SLM B Com Business Regulations

BUSINESS REGULATIONS
THIRD SEMESTER
CORE COURSE : BCM3 B03
B.COM
(2019 ADMISSION ONWARDS)
UNIVERSITY OF CALICUT
School of Distance Education
Calicut University P.O, Malappuram,
Kerala, India 673 635
19605
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
STUDY MATERIAL THIRD SEMESTER
B.COM
(2019 ADMISSION ONWARDS)
CORE COURSE :
BCM3 B03 : BUSINESS REGULATIONS
Prepared by:
Module I to IV : Dr. Lakshmanan M.P
Assistant Professor, Department of
Commerce,Govt. College, Chittur.
Module V : Sri. Rajan.P
Assistant Professor on Contract
School of Distance Education,
University of Calicut
Disclaimer
"The author(s) shall be solely responsible for

the content and views expressed in this book"
CONTENTS
MODULE I - 05
MODULE II - 80
MODULE III - 124
MODULE –IV - 147
MODULE –V - 166
Business Regulations 3
MODULE - I
BUSINESS LAWS
Business Law is a wide term and embraces all legal principles
concerning business transactions. It is also known as the
‘Commercial Law’, ‘Law Merchant’ or ‘Mercantile Law’.
Business Law consists of those legal rules, which govern and
regulate the business activities, transactions and trade. It also
encompasses the law relating to regulation of business
associations and other incidental matters.
Definition
According to S R Davar, business law “means that branch of
law which is applicable to or concerned with trade and
commerce in connection with various mercantile or business
transactions”.
Scope of Business Law
The following legislation enacted by Indian Legislature from
time to time is covered in the IndianBusiness Laws:
a) The Indian Contract Act, 1872.
b) The Negotiable Instruments Act, 1881.
c) The Sale of Goods Act, 1930.
d) The Indian Partnership Act, 1932.
e) The Insurance Act, 1972.
f) The Arbitration & Conciliation Act, 1996.
g) The Law of Insolvency.
h) Law Relating to Carriage of Goods.
Sources of Business Law

The main sources of Indian Business Law are as follows:
a) The English Mercantile Law [Common Laws, Equity,
Roman Laws and Case Laws],
b) Statutes of the Indian Legislature [Supreme and
Subordinate Legislation],
c) Judicial Decisions & Precedents [Declaratory,
Persuasive, Absolutely Authoritative & Conditionally
Authoritative Precedents],
d) Customs and Usage.
THE INDIAN CONTRACT ACT, 1872
In India, the law relating to contracts is contained in the INDIAN
CONTRACT ACT, 1872. The Act came into force on the 1st day
of September 1872, and it applies to the whole of India except
the State of Jammu and Kashmir. The act does not deal with all
the branches of law of contracts. The contracts relating to
Partnership, Sale of Goods Act and Negotiable Instruments Act
are outside the scope of the Indian Contract Act. The Indian
Contract Act deals with:
1. The general principles applicable to all contracts;
2. The conditions, which are essential for making a valid
contract;
3. The principles applicable to quasi contracts;
4. The principles, which are applicable to a few special
contracts, namely,
a) The contracts of indemnity,
b) The contracts of guarantee,
c) The contracts of bailment and agency,

d) The contracts of agency.
The law of contracts deals with agreements, which can be
enforced through law courts. Law of contracts is the most
important branch of mercantile law. It affects every person in one
way or the other, as all of us enter into some kind of contract
everyday. The object of the law of contracts is to introduce
definiteness in commercial and other transactions, and to
ensure the realization of reasonable expectation of the parties,
who enter into a contract.
CONTRACT
The word contract is derived from the Latin word “contractum”
which means “drawn together”. It denotes a drawing together the
minds of two or more persons to form a common intention giving
rise to an agreement. A contract is an agreement enforceable by
law, which offers personal rights and imposes personal
obligations, which the law protects and enforces against the
parties to theagreement.
DEFINITION
Section 2 (h) of the Indian Contract Act defines a contract as “an
agreement enforceable by law”.
Therefore, a contract essentially consists of two elements:
1. Agreement: Section 2 (e) defines an agreement as,
“every promise and every set of promises forming the
consideration for each other”. In other words, an agreement is
formedwhere one party makes the proposal and the other party
accepts it.
2. Enforceability: Only an enforceable agreement can be
called a contract. Section 10 of the Act defines “All agreements
are contracts if they are made by the free consent of parties

competent to contract, for a lawful consideration and a lawful
object, and are not hereby expressly declared to be void”.
Sir William Anson observes, “A contract is an agreement
enforceable at law made between two or more persons, by whom
rights are acquired by one or more to acts or forbearances on the
part of theother or others”.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
The following are the essential elements of a contract, arrived at
on the basis of a combined readingof Section 2(h) and Section
10 of the Indian Contract Act:
1. Offer and Acceptance: There must be a ‘lawful offer’ and
‘lawful acceptance’ of the offer, thus resulting in an agreement.
For example: If X offers to sell his Maruti Car to Y for Rs.
2,25,000 and Y agrees to pay X Rs. 2,25,000 for the Maruti Car.
Here X is called the offeror or promisor and Y is the offeree or
promise.
2. Consensus ad idem: For a valid agreement, there
must be a complete identity of minds between the
contracting parties.
For example: A has two buffaloes but B is aware of only one
of these. B proposes to buy thebuffalo of which he is aware. A’s
Consents to sell the other buffalo. Since there is confusion in the
minds of the parties, there is no consensus and hence no
agreement follows.
3. Free Consent: The contracting parties must give their
consent freely. It must not be given due to coercion, undue
influence, fraud, misrepresentation or mistake. The absence
of free consent would affect the legal enforceability of a contract.
For example: An illiterate woman executes a deed of gift

under the impression that she is executing a deed authorizing
her nephew to manage her agricultural land. The deed is not read
or explained to her. Here, there is no consent, therefore no
contract.
4. Capacity of the parties: The parties making the contract
must be legally competent in the sense that each must be of
the age of majority, of a sound mind, and not expressly
disqualified from contracting (Section 11). An agreement by
incompetent parties shall be a legal nullity.
For example: A, a minor, borrows Rs. 5,000 from B and
executes a promissory note in B’s favour. After attaining
majority A executes a fresh promissory note in favour of B for
this amount. B cannot sue on this promissory note as the
agreement is void for lack ofconsideration.
5. Lawful Consideration: An agreement to be enforceable by
law must be supported by consideration. Without
consideration, a contract is regarded as a nudum
pactum. Each of the contracting parties must give as well as
get something. Moreover, the consideration must be lawful.
For example: X lets his house for being used as a gambling den.
The agreement is illegal as theobject of agreement is unlawful.
6. Lawful object: The object of the agreement must be lawful. It
is considered unlawful if it is (i) illegal (ii) immoral, (iii)
fraudulent, (iv) of a nature that, if permitted, it would defeat
the provisions of any law, (v) causes injury to the person or
property of another, or (vi) opposed to public policy.
For example: A promises to obtain a job for B in government
service in consideration of Rs. 50,000. The agreement is void
because it is forbidden by law.
7. Not expressly declared void: The agreement must not have

been declared void by any law in force in India. The Act has
itself declared void certain types of agreements such as those
in restraint of marriage, or trade, or legal proceedings as well as
wagering agreements.
8. Intention to create legal relations: There must be an
intention among the parties that the agreement should be
attached by legal consequences and create legal obligations.
For example: A wife withdraws a complaint against her
husband under an agreement that husband will pay her
allowance. Court held it as a binding contract.
9. Certainty of meaning: The terms of the agreement must be

certain and unambiguous. Section 29 of the Act, “agreements
the meaning of which is not certain or capable of being made
certainare void”.
For example: A agrees to sell a car to B out of his 5 cars.
There is nothing whatever to show which car was intended.
The agreement is void for uncertainty.
10. Legal formalities: The agreement must comply with the
necessary formalities as to writing, registration, stamping etc.
if any required in order to make it enforceable by law.
CLASSIFICATION OF CONTRACTS
Section of the Act, which is called the ‘interpretation clause’,
besides defining a contract in clause
(h), also provides the basis for the classification of contracts.
Contracts may be classified as follows:
1. On the basis of Enforceability

a) Valid Contract: A contract which satisfies all the legal
requirements laid down in Section 10 of the Act, is a valid
contract. Such a contract creates rights in personem and is
legallyenforceable.
b) Void Agreement: Section 2(g) defines it as, “an agreement not
enforceable by law is said to be void”. Such agreements are
void ab initio which means that they are unenforceable right
from the time they are made.
For example: X agrees with Y, in consideration of Rs. 100,
to draw two parallel lines insuch a way as to cross each other.
The agreement is impossible to perform and, therefore void.
c) Void Contract: Section 2(j) provides that "a contract which
ceases to be enforceable by lawbecomes void when it ceases
to be enforceable." Following are the examples of such
circumstances which render a contract void:
(i) Supervening impossibility or illegality as described in
Section 56.
(ii) In the case of a voidable contract when the party whose
consent is not free, repudiatesthe contract.
(iii)A contingent contract to do or not to do something on the
happening of an event becomes void when the event
becomes impossible (Section 32).
For Example: A agrees to sell 1000 tonnes of wheat to B @
Rs. 500 per tonne in case his ship reaches the port safely by
15th February. The ship fails to reach by the stipulated date.
The contract between A and B is void.
d) Voidable Contract: According to Section 2(i), "An

agreement which is enforceable by lawat the option of one or more
of the parties thereto, but not at the option of other or others, is a
voidable contract."
In a voidable contract, a right or option is open to the aggrieved
party i.e., the party whose consent is not free that either to
repudiate the contract or to abide by it. Thus, a voidablecontract
continues to be valid and enforceable till it is repudiated by the
aggrieved party.
For example: A threatens to kill B if he does not give him a loan
of Rs. 50,000 for 25 years. B gives the loan. This is a voidable
contract as consent of B is obtained by coercion.
e) Illegal agreement: An agreement which is either
prohibited by law or otherwise against the policy of law is an
illegal agreement. Such an agreement is a nullity and is void ab
intio.
f) Unenforceable Contract: An unenforceable contract is
that which is valid and enforceable, but for certain technical
defects such as want of proof, expiry of the period within which
enforceable, absence of writing, registration and attestation,
insufficient stamp etc., it becomes unenforceable.
For example: If a document embodying a contract is
understamped, the contract is unenforceable, but if the
requisite stamp is affixed (if allowed), the contract becomes
enforceable.
2. On the basis of mode of creation
a) Express Contract: An express contract is that which is
made in writing or by the words of mouth.
For example: A writes to B, ‘I am prepared to sell my horse for a
sum of Rs. 500. B accepts A’s offer by a telegram. The contract

will be termed as express contract.
b) Implied Contract: An implied contract is one which
arises out of acts or conduct of theparties or out of the dealings
between them.
For example: A takes a seat in a bus. There is an implied
contract that he will pay the prescribed fare for taking him to
his destination.
c) Quasi Contract: Under certain circumstances, law itself
creates legal rights and obligations against the parties. These
obligations are known as quasi contracts.
For example: A supplies B, a lunatic with necessaries suitable to
his condition in life. A is entitled to be reimbursed from B’s
property.
3. On the basis of execution
a) Executed Contract: When a contract has been
completely performed, it is termed as executed contract, i.e., it
is a contract where, under the terms of a contract, nothing remains
to be done by either party.
For example: X sells a radio set to Y for Rs. 300. Y pays the
price. Both the parties have performed their respective
obligations, and therefore, it is an executed contract.
b) Executory Contract: Where one or both the parties to
the contract have still to performtheir obligations in future, the
contract is termed as executory contract.
For example: A agrees to paint a picture for B and B in
consideration promises to pay A a sum of rupees one hundred.
The contract is executor.
c) Unilateral Contract: A unilateral contract is one sided
contract in which only one party has to perform his promise or

obligation to do or forebear.
For example: A, a coolie, puts B’s luggage in the carriage.
The contract comes into existence as soon as the luggage is put.
It is now for B to perform his obligation by paying the charges to
the coolie.
d) Bilateral Contract: A bilateral contract is one in which
both the parties have to perform their respective promises or
obligations to do or forbear.
For example: A promises to sell his car to B after 15 day. B
promises to pay the price on the delivery of the car. The
contract is bilateral as obligations of both the parties are
outstanding at the time of the formation of the contract.
Distinction between Void Agreement and Voidable Contract
Basis of Void Agreement Voidable Contract
Distinction
All void agreements All illegal agreements
need not necessarily be are alwaysvoid.
1. Void/illegal
illegal.
2. Effect on The collateral The collateral
collateral agreements do not agreements also
agreements become void. become void.
If a contract becomes
void subsequently, theThe money advanced
3. Restoration
benefit receivedmust beor thinggiven cannot be
of benefit
restored to the otherclaimed back.
received
party.
Distinction between Void Agreement and Voidable Contract
Basis of Void Agreement Voidable Contract

Distinction
It is void beginning. It is valid when made and
From the very continues to remain valid
1. Void ab
till it is repudiated by the
initio
aggrieved party.
2. It cannot be It continues to be
Enforceability enforced by any enforceable if the
party. aggrieved party does not
repudiate the contract.
3. Right of Third party does A third party can acquire
thirdparty not acquireany a valid title from a person
rights. claiming under such a
contract.
4. Effect of Even on the expiryOn the expiry of a
lapseof of a reasonable reasonable time, it may
reasonable time, it can neverbecome a valid contract if
time become a validthe aggrieved party does
contract. not repudiate the contract
within reasonable time.
5. Damages The question of The aggrievedparty can
damages doesnot claim damages.
arise.
OFFER AND ACCEPTANCE

It is an established principle that an agreement arises only when
an offer is made by one person andis accepted by the other person,
to whom it is made. Thus, an offer and its acceptance is the starting
point in the making of an agreement.
OFFER OR PROPOSAL
According to Section 2 (a) of the Indian Contract Act, 1872 defines

a proposal as follows:
“When one person signifies to another his willingness to do or to
abstain from doing anything, witha view to obtaining the assent
of that other to such act or abstinence, he is said to make a
proposal”.
The person making the proposal is called the ‘promisor or
offeror’. The person to whom theproposal is made is called
the ‘promisee or offeree’.
Example:
X says to Y, “I want to sell my car to you for Rs. 1, 00,000”.
Here, “to sell car” is an offer or proposal. X who has made
the offer is called offeror or promisor. Y to whom the offer has
beenmade is called the offeree or promisee.
ESSENTIALS CHARACTERISTICS OF A VALID OFFER
1. The offer must be capable of creating legal relations:
An offer must intend to create legal relationship among the
parties. If the parties have agreed that the breach of the agreement
wouldnot confer any right on either party to go to the court of law
for enforcing the agreement, it willnot be a valid offer.
2. The offer must be certain, definite and not vague: The
terms of the offer must be certain andunambiguous and not vague.
If the terms of the offer are vague, no contract can be entered into
because it is not clear as to what exactly the parties intended to
do.
3. The offer must be communicated to the other party: The
offer must be communicated to the person to whom it is made.
Thus, an offer accepted without its knowledge, does not confer
any legal rights on the acceptor.
4. The offer must be made with a view to obtaining the

consent of the offeree: If a person merely makes a statement
without any intention to be bound by it, then it is not a valid
offer.Merely making an enquiry does not constitute an offer.
5. The offer must be distinguished from an answer to a
question: The terms of an offer shouldbe clear so that there is no
confusion whether it is a valid offer or an answer to a question.
Ananswer to a question cannot be taken as an offer.
6. Invitation to an offer is not an offer: Price lists,
catalogues, display of goods in a show window, tenders,
advertisements, prospectus of a company, an auctioneer's request
for bids, etc., are instances of invitation to offer. In case of an
invitation for an offer, there is no intention on the part of the
person sending out the invitation to obtain the assent of the
other persons tosuch an invitation.
7. The offer must be distinguished from mere statement of
intention: The terms of an offer should be clear so that there is
no confusion whether it is a valid offer or a mere statement of
intention. Such statement or declaration merely indicates that an
offer may be made or invited in future.
8. Special conditions attached to an offer must also be
communicated: In such cases the rule is that the party shall not
be bound by the conditions unless conditions printed are
properly communicated.
9. The offer may be positive or negative: An offer to do
something is a positive offer. And anoffer not to do something
is a negative offer.
10. The offer may be express or implied: An offer which is

expressed by words, written or spoken, is called an express
offer. The offer which is expressed by conduct, it is called an

implied offer.
11. The offer may be specific or general: When an offer is
addressed to a specific individual or a group of individuals, called
it as specific offer. When an offer is addressed to an unascertained
body of individuals or to the public at large, it is said to be a
general offer.
12. The offer should not contain a term the non-
compliance of which would amount to acceptance: One
cannot say while making the offer that if the offer is not accepted
by a certaintime, it will be presumed to have been accepted.
DIFFERENT KINDS OF OFFERS
1. Express offer: An express offer is one which is made by words
spoken or written.
2. Implied offer: An implied offer is one which is made
otherwise than in words. In other words, it is inferred from the
conduct of the person or the circumstance of the particular case.
3. Specific offer: A specific offer can be accepted only by that
definite person or that particular group of persons to whom it
has made.
4. General offer: A general offer is one which is made to the
world at large or public in general.
5. Standing or Open or Continuing offer: An offer for a
continuous supply of certain goods and services in any quantity at
a certain price as and when required it will be termed as a standing
oropen offer.
6. Counter offer: A Counter offer is rejecting the original offer

and making a new offer. The new offer is the counter offer.
7. Cross offer: Where identical offers are made by parties in

ignorance of each other, the offersare said to be cross offers.
Lapses of offer [When does an offer come to an end]
Section 6 of the Act deals with the various modes of revocation of
an offer. Accordingly, an offer may come to an end in any of the
following ways:
1. By communication of notice of revocation by the
proposer: The proposer can revoke or withdraw his offer at
any time before the acceptor posts his letters of acceptance. A
notice of revocation to be effective must be communicated to
the acceptor.
2. By lapse of prescribed time: An offer lapses if acceptance
is not communicated within thetime prescribed in the offer, or if
no time is prescribed, within a reasonable time.
3. By non-fulfillment of a condition by acceptor: A proposal
comes to an end when the acceptor fails to fulfill a condition
precedent to the acceptance of the proposal.
4. By the death or insanity of the offeror: A proposal comes to
an end by the death or insanity of the offeror if the fact of the
death or insanity comes to the knowledge of the acceptor
beforeacceptance.
5. By counter offer: A proposal lapses if it has been rejected by
the other party or a counter offer is made.
6. By subsequent illegality or destruction of subject matter:
An offer lapses if it becomes illegal after it is made or which the
subject matter is destroyed or substantially impaired before
acceptance.
7. By rejection: An offer lapses if it has been rejected by the
offeree. The rejection may be express i.e., by words spoken or
written, or implied. Implied rejection is one; (a) where either the

offeree makes a counter offer, or (b) where the offeree gives a
conditional acceptance.
ACCEPTANCE
An acceptance is the manifestation by the offeree of his
willingness to be bound by the terms of the offer. According to
Section 2 (b) of the Act, “When the person to whom the offer is
made signifies his assent thereto, the proposal is said to be
accepted. A proposal when accepted becomes a promise”.
Example: X offers to sell his car to Y for Rs. 1,00,000. Y agrees
to buy the car for Rs. 1,00,000. Y’s act is an acceptance of X’s
offer.
ESSENTIAL AND LEGAL RULES FOR A VALID
ACCEPTANCE
1. The acceptance must be communicated: An acceptance to
be valid must be communicated tothe proposer. If the person to
whom the proposal is made remains silent and does nothing to
show that he has accepted the proposal, no contract is formed.
2. Acceptance must be absolute or unqualified:
Acceptance, in order to be binding, must correspond with all
the terms of the offer. Offer must be accepted in toto. A
qualified and conditional acceptance amounts to marking of a
counter offer which puts an end to the originaloffer and it cannot
be revived by subsequent acceptance.
3. Acceptance may be express or implied: Acceptance
given by words is known as express acceptance. But an
acceptance given by conduct is said to be implied. Implied
acceptance may arise from (a) doing of a particular act as
prescribed in the offer, and (b) by accepting a benefit offered by
the offeror.
4. The acceptance must be given in some usual and

reasonable manner: It is another important legal rule of an
acceptance that where no mode is prescribed, acceptance must
begiven in some usual and reasonable manner.
5. The acceptance must be given before the lapse of offer: A
valid contract can arise only whenthe acceptance is given before
the offer has elapsed or withdrawn.
6. The acceptance cannot be implied from silence: The
offeror does not have the legal rights to say that if no answer is
received within a certain time, the offer shall be deemed to have
beenaccepted.
7. Acceptance means acceptance of all the terms of the
offer: When an offer is accepted, it would mean acceptance of
all the terms of offer. The acceptance of offer cannot be partial at
all.
8. If acceptance has been given conditional there will be no
contract: When an acceptance by a person is made conditional
i.e., ‘subject to a formal contract’ or ‘subject to approval by
certain person – such as solicitors etc’, no contract will arise till
a formal contract is entered into or consent of such persons is
obtained.
COMMUNICATION AND REVOCATION OF OFFER
AND ACCEPTANCE
When the contracting parties are facing each other, there is no
problem of communication, because there is instantaneous
communication of offer and acceptance.
Mode of Communication [Sec. 3]

Section 3 of the Act refers to the two modes of communication:
1. Communication by act, and

2. Communication by omission.
Act includes by conduct or by words, written or oral. So
communication can be by letter, telegram, telephone etc.
Omission includes conduct or forbearance on the part of one
person which has the effect of communication.
When is Communication Complete [Sec. 4]
1. Communication of Offer
The communication of an offer is complete when it comes to
the knowledge of the person towhom it is made.
2. Communication of Acceptance
Communication of an acceptance is complete:
a) as against the proposer, when it is put in course of
transmission to him so as to be out of thepower of the acceptor
to withdraw the same; and
b) as against the acceptor, when it comes to the knowledge of
the proposer.
3. Communication of Revocation
Revocation means “taking back” or “withdrawal”. It may
be a revocation of offer or acceptance. The communication
of a revocation is complete:
a) as against the person who makes it, when it is put into a
course of transmission to the person to whom it is made, so
as to be out of the power of the person who makes it; and
b) as against the person to whom it is made, when it comes to
his knowledge.
CONSIDERATION
The consideration is one of the essential elements of a valid
contract. The term ‘consideration’ may be defined as the price

of the promise. This term is used in the sense of quid pro quo
(i.e., something in return). Accordingly, an agreement which
is not supported by consideration is a nudum pactum (a nude
or a bare agreement), and the effect of a nude agreement is
expressed in the legal maxim, ex nudo pacto non orilur actio
meaning no cause of action arises from a bare agreement.
The most popular definition of consideration is given by Lush J.
in Currie vs Misa. According to him, “A valuable consideration,
in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance,
detriment, loss or responsibility given, suffered, or undertaken
by the other”.
Definition
Section 2 (d) of the Act defines consideration as under:
"When at the desire of the promisor, the promisee or any other
person has done or abstained from doing, or does or abstains
from doing, or promises or to do or abstain from doing
something, such act or abstinence or promise is called a
consideration for the promise".
ESSENTIALS OF CONSIDERATION
1. Consideration must move at the desire of the
promisor: The act or abstinence of the promisee or any other
person must be done at the desire or request of the third party
or voluntary acts would not constitute a valid consideration. The
desire of the promisor may be express or implied from the
conduct of the parties.
2. Consideration may move from the promisee or any other
person: It is not necessary that theconsideration should proceed
only from the promisee. Consideration furnished by a third party

will also be valid if it has been done at the desire of the promisor.
This is termed as ‘Doctrine of Constructive Consideration”.
3. Consideration may be past, present or future: The words,
has done or abstained from doing,does or abstains from doing,
or promises to do or to abstain from doing; indicate that the
consideration may be past, present or future.
a) Past consideration: When the present promise is based on
the consideration already takenplace (i.e., before the date of
the promise), it is termed as consideration.
b) Present consideration: When the promisor receives
consideration simultaneously with hispromise, it is termed as
present consideration.
c) Future consideration: When the consideration for a
promise is rendered in future it is termed as future or
executory consideration.
4. Consideration need not be adequate: The consideration
need not be adequate to the promise but it must be of some value
in the eye of the law. According to explanation 2 to Section 25,
an agreement to which the consent of the promisor is freely
given is not void merely because the consideration is
inadequate; but the inadequacy of the consideration may be taken
into account by the Court in determining the question whether the
consent of the promisor was freely given.
5. Consideration must be real and not illusory: Consideration
must be real and be of some value in the eyes of law.
Consideration of the following type are not real:
(a) Physical impossibility: For instance As promising to put
life into B's dead wife should B pay him Rs. 500, is void for
lack of physical possibility.

