Specific Contract Full Modules - 231122 - 205555

SPECIFIC CONTRACT
MODULE 1
Definition of a Contract
Section 2(h) of the Indian Contract Act defines the term contract as “an agreement
enforceable by law is a contract.” So, a contract is an agreement plus legal enforceability.
Law means a ‘set of rules’ which governs our behaviors and relating in a civilized society. So,
there is no need of law in an uncivilized society. One should know the law to which he is
subject because ‘ignorance of law is no excuse’.
A contract may be defined as a legally binding agreement or, in the words of Sir Frederick
Pollock: "A promise or set of promises which the law will enforce".
“A Contract is an agreement between two or more persons which is intended to be enforceable

at law and is contracted by the acceptance by one party of an offer made to him by the other
party to do or abstain from doing some act.” – Halsbury
“A contract is an agreement creating and defining obligation between the parties” – Salmond.
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law.
It is the foundation upon which the superstructure of modern business is built. It affects
everybody, more so, trade, commerce and industry. It may be said that the contract is the
foundation of the civilized world.
The Indian Contract Act is divisible into two parts:
The first part (Section 1-75) deals with the general principles of the law of contract and
therefore applies to all contracts irrespective of their nature.
The second part (Sections124-238) deals with certain special kinds of contracts, namely
contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
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CONTRACT OF INDEMNITY
Contract of Indemnity –Definition, Nature and Scope - Rights of indemnity holder –

Commencement of the indemnifier’s liability
The term Indemnity literally means “Security against loss”.
In a contract of indemnity one party – i.e., the indemnifier promises to compensate the other
party i.e., the indemnified against the loss suffered by the other.
The English law definition of a contract of indemnity is – “it is a promise to save a person
harmless from the consequences of an act.” The promise may be express or it may be implied
under English law.
An illustration in English law of the meaning and effect of contract of indemnity is to be found
in the facts of Adamson v. Jarvis. The plaintiff, an auctioneer sold certain cattle on the
instruction of the defendant. It subsequently turned out that the livestock did not belong to the
defendant, but to another person, who made the auctioneer liable and the auctioneer in his turn
sued the defendant for indemnity for the loss he had suffered by acting on the defendant’s
directions. The court laid down that the plaintiff having acted on the request of the defendant
was entitle to assume that, if, what he did, turned out to be wrongful, he would be indemnified
by the defendant.
A Contract of indemnity is a direct engagement between two parties whereby one promises to
save another from harm. According to section 124 of the Indian Contract Act a contract of
indemnity means “a contract by which one party promises to save the other from loss caused
to him by the conduct of the promisor himself or by the conduct of any other person.” The
definition provided by the Indian Contract Act confines itself to the losses occasioned due to
the act of the promisor or due to the act of any other person.
DEFINITION: - As provisions made in section 124 of the Indian Contract Act 1872 says that,
“whenever one party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of the any other person, is called a Contract of
Indemnity.”
Example: A contract to indemnify B against the consequences of any proceedings which C

may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
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Meaning of Indemnifier and indemnity holder Indemnifier:
The person who promises to make good the loss is called the ‘indemnifier’. In the aforesaid
example A is the Indemnifier.
Indemnity holder: The person whose loss is to be made good is called ‘Indemnity holder’. In
the aforesaid example B is the Indemnity holder.
ESSENTIAL ELEMENTS:
The following are the essentials of the Contract of Indemnity: -
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss
occurs.
Modes of contract of Indemnity
1. EXPRESS: A contract of Indemnity is said to be express when a person expressly

promises to compensate the other from the loss
2. IMPLIED: A contract of Indemnity is said to be implied when it is to be inferred from

the conduct of the parties or from the circumstances of the case
INSURANCE INDEMNITY
All most all insurances other than life and personal accident insurance are contracts of
Indemnity. The insurers promise to indemnify is an absolute one. A suit can be filed
immediately upon failure to performance, irrespective actual loss. If the indemnity holder
incurred liability and that liability was absolute, he would be entitled to call upon the
indemnifier to save him from that liability by paying it off (New India Assurance Company
Ltd. v. State trading Corporation of India, AIR 2007 NOC)
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Extent of Liability
Sec.125: Right of the indemnity holder
An indemnity holder (i.e., indemnified) acting within the scope of his authority is entitled to
the following rights –
1. Right to recover damages – he is entitled to recover all damages which he might have
been compelled to pay in any suit in respect of any matter covered by the contract.
2. Right to recover costs – He is entitled to recover all costs incidental to the institution
and defending of the suit.
3. Right to recover sums paid under compromise – he is entitled to recover all amounts
which he had paid under the terms of the compromise of such suit. However, the
compensation must not be against the directions of the indemnifier. It must be prudent
and authorized by the indemnifier.
COMMENCEMENT OF LIABILITY
When does the Indemnifier become liable to pay, or, when is the indemnity-holder
entitled to recover his indemnity?
The Indian Contract Act, 1872 is silent on the time of commencement of liability of
Indemnifier. On the basis of judicial pronouncement of courts, it can be said that the
liability of an indemnifier commences as soon as liability of the indemnity holder absolute
and certain. In other words, if the indemnity holder has incurred an absolute liability even
though he has himself paid nothing, he is entitling to ask the indemnifier to indemnify him.
The original English rule was that indemnity was payable only after the indemnity-holder
had suffered actual loss by paying off the claim. The maxim of law was: “you must be
damnified before you can claim to be indemnified.” But the law is different now.
In Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri, Chagla J explained the

transformation of process. It is true that under English law no action could be maintained
until the actual loss had been incurred. It was realized that indemnity might be worth very
little indeed if the indemnified could not enforce his indemnity till he had actually paid the
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loss. Therefore, the court of equity held that if his liability had become absolute then he
was entitled either to get the indemnifier to pay off the claim or to pay into court sufficient
money which would constitute a fund for paying off the claim whenever it was made.
Example: X promises to compensate Y for any loss that he may suffer by filing a suit
against Z. The court orders Y to pay Z damages of Rupees 5000/. As the loss has become
certain, Y may claim the amount of loss from X and pass it on to Z
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CONTRACT OF GUARANTEE
Contract of Guarantee – Definition, Nature and Scope – Difference between contract of

indemnity and Guarantee – Rights of surety – Discharge of Surety – Extent of Surety’s liability –
Co-surety
Contract of Guarantee:
A formal assurance (typically in writing) that certain conditions would be fulfilled
Sec.126 - A “contract of guarantee” is a contract to perform the promise, or discharge

the liability, of a third person in case of his default.
The function of a contract of guarantee is to enable a person to get a loan, or goods on

credit, or an employment.
Some person comes forward and tells the lender, or the supplier or the employer that he
(the person in need) may be trusted and in case of any default, “I undertake to be
responsible”. Guarantees are usually taken to provide a second pocket to pay if the first
should be empty.
Example: X and his friend Y enter a shop and X says to Z “Supply the goods required by
Y, and if he does not pay you, I will.” This is a contract of guarantee
Parties to the contract of guarantee- Sec 126
There are three parties to a contract of Guarantee-Principal debtor, Creditor and Surety.
Meaning of Principal Debtor [Section 126] The person in respect of whose default the
guarantee is given is called the 'Principal debtor'. Y is the principal debtor in the aforesaid
example.
Meaning of Creditor [Section 126] The person to whom the guarantee is given, is called
the 'creditor'. Z is the creditor in the aforesaid example.
Meaning of Surety [Section 126] The person who gives the guarantee is called the
'Surety'. X is the surety in the aforesaid example.
A GUARANTEE MAY BE EITHER ORAL OR WRITTEN
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ESSSENTIAL FEATURES OF CONTRACT OF GUARANTEE
The following are the requisites of a valid Guarantee:
1. All the essentials of a valid contract.
(i) The principal debtor need not be competent to contract. In case the principal debtor is
not competent to contract, the surety would be regarded as the principal debtor and would
be personally liable to pay.
(ii) Surety need not be benefited. According to Section 127, "Anything done, or any
promise made, for the benefit of the principal debtor, may be a sufficient consideration to
the surety for giving the guarantee."
(iii) A guarantee need not be in writing. According to Section 126, a guarantee may be
either oral or written.
2. Tripartite agreement
A contract of guarantee is a tripartite agreement between the principal debtor, creditor

and surety. There are three contracts as under:
(i) Contract between creditor and the principal debtor out of which the guaranteed
debt arises.
(ii) Contract between surety and the principal debtor by which the principal debtor
undertakes to indemnity the surety if surety is required to pay.
(iii) Contract between surety and the creditor by which the surety guarantees to pay
the principal debtor's debt if the principal debtor fails to pay.
3. Principal Debt
There must be an existing liability or a promise whose performance is guaranteed. Such

liability or promise must be enforceable by law. Hence, guarantee can be given only for
liability or promise which is enforceable by law. But there is an exception to this rule.
The exception is a guarantee given for minor's debt. Though minor's debt is not
enforceable by law, yet the guarantee given for minor's debt is valid.
4. Consideration:
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Consideration for guarantee [Section 127]: What constitutes consideration in a case of

guarantee is an important question and is laid down in Section 127 of the Act.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided
C will guarantee the payment of the price of the goods. C promises to guarantee the
payment in consideration of as promise to deliver the goods. This is a sufficient
consideration for Cs promise.
(b) A sold the goods and delivers them to B. C afterwards requests A to forbear to sue
B for the debt for a year, and promises that, if he does so, C will pay for them in default
of payment by B. A agrees to forbear as requested. This is a sufficient consideration for
Cs promise.
5. Guarantee not to be obtained by misrepresentation [section 142]
Any guarantee which has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the transaction,
is invalid.
6 Guarantee not to be obtained by concealment [section 143]
Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid. (London Omnibus Co v. Holloway)
Example: - X sells and delivers goods to Y. X afterwards requests Z to pay in default

of Y. Z agrees to do so. Here, Z cannot become surety without the consent of Y.
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Continuing Guarantee [Section 129]:
A Guarantee which extends to a series of transactions is called a 'continuing guarantee'.

A surety's liability continues until the revocation of the guarantee.
Example 1: On A’s recommendation, C employed B for the collection of rent from his
tenants. A promised to make good any default made by B This is a contract of
continuing guarantee.
Example 2: A guarantees payment to B, a tea-dealer to the extent of Rs 100, for any tea
he may supply to C from time to time. B supplies C with tea to the above value of Rs
100, and C pays B for it. Afterwards, B supplies C with tea to the value of Rs 200. C
fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly
liable to B to the extent of Rs 100.
REVOCATION OF CONTINUING GUARANTEE
1. By Notice of revocation [Section 130]
A continuing guarantee may at any time be revoked by the surety as to the future
transactions by notice to the creditor. However, the surety remains liable for the past
transactions which have already taken place.
Example: X gives guarantee to the extent of Rs 60,000 for the loans given from time
to time by Y to Z. Y gave a loan of Rs 20,000 to Z. Afterwards, X gives notice of
revocation. X is discharged from all liability to Y for any loan granted after the
revocation of guarantee but he is liable to Y for Rs. 20,000 on default of Z.
2. By Death of surety [Section 131]
In the absence of any contract to the contrary, the death of surety operates as a
revocation of a continuing guarantee as to the future transactions taking place after the
death of surety. However, the surety's estate remains liable for the past transactions
which have already taken place before the death of surety
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Rights of a Surety
After making a payment and discharging the liability of the principal debtor, the
surety gets various rights. These rights can be studied under three heads:
(i) rights against the principal debtors.

(ii) rights against the creditor, and
(iii) rights against the co-sureties.
Rights of a surety may be classified as under:
I. Rights against the principal debtor
(a) Right to Subrogation [Section 140]
On payment of the guaranteed debt or performance of the guaranteed duty; the surety
acquires all the rights which the creditor had against the principal debtor. Thus, the
surety steps into the shoes of creditor.
(b) Right to Indemnity [Section 145]
In every contract of guarantee there is an implied promise by the principal debtor to

indemnify the surety; and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but not those sums which he
had paid wrongfully
Example I: B is indebted to C, and A is surety for the debt. C demands payment from
A, and on his refusal sues him for the amount. A defends the suit, having reasonable
grounds for doing so, but he is compelled to pay the amount of the debt with costs. He
can recover from B the amount paid by him for costs, as well as the principal debt.
Example II: C lends B a sum of money, and A, at the request of B, accepts a bill of
exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands
payment of it from A, and on A's refusal to pay sues him upon the bill. A, not having
reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill
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and costs. He can recover from B the amount of the bill, but not the sum paid for costs,
as there was no real ground for defending the action
RIGHTS OF AGAINST CREDITOR
(a) Right to Securities [Section 141]
A surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into, whether the
surety knows of the existence of such security or not; and if the creditor loses, or,
without the consent of the surety, parts, with such security, the surety is discharged to
the extent of the value of the security.
Example I: C advances to B his tenant, Rs 2,000 on the guarantee of A. C has also a

further security for Rs 2,000 by a mortgage of Bs furniture. C cancels the mortgage. B
becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the
amount of the value of the furniture.
Rights against co-sureties
Meaning of Co-sureties: When the same debt or duty is guaranteed by two or more
persons, such persons are called as 'co-sureties'
(a) Co-sureties liable to contribute equally (Section 146):
Equality of burden is the basis of Co-suretyship. This is contained in section 146 which
states that “when two or more persons are co-sureties for the same debt, or duty, either
jointly, or severally and whether under the same or different contracts and whether with
or without the knowledge of each other, the co-sureties in the absence of any contract
to the contrary, are liable, as between themselves, to pay each an equal share of the
whole debt, or of that part of it which remains unpaid by the principal debtor”
Example 1: A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E, He
makes default in payment. A, B and C are liable, as between themselves, to pay
1,00,000 rupees each.
Example 2: A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E, and
there is a contract between A, B and C that A is to be responsible to the extent of one-
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quarter, B to the extent of one-quarter, and C to the extent of one- half. He makes default
in payment. As between the sureties, A is liable to pay 25,000 rupees, B 25,000 rupees,
and C 50,000 rupees.
(b) Liability of co-sureties bound in different sums (Section 147):
The principal of equal contribution is, however, subject to the maximum limit fixed by
a surety to his liability. Co-sureties who are bound in different sums are liable to pay
equally as far as the limits of their respective obligations permit
Example 1: A, B and C, as sureties for D, enter into three several bonds, each in a
different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000
rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes
default to the extent of 3,00,000 rupees. A, B and C are each liable to pay 1,00,000
rupees.
Example 2: A, B and C, as sureties for D, enter into three several bonds, each in a
different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000
rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes
default to the extent of 4,00,000 rupees; A is liable to pay 1,00,000 rupees, and B and
C 1,50,000 rupees each.
Effect of Release of One Co-surety [Section 138]
Where there are co-sureties, a release by the creditor of one of them does not discharge
the others; neither does it free the surety so released from his responsibility to the other
sureties. However, under English law the release of one co-surety shall release all the
other co-sureties since the liability of co- sureties under English law is only joint and
not joint and several.
Extent of Surety’s Liability Sec.128
In the absence of contract to the contrary the liability of the surety is coextensive with
that of the principal debtor. It means that the liability of surety is equal to that of the
principal debtor unless otherwise agreed.
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The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract.
(i) The term “co-extensive with that of principal debtor” means that the surety is
liable for what the principal debtor is liable.
(ii) The liability of a surety arises only on default by the principal debtor. But as
soon as the principal debtor defaults, the liability of the surety co-extensive with
the liability of the principal debtor, in the sense that the surety will be liable for
all those sums for which the principal debtor is liable.
(iii) Where a debtor cannot be held liable on account of any defect in the document,
the liability of the surety also ceases.
(iv) Surety’s liability continues even if the principal debtor has not been sued or is
omitted from being sued. In other words, a creditor may choose to proceed
against a surety first, unless there is an agreement to the contrary.
(v) Surety’s liability may be conditional. The surety may impose certain conditions
in the contract of guarantee. Until those conditions are met, the surety shall not
be liable.
Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The

bill is dishonoured by C. A is liable not only for the amount of the bill but also for any
interest and charges which may have become due on it.
Important cases on Sureties liability
In Bank of Bihar Ltd. v. Damodar Prasad, The Supreme Court held that the liability
of the surety is immediate and cannot be defended until the creditor has exhausted all
his remedies against the principal debtor.
In Maharashtra Electricity Board Bombay v. Official Liquidator and Another, under

a letter of guarantee the bank undertook to pay any amount not exceeding Rs.50000/-
to the Electricity Board. It was held that the bank is bound to pay the amount due under
the letter of guarantee given by it to the Board.
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In Kellappan Nambiar v. Kanhi Raman in this case that if the principal debtor happens
to be a minor and the agreement made by him is void, the surety too cannot be made
liable in respect of the same because the liability of the surety is co-extensive with that
of principal debtor. It has been held that the guarantee of the loan or an overdraft to an
infant is void because the loan to the infant itself is void ab intio.
Discharge of Surety from Liability
Under any of the following circumstances a surety is discharged from his

liability:
i) by the revocation of the contract of guarantee,
ii) by the conduct of the creditor, or
iii) by the invalidation of the contract of guarantee
BY REVOCATION OF CONTRACT OF GUARANTEE
• BY NOTICE [SECTION 130] A specific guarantee may be revoked by a surety by

notice to the creditor if the liability of the surety has not yet accrued. A continuing
guarantee may at any time be revoked by the surety as to future transactions by notice
to the creditor. However, the surety remains liable for the past transactions which have
already taken place.
• BY THE DEATH OF SURETY [SECTION 131] In the absence of any contract to

the contrary, the death of a surety operates as a revocation of a continuing guarantee as
to future transactions taking place after the death of surety. However, the deceased
surety's estate remains liable for the past transactions which have already taken place
before the death of the surety but will not be liable for the transactions taking place after
the death of surety even if the creditor has no notice of surety's death.
BY CONDUCT OF CREDITOR
(i) By Variance In Terms of Contract [Section 133]
Any variance, made without the surety's consent, in the terms of the contract between
the principal debtor and the creditor, discharges the surety as to transactions subsequent
to the variance.
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Example: C contracts to lend A Rs 5,000 on the first March. A guarantees repayment.

