Unit 1

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UNIT I
BUSINESS LAW
WHAT IS LAW
It is possible to describe law as the body of official rules and regulations, generally found in
constitutions, legislation, judicial opinions, and the like, that is used to govern a society and to control the
behaviour of its members, so Law is a formal mechanism of social control.
Legal systems are particular ways of establishing and maintaining social order.
Law may be defined as a bundle of rules of conduct imposed by the state upon its members and enforced
by courts. Such rules of conduct constitute the law of land. The object of law is to enforce certain standard of
behavior among citizens in the interest of peace and good order.
Legally a set of rules alone is not sufficient, unless
1. It is enforced by the state.
2. It has its source in sovereign authority
3. It is accompanied by sanction
4. It has a command and compel a course of conduct
5. It attempts to achieve security and uniformity in its applications.
DEFINE LAW?
Law is a rule of conduct imposed and enforced by the sovereign Austin
Law is the body of principles recognized and applied by the state in the administration of justice Salmond
Law includes all the rules and principles, which regulate our relations with other relations individuals and with
the state
Objectives:
1. Justice: To establish socio economic justice and remove the existence imbalances in the socio economic
structure.
2. Continuity & Uniformity: Continuity ensures public expectation to maintain justice of ascertainable
result in future from that obtained in the past unless there is a change in the law of land.
3. Impartiality: law is necessarily impartial. It treats all alike and is not made for a particular case.
4. Rule of law: Ignorance of law is no excuse. It is to the advantage of each member of the community
to know something of rules and regulations by which he is governed and as such he must acquaint
himself with the general principles of the law of country.
WHAT IS BUSINESS LAW AND EXPLAIN ITS SOURCES?
Mercantile law is used to denote that branch of law which is concerned with such matters as is usually the
subject of what may be called mercantile transactions. It deals with contractual situations and the rights and
obligations arising out of mercantile transactions between mercantile persons. A mercantile person may be
single individual, a partnership or a joint stock company. The term business law is used to denote the aggregate
body of those legal rules which are connected with trade industry and commerce.
Sources:
1. English Mercantile law: Indian Mercantile law is largely based on it.
2. English common law: Based on English customs and usages and traditions which were developed over
countries by the English courts. This is also referred to as unwritten law and it is not contained in any act
of the legislature.
Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,
Sri Manakula Vinayagar Engineering College, Puducherry. [email protected]. 9043417844
3. Principle of Equity: It is also an unwritten law which is based on principles of equity, justice and good
conscience.
4. Law of Merchant: the merchants and traders establish their own tribunals consisting of customs and
usages for their business dealings.
5. Precedents [Past judicial decision of courts]: In India supreme court is the highest court and its
decisions have binding force on all courts subordinate to it based on the past cases except change in
circumstances.
6. Indian Statute law: In India the central and state legislature possess law making powers and have
exercise their power extensively.
7. Local customs & usages: They play important role in regulating business dealings and when the custom
is accepted by a court and is incorporated in a judicial decision it becomes a legally recognized custom.
EXPLAIN THE SOURCES OF LAW.
As the inevitability of law in life of state is well-known, the question automatically crops up as to how law
originate? What are its sources?
By sources of law we mean its beginning as law and the point from which it springs or emanates. As regards
law there are six important sources.
(A) Customs
Customs are oldest source of law. It is the outcome of habits. When a particular habit is followed for a long time
by the people regularly and habitually, the custom comes into being. When written laws were more conspicuous
by their absence in the primitive society, it was customary laws that regulated human conduct in the primitive
society. It is said that kings have no power to create custom and perhaps less to destroy it. Customs largely
influence the legal system of a state and the state gets rid of the bad customs like Sati, Polygamy, and Dowry
etc. only by means of legal impositions. The United Kingdom provides the best example of customary laws
which are found in the common law of England. In the United Kingdom the law and custom are so intimately
connected with each other that the violation of convention custom will lead to the violation of law.
(B) Religion
The religion is another important source of law. It played an important role in the primitive period when men
were very much religious minded and in the absence of written laws the primitive people obeyed religion
thinking it of divine origin. In the medieval period, most of the customs that were followed were only religious
customs. Even today the Hindu Laws are founded on the code of Manu and the Mohammedan Laws are based
on the Holy Koran. The religious codes become a part of the law of the land in the state incorporates the
religious codes in its legal system.
(C) Judicial Decisions
Since the dawn of the human civilisation the dispute between two parties is referred to a third party who acts as
the arbiter. His decision is generally obeyed by both the parties. The arbiter may be a tribal chief or a priest. But
with the passage of time, the judicial organ of the state is given power to decide cases between the parties.
While deciding a case and pronouncing a judgment, the judges generally apply their own common sense and
justice. This is known as Judge-made laws or case laws. Justice Holmes Commented that "judges do and must
make laws". The principle by which a judicial decision becomes a precedent is known as "Stare Decisis".
(D) Scientific commentaries
Chief Justice Hughes of the U.S.A. opines that " We are living under a constitution and the constitution is what
the judges say it is". The law needs interpretation and the scientific commentaries and interpretations by
eminent jurists have contributed a lot for the evolution of a legal system. The views of Blackstone in the U.K.,
Kent in the U.S.A. have made tremendous impact on the legal system of their respective countries. The opinions
of these expert legal luminaries are always kept in high esteem by the judges and the courts.
(E) Equity
The term 'equity' literally means 'just', 'fairness' and according to 'good conscience'. When the existing law is
inadequate or silent with regard to a particular case, the judges generally apply their common sense, justice and
fairness in dealing with such cases. Thus, without 'equity' the term law will be devoid of its essential quality.
(F) Legislation
This is the most important and modern source of law. The legislature is that organ of the state whose primary
function is to make laws. To Leacock the legislatures deliberate, discuss and make laws. Thus, law can be
defined as the opinion of the majority legislators. They are recorded in the Statute Book. When the legislature is
not in session, the executive is empowered to issue ordinances, decrees etc. which are as good as the laws made
by the legislatures
INDIAN CONTARCT ACT, 1872

