways and serves as a social mediator of relations between people.
Thus, the term law refers to the rules of conduct recognized and enforced by the state of control and
regulate the conduct of people, to protect their property and contractual rights in order to secure justice and
equality in the society.
According to Salmond “Law is the body of principles recognized and applied by the state in administration
of justice.”
According to Austin”A Law is a rule of conduct imposed and enforced by sovereign.”
Mercantile law may be defined as a set of rules enforced to govern and regulate business. It is a branch of
civil law which deals with the mercantile transactions. It includes law relating to contracts, sale of goods,
companies, partnership, insurance, negotiable instruments, arbitration etc.
According Prof.M.C.Shukla”Mercantile law may be defined as the branch of law which deals with the
rights and obligations of mercantile persons,”
1.2 Sources of Mercantile Law

The major source of mercantile law in India is English Common Law. The provisions of English law has
adapted with required modification as per the conditions prevailing in India.
1. English Common Law :It is the foundation on which the super structure of the of the Indian
Contract Act has been built.
2. Indian Statute Law: the various act passed by Indian legislatures such as The Negotiable Instruments
Act,1881, The Indian Partnership Act,1932, the Sale of Goods Act,1930, are the main source of
the law of contract in India.
3. Judicial Decisions: It usually referred to as precedents and are binding on all course. Whenever
an act is silent on a particular point or there is ambiguity, The judges have to decide the case on the
basis of principle of justice, equity and good conscience.
4. Customs and Usage: The customary in a trade govern the merchants of that trade while dealing
with each other . These are providing guidelines to the courts in deciding the disputes arises .Some
of them have been recognize by the law of the contract.
The main sources of Indian mercantile law shown in Fig 1.1
1.3 Introduction of Indian Contract Act

The Law of Contract constitutes the most important branch of mercantile or commercial law. It affects
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation of the
civilized world.
The law relating to contracts in India is contained in Indian Contract Act, 1872. It came into force from
September, 1872. It is applicable to All the States of India except the State of Jammu & Kashmir.1 It
determines the circumstances in which promise made by the parties to a contract shall be legally binding
on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract
creates some right and duties upon the contracting parties. Indian Contract deals with the enforcement of
these rights and duties upon the parties in India.
1. The State of Jammu & Kashmir enjoys a special status under Article – 370 of Indian Constitution.
The Act as enacted originally had 266 Sections, it had wide scope and included.
Table – 1 .1
Provi sio ns Sectio n
General Principl es of Law o f Cont ract 1 to 75
Cont ract relati ng t o Sale of Goo ds 76 t o 1 29
Special ki nds of Co ntracts 125 to 238

(inclu des ind emnit y, guarantee, bai lment &
pl edg e)
Cont racts relat ing to Partnership 239 to 266
Indian Contract Act embodied the simple and elementary rules relating to Sale of goods and partnership.
The developments of modern business world found the provisions contained in the Indian Contract Act
inadequate to deal with the new regulations or give effect to the new principles. Subsequently the provisions
relating to the sale of goods and partnership contained in the Indian Contract Act were repealed respectively
in the year 1930 and 1932 and new enactments namely Sale of Goods and Movables Act 1930 and Indian
Partnership act 1932 were re-enacted.
At present the Indian Contract Act includes:
Table – 1 .2
Pro visi ons Sectio n
Gen eral Princi ples of Law of Cont ract 1 t o 75
Sp ecial kind s of Cont ract s

125 to 238
(includ es indemnity, guarantee, bail ment &
pledge)
1.4 Important Facts About Indian Contract Act

1. Rights Available to Parties Under Indian Contract Act: Generally the rights available to a
person are:
a. Rights in Rem (Jus in Rem): A right in rem is available against the world at large. This right
protects interest against the world and there is a duty upon every person of the world not to interfere
with other’s rights. It is available against an open or indefinite class of persons. The freedoms given
in article 19 of the Indian constitution with its restrictions are the rights in rem.
Example: X has a house. The people of the world have a duty not to interfere with his ownership.
Nobody has right to disturb his possession
I have money in my pocket. I can use my money as like. The world at large has no right to interfere
with my possession.
b. Rights in Personam (Jus in Personam): A right in personam is available only against a particular
person or party. This right protects an interest solely against determinate individuals and duty imposed
upon determinate individuals. Indian Contract Act, 1872 provides right in personam to the parties
who enters in to the contract thus, the parties to the contract can exercise their contractual rights
against each other only.
Example: X let his house to Z-tenant. X has a right to receive rent from his tenant. This right to
receive rent from his tenant. is a right in personam. The rest of the world is not concerned with this
right.
2. Assumptions: a. There shall be freedom to the parties to the contract to determine their rights and
obligations under contract and law shall enforce only what the parties have agreed to be bound
subject to certain limited principles.
b. Rights and obligations created by parties shall be performed and their non performance shall
give rise to legal consequences .
3. Law of Contract is Not the Whole Law of Agreements: The law of contract is concerned only
with only those agreements which contains all essentials under section10 and where the parties have
intension to create legal obligation thus the law of contract does not covers all agreements such as
social, political, religious and other agreements without legal intensions.
4. The Law of Contract is Not the Whole Law of Obligation: The Indian contract act shall not lay
down absolute rights and obligations of the contracting parties. It enforce only those obligations
which are agreed by the parties under a contract i.e. contractual obligation. Thus it is not concerned
with obligations arises by the statutes, torts or judgment of courts.
5. It Has No Retrospective Effect: The law of the contract enacted as on 1 sep.1872, and applies
only on those contracts which are formed as on 1sep.1872 or after it. It does not have retrospective
effect therefore, does not enforce those contract which are formed prior to 1sep.1872.
1.5 Definition of Contract

Salmon defines contact as “An agreement creating and defining obligation between agreement as the parties“
Sir Federick Pollock defines it as “Every agreement and promise enforceable at law is a contract.”
Section 2(h) of the Act defines the term contract as “an agreement enforceable by law is a contract”. The
definition resolves that a contract is fundamentally an agreement that binds the parties legally, thus,
Contract = Agreement + Enforceability
1.6 Related Terminology

1. Agreement: An agreement occurs when two minds meet upon a common purpose, i.e. they mean
the same thing in the same sense at the same time. The meeting of the minds is called consensus-ad-
idem, i.e., consent to the matter.
Section 2(e) defines the term ‘agreement’ as “Every promise and every set of promise, forming the
consideration for each other”
In other words, an agreement consist of an offer by one party and its acceptance by the other party
whom the offer was made
Thus, Agreement = Offer + Acceptance
2. Offer : Section 2 (a) defines proposal (offer) as “When one person signifies to another his willingness
to do or to abstain from doing something with a view to obtain the assent of that other to such act or
abstinence, he is said to make a proposal.”
3. Promise: Section 2 (b) defines “a proposal (offer) when accepted becomes a promise.” Thus an
accepted offer is a promise.
4. Acceptance: Se ction 2(b) “when the person to whom the offer is made signifies his assent there
to, the proposal is said to be accepted.”
5. Enforceability: Enforceability means creation of some legal obligations! An agreement is said to
be enforceable only after complying all the requirements under section 10 of Indian contract act and
only those agreements called contracts which have enforceability.
However, there may be certain agreements which do not converts into contracts as there may be
absence of one or more essentials as prescribed under section 10. Such agreement neither creates
any contractual rights nor obligations on the parties.
It is said that all agreements are not contract but on the other hand all contracts are agreement
because every contract contains agreement as well as all essentials as required by the Indian contract
Act. Agreement is the basis for every contract as Section 2(h) revels that “a contract is an agreement
enforceable by law.” therefore every contract is an agreement two but every agreement need not be
contract necessarily. as there may be lack of any essential and due to absence of essential it remains
an agreement.
For example agreement between the family members, are remains agreement as there is no legal
intention., similarly agreement by incompetent person cannot be converted into contract because
the agreement by incompetent person are void under The Indian Contract Act.
1.7 Distinguish Between Agreement and Contract

An agreement differs from a contract in the following respects:
Table – 1 .3
Basi s Agreement Co ntract
1. D efin at ion Every prom ise and set o f An agreement en fo rceable by
co nsi derat ion for each ot her is Law is a cont ract.
an ag reement.
Offer and its acceptance

2. Form ation Co nstitute an agreem en t. Ag reement and it s
enforceability const it ute a
co ntract.
An agreement may o f m ay no t
3. L eg al obligat ion create a legal o bli gat io n. A cont ract necessari ly create a
l eg al obligat ion.
Every agreement need n ot
4. O ne in o ther necessar ily be a co ntract . Al l con tract s are necess ari ly
agreement s.
Sco pe of ag reement is wid er
5. Scop e as it covers all types o f Scope of co ntract is narrow in
ag reement as wal l as contract . co mpariso n to ag reement as it
co vers o nly those agreement
wh ich are en fo rceable.
1.8 Essentials of Contract
According to Section 10, “All agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly
declared to be void”. The analysis of section 10 and section 2(b) reveals that an agreement must have
certain essential elements to constitute contract. The essential elements of a valid contract are:
1. Two Parties: To constitute a contract there must be at least two parties. i.e. one party making an
offer (offerer / proposar) and the other party accepting the offer (offeree / proposee). The terms of
the offer must be definite.
2. Agreement: A contract is initially an agreement when person whom the offer has given signifies his
acceptance on it there arises an agreement which is the foundation of a contract.
3. Consent: There must be consensus-ad-idem (meeting of minds) to constitute a valid contract unity
of minds i.e. consensus-ad-idem means that the parties must agree to the same thing in the same
sense and at the same time. An agreement without consent is void.
4. Intention to Create Legal Relationship: There must be an intention by both parties to create
legal relationship and to legally bind themselves as a result of such agreement. Thus, agreements of
social or household nature are not contracts, as the usual presumption is that the parties do not
intend to create legal relationship unless otherwise agreed upon. However, in case of commercial
transaction the usual presumption is that parties intend to create legal relationship.
5. Contractual Capacity: The parties to the agreement must be capable of entering into a valid
contract. According to Section 11, every person is competent to contract if he or she,
a. is of the age of majority;
b. is of sound mind; and
c. is not disqualified from contracting by any law to which he/she is subject.
6. Consideration: An agreement by incompetent person is void. A valid contract must be supported
by consideration. Consideration means “something in return” (quid pro quo). It can be cash, kind,
an act or abstinence. It can be past, present or future. However, consideration must be real and
lawful. An agreement without consideration is void however, it need not to be adequate. if parties
are agreed in it.
7. Free consent: The parties are said to be on consent when they are agreed upon the same thing in
the same sense, in addition to it, to constitute a valid contract there must be free and genuine
consent of the parties to the contract. consent is said to be free if it must not be obtained by
misrepresentation, fraud, coercion, undue influence or mistake. It the consent is not free, the contract
becomes voidable.
8. Lawful Object and Consideration: The object as well as consideration of the Contract must not
be unlawful. According to Section 23, the consideration or object of an agreement is un lawful, if
• It is forbidden by law; or
• it Is of such nature that, if permitted it would defeat the provisions of any law or
· It is fraudulent; or
• it Involves or implies, injury to the person or property of another; or
• The court regards it as immoral, or
· it is opposed to public policy.
9. Agreement Not Declared Void: Under the provisions of Indian Contract Act, 1872 certain
agreement are expressly declared as void. Agreements which have been expressly declared
void are not enforceable at law; hence does not constitute a valid contract. For example agreement
of wager, agreement in restraint of trade and marriage.
10. Certainty of Meaning: The terms of agreement must be certain and not vague. It must be
either certain or be certained at the time of execution. If it is not possible to ascertain the meaning of
the agreement, it is not enforceable at law.
11. Possibility to Perform: The promises made under a valid contract must be executable. An agreement
to do some impossible act is void from the beginning and never converted into contract.
12. Legal Formalities: Although Indian contract Act does not provide any formality to enter into
contract therefore a contract may be express (oral or written) or even implied (by conduct). However,
where the law requires for a particular contract, it must comply with all the legal formalities such as
in writing, registration and attestation.
a. For example under the provisions of Immovable Properties Act, a contract of immovable
must be written, registered and duly stamped and unless not enforceable by law.
1.T wo parties
12.L egal 2.Agreement

formali ties
3 Intentiont o
11.Possibility to c rea te legal
perf or m relations hip
Esse n ti als
10.Certanity of of a Va lid 4.Contractua l
meaning Capacit y
off er
9.Agreement not 5.Contr ac tual

declaredvoid Capacity
8.Lawful object
and 6.Consider ation
cons ideration
7.Free Consent
Figure - 1.1
1.9 Classification of Contract and Agreement
CLASSIFICATION OF
CONTRACTS
On the basis of On the basis of On the basis of

Enforceability Formation Performance
Fi gure 1. 2
I. Contract I. Express contract I. Executed contract
II. Void agreement II. Tacit contract II. Executory contract
III. Contract III. Implied/Quasi Contracts
IV. Void contract a) Unilateral contract
V. Un enforceable Contract b) Bilateral contract
VI. Illegal Agreement
I. On The Basis of Enforceability: Contract: [Section 2 (b)] “A contract is an agreement
enforceable by law” an agreement becomes contract if it has all the essential elements of a contract.
A valid contract can be enforced by law.
Example: X offers Y to supply 10 bags of rice for Rs. 50000/- Y agreed for it, it is a contract.
Void Agreement: Section 2 (g) “An agreement not enforceable by law is said to be void.” Such
agreement does not confer any right to any of the parties to it. An agreement becomes void due
to absence of one or more essentials under section 10. The agreement, in such a case, is void-
ab-initio (void from the very beginning) and can never converts contract. Such an agreement
does not result in a contract at all.
Example X offers Y a minor to deliver 100 bags of rice. Y agrees but further not supplied the
rice. Here X cannot sue Y as Y is minor.
Voidable Contract [Section 2(i)]: “An agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option of other or others, is a voidable
contract”. It is a contract where in, the law confers right on the aggrieved party either to reject
the contract or to accept it. However, the contract continues to be valid and enforceable unless it
is repudiated by the aggrieved party.
Example: A Threatens B to murder if he does not sell his land for Rs. 100000/- B agreed for it
due to threat. It is a voidable contract which can be rejected by B.
1. Void Contract [Section 2(j)]: “A void contract is a contract which ceases to be enforceable by
law”. A contract which was valid at the time of formation and binding on the parties however,
subsequently become void, due to impossibility to perform is said to be void contract.
Example X a famous singer agrees to sing an album for a musical company. Unfortunately suffered
from throat cancer and not allowed to sing by doctor. Here the contract becomes void contract.
2. Unenforceable Contract: Where a contract is good in substance but becomes unenforceable
due to some technical defect and cannot be enforced by law is called unenforceable contract.
These contracts becomes enforceable when these technical defects (legal formalities) are completed.
Example A draw a promissory note without stamp it is not enforceable but further after one week a
come to know about the mistake and stamped it become enforceable.
3. Illegal Agreement: When the object and consideration of an agreement is unlawful it is said to
be illegal agreement, such an agreement is void. The object and consideration is said to be unlawful
if (a) it is forbidden by law; or (b) is of such nature that, if permitted, would defeat the provisions of
any law or (c) is fraudulent; or (d) involves or implies injury to a person or property of another, or
(e) court regards it as immoral (f) opposed to public policy.
These agreements are punishable by law and are void-ab-initio.
Example X agrees to paid Rs. 100000/- to Y to murdered Z it is an illegal agreement as it is injurious
to Z and forbidden under I.P.C.
“All illegal agreements are void because an illegal agreement is not enforceable by law
but all void agreements are not illegal,” as it is not necessary that object and consideration
of every agreement is unlawful.
II. On the Basis of Formation:
1. Express Contract: Where the terms of the contract are expressly agreed upon in words (written
or spoken) at the time of formation, the contract is said to be express contract.
2. Implied Contract: An implied contract is one which is inferred from the acts or conduct of the
parties or from the circumstances of the cases. Where a proposal and acceptance is made otherwise
than in words, it is said to be implied contract.
3. Quasi Contracts: A quasi contract is created by law on the basis of principal of equity. There,
is no intention of parties to enter into a contract. It is legal obligation which is imposed on a party
and is required to perform it. A quasi contract is based on the principle on equity which states that
a person shall not be allowed to enrich himself at the cost of another. A quasi contract is a contract
imposed by law.
III. On the Basis of Execution: Executed contract: when both of the parties to contract have
preformed their contractual obligation and nothing remains to be performed it is said to be executory.
It is a contract in which both the parties have performed their respective obligation.
1. Executory Contract: An executory contract is one where one or both the parties to the contract
have to perform their obligations in future. Thus, a contract which is partially performed or wholly
unperformed is termed as executory contract.
It is of two types:
a) Unilateral Contract: A unilateral contract is one in which only one party has to perform his
obligation after formation of the contract and the other party have fulfilled his obligation at the
time of the contract or before the contract comes into existence.
b) Bilateral Contract: A bilateral contract is one in which the obligation of both the parties to
the contract is outstanding. In other words when both of parties have still to perform their
obligation it is known as bi lateral contract. Bilateral contracts are also known as contracts
with executory consideration.
1.10 Distinguish Between Contract and Void Agreement

Table – 1. 4
Basi s Contract V oid Agreement
1. D efin it ion An agreement en fo rceable by A n agreement no t enforceab le
law is a co ntract. by law is vo id agreement.
2. L eg al Exi stence It exis t i n the eyes o f law. It does not ex ist in t he eyes of
law.
3. E ssent ials It cons ist s all essenti als of val id It does not co nsist s all es sent ials
co ntract. o f valid contract.
4. E nforceable It is enfo rceable b y law. It is not en forceable by law.
5. D am ag es Damages can be clai med in cas e N o damages fo r non
Of non p erform ance. p erforman ce.
1.11 Distinguish Between Void Agreement and Void Contract
Table – 1 .5
Basis Void Ag reement Vo id Contract
1. D efin ition An agreement not en forceable A co ntract which ceases to be
By law is said to be void. [Sect.2 9E nfo rceable b y law becomes vo id
(g)] When it ceases to be enforceable
[Sec. 2 (j)].
2. V oid From begin ning It is void from very beg inn ing. It is v alid in the beg inn ing, it
Beco mes void sub sequently d ue to change in law
o r chang e in circumstances.
3. Restitu tio n Generally no restitution is granted Restitution
, Ho wever,may b e g ranted
the b y court may on When the contract is d iscover to
Equitable gro unds gran t rest - Be vo id.
itu tio n in case o f fraud or mis-
Representation by mino rs .
4. Causes An agreement beco mes vo id It beco mes vo id d ue to imp oss ibility
Due to absence o f one or more T o perfo rm.
Essentials.
1.12 Distinguish Between Void Contract and Voidable Contract
Table – 1 .6
Basi s of dis tinction Void contract Vo idable contract
1. D efin ition A cont ract which ceas es to be A co ntract which is en fo rceable
Enforceabl e by law beco me vo id,By law at the op tio n of th e
When it ceases to be en forceable.agg rieved party is a vo idable
co ntract .
2. Period of valid ity It remains valid till it do es no t It rem ains valid til l aggrieved party
Cease to enfo rceable. Av oid it.
3. O ptio n to the p arty There is no opt ion with the p art y Its valid ity depends upo n the w ill o f
To m ak e it enforceable or not T he ag grieved party. Aggriev ed party
has to treat it either valid or vo id
4. Causes Co ntracts b ecom e void becau se itContract is vo idab le when the
Becom es im pos sible to perform Consent o f t he party is no t free,
Due to chan ge in circum stances So metim es, it m ay be vo idable
Or in the law o f t he land. under th e provisions of th e
Secs. 3 9,53, and 55
1.13 Distinguish Between Void Agreement and Illegal Agreement

T ab le – 1 .7
B asi s V oid A g re em e nt I llega l A gr ee m en t
1. D efin it ion A n a gr ee ment not en forc ea ble A n ag ree m e nt w h ich is
by la w is vo id exp re ss ly o r im pli ed ly pro hibit ed
b y law . is il legal.
2. E ffe ct o n c ollat eral A n a gr ee ment co lla tera l t o theA n a gre em ent w hich is c ollat eral to an il legal
a gre ement V oid ag ree m en t is not agree me nt is al w ays vo id.
N e cess ari ly vo id.
3. S c op e The scop e i s w id er tha n t hat o f E very void agree m ent is no t il legal t hus,
The i lle ga l agreem e nts . B e ca us e It
e ve
s sc
ryop
i llegal
e is na rrow .
ev ery ill eg al ag reem e nt is
void a lso .
4. R e st itu tio n The court ma y grant res tit utio n R est itut ion of mo ne y is not grante d i n
O n t he basis of eq uit y C ase of a n i llegal a gre ement .
5. P un ish ment T her e is no puni shm e nt for vo id The pa rties t o a n illegal ag re ement are
A g re ement . Pu nis hable as per t he law of count ry
1.14 Distinguish Between Executed and Executory Contract
Table – 1 .8
Basi s Ex ecuted contra ct Executo ry contract
1. P erformance It su ch co ntract p erfo rmance It perfo rmance of both or
Of both parties are fulfilled. At least one party remai ns.
2. Oblig ations There remains no cont ractu al T here remain s legal obl igatio ns
Obligatio ns as p arties have For t he part ies.
Fu lfil led th eir promises.
3. D ischarge The parties are di scharg e T he part ies are not disch arged
Fro m cont ract. and can be sued.
1.15 Summary
“Law is the body of principles recognized and applied by the state in administration of justice.” Salmond
“A Law is a rule of conduct imposed and enforced by sovereign.” Austin
Mercantile law may be defined as a set of rules enforced to govern and regulate business. It is a branch
of civil law which deals with the mercantile transactions. It includes law relating to contracts, sale of
goods, companies, partnership, insurance, negotiable instruments, arbitration etc.
The major source of mercantile law in India is English Common Law, Indian Statute Law, judicial
decisions ,customs and usage . The Indian Contract Act provides right in personam ,thus ,only parties to
the contract can sue each other for enforcement of contract .
The law relating to contracts in India is contained in Indian Contract Act, 1872. It came into force from
September, 1872. It is applicable to All the States of India except the State of Jammu & Kashmir.1 It
determines the circumstances in which promise made by the parties to a contract shall be legally binding
on them. Section 2(h) of the Act defines the term contract as “an agreement enforceable by law is a
contract”. The definition resolves that a contract is fundamentally an agreement that binds the parties
legally, thus,
Contract = Agreement + Enforceability .The essential elements of a valid contract are: two parties
,agreement ,consent ,Intention to create legal relations ,contractual capacity ,lawful object and
consideration ,free consent ,certainty of meaning ,possibility to perform andfulfillment of legal formalities
.contract may be classified as
I. Contract I. Express contract I. Executed contract
II. Void agreement II. Tacit contract II. Executory contract
III. Contract III. Implied/Quasi Contracts
IV. Void contract a) Unilateral contract
V. Un enforceable Contract b) Bilateral contract
VI. Illegal Agreement

I-Very Short Type Question:-
1. Define Agreement.
2. Define Contract.
3 what is enforceability of an agreement?
4 what is the usual presumption in social or domestic agreement ?
5 what is the usual presumption in commercial or business agreements?
6 what is an ‘Express Contract’?
7 what is an ‘Implied Contract’?
8 Define ‘Executed Contract’.
9 Define ‘Executory Contract’.
10 what is meant by ‘Partly Executed and Partly Executory Contract?
11 what is meant by a Valid Contract?
12 Define ‘Void Contract’.
13 Define Void Agreement’.
14 what is voidable Contract’.
15 What is illegal Agreement?
16 What is ‘Unenforceable Contract’?
II-Short Type Question
1 Enumerate the essential of a valid contract.
2 Distinguish between the following:
(a) Implied Contract and Express Contract
(b) Executory Contract and Executed Contract
(c) Void Contract and Voidable Contract
(d) Void Contract and Void Agreement
(e) Void Agreement and Illegal Agreement
3. Comment on the following statement:
(a) All contract are agreements but all agreement are not contracts.
(b) In commercial and business agreement the presumption is that the parties intend to create
legal relations.
4 What do you mean by ‘ consensus ad idem’ ?
5 what is meant by jus in rem and jus in personam.
6 A voidable contract is valid till the aggrieved party opts to avoid it. Explain.
7 All illegal agreements are void but all void are not illegal.”Explain.
8 When does Indian Contract Act came into force ?
9 What is the extent of Indian Contract Act , 1872 ?
10 The provisions of Indian Contract Act does not applies on the contract made prior to first September
1872. Explain.
III-Essay Type Question
1 Define contract and describe essential elements of a valid contract.
2 “All contract are agreement but all agreement are not contract” Explain the statement and explain
the essentials of valid contract .
3 “An agreement enforceable by law is a contract “ Explain the statement and describe the essentials
under section 10 of Indian Contract Act, 1872.

Unit - 2 : (Proposal) Offer and Acceptance
Structure of Unit:
2.0 Objective
2.1 Introduction
2.2 Related Terms
2.3 Essentials of a Valid Offer
2.4 Intention to Put an Offer Invitation to Put an Offer
2.5 Type of Offers
2.6 Acceptance
2.7 Who Can Give Acceptance
2.8 Essential of Valid Acceptance
2.9 Effects of Acceptance
2.10 Communication of Offer and Acceptance
2.11 Lapse and Revocation of Offer
2.12 Summary
2.0 Objective
After studying this unit you would be able to understand:
 What is the valid Offer & Acceptance
 What are the prerequisites of a valid Offer & Acceptance
 Distinguish between Offer and Invitation to offer
 What are the various types of Offer
 What are the effects of valid Acceptance
 What are the rules regarding communication and revocation of Offer and Acceptance
 What are the various modes of revocation
2.1 Introduction
Offer is one of the essential elements of a contract it is the foundation of contract on which a contract
formed.
Proposal is defined under section 2(a) of the Indian contract Act, 1872 as “when one person signifies to
another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other
to such act of abstinence, he is said to make a proposal/offer”. Thus, for a valid offer, the party making it
must express his willingness to do or not to do something. But mere expression of willingness does not
constitute an offer. An offer should be made to obtain the assent of the other. The offer should be communicated
to the offeree and is should not contain a term the non compliance of which would amount to acceptance.
According Anson “An offer is an intimation by word or conduct of a willingness to enter into a legally
binding contract.”
According to Chetty “proposal is the promise to do or not to do some act.”
Example: “X” offers to sell his car to “y” for Rs.50,000/- it is an offer.
2.2 Related Terms
1. Proposer (Offerer): The person making the offer is called offerer.
2. Promisor: After acceptance of offer by offeree the person who has offered (offerer) becomes the
promisor.
3. Proposee (Offeree): The person whom the offer is made is known as proposee (offeree)
4. Promisee: After acceptance of offer the person whom offer was made is known as promissee.
2.3 Essentials of a Valid Offer

1. Two Parties: There must be at least two parties to a valid offer. One is the proposer (offerer)
and another is the proposee (offeree). A person cannot make a proposal to himself. In a case it
was stated that “No man is his own right, be under an obligation to himself.”
2. It May Be To Do or to Not To Do Anything: An offer is made with a view to obtaining the
assent of the offeree to the proposed act or to some abstinence. Thus, there may be a “Positive” of
“Negative” act which the offerer is willing to do.
Example: (A)X offers to y to enter as a partner for ¼ share in his firm and to interest Rs. 100000
as capital it is a positive offer
(B) “X” offers “Y” to not to due against him, if he agrees to pay the outstanding amount of Rs.50,000/
- on him within seven days with an interest of 12% p.a. It is a negative offer where X is offering to
be abstaine offer from filing a suit.
3. The Object Must Be Made To Obtain Assent: An offer is an expression of willingness thus, a
casual enquiry or a mere aceptance of the other it recognize as valid offer in the law
For Example
(A) Do you intend to sell your car? is not an offer, similarity,
(B) I may sell my car if I can get Rs.50,000/- is also not an offer, as in both cases object is not to
take assent, However
(C) I am willing to sell my car to you for Rs.40,000/- is an offer.
4. Intention to Create Legal Relationship: An offer must intend to create legal relations. An offer
must be such that when accepted, it will create legal relationship among the parties. Thus, an invitation
to join a friend on dinner is not a contract because it is a social offer without legal intention. The
question whether or not the parties have intention to create legal relationship can be answered with
reference to type and terms of agreement and the circumstances under which the agreement is
made.
5. The Offer & Terms of Offer Must Be Certain and Unambiguous: The offer must be certain
and definite not vague. If the terms of the offer are vague, no contract can be entered into because
it is not clear as to what exactly the parties intended to do. However, where, the terms of the offer
are capable of being made certain, the offer is not regarded as vague.
Example: X offers to sell to Y “a 100 tons of oil.” if X is a dealer in coconut oil and mustard oil, his
offer is not certain because it is not clear that he wants to sell coconut oil or mustard oil. But if X is
a dealer in coconut oil only, it is clear that he wants to sell coconut oil. Hence, the offer is certain.
6. It Must Not Be Mere Declaration of Intention: The offer must be distinguished from a mere
declaration of intention. Such statement or declaration merely indicates that an offer will be made or
invited in future.
Example I : A father wrote to his would be son-in-law that his daughter would have a share of
what he left after the death of his wife. It was held that the letter was a mere statement of intention
and not an offer. {Farine v. Fickar}
Example II: X a broker of Mumbai wrote to Y a merchant of Ghaziabad stating the terms on
which he is willing to do business. It was held that the letter was a mere statement of intention and
not an offer. {Devidatt v. Shriram}
7. Invitation to Offer Is Not an Offer: An offer must be distinguished from an invitation to offer. In
case of an invitation to offer, the person making an invitation invites others to make an offer to him
and his object is to circulate information that he is willing to open for negotiation with him. Such
invitation to offer are therefore not considered offer in the eyes of law and their acceptance does not
amount to agreement.
Example I: Goods were displayed in the shop for sale with price tags attached on each article and
self service system was there. One customer selected the goods. It was held that the display of
goods was only an intention to offer and the selection of the goods was an offer by the customer to
buy and the contract was made when the cashier accepted the offer to bye and received the price.
{Pharmaceutical Society of Great Britan v. Boots Cash Chemists Ltd.)
Example II: A prospectus issued by a company for subscription of its shares and debentures is
only an invitation to general public to make an offer to buy the shares/debentures which may or may
not be accepted by the company.
Similarly, an advertisement inviting quotations of lowest price in response to an enquiry amounts to
invitation to offer but not an offer capable of acceptance e.g.( in Harvey v. facle (1893).)
8. Communication of Offer: An offer must be communicated to the person to whom it is made
otherwise the offeree cannot accept it as he is not aware of the existence of the offer. An offer is
complete only when it is communicated to the offeree. One can accept the offer only when he
knows about it. Thus, an offer accepted without its knowledge does not confer any legal rights on
the acceptor.
Example I: G sent his servant L to trace his lost nephew. When the servant had left. G announced
a reward of Rs.500/- to anyone who trace the missing boy. L found the boy and brought him home.
When L came to know about reward, he filed a suit against G to recover the reward. It was held
that L was not entitled the reward because he did not know about the reward when he found the
missing boy. [Lalman Shukla v. Gauri Dutt.]
9. It Must not Consists of Term The Non-Compliance of Which Amounts to Acceptance: The
offer must not contain a term the non-compliance of which would amount to acceptance. It means
that while making the offer, the offerer cannot say that if offer is not accepted by a certain time. It
will be presumed to have been accepted.
Example: X writes a letter to Y. I offer to sell my pen for Rs.10000. If I do not receive your reply
by Friday next, I shall assume that you have accepted the offer. Here if Y does not reply. It does not
mean that he has accepted the offer. Many times, there are certain special terms, which form part of
the offer, but they not duly brought to the notice of the offeree, at the time the offer is made. If these
special terms are not communicated to offeror at the time of offer is made, the offeree is not bound
by the terms.
Tw o Parties
It must not
co nsists of Term It may be to do
the Non- or to not to do
complianc e of anything
which Amounts
to Acceptance
The objec t mu st
Communication be to obtain
of offer assent
Es sen tials
of a Valid
offer
Invitation to Intention to
offer is not an Create Legal
offer R elationship
The offer &

It must not be terms of offer
mere must be certain
declaration of and
intention
unambiguous
Figure - 2.1
2.4 Intention to Put an Offer Invitation to Put an Offer

Intention to put an offer is a willingness of a person to put offer in future, similarly Invitation to put an offer
is to Invite people to put offers and to negotiate, these are not considered as offer. Here the object of the
person is merely to circulate information that he is willing to deal with anybody who on such information or
invitation , is willing and open to negotiate with him .Thus ,it does not constitute an offered do not become
agreement by acceptance.
For example: Railway time table
Prospectus of a company
Menu-card
Price Tags
Auction sale
Distinguish Between Invitation to Put An Offer and Offer
B a si s In v it a t i o n t o o f f er O f fe r
1 . O b je ct I t’ s o b je ct is to in v it e p e o p l e T h e o b je c t o f o f fe r is to ta k e
to m a k e o f f er a c ce p t a n ce
2 . O b lig at io n I t d o es n o t g iv e s r ise to a n y T h er e a r ise s leg a l o b lig a t io n
le g a l o b lig at io n a s s o o n as o f fe r g et s
a c ce p t a n ce
3 . A g r ee m e n t I t’ s a c ce p t a n ce d o e s n o t c r ea t e A c c ep ta n c e o f o f f er re su lt in to
ag r ee m e n t f o r m a t io n o f ag r ee m e n t
2.5 Type of Offers
I On the basis of formation
1. Express Offer : An express offer is one which is made by words either spoken or written.
Example :X says to y, “Will you purchase my car for Rs. 1,00,000?”
Example : X advertises in newspaper, “I will pay Rs. 1,000 to anyone who traces my missing
nephew”.
2. Implied Offer : An implied offer is one which is made otherwise than in words. It is inferred
from the conduct of the person or the circumstances of the particular case.
Example : A bus runs on different routes to carry passengers. This is an implied offer to carry
passengers for a certain fare.
II On the basis of offeree
1. Specific Offer : A specific offer is one which is made to a definite person or particular group of
persons. A specific offer can be accepted only by that definite person or that particular group of
persons to whom it has been made.
Example :X offers to buy car from y for Rs 1.0 lakh. This offer is a specific offer which has been
made to a definite person Y. No person other them Y can accept this offer. [Boulton v. Jones]
Similarly an offer made to a company is an offer to a group of persons and hence a specific offer.
2. General Offer: A General offer is one which made to the world at large or public in general. A
general offer can be accepted by any person by fulfilling the terms of the offer. In case of general
offer, the contract is made with person who having the knowledge of the offer comes forward and
acts according to the conditions of the offer.
Example : X advertised in the newspaper that he would pay Rs. 5000 to anyone who traces his
missing boy. Y who knew about the reward trace the boy and informed X. Therefore, Y is entitled
for reward, as he accept it and fulfills the condition.
III On the basis of Nature of offer
1. Cross Offers: Two offers which are similar in all respects made by two parties to each other at
the same time and in ignorance of each other’s offer are known as ‘ cross offers ‘.
Cross offers do not amount to acceptance of one’s offer by the other. Hence, no contract is entered
into on cross offers.
Example X of Jaipur sends a letter by post to Y of Delhi offering to sell his car for Rs. 1 lakh. The
letter is posted on 1st January and the same day. Y of Delhi sends a letter by post to X of Jaipur
offering to buy X’s car for Rs 1 lakh these two letters cross each other. Y’s letter is merely an offer
and not the acceptance of X’s letter. Here, both the parties are making offer and has not accepted
the offer. Therefore, there is no contract. If they want to enter into a contract, at least one of them
must send his acceptance to the offer made by the other.
2. Counter Offer :An offer which is accepted with some conditions is treated as revoked, and
such conditional and qualified acceptance is known as counter offer. A Counter offer is therefore a
new offer by which original offer revoked.
Example: A offers B to sell his house for Rs. 10, 00,000. B agrees to purchase but he wants to pay
the price in four installments it is a counter offer by B.
3. Standing offer / Open offer / Continuing offer : An offer which is open over a period of time
for acceptance is standing offer.
A standing offer is in the nature of a tender. It is the same thing as an invitation to an offer.
Example X Ltd. requires a large quantity of certain goods during the 12 months period and gives
an advertisement inviting tender in the leading newspaper. Z submitted the tender to supply those
goods at a specific rate. Z’s tender is accepted or approved. Now, Z’s tender becomes a standing
offer. Each order given by X Ltd. will be an offer and supply of each order is an acceptance of the
offer.
Types of Offer
O n th e b asis of Na tu re o f
O n th e b asi s of form ation On th e b as is o f offeree o ffer
• E xpres s Offer • S pecific Offer • Cros s offe rs

• Imp lied Offer • General Offer • Co unter offer
• St anding offer / O pe n
offer / C ont nuing o ffer
Figure - 2.2
2.6 Acceptance
Acceptance is the act of giving consent to a proposal. Section 2(b) defines “when the person to whom the
offer is made signifies his assent there to, the offer is said to be accepted.”
Thus ‘acceptance’ is the manifestation by the offeree of his assent to the terms of the offer.
2.7 Who Can Give Acceptance

Acceptance can be given by the following;
1. In case of General offer – It may be given by any person from among the public who has the
knowledge of it, in such offer; acceptance is deemed to be given by fulfilling the terms of the offer.
2. In case of Specific Offer: Acceptance may be given only by that definite person whom the offer
has been made.
2.8 Essential of Valid Acceptance

An acceptance to be valid must fulfill certain conditions which are as following:
1. The Acceptance Must be Absolute and Unqualified: According to Section 7(1) of the Indian
Contract Act, 1872, “In order to convert a proposal into a promise, the acceptance must be
absolute and unqualified.” It means that an offer must be accepted as it is and without any change,
variation or condition. A qualified or conditional acceptance is not valid and amounts to marking of
a counter offer which puts an end to the original offer and it cannot be revived by subsequent
acceptance.
Example : X offered to sell his motor cycle for Rs. 10,000 to Y. B agreed to buy it for Rs 9,000.
Y’s act is a counter offer and not an acceptance of X’s offer. Now if Y accepts the original offer to
buy the car for Rs 10,000. X will not be bound to sell the house because Y’s counter offer has put
an end to the original offer. [ Nihal Chand v Amar Nath ]
Example : X offered to sell two plots of land to Y at a certain price. Y accepted the offer for one
plot. It was held that the acceptance was not valid because it was not for the whole of the offer. [
Bhawan v. Sadula ]
2. The Manner of Acceptance: According to Section 7(2) of the Indian Contract Act, 1872, the
acceptance of an offer must be given in the following manner.
(a) If t he propo sal do es not prescribe The o ffer mu st be accepted in any u sual
the man ner in wh ich it is to be and reasonabl e manner.
accepted.
(b) If t he propo sal prescribes the
manner in which it is to be The o ffer mu st b e accep ted in the
accepted. prescribed manner.
If the offer is not accepted in the prescribed manner, the offerer has an option to approve or reject
such acceptance. However, If the offerer wants to reject it. He must inform the acceptor within a
reasonable time that he is not bound by acceptance because it is not in the prescribed manner. If he
fails to do so within a reasonable time the presumption will be the offer being accepted acceptance
is valid.
Example X of Jaipur sends a letter by post to Y of Delhi offering to sell his car for Rs. 1,00,000 and
also writes “ send your acceptance by telegram,” y sends his acceptance by an ordinary letter. X
can reject such acceptance on the ground that it was not accepted in the prescribed manner. But if
he does not inform y within the reasonable time, he shall be deemed to have accepted such acceptance
and a valid contract will be formed between X and Y.
3. Communication of Acceptance: The acceptance must be signified to the offerer. In other words,
the acceptance is complete only when it has been communicated to the offerer either expressly or
impliedly. A mere mental determination to accept is no acceptance in the eyes of law. However, it
may be communicated in any manner.
Example X offered to supply coal to a Railway Company. The manager of the company accepted
the offer and put it in the drawer of his table and forgot all about it. It was held that no contract was
made because acceptance was not communicated. (Brogden v. Metropolitan Railway co. )
Note: In case of acceptance made by post, the proposer becomes bound by the acceptance as
soon as the properly addressed and stamped letter of acceptance is duly posted even if such letter
of acceptance is lost or delayed in post.
In case of acceptance made by telephone acceptance is deemed to be communicated when it is
properly listened by the offerer.
4. Acceptance Must Be By Offeree Or His Authorized Person: Acceptance must be
communicated by the offeree himself or by a person who has the authority to accept it. In other
words, if acceptance is communicated by an unauthorized person, it will not give rise to legal
relations as there is no contract arises between them.
Example :P applied for the post of a headmaster in school. The managing committee passed
resolution approving P to the post but this decision was not communicated to P. But one member of
the managing committee in his individual capacity and without any authority informed P about the
decision. Subsequently, the managing committee cancelled its resolution and appointed someone
else. P filed a suit for breach of contract. It was held that P’s suit was not maintainable because there
was no communication of acceptance as he was not informed about his appointment by some
Authorized Person. [Powell V Lee]
5. It Must Be Given To Offerer Or Authorized Person: Acceptance must be communicated to
the offerer himself or to his authorized agent. In other words, if acceptance is communicated to an
unauthorized person, it will not give rise to legal relations.
Example F offered by a letter to buy his nephew’s horse for $ 30 saying ‘if hear no more about
him. I shall consider the horse mine. “the nephew sent no reply at all but told B his auctioneer, not
to sell that particular horse as he intended to sell that horse to F. B sold the horse by mistake. It was
held that F will not succeed because his nephew had not communicated acceptance to him.
[Felthouse v. Bindley]
6. Acceptance Must Be Given Within Prescribed Time: Acceptance is considered to be valid if
it has given within the time prescribed (if any) or within a reasonable time (if no time prescribed).An
acceptance after expiryof time is not valid because the offer has already lapsed. However, what is
reasonable time depends upon the facts and circumstances of the case.
Example: An offer to buy shares of a company was made in June with the last date of acceptance
30th june but the acceptance was communicated in November, it was held that the offerer was not
bound by the acceptance because the acceptance was not given within a reasonable time [Ramsgafe
Victoria Hotel co. v Montefiore]
Example: X offered by a letter to sell his car for Rs. 1, 00,000. Subsequently, X withdrew his offer
by a telegram which as duly received by Y. After the receipt of telegram, y sent his acceptance to X.
In this case, the acceptance is invalid because it was made after the effective withdrawal of the offer
7. Acceptance Of An Offer “Subject To A Contract” is Not Valid: Acceptance or “Subject to a
contract to be approved by solicitors” The significance of these words is that the parties do not
intend to be bound and are not bound until a formal contract is prepared and signed by them. Thus,
it is not a valid acceptance and does not constitute a contract here the acceptor may agree to all the
terms of the offer and yet decline to be bound until formal agreement is drawn up.
8. A Mere Mental Acceptance is No Acceptance: To make a contract acceptance must be
communicated to the offeror. However, the communication of acceptance may be either express or
implied. But a mere mental acceptance is no acceptance. A mere mental acceptance means that the
offeree is assenting to an offer in his mind only and it does not deemed the communication of
acceptance to the offeror.
Example A, a supplier, sent a draft agreement relating to the supply of coal and coke to the
manager of a railway company for his acceptance. The manager wrote the word ‘approved ‘on the
same and put the draft in the drawer of his table intending to send it to the company’s solicitors for
a formal contract to be drawn up. By an oversight, the draft agreement remained in the drawer.
Held, there was no contract as the manager had not communicated his acceptance to the offerer.
9. Silence Does Not Considered as Acceptance: The acceptance of an offer cannot be implied
from the silence of the offeree or his failure to reply. In case, the offeree does not respond and keep
silence it does not considered as acceptance.
Example A offered by a letter to buy his nephew’s T.V set for Rs. 3000, Saying, “ If I hear no
more from you, I shall consider the T.V. Set is mine at Rs 300”. The nephew did not reply at all, but
he told an auctioneer who was selling his T.V. set, not to sell that particular T.V. set as he had sold
it to his uncle. By mistake, the auctioneer sold the set. A sued the auctioneer for conversion. Held,
A could not succeed as his nephew had not communicated acceptance and therefore no contract.
10. Acceptance May Be Express Or Implied: Acceptance May be given by words either spoken
or written. It may also be given by conduct For example: performance of conditions, prescribed in
offer or accepting consideration or paying consideration are the means of implied acceptance hence
valid.
11. Contracts Over Telephone Or Through, Telex Fax/ E-Mail. One may enter into contracts
either (i) when he is face to face with another person or (ii) over telephone or ( iii) through telex or
( iv) through post office. When one is face to face with another person, the contract comes into
existence immediately after the negotiations are completed with the process of offer and acceptance.
Contracts over telephone are just like contracts face to face. But the offeree must make it sure that
his acceptance is received by the offeror otherwise there will be no contract, as communication of
acceptance is not complete.
1.
The acc ept ance

mustbe
Absoluteand
Contract s over Unqualified
t elephoneor The Manner of
t hr ough, telex ac ceptance
fax/ e-mail
Acc eptancemay
beexpr ess or Communication
implied Of Acc eptance
Acceptance
Essent ial of
Valid
Silencedoes not Ac ce ptan ce Acceptancemust
be by offeree
c onsideredas authorized
acc ept ance
person
Itmust be given
Amere ment al to offerer or
acceptance is no
accept ance authorized
Person
Acceptanc eof an Accept ancemust

offer “subjectt o begiven within
a contract” is not
Valid pr escr ibed time
Figure 2.3
2.9 Effects of Acceptance

After acceptance the proposal converts into the promise and there arises an agreement between the parties
which create legal obligations for them, the effect and importance of acceptance have been expressed by
Sir William Anson, according them,” Acceptance is to offer what lighted match is to train of gunpowder.”
The effect of this observation is that what acceptance triggers cannot be recalled. However, there is a
choice to the person to remove the train before the match is applied; it means that the offer can be withdrawn
just before it is accepted.
2.10 Communication of Offer and Acceptance
The communication of offer and acceptance must complete to form contract and so as to bind the parties
there arises obligations. As soon as the communication of offer and acceptance completes the parties loose
the right of withdrawal or revocation and their arises contractual obligations under the contract. The legal
provisions relating to the communication of offer and acceptance are as under:
(a) Communication of Offer: The Communication of offer is said to be complete when offer comes
to the knowledge of the person to whom it is made. In case an offer is made by post, its communication
will complete when the letter containing the offer reaches the offeree.
Example X of Jaipur sends a letter by post to Y of Delhi offering to sell his car for Rs. 1, 00,000.
The letter is posted on 10th January and this letter reaches on 17th January. The communication of
the offer is complete on 17th January.
Note: An offer accepted without its complete communication does not bind the offerer.
Example In case of Lalman v. Gauri Dutt. G sent his servant L to trace his lost nephew. When
the servant had left, G announced a reward to anyone who traces the boy. L found the boy and
brought him home. When L came to know of the reward, he claimed the reward. It was held that L
was not entitled to the reward because he did not know about the offer when he found the missing
boy. (Based on Lalman Shukala vs. Gauri Dutt case)
(b) Communication of Acceptance: The communication of acceptance is complete of different times
for the offerer and acceptor. The rules regarding the communication of acceptance are as under. As
against the proposer and as aganist the acceptor. The communication of an acceptance is complete
(a) as against the proposer: when it is put in a course of transmission to him, so as to be out of
power of the acceptor, and (b) as against the acceptor: when it comes to the knowledge of the
proposer i.e., when the letter of acceptance is received by the proposer.
Example: (i) A proposes, by letter, to sell a house to B for Rs. 80,000. the letter is posted, on 6th
instant. The letter reaches B on 8th instant. The communication on the offer is complete when B, the
offeree, receives the letter i.e., on 8th.
(ii) B accept A’s proposal, in the above case, by a letter sent by post on 9th instant. The letter reaches
A on 11th instant. The communication of the acceptance is complete. As against A when the letter is
posted i.e., on 9th , and as against B, when the letter is received by A. i.e., on 11th.
(C) Revocation of Acceptance: When the contracting parties are face to face and negotiate in person,
there is instantaneous communication of offer and acceptance, and a valid contract comes into
existence the moment the offeree gives his absolute and unqualified acceptance to the proposal
made by the offeror. The question of revocation of either offer or acceptance does not arise, for, in
such cases a definite offer is made and accepted instantly at one and the same time.
But where services of the post office are utilized for communicating among themselves by the
contracting parties because they are at a distance form one another, it is not always easy to ascertain
the exact time at which an offer or /and an acceptance is made or revoked. In these cases the
following rules, as laid down in section 4 and 5, will be applicable:-
(i)Time of Revocation:
1. Revocation of Offer “A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterwards.
2. Revocation of Acceptance an acceptance may be revoked at any time before the communication
of the acceptance is complete as against the acceptor but not afterwards.
Applying section 5 to example given above.A may revoke his offer at any time before or at the
moment when B posts his letter of acceptance i.e., 9th, but not afterwards. B may revoke his
acceptance at any time before or at the moment when the letter of acceptance reaches A. i.e., 11th,
but not afterwards. While discussing the rule regarding communication of acceptance is complete
as against A on the day of posting itself i.e., 9th, A’s revocation of his offer, which is complete as
against B on 10th is inoperative. B’s acceptance is valid and there shall be a binding contract.
2.11 Lapse and Revocation of Offer

1. By Expiry of Time: An offer lapses after stipulated or reasonable time. It lapses if acceptance is
not communicated within the time prescribed in the offer, where time has not prescribed, acceptance
must be communicated within a reasonable time. [sec. 6 (2)]. What is a reasonable time is a question
of fact depending upon the circumstances of each case. for example, an offer made by telegram
suggests that a reply is required urgently and if the offeree delays the communication of his acceptance
even by a day or two, the offer will be considered to have lapsed.
2. By Non Acceptance in Prescribed Form: An offer lapses by not being accepted in the mode
prescribed, or where no mode is prescribed, in some usual and reasonable manner. But, according
to section 7, however, if the offeree does not accept the offer according to the mode prescribed, the
offer does not lapse automatically unless offerer reject the acceptance given in other manner and
commnuincated it to the offeree at a reasonable time. It is for the offeror to insist that his proposal
shall be accepted only in the prescribed offeror, and if he fails to do so he is deemed to have
accepted the acceptance.
3. By Rejection: An offer lapses may be lapse by rejection. An offer lapses if it has been rejected by
the offeree. The rejection may be express i.e., by words spoken or written, or implied. Implied
rejection is one(a) where either the offeree makes a counter offer, or (b) where the offeree gives a
conditional acceptance.
4. By Death or Insanity: If before acceptance of ofer there is death or insanity of the offeror or the
offeree it results into lapse of offer. If the offeror dies or becomes insane before acceptance, the
offer lapsed provided that the fact of his death or insanity comes to the knowledge of the acceptor
before acceptance [sec. 6 (4)]. From the analysis of the section, it may be inferred that an acceptance
in ignorance of the death or insanity of the offeror, is a valid acceptance, and gives rise to a contract.
Thus the fact of death or insanity of the offeror would not put an end to the offer until it comes to the
notice of the acceptor before acceptance. An offeree’s death or insanity before accepting the offer
puts an end to offer and his heirs cannot accept for him (Reynolds vs. Atherton).
5. By Revocation: An offer can be lapses by revocation. An offer is revoked when it is retracted
back by the communication of notice of revocation by the offeror to the other party [sec. 6(1). For
example, at an auction sale, A makes the highest bid. But he withdraws the bid before the fall of the
hammer. There cannot be a concluded contract because the offer has been revoked before
acceptance;
6. By Non- Fulfillment of A Condition Precedent To Acceptance: An offer stand revoked if the
offeree fails to fulfill a condition precedent to acceptance [sec. 6 (3)]. Thus, where A, offers to sell
his scooter to B for Rs. 4,000. If B gives entire amount within a week the offer stands revoked and
cannot be accepted be B if B fails to pay within week.
7. By Subsequent Illegality Or Destruction of Subject Matter: If an offer becomes illegal after
it is made, and before it is accepted it is considered as lapse automatically, Thus, where an offer is
made to sell 10 bags of wheat for Rs. 2,000 and before it is accepted, a government law prohibiting
the sale of wheat by private individuals is enacted, the offer comes to an end. In the same manner,
an offer may lapse if the thing, which is the subject matter of the offer, is destroyed or substantially
impaired before acceptance.
2.12 Summary
Offer is one of the essential element of a contract it is the foundation of contract on which a contract formed.
According Anson “An offer is an intimation by word or conduct of a willingness to enter into a legally
binding contract.”
According to Chetty “proposal is the promise to do or not to do some act.”
To make an offer valid there must be certain essentials as prescribed by law.and
to create a contract offer must be followed by a valid acceptance, An acceptance is said to be valid when
it is unqualified and unconditional and it is essential to communicate the offer and acceptance.
However, it may be communicated in any manner, A valid acceptance to an offer creates contractual obligation
on both of the parties, which cannot be withdrawn. Although an offer and acceptance may be revoked
under certain circumstances.

I Very Short Type Question
1. What is an offer?
2. Who is called an offerer?
3. Who is called an offeree?
4. What is meant by an express offer?
5. What is meant by implied offer?
6. What is meant by specific offer?
7. What is meant by general offer?
8. What are cross offer?
9. What is ‘Standing offer’?
10. What is acceptance?
11. What is an ‘express acceptance’?
12. What is an ‘implied acceptance’?
13. What happens if an offer is not accepted in the prescribed mode?
14. What is meant by revocation of an offer?
II Short Type Question
1. How can an offer be made ?
2. Who can accept an offer ?
3. How can an offer be accepted ?
4. “ A mere mental acceptance is not valid “ Explain.
5. When is communication of offer complete?
6. When is communication of acceptance complete as against the offerer?
7. When is communication of acceptance complete as against the acceptor?
8. When is communication of revocation complete?
9. Is there any limit of time after which an offer cannot be revoked?
10. Is there any limit of time after which an acceptance cannot be revoked?
11. When does an offer come to an end?
12. Can the following be regarded as offer ?
(a) An advertisement to sell goods by auction.
(b) An advertisement by a company for subscribing to its shares.
(c) An advertisement offering reward to anyone who finds the lost dog of the advertiser.
(d) Display of goods with price tags attached to them in the showcase
(e) A catalogue of goods for sale
13 Comment on the following statements :
(a) An invitation to offer is an offer
(b) Acceptance must be something more than a mere mental assent.
(c) There cannot be a contract to make a contract.
(d) Acceptance is to offer what a lighted match is to train of gunpowder.
(e) An acceptance to be effective must be communicated to the offerer.
14 Write Short notes on the following:
(a) Counter offer
(b) Cross offer
(c) Standing offer
(d) Lapse of offer
(e) General offer
(f) Implied offer
(g) Implied acceptance
(h) Invitation to offer
(i) Contacts over telephone
(j) Contracts by post
15 Distinguish between the following
(a) Offer and invitation to offer
(b) Offer and mere statement of intention
(c) Counter offer and cross offers
(d) Revocation of offer and lapse of offer
III Essay Type Question
1. What is an offer ? When does it complete?Discuss the legal rules of a valid offer.
2. What is an acceptance ? How can an offer be accepted? Discuss the legal rules of a valid acceptance.
3. Explain briefly the legal provisions relating to the communication of offer.
4. Explain briefly the legal provisions relating to the communication of acceptance.
5. How and on what ground does an offer stand revoked? Is there any limit of time which an offer
cannot be revoked?
6. How can an acceptance be revoked? Is there any limit of time after which an acceptance cannot
be revoked?