(b) Legal impossibility: If consideration consists of something
illegal, the agreement will bevoid.
(c) Uncertain consideration: An uncertain or vague
consideration will make the agreementvoid.
(d) Illusory consideration: It consists of a promise to do
something which a person is already bound to do by law or
contract. It must be something more than what a promisee is
alreadybound to do.
6. Consideration must be lawful: Section 23 of the Act
which says that “every agreement of which the consideration is
unlawful, is void”. It means that an agreement must be supported
bylawful consideration.
7. Consideration must not be illegal, immoral or opposed
to public policy: The consideration of an agreement is unlawful
if:
a) it is forbidden by law; or
b) it is of such a nature that if permitted it would defeat the
provisions of any law; or
c) it is fraudulent; or
d) it involves or implies injury to the person or property of
another; or
e) the court regard it as immoral or opposed to public policy.
PRIVITY OF CONSIDERATION OR STRANGER TO

CONSIDERATION
The term ‘privity of consideration’ means stranger to the

consideration, or consideration given by any other person other
than the promisee. A promise is enforceable so long as there is
some consideration for it, and it is immaterial whether it is
furnished by the promisee or other personeven a stranger.
Example: In Subramaniam Iyer vs. Lakshmi Ammal (1973) 2 SCC
54, A borrowed Rs. 40,000 from B as security for the loan. A
executed a mortgage of his property in favour of B. Later on, A
sold hisproperty to C for Rs. 44,000. Out of this, A received Rs.
4,000 and allowed him to retain the balance of Rs. 40,000 in
order to redeem the mortgage by paying the amount to B. B sued
C for the recovery of the mortgage money. Held, B cannot
succeed as he was not a party to the sale agreement.
PRIVITY OF CONTRACT OR STRANGER TO
CONTRACT
The term ‘privity of contract’ means stranger to a contract. As
per the doctrine of privity of contract, a person, who is not a
party to the contract, cannot sue for carrying out the promise made
by the parties to the contract.
Example: In Dunlop Pneumatic Tyre Co. Ltd. vs. Selfridge & Co.
(1915), AC. 847, S bought tyres from the Dunlop Rubber Co. and
sold them to D, a sub-dealer who agreed with S not to sell below
Dunlop's list price and to pay to Dunlop £5 as damages on every
tyre undersold. D sold two tyres at less than the list price and
thereupon Dunlop sued him for breach. Held, Dunlop cannot
maintain the suit as it was a stranger to the contract.
EXCEPTIONS TO THE RULE OF STRANGER TO

CONTRACT
1. In case of Trusts: When a trust is created, the beneficiary

can enforce his rights given to himunder the trust, even though
he was not a party to the contract between the settler and the
trustees.
2. In case of marriage settlement, partition or other family
arrangements: Where a provision is made in a partition or family
arrangement for the benefit of any member of the family, such a
member may sue to enforce the agreement even though he is not a
party to the agreement.
3. Acknowledgement of payment: Where the promisor
acknowledges payment to a third party, either by conduct or
otherwise, the latter can sue.
4. In case of agency: A contract entered into by an agent acting
within the scope of his authority, can be enforced by the
principal.
5. In case of assignment of rights under a contract: The
assignee can enforce the benefits of thecontract.
6. Agreements relating to the land: When any person
purchases such land with the notice ofrights and obligations of
the owner, then he shall be bound by those rights and
obligations although he was not a party to the agreement.
Rule of “No Consideration, No Contract”
According to Section 25, an agreement made without
consideration is void. But gratuitous promiseshall be enforceable
by law if the promisee on the faith of such promise suffered a
liability as suffering of detriment forms a valid consideration.
According to Salmond and Winfield, a promise without
consideration is a gift, one made for a consideration is a
bargain.
Exceptions to the General Rule of “No Consideration, No

Contract”
The following circumstances under which the agreement is valid
and enforceable even if it is madewithout consideration:
1. Agreements made on account of natural love and
affection [Sec. 25 (1)]: This clause lays down four essential
requirements for the validity of an agreement made without
consideration. Theyare
a) The agreement must be in writing;
b) It is registered under the law;
c) It is made on account of natural love and affection; and
d) It is between parties standing in a near relation to each other.
Example:
A, for natural love and affection, promised to give Rs. 1,000 to
his son B. A put his promise to B inwriting and registered it.
This is valid contract.
2. Promise to compensate for past voluntary services [Sec.
25 (2)]: Such promise made withoutconsideration is valid:
a) If the act was done voluntarily;
b) For the promisor or something which the promisor was legally
bound to do;
c) The promisor must be in existence at the time when the act was
done; and
d) The promisor must agree now to compensate the promise.
Example:
X finds Y’s purse and gives it to him. Y promises to give Rs. 500
to X. This is a valid contract eventhough the consideration did
not move at the desire of Y, the promisor.
3. Promise to pay time-barred debt [Sec. 25 (3)]: When a
debtor makes a written and registered promise, under signature
of his own or that of his agent, to pay a time-barred debt, no
fresh consideration is needed. The following conditions must
be satisfied for the application of this exception:
a) The promise to pay must be definite and express;
b) The promise must be in writing;
c) The promise must be signed by the promisor or his authorized
agent;
d) The debt must be time-barred, i.e., the limitation period for
the recovery of the debt, must beexpired.
Example:
X owed Rs. 2,000 to Y. This debt was barred by Limitation Act
i.e., the limitation period for the recovery of debt has already
expired. X signed a written promise to pay Rs. 1,000 to Y on
account of this debt. This is a valid contract.
4. Completed gift [Explanation 1 to Sec. 25]: The gifts
actually made by a donor and acceptedby the done are valid even
without consideration. Thus, a completed gift needs no
consideration.
5. Contracts of agency [Sec. 185]: No consideration is
necessary to create an agency.
6. Remission [Sec. 63]: No consideration is required for an
agreement to receive less than what isactually due.
CAPACITY TO CONTRACT
One of the essential conditions for the enforceability of an
agreement is that the concerned parties must be competent to enter
into an agreement. The ‘capacity to contract’ means the
competence (i.e., capability) of the parties to enter into a valid
contract.
According to Sec. 11 of the Contract Act, “Every person is
competent to contract who is of the ageof majority according to
the law to which he is subject, and who is of a sound mind, and
is not-disqualified from contracting by any law to which he is
subject”.
PERSONS NOT COMPETENT TO CONTRACT
As per the statement of Section 11 of the Indian Contract Act, the
following persons are notcompetent to contract, i.e., they are
incapable of entering into a valid contract.
(i) Minors;
(ii) Persons of unsound mind; and
(iii) Persons disqualified for contracting by any other law.
(i) MINORS
According to Section 3 of the Indian Majority Act, 1875, a person
who has not completed his age of 18 years (majority), is
considered to be a minor. In the following two cases, a person
becomesmajor on completing the age of 21 years:
a) Where a guardian of a minor’s person or property has been
appointed under the Guardians and Wards Act, 1890; and
b) Where the superintendence of minor’s property is assumed
by a Court of Wards.
Rules Regarding Minor's Agreements

The law protects minor’s rights because they are not mature and
may not possess the capacity to judge what is good and what is
bad for them. The position of a minor as regards his agreements
may be stated as under:
1. An agreement with or by a minor is void ab initio: An
agreement with a minor has been held to be void ab initio. It is
not only void, but is absolutely void.
2. A minor can be a promisee or a beneficiary: A
promissory note executed in favour of the minor can be
enforced. He can draw, negotiate or endorse a negotiable
instrument so as not to incur any liability upon himself.
3. No ratification: Since a contract with or by a minor is
altogether void, he cannot ratify contracts entered into by him
during his minority, even after attaining the majority. There can
be no ratification of a contract void ab intio.
4. No restitution: Sometimes, the minor receives some
property or money by falsely representing his age. In such cases,
the minor can be asked to restore such property or money so long
as the same is traceable in his possession.
5. The liability of Minor’s parents or guardian: A contract
made by the minor's parents or guardian or manager of his
estate can be specifically enforced by or against the minor
provided: (a) the contract is within the scope of authority of the
parent, etc., and (b) it is for thebenefit of the minor.
6. No Estoppel: Where a minor represents fraudulently or
otherwise that he is of age and thereby induces another to enter
into contract with him, he in an action founded on the contract, is
not estopped from setting up infancy.
7. Minor’s property liable for necessaries: Sometimes, a

person supplies necessaries to a minor. In such cases, the
supplier of necessaries can claim reimbursement from the property
ofminor.
8. Minor’s liability for tort: A minor is liable for negligently
causing any injury or damage, or for converting property that
does not belong to him. But, he is not liable for a tort directly
connected with a contract which as an infant he would be entitled
to avoid. In other words, a person cannot convert a contract into
a tort to enable him to sue an infant.
9. Minor as an agent: Minor can act as an agent and bind
his principal by his acts without incurring any personal
liability.
10. Minor as a partner: A minor cannot be a partner in a
firm. But under Section 30 of the Partnership Act, he can be
admitted to the benefits of partnership with the consent of all
themembers.
11. Minor as an insolvent: A minor cannot be declared
insolvent because he is not competent to contract.
PERSONS OF UNSOUND MIND
According to Section 12 of the Indian Contract Act, defines the
term ‘Sound Mind’ as follows:
“A person is said to be sound mind for the purpose of making
a contract if at the time when he makes it, he is capable of
understanding it, and of forming a rational judgement as to its
effectsupon his interests”.
Thus, if a person is not capable of both, he is said to have
suffered from unsoundness of mind. Section 11 of the Act also
specifically declares that persons of unsound mind are
incompetent to enter into an agreement. The following persons are

also considered to be the persons of unsound mind.
1. Idiot: An idiot is a person who has completely lost his mental
faculties of thinking for rational judgement. All agreements, other
than those for necessities of life, with idiots are absolutely void.
2. Lunatics: A lunatic is a person who is mentally deranged
(disordered) due to some mental strain or other personal
experience but who has some lucid intervals of sound mind.
3. Drunken or intoxicated person: A drunken or
intoxicated person is a sane person who is delirious from fever
or who is so drunk that he cannot understand the terms of a
contract or form a rational judgement as to its effect on his
interest.
PERSONS DISQUALIFIED BY ANY LAW
1. Alien enemy: "Alien" means a person who is not a citizen
of India. During the continuance ofwar with the country to which
an alien belongs, he becomes an alien enemy. In that situation,
he can neither contract with an Indian subject nor can he file a
suit in an Indian court. He can do so only after obtaining the
permission of the Central Government. Contracts made before
war may either be suspended or dissolved. They are dissolved
if found to be against public policy or of benefit to the enemy.
2. Insolvent: When a person is declared as an insolvent, his
property vests in the Official Receiver or Assignee. And the
insolvent is deprived of his power to deal with the property, and
sueand be sued on his behalf.
3. Foreign Sovereigns, their Diplomatic Staff and
Accredited representatives of Foreign States: Such persons can
enter into valid contracts and can enforce them in Indian courts.
However,a suit cannot be filed again them, in the Indian courts,

without the prior sanction of the centralgovernment.
4. Joint Stock Company and Corporations incorporated
under Special Acts: A corporationor company, being an artificial
person, and having a separate legal entity, can hold property; can
purchase or sell property; and can sue or be sued in the Courts
of Law. But it cannot enter into contracts which are strictly of
personal nature.
5. Felons or Convicts: A convict cannot enter into a
contract while he is undergoing imprisonment. This inability
comes to an end on the expiration of the period of imprisonment
or if he has been pardoned.
FREE CONSENT
In order to create a valid contract, there should be perfect
identity of mind, i.e., “consensus ad idem” between the
contracting parties regarding the subject matter of the contract.
Section 10 of theIndian Contract Act laid down in clear terms free
consent is one of the essentials of a valid contract.
CONSENT
According to Section 13 of the Act has defined consent as “two or
more persons are said to consent when they agree upon the same
thing in the same sense”. According to this section which has laid
down the basic principle of consensus ad idem on which the law
of contract is based, the parties to an agreement should have
identity of minds regarding the subject matter of the agreement.
FREE CONSENT
If the consent is there but it is not free or real, then the contract
will be voidable at the option of the contracting parties whose

consent is not free. The word “free consent” is defined in Section
14 of the Contract Act as follows –
“Consent is said to be free when it is not caused by
1. Coercion, as defined in Section 15; or
2. Undue influence as defined in Section 16; or
3. Fraud, as defined in Section 17; or
4. Misrepresentation, as defined in Section 18; or
5. Mistake, subject to the provisions of Sections 20, 21 and 22.
Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence,
fraud, misrepresentation or mistake”.
COERCION [SEC. 15]
Coercion means compelling or forcing a person to enter into a
contract under a pressure or threat. Section 15 of the Indian
Contract Act defines coercion as “the committing or threatening
to commit, any act forbidden by the Indian Penal Code, or the
unlawful detaining, or threatening to detain,any property, to the
prejudice of any person whatsoever, with the intention of causing
any person toenter into an agreement”.
Example: X beats Y and compels him to sell his car for Rs.
50,000. Here, Y’s consent has been obtained by coercion
because beating someone is an offence under the Indian Penal
Code.
ESSENTIALS CHARACTERISTICS OF COERCION
(a) The committing of any act forbidden by Indian Penal
Code: When the consent of a person isobtained by committing any

act which is forbidden by the Indian Penal Code, the consent is
said to be obtained by coercion.
(b) The threatening to commit any act forbidden by Indian
Penal Code: If a person attempts to commit an act which is
punishable under the Indian Penal Code, it leads to coercion,
e.g., consent obtained at the pistol point, or by threatening to cause
death or by intimidation.
(c) The unlawful detaining of any property: If a person
unlawfully detains the property of another person and forces
him to enter into a contract, the consent is said to be induced
by coercion.
(d) The threatening to detain any property unlawfully: If a
threat is given to detain any property of another person, this
amount to coercion.
(e) The act of coercion: It must be done with the object of
inducing or compelling any person to enter into an agreement.
EFFECTS OF COERCION
According to Section 19 states that, ‘when the consent of a
party to an agreement is obtained by coercion, the contract
becomes voidable at the option of the party, i.e., such party can
put an end tothe contract if he so chooses’.
According to Section 72 of the Act, which is based on the principle
of equitable restitution, a person to whom anything has been
delivered or money paid under coercion must return or repay it.
UNDUE INFLUENCE [SEC. 16]
When a party enters into a contract under any kind of mental

pressure, unfair influence or persuasion by the superior party,
the undue influence is said to be employed. According to Section
16 (1) of the Act, a contract is said to be induced by undue
influence, “where the relations subsisting between the parties
are such that one of the parties is in a position to dominate the
will of the other, and uses that position to obtain an unfair
advantage over the other”.
Presumption of undue influence
Section 16 (2), a person is deemed to be in a position to
dominate the will of the other is the following cases:
a) Real or apparent authority: Where he holds a real or
apparent authority over the other, e.g., master and the servant,
parent and child, Income Tax officer and assessee, etc.
b) Fiduciary relationship: Fiduciary relation means a relation
of mutual trust and confidence, e.g., guardian and the ward,
solicitor and client, doctor and patient, guru and disciple, trustees
and beneficiaries, etc.
c) Mental distress: Where he contracts with a person whose
mental capacity is temporarily or permanently affected by reason
of age, illness, or mental or bodily distress.
BURDEN OF PROOF [SEC. 16 (3)]
Where a person who is in a position to dominate the will of
another, makes a contract and the transaction appears to be
unconscionable, the burden of proving that the contract has not
been induced by undue influence shall lie on the person who is in
a position to dominate the will of the other.
The presumption of undue influence can be rebutted or opposed
by showing the following:
(i) that full disclosure of all material facts was made;

(ii) that the consideration was adequate; and
(iii) that the other party was in receipt of competent independent
advice and his consent was free.
Distinction between Coercion and Undue Influence
Basis of Coercion Undue Influence
Distinction
1. Nature of It involves physical force. It involves moral
force pressure.
2. Parties to a contract may Parties to a contract are
Relationship or may not berelated to related to eachother under
each other. some sort of relationship.
3. Consent Consent is obtained by Consent is obtained by
giving a threatof an dominating thewill.
offence or committing an
offence.
4. Who can It can be exercised even It can be exercised only
exercise by a strangerto the by a party to acontract
contract. and not by a stranger.
5. Coercion has to be There is a presumption of
Presumption proved by the aggrieved undueinfluence in the
party alleging it in. It is case of certain
notpresumed by the relationship.
law.
6. Restoration The aggrieved party who The aggrieved party may
of benefit is rescindingthe contract or may not berequired to
has to return the benefit return the benefit in whole
received to the other or in part as per Court’s

party. direction.
7. Criminal It entails criminal liability.It doesn’t involve any
element criminal liability.
8. Place of The act or the threat It must have been
use amounting to coercion exercised in India.
may be committed even
outside India.
FRAUD [Sec. 17]
The term ‘fraud’ may be defined as an intentional, deliberate or
wilful misstatement of facts, which are material for the formation
of a contract.
According to Section 17, “fraud means and includes any of the
following acts committed by a party to a contract or with his
connivance or by his agent, with intent to deceive another party
thereto orhis agent, or to induce him to enter into the contract:
(a) the suggestion, as to a fact, of that which is not true, by one
who does not believe it to be true;
(b) the active concealment of a fact by one having knowledge or
belief of the fact;
(c) a promise made without any intention of performing it;
(d) any other act fitted to deceive;
(e) any such act or omission as the law specially declares to be
fraudulent”.
ELEMENTS OF FRAUD
On the basis of aforesaid definition of fraud, the essential
elements of fraud are as follows:

1. The act must have been committed by a party to the
contract: The fraud must be committedby a party to a contract or
by anyone with his connivance or by his agent. Thus, the fraud by
a stranger to the contract does not affect the validity of the
contract.
2. Acts committed may be of the following nature:
a) Suggestion of an untrue fact: If a person knowingly
states an untrue fact or fact which hedoes not believe to be true,
it will be taken as a fraud on his part.
b) Active concealment of a fact: An active concealment
is considered as a fraud when (i)there is a concealment of fact,
and (ii) the concealment is active (i.e., all efforts are made to
conceal fact), and (iii) the concealment is made by a party who has
the knowledge of it.
c) A promise made without any intention of performing
it: If a party while entering into a contract has no intention to
perform his promise, it will be taken as a fraud on his part.
d) Any other act fitted to deceive: The expression ‘act fitted
to deceive’ means any act whichis done with the obvious intention
of committing fraud. Thus, this clause covers all tricks and unfair
ways which are used by cunning and clever people to cheat others.
e) Any such act or omission which the law specially
declares to be fraudulent: Under the Transfer of Property Act,
any transfer of immovable property with the intention of
defrauding the creditors, is taken as a fraud.
3. The act must have been committed with the intention of
inducing the deceived party to act upon it: It implies that the
assertion should be such that it would necessarily influence
andinduce the other party to act.

4. The act must have in fact deceived the other party: If a
person has committed a fraudulent act to deceive the other
party, but the other party has not been actually deceived by his
act, it will not be taken as a fraud on his part.
5. Plaintiff must have suffered: There is no fraud without
damages, and therefore, to constitute fraud it is necessary that the
plaintiff must have suffered some loss of money or money’s worth
or some other tangible detriment capable of assessment.
Mere silence is not a fraud
According to explanation to Section 17, “mere silence as to facts
likely to affect the willingness of aperson to enter into a contract
is not fraud”.
Example: A sells, by auction, to B a horse which A knows to be
unsound. A says nothing to B about the horse’s unsoundness. This
is not fraud by A.
Exceptions
1. Duty to Speak: Mere silence amounts to fraud when the
person keeping silent, is under a duty to speak. The duty to speak
arises, where one party reposes trust and confidence in the
other. The duty to speak arises in the following types of
contracts:
a) Contracts uberrimae fidei, i.e., contracts of good faith such
as contracts of insurance; contracts for the sale of immovable
properties; contracts of marriage; contracts for the purchase of
shares; family contracts, etc.
b) Contracts of partnership: Under the Partnership Act,
partners are required to observe absolute good faith and to be
just and faithful to each other.

c) Contracts of guarantee: The creditor must disclose all material
facts about the debtor to thesurety.
d) Where the parties stand in fiduciary relationship to each other.
e) Contracts to marry.
2. Where silence is equivalent to speech: For instance, B says
to A, "If you do not deny it, I shall presume that the horse is
sound". A says nothing. Here A’s silence is equivalent to speech.
If thehorse turns out to be vicious A can be held liable for fraud.
3. Change of circumstances: Sometimes a statement may
be true when it is made but due to change in circumstances, it
may become false subsequently. In such a case, it is the duty of
the person to communicate the change in circumstances.
Effect of Fraud
1. Right to rescind the contract: The party whose consent
was caused by fraud can rescind (cancel) the contract but he
cannot do so in the following cases:
a) where silence amounts to fraud, the aggrieved party cannot
rescind the contract if he had the means of discovering the
truth with ordinary diligence;
b) where the party gave the consent in ignorance of fraud;
c) where the party after becoming aware of the fraud takes a
benefit under the contract;
d) where an innocent third party before the contract is

rescinded acquires for consideration some interest in the
property passing under the contract;

e) where the parties cannot be restored to their original position.
2. Right to insist upon performance: The party whose consent
was caused by fraud may, if he thinks fit, insist that the contract
shall be performed and that he shall be put in the position in
which he would have been if the representation made had been
true.
3. Right to claim damages: The party whose consent was
caused by fraud, can claim damage if he suffers some loss.
MISREPRESENTATION [Sec. 18]
The term ‘Misrepresentation’ means a false representation of
fact made innocently or non- disclosure of a material fact
without any intention to deceive the other party. A false
representationmade by a person may be either:
1. Innocent or unintentional, i.e., without any intention of
deceiving the party.
2. Intentional or wilful or deliberate, i.e., with the intention of
deceiving the party. According to Section 18 defines the
term ‘misrepresentation’ as follows: “Misrepresentation”
means and includes –
i) the positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true,
though he believes it to be true;
ii) any breach of duty which, without any intent to deceive,
gains an advantage to the person committing it, or anyone
claiming under him, by misleading another to his prejudice, or to
the prejudice of any one claiming under him;
iii) Causing, however innocently, a party to an agreement, to

make a mistake as to the substance of the thing which is the
subject of the agreement.
Essentials of Misrepresentation
1. There must be a representation or breach of duty.
2. The representation must be of facts material to the contract.
3. The representation must be untrue.
4. The representation must be made with a view to inducing the
other party to enter into contract.
5. The other party must have acted on the faith of the
representation.
6. The person making the representation honestly believes it to
be true.
Acts Which Constitute Misrepresentation
Thus misrepresentation may be committed in any of the following
ways:
1. Unwarranted Statements: If a person makes a statement of fact
which is not warranted by his information, he is said to make a
misrepresentation.
2. Breach of Duty: When a person commits a breach of duty
without any intention to deceive the other party and thereby
gains something while the other party loses, it will be termed
as misrepresentation.
3. Inducing Mistake about Subject Matter: If a party to an
agreement induces the other party, although innocently to
commit a mistake as to the nature or quality of the subject
matter of the agreement, he becomes guilty of

misrepresentation.
Effects of Misrepresentation
The effect of misrepresentation is that it makes the contract
voidable the option of the party whoseconsent is so obtained.
And such party may put an end to the contract if he so chooses.
Exceptions
1. Where the other party had the means of discovering the
truth with ordinary diligence: The party cannot complain of
misrepresentation if he had the means of discovering the truth
with ordinary means.
2. Where the misrepresentation does not induce the other
party to enter into contract, the contract is not voidable: If the
consent is given independently in spite of misrepresentation, the
contract is not voidable.
Difference between Fraud and Misrepresentation
Fraud Misrepresentation
1. There is misstatement of1. The misstatement of fact is
concealment of fact, made innocently without any
deliberately made with thebad intention.
intention to deceive the others
party or to induce him to enter
into a contract.
2. The fraud is intentional or2. The misrepresentation is an
wilful wrong. The personinnocent wrong. The person
making an untrue statementmaking the false statement
knows that it is not true. believes it to be true.
3. In case of active fraud, the 3. The aggrieved party

aggrieved party has a right to cannot rescind the contract if
rescind the contract. it was possible for him with
ordinary diligence to discover
the truth.
4. A fraud is a criminal act too. 4. It is not a criminal act.
5. Not only is the contract5. It makes the contract
voidable but it also gives rise tovoidable at the optionof the
an independent action in tortforparty misrepresented.
damages.
6. The aggrieved party in
addition to the normal remedies6. The aggrieved party cannot
can claim also damages. claim to damages.
MISTAKE
A mistake is said to have occurred where the parties intending
to do one thing by error do something else. Mistake is an
erroneous belief concerning something.
Example: X engages Y as a teacher for his son appearing for
IAS Preliminary. Y agrees to comedaily 7. X think 7 a.m. but Y
means 7 p.m. This is a bilateral mistake of fact but not essential
andcan be rectified. Therefore the agreement is valid.
Kinds of Mistake
Mistake may be of two kinds: (I) Mistake of Law; and (II) Mistake
of Fact.
(I) Mistake of Law: It may be of the following types:
a) Mistake of law of the country: It does not render the
agreement void. This is based on the well established rule of law
namely, ignorantia juris non excusat (i.e., ignorance of law is no

excuse). Section 21 lays down that "a contract is not voidable
because it was caused by a mistake as to any law in force in
India".
b) Mistake of foreign law: The mistake of the foreign law has
the same effect as a mistake of fact. Therefore, it renders the
agreement void. Section 21 lays down that “a mistake as to a
law not in force in India has the same effect as a mistake of
fact”.
(II) Mistake of Fact: Mistake of fact may be of two types –
(1) Bilateral mistake; and
(2) Unilateral mistake.
(1) Bilateral mistake: Where both the parties to an agreement
are under a mistake as to matter of fact essential to the
agreement, the agreement is void. An agreement shall be void
if the following conditions are satisfied:
(i) Both the parties must be under a mistake: This means
the mistake must be mutual orcommon.
(ii) Mistake must relate to an essential fact: It is necessary
that the mistake must relate to amatter of fact which is essential
to the agreement.
Types of Bilateral Mistake
The following types of bilateral mistake, which render the
agreement void, are important from the subject point of view:
a) Mistake as to subject matter
Where both the parties working under a mistake relating to
the subject matter of contract, thecontract is void. It may be
of the following types:
(i) Mistake regarding existence of the subject matter:

Where both the parties are under a mistake regarding the
existence of the subject matter, the contract is void.
(ii) Mistake regarding identity of the subject matter: If both,
the parties are mistaken about theidentity of subject matter, the
contract shall be void.
(iii) Regarding the title to the subject matter: If a person
buys some property which neither party knew that it already
belonged to the buyer, the contract will be void.
(iv) Regarding the quantity of the subject matter: Where the
quantity purchased is fundamentally, different from the quantity
intended to be sold, there occurs mutual mistake which prevents
the formation of an enforceable contract.
(v) Regarding the quality of the subject matter: It occurs,
where the subject matter is entirely different from that
contemplated by the parties.
(vi) Regarding the price of the subject matter: Where a
seller while writing the price of thegoods intending to write Rs.
2,250 by mistake writes Rs. 1250, the agreement is void.
b) Mistake as to the possibility of performance
Where the parties to an agreement believe that the agreement is
capable of performance, while in fact it is not so, the agreement is
treated as void. The impossibility may either be physical or legal.
(2) Unilateral mistake
The term unilateral mistake means where only one party to the
agreement is under a mistake. Acontract is not voidable merely
because it was caused by one of the parties to it being under a
mistake as to matter of fact.
Types of Unilateral Mistake

1. Mistake about the identity of the parties to an agreement:
If there is a mistake regarding the identity of the person
contracted with, even if the mistake is caused by fraud or
misrepresentation of another party, the contract will be void.
2. Mistake about the nature of the agreement: If a party does
not disclose the true nature of the document but fraudulently
induces the other party to sign it who believes that he is signing
some other document, in such a case there is no real agreement.
LEGALITY OF CONSIDERATION AND OBJECT
For a valid contract it is essential that the object or consideration
of the agreement must be lawful. According to Sec. 23 of the
Indian Contract Act, the objects and the consideration of an
agreementshall be unlawful in the following cases:
1. Where it is forbidden by law: As a matter of fact, an act
is forbidden by law, when it is punishable by criminal law of
the country, or when it is prohibited by special legislation or by
the regulations made by a competent authority under power
derived from the legislature.
2. Where it defeats the provision of any law: It is of such
nature that, if permitted, it would defeat the provisions of law,
e.g., purchase of land being sold for arrears of land revenue by
the defaulter, or an agreement by a debtor not to raise the plea of
limitation in a suit by the creditor.
3. Where it is fraudulent: If the two parties agree to
practice a fraud on third party, then the agreement between the
parties is unlawful and void.
4. Where it is injurious either to the person or his
property: It involves or implies injury to the person or property
of another, e.g., an agreement to indemnify a person against the

consequencesof publication of a libel.
5. Where it is regarded as immoral: The term ‘immoral’
depends upon the standard of ‘morality’ prevailing at a particular
place and time. If the consideration for the agreement is an act of
sexual immorality, for example, illicit co-habitation and
prostitution, the agreement is illegal.
6. Where it is opposed to public policy: The agreements that
are injurious to the public or which areagainst the public good or
public welfare are void.
AGREEMENTS OPPOSED TO PUBLIC POLICY
Public policy is that principle of law which holds that no citizen
can lawfully do that which has a tendency to be injurious to the
public. An agreement is said to be opposed to public policy when
it is injurious to the welfare of the society or it tends to prejudice
the welfare of the society.
Following agreements have been declared by the Courts as
opposed to public policy and they are asfollows:
1. Trading with an alien enemy: All agreements made with
an alien enemy are illegal on theground of public policy.
2. Agreement for stifling prosecution: An agreement which
seeks to absolve an offender of criminal liability or excuse him
from prosecution or to withdraw a criminal case pending against
him is known as an agreement stifling prosecution.
3. Maintenance and Champerty: Any agreement which
improperly promotes litigation is opposed to public policy. Such
agreements may be either maintenance or Champerty.
4. Agreement for sale of public offices and titles: The

agreements for the sale or trafficking in public offices or to obtain
public title like Padma Shree etc., are illegal on the ground of
being opposed to public policy.
5. Marriage brokerage agreements: Agreements to procure
marriages for reward, or agreement to pay money to the parent or
guardian of a minor in consideration of his consenting to give the
child in marriage, are void.
6. Agreement in restraint of personal liberty: An agreement
which unduly restricts the personalliberty of any person is void on
the ground of being opposed to public policy.
7. Agreement in restraint of parental rights: An agreement
which is inconsistent with the duties arising out of such
guardianship is void as being opposed to public policy.
8. Agreements tending to create interest opposed to duty:
An agreement with a public servant which obliges him to do
something which is inconsistent with his official duty, shall be
void asbeing opposed to public policy.
9. Agreements interfering with marital duties: Any
agreement which interferes with the performance of marital
duties, it is void. For example, an agreement that the husband
shall always live at the wife’s house was held to be void.
10. Agreements to vary the period of limitation: Agreements,
the object of which is to curtail or extend the period of limitation
prescribed by the law of limitation, are void.
11. Agreements to defraud creditors or revenue
authorities: The agreements, the object of which is to defraud
the creditors or revenue authorities are void as being opposed
to publicpolicy.
12. Agreement tending to create monopoly: An agreement,

the object of which is to create monopoly is illegal and void as
being opposed to public policy.
13. Agreement to commit a crime: An agreement to indemnify
a person against consequences of his criminal act is void as
opposed to public policy. These act may be grouped under the
following heads:
a) Agreements in restraint of marriage [Section 26].
b) Agreements in restraint of trade [Section 27].
c) Agreements in restraint of legal proceedings [Section
28].
All these agreements will be discussed in detail in the next chapter
on “Void Agreement”.
VOID AGREEMENTS
According to Section 2 (g) of the Indian Contract Act, 1872, a
void agreement is an agreementwhich is not enforceable by law.
A void agreement does not create any legal rights and obligations.
It is void-ab-initio (i.e., void from the very beginning) and without
any legal effect. Agreements, which possess all the essential
elements of a valid contract laid down in Section 10, must not
have been expressly declares as void by any law in force in any
country.
The following agreements have been expressly declared as void by
the Indian Contract Act:
1. Agreements by incompetent persons [Section 11].
2. Agreements made under a mutual mistake [Section 20].
3. Agreements, the object or consideration of which is
unlawful [Section 23].
4. Agreements, the object or consideration is partly unlawful

[Section 24].
5. Agreements made without consideration [Section 25].
6. Agreements in restraint of marriage [Section 26].
7. Agreements in restraint of trade [Section 27].
8. Agreements in restraint of legal proceedings [Section 28].
9. Agreements the meaning of which is uncertain [Section
29].
10. Agreements by way of wager [Section 30].
11. Agreements to do impossible acts [Section 56].
Agreements from 1 to 5 have already been discussed in earlier
chapters. The other agreements are discussed below:
AGREEMENTS IN RESTRAINT OF MARRIAGE [SECTION
26]
According to Sec. 26 of the Act, “every agreement in restraint of
the marriage of any person, other than a minor, is void”. The law
regards the marriage as the right of every person. Restriction on
the freedom of people shall be against public policy and,
therefore, void.
Example: A promised to marry B only and none else, and to pay
Rs. 2000 in default. A married C and B sued A for recovery of Rs.
2000. It was held that B could not recover anything because the
agreement was in restraint of marriage. [Lowe vs. Peers]
It may be noted that an agreement which provides for a penalty
upon remarriage may not be considered as a restraint of
marriage.
AGREEMENTS IN RESTRAINT OF TRADE [SECTION

27]
According to Sec. 27 of Indian Contract Act, 1872, “every
agreement by which anyone is restrained from exercising a
lawful profession, trade or business of any kind, is to that extent
void”. This is because Article 19 (g) of the Constitution of India
regards the freedom of trade and commerce as a right of every
individual. Therefore, no agreement can deprive or restrain a
person from exercising such a right.
Example: In the case, Madhub Chander vs Raj Coomar, A
and B were rival shopkeepers in a locality of Calcutta. A
agreed to pay a sum of money to B if he would close his
business in thatlocality. B closes his shop. On A’s refusal to pay
the amount, the court held that the agreement wasvoid under Sec.
27 of the Act.
EXCEPTIONS
The following are the exceptions to the rule that ‘an agreement in
restraint of trade is void’.
1. Statutory Exceptions
a) Sale of Goodwill: An agreement which restrains the seller
of a goodwill from carrying on a business is valid if all the
following conditions are fulfilled:
(i) The seller should be restrained only from
carrying on a similarbusiness;
(ii) The restriction shall apply so long as the buyer
or any personderiving title from him is carrying on a similar
business;
(iii) The restraint should apply only within specified local limits.
(iv) The restraint must be reasonable having regard to the nature

of the business.
b) Restrictions under Partnership Act: The following
restrictions are provided in thePartnership Act, 1932:
(i) Restriction on existing partner [Section 11(2)]: A partner
shall not carry on any business other than that of the firm while
he is a partner.
(ii) Restriction on outgoing partner [Section 36(2)]: An
agreement by an outgoing partner with the continuing partners not
to carry on a business similar to that of the firm within a specified
period or within specified local limits shall not be void.
(iii) Restriction in anticipation of dissolution [Section 54]:
Agreement amongst partners that upon dissolution of the firm
some or all of them shall not carry on similar business within a
specified period or within specified local limits shall not be void.
(iv) Restriction in case of sale of goodwill of the firm [Section
55 (3)]: Agreement by a partner upon sale of goodwill of the
firm, with the buyer thereof not to carry on anysimilar business
within a specified period or within specified local limits shall not
be void.
2. Under Judicial Interpretations
a) Trade Combinations: Trade combinations which have
been formed to regulate the business or to fix prices are not
void, but the trade combinations which tend to create
monopoly and which are against the public interest are void.
b) Service Agreements: Agreements of service often contain
a clause by which the employee is prohibited from working
anywhere else during the term of the agreement, such
agreements are valid.
c) Sole Dealing Agreements: An agreement to deal in the

products of a single manufacturer orto sell the whole produce to a
single dealer is valid if their terms are reasonable.
AGREEMENTS IN RESTRAINT OF LEGAL
PROCEEDINGS [SECTION 28]
An agreement by which any party is restricted absolutely from
enforcing his legal rights under orin respect of any contract is void
to that extent. An agreement which interferes with the course of
justice is void on account of its being opposed to public policy.
The following are the four kinds of agreements which are in
restraint of legal proceedings, and are therefore, void:
a) Absolute restrictions from enforcing legal rights: Any
agreement that absolutely restricts a party to a contract from
enforcing his contractual rights in ordinary tribunals is void.
b) Agreements curtailing the limitation period: An
agreement which limits the time within which an action may be
brought so as to make it shorter than that prescribed by the Law
of Limitation, is void because its object is to defeat the
provisions of law.
c) An agreement which extinguishes the rights of a party.
d) An agreement which discharges a party from liability.
Exceptions
There are the following two exceptions to the rule laid down in
Section 28:
1. Restraints for referring the future disputes to arbitration.
2. Restraints for referring the existing or present disputes to
arbitration.
AGREEMENTS THE MEANING OF WHICH IS

UNCERTAIN [SECTION 29]
An uncertain agreement is one, the terms of which are
uncertain or not capable of being madecertain without further
agreement between the parties are void. An agreement with
uncertain, ambiguous or vague terms is void because in such
cases, courts may not give a practical meaning tothe contract.
Example: A agreed to sell to B, 100 tons of oil. There is nothing
whatever to show what kind of oil was intended. Therefore, the
agreement is void for uncertainty.
AGREEMENTS BY WAY OF WAGER [SECTION 30]
The term ‘wagering agreement’ or ‘wager’ may be defined as an
agreement in which one person agrees to pay certain amount of
money to the other person on the happening or non-happening of
aspecified uncertain event.
Sir William Anson defines a wager as “a promise to give
money or money’s worth upon the determination or
ascertainment of an uncertain event” and this definition was
quoted by the Supreme Court in Gherulal Parekh vs Mahadeo
Das Maiya.
Examples:
i) X agrees with Y that if there is rain on a certain day X will
pay Y Rs. 1000. If there is no rain Y will pay X Rs. 1000. The
agreement is of a wagering nature.
ii) A test match between India and Australia has ended in
Kolkata today. Both A and B are ignorant of the result. A agrees
with B to pay 1000 in case India wins and B agrees to pay A Rs.
1000 in case India does not win. The agreement is of a
wagering nature.
Essential Features of a Wager Agreement

1. Promise to pay money or money's worth: There must be a
promise to pay money or money's worth by one party to the
other.
2. Event: The promise must be conditional on the happening or
not happening of an event.
3. Uncertainty of the event: The agreement must be
conditional upon the determination of an uncertain event. An
event may be uncertain not only because it relates to future but
because it is not yet ascertained to the knowledge of the parties.
4. Mutual chances of gain or loss: Each party must stand an
equal chance to win or lose on the determination of the
contemplated events.
5. No control over the event: Neither party should have
control over the happening or non- happening of the event.
6. Stake as the only interest: Neither party should have any
interest other than the sum or stake that he stands to win or lose.
Effects of Wagering Agreement
a) Agreements by way of wager are void in India.
b) Agreements by way of wager have been declared illegal
in the states of Maharashtra andGujarat.
c) No suit can be filed to recover the amount won on any
wager.
d) Transactions which are collateral to wagering agreements
are not void in India except thestates of Maharashtra and Gujarat
(Wagering agreements which are illegal).
Exceptions to Wager
The following transactions are not wagers:
1. Horse race: An agreement to contribute or subscribe towards
any plate, prize or sum of money, the amount of rupees five
hundred or more to be awarded to the winners of any horse race
is a valid agreement and not a wager. In 1996, the Supreme Court
has held horse races to be "gamesof skill" and not gambling.
2. Crossword competitions: Crossword puzzles are games
of skill. But if in crossword competition, the winning of the prize
depends upon the tallying of competitors' entry with the solution
kept with the editor of the magazine, then it is a wagering
transaction. According to the Prize Competition Act, 1955, prize
competitions in games of skills are not wagers provided the
amount of prize does not exceed Rs. 1000.
3. Games of skill: Picture puzzles, literary and athletic
competitions, being based on skill and intelligence, are games
of skill.
4. Share market transactions: In the share market if the
intention is to take and give delivery of stocks and shares, it is a
valid transaction.
5. Contracts of insurance: It is a contract in which an insurer,
in consideration of a certain sum of money, undertakes to make
good the loss of the insured arising on the happening of an
uncertain specified event.
6. Chit Fund: In it, a certain number of persons contribute a
fixed sum for a specified period which is made over to one of
them at the end of a pre-determined period in accordance with an
agreed plan. These are not wagers.
Difference Between Wagering and Contract of Insurance

1. Contract of insurance is valid and can be enforced in court
of law, where as wagering agreement is void under section 30,
without any legal effect.
2. In case of insurance contract, the assured has an insurable
interest in the subject matter, while in the wagering agreements
the parties have no interest in the agreement except the stake.
3. A contract of insurance except life insurance, is a contract of
indemnity i.e., in the event of loss only actual loss is to be made
good, whereas in wagering agreements the amount to be paid is
decided beforehand.
4. A contract of insurance is based on scientific actuarial
calculation of risks while wagering transactions are a pure
gamble or game of chance.
5. A wager will arise only if one party losses and another
gains while in insurance contract no winning or losing.
6. Insurance contracts are social security measures which
are beneficial to the public while wagering transactions do not
promote public welfare in any way, rather they encourage
gambling which is injurious to the interest of public.
Commercial Transaction and Wager
An agreement for the actual sale and purchase of goods is not
a wagering agreement. But sometimes it becomes difficult to
determine whether a particular transaction is by way of wager or a
genuine business transaction.
Lotteries
A lottery is a game of chance, therefore, an agreement to buy
a lottery ticket, is a wagering agreement. If the lottery is
authorized by Government, it does not cease to be a wagering
transaction, the only effect of such sanction is that the persons
conducting the lottery will not be prosecuted under the penal
law.
CONTINGENT CONTRACT
A contract may be absolute or contingent.
Absolute Contract
An absolute contract is one in which the promisor binds himself
to performance independent of any condition of contingency i.e.,
the promisor undertakes to perform the contract in all events.
Contingent contract
According to Section 31 of the Contract Act, a contingent contract
“is a contract to do or not to do something, if some event,
collateral to such contract does or does not happen”.
The performance of a contingent contract becomes due only upon
the happening or non- happening of some future uncertain event.
In simple words, it is a conditional contract. Contracts of
insurance, indemnity and guarantee etc. are some of the important
examples of contingent contracts.
Example: A contracts to pay Rs. 10,000 to B if his (B’s) house
is burnt. This is a contingent contract as its performance is
dependent upon an uncertain event (i.e., burning of B’s house).
Essentials of a Contingent Contract
A valid contingent contract must satisfy these essential
requirements:
1. There must be a valid contract: It must fulfill the basic

requirements of a valid contractbetween the parties.
2. The performance of the contract must be conditional:
The performance of a contingentcontract must depend upon the
happening or non-happening of some future event.
3. The event must be uncertain: The future event, upon
which the performance of a contract depends, must be an
uncertain event.
4. The event must be collateral to the contract: The event must
be independent or ancillary to thecontract.
5. The event should not be the discretion of the promisor: The
‘mere will’ or ‘discretion’ of the promisor is not an event for the
purpose of a contingent contract.
RULES REGARDING CONTINGENT CONTRACTS
1. Contingent contracts dependent on the happening of
future uncertain event: Sec. 32 provides that “contingent
contract to do or not to do anything if an uncertain future event
happens cannot be enforced by law unless and until that event
has happened. If the event becomes impossible such contracts
become void.
2. Contingent contracts dependent on the non-happening of
future uncertain event: Sec. 33 provides that “contingent
contract to do or not to do anything if an uncertain future event
does not happen can be enforced when the happening of that
event becomes impossible, and notbefore.
3. Contingent contracts dependent on the future conduct of
a living person: According to Sec. 34, if a contract is contingent
upon how a person will act at an unspecified time, the event shall
be considered to become impossible when such person does
anything which renders it impossible that he should so act

within any definite time, or otherwise than under further
contingencies.
4. Contingent contracts dependent on the happening of
specified uncertain event within a fixed time: According to
Sec. 35 (para. I), if a person is to perform something within a
fixed time provided an uncertain event happens, then the
person is bound to perform it, if such particular event happens
within that time.
5. Contingent contracts dependent on the non-happening of
specified uncertain event within a fixed time: Sec. 35 (para. II)
provides that contingent contract to do or not to do anything if a
specified uncertain event does not happen within a fixed time may
be enforced by law when the time fixed has expired and such event
has not happened, or before the time fixed has expired, if it
becomes certain that such event will not happen.
6. Contingent contracts dependent on the happening of an
impossible event: Sec. 36 provides that contingent contract to do
or not to do anything, if an impossible event happens, are void,
whether the impossibility of the event is known or not to the
parties to the agreement at the timewhen it is made.
Difference between Wager and Contingent Contract
Contingent Contract Wagering Contract

1. It is perfectly valid and 1. It is absolutely void and
can beenforced in a cannot be enforced in a
Court of Law. Court of Law.
2. The parties have 2. The parties do not have
insurable interest in the insurable interest in the
happening or non- happening or non-happening
happening of the event. of the event as such. Their

main interest is in winning or
losing.
3. In this case, the future 3. In this case, the uncertain
uncertain event is event is the only
merely collateral or determining factor.
incidental.
4. There may not be 4. It consists of reciprocal
reciprocalpromises. promises.
5. All contingent contracts 5. All wagering agreements
are not of a wagering are also contingent contracts
nature, because all the because they are dependent
contingent contracts are on uncertain event.
not void.
6. In a contingent contract, 6. In a wagering agreement,
the parties are interested the parties areinterested
in the occurrence or only for the stake.
non-occurrence of the
event.
QUASI CONTRACTS
Under the Law of Contracts, the contractual obligations are
voluntarily undertaken by the contracting parties. However,
under certain circumstances, a person may receive a benefit to
which the law regards another person as better entitled or for
which the law considers he should pay to the other person, even
though there is no contract between the parties. Such
relationships are called quasi-contracts, because, although there
is no contract or agreement between the parties, they are put in
the same position as if there were a contract between them.
Definition
Quasi contract is defined as “an obligation to pay a sum of
money, whether liquidated or unliquidated, which arises
independently of any contract, on the ground that in the
circumstances of the case, it is considered by the law to be just
debt”.
It is a debt or obligation constituted by the act of the law apart
from any consent or intention of the parties or any privity of
contract. These relationships are termed as quasi-contracts or
constructive contracts under the English Law and “certain
relations resembling those created by contracts” under the Indian
Law.
A quasi-contract rests on the ground of equity that a person shall
not be allowed to enrich himself unjustly at the expense of
another. That is why the law of quasi-contracts is known as the
law of restitution. Strictly speaking, a quasi-contract is not a
contract at all. A contract is intentionallyentered into. A quasi-
contract, on the other hand, is created by law.
BASIS OF QUASI CONTRACTS
The quasi contracts are based on the maxim of ‘nemo debet
locuplatari ex liena justua’, i.e., no man must grow rich out of
another person’s costs. In other words, these are based on the
equitable principle that a person shall not be allowed to enrich
himself at the expense of another. Lord Mansfield explained the
quasi-contracts on the principle that ‘Law as well as justice should
try to prevent unjust enrichment’. The term ‘unjust enrichment’
means the enrichment of one person at the cost of another. The
principle of ‘unjust enrichment’ requires, that
1. the defendant (against whom the case is filled) has been
enriched by the receipt of a benefit.
2. the enrichment is at the expense of the plaintiff (i.e., who files

the case).
3. the retention of the enrichment is unjust.
FEATURES OF QUASI-CONTRACTS
The salient features of a quasi-contract are as under:
a) It is imposed by law and does not arise from any agreement.
b) The duty of a party and not the promise of any party is the
basis of such contract.
c) The right under it is always a right to money and generally,
though not always, to a liquidatedsum of money.
d) The right under it is available against specific person(s) and
not against the world.
e) A suit for its breach may be filed in the same way as in case
of a complete contract.
KINDS OF QUASI CONTRACTS
The quasi contractual obligations are contained in Sections 68
to 72 of the Contract Act, 1872. These have been described
below:
1. Supply of necessaries to persons incompetent to contract
[Section 68]: The person who has supplied the necessaries to a
person who is incompetent to contract or anyone who is dependent
on such incompetent person, is entitled to claim their price from
the property of such incapable person.
Example: A supplies B, a lunatic, some necessaries suitable to
the maintenance of his life. A is entitled to be reimbursed from
B’s property.
The following conditions are necessary for the applicability of the

provisions of Section 68:
a) There must be the supply of necessaries to a person who is
incompetent to contract such as a minor or a person of unsound
mind or dependents of such incompetent person.
b) The term 'necessaries' shall be construed in accordance
with the situation in life of the incompetent person, the nature
of goods, the extent of supplies, etc.
c) The supplier can claim only reasonable value for the
supplies made.
d) The reimbursement of the price of goods supplied can be
obtained from the property of the incompetent person who
cannot be held personally liable.
2. Payment by an interested person [Section 69]: A person
who is interested in the payment of money which another is
bound by law to pay, and who, therefore, pays it, is entitled to
be reimbursed by the other”.
Example: X is bound by law to make a certain payment. Y is
interested in such a payment, and he makes it, there will be a
quasi contractual obligation of X to reimburse Y.
In order to make Section 69 applicable, the following conditions
must be satisfied:
a) The plaintiff should be interested in making the payment
in order to protect his own interest and the payment should not
be voluntary one.
b) The payment must be such as the other party was bound by
law to pay.
c) The payment must not be such as the plaintiff himself was

bound to pay.
3. Liability to pay non-gratuitous acts [Section 70]: Where a
person lawfully does anything for another person, or delivers
anything to him not intending to do so gratuitously and such
other person enjoys the benefits thereof, the latter is bound to
make compensation to the former in respectof, or to restore, the
things so done or delivered.
Example: A, a tradesman, leaves goods at B’s house by mistake.
B treats the goods as his own. Heis bound to pay A for them.
A claim under this Section can be made only when the following
conditions are satisfied:
a) The thing must have been done or delivered lawfully;
b) The person who has done or delivered the thing, must
not have intended to do so gratuitously; and
c) The person for whom the act is done/to whom thing is
delivered must have enjoyed the benefit of the act done/thing
delivered.
4. Responsibility of a finder of goods [Section 71]: A
person who finds goods belonging to another, and takes them
into his custody, is subject to the same responsibility as a bailee.
Example: X, a guest found a diamond ring at a birthday party of
Y. X told Y and other guests aboutit. He has performed his duty to
find the owner. If he is not able to find the owner he can retain the
ring as bailee.
5. Payment by mistake or under coercion: A person to whom
money has been paid or anythingdelivered by mistake or under
coercion must repay or return it.
Example: A paid some money to B by mistake which was in

fact due to C. In this case, B must repay the money to C as it
had been paid under a bonafide mistake.
DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual
relations between the parties to a contract. A contract is said to
be discharged when the rights and obligations of the
contracting parties are extinguished and their relationship
comes to an end.
VARIOUS MODES OF DISCHARGE
A contract may be discharged in the following ways:
 By performance of contract.
 By agreement.
 By lapse of time.
 By operation of law.
 By impossibility of performance.
 By committing breach of contract.
(1) DISCHARGE BY PERFORMANCE OF CONTRACT
Performance of a contract is one of the most usual ways of
discharge of a contract when the partiesto the contract fulfill their
obligations under a contract, the contract is said to have been
performed and the contract comes to an end. Performance of
contract may be classified as:
a) Actual Performance: A contract is said to be discharged
by actual performance when the parties to the contract perform
their promise in accordance with the terms of the contract.
b) Attempted Performance or Tender: A contract is said

to be discharged by attempted performance when the promisor
has made an offer of performance (i.e., a valid tender) to the
promisee but it has not been accepted by the promisee.
(2) DISCHARGE BY AGREEMENT
As contract emerges from an agreement of both parties, it may
also be terminated by another agreement or consent of both
parties. A contract can be discharged by mutual agreement in any
of the following ways:
a) By novation (Substitution of a new contract): Novation
means substituting a new contract for the existing one, either
between the same parties or between different parties, the
consideration mutually being the discharge of the old contract.
The novation may be of the following two types i.e., (i) novation
involving change of parties, but the contract remaining the
same (ii) novation involving substitution of a new contract, but
parties remaining the same.
b) By alteration: Alteration means change in one or more of
the terms of a contract with the consent of all the parties. If any
material alterations are made in the contract, the original contract
will come to an end and in its place a new contract in an altered
form comes into existence.
c) By rescission: Rescission means cancellation of the contract.
A contract may be rescinded by agreement between the parties at
any time before it is discharged by performance or in some other
way.
d) By remission: The term ‘remission’ may be defined as the
acceptance of lesser fulfillment of the terms of the promise, e.g.,
acceptance of a less sum of money where more is due.
e) By waiver: When both the parties, by mutual consent, agree

of abandon their respective rights, the contract need not be
performed and the same is discharged. It is called waiver. To
constitute a waiver, neither an agreement nor consideration is
necessary.
f) By merger: It takes place when an inferior right accruing
to a party under a contract merges into a superior right accruing
to the same party under the same or some other contract, e.g., a
tenantbuying the house in which he is a tenant.
(3) DISCHARGE BY LAPSE OF TIME
The Limitations Act, 1963 provides that a contract must be
performed within the period of limitation. If the contract is not
performed and the promisee fails to take any action within the
period of limitation, then the contract is terminated or discharged
by lapse of time.
(4) DISCHARGE BY OPERATION OF LAW
A contract may be discharged by operation of law in the following
cases:
a) Death: A contract involving the personal skill or ability
of the promisor is dischargedautomatically on the death of the
promisor.
b) Insolvency: When a person is declared insolvent, he is
discharged from his liability up to thedate of his insolvency.
c) Unauthorized Material Alteration: If any party makes any
material alteration in the terms ofthe contract without the approval
of the other party, the contract comes to an end.
d) Merger: Where an inferior right accruing to a party in a
contract merges into the superior rights accruing to the same
party, the earlier contract is discharged.