C pays Rs 5,000 to A on the first January. A is discharged from his liability as the
contract has been varied in as much as C might sue A for the money before the first of
March.
(ii) BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR [SECTION

134]
The surety is discharged by any contract between the creditor and the principal debtor,
by which the principal debtor is released, or by any act or omissions of the creditor, the
legal consequence of which is the discharge of the principal debtor.
Example : A contracts with B for a fixed price to build a house for A within a stipulated
time, B supplying the necessary timber. C guarantees A's performance of the contract.
B omits to supply the timber. C is discharged from his suretyship.
(iii) BY ARRANGEMENT [SECTION 135]
A contract between the creditor and principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue the principal debtor,
discharges the surety, unless the surety assents to such contract.
(iv) Loss of security (Section 141)
If the creditor parts with or loses any security given to him at the time of the guarantee,
without the consent of the surety, the surety is discharged from liability to the extent of
the value of the security.
(v)By Creditor's Act or Omission Impairing Surety's Eventual Remedy

[Section139]
If a creditor does any act which is inconsistent with the rights of the surety, or omits to
do an act which is his duty to the surety requires him to do, and the eventual remedy of
the surety himself against the principal debtor is thereby impaired, the surety is
discharged. Example I: B contracts to build a ship for C for a given sum, to be paid by
installments as the work reaches certain stage. A becomes surety to C for B's due
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performance of the contract. C, without the knowledge' of A, prepays to B the last two
instalments. A is discharged by this prepayment.
BY INVALIDATION OF CONTRACT
(a) Guarantee Obtained by Misrepresentation [Section 142]
Any guarantee which has been obtained by means of misrepresentation made by a

creditor or with his knowledge and assent, concerning a material part of the transaction,
is invalid.
(b) Guarantee Obtained by Concealment [Section 143]
Any guarantee which a creditor has obtained by means of keeping silence to material
circumstances is invalid
Example: - X employs Y as a clerk to collect money for him. Y fails to account for
some of his receipts and X, in consequence calls upon Z to furnish security for his duly
accounting. Z gives guarantee for Ys duly account. X does not inform Z about Ys
previous conduct. Y, afterwards, makes default. 'z is not liable because the guarantee
was obtained by concealment of facts.
(c) Failure of Co-surety to Join a Surety [Section 144]
Where a person gives a guarantee upon a contract that a creditor shall not act upon it
until another person has joined in it as co-surety.
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MODULE 2
CONTRACT OF BAILMENT
Definition – Kinds – Rights and Duties of Bailor and Bailee – Rights of

Finder of goods as Bailee
BAILMENT
Definition
A Bailment is a special contract defined under section 148 of the Indian Contract
Act, 1872. It is derived from a French word i.e., “bailer” which means “to
deliver”.
In Halsbury’s Laws of England, it is defined as “a delivery of personal chattels

in trust, on a contract, express or implied, that the trust shall be duly executed and
the chattels redelivered in either their original or an altered form, as soon as the
time of use for, or condition on which they were bailed shall have elapsed or been
performed.”
Justice Blackstone defines Bailment as ‘a delivery of goods in trust, upon

contract, either expressed or implied, that the trust shall be faithfully executed on
the part of the bailee’.
Definition - Contract of Bailment (Sec. 148)
A ‘bailment’ is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
The person delivering the goods is called the "bailor". The person to whom they
are delivered is called the "bailee".
Example: A has a motor cycle; he sells to B who leaves the motorcycle in the
possession of A while he is out of town. Here, A becomes the bailee even though
he was the owner originally
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NOTE 1: Mere custody of goods is not the same as delivery of possession. A

guest who uses the goods of the host during a party is not a bailee. It was held
in Reaves vs. Capper that a servant in custody of certain goods by the nature of
his job is not a bailee. Similarly, a servant holding his master’s umbrella is not a
bailee but is a custodian.
NOTE 2: Hiring and storin g goods in a bank locker by itself is not bailment
thought there is delivery of goods to the bank premises. The goods are in no
way entrusted to the bank. A bank cannot be presumed to know what goods
are stored in any given locker at all the times. If a bank is given actual and
exclusive possession of the property inside a locker by the person who hired
the locker, only then can bailment under Section 148 can be presumed.
CLASSIFICATION OF BAILMENT
❑ On the basis of Remuneration
• Gratuitous Bailment
When a bailment is made without any consideration or benefit to the bailor or to

the bailee, it is referred to as gratuitous bailment.
For example, when one lends a book to a friend free of cost.
• Non-Gratuitous Bailment
When there is a consideration for bailment between the bailor and the bailee then
it is referred to as non-gratuitous bailment.
For example, when someone gets a book issued from a library in exchange for a
fee.
❑ On the basis of benefits to the parties
1. For the exclusive benefit of the bailor
the bailor delivers his/her good to the bailee for safe custody. There is no benefit
for the bailee.
For example, leaving a pet with a neighbor when going out.
2.For the exclusive benefit of the bailee
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In this case, the bailor delivers a good for the benefit of the bailee.
For example, a friend borrowing our car for a week.
3.For the mutual benefit of them both
In this case, the bailor delivers his good to the bailee for consideration and both
the parties get benefit out of bailment,
For example, giving a bike for repair to a mechanic, for which the mechanic gets
paid.
ESSENTIAL FEATURES
❑ The existence of a valid contract
❑ Delivery of Possession (SEC 149)
• There must be a delivery of goods, which means, delivery of possession of

the goods by the bailer to the bailee to fulfill the purpose of bailment.
• Possession refers to exercising control over the good and excluding any
other person to do the same.
• The delivery of possession can either be actual or constructive.
• Actual Delivery: When goods are physically handed over to the Bailee by
the bailor.
• Eg: delivery of a car for repair to workshop
• Constructive Delivery: Where delivery is made by doing anything that

has the effect of putting goods in the possession of the Bailee or of any
person authorized to hold them on his behalf.
• Eg: Delivery of the key of a car to a workshop dealer for repair of the car.
• In Bank of Chittor vs. Narsimbulu [AIR 1966 AP 163], a person pledged

cinema projector with the bank but the bank allowed him to keep the
projector so as to keep the cinema hall functional. It was held that there
was constructive delivery because action on part of the bailor had changed
the legal character of the possession of the projector. Even though the
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actual and physical possession was with the person, the legal possession
was with the bank, the bailee.
• Kaliaperumal V. Visalakshmi (1938) AIR 1938 Mad 32, In this case A

lady employed a goldsmith to melt old jewellery and prepare new
ornaments. Every evening she used to receive incomplete ornaments from
the goldsmith and put them in a box which was left in the goldsmith’s shop.
It was held that the goldsmith was not liable for the loss of the ornament as
the goldsmith cannot be said to have been the bailee of the goods as the
lady kept the key with her and there was no effective delivery of the
contents of the box to the goldsmith either actually or constructively. Here
the Court held that delivery of possession is an essential element of
bailment.
❑ DELIVERY SHOULD BE UPON CONTRACT
• There must be a contract between the bailor and the bailee for such transfer
or good and its return.
• If there is no contract, there cannot be bailment. Moreover, the contract

can either be expressed or implied.
• Exception: If the good is lost, the finder of good will be seen as the bailee
even if there was no contract of Bailment or delivery of goods under a
contract.
• A finder of goods is a person who found a lost good belonging to someone

else and keeps it under his possession until the owner of the good is found.
This leads to an involuntary form of Bailment contract between them. The
finder has all rights and duties that of a bailee.
❑ Delivery must be for some purpose
• It is essential that there must be a purpose for which the delivery of the
goods takes place.
❑ Return of goods
• After the completion of the purpose, the good must be delivered to the
bailor or dealt with as per his instructions.
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• If he/she is not bound to return the good then there is no bailment.
• Even if there is an agreement to return an equivalent and not the same

good, it will not amount to bailment.
For example, a tailor receives a saree for stitching as he is the bailee. After
the saree has been stitched, the tailor is supposed to return it to the bailor.
In Ultzen v. Nicols, an old customer went in to a restaurant for the purpose

of dining there. When he entered the room, a waiter took his coat, without
being asked, and hung it on a hook behind him. When the customer rose to
leave the coat was gone. What the waiter did might be no more than an act
of voluntary courtesy towards customer, yet the restaurant keeper was held
liable as a bailee.
DUTIES OF BAILOR
1) Duty to disclose defects:
Section 150 of the Indian Contract Act, 1872 bound the bailor with certain
duties to disclose the latent facts specifically pertaining to defect in goods.
Bailor’s duties of disclosure are:
Gratuitous Bailment: It is the duty of the bailor to disclose all the defects
in the goods that he is aware of to the Bailee that can interfere with the use
of goods or can expose him to extraordinary risks. And failure to do the
same will make bailor liable for damages.
Non-Gratuitous Bailment (Bailment for Reward): This duty particularly

deals with the goods given on hire. As per this provision, when the goods
are bailed for hire, then in such a situation even if the bailor is aware of the
defect in the goods or not will be held liable for the injury that has been
caused due to the existence of such defect.
In Hyman v Nye & Sons, the plaintiff took a carriage on hire from the
defendant but the carriage was not fit for the journey and subsequently, the
plaintiff suffered injuries. The court held that even though the defendant
was aware of such defect or not he shall be liable.
2) Duty to bear expenses: Section 158 of the Indian Contract Act says
that, where, by the conditions of the bailment, the goods are to be kept or
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to be carried, or to have work done upon them by the bailee for the bailor,
and the bailee is to receive no remuneration, the bailors shall repay to the
bailee the necessary expenses incurred by him for the purpose of the
bailment.
The general rule in those bailments where the bailee is not to receive any
remuneration is that the bailor should bear the usual expenses in keeping
the goods or in carrying the goods or to have work done upon them by the
bailee for the bailor. The bailor must repay to the bailee all the necessary
expenses which the bailee has already incurred for the purpose of bailment.
For example- if A, a farmer gives some gold to his friend B. who is a

goldsmith, to make a gold ring. B is not to receive any remuneration for
the job. But A has a duty to repay to B any expenses incurred by him in
making the ring.
In cases of non-gratuitous bailments (where the bailee is to receive

remuneration). bailor has a duty to bear extraordinary expenses, borne
by the bailee.
For example, if a horse is lent for a journey, the expenses for feeding the
horse would be payable by the bailee. But, if the horse becomes sick and
expenses have to be incurred, or for the horse is stolen and expenses are
incurred for recovery. the bailor should pay those expenses.
3.Duty of Gratuitous Bailor
• To indemnify bailee for loss in case of premature termination of

Gratuitous Bailment: -
• A Gratuitous Bailment can be terminated by the bailor at any time even

though the bailment was for a specified time or purpose.
• But in such a case, the loss sustained by the bailee from such premature
termination should not exceed the benefit he has derived out of the
bailment.
• If the loss exceeds the benefit, the bailor shall have to indemnify the
bailee.
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• For example, ‘A’ lends an old discarded bicycle to ‘B’ gratuitously for
three months, ‘B’ incurs Rs. 120/- on its repairs. If ‘A’ asks for the return
of bicycle after one month, he will have to compensate ‘B’ for expenses
incurred by ‘B’ in excess of the benefit derived by him.
4. Duty to receive back the goods: It is the duty of the bailor that when
the bailee, in accordance with the terms of bailment, returns the goods to
him that: bailor should receive them. If the bailor, without any reasonable
reasons refuses to take the goods back, when they are offered at a proper
time and at a proper place, the bailee can claim compensation from the
bailor for all necessary and incidental expenses, which the bailee
undertakes to keep and protect the goods.
5.To pay damages for defect in bailor's title (Section 164)-The bailor is
responsible to the bailee for any loss which the bailee may sustain the
reason that the bailor was not entitled to make the bailment, or to receive
back the goods, or to give directions, respecting them.
Duties of Bailee
1. Duty to take reasonable care (Section 151-152)
Section 151 of the Indian Contract Act lays down the degree of care, which
a bailee should take, in respect of goods bailed to him. The bailee is bound
to take as much care "if the goods bailed to him as a man of ordinary
prudence would, under similar circumstances, take of his own goods of the
same bulk, quality and value as the goods bailed. The standard of care is
same whether the bailment is gratuitous or for reward. So, a bailee is liable
when the goods suffer loss due to the negligence on the part of bailee.
However, under Section 152 of the Act, the standard of care of ordinary
prudent man can be increased by entering into a contract, between the
bailor and the bailee. In that situation the bailee, in order to save himself
from any liability, would be bound to take as much care, as provided by
the terms of contract. In the absence of any such contract, if the bailee has
taken care as an ordinary Duty to take reasonable care of the goods bailed
Not to make unauthorized use of goods Duties of Bailee Duty not to mix
goods Duty to return the goods Duty not to setup adverse title Duty to
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return accretions Duty to return the goods prudent man of the goods bailed,
he is not responsible for the loss, destruction or deterioration of the goods
bailed.
If A gives a diamond ring to be kept by its owner for safe custody with
another person B and B is not to receive any reward for it. The bailee
should keep it locked in an iron safe, or some other safe place but not keep
it in his room, simply because the bailment is gratuitous.
2. Duty not to make any unauthorized use. (Section 153-154)
The bailee is under a duty to use the bailed goods in accordance with the terms
of bailment. If bailee does any act with regard to the goods bailed, which is
not in accordance with the terms of bailment, the contract is voidable at the
option of the bailor. Besides it, the bailee is liable to compensate the bailor
for any damage caused to the goods. By an inconsistent use of the goods
bailed. If he makes unauthorized use of goods, bailee would not be saved from
his liability even if he has taken reasonable care of the ordinary prudent man.
Bailee is duty bound to use the goods for a specific purpose only and not
otherwise. If he uses the goods for any other purpose than what is agreed for
then the bailor has the right to terminate such bailment or is entitled with
compensation for damage caused due to unauthorized use. (Section 153-154)
3.Duty not to mix bailor’s goods with his own goods (Section 155-157)
i) If the bailee, with the consent of the bailor, mixes the goods of the bailor
with his own goods, the bailor and the bailee shall have an interest, in
proportion to their respective shares, in the mixture thus produced
ii) If the bailee, without the consent of the bailor, mixes the goods of the
bailor with his goods, and the goods can be a separated or divided, the
property in the goods remains in the parties respectively; but the bailee is
bound to bear the expense of separation or division, and any damages arising
from the mixture (Section 156).
For example, A bails 100 bales of cotton marked with a particular mark to B.
B, without A's consent, mixes these 100 bales with other bales of his own,
bearing a different mark, A is entitled to have his 100 bales returned, and B is
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bound to bear all expenses incurred in the separation of the bales, and any
other incidental damage.
iii) If the bailee, without the consent of the bailor, mixes the goods of the
bailor with his goods, and the goods can be a separated or divided, the
property in the goods remains in the parties respectively; but the bailee is
bound to bear the expense of separation or division, and any damages arising
from the mixture (Section 156)
For example, A bails 100 bales of cotton marked with a particular mark to B.
B, without A's consent, mixes these 100 bales with other bales of his own,
bearing a different mark, A is entitled to have his 100 bales returned, and B is
bound to bear all expenses incurred in the separation of the bales, and any
other incidental damage. goods without sorting them out. It was held that the
bailor was entitled to refuse to take delivery in to and claim compensation for
loss or damage.
4.Duty to return goods on fulfilment of the purpose (Sec. 159- 161, 165-167)
It is the duty of the bailee to return or to deliver the goods according to the
directions of bailor, without demand, on the expiry of the time fixed or when the
purpose is accomplished. If he does not return or deliver as directed by the bailor,
or tender the goods at the proper time, he becomes liable to the bailor for any loss,
destruction or deterioration of the goods from that time. He is liable even without
his negligence.
For example, a book-binder kept books beyond the time allowed to him for
binding, and they were lost in an accidental fire, the binder is liable.
5.Duty to deliver to the bailor increase or profit on the goods bailed (Section
163)
In the absence of any contract to the contrary, the bailee must deliver to the bailor,
or according to his directions, any increase or profit which have accrued from the
goods bailed. For example, A leaves a cow in the custody of B to be taken care
of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.
Bailee’s Rights
1.Right to claim damages (Section 150): If the bailor has bailed the goods,
without disclosing the defects in goods, and the bailee has suffered some loss, the
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bailee has a right to sue the bailor for damages. A hired a carriage of B. The
carriage is unsafe, though B is not aware of it, and A is injured. B is responsible
to A for the injury.
2) Right to claim reimbursement: In case of non-gratuitous bailment the bailee

has a right to recover from the bailor, all necessary expenses, which the bailee
had incurred for achieving the purpose of bailment. In case of a gratuitous
bailment, bailee has a right to recover from the bailor, all extraordinary expenses,
borne by the bailee or the purposes of bailment (Section 158).
3) Right to recover losses: It is a right of bailee to recover from the bailor, all
losses suffered by him by reason of the fact that the bailor was not entitled to
make the bailment of the goods or to receive back the goods, or to give directions
regarding them (Section 164). In the contract of Bailment, the Bailee incurs
expenses to ensure the safety of goods. The Bailee has the right to recover such
expenses from the bailor. (Section 158)
4) Right to deliver goods to any one of the joint bailors: If the goods are owned
and bailed by more than one person, the bailee has a right, in the absence of a
contrary contract, to deliver back the goods to any one of the joint owners, or may
deliver the goods back according to the directions of one of the joint owners,
without the consent of all. (Section 165).
5) Right to deliver the goods to bailor even if his title is defective: If the title
of bailor is defective and the bailee, in good faith returns the goods to the bailor
or according to the directions of bailor, the bailee is not liable to the true owner
in respect of such delivery (Section 166).
6) Right to lien: When the bailee, in accordance with the purpose of agreement
has rendered any service involving the exercise of labour or skill, to the goods
bailed, and his lawful payments are not made by the bailor, the bailee has a right
to retain unless there is a contract to the contrary, the goods bailed, until he
received his remuneration for the services rendered by him. This right to retain
goods is known as bailee's lien (Section 170). The bailee has a right of lien in
respect of charges due to him for work of labour done in respect of goods bailed.
7)Right to suit against a wrongdoer: After the goods have been bailed and any
third party deprives the Bailee of use of such goods, then the Bailee or bailor can
bring an action against the third party. (Section 180).
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Particular Lien: A lien which can be exercised only on goods in respect of which
some payment is due is called particular lien. Where the bailee has, in accordance
with the purpose of the bailment, rendered any service involving the exercises of
labour or skill in respect of the goods bailed, he has, in the absence of a contract
to the contrary, a right to retain such goods until he received due remuneration
for the services, he has rendered in respect of them (Section 170). For example,
A delivers a rough diamond to B, a jeweller, to be cut and polished, which is
accordingly done. B is entitled to retain the stone till he is paid for the service he
has rendered.
General Lien: The right of general lien, as provided for in Section 171, means
the right to hold the goods bailed as security for a general balance of account.
Whereas right of particular lien entitles a bailee to detain only that particular
property in respect of which charges are due. Right of general lien entitles the
bailee to detain any, goods bailed to him for any amount due to him whether in
respect of these goods or any other goods. The right of general lien is privilege
and is specially conferred by Section 171 on certain kinds of bailees only. They
are bankers, factors, wharfingers, attorneys of a high court, and policy brokers.
RD Saxena Vs Balram Prasad (AIR 2000 SC 2912)
The appellant was appointed as a legal advisor to the Madhya Pradesh State
Co-operative Bank Ltd. (herein referred to as ‘Bank’) in 1990. He used to
conduct cases on behalf of the said bank. Subsequently, on 17.7.1993 the bank
terminated the retainers of the appellant; and requested him to return his files
related to the bank. Instead of returning the files, he informed the bank that only
after dues amounting to rupees 97,100/- were paid will he return the files.
Hence, the Bank filed a complaint before the State Bar Council of Madhya
Pradesh on 3.2.1994; wherein the appellant contended that he has a right of lien
on those files; whereas the respondent contended that the appellant is guilty of
professional misconduct by not returning the files to his client.
Subsequently, the matter got transferred to the disciplinary committee of Bar
Council of India; wherein the appellant was held guilty of professional
misconduct and was imposed a fine of rupees 1000/-; and also debarred him
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from practicing for 18 months; and was directed to return all the case bundles
of the client without any delay.
Issue
Whether the advocate can have a lien on the litigation papers entrusted to him by
his clients for pending fees?
Arguments
Arguments by the appellant:
(1) The failure in the part of the Bar Council of India for not considering the
defence of the appellant; wherein he was having a lien over the files for unpaid
fees dues due to him has resulted in the miscarriage of justice.
(2) Section 171 of the Contract Act, 1872 clearly states that; “Bankers, factors,
wharfingers, attorneys of a High Court and policy-brokers may, in the absence
of a contract to the contrary, retain as security for a general balance of the
account, any goods bailed to them; but no other persons have a right to retain,
as a security for such balance, goods bailed to them unless there is an express
contract to that effect”; and hence he can have a lien on litigant’s paper.
Arguments by the respondent:
(1) After the termination of engagement with the client, an advocate cannot retain
the files and can have no lien over it.
Judgment: Decision of the court
Rule of Law-
Section 148 of the Contract Act defines the bailment which states that; if the
goods are transferred from one person to another for some purpose; and after
completion of the purpose the goods have to be returned to; or otherwise
disposed of according to the directions of the person delivering them then such
transfer can be termed as a bailment.
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But in this case, the goods are not bailed to the appellant/advocate as there was
no delivery of the goods; because the advocate owned paper on his account.
The term ‘goods’ has to be understood in the sense of the Goods and Sales Act,
1930 wherein section 2(7) states “every kind of movable property other than
actionable claims and money; and includes stock and shares, growing crops,
grass, and things attached to or forming part of the land which are agreed to be
severed before sale or under the contract of sale.”
Thus, the goods which fall in the purview of section 171 should have
marketability i.e., they should be saleable.
The case files in the present case are neither saleable nor can be converted into
money; hence section 171 is of no merit.
FINDER OF GOODS
According to Section 71 of the Indian Contract Act, 1872 by the finder of lost
goods we mean a person who comes across the goods that are unclaimed or whose
actual owner is not known. Such a person has to take care of these lost goods as
Bailee unless a true owner is found. He has the same responsibility, rights and
duties of that of a Bailee as per section 151 of the Indian Contract Act, 1872. He
is duty bound to return the goods to the actual owner. He has to take all measures
to find actual owners. He cannot refuse the delivery of goods else he will be liable
for non- delivery of goods.
Duties of a Finder of Goods
Under Section 71 of the Contract Act, a finder of goods has same duties with
regards the goods found, as that of a bailee. Hence,
1) The finder should take reasonable care of the goods found.
2) He should not put the goods for his personal use.
3) He should not mix the goods found with his own goods.
4) It is the duty of the finder of goods to find the real owner of the goods and then
to entrust the goods to him.
Rights of Finder of Lost Goods
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1. The right of Lien: According to section 168 of the Indian Contract Act,
1872 finder of the lost goods can exercise his right of particular lien if the
actual owner refuses to make the payment of the expenses incurred to
preserve those goods or to find the actual owner. But finder of the lost
goods cannot sue him for the same.
2. The right of Claiming the Award, if announced by the owner:

According to section 168 of the Indian Contract Act, 1872 finder of lost
goods cannot sue the actual owner for expenses incurred by him. But he
can sue him for the award that is announced by the owner and he refuses
to pay the same.
For instance, X finds Z’s wallet and gives it to him. Z promises X to give
him Rs. 100 for the same. This is a contract of bailment and Z is bound to
pay the reward.
3. Right to sell the goods found: According to section 169 of the Indian
Contract Act, 1872 finder of the lost goods also have the right to sell the
goods on certain circumstances i.e., either he could not find the actual
owner after taking all due diligence or the goods or of such nature that their
value might perish.
TERMINATION OF BAILMENT
A contract of bailment comes to an end under the following cases:
1) On the expiry of fixed 'period: If the goods are bailed-for a fixed time, the
bailment is terminated at the end of that period. Expiry of time When the goods
are bailed for a fixed time, the contract of bailment is terminated at the expiry of
the time fixed.
2) On the fulfilment of the object: If the goods are bailed for some specific
purpose or purposes, the bailment is terminated on fulfilling the object.
Accomplishment of purpose: -When the purpose for which goods were bailed has
been accomplished, the contract of bailment is terminated and goods are returned
to the bailor.
3) Inconsistent use of bailed goods: If the bailee uses the goods in contravention
of the terms of bailment, the bailor may terminate the bailment even before the
term of bailment. Bailee’s inconsistent act-A contract of bailment ‘is voidable
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(terminated) at the option of the bailee does any act with regard to the goods
bailed’ with the conditions of the bailment.
4) Destruction of the subject matter: A bailment is terminated if the subject

matter of the bailment is destroyed or because of some change in the nature of
goods bailed if the goods become incapable of being used for bailment.
5) Termination of gratuitous bailment: a gratuitous bailment can be terminated

by the bailor at any time even though the bailment was for a fixed period or
purpose. But in such a case, the loss to be suffered by the bailee from such
premature termination should not exceed the benefit he had derived from the
bailment. If the loss exceeds the benefit, the bailor shall indemnify the bailee.
6) Death: A gratuitous bailment is terminated by the death of either the bailor or

the bailee.
PLEDGE
Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under

section 172 of the Indian Contract Act, 1892. By pledge, we mean bailment of
goods as a security for the repayment of debt or loan advanced or
performance of an obligation or promise.
TWO PARTIES
1.“Pawnor”- The bailor in case of a pledge is called as pawnor or pledger. It

means the person who delivers the goods as security for payment of a debt or
performance of a promise is called the pawnor.
2. “Pawnee”- The bailee in case of a pledge is called as pawnee or pledgee. It

means the person to whom the goods are delivered as security for payment of a
debt or performance of a promise is called the pawnee.
ESSENTIALS OF PLEDGE
1. Two Parties- Pawnor and Pawnee
2. Delivery of goods (actual or constructive)
3. For some purpose i.e., security of loan or performance of promise
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4. Upon a Contract
5. To be returned, when loan paid off.
In Revenue Authority v Sudarsanam pictures, it has been held that an agreement

wherein, the producer of a film agrees to deliver final prints of the film under
production, when the same are ready, to a financier- distributor in return for the
finance provided by the latter, is not pledge because there is no delivery of the
goods.
In Bank of Chittoor v. Narasimhulu, the bailor of a cinema projector and other

accessories requested the bailee bank to allow the pledged goods to remain in his
possession and promised to hold the same in trust for the bailee, and also further
promised to hand over the possession of the same to the bank whenever
demanded. It was held that there was constructive delivery i.e., delivery by
attornment to the bailee, and the bailor’s possession was in fact the possession of
the bailee. The transaction was, therefore a valid pledge.
RIGHTS OF PAWNEE
1. Right of Lien (S. 173)- The Pawnee has the right to retain the goods pledged
with him until he is paid
i) money due under the pledge;
ii) interest on debt not paid; and
iii) necessary expenses for preservation of goods.
2. Right of retainer for subsequent advances (S. 174)-
There is a presumption that if there are subsequent advances by the pawnee to the
pawnor, then, they are also considered to be the part of the original debt and
therefore, the pawnee has a right to retain the right to retain the goods for non-
payment of the subsequent advances.
3. Right to extraordinary expenses (S. 175)-
The pawnee has the right to recover extraordinary expenses incurred by him for
the preservation of the goods pledged. However, he has no right to retain the
goods in case of non-payment of extraordinary expenses: he can only sue to
recover them.
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4.Pawnee’s right where pawnor makes default (S. 176)
i) he may file a suit against the pawnor upon the debt or promise and may retain
the goods pledged as a collateral security.
ii) he may sell the goods pledged, after giving the pawnor a reasonable notice
of the sale.
iii) he can recover from the pawnor any deficiency arising on the sale of the
goods by him and return back to the pawnor if there is any surplus coming out
of sale.
DUTIES OF A PAWNEE
1. Not to use the goods: The Pawnee has no right to use the goods However,
he may use the goods, if he has been so authorised by the pawnor. Duty not
to make unauthorised use of goods pledged.
2. Return the goods: The Pawnee must return the goods if the pawnor pays
the debt or performs his promise. Duty to return the goods when the debt
has been repaid or the promise has been performed.
3. Take reasonable care: The Pawnee must take such care of goods pledged
as a man of ordinary prudence would take care of his own goods. Duty to
take reasonable care of the pledged goods.
4. Not to mix goods: The Pawnee must not mix his own goods with the goods
pledged. Duty not to mix his own goods with the goods pledged.
5. Return increase in goods: The Pawnee must return to the pawnor any
accretion to the goods pledged with him. Duty to deliver increase (if any),
to the goods pledged.
RIGHTS OF PAWNOR
1. Right to get back goods- The pawnor has a right to get back his goods
pledged on the performance of the promise or repayment of loan and interest,
if any.
2. Preservation and maintenance of goods- The pawnor has a right to see that
the pawnee like bailee, preserves the goods pledged and properly maintains
them.
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3. Right increase in goods- The pawnor has the right to recover from pawnee
any increase in goods pledged.
4. Right of Redemption (section 177)- It is said that “once a pledge, always a

pledge”. The debtor has right to redeem the pledge anytime. There is no
time limit.
The only limitation of time- i.e., goods not sold by pawnee after giving
reasonable notice. If goods sold then right of redemption is no more. He must
pay expenses which have arisen from his default.
Legal Heir’s right to Redemption
In case of death of pawnor, the pledge made by him can be redeemed by his
legal heirs on meeting the liabilities concerning the pledge.
Case: Kamili Sarojini v. Indian Bank:- Gold ornaments were pledged by

husband of petitioner with the respondent bank as a security for gold loan.
During his lifetime, the husband of petitioner had executed a notarized will,
whereunder she was to clear the gold loan availed by her husband and take the
ornaments pledged as a surety for the loan, along with the balance amount
existing in his account with the bank. The bank insisted on production of a
copy of the will or obtaining succession certificate. Rejecting the demand of
the Bank, the Andhra Pradesh H.C directed the bank to permit the petitioner
to repay the loan amount and to hand over to the petitioner the ornaments as
well as the amount lying in the deceased husband’s account.
DUTIES OF PAWNOR
1. Pay the debt- The pawnor is liable to pay the debt or perform the promise.
2. Pay extra-ordinary expenses- The pawnor is liable to pay to the pawnee any
extraordinary expenses incurred by the pawnee for preservation of goods.
3. Disclose faults in goods- The pawnor is liable to disclose all the faults which
a) are material for use of the goods; or
b) may put the pawnee to extraordinary risks.
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4. Indemnify the pawnee- The pawnor must indemnify the pawnee, if loss is
caused to the pawnee due to defect in pawnor’ s title to the goods.
WHO MAY PLEDGE
Any of the following persons may make a valid pledge:
i) The owner, or his authorised agent, or
ii) One of the several co-owners, who is in the sole possession of goods,
with the consent of other owners, or
iii) A Mercantile agent, who is in possession of the goods with the consent
of real owner, or (Sec. 178)
iv) A person in possession under a voidable contract, before the contract

is rescinded, or (Sec. 178 A)
v) A seller, who is in possession of goods after sale [Sec. 30(1)] or a buyer

who has obtained possession of the goods before sale, [Sec.30 (2)] or
vi) A person who has a limited interest in the property. In such a case the
pawn is valid only to the extent of such interest. (Sec. 179)
Note: If a servant has the custody of the goods, or a tenant gets the
possession of a furnished house, the servant cannot pledge the goods, nor
can a tenant pledge the furnishing materials in his possession. A person
obtaining the goods fraudulently does not have any right to pledge them.
Pledge by Non-Owner
❑ Pledge by Mercantile agent
Section 178 of the Indian Contract Act states that the pledge between the
mercantile agent and Pawnee can be valid if the agent has the possession of the
goods with the consent of the owner and the Pawnee acted good faith and does
not know about the original title of the goods.
Illustration
SPECIFIC CONTRACT
If A is a mercantile agent of B bails the bike of B which is in his possession to D.

D in good faith and does not know about the title of the bike accept as security.
Here the pledge is considered as valid. But if B knows about title, then the pledge
will not be held valid.
❑ Pledge by the person in possession under voidable contract
As per section 178 ‘A’ of the Indian Contract Act, the pledge between the pawnor
having the possession of the goods under voidable contract and pawnee can be
valid, provided that during the pledge the contract has not been revoked and the
pawnee acted in good faith and does not have any idea about the title of the goods.
Phillips v. Brooks Ltd., a person, North, went to the plaintiff’s shop and selected
some jewellery. He falsely represented himself to be “Sir George Bullogh”, a man
of credit, and thereby persuaded the plaintiff to take the payment by cheque and
handover the ring immediately. The cheque was subsequently dishonored. Before
the plaintiff could avoid the contract on the ground of fraud by North, North had
pledged the ring to the defendant. The defendant had taken the ring in good faith
and without any notice of the fact that the goods with North (pawnor) were under
a voidable contract. It was held that the pledge was valid.
Illustration
If A has possession of the watch under voidable contract, bails the watch to B. B
in good faith and does not know about the title of the watch, accepts it. That
pledge is considered as valid. But if B knows about the title, then that pledge is
not considered as valid.
❑ Pledge where pledger has only a limited interest
As per Section 179 of the Indian Contract Act, the pledge between the pawnor
having limited interest and Pawnee can be valid, if during the pledge the pawnee
acted in good faith and does not know about the title of the goods.
Illustration
If A pledges the goods to B for Rs. 5000 and B makes a sub pledge of those goods
for Rs. 8000, then A gets a right to take back those goods by paying only Rs.5000.
❑ Pledge by a co-owner in possession
SPECIFIC CONTRACT
The pledge between a co-owner and Pawnee can be valid if he has the consent
of another co-owner. But when the co-owner without the consent of other co-
owner enters the contract of pledge, that contract can be valid if the Pawnee
acted in good faith and does not know about the title of the goods.
Illustration
Situation 1: If A and B jointly owned a car. The car is in the possession of A.

One day A wants to bail the car for the purpose of the pledge, he has to take the
consent of B.
Situation 2: if A enters into the pledge with C and bails the car to C, without the
consent of B. That pledge is considered as valid only if C acts in good faith and
does not know anything about the title of the car.
❑ Pledge by seller or buyer in possession
A seller, after selling his goods has the possession of the goods with the consent
of the buyer or the buyer before completion of the sale has the possession of
goods with the consent of the seller can enter into the valid pledge. But if the
party enter into a contract without the consent of the other party, that contract can
be valid, if the Pawnee acted in good faith and does not know about the title of
the goods.
Illustration
If A buys a cycle from B. A after purchase left the cycle in the possession of B.
B bails the cycle in a pledge with C. C act in good faith and does not know about
the title of the cycle. This is a valid pledge.
DIFFERENCE BETWEEN BAILMENT and PLEDGE
• Sections 148 to 171 of the Indian Contract Act, 1872 deals with bailment
Sections 172 to 181 of the Indian Contract Act deals with Pledge.
• Meaning: The term bailment is derived from the French word ‘Bailor’,
which means ‘to deliver. It means possession voluntarily from one person to
another.
SPECIFIC CONTRACT
Meaning: Pledge is a special kind of bailment. If the goods are bailed as a

security for payment of a debt or performance of a promise, it is called
Pledge
• Definition: Delivery of goods by Bailor to Bailee for a definite purpose on

condition of their return or disposal, when purpose is accepted. (Section.148,
I.C.A)
Definition: The Bailment of goods as security for payment of a debt or

performance of a promise is called pledge. (Section.178, I.C.A).
• Bailment: It is made for any purpose. Bailment may be for purpose other
than by way of providing security for a loan or fulfilment of an obligation. It may
be for purpose like repairs, safe custody, etc.
Pledge: It is made for specific purpose. Pledge is bailment of goods for a

specific purpose, i.e., to provide a security for a loan or fulfilment of an
obligation.
• The Bailee can use the goods. Bailee can use the goods bailed as per terms
of contract. Pledgee cannot use the goods. Pledgee has no right of using goods
pledged.
• The Bailee has no right to sell the goods bailed. Bailee can exercise lien
on goods only for labour and service. The Pledgee / Pawnee has a right to sell
the goods pledged if the pledger could not redeem them within the stipulated
period. Pledgee can exercise lien even for non-payment of interest
Public International Law
MODULE 3
CONTRACT OF AGENCY
Agency -essentials -kinds of agency – creation of agency –express and

implied, by necessity-agency by ratification- essentials- rights, duties and
liabilities of agents –sub-agent and substituted agent- liability of principal for
act of agents –personal liability of agents-Termination of agency
AGENCY – DEFINITION
When one party delegates some authority to another party whereby the latter
performs his actions in a more or less independent fashion, on behalf of the first
party, the relationship between them is called an agency. Agency can be express
or implied.
Chapter X of the Indian Contract Act, 1872 deals with the laws relating to
Agency. It is important to know the law relating to agency because nearly all
business transactions worldwide are carried out through agency. All corporations,
big or small, carry their work out through agency. Therefore, laws relating to the
agency are an important area of Business Law. Relationships relating to principal
and agent involve three main parties: The Principal, the Agent, and a Third
Party.
An agent does not act on his own behalf but acts on behalf of his principal. He
either represents his principal in transactions with third parties or performs an act
for the principal. The question as to whether a particular person is an agent can
be verified by finding out if his acts bind the principal or not.
Illustrations:
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A, a businessman, delegates B to buy some goods on his behalf. Here, A is the

principal and B is the agent, and the person from whom the goods are bought is
the ‘Third Person’.
Joe appoints Mary to deal with his bank transactions. In this case, Joe is the
Principal, Mary is the Agent and the Bank is the Third Party.
Who can appoint an Agent?
According to Section 183, any person who has attained the age of majority and
has a sound mind can appoint an agent. In other words, any person capable of
contracting can legally appoint an agent. Minors and persons of unsound mind
cannot appoint an agent.
Who may be an Agent?
In the same fashion, according to Section 184, the person who has attained the
age of majority and has a sound mind can become an agent. A sound mind and a
mature age is a necessity because an agent has to be answerable to the principal.
Who may employ an agent?
Any person may employ an agent if – He is of the age of majority; and He is of

sound mind.
Who can be an agent?
Any person may become an agent. Even a minor or a person of unsound mind
can become an agent.
ESSENTIALS OF AGENCY
1- The principal should be competent to contract -Any person who is of the

age of majority and is of sound mind may employ an agent. (Section 183)
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Since in an agency, the agent creates a contractual relationship between his

principal and the third persons, it is necessary that the principle and third person
should be competent to contract.
Mahendra Pratap Singh v Padam Kumar Devi, AIR 1993, ALL 143: When a
client gives a power of attorney to his counsel, while he is in good state of health
and mental understanding, but subsequently the client becomes old, feeble, weak,
unable to comprehend under a mental incapacity, the power of attorney becomes
worthless after the change in the state of health and metal infirmity of the client.
Madanlal Dhariwal v Bherulal AIR 1965 272: If the principal is a minor or of

unsound mind, he is incapable of being bound through the acts of his agent.
Although a minor himself cannot appoint an agent, there is nothing in sec 183,
which prohibits the guardian of a minor form appointing an agent for him.
2- The agent may not be competent to contract-Between the principal and the
third persons, any person may become an agent. But no person who is a minor
and of unsound mind can become an agent, so as to be responsible to his principal.
(Section- 184)
The capacity of an agent has 2 angles.
➢ The capacity of the agent to act on behalf of the principal, so as to bind his
principal and the third. ➢ His capacity to bind himself by a bind himself by a
contract between himself and his principal.
He (minor) is capable of creating a valid contract between his principal and third
party, in this context, the agent is only a connecting link between the 2 parties.
3- Consideration (sec. -185): No consideration is necessary to create an

agency. The principal agrees to be bound by the acts done by the agent on his
behalf and that serves as a sufficient detriment to the principal. Here the
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principal’s duty to indemnify the agent is also there. The law does not require
any consideration as such for the validity of a contract of agency.
MODES OF CREATION OF AGENCY
There are various ways or modes by which the relationship of principal and agent
may arise.
1- By actual authority being conferred on the agent to act on behalf of the

principal. Such authority may be either express or implied.
2- By agent’s authority to act on behalf of the principal in a situation of

‘emergency’
3- By the conduct of the principal, which creates an agency on the basis of

the law of estoppel.
4- By ratification of the agent’s act by the principal, even though the same has
been done without the principal’s prior authority.
5- By presumption of agency in husband- wife relationship.
1- ACT DONE WITH PRINCIPAL’S ACTUAL AUTHORITY
a) Express authority –
• According to Section 187, an authority is said to be express when it is given

by words spoken or written.
• A contract of agency can be made orally or in writing.
• Example of a written contract of agency is the Power of Attorney
b) Implied authority –
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• According to Section 187, an authority is said to be implied when it is to

be inferred from the circumstances of the case.
• In carrying out the work of the Principal, the agent can take any legal
action.
• EXTENT OF IMPLIED AUTHORITY (Section 188)
• To do every lawful thing which is necessary in order to fulfill the

purpose for which he is assigned.
2. Agent’s authority in an Emergency (Section 189)
• One person can act on behalf of another to save the person from any loss
or damage, without expressly being appointed as an agent. This creates an
agency out of necessity.
• This arises where there is no express or implied appointment of a person

as agent for another but he is forced to act on behalf of a particular person.
• Ex - A horse was sent by rail at the destination it was not taken delivery
by the owner. The station master had to feed the horse. Held, station master
became the agent by necessity and hence the owner must compensate him.
3. Agency by Estoppel (sec237) – When a person has by his conduct or

statements induced others to believe that a certain person is his agent, he is
estopped from subsequently denying it.
Ex - A tells B that he is C’s agent, this he does in the presence of C and

within his hearing. C does not object to the statement of A is actually not
his agent. Later B makes a deal with A as agent of C. C shall be bound by
this deal.
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4. Agency by holding out (sec189) – Though part of the law of estoppel,

some affirmative conduct by the principal is necessary in creation of
agency by holding out.
Ex - A child purchase goods from a shop and desires the shopkeeper to

collect payment from his parents later. The parents, though not bound to
pay, make the payment. After a few days, the child again makes purchases
from the shop on the credit of the parents. The parents would be bound this
time because, by making payment earlier without raising any objection,
they had held their child out as their agent for making such purchases.
5. Agency by ratification (sec197)– Where an agent does an act for his

principal but without knowledge or authority or where he exceeds the given
authority, the principal is not held bound by the transaction.
Ex - L made an offer to X, MD of a company. X accepted the offer though

he had no authority to do so. L subsequently withdrew the offer, but the
company ratified X’s acceptance. Held – L was bound. The ratification
related back to the time X accepted the offer, thus rendering the revocation
of the offer inoperative. An offer once accepted cannot be withdrawn.
❑ ESSENTIALS OF VALID RATIFICATION
• The act should be done on the behalf of another person (Section 196)
(Keighly, Maxsted & Co. v. Durant)
• The principal should be in existence and competent to the contract when

act is done. ( Kelner v. Baxter)
• Ratification may be express or implied ( Section 197)
• Ratification should be with full knowledge of the facts. (Section 198) (