- Business Laws – Sharma, Gupta, Arya – Ajmera publication
- Business Laws - Tulsian – Tata Mcgraw hill educational publication
- Business Laws – Maheshwari & Maheshwari – Himalaya publishing house
- Business Laws – G.S. Gulshan – Excel publication
Unit – 3 : Capacities of Parties
Structure of Unit:
3.0 Objectives
3.1 Introduction
3.2 Meaning of Capacity of Parties
3.3 Who is Competent to Contract
3.4 Description of Persons Who are Incompetent to Contiract.
3.5 Summary
3.6 Practical Problems
3.8 Reference Books
3.0 Objectives
After completing this unit you would be able to :
 Understand the meaning of capacity of parties.
 Classification of persons who are not competent to make a contract.
 Point out the rules regarding agreement made by minor.
 Classification of persons who are of unsound mind
 Know about the effect of agreement made by unsound mind person.
 Classification of persons who are disqualified by law to make a Contract.
3.1 Introduction
It is a universal truth when we do or assign any work to anyone, that person should be capable enough to
bear the responsibility up to the satisfaction similarly it has been clearly stipulated in sec. 10 of Indian
contract act that parties to the contract must be capable enough to perform their rights and duties. When the
parties are natured and competent enough then only in the eye of law the contract will be a legal one
otherwise void.
3.2 Meaning of Capacity of Parties

Capacity to contract means legal capacity of parties where they can understand and perform their rights and
duties as conferred in the agreement.Parties entering into contract must be capable. Capacity of parties
emphasises that the parties entering into contract should be capable of understanding it and forming a
rational judgment as to its effect upon their interests. It is possible only when the parties are mature enough
to understand the effect of an agreement. For this purpose law insists that the parties should be major, i.e.,
they should have attained the age of eighteen years. Again, even if the parties are mature they should be in
their senses, otherwise they will not understand properly the effect of contract entered by them. Therefore,
law requires that the parties should have sound mind. Only a person with a sound mind can properly
understand the implications of a contract. Thus law does not allow an agreement with an idiot or a drunken
person because he will not be able to understand the consequences of the agreement entered into by him.
Similarly, law does not allow certain persons to enter into an agreement in public interest, such persons are
disqualified by law enter into contract.
3.3 Who is Competent to Contract
See 11 of the Indian Contract Act specifies that every person is competent to contract who is the age of
majority according to the law to which he is subject and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject.”
Analysis :- Sec. 11 states that following persons have competent to contract.
(1) Major as per law
(2) Man of sound mind
(3) He is not disqualified by law to make a contract.
Activity A:
1. According to you who is competent to contract? and what are the essential ingredients of a valid
contract?
3.4 Description of Persons Who are Incompetent to Contiract

(1) Minor
(2) Unsound mind person
(3) Disqualified by Law
Incompetent Persons to make a contract are showing in following chart.
Incompetent Persons to make a c ontract
Minor Unsou nd Mind Disq ualified by Law
Figure - 3.1
3.4.1 Minor
Minor means, any person who has not completed the age of majority. According to Indian Majority Act,
1875.
“A minor is a person who has not completed 18 Year of his/her age.”
In the following two cases minority continuous upto the age of 21 Yrs.
(1) Where the guardian has been appointed for the protection of property and body of a minor by
the court or
(2) Where the property of minor is in the custody of courts of wards become major at
completion of 21 Yrs.
3.4.2 Rules Regarding Agreements Made By Minor
(1) An Agreement By A Minor Is Absolutely Void: Law acts as the guardian of minors and protects
their rights, because their mental faculties are not mature - they don’t possess the capacity to judge
what is good and what is bad for them. Accordingly, where a minor is charged with obligations and
the other contracting party seeks to enforce those obligations against minor, the agreement is deemed
as void ab-initio.
Illustration :- In the case of Mohari Bibi V/s Dharmodas Ghosh a minor (Dharmodas) mortgaged
his house for Rs. 20,000 and the money lander a sum of Rs.8000 to minor. Later on the minor filed
a sued for setting as the mortgage on the ground of his minority. It was hold that according to sec.
11 a minor is incompetent to contract so the mortgage was void and it was cancelled. The money
lander wanted refund of Rs. 8,000 paid by him to minor but the court held that the minor’s agreement
was void so, mortgagee has no right of restitution, under section 65.
(2) A Minor Can Be A Promisory Or Beneficiary: Any contract which is the interest of the minor
and under which there is no obligation on his part is valid and enforced by law. Hence, the minor can
be a beneficiary of any contract as the law also protect the interest of the minor under the contract.
Illustration:- Ram, a minor, sold goods on credit to shyam a major. He can recover the price from
shyam as Ram is a beneficiary.
(3) Minor as an Agent: A minor can be appoint as an agent. Master is always responsible for the act
done by minor. Minor is not responsible for any negligence and for the voluntary mistake committed
by him, master cannot ask him to compensate for the same.
(4) Minor as a Partner: According to the provision of sec. 30 of Indian Partnership Act, “as a
partnership is created by contract and a minor is unable to make a contract that’s why he cannot be
added as a partner to the contract. But he may join the partnership firm with the consent of all the
partners for the share in the profits. On the other hand he cannot be liable for the losses sustained.
(5) No Specific Performance: As the contract made by minor is void in the eye of law. Hence, court
cannot direct for specific performance. Specific performance means actual carrying out of the contract
as agreed. A minor’s agreement being void cannot be specifically enforced. Similarly, minor also
cannot claim ‘specific performance’ from the other party. “Specific performance’ is an equitable
remedy.
Illustration :- A, a minor agrees to sells his house to B for Rs. 60,000 Later on A refuses to give
the house. B cannot enforce specific performance by A. The agreement is void.
(6) Minor and Insolvency: From the beginning itself contract made by minor is void. so minor can’t
be adjudged insolved.
(7) No Ratification: Ratification means approving a past contract. When a minor becomes major, he
cannot ratify any agreement entered into while he was a minor. “The consideration which passed
under the earlier contract cannot to implied into the contract into which the minor enters on attaining
majority”. In Arumugam Chetti Vs. Duraisinga Tevar, it was held that there can be no ratification of
a transaction which is void owing to the promisor possessing no contractual capacity at the time.
Nor can avoid deed form a good consideration for a fresh contract made by the minor on attaining
majority. Similarly, in Suraj Narain vs Sukhu Ahir, where a minor borrowed a sum of money by
executing a promissory note, and after attaining majority executed a second bond in respect of the
original loan, the court held that a suit upon the second bond was not maintainable as that bond was
without consideration. Since ratification relates back to the date when the contract was originally
made, it is necessary for a valid ratification that the person who purports to ratify must be competent
to contract at the time of the contract. But if services are rendered or an advance is made to a minor
during his minority and the services are continued or a further advance is made after he attains
majority, a promise to pay for such services or amount as a whole would be valid and enforceable.
(8) Minor and Doctrine of Estoppel: Doctrive of estoppel means, “When a person makes somebody
believe by written or spoken or his conduct to believe on the existence of some fall things. He will
not be allowed to deny the existence of that state of things, the doctrine of estoppel does not apply
on minor. Even if a minor falsely represent himself as major and induced the other party to contract,
by way of fraud, then to he cannot be liable but law does not allow him to commit fraud with others
so, if the debt or anything is there with him, court may direct to return the same to the concern and
if the same is already use by him and does not exist then the aggrieved party can’t be compensated
in any manner.
Illustration : A, a minor borrowed Rs. 5,000 from B by fraudulently representing himself to be a
major. A refused to repay the money. B sued him for the money. A pleaded that he is a minor and the
agreement between B and himself is void. Here B cannot recover his money
(9) A Minor’s Liability for Necessities of Life: According to Sec. 68 of the Indian Contract Act,
1872 If a person is incapable of entering into a contract of any one whom he legally bound to
support, is supplied by another person with necessaries suited to his condition in life, the person
who has furnished such supplies is entitled to be reimbursed from the property of such incapable
person”. The above provision is applicable to all persons who are not competent to contract,
Talking in the context of minor. if a person supplies goods or services :
 To a minor or anyone whom he is legally bound to support.
 Which are necessaries suited to his condition of life,
 He is entitled to payment for the same out of minor’s property.
What Constitute A Necessity - “necessity is to be determined with reference to the status and
circumstances of the particular minor. Objects of mere luxury are not necessaries, nor are objects,
which though of real use, are excessively costly. Food and clothing may be taken as simple examples
of necessaries. The necessaries would also include the infant’s lodging expense, medical attendance,
cost of defending a minor in civil and criminal proceedings. Loans taken by a minor to obtain
necessaries also bind him. But where a minor is engaged in trade, contracts entered into by him for
trading purposes are not for necessaries and are not binding on him.
Illustration: A supplied the ration goods to a minor; He can recover the price from the property of the
minor.
(10) Restitution: Restitution means returning the benefit which a minor has received under a void
agreement. When a minor received this property or money out of that contract then if the contract
is declared void than the court may direct the minor to refund the money or give compensation.
(11) Liable for Torts: A minor is liable for his tort i.e. a civil wrong made by him but where a tort is a
result of a contract, then a minor is not liable for fort because the contract made by minor is void.
(12) Marriage Contract: If a minor made a marriage contract during the period of minority, then this
contract is void and cannot enforced by law.
(13) Minor and His Parents: The agreements made by minor is void , so the parents of minor are not
liable for the agreement made by minor, However they can be liable when minor make agreement
as an agent of parents.
(14) Minor and Sales of Goods Act: According to the provisions of sales of goods Act, if a minor
made any agreement to sell or buy something then he cannot be liable.
(15) Minor and Negotiable Instrument Act: According to the provisions of negotiable instrument act
a minor can draw, transfer or endorse negotiable instrument but when these instrument get dishonoured
a minor is not liable. But other parties will be liable as per contract.
(16) Minor as a Joint Promisor: A minor can be a joint promisor with major but the major is liable to
perform the contract. The minor is not liable. The contract cannot be enforced against the minor but
the major cannot escape from his liability.
(17) Surety for Minor: A minor cannot stand as surety in a contract of guarantee. Because a minor can
never be held personally liable.
(18) Mortgage Contract: A mortgage Contract made by minor is void.
(19) Service Contract: A contract of personal service by minor is void even if it is in the benefit of the
minor. Morever, parents of minor cannot make any contract of service on behalf of minor the same
shall be void.
(20) Minor Shareholder: A minor cannot enter into a contract so he cannot apply for allotment of
shares in a company. But he can apply in case of transfer of fully paid up shares in a company. If a
minor gets shares in a company by fraud or by misrepresenting his age, then after knowing the fraud
the company can remove his name from the register of members.
Activity B:
1. Who is minor? Discuss the law regarding to minor’s contract.
3.4.3 Unsound Mind Person
According to Sec. 12 of Indian Contract Act, “a person is said to be of sound mind for the purpose of
making a contract, if at the time when he makes it, he is capable of understanding it and of forming a rational
judgment as to its effect upon his interests”.
Analysis Sec. 12 specifies following essential characteristics of sound mind person:-
 Capacity to understand the purpose of making the contract.
 Capacity to make rational judgment as to its effect on a persons interest.
Classification of unsound mind person showing by following chart:-
U nsound Mi nd Person
Id iot Lu nat ic Drunk ard A Seni le Perso n
Figure - 3.2
(1) Idiot: An idiot is a person who is incapable of thinking or of forming rational judgment Idiocy is
permanent. It is a congestal defect caused by lack of development of brain. Hence the agreement of
an idiot is absolutely void ab initio.
Illustration: - Ram sold his car worth Rs. 1,20,000. His mother proved that he was a congenital
idiot. He is unable to understand the transaction held. so, the sale was void
(2) Lunatic: Lunatic person is one, whose mental power are deranged due to some mental disease. It
is a curable disease and not permanent. Lunatic person can make contract during their lucid intervals
(when they are insense). The can make contract only when he is same. He is not liable for agreements
made during the intervals of insanity. Any person who has been declared as Lunatic under Indian
Lunacy Act, then he is cannot make contract even when he is mentally sound.
(3) Drunkard: A drunken or introicated person can not make a contract as long as he is under the
effect of drink of intoricant this is competency to make a contract is temporarily.
(4) A senile Person: A senile person is unable to enter into contract because due to age or poor health
he is unable to understand the contract and its effect upon his interest.
Effects of the Agreement Entered Into By The Persons Of Unsound Mind.
 The agreement made by person of unsound mind are absolutely void.
 When person of unsound mind make a contract for supply of necessaries of life it is valid as quasi
contract under section 68, for such a contract he cannot be held personally liable but his estate is
liable.
 Burden of proof: In the court of law burden of proving that a person was mentally incapable of
contracting, lies on the party who seeks to cancel the contract in this ground. However, once it is
established that a person is insane, the burden to prove that he was sane at the time of making
contract is on the party who wants to establish that the contract is good.
3.4.4 Persons Disqualified by Law
Persons disqualified by law to make contract are showing in following chart :-
C onvi cts
A lien e nemy
Clu bs
Insolv ent Perso ns

disq ualified by
l aw Marr ied W om a n
C orpo ratio n or
Co mpany Professio nal
Per sons
Figure – 3.3
(1) Alien Enemy: Alien means a foreign citizen living in India. An Alien may be friend or enemy. Alien
may be a friend or enemy on declaration of war between his country and india an alien becomes an
alien enemy. Contract with an alien friend is valid but with an alien enemy is void. An alien enemy
cannot made contract with Indian national till such declaration remains in force.
(2) Convicts: According to law a convict cannot make valid contract during imprisonment. When the
imprisonment is over, he become capable to make contract.
(3) Insolvant: According to the provisions of Indian insolvent act an insolvent cannot make a contract
for sale of his property.
(4) Corporations or Companies: A corporation or company is an artificial person created by law. A
company can make contract only through their agents according to the scope of mamorandum. A
corporation or company cannot make a contract of personal nature.
(5) Clubs: Unregistered clubs or socities cannot enter into contract just because they have no legal
unistence.
(6) Married Woman: Under Indian Law men and women have equal contractual capacity. Therefore
a women married or unmarried can enter into a contract, if she is major, has sound mind and is not
disqualified by any law. She can deal with her own property legally, her necessaries of life she can
pledge the credit of her husband i.e. for necessaries of life punrchased by her even her husband can
be held liable to make the payment. Under English Law, however, until 1883 property of married
women passed to their husband on their marriage. But after 1883 Married Women Property Act
has changed the position. Accordingly, now the law is the same as in India.
(7) Professional Persons: Our law does not disqualify a professional from claiming his fees from his
client. Therefore, if a client fails to pay the fees of a lawyer who. is enrolled as an advocate of a high
court, such an advocate can file a suit to recover his fees. But in England a barrister cannot sue his
client for his fees. The prohibition is in relation to their fees only and not for any other claim.
Activity C:
1. According to you who are disqualified persons to be the contract?
3.5 Summary
A contract will be valid only when the parties to it are competent to contract.
Every person is competent to contract who is of the age of majority according to the law to which he is
subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
In summarized form it is easy to say that following three types of persons cannot make a valid contract :-
 Minor
 Unsound mind person
 Disqualified by law
The contract made by above are void from the begining itself in the eye of law. They may get benefit from
the contract indirectly with the consent of other parties to the contract, But the losses sustained out of the
contract they cannot be liable. They are also cannot be held liable in their personal capacity.
Who is a Minor. A minor is a person who has not attained the age of 18 years, and 21 years in case of
guardian appointed under the Guardian and Wards Act or where a minor is under the Guardianship of the
Court of Wards.
Rules regarding agreements made by minor-
(1)An agreement by a minor is absolutely void
(2)A minor can be a promissory or beneficiary
(3)Minor as an Agent
(4)Minor as a partner
(5)No specific performance
(6)Minor and insolvency
(7)No ratification
(8)Minor and doctrine of estoppel
(9)A Minor’s liability for necessities of life
(10) Restitution
(11) Liable for Torts
(12) Marriage Contract
(13) Minor and his parents
(14) Minor and sales of goods Act
(15) Minor and Negotiable Instrument Act
(16) Minor as a joint promisor
(17) Surety for minor
(18) Mortgage Contract
(19) Service Contract
(20) Minor Shareholder
Persons of Unsound Mind : A person who is unable to understand and form a rational judgment as to the
effect of a contract on his interest is a person of unsound mind.
(i) Idiot - a natural fool. He cannot enter into a contract at all.
(ii) Lunatic - whose mental power has deranged due to some mental strain. He can enter into a
contract during lucid intervals, i.e. when he is sane.
(iii) Drunkard or Intoxicated Person - who is under the influence of liquor or drugs cannot enter into
contract in such a condition.
(iv) A senile Person - A senile is person due to age or poor health, he is unable to understand the
contract.
Persons Disqualified by Law to enter into contract:
(i) Alien Enemy - a person whose Government is at war with the Government of India is disqualified
to enter into a contract. If there is an existing contract before the war was declared or broke out it
would become void, or suspended if it can be postponed.
(ii) Foreign Soverign - representatives of foreign states have special status. They can file suit against
an Indian but an Indian cannot sue them without the prior permission of the Central Government.
(iii) Convicts - a person undergoing imprisonment cannot enter into a contract until release.
(iv) Insolvents - an undischarged unsolvent is incapable of entering into contract. However, after his
discharge he can enter into a contract.
(v) Corporations or Companies - A corporation or a company can enter into a binding contract, only
if it is authorised by the Statute by which such corporation was created or by its memorandum of
association.
(vi) Married Women - Under Indian Law a major married woman is free to enter into a contract is
respect of her separate property. For necessaries of life she can pledge the credit of her husband.

1 Ram a minor, obtain a loan of Rs. 40,000 from Kapil by falsely representing himself as major. Can
ram be made liable to refund the money?
2 Sheela 15 years old drives a scooty corelessly and injured means. Is she liable for the accident i.e.
fort?
3 A renewed a promissionery note which he wrote during his minory in favour of B can B enforce
payment.
4 A is 17 Years old, obtaining a loan B.can A. asked to repay the Money.
5 A renders some service to B during his minority at the request of B.B, on attaining majority, into an
agreement with A to compensate A for services rendered during B’s minority. Is the agreement
valid.
6 Ram renders services to Shyam during his minority at the request of Shyam. Shyam on attaining
majority enters into an agreement with Ram to compensate Ram for services rendered during Shyam’s
minority. Is the agreement valid?
7 A, the wife of B pledges with C the furniture and the books in the library belonging to her husband
for the price of (i) jewellery (ii) goods necessary for her maintenance, without B’s knowledge and
consent. What are the rights of C?

1 What do you understand by capacity to contract? Write all the essential ingredients of valid
contract?
2 State briefly the position of a minor with regard to the contracts entered into by him.
3 Explain the following :-
(1) Mohri Bibi V/s. Dharmodas Ghosh
(2) Person of unsound mind.
4 Write the position of minor in the following situation.
(1) Minor and doctrive of estoppel
(2) Minor as a partner
(3) Minor and negotiable instrument act
5 Discuss all the rules regarding agreements made by minor?
6 Discuss the law relating to the following.
(1) Alien enemy
(2) Lunatic Person
(3) Drunkard
(4) Club
6 Who are disqualified persons to do the contract.
3.8 Reference Books

- Sharma Arya Sharma : (2012-13) ‘Business Law’, Ajmera Book Company 2012-13, Jaipur
- B.K. Pitaliya, Sunil Handa, Mukul Sharma (1998); ‘Mercantile Law’, Sheel Write Well (Pvt.) Ltd.
(1988), Jaipur
- Dr. R.L. Nolakha; ‘Business Law’ (2012-13), R.B.D. Publications (2012-13), Jaipur
- Dr. S.M. Shukla, Dr. O.P. Gupta (1995); ‘Mercantile Law’, Sahitya Bhawan, Agra.
Unit - 4 : Consideration
Structure of Unit:
4.0 Objectives
4.1 Introduction
4.2 Meaning and Definition
4.3 Legal Provisions of Consideration
4.4 No Consideration, No Contract
4.5 Privity of Contract
4.6 Summary
4.8 Reference Books
4.0 Objectives
After studying this unit you would be able to understand:
 Consideration as an essential to make a contract
 What are the prerequisites and legal provisions of a valid consideration
 When can a contract be valid even without consideration
 What is meant by Privity of contract
 Who is Stranger to consideration
 When a stranger to contract can sue
4.1 Introduction
4.2 Meaning and Definition

Consideration is an essential element for formation of a contract. An agreement without consideration is said
to be bare promise and is not binding on the parties (ex nudo pacto non aritio action).
Consideration is used as a term “quid pro quo” i.e. something in return. What is something has been
defined by Lush J. in a leading English case Currie v/s Misa as under:
“A valuable consideration in the sense of the law, may consist either in some right, interest, profit or benefit
accruing to the one party or some forbearance, detriment, loss or responsibility give, suffered or undertaken
by the other.”
It reveals that consideration needs not to be in the form of benefit to the promisor, if promisee has suffered
from some loss or determint, it will also be a valid consideration in the eyes of law.
Section 2(d) of Indian Contact Act, 1872 defines
“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 so or to abstain from doing something, such act or
abstinence or promise is called consideration of the promise”
When the promisor promises to do or to abstain from doing something, the promisee must pay something
in return which may be an act or abstinence or a promise to perform a future act or abstinence.
According to Blackstone: - “Consideration is the recompense given by the party contracting to the other.”
Sir Fredric Pollack defines,:- “ Consideration as an act of forbearance of the one party or the promise
thereof is the price for which promise of the other is bought”
Example: A offers to pay Rs.5000/- to B in return of a laptop. Here Rs.5000/- is a consideration for B.
4.3 Legal Provisions of Consideration

1. Consideration Must Move At The Desire Of The Promisor : In order to constitute consideration
the act or abstinence forming the consideration for the promise must be done at the desire or
request of the promisor. Thus an act does or services rendered voluntarily, or at the desire of the
third partly, will not amount of valid consideration so as to support a contract.
Example A ordered the book seller to supply a book of company law, but he supplied a book of
mercantile law, It is not a valid consideration as it is not at the desire of ‘A’.
2. Consideration May Move From Promise Or Any Other Person : Consideration may move
from the promisee or may proceed from any other person. Thus, as long as there is a consideration
for a promise, it is immaterial who has furnished it. It may move from the promisee himself or from
any other person. This means that even a stranger to the contract (one who is not a party in the
contract) can provide consideration. If consideration is furnished by some other person then the
promisee It is known as constructive consideration and constitute a valid consideration for the
contract.
Example II A, an old lady granted her estate to her daughter (the defendant) with a direction that
the daughter should pay an annuity of Rs.653, to A’s brothers (the plaintiffs). On the same day, the
defendants made a promise with the plaintiffs that she would pay the annuity as directed by A. The
defendant failed to pay the stipulated sum. In an action against her by the plaintiffs she contended
that since the plaintiffs themselves had furnished no consideration, they had no right of action. The
Madras High Court held that in this agreement the consideration had been furnished by the
defendant’s mother and that it was enough consideration to enforce the promise between the plaintiff
and the defendant (Chinnya vs.Ramaya).
3. Consideration May Be Past, Present Or Future: The words, has done or abstained from
doing or does or has abstained from doing or promises to do or to abstained from doing or promises
to do or to abstain from doing reveals that Consideration may consist of either something done or
not done in the past or done or not done in the present, or promised to be done or not done in the
future.
In other words consideration may be past, present or future.
(a) Past Consideration - The consideration which has moved before formation of contract.(past
services)
(b) Present Consideration – The consideration which is furnished simultaneously with promise at
the time of formation of contract.(cash transactions)
(c) Future Consideration – The consideration which will be moved after formation of
contract.(credit transactions)
However in English common law, past consideration is not valid.
4. Consideration Need Not to Be Adequate : It means that consideration must be something to
which the law recognizes a value. Although the adequacy of consideration to the promise does not
affect the validity of an agreement. The law only emphasis on the presence of consideration and not
on the adequacy of it. It leaves the parties to the contract to make there own bargains. Thus an
agreement without consideration is void but if there is consideration which is at the desire of the
parties, it is immaterial that is adequate or not, hence,contract cannot be avoided on the ground of
inadequacy of consideration . However it can be determined that whether consent was free or not.
Example: A agrees to lease his property to a hospital authority for 10 year in return of a consideration
of Rs.1 every year. It is a valid contract and in future within a period of 10 year A cannot set aside
the lease deed on the basis of inadequacy of consideration.
5. It Need Not Benefit the Promisor Himself: The consideration need not benefit the promisor
himself. If consideration is for the benefit of some other person at the desire of the promisor it is a
valid consideration
Example: A requests B to sell and deliver goods to C and gives guarantee for the payment of price
within a month. Here, B is doing something at the desire of A but C is being benefited. This is a good
consideration.
6. It May Be Some Act Or Abstinence Or Promise : Consideration may be (i) in the form of an act
;or (ii) abstinence; or (iii) a promise to do or to abstain from doing something . Therefore the
consideration may be positive or negative.
(a) It May Be an Act – An act of a promisee at the desire of the promisor valid consideration for
the promisor. It is a positive or affirmative consideration.
Example: A promises B to pay Rs. 1000 to paint his house .This is a positive consideration for A’s
promise.
(b) It May Be an Abstinence- Abstinence from doing something at the desire of the promisor
may also be good consideration for the promisor .It is a negative form of consideration.
Following are examples of valid consideration in the form of abstinence
Example: A promises B not to file a FIR against him if he pays him Rs. 50000. Here, A is abstaining
from doing something i.e. filing a suit against B for a consideration of Rs. 50000.
(c) It May Be a Promise- A promise to do or to abstain from doing something at the desire of the
promisor is also a good consideration.
Example: (a) A agrees to manage the factory of B on monthly salary of Rs. 5000. It is a promise
to do something and a valid consideration.
(a) Forbearance to sue (b) compromise in a pending suit (c) composition with creditors
7. It Must Be Real Not Illusory: Consideration must exist in the eye of law, It must not be illusory
If a Consideration which does not have value in terms of money are not considered valid by law and
Although it is not necessary that consideration must be in money is illusory consideration. A contract
founded upon an illusory or deceptive consideration is not valid.
Example: X promises to put life into Y’s dead brother and Y promise to pay Rs. 500000. This
agreement is void as it as an illusory consideration.
8. It Must Be Something More Than the Promisor’s Existing Obligation : The performance of
an existing obligation is no consideration in the eye of law as person is already under a duty to do.
It must be something which a promisor is not under an obligation to do either under a contract or by
general law of land.
Example: X promise to pay to Y an advocate an additional sum of money if the suit was decided
in his (X’s) favour. Held there was no consideration for this promise and hence void .The Y an
advocate after having accepted the case was under contractual duty to render the best of his services.
9 It Must not be Unlawful: A Valid consideration must not be unlawful consideration is said to be
unlawful if it is (a) forbidden by law (b) defeats the provision of law (c)fraudulent(d)injurious to the
person or property (e)oppesed to the public policy (f) immoral
10. It Must Be Certain: A promise which is vague o not definite does not constitute valid consideration
. The law requires
4.4 No Consideration, No Contract

According to section 10 of Indian contract Act, 1872, Consideration being one of the essential elements of
a valid contract the general rule is that “an agreement made without consideration is void and is known as
‘nudum pactum’ or a bare promise which cannot be enforced through law. However under section 25 of
Act there are few exceptions to the rule, where an agreement without consideration will be perfectly valid
and binding. These exceptions are as follows:
1. Agreement Made On Account Of Natural Love And Affection [Sec. 25 (1)] : An agreement
made without consideration is enforceable. If it is
(a) Expressed in writing,
(b) Registered under the law for the time being in force for the registration of documents,
(c) Is made on account of natural love and affection,
(d) Is between parties standing in a close relation to each other.
Thus there are four essential requirements which must be complied with to enforce an agreement
made without consideration, as per Section 25 (1).
Example:
(a) A promises, to give Rs 1,000 to B without any consideration. Here in future if A refused to
pay, B cannot take any legal action. Because this is a void agreement hich is not supported by
consideration.
(b) A for natural love and affection, promises to give his son B, Rs 1,00000. A puts his promise
to B into writing and registers it, this is a contract even without consideration.
(c) A registered agreement, whereby an elder brother, on account of natural love and
affection, promised to pay the debts of his younger brother, was held to be valid and binding
an the younger brother can cliam the elder brother if he is not carrying out the a g r e e m e n t
(Venkatasamy vs Rangasami)
It should, however, be noted that mere existence of a close relation between the parties does not
necessarily impart natural love and affection. Thus where a Hindu husband, after referring to quarrels
and disagreement between him and his wife, executed a registered document in favour of his wife,
agreeing to pay for separate residence and maintenance, it was held that the agreement was void for
want of consideration because it was not merely out of natural love, and affection. (Rajlakhi Devi
vs Bhootnath). Similarly, the law does not presume to be absence of consideration due to close
relation, therefore, the contract must be written and registered to prove that parties are agree to
execute the contract even without consideration.
2. Agreement to Compensate for Past Voluntary service (Sec.25 (2)] : A promise made without
consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has
already voluntarily done something for the promisor,’ or done something which the promisor was
legally compelled to do. In other words if something has done voluntarily for the pormisor and
further such promisor, promise to do something he is bound to perform.
Example
(a) A finds B’s purse and gives it to him. B promises to give A Rs 50. This is a contract.
(b) A supports B’s infant. B promises to pay A’s expenses in so doing. This is a contract.
(c) A rescued B from drowning in the river, and B, appreciating the service that had been
rendered and promises to pay Rs 1,000 to A. There is a contract between A and B.
However, In order to attract this exception, the following points should be noted:
(a) The service should have been rendered voluntarily for the promisor. If it is not voluntary
but rendered at the desire of the promisor, then it is covered under ‘past consideration’ [as
per Sec. 2(d) and not under this exception].
(b) The promisor must be in existence at the time the service was, rendered. Thus where
services were rendered by a promoter for a company not in corporate yet, a subsequent
promise by the company to pay for them could not be brought within the exception.
(Ahmedabad Jubilee Spinning Co. vs Chhotalal).
(c) The promise must be to compensate a person who has himself done something for the
promisor and not to a person who has done nothing for the promisor. Thus, where B treated A
during his illness but refused to accept payment from A; they being friends; and A in gratitude
promises to pay Rs 1,000 to B’s son D, the agreement between A and D is void for want of
consideration as it is not covered under the exception.
(d) The intention of the promisor ought to be to compensate the promisee. A promise given
for any motive other than the desire to compensate the promisee would not fall within the
exception. (Abdulla Khan vs Parshottam)
(e) The promisor to whom the service has been rendered must be competent to contract at the
time the service was rendered. Thus a promise- made after attaining majority to pay for g o o d s
supplied voluntarily to the promisor during his minority has been held valid and the promisee
could enforce it ,(Karam Chand vs Basant Kaur).
(f) The service rendered must also be legal. Thus past cohabitation will not make a promise
to pay for it enforceable under this exception (Sabava vs Yamanappa).
3. Agreement to Pay a Time-Barred Debt : According to the limitation Act,1963 in India, A debt
which remains unpaid and unclaimed for a period of 3 years, after it is due for payment, becomes
time barred and is not legally recoverable, However, (Sec. 25 (3)]. Where there is an agreement,
made in writing and signed by the debtor or by his authorized agent, to pay wholly or in part such
time barred debt by the law of limitation, the agreement is valid even though It is not supported by
any consideration. Thus, A time barred debt cannot be recovered as parties are discharge from the
contract by operation of law and therefore a promise to repay such a debt is without consideration
and enforceable.
But before the exception can apply, it is necessary that:
(a) The debt must be such of which the creditor might’ have enforced payment but for the law for
the limitation of suits.
(b) The promisor himself must be liable for the debt. So a promissory note executed by a widow in
her personal capacity in payment of time-’ barred debt of her husband cannot be brought within the
exception (Pestonji vs Maherbai28);
(c) There must be an ‘express promise to pay’ a time barred debt as distinguished from a mere
‘acknowledgement of a liability’ in respect of a debt. Thus. a debtor’s letter to his creditor, “I owe
you Rs. 1,000 on account of my time-barred promissory note” is not a contract. There must be a
distinct promise to pay; and
(d) The promise must be in writing and signed by the debtor or his agent. An oral. promise to pay
a time-barred debt is unenforceable.
The logic behind this exception is that by lapse of time the debt is not destroyed but only the remedy
is lost. The remedy is revived by a new promise under the exception.
Example: A owes B Rs 1,000, but the debt is barred by the Limitation Act. A signs a written
promise to pay B Rs 500 on account of the debt. This is a valid contract (Appended to Sec. 25).
4. Completed Gift : A gift already given does not require consideration in order to be valid “As
between the donor and the donee any of actually made will be valid and binding even though
without consideration” [Explanation 1, to Section 25]. In order to attract this exception there need
not be natural love and affection or nearness of relationship between the donor and done. The gift
must, however, be complete. However a promise to gift is not enforceable by law
5. Contract of Agency : Section 185 of the Contract Act lays down that no consideration is necessary
to create an agency. Therefore a contract of agency may be iratituos or non iratituos and is binding.
6. Remission by the Promisee of Performance of the Promise (Sec. 63) : For compromising a
due debt, If a creditor agreeing to accept less than what is due, no consideration is necessary. In
other words, a creditor can agree to give up a part of his claim and there need no consideration for
such an agreement. Similarly, an agreement to extend time for performances of a contract need not
be supported by consideration (Sec.63).
7. Contribution to Charities : Charity made is a valid contract even without consideration, but a
promise to charity would be enforceable, if on the faith of the promised subscription, the promise
has undertakes a liability, hence, to the extent of liability incurred the promise to charity is enforceable
but , not exceeding the promised amount of subscription.
Example: A had agreed to subscribe Rs 10,00,000 towards the construction of a Town Hall at
Howrah. The plaintiff (secretary of the Town Hall) on the faith of the promise entrusted the work to
a contractor and undertook liability to pay him Rs.6,00,000. The defendant was held liable for
Rs.6, 00,000 ( Kedar Nath vs Ghorie Mohammad). But where the promisee had done nothing
on the faith on the promise, a promised subscription is not legally recoverable. Accordingly, in
Abdul Aziz vs Masum Ali, the defendant promised to subscribe Rs 500 to a fund started for
building of a Mosque but steps had been take to carry out the repairs. The defendant was held not
liable and the suit was dismissed.
A gr ee me nt
m ad e o n
a cco un t o f
n at ura l lo v e an d
a ffe ction [Se c.
2 5 (1 )] Ag re em e nt t o
co m pen sa te fo r
Cont ribution t o
c ha rit ies past volun ta ry
service (Se c.25
(2 )]
Except ion t o
the Rule "No
Re mission by Considera tion,
t he p ro misee of N o Cont ra ct" Ag re em e n t t o
pe r fo rm an ce of p ay a t im e -
th e prom ise bar r ed d ebt
(Se c. 6 3)
Co n tr a ct o f Co m ple te d gift
age n cy
Figure - 4.1
4.5 Privity of Contract

The Doctrine of Privity of Contract in simple words means that only those persons who are parties to the
contract can enforce the contract and a stranger to the contract cannot enforce it even though the contract
may have been for his benefit Thus a stranger to consideration cas sue because he is a party in the contract
although the consideration is furnished by some other person whether he is the promisee or not, but a
stranger to contract cannot sue as he is not a party in the contract. Any contract may be enforce by its
parties if it is supported by consideration and it is immaterial whether it was furnished by the promisee or any
other person even by a stranger.
Example I: A enters in a contract with B, but A himself has not given any consideration to B, but the
consideration has been provided by third party i.e. C to B. Although A is a stranger to consideration, he can
still enforce the contract against B because he is a party to the contract. One has to remember that this is
only true under Indian Law and the situation is different under English Law where the consideration can only
move from the promisee and a stranger to the consideration in no condition can maintain any action.
Now it can be conclude that:
1. Stranger to the contract cannot sue even though he has given consideration.
2. A stranger to consideration can sue on a contract provided he is a party to it.
Example : The doctrine of privity of contract can be best illustrated by and English case Dunlop Pneumatic
Tyre Co. Ltd., V Selfridge & Co., Ltd. As per the facts of the case, Dunlop & co. sold some tyres to one
Dew & Co., with an agreement that these tyres will not be sold below the listed price. Dew & co., in turn,
sold some of the tyres to selfridge & Co., (S) with an agreement that they (S) will observe condition as to
price and they (S) also promised that they would pay to the Dunlop & Co., a sum of Pounds 5 every tyre
sold below the list price. S sold some tyres below the list price and Dunlop & Co., brought an action against
to recover damages for the same. House of Lords held, Dunlop & Co., cannot bring an action against
because; there was no contract between the two.
Exceptions :
In the following cases, a stranger to contract can sue and enforce the contract:
1. A Trust or Charges : In an agreement which is creating a trust or charge for a beneficiary it can be
enforced by the beneficiary under it even through he is not a party to the agreement. However, the
beneficiary must be clearly mentioned in the agreement and the trust or charge must be created on
a specific property in his favour.
X transferred certain properties to Y for the benefit of Z can enforce it even through he is not a party
to the agreement.
2. Marriage Contract : Where the parents or guardians enter into a contract for marriage of their
wards, the contract may be enforced by the wards even though they are not parties to contract.
3. Family Agreement for Marriage Expenses, Maintenance of Members etc. : Where a
provision is made for the marriage or maintenance expenses of the female family members under a
family agreement, such beneficiaries may sue to enforce it even though they are not parties to the
agreement.
Example: (a) A daughter entered into a family arrangement with his father. Accordingly, the father’s
house was to be conveyed to his daughter and the daughter undertook to maintain her mother.
Held, the mother was entitled to sue for specific performance as she was beneficiary under the
arrangement.[ Veeramma v. Appayya,]
(b) A partition deed between the male member of a family made a provision for the expenses of
marriage of a female member had also agreed. Accordingly, the expenses of the marriage were to
contributed by her brothers but they refused. Held, she was entitled to the amount even though she
was not a party to the contract. [ Sundararaja Aiyanger v. Lakshminmmal]
4. Acknowledgement: Where a person by his words or conduct acknowledges or admits
himself as an agent of a third party, he is liable to the third party.
Example : A sold his house to B and the sale price was left in hand of the buyer, B for payment to
his creditor, C. B made a part payment to C promising to pay the balance soon to C. Held, C was
entitled to recover the balance. [ Deveraja Urs. V Ram Krishniah.]
5. Assignment of a Contract : Where the rights under a contract are assigned, i.e. transferred to a
third party voluntarily or by operation of law the assignee can enforce the benefits under it even
though he is not a party to the contract.
6. Conditions Running With the Land : Where the buyer of a land has a notice that the owner of the
land is bound by certain duties created by an agreement or covenants affecting ti, such buyer shall
be bound by them although he was not a party to the original agreement. [ Tulk v. Moxhay ] But
nowadays courts regard that purchaser of the immovable property is not bound by the duties alone
but also has a right to benefits under the agreement.
Example: Certain land- owners adjoining a stream agreed with “Catchment Board” to improve
the banks of the stream and to maintain them in good condition. The land owners on their part paid
the proportionate cost to the Board. Subsequently, one of the land-owners sold his land to A and
who, in turn, sold to B. Due to negligence on the part of the Board, banks of the stream burst and
the land was flooded. Both A and B filed suit against the Board. The Court of appeal allowed them
to sue even though they were strangers to the agreement.[ Smith and Snipes Hall Farms Ltd.v River
Douglas Catchment Board]
Example I A enters in a contract with B, but A himself has not given any consideration to B, but the
consideration has been provided by third party i.e. C to B. Although A is a stranger to consideration,
he can still enforce the contract against B because he is a party to the contract. One has to remember
that this is only true under Indian Law and the situation is different under English Law where the
consideration can only move from the promisee and a stranger to the consideration in no condition
can maintain any action.
Figure – 4.2
4.6 Summary
Consideration is an essential element for formation of a contract. An agreement without consideration is said
to be bare promise and is not binding on the parties (ex nudo pacto non aritio action).
A valid consideration must move at the desire of the promisor, It may move from promise or any other
person .and may be past, present or future the law does not requires consideration to be adequate and to
benefit the promisor himself .if it is at the willing of the promisor It may be some act or abstinence or promise
but must be real not illusory and must be something more than the promisor’s existing obligation
A Contract without consideration is void subject to certain exceptions. According to the provisions of
Indian Contract Act only parties to the contract can sue it is known as privity of Contarct.However in
certain exceptional cases stranger can also sue.

I Very Short Type Question
1 Define Consideration.
2 What is meant by ‘stranger to consideration’?
3 What is meant by ‘stranger to contract’?
4 What is meant by ‘ privity of Contract’?
5 What is meant by ‘constructive consideration’?
6 What are time barred debts.?
7 “Consideration must be real not illusory” Explain?
8 “An agreement without consideration is void” Explain?
II Short Type Questions
1 Comment on the following statement:
(a) No consideration, No contract.
(b) Insufficiency of consideration is immaterial but an agreement without consideration is void.
(c) A stranger to consideration can sue.
(d) A stranger to a contract cannot sue.
2 Is it compulsory that consideration must move from the promise himself?
3 “Consideration may be past, present or future” Explain?
4 State any four essentials of valid consideration.
5 “Completed gift need no consideration” Discuss?
6 Enumerate any four circumstances when a contract may be valid even without consideration.
7 “Adequacy of consideration does not effect the validity of contract.”Discuss.
8 “Past consideration is not valid consideration” Explain?
Essay type Questions
1 Define Consideration. What are the essentials element of a valid consideration?
2 Explain the rule that a stranger to a contract cannot sue with the help of an illustration. Isthere any
exception to this rule?
3 Explain the rule ‘No consideration, No contract .Are there any exception to this rule?
4 “A Stranger to contract cannot sue and stranger to consideration can sue”. Explain with
exception.
5 “An agreement without consideration is void “Explain with exception.
6 Define consideration. Discuss the legal provisions of a valid consideration.
4.8 Reference Books

- Business Laws – Sharma, Gupta, Arya – Ajmera publication
- Business Laws - Tulsian – Tata Mcgraw hill educational publication
- Business Laws – Maheshwari & Maheshwari – Himalaya publishing house
- Business Laws – G.S. Gulshan – Excel publication
Unit - 5 : Free Consent
Structure of Unit:
5.0 Objectives
5.1 Introduction: Consent
5.2 Free Consent
5.3 Coersion
5.4 Undue Influence
5.5 Misrepresentation
5.6 Fraud
5.7 Mistake
5.8 Summary
5.0 Objectives
After completing this unit, you would be able to:
 Understand the meaning of consent
 Point out the obstacles in free consent
 Know the difference between coercion and undue influence
 Know the difference between fraud and misrepresentation
 Learn the consequences and outcomes of coercion, undue influence, fraud, misrepresentation, and
mistake.
 Understand Exceptions to various Laws related to free consent
5.1 Introduction: Consent

Section 13 defines ‘two or more persons are said to consent when they agree upon the same thing in the
same sense.’ It means that there should be consensus ad idem i.e.; identical thinking about the subject
matter of the contract. If same thing is understood in different sense by the parties than no contract would
exist between them at all. There would be absence of consent. Salmond describes it as ‘Error in Consensus’.
Free C o nse nt
Is re stric ted by
C o ersio n U nd ue Fra ud M isre pres e nta tio n M ista ke

inf lue nc e
Vo ida ble a t t he o ptio n o f a g grie ve d Vo id Ag ree m ent

pa rty
Figure - 5.1
5.2 Free Consent
Free consent is one of the important characteristics of a valid contract in which both the party’s consent
should be free while entering into a contract. According to Section 14 consent is not said to be free when it
is caused by any of the following:
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake.
Before discussing about the concept of free consent, it is important to differentiate between ‘no consent’
and ‘no free consent’. In coercion, undue influence, fraud and misrepresentation there is existence of consent
but there is no free consent. Salmond calls it ‘error in causa’. In case of mistake, similar thinking of the
parties is not present; so there is no consent at all. A person cannot acquire the title without the consent of
real owner neither he can transfer title of anything which he does not possess.
When the consent of the person is obtained by coersion, undue influence, misrepresentation and fraud, the
aggrieved party can make the contract voidable at his option as his consent was not free. Section 2(i) of the
Contract Act defines voidable contract as; “An agreement which is enforceable by law at the option of one
or more the parties thereto, but, not at the option of the other or other’s”
Example: X acquired a scooter from Y by coercion. X sells it to Z. Now, this is a voidable contract at the
option of Y and it is enforceable by Law but only unless Z gets the title from X.
While in mistake, there is absence of consensus ad idem (no consent at all) and thus, it is void ab initio
i.e., void from the beginning.
Generally, it is very difficult to draw a line between error in consensus and error in causa because the
mistake can be the outcome of a fraud by either of the parties. In other words, both the errors can coexist
together and such contract will be void, and not voidable.
Activity A:
1. Explain ‘Consent as an element of a contract’. When can be saying that consent is not free?
5.3 Coersion
According to Section 15, ‘Coersion is the committing or threating to commit any act forbidden by Indian
Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person,
what so ever, with the intension of causing any person to enter into an agreement.’ It reveals that one party
induces a person to enter into a contract by the use of force or threat.
On the basis of above definition of coersion following characterises can be studied:
1. Committing or threatening to commit any act forbidden by Indian Penal Code amounts to coercion.
Example: A gave severe assault to B and caused him to sign a gift deed in his favour. The assault
amounts to coercion.
Threatening to Commit: Under the Indian Penal code an attempt to commit suicide is an offence,
but a threat to commit suicide is no offence, therefore, a consent obtained by threatening to commit
suicide does not amount to coercion. It means that if a person threatens to commit an act forbidden
by Indian Panel Code the agreement is voidable at the option of the other party.
Example: If A induces B to sign a contract at gun point or threaten to kill him. A have used
coercion.
However, Madras High Court has held a judgement that even a threat to commit suicide is coercion
even though it is not punishable under the Indian Penal Code. The following observation made by
the court is worth noting.
The term ‘any act forbidden by the Indian Penal Code’ is broader than the term ‘punishable’ by the
Indian Penal Code, simply because a man escapes punishment, it does not follow that the act is not
forbidden by the Indian Penal Code.
Example, if a lunatic or a minor commits a criminal act he may not be punished but this means that
their acts are not forbidden by the Indian Penal Code.
Example: A person by giving a threat to commit suicide induces his wife and son to execute a
release deed in favour of his brother in respect of certain property. It was held that the deed was
obtained by coercion [Chikham Amiraju v. Chikham Seshamma (1912) 16 IC 344].
Threat to File a Suit: A threat to file a civil or criminal suit does not amount to coercion since the
act is not forbidden by the Indian Penal Code. However, a threat to file a suit on a false charge
amount to coercion since such an act is forbidden by Indian Penal Code.
2. Detaining or threatening to detain unlawfully property of another person also amounts to coercion.
Example: A principal refused to pay commission to agent unless the agent hide his fraud from the
books of account. Held, this hiding of fraud amounts to coercion and therefore is not binding.
3. The purpose or aim of coercion should be to induce or force other person to enter into a contract
if there is no intention of causing other person to enter into a contract, it will not amount to coersion.
Example: A takes the possession by B’s house by threatening him. This is not coercion as A has no
intention to induce B to enter into a contract. This is mere a threat with no element of coercion.
4. When a party or person exercises coercion than it is not necessary that he is a party to the contract.
He can even be a stranger to the contract. Also, the coercion can be directed to a person, who is
not a party to the contract i.e., he is a stranger to the contract. In other words, both the person
initiating threat amounting to coercion and the person to whom coercion is directed can be a third
party who has nothing to do with the contract.
Example: If A is threatened by Q to enter into a contract of selling an agriculture land with B and
A agrees to sell it. Q’s threat will amount to coercion even though Q is a not a party to the
contract between A and B.
Example: A is threatened to hurt B’s son P if B does not enter into a contract of sale of farm house
with A. B agrees. But, it is not binding on him because his consent is acquired by coersion.
5. It is not compulsory that the Indian penal code is applicable at the place where coersion has been
exercised.
Example: A on board an English ship on the high seas, causes B to enter into an agreement by an
act amounting to criminal intimidation under the Indian Penal Code.A afterwards sues B for breach
of contract at Calcutta. A has employed coercion, although his act is not an offence under the law of
England and although section 506/566 of Indian Penal Code was not in force at the time or place
where the act was done.
5.3.1 Remedies to Coercion
According to Section 19 of Indian Contract Act “When consent to an agreement is obtained by coersion,
the contract becomes voidable at the option of the party whose consent is so obtained.”
According to Section 72 of the Act, “A person to whom money has been paid or anything delivered under
coersion must repay or return it.”It means that the if party exercising coercion has received anything from
the aggrieved party he must return it at a time of rescinding the contract.
According to Section 19 when the agreement is voidable at the option of aggrieved party then the party can
either avoid or set aside the contract or it can abide by the contract and bind the other party for the
performance of the contract.
However, the party who wants to avoid the contract shall bear the burden of proving that his consent was
obtained by coercion. It means that he has to prove that if coercion would not have been exercised, he
would not have entered into the contract.
Example: A agrees to sell his car to B under fear of assault. It is a contract voidable at the option of A.
Section 64 states that if the aggrieved party has received some benefit from the party who exercised coercion,
than the former must return the same to the letter at a time of rescinding the contract.
Example: X at whose option a contract is voidable has received Rs 100 from Y. X rescinds the contract.
X must refund the same to Y.
Activity B:
1. A at a pistol point asked B to sell his car for Rs 10000 only. B sold his car. Can B sell his car? Can
B avoid the contract? Give full reasons for your answer.
5.4 Undue Influence

The improper use of any power and authority possessed over the mind of contracting party is known as
Undue influence. If the consent is acquired by undue influence then it is not said to be a free consent and
such contract is voidable at the option of the party whose consent is so acquired.
According to Section 16 a contract is said to be affected by undue influence when:
(a) The relation existing between the parties are such that one of the parties is in a position to influence
the will of the other, and
(b) Uses that position to obtain an undue advantage over the other.
A Person Deemed to be in a Position to Dominate the Will of Another:
In following three situations law assumes to be in a position to influence the will of the other:
(i) Where he holds a real or obvious authority over the other (master or servant, parent and child).
Real or obvious authority may rise due to inequality of the parties.
(ii) Where he stand in a fiduciary relationship (religions guru and disciple, trustee and beneficiary,
doctor and patient, lawyer and client).
(iii) Where he makes a contract with a person whose mental ability is temporarily or permanently
challenged by the reason of age, illness or mental or bodily suffering.
When a influential party enters in a contract with the weaker party, and the transaction appears on the face
of it or on the proof given to be immoral, then the influential party must bear the burden of proving that the
contract is not a result of undue influence as he is in the position to control the will of the weaker party.
The above assumption can be rebutted if it is proved that
(a) All material facts were revealed to the party who is complaining for the use of undue influence.
(b) The consideration was adequate.
(c) The party complaining use of undue influence had an independent advice and was free to exercise
it.
Example: B contracts with A his debtor, for a fresh loan on terms which appear to be immoral. The
burden to prove that the contract was not induced by undue influence lies on B.
Example: A person suffering from cancer was confined to hospital. He transferred all his property
to his elder son only. Supreme Court held that this might be a case of use of undue influence.
Burden of Proof
To prove that the contract was induced by undue influence, it has to be exhibiting that:
(i) There was an unequal relationship.
(ii) One person was in a position to influence the will of the other; and
(iii) He has used that position to obtain undue advantage.
Contracts With ‘Pardanashin Woman: There is no statutory or judicial definition of the term ‘paradanashin
woman’. The term probably means a woman who is totally isolated or secluded from the ordinary social
inter-course. It is more likely that such ladies are exposed to undue influence and they require protection
from the court. Once it is shown that the contract was with a paradanashin woman the burden shifts on to
the other party to show that no undue influence was used; the contract was fully explained to her and her
consent was free. A contract with a pardanashin woman is presumed to have been induced by undue
influence.
The burden, therefore, lies on the other party to show that:
(a) The terms of the contract are fair and equitable.
(b) The transaction is real and bona fide.
(c) The lady had an independent advice in the matter.
(d) She acted at an arm’s length from the other party to the contract.
(e) The deed was explained to her, and
(f) She understood it and its effects on her interests in full.
Further, the protection given to a pardanashin woman is also applicable to illiterate and ignorant woman
who are equally exposed to the danger and risk of an unfair deal.
5.4.1 Remedies of Undue Influence
When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the
option of the party whose consent was so caused. “Any such contract may be set aside either absolutely or
if the party who was entitled to avoid it has received any benefit thereunder – upon such terms and conditions
as to the court may seem just.” (Section 19A) Further, the court has given powers under section 19 A to
allow or not to allow the refund of benefits taken.
Example: A moneylender, advanced Rs. 1000 to B, a farmer and, by undue influence, induces B to execute
a bond of Rs. 2000 with interest @ 9% per month. The court may set the bond aside ordering B to repay
Rs. 1000 with such interest as may seem fit.
5.4.2 Difference Between Coersion and Undue Influence
In Coersion and undue influence both, the consent of one of the party is not free and his freedom of will is
affected. As a result, the agreement is voidable at the option of such party under both. However, there are
some points on which they can be differentiated. They are:
(1) Mode of Obtaining Consent: In coercion the consent of the aggrieved party is taken by committing
or threatening to commit an act forbidden by Indian Penal Code or detaining or threatening to
detain some property unlawfully. While in undue influence consent is acquired by influencing the will
of weaker party by the stronger party and thereby taking advantage of one’s superior position.
(2) Type of Force: In case of coercion physical force is exercised while in undue influence moral or
mental pressure is used.
(3) Existence of Relationship: In coercion, relationship between the parties entering into a contract
need not be there. But in case of undue influence some kind of relationship between the parties must
exist where one party influences the will of the other party.
(4) Third Parties: Coercion need not be directed to a party to the contract; it can be directed against
third party also. But undue influences must be exercised upon to the party to the contract.
(5) Burden of Proof: In coercion, party rescinding the contract has to prove the act of coercion and in
no case is coercion assumed by law. But in special cases, undue influence may be assumed by law.
Activity C:
1. A, a man and enfeebled by disease and old age induced by B’s influence over him as his medical
attendant, to agree to pay B an unreasonable sum for his professional services. Discuss.
5.5 Misrepresentation
Misrepresentation is a wrong representation where the person making a false statement believes it to be true
and does not intend to mislead the other party to the contract. It may include two things.
a) Wrong statement of a material fact not known to be false or
b) Non-disclosure of facts where there is legal duty to disclose without any intention to deceive
Thus, the consent obtained by misrepresentation is not a free consent and the contract is voidable at the
option of party whose consent is obtained. Misrepresentation includes the other party to act upon the mis-
statement and enter into the contract. But the mis-statement must relate to the material facts of the contract
otherwise it is not termed as misrepresentation. A general statement or comment whether right or wrong is
not misrepresentation.
Example: A who is about to sell his bike to B says my bike is in good condition without knowing the fact
that his son has damaged the bike yesterday. B buys the bike. There is misrepresentation on the part of A.
As per Section 18, misrepresentation can be committed in any of the following ways:
(i) By Positive Statement : If a person without any logical basis makes complete and clear statement
of fact, which is not true though he believes it to be true, it will be said that he is guilty of
misrepresentation.
(ii) By Breach of Duty : When a person gains something on account of breach of duty and the other
person loses and if it is done unintentionally then it is misrepresentation. The person committing any
breach of duty, without an intension to deceive, gains an advantage to him, it will be termed as
misrepresentation.
(iii) Causing Mistake By Innocent Misrepresentation: In misrepresentation, though unknowingly,
a party makes a mistake as to the substance of the subject-matter of the contract which is material
to the contract.
5.5.1 Essentials of Misrepresentation
(1) False Representation: Misrepresentation is a false statement made without intent to mislead the
other party. But the person making the statement should genuinely believe it to be true and he should
be unaware of its falsehood.
(2) Misrepresentation Must be of Material Facts: Praising expressions made by the businessman
about their goods does not amount to misrepresentation. Misrepresentation is always related to the
facts which are important to the contract. Misrepresentation of facts not related to contract are
insignificant and does not affect the contract.
(3) Misrepresentation Should be Made Before or at the Time of Entering a Contract: A
subsequent statement made after entering into the contract is unimportant.
(4) If Misrepresentation is made by a stranger it does not affect the contract, as he is neither a party nor
agent to the contract.
(5) If there had been no misrepresentation the party would not have entered the contact. Thus,
misrepresentation must lead to the consent of the other party. If misrepresentation has not resulted
in the consent of the party, it is unimportant.
5.5.2 Outcome of Misrepresentation
Misrepresentation makes the contract voidable at the option of the party whose consent was obtained by
misrepresentation.
“A party whose consent was caused by misrepresentation may if thinks fit, insist he shall be in the position
in which he would have been if the representation made had been true.”
Example: A informs B that his estate is free from encumbrances. B there upon buys the estate. The estate
is subject to mortgage, though unknown to A also. B may either avoid the contract or insist on its being
carried out and mortgage debt redeemed.
So, in view of above, following are the remedies available to the aggrieved party whose consent was
obtained by misrepresentation:
(a) Right to Rescission : The aggrieved party who is misled by innocent misrepresentation may sue
for rescission of the contract and anything he has transferred to the other party shall be restituted to
him but the right of denial will be lost in the following cases :
(1) Where the party misled by Misrepresentation had the ways to find out the truth by ordinary
diligence (Exception to Sec. 19). But if the truth cannot be exposed with ordinary diligence then the
contract is voidable.
Example: A, by a Misrepresentation leads B to believe that 500 engine are manufactured annually
in A’s factory. B examines his accounts and finds that only 400 engines are manufactured. After this
B buys the factory, the contract is not voidable on account of A’s misrepresentation.
(2) Where the representation has not been material in causing the other party to enter into a contract.
The party enters into the contract in ignorance of misrepresentation.
(3) Where the party after becoming aware of misrepresentation expressly affirms the contract or
acts in such a manner as to be taken to have impliedly accepted it. In case of implied affirmation the
party does some act which is inconsistent with his right to affirm.
Example: A, by misrepresentation, leads B to believe wrongly that 2000 lt. of oil is made every
day in his factory. B examines the accounts of the factory which show that only 1000 lt. oil has been
made daily in the past. B purchases the factory. B cannot avoid the contract for there is no
misrepresentation. B shall be deemed not to have relied upon the information given to him by A but
upon his own knowledge. He had verified the true state of affairs and he had full opportunity to
disbelieve the statement of A.
(4) Where the interest of third party has intervened before the exercise of the right of rescission of
the contract by the party entitled to do so. The third party should acquire the rights in good faith and
with consideration.
(5) Where the parties cannot be brought back to their original position, the contract cannot be
rescinded.
(b) Right to Insist Upon Performance : Section 19 provides in this regard that “A party whose
consent was caused by Misrepresentation may if he thinks fit, insist that the contract should be
performed and that he shall be put in the position in which he would have been if the Misrepresentation
made had been true.” This means that the aggrieved party can compel the other party to put him in
a position if there would have been no Misrepresentation & then he can accept the contract.
(c) Right to Claim Damages :Usually, innocent misrepresentation does not entitle the aggrieved party
to claim damages. He can insist on restitution. But in the following cases he can get damages.
(1) Where misrepresentation has been made by the promoters or directors of the company in
the prospectus relying on which the public applies for shares. Such public is liable for
damages.
(2) Damages can be claimed for breach of the condition of warranty where innocent
Misrepresentation was embodied in the contract as a condition or a warranty,
(3) An agent who is guilty of breach of warranty of authority is liable to pay damages. Sometimes
an agent may mislead another person to enter into a contract with him by making a
misrepresentation as to his powers. In such cases, even though he is only guilty of innocent
Misrepresentation, he is liable for damages to such person who enters into a contract with
him.
Activity D:
1. “Mere silence as to facts likely the willingness of a person to enter into contract is not fraud, unless
the circumstances of the case are such that regards being had to them, it is the duty of the person
keeping silence to speak or his silence is equivalent to speech.” Explain.
5.6 Fraud
The term ‘fraud’ includes all intentional or wilful misrepresentation of facts, which are material for the
formation of a contract. Misrepresentation made with the purpose of cheating or deceiving others is fraud.
Misrepresentation of facts may be both intentional and innocent. Intentional misrepresentation has been
termed as ‘fraud’ and innocent misrepresentation has been termed simply as Misrepresentation in the Contract
Act.
Definition: Section 17 of the Indian Contract Act defines fraud as follows:
“Fraud means and includes any of the following acts committed by a party to a contract, or by anyone with
his connivance, or by his agent, with intent to deceive another party thereto or his agent or to induce him to
enter into the contract:”
(i) “The suggestion, as a fact, of that which is not true, by one who does not believe it to be true.
(ii) An active concealment of a fact by one having knowledge or belief of the fact.
(iii) A promise made without the intention of performing it.
(iv) Any other act fitted to deceive.
(v) Any such act or omission as the law specially declared fraudulent.”
5.6.1 Essential Elements of Fraud
(1) False Representation of Facts: The most important element of fraud is that there must be a false
statement or representation of facts with the intension of deceiving others. If the statement made is
not false then the person making the statement is not guilty of fraud. There can be no fraud if there
is no false mis-statement except:
(i) where silence may itself amount to fraud, and
(ii) where there is an active concealment of facts.
But when he knows that it is false, or when he makes careless statement without considering for its
truth, he is guilty of fraud.
Example: A says to B that her saree is made of pure silk, though she knows that is untrue. B
purchases the saree believing A’s statement to be true. It is a fraud by A, and therefore, contract is
voidable at B’s option.
It is important to remind here that fraudulent representation must always speak about a matter of
fact and not of an opinion. Commendatory expressions cannot be considered fraudulent as every
seller has a right to appreciate his goods.
(2) The act must have been committed by a party to the contract with his connivance or by agent. It
should not have been committed by a stranger.
Example: A person was forced to buy shares in a company on the basis of a false statement made
by a stranger. It was held that he could not get out the deal because the false statement was not held
by the company or its agent.
(3) Acts Committed Must be of Following Nature :
a. Active Concealment of a Fact: When a person takes positive steps to hide important
facts relating to the contract, the revelation of which would be harmful to his interest will
amount to fraud. But mere concealment of facts to sell the goods is not fraud as a seller
never disclose faults in the goods he is going to sell. It is the obligation of buyer to assure for
the quality and price of goods.
Example : A contracts to sell to B a piece of wool, B thinks that is the English wool, A
knows that B thinks so, but knows it is Japanese wool. A does not correct B’s impression.
Subsequently B discovers the fact. Can B repudiate the contract?
B cannot reject the contract as there is no fraud on the part of A because has no duty to
disclose the fact that piece of wool is a Japanese one. A’s silence cannot be taken as a
fraud.
b. Suggestion of an Untrue Fact: If a person states a fact which is untrue or which he
himself does not believe to be true, then it will be treated as a fraud on his part.
Example: A, who is about to sell a dog to B says ‘the dog is a beauty and worth Rs. 800.
B buys the dog for Rs. 600. Afterwards B learns that A had bought it for Rs. 400 and B
cannot get more than Rs. 200 for it. What is B’s remedy?
B does not have any remedy against A, as the statement made by A is a mere expression of
an opinion and cannot be taken as a fraud. It is necessary that false statement must always
relate to a fact and not opinion. Mere expression of a view will not amount to fraud.
c. A Promise Made Without Intention of Performing it: If a person enters into a contract
and has no intention of performing it, such a promise is considered fraud.
Example: A purchases grains from B. He has no intention of paying for them. The contract
is said to be induced by fraud.
d. Any Other Act Fitted to Deceive: Under this clause are covered all such cases which
cannot aptly be covered under any other clause. Human mind is very productive, can think
of many ways to cheat others. Thus, this sub-section covers all tricks dissembling other
unfair means which are used by cunning people to cheat others.
e. Any Such Act or Omission Which the Law Specially Declares to be Fraudulent:
Example: Under the Transfer of Property Act, Companies Act certain kinds of transfers
are declared to be of fraudulent preference.
f. The Representation Must Have Induced the Other Party to Act Upon it : ‘An
attempt to deceive which does not deceive is no fraud.’ The fraud must have influenced the
willingness of the other party to act upon the contract.
Example: H sold certain birds to W which were to his knowledge suffering from bird flu.
The birds were sold with all faults and H did not disclose the flu to W. It was held that there
was no fraud.
g. The Act Must Have in Fact Deceived the Other Party: If a party is not deceived by
the fraudulent acts committed which were intended to deceive them then it will not amount
to fraud and the person shall not be held guilty of fraud. It has been observed, “a deceit
which does not deceive is no fraud.”
Example: A says to B that his camel is in a healthy condition although he knows that it is not
true. Relying on A’s statement B purchases the camel. The contract is voidable at the option
of B.
h. The party Misled Must Have Suffered: “There is no fraud without damages” and
therefore, to comprise fraud it is necessary that the misled party must have suffered some
loss of money or money’s worth or some other tangible loss capable of assessment. Without
damage fraud does not give rise to any action for deceit.
Example: T bought a cannon from H. The cannon had a defect and H inserted a metal plug
into the weak spot of the gun. T accepted it without inspection. When he used it, the gun
burst. He refused to pay for it on the ground of fraud. But it was held that he could not do
so because he would have bought the gun even if the plug would not have been there.
(Hersfall v. Thomas 1952)
5.6.2 Silence as Fraud
Explanation to Section 17 explains that mere silence without any legal duty to speak will not amount to fraud
except where:
a. The circumstances of the case are such, that regard being had to them, it is the duty of the
person keeping silence to speak, or
b. Silence, in itself, will be equivalent to speech.
A party to the contract has no obligation to reveal all the information or facts to the other
party which may affect the subject matter of the contract. However, he may abstain from
active misstatement of facts. Mere non disclosure does not render a contract voidable.
Duty to Speak: In following types of contracts the law requires that person knowing material facts must
speak out the facts, otherwise it will be treated as a fraud on his part. In such contracts one party has a
unusual means of knowledge which are not accessible to the other. Such contracts are known as contracts
of utmost good faith and in such cases the burden to speak or disclose the truth rests upon only one party as
imposed by the law. Such types of contracts are:
(1) Contracts of Uberrimae Fidei : In case of contracts of uberrimae fidei (absolute good faith) law
imposes upon parties the duty of making a true and full disclosure of material facts. Following
contracts come in this class :
(i) Contracts of Insurance: In such contracts both parties must truly reveal facts but the
burden is more on the insured since he possess more information about the subject matter
which are likely to affect the risk. If he fails to do so insurer can avoid the policy.
(ii) Contracts for the Sale of Immovable Properties: Under Section 55 (1) of the Transfer
of Property Act, the seller is bound to ‘disclose all defects in his property or in seller’s title
thereto, of which the seller is, and the buyer is not aware and which the buyer could not with
ordinary care discover.’ In case buyer knows a material fact of which the seller is unaware,
he must disclose it to the seller.
Example: B, having discovered a mine of silver on the estate of A, adopts means to obscure,
and does obscure, the existence of silver from A. Through A’s ignorance B is entitled to buy
the estate at an under value. The contract is voidable at the option of A.
(iii) Allotment of Shares in Companies: A company offering subscription of its shares to the
public must disclose all information regarding all important matters in the prospectus with
strict accuracy. Any non-disclosure will amount to fraud. This rule is known as the Rule of
Golden Legacy.
(iv) Family Settlement: Full disclosure of all material facts is necessary when family disputes
are settled by mutual agreement.
Example: A knows that there is a treasure in the portion of the house in which he is living.
Before partition he did not disclose this fact to other brothers. Brothers can claim share in
the treasure.
(v) Contracts of Marriage: Strictly speaking contracts of marriage are not contracts of good
faith, but even then both the parties to marriage must disclose all material facts which all
likely to affect the other party’s decision to marry.
(2) Contracts of Partnership: Mutual trust and confidence is the basis of partnership. It requires
utmost good faith among the partners before and after the formation of partnership agreement.
They are also required to render true accounts and full information of all things affecting the firm, to
every partner or his legal representative.
(3) Contracts of Guarantee: Section 143 of the contract act lays down that any guarantee which the
creditor has obtained by means of keeping silence as to material facts is invalid.
(4) Fiduciary relationship: Parties sharing a fiduciary relation with each other are duty bound to
disclose all material facts which are likely to affect the willingness of the other party to enter into a
contract, e.g. Solicitor and client, doctor and patient etc.
Example: A sells by auction to B, a pet dog which A knows is unhealthy. A says nothing to B about
the dog’s illness. There is no fraud on the part of A.
5.6.4 Remedies to Fraud
The party whose consent to the contract was obtained by fraud can exercise any of the following rights:
(A) He may avoid the contract and may (i) ask for the damages suffered because of the non-fulfilment
of the contract of (ii) ask for restitution.
(B) He may insist for the performance of the contract and may ask the other party to put him in the
position in which he could have been if the representation made has been true. It can bring an action
for damages for the fraudulent representation.
5.6.5 Difference between Fraud and Misrepresentation
(1) Intention: In both fraud and misrepresentation, there is a false statement. But in fraud wrong
statement is made knowingly with an intention to deceive the other party and in case of
misrepresentation there is no intention to deceive the other party, the person making it honestly
believes it to be true or does not know that it is false.
(2) Rights: The remedy of rescission is available under both. The aggrieved party can claim damages
suffered by him as fraud is a civil wrong. But as misrepresentation makes the contract voidable at
the option of aggrieved party but it cannot claim damages.
(3) Defence: A person complaining misrepresentation can be met with a defence that he had the
means of discovering truth by ordinary diligence. In case of fraud (except fraud by silence), the
person who has played it, cannot set up the defence that the injured party had the means of discovering
the truth by ordinary diligence.
(4) Criminal Act: In certain cases fraud can be a criminal act and punishable under Indian Penal Code.
But misrepresentation does not show any criminal intent on the part of the person making the
statement and it is not a criminal act and hence not punishable under act.
(5) Silence: In some cases, silence, may amount to fraud e.g. in case of contracts of utmost good faith.
But silence cannot amount to an act of misrepresentation,
Activity E:
1. A, the owner of a ship, by fraudulently representing her to be seaworthy induces B, an underwriter
to insure the ship. Can B obtain cancellation of the policy?
5.7 Mistake
Mistake means wrong belief concerning something. Free consent is needed for the validity of a contract, but
when the consent of the party is caused by mistake, the consent is not said to be free. Either or both the
parties are under a misapprehension of some fact relating to the agreement. If there would not have been
such misunderstanding, probably they would not have entered into the agreement. Such contracts are said
to have been caused by mistake.
Mistake may be of various types as shown by the chart below:
M is t a ke
M is t a ke b y la w M is t a ke o f F a c t
I n d ia n L a w F o r e ig n B ila t e r a l U n ila te r a
P o s s ib il it y o f P e rf o r m a n c e S u b je c t M a t te r
N a t u r e o f Tr a n s a c t io n I d e n t it y o f
C o n t r a c t in g P a r t ie s
Figure - 5.2
5.7.1 Mistake of Law
i) Mistake as to Indian Law: When the mistake is made as to the Indian Law, the contract will not
be voidable because every citizen or resident of a country is expected and should know the law of
the land where he lives. Ignorance of law is no excuse (ignorantia juris nemi nem excusat). Ignorance
of law cannot be the basis of relief to any person.
Example : If A and B entered into a contract on a erroneous belief that a particular debt was barred
by Indian Law of Limitation, the contract cannot be set aside on the basis of mistake by law.
ii) Mistake as to Foreign Law: Mistake as to a foreign law has some effect as a mistake of fact, and,
therefore, the contract can be avoided.
Example: A and B purchase and sell a plot of land of 200 sq. m. in Dubai believing that a house on
be constructed over it. Actually it turns out that in Dubai no house can be constructed on a plot of
less than 300 sq. m. The contract can be avoided.
5.7.2 Mistake of Fact (Section 20 and 22)
(A) Bilateral Mistake: According to Section 20 “where both the parties to a contract are at a mistake
about the facts which are essential to the agreement, the agreement shall be void.”
In order to avoid a contract on the grounds of mistake of fact, it is necessary to show:-
(i) that the mistake was bilateral, and
(ii) the mistake was as to a fact essential to the agreement.
Example: X having cars, blue and red, offers to sell blue car to Y and Y not knowing that X has two
cars thinks of red car and agrees to buy it. Here, there is no real consent and therefore, the contract
is void on the ground of bilateral mistake of fact.
A bilateral also known as identical bilateral mistake may be either a common mistake or mutual
mistake. Where both the parties have made the same mistake it is termed as common mistake.
When both the parties make different mistakes it is mutual mistake and may also be called non-
identical bilateral mistake. In case of common mistake the contract is void. In case of non identical
mistake the contract does not comes into existence at all because there is no consensus ad idem.
The parties are never in agreement.
Again, bilateral mistake of fact may be
(1) Mistake as to Subject Matter: Where both the parties are working under a mistake
regarding the subject matter, the agreement is void. It may be of following types :
(i) Regarding Existence of Subject Matter: It may happen that both the parties are not
aware of the fact that at the time of the contract the subject-matter may ceased to exist or
it may never have been in existence. It is a common bilateral mistake.
Example: A agrees to purchase a specific article from B. Unknown to both the article has
already lost. The contract is void.
(ii) Regarding Identity of the Subject Matter: Example: Satyam transport sales a
cargo to W which arriving from Jaipur. There were two companies of the similar name
carrying cargo on the same date. Both the parties have different company in mind. The
contract was held to be void for mutual bilateral mistake.
(iii) Regarding Title to the Subject Matter: Both the parties are unaware of the fact that
the buyer is already the owner of that which the seller claims to sell him. Such agreement of
sale is void.
Example: A nephew of B, purchases a house from B. But both are unknown that A’s
grandfather has already given this house to A in his will. Held, the agreement is void.
(iv) Regarding Quality of the Subject Matter: Example: A agrees to buy from B a
number of sacks which both A and B believes to contain jute. But in fact, the sacks contain
cotton. The agreement is void.
(v) Regarding Quantity of the Subject Matter: Example: ‘P’ wrote to ‘H’ inquiring
about the price of guns and suggested that he might buy as many as 70 guns. On receipt of
reply, he sent a telegram ‘Send three guns’. Due to mistake of telegraph officer the message
was sent ‘Send the guns’. ‘H’ dispatched 70 rifles. Held there was no contract between the
parties on a ground of consensus ad idem and mistake of third party. P was not held liable
for damages but was required to pay the price of the three guns.
(vi) Regarding Price of the Subject Matter: There may sometimes be a genuine mistake
as to the price of an article for sale.
Example: A contract of lease of house was agreed at a rent of Rs. 4500 pm but in the
written contract the figure was put as Rs 1500 by mistake. Held, that the contract was
enforceable.
(2) Mistake as to the Possibility of Performance: If the presence of certain set of circumstance
is necessary for the performance of the contract and both the parties are unaware about the
existence of such circumstance of at the time of the contract. Then the contract will be void on
the grounds of mistake.
Example: A hires a Television from B for watching the cricket match between India and Pakistan.
Unknown to both the parties the match had already been cancelled due to rain. The contract is
void.
(B) Unilateral Mistake: It is the mistake on the part of one of the parties only as to a matter of fact.
Generally, a unilateral mistake does not affect the validity of the contract. Section 22 of the Indian contract
Act states in this regard that “a contract is not voidable merely because it was caused by one of the parties
to it being under a mistake as to matter of fact.”
In the words of Anson, “We are not concerned with cases in which a man finds the obligations of a contract
more onerous than he intended or is disappointed in the performance which he receives from the other
party.” Thus is not mistake, but error of judgement.
Example: A intends to sell his cell phone. B intending to offer Rs. 3000 for it, by mistake offers Rs. 5000.
A accepts the offer. The contract cannot be avoided by B on the ground of mistake.
However, a contract can be repudiated in case of unilateral mistake if it is proved that the mistake was a
result of fraud or misrepresentation on the part of other party. A unilateral mistake will make an agreement
void if (i) it is about a fact which is material to the agreement, and (ii) secondly, the mistake restricts or
hinders the consent of the parties.
Contract shall also be void where the offeror makes a material mistake in expressing his intention and the
other party knows or is deemed to know the error. But if there is a mistake on the part of one party alone
and the other does not, or cannot be deemed to know of the mistake the contract is binding. Mistake
caused due to carelessness of the party will not grant any right to such party to avoid the contract. Unilateral
mistake may be of two types:-
(a) Mistake About Identity of Parties: Mistake as to identity occurs when one of the parties
represents himself to be someone who he is not then, it is the mistake of identity of parties. In the
words of Sir Anson, “if a man accepts an offer which is plainly meant for another or if he becomes
party to a contract by falsely representing himself to be another contract in either case is void, or to
put in more accurately no contract comes into existence. In the first case one party takes the
advantage of the mistake, in the other he creates it”. When the personality of the party contracted
with is important in a contract then no one has the power to step in and declare that he is the party
contracted with. There is a mistake of identity only when the complaining party wants to deal with
a person having a particular identity. If the name is fictitious, there will be no mistake of identity.
Example: [King’s Norton metal Co. V. Edridge, Merrett & co.(1897) 14 LTR 98] A man named
W adopted a name of H and company, a firm not in existence, and by letters placed an order for
some goods with K N & Co., who complied with the order. It further sold these goods to E M &
Co. who acted in good faith. K N & Co. sued E M & Co. for the value of goods. The contract was
held voidable for fraud but not void for mistake as K N & Co. did not make a mistake regarding
identity.
Example: X falsely representing herself as the wife of a well-known millionaire takes a ring from
the jewellers’ shop for the approval of her husband. She pledges it with a pawnbroker who in good
faith and without notice of the first transaction pays her Rs. 10,000. Can the jeweller recover the
ring from pawnbroker?
In this case there was no contract between the jeweller and the woman and the pawnbroker does
not take good title and must return the ring to the jeweller. Though the woman got possession
physically, there was no mental assent as the jewellers intended to deal not with her but quite a
different person viz. the wife of the millionaire [Lake v Simmens (1927) ac 487]
(b) Mistake as to the Nature of the Transaction: When a party with the fault of his own, make
a mistake as to the very nature of the contract, than the contract is void. The mistake can be due to
blindness, illness, illiteracy or other inabilities of the person signing the contract. It may also be due
to tricks or fraud of the other person as to the nature of the contract so that the plaintiff signs the
contract. A contract shall be void if a party to the contract without any fault of his own makes a
mistake about the very nature of the contract.
Example: (Raja Singh v. Chaichoo Singh [AIR1940 part 201])- A appointed the B to look after
his cultivation and his affairs as he had become to old to manage them. B asked him to grant a lease
of his land. A agreed to it and placed his thumb impression upon a deed which was in fact a gift of
the land.
The court held the deed to be void ab initio.
Usually, such mistakes are result of fraud by one of the parties to the contract who has the obligation to
reveal true nature of the document or contract to the other person who is signing it. If it fails to do so
intentionally and thus, induces other party to sign the document of different nature. In such a case the
agreement is negated by mistake.
5.7.3 Remedies of Mistake
When contract is caused by mistake and is void, the following are the consequences :
(1) Under Section-65, any person who has received any advantage under such contract is bound to
restore it or make compensation for it to the person from whom he received it.
(2) A person to whom money has been paid, or anything delivered by mistake, must re-pay or return
it (Section-72).
Activity F:
1. “The law relating to mistake is a comedy of errors.” Comment.
5.8 Summary
The consent means when two parties enter into a contract with reasonable consideration and they mutually
approve the contract by fulfilling all elements of valid contract. They agree on terms, conditions, situations,
circumstance, with another person. It means that a party mutually agree upon above mentioned terms
without any threat, pressure, force, inducement. As per sections 15, 16, 17, 18, 19, 20, 21&22 of Indian
Contract Act the consent is free when two parties enter into a contract in the absence of coercion, undue
influence, fraud, misrepresentation, and mistake. To make a valid contract, ‘consent’ of all the parties is
important and that too it has to be free.