(5) DISCHARGE BY IMPOSSIBILITY OF
PERFORMANCE
A contract will be discharged when the performance of contract
becomes impossible. The effects of impossibility of performance
may be of the two types, namely,
a) Initial impossibility: It is the impossibility which exists at
the time of formation of contract. It makes the contract void ab
initio, i.e., void from the very beginning.
b) Subsequent or supervening impossibility: Supervening
impossibility means impossibility which does not exist at the time
of making the contract but which arises subsequently after the
formation of the contract and which makes the performance of the
contract impossible or illegal.
Supervening impossibility is an excuse for the non-performance
of the contract in the following cases:
(i) Destruction of subject matter: If the subject-matter of a
contract is destroyed after making the contract, without the
default of either party, the contract is discharged.
(ii) Death or personal incapacity: The contract is
discharged on the death or incapacity orillness of a person if the
performance of a contract depends on his personal skill or ability.
(iii) Change of law: The contract is discharged if the
performance of the contract becomesimpossible or unlawful due
to change in law after the formation of the contract.
(iv) Non-occurrence or non-existence of particular state of
thing: Where a contract is made on the basis of continued
existence or occurrence of a particular state of things, the
contract comes to an end if the state of things ceases to exist or

changes.
(v) Outbreak of war: The pending contracts at the time of
declaration of war are either suspended or declared as void.
(6) DISCHARGE BY BREACH OF CONTRACT
A contract is said to be discharged by breach of contract if any
party to the contract refuses or fails to perform his part of the
contract or by his act makes it impossible to perform his obligation
underthe contract. Breach of contract is of two kinds, namely,
a) Anticipatory breach of contract: When a party to a contract
refuses to perform his part of the contract, before the due date of
performance, it is known as anticipatory or constructive breach of
contract.
b) Actual breach of contract: Actual breach of contract occurs
in the following two ways:
(i) On due date of performance: If a party to a contract fails
to perform his obligation at the specified time, he is liable for its
breach.
(ii) During the course of performance: If during
performance of a contract, a party to it either fails or refuses to
perform his obligation, there is said to be actual breach during
performance of the contract.
FRUSTRATION
Frustration may be defined as the pre-mature termination of the
contract owing to the change of circumstances which are entirely
beyond the control of the parties.
REMEDIES FOR BREACH OF CONTRACT

A breach of contract occurs if any party refuses or fails to perform
his part of the contract or by hisact makes it impossible to perform
his obligation under the contract. A breach of contract may arise
in two ways, (a) anticipatory breach and (b) actual breach. A
remedy is the course of action available to an aggrieved party
(i.e., the party not at default) for the enforcement of a right under
a contract. The various remedies available to an aggrieved
party are as follows:
 Suit for rescission of the contract.
 Suit for damages.
 Suit for specific performance
 Suit for injunction
 Suit upon quantum meruit.
 Restitution.
I. RESCISSION OF THE CONTRACT
Recession of a contract means annulment of it. When all or
some of the terms of the contract are cancelled, rescission of a
contract takes place. When there is a breach of contract by one
party, the aggrieved party may rescind the contract and need
not perform his part of the contract. The aggrieved party has to
file a suit for rescission. When rescission is granted, the aggrieved
party is absolved form all his obligations under the contract.
The court grants rescission in the following cases:
a) Where the contract is voidable at the option of the plaintiff.
b) Where the contract, is unlawful for causes not apparent on
its face and the defendant is moreto blame than the plaintiff.
The court, may, however, refuse to grant rescission, in the

following cases:
a) Where the plaintiff has expressly or impliedly ratified the
contract; or
b) Where owing to change in the circumstances of the contract,
the parties cannot be restored totheir original position; or
c) Where the third parties have, during the subsistence of the
contract, acquired right's in the contract in good faith and for
value; or
d) Where only a part of the contract is sought to be rescinded
and such part is not severable fromthe rest of the contract.
II. SUIT FOR DAMAGES
“Damages” are monetary compensation allowed for loss suffered
by the aggrieved party due to breach of contract. The object of
awarding damages is not to punish the party at fault but to make
good the financial loss suffered by the aggrieved party due to the
breach of contract.
Types of Damages
a) General or ordinary damages: These are the damages which
are payable for the loss arising naturally and directly, in the usual
course, from the breach of contract. In a contract for the sale of
goods, the measure of ordinary damages is the difference between
the contract price and the market price of such goods on the date
of breach.
b) Special damages: These are the damages which are

payable for the loss arising due to some special or unusual
circumstances.
c) Exemplary or punitive or vindictive damages: These are

the damages which are in the nature of punishment. The court
may award these damages in case of:
i) Breach of contract to marry.
ii) Wrongful dishonour of cheque by a banker in violation
of Section 31 of the Negotiable Instruments Act. The damages
are estimated on the basis of loss of prestige and goodwill of the
customer. The rule applied in this case is that smaller the amount
of cheque, the higher shall be the damages.
d) Nominal damages: These are the damages which are very
small in amount. Such damages are awarded simply to establish
the right of the party to claim damages for the breach of contract
even though the party has suffered no loss.
e) Liquidated damages and penalty: When the amount of
compensation fixed by an agreement between the parties to be
paid in case of breach of contract is in the nature of a fair and
honest pre-estimation of probable damages. It is called
liquidated damages.
When the amount named in the contract at the time of its
formation is disproportionate to the damages likely to accrue in
the event of breach, it will be known as penalty.
Rules Regarding Determination of Damages
Section 73 of the Contract Act provides that when a contract has
been broken the party who suffers by such breach, is entitled to
receive, from the party who has broken the contract.
1. The ordinary damages are recoverable: The aggrieved
party is entitled to receive such damages:

a) as may fairly and reasonably be considered to arise
naturally from the breach; or
b) as may reasonably be supposed to have been in the
contemplation of both the parties at the time of making of
contract as the probable result of breach.
2. Remoteness of damage: Compensation shall not be granted for
any remote or indirect damage. Damages are considered to be
remote if they are not the necessary or probable consequence of
breach or if they were not in the contemplation of the parties at
the time when contract wasmade. Loss of profit is not to be taken
in account in estimating damages unless otherwise agreedupon.
3. Primary aim of damages: The primary aim of the law of
damages for breach of contract is toplace the aggrieved party in
the position which he would have occupied if the breach had not
occurred.
4. Special damages, i.e., damages in the contemplation of the
parties: Special damages which do not arise naturally from the
breach cannot be recovered unless these were in the
contemplation of the parties.
5. Only compensation, no penalties: Damages are allowed by
way of compensation for the loss suffered and not by way of
punishment except in the case of (a) breach of promise to marry,
and (b) wrongful dishonour of a cheque by a bank.
6. Nominal damages: What the aggrieved party has not suffered
any loss, the court may allow him nominal damages, in its
discretion.
7. Mental pain and suffering: Damages are not allowed for

injured feeling or mental pain except where (i) the breach was
reckless, (ii) it caused bodily harm, and (iii) the defaulting party
was aware that breach would cause mental suffering.
8. Duty to mitigate the loss: It is the duty of the injured party
to take all reasonable steps to mitigate the loss caused by the
breach. He cannot seek damages for loss which are not due to
breach but due to his own neglect to mitigate the loss.
9. Difficulty of assessment: Any difficulty in assessing
damages shall not prevent the injured party from recovering
them. The court must do its best to determine the amount of
damages.
10. Cost of decree: The aggrieved party can recover the cost of
getting the decree along with thedamages.
III. SUIT FOR SPECIFIC PERFORMANCE
This means demanding the court’s direction to the defaulting
party to carry out the promise according to the terms of the
contract. Specific performance of the contract may be directed by
the court in the following circumstances:
(i) Where actual damages arising from breach are not
measurable.
(ii) Where monetary compensation is not an adequate remedy.
Specific performance of an agreement will not be granted –
a) Where the damages are considered as an adequate remedy;
b) Where the contract is of personal nature, e.g. contract to
marry;
c) Where the contract is made by a company beyond its
powers as laid down in its Memorandum of Association;

d) Where the court cannot supervise the performance of the
contract;
e) Where one of the parties is a minor;
f) Where the contract is inequitable to either party.
IV. SUIT FOR INJUNCTION
An injunction is an order of the court requiring a person to refrain
from doing some act which has been the subject matter of
contract. The power to grant injunction is discretionary and it
may begranted temporarily or for an indefinite period.
V. SUIT UPON QUANTUM MERUIT
The word ‘quantum meruit’ literally means “as much as is earned”
or “according to the quantity of work done”. When a person has
begun the work and before he could complete it, if the other party
terminates the contract or does something which makes it
impossible for the other party to complete the contract, he can
claim for the work done under the contract.
VI. RESTITUTION
Restitution means ‘an act of restoration’. If a person has been
unjustly enriched at the expense of the other party, he should
restore the benefit received or compensate the other party.
MODULE – II
SPECIAL CONTRACTS
CONTRACT OF INDEMNITY AND GUARANTEE

The Contract of Indemnity and Guarantee are specific types of
Contract. Specific provisions have been made in the Contract Act
with regard to these types of contracts. The special legal
provisions relating to these contracts are contained in Sections 124
to 147 of the Indian Contract Act, 1872.
CONTRACT OF INDEMNITY
The term ‘indemnity’ means security against hurt, loss or damage.
A contract of indemnity refers to promise made by one person
to make good any loss or damage another has incurred or may
incur by acting at his request or for his benefit. A contract of
Fire Insurance or Marine Insurance is a Contract of Indemnity.
Definition
According to Sec. 124 of the Contract Act, the contract of
indemnity has been defined as:
“A contract by which one party promises to save the other from
loss caused to him by the conductof the promisor himself or by
the conduct of any other person".
Indemnifier: The person who gives the indemnity, i.e., who
promises to compensate for the loss, isknown as indemnifier.
Indemnity-holder: The person, for whose protection the
indemnity is given, i.e., who is protected against loss, is known
as indemnity-holder or indemnified.
Example
A contract to indemnify B against the consequences of any
proceeding which C may take against B in respect of a certain
sum of Rs. 200. This is a contract of indemnity. A is the
indemnifier (Promisor) and B is the indemnified (Promisee).
Characteristics of a Contract of Indemnity
The important features of an Indemnity Contract are as follows:
1. Essentials of a valid contract: It must have all the essential
elements of a valid contract, such as agreement, free consent,
competency of the parties, legality of object and consideration.
2. Compensation of loss: This is the most important element
of a contract of indemnity. One party must promise to save the
other party from any loss which he may suffer.
3. Express or Implied: The promise to indemnify a person
against the loss suffered by him, may be express or implied. The
express promise is one where a person promises in express terms
to compensate the other from the loss. And the implied promise is
one where the conduct of the promisor shows that he promised to
indemnify the other party against the loss suffered by him.
Rights of Indemnity-Holder
According to Section 125 of the Contract Act, the indemnity
holder, when sued, is entitled to recover from the promiser.
1. All damages which he is compelled to pay in any suit in
respect of any matter to which the promise to indemnify
applies;
2. All costs which he is compelled to pay, in bringing or
defending such suit:
a) he did not contravene the orders of the promiser, and

acted as it would have been prudentfor him to act in the absence
of any contract of indemnity, or
b) the promisor authorized him to bring or defend the suit;
3. All sums which he has paid under the terms of any
compromise of any such suit:
a) the compromise was not contrary to the orders of the
promisor, and was one which it would have been prudent for the
promisee to make in the absence of any contract of indemnity, or
b) the promisor authorized him to compromise the suit.
4. Suit for specific performance: An indemnity holder is
entitled to sue the indemnifier even before he has suffered any
damage provided an absolute liability has been incurred by him.
Rights of Indemnifier
There is no provision in the Indian Contract Act about
indemnifier’s rights. The Act is silent on this point. It may,
however, be said that indemnifier’s rights are the same as those of
a surety, which arethe essential part of law.
CONTRACT OF GUARANTEE
The term ‘guarantee’ may be defined as undertaking by one
person to pay the amount due from another person. And a
contract to pay the amount due from another person, in case the
latter fails topay, is known as contract of guarantee.
Definition
According to Section 126 of the Act,
“A contract of guarantee is a contract to perform the promise, or
discharge the liability, of a thirdperson in case of his default.” A

contract of guarantee involves three parties, the creditor, the surety
and the principal debtor.
Surety: The person who gives the guarantee is called the surety.
Principal Debtor: The person in respect of whose default the
guarantee is given is called the principal debtor.
Creditor: The person to whom the guarantee is given is called
creditor.
Example
X advanced a loan of Rs. 10000 to Y at the request of Z. And Z
promised to A that if Y does notrepay the amount then he (Z) will
pay. This is a contract of guarantee. In this case, A is the creditor,
Y is the principal debtor and Z is the surety.
CHARACTERISTICS OF A CONTRACT OF GUARANTEE
The essential features of a contract of guarantee are as follows:
1. Three parties: A contract of guarantee is a tripartite
agreement between the principal debtor, creditor and surety.
2. Consent or Identity of mind: The contract of guarantee
requires the identity of mind (concurrence) of all the said three
persons in respect of the subject matter of the contract.
3. Existence of a Liability: There must be an existing liability
or a promise whose performance is guaranteed. Such liability or
promise must be enforceable by law.
4. Primary and secondary liability: It is an essential
requirement of a contract of guarantee that there must be someone
primarily liable (i.e., liable as principal debtor) other than the
surety. A contract of guarantee presupposes existence of some
liability of the principal debtor to the creditor.

5. Essentials of a valid contract: All the essential elements of
a valid contract must be present in a contract of guarantee.
However, the following points are worth noting in this regard:
a) 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.
b) Surety need not be benefited. 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.
c) A contract of guarantee may be oral or in writing.
6. No misrepresentation: Any guarantee which has been
obtained by means of misrepresentationmade by the creditor, or
with his knowledge and assent, concerning a material part of
the transaction is invalid.
7. No concealment: Any guarantee which the creditor has
obtained by means of keeping silence as to material
circumstances is invalid.
8. Surety's liability must be conditional: The liability of
surety should arise only when the principal debtor makes a
'default'. If surety's liability arises independent of the default of
theprincipal debtor, it is not a contract of guarantee.
KINDS OF GUARANTEE
1. Specific guarantee: Where a guarantee is given for a single
and particular transaction or debt, it is called specific or simple
guarantee. Such guarantee comes to an end as soon as the
transactionis duly performed or the debt is duly discharged.
2. Continuing guarantee: A guarantee which extends to a

series of transactions called a continuing guarantee. It is not
confined to single transactions.
3. Retrospective guarantee: Where a guarantee is given for
an existing debt, is called a retrospective guarantee.
4. Prospective guarantee: When a guarantee is given for a
future debt, it is called prospectiveguarantee.
5. Absolute guarantee: It means a guarantee where the surety
unconditionally promises to pay in case of default of the
principal debtor.
6. Conditional guarantee: It means a guarantee where the
surety promises to pay in case of some event, in addition to the
default of the principal debtor, happens.
7. Fidelity guarantee: A guarantee given for the good conduct
or honesty of a person employedin a particular office is called a
fidelity guarantee.
8. Limited or unlimited guarantee: A limited guarantee is
one, restricted to a single transaction. An unlimited guarantee is
one which is unlimited either as to time or amount.
Revocation of Continuing Guarantee
A continuing guarantee as to future transactions may be
revoked in any of the following ways:
(i) By notice of revocation by the society [Section 130]: A
continuing guarantee may at anytime be revoked by the surety
as to the future transactions by notice to the creditor. In such a
case the surety would not be responsible for future transactions
which may be made by the principal debtor after surety has
revoked the contract of guarantee.
(ii) By the death of the surety [Section 131]: In the absence of

any contract to the contrary, the death of the surety operates as
a revocation of a continuing guarantee as to the future
transactions taking place after the death of surety.
(iii) By modes of discharging the surety: A continuing
guarantee is also revoked in the same manner in which the
surety is discharged such as:
a) By novation [Section 62];
b) By variance in terms of contract [Section 133];
c) By release or discharge of principal debtor [Section 134];
d) By creditors act of omission [Section 139];
e) By loss of security [Section 141].
RIGHTS OF SURETY
The Act recognizes certain rights of the surety, besides
imposing liability on him by virtue ofSection 128. This right
may be studied under the following three heads:
1. Right against the principal debtor.
2. Right against the creditor.
3. Right against the co-sureties.
4.
Rights of a Surety
Rights against the Rights against the Rights against the

principal debtor creditor co-sureties
Right to Right to Right to Right to Right to Right to
subrogatio indemnit securitie claim set claim sharethe
n y s off contribut security
ion
1. Rights of the Surety against the Principal Debtor

a) Right of subrogation [Section 140]: On the default of the
principal debtor, the surety can, after paying off the creditor,
claim all those rights which the creditor had against the
principal debtor. In other words, the surety steps into the shoes of
the creditor to exercise his rights. There is a need of assignment
or transfer of rights from the creditor to the surety.
b) Right to claim 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 to recover from the
principal debtor whatever sum he has paid rightfully under the
guarantee but no sums which he haspaid wrongfully, e.g. cost of
fruitless litigation.
2. Rights of the Surety against the Creditor
a) Rights to claim securities: 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.
b) Right to claim set-off: The surety is also entitled to the
benefit of the principal debtor’s set off against the creditor if it
arises out of the same transaction.
c) Right to share reduction: The surety is entitled to claim
the proportionate reduction of his liability by the amount of
dividend claimed by the creditor.
3. Rights of the Surety against the Co-Sureties
Where a debt is guaranteed by more than one surety, they are
called co-sureties. In such a case it would be unfair if one co-
surety is compelled to pay the entire debt of the principal debtor.
a) Right to contribution [Section 146]: Where co-securities
have guaranteed the same debt either jointly or severally, each
surety would be liable to contribute equally towards the debt or
thatpart of the debt which unpaid.
b) Right to share benefits of securities: Sometimes, at the
time of guarantee, one of the co- sureties receives a security
from the principal debtor, or on payment of the debt, he
receives security from the creditor. In such cases, the co-
sureties are entitled to share the benefit of the securities.
c) Liability of co-sureties bound in different sums [Section
147]: Where the co-sureties have agreed to guarantee different
sums, they have to contribute equally subject to the maximum of
the amount guaranteed by each one.
d) Effect of release of a surety [Sec. 138]: Where there are

co-sureties, release by the creditor of one of them does not
discharge the others nor does it free the surety so released from his
liabilityto other sureties.
NATURE AND EXTENT OF SURETY’S LIABILITY
According to Section 28 of the Contract Act defines the nature
and extent of surety’s liability as “the liability of the surety is
coextensive with that of the principal debtor, unless it is
otherwiseprovided by the contract”. The nature s
1. Surety’s liability is coextensive: The surety may limit his
liability at the time of entering into the contract. In the absence
of such express specification, the surety's liability will be
coextensive with that of the principal debtor.
2. Secondary liability: The surety’s liability arises only
when the principal debtor makes a default. In this sense his
liability is secondary.
3. Surety’s liability arises immediately on default of the
principal debtor: Unless specially agreed, the surety cannot
demand a notice of the default from the creditor, because it is
the responsibility of the surety to see that the principal debtor
makes the payment.
4. The creditor need not exhaust his remedies against the
principal debtor before he proceeds against the surety.
5. Surety’s liability where the original contract between
creditor and principal debtor is void or voidable: If the original
agreement between the creditor and the principal debtor is void,
thesurety may still become liable not only as a surety but also as
a principal debtor.
6. If the creditor has obtained the guarantee by

misrepresentation or by concealing some material information
then the guarantee shall be invalid and the surety will not be liable.
DISCHARGE OF SURETY FROM LIABILITY
A surety is said to be discharged when his liability comes to an
end. A surety may be dischargedfrom liability by the
I. revocation of the contract of guarantee;
II. conduct of the creditor; or
III. invalidation of the contract.
I. Discharge of Surety by Revocation
a) Revocation by giving notice [Section 130]: A surety may
revoke the guarantee, at any time, by giving notice of revocation
to the creditor.
b) Revocation by death [Section 131]: In the absence of
any contract to the contrary, thedeath of the surety operates as
termination of a continuing guarantee as to future transactions.
c) Revocation by novation: A surety is discharged when
a new contract of guarantee is substituted for an old one.
II. Discharge of Surety by the conduct of the creditor
a) By variance in terms of contract [Section 133]: If
without the consent of the surety, the creditor makes any material
change in the nature or terms of his contract with the principal
debtor, the surety is discharged from liability.
b) By release or discharge of the principal debtor
[Section 134]: If there is any contractbetween the creditor and
the principal debtor by which the debtor is released, then the
surety will also be discharged.
c) By compounding with or giving time to the principal

debtor [Section 135]: The surety is discharged if the creditor (a)
makes a composition with the principal debtor, or (b) gives time
to him, or (c) promises not to sue the principal debtor; without
the consent of the surety.
d) By Creditor’s act or omission impairing surety’s
eventual remedy [Section 139]: If the creditor does any act
which is inconsistent with the right of the surety, or omits to do
anyact which his duty to the surety requires him to do, and the
eventual remedy of surety against the principal debtor is thereby
impaired, the surety is discharged.
e) By loss of securities [Section 141]: If the creditor loses or
parts with the security without the consent of the surety, the
surety is discharged from his liabilities to the extent of thevalue
of the security.
III. Discharge of Surety 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.
c) Failure of a person to join as Co-surety [Section 144]:
Where a person gives a guaranteeupon a contract that a creditor
shall not act upon it until another has joined in it as co- surety,
the guarantee is not valid if that person does not join.
d) Failure of consideration: The surety will be

discharged on a substantial failure of consideration.
e) Lack of essential element of a valid contract: If any of
the elements is not present, the contract is void and the surety
is discharged.
DIFFERENCE BETWEEN CONTRACT OF
INDEMNITY AND GUARANTEE
Basis Contract of Contract of Guarantee

Indemnity
1. Number There are two parties - Contract of guarantee has
of indemnifierand the three parties,viz., creditor,
Parties indemnified. principal debtor and surety.
2. There is only one It has three contracts -
Number contract between the Between principal debtor
of indemnifier and the and the creditor, Between
Contrac indemnified. the creditor and surety;
ts and Between the surety
and principal debtor.
3. Nature Liability of Liability of surety is
of indemnifier is primary secondary andconditional.
Liabilit and unconditional. It arises only if the
y principal debtor does not
pay.
4. It is not necessary for It is necessary that surety
Request theindemnifier to act should give theguarantee at
at the request of the the request of the debtor.
indemnified.
5. Existenc The liability of the There is an existing
eof Risk indemnifier arises liability the performance
only on the happening of which is guaranteed by
of acontingency. the surety.
6. Indemnifier cannot The surety can proceed