Savery v. King)
6|Page Semester 3
• Ratification should be of the whole transaction (Section 199)
• Ratified acts should not be injurious to third person (Section 200)
• Ratification should be made within reasonable time.
6. Agency between Husband and Wife
Generally, there exists no agency between a husband and wife, except in cases
where it has expressly or impliedly been sanctioned that either of them
would do certain acts or transactions as the agent of the other. That is, a
relationship of agency can come into existence between the two through
contract, appointment, or ratification.
A married woman cohabiting with her husband is presumed to have the

power to pledge the credit of her husband for necessaries. It means for the
domestic use or which may be of use of her husband, herself or children.
If such goods or services are necessary to the conditions of life of that family,
the husband becomes bound to pay for them. This results in an agency of
necessity where the wife can use her husband’s credit for what is
necessary for her to live. But in cases where they are separated because of
the wife’s own whims or faults, for no just reason, the husband is not liable
for the wife’s necessaries. If they are living separately, there is presumed to
be no such authority in wife to pledge the credit of her husband.
Wife as Agent
Where a husband and wife are living together, we presume that the wife has
her husband’s authority to pledge his credit for the purchase of necessaries
7|Page Semester 3
of life suitable to their standard of living. But the husband will not be liable if
he shows that:
(i) he had expressly warned the tradesman not to supply goods on credit to
his wife; or
(ii) he had expressly forbidden the wife to use his credit; or
(iii) he already sufficiently supplies his wife with the articles in question; or
(iv) he supplies his wife with a sufficient allowance.
CLASSIFICATION OF AGENTS
1. General Agent
Agent appointed to do all acts relating to a specific job. This type of agents has a
general authority to do everything in the course of his agency and he has to
perform all the acts in the interest of his principal.
For example, A manager of a firm
2. Special Agent
• Agent appointed to do a singular specific act. A special agent is also

known as a specific or particular agent.
• For example: An agent employed to sell a Bike. If the special agent does
anything outside his authority, the principal is not bound by it and third
parties are not entitled to assume that the agent has unlimited powers.
3.Co-Agent
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• Agents together appointed to do an act jointly.
• When a principal appoints two or more persons as agents jointly or

severally, such agents are known as co-agents.
• Their authority is joint when nothing is mentioned about the exercise of

their authority.
• It implies that all co-agents concur in the exercise of their authority unless
their authority is fixed. But when their authority is several, any one of
the co-agents can act without the concurrence of other.
4. Sub agent
• Section 191 of the Indian Contract Act, 1872 defines a sub-agent to be a

person employed by and acting under the control of the original agent
in the business of the agency.
• Ordinarily, an agent cannot delegate the duty he is supposed to perform

himself to another person (Delegatus Non Potest Delegare), except in
particular circumstances where he must, out of necessity, do so.
5.Substituted Agent
• Section 194 provides that substituted agents are not sub-agents but are in
fact agents of the principal.
• Suppose an agent has an implied authority to name another person to

act for the principal in the business of the agency, and he has named
another person accordingly.
• For Example: A directs B who is a solicitor to sell his estate by auction

and to employ an auctioneer for the purpose. B names C, an auctioneer, to
9|Page Semester 3
conduct the sale. In such a situation, C is not sub-agent, but is A’s agent
for the sale.
6. Mercantile Agent:
As per section 2(9) of the Sale of goods act, 1930, a mercantile agent is a person
who in the customary course of business has an agent’s authority either to sell
or consign the goods for the purpose of sale or to buy goods or to raise money
on the security of goods.
a. Factors
b. Brokers
c. Del Credere Agent
d. Auctioneers
a. Factors:
• A factor is a person who is appointed to sell goods which are put in his
possession or to buy goods for his principal.
• He is the evident owner of the goods in his custody and can thus sell them
in his own name and receive payment for them.
• He also has a general lien regarding any claim that he may have to arise
out of the agency.
b. Brokers:
• A broker is a person whose business is to make contracts with the other

parties for the sale and purchase of goods or securities for brokerage.
• He does not have the possession of the goods and acts in the name of the
principal.
• Also, he has no lien over goods because he has no possession of goods.
c. Del Credere Agent:
• A del credere agent is a person who ensures or guarantees his principal

that the creditors of goods will pay for the goods they buy for extra
remuneration.
• In the case of failure to pay by the third party, he needs to pay the due
amount to his principal.
d. Auctioneers:
• An auctioneer is a person who sells the goods by auction.
• An auction is a process by which goods are sold to the highest bidder in a

public competition.
• He is the agent of the seller until the goods are auctioned or knocked down.
• However, after the knockdown, he becomes the agent of the buyer.
• Also, he is evidence that the sale took place.
AGENT’S DUTIES TO PRINCIPAL
An agent owes a number of duties to his principal who varies in degree according
to the nature of agency and circumstances of a case. An agent has following duties
towards his Principal:
• Duty to act according to directions or custom of trade – Sec. 211
He has to conduct the business of the principal according to the directions of

the Principal.
• Duty to follow customs, Where the principal has not given any
instructions, it is the duty of agent to follow the customs prevailing in the
same kind of business at the place where the agent conducts his business.
• To act under the terms of the contract: - An agent is obliged to perform

each and every term mentioned in the contract towards his principal.
• Duty to act with reasonable care and skill/Duty to carry out the work
with reasonable care, skill and diligence: - Sec. 212 An agent is bound
to conduct the business he is supposed to conduct with as much skill as a
person on his position ordinarily holds. Agent is always bound to act with
reasonable care, skill and diligence as he possesses and to make
compensation to his principal in respect of direct consequences of his
neglect or want of skill or misconduct.
• Duty to render account – Sec. 213 An agent is supposed to show the

relevant accounts to the Principal as and when the Principal demands. Duty
to keep and render separate and correct accounts, an agent must keep the
money and property of the principal separate. He must keep true, correct
and proper accounts of his all transactions on behalf of his principal and to
be prepared all times to produce them to his principal.
• Duty not to deal on his own account (Ss. 215 & 216) Accounting must
maintain separate accounts for the principal’s funds & for the agent’s
funds, no intermingling is permitted o Repudiation of contract by principal
when agent deals on his own account -sec. -215 o Principal’s right to claim
benefit when agent acting on his own account – sec. 216.
• Duty to communicate with Principal and to obtain Principal’s

instructions – Sec. 214, An agent has the duty to communicate any
difficulty whatsoever he may come across while doing the Principal’s
business. He is supposed to perform due diligence in this regard. Duty to

communication in cases of difficulty, it will be also the agent’s duty to
communicate the principal and obtain his instructions while carrying the
business agency.
• Duty to follow instructions/ directions:-(Section 211) The first and

foremast duty of an agent is to act strictly within the scope to the authority
conferred upon him and to carry out the instructions of the principal. It is
duty of an agent in cases of difficulty, to use all reasonable diligence in
communicating with his principal and seeking to obtain his instruction
• Duties to disclose all material circumstances and to obtain the

Principal’s consent in dealings – Sections 215 & 216 If any material fact
has been concealed or the business is not carried out in the manner that the
Principal directed, the Principal can repudiate the contract between them.
An agent must not use confidential information entrusted to him by his
principal for his own benefit or against the principal
• Duty to pay sum received for Principal – Sections 217 & 218, If the
agent carries out the business in the manner, he wanted to perform it, rather
than on the directions of the Principal, the Principal may claim from the
agent any benefit he may have achieved through doing so. An agent is duty
bond to pay sums received to the principal on his account.
• Duty not to make secret profit from agency: -An agent’s duty is to be
loyal to his principal. It an agent makes secret profit from its agency; the
principal can demand all the profits from the agent. The agent must not
make secret profit from the extract agency. He must disclose any extra
profit that he may make.
• Duty to protect and preserve the interest entrusted to him – Section

219 An agent must not allow his interest conflict with his duty. For
example, he must not compete with his principal. Loyalty: actions must be
strictly for the benefit of the principal, not in the interest of the agent or a
third party
• Duty to act with good faith: - An agent must act in good faith while
representing the principal. Agent should not have any intention to cause
harm to the principal. Obedience: must follow lawful & clearly stated
instructions of the principal
• Duty not to delegate his authority (Sec. 190), An agent must not delegate
his authority to delegate authority agent must have the permission of
principal. As much as possible agent himself performs on behalf of
principal. An agent must not delegate his authority to as sub-agent. This
rule is based on the principle ‘Delegatus non protest delegare’. Delegate
cannot further delegate (Section 190). But there are exceptions for this
principle.
PRINCIPAL’S DUTIES TO AGENT
The Principal has duties towards the Agent:
• The Principal is bound to indemnify the agent against any lawful acts done
by him in the exercise of his authority as an agent.
• The Principal is bound to indemnify the agent against any act done by him
in good faith, even if it ended up violating the rights of third parties.
• The Principal is not liable to the agent if the act that is delegated is criminal
in nature. The agent will also in no circumstances be indemnified against
criminal acts.
• The Principal must make compensation to his agent if he causes any injury
to him because of his own competence or lack of skill. Compensation: must
pay the agent for services rendered, & do so in a timely manner
• Liability of Principal for Agent’s Fraud or Misrepresentation: According

to Section 238, The Principal is liable for any fraud or misrepresentation
made by his agent during the course of his business, as if the fraud or
misrepresentation was done by the Principal himself.
• Reimbursement & indemnification: must reimburse agent that disburses

money at principal’s request. Must compensate (indemnify) agent for any
costs incurred as a result of principal’s failure to perform the contract
RIGHTS OF AGENT
There are number of rights which an agent has against his principal and third
parties. These areas follows
• Right to get remuneration, (sec – 219) If it is provided in the contract

of agent has right to receive reasonably remuneration for his work for
principal. An agent, when he has wholly carried out the business of the
agency has the right to be remunerated of any expenses suffered by him
while conducting the business. The agent has a right to retain any sums
received on account of the principal in the business of the agency, all
moneys due to himself in respect of his remuneration and advances
made or expenses properly incurred by him in conducting such business
• Right of Lien-(sec – 221)-If agent is not paid lawful charges

remunerations or expenses by his principal and of goods of principal
are under his control he can retain the goods until the lawful charges is
paid by principal. This right last till the lawful charges are fully
satisfied. Right of Lien on Principal’s property means the agent has the
right to hold (keep with himself) any movable or immovable property
of the Principal until his due remuneration is paid to him by the
Principal. In the absence of any contract to the contrary, an agent is
entitled to retain goods, papers and other property.
• Right to get indemnity- (sec – 222- 224) If principal removes the agent
without concrete reason agent has right to claim compensation from his
principal. Therefore, agent has also right to continue business
performance until nothing is wrong done by agent. The agent has the
right to be indemnified against all the lawful acts done by him during
the course of conducting the Principal’s business. Indemnified by
principal in respect of the contract and all losses/liabilities provided the
agent acted within his authority.
➢ Indemnity for civil wrong- (sec 223) ➢ No indemnity in case of

criminal offences (sec 224)
• Right to Compensation– (sec 225) The Agent has the right to be

compensated for any injury or loss suffered by him due to the lack of
skill and competency of the Principal.
LIABILITY OF PRINCIPAL
Sec 226 for contracts relationship between the principal and the 3rd persons
becomes bound towards a third person as if he entered into the contract
himself.
• Principal’s liability when agent exceeds authority- principal is not

liable.
• Position when the authorized and unauthorized acts are separable sec-
227
• Principal’s liability for notice to the agent – sec 299
• Principal’s liability for agent’s fraud, misrepresentation and torts (sec -

238)-do not fall within their authority – it does not affect their
principals.
PERSONAL LIABILITY OF AN AGENT
General Rule – No personal liability [Sec.230],
In the absence of contract to contrary, an Agent cannot –
(a) personally, enforce contracts entered into by him, on behalf of his Principal,
(b) be held personally liable for them. This is because the Agent merely acts on
behalf of his Principal. Thus, he enjoys immunity from being personally
sued.
CIRCUMSTANCES WHERE AGENT BECOMES PERSONALLY

LIABLE
(i) When agent acts on behalf of a Foreign Principal [Sec.230]: Where the
contract is made by an Agent for the sale or purchase of goods for a
merchant resident abroad.
(ii) When agent acts for an Undisclosed Principal [Sec.230]
(iii) When Principal cannot be sued [Sec.230]: Where the Principal,

though disclosed, cannot be sued, e.g., Principal becoming of unsound
mind, subsequent to appointment of agent.
(iv) When there is a contract for the agent’s personal liability (230)
(Alliance Mills v. India Cements Ltd.)
(v) When an agent makes a breach of some legal obligation (Nepal Food
Corp. v. U.P Import & Export Ltd.)
(vi) Liability of pretended agents(235)
TERMINATION OF AGENCY
• Various modes/rules in which the agency can be terminated:
1- When the agent’s authority is revoked by the principal (Revocation by the

principal) (sec. 201)
2- Revocation may be express or implied (sec. -207)
3- Revocation possible before the authority has been exercised (sec. 203)
4-Revocation when authority has been partly exercised (sec. 204)
5- Principal to compensate, if there is premature revocation without

justification (sec. 205)
6- Principal should give reasonable notice of revocation (sec. 206)
7- When the agent renounces the business of the agency
8- When the business of the agency is completed (Mutual Agreement). By

performance- If agency is made for certain purpose on the completion of
achievements of purpose the agency is terminated
9- When either of the parties dies or becomes mentally disabled. The death of
the principal or agent terminates the contract of agency. (sec. 209)
10- When the Principal is adjudicated an insolvent. After the insolvency or

bankruptcy of principal if agent acts on behalf of principal, he himself will be
liable for that not the principal. So, after the insolvency the contract of agency
terminates.
11- By the act of the parties/ Destruction of the subject matter: - If the subject
matter for which agency was created destroyed then it terminates the contract of
agency.
12- Rescinding (Cancel) the authority by the principal
13- By expiry of time fixed: (sec. -208)- If time is fixed for the agency, whether
or not purposes are fulfilled, and the agency is terminated after expiry of time
fixed.
14- By dissolution of company: - If the company dissolves the agent will have
no more authority provided by the company or principal, and then contract of
agency terminates
15- By operation of law /By the happening of any event rendering the agency
unlawful: - If subsequent to the contract, law change in such way which
invalidated the transaction, then the agency also terminates.
SPECIFIC CONTRACT
MODULE 4
INDIAN PARTNERSHIP ACT, 1932
Partnership –distinction from company, HUF& co-ownership-nature and

creation – types of partnerships - mutual relationship of partners –implied
authority of partners - rights and liabilities of partners- incoming and outgoing
partners– minor as a partner-partnership property - dissolution of partnership –
effects of non-registration of partnership- concept of limited liability partnership
registration formalities.
Partnership is one of the specific contracts which were a part of the Indian
Contract Act,1872. In 1930, however, the provisions relating to partnership
contract were repealed and a separate Act called the Indian Partnership Act, 1932
was passed which is in force till today. It extends to the whole of India except the
State of Jammu and Kashmir. It has come into force on the 1st day of October
1932 except Section 69, which came into force on the 1st day of October 1933.
Partnership in India are governed by the Indian Partnership Act,1932.

Partnership is formed as result of an agreement between two or more persons who
have agreed to share the profits of a business carried by all or any of them acting
for all. Hence the general principles of law of contracts and agency (as contained
in the Indian Contract Act,1872) also apply to partnerships except where the Act
specifically provides to the contrary.
Meaning and Definition
Partnership is the relation between persons who have agreed to share the profits
of a business carried on by all or any one of them acting for all (Section 4). It,
therefore, follows that a partnership consists of three essential elements:
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(i) It must be a result of an agreement between two or more persons.
(ii) The agreement must be to share the profits of the business.
(iii) The business must be carried on by all or any of them acting for all. All
these essentials must co-exist before a partnership can come into
existence
Example: A manager, as a part of his remuneration, may be given a share in

profits of the business.
ESSENTIAL ELEMENTS OF PARTNERSHIP
1) Two or more Persons - There must be at least two persons to form a

partnership and all such persons must be competent to contract. According to
Section 11 of the Indian Contract Act, 1872, every person except the
following, is competent to contract: (i) Minor (ii) Persons of unsound mind
(e.g., lunatics, idiots), and (iii) Persons disqualified by law (e.g., alien
enemies, insolvents)
Shivaram v. Gauri Shankar in this case court held that ‘there must be at least
two persons and such persons must be competent to contract but after the
formation of partnership, a minor can be admitted to the benefits of partnership
with the consent of all other partners of the firm as per the provisions of
Section 30 of the Act’.
The partnership can be formed between Companies but firms can’t form
partnership because Act makes it clear that by way of an agreement between
competent person partnership can be established company being artificial
person can be a party to the ‘partnership deed’ but unlike company firm is not
legal person and therefore, firm is not capable of entering in to partnership
deed. (Dulichand v. Comissioner of Income tax, Nagpur)
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2) Agreement: Partnership must be the result of an agreement between two or

more persons. An agreement from which relationship of Partnership may arise
may be express or implied from the act done by partners and from a consistent
course of conduct being followed, showing mutual understanding between
them. It may be oral or in writing.
The essential element is further clarified under Section 5. Section 5 provides

that the relation of partnership arises from contract and not from status. That
is why; a Hindu undivided family carrying on a family business is not
considered as partnership firm. The reason is that the coparceners of a Hindu
undivided family acquire interest in the business because of their status (i.e.,
birth) in the family and not because of any agreement between them. Thus,
partnership is voluntary and contractual in nature
3. Business - There must exist a business. According to Section 2(b), the term
‘Business’ includes every trade, occupation and profession. For example,
when two or more persons agrees to share the income of the joint property
(e.g., rent from a building). It does not amount to a partnership because there
does not exist any business. Similarly, an association created for charitable,
religious or social purpose cannot be regarded as partnership because there
does not exist any business. It may also be noted that an agreement to carry on
business at a future time does not result in partnership unless that time arrives
and the business is started. [R.R. Sorna, v. Reuben]
When goods purchased for self-Consumption and not for the re-sale then it is
not considered as business transaction, accordingly there will be no
Partnership. (Coope v. Eyre)
4. Sharing of Profits – There must be sharing of profits. Unless otherwise

agreed, sharing of profits implies sharing of losses too. It may also be noted
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that sharing of profits is prima facie evidence and not conclusive evidence of
partnership. Because of that everyone who shares the profits of business need
not necessarily be a partner. For example, a manager who receives a
particular share in the profits of a business as part of his remuneration is
simply an employee and not a partner.
Relation between persons sharing profits not a partner (Section 6):
Persons sharing the profits but not having mutual agency [Explanation II to
Section 6] - The sharing of profits is prima facie evidence. This statement is
true in the sense that some persons though sharing the profits of a business are
not regarded as partners since they do not have mutual agency relationship.
Such persons are:
(i) Money lender (who has lent money to the firm) who receives a share of
profits: [Mallow Mantle & Co. v. The Court of Wards and Cox v. Hickman]
(ii) Widow or child of a deceased partner sharing profits; Sometimes on

the death of the partner the widow or child of the deceased partner may be
given share of profits according to terms and conditions of contract. Merely
sharing profits such widow or child doesn’t become partner in the firm.
Holme v. Hammond in this case court held that executors of deceased partner
who shares profit had not become partners and therefore they couldn’t made
liable.
I.T. Commissioner v. Kesharmal Keshardeo ` there is no bar to the widow or

son of the deceased partner to join firm after the death of the partner based on
the terms and conditions provided in the agreement.
(iii) a servant or an agent who receives a share of profits as part of his

remuneration; In partnership sometimes share may be given profits to the
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servants or agents to carry out the firm’s business effectively merely, sharing
profits he doesn’t become partner in the partnership [Munshi Abdul Latif v.
Gopeshwar and Walker v. Hrisch]
iv)The seller of the goodwill sharing the profits: seller of goodwill also may
be entitle to the share in the profits in the form of consideration for the sale of
goodwill, such person doesn’t become partner. [Rawlinson v. Clarke and
Pratt v. Strick]
5. Mutual Agency :There must existence of a mutual agency relationship

among the partners. 'Mutual Agency' relationship means that each partner is
both an agent and a principal. Each partner is an agent in the sense that he has
the capacity to bind other partners by his acts done. Each partner is a principal
in the sense that he is bound by the acts of other partners.
PARTNERSHIP AND CO-OWNERSHIP
Co-ownership means joint ownership of some property. The two or more

persons who own some property jointly arc called co-owners. As per
Explanation I to Section 6, the joint owners of some property sharing profits
or gross returns arising from the property do not become partners.
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PARTNERSHIP AND HINDU UNDIVIDED FAMILY (HUF)
According to the Hindu Law, "Hindu undivided family is a family which

consists of all persons lineally descended from a common ancestor and includes
their wives and unmarried daughters." Three successive generations in the male
line (son, grandson, and great-grandson) who inherit the ancestral property are
called 'Coparceners'. The property which a man inherits from any of his three
immediate mule ancestors (i.e., his father, grandfather and great grandfather), is
called 'ancestral property'. Eldest coparcener of the HUF is the Karta of that
family, who acts as the head and is responsible for managing its affairs, legal
and financial
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PARTNERSHIP HINDU UNDIVIDED FAMILY

(HUF)
It arises from an agreement. It arises from an agreement.
It is governed by the Indian It is governed by Hindu Law.