1. ‘An agreement requires a meeting of the minds’. Comment
2. What is ‘undue influence’? How does it differ from ‘coercion’?
3. “An attempt to deceive which does not deceive is no fraud”. Comment
4. What is the importance of distinction between Bilateral Mistake and Unilateral Mistake?

- S N Maheshwari & S K Maheshwari (2008); ‘Business Laws’; Himalaya Publishing House Private
Limited, 2008, New Delhi.
- R L Miller & W E Hollowell (2010); ‘Business Law Cengage Advantage Book’, 2010
- N Singh (2006); ‘business laws’, Deep &Deep Publications Pvt. Ltd.(2006), New Delhi.
- R R Ramtirthkar (2009); ‘Legal Aspects of Business’; Himalaya Publishing House Private Limited,
2009, New Delhi.
- P M Rao (2011); ‘Mercantile Law’; PHI, 2011, New Delhi.
Unit - 6 : Legality of object and Consideration and Agreements
Opposed to Public Policy
Structure of Unit:
6.0 Objectives
6.1 Introduction
6.2 Unlawful Consideration and Object
6.3 Public Policy
6.4 Agreements, The Consideration or Object of Which is Unlawful in Part
6.5 Effect of Illegal Agreements on Collateral Transactions
6.6 Recovery of Benefits Given Under Illegal Agreements
6.7 Provision of Restitution
6.8 Summary
6.0 Objectives
After reading this chapter you should be able to
 Understand the importance of Legality of Object and Consideration of a contract
 Learn what objects and considerations are unlawful
 Understand the meaning of Public Policy and agreements against Public Policy
 Know partial lawful object and consideration
 Remedies available in such cases
6.1 Introduction
Legality of Object and Consideration: For a contract to be valid, one essential element is that the
consideration and object of the contract should be lawful. ‘Consideration’ for a contract is different from its
object. ‘Consideration’ means acting, abstinence or promising something at the desire of the promisor
whereas ‘object’ is the purpose for which the agreement is entered into. Consideration is given to fulfill the
object of the contract. For example an agreement made for the purchase of arms and ammunitions for
continuing a war against the nation. Here, the object is to continue war and consideration is the promise to
provide arms and ammunitions and pay for the same. Therefore, for a valid contract both object and
consideration should be lawful otherwise it cannot be enforced by Law.
Section 23 mentions the circumstances when the consideration or object of an agreement is not lawful:
What Consideration and Objects are Lawful, and What Not? The consideration or object of an
agreement is lawful, unless-
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the provisions of law; or
is fraudulent; or
involves or implies injury to the person or property of another; or
the Court regards it as immoral, or opposed to public policy.
In each of the above cases, the consideration or object of an agreement is unlawful and void.
Section 10 lays down that all agreements are contracts if made for lawful consideration and with a lawful
object. If any one of the reasons mentioned in section 23 exists in the object or consideration of the
contract, the agreement is ‘illegal’ and therefore void.
The use of word ‘illegal’ is not apt here as it refers to an offence deserving punishment. But the parties
involved in a so-called illegal agreement are not liable for punishment unless it is expressly a criminal or a
civic wrong declared by law. The parties have only accomplished a transaction that is shunned by law.
According to Section 23 the words ‘object’ and ‘consideration’ are not synonymous. The object here,
means ‘rationale or aim’. In Jaffer Maher Ali v. Budge Budge Jute Mills Co. (1906) 33 Cal. 702, an
insolvent person with the object of defrauding his other creditors, transferred his property to one of his
creditors, the court thus held the agreement void and the transfer inoperative. In this case the court was of
the opinion that though the consideration of the contract was lawful, the object was to defeat the provisions
of Insolvency Law which is unlawful.
6.2 Unlawful Consideration and Object

Section 23 declares the agreement whose either object or consideration is unlawful and void. What kinds of
considerations and objects are unlawful shown as under?
1. If it is Forbidden By Law, i.e. it has specifically been declared to be unlawful by any of the
country for the time being in force. An act or an undertaking is forbidden by law:
(a) when it is liable to be punished by the criminal law of the country, or
(b) when it forbidden by the special legislation or regulations made by a expert authority under the
powers resulting from the legislature.
Case: An agreement to pay consideration to a tenant to induce him to vacate premises governed by
the Rent Restriction Act is illegal and can be enforced because such an act is forbidden by the said
act [Mohanchana v. Manindra AIR (1955) Cal.442.]
Example: A agrees to sell certain gems to B which B will smuggle out of the country. The contract
is unlawful.
2. If it is of Such a Nature That, if Permitted, Would Defeat the Provisions of Law– This
clause includes cases where the object or consideration of an agreement is of such a nature that,
though not directly prohibited by law, it would indirectly lead to a breach of law, whether enacted or
otherwise (e.g. Hindu and Mohammedan Laws). Such an agreement is also void.
Example: A gives a loan of Rs. 10,000 to B. B agrees not to raise the plea of limitation in case a sue
has to be filed against him for recovery of loan even if it becomes time barred. The agreement is
void as it defeats the provisions of the Indian Limitation Act.
Case: An agreement between husband and wife to live separately is invalid as being opposed to
Hindu Law [A.E. Thimmal Naidu v. Rajammal (1968), AIR Mad. 201]
3. If it is Fraudulent, i.e. the object of the contract is to cheat the other party by concealment of any
material fact or otherwise.
Example: (i) A promises to pay Rs. 20,000 to B, if B would commit fraud on C. B agrees. B’s
agreeing to trick is unlawful consideration for A’s promise to pay. Hence, the agreement is illegaland
void.
Example: (ii) A, B and C enter into an agreement of partnership for the division profits earned by
them from business as well as by illegal activities. The agreement is void, as its object is unlawful.
4. If it Involves or Implies Injury to the Person or Property of Another:
Case: An agreement which compels a debtor to do manual labor for the creditor as long as the debt
is not paid in full is void [Ram Sarup vs Bansi Mandar (1915) 42 Cal. 742.]
Example: An agreement to put certain property to fire is illegitimate and void under this clause.
5. If the court regards it as Immoral — ‘Immorality’ depends upon the principles of morality
existing at a particular time and as approved by courts. Such agreements whose object and
consideration are immoral, is illegal and therefore, void. The scope of word ‘immoral’ here extends
to the following:
(i) Sexual Immorality e.g. Illicit Cohabitation or Concubinage or Prostitution
Example: A agrees to let her daughter to B for concubinage. The agreement is void because it is
immoral, though the letting may not be punishable under the Indian Penal Code. ( Illustration (k) to
Section 23).
It is important to note that consideration paid for past cohabitation and promise to pay for future
cohabitation both are immoral and thus, illegal and void. Past immoral consideration does not
become right with the passage of time, it remains unlawful.
(ii) Furtherance of Sexual Immorality
Case: A prostitute was sued for the hire money of a carriage in which she used to go every evening
in order to make a display of her beauty and thus to attract customers. The suit was dismissed on
the ground that the plaintiff contributed towards the performance of an immoral and illegal act and
hence he was liable to suffer. [Pearce v. Brooks (1866), L.R. 1 Ex. 213].
Case: A man who intentionally lets out his house for prostitution cannot recover the rent, it being an
act for furtherance of sexual immorality [Choga Lal v. Piyasi (1909), All. 58]. The landlord may,
however, recover if he did not know the purpose.
(iii) Interference With the Marital Status
Case: Money advanced to a married woman to enable her to procure divorce and to marry the
plaintiff could not be recovered back as the object of the agreement was held immoral. [Bai Vijli v.
Nansa Nagar (1885) 10 Bom. 152].
Example: An agreement for future separation between a husband and a wife is void ab initio, it
being immoral in the eye of Law.
(iv) Such acts which are against Good Public Morals
Case: An agreement for future marriage, after the death of first wife is against good morals and
hence would be void. [Wilson v. Cornley (1908), 1 KB. 729].
Activity A:
1. A, being already married to B, agrees with C, during B’s lifetime that he will marry C in case B dies.
Can C ask for the performance of the promise in the event of B’s death?
6.3 Public Policy

Public Policy means any Principle of Law which no person can lawfully do that which can be harmful for
public law or it can harm public. Anything which is beyond the good of public or against the public interest
can be termed as ‘opposed to Public Policy’ and any agreement which is opposed to public policy is
unlawful. Public Policy can be different at different places and its implication varies with the social structure
of the country. Any agreement which promotes corruption, injustice, immorality is said to be ‘opposed to
public policy’. It is remarkable to know that the term ‘immoral’ and ‘opposed to public policy’ can be used
interchangeably, as they both have somewhat related character. What is immoral is opposed to public
policy and vice versa is also true.
Public policy is a vague concept. It has been described as an ‘untrustworthy guide’, ‘unruly horse’, etc., and
therefore, the set of guidelines of public policy is generally governed by traditions. In Gherulal v. Mahadeodas
[(1959), A.I.R. S.C.781] the Supreme Court observed, “…though the heads(of public policy) are not
closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances
of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover
new heads in these days.” The courts, thus, are generally disinclined to invent new heads of public policy.
6.4.1 Meaning of Public Interest
‘Public Interest’ implies common good or general social welfare. Public interest is to be differentiated from
private interest. According to dictionary of sociology, a thing may be said to be in the public interest where
it is or can be made to appear to be contributive to the general welfare rather than to special opportunity of
a class, group or individual. Anything which is not injurious to public good shall be in public interest.
6.4.2 Agreement against Public Policy
Following are some cases, in which the courts have hold the agreements to be against public policy:
1. Trading With the Enemy: It is clear that trading with an alien enemy (i.e. a citizen of other country
at war with the nation) is against public policy in so far as it tends to aid the economy of the enemy
country. Such agreements are illegal, unless made with the special permission of Court.
2. Agreements for Stifling Prosecution: It is well known law if anyone commits a crime, he should
be punished. Therefore, any agreement which restricts the prosecution of a criminal or a guilty, such
agreement is opposed to public policy and is void for “no one can be allowed to make a trade of a
felony.” No court can give effect to an agreement which takes the administration of law from the
hands of Judges and put it in the hands of general public.”
Example: A promises B to drop a prosecution which he has instituted against B for robbery and B
promises to restore the value of the goods taken. The agreement is void, as its object is to stifle
prosecution.
3. Agreement of Maintenance and Champerty: ‘Maintenance’ means an agreement in which a
person promises to help another by money or otherwise to continue legal action in which he is not
himself interested.
‘Champerty’ is an agreement whereby a person agrees to serve another in recovering property in
consideration of the latter giving the former a share in the property so recovered.
In both the cases, financial and professional help is provided by the third party who is stranger to the
contract but in case of champerty the party supporting demands a share or gain from the litigation in
addition to his fees.
Case: An agreement by a client to pay his lawyer according to the result of the case was held
opposed to public policy and void, it being against professional code of conduct. [Kothi Jairam v.
Vishwanath A.I.R. (1925) Bom. 470].
Case: An agreement to pay 75 paisa in a rupee as a share of the financer from the property
recovered, it was held that the agreement was irrational and void. However, the plaintiff was eligible
for the expenses actually incurred by him with interest. [Nuthaki Venkataswami v. Katta Nagi
Reddy A.I.R. (1962) A.P. 457].
In, England, all Maintenance and Champerty agreements are illegal and unenforceable. The Indian
Law however, does not make them absolutely void because of the peculiar position of Indian
litigants many of whom are too poor to afford expensive litigation.
4. Marriage Brokerage Contracts: In these agreements the consideration paid is for marriage.
However, it does not affect the validity of marriage but the reward paid for consideration of marriage
cannot be recovered and if not paid, a suit for recovery of the promised reward cannot be maintained
because such agreement is illegal. But the money can be recovered when the marriage is not
performed [Dharnidhar v. Kanji Sahay A.I.R. (1949) Pat. 250]. Similarly, the value of clothes or
ornaments can also be recovered if marriage does not take place [Girdhari Singh v. Neeladhar
Singh (1912) 16 I.C. 1004]. Further, an agreement of dowry is also illegal and cannot be enforced.
But such an agreement is illegal in respect of payment only; the validity of marriage is not affected.
Example : A promises to pay a sum of Rs. 1,100 to B, the father of the bridegroom, and actually
pays Rs. 400. The marriage falls through, Rs. 400 can be recovered by A. (In case certain presents
are given, they can be recovered).
5. Traffic in Public Offices: The agreements for sale or transfer of public offices and recommendations
for appointment in public offices by taking bribes or money considerations are illegal as being
opposed to public policy. Such agreements corrupt public services and the dignity attached to
them. If enforced, then such agreements would lead to inefficiency and corruption in public life.
Example: A promise by a person to obtain an employment for the other in any of the government
services for some consideration (bribery) shall be void for the reason that traffic in public offices is
forbidden by law and consideration as an offence.
Case: A promise to pay money to a public servant to induce him to retire to pave the way for the
appointment of the promisor is void [Saminatha v. Muthusami (1907), 30 Mad, 530].
6. Agreements Creating Interest Opposed to Duty: When a person enters into an agreement as
a result of which he will have to pursue a cause which is against his public or professional duty, the
agreement is void because it creates a conflict between his interest and responsibility as a professional
and it is opposed to public policy.
Example: A agrees to pay B the Major in the army, Rs. 20,000 if he will give him the secrets of the
army then, the object of the agreement is opposed to public policy and hence it is illegal and void.
Example: An agreement made by a solicitor with the third party that he will not produce the
evidence favoring his client in the court is illegal, and opposed to public policy as well as the
professional code of conduct of a solicitor. This agreement conflicts between the interest and duty
of solicitor.
7. Agreements Unduly Restraining Personal Liberty: All agreements which unjustifiably hamper
the personal freedom of an individual are held to be void and illegal as they are opposed to public
policy.
Example: A borrowed money from B, a money lender, and agreed that he would not, leave his job,
borrow money, dispose of his property or change his residence without the written consent of A. It
was held that the agreement was unduly restricting the personal independence of A.
8. Agreements in Restraint of Parental Rights: A father and in his absence the mother, is the legal
guardian of his/her minor child. This right cannot be bartered away by any agreement. Therefore, an
agreement, in which a father agreed to transfer custody or guardianship of his two minor children in
favour of the lady, was held to be void, though the father agreed not to rescind the authority of the
lady. [Giddu Narayanish vs Mrs. Annie Besant (1907), 38 Mad. 807]
Activity B:
1. In a suit by A against B for the recovery of Rs. 5000, A is in need of money. C agrees to provide
funds to A in consideration of sharing one-forth of the money recovered from B. Decide the validity
of the agreement between C and A.
Activity C:
1. X promises a sum of Rs. 500 to Y, who is an intended witness in a suit against X, in consideration
of Y’s absenting himself from the court on one pretext or the other. Y absents himself and demands
payment from X who refuses to pay. Can Y recover Rs. 500 from X.
6.4 Agreements, The Consideration or Object of Which is Unlawful in Part

In section 23, we have studied that when object and consideration is lawful, the agreement is void. Section
24 describes the cases where only a part of consideration and object is unlawful as under :-
(i) if there are several objects but a single consideration, the agreement is void if any of the objects is
unlawful. (Section 24)
(ii) If there is a single object but several consideration, the agreement is void if any of the consideration
is unlawful. (Section 24)
There are some agreements which comprise of both legal and illegal aspect. Section 24, 57 and 58
of the Contract Act deals with such cases where object and consideration are partially unlawful. In
such cases following rules are applicable:
1.When an agreement contains various promises to do legal as well as illegal things, and the legal
part cannot be distinguished from the illegal part, the whole agreement is illegal and void.
Example : A promises the Incharge, on behalf of B, a legal manufacturer of dyes, and an smuggler
of gold. B promises to pay him a salary of Rs. 20,000 a year. The agreement is void and unlawful
because a part of the object is legal and a part is illegal which are not separable i.e., the object of A
and consideration of B are unlawful in part. (Section 24)
2. Where there is a mutual promise to do things legal and also other things illegal, and the legal part
can be separated from the illegal part, i.e., there is a separate consideration for different promises,
the legal part is a contract and the illegal part is a void agreement. (Section 57)
Example: A agrees to sell a house to B for Rs. 20,000 but if B uses it as a godown for smuggled
articles, he shall pay Rs. 80,000 for it. The first set of reciprocal promises, namely, to sell the house
and pay Rs. 20,000 for it, is a contract. But the second set has an unlawful object i.e., to use the
house for smuggling is void and illegal.
It must be noted here that there are two distinct promises and separate consideration for each
promise. The promises are two but they form a part of single contract.
3. In case of an alternative promise one branch of which is legal and the other illegal, the legal
branch alone can be enforced (Section 58).
Example: A and B agree that A shall pay B Rs. 10,000 for which B shall afterwards deliver to A
either wheat or smuggled opium. There is a valid contract to deliver wheat and a void contract as to
opium.
Activity D:
1. A promises to B to pay Rs.5000 for arranging a housemaid to look after his kids. A arranges for the
same. But unknown to A, B is involved in human trafficking. Can A recover the amount from B?
6.5 Effect of Illegal Agreements on Collateral Transactions

It has been discussed earlier that ‘illegal agreements’ and ‘void agreements’ are unenforceable. But an illegal
agreement also affects the other transactions which are collateral to it and such transactions are also ruined
by illegality. But if the parties of the collateral transaction have the knowledge of the illegal aspect of the
principal agreement then the void agreement does not makes the collateral transaction illegal.
Example: A enters into an agreement of smuggling goods with B for which he borrows Rs. 3000 from C to
pay it to B. If C knew the purpose for which A has borrowed money from him, he cannot recover the money
lent because his loan was a collateral transaction to an illegal agreement. But if C did not know the purpose
of money lent by him, he can recover it from A even though A had used the money for an illegal object.
6.6 Recovery of Benefits Given Under Illegal Agreements

Money paid or property transferred under an illegal agreement is written off except in following cases:
(i) Where the transferor is not equally blameworthy with the other party i.e., transferee.
(ii) Where the transferor remorse of making the agreement before any part of the illegal purpose is
carried out.
(iii) Where the transferee was under a fiduciary duty to protect the plaintiff’s interests and has harmed
his duty by making the illegal agreement.
6.7 Provision of Restitution

Parties to an illegal agreement cannot get any assistance from a court of law, for, “no polluted hands shall
touch the pure foundation of justice.” Nothing can be recovered under an illegal agreement and if something
has been paid it cannot be recovered back, whether the illegal object has been carried out or has not been
carried out, is irrelevant. The rule of law is that “no action is allowed on an illegal agreement” and “in case of
equal guilt, the position of a defendant is better than that of the plaintiff.”
Example : X promises Y to pay Rs. 10,000 if he murders Z. If Y commits the murder, he cannot recover
the amount from X. If X has already paid the amount and Y fails in murdering Z, X cannot recover the
amount back.
Activity E:
1. A pays Rs. 10,000 to B in consideration of his assaulting C. B did not performed his promise. Can
A recover his money?
6.8 Summary
This chapter describes that an agreement is a contract if its object and consideration are lawful (Section 10).
It also deals with those transactions which are void ab initio due to unlawful object and consideration.
Section 23 of the Act explains the circumstances in which both object and consideration are unlawful as: (a)
it is forbidden by law, (b) it is of such a nature that, if permitted, it would defeat the provisions of law, (c) it
is fraudulent, (d) it involves or implies injury to any person or property of another, (e) the court regards it as
immoral or (f) opposed to public policy.
The chapter deals with the transactions which are against the public policy and which defeats the public
interest. Such agreements are void and illegal as they are injurious to the welfare of the society.
There are also certain agreements a part of which is legal and the other part is illegal. Such agreements are
also dealt with in this chapter. In such cases, either the object or the consideration is illegal. However, the
validity of the contract in these cases depends on the set of promises that are legal or illegal.
At last the chapter describes the remedies available in case of unlawful object and consideration. The
assistance they can get from the court and the recovery benefits, if any, available to the party are also
constituted in this part of the chapter.

1. “An agreement is illegal and shall not be enforced if the court regards it as immoral.” Comment.
2. What do you understand by an illegal agreement? What is the effect of illegal agreements on
collateral transactions?
3. Examine the validity of agreements with consideration and object unlawful in part.
4. When is consideration illegal?
5. What are the contracts of uberrimae fidei? Give any four examples.
6. What do you understand by the ‘Doctrine of Public Policy’?
7. Differentiate between champerty and maintenance.
8. Under which circumstances are object and consideration unlawful? Explain in brief.
- S N Maheshwari & S K Maheshwari (2008); ‘Business Laws’; Himalaya Publishing House Private
Limited, 2008, New Delhi.
- R L Miller & W E Hollowell (2010); ‘Business Law Cengage Advantage Book’, 2010
- N Singh (2006); ‘business laws’, Deep &Deep Publications Pvt. Ltd.(2006), New Delhi.
- R R Ramtirthkar (2009); ‘Legal Aspects of Business’; Himalaya Publishing House Private Limited,
2009, New Delhi.
- P M Rao (2011); ‘Mercantile Law’; PHI, 2011, New Delhi.
Unit - 7 : Void Agreement and Contingent Contract
Structure of Unit:
7.0 Objectives
7.1 Introduction
7.2 Meaning and Definition of Agreement
7.3 Meaning and Definition of Void Agreement
7.4 Features of Void Agreement
7.5 Void Agreements as Per the Provisions of Indian Contract Act, 1872
7.6 Differences Between Void, Illegal and Voidable Agreement
7.7 Meaning and Definition of Contingent Contracts
7.8 Essential elements of Valid Contingent Contracts
7.9 Rules as to Enforce of Contingent Contracts
7.10 Summary
7.11 Key Terms
7.0 Objectives
After studying this unit, you would be able to:
 Meaning and Definition of Void Agreement and Contingent Contract.
 Features of void agreement and provision of Indian Contract Act.
 Essential elements of valid contingent contracts.
 Rules as to enforce of contingent contracts
7.1 Introduction
Business Laws are essentially required, in present day modern business environment, when several business
activities have turned to be of global nature elevating from the local level, these business and commercial
activities are being operated, only through appropriate contracts and agreements. In general sense, the
laws, by-laws. Legal provisions, legal procedures, legal systems, etc. framed by the government of any
country, state and local body to systematize and regulate the human behaviour in social, economic and
political fields, are called, law. An agreement is in simple term “every promise and every set of promises,
forming the consideration for each other”.
7.2 Meaning and Definition of Agreement

An agreement is a very wide term. “All contracts are agreements but all agreements are not contracts”
AGREEMENT [SECTION 2(e)]: An agreement means, “Every promise or every set of promises, forming
consideration for each other”.
AGREEMENT = PROMISE(S) BY ONE PARTY (+) PROMISE(S) BY THE OTHER PARTY
When we are going to classify the contract, on the basis of validity under that come Void agreement. All
agreements which have been declared to be void by the law of the land are not contracts. They are born as
agreements and die without fruits. Agreements without consideration or for unlawful object or consideration,
agreement in restraint of marriage, trade, legal proceedings, wagering agreements etc. are some of the
agreements which have been expressly declared to be void under the Act. They can never be enforced.
Illustration: Mutual consent between Jai and Vijay for sale and purchase of Maruti car in Rs. 80,000 is
called, agreement.
Illustration: Ram agrees to take dinner with Shyam on his Birthday. This is social agreement between Ram
and Shyam.
Activity A:
1. Very contract is an agreement but every agreement is not a contract. This statement is -
(a) Wrong (b) Correct (c) Correct subject to certain exceptions (d) Partially correct.
An Agreement is -
(a) Offer (b) Offer + Acceptance (c) Offer + Enforceability (d) Contract.
7.3 Meaning and Definition of Void Agreement

“Void Agreement [Section 2(g)]: An agreement not enforceable by law is said to be void”. Hence, void
agreement continues to be void, from the beginning to the end. Such agreement does not confer any right to
any of the parties to it. The agreement, in such a case, is void-ab-initio (from the very beginning). Such an
agreement does not result in a contract at all.
In other words, it does not create any obligation of the parties. All agreements with incompetent person and
agreements which have been expressly declared to be void under this Act.
Illustration: A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic
in other articles. B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the object
of A’s promise, and the consideration for B’s promise, being in part unlawful.
As per Section 2(g) of The Indian Contract Act , 1872 “An agreement not enforceable by law is said to be
void”, and as per Section 2(j) of The Act “A Contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable”.
Thus void contracts can be of the following two types:-
(i) Void ab initio:- Void-ab-initio i.e. unenforceable from the very beginning
(ii) Void due to the impossibility of its performance: - A contract can also be void due to the impossibility
of its performance. E g: If a contract is formed between two parties A & B but during the performance
of the contract the object of the contract becomes impossible to achieve (due to action by someone
or something other than the contracting parties), then the contract cannot be enforced in the court
of law and is thus void.
Illustration: Sudha says to Ram that if he promises not to marry, during his entire life period, she will give
him Rs 20 lakh. Ram, who has attained majority, receives Rs. 20 lakhs, by promising not to marry. But,
thereafter, he gets married with Sarika. However, Sudha can not impose any legal restriction on his marriage,
because this is a void agreement.
Effects:
 Void From Beginning: The agreement is void from beginning. It does not give rise to legal obligation
of either party.
 No Restitution: no restitution can be granted. Any consideration passed on by parties to each
other, cannot be generally restored. However, the law courts may on equitable ground, grant restitution
where one of the parties is minor and he/she has misrepresented or defrauded the other.
Activity B:
1. A void agreement is one which is:
(a)Enforceable at the option of one party.
(b) Enforceable at the option of both the parties.
(c) Valid but not enforceable.
(d) Not enforceable in a court of law.
7.4 Features of Void Agreement

 An agreement made by incompetent parties (Minor/Incapacitated Person) is void.
 Any agreement with a bilateral mistake is void.
 Agreements which have unlawful consideration is void.
 Agreement with a unlawful object is void.
 Agreements made without consideration is void.
 Agreement in restraint of marriage of any major person is void (absolute restriction).
 Agreement in restraint of trade is void.(reasonable reason)
 Agreement in restraint of legal proceedings is void.
 An agreement the terms of which are uncertain is void.
 An agreement by way of wager (betting/gambling) is void.
 An agreement contingent upon the happening of an impossible event is void.
 Agreement to do impossible acts is void.
7.5 Void Agreements as Per the Provisions of Indian Contract Act, 1872
1. An Agreement Made by Incompetent Parties (Minor/Incapacitated Person) is Void:
According to Section 11 of Indian Contract Act, agreement by incompetent persons e.g. minors,
persons of unsound mind and persons disqualified by law of the land is absolutely void from very
beginning. A minor can enforce an agreement is which he is a beneficiary or promise. This right is
subject to the condition that he must have performed his promise under this agreement. A minor
cannot ratify his agreement even after attaining the age of majority because void agreement cannot
be ratified. He can always plead minority even if he has falsely represented to be a major. It is so
because rule of estoppels is not applicable to a minor. Incompetent parties are not personally liable
for the payment of price of necessaries of life supplied to him or his legal dependents. However, a
person who furnishes such supplies is entitled to be reimbursed from the property of the minor.
Activity C:
1. An agreement with a minor is:
(a) Void (b) Void ab initio (c) Voidable (d) Valid
2. Agreement Made Under Bilateral Mistake as to Material Fact is Void. (Section 20): Where
both the parties to an agreement are under a mistake as to matter of fact essential to agreement, the
agreement is void, for ex. A agrees to buy from B a certain horse. It turns out that the horse was
dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
But a contract is not voidable merely because it was caused by one of the parties to it being under
a mistake as to a matter of fact. (Section 22)
3. Agreements Which Have Unlawful Consideration and Objects are Void. (Section 23): The
consideration or object of an agreement is unlawful if it is forbidden by law or of such a nature that
if permitted, it would defeat the provisions of any law or is fraudulent or involves injury to the person
or property of another or court regards it as immoral or opposed to public policy .
If any part of a single consideration for one or more objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the agreement is void. But where the legal part ofan agreement
is severable from the illegal, the former would be enforced.
Illustration: Promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in
other articles. B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the object of
A’s promise, and the consideration for B’s promise, being in part unlawful.
Figure 7.1
4. Agreements With Unlawful Consideration and Objectives, in Past (Section 24): According
to Section 24 of Indian Contract Act, if consideration and object of any agreement is unlawful, in
past such agreement is absolutely, void. But if the lawful and unlawful consideration of the agreement
may be separated, the past of the contract with lawful consideration and object, will be valid agreement
and the past with unlawful consideration and object will be regarded, invalid and void.
Illustration: Clark appointed, Allis, a married woman to perform domestic work and for adultery
with Clark to satisfy his sexual needs, jobs at his place on Rs.50 per month.
The first objective of the agreement is lawful.
The second object of the agreement is unlawful.
5. Agreements Made Without Consideration is Void.(Section 25) :- Section 25 if Indian contract
Act, some such agreements have been mentioned, which are lawful, even without consideration i.e.
such agreements may be made enforceable by law. Hence, barring certain exceptions the agreements
without consideration are absolutely void. An agreement without the consideration is void unless :-
(i) It is made on account of natural love and affection and it is expressed in writing and registered
under the law for the time being in force.
(ii) It is a promise to compensate, a person who has already voluntarily done something for the
promisor.
(iii) It is a promise to pay a time barred debt.
(iv) Agreements to agency.
(v) Agreements for donations and gifts.
(vi) Agreements to bailment, without charges.
6. Agreement in Restraint of Marriage of Any Major Person is Void (Section 26): Every
agreement in restraint of the marriage of any person, other than a minor is void. It is the policy of the
law to discourage agreements which restrains freedom of marriage. The restraint may be general or
partial , that is to say , the party may be restrained from marrying at all , or from marrying for a fixed
time or from marrying a particular person or class of persons , the agreement is void.
Illustration: Raj tells to Jai that if he does not marry with Kajal, he will pay 21,000 to Jai. This
agreement made between Raj and Jai is void.
7. An Agreement the Terms of Which are Uncertain is Void. (Section 29): Agreements, the
meaning of which is not certain, or capable of being made certain, are void. It is a necessary
requirement that an agreement in order to be binding must be sufficiently definite to enable the court
to give it a practical meaning. An agreement to agree in the future is void, for there is no certainty
whether the parties will b able to agree.
Where only a part or a clause of the contract is uncertain , but the rest is capable of bearing a
reasonably certain meaning , the contract will be regarded as binding. Similarly , if the agreement is
totally silent as to price , it will be valid , for , in that case , Section 9 of the Sale of Goods Act,1930
will apply and reasonable price shall be payable.
Illustration: Surya & Company made agreement to sell 500 tons of oil to Chand & Company. It
is not clear in this agreement what type of oil or of which brand of oil is to be sold. Hence, the
agreement is void, due to uncertainty.
8. An Agreement By Way of Wager (Betting/Gambling) is Void. (Section 30): Agreements by
way of wager are void; and no suit shall be brought for recovering anything alleged to be won on
any wager or entrusted to any person to abide by the result of any game or other uncertain event on
which any wager is made. The section does not define “Wager”. But wager can be said as a
promise to give money or money’s worth upon the determination or ascertainment of an uncertain
event.
Meaning: In general terms, wagering agreements are such agreements, according to which one
party agrees to p[ay certain amount of money or any commodity, on the happening or non-happening
of any uncertain event. Hence, in these agreements, one party is a winner and another is the looser.
This rule has two exceptions to it, which is as follows:
1. Horse Race: This section does not render void a subscription or contribution, or an agreement
to subscribe or contribute, towards any plate, prize or sum of money of the value or amount of 500
Rs. Or upwards to the winner or winners of any horse races .
2. Crossword Competitions & Lottery: If skill plays a substantial part in the result and prizes are
awarded according to the merits of the solution, the competition is not a lottery. Otherwise it is.
Thus, literary competitions which involve the application of skill and in which an effort is made to
select the best and most skilful competitor, are not wagers.
9. Agreement in Restraint of Trade is Void. (Section 27): Every agreement by which anyone is
restrained from exercising a lawful profession, or trade or business of any kind, is to that extent
void.
The words, to that extent is void, in section 27, means that if the agreement can be divided in two
part, will be void, which restrains the trade. In such situation, the entire agreement will not be void.
But, if the lawful and unlawful parts of the agreement can not be separated the entire agreement will
be void.
There are two kinds of exception to the rule, those created by Statutes: -
Sale of Goodwill: The only exception mentioned in the proviso to section 27 is that relating to sale
of goodwill. It states that “One who sells the goodwill of the business may agree with the buyer to
refrain from carrying on a similar business, within specified local limits, so long as the buyer , or any
person deriving the title to the goodwill from him , carries on a like business therein : Provided that
such limits appear to the court reasonable , regard being had to the nature of the business.
Partnership Act: There are four provisions in the Partnership Act which validate agreements in
restraint of trade. Section 11 enables partners during the continuance of the firm to restrict their
mutual liberty by agreeing that none of them shall carry on any business other than that of the firm.
Section 36 enables them to restrain an outgoing partner from carrying on a similar business within a
specified period or within specific local limits. A similar agreement may be made by partners upon
or I anticipation of dissolution...
Exception to the Rule as Per Judicial Interpretation:
1.Exclusive Dealing Agreements :- Business practice in vogue is that a producer or manufacturer
likes to market his goods through a sole agent or distributor and the latter agrees in turn not to deal
with the goods of any other manufacturer. In the case of Percept D. Mark (India) Pvt. Ltd. v Zaheer
Khan [1], it was observed by the Court that Negative Covenant in a contract that the covenantee
would not sell a similar product of a competitor does not necessarily in restraint of trade , it could
also be in furtherance of the trade.
2. Restraints Upon Employee: - An agreement of service often contain negative covenants
preventing the employee from working elsewhere during the period covered by the agreement.
Trade Secrets, name of customers etc. are also the property of master and servant is not supposed
to disclose it to anyone else. An agreement of this class does not falls within Section 27.
10. An Agreement Contingent Upon the Happening of an Impossible Event is Void. (Section
36): 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. Contingent agreements to do or not to do anything, if an
impossible event happens, are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.
Illustration: Anil and Sarita makes agreement that if Anil joins two parallel lines, Sarita will give Rs
5,100 to Anil. Since, this agreement is based on future impossible event, such agreements are void.
11. Agreement to Do Impossible Acts is Void. (Section 56): An agreement to do an act impossible
in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or ,
by reason of some event which the promisor could not prevent , unlawful , becomes void when the
act becomes impossible or unlawful .
Illustration: Ram and Shyam make agreement between themselves that Ram will give Rs 50,000
to Shyam, if he makes his dead wife, alive. Such agreement is void, because it is impossible to make
any dead person, alive. Hence, the agreement is , void.
12. Agreement in Restraint of Legal Proceedings is Void. (Section 28): Every agreements by
which any party thereto is restricted absolutely from enforcing his rights under or in respect of any
contract or which extinguishes the rights of any party thereto, or discharges any party thereto from
any liability, under or in respect of any contract, on the expiry of a specified period so as to restrict
any party from enforcing his rights, is void to that extent. Section 28 of the Act renders void two
kinds of agreement, namely:
1.An agreement by which a party is restricted absolutely from enforcing his legal rights arising under
a contract by the usual legal proceedings in the ordinary tribunals.
2. An agreement which limits the time within which the contract rights may be enforced.
Agreement in restraint of legal proceedings is void, this is also not an absolute rule and it has two
exceptions to it which is as follows:
1. This section shall not render illegal a contract, by which two or more persons agree that any
dispute which may arise between them in respect of any subject or class of subjects shall be referred
to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect
of the dispute so referred.
2. Nor shall this section render illegal any contract in writing, by which two or more persons agree
to arbitration any question between them which has already arisen, or affect any provision of any
law in force for the time being as to references to arbitration.
But right to Appeal does not come within the purview of this section. A party to a suit may agree not
to appeal against the decision.
Activity C:
1. X gave consent to sell his shop to Y, at such price, which Y can give. Such agreement will be:
(a) Void (b) Valid (c) Voidable (d) Contingent
7.6 Differences Between Void, Illegal and Voidable Agreement
Void and Illegal Agreement: - The Contract Act draws distinction between an agreement which is only
void and the one which is unlawful or illegal. An illegal agreement is one which is forbidden by law; but a
void agreement may not be forbidden, the law may merely say that if it is made, the courts will not enforce
it. Thus every illegal contract is void but a void contract is not necessarily illegal.
The main difference between a void and illegal contract is that, a void contract is not punishable and its
collateral transactions are not affected but on the contrary illegal contract is punishable and its collateral
transactions are also void.
Activity D:
1. Agreement for insurance is:
(a) Valid (b) Void (c) Invalid (d) Voidable
Void and Voidable Agreement: - A void contract is considered to be a legal contract that is invalid, even
from the start of signing the contract. On the other hand, a voidable contract is also a legal contract which is
declared invalid by one of the two parties, for certain legal reasons.
While a void contract becomes invalid at the time of its creation, a voidable contract only becomes invalid
if it is cancelled by one of the two parties who are engaged in the contract.
In the case of a void contract, no performance is possible, whereas it is possible in a voidable contract.
While a void contract is not valid at face value, a voidable contract is valid, but can be declared invalid at
any time.
While a void contract is nonexistent and cannot be upheld by any law, a voidable contract is an existing
contract, and is binding to at least one party involved in the contract.
7.7 Meaning and Definition of Contingent Contracts

Contracts, which absolutely depend upon happening of any event or chance, are contingent. These also
have their significance, because in the sphere of contract business, several such occasions arise, when
contingent agreements are required to be made to effectively operate the business activities, due to happening
or non- happening of certain events.
Meaning of contingent contract in general such contract, which depends upon happening or not happening
of any future event and such events collateral to such contract?
Contingent Contract” Defined. According to Section 31-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”.
Such types of contracts may be called, conditional contracts, also, because these are related to fulfillment or
non-fulfillment of any condition.
From the analysis of above definition, it becomes clear that:
 On happening of any future event: Such contracts may be for doing or not doing something.
 On non-happening of any future event: Such contract may be for doing or not doing something.
Illustration: A contract to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.
So, in simple words, it may be defined as a conditional contract.
Illustration: United Insurance Company undertakes fire insurance of Rs. 20 lakhs of Kamal and Company.
In case, Kamal and Company gets fire causing loss to it, the United Insurance Company will compensate
the loss caused by fire to Kamal and Company. Lighting or non-lighting of fire depends upon contingency.
Hence, such type of contract is called, contingent contracts.
Activity F:
1. XYZ makes promise to give Rs 3, 00,000 to ABC, if ABC plucks and brings ten stars from the sky.
This is a contingent contact, as also, is.
7.8 Essential Elements of Valid Contingent Contracts

 There must be a valid contract.
 The performance of the contract must be conditional.
 The event must be collateral to the contract. For example incidental to the contact.
 There should be existence of a contingency; happening or non-happening of some event in future.
 Contingency must be uncertain.
Activity F:
1. Sonia promises to pay to Anil, certain amount of money, if a particular ship returns back within three
months. However, this ship gets burnt, within three months. Give advice to Anil.
7.9 Rules as to Enforce of Contingent Contracts
(Sec.32) (Sec 33) (Sec 34) (Sec 35) (Sec 35) (Sec 36)
Figure 7.2
 On Happening of the Event (Sec. 32): According to Section 32 of Indian Contract Act, Contingent
contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law
unless and until that event has happened. If the event becomes impossible, such contracts become
void.
Illustrations
(a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced
by law unless and until C dies in A’s lifetime.
(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 until C refuses
to buy the horse.
(a) A contract to pay B a sum of money when B marries C. C dies without being married to B. The
contract becomes void.
 Enforcement of Contracts Contingent on an Event Not Happening (Section 33): Contingent
contracts to do or not to do anything if an uncertain future event does not happen can be enforced
when the happening of that event becomes impossible, and not before.
Illustration: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The
contract can be enforced when the ship sinks.
 When Event on Which Contract is Contingent to Be Deemed Impossible, if it is the Future
Conduct of a Living Person (Section 34) : When event on which contract is contingent to be
deemed impossible, if it is the future conduct of a living person. If the future event on which a
contract is contingent is the way in which a person will act at an unspecified time, the event shall be
considered to become impossible when such person does anything which renders it impossible that
he should so act within any definite time, or otherwise than under further contingencies.
Illustration: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must
now be considered impossible, although it is possible that D may die and that C may afterwards marry B
Happening of an Uncertain Event Within Fixed Time (Section 35): When contracts become void
which are contingent on happening of specified event within fixed time. Contingent contracts to do or not to
do anything if a specified uncertain event happens within a fixed time become void if, at the expiration of the
time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. When
contracts may be enforced which are 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 within a fixed time may be enforced by law
when the time fixed has expired and such event has not happened or, before the time fixed has expired, if it
becomes certain that such event will not happen.
Illustrations
(a) A promises to pay B a sum of money if a certain ship returns within a year. The contract may be
enforced if the ship returns within the year, ‘and becomes void if the ship is burnt within the year.
(b) A promises to pay B a sum of money if a certain ship does not return within a year. The contract
may be enforced if the ship does not return within the year, or is burnt within the year.
Agreement Contingent on Impossible Events Void. (Section 36): Contingent agreements to do or not
to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or
not to the parties to the agreement at the time when it is made.
Illustrations:
(a) A agrees to pay B 1,000 rupees if two straight lines should enclose a space. The agreement is
void.
(b) A agrees to pay B 1,000 rupees if B will marry A’s daughter C. C was dead at the time of the
agreement. The agreement is void.
Activity G:
1. Salman makes contract to give Rs. 50,000 to Yash, on his marrying with Rekha. However, Rekha
dies, without being married to Yash. Is the contract Valid and enforceable?
Hints for Solution: The contract is not valid, rather it is void. Hence, it cannot be enforced by law.
7.10 Summary
To secure the performance and enforceability of a contract, the contract should be a valid contract. As the
void contracts can’t be enforced.
A void contract, also known as a void agreement, is not actually a contract. Void Contract means that a
contract does not exist at all. The law cannot enforce any legal obligation to either party especially the
disappointed party because they are not entitled to any protective laws as far as contracts are concerned.
An agreement to carry out an illegal act is an example of a void contract or void agreement. For example,
a contract between drug dealers and buyers is a void contract simply because the terms of the contract are
illegal. In such a case, neither party can go to court to enforce the contract.
A void contract cannot be enforced by law. Void contracts are different from voidable contracts, which
are contracts that may be (but not necessarily will be) nullified.
An agreement to carry out an illegal act is an example of a void contract or void agreement. For example,
a contract between drug dealers and buyers is a void contract simply because the terms of the contract are
illegal. In such a case, neither party can go to court to enforce the contract. A void contract is void ab initio,
i e from the beginning while a voidable contract can be voidable by one or all of the parties.
A contract can also be void due to the impossibility of its performance. E g: If a contract is formed
between two parties A & B but during the performance of the contract the object of the contract
becomes impossible to achieve (due to action by someone or something other than the contracting
parties), then the contract cannot be enforced in the court of law and is thus void. A void contract
can be one in which any of the prerequisites of a valid contract is/are absent for example if there is no
contractual capacity, the contract can be deemed as void. In fact, void means that a contract does not exist
at all. The law cannot enforce any legal obligation to either party especially the disappointed party because
they are not entitled to any protective laws as far as contracts are concerned.
A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into
may be valid and binding on the parties. It may subsequently become void.
A contract may be unconditional or absolute on the one hand and conditional or contingent on the other. The
absolute or unconditional contract is one without any reservations or conditions and is to be performed
under any event. On the other hand, conditional or contingent contract is one in which a promise is conditional
and the contract shall be performed only on the happening or not happening of some future uncertain event.
The event must be collateral to the contract. The condition may be precedent or subsequent.
A collateral event is defined as one which is neither a performance directly promised as part of the contract,
nor the whole of the consideration for a promise. The event, therefore independent of the contract and does
not form part of consideration to it.
The performance of such a contract depends on contingency and such contingency is uncertain. The test of
determining whether the contract is contingent or not, is uncertainty. If contingency is certain it is not a
contingent contract.
7.11 Key Terms

 Agreement: “Every promise and every set of promises forming the consideration for each other, is
an agreement”.
 Contract: “An agreement enforceable by law is a contract”.
 Void Agreement: “An agreement not enforceable by law is said to be void”.
 Voidable Contract: “An agreement which is enforceable by law at the option of one or more of
the parties thereto, but not at the option of the other or others, is a voidable contract”.
 Void Contract: “A contract which ceases to be enforceable by law becomes void when it ceases
to be enforceable”.
 Contingent Contract: 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”.
 Illegal Agreement: “An illegal agreement is one which is forbidden by law; but a void agreement
may not be forbidden, the law may merely say that if it is made, the courts will not enforce it. Thus
every illegal contract is void but a void contract is not necessarily illegal”

Very Short Answer Type Questions:
1. Agreement of Mistake is void. Why?
2. What is meant by Wagering Agreement?
3. What is Uncertain Agreement?
4. What is meant by Agreement of doing Impossible Acts?
5. Explain the characteristics of Void Agreement.
6. Define Contingent Contract.
7. Explain any four characteristics of contingent contract.
8. “A contract of guarantee is not a contingent Contract”. Discuss.
Short Answer Type Question:
1. Explain the agreements in Restraint of Marriage.
2. Explain the difference between Insurance and a Wagering Agreement.
3. Contingent contract depends upon Contingency. Explain.
4. Explain difference between Contingent Contract and Wagering Agreement.
Essay Type Questions:
1. What is a Void Agreement? Briefly, state the various agreements that are expressly to be void by the
Indian Contract Act.
2. “Section 24 to 30 deal with agreements expressly declared as void”. State them and give suitable
examples of each.
3. Explain with the help of suitable examples, the rules that apply in the case of Contingent Contracts.
4. Write a note on Contingent Contract.
5. Define Contingent Contract and explain its chief elements.