Rights bring a suit against a against the principal debtor
of third party in his own in his own right after hehas
Parties name unless there is discharged the liability of
assignment of claim in the principal debtor.
his favour.
7. Indemnifier may have The surety should have no
some other interest other interestin the
Parties than indemnity. For transaction apart from
Interests instance, a del credre guarantee.
agent gets
commission for his
promise to indemnify
the principal against
bad debts.
8. The object of The object of guarantee
Purpose indemnity is to is to providesecurity to
provide security the creditor against
against loss. default by the principal
debtor.
CONTRACT OF BAILMENT AND PLEDGE
The Indian Contract Act, 1872 deals with the general rules
relating to bailment but does not deal with all types of bailment
for which separates acts have been enacted, for example, The
Carrier Act 1865, The Railways Act 1889, The Carriage of
Goods by Sea Act, 1925.
CONTRACT OF BAILMENT
The word ‘Bailment’ has been derived from the French word
‘Baillier’ which means ‘to deliver’. Bailment, therefore, means
delivery of property or goods in trust to another for a special
purpose and for a limited period
Definition
According to Section 148 of the Contract Act has defined bailment
as "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".
Bailor: The person delivering the goods is called 'bailor'.
Bailee: The person to whom they are delivered is called "the
bailee".
Example
1. X deposited his luggage in a cloak room at railway
station. This is a contract of bailment between X and the
Railways.
2. Y who is going out of station delivers a horse to Y for proper
care.
3. S handsover a piece of cloth to B, a tailor, for making a shirt.
4. A gives his book to his friend B, for preparing lessons of an
examination.
5. A handsover gold ornaments to B, a bank, as security for loan.
CHARACTERISTICS OF BAILMENT
The requisites or essential features of bailment can be summed up
as under:
1. Delivery of possession goods: It is an essential and
important element of the bailment that the possession of the goods
must be delivered by the bailor to the bailee. Delivery may be
either (a)actual, or (b) constructive.
a) Actual Delivery: A delivery is said to be actual where the

goods are physically handed overby the bailor to the bailee. For
example, Mr. A delivers a Car for repair to a workshop dealer.
b) Constructive Delivery: It may not always be possible to
give physical possession due to difficulty or inconvenience, or
for any other reason. In such cases, delivery may be
constructive or symbolic. For example, delivery of railway
receipts [Morvi Mercantile BankLtd. vs. Union of India (1965)].
2. Delivery of goods must be for some purpose and upon a
contract: Delivery of goods should be made for some purpose
upon an agreement that when the purpose for which the goods
aredelivered is completed, the goods should be returned to the
bailor.
3. Return of goods: In bailment the goods are given on the
condition that when the purpose for which they are given, is
accomplished they shall be returned to the bailor or disposed
of according to his directions. The goods may be returned in
their original form or in an alteredform.
4. Movable goods: There can be a bailment of movable
properties only but money is not included in the category of
movable goods.
5. No transfer of ownership: In bailment, the bailor is not
transferred the ownership to the bailee. Possession alone is
transferred but ownership is retained by the bailor.
CLASSIFICATION OF BAILMENT
The bailment may be broadly classified on the basis of
charges (i.e., reward) and benefits as discussed below:
1. Bailment on the basis of Charges or Reward

a) Gratuitous bailment: When the goods are delivered by the
bailor to the bailee without any charges or remuneration, it is
called gratuitous bailment.
b) Non-gratuitous bailment: Where either the bailor or
the bailee gets remuneration, the bailment is termed as non-
gratuitous.
2. Bailment on the basis of benefits
a) Bailment for the exclusive benefit of bailor: It is a
contract of bailment which is executedonly for the benefit of the
bailor and the bailee does not derive any benefit from it.
b) Bailment for the exclusive benefit of bailee: It is a
contract of bailment which is executedonly for the benefit of the
bailee and the bailor does not derive any benefit from it.
c) Bailment for the mutual benefit of both bailor and
bailee: It is a contract of bailment which is executed for the
mutual benefit of both of them.
DUTIES OF BAILOR
1. To disclose known defects in the goods: Under Section
150, the duty of bailor to disclose faults in the goods bailed is
different for gratuitous and non-gratuitous bailor. It is described
below:
a) Duty of gratuitous bailor: A gratuitous bailor is a bailor who
lends his goods to the bailee without any charge. In such a case,
the bailor is bound to disclose to bailee the faults in the goods
bailed of which the bailor is aware and which materially
interfere with the use of them or expose the bailee to
extraordinary risks. If the bailor fails to make such disclosure, he
is liable to the bailee for damages.

b) Duty of a non-gratuitous bailor: Since a non-gratuitous bailor
delivers goods for a reward,his duty is greater. He must ensure that
the goods delivered are reasonably safe. Section 150provides that
if the goods are bailed for hire, the bailor would be liable for
such damages,whether or not he was aware of the existence of
any faults.
2. To bear ordinary expenses: In a gratuitous bailment, where
the goods are to be kept or to be carried, or to have work done
upon them by the bailee for the bailor, the bailor shall repay to the
bailee the necessary expenses incurred by him for the purpose of
bailment.
3. To bear extraordinary expenses: In case of non-gratuitous
bailment, where the goods are bailed for reward or remuneration,
the ordinary expenses are not to be borne by the bailor, but if there
are some extraordinary expenses incurred, then it becomes the
duty of the bailor to paysuch extraordinary expenses.
4. To indemnify bailee: The bailor is responsible to the bailee
for any loss which the bailee maysuffer because of the defective
title of the bailor.
5. To receive back the goods: It is the duty of the bailor to take
back the goods when the bailee returns them after the expiry of
period of bailment, or the accomplishment of the purpose for
which the goods were bailed.
6. To bear the risks: The bailor must bear the risk of loss of
goods provided the bailee has taken all reasonable steps to
protect the goods from loss.
DUTIES OF BAILEE
1. To take reasonable care of the goods bailed: According to
this duty, the bailee is required to take reasonable care of the
goods bailed to him. The bailee must take as much care as an
ordinary sensible man would take under the similar circumstances,
in respect of his own goods of the same type (Section 151). If the
bailee is negligent in taking the care of the goods bailed,then he
is liable to pay damages for loss or destruction of the goods.
2. Not to make any authorized use of goods bailed: If the
bailee makes any use of the goods bailed which is not according
to the conditions of bailment, he is liable to make compensation
to the bailor for any damage arising to the goods from or during
such use of them.
3. Not to mix goods bailed with his own goods: It is the
duty of the bailee not to mix the bailor’s goods with his own
goods. If the bailee mixes up his own goods with those of the
bailor, the following rules apply:
a) Mixing of goods of bailor with that of bailee with bailor's
consent: Bailee cannot mix the goods bailed with his own
goods. But with the consent of the bailor, the goods may be
mixed and in that case the parties shall have an interest in
proportion to their respective shares in the mixture thus
produced (Section 155).
b) Mixing of goods without bailor's consent, where the goods
can be separated: If the bailee mixes the goods bailed with his
own goods without the consent of the bailor, and the goodscan be
separated, the property in the goods remains in the parties
respectively but the bailee must bear the expenses of separation
and any damages arising from separating the mixture (Section
156).
c) Mixing of goods without bailor's consent, where goods cannot

be separated: If the bailee without the consent of the bailor, mixes
the goods of the bailor with his own goods, in sucha manner that
it is impossible to separate them, the bailee shall compensate
the bailor forthe cost of goods (Section 157).
4. To return the goods: The bailee must return or deliver
the goods according to the bailor’s directions without demand,
after the accomplishment of purpose or after the expiry of period
of bailment. If he fails to do so, he is responsible to the bailor
for any loss, destruction or deterioration of the goods from that
time.
5. Not to set up adverse title: The bailee must not do any act
which is inconsistent with the title
of the bailor. He must not set up his own title or a third party’s title
on the goods bailed to him.
6. To return any accretions to the goods bailed: In the
absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, or according to his directions, any increase
or profit which may have accrued from the goods bailed.
RIGHTS OF BAILOR
1. Right to terminate the bailment: If the bailee fails to follow
the conditions of bailment, the bailor may terminate the
bailment.
2. Right to claim damages in case of negligence: If the bailee
has not taken reasonable care or special care, the bailor has a right
to claim damages for the loss, destruction or deterioration of the
goods bailed.
3. Right to demand return of goods: The bailor has a right to

demand return of goods after the accomplishment of the purpose
or after the expiry of period of bailment.
4. Right to file a suit against wrong-doer: A wrong-doer is
a third person who does some wrongful act and deprives the
bailee from the use of goods bailed or does injury to the goods
bailed, the bailor has a right to file a suit against that third person
and claim compensation fromhim.
5. Right to file a suit for the enforcement of the duties
imposed upon a bailee: If the baileeneglects in his duties, the
bailor has a right to enforce these duties by filing a suit against
thebailee.
6. Right to claim any increase in value or profits: In the
absence of contract to the contrary, the bailor has a right to
demand any increase or profit which may have accrued from
the goodsbailed.
RIGHTS OF BAILEE
1. Right to enforce bailor duties: The bailee can, by a suit,
enforce the duties of the bailor towards him.
2. Right to claim compensation in case of faulty goods:
Bailee can sue the bailor for his failure to disclose faults in the
goods bailed which materially interfere with their use or expose
thebailee to extraordinary risks.
3. Right to claim reimbursement of expenses: The bailee can
claim reimbursement of expensesincurred by him in the case of a
gratuitous bailment, and of extraordinary expenses in case of non-
gratuitous bailment.
4. Right to return the goods to anyone of the joint bailors:
If several joint owners of goods bail them, the bailee may
deliver them back to, or according to the direction of, one joint
owner without the consent of all, in the absence of any agreement
to the contrary.
5. Right to recover agreed charges: Where there is no such
agreement of charges, the bailee has the right to ask the bailor for
the payment of necessary expenses incurred by him for the
purpose of bailment.
6. Right to recover loss in case of Bailor’s defective title:
The bailee has a right to be indemnified in case he suffers any
loss because of the defective title of the bailor.
7. Right of action against third parties: If a third person
wrongfully deprives bailee of the use of possession of the goods
bailed, he has a right of action against such third parties in the
samemanner as the true owner has against third persons.
8. Right to interplead: Where a person other than the bailor
claims the goods bailed, bailee may apply to the court to stop
delivery of the goods to the bailor and to decide the title to the
goods.
9. Right of lien: The bailee has a right to claim his lawful
charges and if they are not paid, the bailee is given the right to
retain the goods until the charges due in respect of those goods are
paid. This right is known as bailee’s right of lien.
BAILEE’S LIEN
Lien means the right of a person, who has possession of the goods
belonging to another person, toretain such possession of the goods
until some debt due to him or claim is satisfied. This right is
sometimes called “Possessory Lien”.
A lien may be either a particular lien or a general lien.

a) Particular or Special Lien [Section 170]: A particular

lien is a right to retain only thosegoods in respect of which some
charges are due. This right is available only if the following
conditions are fulfilled:
(i) The bailee must have exercised labour or skill in respect of
the goods bailed.
(ii) The bailee must have rendered the service in accordance
with the purpose of the bailment.
(iii) The bailee must be in possession of the goods.
(iv) There must not exist any contract for payment of price in
future.
(v) The bailee cannot exercise right of lien if he has agreed to
perform the services on credit.
(vi) The bailee can exercise the right of particular lien only
if there is no agreement to thecontrary.
b) General Lien [Section 171]: A general lien is a right to
retain all the goods as a security for the general balance of account
until the full satisfaction of the claims due whether in respect of
those goods or other goods. The right of general lien is a privilege
and is given only to certainkinds of bailee’s namely, (i) Bankers,
(ii) Factors, (iii) Wharfinger, (iv) Attorneys of a High Court, and
(v) Policy brokers.
FINDER OF LOST GOODS
Sec. 71 of the Act clearly lays down that a person, who finds goods
belonging to another and takes them into his custody, is called a
finder of lost goods. Generally there is no obligation on the part
of a person who finds goods, but if he picks them up or to take
charge of the goods, he becomesthe bailee of those goods.

Rights of the finder of lost goods

1. Right of Lien [Section 168]: The finder of goods has a right
to retain the goods found until he receives the compensation for
trouble and expenses voluntarily incurred by him-
a) to preserve the goods; and
b) to find out the true owner.
It may be noted that the finder of goods has no right to sue the
owner for such compensation.
2. Right to sue for reward [Section 168]: If the owner of the
goods lost has offered a specific reward, for the return of goods
lost, the finder may sue for such reward, and may retain the
goods unless he receives it.
3. Right to sell [Section 169]: A finder of goods has a right
to sell the goods found under thefollowing circumstances:
a) If the owner cannot with reasonable diligence be found; or
b) If the owner refuses to pay the lawful charges of the finder;
or
c) If the goods are of a perishable nature; or
d) If the lawful charges of the finder in respect of the goods
found exceed two-thirds of thetotal value of goods.
Duties and Liabilities of the Finder of Lost Goods
 The finder of goods must take reasonable care of the goods
found.
 The finder of goods must return the goods to the real
owner, who has paid the expensesincurred by the finder.

 The finder of goods must not use the goods for his own
purpose.
 The finder of goods must not mix up the goods with his own
goods.
 The finder of goods must also return the increase in the goods.
 The finder of goods must make efforts to find the true owner.
TERMINATION OF BAILMENT
Every contract of bailment comes to an end under the following
circumstances:
1. On the achievement of the object: Where the bailment is for
a specific purpose, it terminates as soon as the purpose is
achieved.
2. On the expiry of the period: If the contract of bailment
is only for particular period, it is terminated on the expiry of
that period.
3. Inconsistent use of goods: Where a bailee does something
which is inconsistent with the terms of the contract, the
bailment is terminated.
4. Destruction of the subject matter of bailment: A bailment
is terminated if the subject matterof the bailment (a) is destroyed,
or (b) becomes incapable of being used for bailment because of
some charge in the nature of goods.
5. Gratuitous bailment: Where the bailment is gratuitous, the
bailor may terminate the bailmenteven before the specified time
or before the purpose is fulfilled.
6. Death of the bailor or bailee: A gratuitous bailment is
terminates by the death of either the bailor or bailee.

PLEDGE OR PAWN
A pledge is a special kind of bailment. In this case, the goods are
delivered as a security for a loan or for the fulfillment of an
obligation. According to Sec. 172 of the Indian Contract Act
definespledge as, “the bailment of goods as security for payment
of a debt or performance of a promise”. The bailor is in this case
called the “pawnor” and the bailee is called the “pawnee”.
Example: Y borrows Rs. 50,000 from Citi Bank and keeps his
shares as security for payment of adebt. It is a contract of pledge
or pawn.
Pawnor or Pledger:
The person who delivers the goods as security for payment of a
debt or performance of a promise is called the pawnor. In the
aforesaid example, Y is the pawnor.
Pawnee or Pledgee:
The person to whom the goods are delivered as security for
payment of a debt or performance of a promise is called the
Pawnee or Pledgee. In the aforesaid example, Citi Bank is the
pawnee.
RIGHTS OF PAWNEE OR PLEDGEE
1. Right of retainer: The pawnee may retain the goods pledged
not only for payment of the debt or the performance of the
promise, but for the interest of the debt, and all necessary expenses
incurred by him in respect of the possession or for the preservation
of the goods pledged.
2. Right of retainer for subsequent advance: When the
pawnee lends money to the same pawnor after the date of the
pledge, it is presumed that the right of retainer over the pledged

goods extends to subsequent advances also.

3. Right to extraordinary expenses: The pawnee is entitled
to recover from the pawnor extraordinary expenses incurred by
him for preserving the goods pledged. This right is only a right of
action but not a lien.
4. Right in case of default of the pawnor:
(a) To bring a suit on the debt and to retain the goods pledged
as a collateral security.
(b) To sell the goods pledged after giving reasonable notice to
the pawnor.
DUTIES OF PAWNEE
The pawnee has almost the same duties as those of the bailee. His
duties as follows:
1. To take reasonable care of the goods pledged;
2. Not to make any unauthorized use of goods;
3. Not to mix goods pledged with his own goods;
4. To return goods; and
5. To return accretions to the goods.
RIGHTS OF PAWNOR
1. Defaulting pawnor’s right to redeem:
The pawnor has an absolute right to redeem the goods pledged,
upon the satisfaction of thedebt. When the time is fixed for the
payment of the debt, the pawnor may redeem the goods even
after the expiry of the fixed time.

2. Preservation and maintenance of the goods:

It is implied that the pawnee as a bailee is bound to preserve the
goods pledged and properly maintain them.
3. Protection as an ordinary debtor:
It is also implied that a pawnor has the rights of protection as an
ordinary debtor by statutes meant for such protection e.g., the
Moneylender’s Act.
4. Right to receive the increase:
The pawnor has a right to receive any increase of profits from
pledged goods.
DUTIES OF PAWNOR
The duties of pawnor are almost similar to those of a bailor
which have already been discussed.However, the following are
some additional duties of the pawnor.
a) Duty to repay the loan:
If he fails to repay the loan, as per the terms of the contract, the
pawnee may bring a legal action against him for the recovery
of the loan.
b) Duty to pay the expenses in case of default:
The pawnee must pay the expenses incurred by the pawnee due to
default in repaying the loanat stipulated time.
PLEDGE BY NON-OWNERS
According to the general rule, only the true owner can pledge
the goods but under the followingcases, even a non-owner can
make a valid pledge:

1. Pledge by a mercantile agent: The mercantile agent is an

agent who has the authority either tosell the goods, or to consign
the goods for the purpose of sale, or to buy the goods or to raise
money on the security of the good. Following are the
conditions for a valid pledge by a mercantile agent:
a) The mercantile agent must be in possession of goods or
documents of title to goods.
b) The possession of goods must be with the consent of the owner.
c) The goods most he in the possession of the
agent in his capacity asa mercantile agent.
d) The pawnee must act in good faith and should not have
notice, at the time of pledge, that pawnor has no authority to
sell.
2. Pledge by a person in possession under a voidable
contract (Section 178-A): Where a person obtains possession
of goods under a voidable contract, the pledge created by him is
valid provided (a) the contract has not been rescinded at the time
of pledge, and (b) the pawnee acts in good faith and without
notice of pawnor’s defect of title.
3. Pledge by a pawnor having only a limited interest (Section
179): Where a person pledges goods in which he has only a limited
interest, the pledge is valid to the extent of that interest.
4. Pledge by co-owner in possession: Where there are several
joint owners of goods then pledge by one of them who is in
possession of the goods, with the consent of other co-owners, shall
bevalid.

5. Pledge by a seller in possession after sale [Section 30 (1)

of the Sale of Goods Act]: A seller who continues to be in
possession of the goods even after their sale, can make a valid
pledgeprovided the pawnee acts in good faith and has no notice
of sale.
6. Pledge by a buyer in possession before payment of
price [Section 30 (2) of the Sale of Goods Act]: A buyer who
obtains possession of goods with the consent of the seller
before payment of price and pledges them, the pawnee will get a
good t.tle provided he does not have notice of seller's right of
lien or any other right.
Difference between Bailment and Pledge
Basis of Bailment Pledge
distinction
1. Purpose The bailment can be The pledge is made for a
made for any purpose specific purpose i.e.,
such as, safe custody, repayment of a debt or
repair, use, performance of a
transportation etc. promise.
2. Right to use Bailee can use the Pawnee cannot use the
goods pledged as per goods pledged.Pawnee
terms of bailment. can sell the goods
3. Right to sell Bailee can either retain pledgedafter giving
the goods or sue the notice to the pawnor in
bailor for his dues, but case of default by the
he cannot sell it. pawnor.
4. Right to Bailee gets only the Pawnee acquires a special
property possession of the goods property inthe goods
bailed. pledged.
It may or may not exist In pledge, thereis
5. Considerati in bailment. alwaysconsideration.
on

CONTRACT OF AGENCY
A person who is competent to make a contract may do so (i)
either by himself or (ii) through another person. When he makes
contracts through another person; he is said to be making a
contract through an agent. The person who acts on behalf of
another or who represents a person in dealing with third parties
is called as an ‘agent’ and the person on whose behalf he acts
or who is thus represented, is called as ‘principal’. The contract
which creates the relationship of principal and agent is known as
‘agency’. The legal provisions relating to agency are contained
in Chapter X (Sections 182 to 238) of the Indian Contract Act,
1872.
AGENT
According to Section 182 of the Contract Act defines an ‘agent’
as “a person employed to do any act for another or to represent
another in dealings with third parties”.
PRINCIPAL
The person for whom such act is done, or who is so represented, is
called the principal.
AGENCY
The relationship between an agent and the principal is called
agency, which may be created by an express or implied
agreement.
Example:
X appointed Y to purchase 100 bags of rice on his behalf. In this
case, X is the principal, and Y, theagent. And the relationship
between X and Y is known as agency.

GENERAL RULE OF AGENCY

There are two important rule of agency:
1. Whatever a person can do personally, he can do
through an agent: Whatever a person competent to contract
may do by himself, he may do through an agent except for acts
involving personal skill and qualification such as painting,
marriage, singing etc.
2. He who does an act through another does it by himself:
This means that the acts of agent are, for all legal purposes, the
acts of the principal (Sec. 226).
ESSENTIALS OF A CONTRACT OF AGENCY
1. Existence of agreement: There must be an agreement by
which a person is appointed as an agent by the other. The
agreement may be express or implied.
2. Competency of the Principal: According to Section 183,
"any person who is of the age of majority according to the law
to which he is subject and who is of a sound mind, may employ an
agent". An appointment of an agent made by an incompetent
person is void. An agent acting on behalf of an incompetent
person will be personally liable to third parties.
3. Any person may become an agent: According to Section
184, any person may become an agent and he need not be
competent to contract. For instance, a minor can bring about a
contractual relation between the principal and third party without
that agent being liable to the principal.
4. No consideration is required to create agency (Sec. 185):
The detriment to the principal inconsenting to be represented by
the agent is sufficient to support the promise of the agent.

CREATION OF AGENCY
The creation of an agency, i.e., creation of principal and an
agent, may take place in any of thefollowing ways:
1. Agency by express agreement (Sec. 187): An agency
by express authority arises when an express authority is given to
the agent by spoken or written words.
2. Agency by implied agreement (Section 187): When
agency arises from the conduct of the parties, or inferred from
the circumstances of the case, it is called an implied agency.
Partners, servants and wives are usually regarded as agents by
implication.
3. Agency by estoppel (Section 237): Where a person,
by his words or conduct has wilfully led another person to
believe that certain set of circumstances or facts exists, and that
other person has acted on that belief, then he is estopped from
denying the truth ofsuch statements subsequently.
4. Agency by holding out: Agency by holding arises when
a person by his past affirmative or positive conduct leads third
person to believe that person doing some act on his behalf is doing
with authority.
5. Agency by necessity: In certain circumstances, a person
may be compelled to act as an agent of the other. In order to
protect the interests of another, it may become necessary to take
some action without waiting for the instructions of the owner.
But the following conditions must be fulfilled before a person
may act as an agent of necessity:
(a) There must be a real emergency to act on behalf of the
principal,

(b) It may not possible for the agent to communicate with the
principal or to obtain his instruction,
(c) The person acting as agent must act bonafide and in the interest
of the partiesconcerned,
(d) The agent must adopt a reasonable and practical course
under thecircumstances of the case.
6. Husband and Wife relations: The wife is considered an
implied agent of the husband forthe purpose of buying household
necessaries on credit, and the husband becomes bound to pay for
the same.
7. Agency by operation of law: An agency may also come
into existence by operation of law. In certain circumstances, the
law treats one person as an agent of another. Example: Every
partner is an agent of the partnership firm. Similarly, a legal
advisor is the agent ofhis client.
8. Agency by ratification: Ratification means subsequent
acceptance and adoption of an actby the principal originally done
by the agent without authority. This is agency ex-post facto or
agency arising after the event.
SUB-AGENT [SECTION 191]
A sub-agent is a person who is employed by the original agent
and who acts under the control of theoriginal agent in the
business of agency.
Agent can appoint a sub-agent in the following circumstances:
1. If such appointment is permitted by the custom of the trade.
2. If the nature of the business makes such appointment
necessary.