Partnership Act, 1932.
The persons who form partnership are The persons who are the members of
called 'Partners’. the HUF are called 'Coparceners'.
The maximum limit of partner is 10 for There is no maximum limit of

a banking business and 20 for any coparceners.
other business.
A person can be admitted to the A male person becomes a member

existing partnership with the consent merely by his birth
of all other partners.
A minor can be admitted to the A male minor becomes a member

benefits of partnership with the merely by his birth.
consent of all the partners.
A female can become a full-fledged A female does not become member

partner. merely by her birth
Each partner has implied authority to Only the Karta has implied authority.
bind the firm by acts done in the
ordinary course of the business of the
firm.
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The liability of all the partners is Only Karta's liability is unlimited and
unlimited the liability of the other coparceners is
limited only to their shares in the
family property.
Each partner has a right to inspect and The coparceners have no right to ask
copy the account books and ask for the for the account of past dealings
account of profits and losses.
Unless otherwise agreed partnership is The Hindu undivided family continues

dissolved on the death of any partner. to operate even after the death of a
coparcener
PARTNERSHIP AND COMPANY
A company is an artificial person created by law having, perpetual succession,

separate legal entity with limited liability and a common seal.
PARTNERSHIP COMPANY
A firm doesn't enjoy separate legal It has a separate legal existence. A

existence. Partners are collectively company is separate from its
termed as a firm and individually as members.
partners
The liability of partners is unlimited. Liability of its members is limited to

the extent of the value of shares held
by them.
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It does not enjoy a long lease of life. It enjoys perpetual existence. Even on
Death, sickness, retirement of partners the death of all the members company
may affect its existence so as to can’t come to an end.
dissolve it. Dissolution may take place
on certain grounds.
Minimum number of partners is two. A public company must have a

Maximum may be ten (in case of minimum 7 members to start with.
banking business) or twenty (in case of However, there is no limit on the
nonbanking business). maximum number of members of a
company. In case of private company
minimum 2 maximum 200 members.
A partner cannot transfer his share A member may transfer his shares as
without the consent of other partners. and when he likes. There is no
restriction on transfer of shares.
Each partner represents the other There is no agency relation-ship

partners so as to bind and be bound to among members of a company as they
others. do not bind each other with their
actions.
Profits are distributable among There is no such compulsion that

partners as per the partnership deed. profits must be distributed. Only when
the dividends are declared that the
members get a share of profits.
The entire management lies with all Members cannot participate in

the partners. management unless appointed as
directors. However, members may
attend and vote at meetings while
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making the appointment of Directors,

Auditors etc.
Property of the firm the joint property Property of the company is not the
of all its partners properly of its members as the
company and members have separate
legal existence.
DURATION OF PARTNERSHIP
On the basis of duration, the partnership can be classified in to two types namely
1) Partnership at will
2)Particular Partnership.
Partnership at Will (Section 7]: When there is no provision in partnership

agreement for duration of the partnership, the partnership is called 'Partnership at
Will'. A partnership at will may be dissolved by any partner by giving a notice in
writing to all other partners of his intention to dissolve the firm.
• Moss v. Elphick
• K.T Chettiar v. E.M.I Muthappa
Particular Partnership [Section 8]: When a partnership is formed for a specific

venture or for a particular period, the partnership is called a ‘Particular
Partnership’. Such partnership comes to an end on the completion of the venture
or on the expiry of the period. If such partnership is continued after the expiry of
term or completion of the venture, it is deemed to be a partnership at will. A
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particular partnership may be dissolved before the expiry of the term or

completion of the venture only by the mutual consent of all the partners.
NATURE OF PARTNERSHIP
❑ General Partnership
• In a general partnership, each partner reserves a right to make decisions

about the working and management of the firm.
• the liability of the partner in such a type of partnership is unlimited.
• It means that if there is any financial error or loss incurred by one partner,
all the other partner’s assets would be taken into consideration in
order to pay the liabilities incurred in the form of debts.
❑ Limited Liability Partnership (LLP)
• limited liability partnership is a corporate form of business organization.
• the liabilities are limited to each partner in accordance with the

contribution made by them in the business.
• Furthermore, the personal property or assets of the partner cannot be

attached to pay back the liability of the firm.
• this organization is not governed under Partnership act,1932, but is

governed under Limited Liability Partnership Act, 2008.
ON THE BASIS OF REGISTRATION
• The registration of a firm is not mandatory under Partnership Act, 1932.

Both Registered firm and unregistered firm are valid in the eyes of
Law.
❑ Unregistered Partnership Firm

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• An unregistered firm is established when there is execution of agreement

between the partners.
• The partnership firm which is unregistered allows the partners to carry

out business activities as provided in the agreement.
❑ Registered Partnership Firm
• In order to register a partnership firm, it must be registered with the

Register of Firm (RoF) having the requisite jurisdiction over the place
where the Firm is carrying out its business activities.
• The application of registration involves the payment of registration fee

to RoF, which varies from state to state in accordance with the state laws.
• In a partnership, registration of a firm is preferred due to benefits it offers

such as filing a suit in the court.
KINDS OF PARTNERS
❑ Active/Managing Partner
• takes part in the day-to-day running of the business and also takes active
participation in the conduct and management of the business firm.
• He carries the daily business activities on behalf of other partners.
• He may act in different capacities such as manager, advisor, organizer and

controller of affairs of the firm.
• he acts as an agent of all the other partners in order to run main functions
pertaining to business.
• Furthermore, subject to the clause in the partnership deed, the active

partner can withdraw remuneration from the firm
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❑ Sleeping Partner
• also known as a “dormant partner”.
• does not participate in the day-to-day functioning activities of the

partnership firm.
• A person who has sufficient money or interest in the firm, but cannot
devote his time to the business, can act as a sleeping partner in the firm.
• However, he is bound by all the acts of the other partners.
• continues to share the profits and losses of the firm.
• If a dormant partner makes a decision to retire from the partnership firm,

then it is not mandatory for him to give a public notice for the same.
He is not allowed to withdraw remunerations from the firm.
❑ Nominal Partner
• he is only lending his name to the firm and does not have a voice in the
management of the firm.
• On the strength of his name, the firm can promote its sales in the market
or can get more credit from the market.
For example: A partnership is executed between the partner and the

celebrity or a business tycoon for the sake of value addition to the firm and
also for promoting branding by using the person’s fame and goodwill.
• This partner does not share any profit and losses in the firm because he
does not contribute any capital to the firm.
• However, it is pertinent to note that a nominal partner is liable to the

outsiders and third parties for the acts done by other partners.
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❑ Partner by Estoppel
• A partner by estoppel is a partner who displays by his words, actions or

conduct that he is the partner of the firm.
• though he does not contribute in capital or management of the firm but on

the basis of his representation in the firm he is liable for the credits
and loans obtained by the firm.
• There are two essential conditions of establishing a ‘holding out’:
1. Firstly, the person who is held out must have made a representation of
words, actions or conduct that he is a partner in the firm.
2. Secondly, the other party must substantially prove that he had

knowledge of such representation and he acted on it.
Partner by holding out
• When a firm declares the name of a person as the partner and the person
knowing this does not react or deny that partnership, he will become
partners by holding for that firm.
• Now, if a person invests his money by such declaration, then he will be

liable to that person if he took any loss from the side of that firm.
❑ Partner in Profits only
• This partner of a firm will only share the profits of the firm and won’t
be liable for any losses of the firm.
• He is not allowed to take part in management of the firm. Such kinds of

partners are associated with the firm for their money.
❑ Minor Partner
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• Section 11 of the Indian Contract Act, 1872 prohibits a minor from

entering into an agreement, as the agreement entered by a minor is void ab
initio.
• However, the Partnership Act, 1932 allows a minor to enjoy benefits of

partnership when a set of rules and procedures are complied in
accordance with the law.
A minor will share the profits of the firm, however, his liability for losses is
only limited to his share of the firm.
RIGHTS AND LIABILITIES OF' A MINOR PARTNER BEFORE

ATTAINING MAJORITY
Rights
(a) He has a right to share the profits and property of the firm in
accordance with the agreement. [Section 30(2)]
(b) He has a right to have access to, and inspect and copy, any of the
accounts of the firm. But he does not enjoy such rights in respect, of books
other than account books. (Section 30(2))
(c) He has a right to file a suit for his share of profits or the property of the
firm when he is not given his due share of profits. However, he can exercise
this right only when he decides to sever his connections with the firm
[Section 30(4)].
Liabilities
(a) He is liable only to the extent of his share in the profits and the
property of the firm. He is not personally liable to third parties. [Section
30(3)]
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RIGHTS AND LIABILITIES OF A MINOR PARTNER ON

ATTAINING MAJORITY [SECTIONS 30(5), (6), (7)]
• A minor person after attaining the age of majority (i.e. 18 years of age)
needs to decide within 6 months if he is willing to become a partner for
the firm.
• If at all a minor partner decides to continue as a partner or wishes to retire,

in both the cases he needs to make such a declaration by a public notice.
When he elects to become a partner
(a) He becomes personally liable to third parties for all acts of the firm since
he was admitted to the benefits of partnership (Section 30(7) (a)].
(b) His share in the property and profits of the firm remains the same as he
was entitled as a minor [Section 30(7) (b)].
When he elects not to become a partner
(a) His rights and liabilities continue to be those of minor up to the date of
giving public notice (Section 30(8) (a)]
(b) His share is not liable for any acts of the firm done after the date of the
public notice [Section 30(8) (b)].
(c) He is entitled to sue the partners for his share of the property and
profits in the firm [Section 30(8)(c)].
❑ Secret Partner
• In a partnership, the position of secret partner lies between the active and
sleeping partner.
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• The membership of the firm of a secret partner is kept secret from the
outsiders and third parties.
• His liability is unlimited since he holds a share in profit and shares

liabilities for losses in the business.
• He can even take part in working for the business.
❑ Outgoing partner
• a partner who voluntarily retires without dissolving the firm.
• He leaves the existing firm, therefore he is called as an outgoing or retiring

partner.
• Such a partner is liable for all his debts and obligations incurred before
his retirement.
• However, he can be held liable for his future obligations, if at all he fails
to give a public notice stating his retirement from the partnership firm.
RECONSTITUTION OF A FIRM (INCOMING AND OUTGOING

PARTNERS)
The reconstitution of a firm takes place when there is any change in the
composition of the partnership. Chapter V (Section 31 to 38) of Indian
Partnership Act contains provisions with respect to incoming and outgoing
partners.
INCOMING PARTNERS
• Meaning : The partners who are joining the partnership firm by contract
or is added to the firm.
• New partner can be introduced into a firm in the following ways: –
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i. With the consent of all existing partners.
ii. According to a contract between the partners(even without the consent

of all the existing partners)
iii. A minor admitted to the benefits of partnership becoming a

partner(the consent of other partners is not required.)
Liability of an Incoming Partner for Firm's Acts done before his Admission:
An incoming partner is not liable for all the acts of the firm done before his
admission. This general rule has two exceptions which are as follows:
(a) An incoming partner is liable for the acts done before his admission if (i) the
new firm assumes the liabilities of the old firm, and (ii) the creditors accept the
new firm as their debtor and discharge the old firm from its liability.
(b) A minor who, on attaining majority decides to become a partner, is liable for
all acts of the firm done since he was admitted to the benefits of partnership.
(c) A minor admitted to the benefits of partnership becoming a partner(sec.30)
Liability of an Incoming Partner for Firm's acts done after his Admission:
An incoming partner is liable for all the acts of the firm done after his admission.
OUTGOING PARTNERS
1. Retirement of a Partner [Section 32] – A partner may be retire from the

firm in any of the following ways:
(i) with the consent of all the other partners; or
(ii) in accordance with an express agreement among the partners; or
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(iii) in the case of partnership at will, by giving a notice to all other

partners of his intention to retire. In case of a partnership at will, a
partner may retire by notice even if the pending contracts have not
been completed. [Keshav Lal v. Bhai Lai]
Liabilities of a Retiring Partner
The liabilities of a retiring partner may be as follows:
(a) For Firm's acts before his retirement [Section 32(2)]: He continues
to be liable to third party unless he is discharged for the same by a tripartite
agreement between him, third party and the partners of the reconstituted
firm.
(b) For Firm's acts after his retirement [Section 32(3), (4)]: He
continues to be liable to third party (other than one who deals with the firm
without knowing that he was a partner) until public notice of his retirement
is given either by himself or any of the other partners. This liability of a
retiring partner is based on the principle of holding out. (Sec.28).
Rights of a Retiring Partner (Section 36 and 37)
(a) Right to carry on competing business [Section 36]: He may carry on

a business competing with that of the firm and may advertise such
business but unless otherwise agreed he cannot-
(i) use the firm's name;
(ii) represent himself as carrying on firm's business;
(iii) solicit the old customers.
(b)Right in case of no final settlement of accounts [Section 37]: He at

his option, is entitled to claim, either of the following:
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(i) such share of profits earned after his retirement which is attributable to
the use of his share of the property of the firm, or
(ii) Interest at the rate of 6% p.a. on the amount of his share in the property.
This right is available to a retiring partner even if only a part of his property
is used in the business. [Ramakrishna Ayyar v. Muthuswami Ayyar] This
right is also available to the legal representatives of a deceased partner.
2. EXPULSION OF A PARTNER [SECTION 33]
A partner may be expelled if the following three conditions are satisfied:
(a) the power to expel a partner must have existed in a contract between the
partners;
(b) the power must have been exercised by a majority of the partners, and
(c) the power must have been exercised in good faith without any private
animosity.
(d)The affected partner must be given an opportunity to make a representation

before being dismissed the expulsion, without the satisfaction of the aforesaid
conditions, is said to be an irregular expulsion which is null and void. The
partner who has been wrongly expelled, has a right to claim re-instalment as
a partner and not to recover damages for wrongful expulsion.
3. INSOLVENCY OF A PARTNER [SECTION 34]
The following are the effects of the insolvency of a partner:
(a) He ceases to be a partner on the date of the orders of adjudication:
(b) Unless otherwise agreed, the firm is dissolved; [Section 42(d)]
(c) His estate is not liable for firm's acts done after the date of the order
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(d) Firm is not liable for his acts done after the date of the order.
No public notice is required on the insolvency of a partner. [Section 45]
4.Death of a Partner [Sections 35 and 42(c)]
Unless otherwise agreed by the partners, a firm is dissolved on the death of a

partner [Section 42(c)]. Where under the contract a firm is not dissolved by
the death of a partner, the estate of the deceased partner is not liable for any
act of the firm done after the date of his death [Section 35].
No public notice is required on the death of a partner. (Section 45]
Example: X was a partner in a firm. The firm ordered goods in X's life time
but the delivery of the goods was made after X's death. In such a case, X's
estate would not be liable for this debt because there was no debt due in
respect of such goods in X's life time. (Beget v. Miller)
RIGHTS AND DUTIES OF PARTNERS
Rights of Partners:
The rights of partners as provided in the Act are subject to the agreement
between the partners. They can be changed by an agreement amongst the
partners. Unless otherwise agreed by the partners, every partner has the
following rights:
(a) Right to take part in the conduct of the business [Section 12 (a)]: Every
partner has a right to take part in the conduct of the business.
(b) Right to express opinion [Section 12(c)]: Every partner has the right to
express his opinion before the matter is decided. All matters except the change
in the nature of the business, may he have decided by a majority of the
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partners. The change in the nature of the business may be made only with the
unanimous consent of all the partners.
Ex: Admission of new partner to the firm, change in the nature of firm’s
business. Power of majority opinion has to be exercised in good faith. For
instance, if the majority of the partners decided to expel one of the partners
without justifiable reason such expulsion would be set aside.
(c) Right to have access to books of the firm [Section 12(d)]: Every partner
has a right to have access to and to inspect and copy any of the books of the
firm. A partner may exercise this right personally or by engaging his agent.
(d) Rights to share profits [Section 13(b)]: generally, A partner is entitled to

share the profits of the business of the firm equally. Partners are entitled to
share equally in the profits earned and so contribute equally to the losses
sustained by the firm. The amount of a partner’s share must be ascertained by
enquiring whether there is any agreement in that behalf between the partners.
If there is no agreement then you should make a presumption of equality and
the burden of proving that the shares are unequal, will lie on the party alleging
the same.
(e) Right to receive interest on capital out of profits [Section 13(c)]:

Suppose interest on capital subscribed by the partner is payable to him under
the partnership deed, then in such a case the interest will be payable only out
of profits. As a general rule, interest on capital subscribed by partners is not
allowed unless there is an agreement or usage to that effect.
The following elements must be before a partner can be entitled to interest on

moneys brought by him in the partnership business:
(i) an express agreement to that effect, or practice of the particular

partnership or
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(ii) any trade custom to that effect; or
(iii) a statutory provision which entitles him to such interest.
(f) Right to claim interest on advances [Section 13(d)]: A partner is entitled

to claim interest on advances made by him to the firm 6t 6% p.a. Interest on
advances is payable whether there are profits or losses. It may be noted that
the partner is not entitled to interest after the date of dissolution of firm unless
otherwise agreed
(g) Right to be indemnified [Section 13(e)]: A partner has a right to recover

from the firm the payments made and liabilities incurred by him:
(i) in the ordinary and proper conduct of the business, and
(ii) in doing act in emergency for the purpose of protecting the firm from loss
if he has acted in a manner as a person of ordinary prudence would have acted
in similar circumstances in his own case.
(h) Right to prevent the introduction of a new partner [Section 31]: Every
partner has the right to prevent the introduction of a new partner without the
consent of all the existing partners.
(i) Right to retire [Section 32]: Every partner has the right to retire with the
consent of all other partners and in the case of a partnership at will, by giving
notice to that effect in writing to all the other partners.
(j) Right not to be expelled [Section 33]: Every partner has the right not to
be expelled from the firm by any majority of partners unless such power is
conferred by partnership agreement and is exercised in good faith. Thus,
expulsion may be exercised subject to the following conditions.
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(k) Right to carry on competing business [Section 36(1)]: Every outgoing

partner has a right to carry on a competing business and to advertise such
business. But, he cannot
(i) use the firm's name; (ii) represent the firm, or (iii) solicit the firm's
customers.
(l) Right to share subsequent profits [Section 37]: Every outgoing partner
or the estate of any partner who ceased to be a partner has the right to claim
either a share in the subsequent profits of the firm or interest at 6% p.a. on his
share in the firm's property till the accounts are finally settled.
(m)Right to dissolve the firm [Section 40]: A partner has the right to dissolve
the partnership with the consent of all partners. But where the partnership is
at will the firm may be dissolved by any partner giving notice in writing to all
other partners of his intention to dissolve the firm.
(a) It must be approved by majority of the partners.
(b) It Must be exercised in good faith without any private animosity.
(c) The concerned partner must be given an opportunity to make a

representation.
MANDATORY DUTIES OF PARTNERS [SECTIONS 9 AND 10]
These provisions cannot be changed by an agreement amongst the partners. The

mandatory duties are:
A) to carry on the business of the firm to the greatest common advantage,
B) to be just and faithful to each other, i.e. every partner should act in good faith.
Good faith requires that a partner should not deceive the other partner by
concealment of material facts.
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C) to render true accounts and full information of all things affecting the firm to
any partner or his legal representative.
D) to indemnify (i.e., to make good or to compensate) the firm for loss caused to
it by his fraud in the conduct of the business of the firm.
GENERAL DUTIES OF PARTNERS:
The general duties of partners as provided in the Act are subject to the clauses
inserted in agreement by partners. They can be changed by an agreement amongst
the partners. Unless otherwise agreed by the partners, every partner has the
following duties:
(a) To attend diligently [Section 12(b)]: Every partner is bound to attend

carefully to his duties in the conduct of his business.
(b) Not to claim remuneration for taking part [Section 13(a)]: A partner is not
entitled to receive remuneration for taking part in the conduct of the business.
(c) To contribute equally to the losses [Section 13(b)]: A partner must

contribute equally to the losses sustained by the firm.
(d) To indemnify the firm [Section 13(f)]: A partner must indemnify (i.e.,
compensate) the firm for any loss suffered by the firm due to his willful neglect
in the conduct of the business of the firm. The term 'willful neglect', is something
more than a mere 'negligence' and has been described as 'culpable negligence'.
(e) To hold and use firm's property for business purpose [Section 15]: The
partners must hold and use the firm's property for the purposes of the business.
(f) To account for and pay the personal profits from transactions firm etc.
[Section 16(a)]: Every partner must account for and pay to the firm the profits
earned by him from any transaction of the firm or from the use of firm's property,
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business connection or name in Bentlay v. Crawen. If a partner is entrusted with

the job of buying sugar for the firm and he supplies sugar to the firm at a higher
price from personal supplies held by him, he is liable to account for profits made
(g) To account for and pay the personal profits from a competing business
[Section 16(b)]: Every partner must account for and pay all profits earned by him
in the competing business. It may be noted that Section 11(2) permits the partners
to enter an agreement restraining a partner from carrying on any business other
than the business of the firm so long as he is a partner.
RELATION OF PARTNERS WITH THIRD PARTIES [SECTION 18]
The relations of partners with third parties are governed by the mutual agency
relationship existing among the partners. According to Section 18, "every partner
is an agent of the firm for the purposes of the business of the firm." In other words,
every partner has the capacity to bind other partners by his acts done in firm's
name. Therefore, all partners are liable to third parties for the acts of every
partner.
IMPLIED AUTHORITY OF A PARTNER [SECTION 19]
The authority of a partner means the capacity of a partner to hind the firm by his
act. This authority may be express or implied. The authority conferred on a
partner by mutual agreement is called 'express authority'. The authority conferred
on a partner by the provisions of Section 19 of the Indian Partnership Act is called
'implied authority'. Reading together Sections 19(1) and 22, Implied authority
covers those acts of partners which fulfil the following three conditions:
(a) The act must relate to the normal business of the firm;
(b) The act must have been done in the usual way of carrying on the business of
the firm;
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(c) The act must be done in the firm's name or in any other manner expressing or
implying an intention to bind the firm.
In Mathuranath v. Bageshwari Rani, A firm was engaged in trapping elephants.