Definition:
A contract may be defined as an agreement between two or more persons which can be enforced in a
court of law. Some of the eminent jurists have defined the contract as under:
Every agreement and promise enforceable at law is a contract - Pallock.
A contract is an agreement between two or more persons which is intended to be enforceable at law and
is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from
doing some act - Halsbury.
A contract is an agreement creating and defining obligations between the parties- Salmond.
The term contract is defined in section 2(h) of the Indian Contact Act, which reads as under:
An agreement enforceable by law is a contract.
The analysis of this definition shows that a contract must have the following two elements:
1. An agreement and 2. The agreement must be enforceable by law.
Contract = An agreement + Enforceability.
The term agreement is defined in section 2 (e) of the Indian contract act, which read as under,
Every promise and every set of promises forming the consideration for each other, is an agreement
The term promise is defined in section 2(b) of the Indian contract act, which reads as under,
A proposal when accepted, becomes a promise.
Agreement = Offer + Acceptance.
All agreements are contracts if they are made by the free consent of parties competent to contract, for a
lawful consideration and with a lawful object and are not hereby expressly declared to be void.
The analysis of this definition shows that an agreement becomes a contract only if the following conditions are
satisfied:
1. The agreement must be made by the free consent of the parties.
2. The agreement must be made by the parties who are competent to contract.
3. The agreement must be made for lawful consideration and with lawful object.
4. The agreement must not be expressly declared to be void.
HOW WOULD YOU CLASSIFY CONTRACTS? OR DESCRIBE ELABORATELY THE VARIOUS
KINDS OF CONTRACTS?
Classification of contracts:
All the contracts may broadly classified into the following three categories.
CLASSIFICATION OF CONTRACTS
According to enforceability
performance
Valid
Void
Voidable
According to formation
Express
Implied
Quasi Unilateral
According to
Bilateral
Executed
Executory
Unenforceable
1. Classification of contracts according to their enforceability or legal validity:
The contracts may be classified into the following types according to their enforceability.
a) Valid Contracts:
We know that a contract is an agreement which is enforceable by law. The conditions of enforceability
are laid down in section 10 of the Indian Contract Act. And a valid contract is that which satisfies all the
conditions of enforceability.
b) Void Contracts:
A void contract is that which is not enforceable by law. As a matter of fact, a void contract is not at all a
contract, as it is without any legal effect.
Example: On the Nov, A agreed to sell his car to B for Rs. 50,000. It was agreed that the car was to be delivered
on 15th Nov after making full payment. But on 10th Nov, the car was destroyed in an accidental fire. In this case,
the contract between A and B becomes void on the destruction of car.
c) Voidable Contracts:
We know that free consent is an essential element of a valid contract. If the consent of a party is not
free then such party, may avoid the contract. Such contract is voidable at the option of the party whose consent
is not free.
Example: A agreed to sell his dog to B for Rs.10, 000. The consent of A was obtained by use of force. The
contract is voidable at the option of A. And A may put an end to his contract if he so decides.
S.No Voidable Contract
Void Contract
.
1. It is voidable at the option of one of It cant be enforced y any one of
the parties
the parties
2. Defect is curable & condoned
It is void ab initio & curable
3. It doesnt become void unless at Void ab initio
the option of the party
4. Person is entitled to compensation As it is unenforceable by law
for loss or damages suffered
Compensation is not possible
d) Unenforceable Contracts:
The unenforceable contracts are those which cannot be enforced in a court of law because of some
technical defects. In certain cases, there are special provisions of law which require some formalities to be
fulfilled, e.g. there are special provisions which provide that a contract must be in writing, or it must be
registered, or it must be properly stamped or it must be attested, etc. if such formalities are not properly
observed, the contract cannot be enforced in a court of law.
2. Classification of contracts according to their formation or mode of creation:
The contracts may be classified into the following types according to their formation:
a) Express Contracts:
An express contract is that which is made in writing or by the words of mouth.
Example: A wrote a letter to B, I am prepared to sell my car for Rs.50000. B also accepted the offer by a letter.
This is an express contract.
b) Implied Contracts:
An implied contract is that which is not made in words. Such contracts come into existence an account
of act or conduct of the parties.
Example: A went to a restaurant, and took a cup of tea. In this case, there is an implied contract that he will pay
for the cup of tea.
c) Quasi Contracts:
As a matter of fact, quasi-contracts are not (supply of goods at quoted prices) contracts as there is no
intention of the parties to enter into a contract. In fact, it is an obligation which the law creates in the absence of
any agreement. A quasi-contract is based upon the equitable principle that a person shall not be allowed to
enrich himself at the expense of another.
Example: A, a tradesmen, left certain goods at Bs house by mistake. B treated the goods as his own. In this
case, B, is bound to pay for the goods.
3. Classification of contracts according to their performance:
The contracts may be classified into the following types according to their performance:
a) Unilateral Contracts:
A unilateral contract is a one sided contract in which only one party has to perform his obligation. In
such contracts, promise on one side is exchanged for an act on the other side. It may be noted that after the