3. If the act to be done is purely ministerial and involves no

exercise of discretion.
4. If principal agrees to such appointment.
5. In case of an unforeseen emergency.
SUBSTITUTED AGENT [SECTION 194]
A substituted agent is a person who, named by the original
agent on the basis of an express or implied authority from the
principal. He is taken as an agent o the principal for such part
of thebusiness of agency which is entrusted to him. A privity
of contract is established between the principal and substituted
agent.
DIFFERENT KINDS OF AGENTS
The relationship between the principal and agent and the extent
of the authority of the latter are matters to be determined by
agreement of the parties. A general classification of agents is
as follows:
1. General Agent: A general agent is one who has authority to
do all acts in the ordinary course of trade or profession. The
authority of a general agent is continuous unless it is terminated.
2. Special Agent: A special agent is one who has authority to
do a particular act in a particulartransaction.
3. Universal Agent: A universal agent is one who has authority
to do all acts which the principal can lawfully do and delegate. He
has an unlimited authority to bind the principal.
4. Commercial or Mercantile Agent: A mercantile agent is a
person having authority either to sell the goods or to consign the
goods or to raise money on the security of goods. Mercantile
agents may be of several kinds which are as follows:

a) Broker: He is an agent employed to make bargains and

contracts in matters of trade, commerce, or navigation between
other parties for a compensation commonly called brokerage.
b) Factor: A factor is one who is entrusted with the possession
of goods and who has the authority to buy, sell or otherwise deal
with the goods or to raise money on their security.
c) Auctioneer: An auctioneer is one who is entrusted with the
possession of goods for sale at apublic auction.
d) Commission Agent: The term ‘commission agent’ is a
general term which is used in practice even for a factor or
broker.
e) Banker: Banker acts as an agent of the customer when he
collects cheques or drafts or bills or buys or sells securities on
behalf of his customers.
f) Del-credere Agent: A del-credere agent is one who gives
guarantee to his principal to the effect that the third person with
whom he enters into contracts shall perform his obligation.
5. Non-mercantile Agent: An agent who does not deal in
mercantile transactions. These include attorneys, solicitors,
guardian, promoters, wife, etc.
DUTIES OF AN AGENT
The duties of an agent to his principal are as follows:
1. To conduct business as per directions or custom of trade
[Section 211]: An agent is bound to conduct the business of his
principal according to principal’s directions or the custom of trade
(in the absence of principal’s directions).

2. To act with reasonable care, skill and diligence [Section

212]: An agent is bound to conduct the business of the agency
with reasonable care and skill.
3. Duty to render proper records [Section 213]: An agent is
bound to render proper accounts tohis principal on demand.
4. To communicate with principal [Section 214]: It is the duty
of an agent, in cases of difficulty,to use all reasonable diligence in
communicating with his principal and obtain his instructions.
5. Duty not to deal on his own account [Section 215 & 216]:
An agent is bound to disclose all material circumstances which
have come to his knowledge on the subject, to the principal and
obtain his consent if he desires to deal on his own account in the
business of agency.
6. Duty to pay sum received [Section 218]: It is the duty of
the agent to pay sum received on behalf of the principal subject
to any lawful deductions for remuneration or expenses properly
incurred.
7. To protect and preserve the interest [Section 209]:
When an agency is terminated by the principal dying or
becoming of unsound mind, the agent must take all reasonable
steps for the protection and preservation of the interest
entrusted to him.
8. Not to delegate authority [Section 190]: An agent cannot
lawfully employ another to perform acts which he has expressly
or impliedly undertaken to perform personally unless custom of
trade or the nature of the agency so requires.
9. Duty not to set up adverse title.
10. Duty to pass the information to the principal.
11. Duty not to make any secret profit from agency.

RIGHTS OF AN AGENT
1. Right of Retainer [Section 217]: An agent has the right to
retain, out of any sum received on account of the principal in the
business of the agency such as remuneration and advances made
or expenses properly incurred.
2. Right to receive remuneration [Section 219 & 220]: The
agent has the right to receive agreed remuneration or usual
remuneration as per the custom of the trade in which he has
been employed.
3. Right of lien [Section 221]: An agent has a right to retain
goods, papers and other movable or immovable property of the
principal received by him until the amount due to him had been
paidor accounted for.
4. Right to indemnification [Section 222]: The agent has a
right to be indemnified against the consequences of all lawful acts
done by him in exercise of the authority conferred upon him.
5. Right to be indemnified against consequences of facts
done in good faith [Section 223]: An agent has right to be
indemnified by the principal against the consequences of act done
in good faith that causes an injury to the rights of third person.
6. Right to compensation [Section 225]: The agent has a
right to be compensated for injuriessustained by him by neglect
or want of skill on the part of the principal.
DUTIES OF PRINCIPAL
The main duties of principal are as follows:
1. To remunerate the agent for his services;
2. To indemnify the agent against the consequences of all
lawful acts;

3. To indemnify the agent against the consequences of an act

done in good faith, even though the act causes an injury to the
rights of third persons; and
4. To make compensation to the agent in respect of injury
caused to such agent by his negligence or want of skill.
RIGHTS OF PRINCIPAL
1. To get proper accounts on demand from his agent.
2. To see that the agency business is conducted according to his
instructions, or in their absence, according to the custom which
prevails in the place where similar business is conducted.
3. To be entitled to compensation in respect of the direct
consequences of the agent’s negligence, want of skill, or
misconduct.
4. To give instructions in cases of difficulty, when contracted by
the agent.
5. To be entitled to compensation for loss, or any profit
accruing, owing to departure from instructions.
6. To claim the benefit, if any, arising from a transaction entered
into by the agent on his agent onhis own account.
7. To repudiate the transaction, if a material fact is concealed
or the dealing by the agent on his own account is
disadvantageous to him.
8. To receive all moneys due to him, subject to such deductions
by the agent as are permissible.
9. To remunerate the agent only after the completion of the act.
10. To refuse to pay the remuneration if the agent is guilty of
misconduct.

LIABILITY OF AGENT TO THIRD PARTIES [Agent

Personally Liable]
In the absence of any contract to that effect, an agent cannot
personally enforce contract entered into by him on behalf of his
principal, nor is he personally bound by them. The circumstances
underwhich an agent becomes personally liable are as follows:
1. Where the agent acts for a foreign principal [Sec. 230 (l)]:
The agent will be personally liable if he acts for a merchant
who is resident abroad unless there is an intention to the
contrary.
2. Where the agent acting for a principal who cannot be
sued [Sec. 230 (2)]: The instances of principals who cannot
be sued are sovereigns and their accredited agents, a
company before its incorporation, or an incompetent person,
etc. In such cases, the agent ispersonally liable.
3. Where the agent acts for a principal who cannot be sued
[230(3)]: The instances of principals who cannot be sued are
sovereigns and their accredited agents, a company before its
incorporation, or an incompetent person, etc. In such cases, the
agent is personally liable.
4. Where an agent acts for a non- existent principal: If the
agent contracts for a fictitious principal, he shall incur
personally liability.
5. Where the agent acts for an undisclosed principal [Sec.
231]: When the agent does notdisclose that he is acting as an
agent for someone and he contracts in his own name, he
becomes personally liable to third parties.
6. Where the agent expressly provides [Sec. 230]: The
personal liability of agent may arise from express
agreement to that effect.
7. Where the agency is one coupled with interest: If the agent

has an interest in the subjectmatter of the contract, he will be
personally liable thereon to the extent of his interest in the
contract.
8. Where the agent exceeds his authority: If an agent exceeds
his authority, or represents to have some kind of authority
which he does not have, he commits breach of warranty of
authority and is personally liable to third parties who have
acted under such false representation.
9. Where there is trade usage or custom: The agent is
personally liable where there is tradeusage or custom to that
effect.
10. Where an agent receives money by mistake or fraud:
Where a third party pays to anagent under a mistake, there
can be suits personally against the agent for the refund of
theamount.
11. Where the agent signs the negotiable instrument in his
own name: If an agent puts signature on a negotiable
instrument, etc., without making it clear that he is signing
on behalf of the principal, the agent will be personally
liable.
12. Pretended agent [Section 235]: If he induces a third party
to enter into a contract withhim, he will be personally liable
to compensate the third party in case his alleged employer
does not ratify his acts.
LIABILITIES OF PRINCIPAL TO THIRD PARTIES
In the following cases the principal is liable to third parties for the
acts done by his agent:

1. Where the agent acts within the scope of his authority

[Sec. 226]: When an agent is appointed, then his principal is
bound by the acts of the agent within the scope of his real or
apparent authority. Such acts of the agent may be enforced in the
same manner and will have the same legal effect as if they were
the acts of the principal.
2. Where the act within agent's authority is separable
from that which is beyond his authority (Sec. 227): In case
the act which is within the agent's authority, can be separated
from that which lies beyond his authority, only the act which is
within his authority is bindingbetween him and the principal.
3. Liability of principal for misrepresentation or fraud of the
agent (Sec.238): The principal is liable for and is bound by
misrepresentation or fraud committed by the agent in respect
of matters falling within his authority.
4. Where the Agent Acts for an Unnamed Principal:
Where the agent discloses that he is an agent but does not
disclose the name of the principal, the acts of the agent
shall be binding on the principal. However, the agent will
become personally liableif:
(a) the agent declines to disclose the identity of the principal, or
(b) the agent does not disclose his representative character, or
(c) there is a trade custom to the contrary.
5. Responsibility of principal even where the agent is
personally liable: In cases where theagent has rendered himself
personally liable in respect of the transactions, a third person
dealing with him may hold either him or his principal, or both
of them, liable.

6. Bound by notice given to agent [Section 229]: Notice given

to agent, in the course of business of agency is considered as a
notice to the principal.
TERMINATION OF AGENCY
A contract of agency may be terminated in one of the following
two ways:
1. Termination by the act of parties:
A contract of agency may come to an end either on account of
the act of the principal or agent or both. Thus, agency may be
terminated.
a) By agreement between the parties: An agency is
terminated if the principal and agentmutually agree to do so.
b) By revocation of authority by the principal: The
principal has the power to revoke theauthority given to his agent
at any time before the authority has been exercised so as to bind
the principal.
c) By renunciation of agency by the agent: An agency may
also be terminated by the agent by an express renunciation, but a
reasonable notice must be given to the principal.
2. Termination by operation of law:
An agency will come to an end by operation of law in the
following cases:
a) Completion of the business of agency: When the
purpose for which the agency was created is completed, the
agency comes to an end automatically.

b) Expiry of time: Where the agent is appointed for a

fixed period it will terminate on the expiry of that period, it is
immaterial whether the purpose of agency has been accomplished
or not.
c) Death or insanity of the principal or agent: An agency
comes to an end automatically on the death or insanity of the
principal or agent.
d) Insolvency of the principal: An agency comes to an end
automatically on the insolvency ofthe principal.
e) Destruction of the subject matter: If the subject matter
of the agency is destroyed, theagency comes to an end.
f) Dissolution of company: When the principal or agent
is an incorporated company, the agency will come to an end on
the dissolution of the company.
g) Principal becoming an alien enemy: If the principal and
the agent belong to two different countries, and war breaks out
between the two countries, the authority of the agent ceases.
h) Termination of the sub-agent’s authority: The
termination of the authority of an agent causes the termination of
the authority of all sub-agents appointed by him.

MODULE – III
THE SALE OF GOODS ACT 1930
The law relating to the sale of goods or movables in India is

contained in the Sale of Goods Act,1930 which came into force
on 1st July, 1930. Prior to the enactment of the Sale of Goods
Act,1930, the law of sale of goods was contained in Chapter VII
of the Indian Contract Act 1872. The Act contains sixty-six
sections and extends to the whole of India, except the State of
Jammu andKashmir.
Contract of sale
Under Section 4 (1) of the Sale of Goods Act, 1930, the
contract of sale of goods is defined asfollows:
“A contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods to the
buyer for a price.”
A contract of sale may provide for:
a) Sale: A contract of sale may be absolute or conditional.
Where the right of ownership in the goods is transferred from
the seller to the buyer, the contract is sale.
b) Agreement to sell: Where under a contract of sale the
transfer of property in the goods is to take place at a future time
or subject to some condition thereafter to be fulfilled, the contract
is called an agreement to sell.
Essentials of a Valid Contract of Sale
1) Contract: All the essential elements of a contract must be
present in a contract of sale.

2) Two parties: There must be two parties to constitute a contract

of sale namely; a buyer and a seller. The same person cannot
both be a seller and a buyer.
3) Goods: The subject matter of a contract of sale will always
be goods. The goods may beeither existing goods, future goods
or contingent goods.
4) Transfer of property: In a contract of sale, the seller must
transfer or agree to transferproperty in the goods to the buyer.
5) Price: The consideration for a contract of sale must be money
called the price.
Distinction between Sale and Agreement to Sell
Basis Sale Agreement to Sell
1. The property or ownership The property in goods
Transfe in the goods immediately transfers onsome future
r of passes from seller to buyer. date or subject to
propert fulfillment of some
y conditions. The seller
continues to be the
owner of
goods.
2. Kinds Sale is always of existing, An agreement to sell
of specific orascertained may relate to existing
goods goods. goods, unascertained
goods and mostly to
future or contingent
goods.
3. Type Sale is an executed contract. It is an executor or future
of contract.
contra
ct

4. Risk The goods belong to the buyer The goods belong to the
even if they remain in the seller and he will suffer
possession of seller. In case the loss if goods are
of loss or damage, the buyer destroyed, even if these
will suffer the are in the possession of
loss. the buyer.
5. If the buyer fails to pay the The seller can recover
Remedy price, the seller can sue him the goods, can sue for
for breach for price, but cannot resell damages and can resell
of thegoods. the goods, but cannot
contract sue the intended buyer
for recovery of price.
6. If buyer gets insolvent The seller can recover
Insolve before he pays the price, the the goods, can sue for
ncyof seller cannot retain the goods. damages and can resell
buyer He must return the goods to the goods, but cannot
the buyer’s Official Receiver sue the intended buyer
and shall be entitled only for recovery of price.
to a reteable dividend.
7. If seller gets insolvent, the If the buyer has already
Insolve buyer can recover goods paid the price, buyer
ncyof from seller’s Official cannot recover the
seller Receiver. goods. He can only
claim reteable dividend.
CONDITIONS AND WARRANTIES
Stipulation
‘Stipulation’ means a requirement or a specified item in an
agreement”. In a contract of sale of goods, stipulation refers to
representations made by the buyer and the seller reciprocally as a
part of negotiation between them before they enter into a
contract.

Meaning of Conditions and Warranties

Condition: According to Section 12(2), a condition is a
stipulation essential to the main purpose ofthe contract, the breach
of which gives a right to repudiate the contract.
For example: B wanted to purchase a car, suitable for touring
purpose and M suggested him a ‘Burgatti’ car. B purchased the
car from M, a car dealer. After some use, car was found unfit for
thetouring purpose. Held there was a breach of condition.
Warranty: According to Section 12(3), a warranty is a stipulation
collateral to the main purpose of the contract, the breach of which
gives a right to a claim for damages but not a right to reject goods
and to treat the contract as repudiated.
For example: X purchased a car from a dealer with assured
gifts and discount schemes. Dealerdefaulted in delivery of these
schemes as intended. There is a breach of warranty.
Express and Implied Conditions and Warranties
The conditions and warranties may be express or implied.
‘Express’ conditions and warranties are those, which have been
expressly agreed upon by the parties at the time of the contract
of sale. ‘Implied conditions and warranties are those, which the
law incorporates into the contract unless theparties stipulate to the
contrary. They may be cancelled, or varied by an express
agreement or by the course of dealing or by usage and custom.
Implied Conditions
1) Condition as to title [Sec. 14 (a)]: In every contract of sale,
unless there is an agreement to the contrary, the first implied
condition on the part of the seller is that:
a) In case of sale, the seller has a right to sell the goods, and

b) In case of an agreement to sell, the seller will have the

right to sell at the time when theownership is to pass from the
seller to the buyer.
Example: If the goods can be sold only by infringing the
trademark, the seller shall be deemed to have broken the
condition that he has a right to sell the goods. [Niblett vs.
Confectioners MaterialsCo. Ltd (1921) 3KB 387]
2) Sale by description [Sec. 15]: Where there is a contract of
sale of goods by description, there isan implied condition that the
goods shall correspond with the description. This rule is based on
the principle that “if you contract to sell peas, you cannot compel
the buyer to take beans.” Theterm ‘sale by description’ includes
the following:
a) Where the buyer has never seen the goods and buys
them on the basis of the descriptiongiven by the seller.
b) Where the buyer has seen the goods but he relies not on
what he has seen but what wasstated to him and the deviation of
the goods from the description is not apparent.
c) Packing of goods may sometimes be a part of description.
d) Brand may also form part of the description.
For example: A sold B ‘a new Maruti 800 car’. On delivery,
the buyer finds that it is an old car. The buyer may reject the
sale.
3) Sale by sample [Sec. 17]: In the case of contract for the
sale of goods by sample, there is animplied condition:
a) that the goods must correspond with the sample in quality;
b) that the buyer must have reasonable opportunity of
comparing the bulk with the sample.

c) that the goods must be free from any defect which renders
them unmerchantable and which would not be apparent on
reasonable examination of the sample.
For example: A seller undertakes to supply 100 tonnes of Java
sugar warranted to be equal to the sample. The sugar when
supplied corresponds to the sample but is not Java sugar. The
buyer can repudiate the contract.
4) Sale by sample as well as description (Section 15):
Where the goods are sold by sample as well as by description,
the implied condition is that the bulk of the goods supplied
must correspond with the sample and the description.
5) Condition as to quality or fitness [Sec. 16 (1)]: Usually
in a contract of sale, there is no implied condition as to quality
or fitness of the articles for any particular purpose. It is the duty
of the buyer to see and satisfy himself whether the article will
be suitable for the purpose for which he requires them (Caveat
Emptor). Section 16 constitutes an exception to the rule of
caveat emptor in the following circumstances:
(i) the buyer makes the seller know, whether expressly or by
implication, the purpose for whichthe goods are required,
(ii) the buyer relies on the skill and judgement of the seller, and
(iii) it is the business of the seller to supply goods of that
kind in the ordinary course of hisbusiness.
For example: A contracts to make and deliver a set of false teeth
to B. The false teeth did not fitin the mouth of B. B is entitled to
reject the goods.
6) Condition as to merchantability [Sec. 16 (2)]: Where the
goods are bought by description from a seller who deals in goods
of that description (whether he is the manufacturer or producer or
not), there is an implied condition that the goods shall be of

merchantable quality.
For example: A agreed to sell B some motor horns. Goods were
to be delivered by instalments. The first instalment was accepted
but the second contained a substantial quantity of horns which
were damaged owing to bad packing. Held, the buyer was entitled
to reject the whole instalemnt, as the goods were not of a
merchantable quantity.
7) Condition as to Wholesomeness: This condition applies in
the case of provisions and foodstuffs which must not only be
merchantable but also be wholesome and suitable for
consumption.
For example: X purchased milk from Y, a milk dealer. The milk
contained typhoid germs. X’s wife, on taking the milk, got
infection and died. Held, X was entitled to get damages.
Implied Warranties
1. Warranty of quiet possession [Sec. 14 (b)]: Under the
circumstances are such as to show adifferent intention there is
an implied warranty that the buyer shall have and enjoy quiet
possession of the goods. The buyer, therefore, will be entitled
to recover compensation forbreach of both, a condition as well
as a warranty.
For example: Anil purchased a secondhand typewriter from Rahul. Anil
spent some money on its repairs but was dispossessed of it after six
months by the true owner. It was held that Anil was entitled to recover
from Rahul not only the price paid but also the cost of repair.
2. Warranty of freedom from encumbrances[Sec. 14 (c)]:
There is an implied warranty that thegoods shall be free from any
charge or encumbrance in favour of a third party not declared or

known to the buyer before or at the time when the contract is

made.
For example: A borrowed Rs. 500 from B and hypothecated his
radio with B as security. Later on A sold this radio to C who
bought in good faith. Here, C can claim damages from A because
his possession is distributed by B having a charge.
3. Warranty implied by usage of trade [Sec. 16 (3)]: An
implied warranty or condition as to quality or fitness for a
particular purpose may be annexed by the usage of trade.
For example: There was a sale of drugs by auction. It was a
trade usage to declare any seadamage in such cases. It was held
that it could be implied that drugs so sold without any such
declaration were free from sea damage.
4. Warranty to disclose dangerous nature of goods: Where
the goods are dangerous to the knowledge of the seller and the
buyer is ignorant of the same, there is an implied warranty thatthe
seller should warn the buyer about the probable danger.
For example: X sold a tin of disinfectant powder to Y, X knew
that the tin was to be opened withspecial care otherwise it might
prove dangerous. He also knew that Y was ignorant about it. He
did not warn Y. C opened the tin and his eyes were injured by the
powder. It was held that A was liable as he should have warned
Y of the probable danger.
Doctrine of Caveat Emptor
The term ‘caveat emptor’ is a Latin word which means ‘let the
buyer beware’ i.e., a buyer purchases the goods at his own risk.
The doctrine of caveat emptor means that the seller is notbound
to disclose the defects in the goods, which he is selling. It is the
duty of the buyer to satisfy him before buying the goods that the

goods will serve the purpose for which they are being bought.
Section 16 of the Sale of Goods Act has enunciated the rule of
caveat emptor as follows:
“Subject to the provisions of this Act and of any other law for
the time being in force, there is no implied warranty or
condition as to the quality or fitness for any particular purpose
of goods supplied under a contract of sale”.
Exceptions to the Doctrine of Caveat Emptor
The doctrine of caveat emptor is, however, subject to the following
exceptions:
1) Fitness for buyer’s purpose [Section 16(1)]: Where buyer
lets the seller know the particular purpose and depends on the
seller’s skill and judgement who deals in goods of that kind, the
condition is that the goods must be fit for that purpose.
2) Goods purchased under patent or brand name: In case
where the goods are purchased under its patent name or brand
name, there is no implied condition that the goods shall be fit for
anyparticular purpose.
3) Condition as to merchantability [Section 16(2)]: This
condition applies (i) where goods are sold by description, (ii) the
seller deals in those goods, and (iii) the buyer has no opportunity
to examine the goods being bought.
4) Good sold by sample as well as description [Section
15(1)]: Where the goods are sold by sample as well as by
description, the doctrine does not apply if the bulk of the goods
supplieddo not correspond with the sample and the description.
5) Goods sold by sample [Section 17]: Where the goods are
bought by sample the doctrine doesnot apply if the bulk does not
correspond with the sample.

6) Condition implied by usage or custom of trade: Where

trade usage attaches an implied condition or warranty
regarding the quality of fitness of goods for a particular
purpose, thedoctrine of caveat emptor does not apply.
7) Goods sold by Misrepresentation: Where the seller sells
the goods by making some misrepresentation or fraud and the
buyer relies on it or where the seller knowingly conceals defects
not discoverable on reasonable examination, then the rule of
caveat emptor will not apply.
TRANSFER OF OWNERSHIP (PROPERTY) IN GOODS
In a contract of sale of goods, there are three stages in the
performance of contract by a seller:
- Transfer of property in the goods;
- Transfer of possession of the goods; and
- Passing of the risk.
The expression ‘transfer of property’ means the transfer of
ownership of goods from seller to buyer so as to constitute the
buyer, the owner thereof. The time at which property passes
fromseller to buyer is important due to the following reasons:
1) Risk prima facie passes with property: Sec. 26 provides
that “unless otherwise agreed, the goods remain at the seller’s risk
until the property therein is transferred to the buyer, the goods are
at buyer’s risk whether delivery has been made or not.”
2) Action against third parties: When the goods are in any
way damaged or destroyed by theaction against them.
3) Right of resale: To determine whether buyer can resell
the goods to a third party without incurring any liability is
linked with transfer of ownership.

4) Suit for the price: Transfer of property confers upon the

seller the right to sue the buyer forprice.
5) Insolvency of the seller or the buyer: On the insolvency of
a person, the Official Receiver or Assignee takes the possession
of the property belonging to the insolvent.
Rules regarding Transfer of property
The rules for the transfer of ownership are contained in Sections
18 to 24 of the Sale of Goods Act.These rules determine the time
at which the ownership of the goods is transferred from the seller
to the buyer. As the general rule, the “transfer of ownership
depends upon the intention of both theparties”.
1) Transfer of property in case of Specific or Ascertained
Goods –
a) When goods are in deliverable state (Sec. 20): Where
there is an unconditional contract forthe sale of specific goods in
a deliverable state, the property in the goods passes to buyer
when the contract is made, and it is immaterial whether the time
of payment of the price or the time of delivery of the goods, or
both is postponed.
b) When goods are not in a deliverable state (Sec. 21):
Where there is a contract for the sale of specific goods and the
seller is bound to do something to the goods for the purpose of
putting them into a deliverable state, the property does not pass
until such thing is done andthe buyer has notice thereof.
c) When price of goods is to be ascertained (Sec. 22): Where
there is a contract for the sale of specific goods in a deliverable
state but the seller is bound to weigh, measure, test or dosome
other act or thing with reference to the goods for the purpose of
ascertaining price, the property does not pass until such thing is
done and the buyer has notice thereof.

2) Transfer of property in case of Unascertained Goods –

a) Goods must be ascertained (Sec. 18): Where there is a
contract for the sale of unascertainedgoods, no title of property in
the goods is transferred until the goods are ascertained.
b) Appropriation of goods to the contract (Sec. 23): The
term ‘appropriation’ means the process by which the goods to
be delivered under the contract are identified and set apartwith
the consent of the seller as well as buyer. The seller may
appropriate the goods in one of the following ways:
(i) By separating the contracted goods from the other with
the consent of the buyer.
(ii) By putting the contracted quantity in suitable
receptacles with the consent of the buyer.
(iii) By delivering the contracted goods to the common
carrier for transmission to the buyer without reserving the right
of disposal.
3) When goods are sold on approval (Sec. 24) – When the
goods are sent to the buyer on ‘approval’ or on ‘sale or return
basis’, the property in the goods will pass from seller to buyer
when any of the following conditions are satisfied:
a) When he accepts the goods;
b) When he adopt the transaction; or
c) When he fails to return the goods.
Sale by Non-owners
The general rule is that if a person, who has no right or title to the
goods, sold the same, the buyer, cannot obtain any right or title
to the goods which he purchased even though he may have

acted honestly and paid the value for the goods. Thus a buyer
cannot get a good title to the goodsunless he purchases the goods
from a person who is the owner thereof or who sells them under
the authority or with the consent of the owner.
This is based on the following important Latin maxim, “Nemo dat
quod non habet,” which means that ‘no one can give what he
has not got’. Section 27 of the Sale of Goods Act also provided
that “where goods are sold by a person who is not the owner
thereof and who does not sellthem under the authority or with the
consent of the owner, the buyer acquires no better title to the
goods than the seller had. . .”
Exceptions to the Rule ‘Nemo dat quod non habet’
1) Title by estoppels [Sec. 27]: When the owner of goods,
by his conduct or by statement, wilfully leads the buyer to
believe that the seller has the authority to sell, then he is stopped
(i.e.,prevented) from denying the seller’s authority to sell.
2) Sale by merchantable agent [Sec. 27 (2)]: This
exception will apply if the following conditions are satisfied:
a) The goods must have been sold by a mercantile agent;
b) He must be in possession of the goods or any document of
title to the goods with the consentof the real owner;
c) The sale should be in the ordinary course of business;
d) The buyer must act in good faith; and
e) The buyer should not have, at the time of contract, notice
that seller had no authority to sell.