One of the partners of the firm hired out an elephant without the consent of the
other partners. Held, the act fell within the implied authority of the partner
ACTS WITHIN THE IMPLIED AUTHORITY
(a)To purchase goods of the kind that are used in the business of the firm;
(b)To sell the goods of the firm;
(c)To settle accounts with the persons dealing with the firm;
(d)To receive payment of the debts due to the firm and issue receipts for the
same;
(e)To engage servants for the business of the firm;
(f)To engage a lawyer to defend an action brought against the firm;
(g)To borrow money for the purpose of the firm's business;
(h)To pledge the goods of the firm as security for the repayment of borrowings
made for the purpose of firm's business;
(i)To draw, accept, endorse Bill of Exchange and other negotiable instruments
in the name of the firm.
RESTRICTIONS ON THE IMPLIED AUTHORITY OF A PARTNER

[SECTIONS 19 AND 20]
Restrictions on the implied authority of a partner may be of two kinds:
I) Statutory Restrictions and II) Restrictions imposed by mutual agreement.
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I. Statutory Restrictions [Section 19(2)]:
In the absence of any usage or, custom of trade to the contrary, the implied
authority of a partner does not empower him to do the following acts namely-
(a) To submit a dispute to arbitration relating to the business of the firm;
(b) To open a Bank Account on behalf of the firm in partner's own name;
(c) To compromise or relinquish any claim or portion of the claim by the firm;
(d) To withdraw a suit or proceedings filed on behalf of the firm;
(e) To admit any liability in a suit or proceedings against the firm;
(f) To acquire immovable property on behalf of the firm;
(g) To transfer immovable property belonging to the firm; and
(h) To enter into partnership on behalf of the firm.
II. Restrictions Imposed by Mutual Agreement [Section 20] –
The partners of a firm by mutual agreement may extend or, restrict the scope of
implied authority of any partner. But a third party is not bound by any such
restriction unless it has the, knowledge of such restriction. In other words, the
firm is liable to third party only if the third party has no knowledge of the
restrictions.
For example, A, B and C are partners in a trading firm. By an agreement, they

decided that no partner shall have the right to buy goods beyond the value of Rs
2,00,000 without the consent of other partners. A third party who had no
knowledge of such restriction sold goods worth Rs 3,00,000 to A who did not
consult his other partners about this transaction. The firm is liable to pay the full
amount to the third party.
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IMPLIED AUTHORITY AND THIRD PARTIES
All partners are liable to third parties for all acts of a partner which fall within the
scope of his implied authority.
(a) Effect of Restriction on Implied Authority [Section 20] - The partners

of a firm by mutual agreement, may extend or restrict the scope of implied
authority of any partner. But, the third party is not bound by any restriction
imposed on the implied authority of a partner unless it has the knowledge
of such restriction.
(b) Effect of Admissions by a Partner [Section 23] - Any admission or

representation (e.g., acknowledgement signed by a partner) by a partner is
sufficient evidence against the firm if the following two conditions are
fulfilled:
(i) Such admission or representation must relate to the affairs of the firm; and
(ii) Such admission or representation must be made in the ordinary course of

business.
(c) Effect of Notice to an Acting Partner [Section 24] - Any notice to a

partner operates as a notice to the firm if the following three conditions are
fulfilled:
(i) Such notice must relate to the affairs of the firm;
(ii) Such notice must be given to a working partner and not to a sleeping
partner.
(iii)There must not be any fraud committed by the partners and the third party
against the firm.
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(d) Contractual Liability [Section 25] - Every partner is liable jointly with
other partners and also severally (i.e., individually) for all those acts of the
firm which have been done while he was a partner.
Example X, Y and Z were partners in a firm when infringement of a trademark

took place. X retired. Later on, damages arising out of the alleged
infringement arose after the dissolution of the firm. It was held that all the
partners who were members of the firm at the time when infringement of a
trademark took place, were liable. (Thomas Bear & Sons v. Ralia Ram]
(e) Liability for torts and Wrongful Acts of a Partner [Section 26] - The
firm is liable to the same extent as the partner for any loss or injury caused to
any third party or any penalty by the wrongful act or omission of a partner if
either of the following two conditions is fulfilled:
(i) Such wrongful act or omission must have been done by a partner while he
was acting in the ordinary course of business of the firm, or
(ii) Such wrongful act or omission must have been done by a partner with the
authority of the other partners.
(f)Liability for misappropriation by a partner: [Section 27] provides that

(a) when a partner, acting within his apparent authority, receives money or
other property from a third person and misapplies it or (b) where a firm, in the
course of its business, received money or property from a third person and the
same is misapplied by a partner, while it is in the custody of the firm, is liable
to make good the loss.
Example: A, B, and C are partners of a place for car parking. P stands his car
in the parking place but A sold out the car to a stranger. For this liability, the
firm is liable for the acts of A.
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(g)Partner's Authority in Emergency [Section 21]: A partner's authority in

an emergency covers those acts which fulfil the following two conditions:
(a) The act must be done to protect the firm from loss; and
(b) The act must be such as a prudent man would undertake under similar
circumstances in his own case.
Example: A, B and C are partners in a trading firm. By an agreement, they

decided that no partner would have authority to sell goods of the firm above
the value of Rs 50,000 without the consent of other partners. Owing to a
sudden drop in the market, the prices crashed. One partner, in order to save
the firm from loss, sold all the stock worth Rs 5,00,000 without consulting any
other partner. Such an act would bind the firm.
DISSOLUTION OF FIRM [SECTIONS 39 TO 47]
Meaning of Dissolution: The term 'dissolution' stands for discontinuation.

Under the Indian Partnership Act, 1932, the dissolution may be either of
Partnership or of a firm.
Meaning of Dissolution of Partnership:
Dissolution of partnership means coming to an end of the relation known as

partnership, between various partners. The firm continues its business after
being reconstituted. This may happen on admission, retirement or death of a
partner in the firm.
Example X, Y and Z are partners in a firm. X retires. The partnership between

X Y and Z comes to an end and new partnership between Y and Z comes into
existence. This new partnership between Y and Z shall be known as
‘reconstituted firm’. Thus, on retirement of partner, the old partnership stands
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dissolved, but the firm continues its business with the remaining partners le
and Z.
Meaning of Dissolution of Firm – According to Section 39 Dissolution of a

firm means the dissolution of partnership between all the partners of a firm. In
such a situation, the business of the firm is discontinued, its assets are realized,
the liabilities are paid off and the surplus (if any) is distributed among the
partners according to their rights.
Example: Firm consisting of A, B and C all of them cease to be partners with

one another, it amounts to dissolution of the firm.
MODES OF DISSOLUTION (SECTION 40-41)
1) Dissolution by mutual agreement [Section 40]: - A firm may be

dissolved by mutual agreement among all the partners. Even a firm for a
fixed duration may be dissolved by mutual agreement.
2) Compulsory dissolution [Section 41]: A firm is compulsorily dissolved

in the following two circumstances:
(i) If all the partners, or all but one partner of the firm are declared
insolvent; [The reason is that there must be at least two persons to continue
a firm and such persons must be competent to contract].
(ii) If some event takes place which makes it unlawful for the firm's
business to be carried on.
Example: A the resident of India and Y the resident of Pakistan, are

partners in a firm. War breaks out between India and Pakistan. In such a
situation, on outbreak of war, the business of the firm becomes unlawful to
be carried on.
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3) Dissolution on the happening of contingent event (S.42): A firm may

be dissolved on the happening of any of the following contingent event
(i) Expiry of Fixed Period: A firm constituted for a term is of course not
exempt from dissolution by any of the other possible cause before the
expiration of the term. The contract may expressly provide that the
partnership will determine in certain circumstances but even if there is no
such express term, an implied term as to when the partnership will
determine may be gathered from the contract and the nature of the business.
(ii) On Achievement of Specific Task: A partnership constituted to carry

out contracts with specified persons during a particular season would be
taken to be dissolved once the contracts are closed.
In the case of Basantlal Jalan v. Chiranjilal, Where the firm was

constituted for a specific undertaking to supply certain quantity of grain
and the contract was prematurely terminated after supply of a part of the
goods, it was held that the partnership did not come to an end and was
dissolved only on the final realization of the assets.
(iii) Death of Partner: When the deed of partnership did not provide that
the death of a partner would not dissolve the partnership, the partnership
stood dissolve on the death of a partner. Firm, stands dissolved
automatically on death of one partner.
(iv) Insolvency of Partner: In the absence of a contract to the contrary,

the insolvency of any of the partner may dissolve the firm. The rule shall
apply even though the partnership has been constituted for a fixed term and
the term has not yet expired or has been constituted for particular adventure
and the same has yet not been completed.
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(v) Resignation of Partner: Resignation by any of the partners dissolves

the partnership If all the partners or all but one partner of the firm are dead
or becomes insolvent, the firm shall be compulsorily dissolved even if the
partnership agreement provided that the firm shall not be dissolved on the
death of a partner. The reason is that there must be at least two partners to
continue a firm.
4.DISSOLUTION BY NOTICE (S.43)
In case of partnership at will, a partner can dissolve it by giving written

notice of dissolution to other partners duly signed by him. Notice must be
very clear and certain. A notice once given cannot be withdrawn without
the consent of other partners was held in case of Banarsidas v. Kanshi
Ram. In those cases where a partner has given notice of dissolution at a
time when dissolution will give him some advantage over the other
partners, he may be held in the firm till the pending transactions are
completed.
5. DISSOLUTION BY COURT (S 44)
The court may order for the dissolution of the firm on the following
grounds:
(i) Insanity of Partner: On the application of any of the partner, court

may order for the dissolution of the firm if a partner has become of an
unsound mind. Lunacy of a partner does not itself dissolve the
partnership but it will be a ground for dissolution at the instance of
other partners. It is not necessary that the lunacy should be permanent.
(ii) Incapacity of Partner: If a partner has become permanent in capable

of discharging his duties and obligations then court may order for the
dissolution of firm on the application of any of the partner. where a
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partner is imprisoned for a long period of time the court may dissolve
the partnership was held in case of Whitwell v. Arthur
(iii) Misconduct of Partner: If any partner other than partner suing is

responsible for any loss to the firm, which amounts to misconduct and
prejudicially affects the carrying on of business then the court may
order for the dissolution of the firm. In Carmichael v. Evans a partner
of the firm was convicted on account of travelling without ticket in
Rail, the court ordered the firm to be dissolved on petition by other
partners as such act of the partner was detrimental to the interest of the
firm.
(iv) Constant breach of Agreement by partner: the court may order for
the dissolution of the firm if the partner other than the suing partner is
found guilty for constant breach of agreement regarding the conduct of
business or the management of the affairs of the firm and it becomes
impossible to continue the business with such partner
(v) Transfer of Interest: When any of the partner other than the suing
partner transfers whole of its share to the third party for permanently.
(vi) Continuous Losses: The court may order for dissolution if the firm is
continuously suffering losses and there is no more capital available for
the future growth of the firm.
(vii) Just and Equitable: The court may order for dissolution on any other
ground which court think is just, fair and equitable. e.g., loss of total
confidence between the partners was held in Abbot v. Crump where
adulterous act has been committed by one partner with another partners
wife was held to be valid ground for the dissolution of firm by the court.
RIGHTS AND LIABILITIES OF A PARTNER ON DISSOLUTION

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Rights of a Partner on Dissolution [Sections 46, 51 to 53] The various

rights of a partner on dissolution are as follows:
(a) Partner's General Line [Section 46]: Every partner or his

representative is entitled-
(i) to have the firm's property applied in payment of the firm's debts, and
(ii) to have the surplus distributed amongst the partners or the

representatives according to their respective rights.
(b) Right to Claim the Return of Premium on Premature Winding Up

[Section 51]: If a partner joined a firm for a fixed term and had paid a
premium and the firm is dissolved before the fixed term, he is entitled to
return of the premium. The amount of premium will depend upon
(i) the terms upon which he became a partner, and
(ii) the length of the time during which he was a partner.
However, such a partner cannot claim any return of the premium in the
following three circumstances:
(i) When the dissolution is due to the death of partner,
(ii) When the dissolution is mainly due to the misconduct of the partner
who paid the premium; or
(iii) The dissolution is according to an agreement which had no provision

for the return of premium or any part thereof.
(c) Rights of a Partner in Case of Dissolution on Account of Fraud or

Misrepresentation [Section 52]: Where the partnership is rescinded on
grounds of fraud or misrepresentation, the aggrieved partner, besides other
rights under other provisions, has the following rights: (i) He has a right of
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lien on the surplus assets after the payment of firm's debts, for any sum
paid by him for purchase of a share in the firm or for any capital contributed
by him;
(ii) He is entitled to rank as a creditor of the firm in respect of any payment

made by him towards firm's debts;
(iii) He is entitled to be indemnified by the partners) guilty of fraud or

misrepresentation against all the debts of the firm.
(d)Right to Restrain from Use of Firm Name or Firm Property [Section

53]: Unless otherwise agreed by the partners, every partner or his rep
tentative may restrain any other partner or his representative from carrying
on a similar business in the firm name or from using the property of the
firm for his own benefit till the affairs of the firm are completely wound
up.
(e) Agreements in restraint of trade (S.54): Partners may, upon or in

anticipation of the dissolution of the firm, make an agreement that some or
all of them will not carry on a business similar to that of the firm within a
specified period or within specified local limits; and notwithstanding
anything contained in section 27 of the Indian Contract Act, 1872 such
agreement shall be valid if the restrictions imposed are reasonable
Example: A sells the goodwill of his business to B and sets up a new

business. X who remains customer of the old firm deals his own accord
with the new firm set by A. A is not entitled to solicit even such a customer
as X, though if X continues to deal with A of his own accord, A would be
entitled to deal with him.
LIABILITIES OF A PARTNER ON DISSOLUTION [SECTIONS 45

AND 47]
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• Continuing Liability for acts of partners done after dissolution (S.45):

This section provides that despite dissolution, the partners cannot escape their
liability to third parties for acts done even thereafter unless public notice of
dissolution is given. These provision emphasis the necessity of giving a
public notice before a partner could terminate his future liability whether it is
a case of dissolution, retirement or expulsion.
REGISTRATION OF PARTNERSHIP FIRM
Procedure for registration
Section 58 of the Indian Partnership Act.1932 deals with the procedure for
incorporation of a firm in which the firm has to initially fill a form which shall
contain different details about the firm which are as follows:
1. Name of the firm,
2. The address of the underlining members,
3. The duration of the firm,
4. The original place of the firm, and
5. The place where the firm will carry out all its functions.
After the registration is complete the form is submitted to the registrar, who then
accepts the form and registers the form by completing it through writing the
details in the registration register. This process is mentioned in section 59 of the
Indian Partnership Act,1932. Another important essential which needs to be
taken care of during the incorporation is that the registration application must be
duly signed by all the members.
EFFECTS OF NON-REGISTRATION
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A non-registered firm does not have all the rights of a registered firm. Its working
is different from that of a registered firm and the right of a non-registered firm is
restricted. The effect on a firm for not being a registered one is mentioned
under section 69 of the Indian Partnership Act,1932. There are certain
consequences to it which are as follows:
• No suit to enforce rights under the Act
A firm which has not undergone the process of incorporation cannot file a suit
against any other firm or third party. A non-registered firm does not have the
privilege to file a suit like all other registered firms. Another important essential
about this sub-point is that the person or the third party suing the non-registered
firm shall be already registered in the register as a firm.
• No suit to enforce rights against any third party
A non-registered firm cannot file a suit against a third party in any court, neither
can they file any suit against any party and nor any party can sue them if they are
registered in the registrar. No suit can be filed in any court of jurisdiction within
India.
• No proper relief
If there is no registration of the firm, the claim exceeding Rs100 cannot be set off
by a third party, so there is no relief in this regard to the party. Such a right can
be only enjoyed by the registered firm.
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• Partners cannot bring legal action against each other
An aggrieved partner of an unregistered firm cannot bring legal action towards

each other as they are in no position to file a suit in the court or have the power
to enforce any right.
POWERS WHICH ARE GIVEN TO THE UNREGISTERED FIRMS
Though being subjected to many limitations, unregistered firms are still vested
with some powers which may not be as absolute as the registered ones but they
do exist. Certain rights and power are given to the unregistered firm are as
follows:
1. Even if the firm is unregistered, a third party can still bring out a legal
action towards them.
2. Unregistered firms give power to the partner to file a suit against another
one in cases of dissolution and for settling the accounts.
3. The court can release the insolvent property of the partner and bring
legal action to it.
Case laws relating to the effect
• S.H Patel v. Hussenibhai Mohammad (1935)

In this case, the court held that the right which the partner wants to enforce it is
not an acquired right which has been acquired by him as a partner which means
that it does not actually regulate the rights of a person but instead of all that it
creates a new right and which is not based on the rights of what a partner may
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hold while being one. The creation of a new right is an extremely different cause
of action which may also be allowed in unregistered firms.
• D.D.A. v. Kochhar Construction Work and Anr (1996)

In this case, the court held that just because a proceeding has been filed in the
court for its non-registration, the obligation to it be registered as a company does
not remove the initial defect as it may be a registered firm now but it was not one
in the institution of the proceeding. It was unregistered that is why the firm was
led to court if it is seen that the initial defect is settled the whole point of the
proceeding will be meaningless as well as it will be unjustified to the plaintiff
too.
• In Shriram Finance Corporation v. Yasin Khan and Ors. (1989)
In this case, it was held by the court that the suit filed by the current partners was
not maintainable as the current partners were recruited after the registration and
their name was not mentioned under the register of incorporation which makes
them not in the position to file a suit. As it was mentioned under section 69(2) of
the Indian Partnership Act,1932 that for a third party to sue, their name shall be
mentioned in the register of registration as a firm. So that is why the suit was not
held liable.
CONCEPT OF LIMITED LIABILITY PARTNERSHIP
The Limited Liability Partnership is a business form, in which business can be

carried on even if there is an alteration in the partners of the business. Limited
Liability Partnership (LLP) is a separate legal entity, where the Limited Liability
Partnership is liable in full to its assets, but the partners are liable to the
contribution made by themselves individually only.
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The LLPs are governed by the Limited Liabilities Act, 2008. It’s a corporate
body and is to be considered as a separate legal entity undergoing perpetual
successions. There must be a minimum of at least two members required, with a
motive to start a lawful business, in order to obtain profit in order to form an LLP,
and there is no maximum no. of members prescribed. However, the provisions of
the Partnerships Act, 1932 is not applicable to LLPs.
A corporate body or an individual can be a partner to the LLP. There should be

at least two “Designated Partners” who could also be held liable for legal
compliances, beside their liabilities as partners. If a Limited Liability Partnership
has only one individual or all corporate bodies as its members then the designated
members, i.e., at least two individuals shall be chosen from the corporate bodies,
who are nominated by the bodies themselves. However, every designated partner
holds a specific identification number which is called Designated Partner’s
Identification Number.
REGISTRATION OF LLP
Process of Registration
Certain documents are necessary as part of the registration process to form an
LLP. These documents are classified into two categories: partner documents and
LLP documents. Section 11 of the LLP Act of 2008 mentions the following
above-mentioned statement.
1. PAN Card/ ID proof, residence proof, address proof, photograph of the

partners, passport if the partners are foreign nationals or NRIs are all
important documents for partners.
2. The LLP requires proof of registered office address as well as a digital
signature certificate. From the time you acquire a DSC certificate to the
time you file Form 3; it takes about 15 days.
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STEPS REQUIRED FOR REGISTRATION OF LLP