- Elements of Mercantile Law N.D.Kapoor
- Business Law Dr. R.L.Nolakha
- Business Law Dr. Ashok Sharma, Dr. Rashmi Arya & Dr. Anju Gupta
Unit - 8 : Performance of a Contract
Structure of Unit:
8.0 Objectives
8.1 Introduction
8.2 Meaning of Performance
8.3 Performance of Contract
8.4 Types of Performance
8.5 Essentials of a Valid Tender,
8.6 Rules Regarding Performance of Contract,
8.7 Appropriation of Payments
8.8 Summary
8.9 Key Terms
8.11 References
8.0 Objectives
After studying this unit, you would be able to:
 Understand how obligations under a contract must be carried out by the parties.
 Be familiar with the various modes of performance.
 Be clear about the consequence of refusal of performance or refusal to accept performance, by
either of the parties.
 Understand rights of joint promises, liabilities of joint promisors, and rules regarding appropriation
of payments.
8.1 Introduction
The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed
by British India and is based on the principles of English Common Law. It is applicable to the All the States
of India except the State of Jammu & Kashmir. It determines the circumstances in which promise made by
the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday
knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian
contract deals with the enforcement of these rights and duties upon the parties in India.
A Contract being an agreement enforceable by law, creates a legal obligation, which subsits until discharged.
Performance of the promise or promises remaining to be performed is the principal and most usual mode of
discharge.
Basic tenet of performance: In a contract where there are two parties, each one has to perform his part and
demands the other to perform. This obligation is the primary tenet. The parties would be treated as having
been absolved only under the provisions of any law or by the conduct of the other party.
8.2 Meaning of Performance

Sec 37:- That the parties to a contract must either perform or offer to perform, their respective promises
unless such performance is dispensed with or excused under the provisions of contract Act, or
of any other law.
Performance: - Two types
1. Actual performance – actually performed – liability of such a party comes to an end.
2. Attempted performance or tender of performance refusal to accept offer of performance
by promise [38]
Promisor is not responsible for non performance and they can sue the promisee for breach of
contract – nor he (promisor) thereby lose his rights under the contract.
Figure 8.1
8.3 Performance of Contract

Performance of contract means performing all the promises and fulfilling all the obligations required by the
contract.
Illustration: Mohan makes promise to sell his Honda bike to Ram for Rs 40,000 and Ram makes promise
to purchase it, in Rs 40,000. So, it is essential that both the parties fulfill their respective promise. Mohan
should fulfill his promise, by giving the bike and Ram should fulfill her promise by taking the delivery of the
bike and paying 40,000.
Thus, when both the parties fulfill their promise, it is said that they have fulfilled their promise and that the
contract has been performed.
For detailed study, we may divide performance of contract into following parts:
i. Obligation of the parties regarding performance of the contract ( Sec 37-39)
ii. By whom contract should be performed. (Sec 40-45)
iii. Time and Place of performance. (Sec 46-50)
iv. Performance of reciprocal Promises (Sec 51-58)
Activity A:
1. A, B and C are under joint promise to pay Rs. 50,000 to Hari. C is unable to pay anything and B
is compelled to pay the entire amount. What amount can B successfully recover from A?
8.4 Types of Performance

According to section 37, for performance of contract, the obligation of the parties is that they must either
perform, or offer to perform, their respective promises, unless such performance is dispensed with or
excused under the provisions of Indian Contract Act, or of any other law.
Section 37 also makes it clear that a contract may be performed in either of the two ways:
 By performing promises, i.e actual performance.
 By offer to perform promise, i.e. by tender of performance.
Actual Performance: It takes place when both the parties to a contract perform their respective promises
and nothing remains to be performed in future by them. In other words the contract may be actually performed,.
When for performance of contract, the parties to the contract fulfill their respective obligations, within
specified time and procedures, it is called actual performance.
Illustration: Anta buys a car from Soma for Rs one laks. Anta pays the price and Soma delivers the car.
This is actual performance of the contract because nothing is executor in the contract.
Tender of Performance (Sec 38): Attempted performance is also a way of performance of contract.
When a party makes offer before another party for fulfillment of his obligation, it is called tender of performance.
This offer is in the form of request. Hence, it is also called offer of performance. Therefore, if the promise
doesnot accept or fails to accept the tender, the promisor is not responsible for the non-performance of the
promise and promisor stands discharged from his liabilities. Thus, when a valid tender of performance is not
accepted by the promise, it is called an attempted performance of the contract.
Illustration: Jai makes contract to give his bike to Kajal, for Rs. 30,000. Jai makes the bike to deliver his
bike to Kajal. This is called, attempted performance.
Type of Tender:
 Tender of Goods and Services: When a promisor offers to delivery of goods or service to the
promise, it is said to be tender of goods or services, if promisee does not accept a valid tender,
It has the following effects:
(i) The promisor is not responsible for non – performance of the contract.
(ii) The promisor is discharged from his obligation under the contract. Therefore, he need not offer
again.
(iii) He does not lose his right under the contract. Therefore, he can sue the promise.
 Tender of Money: Tender of money is an offer to make payment. In case a valid tender of money
is not accepted, it will have the following effects:
(i) The offeror is not discharged from his obligation to pay the amount.
(ii) The offeror is discharged from his liability for payment of interest from the date of the tender of
money.
8.5 Essentials of a Valid Tender

To a proper person
Unconditional
Essential Proper time

Proper form Essential of
of valid
Valid Tender
Tender
Reasonable At a proper place

opportunity of
inspection
Exact & legal

amount of money For whole obligation
Figure 8.2
Activity B:
1. Who among the following can perform the contract?
(A) Promisor (B) Agent of the promisor
(C) Legal representative of the promisor (D) All these
Tender or offer of performance to be valid must satisfy the following conditions:-
(i) It must be unconditional
Ex: - ‘X’ offers to ‘Y’ the principal amount of the loan. This is not a valid tender since
the whole amount of principal and interest is not offered.
(ii) It must be made at a proper time and place.
Ex: - If the promisor wants to deliver the goods at 1 am. This is not a valid tender unless
it was so agreed;
(iii) Reasonable opportunity to examine goods.
Ex: - Delivery of something to the promise by the promisor promise must have
reasonable opportunity of inspection.
(iv) It must be for the whole obligation: - goods and amount.
Ex: - ‘X’ a debtor, offer’s to pay ‘Y’ the debt due in installments and tenders the first
installment. This is not a valid tender minor deviation – not invalid [Behari lal v ram
gulam]
(v) It must be made to the promise or his duty authorized agent or proper person.
Ex: - It must be person who is willing to person his part of performance.
(vi) In case of payment of money, tender must be of the exact amount due and it must be in the legal
tender.
(vii) In case of proper form tender must be made in the proper form. The form may be decided by
the parties while making the contract.
Ex: - Parties may decide the goods must be in the packs of 100 grams. If the parties do not decide, the
tender must be in the form usually adopted by the trade.
8.6 Rules Regarding Performance of Contract

 Effect of Refusal of Party to Perform Promise Wholly (Sec 39).
Where a party to a contract has refused to perform the promise he has made or had disabled himself from
performing his promise in its entirely, the promise may put an end to the contract, unless his acquiescence in
the continuance of the contract has been conveyed either by words or by deeds ( Sec 39). Thus from the
above it could be seen that the following two rights accrue to the aggrieved party- (i) to terminate the
contract and (ii) to indicate by words or conduct that he is interested in its continuance.
Promisor – Refuse – Promise – wholly
Promisee can put – can end of the contract or – he can continue the contract if he has
given his consent either by words or – by conducts in its continuance.
Result – claim damages. [compensation]
Ex:- A, a singer enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in
every week during the next two months, and B engages to pay her 100 rupees for each night’s performance.
On the sixth night A willfully absents herself from the theatre. B is at liberty to put an end to the contract.
If A, after his absence on sixth night, comes on the seventh night and starts singing with B’s acquiescence,
i.e. tacit assent. B cannot now put an end to it, but B is entitled to compensation for the damange sustained
by him through A’s failure to sing on the sixth night.
Who Can Demand Performance?
1. Promisee – stranger can’t demand performance of the contract.
2. Legal Representative – legal representative can demand Exception performance.
 contrary intention appears from the contract
 Contract is of a personal nature.
3. Third Party – Exception to “Stranger to a Contract”
 Person by whom promise is to be performed Sec 40.
Any of the following parties may be liable for the performance of the contract:
1. Promisor: If there is something in the contract to show that it was the intention of the parties that the
promise should be performed by the promisor himself, such promise must be performed by the
promisor( Sec 40). This means contracts which involve the exercise of personal skill and diligence
or which are founded on personal confidence between the parties must be performed by the promisor
himself.
Illustration: Hari is a reputed goldsmith. He makes contract to make a golden necklace for Soha , in
return of Rs 1,20,000. Here, the intention of the parties is that the promisor himself should fulfill the
promise.
2. Legal Representative- [does not involve personal skill and taste]
3. Third Party [Sec 41]:- Acceptance of promise from the third party:-
If the promisor accepts performance of a contract by a third party, he can’t after wards enforce the
performance against the promisor although the promisor had neither authorized not ratified the act
of the third party.
[In other meaning once the promise accepts the performe from a third person, he cannot compel the
promisor the perform the contract again]
4. Agent – In case of those contracts, which do not require personal confidence and skill, the promisor
or his representative may employ a competent person to perform the contract.
5. Performance in Case of Joint Promisors: When two or more persons have made a joint promise,
then unless a contrary intention appears from the contract, all such persons must jointly with surviving
promisors, fulfill the promise.
 Performed by All the Joint Promisor [42]
 All the joint promisor – liable
 Thus in India the liability of joint promisors is joint as well as several.
 In England, however the liability of the joint promisors is only joint and not several and
accordingly all the joint promisors must be sued jointly.
 Liability of Joint Promisor [43]
 Liability – joint as well as several [unless express A + B + C 900 D. D may compel either
A, B or C or any of two of them or all of them.
 Where a joint promisor has been compelled to perform the whole promise, be may compel
every other joint promisor to contribute equally with himself to the performance of the
promise (unless a contrary intention appears from the contract).
C – 9000 – D A+ B – C
3000 3000
3. If any one of the joint promisors make default in such contribution, the remaining joint promisors must
bear the loss arising from such default in equal shares
A + B + C – 9000 (A) – Insolvent
B + C = 4500 + 4500 = 9000
 Sec 43 Lays Down Three Rules as Regards Performance of Joint Promises:
1. When two or more persons make a joint promise and there is no express agreement to the contrary,
the promise may compel any one or more of the joint promisors to perform the whole of the
promise. This means the liability of joint promisors is joint and several.
Eg: A, B, C jointly promises to pay D Rs 3000. D may compel either A or B or C to pay him Rs
3000.
2. When a joint promisor has been compelled to perform the whole of the promise, he may compel the
other joint promisors to contribute equally with himself to the performance of the promise, unless a
contrary intention appears from the contract. (Sec 43).
Eg: A,B and C are under a joint promise to pay D Rs 600, A is compelled to pay the whole amount
D. He may recover Rs 200 each from B and C.
3. If any one of the joint promisors makes default in the contribution, the remaining joint promisors
must bear the loss arising from such default in equal shares. The same principle applies to the case
of recovery of a loan by a creditor from the heirs who by operation of law become joint promisors
after the death of the single promisor.
Eg: Ram, Shyam and Sohan are under a joint promise to pay Sita Rs 30,000. Sohan is unable to
pay anything and Ram is compelled to pay the whole. Ram is entitled to receive Rs 15000 from
Shyam
 Release of One Joint Promisor (Sec 44): A release by the promise of any one of the joint
promisors doesn not discharge the other joint promisors from liability. The released joint promisor
also continues to be liable to the other joint promisors. In other words, where one of the joint
promisors is released other joint promisors shall continue to be liable.
[In English law if one joint promisor – discharge then all the joint promisors discharge]
 Rights to Claim Performance of Joint [Devolution of Joint Rights] Sec 45: When a person
has made a promise to several persons, then unless a contrary intention appears from the contract,
the right to claim performance rests, with all of them. When one of the promise dies, it rests with his
legal representatives jointly with the surviving promises. When all the promises die, it rests with their
legal representatives jointly.
1. During their joint lives – all the joint promisors .
2. After the death of any of them – The representative of such deceased promise jointly with
the surging promise .With the representatives of all jointly.
Ex:- ‘A’ in consideration of Rs 50,000 lent to him by ‘B’ and ‘ C’ promises ‘B’ and ‘C’ jointly to
replace them that sum with interest on a day specifies.
‘B’ dies. The right to claim performance rests with ‘B’ representatives jointly with ‘c’ during
‘C’ life.
And after ‘C’s death with the representatives of ‘B’ and ‘C’ jointly.
 Time Place and Manner of Performance [46–50]
The parties are free to decide the time, place and manner of performance of a promise made under
a contract. Usually, the contract is performed, within the usual business hours and proper place. In
general, the place and date of the performance will be the same, as has been specified in the
contract. However, rules governing the decision as to time, place and manner of performance of
promise are given in Section 46-50 of this Act.
They are as under:
1. No Time is Specified for Performance [Sec 46]: Where, by the contract, a promisor is to
perform his promise without application by the promise, and no time for performance is specified,
the engagement , must be perfomed within a reasonable time.
Time of performance is not specified + promisor agreed to perform without, a demand from the
promise the performance must be made within a reasonable time. Reasonable time – in each particulars
case – a question of fact.
2. Time Specified But Hour Not Mentioned [47]: Time of performance specified + promisor
agreed to perform without application by the promisee
Performance must perform on the day fixed during the usual business hours and at the place at
which the promise ought to be performed.
Illustration: Anta promises to deliver goods at Banta’s warehouse on the first January. On that day Anta
brings the goods to Banta’s warehouse but after the usual hour for closing it and they are not received. Anta
has not performed his promise.
3. Where Time is Fixed and Application to Be Made [48]
Proper place and within the usual hour of business
Promisee to apply for performance
Illustration: A makes promise to supply 500 tons of groundnut oil to B, on 10 December usual
hours of business are 10 A.M to 8 P.M. Demand by B to make the delivery of the oil tins at 12 in the
night is not proper. Hence, A can refuse for supply of oil tins.
4. Performance of Promise Where no place is Specified and No Application is to be Made by
the Promise [49]: When a promise is to be performed without application by the promise, and no
place is fixed for the performance of it, it is the duty of the promisor to apply to the promise to
appoint a reasonable place for the performance of the promise, and to perform it at such place.
Illustration: A undertakes to deliver 1,000 quintals of jute to B on a fixed day. A must apply to B
to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.
5. Performance in Manner or at Time Prescribed or Sanctioned by Promise [50]: The
performance of any promise may be made in any manner, or at any time which the promise prescribes
or sanctions
Ex: ‘A’ desires ‘B’ who owes him Rs 10,000 to send him a promissory note for Rs 10,000 by
Post. The debt is discharged as soon as ‘B’ puts into the post a letter containing the promissory note
duly addressed to ‘A’.
 Performance of reciprocal promises (Section 51-58):
Reciprocal Promise: “Promises which form the consideration or part of consideration for each
other as called reciprocal promises” (Sec 2(f)). They are also known as mutual promises in which
promises are exchanged for promises by the parties.
Contract may be unilateral or bilateral. In unilateral contract, when a party fulfills its promise, only
another party is required to fulfill its promises. However, in bilateral contracts, both the parties are
left with the responsibility to fulfill their respective promises. This is called, reciprocal promises.
Illustration: Ram promises Mohan to pay a monthly salary of Rs. 5000 in return for his promise to work
as a salesman in his shop. Here, Ram and Mohan are making reciprocal promises, Mohan is promising to
work as salesman in consideration of a promise to pay a salary of Rs 5,000.
Lord Mansfield in Jones V Barkley, [(1781) Dough 659] classified reciprocal promises into three
categories:
1. Mutual and Independent:- Such promises all to be performed by each party independently without
waiting for the other party to perform his promise can’t excuse himself on the ground of non-
performance by the default party.
Y – Price – non Payment

X – Goods delivered
Figure 8.3
2. Mutual and Dependent: - Sue damage. The performance of promise by one party depended on
the prior performance of the promise by other party.
[The party at fault becomes liable to pay compensation to the other party may sustain by the non
performance of the contract – [54]
Illustration: X agrees with Y to sell certain goods for cash. Here, both X and Y are required to
perform their promises simultaneously.
3. Mutual and concurrent: - when reciprocal promises are to be performed simultaneously a promisor
need not perform his part unless the promise is ready and willing to perform [51]
Figure 8.4
Activity C:
1. X promises Y that he will sell his car to Z for Rs.20, 000. However, due to certain unavoidable
reasons, X is not in a position to perform the contract can Z bring a suit, against X.
Rules as to Performance of Reciprocal Promises: These are contained in Sections 51 to 54 and
57&58.
1. Simultaneous Performance of Reciprocal Promises (Sec 51): When a contract consists of
reciprocal promises to be simultaneously performed, no promisor need perform his promise unless
the promise is ready and willing to perform his reciprocal promise.
Illustration: X and Y contract that X shall deliver car to Y at a price to be paid by installments, the
first installment to be paid on delivery. X need not deliver, unless Y is ready and willing to pay the
first installment on delivery and similarly. Y need not pay the first installment, unless X is ready and
willing to deliver the goods on payment of the first installment.
2. Order of Performance of Reciprocal Promises (Sec 52): Where the order in which reciprocal
promises are to be performed is expressly fixed by the contract, they must be performed in that
order; and where the order is not expressly fixed by the contract, they must be performed in that
order which the nature of the transaction requires.
Illustration: A and B contract that A shall build a house for B at a fixed price. A’s promise to build
the house must be performed before B’s promise to pay for it.
3. Effect of One Party Preventing Another From Performing Promise (Sec 53): When a contract
contains reciprocal promises, it may happen that one party to the contract prevents the other from
performing his promise. In such a case, the contract become voidable at the option of the party so
prevented, and he is entitled to compensation from the other party for any loss which he may sustain
in consequence of the non-performance of the contract.
Illustration: Nishi makes contract to paint a picture for Radha, for Rs.2, 000. Afterwards, Radha
refuses to take the picture, even before its completion. In this situation, Nishi can claim compensation
for the loss sustained, due to non-performance of the contract.
4. Effect of Default as to Promise to Be Performed First (Sec 54): Where the nature of reciprocal
promises is such that one of them cannot be performed till the other party has performed his promise
then if the latter fails to perform it, he cannot claim the performance of the promise from the other.
In such a case, he must make compensation to the other party to the contract for any loss which
such other party may sustain by the non-performance of the contract.
Illustration: X promises Y to sell him one hundred bales of merchandise, to be delivered next day,
and Y promises X to pay for them within a month. X does not deliver according to his promise. Y’s
promise to pay need not to performed, and X must make compensation.
5. Reciprocal Promise to Do Things Legal and Also Other Thing Illegal (Sec 57): Where
persons reciprocally promise, firstly, to do certain things which are legal, and secondly, under specified
circumstances, to do certain other things which are illegal, the first set of promises is a contract, but
the second is a void agreement.
Illustration: A contract was made to appoint Satish as Manager in Gunn & Company, on monthly
payment of Rs. 20,000. However, it was also stated in the contract that if Satish manages tax
evasion and smuggling activities also, he will get monthly salary of Rs 22,000. In it, the first part is,
the contract and second part is, void agreement.
6. Alternative Promise, One Branch Being Illegal ( Section 58) : In the case of an alternative
promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced by
law and not the other one.
Illustration: Nazir makes agreement to pay Rs. 2 lacs to Sonal and in return of it, Sonal will supply
him either wheat or the smuggled opium. Here, the contract for supply of wheat is valid, but agreement
for supply of smuggled opium is, void. Only the agreement for supplying the wheat is enforceable by
law.
7. Contract in Which Reciprocal Promises are Independent: In various contracts, every party
has the right to perform its respective promise, without waiting for performance by another party.
However, any party claim to compensate loss sustained, due to non-performance of the contract,
by another party.
Illustration: X pays the price of rice to Y on 12 November, whereas Y will deliver the goods on 20
November. Both these are independent reciprocal promises and each party can claim, from each
other the compensation of loss due to non- performance of the promise.
8.7 Appropriation of Payments

When a debtor, owing several distinct debt to any one person makes payment of these debts to the creditor,
how the payment so received may be appropriated against which particular debt, is called appropriation of
payments. In other words Appropriation means application of payments; the question of appropriation
of payments arises when a debtor owes several debts to the same creditor and makes a payment that is not
sufficient to discharge the whole in debtless.
Illustration: Gunn & Company owes to Shyam Ji & Sons, three debts of Rs. 10,000, Rs. 15,000 & Rs.
25,000. Determination, as to against which debt payment of Rs. 35,000 by Gunn & Company may be
appropriated, whether, Rs. 10,000 for first loan, Rs. 15,000 for second loan and remaining Rs. 10,000 for
the third debt or the entire amount for the third debtor, is called appropriation of payments.
The general rule regarding appropriation of payments is that when a debtor makes payments to the creditor,
its appropriation may be made, only according to the wishes of the debtor, and not of the creditor. Sections
59 to 61 of the Act lay down following rules as to appropriation of payments which provide an answer to
this question:
Activity D:
1. Appropriation of payments means:
(A) In which order payments against debts be made, when a debtor owes several debts to
the same creditor.
(B) How payment of one single debt be made.
(C) How payment be made of debt
(D) None of these
1. Appropriation as Per Express Instructions (Sec 59): Every debtor who owes several debts to a
creditor has a right to instruct his creditor to which particular debt, the payment is to be appropriated or
adjusted. Therefore, where the debtor expressly states that the payment is to be applied to the discharge of
a particular debt, the payment must be applied accordingly.
Example: A owes B three distinct debts of Rs.2, 000, 3,000 and 5,000. A sends Rs.5,000 and instructs B
that the payment should be appropriated against the third debt. He is bound to appropriate the payment
against the third debt only.
Application of Payment Where Debt to Be Discharge is Not Indicated (Sec 59): If section 60 is
attracted, the creditor shall have the discretion to apply such payment for any lawful debt which is due to
him from the person making the payment.
Example: A owes to B, among other debts; the sum of Rs.520. B writes to A and demands payment of this
sum. A sends to B Rs.520. This payment is to be applied to the discharge of the debt of which B had
demanded payment.
2. Appropriation at the Discretion of the Creditor (Sec 60): Sometimes, neither the debtor sends
express instructions nor the circumstances imply as to which debt the payment is to be applied. In such a
case, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the
debtor. It makes no difference whether the recovery of the debt is or is not barred by the law of limitations.
The creditor cannot, however, apply the payment to a disputed or unlawful debt, but he may apply it to a
debt which is barred by the law of limitation.
Illustration: In this regard, the case, Syndicate Bank V/s M/s West Bengal Cement Ltd, 1989 is worth
mention.
In this case, the plaintiff bank had granted overdraft facility of Rs. Ten Lakhs to the respondent, for which
the respondent had submitted a promissory note. Every third month, interest was booked on the amount of
overdraft and it was added to the principal amount. The respondent paid several installments to the bank for
paying this amount. But, did not intimate to the bank, for which debt, this payment was being made. The
court, in its judgment held that the respondent cannot compel the bank to appropriate these installments,
against the principal amount of the loan.
3. Application of Payment Where Neither Party Appropriates (Sec 61): The payment shall be applied
in discharge of the debts in order of time whether they are or are not based by the limitation Act 1963, if the
debt are of equal standing (i.e. payable on the same date) the payment shall be applied in discharge of each
of these debt proportionately.
 First interest then principle
 Director of payer not receiver.
 Right primary of the debtor
Whatever is paid, paid according to the intention of paying it
Example: A owes B, the following debts:
Amount of the debt Positions of the debt
Rs.2, 000 Time barred
Rs.1, 000 Time barred
Rs.2, 000 due on 10th June
Rs.3, 000 due on 20th September
A sends Rs. 1,500 in the month of June. He neither expressly intimates nor circumstance of the case imply
as to which debt the amount is to be applied. Moreover, B also does not appropriate the payment at his
own discretion. Therefore, the payment will be appropriated in order of time. However, here in this case
two debts are of equal standing. The payment will, therefore, be appropriated in order of time but to all
equal standing debts. In this case, Rs.1,500 will be appropriated towards the first two debts of equal
standing proportionately, i.e. in the ratio of 2:1.
4. In Case Interest is Also Due: If interest is also due to be paid, along with debt, the amount paid will be
appropriated first for payment of interest and the remaining amount, if any, will be appropriated against the
principal amount.
5. In Case of Current Account: In case of current account, payment will be appropriated, in the order of
time, according to the provision of Section 61 of Indian Contract Act. In other words, in current account,
first debit entry is offset against first credit entry.
6. In Case of Payment Received in Demand for Various Debts: Sometimes, creditor’s makes a
demand for payment of various debts due from the debtor and the debtor pays a part of the amount due. In
such a case, the payment will be appropriated to the each debt due proportionately.
7. In case of Appropriation of Trust Fund: Sometimes, a man keeps one bank account and makes a
series of deposits and withdrawals in it of his own money as well as the money of which he is a trustee.
Firstly the withdrawals are of his money and withdrawals thereafter are of the trust. Similarly, when money
will be deposited in the account, it will be presumed that firstly, the deposit is of the trust and only thereafter
the deposit is of the individual, irrespective of any order of depositing or withdrawing the money. This
system is based on the principle of public interest, Justice and the security of the assets of the public
institutions.
Activity F:
1. How payments are appropriated, in case of current account:
(A) Appropriation of payments will be in order of time.
(B) Last debt will be paid first.
(C) Payment will not be made.
(D) None of these
8.8 Summary
The parties to a contract must either perform or offer to perform their respective promises. Performance of
a contract within the time and in the manner prescribed.
Attempted performance or tender is an offer of performance by the promisor in accordance with the terms
of the contract. If the promises do not accept performance, the promisor is not responsible for non-
performance, nor does he thereby lose his rights under the contract. Thus a tender is equivalent to actual
performance. The tender, in order to have this effect must be unconditional of the whole quantity contracted
for at the proper time, place and in the manner specified; and, where these are not specified, it must be
made in a reasonable manner. Tender may be of goods and money.
Reciprocal Promises are promises which form the consideration or part of the consideration for each other.
There are some rules regarding performance of reciprocal promises like promise is ready and willing to
perform his promise, the order in which reciprocal promises must be performed may be fixed by the contract
and one cannot be performed or its performance cannot be claimed unless the other party performs his
promise in the first place.
Contract must be performed by promisor, agent, and representative and by joint promisors.
Appropriation of Payments is that the debtor has, at the time of payment, right or choice of appropriations
the payment; in default, the creditor has the right to appropriate; in default of either, the law will allow
appropriation of debts in order of time.
8.9 Key Terms
 Performance of the contract means performing all the promises and fulfilling all the obligations byall
the parties required by the contract.
 Actual performance takes place when both the parties to a contract perform their respective promises
and nothing remains to be performed in future by them.
 Tender means tendering or offering performance of obligations under the contract to the other party
of the contract.
 Attempted performance means when a valid tender is not accepted or rejected by the promise.
 Joint promise means, promise may compete any of the joint promisors to perform the contract
unless otherwise agreed by the parties.
 Reciprocal promises are promises which form the consideration or part of the consideration for
each other.
 Appropriation of payments means when a debtor, owing several debts to any one person makes
payments of these debts to the creditor, how the payment so received may be appropriated against
which particular debt.

Very short Questions:
1. What do you mean by Performance of Contract?
2. Who can demand Performance?
3. What is actual performance of contract?
4. What do you mean by reciprocal promise?
5. Explain, the proposal for performance should be unconditional?
6. The parties to a contract must perform their promises. Why?
7. What is the effect of non- performance of contract in specified time?
8. What is appropriation of payment?
9. What do you understand by in absence of any instruction for appropriation?
10. What is appropriation of payment according to circumstances?
Short Questions:
1. Appropriation is a right primarily of the debtor and for his benefit. Comment.
2. “Tender is attempted performance”. Comment.
3. When joint promisors are liable under the Indian Contract Act?
Is it required that parties to the contract must perform the contract personally?
4. How the devolution of joint liabilities takes place?
5. When the time is treated to be the essence of contract?
6. What are the effects of failure to accept a valid tender of goods and money?
Essay Type Questions:
1. State by whom contract should be performed? Is the promises bound to accept performance from
persons other than the promisor?
2. What do you mean by performance of a contract? Under what circumstances a contract need not
be performed?
3. What are the essential requisites of a valid tender of performance? What is the effect of refusal by
promise to accept a valid tender of goods and money?
4. What do you understand by reciprocal promises? Discuss the provisions of the Indian Contract Act
relating to the performance of reciprocal promise.
5. Describe the rules regarding appropriations of payments as stated in the Indian Contract Act.
6. Summaries the rules laid down in the Act as to the appropriation of payments made by debtor?
8.11 References
- Elements of Mercantile Law -N.D.Kapoor
- Business Law- Dr. R.L.Nolakha
- Business Law -Dr. Ashok Sharma, Dr. Rashmi Arya & Dr. Anju Gupta
- Business Law – Tejhpal Sheth
Unit - 9 : Discharge of a Contract
Structure of Unit:
9.0 Objectives
9.1 Introduction
9.2 Different Modes of Discharge of Contract
9.2.1 Discharge by Performance
9.2.2. Discharge by Agreement or Mutual Consent (Sections 62 and 63)
9.2.3 Discharge by Operation of Law
9.2.4 By Impossibility of Performance
9.2.5 By Lapse of Time
9.2.6. Discharge by Breach of Contract
9.3 Summary
9.6 Reference Books
9.0 Objectives
 Meaning of Discharge of a Contract
 Different Modes of Discharge of Contract
 By performance
 By agreement or mutual consent
 By operation of law
 By impossibility of performance
 By lapse of time
 By breach of contract
9.1 Introduction
A contract has always been considered a compact between two or more parties. Many contracts have been
made and many have been broken. Law has always stood to help the innocent. Discharge is a general legal term
describing the termination or completion of a contract. This word is much broader than ‘performance’, which
denoted only one of several ways in which a contract is brought to an end. Discharge means termination or
completion of a contract.
Meaning of Discharge of Contract: This is the last stage of contract. Discharge of contract means
termination of the contractual relationship between the parties. A contract is said to be discharged when the
right and liabilities created by such contracts come to an end. In some cases, other rights and obligations
may arise as a result of discharge of contract, but they are altogether independent of original contract.
9.2 Different Modes of Discharge of Contract

Contract may be discharged or terminated by the following ways:
A contract may be discharged in various modes.
9.2.1 Discharge by Performance
Performance means doing of that which is required by a contract. When parties to a contract fulfill their
obligations and promises arising under the contract with in the time and in the manner prescribed, discharge
by performance takes place. Section 37 of Contract Act provides that the parties to a contract must either
perform or offer to perform their respective promises, unless such performance is dispenced with or excused
under the provision of Indian Contract Act, or any other law.
Example: X contracts to sell his car to Y for Rs. 500,000, as soon as the car is delivered to Y andY pays the
agreed price for it, the contract comes to an end by performance.
Performance of a contract is the most obvious mode of its discharge. It may be:
(a) Actual Performance: A contract is said to be discharged by actual performance when the parties
to the contract perform their promises according to the terms of the agreement. Most of the contracts
are discharged by performance in this way.
(b) Attempted Performance or Tender: The tender or offer of performance has the same effect as
performance. If a promisor tenders performance of his promise but the other party refuses to
accept, the promisor stands discharges of his obligations and may sue for breach of contract if he so
wishes. This is called discharge by tender.
To be valid, a tender must fulfill the following conditions:
(a) It must be unconditional,
(b) It must be made at a proper time and place.
(c) It must be made under circumstances enabling the other party to ascertain that the party by
whom it is made is able and willing then and there to do the whole of what he is bound to do, by
his promise.
(d) If the tender relates to delivery of goods, the promise must have a reasonable opportunity
of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver.
(e) Tender may to one of several joint promises has the same effect as a tender to all of them.
Activity A:
1. What is the difference between actual and attempted performance of a contract?
9.2.2. Discharge by Agreement or Mutual Consent (Sections 62 and 63)
Since a contract is created by mutual consent, it can also be discharged by mutual consent. The methods
stipulated under Section 62 and 63 for discharging a contract by mutual consent are:
(a) Novation (Section 62): Novation means the substitution of a new contract for the original contract.
It may be novation by change in terms and conditions of the contract or novation by change in the
parties to the contract.
In Evans v Drummond, two partners of a partnership firm executed a bill in the favour of third
person. On the retirement of one of the partners, the other one took back the bill given and issued
a new bill signed by him for the original amount, which was accepted. It was held that as the third
person had relied on the sole security of the other partner; he had impliedly discharged the original
partner from liability.
Example: X owes money to Y under a contract. It is agreed between X,Y and Z that Y shall hence
forth accept Z as his debtor instead of X. The old debt of X to Y is at an end and a new debt from
X to Y has been contracted.
Following are certain essentials which need to be fulfilled in case of novation:
(1) It can take place only with the consent of all the parties, including the new one (s) if any.
(2) The contract which is replaced must be valid and enforceable by law.
(3) Novation must take place before the expiry of the time of the performance of the original
contract.
Example: X who owes Y Rs. 5, 00,000 enters into an arrangement with him thereby giving Y a
mortgage of his estate for Rs. 4, 00,000. This arrangement constitutes a new contract and
terminates the old one.
(b) Rescission (Section 62): Rescission means cancellation of all or some of the terms of the contract,
where parties mutually decide to cancel all or some of the terms of the contract, the obligation of the
parties there under terminates.
Example: X and Y enter into a contract that X shall deliver certain goods to Y by the 19th of this
month and Y shall pay the price on the 3rd of the next month. X does not supply the goods. Y may
rescind the contract and need not pay the price. Rescission may be total or partial. Total rescission
is the discharge of the contract as a whole and the partial rescission is the variation of the original
contract by (i) rescinding some of the terms and conditions of the contract or (ii) substituting new
terms and conditions for the contract which was rescind or (iii) by adding new terms without rescinding
any of the terms of the existing contract.
While novation leads to dissolution of the contract and replacement of the same, rescission involves
only dissolution of the original contract.
(c) Alteration (Sec.62): A contract is said to be altered, when the terms and conditions of a contract
are changed. It can take place only with the consent of all the parties to the contract. However,
where an alteration of written contract is made by one party to the contract without the consent of
other and of a material fact so that the legal effect of instrument is changed, the contract is discharged
and the other party is also discharged from his obligations under the contract.
It should be noted that, in alteration only some of terms and conditions of the contract are changed
but no change in the parties to the contract, whereas in case of novation, a new contract replaces
the old contract and the parties may also change.
Example: A promises to sell and deliver 100 bags of sugar on 1st January and B promises to pay for
goods on mist February. Afterwards A and B mutually decide that the goods shall be delivered in
five equal installments at C’s godown. Here, original contract has been discharged and a new
contract has come into effect.
(d) Remission [Section 63]: Remission means accepted by the promisee of a lesser fulfillment of the
promise made may be acceptance of a lesser sum than what was contracted for in discharge of the
whole of the debt. [Case: Hari Chand Madan Gopal Vs State of Punjab A.I.R.(1973)] S.C.381]
According to section, 63 “promisee may dispense with or remit, wholly or in part, the performance
of the promise made to him or may extend the time for such or may accept instead of it any
satisfaction which he thinks fit”.
The law applicable to remission is different in England and India. In English Law Remission must be
supported by a fresh consideration. But in India, the promise may give up a part of his claim and
such a promise is binding even if there is no consideration to support this promise.
Example: X owes Y Rs. 5,000. X pays to Y and Y accepts, in satisfaction of the whole debt, Rs.
2,000 paid at the time and place at which Rs. 5000 were payable. The whole debt is discharged.
(e) Merger: Merger takes place when an inferior right accruing to a party under a contract merges
into a superior right accruing to the same party under the same or some other contract. In other
words, where a party to a contract takes a better security than the one he has already have, it is
known as merger. A merger to be valid, three conditions must be fulfilled, namely (a) the two
securities must be different in their legal operation; one is inferior and the other superior. (b) the
subject matter must be same and (c ) the parties must be same.
Example: A holds a property under a lease. He later buys the property. His right as a lessee merges
into the rights as an owner.
(f) Waiver: Waiver deliberate abandonment or giving up of a right which a party is entitled to under a
contract, where upon the other party to the contract is released from his obligation. Consideration
is not necessary for waiver. Under English Law, Waiver is possible only by agreement under seal.
Activity B:
1. What do you mean by novation? Explain it with suitable example.
2. Distinguish between novation and recession with the help of example.
9.2.3 Discharge by Operation of Law
A contract may be discharged by the operation of law in any of the following ways:
(a) Death: Where a contract involving personal skills or ability and in other words that performance of
the contract should be made by the promisor in person, the contract will be discharged on the death
of the promisor.
(b) Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred prior
to his adjudication.
(c) Merger: When the parties agree to include the previous inferior contract in a superior contract, it
is known as merger. In such a case the inferior right as merger. In such a case the inferior right
available to a party under an earlier contract will automatically disappear.
(d) Unauthorised Alteration of Terms of Agreement: Law does not permit any unauthorized
alteration of terms of a written agreement. Where a party to a contract makes any material alteration
in the contract without the consent of the other party, the other party can avoid it. A material
alteration is one which changes, in a significant manner, the legal identity or character of the contract
or the rights and liabilities of the parties to the contract. An alteration which is not material or which
is made to carry out the common interest of the parties does not affect the validity of the contract.
(e) Same Identity: When the promisor becomes the promisee, the other parties are discharged.
Example: A draws a bill receivable on B who accepts the same. A endorses the bill in favour of B
who is in turn endorses in favour of A. Here, A is both promisor and promisee and hence the other
parties are discharged. This is to avoid circuity of action.
Activity C:
1. What are the various ways in which a contract may be discharged by the operation of law?
9.2.4 By Impossibility of Performance
A contract which is entered into to perform something that is clearly impossible is void. For example, X
agrees with Y to discover treasure by magic. The agreement is void as per Section 56 which lays down the
principle that an agreement to do an act impossible in itself is void. According to Sec. 56, impossibility of
performance comes under the following categories:
(a) Initial Impossibility: Impossibility existing may be of following two types:
(i) Known to the Parties: This is also known as absolute impossibility. In this type of case,
the agreement is void ab initio.
Example: A agrees to pay Rs. 10,000 and B promises to bring stars for A from heaven. The
agreement is void on account of absolute impossibility.
(ii) Unknown Impossibility: Where both the parties of the contract are ignorant of the
impossibility of performance at the time of making the contract, as in the case of destruction
of the subject matter to the ignorance of both the parties, the contract is void on the ground of
mutual mistake.
Illustration: A sold to B certain goods supposed to be on a voyage. The goods had ceased to
exist due to the perils of the sea. Held, the contract was void. [Couturier V. Hastie, (1856) ]
(b) Supervening or Subsequent Impossibility: Impossibility which arises subsequent to the formation
of a contract is called post contractual or supervening impossibility. In such a case, the contract
becomes void when the act becomes impossible. The impossibility must be either legal or physical
but not commercial.
Impossibility of performance of a contract; as a general rule, is no excuse for the non- performance
of contract; but where this impossibility is caused by the conditions beyond the control of the
parties; the parties are discharged from further performance of the obligation under the contract.
A contract may be discharged by supervening impossibility through any of the following cases:
(i) Destruction of Subject Matter: When the subject matter of a contract, is destroyed
without any fault of the parties to the contract, the contract is discharged.
Illustration (a) : Caldwell let a music hall to Taylor for a series of concerts for certain days.
The hall was accidently burnt down before the date of the first concert. So, the contract was
void. [Taylor v. Caldwell, (1863) 3B & 826).
Illustration (b) A contracted to sell a specified quantity of potatoes to be grown on his farms.
The crop largely failed. Held, the contract was discharged. [Howell v. Coupland, (1876) Q.B.D.
258].
(ii) Non –existence of a State of Things: When a contract is made between two parties on
the basis of a continued existence or occurrence of a particular state of things. If there has been
a change in the state of the things after the contract is entered into or state of things which ought
to have occurred did not occur, then the contract is discharged.
Illustration: H hired a flat from K for two days for viewing a coronation procession of King
Edward VII. K knew of H’s purpose though the contract contained no reference to this. The
procession was however abandoned because of the illness of the king. So, H was excused
from paying the rent, as the existence of the procession was the basis of the contract. Its
cancellation discharged the contract. [Krell v. Henry, (1903) 2 K.B. 740].
This kind of failure of the object of a contract is often called ‘frustration of the contract’.
(iii) Death or Personal Incapacity: The contract is discharged on the death or incapacity or
illness of a person if the performance of a contract depends on his personal skill or ability.
Illustration: An artist undertook to perform at a concert on a specific day. Due to his illness he
was not able to sing on that day. It was held that the contract was discharged and the promisor
was not liable to pay damages.
(iv) Declaration of War: The pending contract at the time of declaration of war are either
suspended or declared as void by the government. If they are suspended, they may be performed
after the war is over.
Illustration: X contract to take in cargo for Y at a foreign port. X’s government afterwards
declares war against the country in which the port is situated. The contract becomes void when
the war is declared.
(v) Change of Law: The contract is discharged if the performance of the contract becomes
impossible or unlawful due to change in law or the Government takes some power under some
ordinance or special act like the Defence of India Act, after the formation of the contract.
Examples:
(a) D leased some land to B and agreed to erect a building on the adjoining land. After
some time, the adjoining land was acquired under statutory powers by a railway company
which built a railway station on it. Held, D was excused from performance of the contract.
Baily v. De Crespigny, (1869).
(b) A sold to B a specific parcel of wheat in a warehouse. The wheat was requisitioned by
the Government under statutory power, before the delivery was given. Held the contract
was discharged. Shipton Anderson & Co., Re (1915).
Impossibility of Performance – Not an Excuse: “Impossibility of performance” is as a rule, not an
excuse from performance, observed Scrutton, L.J. in RAlli Bros. V. Compania Naviera, etc. (1920) 2 K.B.
287. It means that when a person has promised to do something, he must perform it unless its performance
becomes absolutely impossible. A contract is not discharged by the supervening impossibility in the following
cases:
(a) Difficulty of Performance: A contract is not discharged simply on the ground that contract becomes
difficult to perform due to unforeseen changes like more expensive or less profitable than that
agreed at the time of its formation.
Examples:
(i) A sold a certain quantity of Finland timber to B to be supplied between July and September.
Before any timber was supplied, war broke out in the month of August and transport was
disorganized so that A could not bring any timber from Finland. Held, the difficulty in getting the
timber from Finland did not discharge A from performance. [Blackburn Bobbin Co. v. Allen &
Sons (1918) 1 K.B. 540].
(ii) In Keshav Lal v Dewan Chand, one of the parties to the contract agreed to supply coal
within a certain time. Due to Government’s restrictions on transport of coal from collieries,
there was a failure to make delivery in time. It was held that this could not be treated as a case
of impossibility of performance. The coal was available in the open market and could be supplied
from there.
(b) Default of a Third Party: A contract is not discharged if a contract could not be performed
because of the default of a third party on whose work the promisor relied.
Example: In Ganga Sarans v Ram Saran, an agreement to sell certain goods as and when the same
was received from the mills where orders were placed could not be carried out due to failure by the
mills to supply the same.
(c) Commercial Impossibility: Commercial impossibility do not discharge the contract. A contract is
not discharged on the ground that the higher profits are not realized or the necessary raw material is
available at a higher price because of the outbreak of war, or there is a sudden depreciation of
currency.
Example: A promised to send goods from Bombay to Antwrep in September. Before the goods
were sent, war broke out and the shipping space was not available except at very high rates. The
contract was not discharged. [ Karl Ettlinger v Chagandas & Co. , (1915) ]
(d) Strike, Lock-outs and Civil Disturbances: Strikes, lockouts and civil disturbance like riots do
not terminate contracts unless there is a clause in the contract providing for non-performance in
such-cases.
Examples:
(i) The unloading of ship was delayed beyond the date agreed with the ship owners owing to
a strike of dock workers. It was held, that the ship owners were entitled to damages, the
impossibility of performance being no excuse. [ Budget v. Binnington, (1891) 1 Q.B. 35].
(ii) A agreed to supply to B certain goods to be produced from Algeria. The goods could not
be produced due to riots and disturbances in that country. It was held, that there was no excuse
for non-performance of the contract. [Jacobs v Credit Lyonnais, (1814) 12 Q.B.D. 589].
(E) Failure of One of the Objects: Failure of one of the objects of the contract will not terminate the
entire contract.
Example: X agreed to let a boat to H (i) to view the naval review at the coronation of king and (ii)
to cruise round the fleet. Due to the illness of the king, the naval review was canceled but the fleet
was assembled and the boat could have been used to cruise round the fleet. It was held that the
contract was not discharged. [Herne Bay Steamboat Co. v. Hutton, (1903) 2K.B. 683).
Effects of Supervening Impossibility: There are three effects of supervening impossibility:
(a) A contract to do an act which, after the contract is made, becomes impossible or by reason of some
event which the promisor could not present, unlawful, becomes void when the act becomes impossible
or unlawful. [Sec. 56, para 2].
(b) Where one person has promised to do something which he knew or with reasonable diligence,
might have known and which the promisee did not know to be impossible or unlawful, such promisor
must make compensation to such promisee for any loss which such promisee sustains through the
non performance of the promise. [Sec. 56. Para3].
(c) When a contract becomes void, any person who has received any advantage under such contract
is bound to restore it, or to make compensation for it, to the person from whom he received it.
[Section 65].
Example: A promises to sing for B at a contract for Rs. 5000 which are paid in advance. Due to his illness
‘A’ was not able to perform. Thus, A must refund to B Rs. 5000.
Doctrine of Frustration: In England the doctrine of frustration is the parallel concept of ‘supervening
impossibility’. It comes into play when the common object of a contract can no longer be achieved or when
the contract, after it is made, become impossible of performance due to circumstances beyond control or
contemplation of the parties. It is really an aspect or part of the law of the discharge of contract by reason
of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of
Sec. 56. (Boothaliga Agencies v. U.T.C. Poriaswami, 1969)
In Satyabarta Ghose v. Sugnuram, 1954, the Supreme Court interpreted the term ‘impossible’ appearing in
second paragraph of Section 56. The court observed that the word ‘impossible’ not been used here in the
sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may
be impracticable and useless from the point of view of the object and purpose which the parties had in view;
and if untoward event or change of circumstances totally upsets the very foundation upon which the parties
rested their bargain; it can very well be said that the promisor found it impossible to do the act which he
promised to do. In this case, A undertook to sell a plot of land to B but before the plot could be developed,
war broke out and the land was temporarily requisitioned by the Government. A offered to return earnest
money to B in cancellation of contract. B did not accept and sued A for specific performance. A pleaded
discharge by frustration. The court held that Section 56 is not applicable on the ground that the requisition
was of temporary nature and there was no time limit within which A was obliged to perform the contract.
The impossibility was not of such a nature which would strike at the root of the contract.
Activity D:
1. “Impossibility of performance is, as a rule, not an excuse or non-performance of a contract”. Discuss.
2. Describe ‘Doctrine of Frustration’.
9.2.5 By Lapse of Time
Every contract must be performed either with in the period fixed or within a reasonable time of the contract.
A contract is discharged if it is not performed or enforced within a specified period, called period of limitation.
The Limitation Act, 1963 has prescribed the different periods for different contract; like period of limitation
for exercising right to recover a debt in 3 years and to recover an immovable property is 12 years. The
contractual parties cannot exercise their rights after the expiry of a period of limitation.
Activity E:
1. Explain the discharge of a contract by lapse of time.
9.2.6. Discharge by Breach of Contract
Breach of contract is often referred as the easiest way of discharging a contract. When any of the party does
not fulfill the duties and liabilities prescribed by the contract, the contract is said to be breached. If the
promisor has not performed his promise in accordance with the terms of the contract or where the performance
is not excused by tender, mutual consent or impossibility or operation of law, then this amounts to breach of
contract on the part of promisor. The effect of this is that the promise becomes entitled to certain remedies.
A breach of contract may occur in the following two ways:
(a) Actual Breach of Contract: Actual breach of contract may take place in two instances:
(i) At the Time When the Performance is Actually Due: If any party to a contract refuses or
fails to perform his part of the contract at the time fixed for performance, it is called actual breach of
contract on due date of performance.
Example: A promises to supply certain goods to B on a particular date and he fails to do so on that
date, he is said to have committed an actual breach of contract. In this contract, the breach has
taken place when the performance is actually due.
(ii)During the Performance: If any party has performed a part of the contract and then refuses or
fails to perform his obligation under it by express or implied act. It is called an actual breach of
contract during the course of performance.
(b) Anticipatory Breach of Contract: Anticipatory breach of contract is stated to have occurred
when the party declares his intention of not performing the contract or does some definite act which
makes the performance impossible, before the performance is due. The other party, on such a
breach being committed, has a right of action for damages. The party may either sue for breach of
contract immediately after repudiation or wait till the actual date when the performance is due and
then sue for breach.
In Hochester vs. De. La. Tour, A hired B in April to act as a courier commencing employment from
1st June, but wrote B in May repudiating the agreement, B sued A for breach of contract immediately
after repudiation. A contended that there could not be breach of contract before June 1st. Held, B
was immediately entitled to sue and need not wait till the 1st June for his right of action to accrue.
(1853).
A hired B’s ship to carry a cargo from Russia. Later on B repudiated the contract. A delayed taking
action hoping B would change his mind before the performance date war broke out between Russia
and Britain before the date of performance, frustrating the contract. Held, A lost his right to sue B
for damages by his delay.
The above explanation clarifies that it occurs when a party to an executor contract declares his
intention of not performing the contract before the performance is due. This may be by:
(a) Express Repudiation: In this, one party refuses to continue to perform his obligation by
his word or act. The other party can treat the contract as no longer binding on him and sue for
breach of contract.
Example: A undertakes to supply certain goods to B on 1st January. Before this date, he informs
B on 1st January. Before this date, he informs B that he is not able to supply the goods. This is
anticipatory breach of contract by express repudiation.
(b) Implied Repudiation: If a party makes by his own act the complete performance of the
contract impossible, the effect is as if he has breached the contract.
Example: P, a British subject, was engaged by the Captain of a warship owned by the Japanese
Government to act as a fireman. Subsequently, when the Japanese Government declared war
with China, P was informed that the performance of the contract would bring him under the
penalties of the Foreign Enlistment Act. He consequently left the ship. Held, he was entitled to
recover the wages agreed upon . [ O’ Neil v. Armstrong, (1895) 2 Q.B 418].
Activity F:
1. Explain Anticipatory Breach of Contract.
Measure of Damages in Case of Anticipatory Breach of Contract: If the contract is ended by the
promisee at once, he can sue the promisor for damages. The measure of damages will be corresponding to
the difference between the price prevailing on the date of breach and the contract price.
However, if the contract is kept operative till the date of performance of the contract, then the damages will
be the difference between the price prevailing on the date of the performance and the contract price.
9.3 Summary
A contract is said to be discharged when the obligations created by it come to an end. Contracts may be
discharged or terminated by following ways:
1. Discharge by Performance: Discharge of a contract by performance takes place when the parties
to the contract fulfill their obligations arising under the contract with tin the time and the manner
prescribed.
2. Mutual Consent: A contract rests on the agreement of the parties. As it is agreement which binds
them, so by their agreement or consent they may be discharged. The discharge by consent may be
express or implied. Discharge by implied consent takes place by- (a)Novation: Novation means
the substitution of a new contract for the original contract. It may be novation by change in terms
and conditions of the contract or novation by change in the parties to the contract.
(b)Rescission:Rescission means cancellation of all or some of the terms of the contract, where
parties mutually decide to cancel all or some of the terms of the contract, the obligation of the
parties there under terminates. (c)Alteration: A contract is said to be altered, when the terms and
conditions of a contract are changed. It can take place only with the consent of all the parties to the
contract. However, where an alteration of written contract is made by one party to the contract
without the consent of other and of a material fact so that the legal effect of instrument is changed,
the contract is discharged and the other party is also discharged from his obligations under the
contract. (d)Remission: Remission means accepted by the promisee of a lesser fulfillment of the
promise made may be acceptance of a lesser sum than what was contracted for in discharge of the
whole of the debt. (e) Merger: Merger takes place when an inferior right accruing to a party under
a contract merges into a superior right accruing to the same party under the same or some other
contract.
3. Discharge by Operation of Law: This includes discharge by (a) death (b) merger (c ) insolvency
(d) unauthorized alteration of the terms of a written agreement and ( e) rights and liabilities becoming
vested in the person.
4. Discharge by Impossibility of Performance: Section 56 states that a contract which is made
impossible to perform due to subsequent changes is taken as void and hence discharged. This is
known as ‘supervening impossibility’. There are several cases where discharge by supervening
impossibility is not permitted such as when the contract becomes difficult to perform or expectations
of higher profits is not realized.
5. Discharge by Lapse of Time: Every contract must be performed either with in the period fixed
or within a reasonable time of the contract. A contract is discharged if it is not performed or enforced
within a specified period, called period of limitation.
6. Discharge by Breach of Contract: There are two types of breach of contracts- actual breach of
contract and anticipatory breach of contract.
Actual breach of contract may occur (a) at the time when the performance is due or (b) during the
Anticipatory breach of contract occurs when a party repudiates his liability or obligation under the
contract before the time for performance arrives.

1. What are the various ways in which a contract may be discharged?
2. “Impossibility of performance is as a rule, not an excuse for non-performance of a contract. Discuss.
3. Distinguish between novation and alteration.
4. What is ‘Supervening Impossibility’? What are its effects upon the contract?
5. What do you understand by ‘anticipatory breach of contract’? State the rights of the promisee in
such cases.