3) Sale by a joint owner (co-owner) [Sec. 28]: In order to get

a valid title to the buyer who buys the goods from one of the co-
owners, the following conditions should be satisfied:
a) The co-owner must be in the sole possession of goods with
the consent of other co-owners.
b) The buyer should purchase the goods for consideration and
in good faith.
c) The buyer should not have notice or suspicion, at the
time of sale, of any defect in seller'sauthority to sell.
4) Sale by person in possession under voidable contract [Sec.
29]: when the seller of goods hasobtained possession of the goods
under a voidable contract and he sells those goods before the
contract is repudiated, the buyer of such goods acquires a good
title provided the buyer acts in good faith and without notice of
the seller's defect of title.
5) Sale by seller in possession after sale [Sec. 30 (1)]: Where
a person, having sold the goods, continues to be in possession
of the goods or of the documents of title, and sells them over
again to a buyer, the buyer gets a better title provided he has
acted in good faith and withoutnotice of the previous sale.
6) Sale by buyer in possession after sale [Sec. 30 (2)]: Where
by the buyer has bought or agreed to buy the goods, with the
consent of the owner obtains possession of the goods or
documents of title to the goods, but the seller still has some lien
or right over the goods, if the buyer sells the goods to a second
buyer, who buys them in good faith, the second buyer gets a better
title.

7) Sale by unpaid seller [Sec. 54 (3)]: Where an unpaid seller

who is in possession of goods after having exercised the right of
lien or stoppage in transit, resell the goods the buyer gets a good
title there to as against the original buyer.
8) Exceptions under the provisions of other Acts: The
following are valid transactions:
a) Sale by finder of lost goods u/s 169 of Contract Act;
b) Sale by pawnee or pledgee u/s 176 of the Contract Act;
c) Sale by an Official Receiver or Assignee in case of
insolvency of an individual and Liquidator of companies.
d) The legal maxim ‘nemo dat quod non habet’ does not apply
to negotiable instruments.
PERFORMANCE OF THE SALE OF CONTRACT
A contract of sale consists of two reciprocal promises:
(i) The seller’s duty to deliver the goods; and
(ii) The buyer’s duty to accept the goods and pay the price.
It may be noted that the delivery of goods and the payment of
their price are the concurrent conditions, i.e., both these
conditions should be performed simultaneously.
Delivery of Goods
Section 2 (2) of the Act defines, delivery to mean “voluntary
transfer of possession from one personto another.” Such voluntary
transfer can, as Sec. 33 states, be made by doing anything which
has the effect of putting the goods in the possession of the buyer
or his authorized agent.

Modes of Delivery
Delivery of goods may be made in any of the following ways:
a) Actual delivery: Where the goods are physically handed
over by the seller to the buyer, the delivery is said to be actual.
b) Symbolic delivery: Where the goods are bulky and
incapable of actual delivery, there are other means of obtaining
possession of goods are delivered by the seller to the buyer.
c) Constructive or Delivery by attornment: Where the
goods at the time of sale are in the possession of a third person,
there is no delivery by seller to buyer unless and until suchthird
person acknowledges to the buyer that he holds the goods on his
behalf.”
Rules Regarding Effective Delivery of Goods
1) Delivery and payment are concurrent conditions [Sec.
32]: The seller shall be ready and willing to give possession of
goods to the buyer in exchange for the price and the buyer shall be
ready and willing to pay the price in exchange for possession of
the goods.
2) Delivery may be either actual, symbolic or constructive [Sec.
33]: The delivery of goods must have the effect of putting the
goods in the possession of buyer or his authorized agent.
3) Effect of part delivery [Sec. 34]: A delivery of part of the
goods, in progress of the delivery of the whole, has the same
effect, for the purpose of passing the property in such goods,
as adelivery of the whole.
4) Buyer should apply for delivery [See. 35]: Apart from any
express contract the seller is not bound to make delivery until the
buyer applies for delivery.

5) Place of delivery [Sec. 36 (I)]: The goods must be delivered

at the specified place during the business hours and on a working
day. But where no place is specified in the contract, the
following rules contained in Section 36(1) shall apply:
(a) In case of sale, the goods sold are to be delivered at the
place where they are, at the time ofsale;
(b) In case of an agreement to sell, the goods are to be
delivered at the place where they are, atthe time of agreement to
sell;
(c) If at the time of agreement to sell, the goods are not in
existence they are to be delivered at a place where they are
manufactured or produced.
6) Time for delivery of goods [Sec. 36(2)]: Where under the
contract of sale the seller is bound tosend the goods to the buyer,
but no time for sending them is fixed, the seller is bound to send
them within the reasonable time. Demand for and the making
of delivery must be done at reasonable hours [Sec. 36(4)].
7) Effect of goods in possession of a third party [Sec. 36(3)]:
Where the goods at the time of sale are in the possession of a
third person, effective delivery takes place when such person
acknowledges to the buyer that he holds the goods on his behalf.
However, if goods are sold by transfer of documents to title, the
consent of third person having possession of the goods is not
required.
8) Expenses of delivery [Sec, 36(5)]: Unless otherwise agreed,
the expenses of and incidental to putting the goods into a
deliverable state must be borne by the seller.
9) Delivery of wrong quantity [Sec. 37]: "Wrong quantity" may
include short or excess delivery of goods than the agreed quantity,

and also the delivery of agreed quality mixed with another

quality. Section 37 deals with the following three cases:
a) Short delivery [Sec. 37(1)]: If the seller delivers a
quantity less than he has contracted to sell, the buyer may reject
them. But if he accepts the goods so delivered, he shall pay for
them at the contract price.
b) Excess delivery [Sec. 37(2)]: If the seller delivers a larger
quantity than he contracted to sell, the buyer has the option of
accepting the quantity as per the contract and reject the rest or he
may reject the whole. It he accepts the entire quantity, he has to
pay for the excess at the contract price.
c) Mixed delivery [Sec. 37(3)]: If the seller delivers the
goods mixed with the goods of a different description, the
buyer may accept the contracted goods or reject the whole
quantity of goods.
10) Instalment deliveries [Sec. 38(1)]: Unless otherwise agreed,
the buyer of goods is not bound to accept delivery thereof by
instalments.
11) Delivery to carrier or wharfinger [Sec. 39]: Where, in
pursuance of a contract of sale, goods are delivery to a carrier for
the purpose of transmission to the buyer or to a wharfinger for safe
custody, delivery of goods to them is prima facie deemed to be
a delivery of the goods to thebuyer. In addition to delivery to the
carrier or wharfinger, the seller has to perform the following
duties:
(a) To make a suitable contract with the carrier or wharfinger
[Sec. 39(2)]: The seller shallmake a suitable contract with carrier
or wharfinger for safe transmission or custody of goodsas may be
reasonable keeping in view the nature of goods and other
circumstances. If theseller fails to do so, the buyer may refuse

to treat the delivery to himself, or may hold theseller liable for

damages.
(b) To give notice to the buyer to enable him to insure the
goods [Sec. 39(3)]: This dutyattaches when the goods are to
be sent by a sea route.
12) Deterioration of goods during transit [Sec. 40]: Where the
seller agrees to deliver the goods at his own risk at a place
different from that where they were at the time of sale, the buyer
shall bear the risk of deterioration of goods incidental to the
course of transit.
UNPAID SELLER
According to Sec. 45 of the Sale of Goods Act, the seller of goods
is deemed to be an unpaid seller:
(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
dishonour of the instrument or otherwise.
Rights of an Unpaid Seller
An unpaid seller has two-fold rights, viz:
I. Right of an Unpaid Seller against the goods; and
II. Rights of an Unpaid Seller against the buyer personally.
I. Right of an Unpaid Seller against the goods
An unpaid seller has the following rights against the goods
notwithstanding the fact that the property in the goods has
passed to the buyer:

1. Right of lien;
2. Right of stoppage of goods in transit;
3. Right of resale.
1) Right of Lien [Sec. 47 to 49]
Lien is the right of an unpaid seller to retain the goods in his
possession and refuse to deliver them to the buyer until the full
payment of the price is made to him, or the price is offered to him.
The unpaid seller can exercise lien only in the following cases:
a) Where the goods have been sold without stipulation as to
credit;
b) Where the goods have been sold on credit but the term of
credit has expired;
c) Where the buyer becomes insolvent even though the
period of credit may not have yet expired;
d) Where the unpaid seller has delivered a part of the
goods, he may exercise his lien on the remaining part of the
goods.
Termination of Lien or Loss of Lien
An unpaid seller of goods loses his right of lien on the goods in the
following cases:
(i) By delivery to the carrier: When he delivers the goods
to a carrier or other bailee for the purpose of transmission to the
buyer without reserving the right of disposal of the goods.
(ii) By delivery to the buyer: When the buyer or his agent
lawfully obtains possession of goods, unpaid seller losses his
right of lien.

(iii) By waiver: When the seller expressly or impliedly waives

his right of lien, the right of lienis terminated.
(iv) By tender of price: Where the buyer tenders price for the
goods purchased by him, seller’s
lien is lost.
2) Right of stoppage of goods in transit [Sec. 50 to 52]
The right of stoppage in transit means the right of stopping
further transit of the goods while they are with a carrier for the
purpose of transmission to the buyer, resuming possession of them
and retaining possession until payment or tender of the price.
The right of stoppage can be exercised only when the
following conditions are satisfied:
a) The seller should be an unpaid seller;
b) The buyer must have become insolvent;
c) The seller must have parted with the possession of the
goods; and
d) The goods must be in the course of transit.
Duration of transit
The goods are deemed to be in transit from the time when they
are delivered to a carrier or other bailee for the purpose of
transmission to the buyer or his agent takes delivery of them.
Termination of transit and Right of Stoppage
The transit comes to an end in the following cases:
(i) Delivery to the buyer: When the buyer or his agent
obtains delivery of the goods before their arrival at the
appointed destination.

(ii) Interception by the buyer: When the buyer or his agent

takes delivery after the goods havereached destination.
(iii) Acknowledgement to the buyer: When the goods have
arrived at their destination and the carrier acknowledges to the
buyer or his agent that he holds the goods on his behalf.
(iv) Goods delivered to buyer’s carrier: When the goods are
delivered to a carrier, who acting as an agent of the buyer, the
transit ends as soon as the goods are delivered to the carrier.
(v) Wrongful refusal to deliver: When the carrier wrongfully
refuses to deliver the goods to the buyer or his agent.
(vi) Part delivery of goods: When part delivery of the goods
has been made to the buyer with an intention of delivering the
whole of the goods, transit will be at an end for the remainder of
the goods also which are yet in the course of the transit.
3) Right of Resale [Sec. 54]
If the buyer fails to pay or offer the price within a reasonable
time, the unpaid seller has the right to resell the goods in the
following circumstances:
a) Where the goods are of a perishable nature;
b) Where the unpaid seller has exercised his right of lien or
of stoppage in transit and gives notice to the buyer of his
intention to resell the goods;
c) Where the seller expressly reserve his right of resale.
II. Rights of an Unpaid Seller against the Buyer Personally
On breach of the contract of sale due to seller’s default, the buyer
has the following remedies (i.e.,rights) against the seller.

1) Suit for price [Sec. 55]: When the property has passed to
the buyer, and the buyer wrongly neglects or refuses to pay, the
seller can sue him for the price.
2) Suit for damages [Sec. 56]: Where the buyer wrongfully
neglects or refuses to accept and pay for the goods, the seller may
sue him for damages for non-acceptance.
3) Suit for repudiation [Sec. 60]: The repudiation of the
contract of sale by the seller before the date of delivery entitles
the buyer to treat the contract as rescinded and sue the seller for
damages for the breach.
4) Suit for interest [Sec. 61(2)]: In case of breach of contract
on the part of the buyer, while filing a suit for the price, the seller
may sue the buyer for interest from the date of the tender of the
goods or from the date on which the price was payable.

MODULE -IV
THE CONSUMER PROTECTION ACT, 1986
Objects of the Act

The Preamble to the Consumer Protection Act, 1986 reads as
under:
“An Act to provide for the protection of the interests of
consumers and for that purpose to make provision for the
establishment of Consumer Councils and other authorities for the
settlement of consumer’s disputes and for matters connected
therewith.”
The rights given to the consumers under the Act are based on
the basic rights as defined by the International Organization of
Consumers (IOCU) i.e., the Rights to Safety, Information, Choice,
Redressal, Hearing, Education and Healthy environment.
Scope and Applicability
The Consumer Protection Act, 1986 extends to the whole of India
except the State of Jammu and Kashmir. It applies to all types
of goods and services, public utilities and public sector
undertakings. Complaints of all types whether relating to goods,
services or unfair trade practices have been brought within the
purview of the Act. The provisions of the Act are in addition to
andnot in derogation of provision of any law for the time being in
force (Sec. 3).
The Act may be regarded as a highly progressive social welfare
legislation which provides more effective protection to the
consumers than any corresponding legislations.

Definition of Terms Complainant [Sec. 2 (l) (b)]

The person who can make a complaint before a Consumer
Redressal Forum may be:
i. a consumer, or
ii. any voluntary consumer association registered under the
Companies Act, 1956 or under any other law for the time being
in force, or
iii. the Central or State Government, or
iv. one or more consumers, where there are numerous
consumers having the same interest,or
v. in case of death of a consumer, his legal their or
representative.
The persons falling within the ambit of Section 2 (l) (b) are
considered complainants and have a locus standi to file" a
complaint under the Act. A public cause can be taken up by an
association in the form of public interest litigation.
Complaint [Sec. 2 (1) (c)]
It means a written allegation by a complainant that:
i. An "unfair trade practice or a "restrictive trade practice" has
been provided by any trader orservice provider,
ii. The goods bought by him or agreed to be bought by him,
suffer from one or more 'defects'.
iii. The services hired or availed or agreed to be hired or
availed of by him suffer from "deficiency in any respect;
iv. A trader or the service provider has charged for the goods
or for the service mentioned in the complaint, a "price in excess"
of the price:
a) fixed by or under any law for the time being in force

b) displayed on the goods or any package containing such
goods;
c) displayed on the price list established by him or under
any Jaw for the time being in force;
d) agreed between the parties;
v. Goods which will be 'hazardous to life and safety' when
used, are being offered for sale to thepublic:
a) in contravention of any standards relating to safety
of such goods as required to becomplied with by or under any
law for the time being in force;
b) if the trader could have known with due diligence that
the goods so offered are unsafeto the public;
vi. Services which are hazardous or are likely to be
hazardous to life and safety of the public when used, are being
offered by the service provider which such person could have
knownwith due diligence to be injurious to life and safety.
Consumer [Sec. 2 (1) (d)]
A consumer means:
(i) any person who buys any goods for a consideration which
has been paid or promised or partly paid and partly promised, or
under any system of deferred payment, and includes any person
who uses such goods with the approval of the buyer. It does not
include a person who buys goods for resale or for any
commercial purpose; or
(ii) any person who hires or avails any services for a
consideration which has been paid or promised or partly paid

and partly promised, or under any system of deferred payment,

and includes any person who is a beneficiary of such services
with the approval of the hirer. It does not include a person who
avails of such services for any commercial purpose.
Consumer Dispute [Sec. 2(1) (e)]
Consumer Dispute means “dispute, where the person against
whom a complaint has been made, denies or dispute the
allegation contained in the complaint”.
The allegations referred to may relate to any unfair trade practices
adopted by a trader, or any defects in goods or any deficiency in
services or against charging exorbitant price.
Defect [Sec. 2 (1) (f)]
Defect means ''any fault, imperfection or shortcoming in the
quality, quantity, potency, purity or standard which is required to
be maintained by or under any law for the time being force, or
under any contract, express or implied or as is claimed by the
trader, in any manner whatsoever in relationto any goods".
Imperfection or shortcoming as claimed by the trader is to be
determined with reference to the warranties or guarantees
expressly given by a trader.
Deficiency [Sec. 2 (1) (g)]
Deficiency means "any fault, imperfection, shortcoming or
inadequacy in the quality, nature and manner of performance
which is required to be maintained by or under any law for the
time being in force, or has been undertaken to be performed by a
person in pursuance of a contract or otherwise in relation to any
service".

Goods [Sec. 2 (1) (i)]

Goods means “every kinds of movable property other than
actionable claim 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”.
Services [Sec. 2 (1) (o)]
Service means “service of any description which is made
available its potential users and includes but not limited to the
provision of facilities in-connection with banking, financing,
insurance, transport processing supply of electrical or other
energy, board or lodging or both, housing construction,
entertainment, or the purveying of news or other information but
does not include the rendering of any service free of charge or
under a contract of personal service”.
Unfair Trade Practices [Sec. 2 (1) (r)]
Unfair Trade Practice means a trade practice which, for the
purpose of promoting the sale, use orsupply of any goods or for
the provision of any services, adopts any unfair method or
unfair or deceptive practice. The following six categories of such
practices have been declared as unfair tradepractices:
(1) False Representation and Misleading
Advertisements[Sec. 2 (1) (r) (1)]:
a) False representation as to standards, etc., of goods: It
consists of a written, oral or visible representation which falsely
represents the goods to be of particular standard, quality,
quantity, grade, composition, style or model.
b) False representation as to standard, etc., of services:
It consists of making false representation as to standard,
quality or grade of service such as an assertion about

professional qualifications which one does not possess. [R vs.
Breeze (1973) 2 All ER 1143].
It may also consist of falsely representing any rebuilt, second-
hand, renovated or reconditioned goods as new.
c) Making false representation as to sponsorship, approval,
performance, characteristics, accessories, users or benefits of
such goods or services.
d) Misleading representation concerning the need for
usefulness, etc., of any goods or services: It may consist of
giving the public any warranty or guarantee of performance, etc.,
of any goods that is not based on adequate or proper test; or
misleading promise to replace, maintain or repair an article, etc.,
e) Misrepresentation as to price.
f) Disparagement of goods, services or trade of others.
(2) False offer of Bargain Price [Sec. 2 (1) (r) (2)]:
Explanation appended to sub-clause (2)has defined ''bargain price
to mean:
a) a price that is stated in any advertisement to be a
bargain price by reference to an ordinary price or otherwise, or
b) a price that a person who reads, hears or sees the
advertisement, would reasonably understand to be a bargain
price having regard to the prices at which like products aresold.
(3) Offer of Gifts, prizes, etc., [Sec. 2 (1) (r) (3)]: This
type of unfair trade practice may consist of:
a) Offer of any gifts or other items with the intention of not
providing them.

b) Creating an impression that something is being given

free of charge when it is fully or partly covered by the amount
charged in the transaction,
c) Conducting of any contest, lottery, game of chance or
skill for the purpose of promoting
- directly or indirectly - the sale, use or supply of any product or
any business interest.
(4) Withholding any scheme [Sec. 2 (1) (r) (3A)]: It will
be an unfair trade practice for a trader to withhold from the
participants of any scheme offering any gifts, etc., information
about final results of the scheme on its closure. The participants
are deemed to have been informed of the final results of the
scheme if the results are published prominently in the
newspaper in which the scheme was originally advertised within
a reasonable time.
(5) Sale or supply of goods not complying with prescribed
standard [Sec. 2 (1) (r) (4)]: Theprescribed standards may relate
to performance, composition, contents, design, packaging, etc., as
are necessary to prevent or reduce the risk of injury to the person
using the goods.
(6) Hoarding destruction or refusal to sell [Sec. 2 (1) (r)
(5)]: Hoarding, destruction or refusal to sell the goods which
raises or tends to raise the cost of those or other similargoods
or services shall amount to an unfair trade practice.
(7) Manufacturing or sale of spurious goods [Sec. 2 (1)
(r) (6)]: 'Spurious goods and services' means such goods and
services which are claimed to be genuine but are not so.
Restrictive Trade Practices [Sec. 2 (1) (nn)]
Restrictive Trade Practice means a trade practice which tends to
bring about manipulation of price,or its conditions of delivery or

to affect flow of supplies in the market relating to goods or in such
a manner as to impose on the consumers unjustified costs or
restrictions and shall include:
a) delay beyond the period agreed to by a trader in supply
of such goods or in providing the services which has led or is
likely to lead to rise in the prices.
b) any trade practice which requires a consumer to buy, hire
or avail or any goods or services as a condition precedent to
buying, hiring or availing of other goods or services.
Rights of Consumers
According to Section 6 of the Consumer Protection Act, the
following rights are available toconsumers.
1) Right to be protected or right to safety: Every consumer
has the right to be protected against the marketing of goods and
services which are spurious or hazardous to life and property.
2) Right to be informed: The right to be informed about the
quality, quantity, potency, purity, standard and price of goods or
services as the case may be, so as to protect the consumers
against unfair trade practices.
3) Right to be assured/choose: Every consumer has a right to
be assured, wherever possible, access to a variety of goods and
services at competitive prices.
4) Right to be heard: The right to be heard and to be assured
that consumers interest will receive due consideration at
appropriate forums.
5) Right to seek redressal: The right to seek redressal against
unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers.

6) Right to consumer education: The responsibility of

creating awareness amongst the consumers has been assigned
to the Central Consumer Protection Council.
7) Right to Basic Needs: The basic needs mean those goods
and services which are necessary for a dignified living of people.
It includes adequate food, clothing, shelter, energy, sanitation,
health care, education and transportation. All the consumers have
the right fulfil these basic needs.
8) Right to healthy environment or quality of life: This
right provides the consumers, protection against environmental
pollution so that the quality of life is enhanced. Not only this, it
also stresses the need to protect the environment for the future
generations as well.
Consumer Protection Councils
The Consumer Protection Councils are established at Central
Level, State Level and District Level. These councils work
towards the promotion and protection of the rights of the
consumers. They give publicity to the matters concerning
consumer interests; take necessary steps for consumer
education and protecting consumers from exploitation.
Central Consumer Protection Councils
Section 4 provides that:
(1) The Central Government shall, by notification, establish a
council to be known as the Central Consumer Protection Council
(hereinafter referred to as the Central Council).
(2) The Central Council shall consist of the following members,
namely:
a) the Minister-in-charge of Consumer Affairs in the
Central Government, who shall be itsChairman, and

b) such number of other official or non-official members

representing such interests as maybe prescribed.
State Consumer Protection Councils
Section 7 provides that:
(1) The State Government shall, by notification, establish a
council to be known as the StateConsumer Protection Council
(hereinafter referred to as the State Council).
(2) The State Council shall consist of the following members,
namely:
a) the Minister-in-charge of Consumer Affairs in the
State Government, who shall be its Chairman, and
representing such interests as may be prescribed by the State
Government.
c) such number of other official or non-official members,
not exceeding 10, as may be nominated by the Central
Government.
(3) The State Council shall meet as and when necessary but not
less than 2 meetings shall be heldevery year.
(4) The procedure to be observed in regard to the transaction of
its business at such meetings shall prescribed by the State
Government.
District Consumer Protection Council
Section 8-A provides that:
(1) The State Government shall establish for every district, by
notification, a council to be known as the District Consumer

Protection Council (hereinafter referred to as the District Council).

(2) The District Council shall consist of the following members,
namely:
a) the Collector of the District (by whatever name called),
who shall be its chairman; and
representing such interests as may be prescribed by the State
Government.
(3) The District Council shall meet as and when necessary but
not less than 2 meetings shall beheld every year.
(4) The procedure to be observed in regard to the transaction of
its business at such meetings shall prescribed by the State
Government.
Consumer Disputes Redressal Agencies
Consumer Protection Act, 1986 has set up a three-tier quasi-
judicial redressal machinery for expeditious and inexpensive
settlement of consumer disputes. It is an active to the ordinary
process of instituting actions before a civil court. According to
Section 9, there shall be established for the purpose of the Act,
the following agencies, namely:
 Consumer Disputes Redressal Forum to be known as
the “District Forum”. The State Government shall establish a
District Forum ach district of the state. However, more than one
District Forum may be established strict if it is deemed fit.
 State Consumer Disputes Redressal Commission
(SCDRC) to be known as “State Commission”. This is also to
be established by the State Government in the state by
notification.