formation of a unilateral contract, only one party remains liable to perform his obligation because the other
party has already performed his obligation by doing some act.
Example: A promised to pay Rs.1000 to anyone who finds his lost dog. B found the dog and returned it to A. it is
a unilateral contract which comes into existence when the dog is found. Now, only A has to perform his
obligation by paying Rs.1000 to B, because B had already performed his part of obligation by finding the dog.
b) Bilateral Contracts:
A bilateral contract is a two sided contract in which both the parties have to perform their respective
obligations, i.e. at the time of formation of a contract the obligations of both the parties are outstanding. In such
contracts, promise on one side is exchanged for a promise on the other. The bilateral contracts are also known as
contracts with executory contracts.
Example: A promised to paint a picture for B, and B promised to pay Rs.150 to A. it is a bilateral contract as
there is exchange of promises, and obligations of both the parties are outstanding at the time of formation of the
contract.
c) Executed Contracts: 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. A contract may be
executed once i.e. at the time when it is made.
Example: A agreed to sell his horse to B for Rs.1000 B paid the price and A delivered the horse. It is an
executed contract as both the parties have performed their respective obligations.
d) Executory Contracts:
Executory contract is that where under the terms of a contract something remains to be done by the
parties. In other words, where one or both the parties to the contract have still to perform their obligations in
future, the contract is termed as executory contract.
Example: A agreed to sell his car to B for Rs.30000. car was to be delivered by A on 15 th of next month, and the
price was to be paid by B on 25th of that month. It is an executory contract.
OTHER CONTRACTS:
1. Wagering Contract: Sec 30: An agreement between the parties by which one promises to pay money or
moneys worth on the happening of some certain event in consideration of the other party, promise to
pay if the event does not happen.
2. Contingent contract: Sec 31: It is a contract to do or not to do something, if some event, collateral to
such contract, does or does not happen.
WHAT ARE THE ESSENTIALS OF A VALID CONTRACT? OR WHAT ARE LEGAL RULES FOR A
VALID CONTRACT?
We know that a contract is an agreement which is enforceable by law. It is enforceable only when all the
conditions of enforceability are fulfilled. Following are the general conditions of enforceability and legal rules
for a valid contract. In order to become a contract an agreement must have the following essential elements:
OFFER AND ACCEPTANCE: In an agreement there must be at least two parties one of them making the offer and
the other accepting it. In other words, there must be an offer by one party and its acceptance by the other. The
offer when accepted becomes agreement.
MUTUAL CONSENT OF THE PARTIES: The parties to an agreement must have the mutual consent i.e. they must
agree upon the same thing and in the same sense. This means that there must be consensus ad idem (i.e. meeting
of minds).
Example: A owned two horses, one black and the other white. He offered to sell one horse to B. while making
the offer, A had the black horse in mind. But B accepted the offer, thinking that it was made for white horse. In