• Obtaining a Certificate of Digital Signature
Every individual who wishes to be nominated as a partner of an LLP must first
apply for a Digital Signature Certificate before proceeding with the rest of the
registration process. This is necessary since all of the LLP’s documentation must
be filed online and signed electronically. All forms filed online on the MCA portal
require a DSC to be signed digitally.
• Fill out an application for a Director Identification Number

Once the DSC has been obtained, the designated partners must apply for the
Designated Partner Identification Number using Form DIR-3 (DPIN). The
partner must also include confirmation of identity and proof of domicile when
filing Form DIR-3. All designated partners or those wanting to be designated
partners of such prospective LLP should submit an application for a DIN.
• Reservation for LLP Name

For any conversion of a company/firm into an LLP or the incorporation of a new
LLP, an applicant must acquire a name reserved. An application must be
submitted through the MCA Portal to reserve a proposed name.
INCORPORATION OF LLP
Following the reservation of a name, the member must file an LLP Integrated
Incorporation form through MCA Portal. This FiLLiP (Form for Incorporation
of LLP) requires information and documents such as the LLP’s approved or
proposed name, proof of address of the office registered under the LLP, the LLP’s
planned activity, details of designated partners with their DPIN, subscriber’s
sheet with consent, and the total contribution by the LLP’s partners with their
monetary value, etc. The incorporation paperwork of an LLP is discussed in
Section 11 of the LLP Act. The FiLLiP form must be submitted with the
appropriate fee, as well as the Stamp Duty, as specified on the MCA Portal:
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▪ Fee of Rs. 500 for an LLP with a contribution of less than Rs. 1 lakh.
▪ A fee of Rs. 2,000 is charged for an LLP with a contribution of between
Rs. 1 lakh and Rs. 5 lakhs.
▪ Fee of Rs. 4,000 for an LLP with a contribution of between Rs. 5 lakh and
Rs. 10 lakhs.
▪ A fee of Rs. 5,000 is charged to an LLP with a donation of more than Rs.
10 lakhs.
ADVANTAGES OF HAVING LLP

• Separate Legal Entity
A Limited Liability Partnership (LLP) is a separate legal entity. It can sue and be
sued since it possesses assets in its own name. Furthermore, one partner is not
liable or responsible for the misbehaviour or neglect of the other.
• No owner/manager distinction
An LLP is made up of partners who own and operate the company. A private
limited company, on the other hand, may have directors who are not shareholders.
As a result, venture capitalists avoid the LLP form.
• Flexible Agreement
In terms of their rights and responsibilities, the partners are allowed to design the
agreement according to their own will.
• Limited Liability
The partners’ responsibility is restricted to the amount of money they put into the
LLP. Unless fraud is discovered, the partner’s personal assets are protected from
the LLP’s liabilities.
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• Fewer Compliance Requirement

Because there are only three compliances per year, an LLP is significantly easier
and less expensive to administer than a private limited company. A private limited
business, on the other hand, must comply with numerous regulations and have its
books audited.
• Easy to Wind-up
In comparison to a private limited company, an LLP is not only easier to create
but also to wind up. While this process still takes two to three months, closing a
private limited business can take up to a year.
• Protecting the Partnership name

By registering an LLP at Companies House another company can be prevented
from registering the same name.
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MODULE 5
Sale of goods – definition and essentials of a contract of sale– sale and
agreement to sell-conditions and warranties – rule of caveat emptor – passing
of property and risk –sale by non-owners-principle of nemo dat quod non habet
- delivery of goods- Unpaid seller –unpaid seller’s rights against goods and the
buyer personally –buyer’s remedies against the seller
SALE OF GOODS ACT, 1930
The Indian Sale of Goods Act, 1930 is a Mercantile Law, which came into
existence on 1 July 1930, during the British Raj, borrowing heavily from the Sale
of Goods Act, 1893. Till 1930 the transactions relating to sale and purchase of
goods were regulated by the Indian contract act, 1872, (sec 76-123) and were
repealed and made separate act called Indian Sale of Goods Act, 1930. The Act
was amended on 23 September 1963, and was renamed to the Sale of Goods Act,
1930. It is still in force in India. The Sale of Goods Act, 1930, is the law that
governs the sale of goods in all parts of India.
The contacts for sale of goods are subject to the general principles of the law
relating to contracts i.e., the Indian Contact Act. A contract for sale of goods has,
however, certain peculiar features such as, transfer of ownership of the goods,
delivery of goods rights and duties of the buyer and seller, remedies for breach of
contract, conditions and warranties implied under a contract for sale of goods,
etc.
Buyer and Seller
As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to buy
goods. Since a sale constitutes a contract between two parties, a buyer is one of
the parties to the contract.
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The Act defines seller in sec 2(13). A seller is someone who sells or has agreed
to sell goods. For a sales contract to come into existence, both the buyers and
seller must be defined by the Act. These two terms represent the two parties of a
sales contract.
Goods
One of the most crucial terms to define is the goods that are to be included in the
contract for sale. The Act defines the term “Goods” in its sec. 2(7) as all types of
movable property. The sec. 2(7) of the Act goes as follows: “Every kind of
movable property other than actionable claims and money; and includes stock
and shares, growing crops, grass, and things attached to or forming part of the
land which are agreed to be severed before sale or under the contract of sale
will be considered goods”
The term actionable claims mean those claims which are eligible to be enforced
or initiated by a suit or legal action. This means that those claims where an action
such as recovery by auction, suit, refunds etc. could be initiated to recover or
realize the claim. We say that goods are in a deliverable state when their
condition is such that the buyer would, under the contract, be bound to take
delivery of these goods. Actionable claims are things that a person cannot make
use of, but which can be claimed by him by means of legal action such as a debt
Money cannot be sold because money means legal tender and not the old coins
which can be sold and purchased as goods.
Sale of immovable property is not covered under this Act. As per Section 3 of
the Transfer of Property Act, 1882, ‘immovable property’ does not include
standing timber, growing crops or grass. They are considered movable property
and thus goods. Standing timber is taken as movable property while trees are
immovable property.
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Things like goodwill, copyright, trademark, patents, water, gas, electricity

are all goods. In the case of Commissioner of Sales Tax vs. Madhya Pradesh
Electricity Board [AIR 1970 SC 732], the Supreme Court observed –
“…electricity…can be transmitted, transferred, delivered, stored, possessed, etc.,
in the same way as any other movable property…If there can be sale and purchase
of electric energy like any other movable object, we see no difficulty in holding
that electric energy was intended to be covered by the definition of “goods”.
In the case of H. Anraj vs. Government of Tamil Nadu [AIR 1986 SC 63], it was
held that lottery tickets are goods and not actionable claims. Thus, sale of lottery
tickets is sale of goods.
Sugarcane supplied to a sugar factory is goods within the meaning of Section

2(7) of the Act as held in the case of UP Cooperative Cane Unions Federation
vs. West UP Sugar Mills Assn. [AIR 2004 SC 3697]
Sale and agreement to sell [Sec. 4(3)]
• the property in the goods is transferred from the seller to the buyer,
the contract is called a ‘sale’
• Transfer of the property in the goods is to take place at a future time

or subject to some conditions thereafter to be fulfilled, the contract is
called an ‘agreement to sell’
• An agreement to sell becomes a sale when time elapses or the

conditions, subject to which the property in the goods is to be
transferred, are fulfilled [Sec. 4(4)].
FORMALITIES OF A CONTRACT OF SALE
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1) Offer and Acceptance: A contract of sale is made by an offer to buy or

sell the goods for a price and acceptance of such offer.
2) Delivery and Payment: It is not necessary that the payment for the goods
to the seller and delivery of goods to the buyer must be simultaneous. They
can be made at different times or in instalments – as per the contract.
3) Express or Implied: The contract can be in writing, oral or implied. It can

also be partly oral and partly written.
ESSENTIAL FEATURES
The five essential features of a contract of sale are as discussed below:
1) Two parties: there must be 2 distinct parties i.e., a buyer and a seller, to
affect a contract of sale and they must be competent to contract. ‘Buyer’
means a person who buys or agrees to buy goods [Sec. 2(1)]. ‘Seller’ means
a person who sells or agrees to sell goods [Sec. (13)]. A sale has to be
bilateral because the goods have to pass from one person to another. The
seller and the buyer must be different persons. A part owner can sell to
another part owner. A partner may, therefore, sell to his firm or a firm may
sell to a partner. But if joint owners distribute property among themselves
as per mutual agreement, it is not ‘sale’.
2) Subject matter to be goods: there must be some goods the property in

which is or is to be transferred from the seller to the buyer. The goods
which form the subjectmatter of the contract of sale must be movable.
Transfer of immovable property is not regulated by the Sale of Goods Act.
3) Transfer of ownership of Goods: There must be transfer of ownership or

an agreement to transfer the ownership of goods from the seller to the buyer
(not the transfer of mere possession or limited interest as in the case of
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pledge, lease or hire purchase agreement). If goods remain in possession

of seller after sale transaction is over, the ‘possession’ is with seller, but
‘ownership’ is with buyer. The Act uses the term ‘general property’
implying that sale involves total ownership and not a specific right limited
by conditions.
Delivery of goods refers to a voluntary transfer of possession of goods

from one person to another. Delivery may be constructive or actual
depending upon the circumstances of each case. A contract may provide
for the immediate delivery of the goods or immediate payment of the
price or both. Alternatively, the delivery or payment may be made by
instalments or be postponed.
4) Consideration is Price: Price is an essential ingredient for all transactions

of sale and in the absence of the price or the consideration, the transfer is
not regarded as a sale. The transfer by way of sale must be in exchange for
a price. It has been held that price normally means money considerations
for a sale of goods sec 2 (10). The price can be paid fully in cash or it can
be partly paid and partly promised to be paid in future. The price can be
fixed by the agreement between the parties before the conveyance of the
property. When goods are exchanged for goods, it is a contract of barter
or exchange
5) Essential elements of a valid contract: All essential elements of a valid

contract must be present in the contract of sale. viz., competent parties, free
consent, legal object and so on. The transfer of possession and ownership
under the Act has to be voluntary and not be tainted with fraud.
CONDITIONS AND WARRANTIES

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• Section 11 to 17 of the Sale of Goods Act enlightens the provisions relating

to Conditions and Warranties.
• Section 12 of the Act draws a demarcation between a condition and a

warranty.
• 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.
• A warranty is a stipulation collateral to the main purpose of the

contract, the breach of which gives rise to a claim for damages but not
to a right to reject the goods and treat the contract as repudiated.
In Section 12 of the Act the meaning of conditions and warranties are given
as under-
(1) A stipulation in a contract of sale with reference to goods which are the
subject thereof may be a condition or a warranty.
(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.
(3) A warranty is a stipulation collateral to the main purpose of the contract,

the breach of which gives rise to a claim for damages but not to a right to
reject the goods and treat the contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a warranty

depends in each case on the construction of the contract. A stipulation may
be a condition, though called a warranty in the contract.
KINDS OF CONDITIONS
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• Expressed Condition: The dictionary meaning of the term is defined

as a statement in a legal agreement that says something must be done or
exist in the contract. The conditions which are imperative to the
functioning of the contract and are inserted into the contract at the will
of both the parties are said to be expressed conditions.
• Implied Condition: There are several implied conditions which are

assumed by the parties in different kinds of contracts of sale. Implied
conditions are described in Section 14 to 17 of the Sale of Goods Act,
1930. Unless otherwise agreed, these implied conditions are assumed
by the parties as if it is incorporated in the contract itself.
Implied Conditions: There are seven implied conditions in a contract of sale

of goods.
• Condition as to Title [Section 14(a)]: Section 14(a) of the Sale of Goods

Act 1930 explains the implied condition as to title as ‘in the case of a sale, he
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’.
Consequently, if the seller has no title to sell the given goods, the buyer may
refuse or reject those goods. He is also entitled to recover the full price paid
by him.
Rowland v Divall, – The plaintiff had purchased a car from the defendant and
was compelled to return it to the true owner after having used it for a while.
The plaintiff then sued the defendant for the purchase money, since the
defendant didn’t receive the consideration as per the condition of the title of
ownership.
NOTE: If the goods bear labels infringing the trademark of a third party,
the seller has no rights to sell them. In Niblett v Confectioners' Material,
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the claimant purchased 1,000 tons of condensed milk from the defendant. The
tins were labelled 'Nissly'. Nestle told the claimant that if they attempted to
sell these on, they would apply for an injunction to prevent the sale as the label
was very similar to Nestle's labels for their condensed milk. The claimants
agreed not to sell them and brought an action against the sellers. It was held
that, the sellers did not have the right to sell the goods and therefore the buyers
were entitled to repudiate the contract.
• Sale by Description (Section 15): Section 15 of the Sale of Goods Act, 1930
explains that when a buyer intends to buy goods by description, the goods
must correspond with the description given by the buyer at the time of
formation of the contract, failure in which the buyer can refuse to accept the
goods.
In Shepherd v Kane, A ship was contracted to be sold as "copper fastened

vessel" to be taken with all faults, without any allowance for any defects
whatsoever. The ship turned to be partially copper fastened. The court held
that that the buyer was entitled to reject the goods.
Note: Packing of goods may sometimes be part of the description: In

Moore &Co v. Landauver & Co., M sold to L 300 TINS OF Australian
Apple packed in cases containing 30 tins. M tendered a substantial portion in
case containing 24 tins. It was held that l could reject all the tins as the goods
were not packed according to the description given in the contract as the
method in which the fruit was packed was an essential part of the description.
• Sale by Sample (Section 17): When the goods are to be supplied on the basis
of a sample provided to the seller by the buyer while the formation of a
contract the following conditions are implied:
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• Bulk supplied should correspond with the sample in quality, That the actual
products would correspond with the sample with respect to the quality, size,
colour etc.
• Buyer shall have a reasonable opportunity to compare the goods with the
sample
• The good shall be free from any apparent defect on reasonable examination
by the buyer.
In Godley v Perry, a retailer purchased from a wholesaler a number of toy

catapults in a sale by sample. The retailer sold one of those catapults to a boy
and when the boy tried to play with it, it broke into pieces because of
manufacturing defect. The retailer was held bound to pay compensation to
the boy and in his turn, he sued the wholesaler for indemnity. It was found
that the retailer had done reasonable examination on his part, thus wholesaler
had to indemnify him
• Sale by sample as well as Description (Section 15):
When the sale of goods is by a sample as well as a description the bulk of the
goods should correspond with both, i.e., description and sample provided to
the seller in the contract and not only sample or description.
In Nichol v. Godis (1854), there was a sale of foreign refined rape-oil. The
delivered oil was the same as the sample but it was having a mixture of other
oil too. It was held in this case that the seller was liable to refund the amount
paid.
• Condition as to Quality or Fitness (Section 16)
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S. 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 Priest v Last, B went to S, a chemist and demanded a hot water bottle from
him, S gave a bottle to him saying that it was meant for hot water, but not
boiling water. after few days while using the bottle B's wife got injured as
the bottle burst out, it was found that the bottle was not fit to be used as hot
water bottle. The court held that the buyer's purpose was clear when he
demanded a bottle for hot water bottle, thus the implied condition as to fitness
is not met in this case.
• Implied condition of merchantable quality- Sec. 16(2): Goods must be of

merchantable quality.
For eg: A purchased sugar sack from B which was damaged by ants. The
condition of merchantability is broken here and it is unfit for use.
NOTE: The buyer has the right to examine the goods before accepting
it. But a mere opportunity without an actual examination would not suffice
to deprive the buyer of his rights. If, however, the examination does not
reveal the defect but within a reasonable time period the goods are found to
be defective, He may repudiate the contract even if he approves the goods.
NOTE: The implied conditions especially in case of eatables must be

wholesome and sound and reasonably fit for the purpose for which they
are purchased. For eg: Amit purchases milk that contains typhoid germs
and because of its consumption he dies. His wife can claim damages.
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In Shivallingappa v. Balakrishna & Son, the buyer ordered for the best
quality of 'Toor dal'. The dal was loaded in rain and by the time it reached
the destination, it became damages by moisture. It was held that since the
damaged Toor dal could not be sold as that of best quality as it was no longer
of merchantable quality. The buyer was entitled to claim damages.
• Conditions implied by trade usage - S. 16(3): It gives statutory force to

conditions implied by the usage of a particular trade. It says: "An implied
warranty or condition as to the quality or fitness for the particular
purpose may be annexed by the usage of trade." In case of Peter
Darlington Partners Ltd v Gosho Co Ltd, where a contract for the sale of
canary seed was held subject to the custom of the trade that for impurities in
the seed, the buyer would get a rebate on the price, but would not reject the
goods.
WARRANTY
Warranty is the additional stipulation and a written guarantee that is collateral to

the main purpose of the contract. The effect of a breach of a warranty is that the
aggrieved party cannot repudiate the whole contract however, can claim for the
damages. Unlike in the case of breach of condition, in the breach of warranty, the
buyer cannot treat the goods as repudiated.
Kinds of Warranty
• Expressed Warranty: The warranties which are generally agreed by both

the parties and are inserted in the contract, it is said to be expressed
warranties.
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• Implied Warranty: Implied warranties are those warranties which the

parties assumed to have been incorporated in the contract of sale despite the
fact that the parties have not specifically included them in the contract.
Subject to the contract, the following are the implied warranties in the
contract of sale:
i) Warranty as to undisturbed possession Section 14(2) of the given Act

provides that there is an implied warranty that the buyer shall enjoy the
uninterrupted possession of goods. As a matter of fact, if the buyer having got
possession of the goods, is later disturbed at any point, he can sue the seller
for the breach of warranty.
For e.g.: ‘X’ purchased a second-hand bike from ‘Y’. Unknown to the fact that
the bike was a stolen one, he used the bike. Later, he was compelled to return the
same. X is entitled to sue Y for the breach of warranty
ii) Warranty as to freedom from Encumbrances In Section 14(3), there is an

implied warranty that the goods shall be free from any charge or
encumbrances that are in favor of any third party not known to the buyer. But
if it is proved that the buyer is known to the fact at the time of entering into
the contract, he will not be entitled to any claim.
For eg: A pledges his goods with C for a loan of Rs. 20000 and promises him to
give the possession. Later on, A sells those goods to B. B is entitled to claim the
damages if he suffers any.
iii) Implied warranty to disclose Dangerous nature of the goods sold: If the
goods sold are inherently dangerous or likely to be dangerous and the buyer is
not aware of the fact, it is the duty of the seller to warn the buyer for the
probable danger. If there would be a breach of this warranty, the seller will be
liable.
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For eg: A purchases a horse from B if the horse is violent and then It is the duty
of the seller to inform A about the probable danger. While riding the horse, A was
inflicted with serious injuries. A is entitled to claim damages from B.
Doctrine of Caveat Emptor
• means let the buyer beware
• the responsibility lies on the buyer of goods and he must perform due
diligence before the purchase of the goods.
• Buyer cannot hold the seller responsible for inferior goods unless the
contract is based on fraud
• Section 16 of the Sale of Goods Act, defines it as ‘“there is no implied

warranty or condition as to the quality or the fitness for any particular
purpose of goods supplied under such a contract of sale”
In Re Andrew Yule & Co., the buyer ordered for hessian cloth without
specifying purpose for which he wanted the same. It was in fact needed for
packing. Because of its unusual smell, it was unsuitable for the same. It was
held that the buyer had no right to reject the cloth and claim damages.
Exceptions to the Doctrine of Caveat Emptor
❑ Fitness of the Product for the Buyer’s Purpose of Purchase- Section 16