 National Consumer Disputes Redressal Commission

(NCDRC) to be known as “National Commission”. This is to be
established by the Central Government by notification.
District Forum
The District Forum shall have jurisdiction to entertain complaints
where the value of goods andservices complained against and the
compensation claimed, if any, is less than Rs. 20 Lakhs.
Composition of District Forum
According to Section 10 (1), each District Forum shall consist of
the following:
a) President: He shall be a person who is, or has been or is
qualified to be a District Judge.
b) Members: There shall be two other members, one of whom
shall be a woman. A member must have the following
qualifications:
(i) be not less than 35 years of age;
(ii) possess a bachelor's degree from a recognized university;
(iii) must be a person of ability, integrity and standing and have
adequate knowledge and experience of at least 10 years in
dealing with problems relating to economics, law, commerce,
accountancy, industry, public affairs, or administration.
Jurisdiction
The District Forum shall have jurisdiction to entertain
complaints where the value of goods and services and the
compensation, if any claimed, does not exceed Rs. 20 Lakhs. A
complaint shall befiled in district forum within the local limits of
whose jurisdiction the opposition party (or parties) reside or carry

on business or the cause of action has arisen.

The complaint may be filed by any of the following persons:
 The consumer concerned;
 Any recognized consumer association;
 One or more consumers for the benefit of all consumers;
 The Central or the State Government.
State Commission
The State Commission shall have jurisdiction for such
complaints and claims if the value thereof isexceeding Rs. 20
Lakhs but not exceeding Rs. 1 Crore.
Composition of State Commission
According to Section 16 (1), each State Commission shall consist
of the following:
a) President: He shall be a person who is or has been a judge of
the High Court. His appointment shall not be made except after
consultation with the Chief Justice of the High Court.
b) Members: There shall be not less than two or not more than
such number of members as may be prescribed, who shall be the
person of ability, integrity and standing and have adequate
knowledge or experience of at least 10 years in dealing with
problems relating to economics, law, commerce, accountancy,
industry, public affairs, or administration, one of whom shall be a
women.
Jurisdiction
The State Commission shall have the jurisdiction:

(i) to entertain:
 complaints where the value of the goods or
services and compensation, if any claimed exceeds rupees 20
Lakhs but does not exceed rupees one crore; and
 appeals against the orders of any District Forum
within the State; and
(ii) to call for the records and pass appropriate orders in any
consumer dispute which is pendingbefore or has been decided by
any District Forum within the State, where it appears to theState
Commission that such District Forum has exercised a jurisdiction
not vested in it by law, or has failed to exercise a jurisdiction so
vested or has acted in exercise of its jurisdiction illegally or
with material irregularity.
National Commission
The National Commission shall have jurisdiction for complaints
and claims of the value exceedingRs. 1 Crore.
Composition of National Commission
Section 20 (1) provides that the National Commission shall
consists of:
a) President: He shall be a person who is or has been judge of
the Supreme Court, to be appointed by the Central Government
(in-consultation with the Chief Justice of India.
b) Members: There shall be not less than four and not more than
such number of members as may be prescribed, possessing the
qualifications as are prescribed for a member of the State
Commission.

Jurisdiction
The National Commission shall have the jurisdiction: (iii)to
entertain:
 complaints where the value of the goods or services
and compensation, if any claimed exceeds rupees one crore;
and
 appeals against the orders of any State Commission; and
(iv)to call for the records and pass appropriate orders in any
consumer dispute which is pending before or has been decided
by any State Commission where it appears to the National
Commission that such State Commission has exercised a
jurisdiction not vested in it by law, or has failed to exercise a
jurisdiction so vested, or has acted in exercise of its jurisdiction
illegally or with material irregularity.
Manner of Making the Complaint who can file a complaint?
(Sec. 12]
The following may file a complaint before the District Forum:
(a) the consumer to whom the goods are sold or delivered, or
agreed to be sold or delivered, orthe service has been provided,
or agreed to be provided
(b) any recognized consumer association, regardless of whether
the consumer is a member of such association or not,
(c) one or more consumers, where there are numerous
consumers having the same interest with the permission of the
District Forum on behalf of or for the benefit of all consumers
so interested,
(d) The Central or State Government, either in its individual

capacity or as a representative of the interests of consumers in

general.
Every complaint shall be accompanied with such amount of fee
and payable in such manner as may be prescribed. The District
Forum may, on receipt of the complaint, allow it to be proceeded
with or rejected. However, the complaint shall not be rejected
unless an opportunity of being heard has been given to the
complainant. The admissibility of the complaint shall ordinarily
be decided within 21 days of its receipt. On its admission, the
complaint shall not be transferred to any other court or tribunal
or any other authority. In case a consumer cannot file the
complaint due to ignorance, illiteracy or poverty, any recognized
consumer association may be file a complaint.
Procedure on Receipt of Complaint [Sec 13]
[A] Complaints where laboratory testing is possible or
required [Sec. 13 (1)]
(i) Referring a copy of complaint to the opposite party:
Within 21 days of admission of complaint, a copy thereof shall
be referred to the opposite party mentioned in the complaint,
directing him to file his version of the case within 30 days or such
extended period not exceeding
15 days. If the opposite partly admits the allegations contained in
the complaint, the matter will be decided on the basis of
materials on the record.
(ii) Denial of allegations or failure to take action to
represent the case by the opposite party: Where the opposite
party denies or disputes the allegations contained in the complaint,
or omits orfails to take any action to represent his case within the
specified time, the dispute will be settled asfollows:

a) Reference of sample to appropriate laboratory: Where the

complaint alleges a defect in the goods which cannot be
determined without proper analysis or test of the goods, a sample
of the goods shall be obtained from the complainant, sealed,
and authenticated in the prescribed manner. The sample shall be
referred to appropriate laboratory for analysis or test. The report
of the appropriate laboratory shall be sent to the referring
authority (DistrictForum or State Commission) within 45 days of
receipt of reference or within the extended period prescribed by
the District Forum.
b) Deposit of fees by complainant for payment to appropriate
laboratory: The complainant shall deposit the fee to the credit of
District Forum. The amount so deposited shall be remitted to
the appropriate laboratory.
c) Forwarding of report of analysis or test to the opposite
partly.
d) Objections to the laboratory/test report: If any of the
parties disputes the correctness of the methods of analysis/ test
adopted by the appropriate laboratory, the concerned partly will
be required to file his objections in writing in regard thereto.
e) Providing reasonable opportunity of hearing to the
parties: Both the parties shall be provided with a reasonable
opportunity of being heard as to correctness or otherwise of the
report made by the appropriate laboratory and the objections made
in relation thereto. After such hearing, appropriate orders shall
be made under Section 14.
[B] Complaints relating to services, i.e., where laboratory
testing is not possible or required [Sec. 13(2)]
(i) Reference of complaint to opposite party: The opposite
party is directed to give his version within 30 days or an

extended period of 15 days.

(ii) Denial or disputing of allegation or failure of opposite
party to take action to represent his case: In such a case, the
District Forum shall proceed to settle the consumer dispute as
under:
(a) on the basis of evidence brought to its notice by the parties
to the dispute; or
(b) decide the matter ex parte on the basis of evidence
brought to its notice by thecomplainant;
(c) on failure of complainant to appear on the date of hearing,
either to dismiss the complaintfor default or decide it on merits.
A proceeding complying with the above procedure cannot be
called in question on the ground thatprinciples of natural justice
have not been complied with.
Nature and Scope of Remedies under the Act [Sec. 14]
In case the goods complained against suffer from any defect
specified in the complaint, or any of the allegations contained in
the complaint about the services are proved the District
Forum/State Commission/National Commission may pass one or
more or the following orders:
(1) to remove the defects pointed out by the appropriate
laboratory from all the goods in question;
(2) to replace the goods with new goods of similar description
which shall be free from any defect;
(3) to return to the complainant the price or the charges paid by
him;
(4) to pay such amount, may be awarded by it as

compensation to the consumer for any loss orinjury suffered by

the consumer due to the negligence of the opposite party.
(5) to remove the defects m goods or deficiencies m the services
in question;
(6) to discontinue the unfair trade practice or the restrictive trade
practice or not to repeat them;
(7) not to offer the hazardous goods for sale;
(8) to withdraw the hazardous goods from being offered for sale;
(9) to cease manufacture of hazardous goods and to desist
from offering services which are hazardous in nature;
(10) to issue corrective advertisement to neutralize the effect of
misleading advertisement at the cost of opposite party
responsible for issuing such misleading advertisement; to
provide for adequate costs to the parties.

MODULE – V
LIMITED LIABILITY PARTNERSHIP ACT 2008
Limited liability partnership

Limited liability partnership is a combination of both partnership and
corporation. It has the features of both these forms. This form of
business becomes very popular now a days as many entrepreneur
are opting this. All limited liability partnership is governed under the
limited liability partnership act 2008. However in india LLP was
introduced in april 2009.
This form of organization would be quite useful for small and medium
enterprises in general and for the enterprises in service sector in
particular. Internationally, it is a common type of business
particularly for service industry or for activities involving
professionals.
Limited liability partnership Act: as per the Act, LLP means a
partnership formed and registered under the act. This act extends to
the whole of india. Generally and LLP is a corporate business vehicle
that enables professional expertise and entrepreneurial initiative to
combine and operate in flexible, innovative and efficient manner,
providing benefits of limited liability while allowing its members the
flexibility for organizing their internal structure as partnership.
Salient features or nature and characteristics
1. Legal entity: the LLP shall be a body corporate formed and
incorporated under the LLP Act 2008, and is a legal entity separate
from that of its partners. Any two or more persons, associated for
carrying on a lawful business with a view to profit, may be
subscribing their names to an incorporation document and filing
the same with the registrar, from a limited liability partnership.

2. Continuous existence: an LLP shall have perpetual

succession. Any change in the partners of LLP shall not affect the
existence, rights and liabilities of the LLP.
3. Number of partners: every LLP shall have atleast two
partners and shall also have atleast two individuals as designated
partners of whom at least one shall be resident in india. There is
no maximum limit to the number of partners are concerned.
4. Type of partners: any individual or body corporate may be
a partner in LLP.
5. Rights and duties of partners: mutual rights and duties of
the partners are governed by the agreement between the partners or
between the LLP and the partners subject to theprovisions of the
LLP Act 2008.
6. Partners as agent: every partner of a LLP is for the purpose
of the business of the LLP, the agent of the LLP but not of other
partner.
7. Limited liability: the liability of the partners of LLP are
limited only the amount contributed by them. No partners will be
individually liable for any wrongful acts of other partners.
8. Name of the firm: every LLP shall use the words
“limited Liability partnership or its acronym “LLP” as the last
words of its name.
9. Financial disclosure: every LLP is under an obligation
to maintain annual account reflecting true and fair view of its state
of affairs. A statement of accounts and solvencymust be filed with
the registrar every year.
10. Winding up: an LLP may be wound up either voluntary
or by the tribunal and an LLPso wound up may be dissolved.

Formation: an LLP is a body corporate formed and incorporated

under the LLP Act, 2008.It has legal entity separate from that of
its partners and have perpetual succession. Every limited
partnership shall have at least two partners and there is no
maximum limit. Any individual or body corporate may be a
partner in a limited liability partnership. The following entities
and /or persons can become a partner in the LLP.
a. An LLP incorporated in and outside india.
b. A company incorporated in and outside india.
c. Individuals resident in and outside india.
An individual shall not be capable of becoming a partner in a
limited liability partnership if
a. He has been found to be of unsound mind by a court of
competent jurisdiction and thefinding is in force.
b. He is an undischarged insolvent
c. He has applied to be adjudicated as an insolvent and his
application is pending
Capital contribution
In case of LLP, there is no concept of any share capital, but every
partner is required tocontribute towards the LLP in some manner as
specified in the LLP agreement. The contribution of the partner may
consist of tangible, movable or immovable or intangible property
or other benefit to the LLP including money, promissory notes,
other agreements to contribute cash orproperty, and contracts for
services performed or to be performed.

LLP agreement
LLP means any written agreement between the partners of the
limited liability partnership or between the limited liability
partnership and its partners which determines the mutual rights
and duties of the partners and their rights and duties in relation to
that limited liability partnership. So the agreement contains name
of LLP, name of partners and designated partners, form of
contribution, profit sharing ratio and rights and duties of partners.
Partners and designated partners
Partners in relation to a limited liability partnership means any
person who becomes apartner in the limited liability partnership
in accordance with the limited liability partnershipagreement. And
every limited liability partnership shall have at least two partners; and
shall also have atleast two individuals as designated partners of
whom at least one shall be resident in india. “designated partners”
means a partner who is designated as such in the incorporation
documents or who becomes a designated partner by and in
accordance with the LLP agreement.
In case of an LLP in which all the partners are bodies corporate or in
which one or more partners are individuals and bodies corporate,
at least two individuals who are partners of such limited liability
partnership or nominee of such body corporate shall act as
designated partners. Every designated partners shall obtain a
designated partner identificationnumber (DPIN) from the central
government and for this the provisions of the Companies Actalso
is applicable.
Incorporation by Registration
In order to incorporate an LLP, two or more persons associated
for carrying on a lawful business with a view to profit shall
subscribe their names to an incorporation document. It shall be

filed with the prescribed fees, and in the manner prescribed by the
Registrar of the state where the registered office of the LLP is
situated. A statement in the prescribed form should also be filed
along with the incorporation document, which states that all
the requirements of the Act and Rules have been complied with
in the case of incorporation. The statement should be made by
either an advocate or a company secretary or a chartered
accountant or a cost accountant, who is engaged in the formation of
the LLP and by anyone who subscribed his name in the
incorporation document. The incorporation document contains the
following matters.
a) the name of the limited liability partnership;
b) the nature of the proposed business;
c) the address of the registered office;
d) the name and address of the partners
e) the name and address of the designated partners;
f) other matters incidental thereto.
When all the formalities are complied with the Registrar will
register the LLP in the name specified there in. Every LLP shall
have either the words "limited liability partnership orthe acronym
"LLP as the last words of its name. The name selected shall not be
undesirable inthe opinion of the Central Government or identical
or too nearly resemble to that of any othepartnership firm or limited
liability partnership or body corporate or a registered trade mark, or a
trade mark which is the subject matter of an application for
registration of any other person under the Trade Marks Act,
1999.
Effect of Registration: On registration, an LLP shall, by its name, be
capable of

a) Suing and being sued

b) Acquiring ,owing , holding and developing or disposing of
property, whether movable orimmovable, tangible or intangible
c) Having a common seal, if it decides to have one: and
d) Doing and suffering such other acts and things as body
corporate may lawful do andsuffer
Penalty for improper use of words “limited liability
partnership” or “LLP”
If any person or persons carry on business under any name or title of
which the words “limited liability partnership” or “LLP” or any
contraction or imitation thereof is or are the last word or words, that
person or each of those persons shall, unless duly incorporated as
limitedliability partnership, be punishable with fine which shall be
less than fifty thousand rupees but which may extended to five
lakh rupees.
Partners and their relation
On the incorporation of an LLP the person who subscribed
their names to the incorporation document shall be its partners
and any other person can become a partner according to the LLP
agreement. The rights and duties of the partners, and the
partnership and the partners are according to the terms and
condition of the partnership agreement between the partners or
between the LLP and its partners.
Cessation of partnership interest
A person may cease to be a partners of LLP in accordance with
agreement with the other partners or , in the absence of agreement
with the other partner as to cessation of being apartner, by giving
a notice in writing of not less than thirty days to the other partners
of his intention to resign as partner.

a person shall cease to e a partner in the following circumstances

also
a. On his death or dissolution of the LLP. Or
b. If he is declared to be of unsound mind by a competent court,
or
c. If he has applied to be adjudged as an insolvent or declared
as an insolventThe ceased partner is referred as a former partner of
LLP
Liability of a former partner
The former partner is to be regarded as still being a partner of the
LLP in relation to anyperson dealing with the LLP unless
a. The person has notice that the former partner has ceased to
be a partner of the LLP or
b. Notice that the former partner has ceased to be a partner of
the LLP has been delivered tothe Registrar.
The former partner also is responsible for all the obligation of the
partnership during the period of his partnership.
Rights of a former partner
Where a partner of an LLP ceases to be a partner, unless otherwise
provided in the LLP agreement, the former partner or a person
entitled to his share in consequence of the death or insolvency of the
former partner, shall be entitled to receive from the LLP.
A. An amount equal to the capital contribution of the former
partner actually made to theLLP; and
B. His right to share in the accumulated profits of the
LLP, after the deduction of accumulated losses of the LLP,
determined as at the date the former partner ceased to bea partner.
Extent and liability of LLP and partners

1. Every partner of an LLP is treated as the agent of the LLP
but not of other partners forthe purpose of doing the business.
2. An LLP Is not bound by anything done by a partner in
dealing with a person if
a. The partner in fact has no authority to act for the LLP in doing a
particular act: and
b.The person knows that he has no authority or does not know or
believe him to be a particular of the LLP
3. The LLP is liable if a partner of an LLP is liable to any
person as a result of a wrongful act or omission on his part in the
course of the business of the LLP or with its authority.
4. An obligation of the LLP whether arising in contract or
otherwise, shall be solely theobligation of the LLP.
5. The liability of the LLP shall be met out of the property of
the LLP
6. A partner of an LLP shall not be personally liable for the
wrongful act or omission of any other partner of the LLP.
7. Any person, who by words spoken or written or by
conduct, represents himself or knowingly permits himself to be
represented to be a partner in an LLP is liable to anyperson who
extends credit to the LLP. the LLP also is liable for such credit
received bythe firm.
8. Where after a partners death the business is continued in
the same LLP’s name, the continued use of that name or of the
deceased partners name as a part thereof shall not be of itself make
his legal representative or his estate liable for any act of the LLP
done after his death.

Unlimited liability in case of Fraud

If any act is done or carried out by the LLP or any of its partners
with the intent to defraud the creditors of the LLP, the liability of
the partners and LLP becomes unlimited for all or any of the debts
or other liabilities of the LLP. even if the act is done by the partner,
the LLP is liable to the same extent as the partner, unless it is
established by the LLP that such act waswithout the knowledge or
the authority of the LLP. for this act, the partner or partners are
alsobe punishable with imprisonment for a term which may extent to
two years and with fine which shall not be less than fifty thousand
rupees but which may extend to five lack rupees.
Assignment and transfer of partnership rights
The right of a partner to a share of the profits and losses of the
LLP and to receive distribution in accordance with the LLP
agreement are transferable either wholly or in part, provided such
transfer does not causes any disassociation of partners or a
dissolution and winding up of the LLP. but such transfer does not
give any right to the transferee or assignee to participate in the
management or conduct of the activities of the LLP or access
information concerning the transactions of the LLP.
Conversion into limited liability partnership
A firm, private company or an unlisted public company is allowed to
be converted into LLP in accordance with the provisions of the act.
Upon such conversion, on and from the date of certificate of
registration issued by the registrar, all tangible and intangible
property vested in the firm or the company: all assets, interest, rights
, privileges, liabilities, obligations relating to the firm or the
company and the whole of the undertaking of the firm or the
company shall be transferred to and shall vest in the LLP without
further assurance , act or deed and the firm or the company shall
be deemed to be dissolved and removed from the records of the
registrar offirms or registrar of companies, as the case may be.

Distinction between LLP and partnership
Features LLP Partnership

1. Formation Formed as per LLP For as per the
act 2008Registration partnership act
is compulsory act1932
2. Registration with the registrar of Not compulsory but

companies an unregistered
partnership won’t
have the ability to
sue.
3. Legal entity A separate legal Not a separate legal
entity entity
4. Perpetual Comes to an end at
succession LLP has a perpetual the death, retirement
succession or insolvency of the
partners.
5. Capital Not mentioned Not mentioned
contribution
6. Number of Minimum two and Two to twenty
partners there is no partners
maximum limit
7. Name Name the end word No rules for the name.
limitedliability
partnership or the
acronym LLP
8. Liability Limited to the extent Unlimited liability and
of thecontribution to personal property of
the LLP. the partners are liable
for the debtsof the
firm.

9. Foreign Foreign nationals can Foreign national

nationals as bepartners. cannot form
partners partnership firm.
10. Annual Annual statement of No necessity of filing
return accountsand annual returnsto the registrar
returns has to be of firms.
filed with the ROC.
11. Meeting Not required Not required
12. Dissolution Voluntary or by By agreement of the
order of thetribunal partnersinsolvency or
by court order.
Distinction between LLP and company
Features Company LLP

Formation Formed as per the Formed by the limited
companies act 2013 liability partnership
and various rules act 2008 and various
made there under rules made therunder
Registration Registration is Registration is
compulsoryand it is compulsorywith the
registered with the registrar of
registrar of companies
companies who
issues the
certificate of
incorporation
Legal entity A separate legal A separate legal entity
entity
Perpetual Company has a LLP has a
succession perpetual perpetual succession
succession

Capital The minimum and Not specified

maximum amount of
paid up capital of
public and private
companies are
clearly be specified
in thecompanies act
Minimum number Two in the case of a Minimum two partners
of members private company
and seven in the
case of a public
limited company
Maximum Maximum 200 in the No limit to the
numberof case of a private maximumnumber of
members company and there is partners
no maximum limit for
a publiccompany
Name Public company uses Use either the word
the word ltd at its end limited liability
name and private partnership or the
company use the Acronym LLP at its
word pvt.ltd at its end name.
end name
Liability Limited to the Limited to the
extent of thevalue extent of the
of shares contribution to the
LLP.
Minimum number Minimum two in the Minimum tow
of directorsor case of a private designatedpartners
partners company and three required
inthe case of a public
company

Memorandum of Very important No such document

associationand documents which but LLPagreement
articles of mentions everything
association about the company
Transferability of Shares of public Rights and interest of
interest company are partners are
transferable, but share transferable
transfer is restricted according to the LLP
in private company Agreeement.
Winding up and dissolution

The winding up of an LLP may be either voluntary or
by the tribunal and LLP, so wound up maybe dissolved.
Voluntary winding up
Any LLP may be wound up voluntarily if the LLP passes
a resolution to wind up theLLP with approval of at least three
fourth of the total number of its partners, but if the LLP has
creditors, whether secured or unsecured, the approval of such
creditors are also be required forits winding up. A copy of the
resolution shall be filed with the registrar within third party
days of passing of such resolution. The voluntary winding up
shall be deemed to commence on thedate of the resolution for
voluntary winding up.
The tribunal may woundup the LLP in the following
circumstances
1. If the LLP decides that the LLP be wound up by the tribunal
2. If for a period of more than six months, the number of
partners of the LLP is reducedbelow two;
3. If the LLP is unable to pay its debts

4. If the LLP has acted against the interests of the

sovereignty and integrity of india, the security of the
state or public order.
5. If the LLP has made a default in filing with the registrar
the statement of account andsolvency or annual return for
any five consecutive financial year; or
6. If the tribunal is of the opinion that, it is just and equitable
that the LLP be wound up.
Advantages of LLP
1. Easy formation
2. Separate legal entity
3. Limited liability
4. Perpetual succession
5. Combined benefit of partnership and company
6. Flexibility
7. Easy transferability of ownership
8. Lower rate of taxation
Disadvantages
1. Public disclosure
2. Less credibility
3. Retaining profit
4. Unlimited liability
5. Joint liability


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BUSINESS REGULATIONS

(2019 ADMISSION ONWARDS)

STUDY MATERIAL THIRD SEMESTER

BCM3 B03 : BUSINESS REGULATIONS

"The author(s) shall be solely responsible for

MODULE III - 124

MODULE –IV - 147

Sources of Business Law

c) The contracts of bailment and agency,

are contracts if they are made by the free consent of parties

For example: An illiterate woman executes a deed of gift

7. Not expressly declared void: The agreement must not have

9. Certainty of meaning: The terms of the agreement must be

1. On the basis of Enforceability

d) Voidable Contract: According to Section 2(i), "An

sum of Rs. 500. B accepts A’s offer by a telegram. The contract

contract in which only one party has to perform his promise or

Distinction between Void Agreement and Voidable Contract

Basis of Void Agreement Voidable Contract

OFFER AND ACCEPTANCE

According to Section 2 (a) of the Indian Contract Act, 1872 defines

4. The offer must be made with a view to obtaining the

10. The offer may be express or implied: An offer which is

offer. The offer which is expressed by conduct, it is called an

6. Counter offer: A Counter offer is rejecting the original offer

7. Cross offer: Where identical offers are made by parties in

written, or implied. Implied rejection is one; (a) where either the

4. The acceptance must be given in some usual and

Mode of Communication [Sec. 3]

1. Communication by act, and

contract. The term ‘consideration’ may be defined as the price

only from the promisee. Consideration furnished by a third party

lack of physical possibility.

PRIVITY OF CONSIDERATION OR STRANGER TO

The term ‘privity of consideration’ means stranger to the

EXCEPTIONS TO THE RULE OF STRANGER TO

1. In case of Trusts: When a trust is created, the beneficiary

Exceptions to the General Rule of “No Consideration, No

Rules Regarding Minor's Agreements

7. Minor’s property liable for necessaries: Sometimes, a

incompetent to enter into an agreement. The following persons are

However,a suit cannot be filed again them, in the Indian courts,

will be voidable at the option of the contracting parties whose

Code: When the consent of a person isobtained by committing any

UNDUE INFLUENCE [SEC. 16]

When a party enters into a contract under any kind of mental

(i) that full disclosure of all material facts was made;

received to the other or in part as per Court’s

elements of fraud are as follows:

andinduce the other party to act.

just and faithful to each other.

d) where an innocent third party before the contract is

property passing under the contract;

iii) Causing, however innocently, a party to an agreement, to

matter of the agreement, he becomes guilty of

3. In case of active fraud, the 3. The aggrieved party

namely, ignorantia juris non excusat (i.e., ignorance of law is no

(i) Mistake regarding existence of the subject matter:

Types of Unilateral Mistake

of another, e.g., an agreement to indemnify a person against the