this case, there is no consensus ad idem, as the parties did not agree upon the same thing in the same sense.
Thus, no agreement came into existence.
LEGAL OBLIGATIONS: An agreement must create legal obligations (i.e. an obligation which is enforceable by
law). An obligation is the legal duty to do or abstain from doing a definite act or acts. Moreover, the parties
must have the intention to create legal obligations.
Example: A invited B to a dinner. B accepted the invitation. It is a social agreement. If A fails to serve dinner to
B, he cannot go to courts of law for enforcing the agreement.
FREE CONSENT OF THE PARTIES: The contract must have been made with free consent of the parties. It may be
noted that the consent is not free, when it is obtained by undue influence, fraud, misrepresentation of facts, etc.
if the consent of the parties is not free, then no valid contract comes into existence.
COMPETENT TO CONTRACT: The parties to an agreement must be competent to contract. In other words, they
must be capable of entering into a contract. It may be noted that minors or persons of unsound mind are not
competent to contract. If the parties are not competent to contract then no valid contract comes into existence.
Example: A, a minor, borrowed Rs.5000 from B and agreed to repay it within two months. This is not a valid
contract as A is not competent to contract.
LAWFUL CONSIDERATION: The agreement must be support by a lawful consideration. The lawful consideration
is that which is not fraudulent, forbidden by law, immoral or opposed to public policy etc. if the consideration is
not lawful, then no valid contract comes into existence.
Example: A promised to obtain an employment for B in a government department, and B promised to pay
Rs.10000 to A. in this case, the agreement is not valid as the consideration for it is unlawful.
LAWFUL OBJECT: The object of the agreement must be lawful. It may be noted that a lawful object is that
which is neither fraudulent, forbidden by law, immoral nor opposed to any public policy etc. if the object is not
lawful, then no valid contract comes into existence.
AGREEMENT NOT DECLARED VOID: The agreement must not have been expressly declared to be void by any
law in force in the country. If certain agreements are expressly declared to be void by the law of the country,
then such agreements if entered into, shall not be enforceable by courts of law.
Example: A agreed to pay Rs.500 to be if he does not marry throughout his life B promised not to marry at all.
In this case the agreement is not valid because agreements in restraint of marriage are expressly declared to be
void (i.e. not enforceably by law).
AGREEMENT MUST BE CERTAIN: The meaning of the agreement must be certain. In other words, an agreement
whose meaning is not certain, is not valid.
Example: A agreed to sell his white horse for Rs.2500 (or) Rs.3000 to B. there is nothing to show which of the
two prices was to be given. In this case the agreement is not valid as it is uncertain.
PERFORMANCE MUST NOT BE IMPOSSIBLE: The performance of an agreement must be possible. An agreement
to do an impossible act is not valid.
Example: A agreed with B to discover treasure by magic. In consideration, B agreed to pay Rs.5000 to A. in this
case, the performance of the agreement is impossible, therefore it is not a valid agreement.
AGREEMENT
WHAT IS AGREEMENT AND ENFORCEABILITY OF AN AGREEMENT?
Agreement: According to sec.2(e) of the Indian Contract Act, 1872, every promise and every set of promises
forming the consideration for each other is an agreement.
Example: X offers to sell his car for Rs. 1,00,000 to Y. Y accepts this offer. This offer after acceptance
becomes promise and this promise is treated as an agreement between X and Y.
Enforceability of agreement: An agreement is said to be enforceable by law if it creates some legal obligation.
Example: X offers to sell his car to Y for Rs. 2,000,000. Y accepts this offer. Such an agreement between X
and Y is a contract because it creates legal obligation. In this, if X refuses to sell or Y refuses to buy, the other
party can file a suit in the court of law for the breach of the contract.
DIFFERENCE BETWEENAN AGREEMENT AND A CONTRACT
BASIS OF DISTINCTION
AN AGREEMENT
What constitute?
Offer + acceptance constitute an
agreement
Creation of legal obligation
An agreement may or may not
create a legal obligation
One in other
Every agreement need not
necessarily be a contract
Binding
Not concluded or a binding
contract
A CONTRACT
Agreement + Enforceable by law
constitute a contract
Necessarily create a legal
obligation
All contracts are necessarily
agreements
Concluded and binding on the
concerned parties
DISTINGUISH BETWEEN AN AGREEMENT AND A CONTRACT