1. A owned a room in a hotel which was hired to B for watching the coronation procession of King
Edward II at £ 141 payable at the time of contract. £100 were paid in cash. But the before the
balance was paid, the procession was cancelled. B filed a suit for the recovery of amount he had
already paid. Decide.
(Hint: B can recover £100 paid in cash and is not bound to pay the balance £ 41. But if A has
incurred some expense in partial performance of the contract, he can claim compensation from B).
2. A contract between X and Y provided that “100 bales are to be given to you by me; I shall go on
supplying goods of the Z mills to you soon as they are supplied to me by the said mill”. Y failed to
deliver the goods as agreed. In a suit for damages for non-delivery of goods, Y pleaded impossibility
on the ground that the goods were not supplied to him by the mill. Advise X.
(Hint: X is entitled to claim damages for no-delivery of goods by Y.).
3. X was due to perform a contract on 1st April 2000, but on 23rd March he repudiated his obligation,
on 28th March the contract become illegal through a change in law. Y, the other party to the contract,
filed a suit for breach of contract on 29th March, 2000. Discuss.
(Hint: Y has no remedy against X as, when Y files a suit for breach of contract, the contract has
already been discharged by supervening illegality.)
4. A contracted to make and deliver 500 chairs to B by December. A strike of A’s employees prevented
him from fulfilling his contract. In a suit by B for breach of contract, A claimed that the contract was
terminated by impossibility of performance. Was his defence justified?
(Hint: No. Further A is liable to B in damages).
9.6 Reference Books

- Kapoor, N.D, Pagare Dinkar, Business Laws and Management; Sultan Chand & Sons, New Delhi.
- Tulsian, P.C., Business Law, Tata Mc Graw Hill Publishing Company Limited, New Delhi
- Mathew, M.J., Commercial Law RBSA Publishers, Jaipiur.
- Business Law, The Federation of Universities.
Unit - 10 : Remedies for Breach of Contract
Structure of Unit:
10.0 Objectives
10.1 Introduction
10.2 Remedies for Breach of Contract
10.2.1 Rescission of Contract
10.2.2 Suit for Damages
10.2.3 Suit for Specific Performance
10.2.4 Suit for Injunction
10.2.5 Suit upon Quantum Meruit
10.3 Summary
10.0 Objectives
 Remedies For Breach Of Contract
 Rescission of contract
 Suit for damages
 Suit for specific performance
 Suit for injunction
 Suit upon quantum meruit
10.1 Introduction
A contract, being a fountainhead of a correlative set of rights and obligations for the parties, would be of no
value, if there were no remedies to enforce the rights arising there under. A legal remedy is a court order that
seeks to uphold a person’s rights or to redress a breach of the law. When one party breaches a contract, the
other party may ask a court to provide a remedy for the breach. The court may order the breaching party
to pay money to the non-breaching party. This remedy is called damages. Alternatively, the court may order
the party to do what they promised to do under a contract.
10.2 Remedies for Breach of Contract

When someone breaches a contract, the other party is no longer obligated to keep its end of the bargain.
From there, that party may proceed in various ways:
(i) the other party may urge the breaching party to consider the breach
(ii) if it is a contract with a merchant, the other party may get help from consumer’s associations
(iii) the other party may bring the breaching party to an agency for alternative dispute resolution.
(iv) The other party may sue for damages or
(v) The other party may sue for other remedies.
A contract gives rise to correlative rights and obligations. A right accruing to a party under a contract would
be of no value, if there were no remedy to enforce that right in a law court in the event of its infringement or
breach of contract. A remedy is the course of action which are available to an aggrieved party (i.e. the party
not at default) for the enforcement of a right under a contract.
The following are the remedies provided in the Act:
(i) The Indian Contract Act, 1872 specifies the remedies available to the parties for the breach of
contract in Section 73, 74 and 75;
(ii) Section 73 deals with the compensation for loss or damages caused by breach of contract,
(iii) Section 74 deals with the compensation of breach of contract where penalty is stipulated for; and
(iv) Section 75 provides that the party who is rightfully rescinding the contract is entitled to compensation.
The various remedies available to an aggrieved party are as follows:
Activity A:
1. Define remedy for breach of contract.
10.2.1 Rescission of Contract
Rescission means a right not to perform obligation. In case of breach of contract, the promise may put an
end to the contract. In such a case, the aggrieved party is discharged from all the obligations under the
contract and is entitled to claim compensation for the damage which he has sustained because of the non-
Under Section 65, when a party treats the contract as rescinded, he makes himself liable to restore any
benefits he has received under the contract to the party from whom such benefits were received. Under
Section 75 of the Indian Contract Act, if a person rightfully rescinds a contract he is entitled to a compensation
for any damage which he has sustained through the non-fulfillment of the contract by the other party. Section
64 deals with consequences of rescission of voidable contracts, i.e. where there is flaw in the consent of one
party to the contract. Under this Section, when a person at whose option a contract is voidable rescinds, the
other party there to need not perform any promise there in contained in which he is the promisor. The party
rescinding avoidable contract shall, if he has received any benefit there under, from another party to such
contract, restore such benefit so far as may be, to the person from whom it was received.
Example: A promises B to supply one bag of wheat to pay the price on receipt of the bag. A does not
deliver the bag of wheat on the appointed day, B need not pay the price. A person who rightfully rescinds
the contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of
the contract.
Activity B:
1. Describe the recession of contract with a suitable example.
10.2.1 Suit for Damages
Damages are monthly compensation allowed for loss suffered by the aggrieved party due to breach of a
contract. The object of awarding damages is not to punish the party at fault but to make good the financial
loss suffered by the aggrieved party due to the breach of contract. The foundation of the claim for damages
is based on the judgment in English case of Hadelty v. Baxendale. The facts of the case were: There was a
breakdown of a shaft in A’s mill. He delivered the shaft to B, a common carrier to be taken to a manufacturer
to copy and a make a new one. A did not make know to B that delay would result in loss of profits. By some
neglect on the part of B, the delivery of the shaft was delayed in transit beyond a reasonable time. As a
result, the mill was idle for a longer period than it would otherwise have been. It was held, B was not liable
for the loss of profits during the period of delay as the circumstances communicated to B did not show that
the delay in the delivery of the shaft would entail loss of profits to the mill. In the course of judgment it was
observed that where two parties made a contract which one of them has broken, the damages which the
other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably
be considered either arising naturally, i.e. according to the usual course of things from such breach of
contract itself, on such as may reasonably be supposed to have been in the contemplation of both parties at
the time they made the contract as the probable result of the breach of it.
Section 73 contains three important rules: (i) compensation as general damages will be awarded only for
those losses that directly and naturally result from the breach of contract. (ii) Compensation for losses
indirectly caused by breach may be paid as special damages if the party in breach had knowledge that such
losses would also follow from such act of breach. (iii) The aggrieved party is required to take up reasonable
steps to keep his losses to the minimum. It is the duty of the injured party to the minimum loss. (British
Westinghouse & Co. V Underground Electric etc. Co. (1915) A.C. 673). He cannot claim to be compensated
by the party in default for loss which is really not due to the breach but due to his own neglect to minimize
loss which is really not due to the.
Thus, the loss or damages caused to the aggrieved party must be such that either (i) it arose naturally or (ii)
the parties knew, when they made the contract, was likely to rise. Such compensation cannot be claimed for
any remote or indirect loss or damage sustained by reason of the breach of contract.
Different types of Damages:
Following are the various types of damages:
(i) Ordinary Damages: These damages are those which naturally arise in the usual course of things from
such breach. These damages can be recovered if the following two conditions are fulfilled:
(a)The aggrieved party must suffer by breach of contract, and
(b)The damages must be proximate (i.e direct) consequences of the breach of contract and not the
indirect consequences.
The measure of ordinary damages is the difference between the contract price and the market price at the
date of the breach. If the seller retains the goods after the breach; he cannot recover from the buyer any
further loss if the market falls, nor is he liable to have the damages reduced if the market rises.
In a contract for the sale of goods, the measure of damages on the breach of a contract is the difference
between the contract price and the market price of such goods on the date of the breach. If, however, the
thing contracted for is not available in the market, the price of the nearest and best available substitute may
be taken into account in calculating damages. In the absence of market at the place of delivery, market price
of the nearest place or prevailing in the controlling market is to be considered. Where the subject matter of
a contract is goods specially made to order and which are not marketable, the price of the goods is measure
of damages 9Punjab State Electricity Board v. A.T.T.T. Agencies, 1986)
Example (a) A contracts to pay a sum of money to B on a specified day. B in the consequence of not
receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good
to B anything except the principal sum; he contracted to pay together with interest upto the day of payment.
(b) A contracts with B to repair his house. B neglects or refuses to point out to A the places in which his
house requires repair. A is excused for the non-performance of the contract, if it is caused by such neglect
or refusal. General Damages are usually assessed based on the actual loss suffered. The main aim ofproviding
general damages is to compensate the aggrieved party and not to punish the party which is at fault.
(c) On 1st December, A contracted to sell and deliver 50 tons of rice @ 8000 per ton to B on 1stJanuary. On
20th December B, afterwards, contracted to sell those goods to C at Rs. 10,000 per ton. A failed to deliver
goods on 1st January. Whern the price of rice war Rs. 9500 per ton. B is entitled to recover Rs. 75,000 [ i.e.
(Rs. 9500-Rs. 8000) X 50 ]. B is entitled to recover Rs. 100,000 as profit which would have arisen to Y
from the sale to C because the profit is the indirect consequence of the breach of contract.
(c) Special Damages: Special damages are those which may reasonably be supported to have been
in the contemplation of both parties as the probable result of the breach of a contract. These damages can
be recovered if the special circumstances which would result in a special loss in case of breach of contract
are communicated to the promisor.
In Madras Railway Company v. Govind Ram, a tailor delivered a sewing machine and some cloth to a
railway company to be sent to a place, where he expected to earn profits in view of the forthcoming festival.
The railway company was unaware of this fact and the goods reached the destination after the festival. The
tailor could not claim damages for loss of profits.
In Simpson V London and N.W. Rail Co., Simpson entrusted a few specimens of his goods to an agent of
a railway company in order that the same be delivered at New Castle where an agricultural show was to be
held. The consignment note clearly specified that the delivery was to be made in time. Because of default by
railway company, the samples arrived late for the show. It was, held that Simpson could claim damages for
loss of profits.
X’s mill was stopped due to the breakdown of a shaft. He delivered the shaft to Y, a common carrier, to be
taken to a manufacturer to copy it and make a new one. X did not make known to Y that delay would result
in a loss of profits. By some neglect on the part of Y the delivery of the shaft was delayed in transit beyond
a reasonable time. As a result, the mill remained idle for a longer time than otherwise would have been, had
the shaft been delivered in time. Held, Y was not liable for loss of profits during the period of delay as the
circumstances communicated to Y did not show that a delay in the delivery of the shaft would entail loss of
profits to the mill. [Hadely v Baxendale].
(d) Vindictive Damages or Exemplary Damages: These damages are awarded with a view to
punish the defendant and not solely with the idea of awarding compensation to the plaintiff. These have been
awarded:
(i) for breach of a promise to marry;
(ii) for wrongful dishonor of a cheque by a banker possessing adequate funds of the customer.
In a breach of promise to marry, the amount of the damages will depend upon the extent of injury to the
party’s feelings. In the banker’s case, the smaller the amount of the cheque dishonoured, larger will be
damages as the credit of the customer would be injured in a far greater measure, if a cheque for a small
amount is wrongfully dishonoured.
(e) Nominal Damages: Nominal damages are those which are awarded where there is only technical
violation of a legal right but the aggrieved party has not in fact suffered any loss because of breach of
contract. These damages are called nominal because they are very small, say, one rupee. The court may or
may not award these nominal damages.
Example: A firm consisting of four partners employed B for a period of two years. After six months two
partners retired, the business being carried on by the other two. B declined to be employed under the
continuing partners. Held, he was only entitled to nominal damages as he had suffered no loss. [Brace V
Calder, (185) 2 Q.B. 253].
(a) Liquidated Damages and Penalty: Sometimes parties themselves at the time of entering into a
contract agree that a particular sum will be payable by a party in case of breach of the contract by
him. Such a sum may either be by way of ‘liquidated damages’ or it may be by way of ‘Penalty’.
(i) Liquidated Damages if the specified sum represents a fair and genuine pre-estimate of the damages
likely to result due to breach,
(ii) Penalty if the specified sum is disproportionate to the damages likely to result due to breach.
In Indian Law, there is no such difference between liquidated damages and penalty. Section 74 provides for
‘reasonable compensation’ upon the stipulated amount whether it is by way of liquidated damages or penalty.
Example: A borrows Rs. 500 from B and promises to pay Rs. 1000 if he fails to repay Rs. 500 on the
stipulated date. On A’s failure to repay on the given date, B is entitled to recover from A such compensation,
not exceeding Rs. 1000 as the court may consider reasonable. (Union of India V Raman Iron Foundry,
1974).
Activity C
1. What are the various types of damages?
2. State the principles on which damages are assessed for breach of contract.
3. Examine critically the rule in Hadely V. Baxendale, and indicate to what extent the said rule is
applicable in India.
10.2.3 Suit for Specific Performance
Specific performance means doing exactly what had been intended to be done by the parties in the contract.
Specific performance is the remedy granted by the courts to the aggrieved parties in equity only in cases
where it is absolutely essential to grant it. Specific performance is a rare remedy at law, but sometimes
available where the subject of the breached contract is special and irreplaceable. The court orders the guilty
party to actually perform his obligation only when monetary compensation will not be an adequate remedy.
Specific remedies direct the party in default to do or to bear for the very thing, which he is bound to do or
make declaration of rights, which the nature of the case may require.
Specific performance is usually granted in contracts connected with e.g. purchase of a particular plot or
house, or to take debentures in a company. In case of a sale of goods, it will only be granted if the goods are
unique and cannot be purchased in the market, e.g. a particular race horse, or one of the special value to the
party suing by reason of personal or family association, e.g. heirloom.
Specific performance will not be ordered:
(a) where monetary compensation in an adequate remedy,
(b)where the court cannot supervise the execution of the contract, e.g. a building contract.
(c) where the contract is for personal service; and
(d)where one of the parties is a minor,
(e) where the contract is made by a company in excess of its powers as laid down in its
Memorandum of Association.
Example: X agreed to sell an old painting to Y for Rs. 50,000. Subsequently, X refused to sell the
painting. Here, Y may file a suit against X for the specific performance of the contract.
Activity F
1. In which circumstances specific performance will not be orderd?
10.2.4 Suit for Injunction
An injunction is an order of a court restraining a person from doing a particular act. It is a mode of securing
the specific performance of a negative term of the contract, (i.e. where he is doing something which he
promises not to do so), the Court may in its discretion issue an order to the defendant restraining him from
doing what he promised not to do, Injunction may be prohibitory or mandatory. In prohibitory it is the order
of the court restraining the commission of a wrongful act whereas in mandatory, it restrains continuance of
wrongful commission.
Example: W agreed to sing at L’s theater only during the contract period. During the contract period, W
made contact with Z to sing at another theater and refused to perform the contract with L. It was held that
W could be restrained by injunction from singing for Z [Lumely V Wagner (1852)].
Activity G
1. Describe suit for injunction.
10.2.5 Suit upon Quantum Meruit
Quantum Meruit means simply ‘as much as earned’. A right to sue on a quantum meruit arises where a
contract, partly performed by one party has become discharged by the breach of the contract by the other
party. The right is founded not on the original contract which is discharged or is void but on an implied
promise by the other party to pay for what has been done.
Even where there is no contract per se, there may because of action where a person gives value to another
under circumstances that would cause the first person (if reasonable) to believe the second person will give
fair market value for what he received. Quantum meruit offers recovery of ‘whatever the thing was worth’
or right to claim the compensation for the work already done.
Quantum meruit recovery is appropriate where the parties, by their conduct, have formed a relationship
which is contractual in nature, even though an enforceable contract may never have been created. For
example, where a written agreement between an owner and a contractor is deemed unenforceable as a
result of technical deficiency or because it violets public policy, the contractor may still recover in quantum
meruit. As a general rule, one should not look to recover in quantum meruit unless there have been direct
dealings between the parties that create the basis for the contract to be ‘implied in fact’.
C an owner of a magazine engaged P to write a book to be published by installments in his magazine. After
a few installments were published, the publication of the magazine was stopped. It was held that P could
claim payment for the part already published. [Planche v Calburn].
10.3 Summary
 Breach of contract is often referred to as the easiest way of discharging a contract. When either of
the parties does not fulfill the duties and liabilities prescribed by the contract, the contract is said to
be breached.
 In case of breach of a contract, the injured party has one or more of the following remedies:
(i) Recession: When there is breach of contract by a party, the injured party may sue to treat the
contract as rescined. He is also absolved of all his obligations under the contract.
(ii) Damages: Damages are monetary compensation awarded to the injured party by court for the
loss or injury suffered by him. Sec. 73 of the Indian Contract Act which deals with ‘compensation
for loss or damage caused by breach of contract’ is based on the judgment in the case of Hadely v.
Baxendale. Damages may be of following types:
(a) Ordinary Damages: These damages are those which naturally arise in the usual
course of things from such breach.
(b) Special Damages: Special damages are those which may reasonably be supported
to have been in the contemplation of both parties as the probable result of the breach of a
contract.
(c) Vindictive Damages or Exemplary Damages: These damages are awarded
with a view to punish the defendant and not solely with the idea of awarding compensation
to the plaintiff.
(d) Nominal Damages: Nominal damages are those which are awarded where there
is only technical violation of a legal right but the aggrieved party has not in fact suffered any
loss because of breach of contract.
(e) Liquidated Damages and Penalty: Sometimes parties themselves at the time of
entering into a contract agree that a particular sum will be payable by a party in case of
breach of the contract by him. Such a sum may either be by way of ‘liquidated damages’ or
it may be by way of ‘Penalty’.
(iii) Specific performance: In certain cases the Court may direct the party in breach of a contract
to actually carry out the promise, exactly according to the terms of the contract. This is called
specific performance of the contract.
(iv) Injunction: It is a mode of securing the specific performance of the negative terms of a contract.
(v) Quantum meruit: Quantum Meruit means simply ‘as much as earned’. A right to sue on a
quantum meruit arises where a contract, partly performed by one party has become discharged by
the breach of the contract by the other party. The right is founded not on the original contract which
is discharged or is void but on an implied promise by the other party to pay for what has been done.

1. A contracts to repair B’s house in a certain manner and receives payment in advance. A repairs the
house but not according to the contract. B incurs Rs. 1000 to remedy the defect. Can B recover
Rs. 1000 from A.
(Hint: Yes because he suffered the loss which naturally arose in the usual course of things from such
breach. [Sec. 73].
2. B was an employee in a partnership firm for a certain period. The firm was dissolved before the
expiry of the period for which he was employed. Two of the partners continued the business and
offered to employ B. B refused. What damages can he claim from the firm for breach of contract?
(Hint: B is entitled to claim only nominal damages as the continuing partners were willing to employ
B who refused to accept the employment. [ Brace V. Calder].
3. X bought a horse with a warranty that it was free from any disease. The horse was suffering from a
disease at the time of sale. As result, not only that horse died but infected other horses also. Discuss
the legal position.
(Hint: X is entitled to claim not only the loss occasioned by the death of the horse bought but the
entire loss which occurred as a result of the breach of warranty. (Section 73) [Smith v. Green].
4. A commenced a periodical publication called, the ‘Armour’ and engaged B to write a volume on
ancient armour for it. For this B was to receive the sum of Rs. 10,000 on completion of the work.
When he had completed a part, but not the whole of his volume, A abandoned the publication. B
sued A for recovery of the amount contracted for. Advise B.
(Hint: B is entitled to claim compensation on quantum meriut).

1. What remedies are available to an aggrieved party on the breach of a contract?
2. “if the contract is broken, the law will endeavor, so far as money can do it, to palce the injured party
in the same position as if the contact had been performed”. Comment
3. State the circumstances under which a party is not entitled to specific performance.
4. When does a claim on quantum meruit arise?
5. State the importance of time in case of actual breach of a contract.
6. Explain and illustrate the circumstances in which a party may maintain action for breach of a contract
without having himself fully performed his own obligation under the contract.

- Kapoor, N.D, Pagare Dinkar, Business Laws and Management; Sultan Chand & Sons, New Delhi.
- Tulsian, P.C., Business Law, Tata Mc Graw Hill Publishing Company Limited, New Delhi
- Mathew, M.J., Commercial Law RBSA Publishers, Jaipiur.
- Business Law, The Federation of Universities.
Unit - 11 : The Sale of Goods Act, 1930 (I)
Structure of Unit:
11.0 Objectives
11.1 Introduction
11.2 Meaning and Essential Elements of Contract of Sale
11.3 Distinction between Important Terms of Contract of Sale
11.4 Goods- Meaning and Types
11.5 Effects of Destruction of Goods
11.6 Price of Goods
11.7 Stipulation Relating to Time
11.8 Conditions and Warranties
11.9 Summary
11.0 Objectives
After Completing this unit you will be able to:
 Explain the meaning and essential elements of Contact of Sale,
 Identify and understand the distinction between Terms involved in Sale of Goods Act,
 Discuss the meaning and types of ‘Goods’ ,
 Identify and discuss the rules applicable to effects of destruction of goods,
 Understand the meaning and different modes of fixing price in a contract of sale,
 Get acquainted with information about different provisions related to stipulation of time, delivery of
goods as well as conditions and warranties in Contract of Sale.
11.1 Introduction
For all commercial contracts the sale of goods is most common and knowledge of its principles is important
for all the segment of community. The law of sale of goods is based on the basic principles of mercantile law
which defines the duties and obligations of buyer and seller. The law relating to sales of goods or movables
in India is contained in the Sale of Goods Act, 1930, contains sixty six Sections, which came into force on
1st July 19360, and extends to the whole of India except the State of Jammu and Kashmir. The Sale of
Goods Act, 1930 was amended as Sale of Goods (Amendment) Act, 1963, where few minor amendments
were made. Prior to Sales of Goods Act, 1930, the sale of goods was contained in chapter VII of the Indian
Contract Act, 1872. The general provisions of the Indian Contract Act, 1872 are continue to be applicable
to the contract of sale of goods provided they are not inconsistent with the express provisions of Sale of
Goods Act )Sec. 3). Thus, for example, the provisions of the Contract Act relating to offer made and its
acceptance, the capacity of the parties, free consent, consideration, agreements in restraint of trade, wagering
agreements, and measure of damages and legality of object are continue to be applicable to a contract of
Sale of Goods. But to some extent the definition of consideration stands modified that in a contract of Sale
of Goods consideration must be way of price i.e. only money consideration [Sec. 2 (10) and 4].
The transaction is not a contract of sale when there is no money consideration. It is, therefore, necessary
that goods should be exchanged for money. If goods are exchanged against goods, the transaction would
not become a sale and considered as barter. However, if consideration for the transfer of property consists
partly of payment of money and partly of goods, the transaction becomes sale.
11.2 Meaning and Essential Elements of Contract of Sale
Meaning: If not inconsistent with the express provisions of the Sale of Goods Act, 1930, the general rules
applicable to contract are also applicable to contract of Sale of Goods as sales of goods takes into account
basic principles of contract and makes a clear introspection of the commercial transaction.
11.2.1 Definition
The contract of sale of goods is defined under section 4 (1) of the Indian Sale of Goods Act, 1930 as
follows.
“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price”.
A contract of sale includes (a) transfer of property (sale) or (b) agreement to transfer the property (Agreement
to sell). ‘Sale’ includes transfer of ownership rights to the buyer immediately on making contract where as
an ‘agreement to sell includes transfer of ownership rights to be passed on some future time or subject to
some conditions thereafter to be fulfilled. For example, Manu sells his bike to Kanu for Rs. 10000/-. It is a
sale because the ownership of the bike has been transferred to Kanu by Manu for a price. When Manu
agrees with Kanu to sell his bike after two months for Rs. 10000/-. It is an agreement to sale as the bike is
to be transferred on a future date.
As per Section 4 (2) a contract of sale may be absolute or conditional. When the property in goods passes
immediately to the buyer and nothing remaining to be done by seller is called ‘absolute contract of sale’. For
example, goods sold on counter of a shop. When the property in goods does not pass to the buyer immediately,
but it passes on the fulfillment of certain conditions is called ‘conditional’ contract of sale’.
11.2.2 Essential Elements of Contract of Sale:
In a contract of sale there should be presence of following elements.
(a) A contract
(b) Existence of two Persons/Parties (buyer and seller)
(c) Goods
(d) Price
(e) Transfer or agree to transfer property (ownership)
(f) From seller to buyer
The essential elements / characteristics of a contract of sale can be summarized as follows.
(a) A Contract: All the essential elements of a valid contract must be present as contract of sales
means an agreement enforceable by law. No particular form is necessary for making of a contract
of sale. According to sec 5 (1), contract of sale may provide for immediate delivery of the goods, or
immediate payment of the price or both, or the delivery or payment by installments or that the
delivery or payment or both shall be postponed.
According to section 5 (2), a contract of the sale may be made in writing or by words of mouth or
partly in writing and partly by words of mouth or may be implied from the conduct of the parties.
However, if any particular mode is prescribed by any law, then the contract of sale must be made in
that particular mode.
Contract of sale is called a Consensual, Bilateral and Commutative contract. Consensual means
there must be free consent, some consideration and the object must be lawful. Where ownership
rights are given to another person without any consideration, then it is not a contract of sale but a
transaction of gift.
Bilateral means the property in goods has to pass from one person to another (the seller and buyer).
Commutative contract means the things given or act done by one party are regarded as equivalent
of money paid or act done by the others.
(b) Existence of Two Persons/ Parties (Buyer/ Seller): To constitute a valid contract of sale, there
must be two parties i.e. there must be a transfer or agreement to transfer the property in goods by
the seller to the buyer. The seller and buyer must be two different persons, as a person cannot buy
his own goods.
For example, students in a college run mess on a cooperative basis and take meals is not considered
as contract as students are undivided joint owners of the meals they are consuming. Another example
of State of Gujarat vs. Ramlal & co. (1965). On dissolution of a partnership firm, the surplus assets
including some goods were divided among the partners. The Sales Tax officer wanted to tax this
transaction but the court observed that the partners were themselves the joint owners of the goods
and they could not be both sellers and buyers. Moreover no money considerations was promised
or paid by any partner to the firm as consideration for the goods allotted to him.
(c) Goods: The subject matter of contract of sale should obviously be goods as in contract of sale
property in the goods is required to be transferred by the seller. According to section 2 (7), “goods
mans every kind of movable property, other than actionable claims, immovable property and money
(current money), and includes stock and shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be served before sale or under the contract of sale”.
The trade marks, Copy rights, Patent rights, Gas, water, Electricity are all regarded as goods.
Actionable claims and money are excluded from goods. Actionable claims are defined by the Transfer
of Property Act and such claims can be enforced only by a legal action or suit. For example, a debt
can be enforced by legal action. Money (current money) is also excluded from the definition of
goods because it constitutes the price for exchange of goods sold, and is governed by a different
principles, law due to its being currency. Old coins which are not current money can be treated as
goods.
(d) Price: According to section 2 (10) price is the money consideration for sale of goods. The transaction
is called barter and not a sale of goods if goods are sold or exchanged for other goods. The basic
requirement is that the goods must be sold for a definite sum of money. But if goods are sold partly
for goods and partly for money, the contract is called sale. For example, when a person returned his
old bike and ask dealer to deliver new bike by paying the difference in cash would also be called as
sale.
(e) Transfer or Agree to Transfer Property (Ownership): Property means ownership which seller
must either transfer or agree to transfer to the buyer. Section 2 (11) of the Act defines property to
mean general property in goods, and not merely, a special property. The property in goods means
the general property i.e. all ownership right of the goods. Where a person owns goods, he is said to
have general property in goods. In the case where person has special property, he is merely Pawnee
of the goods. For example, if Ganesh who owns certain goods pledges them to Dinesh, here Ganesh
has general property in the goods, where as Dinesh (the Pawnee) has special property or interest in
the goods to the extent of the amount of advance Dinesh has made to the Ganesh. The pledge
(Dinesh) gets a special property in the goods pledged, but the general property remains with the
pledger (Ganesh).
(f) From Seller to Buyer: The another important aspect is that the transfer of property I goods
should be from the seller to the buyer. There will be no contract if the seller has no right to sell the
goods, and then the buyer is not entitled to receive the same.
Activity A:
1. Make an attempt to relate the essential elements of the sale of goods with real life experience and
some actual decision of court of law.
11.3 Distinction between Important Terms of Contract of Sale

The distinction between following will help to understand the terms involved in Sale of Goods Act.
11.3.1 Distinction between Sale and Agreement to Sale
The following are the main areas of distinction between Sale and Agreement to Sale which helps in determining
the rights and liabilities of the parties to the contract.
(a) Nature of Contract of Sale of Goods: A sale is a executed contract coupled with conveyance of
the property in goods, the seller sells the goods to the buyer for a price. An agreement to sale is an
executor contract, the seller agrees to sell and buyer agrees to buy the goods for a price.
(b) Transfer of Property: In a sale the property in goods passes from the seller to the buyer immediately
with contract and it implies immediate conveyance of property so that the seller is no more the
owner of goods sold. For example, Manoj buy a motor bike from Vinod and the price to be paid
after a week. Manoj becomes owner though the price is yet to be paid. Payment of prices and
delivery of goods are no conditions for transferring the property in the goods.
In agreement to sell the transfer of property in the goods is to take place at a future time or subject
to certain conditions to be fulfilled. The conveyance of property takes later and the seller continues
to be the owner until the agreement to sell becomes a sale either by the fulfillment of some condition
or by the expiry of time. For example, if Manoj agrees to buy a motor bike from Vinod, on the
condition that if it is approved by Manoj’s father, then it is considered as an agreement to sell.
Property in goods will pass from Vinod only when Manoj’s father approved the motor bike.
(c) Risk of Loss: In contract of Sale risk follows ownership because the ownership of property
passes immediately to the buyer with sale. In sale loss fall on the buyer in case the goods gets
destroyed even though the goods may never have come in to his possession because the property
in the goods has already passed to the buyer. For example, Mr. X has purchased Television form a
shop and agrees to take delivery on next day and in the same night there was a fire in shop and
television gets destroyed. Here Mr. X shall be liable to pay the price and bare loss since the ownership
had already passed to him.
In case of agreement to sell the loss in case of goods gets destroyed, loss has to be borne by the
seller as the ownership in the goods is yet to pass from seller to buyer even though the goods are in
possession of the buyer.
(d) Consequence of the Breach: In case of contract of sale, if the buyer refuses to pay price for the
goods or accept the goods, the seller can sue for the price, even though the goods are still in his
possession.
In an agreement to sell, if buyer does not follow his promise, then the seller can only sue for damages
and not for the price, even though the goods are in the possession of the buyer. In contract of sale,
if the seller refuses to deliver the goods, the buyer can sue for the recovery of the goods as well as
for damages.
In an agreement to sell, if the seller refuses to sell the goods the buyer’s right is to only claim
damages and cannot compel the seller to deliver the goods to him.
(e) Right to Resale: In case of sale, the property is with the buyer and therefore the seller cannot
resale the goods. If seller does so, the original buyer can recover the goods even from third party
i.e. subsequent buyer and third party does not acquire a title to the goods. In case of agreement to
sell, the property in the goods remains with the seller and he can dispose of the goods as he likes
although seller may thereby commit a breach of his contract. The original buyer can sue the seller
only for the breach of contract, and subsequent buyer gets a title of the goods.
(f) Insolvency of the Buyer: In case of sale, where ownership is passed to buyer and if the buyer
becomes an insolvent before paying the price for the goods, the seller in the absence of lien over
goods, will have to deliver the goods to the official receiver or assignee and the seller have the right
to claim only ratable dividend for the price of the goods. In case of agreement to sell if the buyer
who is declared insolvent and has not paid the price, the seller may refuse to deliver the goods to
official receiver or assignee as ownership has not passed to the buyer.
(g) Insolvency of the Seller: In case of sale, if the seller is adjudged an insolvent after the payment of
price for the goods by the buyer, the buyer will be entitled to claim the identical goods from the
official receiver. In case of an agreement to sell, if the buyer has already paid the price and the seller
is adjudged insolvent, the buyer can only claim a ratable dividend (as if he is creditor) and not the
goods as property in goods is still rests with seller.
(h) General and Particular Property Right: A sale creates right against whole world (jus in ram), as
the buyer becomes the absolute owner of the goods and can use the same in any manner he likes.
An agreement to sell creates right against an individual (jus in personam). Here the buyer’s right are
only personal and he can sue the seller for damages for breach but not for the recovery of the goods
by specific performance.
(i) Performance: In case of sale the performance of contract of sale is absolute and without any
condition. In case of agreement to sell the performance is conditional and is made in future.
11.3.2 Distinction between Sale and Hire-Purchase Agreement
In a modern commercial transaction the contract of hire- purchase is prevailing in practice in which the main
objective is of selling goods as one can observe in contract of sale. Under hire purchase agreement the
owner of the goods agrees to transfer the property in goods to the higher purchaser when a certain fixed
number of installments of price are paid by the hirer. The installments paid by hirer are regarded as the hire-
charges for the use of goods and till he pay all the installments the hirer remains the bailee. The owner
(bailer) has a right to resume the possession of the goods immediately without refunding the amount received
till date from refunding bailee if there is a default by the hire-purchaser in paying an installment. This is
because ownership rests with ownership till all the installments are paid by hire-purchaser. The hirer may
return the goods at any time without any obligation to pay the balance installments. The essence is that hire-
purchase agreement is not a contract of sale because there is no agreement to buy but only a bailment and
the property in the goods remains with the owner during the continuance of the bailment of goods, which
coupled with an option to purchase them which may or may not be exercised. For example, Ramu hires a
sewing machine and agreeing to pay Rs. 200 per month with the condition that if he pays monthly installments
regularly up to 36 months the Ramu becomes owner of the machine at the end of the 36 months. This is
called hire purchase agreement and Ramu will not become owner till all installments are paid.
The main points of distinction between the sale and hire purchase are as follows.
(a) Mode of Agreement: In case of sale the contract may be made either orally or in writing where
as in hire-purchase agreement must be in writing.
(b) Ownership: In case of sale the property in goods or ownership is transferred to the buyer from the
seller as soon as the contract is entered into. In hire-purchase the property in the goods or ownership
is transferred to the higher purchaser only when a certain agreed number of installments is paid by
the hire-purchaser.
(c) Position of Buyer: In a contract of sale the position of the buyer is that of the owner of the goods
where as in hire purchase the position of the hirer is that of a bailee till all the installments are paid by
him.
(d) Termination of Contract: The buyer in sale cannot terminate the contract and is bound to pay the
price of the goods. In case of hire purchase, the hire purchaser has an option to terminate the
contract at any stage by returning the goods to its owner without any liability to pay or can’t be
forced to pay the remaining installments of the goods.
(e) Installment Payment: In case of sale if payment is made by the buyer in installments, the amount
paid is considered as payment made towards price of the goods and the amount payable by the
buyer to the seller is reduced.
(f) Resell the Goods: In case of sale, the buyer can resell the goods whereas in case of hire purchase
the hire purchaser cannot resell till he has not paid all the installments of hire.
(g) Risk of Loss: In the case of sale, the seller takes the risk of any loss resulting from the insolvency
of the buyer. In the case of hire purchase, the owner takes no such risk, or if the hirer fails to pay an
installments the owner has the right to take back the goods.
(h) Governing Act: The sale is governed by the sale of Goods Act, 1930, whereas hire purchase is
governed by Hire-Purchase Act,1972.
(i) Passing of Title of Goods: In case of sale, the buyer can pass a good title to a bona fide purchaser
from him but in a hire-purchase, the hirer cannot pass any title even to a bona fide purchaser.
(j) Levy of Tax: In case of sale, the buyer can pass a good title to a bona fide purchaser from him but
in hire-purchase the hirer cannot pass any title even to a bona fide purchaser.
11.3.3 Sale and Contract for Work and Labour
Considering the sales tax law in the different states of India it is necessary to understand the distinction
between sale of goods and contract of work and skill because sales tax is leviable on sale of goods under
certain circumstances but sales tax is not leviable on the remuneration received for work and labor rendered.
For example, a dentists agreed to make a set of artificial teeth to fit it in to the mouth of a customer. Held, it
is a contract for the sale of goods (Lee vs. Griffin, 1861). Another example is a contract with an artist who
agreed to paint a picture for sum agreed on the canvas and with the material to be supplied by the other
party, was had to be a contract for work and skill and not one for sale of goods (Robinson vs Graves,
1935). One more example in which a person has given order for making and fixing some curtains in a house
is considered as contact of sale of goods though it involves some work and labour in fixing the same [Love
vs Norman Wright (Builders) Ltd., 1944).
An agreement is considered to be a sale when the property in the goods is intended to be delivered to the
buyer, even though some labour on the part of the seller of the goods may be necessary. An agreement is
considered to be a contract of work and labour and not a contract of sale, where the essence of the contract
is rendering of service and exercise of skills and no goods are delivered.
Activity B:
1. Refer different real cases registered under contract of sale and make a different list of them by
differentiating cases as (a) sale and agreement to sale (b) sale and hire-purchase agreement (c) sale
and contract for work and labour.
11.4 Goods- Meaning and Types

11.4.1 Meaning
Goods form the subject matter of sale. As defined in Section 2 (7) of Sale of Goods Act, “Goods mean
every kind of movable property other than actionable claims and money; and includes stocks and shares,
growing crops, grass and things attached to or forming part of land which are agreed to be served before
sale or under the contract of sale”. Trade marks, Copy rights, Patent right, Goodwill, Electricity, Water and
Gas are all goods. The definition of Goods includes stocks and shares, growing crops, grass and things
attached to or forming part of land, which are agreed to be served from land before sale. Not only growing
crops and grass but trees are also called goods because they are agreed to be served before sale or under
the contract of sale [Badri Prasad vs State of M.P., A. I. R.(1970) S. C. 706].
Actionable claims and money have been excluded from the definition of goods. An actionable claim means
a claim or right which can be enforced by filling a suit in the court of law. For example, a debt due from one
person to another is an actionable claim and cannot be bought and sold.
11.4.2 Types/Classification of Goods
According to section 6, goods which form the subject matter of a contract of sale may be either existing
goods, or future goods [Sec. 6 (1)], or contingent goods [Sec., 6 (2)].
GOODS
(1) Existing Goods (2) Future Goods (3) Contingent Goods
(a) Specific Goods (b) Ascertained Goods (c) Unascertained Goods
Figure - 11.1
(1) Existing Goods: In case the goods are not in existence, there can be no contract of sale. The
goods which physically exists and which are owned and\or possessed by the seller at the time of
making contract of sale, are known as existing goods. That is where the seller is the owner, he has
general property in them and where seller is in possession, say as an agent or a pledge, he has a right
to sell them. Sometimes, the seller may be in possession of goods, but may not be the owner, as it
happens when goods are sold by mercantile agent. It is only the existing goods which can be the
subject matter of sale. Existing goods may either be specific goods or ascertained goods and
unascertained goods.
(a) Specific Goods or Ascertained Goods: According to Section (14), goods identified and
agreed upon at the time of contract of sale are called ‘Specific Goods’. Where there is a
contract for specific goods, the seller would not fulfill his contract by delivering any goods other
than those agreed upon. For example, kanu owns a number of horses, and promises to sell his
black horse to Janu. Here, horse to be said is identified and separated and therefore called
specific goods. If Mahesh agrees to sell to Jignesh a particular DVD player bearings a distinctive
number, there is a contract of sale of specific or ascertained goods. Here the point to be noted
is that in actual practice the term ‘Ascertained Goods’ is used in the same sense as ‘ Specific
Goods’.
Ascertained Goods has not been defined in the act. These are the goods which are ascertained
to the formation of contract of sale. As contrasted with specific goods which are identified at the
time of sale, ascertained goods means goods identified in accordance with the agreement after
the contract of sale is made. The identification takes place at a later date.
(b) Unascertained Goods: The goods which are not separately identified or ascertained at
the time of the making of the contract are known as generate or unascertained goods such
goods re defined or indicted by description or by sample. For example, Jayesh has many
horses and he agrees to sell one of the horse to Ganesh, the goods are unascertained. As soon
as the horse to be sold is identified, it becomes ascertained goods. Another example, if Mr. Joy
agrees to sell 1 bag of 20 kg of wheat to Mr. Tom out of 200 bags lying in his warehouse, it is
a sale of uncertain goods because it is not known which bag of wheat is to be delivered. As
soon as the particular bag is separated from the lot for delivery, it becomes ascertained or
specific goods.
(2) Future Goods: As defined by Section 2 (6) ‘Future Goods’ are the goods to be manufactured or
produced or acquired by the seller after the making of the contract of sale. At the time of contract
of sale future goods may be either not in existence or be in existence but not yet acquired by the
seller. This is because a person may agree to sell goods in anticipation of their production or
acquisition. A contract of present sale of future goods, though expressed as an actual sale, purports
to operate as an agreement to sell the goods and not a sale [Section 6 (3)]. This is because the
ownership of the goods cannot be transferred before goods come into existence. For example, if
John agrees to sell to Robinson the rice which will be grown in his field in the current season, it is a
sale of future goods, amounting to an agreement to sell. Another example Ganesh agrees to sell to
Jayesh all the mangoes which will be produced in his garden in next year mango season. It is a
contract of sale of future goods, amounting to an agreement to sell.
(3) Contingent Goods: Contingent goods are a type of future goods as its acquisition by the seller
depends upon a contingency which may or may not happen. A contract for the sale of contingency
goods also operates as an agreement to sell and not a sale so far as the question of passing of
property to the buyer is concerned. In a contract of sale of contingent goods, the contract can be
enforced only when the event on the happening of which the performance depends happens, otherwise
the contract becomes void. Such contracts give no right of action if the contingency does not
happen. For example, Sanjeev agrees to sell to Rajeev specific goods which are in transit and will
arrive through ship which is on the way from Australia to India, on the condition that if the ship
carrying the goods arrives safely. But if the ship is sunk or ship arrives but with no such goods on
Board, the contract becomes void and the seller is not liable. The distinction between future goods
and contingency goods is that the procurement of contingent goods depends upon a contingent
whereas it is not so in case of future goods. In case of non-acquisition of contingent goods, the
parties who made an agreement are discharged where as non-acquisition or non-production of
future goods the parties are not discharged.
11.5 Effects of Destruction of Goods

The section 7 and 8 of the Sale of Goods Act, 1930 lay down the rules applicable to the cases where the
subject matter of contract of sale (Goods) is destroyed before or after the contract.
11.5.1Meaning
It deals with the effect of perishing of goods on the rights and obligations of the parties to a contract of sale.
The word perishing means not only physical destruction of the goods but it also covers damage in commercial
sense. Commercial loss means though goods are not physically destroyed but goods lose their merchantable
character. For example, where cement is spoiled by water and becomes almost stone. It also covers loss of
goods by theft [Barrow Ltd., vs Philips Ltd., (19290, 1 K.B. 574] and where the goods have been lawfully
requisitioned by the Government [Re Shipton, Anderson & Co., (1915), 3 K. B. 676].
The effects of perishing of goods may be discussed as (a) goods perishing before making of the contract (b)
goods perishing before sale but after agreement.
1. Goods Perishing Before Making of the Contract (Section 7): As given in the section 7 of the
act, where there is a contract for sale of specific goods, the contract is void if the goods without the
knowledge of seller have, at the time when the contract was made perished or became so damaged
as no longer to answer to their description in the contract. When specific goods form the subject
matter of the contract of sale and they without the knowledge of the seller perish, at or before the
time of contract, the contract is void. This provision is based on the ground of mutual mistake or
impossibility of performance. For example, Ganpat agrees to sell to Mahesh a specific black horse.
It turns out that the horse was dead at the time of bargain, though neither party was aware of the
fact, the agreement is void. Another example is Kamlesh agrees to sell Mrugesh, a specific cargo
which supposed to be on way US to Bombay. If turns out that, before the day of bargain the ship
carrying the cargo has seen cast away and the goods lost. Neither party was aware of the facts the
agreement is void.
Under this section certain conditions must be fulfilled to make contract void includes (a) the contract
must be for the sale of specific goods (b) the goods must have been perished before the contract is
made (c) the seller must not have the knowledge of the destruction of the goods. When in a contract
for the sale of specific goods, only part of the goods are destroyed or damaged, the effect of
perishing will depend upon whether the contract is entire or divisible. If it is entire (indivisible) and
only part of the goods has perished, the contract is void. If the contract is divisible it will not be void
and the party available in good condition must be accepted by the buyer. For example, X sold to Y
500 bags of Chinese groundnuts identified by marks and lying in a named warehouse. X is not
aware that bag has stolen at the time of the sale. X tendered delivery of 391 bags. Held, the sale
was void and Y could not be compelled to take the remainder [Barrow, Lane and Ballard Ltd. Vs
Philips & Co. (1929) 1 K.B. 574].
2. Goods Perishing Before Sale but After Agreement (Section 8): According to Sale of Goods
Act which reads as “Where there is an agreement to sell specific goods, and subsequently the
goods, without any fault on the part of the seller or buyer, perish or become so damage as no longer
to answer to their description in the agreement before the risk passes to the buyer, the agreement is
thereby avoided and both parties are excused from the performance of the contract. In such a
cases, the contract of the sale becomes void if the contract is for the sale of specific goods and the
goods are destroyed without any fault of the seller or buyer. The provision in this act is based on the
ground of supervening impossibility of performance which makes a contract void. In case where
some part of the goods agreed to sold gets perished, and if it is indivisible the contract becomes
void. But ion case where goods are divisible in nature then parties are absolved from their obligation
only to the extent of perishing of the goods, that is, the contract remains valid as regards the part
available in good condition.
Further, according to section 26, it is important to note that due to the fault of either party causes the
destruction of the goods, and then the default party is liable for non-delivery or pay for the goods as
the case may be. In some cases the risk has passed to the buyer at the time of the contract, that is,
the buyer has expressly or impliedly undertaken the responsibility to suffer the loss of the goods. In
such cases, the buyer will be liable to pay the damages to the seller for the loss of the goods even if
the goods have not been delivered to him. For example, a buyer took a horse from the seller on a
trial for 8 days and made a condition that if buyer found horse suitable for his purpose the bargain
would become absolute. The horse died on 3rd day without any fault of either party. Held, the
contract, which was in the form of an agreement to sell, becomes void and the seller should bear the
loss [Elphick vs Bame, (1880), 5 C.P.D. 321)].
Certain conditions must be satisfied includes (1) the contract is an agreement to sell and not an
actual sale (2) the contract should be for specific good and not for unascertained goods (3) the
goods must have been perished without the fault of seller or buyer. (4) the goods must have perished
or damaged before the property or the risk passes to the buyer.
Effects of Perishing of Unascertained Goods: The section 7 and 8 of contract act are applicable to only
specific goods, but in case of unascertained goods the contract shall not become void even if the entire
stock of goods is destroyed, and the parties remain liable to fulfill their obligation. For example, out of 100
bags of 20 kg each of wheat lying in warehouse Shri Ramesh agrees to sell Ganesh 10 bags of wheat. The
warehouse had been destroyed by fire at the time of contract and both the parties are unaware of the fact.
The contract is not void as the contract is made to sell certain quantity of unascertained goods and not
specific goods. It is the responsibility of Ramesh to supply 10 bags of wheat or pay damages for the breach
of contract.
Effects of Perishing of Future Goods: we have understood earlier that a present sale of future goods
always operates as an agreement to sell and the question arises as to whether section 8 applies to a contract
of sale of future goods. The answer is where in an agreement to sell it has been held that future goods if
sufficiently identified, are to be treated as specific goods, the destruction of which makes the contract void.
For example, Gopal agreed to sel to Krunal 200 tons of potetos to be grown on Gopal’s land. Gopal
sowed sufficient land to grow the required of potatoes but without any fault on his part, a disease attacked
the crop and he could deliver only about 10 tons. The contract was hald to have become void.
Activity C:
1. Identify and list out various situation where contract of sale is applied classify them in terms of
contract for Existing goods, Future goods and Contingent goods.
11.6 Price of Goods
11.6.1 Meaning
According to Section 2 (10), the essential part of the contract is the price which is the money consideration
for a sale of goods. Price is expressed as money and is the consideration for the transfer or agreement to
transfer the property in goods from the seller to buyer. It is only essential that price should be fixed at the
time of sale, but however must be payable though it may not have been fixed. The price may money actually
paid or promised to be paid depending on whether the agreement is for cash or credit sale. The price in a
contract of sale may be fixed by the contract or left to be fixed in a manner thereby agreed or may be
determined by the course of dealing between parties [Section 9 (1)]. Where the price is not determined in
accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price and what is
reasonable price is question of fact dependent on the circumstances of each particular case [Section 9 (2)].
11.6.2 Models of Fixing the Price
According to Section 9, the price may be fixed by one or the other of the following model.
(a) Price may be fixed by the contract
(b) Price ma y be fixed in a manner agreed upon
(c) The fixation of price by course of dealing
(d) Fixation of reasonable price
(a) Fixed by the Contract: The most usual mode of fixing the price is that parties may fix the price for
the goods which they like and its adequacy will not be challenged by the court. The price may be
expressly stated in the contract and its inadequacy does not affect sale.
(b) Fixed in a Manner Agreed upon: the price may be fixed in a manner provided in the contract.
The buyer and seller agreed that price is to be fixed by a third party for which both has given
consent or buyer would pay the market price prevailing on a particular date.
(c) The Fixation of Price by Course of Dealings: Price can be determined in the course of dealings
between the parties. For example, if in earlier contract the buyer has agreed to pay price prevailing
on the date of placing order, such a dealings suggest that in subsequent transactions also the price
will be determined as on the date of order.
(d) Fixation of Reasonable Price: If above given modes of fixing price does not work, the buyer
shall pay to the seller a reasonable price. What is a reasonable price is a question of fact depending
upon the circumstances of each case. In normal situation the prevailing price on the date of supply
is considered as reasonable price.
11.6.3 Agreement to Sell at Valuation of Third Party
According to Section 10 (1) of Contract Act, where there is an agreement to sell goods on the terms that the
price is to be fixed by the third party and such third party cannot or does not make such valuation, the
agreement is avoided. But if the goods or any part thereof have been delivered to and appropriated by the
buyer, he shall pay a reasonable price. The Section 10 (2) states that where such party is prevented from
making the valuation by the fault of the seller or buyer, the party not in fault may maintain a suit for damages
against the party in fault.
11.7 Stipulation Relating to Time
Meaning: In a contract of sale the time of payment and delivery of goods must be given due weightage, the
stipulation as to time in a contract fall under two heads.
(a) Stipulation Relating to Time of Delivery of Goods: The time fixed for the delivery of goods is
usually held to be the essence of the contract. In case the seller makes delay in delivering the goods
as per time fixed for the delivery, the contract is voidable at the option of the buyer. The buyer may
refuse to accept the delivery and may put an end to contract where the seller has made late delivery.
(b) Stipulation Relating to Time of Payment of the Price: According to Section 11, considering
the fixed time for the payment of the price, the general rule is that time is not deemed to be the
essence of the contract if different intention does not appears form the terms of the contract. The
seller cannot avoid the contract on the ground that the agreed piece is not paid by the buyer. Seller
has to deliver the goods, however, seller may claim compensation for the loss incurred to him due to
failure on the part of buyer to pay on the appointed time.
11.8 Conditions and Warranties

11.8.1 Stipulation – Meaning
While selling the gods, a seller usually makes certain statements or representations with a view to induce the
intending buyer to purchase the goods. Stipulation means a requirement or a specified item in an agreement.
In a contract of sale of goods, stipulation refers to representation made by the buyer and the seller reciprocally
as a part o negotiation between them before they enter in to contract. Such representations are generally
about the nature and quality of the goods, price, mode of payment, delivery of goods etc. But all of the
representation are not equally important, some items are considered to be major terms and become
fundamental root of the contract, and the breach of this representation may frustrate the very purpose of and
have legal consequences on the contract, while some other representations may be minor terms which are
not so important that their breach may seem to be not a relevant and have no legal effect on the contract. All
representations are not stipulations, and only such representations are stipulations which have been finally
accepted by the parties.
According to Section 12 (1) of the Act, “A Stipulation in a contract of sale with reference to goods which
are the subject thereof may be a condition or warranty”. Some stipulations may be essential to the contract
while some may be essential collateral or incidental to the contract. A stipulation essential to contract is
called a “Condition” and stipulation which is a collateral or incidental to the contract is called warranty.
11.8.2 Condition
According to Section 12 (2), “A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated”. The aggrieved party may maintain
an action for damages for lost suffered in him on the ground that the whole contract is broken. For example,
the buyer asked the seller of horse to give him a horse which can run at a speed of 60 k.m. per hour. The
dealer gives a particular horse and buyer finds that horse can run only at a speed of 30 k.m. per hou. This
is a breach of condition as the stipulation made by the buyer is essential to the contract.
11.8.3 Warranty
According to Section 12 (3) “A warranty is a stipulation collateral to the main purpose of the contract the
breach of which gives rise to claim for damages but not to a right to reject the goods and treat the contract
as repudiated”. The aggrieved party can sue for damages only and not to avoid the contract. For example,
the buyer asked the seller of horse to give him a good horse and seller points put that a particular horse
which seller is giving to buyer is good horse and can run at a speed of 60 k. m. per hour, Buyer later on finds
that the horse can run only at a speed of 30 k. m. per hour, is considered as breach of warranty.
11.8.4 Conditions and Warranty” Distinction:
The distinction between Conditions and warranties is given below.
(a) In a condition the stipulation which is essential to the contract becomes main purpose of the contract
where as in a warranty stipulation is only subsidiary or collateral to the main purpose of the contract.
(b) A contract of some cannot be fulfilled if the condition to it is not fulfilled, whereas the main contract
can be fulfilled even if the warranty is not fulfilled.
(c) The breach of condition gives the aggrieved party the right to repudiate the contract and also claim
damages, whereas the breach of warranty gives the aggrieved party a right to claim damages only.
(d) A breach of condition may be treated as a breach of warranty, whereas a breach of warranty
cannot be treated as breach of condition.
There is no standard rule that which stipulation in a contract of sale is a condition and which one is a
warranty. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on
the construction of the contract. To determine whether the stipulation is a condition or warranty it is necessary
to look in to the intention of the parties by referring to the terms and construction of contract as well as the
surrounding circumstances in which contract was entered in to. The main distinction between condition and
warranty is that when a breach would bw fatal to the rights of the aggrieved party, then such a stipulation is
a condition and where it is not fatal to the rights of the aggrieved party the stipulation is only a warranty.
11.8.5 When Conditions to be Treated as Warranty
In some cases a condition may become a warranty and the aggrieved party has the right to claim damages
only and not to repudiate the contract. It may, however, be noted that conditions converted into warranty
only for remedial purpose and not to exclude the rights of the other parties. In fact once a condition is
always a condition. Section 13 of the sale of goods act lays down the following situations when conditions
become a warranty.
(a) Voluntary waiver of condition [Section 13 (1)]
(b) Acceptance of goods by the buyer [Section 13 (2)]
(c) By impossibility of performance [Section 13 (3)]
(a) Voluntary Waiver of Condition: According to Section 13 (1), where a contract of sale involve a
condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach
of the condition as a breach of warranty. The option is available to buyer to accept the goods and
claim damages from the seller. Once a buyer have decided to waive the condition, he cannot afterward
insist on its fulfillment. For example, Kartik agrees to buy form Ramesh 20 bags of rice as per the
sample. Ramesh delivers the rice, but it was not according to the sample of rice shown to buyer
while entering in to a contract. Kartik has right to reject the goods, but he may decide to accept the
goods treat this breach of condition as a breach of warranty.
(b) Acceptance of Goods by Buyer: Under Section13 (2) “Where a contract of sale is not severable
and the buyer has accepted the goods or part thereof, or where the contract is for specific gods, the
property in which has passed to the buyer, the breach of any condition to be fulfilled by the seller
can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating
the contract as repudiated, if there is not such term of the contract, expressed or implied, to that
effects”. Where the buyer has accepted the goods and subsequently he comes to know of the
breach of condition, he cannot reject them, but only maintain and take action for damages. If the
buyer has accepted only part of the goods and the contract is indivisible, he will have to accept the
remaining part of the goods also. But in case of divisible contract, buyer can repudiate as regards
remaining goods if he has accepted only part thereof. For example, Kartik purchased 20 bags of
rice from Ramesh according to sample. When the goods were delivered, Kartik resold the 10 bags
of rice to Ganesh. The Ganesh found that rice are not according to sample, hence, rejected the
goods. Now Kartik wants to avoid the contract, but will not succeed because by reselling the
goods to Ganesh, the Kartik has accepted the goods. So Kartik has treat this breach of condition
as a breach of warranty and be content with damages only.
Merely taking possession or delivery of the goods does not by itself amount to acceptance. According
to Section 42 the buyer is deemed to have accepted the goods (i) when buyer intimates to the seller
that he has accepted the goods; (ii) when buyer does any act in relation to goods (consumes, Uses,
Pledges or resell etc.) which is inconsistent with ownership of seller’ or (iii) when after the lapse of
a reasonable time, buyer retains the goods without intimating to the seller that he has rejected the
goods.
(d) By Impossibility of Performance: According to Section 13 (3) “Nothing in this section shall
affect the case of any condition or warranty fulfillment of which is excused by law by reason of
impossibility or otherwise”. Where the performance of the contract becomes impossible subsequent
to the formation of contract, performance will be excused. However, this rule will not be applicable
(i) where the performance was made impossible owing to the negligence or default of any of the
parties to contract; (ii) when the parties expressly contract with reference to the occurrence of the
supervening event; (iii) where the promise is capable of being performed in itself, the promise
cannot be excused from his obligation to perform by stating that the inability to perform was due to
circumstances beyond his control and so on.
11.8.6 Express and Implied Conditions and Warranties
1. Meaning: as given in Section 14 to 17 the conditions and warranties may be expressed or implied.
‘Express’ conditions and ‘Warranties’ are those which have been expressly agreed upon by the
parties at the time of the contract of sale. Conditions and warranties are said to be express when
that are at the will of the parties inserted in the contract, i. e. express conditions and warranties are
those which are entered in clear words in the contract. ‘Implied conditions and warranties’ are
those which law incorporates in to the contract unless the parties stipulate to the contrary. Conditions
and warranties are said to be implied when the law presumes their existence in the contract
automatically though they have not been put into in express words. According to Section 62, Implied
conditions and warranties may be cancelled or varied by the express agreement or by the course of
deadlines or by usage and custom.
For example, Kamlesh wants to buy a washing machine of a specific model number. Here the
model number is an express condition.
2 Implied Conditions and Warranties: Section 14 to 17 of the contract act lay down the implied
conditions in a contract of sale. Though it is agreed or not agreed, the following implied conditions.
(a) Condition as to Title [Sec. 14 (a)]
(b) Sale by Description [Sec. 15]
(c) Sale by Sample [Sec. 17]
(d) Sale by sample as well as Description [ Sec. 15]
(e) Condition as to Quality or Fitness [Sec. 16 (1)]
(f) Condition as to Merchantability [Sec. 16 (2)]
(g) Condition as to Wholesomeness
Subject to the contract to the contrary, following are the implied warranties in a contract of Sale
of goods.
(a) Warranty of Quiet Possession [Sec. 14 (b)]
(b) Warranty of Freedom from Encumbrance [Sec. 14 (c)]
(c) Warranty to Disclose Dangerous Nature of goods
Implied Conditions:
(a) Condition as to Title [Sec. 14 (a)]: According to Section 14 (a) an implied condition on the part
of the seller is that, in the case of a sale, seller has a right to sell the goods and that in the case of an
agreement to sell, he will have a right to sell the goods at the time when the property is to pass. This
is called condition as to title. The object of ale is to transfer the legal ownership or property from
one person to another. Divall obtained the car by theft. Rowland could recover the full price from
Divall. So in this case, there was a breach of condition as to title as Divall had no right to sell the car.
(b) Sale by Description [Sec. 15]: According to Section 15 where there is a contract for the sale of
goods by description, there is an implied condition that the goods shall correspond with the description.
The buyer is not bound to accept and pay for the goods which are not in accordance with the
description of goods. For example, buyer may give description of the goods in terms of physical
appearance of the goods he requires, or gives brand name or a particular trade mark etc. Another
example, where there was a contract for the supply of ‘New car’ and one of the car supplied by the
seller was run a considerable mileage was not new, there was a breach of condition on the part of
the seller and the buyer was held entitled to reject the car [Andrews Bros. vs Singer & co. (1934),
1 K. B. 17].
(c) Sale by Sample [Sec. 17]: According to Section 17, a contract of sale is a contract for sale by
sample where there is a term in the contract, express or implied, to that effect, where seller shows
the sample to the buyer, it does not amount to a sale by sample, i.e. when under a contract of sale,
goods are to be supplied according to a sample agreed upon, the implied conditions are:
(i) that the bulk shall correspond with the sample in quality;
(ii) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;
(iii) that the goods shall be free from any defect, rendering them unmerchantable, which would
not be apparent on reasonable examination of the sample.
For example, in Wood vs Michaaud, there was a contract for sale of cane Corn. The buyer was
shown a sample of corn, which was supposed to have been grown in the previous year. This was
not a sale by sample, as it was likely that there would be a difference in quality between the Corn
grown in two different years.
(d) Sale by Sample as Well as Description [Sec. 15]: The implied condition according to Section
15 of contract act is that goods shall correspond with both, the sample as well as description. If the
sale is by sample as well as by description it is not sufficient that the bulk of the goods correspond
with the sample if the goods do not also correspond with the description. For example, there was a
sale of ‘foreign refined rape oil’ warranted only equal to sample. The oil tendered was the same
as the sample, but it was not ‘foreign refined rape oil’, being a mixture of it and other oil. It was held
that the seller was liable, and the buyer could refuse to accept [Nichol vs Godts (1854)].
(e) Condition as to Quality or Fitness [Sec. 16 (1)]: It is not necessary that every contract contain
an implied condition as to quality or fitness of the goods for a particular purpose. It is the duty of
buyer to examine whether the goods purchased by him will be suitable for the purpose for which he
is buying before he buy goods. According to Section 16 (1) “where the buyer expressly or by
implication, makes known to the seller the particular purpose for which the goods are required, so
as to show that the buyer relies on the seller’s skill or judgment and the goods are of a description,
and it is in the course of the seller’s business to supply, whether seller is the manufacturer or producer
or not, there is an implied condition that the goods shall reasonably fit for such purposes.
If the goods or article is fit for one particular purpose alone, and turns out to be unsuitable for the
purpose when used, it is easy to see that condition as to fitness has been broken. But in case, if the
goods or article is fit for variety of purposes it is the duty of buyer to notify his specific purpose. The
implied condition as to quality and fitness operates only if following conditions are satisfied.
(i) The buyer requires the goods for a particular purpose and buyer lets the seller know about
his purpose.
(ii) The buyer relies upon the skill and judgment of the seller.
(iii) The seller’s business is to sell goods of the type required by buyer.
For example, Shri grant purchased two woolen underpants from a retailer manufactured by the
‘Defendant’ after wearing one of them, he contracted skin disease which was due to chemical
irritant which had negligently omitted to remove in the process of manufacture. It was held that the
implied condition of fitness for the buyer’s purpose was broken [Grant vs Australian knitting Mills
(1936)]. Another example is that a buyer does not have special knowledge of hot water bottles and
he asked chemists for hot water bottle. Buyer was shown an American rubber bottle which the
chemists said would not stand boiling water but was meant for hot water. After a few days, while
being used, if burst and injured buyer’s wife. It was found that the bottle was not fit for use as a hot
water. It was held that since the bottle could be used only for one particular purpose, there was
breach of implied condition as to fitness and the seller was liable to pay damages [Priest vs Cast
(1903) 2 K.B. 148].
(f) Condition as to Merchantability: Where there is a sale by description the condition is considered
as implied. The term merchantability has not been defined in the Act. According to Section 16 (2)
“where goods are bought by description from a seller who deals in goods of that description,
whether seller is the manufacturer or producer or not, there is an implied condition that the goods
shall be of merchantable quality; provided that, if the buyer has examined the goods, there shall be
no implied condition as regards defects which such condition examination ought to have revealed.
In order to apply the implied condition as to merchantability the following requirements must be
satisfied viz., (i) Whether the seller is the manufacturer or not, he should be a dealer in goods of that
description. (ii) The goods should have been bought by description. (iii) The buyer must not have
any opportunity of examining the goods or there must be some latent defect in the goods which
would not be apparent on reasonable examination of the same.
Though opportunity provided, buyer avoids examining goods or if he has examined the goods,
there is no implied condition as to merchantability as regards defects which was revealed during
examination. For example, the buyer bought some underwear, which contained some chemical
which could cause skin disease. It was held that goods were not of merchantable quality and the
buyer could reject the goods and claim damages [Grant vs Australian Knitting Mills Ltd, (1936) A.
C. 85].
(g) Condition as to Wholesomeness: In case of contract of sale of eatables and provisions condition
of unwholesomeness is implied. In such cases the goods supplied must not only answer to description
and be merchantable but must also be wholesome i.e. goods must be pure, unadulterated and
suitable for consumption at the time of sale. Goods must be free from any defect which render them
unfit for human consumption. For example, the bought milk which he found contaminated with
germs of typhoid fever. The buyer’s wife became infected on talking the milk and died. The buyer
was held liable for damages [Frost vs Aylesbury Dairy Co. Ltd., (1905), 1 K. B. 608].
Implied Warrnties: Following are the implied warranties in a contract of sale of goods, subject to the
contract to the contrary.
(a) Warranty of Quiet Possession: According to Section 14 (b) of contract of sale, there is an
implied warranty that the buyer shall have enjoyed quiet possession of the goods. It is an implied
assurance to the buyer that he shall have the possession and enjoyment of the goods sold to him
without disturbance by the seller or any other person. In case the buyer in any way disturbed in the
enjoyment of the goods because of the seller’s defective title, he can claim damages from the seller.
Since disturbance of quiet possession is likely to arise only where the seller’s title to goods is
defective, this warranty may be regarded as an extension of the implied condition of title provided
for by section 14 (a). For example, buyer has made purchase of second hand computer and spends
some money on getting the computer repair. Buyer used it for some time and was subsequently the
true owner had disposed of the computer after six months. It was held that buyer was entitled to
recover from owner not only the price paid but also the cost of repair.
(b) Warranty of Freedom from Encumbrance: In some cases the buyer needs to pay some charge
for the goods purchased by him. According to Section 14 (c) the goods shall be free from any
charge or encumbrance in favour of any third party not declared or known to the buyer or at the
time when the contract is made. This warranty will not apply where such encumbrances are declared
to the buyer when the contract is made or buyer has notice of such charges. If the possessions of the
buyer are disturbed due to such charge in favour of third party, he can claim damages from the
seller. For example, Kanu pledges his bicycle with Manu for a loan of Rs. 100 and promises him to
give its possession the next day. Soon after, Kanu sells the bicycles to Tanu, an innocent buyer being
pledged. Tanu may either ask Kanu to clear the loan or may himself pay the money and then file a
suit against Kanu to recover this money with interest.
(c) Warranty to Disclose Dangerous Nature of Goods: Where the goods are dangerous and the
seller knows the buyer is ignorant about the dangerous nature of the goods, the seller should warn
the buyer about the probable danger, otherwise he will be liable for damages for the injury caused
to the buyer because of the dangerous quality of the goods. For example, Clark purchases a tin of
disinfectant powder from Army and Navy Cooperative Society. The Cooperative Society knew
that it was likely to be dangerous to Clark, if it was opened without special care being taken, but
tells nothing to Clark. Buyer opened the tin in the normal way whereupon the disinfectant powder
flies into buyer’s eyes and causes injury. Cooperative Society is liable in damages to Clark as
Cooperative Society should have warned Clark of the probable danger.
Activity D:
1. Conduct a survey of consumers for measuring their experience of real life for warranty and conditions
of sale and based on the findings give your comment on the provisions made by law for conditions
and warranty in the contract of sale.
11.9 Summary
The knowledge and understanding of sale of goods help not only to business but also to community. This
unit provides understanding about basic concepts and illustrations related with various provisions of Sale of
Goods Act, 1930. The students will able to understand elements of contract of sale and will also be able to
distinguish the important terms viz., sale and agreement to sale, sale and hire-purchase, and sale and contract
for work and labour. This unit provides clear understanding of legally what is to be called as goods, the
concept of existing, future and contingent goods as well as the rules applicable to cases where the subject
matter of a contract of sale (Goods) is destroyed before and after the contract. It also gives the idea about
various provisions related to stipulation of time and delivery of goods as well as stipulation relating to
payment of price, and conditions or warranties in a contract of sale may be negotiated or varied by express
agreement between the parties or course of dealing between them or the custom or usage of trade.