(1):
buyer informs the seller about his purpose behind purchasing the goods and
the seller does not sell the goods according to that knowingly, it relieves the
buyer from the responsibility
❑ Sale of Goods Under the Trade Name
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If the buyer purchases a branded product or a product sold under a trading

name, then he is assured of the quality that is associated with that brand
name.
❑ Merchantable Quality of Goods- Section 16(2)
The seller must provide goods of merchantable quality to the buyer.
This means that the goods must be fit for resale in the market and must pass
the market standards.
❑ Sale by Sample Inspection
Doctrine of Caveat Emptor does not apply if the buyer purchases the goods
after careful inspection of a sample of the goods that he intends to buy
and the seller supplies goods different from that sample
❑ Goods sold by Description
When the buyer buys the goods based only on the description there will be
an exception. If the goods do not match the description then in such a case the
seller will be responsible for the goods.
❑ Sale by Description and Sample
❑ Trade Usage - Section 16(3)
The rule of Caveat Emptor does not apply if the seller deviates from
informing the buyer about the quality or the fitness of goods/products. There
is an implied condition or warranty on the condition of the goods.
❑ Fraud or Misrepresentation by the Seller
If the seller provides fraudulent information about the goods or conceals

some important information about them, the buyer is not responsible.
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TRANSFER OF TITLE
Nemo Dat Quod Non Habet- Sec. 27
The general rule relating to the transfer of title on sale is that “the seller
cannot transfer to the buyer of goods a better title than he himself has.”
If the title of the seller is defective, the buyer’s title will also be subject to the
same defect. Section 27 lays down to the same effect and provides that “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…” This rule is
expressed by the maxim “nemo dat quod non habet”, which means that no one
can give what he has not got, i.e., a seller cannot convey a better title than that
of his own.
EXCEPTIONS TO SECTION 27
In the following scenarios a non-owner of goods can transfer a better title to

the buyer:
1] Sale by a Mercantile agent (Proviso to Section 27): Consider a mercantile

agent, who is in possession of the goods or a document to the title of the goods,
with the consent of the owner. Such an agent can sell the goods when acting
in the ordinary course of business of a mercantile agent. The sale shall be valid
provided the buyer acts in good faith and has no reason to believe that the
seller doesn’t have any right to sell the goods. The transfer of title is valid in
such a case.
2] Sale by one of the Joint Owners (Section 28): Many times, goods are
purchased in joint ownership. In many cases, the goods are kept in the
possession of one of these joint owners by the permission of the co- owners.
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If this person (who has the sole possession of the goods) sells the goods, the
property in the goods is transferred to the buyer. This is provided the buyer
acts in good faith and has no reason to believe that the seller does not have a
right to sell the goods. Example: Peter, John, and Oliver are three friends to
buy a 42-inch television set to watch the upcoming cricket World Cup. They
unanimously decide to keep the television set at Oliver’s house. Once the
World Cup is over, the TV is still at his house. One day, Oliver’s office
colleague Julia visits his house and he sells the TV to her. She buys it in good
faith and has no knowledge about the fact that it was purchased jointly. In this
case, she gets a good title to the TV.
3] Sale by a Person in Possession of Goods under a Voidable Contract

(Section 29): Consider a person who acquires possession of certain goods
under a contract voidable on grounds of coercion, misrepresentation, fraud or
undue influence. If this person sells the goods before the contract is terminated
by the original owner of the goods, then the buyer acquires a good title to the
goods.
Example: Peter fraudulently obtains a gold diamond ring from Olivia. Olivia
can void the contract whenever she wants. Before she realizes the fraud, Peter
sells the ring to Julia – an innocent buyer. In this case, Olivia cannot recover
the ring from Julia since she didn’t void the contract before the sale was made.
4] Sale by a Person who has already sold the Goods but Continues to have
Possession [Section 30 (1)]: Consider a person who has sold goods but
continues to be in possession of them or of the documents of title to them. This
person might sell the goods to another buyer. If this buyer acts in good faith
and is unaware of the earlier sale, then he will have a good title to the goods
even though the property in the goods was passed to the first buyer. A pledge
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or other disposition of the goods or documents of title by the seller in

possession are valid too.
5] Sale by Buyer obtaining possession before the Property in the Goods

has Vested in him [Section 30 (2)]: Consider a buyer who obtains possession
of the goods before the property in them is passed to him, with the permission
of the seller. He may sell, pledge or dispose of the goods to another person. If
the second buyer obtains delivery of the goods in good faith and without notice
of the lien or any other right of the original seller, he gets a good title to them.
This rule does not hold true for a hire-purchase agreement which allows a
person the possession of the goods and an option to buy unless the sale is
agreed upon.
Example: Peter takes a car from John under the conditions that he will pay
Rs. 5,000 every month as rent of the vehicle and that he can choose to
purchase it for Rs. 100,000 to be paid in 24 equal installments. Peter pays Rs.
5,000 for three months and then sells the car to Oliver. In this case, John can
recover his car from Oliver since Peter had neither purchased the car nor
agreed to purchase it. He only had an option to buy the car.
6] Estoppel :If an owner of goods is stopped by the conduct from denying the
seller’s authority to sell, the buyer gets a good title. However, to get a good
title by estoppel, it needs to be proved that the original owner had actively
suffered or held out the seller in question as a person authorized to sell the
goods.
Example: Peter, John, and Oliver are having a conversation. Peter tells John
that he owns the BMW car parked nearby which actually belongs to Oliver.
However, Oliver remains silent. Subsequently, Peter sells the car to John. In
this case, John will get a good title to the car even though the seller is Peter
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who has no title to it. This is because, Oliver, by his conduct, did not deny
Peter’s authority to sell the car.
7] Sale by an Unpaid Seller [Section 54 (3)]: If an unpaid seller exercises his

right of lien or stoppage in transit and sells the goods to another buyer, then
the second buyer gets a good title to the goods as against the original buyer.
So, in such a case transfer of title will occur.
RIGHTS OF THE SELLER (SECTION 31)
• He can reserve the rights of the goods until and unless payment of goods
is done.
• He will only deliver the goods when the buyer would apply for the
delivery.
• He can make the goods delivered in instalments when so agreed by the

buyer.
• He can stop the delivery of goods and resume possession of the goods
unless and until the payment is done for the goods.
• He can resell the goods under certain conditions.
• He can bring the goods back if it is not delivered to the buyer.
• He can sue the buyer if the buyer fails to make the payment on a certain
day, in terms of the contract.
DUTIES OF SELLER
• He should make an arrangement for the transfer of property to the buyer.
• He should check whether the goods are delivered properly or not.
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• He should give a proper title to the goods which he has to pass to the buyer.
• He should deliver the goods according to the terms of the agreement.
• He should ensure that the goods supplied should be agreed to the implied
condition and warranties.
• He should keep the goods in a deliverable state and deliver the goods when
the buyer asks for it.
• He should deliver the goods within a specific time fixed in the contract.
• He should bear all the expenses for which the good should be delivered.
• He should deliver the goods as said by the buyer in the contract in an agreed
quantity.
• To deliver the goods in instalments only when the buyer wants.
• He should make arrangements for the goods while they are in the custody
of the carrier.
RIGHTS OF THE BUYER (SECTION 31)
• He should get the delivery of the goods as per contract.
• He can reject the goods if the quality and quantity are not as specified in the
contract.
• To deny the contract when goods are delivered in instalments without any
agreement to the effects.
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• The seller should inform him when the goods are to be sent by sea route, so
that the buyer may arrange for their insurance.
• He can examine the goods for checking whether they are in the agreement
with the contract.
• If he has already paid, he can sue the seller for recovery of the price if the
seller fails to deliver the goods.
• He can also sue the seller for damages or the seller’s wrongful neglect or
the seller refuses to deliver the goods to the buyer.
• He can sue the seller for damages for breach of a warranty or for breach of
a condition.
• He can sue the seller for the damages of breach of contract.
DUTIES OF THE BUYER
• He should accept the delivery of goods when the seller is prepared to make
the delivery as per the contract.
• To have possession on it he should pay the price for the goods as per the
contract.
• He should apply for the delivery of the goods.
• He can ask to deliver the goods at a particular time.
• He should accept delivery of the goods in instalments and pay for it

according to the contract.
• He should bear the risk of failure of delivery of goods if the delivery point is
a distant place.
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• He should pay the price on the transfer of possession of the goods as given
in the term of the contract.
• He has to pay for not accepting the goods.
SEC-45. “UNPAID SELLER”
Defined— (1) The seller of goods is deemed to be an “unpaid seller” within the
meaning of this Act— (a) when the whole of the price has not been paid or
tendered;
(b) when a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has not been
fulfilled by reason of the dishonor of the instrument or otherwise.
Illustration- If A is a seller and he delivers the goods to B and transfers the

possession, and if B hasn’t paid the sum then A becomes an unpaid seller.
Rights of an unpaid seller
Section 46 of the Sale of Goods Act 1930, discusses the rights of an unpaid seller.
This can be of two types:
• Against the goods – jus in rem (right against property)
• Against the buyer – jus in personam (right against the person)
RIGHT AGAINST THE GOODS
• Right to a lien which means the seller has the right on the possession over the
goods.
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• Right to stoppage in transit which means the seller can call up the carrier
transporter and tell not to deliver the goods.
• Right to resale means the seller can again sell the goods as he has the possession
of the goods.
RIGHTS AGAINST THE BUYER
• The seller has the right to sue the buyer for the price if the seller has already
sold the goods and the buyer hasn’t paid the sum.
• The seller has the right to sue for the damages, for e.g. if the seller has sent the
carrier for the delivery and the buyer isn’t available to receive the delivery and
the goods returned back by the carrier to the seller then he can sue the buyer for
damages like the packing of goods, transportation charges and so many.
• If the buyer hasn’t paid the price of the goods to the seller after the delivery
within a stipulated time period as given in the contract, then the seller can sue for
the interest on the buyer.
Rights of Lien
Seller’s Lien (Section 47):
According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an

unpaid seller, who is in possession of the goods can retain their possession until
payment. This is possible in the following cases:
1. He sells the goods without any stipulation for credit
2. The goods are sold on credit but the credit term has expired.
3. The buyer becomes insolvent.
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Subsection (2) specifies that the unpaid seller can exercise his right of lien
notwithstanding that he is in possession of the goods acting as an agent or bailee
for the buyer.
Termination of Lien (Section 49)
According to subsection (1) of Section 49 of the Sale of Goods Act, 1930, an

unpaid seller loses his lien:
• If he delivers the goods to a carrier or other bailee for transmission to the buyer
without reserving the right of disposal of the goods.
• When the buyer or his agent obtain possession of the goods lawfully.
• When the seller expressly or impliedly waives his rights of lien. An implied
waiver takes place while the seller offers a fresh time period of credit or allows
the customer to just accept an invoice of trade payable at a particular date to a
sub-sale which the purchaser may additionally have made.
RIGHTS OF STOPPAGE OF GOODS IN TRANSIT
The right of stoppage in transit method is the right of stopping the transit of the
goods even if they may be with a carrier for the cause of transmission to the buyer;
resuming the ownership of the customer and retaining possession until they made
the payment of the good. Hence, this right is an extension of the right of lien
because it entitles the seller to regain ownership even if the seller has parted with
the possession of the products.
When can this right be exercised? (Section 50)
An unpaid seller can exercise this right in the simplest way when:
SPECIFIC CONTRACT
• The purchaser becomes insolvent : The buyer is said to be bankrupt when he

has denied paying his debts inside the normal route of business, or if he cannot
pay his money then it will be due. [Section 2(8)]
• The property has exceeded the buyer: If assets have not surpassed the buyer
then this right is called the “right of withholding shipping”. [Section 46(2)]
• The products are within the route of transit: This means that goods should
be neither with the seller nor with the buyer nor with their agent. The product has
to be within the custody of a carrier as an intermediary. At that time, the carrier
needs not to be either a seller’s agent or customer’s agent. Because, if he is the
seller’s agent then the products are still in the arms of seller in the eye of
regulation and consequently there may be no transit, and if he is the customer’s
agent, the consumer gets transport in the attention of law and hence query of
stoppage does now not rise up.
RIGHT OF RESALE (SECTION 54)
The right of resale is an important right for an unpaid seller. If he does not have
this right, then the right of lien and stoppage won’t make sense. An unpaid seller
can exercise his right of resale under the following conditions:
• Goods are perishable in nature: In such cases, the seller does not have to inform
the buyer of his intention of resale.
• Seller gives a notice to the buyer of his intention of resale: The buyer needs to
pay the price of the goods and ask for delivery within the time mentioned in the
notice. If he fails to do so, then the seller can resell the goods. He can also recover
the difference between the contract price and resale price if the latter is lower.
However, if the resale price is higher, then the seller keeps the profits.
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• Unpaid seller resells the goods post exercising his right of lien or stoppage: The
subsequent buyer acquires a good title to the goods even if the seller has not given
a notice of resale to the original buyer.
RIGHTS AGAINST BUYER
1- Suit for the price:
When any goods are passed on to the buyer and the buyer has wrongfully
neglected or refused to pay as per the terms and conditions of the contract, the
seller may sue him as per the Section 55(1) because once the property has been
passed the buyer is bound to pay the price. But in the case due date of payment
has been passed and goods had not been delivered yet, the seller can sue the buyer
for the wrongful neglect or refusal on his part according to clause 2 of Section
55.
2- Suit for damages
In case there is a wrongful refusal on the part of buyer for acceptance of goods
and payment of money, the seller can sue him for damages of non-acceptance as
per Section 56. For calculating the quantum of damages Section 73 and 74 of the
Indian Contract Act applies.
In case the goods have a ready market, the seller has to resell the goods and buyer
have to pay the losses if incurred. If the seller does not resell the goods the
difference between contract and market price at the day of breach is taken as a
measure for damages. If the difference between them is nil seller gets nominal
value.
3- Suit for interest
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As stated under Section 61, where there is a specific agreement between buyer
and seller with regards to interest on the price of goods from the date on which
payment becomes due, the seller may recover interest from a buyer. But if there
were no such agreement the seller may charge interest from the day; he notifies
the buyer.
If there is no contract to the contrary, the court of law may award interest to the
seller at such rate as it thinks fit on the amount of the price from the date on which
amount is payable.
4- Repudiation of the contract before the due date
According to Section 60, the rule of anticipatory breach contract applies,

wherein, if buyer repudiates the contract before the date of delivery the seller can
consider the contract as rescinded and can sue for damages of the breach.
According to this Section, if one party repudiates before due date other has two
courses of action. Either he may immediately accept the breach and bring the
action of damages the contract is rescinded and damages will be assessed
according to the prices then prevailing or he can wait for the date of delivery. In
the second case, the contract is open at risk and will be a benefit to both parties.
Ma be the party changes is mind and agree to perform and damages will be
assessed according to prices on the day of delivery
RIGHT OF LIEN VS. RIGHTS OF STOPPAGE IN TRANSIT
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BUYER’S REMEDIES AGAINST THE SELLER
1- Damages for non-delivery: Section 57 states that, whenever any seller or

refuses to deliver the goods to the buyer, the buyer may sue for non-
delivery of goods. If the buyer has paid any amount, he is entitled to
recover it. Quantum of damages is decided through market forces, contract
and market price on the day of the breach is considered as damages. If the
buyer wants to claim that damages, he must prove it in the court of law,
otherwise, he cannot get a penny more than refund i.e., the amount he has
already paid. Buyer must try to keep the loss at a minimum by purchasing
the goods from other sources instead of waiting for the market to fluctuate.
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2- Suit for specific performance: Acc. to Section 58 when goods are

specific or ascertained and there is a breach of contract committed on the
part of the seller then the buyer can appeal to the court of law for specific
performance. The seller has to perform the contract and he does not have
any option of retaining the goods by paying damages. The power of the
court to order specific performance is subject to the provisions of chapter
II of Specific Relief Act, 1963.
Thus on the sale of ship buyer was allowed to recover the ship specifically
in the case of Behnke V Bede Shopping, there was a ship named the city
which holds a unique value to the plaintiff but she was a cheap vessel being
old but her engines were new and as to satisfy the German regulations and
hence plaintiff could as a German shipowner have her at once put on the
German register. A very experienced ship-valuer has said that he knew
only one other comparable ship, but that may not be sold. Thus, on sale of
a ship buyer was allowed to specifically recover the ship.
3. Suit for breach of warranty: As stated under Section 59, the buyer
cannot reject the goods solely on the basis of breach of warranty on the part
of the seller or when a buyer is forced to treat a breach of condition as a
breach of warranty. But he may sue the seller for damages or set up against
the seller the breach of the warranty in the extinction of the price.
The measure of damages is directly and naturally occurring loss in ordinary

events from breach of warranty. Mason v. Burningham, the buyer of a
second- hand typewriter spends some money on getting it overhauled.
Afterwards, the typewriter was seized from her as stolen property. this was
a breach on the part of the seller of warranty of quiet possession. She was
held entitled to recover damages including the cost of repair. She did a
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natural thing in having the typewriter repaired and the amount she had
spent was a loss directly and naturally resulting from the breach.
4. Suit for anticipatory breach: According to Section 60, the rule of

anticipatory breach contract applies, wherein, if any party repudiates the
contract before the date of delivery the other party can consider the contract
as rescinded and can sue for damages of the breach.
According to this Section, if one party repudiates before due date other has
two courses of action. Either he may immediately accept the breach and
bring the action of damages the contract is rescinded and damages will be
assessed according to the prices then prevailing or he can wait for the date
of delivery. In the second case, the contract is open at risk and will be a
benefit to both parties. Maybe the party changes are mind and agree to
perform and damages will be assessed according to prices on the day of
delivery.

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SPECIFIC CONTRACT

“A Contract is an agreement between two or more persons which is intended to be enforceable

The Indian Contract Act is divisible into two parts:

Contract of Indemnity –Definition, Nature and Scope - Rights of indemnity holder –

The term Indemnity literally means “Security against loss”.

Example: A contract to indemnify B against the consequences of any proceedings which C

Meaning of Indemnifier and indemnity holder Indemnifier:

The following are the essentials of the Contract of Indemnity: -

1. There must be a loss.

3. Indemnifier is liable only for the loss.

Modes of contract of Indemnity

1. EXPRESS: A contract of Indemnity is said to be express when a person expressly

2. IMPLIED: A contract of Indemnity is said to be implied when it is to be inferred from

Sec.125: Right of the indemnity holder

In Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri, Chagla J explained the

Contract of Guarantee – Definition, Nature and Scope – Difference between contract of

A formal assurance (typically in writing) that certain conditions would be fulfilled

Sec.126 - A “contract of guarantee” is a contract to perform the promise, or discharge

The function of a contract of guarantee is to enable a person to get a loan, or goods on

Parties to the contract of guarantee- Sec 126

A GUARANTEE MAY BE EITHER ORAL OR WRITTEN

ESSSENTIAL FEATURES OF CONTRACT OF GUARANTEE

The following are the requisites of a valid Guarantee:

1. All the essentials of a valid contract.

A contract of guarantee is a tripartite agreement between the principal debtor, creditor

There must be an existing liability or a promise whose performance is guaranteed. Such

Consideration for guarantee [Section 127]: What constitutes consideration in a case of

5. Guarantee not to be obtained by misrepresentation [section 142]

6 Guarantee not to be obtained by concealment [section 143]

Example: - X sells and delivers goods to Y. X afterwards requests Z to pay in default

Continuing Guarantee [Section 129]:

A Guarantee which extends to a series of transactions is called a 'continuing guarantee'.

REVOCATION OF CONTINUING GUARANTEE

1. By Notice of revocation [Section 130]

2. By Death of surety [Section 131]

(i) rights against the principal debtors.

Rights of a surety may be classified as under:

I. Rights against the principal debtor

(a) Right to Subrogation [Section 140]

(b) Right to Indemnity [Section 145]

In every contract of guarantee there is an implied promise by the principal debtor to

RIGHTS OF AGAINST CREDITOR

(a) Right to Securities [Section 141]

Example I: C advances to B his tenant, Rs 2,000 on the guarantee of A. C has also a

Rights against co-sureties

(a) Co-sureties liable to contribute equally (Section 146):

(b) Liability of co-sureties bound in different sums (Section 147):

Effect of Release of One Co-surety [Section 138]

Extent of Surety’s Liability Sec.128

Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The

Important cases on Sureties liability

In Maharashtra Electricity Board Bombay v. Official Liquidator and Another, under

Discharge of Surety from Liability

Under any of the following circumstances a surety is discharged from his

BY REVOCATION OF CONTRACT OF GUARANTEE

• BY NOTICE [SECTION 130] A specific guarantee may be revoked by a surety by

• BY THE DEATH OF SURETY [SECTION 131] In the absence of any contract to

(i) By Variance In Terms of Contract [Section 133]

Example: C contracts to lend A Rs 5,000 on the first March. A guarantees repayment.