Matter
Agreement
Meaning
Every promise or a set of promises forming consideration
for each other is an agreement.
One in another All agreements are not contracts.
Enforceable at May or may not be enforceable.
law
Rights
to It does not always grant right.
parties
Contract
Agreement enforceable by law
is a contract.
All contracts are agreements.
Always enforceable by law.
It always grants rights.
DISTINGUISH BETWEEN VOID AND VOIDABLE CONTRACT

Matter
Void Contract
Voidable Contract
Definition
It means contract which ceases to be It means an agreement enforceable by law, by one
enforceable.
or more parties.
Nature
Valid when made but subsequently It remains as voidable until cancelled by the party.
becomes unenforceable.
Rights or remedy No legal remedy is available for the Aggrieved party has a remedy to cancel the
void contract.
contract.
Performance of Party
cannot
demand
the If aggrieved party does not cancel it within a
contract
performance of contract.
reasonable time, performance can be demanded.
Reason
Contract becomes void due to If consent is not obtained freely then it is regarded
change in law or circumstances.
as a voidable contract.
Damages
Party cannot claim damages.
Party can demand damages in certain cases.
DISTINGUISH BETWEEN VOID AND ILLEGAL AGREEMENT
Matter
Void Agreement
Illegal Agreement
What
Void agreement is not prohibited by It is prohibited by law.
law.
Effect on collateral Any agreement which is collateral to Any agreement or transaction which is
transaction
the void agreement is enforceable.
collateral to illegal agreement is not
Punishment
Void ab initio
It is not punishable.
May not void ab initio.
enforceable.
It is punishable.
Always void ab initio.
OFFER AND ACCEPTANCE

DEFINE THE TERM OFFER.
The term offer or proposal is defined in section 2(a) of the Indian Contract Act, when one person
signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of
that other to such act or abstinence, he is said to make a proposal.
"When one person signifies to another his willingness to do or to abstain from doing anything with a view to
obtaining the assent of that other person to such act or abstinence, he is said to make a proposal."
The person making the proposal is called the 'offeror' or 'promisor'. The person to whom the offer is made is
called the 'offeree' or 'promisee'.
Example: A with a view to obtain the assent of B, says to him, will you purchase my motor cycle for
Rs.10,000. In this case, A is making an offer to B as he signifies to B his willingness to sell his motorcycle to
him for Rs.10,000. And A is doing so with a view to obtain Bs assent to purchase the motorcycle.
EXPLAIN THE ESSENTIALS AND LEGAL RULES FOR A VALID OFFER?
Legal Rules Regarding Offer:
1. Offer may be express or implied: An offer may be express or may be implied from the conduct of the
parties or circumstances of the case.
Express Offer: An express offer is made by words spoken or written.
Examples: (1) A says to B, "Will you purchase may car for Rs. 15,000? It is an oral offer.
(2) A, through a letter asks B to buy his car for Rs. 15,000. It is a written offer.
Implied Offer - An implied offer is not made by words spoken or written. It is implied from the conduct of the
parties or from the circumstances.
Example: (1) Public Transport, like, Railways. DTC in Delhi or MEST in Mumbai offer to carry passengers for
a certain fare on a particular route.
2. Offer may be specific or general:
A specific offer is one which is made to a particular person. It can be accepted by the person to whom it has
been made, no one else can accept such an offer.