1. What is contract of sale? Discuss the essential elements of contract with illustration.
2. Distinguish between (a) Sale and Agreement to Sell (b) Specific and Unascertained Goods (c) Sale
and Hire-Purchase Agreement.
3. How the price is fixed in a contract of sale? What are the different modes of determination of price?
4. What is the meaning of ‘Perishing’ of goods under the Sale of Goods Act? What is the effect of
perishing of goods on a contract of sale?
5. What is goods in terms of contract sale of goods? What are the different types of goods?.
6. “Conditions and Warranties under contract of sale are same”. Discuss with illustration. Under what
circumstances a breach of condition is to be treated as breach of Warranty?
7. List out and discuss the implied condition with suitable example?
8. Write Short Notes on following;
(a) Goods.
(b) Stipulation as to Time.
(c) Document of Time to Goods.
(d) Future Goods.
9. List out and discuss the implied warranties with suitable illustration.

- Arun Kumar (2002); “Mercantile Law”; Atlantic Publishers & Distributors, New Delhi, 2002.
- http://dspace.jgu.edu.in:8080/dspace/bitstream/10739/67/1/Chapter%2016.pdf.
- http://www.rfhha.org/images/pdf/Hospital_Laws/Sale_of_goods_act_1930.pdf.
- L. M. Porwal and Dr. Sanjeev Kumar (2010); “Business Law”; Vrinda Publications (P) Ltd. Delhi,
1st Reprint Edition, 2010, pp.291-394.
- M. C. Kuchhal (2009); “Mercantile Law”; Vikas Publishing House Pvt. Ltd., Noida, 7th Edition.,
2009, pp. 244-303.
- N. D. Kapoor (2009); “Elements of Mercantile Law”; Sultan Chand & Sons, New Delhi, 31st
Revised Edition, 2009, pp. 222-282.
- Nirmal Singh (2009); “Business Law”; Deep & Deep Publications Pvt Ltd., New Delhi, 1st Reprint
Edition, 2009.
- P. C. Tulsian (2006); “Business Law”; Tata Mcgraw Hill Publishing Co. Ltd., New Delhi; 12th
Reprint, 2006.
- R. S. N. Pillai and Bagavathi (2010); “Business Law”; S. Chand & Company Ltd., New Delhi, 3rd
- S.S. Gulshan (2005); “Business and Corporate Laws”; New Age International, 01-Jan-2005.
- Surajit Sengupta (1979); “Business Law in India”; Oxford University Press, 1979.
- www.ficci-arbitration.com/act/SaleofGoodsAct1930.doc.
Unit - 12 : The Sale Of Goods Act, 1930 (II)
Structure of Unit:
12.0 Objectives
12.1 Introduction
12.2 Meaning and Exception to the Doctrine of Caveat Emptor
12.3 Meaning and Significance of Passing or Transfer of Property
12.4 Rules Regarding Transfer of Property
12.5 Reservation of Right of Disposal
12.6 Risk Prima Facie Passes with Property
12.7 Sale by Non Owners
12.8 Delivery of Goods
12.9 Rights of an Unpaid Seller and Rights of Buyer
12.10 Auction Sale
12.11 Summary
12.0 Objectives
After Completing this unit you will be able to:
 Explain the meaning and exception to the doctrine of caveat emptor,
 Understand the meaning and significance of passing or transfer of property,
 Discuss the rules regarding transfer of property and reservation of right of disposal,
 Identify and discuss the how the risk prima facie passes with property,
 Understand the meaning of sale by non owners and different provisions of delivery of goods,
 Get acquainted with information about rights of an unpaid seller and rights of buyer, and auction
sale.
12.1 Introduction
In a Sale of Contract the buyer is also responsible for his own purchase decision and his requirement. When
ownership of the goods is transferred to the buyer, he becomes the owner of the goods, and the seller
ceases to be the owner. The time of transfer of property in the goods decides various rights and liabilities of
the seller and the buyer. The precise moment of time at which property in goods passes from the seller to the
buyer is of importance from various important points of view such as, risk passes with property, action
against third party, suit for price and insolvency of the seller or the buyer etc. in order to understand such
aspects this unit-12 focuses on providing understanding about various provisions related to doctrine of
caveat emptor and its exceptions; meaning, rules and significance of passing or transfer of property from
seller to buyer; reservation of right of disposal; the passing of risk prima facie with property; sale by non
owners; delivery of goods; rights of an unpaid seller; rights of buyer and provisions related with auction sale.
12.2 Meaning and Exception to the Doctrine of Caveat Emptor

12.2.1 Meaning
The fundamental principle of law embodied in the case of a sale of goods is the “Caveat Emptor”. The
meaning of term ‘Caveat Emptor’ is ‘let the buyer be aware’. The doctrine of Caveat Emptor is universally
applicable as far as quality is concerned in sale of goods. The doctrine of Caveat Emptor means that the
seller is not bound to disclose the defects in the goods which seller is selling. The seller is not expected to
give to the buyer an article suitable for a particular purpose if such purpose is not made known to the seller
by the buyer. According to the doctrine of Caveat Emptor it is the duty of the buyer to be careful while
purchasing goods of his requirement and in the absence of any enquiry from the buyer, the seller is not
bound to disclose every defect in the goods of which he may be cognizant. A buyer purchases at his own
risk and must thoroughly examine the goods in order to satisfy before buying the goods that the goods will
serve the purpose for which they are being bought.
If the goods turn out to be defective or do not suit the purpose or depend upon buyer’s own skills and
judgment and makes a bad selection, he cannot blame anybody except himself. The buyer has to bear the
consequences of his wrong selection of goods. Section 16 of the Sale of Goods Act has enunciated the rule
of Caveat Emptor as “subject to the provisions of this act and of any other law for the time being in force,
there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale”. For example, Ganesh purchased a Dehradun Basmati rice from Kamlesh.
The Kamlesh erroneously thought that the rice was not new, but in reality the rice were new. In this case
Kamlesh cannot avoid the contract because he has depended on his own skill and judgment and therefore
the rule of Caveat Emptor will be applicable.
12.2.2 Exceptions to the Doctrine of Caveat Emptor
In earlier days mostly the goods were sold in an open market where the buyer was in a better position to get
the opportunity to inspect the goods in terms of quality and fitness of the gods for the purpose and satisfy
himself. So considering such availability of opportunity to buyer for satisfying himself this principle was
originated. But now a days trade has spread at global level and it makes difficult for the buyers to examine
the goods thoroughly as the purchases are made through mail order or online etc. in such cases it is only the
seller who can assure the quality of the goods and their fitness for buyer’s purpose. Due to such reasons, the
application of Caveat Emptor has been restricted, thus, the doctrine of caveat emptor is subject to following
exceptions.
(a) Fitness for Buyer’s Purpose [Sec., 16 (1)]
(b) Sale under a Patent or Trade Name [Sec., 16 (1)]
(c) Goods Sold by Description [Sec., 15]
(d) Merchantable Quality [Sec., 17]
(e) Sale by Sample [Sec., 16 (1)]
(f) Sale by Sample as well as by Description [Sec., 15]
(g) Custom or Conditions Implied by Trade Usage
(h) Goods Sold by Misrepresentation
These exceptions to Caveat Emptor are discussed in brief as follows.
(a) Fitness for Buyer’s Purpose: In this buyer makes known to the seller the particular purpose for
which the goods are required and buyer relies upon the seller’s skill and judgment, but the goods
supplied are unfit for the specified purpose, the seller is not protected by Caveat Emptor.
According to Section 16 (1) “Where the buyer, expressly or by implication, makes known to the
seller the particular purpose for which the goods are required, so as to show that the buyer relies on
the seller’s skill or judgment, and the goods are of a description which it is in the course of the
seller’s business to supply, whether he is the manufacturer or producer or not, there is an implied
condition that the goods shall be reasonably fit for such purpose”. In such case, the doctrine of
Caveat Emptor does not apply.
(b) Sale under a Patent or Trade Name: According to proviso of Section 16 (1), in case where the
goods are purchased under its patent name or brand name, there is no implied condition that the
gods shall be fit for any particular purpose. For example, a car was described as ‘Herald Convertible’
1961 Model, was put to sale. The buyer purchased the car and later he discovered that the real part
of the car was part of a 1961 model but the front half was a part of an earlier model. The buyer
could reject the car and recover the amount paid [Beale vs. Taylor (1967) All E. R. 253].
(c) Goods Sold by Description: According to Section 15, where there is a contract for sale of goods
by description, there is an implied condition that the goods shall correspond with the description. In
such cases, the doctrine of Caveat Emptor does not apply. For example, the buyer and seller have
made a contract for 3000 tins of canned fruit from Australia to be packaged as 30 tins in each case.
In reality the buyer has received the goods and substantial part of goods was packed as 24 tins in
each case. The buyer could reject the goods as it is not as per description [Moore & Company vs.
Landever & Company (1921) 2 K. B. 519].
(d) Merchantable Quality: According to Section 16 (2) whether the seller is the manufacturer or
not, where the goods are bought by description from a seller who deals in goods of that description,
there is an implied condition that the goods shall be of merchantable quality, the doctrine of Caveat
Emptor does not apply. However, the doctrine of Caveat Emptor applies if the buyer has examined
the goods, as regards defects which such examination ought to have revealed. For example, buyer
bought some undergarments, which contained some chemical, which could cause skin diseases. It
was held that goods were not of merchantable quality and the buyer could reject the goods and
claim damages.
(e) Sale by Sample: According to Section 17, where the goods are bought by sample, the doctrine of
caveat Emptor does not apply if the bulk does not correspondence with the sample, or if the buyer
is not provided an opportunity to compare the bulk with the sample, or if there is any hidden or
latent defect in the goods. For example, if buyer has bought wheat as per sample shown by the
seller and if the purchased gods were not according to the sample buyer can claim for damages and
the rule of Caveat Emptor does not apply.
(f) Sale by Sample as Well as Description: According to Section 15, where the goods are bought
by buyer from the seller considering the sample as well as description, the rule of Caveat Emptor
does not apply if the goods supplied by seller do not correspond with both sample as well as
description, the buyer can reject the goods. For example, the buyer has purchased seeds and he
found that supplied seeds were not as per quality specified by buyer and the defect also existed in
the sample also. The discrepancy in quality was discovered only after the seeds were sworn. The
buyer could recover damages, as there was a breach of condition.
(g) Customs or Conditions Implied by Trade Usages: According to Section 16 (3) an implied
warranty or conditions as to quality or fitness for a particular purpose may be annexed by the usage
of trade and if the seller deviates from that, this rule of Caveat Emptor is not applicable. However,
custom should not be unreasonable and should not be inconsistence with the terms of the contract.
For Example, in case of Jones vs. Bowden (1813, 4 Tount 847) where drugs were sold by auction
and where it is a usage of trade to disclosure must be made beforehand about any sea-damage. In
case no such disclosure has been made and the goods are found to be defective, it will be taken as
a breach of warranty.
(h) Goods Sold by Misrepresentation: The doctrine of Caveat Emptor will not apply where the
seller has made a false representation relating to the goods and buyer has relied upon it, i.e. when
sell activity conceals some defect in the goods so that the same could not be discovered but the
buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a case the
buyer has a right to avoid the contract and claim damages.
Activity A:
1. Make an attempt to identified the cases of Caveat Emptor in real life experience and classify them
according to exceptions of Caveat Emptor. .
12.3 Meaning and Significance of Passing or Transfer of Property

12.3.1 Meaning of Transfer of Property
The main purpose of a contract of sale is the transfer of ownership of the goods from a seller to a buyer.
When the ownership of the goods is transferred to the buyer, the seller is no more the owner of the goods.
The time of transfer of property in the goods decides various rights and liabilities of the seller and the buyer.
The term ‘transfer of property’ in goods means transfer of ownership of goods. The term ‘property’ in the
goods may be defined as the legal ownership of the goods. The term ‘property in goods’ must be distinguished
from the term ‘possession of the goods’. The ownership of the goods refers to the term ‘property in goods’
whereas the custody or physical control over the goods called ‘possession of the goods’. A person may
have the possession of the goods but may not be the owner of the same. For example, the servant and agent
possess goods to deliver either their boss or customer. So the property in goods may pass from the seller to
the buyer but the goods may be in possession of the seller either as unpaid seller or as a bailee for the buyer.
In other cases the property in goods may still be with the seller although the goods may be in the possession
of the buyer or his agent or a carrier for transmission to the buyer.
12.3.2 Significance/Importance of Time at Which the Property in Goods Passes from the Seller to
the Buyer
The moment of time at which the property in goods passes from the seller to the buyer is of great significance
from various viewpoints. The following points are significant for the transfer of ownership of the goods.
(a) Risk Follows Ownership (Section 26)
(b) Action against Third Party
(c) Suit for Price
(d) Insolvency of the Seller or the Buyer
(a) Risk Follows Ownership (Section 26): As a general rule the risk of the loss of goods is with the
person who has property right. According to section 26, “unless otherwise agreed, the goods
remain at the seller’s risk until the property therein is transferred to the buyer, but when the property
therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made
or not.” The risk of destruction or loss of goods sold falls on the buyer and not on the seller though
the goods may still be in the possession of seller. Risk of loss is to be decided not on the basis of
possession of goods but on the basis of ownership of goods as risk passes with transfer of ownership.
(b) Action Against Third Party: In contract of sale, when the goods are in any way damaged or
destroyed by the action of the third parties, it is only the owner of the goods can take action against
them. It means the right to proceed against a third party for destruction or damage to the goods
depends not on possession but on the transfer of property.
(c) Suit for Price: The seller can sue the buyer for price only if the goods have become the property
of the buyer. It means transfer of property in goods confers upon the seller the right to sue the buyer
for the price.
(d) Insolvency of the Seller or the Buyer: in the event of insolvency of either buyer or seller, the
answer to the question whether the official receiver or assignee can take over the goods or not, shall
depend upon whether the property in goods was with the party who has become insolvent. If
official assignee finds that insolvency (buyer or seller) is the owner of the goods at the time of his
insolvency, the official assignee can take over the goods and if official assignee finds that insolvent is
not the owner at the time of his insolvency, he cannot take over the goods.
12.4 Rules Regarding Transfer of Property

12.4.1 Meaning
The rules relating to transfer of property are given in Sections 18 to 25 of the Sale of Goods Act.
According to Sec. 18, (focuses on goods to be ascertained) “Where there is a contract for the sale of
unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are
ascertained.” According to Sec. 19 (1), (focuses on parties intension) “Where there is a contract for the sale
of specific or ascertained goods, the property in them is transferred to the buyer at such time as the
parties to the contract intend it to be transferred.” According to Sec. 19 (3), (focuses in a situation
when no intension is expressed) if a different intention does not appears, the rules contained in Sections
20 to 24 of the Sale of Goods Act are rules for ascertaining the intention of the parties as to the time
at which the property in the goods is to pass to the buyer.
It is clear from the earlier topics of the sale of goods that sale differs from an agreement sell bythe fact that
in the sale property is transferred while in the agreement to sell property not transferred immediately. If the
property has passed to the buyer the risk of loss, destruction or deterioration of the goods sold, falls on the
buyer and not on the seller, even if the goods are remaining in the seller’s possession. The rules regarding
transfer of property can be classified in following two heads.
(i) Transfer of property in Specific or Ascertained Goods
(ii) Transfer of property in Unascertained and Future goods
12.4.2 Transfer of Property in Specific or Ascertained Goods
For specific goods or ascertained goods the property in them is transferred to the buyer under the contract
for sale at such time when the parties to the contract intend it to be transferred. For the purpose of knowing
the intension of the parties to the contract the regard should be given to terms of contract, conduct of the
parties and the circumstances as the case may be. According to Section 18, where there is a contract for
the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until
the goods are ascertained.
In the case of specific goods, the transfer of property takes place when the parties intend to pass it at once
at the time of making the contract or when goods are delivered or when the goods are paid for. So in case
it is not possible to judge the intension of parties from their contract, conduct or other circumstances, the
rules laid down in section 20, 21, 22 can be apply.
Such provisions under section 20, 21, 22 and 24 are summarized as follows.
(a) When Goods are in Deliverable State (Section 20): According to Section 20 “Where there is
an unconditional contract for the sale of specific goods in a deliverable state, the property in
the goods passed to the buyer when the contract is made, and it is immaterial whether the time
of payment of the price or the time of delivery of the goods, or both, is postponed.” The goods
are said to be in a `deliverable state’, when they are in such a state that the buyer would, under
the contract, be bound to take delivery of them immediately. When the goods are ready for
delivery and there remains nothing to be done to them, they are said to be in a deliverable
state. For example, there is a contract for the sale of a machine, weighing 20 tons and embedded
in a concrete floor. A part of the machine is destroyed while being removed. The buyer is entitled to
refuse to take the machine as it is not in a deliverable state [Underwood Vs. BC Cement Syndicate
(1922)].
(b) When Goods have to be Put in Deliverable State (Section 21): According to Sec. 21 of sale
of goods act “Where there is a contract for the sale of specific goods and the seller is bound to
do something to the goods for the purpose of putting them into deliverable state, the property
does not pass until such thing is done and the buyer has notice thereof “. in order to put the
goods in deliverable state, the basic condition in contract is the seller must do something. For
example, such includes the act may be painting, polishing, loading, packing, filling in containers
etc. When buyer comes to know that seller has put the goods into deliverable state by
performing such act in such a case the ownership is transferred. It means merely putting the
thing in a deliverable state would not result in the transfer of property in goods from seller to
the buyer but it is necessary that buyer must have notice the same. For example, in case of
Underwood vs. Burgh Castle Cement Syndicate, contract for sale of fixed condensing engine
was made. The engine was to be served and delivered free of rail at a specified price. However,
the engine was damaged before it reached the railway. It was held that the property in goods
did not pass as the gods were not in a deliverable state when it reached the railway.
(c) When Goods have to be Measured etc., to Ascertain Price (Section 22): According to Sec.
22, “Where there is a contract for the sale of specific goods in a deliverable state, but the seller is
bound to weigh, measure, test or do some other act or thing with reference to the goods for the
purpose of ascertaining the price, the property does not pass until such act or thing is done and
the buyer has notice thereof.” The ownership is transferred to the buyer as soon as the seller
has done such act and the buyer comes to know about it. Passing of property is conditional
upon the performance of some act with reference to the goods for the purpose of ascertaining
the price. For example, in case of Zagury Vs. Fur’nell (1809), The contract was for the sale of
289 bales of goat skins. Each bale marked as containing 5 dozen skins. It was the duty of the seller
to count the goat skin in each bale. Before he could count the skins, the bales were destroyed by
fire. It was held that the property in the goods had not passed to the buyer as something still
remained to be done by the seller for ascertaining the price. As such the loss caused by fire had to
be home by the seller.
12.4.3 Transfer of Property in Unascertained and Future Goods
The rule relating to transfer of properly in unascertained and future goods is contained in Sections 18
and 23. According to Sec. 18, where there is a contract for the sale of unascertained goods, property in the
goods is not transferred to the buyer unless and until the goods are ascertained. Sec. 23 (1) states that
“where there is a contract for the sale of unascertained or future goods by description and goods of
that description and in a deliverable state are unconditionally appropriated to the contract, either by
the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the
goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given
either before or after the appropriation is made. It must be noted that the above rule is a fundamental rule
and it applies irrespective of what the parties intended. Until goods are ascertained or appropriated there
is merely an agreement to sell.
Ascertainment means establishing the identity of the goods and appropriation means selection, setting
at par or any other act with the intention of using the goods for the performance of the contract.
Ascertainment is the process by which the goods answering the description are identified and set at
par. Appropriation is generally made by the seller by putting the goods into boxes or bags with the
assent of the buyer which may be express or implied. For example, in case of Rhode Vs. Thwaires
(1827), there was a contract for the sale of 20 hog heads of sugar out of a larger quantity. 4 hog heads,
which were filled in, were taken away by the buyer. Later, the seller filled 16 more hog heads and informed
the buyer asking him to take them away. The buyer says he will take them as soon as he can. But before he could
do so, the goods were lost. Held, the property had passed to the buyer at the time of the loss.
Activity B:
1. Refer different real cases registered under contract of sale and make a different list of them by
differentiating cases (a) Goods have to be put in deliverable State (b) Goods have to be Measured
or any other act, to Ascertain Price or any other aspect of contract.
12.5 Reservation of Right of Disposal

The section 25 of the Sale of Goods Act, 1930 lay down the rules applicable to the cases where the
Reservation of Right of Disposal is available to seller.
12.5.1Meaning
Reservation of the right of disposal means reserving it right to dispose of the goods until certain
conditions, like payment of the price, are fulfilled. When the seller reserves such a right the property in
the goods does not pass until those conditions are fulfilled.
According to Sec. 25 (1), “Where there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract. The seller may, by the terns of the contract or appropriation
reserve the right of disposal of the goods until certain conditions are fulfilled. In such case,
notwithstanding the delivery of the goods to a buyer, or to a carrier or other bailee for the purpose of
transmission to the buyer, the property in the goods does not pass to the buyer until the conditions
imposed by the seller are fulfilled.”
According to Sec. 25 (2), “Where goods are shipped and by the bill of lading the goods are
deliverable to the order of seller or his agent, the seller is prima facie deemed to reserve the right of
disposal.” In such cases, the goods are said to be deliverable to the order of the seller or his agent.
According to Sec. 25 (3), “Where the seller of goods draws on the buyer for the price, and transmits
the bill of exchange and bill of lading to the buyer together, to secure acceptance or payment of the bill
of exchange, the buyer is bound to return the bill of lading if he does not honour the bill of exchange
and if he wrongfully retains the bill of lading the property in the goods does not pass to him.”
For example, Mayank placed an order with Saurabh requesting his to send the goods by sea. Saurabh
took a bill of lading in the name of Mayank and sent it to his own agent. The goods were destroyed in
the course of voyage. Saurabh had to suffer the loss as the ownership had not passed to Mayank.
Activity C:
1. Identify and list out various situation where contract of sale is applied and where the reservation of
right of disposal is available to seller.
12.6 Risk Prima Facie Passes with Property

Meaning: According to Section 26 “Unless otherwise agreed, the goods remain at the seller’s risk until
the property therein is transferred to the buyer, but when the property therein is transferred to the
buyer, the goods are at the buyer’s risk whether delivery has been made or not.”. Sec. 26 lays down
the general rule the risk prima jade passes with the ownership, i.e., the risk and the ownership of the
goods go together. This means that in case of loss of the goods, the loss shall be borne by the party
who has the ownership of the goods at the time of loss. Thus, question of finding the owner of goods
is important when there is some loss of the goods. The loss is to be borne by the person who is the
owner of the goods at the time of loss. For example, For example, Amit buys goods form Bhavesh and
goods remain in Bhavesh’s warehouse. Before delivery of goods to Amit, there is a fire in Bhavesh’s
warehouse and all the goods are destroyed. Amit must pay the price of goods to Bhavesh, if he has not
paid so far. Another example, Ankit agrees to purchase Bapu’s Refrigerator for Rs. 12,000. The
ownership from Bapu to Ankit is to pass on 15th January, 1985, while the price is paid in advance on
10th January, 1985. On 11th January 1985, the Refrigerator burned due heavy voltage and Bapu will
have to bear loss.
But there are certain exceptions to the above Rule. When the risk and the ownership may be separated
by an agreement between the seller and the buyer, as to when the ownership shall be transferred and who
shall suffer the loss, the above rules does not apply. Another situation is related with delay of goods i.e.
where delivery has been delayed through the fault of the buyer or the seller, the goods are at the risk of
the party in fault as regards any loss which might not have occurred but for such fault. Sometimes the trade
custom also held the buyer responsible for risk. We know that the “trade custom” is the customary rule
prevalent in a particular trade which is generally followed by the parties, for example, the trade custom may
proved that the goods shall be at the risk of the buyer whether or not the ownership has been transferred to
him.
12.7 Sale by Non Owners

12.7.1 Meaning
The seller, generally, 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, and then the question arises as to what is the position of the buyer
who has bought the goods by paying price.
According to Section 27 “Subject to the provisions of this Act and of any other law for the time being
in force, where goods are sold by a person who is not the owner thereof and who does not sell them
under the authority or with the consent of the owner, the buyer acquires no better title to the goods
than the seller had, unless the owner of the goods, is by his conduct precluded from denying the
seller’s authority to sell.”
The general rule is that “no one can give that which one has not got”. This general rule is expressed by
the maxim, “nemo dal quod non habet”. This means that “no one can transfer a better title than he
himself has.” The seller cannot give to the buyer of the goods a better title to the goods than he himself.
If the title of the seller is defective, the buyer’s title will also be subject to the same defect. If the seller
has no title to the goods, the buyer does not acquire any title although he might have acted honestly
and might have paid the value of the goods. This is to protect the true owner. If a thief disposes of
stolen property, the buyer acquires no title though he may have purchased the goods bonafide for
value, and the real owner of the goods is entitled to recover possession of goods without paying
anything to the buyer. Thus a buyer cannot get a good title to the goods unless he purchases the goods from
a person who is the owner thereof or who sells them under the authority or with the consent of the
owner. For example, Anil finds a ring of Bijoy and sells it to Collin, who purchases it for value and in
good faith. The true owner i.e., Bijoy can recover the ring from Collin, for A having no title could pass
none the better. Another example is Atul was a hirer of certain goods under the hire purchase agreement.
He sold the goods to Bishnu, who bought them in a good faith. In this case, Bishnu will not become the
owner of the goods because Atul was only a hirer and not the owner.
12.7.2 Exception to Sale by Non Owners
A person although he is not the owner of the goods, may sell the goods and pass a better title than he himself
has. The following are the various exceptions to the rule.
(a) Sale by Mercantile Agent: Sec. 2 (9) provides that. “Mercantile agent” means a mercantile agent
having in the customary course of business as such agent 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
goods. Where a mercantile agent is, with the consent of the owner. in possession of the goods
or of documents of title to the goods, any sale made by him when acting in the ordinary course
of the business of a mercantile agent shall be binding on the owner and be as valid as if he were
expressly authorized by the owner of the goods to make the same. The essential conditions are
that the agent is in possession of the goods or of the document of title to the goods; the
possession is in his capacity as a mercantile agent; the mercantile agent sells the goods in the
ordinary course of his business as an agent; the buyer acts in good faith and he should presume
that the agent has full authority to sell. For example, Ajit the owner of the car entrusted his car to
a mercantile agent for sale at a stated price and not below that. The agent sold car to Pradip below
the reserve price and misappropriated the money. Pradip subsequently sold the car to Raju. Ajit
cannot recover the car Raju. The mercantile agent was able to convey a better title in this case.
(b) Title by Estoppel: In certain cases the true owner is prevented by his conduct form denying the
seller’s authority to sell. The principle of estoppels applies when the owner by his words or conduct
has led the buyer to believe that the seller was the owner of the goods or had the owner’s authority
to sell them and induced the buyer to buy, he cannot afterwards deny the seller’s authority to sell. In
such a case the buyer gets a title. In other words when someone makes another person to believe
that a particular thing or fact is true, then afterwards he cannot be allowed to deny the truth of
that thing or fact. In a contract of sale, estoppel may arise where the owner by any act or
omission leads the buyer to believe that the seller has the right to sell. Thus, when the owner of
the goods by his conduct or by statement, willfully leads the buyer to believe that the seller has
the authority to sell, then he is prevented from denying the seller’s authority to sell. If a buyer
buys goods in such belief, latter on the owner cannot say that the seller had no authority to sell.
The basis of estoppel is that it would be unfair or unjust to allow a party to depart from a
particular state of affairs which he has permitted another person to believe to be true. For
example, Axit is selling Bijoy’s goods in his presence to Manoj. Bijoy does not object to sale.
Manoj gets a better title because the true owner Bijoy is estoppel from denying Axit’s authority.
(c) Sale by a Joint Owner: According to Sec. 28, “If one of several joint owners of goods has the
sole possession of them by permission of the co-owners, the property in the goods is transferred
to any person who buys them of such joint owner in good faith and has not at the time of the
contract of sale notice that the seller has not authority to sell.” Joint owner may be defined as
a person who owns the goods jointly with some other persons. It is essential to point out that
a co-owner can sell his own share even without the application of the provisions of this section.
However, according to this section, that the co-owner should be in possession of the same
with the consent of the other co-owners and the buyer should act in good faith and without
notice that the seller has no authority to sell. Thus it is essential to point out that a co-owner
can sell his own share even without the application of the provisions of this section. However,
according to this section, that the co-owner should be in possession of the same with the
consent of the other co-owners and the buyer should act in good faith and without notice that
the seller has no authority to sell. Anil, Biju and Collin are joint owners of a poultry farm having
one thousand chickens. The farm was being managed by Biju with the consent of Anil and
Collin. Biju sells all the chickens to Yogesh who buys in good faith. Yogesh gets a better title.
This exception is applicable only when the buyer buys goods in good faith. If it can be proved
that the buyer had the knowledge about the defective title of the seller, then the buyer will not
get a better title.
(d) Sale under a Voidable Contract: When a person has obtained possession of the goods under
a voidable contract and he sells those goods before the contract has been rescinded, the buyer
of such goods acquires a good title to there provide the buyer acts in good faith and without
notice of the seller’s defect of title. A person who has obtained possession of goods under a
contract which is voidable on the ground of fraud, misrepresentation, coercion or undue influence,
can convey a good title provided the sale takes place before the voidable contract is avoided.
According to Section 29 “When the seller of goods has obtained possession thereof under a
contract voidable under Section 19 or 19 (A) of the Indian Contract Act, but the contract has
not been rescinded at the time of the sale, the buyer acquires a good title to the goods, provided
he buys them in good faith and without notice of the seller’s defect of title.” However, the
buyer gets a valid title only if the seller must have obtained the possession of the goods under
a voidable contract and not under void contract; the contract must not have been rescinded at the
time of sale; and the buyer must act in good faith and he should not have any knowledge about
seller’s defective title. For example, Joy, by misrepresentation induces Mithun to sell and deliver to
him a cow. Joy sells the cow to Amit before Mithun has rescinded the contract. Amit purchases the
cow in good faith and without notice of the seller’s defective title. Amit acquires a good title.
(e) Sale by Seller in Possession After Sale: According to Section 30 (1), where a seller, having
sold goods, continues to be in possession of goods or the documents of’ title to the goods and
sells them either himself or through his mercantile agent to another person, who buys in good
faith and without notice of the previous sale, the buyer gets a good title. For the application of
this exception it is essential that the possession of the seller must be as seller and not as a hirer
or bailee.
(f) Sale by Buyer in Possession, After Sale: According to Section 30 (2), where a buyer has
agreed to buy the goods and has obtained possession of the same or the documents of title to
them with the consent of the seller, resells or pledges the goods either himself or through a
mercantile agent, he will convey a good title to the buyer or pledgee provided the person
receiving the goods acts in good faith and without notice of any line or other right of the original
seller in respect of those goods. Here second buyer gets a better title.
(g) Resale by Unpaid Seller: According to Section 54 (3) “where an unpaid seller who has exercised
his right or lien or stoppage in transit resells the goods, the buyer acquires a good title there o as
against the original buyer, notwithstanding that no notice of the re-sale has been given to the original
buyer.”
(h) Sale in Market Overt: English law provides an additional exception to the general rule. Market
overt is an open, public and legally constituted market. Where a person buys goods in market
overt, according to usage of the market, the buyer acquires a good title to the goods. This rule
does not apply in India.
(i) Sale by a Finder of Goods: According to Section 169 of Indian Contract Act, Sometimes, the
finder of lost goods sells the goods to a buyer. In such cases, the buyer gets a valid title to the goods
if the finder sells the goods under the permitted circumstances such as if the owner cannot with
reasonable diligence be found, or if found, he refuses to pay lawful charges to the finder, or if the
goods are losing the greater part of their value, or if the lawful charges of the finder, in respect of
goods found, amount to 2/3rds of their value.
12.8 Delivery of Goods

12.8.1 Meaning
After the formation of a valid contract of sale, the next stage is its performance. Contract of sale imposes
some duties on the seller and the buyer. It also confers some rights to the seller and the buyer. The seller’s
main duty is to deliver the goods to the buyer. Similarly, the buyer’s main duty is to accept the goods and
pay the price to the seller as per the terms of the contract.
According to Sec. 2(2), “delivery means voluntary transfer of possession from one person to another”.
Delivery is a bilateral act. It requires two parties to act. If transfer of possession of goods is not voluntary
i.e. possession is obtained by theft etc., there is no
delivery. The performance is mutual and is laid down in Sec. 31 of the Act states that. “It is the duty of the
seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the
contract of sale.”
12.8.2 Modes of Delivery
According to sec. 33 “Delivery of goods sold may be made by doing anything which the parties agree
shall be treated as delivery or which has the effect of putting the goods in the possession the buyer or
of any person authorized to hold them on his behalf.” Thus delivery need not mean transfer of physical
possession of goods. Delivery of goods may be made in any of the following ways:
(a) Actual Delivery: Where the goods are physically handed over by the seller (or his authorized
agent) to the buyer (or his authorized agent), the delivery is said to be actual. For example, the
seller of a car hands over the car to the buyer, there is actual delivery of the goods.
(b) Symbolic Delivery: Here the goods remain where they are, may be because they are bulky,
but the means of obtaining possession of goods is delivered. For example, the seller hands
over to the buyer the key of the godown where the goods are stored, or transfers a document
of title (i.e., bill of lading or railway receipt) to the buyer which will entitle him to obtain the
goods.
(c) Constructive Delivery: Such a delivery takes place when the person in possession of the
goods of the seller acknowledges, in accordance with the seller’s order that he holds the
goods on behalf of the buyer and the buyer has assented to it. Note that in such a delivery all
the three parties, namely, the seller, the person holding the seller’s goods and the buyer, must
concur. For example, where the Baler hands over the ‘delivery order’ to
12.8.3 Rules Regarding Delivery of Goods (Sec. 33 to 40)
The provisions related to rules regarding delivery of goods are given under Section 33 to 40 which includes
provisions related to giving possession and full control of goods to buyer; delivery and payment are concurrent
conditions; delivery of goods as demanded; conditions related to time, place of delivery; consent of third
person to deliver if he possess the goods; effect of part delivery; expenses of delivery; installment delivery;
delivery of wrong quantity; short delivery; excess delivery; delivery to a carrier; delivery at a distant place
etc.
Activity D:
1. Refer various cases fall under contract act and indentify and discuss the cases were sales made by
non owner, and also comment on what should have been done to overcome the problems involved
in these cases.
12.9 Rights of an Unpaid Seller and Rights of Buyer

12.9.1 Meaning
A seller who has not received the whole of the price of the goods sold to known as unpaid seller. The
seller of goods is deemed to be an ‘unpaid seller’ (a) when the Whole of the price has not been paid
or tendered; or (b) where a bill of exchange or other negotiable instrument has been received as a
conditional payment, i.e., subject to the realization thereof, and the same has been dishonored.
Rights of an Unpaid Seller against Goods can be studied under the two conditions i.e. where the ownership
of the goods is transferred to the buyer and where the ownership of the goods is not transferred to the
buyer. According to Sec. 46 of the Act, the unpaid seller has three distinct rights even though property in the
goods is transferred to the buyer. These rights are: (a) Right of lien, (b) Right of stoppage in transit
and (c) Right of resale.
(a) Right of Lien: The word ‘lien’ means ‘to retain possession of’. According to Sec. 47 (1) “The
unpaid seller of goods who is in possession of them is entitled to retain possession of them until
payment or tender of the price in the cases, namely, where the goods have been sold without any
stipulation as to credit; where the goods have been sold on credit, but the term of credit has expired
and where the buyer becomes insolvent.”
The right of lien is one of the unpaid seller’s right against the goods, the property in which is
transferred to the buyer. It is the unpaid seller’s right to retain the goods until the whole of the
price is paid or tendered. Lien can be exercised only for non-payment of the price, and not for
any other charges due against the buyer. For instance, the seller cannot claim lien for godown
charges for storing the goods in exercise of his lien for the price. The lien of an unpaid seller’s
particular lien, it is a personal right which can be exercised only by him and not by his assignees
or his creditors. The unpaid seller may exercise his lien notwithstanding that he is in possession
of the goods as agent or bailee for the buyer. The right of lien is linked with the possession of
the goods and not with the title of the goods.
The right of lien depends only upon the possession of the goods. Thus, the right of lien is lost as soon
as the possession of the goods is lost. The circumstances, in which the unpaid seller’s lien is lost
includes following cases:
(i) Sec. 49 (1) (a) “When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods”
(ii) Sec. 49 (1) (b) “when the buyer or his agent lawfully obtains possession of the goods”
(iii) Sec. 49 (1) (c) “by waiver thereof Waiver may be express or implied. The express waiver
is the waiver when the contract of sale provides in express terms that the seller shall not
retain the possession of the goods even if the price is not paid. Implied waiver is the w a i v e r
where the conduct of the seller shows that he will not exercise his right of lien.
(iv) Where he assents to a sub-sale by the buyer.
(b) Right of Stoppage in Transit (Sec. 50 to 52): The right of stoppage in transit means the right
of stopping future transit of the goods while they are with a carrier for the purpose of transmission
to the buyer, resuming possession of them and retaining possession until payment or tender of
the price. According to Sec. 50, “Subject to the provisions of this Act, when the buyer of the
goods becomes insolvent, the unpaid seller who has parted with the possession of the goods,
has the right of stopping them in transit, that is to say, he may resume possession of the goods
as long as they are in the course of transit, and may retain them until payment or tender of
price.” The second right which is available to an unpaid seller is the right to stoppage in transit.
This right can be exercised if certain conditions are satisfied such as the seller must be unpaid;
the buyer must be insolvent; property in the goods must have passed; seller has parted with the
possession of the goods and buyer has not got the possession of the goods.
Considering the duration of transit according to Section 51 “Goods are deemed to be in the
course of transit from the time when they are delivered to a carrier or other bailee for the
purpose of transmission to the buyer, until the buyer or his agent in that behalf takes delivery of
them from such carrier or other bailee.” The carrier may hold the goods as Seller’s agent; Buyer’s
agent; Independent contractor.
The important question is how Stoppage in Transit is affected? According to Section 52, an unpaid
seller may exercise his right of stoppage of goods in transit by following some ways includes by
taking actual possession of the goods; or by giving notice of his claim to the carrier or other
bailee, who possesses the goods.
In case where there exists the need for withholding Delivery, according to Section 46 (2), “Where
the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other
remedies, a right of withholding delivery similar to and co-extensive, with his rights of lien and
stoppage in transit where the property has passed to the buyer.”
In addition to his rights against the goods, as discussed above, an unpaid seller has the following
rights against the buyer personally:
(i) Suit for Price (Sec. 55): On transfer of the ownership of the goods to the buyer, he
becomes bound to pay the price to the seller. When he does not pay the price in terms of
the contract, legal action can be taken against the buyer by the unpaid seller.
(a) Sec. 55 (1) states, “Where under a contract of sale the property in the goods has
passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods
according to the terms of the contract, the seller may sue him for the price of the
goods.”
(b) Sec. 55 (2) states, “Where under a contract of sale the price is payable on a certain
day irrespective of delivery and the 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 goods have not been appropriated to the contract.”
(ii) Suit for Damages for Non-acceptance (Sec. 56): Sec. 56 states, “Where the buyer
wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for
damages for non-acceptance.”
This section deals with general damages. As such, the seller can recover the estimated loss
arising directly and naturally, in the course of events, from the buyer’s breach of the contract.
Such damages are measured as per provisions contained in Sec. 73 of the Indian Contract
Act. They are:
(i) Where there is an available market for the goods in question, the difference between
the contract price and the market price on the date of breach will be the measure of
damages.
(ii) Where there is no such market, the measure will be the estimated loss directly or indirectly
resulting in the ordinary course of events from such breach.
In the same way, when the seller is ready and requests the buyer to take the delivery of
the goods and the buyer wrongfully neglects or refuses to take the delivery within a
reasonable time, the seller is entitled to recover from the buyer: (a) any loss by the
buyer’s neglect or refusal to the seller; and (b) reasonable charges for the care and
custody of goods (Sec. 44).
(iii) Suit for Repudiation of the Contract Before Due Date (Sec. 60): Sometimes, the
buyer puts an end to the contract before the due date of delivery of goods. Sec. 60 states,
“Where either party to a contract of sale repudiates the contract before the date of deliver
the other may either treat the contract as subsisting and wait till the date of delivery, or he
may treat the contract as rescinded and sue for damages for the breach.” Thus the seller
may (a) treat the contract as subsisting and wait till the date of delivery or (b) treat the
contract as rescinded and sue the buyer for damages for breach.
(iv) Suit for Interest (Sec. 61): Where there is a specific agreement between the parties
as to interest on the price of the goods from the date on which the payment becomes due.
The seller may recover such- interest from the buyer. Further, Sec. 61 (2) states, “In the
absence of a contract to the contrary, the Court may award interest at such rate, as it
thinks ft, on the amount of price to the seller in a suit by him for the amount of the price,
from the date of the tender of the goods or from the date on which the price was payable:”
(c) Right of Resale (Sec. 54): An unpaid seller who has exercised his right of lien and stoppage in
transit is also empowered to effect resale of the goods. This resale right is a valuable right
given to an unpaid seller. Section 54 of the Act has given the right of resale to an unpaid seller,
in the following circumstances:
(i) Where the Goods are Perishable: Sometimes, the goods are of perishable nature.
The unpaid seller, who has exercised the right of lien or stoppage in transit, can resell
the goods. The unpaid seller need not give a notice to the buyer of his intention to resell
the goods. Perishable goods may include those goods which are apt to deterioration in
a mercantile sense.
(ii) Where Unpaid Seller Gives Notice of His Intention: When the goods are not
of perishable nature and buyer does not pay or tender the price, the seller can resell
the goods. However, he should give a notice to the buyer of his intention to resell the
goods.
(iii) Where the Seller Expressly Reserves His Right of Resale: Where the seller
expressly reserves a right of resale in case the buyer makes default, and, on the buyer
making default, resells the goods, the original contract of sale is thereby rescinded.
This rescission, however, does not affect the seller’s right to claim damages for loss.
The seller is entitled to recover from the original buyer damages caused to him by the resale. But if any
profit accrues, such profit shall belong to the seller. However, the seller shall not be entitled to recover
damages from the buyer or retain surplus if he fails to give reasonable notice to the buyer. In case of
perishable goods, such notice is not necessary.
The right of resale is a very valuable right given to an unpaid seller. In the absence of this right, the
unpaid seller’s other rights against the goods, namely, ‘lien’ and ‘stoppage in transit,’ would not have
been of much use because these rights only entitle the unpaid seller to retain the goods until paid by the
buyer.
12.10 Auction Sale

In an auction sale, the auctioneer invites bids from prospective purchasers and sells the goods to the highest
bidder. Section 64 lays down the following rules relating to an auction sale:
(a) According to Section 64 (1) where goods are put up for sale in lots, each lot is prima facie deemed
to be the subject of a separate contract of sale.
(b) According to Section 64 (2) the sale is complete when the auctioneer announces its completion by
the fall of hammer or in other customary manner; and until such announcement is made, an bidder
may retract his bid. .
(c) According to Section 64 (3) a right to bid may be reserved expressly by or on behalf of the seller
and where such right is expressly so reserved but not otherwise, the seller or any one person on his
behalf may, subject to the provisions hereinafter contained, bid at the auction. .
(d) According to Section 64 (4) where the sale is not notified to be subject to a right of the seller, it
shall not be 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 of any such person; and any sale contravening
this rule may be treated as fraudulent by the buyer. .
(e) According to Section 64 (5) The sale may be notified to be subject to a reserved or upset price.
(Sec. 64(5)).
(f) According to Section 64 (6) If the seller makes use of pretended bidding to raise the price, the
sale is voidable at the option of the buyer.
12.11 Summary
There are three stages in the performance of a contract of sales of goods by a seller viz., the transfer of
property in goods, the transfer of possession of the goods (i.e. delivery) and the passing of the risk. The
knowledge and understanding of sale of goods helpful to business and community. This unit provides
understanding about important topics related with various provisions of Sale of Goods Act, 1930 viz.,
meaning and exception to the doctrine of caveat emptor; meaning and significance of passing or transfer of
property; rules regarding transfer of property; reservation of right of disposal; risk prima facie passes with
property; sale by non owners; delivery of goods; rights of an unpaid seller and rights of buyer, and rules
related to auction sale.

1. State the rules in regard to the passing of property from a seller to a buyer in a contract for the sale
of goods.
2. Why it is important to know the exact time the property in goods passes from a seller to buyer?
Explain with examples the rules regarding the transfer of ownership of goods from seller to buyer.
3. What are the rules as to passing of property from a seller to a buyer in a contract for the sale of
unascertained and future goods?
4. “A seller cannot convey a better title to the buyer than he himself has.” Discuss this rule of law and
point out the exceptions.
5. Discuss the various provisions of law under which a non-owner can convey a good title to a buyer.
6. Who is an unpaid seller of goods and what are his rights against the goods? How he apply any
remedy against the buyer personality?
7. Define Unpaid Seller and discuss his rights under sale of goods act.
8. Write Short Notes on following;
(a) Auction sale.
(b) Modes of Delivery.
(c) Risk Prima Facie Passes with Property.
(d) Doctrine of Caveat Emptor.
9. Distinguish between an unpaid seller’s right of lien and right of stoppage of goods in transit. When
can the unpaid seller resell the goods? Explain.

- Arun Kumar (2002); “Mercantile Law”; Atlantic Publishers & Distributors, New Delhi, 2002.
- http://dspace.jgu.edu.in:8080/dspace/bitstream/10739/67/1/Chapter%2016.pdf.
- http://www.rfhha.org/images/pdf/Hospital_Laws/Sale_of_goods_act_1930.pdf.
- L. M. Porwal and Dr. Sanjeev Kumar (2010); “Business Law”; Vrinda Publications (P) Ltd. Delhi,
1st Reprint Edition, 2010, pp.291-394.
- M. C. Kuchhal (2009); “Mercantile Law”; Vikas Publishing House Pvt. Ltd., Noida, 7th Edition.
2009, pp. 244-303.
- N. D. Kapoor (2009); “Elements of Mercantile Law”; Sultan Chand & Sons, New Delhi, 31st
- Nirmal Singh (2009); “Business Law”; Deep & Deep Publications Pvt Ltd., New Delhi, 1st Reprint
Edition, 2009.
- P. C. Tulsian (2006); “Business Law”; Tata Mcgraw Hill Publishing Co. Ltd., New Delhi; 12th
Reprint, 2006.
- R. S. N. Pillai and Bagavathi (2010); “Business Law”; S. Chand & Company Ltd., New Delhi, 3rd
- S.S. Gulshan (2005); “Business and Corporate Laws”; New Age International, 01-Jan-2005.
- Surajit Sengupta (1979); “Business Law in India”; Oxford University Press, 1979.
- www.ficci-arbitration.com/act/SaleofGoodsAct1930.doc.
Unit - 13 : The Negotiable Instruments Act, 1881 (Part – I)
Structure of Unit:
13.0 Objectives
13.1 Introduction
13.2 Meaning and Definition of Negotiable Instrument
13.3 Features of Negotiable Instruments
13.4 Presumptions as to Negotiable Instruments
13.5 Payee in a Negotiable Instrument
13.6 Types of Negotiable Instrument
13.7 Promissory Note
13.8 Bill of Exchange
13.9 Cheque
13.10 Summary
13.0 Objectives
 Understand meaning and essential characteristics negotiable instruments;
 Describe various types of negotiable instruments i.e. Promissory Note, Bill of Exchange and
Cheque;
 Explain various essential features of Promissory Note, Bill of Exchange and Cheque;
 Differentiate between Promissory Note and Bill of Exchange;
 Differentiate between Bill of Exchange and Cheques;
 Explain different kinds of cheques.
13.1 Introduction
For a commercial transaction, it is always not possible for a businessman to carry huge cash. Businessman,
therefore adopt a new method of exchanging documents as bill of exchange, cheques etc, in place of money.
These documents, which are used as a substitution for money, are known as negotiable instruments. Advent
of cheques in the market have given a new dimension to the commercial and corporate world, its time when
people have preferred to carry and execute a small piece of paper called cheque than carrying the currency
worth the value of cheque. Dealings in cheques are vital and important not only for banking purposes but
also for the commerce and industry, and the economy of the country.
The history of the Negotiable Act is a long one. The Act was originally drafted in 1866 by the India Law
Commission and introduced in December, 1867 in the Council and was referred to a Select Committee.
Objections were raised by the mercantile community to the numerous deviations from the English Law
which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by
the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select
Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of
State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law
Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the
additions recommended by the new Law Commission. The draft thus prepared for the fourth time was
introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (26
of 1881). The Act came into force on 1st March, 1882. The latest amendment to the Act was made in the
year 2002. Now the Act contains 147 sections. . This amendment Act inserts five new sections from 143 to
147 touching various limbs of the parent Act and Cheque truncation through digitally were also included and
the amendment Act has been recently brought into force on Feb. 6, 2003. It deals with Promissory Notes,
Bills of Exchange and Cheques, the three kinds of negotiable instruments in most common use. The Act
applies to the whole of India and to all persons resident in India, whether foreigners or Indians. The provisions
of this Act is also applicable to Hundies, unless there is local usage to the contrary and on the other native
instruments like Treasury Bills, Bearer debentures etc. are also considered as negotiable instruments either
by mercantile custom or under other enactments.
13.2 Meaning and Definition of Negotiable Instrument

To understand the meaning of negotiable instruments let us take a few examples of day-to-day business
transactions.
Suppose Kaushal, a book publisher has sold books to Jhanvi for Rs 1,00,000/- on six months credit. To be
sure that Jhanvi will pay the money after six months, Kaushal may write an order addressed to Jhanvi that
she is to pay after six months, for value of goods received by her, Rs.1,00,000/- to Kaushal or anyone
holding the order and presenting it before her (Jhanvi) for payment. This written document has to be signed
by Jhanvi to show her acceptance of the order. Now, Kaushal can hold the document with him for six
months and on the due date can collect the money from Jhanvi. He can also use it for meeting different
business transactions.
For instance, after a month, if required, he can borrow money from Sunil for a period of two months and
pass on this document to Sunil. He has to write on the back of the document an instruction to Jhanvi to pay
money to Sunil, and sign it. Now Sunil becomes the owner of this document and he can claim money from
Jhanvi on the due date. Sunil, if required, can further pass on the document to Amit after instructing and
signing on the back of the document. This passing on process may continue further till the final payment is
made.
In the above example, Jhanvi who has bought books worth Rs. 1,00,000/- can also give an undertaking
stating that after six month she will pay the amount to Kaushal. Now Kaushal can retain that document with
himself till the end of six months or pass it on to others for meeting certain business obligation (like with sunil,
as discussed above) before the expiry of that six months time period.
You must have heard about a cheque. What is it? It is a document issued to a bank that entitles the person
whose name it bears to claim the amount mentioned in the cheque. If he wants, he can transfer it in favor of
another person. For example, if Mr Ramju issues a cheque worth Rs. 5,000/ - in favor of Mr Mugal, then
Mr Mugal can claim Rs. 5,000/- from the bank, or he can transfer it to Mr Ali to meet any business
obligation, like paying back a loan that he might have taken from Mr Ali. Once he does it, Ali gets a right to
Rs. 5,000/- and he can transfer it to Pawan, if required. Such transfers may continue till the payment is
finally made to somebody.
In the above examples, we find that there are certain documents used for payment in business transactions
and are transferred freely from one person to another. Such documents are called Negotiable Instruments.
Thus, we can say negotiable instrument is a transferable document, where negotiable means transferable
and instrument means document. To elaborate it further, an instrument, as mentioned here, is a document
used as a means for making some payment and it is negotiable i.e., its ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments, the ownership of which can be
transferred from one person to another many times before the final payment is made.
13.2.1 Definition of Negotiable Instrument
The term “Negotiable Instrument” means a document transferable from one person to another. However
the Act has not defined the term. It merely says that “A negotiable instrument” means a promissory note, bill
of exchange or cheque payab1e either to order or to bearer. [Negotiable Instruments Act, 1881, Section
13(1)]
According to Thomasb, “An instrument is negotiable when it is, by a legally recognized custom of trade or
by law, transferrable by delivery or by indorsement and delivery, without notice to the party liable in such a
way that (a) the holder of it for the same being may sue upon it in his own name, and (b) the property in it
passes to a bona fide transferee for value free from any defect in the title of the person from whom he obtain
it
In the words of Justice, Willis, “A negotiable instrument is one, the property in which is acquired by anyone
who takes it bona fide and for value notwithstanding any defects of the title in the person from whom he
took it”.
Thus, the term, negotiable instrument means a written document which creates a right in favor of some
person and which is freely transferable. Although the Act mentions only these six instruments (such as a
promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other
instrument which satisfies the following two conditions of negotiability:
1. The instrument should be freely transferable (by delivery or by indorsement. and delivery) by the custom
of the trade; and
2. the person who obtains it in good faith and for value should get it free from all defects, and be entitled to
recover the money of the instrument in his own name.
As such, documents like share warrants payable to bearer, debentures payable to bearer and dividend
warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share
certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are transferable
by delivery and indorsements, yet they are not able to give better title to the bona fide transferee for value
than what the transferor has.
13.3 Features of Negotiable Instruments

Following are the important features of negotiable instruments:
1. In Writing - It is the basic condition of the negotiable instrument that it is always in writing. It cannot
be verbal. This includes handwriting, typing, computer printout and engraving, etc.
2. Signature - Negotiable instrument must bear the signature of its maker. Without the signature of the
drawer or the maker, the instrument shall not be a valid one.
3. Unconditional - It is an unconditional instrument if any condition is attached, then it cannot be
called negotiable instrument.
a. Example: Avadhesh promises to pay Rs. 10,000 to Vijay Mohan, provided that Vijay
Mohan delivers goods as per his order. This is a conditional negotiable instrument and,
hence, invalid one.
4. Transferable - It can easily transferable from one person to another. In these instruments right of
ownership passes either by delivery or by indorsement. Usually, when we transfer any property to
somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But,
such formalities are not required while transferring a negotiable instrument. The ownership is changed
by mere delivery (when payable to the bearer) or by valid indorsement and delivery (when payable
to order). Further, while transferring it is also not required to give a notice to the previous holder.
5. Payable on Demand - The amount of the instrument is payable on demand or at any
predetermination future time.
6. Payable in Money - The amount must be written on the instrument and it is always payable in
terms of money. It can never be payable in commodity or chattel such wheat, rice, apple etc. if it is
payable other than money or something in addition, it becomes invalid
7. Payable to the Bearer - The amount written on it is payable to the bearer or to a specified person.
The payee must be a certain person. It means that the person in whose favor, the instrument is made
must be named or described with reasonable certainty. The term ‘person’ includes individual, body
corporate, trade unions, even secretary, director or chairman of an institution. The payee can also
be more than one person.
8. Payment of Debt - It can be very easily used for the payment of debt. It is very simple and
convenient method of payment.
9. Right of Recovery - A cheque or Note gives the right to the creditor to recover the written amount
from the debtor. He can recover this amount by himself or he can transfer this right to another.
10. Absolute and Good Title - If there is a defect in the title of the previous holder it does not affect
the holder in due course. So it is a better little than others. Negotiability confers absolute and good
title on the transferee. It means that a person who receives a negotiable instrument has a clear and
undisputable title to the instrument. However, the title of the receiver will be absolute, only if he has
got the instrument in good faith and for a consideration. Also the receiver should have no knowledge
of the previous holder having any defect in his title. Such a person is known as holder in due course.
a. Example: Rajiv issued a bearer cheque payable to Ajay. It was stolen from Ajay by a
person, who passed it on to Pradeep. If Pradeep received it in good faith and for value and
without knowledge of cheque having been stolen, he will be entitled to receive the amount
of the cheque. Here Pradeep will be regarded as ‘holder in due course’.
11. Exception of General Law - In case of transfer of property the general concept of law is that
“Nobody can transfer a better title than that of his own.” But in case of instrument this law does not
apply. A negotiable instrument even got in good faith from thief is better title.
12. Specified Amount - It is also a characteristic of negotiable instrument that specified and definite
amount is written on the instrument. Without specified amount a negotiable instrument cannot be
freely negotiated.
13. Payment Time - The time of payment must be certain. It means that the instrument must be payable
at a time which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable
instrument. However, if the time of payment is linked to the death of a person, it is nevertheless a
negotiable instrument as death is certain, though the time thereof is not.
14. Stamp - Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per
the Indian Stamp Act, 1899. The value of stamp depends upon the value of the note or bill and the
time of their payment.
15. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that
consideration has been paid under it. It is not necessary to write in a promissory note the words ‘for
value received’ or similar expressions because the payment of consideration is presumed. The
words are usually included to create additional evidence of consideration. These presumptions are
being explained under a separate head.
13.4 Presumptions as to Negotiable Instruments

For deciding cases in respect of rights of parties on the basis of a bill of exchange, the Court is entitled to
make certain presumptions. These are briefly stated as follow:
1. As to Consideration- Every negotiable instrument was made or drawn for consideration, and that
every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted,
indorsed, negotiated or transferred for consideration
2. As to Date- That every negotiable instrument bearing a date was made or drawn on such date;
3. As to Time of Acceptance- That every accepted bill of exchange was accepted within a reasonable
time after its date its date and before its maturity
4. As to Time of Transfer - That every transfer of a negotiable instrument was made before its
maturity
5. As to Order of Indorsements - That the indorsements appearing upon a negotiable instrument
were made in the order in which they appear thereon
6. As to Stamps-That a lost promissory note, bill of exchange or cheque was duly stamped;
7. Holder is Holder in Due Course - That the holder of a negotiable instrument is a holder in due
course; provided that, where the instrument has been contained from its lawful owner, or form any
person in lawful custody thereof, by means of an offence or fraud, or for unlawful consideration, the
burden of proving that the holder is a holder in due course lies upon him.
8. Proof of Dishonor - If a suit is filed upon an instrument which has been dishonored, the Court shall,
on proof of the protest, presume the fact of dishonor unless it is disproved. (Section 119)
All above presumptions hold for all negotiable instruments until the contrary is proved by evidence.
13.5 Payee in a Negotiable Instrument

All three kinds of negotiable instruments mentioned under section 13 of the Act could be made payable in
any of the following ways – Payable to bearer or Payable to order.
Payable to Bearer: The expression “bearer instrument” signifies an instrument, be it promissory note, bill
of exchange or a cheque, which is expressed to be so payable or on which the last indorsement is in blank.
This character of the instrument can be altered subsequently e.g. an indorsee can convert an ‘Indorsement
in blank’ into an ‘Indorsement in full’. In such a case, the holder of the instrument would not be able to
negotiate the instrument by mere delivery. He will be required to indorse the instrument before delivering it.
Payable to Order: An instrument is payable to order when it is payable to:
(i) The order of a specified person, or
(ii) A specified person or his order, or
(iii) A specified person without the addition of the words “or his order” and does not contain words
prohibiting transfer or indicating an intention that it should not be transferable.
When an instrument is not payable to bearer, the payee must be indicated with reasonable certainty
13.6 Types of Negotiable Instrument

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of
exchange or a cheque payable either to order or to bearer. The Act does not affect the custom or local
usage relating to an instrument in oriental language i.e., a Hundi
Negotiable instruments recognized by statute are:
(i) Promissory notes
(ii) Bills of exchange
(iii) Cheques
Negotiable instruments recognized by usage or custom are:
(i) Hundis
(ii) Share warrants
(iii) Dividend warrants
(iv) Bankers draft
(v) Circular notes
(vi) Bearer debentures
(vii) Debentures of Bombay Port Trust
(viii) Railway receipts
(ix) Delivery orders.
This list of negotiable instrument is not a closed chapter. With the growth of commerce, new kinds of
securities may claim recognition as negotiable instruments. The courts in India usually follow the practice of
English courts in according the character of negotiability to other instruments.
13.7 Promissory Note

The term Promissory note has been defined under Section 4 of the Negotiable Instruments Act 1881, as
under:
“A promissory note is an instrument (not being a bank note or a currency-note) in writing containing an
unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a,
certain person, or to the bearer of the instrument”. Provided that ‘no person other than RBI or the Central
Government can make a promissory note payable to the bearer’ (Section 21 of the RBI Act)
Illustrations: Kaushal signs instruments in the following terms
(a) “I promise to pay Sunil or order Rs. 1500”.
(b) “ I acknowledge myself to be indebted to Sunil in Rs. 1,500 to be paid on demand, for value
received.”
(c) “Mr. Sunil, I O U (I Owe You) Rs. 1,500”.
(d) “I promise to pay Sunil Rs. 1500 and all other sums which shall be due to him”.
(e) “I promise to pay Sunil Rs. 1500; first deducting there out any money which he may owe me”.
(f) “ I promise to pay Sunil Rs. 1500 seven days after my marriage with Seema”.
(g) “I promise to pay Sunil Rs. 1500 on Chaturbhuj’s death, provided Chaturbhuj leaves me enough
to pay that sum”.
(h) “I promise to pay Sunil Rs. 1500 and to deliver to him my black horse on 1st January next”.
The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked
(c), (d), (e), (f), (g) and (h) are not promissory notes.
Specimen of a Promissory Note
Rs. 1,00,000/- Ajmer

November 1, 2012
On demand, I promise to pay Ramesh, s/o Ramlal of Meerut or order a some of Rs 1,00,000/-
(Rupees Ten Thousand only), for value received.
To, Ramesh
Navgraha Colony, Pushkar Sd/ Sanjeev
Road, Ajmer – 305001 Stamp
13.7.1 Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are:
i. The Maker– the person who makes the note and promises to pay the amount stated
therein. In the above specimen, Sanjeev is the maker.
ii. The Payee – the person to whom the amount is payable. In the above specimen it is
Ramesh.
In course of transfer of a promissory note by payee and others, the parties involved may be -
a. The Indorser – the person who indorses the note in favor of another person. In the above
specimen if Ramesh indorses it in favor of Ranjan and Ranjan also indorses it in favor of Puneet,
then Ramesh and Ranjan both are indorsers.
b. The indorsee – the person in whose favor the note is negotiated by indorsement. In the
above, it is Ranjan and then Puneet.
13.7.2 Essentials of a Promissory Note
1. It Must Be in Writing - It is the basic condition of the promissory note that it is always in writing.
It cannot be verbal. This includes handwriting, typing, computer printout and engraving, etc. An oral
promise to pay does not become a promissory note
2. It Must Certainly an Express Promise or Clear Understanding to Pay: There must be an
express undertaking to pay. A mere acknowledgment is not enough.
The following are not promissory notes as there is no promise to pay.
If A Writes:
(a) “Mr. B, I.O.U. (I owe you) Rs. 500”
(b) “I am liable to pay you Rs. 500”.
(c) “I have taken from you Rs. 100, whenever you ask for it has to pay”.
The following will be taken as promissory notes because there is an express promise to pay:
If A Writes:
(a) “I promise to pay B or order Rs. 500”
(b) “I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for
the value received”.
3. The Promise to Pay Must Be Unconditional: If a condition is attached to the ‘promise to pay’
then the instrument will not be construed as a promissory note. Suppose, A signs an instrument
made out as follows, “ I promise to pay to B Rs. 500 on D’s death, provided D leaves me enough
to pay the sum”. The instrument will not be a promissory note. But if an instrument runs as: “I
acknowledge myself to be indebted to B of Rs 500 to be paid on demand for value received”. This
instrument would be a promissory note.
It may be noted that a promise to will not be conditional under section 4, where it depends upon an
event which is certain to happen but the time of its occurrence may be uncertain.
For example:- Where a promissory note is in this form : “I promise to pay to A Rs. 2000,
15 days after the death of B”, it is not conditional as it is certain that B will die though the
exact time of his death is uncertain (Section 4).
4. The Amount Promised Must be Certain and a Definite Sum of Money: Certainly is one of
the essential characteristics of a promissory note. Certainly must be as to the amount and also as to
the person by whose order and to whom payment is to be made.
For example:-The following instruments are invalid as promissory notes because of
uncertainly of the sum of money payable:
(i) “I promise to pay Sunil Rs. 10000 and all other sums which shall be due to him”, it
is not a valid
(ii) “I promise to pay Sunil Rs 10000 first deducting there out any money which he
may owe me”.
(iii) “I promise to pay Sunil Rs. 15000 and all fines according to rules”.
5. It Must Be Signed By the Maker: A promissory note is uncompleted till it is signed. Since the
signature is intended to authenticate the instrument it can be on any part of the instrument
6. The Maker Must Be Certain and Definite Person: The maker of a promissory note must be
certain. He may be ascertained by his name or designation. Where the name of the payee is not
mentioned as a party, the instrument becomes invalid. But a promissory node cannot be made
payable to the maker himself. Thus, a note which runs “I promise to pay myself” is not a promissory
note and hence invalid.
A promissory note must point out with certainty the person who is entitled to receive the money.
Where it is made payable to the bearer, the bearer is the definite person to whom payment is to be
made. The words ‘certain person’ means a person who is capable of being ascertained at the time
of making of the instrument. Therefore, if any person has not been named in the instrument but
sufficient description of such person have been included therein by which such person may be
ascertained, the requirement is fulfilled (Ponnuswami V. Velliamuthu AIR 1957 Mad 355). If the
payee is mentioned as ‘you’, it does not indicate any certainty about the person (Naraindas V.
Purnidas AIR 1959 Orissa 176).
It may be noted that a promissory note may be made by (i) one person; or (ii) be several persons
jointly, or (iii) by several persons jointly and severally.
It may also be noted that certainty of the payee is not required if the promissory note is payable to
bearer. But no person other than the RBI or the Central Government can make a promissory note
payable to bearer. [Sec. 31 (2) of the Reserve Bank of India Act, 1934]
7. Stamped: All promissory notes are chargeable with stamp duty under the India Stamp Act. Therefore,
all promissory note must be properly stamped in order to make them legally enforceable.
8. Other Points: The following points shall also be remembered in connection with promissory notes:
a. Consideration need not be mentioned.
b. Place and date of making it need not be mentioned. A promissory note on which date is not
mentioned is deemed to have been drawn on the date of its delivery.
c. An ante-dated or post dated instrument is not invalid.
d. Place of payment also need not be mentioned in the promissory note. However, it can be
made payable at any specified place.
e. It cannot be made payable to bearer on demand or payable to bearer after a certain time.
(Section 31 of the Reserve Bank of India Act)
f. It may be made payable on demand or after a certain time. A demand promissory note
becomes time barred on expiry of three years from the date it bears.
g. It must be duly stamped as per the state laws in which it is executed, under the Indian
Stamp Act. A promissory note which is not stamped is a nullity. Stamping may be before or
after the execution.
h. A promissory note cannot be made payable to the maker himself. Such a note is nullity. But,
if it is indorsed by the maker to some other person, or indorsed in blank, it becomes a valid
promissory note (Gay V. Landal (1848) LT CP 286).
i. Where two or more persons sign the promissory note, their liabilities will be joint as well as
several. A note cannot be signed in alternative.
j. It is usual to mention in a promissory note the words ‘for value received’, but such a
statement is not essential for the validity of the note, because the note is presumed to be for
consideration unless contrary proved.
k. A promissory note is not invalid by reason only that it contains any matter in addition to
promise to pay e.g. a recital that the maker has deposited the title deeds with the payee as
a collateral security.
13.8 Bill of Exchange

Before going into the definition, you must know how a bill of exchange ordinarily comes into existence. It
comes into being, when a trader decides to sell goods on credit. Suppose, A sells goods worth Rs. 800 to
B, and allows him three months’ time to pay the price, A will then draw a bill on B in the following terms
“three months after date pay to my order the sum of Rs 800 for value received”. After signing the will, A will
present it to B for acceptance. It B writes across the bill ‘accepted’, it will indicated that B undertakes the
liability to pay a sum of Rs 800 within the time stipulated therein. Here A is the drawer, B is the drawee and
after acceptance B will be the acceptor.
Section 5 of the Negotiable Instruments Act, 1881 defines “a bill of exchange is an instrument in writing
containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of certain person to the bearer to the instrument.”
It should be noted that no person other than the RBI or the Central Government can draw a bill of exchange
payable to bearer on demand. [Sec. 31 of the RBI Act. 1934]
A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor and accepted
by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or drawee and payee.
Drawer himself may be the payee.
13.8.1 Specimen of a Bill of Exchange
Rs. 10000/- New Delhi

November 26, 2012
Five month after date pay Tarun or (to his) order the sum of Rupees Ten Thousand only for
value received.
To Sameer Accepted Stamp

Purani Mandi, Ajmer Sameer S/d
305001 Rajiv
Rs. 10000/- New DelhiNovember 26, 2012

13.8.2 Parties to a Bill of Exchange
There are three parties involved in a bill of exchange. They are
i. The Drawer – The person who makes the order for making payment. In the above specimen,
Rajiv is the drawer.
ii. The Drawee – The person to whom the order to pay is made. He is generally a debtor of the
drawer. It is Sameer in this case.
iii. The Payee – The person to whom the payment is to be made. In this case it is Tarun.
The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in
the bill would be Pay to us or order. In a bill where a time period is mentioned, just like the above specimen,
is called a Time Bill. But a bill may be made payable on demand also. This is called a Demand Bill.
13.8.3 Essentials of a Bill of Exchange
1. It Must be in Writing: The bill of exchange must be in writing.
2. Order to Pay: There must be an order to pay. It is of the essence of the bill that its drawer orders
the drawee to pay money to the payee. The term ‘order’ does not mean command. Any request or
direction or other words, which show an intention of the drawer to cause a payment being made by
the drawee is sufficient. Politeness may be admissible but excessive politeness may prompt one to
disregard it as an order.
3. Unconditional Order: This order must be unconditional, as the bill is payable at all events. It is
absolutely necessary for the drawer’s order to the drawee to be unconditional. The order must not
make the payment of the bill dependent on a contingent event. A conditional bill of exchange is
invalid.
4. Signature of the Drawer: The drawee must sign the instrument. The instrument without the proper
signature will be inchoate (unclear or unformed or undeveloped) and hence ineffective. It is permissible
to add the signature at any time after the issue of the bill.
5. Drawee: A bill, in order to be perfect, must indicate a drawee who should be called upon to accept
or pay it.
6. Parties: The drawer, the drawee (acceptor) and the payee- the parties to a bill are to be specified
in the instrument with reasonable certainty.
7. Certainty of Amount: The sum must be certain.
8. Payment in Kind is Not Valid: The medium of payment must be money and money only. The
distinctive order to pay anything in kind will vitiate the bill.
9. Stamping: A bill of exchange, to be valid, must be duly stamped as per the Indian Stamp Act.
10. Cannot Be Made Payable to Bearer on Demand: A bill of exchange as originally drawn
cannot be made payable to the bearer on demand.
13.8.4 Special Benefits of Bill of Exchange
Following special benefits associated with the bill of exchange:
i. A bill of exchange is a double secured instrument i.e. where the drawee fails to honor the order, the
holder of the instrument may look to the drawer for payment.
ii. In case of immediate requirement a Bill may be discounted with a bank.
iii. The drawer or any indorser thereof may mention a person as ‘drawee in case of need’ to be
resorted to for payment by the payee in case of dishonor of the bill by the drawee.
13.8.5 Distinction Between a Promissory Note and a Bill of Exchange
Table-1 : Difference between Promissory Note and bill of exchange
Promissory Note Bill of Exchange

1 There are only two parties – the maker There are three parties – the drawer,
(debtor) and the payee (creditor) the drawee and the payee although
drawer and payee may be the same
person
2 It contains a promise to pay. It contains an order to pay.
3 The liability of the maker of a note is The liability of the drawer of a bill is
primary and absolute (S.32). secondary and conditional. He would
be liable if the drawee, after accepting
the bill fails to pay the money due
upon it provided notice to dishonor is
given to the drawer within the
prescribed time (Section 30)
4 It is presented for payment without any If a bill is payable some time after
previous acceptance by the maker. sight, it is required to be accepted
either by the drawee himself or by
someone else on his behalf, before it
can be presented for payment.
5 The maker of a promissory note stands The maker or drawer of an accepted
in immediate relationship with the payee bill stands in immediate relationship
and is primarily liable to the payee or the with the acceptor and the payee.
holder.
6 It cannot be made payable to the maker The drawer and payee or the drawee
himself. The maker and the payee and the payee may be the same
cannot be the same person. person.
7 In the case of a promissory note there There are three parties, viz, drawer,
are only two parties, viz., the maker drawee and payee, and any two of
(debtor) and the payee (creditor). these three capacities can be filled by
one and the same person.
8 A promissory note cannot be drawn in The bills can be drawn in sets.
sets.
9 A promissory note can never be A bill of exchange too cannot be
conditional. drawn conditionally, but it can be
accepted conditionally with the
consent of the holder.
10 In case of dishonor no notice of dishonor A notice of dishonor must be given
is required to be given by the Holder. in case of dishonor of Bills of
Exchange.
13.9 Cheque
A ‘cheque’ is a ‘bill of exchange’ drawn on a specified banker and not expressed to be payable otherwise
than. It includes the electronic image of a truncated cheque and a cheque in the electronic form.
A cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque,
and is generated, written and signed in a secure system ensuring the minimum safety standards with the use
of digital signature (with or without biometric signatures) and asymmetric crypto systems.
A truncated cheque means a cheque which is truncated during the course if a clearing cycle, either by the
clearing house or by the Bank whether paying or receiving payment immediately on generation of an electronic
image for transmission substituting the further physical movement of the cheque in writing.
Clearing house means the clearing house managed or recognized by Reserve Bank of India.
A cheque is drawn on a banker only, while a bill of exchange can be drawn on any one. Like bill of
exchange, cheque has three parties, viz., drawer, drawee and payee. A drawee in case of cheque is always
a banker. A cheque is an unconditional order on the specified banker to pay on demand, a certain sum of
money to the bearer of the cheque or to his order. A bill of exchange is wider than a cheque. Therefore all
cheques are bills of exchange but all bills of exchange are not cheque. However, a cheque does not require
acceptance. It the cheque is dishonored, the holder has no remedy against the banker, because cheque
does not amount to assignment of deawer’s funds in the hands of the banker in favor of the holder. Further,
there is no privity of contract between the payee and the banker. The banker is liable only to the drawer.
Drawing of a cheque is simply a direction to pay. A cheque is not invalid because it is post-dated or anti-
dated. A cheque is payable only on demand and on presentation. Usually, a cheque is valid for a period of
six months. It may be drawn on a Sunday or a Holiday.
13.9.1 Characteristics
1. A cheque is an unconditional order on a specified banker where the drawer has his account.
2. A cheque can be drawn for a certain sum of money.
3. Cheque is payable by the banker only on demand.
4. A cheque does not require acceptance by the banker as in the case of bill of exchange.
5. A cheque may be drawn up in three forms i.e.
a. Bearer cheque is one which is either expressed to be so payable or on which the last or
only indorsement is an indorsement in blank);
b. Order cheque is one which is expressed to be so payable or which is expressed to be
payable to a particular person without containing any prohibitory words against its transfer
or indicating an intention that it shall not be transferable (Section 18); and
c. Crossed cheque is a cheque which can be collected only through a banker.
6. The cheque is a revocable mandate and the authority can be revoked by countermanding payment.
7. The cheque is determined by notice of death or insolvency of the drawer.
8. All cheques are bills of exchange but all bills of exchange are not cheques.
13.9.2 Specimen of a Cheque
Every bank has its own printed cheque forms which are supplied to the account holders at the time of
opening the account as well as subsequently whenever needed. These forms are printed on special security
paper which is sensitive to chemicals and make any chemical alterations noticeable. Although, legally, a
customer may withdraw his money even by writing his direction to the banker on a plain paper but in
practice banker honors only those orders which are issued on the printed forms of cheque.
13.9.3 Essentials of a Cheque
1. It Must Be in Writing - It is the basic condition of the cheque that it is always in writing. It cannot
be verbal. This includes handwriting, typing, computer printout etc.
2. Unconditional Order - A cheque must contain an unconditional order. It is, however, not necessary
that the word order or its equivalent must be used to make the document a cheque. Generally the
order to bank is expressed by the word “pay”. If the word “please” precedes “pay” the document
will not be regarded as invalid merely on this account.
3. On a Specified Banker Only – A cheque must be drawn on a specified banker. To avoid any
mistake, the name and address of banker should be specified.
4. A Certain Sum of Money – The order must be only for the payment of money and that too must
be specified. Thus, orders asking the banker to deliver securities or certain other things cannot be
regarded as cheques. Similarly, an order asking the banker to pay a specified amount with interest,
the rate of interest not specified, is not a cheque as the sum payable is not certain.
5. Payee to Be Certain – A cheque to be valid must be payable to a certain person. ‘Person’ should
be understood in a limited sense including only human beings. The term infect includes ‘legal persons’
also. Thus, instruments drawn in favors of a body corporate, local authorities, clubs, institutions,
etc., are valid instruments being payable to legal persons.
6. Payable on Demand – A cheque to be valid must be payable on demand and not otherwise. Use
of the world ‘on demand’ or their equivalent is not necessary. When the drawer asks the banker to
pay and does not specify the time for its payment, the instrument is payable on demand (Section 19)
7. Amount of the Cheque – Amount of the cheque must be clearly mentioned. The amount should be
written both in words as well as figures so as to avoid mistakes. Moreover, the amount should be so
written as to leave no blank space before or after the words and figures specifying the amount. In
case a customer does so, though innocently and his banker pays the forged amount because the
forgery is not noticeable in spite of reasonable care, the banker would be justified in debiting his
account with the amount actually paid.
8. Dating of Cheques – The drawer of a cheque is expected to date it before it leaves his hands. A
cheque without a date is considered incomplete and is returned unpaid be the banks. The drawer
can date a cheque with the date earlier or later than the date on which it is drawn. A cheque bearing
an earlier date is antedated and the one bearing the late date is called post-dated. A post-dated
cheque cannot be honored, except at the personal risk of the bank’s manager, till the date mentioned.
A post- dated cheque is as much negotiable as a cheque for which payment is due, i.e., the transferee
of a post-dated cheque, like that of the cheque on which payment is due, acquires a better title than
its transferor, it he is a holder in due course. A cheque that bears a date earlier than six months is a
stale cheque and cannot be claimed for.
13.9.4 Difference Between Cheque and Bill of Exchange
Table-2 : Difference between Cheque and bill of exchange
Cheque Bill of Exchange

Dra wee Cheq ue can be drawn only on a The drawee may be any person.
banker.
Time of A cheque is payable on demand. A bill may be drawn payable on
pay me nt demand or on expiry of certain period
after date or sight.
Grace Cheq ue is payable on demand and no While calculating maturity three day’s
period grace period is allowed. grace is allowed
Notice of Notice of disho nor is not necessary. A no tice of disho nor is required.
dis hono r
Payee A cheque can be drawn to bearer and A bill cannot be made bearer if it is
made payable on demand. payable on demand. A bill drawn
‘payable to bearer on demand’ is void.
Acceptance A cheq ue is not required to be Bills sometimes, require presentment
presented for acceptance. It needs to for acceptance and it is advisable to
be presented onl y for payment. present them for acceptance even
when it is not essential to do so.
Stamping No stamp duty is payable on cheq ues. Affixation of proper stamps is
necessary in case of Bills of Exchange.
Crossing A cheque may be crossed. A bill of exchange cannot be crossed.
Noting a nd There is no system for no ting and In case of dishonor of a bill proper
protesting protesting i n case of disho nor. no ting and protesting is necessary.
Discharge The drawer does not get discharged The drawer of the bill stands
of drawer fro m his liability because of delay in discharged from his liability if it is not
presenting the cheq ue to the bank for dul y presented for payment.
payment.
Lia bility of In case of dishonor of cheq ue the In case of dishonor of the bill by non-
drawee for drawee is liable to the drawer and not payment on an accepted bill of
dis hono r to the payee. exchange the drawee becomes liable to
the payee.
Validity A cheque is usually valid for a period A bill may be drawn for any period.
period of six months.
13.9.5 Different Kinds of Cheques
1. Customer’s Sight Draft: - The cheque which is an order upon a commercial bank by its client
who has already deposited money with it is also called customers sight draft.
2. Certified Cheque:- These cheques are used where the drawer of the cheque is not trust worthy. It
is that cheque on which the payment is guarantee to the payee by the drawee bank. When the
cheque is presented to officer of the bank he writes certified or accepted on the face of the cheque.
The cheque is honored whenever it is presented to the bank.
3. Cashier’s Cheque or Treasure’s Cheque:- It is drawn upon a bank by its own officer for meeting
the expenses of the banks.
4. Bank Money Orders or Registered Cheques: - A person who wants to transfer a certain sum
of money may use bank money order. The person has to pay the amount of the money order plus a
bank fee and receives the registered cheque from the bank. He then signs the cheque, fill in the
name of the person and then forward the cheque to the payee.
5. Traveler’s Cheque: - These cheques enable the tourists to meet the expenses of their trip. These
are not only acceptable by the issuing bank but also by the merchants and hotels inside and outside
the country. The procedure is simply to pay the bank amount of the order and the bank commission.
The bank will issue cheques on which the value is already printed. The guarantor has to sign all the
cheques issued in the presence of issuing banker.
6. Drafts: - A draft is a cheque drawn by one bank upon another bank ordering to pay the payee.
Bank drafts are commonly used inside and outside the country for the transfer of money. It has also
helped in financing the foreign trade.
7. Crossed Cheque:- A crossed cheque is paid only through the bank. The paying bank is to make
payment strictly according the instructions conveying by a crossing. Generally parallel lines are
drawn on the face of the cheque.
13.10 Summary
The law of negotiable instrument in India is based almost entirely on the Principle of Mercantile Law of
England. In India, law relating to negotiable instruments is contained in the Negotiable Instruments Act,
XXVI of 1881. It mainly deals with only three types of negotiable instruments, viz., promissory note, bill of
exchange and cheque. A negotiable instrument is a piece of paper which entitles a person to a sum of money
and which is transferable from one person to another by mere delivery or by indorsement and delivery. The
characteristics of a negotiable instrument are easy negotiability, transferee gets good title, transferee gets a
right to sue in his own name and certain presumptions which apply to all negotiable instruments. There are
two types of negotiable instruments (a) Recognized by statue: Promissory notes, Bill of exchange and
cheques and (b) Recognized by usage: Hundis, Bill of lading, Share warrant, Dividend warrant, Railway
receipts, Delivery orders etc. The parties to bill of exchange are drawer, drawee, acceptor, payee, indorser,
indorsee, holder, drawee in case of need and acceptor for honor. The parties to a promissory note are
maker, payee, holder, indorser and indorsee while parties to cheque are drawer, drawee, payee, holder,
indorser and indorsee.

1. What do you mean by a negotiable instrument? Describe the essential characteristics of negotiable
instruments
2. What is a promissory note? What are its essential elements?
3. How does Negotiable instrument differ from a bill of exchange?
4. What is a bill of exchange? Discuss its essential characteristics.
5. Define a Cheque. What are the various requisites/essentials of a cheque? Comment
6. Distinguish between a cheque and a bill of exchange?
7. Explain different kinds of Cheques.

- S S Gulshan (2007); ‘Mercantile Law’; Excel Books, New Delhi
- R L Nolakha (2009); ‘Business Law’; Ramesh Book Depot, Jaipur
- K R Bulchandani (2009); ‘Business Law for Management’ Himalaya Publishing House Pvt.
Ltd
- S S Gulshan (2006); ‘Business Law’; Excel Books, New Delhi
- S B Mathur (2010); ‘Business Law’; Tata Mcgraw Hill, New Delhi
- D C Boss (2008); ‘Business Law’; PHI Learning Pvt Ltd., New Delhi
Unit - 14 : The Negotiable Instruments Act, 1881 (Part – II)
Structure of Unit:
14.0 Objectives
14.1 Introduction
14.2 Holder
14.3 Holder in Due Course
14.4 Crossing of a Cheque
14.5 Types of Crossing
14.6 Dishonor of a Cheque
14.7 Summary
14.8 Self Assessment Question
14.0 Objectives
 Understand the meaning of Holder and Holder in due course.
 Know the difference between Holder and Holder in due course.
 Classify the holder as ‘who is a holder’ and ‘who is not a holder’.
 Describe the crossing of cheques and types of crossing of a cheque;
 Point out various issues related to crossing of cheques.
 Learn how a cheque is called dishonor and what actions can be taken.
14.1 Introduction
Exchange of goods and services is the basis of every business activity. Goods are bought and sold for cash
as well as on credit. All these transactions require flow of cash either immediately or after a certain time. In
modern business, large number of transactions involving huge sums of money takes place every day. It is
quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, it is a
common practice for businessmen to make use of certain documents as means of making payment. Some of
these documents are called negotiable instruments. In this lesson let us learn about these documents and
parties involving in it with basic and essential terminologies viz. holder and holder in due course. In this
chapter an attempt is also made to describe the provision of law regarding crossing and dishonor of cheques
and also the rights and obligations of banks and drawers of the cheques.
14.2 Holder
According to Section 8, Holder is defined as:
“The holder’ of a promissory note, bill of exchange or cheque means any person entitled in his own
name to the possession thereof and to receive or recover the amount due thereon from the parties
thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person entitled at the time of such
loss or destruction.”
From the above definition it is clear that for being a holder a person must be entitled to –
a. The possession of the instrument in his own name; and
b. Receive or recover the amount due thereon from the parties liable thereto.
‘Possession’ of the instrument by the holders refers to ‘de factor’ control and not the actual possession. The
person must be named in the instrument either as a payee or as indorsee. Meaning of ‘de facto’ contract
becomes clear in the event of death of the actual holder. The legal heir of a deceased holder does not have
his name indorsed on the instrument but he becomes holder by operation of law.
Any person in wrongful possession of the instrument cannot be the holder. Therefore, the finder of a lost
instrument payable to bearer, or a person in wrongful possession of such instrument, is not a holder.
Further, the possession of the instrument and being named in it as the payee does not make a person a
‘holder’ thereof. He shall also be entitled to receive payment and to give a valid discharge. Thus, a beneficiary
cannot be termed as holder of the instrument and any payment by the drawer to the beneficiary cannot
discharge him from his liability. Bacha Prasad V. Janki Rai, 1957 BLJR 331 (FB).
Any person who is in possession of the instrument as payee will not be a holder within the meaning of
section 8 of the Act if he has been prohibited from receiving payment by an order of Court. The payee may
authorize his agent to receive payment and to give a valid discharge for the same but this does not make the
agent the holder of the instrument since he cannot bring an action for recovery of money in the instrument in
his own name.
14.2.1 Characteristics
Following are the main characteristics of a holder:
1. Entitled to Possession of an Instrument – A holder is a person who is entitled to the possession
of an instrument and that too in his own name. A person who has possession of an instrument but
cannot possess it is his own name cannot be called a holder. Thus, a holder mean a de jure (legally)
holder and not merely a de facto holder. A holder is always a owner at law.
2. Entitled to Receive or Recover the Amount – A holder is also entitled to receive or recover the
amount on the instrument from the parties thereto. If a person possessing an instrument has no right
to receive or recover the amount on it, cannot be called the holder.
3. Holder of Lost or Destroyed Instrument – In the case of lost or destroyed instrument, the law
presumes that the person (i) who was entitled in his own name to the possession of the instrument,
and (ii) who was entitled to receive or recover the amount due on the instrument from the parties
thereto at the time of such loss or destruction, is its holder.
14.2.2 Who Can be a Holder?
A person who possesses the above characteristics is a holder of a negotiable instrument. The following
persons are, therefore, usually the holders:
1. Payees – The payee is usually the original holder or de jure holder of an instrument. He remains
holder till he indorses the instrument.
2. Indorsee – The person to whom an instrument is indorsed becomes holder of in place of the
indorser. An order instrument, when indorsed and delivered, the indorsee becomes the holder.
However, if an indorsee is prohibited by a court order from receiving the amount due on the instrument,
is not a holder.
3. Bearer – In the case of bearer instrument, the person to whom the instrument is delivered becomes
the holder. It is so because a bearer instrument can be negotiated be mere delivery.
But every bearer of an instrument cannot become the holder. A thief or a finder of a bearer instrument
or a servant possessing a bearer instrument on behalf of his employer cannot become holder. However,
if a thief or finder of an instrument transfers it to another, the transferee becomes a holder of the
instrument provided he obtained it in good faith and for consideration
4. Legal Representative or Heir – a legal representative or heir of a deceased person can become
holder be operation of law even though he is not the payee or the bearer or the indorsee of the
instrument.
It may be noted that every person who can lawfully discharge an instrument can be deemed to be
the holder of the instrument. [Lala Ram v. Ram Swarup, AIR (1964) All 495]
14.2.3 Who is Not a Holder?
Sometimes, a person apparently seems to be holder but actually he is not a lawful holder of an instrument.
A few such persons are as follows:
1. Agent – An agent who possesses an instrument on behalf of his principal is not a holder. It is so
because he is not entitled in his own name to possession of the instrument and cannot sue on the
instrument in his own name.
2. Servant – A servant cannot be a holder for the above sated reasons.
3. Beneficial or Real Owner – A real or beneficial owner of an instrument is not a holder in the
ground that the actual holder is only a benamidar or name lender. He is not a de jure holder.
[Sarjoo Prasad v. Ramapyari, AIR (1950) Pat 493]
4. Thief or Finder – A thief or a finder of an instrument is not a holder because he does not derive the
title in lawful manner. Such a person is not entitled to the possession of the instrument in his own
name and claim to the amount of it.
5. Forged Indorsee – A person who acquires an instrument be forged indorsement, is not a holder.
Such a person is not entitled to possess the instrument lawfully and cannot claim the amount due on
it.
6. indorsee for Collection – An indorsee for collection of the instrument is not a holder as he does
not acquire any interest in the instrument. [Irinjalakuda Bank Ltd. V. Poruthussery Panchayat, (1970)
40 Comp Cases 767]
14.2.4 Rights of a Holder
The holder of a negotiable instrument is a very important party to the instrument as such. He has the
following rights:
(i) He is entitled in his own name to the possession of the instrument.
(ii) He can receive or recover the amount due on the instrument from the parties liable on it.
(iii) If necessary, he can sue the parties in order to recover the money due on the instrument.
(iv) He can validly discharge the instrument on payment of the instrument.
(v) He may indorse the instrument to any other person.
(vi) He is entitled to convert ‘indorsement in blank’ in to full indorsement.
14.3 Holder in Due Course
Section 9 of the Act defines ‘holder in due course’ as any person who
(i) for valuable consideration,
(ii) becomes the possessor of a negotiable instrument payable to bearer or the indorsee or payee
thereof,
(iii) before the amount mentioned in the document becomes payable, and
(iv) without having sufficient cause to believe that any defect existed in the title of the person from whom
he derives his title. (English law does not regard payee as a holder in due course).
Thus the essential qualification of a holder in due course may, therefore, be summed up as follows:
1. He must be a holder for valuable consideration. Consideration must not be void or illegal, e.g. a
debt due on a wagering agreement. It may, however, be inadequate. A donee, who acquired title to
the instrument by way of gift, is not a holder in due course, since there is no consideration to the
contract. He cannot maintain any action against the debtor on the instrument. Similarly, money due
on a promissory note executed in consideration of the balance of the security deposit for the lease
of a house taken for immoral purposes cannot be recovered by a suit.
2. He must have become a holder (possessor) before the date of maturity of the negotiable instrument.
Therefore, a person who takes a bill or promissory note on the day on which it becomes payable
cannot claim rights of a holder in due course because he takes it after it becomes payable, as the bill
or note can be discharged at any time on that day.
3. He must have become holder of the negotiable instrument in good faith. Good faith implies that he
should not have accepted the negotiable instrument after knowing about any defect in the title to the
instrument. But, notice of defect in the title received subsequent to the acquisition of the title will not
affect the rights of a holder in due course.
Besides good faith, the Indian Law also requires reasonable care on the part of the holder before he
acquires title of the negotiable instrument.
He should take the instrument without any negligence on his part. Reasonable care and due caution
will be the proper test of his bona fides. It will not be enough to show that the holder acquired the
instrument honestly, if in fact, he was negligent or careless. Under conditions of sufficient indications
showing the existence of a defect in the title of the transferor, the holder will not become a holder in
due course even though he might have taken the instrument without any suspicion or knowledge.
Example:
(i) A bill made out by pasting together pieces of a tom bill taken without enquiry will not make the
holder, a holder in due course. It was sufficient to show the intention to cancel the bill. A bill should
not be taken without enquiry if suspicion has been aroused.
(ii) A post-dated cheque is not irregular. It will not preclude a bona fide purchase instrument from
claiming the rights of a holder in due course. It is to be noted that it is the notice of the defect in the
title of his immediate transferor which deprives a person from claiming the right of a holder in due
course. Notice of defect in the title of any prior party does not affect the title of the holder.
4. A holder in due course must take the negotiable instrument complete and regular on the face of it.
14.3.1 Holders not Holders in Due Course
Following persons/holders cannot be said to be the holders in due course:
1. The holder who has obtained the instrument by way of gift.
2. The holder who has obtained the instrument after its maturity.
3. The holder who has obtained the instrument for an unlawful consideration.
4. The holder who has obtained the instrument by illegal methods i.e. by stealing or defrauding.
5. The holder who has found the lost instrument, i.e. finder of the lost instrument.
6. The holder who has obtained the instrument without good faith or bona fide. In other words, who
obtains an instrument having notice of any defect in the title of the person from whom he delivered
his titled.
7. The holder who is not entitled in his own name to the possession of the instrument.
8. The holder who is not either the payee or the indorser if the instrument is payable to order.
9. The holder who has incomplete or irregular instrument.
10. The holder who is having forged instrument
14.3.2. Privileges of a Holder in Due Course
1. Instrument Purged of All Defects: A holder in due course who gets the instrument in good faith
in the course of its currency is not only himself protected against all defects of title of the person
from whom he has received it, but also serves, as a channel to protect all subsequent holders. A
holder in due course can recover the amount of the instrument from all previous parties although, as
a matter of fact, no consideration was paid by some of the previous parties to instrument or there
was a defect of title in the party from whom he took it. Once an instrument passes through the hands
of a holder in due course, it is purged of all defects. It is like a current coin. Who-so-ever takes it
can recover the amount from all parties previous to such holder (Sec. 53).
It is to be noted that a holder in due course can purify a defective title but cannot create any title
unless the instrument happens to be a bearer one.
Examples:
(i) A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a holder in due
course. The instrument is purged of its defects and C gets a good title to it. In case C indorses it to
some other person he will also get a good title to it except when he is also a party to the fraud played
by A.
(ii) A bill is payable to “A or order”. It is stolen from A and the thief forges A’s signatures and
indorses it to B who takes it as a holder in due course. B cannot recover the money. It is not a case
of defective title but a case where title is absolutely absent. The thief does not get any title therefore,
cannot transfer any title to it.
(iii) A bill of exchange payable to bearer is stolen. The thief delivers it to B, a holder in due course.
B can recover the money of the bill.
2. Rights Not Affected in Case of an Inchoate Instrument: Right of a holder in due course to
recover money is not at all affected even though the instrument was originally an inchoate stamped
instrument and the transferor completed the instrument for a sum greater than what was intended by
the maker. (Sec. 20)
3. All Prior Parties Liable: All prior parties to the instrument (the maker or drawer, acceptor and
intervening indorers) continue to remain liable to the holder in due course until the instrument is duty
satisfied. The holder in due course can file a suit against the parties liable to pay, in his own name
(Sec. 36)
4. Can Enforce Payment of a Fictitious Bill: Where both drawer and payee of a bill are fictitious
persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the
signature of the supposed drawer and the first indorser are in the same hand, for the bill being
payable to the drawer’s order the fictitious drawer must indorse the bill before he can negotiate it.
(Sec. 42).
5. No Effect of Conditional Delivery: Where negotiable instrument is delivered conditionally or for
a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively
presumed and he acquired good title to it. (Sec. 46).
Example: A, the holder of a bill indorses it “B or order” for the express purpose that B may get it
discounted. B does not do so and negotiates it to C, a holder in due course. D acquires a good title
to the bill and can sue all the parties on it.
6. No Effect of Absence of Consideration or Presence of An Unlawful Consideration: The
plea of absence of or unlawful consideration is not available against the holder in due course. The
party responsible will have to make payment (Sec. 58).
7. Estoppel Against Denying Original Validity of Instrument: The plea of original invalidity of
the instrument cannot be put forth, against the holder in due course by the drawer of a bill of
exchange or cheque or by an acceptor for the honour of the drawer. But where the instrument is
void on the face of it e.g. promissory note made payable to “bearer”, even the holder in due course
cannot recover the money.
Similarly, a minor cannot be prevented from taking the defence of minority. Also, there is no liability
if the signatures are forged. (Sec. 120).
8. Estoppel Against Denying Capacity of the Payee to Indorsee: No maker of promissory note
and no acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due
course, be permitted to resist the claim of the holder in due course on the plea that the payee had
not the capacity to indorse the instrument on the date of the note as he was a minor or insane or that
he had no legal existence (Sec 121)
9. Estoppel Against Indorser to Deny Capacity of Parties: An indorser of the bill by his indorsement
guarantees that all previous indorsements are genuine and that all prior parties had capacity to enter
into valid contracts. Therefore, he on a suit thereon by the subsequent holder, cannot deny the
signature or capacity to contract of any prior party to the instrument.
14.3.3 Distinction Between Holder and Holder in Due course
Though the holder in due course is a special type of holder, who occupies a privileged position. But he
can be distinguished from a mere holder of an instrument in the following ways:
Table – 1
Difference between holder and holder in due course
Base Holder Holder in Due Course

Meaning A holder is a person who is Holder in due course is a holder who
entitled to possess an instrument in gets an instrument before maturity, in
his own name and recover the good faith and for valuable
payment from the party liable to consideration
pay
Consideration For a holder it is not necessary that Holder in due course consideration
he must have given consideration must have been given by him for
for the instrument. acquiring an instrument
Maturity A holder may acquire an Holder in due course must get an
instrument even after the date of instrument before the date of maturity
maturity
Title A holder of an instrument will get The holder in due course gets title
same title as the transferor had better than that of transferor
Liability of For a holder it is only a drawer, But for holders in due course all
parties to pay drawee and transferor who are parties prior to him are liable to pay
liable to pay until the instrument is duty discharged
Privileged A holder does not enjoy special While as, the position of a holder in
position position or right due course is privileged and he gets
special rights
Fictitious A holder cannot recover the A holder in due course can recover the
amount on a fictitious instrument amount on a fictitious instrument
provided he proves that the signature
of the drawer and the first indorsee are
in the same handwriting
Unlawful A holder cannot enforce his rights A holder in due course can enforce his
means or against the instrument obtaining rights against the person who obtained
consideration by unlawful means or for unlawful the instrument by unlawful means or
consideration for unlawful consideration
Original A holder cannot enforce his rights A holder in due course can claim on an
validity of the on the instrument if original instrument even if original validity of
instrument validity of the instrument is denied the instrument in denied
Payee’s A holder cannot claim on an A holder in due course can claim rights
capacity to instrument if payee’s capacity to against the instrument even if payee’s
indorse indorse is denied capacity to indorse is denied
Signature or A holder cannot enforce his right A holder in due course can enforce his
capacity of of the signature or capacity to rights even if the signature or capacity
prior parties contract of any prior to the of contract of any prior party to the
instrument is denied instrument is denied
14.4 Crossing of a Cheque
A cheque may be an open cheque or a crossed cheque. An open cheque is one that can be paid by the
paying banker across the counter while crossed cheque cannot be paid across the counter.
Crossing of cheques is a universally adopted practice. It is a direction to the paying banker that the payment
shall not be made across the counter. The payment on a crossed cheque can be collected only through a
banker.
Cheques are usually crossed as a measure of safety. Crossing is made by drawing two parallel traverse lines
across the face of the cheque with or without the addition of certain words. The usage of crossing distinguishes
cheques from other bills of exchange.
In this regard section 123 of the Negotiable Instruments Act states:
“Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation
thereof, between two traverse lines, or of two parallel traverse lines simply, either with or without
the words ‘not negotiatble’ that addition shall be deemed a crossing, and the cheque shall be deemed
to be crossed generally”.
14.4.1 Who May Cross the Cheque?
Crossing of a cheque is an instance of an alteration which is authorized by the Act. Thus, the following
parties may cross a cheque :
1. Drawer: The drawer of the cheque may cross the cheque generally or specially.
2. Holder: Where the drawer does not cross the cheque, the holder may cross it generally or specially.
Even if the cheque is already crossed the holder may add the words ‘not negotiable’.
3. Banker: Where a cheque crossed specially the collecting banker may again cross it especially to
another banker as its agent for collection. This is the only case where the Act allows a second
special crossing by a banker and for the purpose of collection
14.5 Types of Crossing

Crossing may be either (1) general or (2) special.
1. General crossing, and
2. Special crossing.
These basic kinds of crossing may take several forms. Some of them are:
3. Account payee crossing or Restrictive crossing.
4. Not negotiable crossing.
1. General Crossing: Section 123 of the Act refers to general crossing. Where a cheque bears
across its face two traverse lines with or without the words “and Company” or any abbreviation
thereof or the words ‘not negotiable, the cheque is said to have been crossed generally.
“Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise
than to the banker” (Section 126). The payee may get the cheque collected through a bank of his
choice.
Crossing by parallel transverse lines Crossing by adding the words ‘and
company’
Crossing by adding the words ‘Not Crossing by any combination of the

Negotiable’ above
Figure 14.1 Specimens of General Crossing

Effect of General Crossing
i. The cheque is not payable to the counter of the bank
ii. The drawee bank shall pay the amount of the cheque only to a banker. Therefore, the holder will
have t deposit the cheque in an account with any banker. [Sec. 126, para 1]
2. Special crossing: Special crossing implies the specifications of the name of the banker on the face
of the cheque. The object of special crossing is to direct the drawee banker to pay the cheque only
if it is presented through the particular bank mentioned.
In the case of special crossing the addition of two parallel transverse lines is not essential though
generally the name of the bank to which the cheque is crossed specially is written between the two
parallel transverse lines (Section 124).
Section 126 of the Act provides that –
”Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than
to the banker to whom it is crossed, or his agent for collection.”
”Where a cheque is crossed specially to more than one banker, except when crossed to an agent for
the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.”
Specimens of Special Crossing
Sp eci a l cro ssi ng w ith p a ra lle l tra nsv er se S p ecia l c ro ss in g wi th w or ds ‘no t
lin es n eg o tia b le ’
Sp eci a l cr o ss in g wi th w o rd s ‘a n d S p ecia l cr o ss in g w ith w o rd s ‘a n d co m p a ny

co m pa n y ’ a n d n o t n eg o tia b le’
Figure 14.2 Specimens of Special Crossing

Effects of Special Crossing - In the case of a cheque especially crossed, the payment can be obtain only
through the particular banker whose name appears across the face of the cheque or his agent for collection.
3. “Account Payee” Crossing or Restrictive Crossing
This type of crossing acts as a warning to the collecting bankers that the proceeds are to be credited into the
account of the payee.
These words are a mere direction to the receiving or collecting banker. These do not affect the paying
banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the
person names as the payee.
It has been held that crossing cheque with the words “Account Payee” and mentioning a bank is not a
restrictive indorsement so as to invalidate further negotiation of the cheque by the indorsee.
It has been decided by the courts that an “account payee” crossing is a direction to the collecting banker as
to how the proceeds are to be applied after receipt. The banker can disregard the direction only at his own
risk and responsibility.
Specimens of Restrictive Crossing
Restrictive crossing of a cheque crossed Restrictive crossing of a cheque crossed
generally specially
Fig. 14.3 Specimens of Restrictive Crossing

4. Cheque Marked “Not Negotiable”
The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque
takes the instrument free from any defect which might be existing in the title of the transferor. If the holder
takes the instrument in good faith, before maturity and for valuable consideration, his claim is not defeated
or affected by the defective title of the transferor. In case of any dispute, it is the transferor with the defective
title who is liable.
Addition of the words “not negotiable” to the crossing of a cheque, makes the position different. The
principle of ‘nemo date quod non habet – (nobody can pass on a title better than what he himself has) will
be applicable to a cheque with a “not negotiable” crossing.
Section 130 of the Negotiable Instruments Act provides that –
“A person taking a cheque crossed generally or specially bearing in either case the words ‘not
negotiable’ shall not have or shall not be able to give a better title to the cheque than the title of
person from whom he took had.”
The effect of such a crossing is that the title of the transferee would be vitiated by the defect in the title of the
transferor. The transferee of such a crossed cheque cannot get a better title than the transferor himself. The
transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in
good faith for value.
14.5.1 Bankers Liability on Payment of Crossed Cheque in Due Course
In respect of a crossed cheque it is presumed that the banker, on whom it is drawn, has made payment to
the true owner of the cheque, though in fact, the amount of the cheque may not reach the true owner. In
other words, the banker making payment in due course is protected, whether the money is or is not, in fact,
received by the true owner of the cheque (Section 128).
14.5.2 Bankers Liability on Wrong Payment of a Crossed Cheque
Section 126 of the Act states that:
a) in the case of generally crossed cheque the banker shall not pay it otherwise than to a banker, and
b) in the case of a specially crossed cheque it shall not be paid by the banker otherwise than to the
banker to whom it is crossed or to his agent for collection.
Where the drawee banker pays a crossed cheque otherwise than in accordance with the provisions
of Section 126 it shall be liable to the true owner of the cheque for any loss he may have sustained
(section 129)
14.5.3 Protection of Banker in Respect of Uncrossed Cheques
Section 85(2) reads:
When a banker makes payment on an uncrossed cheque in due course he is authorized to debit the
account of his customer with the amount so paid irrespective of the genuineness of the Indorsement
thereon.
For example, a cheque is drawn payable to N or order and it is stolen. Thereafter, the thief or someone else
forges N’s indorsement and presents the cheque to the bank for encashment. On paying the cheque, the
banker would be able to debit the drawer’s account with the amount of the cheque.
The original character of the cheque issued as bearer, is not altered by subsequent indorsements , so far as
the paying bank is concerned, provided that the payment is made in due course. Hence the proposition that
“once a bearer instrument always a bearer instrument”.
Protection in Respect of Crossed Cheques: When a banker pays a cheque drawn by his customer in
accordance with section 126 of the Act he can debit the drawer’s account with the amount paid, even
though the amount of the cheque does not reach the true owner.
14.5.4 Prerequisites for Caiming Protection
The protection in both the cases referred above can be availed of only if the payment has been made in due
course i.e.
a) According to the apparent tenor of the instrument,
b) In good faith and without negligence.
c) To any person in possession thereof,
d) In circumstances that do not incite any suspicion that he is not entitled to receive payment of the
cheque.
Liability of Drawee of Cheque
Section 31 of the Act states that:
The drawee bank is under a duty to pay the cheque, provided he has in his hands sufficient funds of the
drawer and the funds are properly applicable to such payment. If the banker refuses payment without
sufficient cause being shown, he must compensate the drawer, not the holder, for any loss caused by such
improper refusal (Section 31).
The banker must pay the cheque only when he is duly required to do so e.g. if there is an agreement
between the drawer and the banker that the former shall not draw more than one cheque every week, the
banker is not bound to pay the second cheque.
The amount of compensation that the drawee would have to pay to the drawer is to be measured by the loss
or damage say loss of credit, suffered by the drawer. The principle is : “The lesser the value of the cheque
dishonoured, the greater the damage to the credit of the drawer”.
14.5.5 When Banker Shall Refuse the Payment?
a) A banker will be justified or bound to dishonour a cheque in the following cases, viz;
b) The cheque is undated.
c) The cheque is stale i.e. it has not been presented within the validity period of the cheque.
d) The instrument is inchoate (unclear or unformed or tentative) or not free from reasonable doubt.
e) The cheque is post-dated and presented for payment before its ostensible date.
f) The customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque
drawn by the former.
g) The customer has credit with one branch of a bank and he draws a cheque upon another branch of
the same bank in which either he has account or his account is overdrawn.
h) A garnishee or other legal order from the Court attaching or otherwise dealing with the money in the
hand of the banker, is served on the banker.
i) Authority of the banker to honour a cheque of his customer is determined by the notice of the
drawer’s death, lunacy and insolvency. However, any payment made prior to the receipt of the
notice of death is valid.
j) Notice in respect of closure of the account is served by either party on the other.
k) The cheque contains material alterations, irregular signature of irregular indorsement.
l) The customer has countermanded payment.
m) Any ambiguity in the material part of the cheque including the defects resulting from the crossing of
the cheque.
n) Any difference between the amount of cheque in words and in figures.
o) Any irregular indorsements.
p) The cheque is mutilated.
q) Signature of the drawer has been forged.
14.5.6 Liability of Payee’s Banker
”A banker who has in good faith and without negligence received payment for a customer of a
cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves
defective, incur any liability to the true owner of the cheque by reason only of having received such
payment.”
Section 131 of the Act confers a special protection on the collecting banker which is available to him
subject to fulfillment of certain conditions. If the following conditions do not co-exist, this protection would
be denied to the collecting banker :
a) The Collecting Banker Should Have Acted in Good Faith and Without Negligence: In
Lloyds Savouy Co. (1933) A.C. 201, the court held that if the banker receives payment of a
cheque to which the customer has no title, the onus is on him to disprove negligence. What amounts
to negligence is, however a question of fact in each case. “Negligence” means want of “reasonable
care” with reference to the interest of the true owner. The test of “negligence” is whether the transaction
of paying in any given cheque coupled with the circumstances antecedent and present was so
flagrantly out of the ordinary course that it ought to have aroused suspicion in the mind of the banker
and caused him to make enquiry (Bopulal Prem Chand v. The Nath Bank Ltd. 48 Bom. L.R.393).
b) That the Collecting Banker Acts Only to Receive Payment of the Crossed Cheque for a
Customer : To make a person a customer of a bank it is essential that there must be some sort of
account, either a deposit or a current account or some similar relationship. Protection under section
131 is available only when the banker is acting as an agent for collection but not to a case where the
banker is himself the holder.
c) That Crossing Had Been Made Before the Cheque Fell Into the Hands of the Collecting
Banker : Section 131 does not provide an absolute immunity to the collecting banker and unless
the banker brings himself within the conditions stipulated under this section, he is left to his common
law for conversion. The onus of proving that he had taken all reasonable steps to ensure compliance
with the requirements of this section lies on the banker.
It shall be the duty of the banker who receives payment based on an electronic image of a truncated
cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any
fraud, forgery or tampering apparent on the face of the instrument that can be verified with due
diligence and ordinary care.
14.6 Dishonor of a Cheque

14.6.2 Meaning of Dishonor
Section 92 of the Act reads as under –
”A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the
maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being
duly required to pay the same.”
If on presentation the banker does not pay then dishonor takes place and the holder acquired at once the
right of recourse against the drawer and the other parties on the cheque.
Effects of Dishonor
The important point to be noted in connection with the dishonor of a cheque is that its negotiability is lost.
14.6.2 Types of Dishonor
Dishonor of cheque can be divided into two categories i.e.
a) Rightful Dishonor: Dishonor of cheque by the drawee banker for any of the reasons specified
above or for any other rightful reason. In this case there is no remedy available against the banker
but the holder in due course has remedy both civil and criminal against the drawer.
b) Wrongful Dishonor: Dishonor of cheque by the banker due to negligence or carelessness by its
employees. The drawer may bring an action against the bank for losses suffered by him. The payee
has no action against the banker in this case.
Dishonor of Cheque is an Offence
Section 138 of the Negotiable Instruments Act states that the return of a cheque by a banker because the
money standing to the credit of the accountholder is insufficient to honor the cheque or that it exceeds the
amount arranged to be paid from the account by an agreement made with the bank, is a criminal offence.
The drawer shall be deemed to have committed an offence and such offence will be punishable with
imprisonment for a term up to two years imprisonment or with a fine twice the amount of the cheque or
both.
Provisions of section 138 of the Act are applicable only if –
a) The cheque in question has been issued in discharge of a liability only. Unless contrary is proved, as
per the provisions of section 139, a cheque is presumed to have been received by the holder in
discharge of a debt or liability. A cheque given as gift will not fall in this category.
b) The cheque is presented to the bank for payment within six months or its specific validity period,
whichever is earlier.
c) The payee or holder in due course has given notice demanding payment within thirty days of the
receiving information of dishonor which should be for a reason other than insufficiency of funds.
d) The drawer does not make payment within 15 days of the receipt of the notice. The complaint can
be made only by the payee/holder in due course, within one month.
Offences by Companies
If the person committing an offence under section 138 is a company, every person who was in charge of the
affairs of the company and was responsible for the business of the company at the time offence was committed
shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly. (Section 139) However, a person shall not be punishable under section 139 if it is proved that
the offence has been committed without his knowledge or consent and that he had taken all due care to
prevent commission of the offence.
14.6.3 Action to Be Taken
If a cheque is dishonored for lack of funds, the drawer can be punished with imprisonment upto one year
and/ or within a fine up to double the amount of the cheque if:
 The cheque has been presented to the bank within a year from the date on which it was drawn or
within its validity.
 The payee or holder makes a demand for payment by giving notice in writing to the drawer within
thirty days of the receipt of the information.
 The drawer of the cheque fails to make payment within fifteen days of receipt of the notice.
14.7 Summary
The holder’ of a promissory note, bill of exchange or cheque means any person entitled in his own name to
the possession thereof and to receive or recover the amount due thereon from the parties thereto. While
Agent, Servant, Beneficial or Real Owner, Thief, Finder, Forged Indorsee, and Indorsee for Collection
cannot be holder. On the other side ‘holder in due course’ as any person who becomes the possessor of a
negotiable instrument payable to bearer or the indorsee or payee thereof, before the amount mentioned in
the document becomes payable, and without having sufficient cause to believe that any defect existed in the
title of the person from whom he derives his title. A cheque may be an open cheque or a crossed cheque. An
open cheque is one that can be paid by the paying banker across the counter while crossed cheque cannot
be paid across the counter. Crossing of cheques is a universally adopted practice. It is a direction to the
paying banker that the payment shall not be made across the counter. Crossing may be general, special,
account payee crossing or restrictive crossing, and not negotiable crossing. A promissory note, billof exchange
or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or
drawee of the cheque makes default in payment upon being duly required to pay the same.
14.8 Self Assessment Question

1. Define the term ‘holder’ and ‘holder in due course’. Distinguish between ‘holder’ and ‘holder in
due course’.
2. “Once a negotiable instrument passes through the hands of a holder in due course it is purged or
cleansed of all its defects.” Comment and enumerate the privileges of a ‘holder in due course’.
3. Write a short note on crossed cheque.
4. Explain clearly the meaning of ‘general’ and ‘special’ crossing of a cheque with suitable examples.
5. Explain the effect of (i) Not negotiable crossing (ii) Account payee only crossing.
6. Who can cross a cheque after issue?
7. What do you mean by dishonor of a cheque?
8. State the circumstances in which a bank would be justifies in dishonoring of a cheque.

- Avtar Singh: Law of Contract; Eastern Book Co., Lucknow.
- Bhashyam and Adiga: Negotiable Instruments Act, Madras Law Journal, Madras.
- Gopal Swaroop: Laws and Practices Related to Banking Sultan Chand and Sons, New
Delhi, Second Rev. Edition, 2003.
- Jhabvala, N.H., Negotiable Instruments Act, 1881, C. Jamnadass and Co. Bombay.
- K.P.M. Sundharam and P.N. Varshney: Banking Theory, Law and Practice, Sultan Chand and
Sons, New Delhi.
- M.C. Kuchhal: Mercantile Law, Vikas Publishing House Pvt. Ltd., New Delhi, 1978.
- S S Gulshan (2007); ‘Mercantile Law’; Excel Books, New Delhi
- R L Nolakha (2009); ‘Business Law’; Ramesh Book Depot, Jaipur
- K R Bulchandani (2009); ‘Business Law for Management’ Himalaya Publishing House Pvt.
Ltd
- S S Gulshan (2006); ‘Business Law’; Excel Books, New Delhi
- S B Mathur (2010); ‘Business Law’; Tata Mcgraw Hill, New Delhi
- D C Boss (2008); ‘Business Law’; PHI Learning Pvt Ltd., New Delhi
Unit - 15 : Introduction to the Companies Act
Structure of Unit:
15.0 Objectives
15.1 Introduction
15.2 Brief History Till Independence
15.3 The Companies Act, 1956
15.3.1 Amendments to the Companies Act, 1956
15.3.2 Extent of the Act
15.3.3 Application of the Act
15.4 Meaning and Nature of Company
15.5 Lifting or Piercing of Corporate Veil
15.6 Meaning Of Promotion
15.7 Who Are Promoters
15.7.1 Functions of Promoters
15.7.2 Rights of Promoters
15.7.3 Liabilities of Promoters
15.7.4 Duties of Promoters
15.8 Summary
15.0 Objectives
 Able to understand the history of Companies Act till Independence;
 Point out the various Amendments of Companies Act;
 Know about the extent and Application of Company law;
 Understand the meaning and nature of Company;
 Able to know all the situations under which the corporate veil of a Company may be lifted;
 Understand the meaning of promotion;
 Know about promoters and their duties, liabilities and functions of promoters.
15.1 Introduction
As a result of growth of business and industrilization, proprietorship and partnership firms are Gradually
developing as company which is today’s requirement proprietorship firms of organization could not always
fulfil the ever increasing requirement of the business. This firm of business organization is being created for
globalisation of business, mass production and delivering vast opportunities of employment, standerd and
quality of life to the people world-over. Company law is the law relating to the various affairs of companies
that is registration and winding-up of the companies. It elobrately discloses how The Companies Act, 1956
has been amended several times to protect Investors, to protect the legal rights of shareholders, to ensure
honesty in company management etc. The companies are created, functioning companies, rights and duties
of shareholders and directors, companies meetings and their proceddings, punishment for offences, remedies
against oppression and mis- management of the companies etc.
15.2 Brief History Till Independence
The first company legislation was passed in India in 1850 on the models of British Company Act of 1844.
At that time most of the laws in India were passed on the models of British law and the decisions were taken
as precedents by the Indian courts. This Act of 1850 did not confer the privilege of limited liability of
members. Which last was introduced by the Act of 1857. This benefit, however was not entered to banking
and insurance companies. In 1860 the privilege of limited liability was extended to banking companies
although subject to certain conditions. Thus after this Act all the companies were allowed to be registered
with the provisions of limited liability. Then after, the companies Act 1866 was passed. It incorporated and
regulated all the previous companies Act. It was based on the British Companies Act 1862. There after it
was replaced by the act of 1882. The Act remained in force till 1913. During the period of 1882-1913 the
following amendments were paased in India:
 Companies (Amendment) Act, 1887
 Companies (Memorandum of Association) Act, 1895
 Companies (Branch Register) Act, 1900
 Companies (Amendment) Act, 1910
The Companies Act, 1913 based on the English companies (Consolidation) Act, 1908 with certain additional
provisions to satisfy, the peculiar business conditions in this country. The Indian companies act 1913 remained
in force till 43 years i.e. from 1913 to 1956. However the act of 1913 was found to be deficient on many
courts. Therefore some amendments were made in 1914, 1915, 1920, 1926, 1930 and 1932.
In order to remove the deficiencies and to control the evils of the managing agency system, the Indian
Companies Act was passed in 1936 and it became operative from 15 January, 1937. The amendments
made in 1936 were extensive and contained the provisions for regulating managing agency system in Indian
companies.
15.3 The Companies Act, 1956

The Companies Act, 1956 come into force with effect from 1st April, 1956. It is based on the recommendations
of the Bhabha committee which submitted its report in 1952 recommending wholesaler amendments in the
Indian Companies Act, 1913. The Company Act, 1956 consist of 658 sections and 15 schedules.The
Companies Act, 1956 has been amended several times since its enactment. The Companies Act, 1956 also
helps the growth of companies on health business principles.
Objectives of The Companies Act, 1956
The main objectives of Companies Act are as follows:
 To protect the legal rights of shareholders and creditors.
 To recognize the effectiveness of Company Act.
 To publish full and fair disclosure of companies affairs in their annual reports.
 To establish minimum standerds of good behaviour and business honesty in company formation.
 To recognize the rights of shareholders to get correct information.
 To empower the manager and workers to discharge their duties and fulfil their liabilities.
 To empower the government to interfare and regulate the work of the company.
15.3.1 Amendments to the Companies Act, 1956
1. The First Amendment Has Been Made In 1960 - This amendment impose some restrictions on
management of companies, managerial remunerations of private companies.
2. The Second Amendment Has Been Made in 1962 - This amendment relates to the contribution
by the second of directors to national defence fund or any other fund approval by the central
government.
3. The Third Amendment Has Been Made In 1963 - Through this amendment a companies tribunal
was established. The amendment was carried out for the purpose of more practical and effective
control by way of tracking the cases of found.
4. The Fourth Amendment Has Been Made In 1964 - This act introduce protection to employees
during the period of investigation by an inspector.
5. The Fifth Amendment Has Been Made In 1965 - This amendment provided strength to the
provisions regarding to investigate the affairs of companies.
6. The Sixth Amendment Has Been Made In 1966 - The purpose of this amendment was to
introduce in respect of production of documents under section 240 and loans to companies under
some management under section 370.
7. The Seventh Amendment Has Been Made in 1967 - Through this amendment the companies
tribunal was abolished. The powers of companies tribunal were transferred back to the central
government.
8. The Next Amendment Made in 1969 - This amendment restricted to donate any money to
political parties.
9. Thereafter Amendments Made in 1971, 1972, 1977 and 1988 - The amendment of 1988 was
based on the recommendations of sachar committee.
10. The Companies (Amendment) Act, 2000 - Every private company existing on the commencement
of the companies (Amendment) Act, 2000, with a paid-up capital of less than one lakh rupees, shall
with in a period of two years from such commencement, enchance its paid up capital to one lakh
rupees. Every public company existing on the commencement of the companies (Amendment) Act,
2000, with a paid up capital of less, than five lakh rupees, shall with in a period of two years from
such commencement, enchance its paid up capital to five lakh rupees.
Activity A:
1. Write the objectives of companies Act, 1956.
15.3.2 Extent of the Act
The Companies Act 1956 extends the whole of India from 1 April, 1956 [sec. 1(3)]. But certain exceptions
are as follows:
1. In the case of companies in Nagaland, this Act shall be applicable with those amendments as may
be notified by the Central Government in official Gazette from time to time [sec. 1(36)].
2. In the case of companies in centrally ruled Goa, Daman and Due, the Central Government may
issue directions through official notification that certain provisions of this Act shall not be applicable
to those companies for a period notified or applicable with those amendments or changes or
modifications notified in the Official Gazette [sec 620(B)].
3. In the case of companies in the State of Jammu and Kashmir, the Central Government may issue
directions through official notification that provisions of this Act shall not be applicable to those
companies situated in the State for a period notified or applicable with those amendments,
modifications or changes, as the case may be, notified in the Official Gazette.
4. In the case of companies in Sikkim, the Registration of Companies (Sikkim) Act, 1961 is applicable.
15.3.4 Application of the Act
This Act applies to the whole of India. In Jammu & Kashmir it applies only to the extent to which its
provisions relate to incorporation, regulation and winding up of the insurance, banking and financial
corporations.
The Act applies to the following companies -
1. Companies formed or registered under the Act;
2. Every existing company (section 561);
3. Every company registered but not formed under any previous companies law to the extent and in
the manner declared in Part IX of the Act (section 562);
4. Unlimited companies registered as limited companies in pursuance of any previous companies law;
5. Unregistered companies for the purpose of winding up under Part X of the Act;
6. Foreign companies which comply with the provisions of section 592 of the Act;
7. Insurance companies, except in so far as the provisions of the Act are inconsistent with the provisions
of the Insurance Act, 1938 (IV of 1938);
8. Banking companies except in so far as the provisions of the Act are inconsistent with those of the
Banking Companies Act, 1949 (X of 1949);
9. Companies engaged in the generation of supply of electricity, except in so far as the provisions of
the Act are inconsistent with those of the Indian Electricity Act, 1910, or the Electricity Supply Act,
1948 (LIV of 1948);
10. Any other company governed by any special Act for the time being in force, except in so far as the
provisions of the Act are inconsistent with those contained in such special Act;
11. Such body corporate incorporated by any Act for the time being in force, as the Central Government
may, by notification in the Official Gazette, specify in this behalf subject to such exceptions,
modifications or adaptations as may be specified therein.
12. Government companies in which not less then 51percent of the paid-up share capital is held by the
Central Government or by any State Government and party by one or more State Government and
subsidiaries of such companies (section 617), subject to such exceptions, modifications and
adaptations of the provisions of the Act (other then ss. 618, 619 and 619A) as may be specified by
the Central Government in a notification published in the Official Gazette [section 620 (1) (b)]; and
13. Nidhis or Mutual Benefit Societies declared as such by the Central Government by notification in
the Official Gazette, subject to such exceptions, modifications and adaptations as may be specified
in the notification [section 620A (2) (b)].
15.4 Meaning and Nature of Company

Company means an organization of certain number of persons formed for any common purpose like business,
charity etc. Any association recognize as company only it is registered under the Companies Act. In other
works we can say that company is an artificial person and it is created by law.
Defination of Company - The definition of a “Company” may be classified into three groups-
a. Definitions as Given in the Companies Act According to The Companies Act 1956 section
3(1)(i) - “Company means a company formed and registered under this act or an existing company
formed under any previous Indian company laws.”
b. Judicial Definitions According to Chief Justice Marshall - “A corporation is an artificial being
invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses
only the properties which the charter of its creation confers upon it, either expressly or as incidental
to its very existence.”
According to Lord Justice Lindley - “A company is an association of many persons who
contributed money or money’s worth to a common stock and employed in some trade or business
and who share the profits and loss arising therefrom. The common stock so contributed is denoted
in money and is the capital of the company. The persons who contribute it, or to whom it belongs,
are members. The proportion of capital to which each member is entitled is his share. The shares
are always transferable although the right to transfer is after more or less restricted.”
According to Justice James - “A company is an association of persons united for common
object.”
c. Author’s definitions According to Prof. Haney - “ A company is an artificial person created by
law, having a separate entity with perpetual succession and a common seal.”
According to Dr. William R. Spriegal - “The corporation is a creature of the state and possesses
an entity separate and distinct from the persons owing its stock or securities.”
Conclusion – A Company, thus, may be defined as an incorporated association, which is an artificial
person, having an independent legal entity, with a perpetual succession, a common seal, a common
capital comprised of transferable shares and carrying limited liability.
Nature and Characteristics of the Company
The characteristics of company are as follows-
1. Incorporated Association - The company is a voluntary association of persons (two or more
persons in case of private company, seven or more persons in case of public company) registered
under the companies act. The registration is compulsory and cannot be optional. If an association is
not registered then it is deemed to be an illegal association and the liability of the members of such
an association is unlimited.
2. Artificial Legal P erson - A company is an artificial person and created by law. On the other hand,
we can say it is not a natural person. It does not exist like a living person but it exist in the eye of law.
The company may acquire, and dispose of property. A company can make a contract through its
agents. Because of all these points a company is called an artificial person. But is not a natural
person because it cannot be sent to jail, can’t marry or divorce.
3. Limited Liability - The liability of the members of a registered company is limited but if the company
is not registered the liability of the members is unlimited. It is the most important advantage of a
company that the liability of its members is limited.
a. In Case of Company Limited by Shares - In this type of company the liability of a member is
limited to the nominal value of shares held by him.
Illustration - Ram a shareholder of a company limited by shares. Ram buys 50 shares of Rs. 10
each. The pays Rs. 7 on each share. (Rs. 350 paid by Ram). Now the remaining amount is Rs. 150.
He can be made to pay remaining Rs. 150. But he cannot be made to pay more than Rs. 500 in all.
It is because the liability of Ram is limited to the nominal value of shares held by him.
b. In Case of a Company Limited by Guarantee - In this type of company the liability of a
member is limited to the extent of the amount guaranteed by him.
Illustration - Sheela is a member of a company limited by guarantee. She has guaranteed to
contribute Rs. 2000. The company, in the event of its being wound up deemed contribution from
Sheela manimum to the extent of the amount guaranteed by her (Rs. 2000).
4. Separate Legal Entity - It means the company has a separate legal entity distinct from and
independents of the individual persons who are for the time, being its members. The company is not
liable for the individual debt of its members. The principle of separate legal entity was recognized in
the famous case of Salomon VS Salomon Company Limited. In this case Mr. Salomon carried a
business as a leather merchant for many years. Later on in the year 1892. He decided to convert his
business into a limited company. He formed his company by incorporating his wife, one daughter
and four sons with a share of 1 each to fulfil statutory requirement i.e. 7 members. A board of
director was constituted with himself and his two sons. The purchase consideration was paid by the
company by the allotment of 20000 shares of 1 each and 10000 debentures which gave Salomon
change over all the assets of the company and the balance was paid in cash to the Salomon. The
company almost immediately ran into difficulty and a year later the holder of debentures was
appointed as receiver and the procedure of liquidation is started. The position or liquidation was as
follows-
Debentures issued to Salomon 10000, unsecured creditors 7000 and assets 6000. It was observed
that after paying the debenture holders nothing left for unsecured creditors. The unsecured creditors
contended that Salomon and Salomon is company are one and the same Salomon could not our
money to himself but it was held that once the company was incorporated under the act it had
separate legal entity , independent of its members. In this case where Salomon was a secured
creditor he was entitled to be repaid in priority over the unsecured creditors.
5. Common Seal - Every company have a common seal. A company is an artificial person it cannot
sign document for itself. That’s why common seal is required for every company. The common seal
is used as a substitute for its signature. When the seal of the company is assined on any document,
below to director’s signature then only the signature of director are valid.
6. Perpetual Succession - A company never dies, law creates it and law alone can dissolve it.
Company has a perpetual succession. The existence of company is not affected by the death,
insolvency or exit of any shareholder. “ During the war all the members of one private company ,
while in general meeting, were killed by a bomb. But the company survived not even a hydrozen
bomb could have destroyed it.” This perpetual succession mean that the company is not affected
with the death, insolvery of its members. Members may come, members may go but the company
never affected. It go forever.
7. Transferable Shares - It is an important characterstic of public limited company. The shares of a
public limited company is freely transferable. According to Indian companies act, “ the shares or
other interest of any member in a company shall be movable property transferable in the manner
provided by the articles of the company.” (section 82). A public limited company transfer its shares
but in case of a private company some restrictions are held on the right to transfer its share by its
articles.
8. Separate Property - A company has the right to acquire and transfer property in its own Name.
The members of the company cannot use the company’s property for their personal aim. The
members can use property only for company’s business. A member does not have insurable interest
in the property of company.
9. Capacity to Sue and Being Sued - A company is capable to make contract. It is an artificial
person so it may sue on other parties in its own name. Just like it other parties may also sue the
company is its own name.
10. Share Capital and Shareholders - The company have its own share capital and its capital is
divided into small parts called shares. The person who buy shares are known as shareholders.
According to section 3(1), “The minimum paid-up capital of a public company is Rs. 5 lakh and of
a private company is Rs. 1 lakh.
11. Limited Capacity to Make Contract - A company can make contract under the scope of
memorandum of association. If any work is done beyond the rules prescribed there of shall have no
enforcement.
12. Borrowing Loans - A company can borrow loan from financial institutions and commercial banks.
13. Number of Members - According to the provisions of Indian companies act, 1956 a private
company must have minimum of two members and maximum have fifty members. In public company
must have seven members. There is no limit maximum members.
14. Social form of a Company - Company is an artificial person and created by law. It is exists in the
society work for the society and operated by the persons of society. Company has some social
responsibility towards society. Products manufactured by company should be in accordance of
society. It should not concentrate only on profits, it should also be proactive towards interest of
social rights.
15. Democratic Management - It is also known as representative management. Company is an
artificial person. Its work is manage by the agents and selected people. They make contract on
behalf of the company, for the company and enforce the same.
16. Company is Not Citizen - Company is a artificial body. Its cannot claim fundamental rights under
constitution law or any law. It is cannot be called an Indian citizen but if any rights granted to the
company are violated or encroached then company may take shelter of the court.
17. Termination of Existence - Being an artificial personality, a company cannot die a natural death.
It is created by law and carries on its affairs according to law normally. The existence of a company
is terminated by means of winding up of a company. However to avoid winding up, companies
change form by means of recoganisation and reconstitution.
Activity B:
1. “A company is an artificial person created by law, having a separate entity with a perpetual succession
and a common seal.” Discuss it and explain the characterstics of company.
15.5 Lifting or Piercing of Corporate Veil

A company is a legal person different from its members. There is a curtain between company and its
members. But if work done by the company or its managers are against the public interest then the court has
power not to accept the principle of separate legal entity. The court may held the directors of the company
as personally liable and punish them according by. This process is known as lifting or piercing the corporate
veil.
The grounds in which the lifting of corporate veil is done are divided into two categories -
1. Under statutory provisions -
2. Under judicial provisions -
1. Under Statutory Provisions -
a. Reduction of Membership (Section 45) - The minimum number of members in a private
company is two and in a public company is 7. If the members of a company is reduced below the
statutory minimum (below 7 or below 2 respectively) And the company carries on business for
more than six months after the reduction, and if it is in the knowledge of the member then the
member of such company are personally liable for any debt due to the company during that period.
b. Mis-Statement in Prospectus (Section 62) - If there is mis-statement in companies prospectus,
and any person who buy the shares on the basis of that statement, then every person (who authorized
the issue of the prospectus) is liable to pay compensation.
c. Failure to Refund Application Money (Section 69(5)) - It the company is unable to allotted
the shares , to someone, then the company is bound to return the application money within 130
days of issuing the prospectus.
d. Misdescription of Name of the Company (Section 147) - The name of company must be
properly written on all documents issued by company. However, if the name of the company is not
mentioned then the persons who make contract on behalf of company liable for it.
e. Non-payment of Income Tax (Section 179) - The company is responsible to pay tax on its
income. But if any amount of tax is found to be outstanding or company is not paying the tax then its
separate entity will not recognized. The company shall be responsible for the payment of outstanding
tax.
f. Holding and Subsidiary Companies (Section 212) - When one company controls the
constitution of the board of directors of another company or holds more than 50% of the share
capital then it is called the holding company. If one company is holding and other is subsidiary then
the principle of separate legal entity will not be accepted.
g. To Simplify the Investigation of Affairs of the Company (Section 239) - If an inspector is
appointed to investigate the affairs of the company, he shall also have power to investigate the
affairs of any other corporate of the some group.
h. Investigation of Ownership of a Company (Section 247) - When the central government
wants to determine the true persons (a) who have been financially interested in success or failure of
the company (b) who have been able to control or materially influence the power of the company.
Then the central government appoint an investigator for lifting the corporate status of a company.
i. Fraudulent Trading (Section 542) - Sometimes in the course of winding up of a company , it
came to know that any business operated by the company with an intent to defrurd creditors or any
other person or any other fraudulent purpose. In this situation, the court may declare that all the
knowingly parties are personally liable for any of debt of the company. The liability of such persons
are unlimited.
2. Under Judicial Provisions -
a. For Protection of Revenue - When the company is formed for the aim of evading taxes then
the court have the power to disregard the corporate entity.
Illustration - ‘Ram’ an assessee was a rich man. He is enjoying huge dividends and interest incomes.
To reducing his tax liability Ram established four companies and divided his income in four parts.
The court held that “the company was formed by the assessee purely and simply as a means of
avoiding tax and the company was nothing more then the assessee himself. Hence, the court decided
to disregard the corporate entity and lift the corporate veil.
b. To Prevent Fraud - If any company is established with some frandulent object, then the court
will not accept to uphold the separate existence of the company or the court can lift the veil of or the
existence of companies.
Illustration - H was appointed as a managing director of a company on the condition that he
would not entice away the customers of the company. When H left the job, he established a company
to carry on his own business. His company solicited the customers of G company. It was held by
the court, the company was a mere clock or sham for the purpose of enabling H to commit a breach
of his covenant against solicitation. Therefore the court issued an injunction against H.
c. For Determining the Character of the Company - The company is an artificial person. It
make contract through its selected members. The company cannot act like a natural person that’s
why it can be neither a friend or enemy. But if the persons in control of its affairs are residents of an
every country or working under the instructions of an every country then the company may assume
as an every character and in this situation the court may lift or pierce the corporate veil and examine
the characters of the persons constituting it.
Illustration - In Daimler Company limited vs continental tyre & rubber company. A company was
incorporated in England for the purpose of selling tyres manufactured by a German company. The
German company held the bulk of share in the English company. All the directors and shareholders
(except one) were Germans. Thus the English company was controlled by Germans. During the
first world was the English company filed a suit to recover a trade debt it was held that the company
had become an every company as the affair of the company was controlled by residence in an every
country and the suit was dismissed. It will be against the public policy to allow the enemies to
function as a company.
d. In Case the Company is Acting as an Agent or Trustee of the Shareholders - if the
company is acting as an agent on behalf of its members or shareholders then the members held
responsible for the acts or the liabilities of the company .
Illustration - an American company financed the production of a film named ‘Monsoon’ in India in
the name of a English company. 90% of shares of English company were held by American director.
The board of trade of great Britain refused to register the film as a British film because this is the
English company acted as an agent for the American company.
e. Ignorance of Labour Welfare and Social Security Law - If the employer of any company
ignored the provision of the labour welfare and social security law made be government then the
court empowered to left the veil of corporate entity.
f. In Case of Company is Formed for Illegal Purpose - If any company is formed for illegal
purpose or used for illegal purpose then the court may lift the corporate veil.
g. For the Protection of Public Policy - For the protection of public policy the court empowered
to lift the corporate veil.
Activity C:
1. Discuss the situations under which the corporate veil of a company may be lifter. Explain it with
illustration.
15.6 Meaning Of Promotion

A company is an artificial person created by law for any purpose of business, charity, sports etc. The main
purpose of the formation a company is start a new business or to acquire any existing business. The process
of company formation is divided into following stages -
1. Promotion Stage
2. Registration Stage
3. Capital Subscription Stage
4. Commencement of Business Stage
Figure – 15.1
Definition of Promotion
The term ‘promotion ’ has not been define in the companies act. Promotion is the first stage in the formation
of accompany . in simple words, promotion mean all those activities with starts of the idea of establishing
any business and bring into the position of the starting the business in to realistic way.
According to Gerstenberg - “ Promotion is the discover the business opportunities and the subsequent
organization of fund. Property and managerial ability into a business concern for the purpose of making
profits there from”.
According to E.S. Mead - “Promotion involves four elements:- Discovery, investigation, assembling and
financing “.
According to Dr. Henry E. Hogland - “Promotion is the process of creating a specific business enterprises
the aggregate of activities contributed by all those the participated in the building of the business constitutes
promotion.”
Conclusion – Thus, promotion involves discovery of business opportunities and subsequent arrangement
of funds, men, materials, etc. to form a business enterprises.
15.7 Who Are Promoters

Before a company can be formed, there must be some persons who have an intention to form a company
and who take the necessary steps to carry that intention into operation, such person are called “Promoters”.
The term ‘promoter’ does not defined in the companies act. The term ‘promotion’ is a term not of law but
of business, usefully summing up in a single word a number of business operations familiar to the commercial
world by which a company is generally brought into existence. A promoter is a convenient way of designating
those who set in motion the machinery by which the act enables them to create an incorporated company.
According to L.J. Browen - “It is not a term of law but of business, usefully summing up in a single
commercial word, a number of business operations, familiar to the commercial world, by which a company
is brought into existence.”
In the words of Justice C. Cockburn - “A promotion is one who undertakes to form a company with
reference to a given project and to get it going and who takes the necessary steps to accomplish that
purpose.”
According to Sir Francies Palmer - “Promoter is a person who originates a scheme for the formation of
a company, has the memorandum and the articles prepared, executed and registered, and finds the first
directors, settles the terms of preliminary contracts and prospectus, if any and makes arrangements for
advertising and circulating the prospectus and placing the capital.”
Conclusion - So we can say that promoter is a person who take all pain and decision to develop and bring
into its existence. He is the only person who put all his efforts heart and sole out to develop a company. That
is why he is called promoter.
15.7.1 Functions of Promoters
1. Conveicing the Idea of Forming a Company - First of all, an idea of formation of a company
conceived in a person or group of persons. Then they analyse the idea. After that they decide how
the company is to be created. Then they/he determines the objects, nature, objects and scope of
the proposed company.
2. Work Related to Investigation and Analysis -
· To study the primary report received from consultants.
· To evaluate the plans of business.
· To collect related data.
· Determination of size of the enterprise.
· Promoters can take help of experts.
· To investigate the competitors, their products and the level o competition.
3. Work Related to Preliminary Contracts - After the investigation the promoter have to make
preliminary contracts for purchase of land, building or any other machinery. The promoter have to
pay preliminary expenses. Usually a preliminary contract contain the detailed description of the
property and assets, its purchase price, made of payment remedies for branch of contract.
4. Appointment of Officers and Related to Accumulate of Resources -
· After the appointment of legal advisors the promoter may give them orders to prepare necessary
documents.
· Then the promoter appointed managers, secretaries and other workers.
· After the appointments it is for necessary promoter to accumulate funds to fulfit the basic needs for
purchase land, building, machinery etc.
5. Work Related to Legal Formalities -
· To decide the name of the company.
· To decide the place of the registered office of company.
· To decide the objectives of the company.
· To determine the capital of the company.
· To receive industrial License from government.
· To prepare memorandum of association.
· To make suitable arrangements for printing of memorandum of association.
6. Work Related to Incorporation of Company - After the legal formalities the promoter files
application to the register for registration of company and receive the certificate of incorporation.
7. Work Related to Subscription of Capital - After incorporation the promoter make plan for
capital subscription. Promoter make suitable arrangements for preparation of prospectus. Then he
determine the remuneration of Auditors, Bankers, Underwriters etc. he also make suitable
arrangements for allotment of shares and issue of share certificate to shareholders.
8. Receiving “Certificate of Commencement of Business” - This is the last but most important
function of promoter to getting a certificate of commencement of business from the registar. For this
purpose, it is necessary for promoter to submit a certificate to the registrar that minimum subscription
has been subscribed.
15.7.2 Right of Promoters
1. Right to Receive Preliminary Expenses - It is the right of promoter to receive all the
preliminary expenses incurred by him in the process of formation of company. But the right to
claim the preliminary expenses is not contracted right of promoter. It depends on the discretion of
directors.
1. Right to Receive Proportional Amount from Company Promoters - If more than one
promoter act as the promoters of company, then one promoter can claim another promoter to
receive proportional amount of damages.
2. Right to Receive Remuneration - It is the right of promoter to receive remuneration from company
for his services. He has the right to sue the company for recovery of remuneration only when, if
company make any agreement with promoter to that effect.
15.7.3 Liabilities of Promoters
A promoter of a company is subject to certain liabilities under the Indian Companies Act, 1956. They are -
1. Matters to be set out in the prospectus are mentioned in Section 56 of the Act. The promoter may
be held liable for non compliance of the provision of this section.
2. The Promoter is liable for any untrue statement in the prospectus to any person who is subscribed
shares or debentures of the company and liable to pay damage. Any false statement in the prospectus
may lead the following consequences -
· The Allotment of shares or debentures may be set aside.
· The promoter may sue for damages and also for compensation.
· Criminal proceedings may instituted against the promoter and may incur criminal liability.
· If it appears that the promoter has been guilty of any offence punishable under Section 542 (whether
he has been convicted or not), the court may restrain the promoter from taking part in the management
of the company for a period of 5 years.
3. Section 63 of Indian Companies Act, 1956 makes a promoter criminally liable for the issue of
prospectus containing false or deceptive statements. The punishment may be for a term which may
extend to two years or with fine which may extend to Rs. 5000/- or with both.
4. The promoter may however escape liability if he proves that he had reasonable ground to believe
that the statement was true or the statement was immaterial from the point of view of attracting the
investors.
5. If the company is being wound up by the order of the court and the liquidators report alleges any
fraud in the promotion and formation of the company, the promoters shall be liable to public
examination like any other officer or director of the company.
6. If the promoter retained any property of the company, he can be sued by the company for branch
of duty or deceit, as the case may be.
7. In the event of death of promoters, the company may recover damages or compensation from the
property of the deceased.
8. The liability of Promoter commences only after they have started functioning as promoter and not
for earlier acts. The promoters are liable for only those acts which are purported have been done
for the company which they intend to float.
15.7.4 Duties of the Promoters
The main duties of the promoters are as follows -
1. To conceive the idea of floating the company.
2. To find out suitable persons who may sign the memorandum of association and are also willing to
act as the first detectors of the company.
3. To select suitable names of the company and settle the amount and form of its capital, the kinds of
shares to be issued the rights of various shareholders, etc.
4. To select the bank where the account of the company is to be kept and also the auditors, legal
advisers and brokers for the company.
5. To prepare a draft of the memorandum of association and prospect of the company and get it
printed.
6. To submit to the registrar of joint stock companies all the documents required for the incorporation
of the company.
7. To arrange for advertisement of prospect of the company in the newspaper.
8. To meet all the preliminary expenses for the forming or Fioating of the company.
9. To disclose fully all the material facts relating to the information of the company.
10. To arrange for the completion of the contracts with vendors managing agents and underwrites.
11. To receive remuneration from the vendors in the form of a commission on the sold property or get
founder’s shares fully paid up for the services rendered by them to the company.
15.8 Summary
In summarized form we can say that company is an artificial person created by law. It does not exist like a
living person because it can’t be sent to jail, can’t marry or divorce. It exist in the eye of law. The following
are the characterstics of company -
1. Incorporated association
2. Artificial legal person
3. Limited liability
4. Separate legal entity
5. Common seal
6. Perpetual succession
7. Transferable shares
8. Separate property
9. Capacity to sue and being sued
10. Statutory obligations
11. Share capital and share holders
12. Limited capacity to make contract
13. Borrowing loans
14. Number of members
15. Social form of company
16. Democratic management
17. Company is not a citizen
Lifting the Corporate Veil - The principle of separate legal entity has considered as a fundamental principle
of company law. The principle of separate legal entity means the company has separate legal entity distinct
from its members. Thus a kind of veil is drown between company are its members. But when the affairs of
company has done against the public interest then the court has discretion to lift the limited liability of
members. This is known as lifting or piercing the corporate veil.
Promotion and Promoters - Promotion is the first stage of formation of a company where as promoters
are the persons who creates a company. Promoter may be on individual, a firm, an association of persons
or even a company. Whether a person is or is not a promoter of a company merely depends upon the facts
in each particular case. It is no doubt to say that any person who has a desire be formed and is fully
prepared to take some steps to implement it is a promoter.
The Functions of Promoters are as follows –
1. Conveicing the idea of forming a company
2. Work related to investigation and analysis
3. Work related to “preliminary contracts”
4. Appointment of officers
5. Legal formalities
6. Incorporation of capital
7. Subscription of capital
8. Receiving certificate of commencement of business
Rights of Promoters are Follows –
1. Right to receive preliminary expenses
2. Right to receive proportional amount
3. Right to receive remuneration
Liabilities of Promoters are Follows –
1. Liability towards misstatement in prospectus
2. Liability towards profits
3. Liability towards breach of trust

1. An Association of persons may form a company and get itself registered as such under the companies
Act. What are the considerations which may actuate it to do so?
2. A and B are friends, who were the only two members of ‘Private Limited Company’ are dead on
road accident. Whether the company also die with them?
3. If the members composing the company die or dissociate themselves, the company also gets extinct.
Is it correct statement? Give the reason.
4. All the four persons A, B, C and D, who are the only members of a private company. Go on trip by
a boat. The boat expsizers in to the open sea and they are drowned and all of them die. Whether the
private company remains in existence.
5. The promoters of a company before its incorporation enter into an agreement with a to buy a oil-
mill on behalf of the company. After incorporation, the company refuses to buy the said oil-mill. Has
any remedy either against the promoters or against the company?
6. A promoter sell his own property to a company formed by him. A shareholder approaches you and
your advice as to the steps he can take against the promoters. Give him advice fully.
7. The promoter of a company incorporated on 1 october,2012 had entered into a contract with A 1
August, 2012 for supply of goods when the company came into existence. The company, however,
does not want to proceed with the contract. Discuss the correctness or otherwise of the company’s
action.
8. A debt was contracted by the promoter for on behalf of a public company before the date which the
company was entitled to commence its business. The promoters applied for shares in the company
and debt was set off against payment in cash for allotted stares. Discuss the validity of the set-off.

1. What do you mean by company? Explain the characterstics of a company?
2. Describe the history of Companies Act, 1956.
3. “A company is a legal person just as much as an individual but with no physical existence.” Explain
it.
4. “A company is an artificial person created by law, having a separate entity with a perpetual succession
and a common seal.” Discuss this statement and explain the characteristics of a company.
5. “A company has a separate legal existence other than of its members.” Discuss the statement and
state the circumstances under which the Court may ignore this principle.
6. “Limited liability” and “Separate legal existence” are basic features of company but under their
cover directors cannot do whatever they like” Analyse this statement and explain it.
7. “What do you understand by “lifting the corporate veil”? under what circumstances is it necessary
to lift the corporate veil?
8. Who are promoters? Write all the functions of promoters?
9. Write the duties and liabilities of promoters?

- M.J. Mathew (1991) - “Company Law and Secretarial Practice”, RBSA Publishers 1991, Jaipur.
- Ashok K Bagrial - “Company Law 3rd Revised Edition”, Vikas Publishing House Private Limited,
New Delhi.
- M.C. Kuchhal - “Secretarial Practice”, Vikas Publishing House Private Limited, New Delhi.
- Dr. R.L. Nolakha - “Company Law and Secretarial Practice”, Ramesh Book Depot, Jaipur.
- Arun Kumar, Rachna Sharma - “Secretarial Practice and Company Law”, Attantic Publishers and
Distributors, New Delhi.
- C.L. Bansal (1994) - “Company Law”, V.K. publishing House, (1994), Bareilly.
Unit - 16 : Consumer Protection Act
Structure of Unit:
16.0 Objectives
16.1 Introduction
16.2 Consumer Protection Act, 1986
16.3 Salient Features of the Act
16.4 Important Definitions Related to Act
16.5 Three Tier Grievance Redressal Machinery
16.6 District Forum
16.7 State Commission
16.8 National Commission
16.9 Conclusion
16.0 Objectives
 Introduction
 Consumer Protection Act.
 Salient Features of the Act.
 Important definitions related to Act
 District Forum of the Act.
 State Commission of the Act.
 National Commission of the Act.
 Conclusion
16.1 Introduction
The moment a person comes into this would, he starts consuming. He needs clothes, milk, oil, soap, water,
and many more things and these needs keep taking one form or the other all along his life. Thus we all are
consumers in the literal sense of the term. When we approach the market as a consumer, we expect value
for money, i.e., right quality, right quantity, right prices, information about the mode of use, etc. But there
may be instances where a consumer is harassed or cheated.
The Government of India understood the need to protect consumers from unscrupulous suppliers, and
several laws have been made for this purpose. We have the Indian Contract Act, the Sale of Goods Act, the
Indian Standards Institution (Certification Marks) Act, the Prevention of Food Adulteration Act, etc. which
to some extent protect consumer interests. However, these laws require the consumer to initiate action by
way of a civil suit involving lengthy legal process which is very expensive and time consuming.
The Consumer Protection Act, 1986 was enacted to provide a simpler and quicker access to redressal of
consumer grievances. The Act for the first time introduced the concept of ‘Consumer’ and conferred express
additional rights on him. It is interesting to note that the Act doesn’t seek to protect every consumer within
the literal meaning of the term. The protection is meant for the person who fits in the definition of ‘Consumer’
given by the Act.
16.2 Consumer Protection Act, 1986
The Consumer Protection Act, 1986 is a milestone in the history of socio-economic legislation in India. It is
the most progressive and comprehensive regulations formulated to safeguard the interest of consumers in
the country. It was enacted after an in-depth study of Consumer Protection Laws in several countries and in
consultation with representatives of consumer bodies, trade and industry and extensive discussions within
the government. The Act Attempts to give consumers complete protection from malpractices of manufacturers,
producers, suppliers, wholesalers and retailers. The Act is designed to make available, inexpensive and
speedy justice to the consumer.
It is an Act to provide for better protection of the interests of consumers and for that purpose to make
provision for the establishment of consumer councils and other authorities for the settlement of consumers’
disputes and for matters connected therewith.
The Consumer Protection Act was passed in December 1986 and came into force in April 1987. The Act
is in force to whole of India except the state of Jammu and Kashmir. It was amended in 1991, 1993 and
2002 (effective from March 15, 2003) to make it more functional and purposeful. Remedy for consumers
under this Act is through an effective three-tier quasi-judicial mechanism comprising of the District Forum at
the grass root, State Commission at the State Level and National Commission at the apex.
At present, there are 35 State Commissions and One District Forum in each district of the country. The
State governments are accountable for setting up the district forums and the State Commissions. The
Government of India has declared ‘24December’ as the ‘National Consumer Day’ as it was on that date
then President of India had given his consent to the enactment of this historic Act. Besides this, ‘15 March’
is observed as ‘World Consumer Rights Day’.
16.3 Salient Features of the Act

The salient features of the Act are as follows:
1. The Act applies to all goods and services unless specifically exempted by the Central Government.
2. It covers all the sectors i.e. Public, Private and Co-operative
3. The provisions of the Act are chiefly compensatory in nature.
4. It seeks to confer upon the consumers the following six rights:
a. Right to Safety: It is the right of the consumer to be protected against the marketing of
goods and services by unscrupulous sellers, which are potentially hazardous to life and
property. The goods purchased and services availed of should not only meet their immediate
needs, but also fulfill long term interests.
b. Right to be Informed: This refers to the entitlement of the consumer to be informed about
the quality, quantity, potency, purity, standard and prices of goods so as to protect the
buyer against unfair trade practices. A consumer should insist on getting all the information
about the product or service before making a choice or a decision. This will enable him/ her
to act wisely and responsibly and also enable him to desist from falling prey to high pressure
and misleading selling techniques.
c. Right to Choose: It is the right of the consumer to be assured, as far as possible, of access
to a variety of goods and services at competitive price. In case of monopolies, it implies the
right to be assured of satisfactory quality and service at a fair and reasonable price.
d. Right to be Heard: This implies that consumer’s interest will receive due consideration at
appropriate forum. it also includes the consumer’s liberty to be represented in various
forum constituted for consumer welfare.
e. Right to Seek Redressal: This refers to the privilege of the consumer to seek compensation
against unfair trade practices or unscrupulous exploitation. Is also includes the right to fair
settlement of genuine grievances of the consumer. Consumer can also take the help of
consumer organizations in seeking redressal of their grievances.
f. Right to Consumer Education: This refers to the entitlement of the consumer to acquire
the knowledge and skill to be an informed buyer throughout his/ her life. Ignorance of
consumers, particularly of rural folk, is the main cause of their exploitation. They should
know their rights and must exercise them.
5. The Act also envisages establishment of Consumer Protection Councils at the Central, State and
District Levels, whose main objectives will be to promote and protect the rights of consumers
6. To provide a simple, speedy and inexpensive redressal of consumer grievances, the Act envisages
three-tier quasi-judicial machinery at the National, State and District levels. There are National
Consumer Disputes Redressal Commission known as National Commission, State Consumer
Disputes Redressal Commission known as State Commissions and District Consumer Disputes
Redressal Forums known as District Forums.
7. Engagement of an advocate is not mandatory to file a complaint under the Consumer Protection
Act.
It is worth mentioning that the provisions of Consumer Protection Act, 1986 are in addition to, and not in
derogation of the provisions of any other law for the time being in force. The Act has not overridden or
repealed any of the legislation in force prior to this Act.
16.4 Important Definitions Related to Act

16.4.1 Appropriate Laboratory
“Appropriate Laboratory” means a laboratory or organization that is:
i. recognised by the Central Government;
ii. recognised by a State Government, subject to such guidelines as may be prescribed by the Central
Government in this behalf; or
iii. any such laboratory or organisation established by or under any law for the time being in force,
which is maintained, financed or aided by the Central Government or a State Government for
carrying out analysis or test of any goods with a view to determining whether such goods suffer from
any defect [Section 2(1) (A)]
16.4.2 Branch Office
“Branch Office” means:
(i) any establishment described as a branch by the opposite party; or
(ii) any establishment carrying on either the same or substantially the same activity as that carried on
by the head office of the establishment;
16.4.3 Complainant
“Complainant” means—
(i) a consumer; or
(ii) any voluntary consumer association registered under the Companies Act, 1956 (1of 1956)or under
any other law for the time being in force; or
(iii) the Central Government or any State Government,
(iv) one or more consumers, where there are numerous consumers having the same interest;
(v) in case of death of a consumer, his legal heir or representative; who or which makes a complaint;
16.4.4 Complaint
“Complaint” means any allegation in writing made by a complainant that:
(i) an unfair trade practice or a restrictive trade practice has been adopted by any trader or service
provider;
(ii) the goods bought by him or agreed to be bought by him; suffer from one or more defects;
(iii) the services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in
any respect;
(iv) a trader or service provider, as the case may be, has charged for the goods or for the service
mentioned in the complaint a price in excess of the price –
(a) fixed by or under any law for the time being in force
(b) displayed on the goods or any package containing such goods ;
(c) displayed on the price list exhibited by him by or under any law for the time being in force;
(d) agreed between the parties;
(v) goods which will be hazardous to life and safety when used or being offered for sale to the public:
(A) in contravention of any standards relating to safety of such goods as required to be complied
with, by or under any law for the time being in force;
(B) if the trader could have known with due diligence that the goods so offered are unsafe to the
public;
(vi) services which are hazardous or likely to be hazardous to life and safety of the public when used,
are being offered by the service provider which such person could have known with due diligence
to be injurious to life and safety;”
16.4.5 Consumer
“Consumer” means any person who—
(i) buys any goods for a consideration which has been paid or promised or partly paid and partly
promised, or under any system of deferred payment and includes any user of such goods other than
the person who buys such goods for consideration paid or promised or partly paid or partly promised,
or under any system of deferred payment when such use is made with the approval of such person,
but does not include a person who obtains such goods for resale or for any commercial purpose; or
(ii) hires or avails of any services for a consideration which has been paid or promised or partly paid
and partly promised, or under any system of deferred payment and includes any beneficiary of
such services other than the person who ‘hires or avails of the services for consideration paid or
promised, or partly paid and partly promised, or under any system of deferred payment, when such
services are availed of with the approval of the first mentioned person but does not include a
person who avails of such services for any commercial purposes;
Explanation: For the purposes of this clause, “commercial purpose” does not include use by a
person of goods bought and used by him and services availed by him exclusively for the purposes
of earning his livelihood by means of self-employment.
The definition of ‘Consumer’ given in the Act makes it clear that it includes not only the person who buys
and goods or hires a service for consideration, but also any user of such goods or services, when such use
is made with the approval of the buyer or hirer.
16.4.6 Consumer Dispute
“Consumer Dispute” means a dispute where the person against whom a complaint has been made, denies
or disputes the allegations contained in the complaint.
16.4.7 Defect
“Defect” means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard
which is required to be maintained by or under any law for the time being in force under any contract,
express or implied or as is claimed by the trader in any manner whatsoever in relation to any goods.
16.4.8 Deficiency
“Deficiency” means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of
performance which is required to be maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.
16.4.9 District Forum
“District Forum” means a Consumer Disputes Redressal Forum established under clause (a) of section 9.
16.4.10 Goods
“Goods” means goods as defined in the Sale of Goods Act, 1930 (3 of 1930);
16.4.11Manufacturer
“Manufacturer” means a person who—
(i) makes or manufactures any goods or part thereof; or
(ii) does not make or manufacture any goods but assembles parts thereof made or manufactured
by others; or
(iii) puts or causes to be put his own mark on any goods made or manufactured by any other
manufacturer;
Explanation: Where a manufacturer dispatches any goods or part thereof to any branch office
maintained by him, such branch office shall not be deemed to be the manufacturer even though the
parts so dispatched to it are assembled at such branch office and are sold or distributed from such
branch office;
16.4.12 Member
“Member” includes the President and a member of the National Commission or a State Commission or a
District Forum, as the case may be.
16.4.13 National Commission
“National Commission” means the National Consumer Disputes Redressal Commission established under
clause (c) of section 9;
16.4.14. Notification
“Notification” means a notification published in the Official Gazette.
16.4.15 Person
“Person” includes,—
(i) a firm whether registered or not;
(ii) a Hindu undivided family;
(iii) a co-operative society;
(iv) every other association of persons whether registered under the Societies Registration Act, 1860
(21 of 1860) or not.
16.4.16 Prescribed
“Prescribed” means prescribed by rules made by the State Government, or as the case may be, by the
Central Government under this Act.
16.4.17 Service
“Service” means service of any description which is made available to potential users and includes, but not
limited to, the provision of facilities in connection with banking, financing insurance, transport, processing,
supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement
or the purveying of news or other information, but does not include the rendering of any service free of
charge or under a contract of personal service.
16.4.18 State Commission
“State Commission” means a Consumer Disputes Redressal Commission established in a State under clause
(b) of section 9.
16.4.19 Trader
“Trader” in relation to any goods means a person who sells or distributes any goods for sale and includes the
manufacturer thereof, and where such goods are sold or distributed in package form, includes the packer
thereof.
16.4.20 Unfair Trade Practice
“Unfair Trade Practice” means a trade practice which, for the purpose of promoting the sale, use or supply
of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice
including any of the following practices, namely;
1. The practice of making any statement, whether orally or in writing or by visible representation which
i. falsely represents that the goods are of a particular standard, quality, quantity, grade,
composition, style or model;
ii. falsely represents that the services are of a particular standard, quality or grade;
iii. falsely represents any re-built, second-hand, reno-vated, reconditioned or old goods as
new goods;
iv. represents that the goods or services have sponsorship, approval, performance,
characteristics, accessories, uses or benefits which such goods or services do not have;
v. represents that the seller or the supplier has a sponsorship or approval or affiliation which
such seller or supplier does not have;
vi. makes a false or misleading representation concerning the need for, or the usefulness of,
any goods or services;
vii. gives to the public any warranty or guarantee of the performance, efficacy or length of life of
a product or of any goods that is not based on an adequate or proper test thereof;
Provided that where a defence is raised to the effect that such warranty or guarantee is
based on adequate or proper test, the burden of proof of such defence shall lie on the
person raising such defence.
viii. makes to the public a representation in a form that purports to be—
(i) a warranty or guarantee of a product or of any goods or services; or
(ii) a promise to replace, maintain or repair an article or any part thereof or to repeat or
continue a service until it has achieved a specified result, if such purported warranty or
guarantee or promise is materially misleading or if there is no reasonable prospect that
such warranty, guarantee or promise will be carried out;
(ix) materially misleads the public concerning the price at which a product or like products or
goods or services, have been or are, ordinarily sold or provided, and, for this purpose, a
representation as to price shall be deemed to refer to the price at which the product or
goods or services has or have been sold by sellers or provided by suppliers generally in the
relevant market unless it is clearly specified to be the price at which the product has been
sold or services have been provided by the person by whom or on whose behalf the
representation is made;
(x) gives false or misleading facts disparaging the goods, services or trade of another person.
For the purposes of clause (1), a statement that is
(a) expressed on an article offered or displayed for sale, or on its wrapper or container;
or
(b) expressed on anything attached to, inserted in, or accompanying, an article offered
or displayed for sale, or on anything on which the article is mounted for display or sale;
or
(c) contained in or on anything that is sold, sent, delivered, transmitted or in any other
manner whatsoever made available to a member of the public, shall be deemed to be
a statement made to the public by, and only by, the person who had caused the statement
to be so expressed, made or contained;
(d) permits the publication of any advertisement whether in any newspaper or otherwise,
for the sale or supply at a bargain price, of goods or services that are not intended to be
offered for sale or supply at the bargain price, or for a period that is, and in quantities
that are, reasonable, having regard to the nature of the market in which the business is
carried on, the nature and size of business, and the nature of the advertisement.
2. For the purpose of clause (2), “bargaining price” means
(a) a price that is stated in any advertisement to be a bargain price, by reference to an
ordinary price or otherwise, or
(b) a price that a person who reads, hears or sees the advertisement, would reasonably
understand to be a bargain price having regard to the prices at which the product
advertised or like products are ordinarily sold;
3. An unfair trade practice is one which permits
i. the offering of gifts, prizes or other items with the intention of not providing them as
offered or creating impression that something is being given or offered free of charge
when it is fully or partly covered by the amount charged in the transaction as a
whole;
ii. the conduct of any contest, lottery, game of chance or skill, for the purpose of
promoting, directly or indirectly, the sale, use or supply of any product or any
business interest;
(3A) withholding from the participants of any scheme offering gifts, prizes or other
items free of charge, on its closure the information about final results of the scheme.
Explanation: For the purposes of this sub-clause, the participants of a scheme shall
be deemed to have been informed of the final results of the scheme where such
results are within a reasonable time, published, prominently in the same newspapers
in which the scheme was originally advertised.
4. Permits the sale or supply of goods intended to be used, or are of a kind likely to be used, by
consumers, knowing or having reason to believe that the goods do not comply with the standards
prescribed by competent authority relating to performance, composition, contents, design,
constructions, finishing or packaging as are necessary to prevent or reduce the risk of injury to
the person using the goods;
5. Permits the hoarding or destruction of goods, or refuses to sell the goods or to make them
available for sale or to provide any service, if such hoarding or destruction or refusal raises or
tends to raise or is intended to raise, the cost of those or other similar goods or services.
6. Manufacture of spurious goods or offering such goods for sale or adopts deceptive practices in
the provision of services (Inserted by the Consumer Protection (Amendment) Act, 2002)
16.5 Three Tier Grievance Redressal Machinery

In order to provide simple and speedy redressal of consumer grievances, Section 9 of the Consumer
Protection Act envisages three-tier quasi-judicial machinery at the national, state and district levels. Collective
popular as consumer courts, the redressal machinery comprises the following:
1. National Consumer Disputes Redressal Commissions or the “National Commission” at the
apex. It is based in Delhi.
2. Consumer Disputes Redressal Commissions or “State Commissions”. These are based in
every state capital.
3. Consumer Disputes Redressal Forum or “District Forums” which are established at the
district level.
At present, there are 35 state commissions, one in each State or Union Territory and 571 District forums.
16.6 District Forum

Section 9 (a) of the Act lays down that there shall be established for the purpose of this Act, a Consumer
Disputes Redressal Forum to be known as the ‘District Forum’ established by the state government by
notification. The state government may, if it deems fit, establish more than one District Forum in a district.
Composition of the District Forum
Section 10 of the Act states that each District Forum shall consist of:
a. a person who is, or has been, or is qualified to be a District Judge, who shall be its President;
b. two other members, one of whom shall be a woman, who shall have the following qualifications,
namely:
(i) be not less than thirty-five years of age,
(ii) possess a bachelor’s degree from a recognized university,
(iii) be persons of ability, integrity and standing, and have adequate knowledge and experience
of at least ten years in dealing with problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration:
Provided that a person shall be disqualified for appointment as a member if he/ she
a. has been convicted and sentenced to imprisonment for an offence which, in the opinion of
the state Government involves moral turpitude; or
b. is an undischarged insolvent; or
c. is of unsound mind and stands so declared by a competent court; or
d. has been removed or dismissed from the service of the Government or a body corporate
owned or controlled by the Government; or
e. has, in the opinion of the state Government, such financial or other interest as is likely to
affect prejudicially the discharge by him of his functions as a member; or
f. has such other disqualifications as may be prescribed by the State Government;
Every appointment under sub-section (I) shall be made by the State Government on the recommendation of
a selection committee consisting of the following, namely
i. President of the State Commission Chairman
ii. Secretary, Law Department of the State Member
iii. Secretary In-Charge of the Department dealing with Consumer affairs in the State Member
Every member of the District Forum shall hold office for a term of five years or up to the age of sixty-five
(65) years, whichever is earlier, and shall not be eligible for re-appointment.
The salary or honorarium and other allowances payable to, and the other terms and conditions of service of
the members of the District Forum shall be such as may be prescribed by the State Government. However,
the appointment of a member on whole-time basis shall be made by the State Government on the
recommendation of the President of the State Commission taking into consideration such factors as may be
prescribed including the work load of the District Forum.
The District Forum subject to the other provisions of this Act, shall have jurisdiction to entertain complaints
where the value of the goods or services and the compensation, if any, claimed ‘’does not exceed Rupees
Twenty lakhs (Rs 20 Lakh).
A complaint shall be instituted in a District Forum within the local limits of whose jurisdiction:
a. the opposite party or each of the opposite parties, where there are more than one, at the
time of the institution of the complaint, actually and voluntarily resides or carries on business or
has a branch office or personally works for gain, or
b. any of the opposite parties, where there are more than one, at the time of the institution of
the complaint, actually and voluntarily resides, or carries on business or has a branch office, or
personally works for gain, provided that in such case either the permission of the District Forum
is given, or the opposite parties who do not reside, or carry on business or have a branch office,
or personally work for gain, as the case may be, acquiesce in such institution; or
c. the cause of action, wholly or in part, arises (Section 11).
16.7 State Commission

State Commission forms the middle tier of the redressal mechanism. One in each state capital the State
Commission settle issues between Rupees 20 Lakhs (Rs 20 Lakh) and Rupees One Crore (Rs 1 Cr).
These commissions also serve as appellate courts for verdicts of the District forums. Each State Commission
is headed by a President or Chairman, who is the rank of a serving High Court Judge and Two to Four
members (one of whom is woman).
Section 9(b) of the Act lays down that “there shall be established for the purposes of this Act a Consumer
Disputes Redressal Commission to be known as the “State Commission”, established by state government
by notification.
Each State Commission shall consist of:
a. a person who is or has been a Judge of a High Court, appointed by the State Government, who
shall be its President, provided that no appointment under this clause shall be made except after
consultation with the Chief Justice of the High Court.
b. not less than two, and not more than such number of members, as may be prescribed, and one of
whom shall be a woman, who shall have the following qualifications, namely
(i) be not less than thirty-five years of age;
(ii) possess a bachelor’s degree from a recognised university; and
(iii) be persons of ability, integrity and standing, and have adequate knowledge and experience
accountancy, industry, public affairs or administration:
Nevertheless, not more than fifty per cent of the members shall be from amongst persons having a judicial
background.
The expression “persons having judicial background’’ shall mean persons having knowledge and experience
for at least a period of ten years as a presiding officer at the district level court or any tribunal at equivalent
level:
Further that a person shall be disqualified for appointment as a member if he—
a. has been convicted and sentenced to imprisonment for an offence which, in the opinion of
the State Government, involves moral turpitude; or
c. is of unsound mind and stands so declared by a competent
court; or
e. has, in the opinion of the State Government, such financial or other interest, as is likely to
f. has such other disqualifications as may be prescribed by the State Government.
Every appointment under sub-section (1) shall be made by the State Government on the recommendation
of a Selection Committee consisting of the following members, namely:
i. President of the State Commission Chairman
ii. Secretary, Law Department of the State Member
iii. Secretary In-Charge of the Department dealing with Consumer affairs in the State[Section 16 as
Amended by the Consumer Protection (Amendment) Act, 1986] Member
Under Section 16 (2), the salary or honorarium and other allowances payable to, and the other terms and
conditions of service of, the members of the State Commission shall be such as may be prescribed by the
State Government. The appointment of a member on whole-time basis shall be made by the State Government
on the recommendation of the President of the State Commission taking into consideration such factors as
may be prescribed including the work load of the State Commission.
Every member of the State Commission shall hold office for a term of five years or up to the age of sixty-
seven years, whichever is earlier and shall not be eligible for re-appointment.
Subject to the other provisions of this Act, the State Commission shall have jurisdiction:
a. to entertain
i. complaints where the value of the goods or services and compensation, if any,
claimed exceeds Rupees twenty lakhs but does not exceed Rupees one crore;
ii. appeals against the orders of any District Forum within the State; and
b. to call for the records and pass appropriate orders in any consumer dispute which is pending
before or has been decided by any District Forum within the State, where it appears to the
State Commission that such District Forum has exercised a jurisdiction not vested in it by law,
or has failed to exercise a jurisdiction so vested or has acted in exercise of its jurisdiction
illegally or with material irregularity. (Section 17)
A complaint shall be instituted in a State Commission within the limits of whose jurisdiction:
a. the opposite party or each of the opposite parties, where there are more than one, at the
time of the institution of the complaint, actually and voluntarily resides or carries on business or
has a branch office or personally works for gain; or
b. any of the opposite parties, where there are more than one, at the time of the institution of
the complaint, actually and voluntarily resides, or carries on business or has a branch office or
personally works for gain, provided that in such case either the permission of the State Commission
is given or the opposite parties who do not reside or carry on business or have a branch office
or personally work for gain, as the case may be, acquiesce in such institution; or
c. the cause of action, wholly or in part, arises.
On the application of the complainant or of its own motion, the State Commission may, at any stage of the
proceeding, transfer any complaint pending before the District Forum to another District Forum within the
State if the interest of justice so requires.
16.8 National Commission

At the apex of the redressal mechanism, stands the five-member National Commission headed by a person
no less than the rank of serving or retired Supreme Court Judge. Out of the other four members, two are
supposed to have a judicial background and one of them has to be a woman.
The National Commission shall consist of:
a. a person who is or has been a Judge of the Supreme Court, to be appointed by the Central
Government, who shall be its President. However, no appointment under this clause shall be made
except after consultation with the Chief Justice of India;
b. not less than four, and not more than such number of members, as may be prescribed, and one of
whom shall be a woman, who shall have the following qualifications, namely:
i. be not less than thirty-five years of age;
ii. possess a bachelor’s degree from a recognised university; and
iii. be persons of ability, integrity and standing and have adequate knowledge and experience
accountancy, industry, public affairs or administration.
However, not more than fifty per cent of the members shall be from amongst the persons having a judicial
background. The expression “persons having judicial background’’ shall mean persons having knowledge
and experience for at least a period of ten years as a presiding officer at the district level court or any tribunal
at equivalent level:
Further a person shall be disqualified for appointment if he/ she
a. has been convicted and sentenced to imprisonment for an offence which, in the opinion
of the Central Government, involves moral turpitude; or
c. is of unsound mind and stands so declared by a competent court; or
e. has in the opinion of the Central Government such financial or other interest as is likely to
f. has such other disqualifications as may be prescribed by the Central Government :
Every appointment under this clause shall be made by the Central Government on the recommendation of a
selection committee consisting of the following, namely:
i. A person who is a judge of the Supreme Court, to be nominated by the Chief Justice of India
Chairman
ii. Secretary in the Department of Legal Affairs in the Government of India Member
iii. Secretary of the Department dealing with Consumer affairs in the Government of India Member
The salary or honorarium and other allowances payable to and the other terms and conditions of service of
the members of the National Commission shall be such as may be prescribed by the Central Government.
Every member of the National Commission shall hold office for a term of five years or up to the age of
seventy years, whichever is earlier and shall not be eligible for re-appointment.
Subject to the other provisions of this Act, the National Commission shall have jurisdiction—
a. to entertain:
i. complaints where the value of the goods or services and compensation, if any,
claimed exceeds Rupees One Crore; and
ii. appeals against the orders of any State Commission; and
b. to call for the records and pass appropriate orders in any consumer dispute which is
pending before or has been decided by any State Commission where it appears to the
National Commission that such State Commission has exercised a jurisdiction not vested in
it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its
jurisdiction illegally or with material irregularity [Under Section 21].
The National Commission may, with the previous approval of the Central Government, by notification,
make regulations not inconsistent with this Act to provide for all matters for which provision is necessary or
expedient for the purpose of giving effect to the provisions of this Act.
In particular and without prejudice to the generality of the foregoing power, such regulations may make
provisions for the cost of adjournment of any proceeding before the District Forum, the State Commission
or the National Commission, as the case may be, which a party may be ordered to pay.
No suit, prosecution or other legal proceedings shall lie against the members of the District Forum, the State
Commission or the National Commission or any officer or person acting under the direction of the District
Forum, the State Commission or the National Commission for executing any order made by it or in respect
of anything which is in good faith done or intended to be done by such member, officer or person under this
Act or under any rule or order made thereunder.
16.9 Summary
The Consumer Protection Act, 1986 deals with all the issues relating to the redressal of Consumer grievances.
In the modern market the seller is organized and has professional skills, whereas the buyer is generally
considered unorganized and amateur. Most of the modern goods are technological gadgets about which the
consumer knows little or even nothing. The principle of caveat emptor (let the buyers beware), thus has
ceased to be appropriate as a general rule. The common consumer deserves to get what he pays for in real
quantity and real quality.
In every society, consumer remains the pivot of all business and industrial activity and does need protection
by law when goods fail to live upto the promises. The Consumer Protection Act, 1986 is a landmark
regulation. The Act is designed to make available cheap and quick remedy to an individual and unorganized
consumer. It applies to all goods and services unless specifically exempted by the Central Government and
covers all the sectors. The provisions of the Act are rather compensatory than preventive or punitive. It
seeks to promote and protect the rights of the consumers. For simple, fast and inexpensive settlement of
consumers’ disputes and for the matters connected therewith, the Act envisages three-tier quasi-judicial
machinery. The Act also makes provision for the establishment of Consumer Councils and other authorities.
The Act, however, does not attempt to derogate the provisions of any other law.

1. State whether the following statements are True or False.
a. A person who buys goods for commercial purpose is not a consumer.
b. Utility of a product is the sole reason to buy it.
c. Engagement of advocate is mandatory for the complainant under the Consumer
Protection Act.
d. The provisions of the Consumer Protection Act, 1986 are in addition to and not in
derogation of the provisions of any other law, for the long time in force, to protect the
interest of consumers.
e. The ‘National Commission’ has the jurisdiction to entertain (a) complaints where the
value of the goods or services and compensation, if any, claimed exceeds One Crore
rupees, and (b) appeals against the orders of any state commission.
(a) True (b) False (c) False (d) True (e) True
2. Describe the salient features of the Consumer Protection Act, 1986?
3. Discuss the aim and objectives of the Consumer Protection Act, 1986?
4. Who is a Consumer as per Consumer Protection Act, 1986?
5. What is the statutory definition of ‘Defect’ as per Consumer Protection Act, 1986?
6. What is the statutory definition of ‘Deficiency’ as per Consumer Protection Act, 1986?
7. What is the statutory definition of ‘Goods’ as per Consumer Protection Act, 1986?
8. What is the statutory definition of ‘Manufacturer’ as per Consumer Protection Act, 1986?
9. What is the statutory definition of ‘Complainant’ as per Consumer Protection Act, 1986?
10. What is the statutory definition of ‘Complaint’ as per Consumer Protection Act, 1986?
11. What is the statutory definition of ‘Person’ as per Consumer Protection Act, 1986?
12. What is the statutory definition of ‘Trader’ as per Consumer Protection Act, 1986?
13. What is the statutory definition of ‘Unfair Trade Practice’ as per Consumer Protection Act,
1986?

- Kumar, R.,(2012); ‘Legal Aspects of Business’; Cengage Learning India Pvt. Ltd., Second Edition,
New Delhi.
- Kuchhal, M. C. and Prakash, D. (2007); ‘Business Legislation for Management’; Vikas Publishing
House Pvt. Ltd., New Delhi.
- K. Aswathappa (2009); ‘Essentials of Business Environment’; Himalaya Publishing House Private
Limited, New Delhi.

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BBA-15

Vardhaman Mahaveer Open University, Kota

Legal Aspects of Business

Vardhaman Mahaveer Open University, Kota

Legal Aspects of Business

Unit No. Name of Unit

Unit - 1 Meaning and Essential of Contract

Unit - 2 (Proposal) Offer and Acceptance

Unit - 3 Capacities of Parties

Unit - 5 Free Consent

Unit - 6 Legality of object and Consideration and Agreements

Opposed to Public Policy

Unit - 7 Void Agreement and Contingent Contract

Unit - 8 Performance of a Contract

Unit - 9 Discharge of a Contract

Unit - 10 Remedies for Breach of Contract

Unit - 11 The Sale of Goods Act, 1930 (I)

Unit - 12 The Sale Of Goods Act, 1930 (II)

Unit - 13 The Negotiable Instruments Act, 1881 (Part – I)

Unit - 14 The Negotiable Instruments Act, 1881 (Part – II)

Unit - 15 Introduction to the Companies Act

Unit - 16 Consumer Protection Act

1.2 Sources of Mercantile Law

1.3 Introduction of Indian Contract Act

Special ki nds of Co ntracts 125 to 238

Pro visi ons Sectio n

Gen eral Princi ples of Law of Cont ract 1 t o 75

Sp ecial kind s of Cont ract s

1.4 Important Facts About Indian Contract Act

1.5 Definition of Contract

1.6 Related Terminology

1.7 Distinguish Between Agreement and Contract

Offer and its acceptance

12.L egal 2.Agreement

9.Agreement not 5.Contr ac tual

1.9 Classification of Contract and Agreement

On the basis of On the basis of On the basis of

1.10 Distinguish Between Contract and Void Agreement

1.13 Distinguish Between Void Agreement and Illegal Agreement

1.16 Self Assessment Questions

1.17 Reference Books

2.3 Essentials of a Valid Offer

The offer &

2.4 Intention to Put an Offer Invitation to Put an Offer

• E xpres s Offer • S pecific Offer • Cros s offe rs

2.7 Who Can Give Acceptance

2.8 Essential of Valid Acceptance

The acc ept ance

Acceptanc eof an Accept ancemust

2.9 Effects of Acceptance

2.11 Lapse and Revocation of Offer

2.13 Self Assessment Questions

2.14 Reference Books

3.2 Meaning of Capacity of Parties

3.4 Description of Persons Who are Incompetent to Contiract

Incompetent Persons to make a c ontract

Minor Unsou nd Mind Disq ualified by Law

Id iot Lu nat ic Drunk ard A Seni le Perso n

Insolv ent Perso ns