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Example: A offers to sell his watch to B for Rs. 200. This is a specific offer made to B. It is B alone who can
accept this offer and no one else can accept this offer, i.e., C or D cannot accept this offer.
A general offer is made to the world at large. Therefore, it can be accepted by any person.
Example: 1. A advertised in a Newspaper that he would give Rs. 100 to anyone who finds and returns his lost
dog.
3. Offer must give rise to legal obligation:
An offer to be valid must create legal relationship between the parties. The very purpose of entering into an
agreement is to make it enforceable at a Court of law. If the offer has not been made with this intention it will
not become a contract even if it is accepted by the party to whom it was made.
Example: A promised to pay Rs. 30 to his wife every month. Later, A failed to pay the amount. The wife filed a
suit against the husband to recover the amount. The Court held that she could not recover as the promise was
not made with an intention to create any legal relationship.
4. Terms of an offer must be definite and certain: The terms of an offer should not be vague or indefinite.
Example: A has two cars - Ambassador and Fiat. He agrees to sell one of his cars to B for Rs. 20,000. It is not
clear as to which of the cars A has agreed to sell. A might be thinking to sell the Ambassador car while B might
be thinking to purchase the Fiat car. The offer is not definite.
5. Offer must be distinguished from an invitation to offer: An offer must be distinguished from an invitation
to offer. The shopkeepers generally display their goods in showcases with price tags. The shopkeeper in such
cases is not making an offer so that you can accept it. He is, on the other hand, inviting you to make an offer
which he may or may not accept. Thus you cannot compel a shopkeeper to sell the goods displayed in the
showcase at the marked price. However, if there is specific law to sell goods at marked price then the seller will
have to sell at marked price.
For example, during National Emergency essential commodities like sugar etc. have to be sold at marked price.
6. Offer must be distinguished from a mere declaration of intention: A declaration of intention to make an
offer is not an offer. It is regarded as an invitation to offer. An advertisement for sale in a Newspaper or
Magazine etc. is not an offer for sale.
Example: A lost his camera in a DTC bus. He announced a reward of Rs. 100 to the finder who may return it to
him. B found the camera after reading the advertisement and returned it to him. B is entitled to the reward.
7. Offer must be communicated:
An offer must be communicated to the person to whom it is made. A person can accept the offer only when he
knows about it. If he does not know it, he cannot accept it.

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Example: G sent his servant L to trace his lost nephew. Later on G, announced a reward for tracing the boy. L
without knowing about the advertisement of the reward traced the boy and restored him to G. When L came to
know of the reward, he claimed it. G refused to give the reward. The Court held that L was not entitled to
recover the reward as the offer was not communicated to L. He could not accept an offer which he did not know.
8. Communication of Special Terms:
Special terms of a contract must be communicated. Generally, such cases arise in respect of general offers, like
tickets or receipts for depositing luggage at the Railway Station or receipts for clothes given for dry cleaning
etc. The rule in these cases is that parties are not bound unless conditions printed are properly communicated.
Example: A and his wife took a room on hire in a hotel. After booking the room, they entered the room and saw
a notice on the wall of the room. The proprietors not responsible for articles lost or stolen unless handed over
to the manager for safe custody."
Due to the negligence of the hotel staff, their property was stolen. Held, the proprietor of the hotel was liable as
the notice was not binding, because it came to the knowledge of the client only after the contract to take the
hotel on hire had already been made.
9. Offer must be made with a view to obtaining the consent of the other party to do or to abstain from
doing the act:
The offer must be made with an intention to get the consent of the other party to do or to abstain from doing the
act and not simply with a view to making known the intention of making an offer.
Example: A tells B, "I may sell my Television if I can get Rs. 2,000 for it. It is not an offer as it has not been
made with a view to get the consent of B. It is a mere declaration of intention. Therefore, B cannot accept it by
saying. "I can pay you Rs. 2,000 for it." B is not accepting A's offer but is making his offer which A may or may
not accept.
10. Offer should not impose an unnecessary obligation to communicate non-acceptance:
Thus an offeror cannot say that if acceptance is not communicated by Sunday next, the offer would be
considered as accepted.
Example: A offers his car to B for Rs. 20,000 saying, "If you do not reply by Sunday next, I shall presume, you
have accepted the offer."
LEGAL RULES AS TO OFFER:1. Offer must be such as in law is capable of being accepted and giving rise to legal relationship.
2. Terms of offer must be definite, unambiguous and certain and not loose and vague.
3. An offer may be distinguished from
A declaration of intention and an announcement.
An invitation to make an offer or do business.
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4.
5.
6.
7.
An offer to be completed must be communicated to the person to whom it is made.

Offer must be made with a view to obtaining the assent.
Offer should not contain a term the non compliance of which may be assumed to amount to acceptance.
A statement of price is not an offer.
WHAT ARE THE DIFFERENT TYPES OF OFFER?

Types of Offer:
Express Offer: An offer made by express words, spoken or written is known as express offer.
Example: P tells Q will you buy my cycle for Rs.700?
R writes to S I want to sell my car for Rs.2lakhs.
Implied Offer: An offer that is to informed or understood from the conduct of the parties or the circumstances
of each particular case is known as implied offer.
Example: The offer by a cinema theatre to screen films is always an implied offer.
Specific Offer: An offer made to a specific person or group is known as a specific offer.
Example: A school of management offers a cash prize of Rs.1000 to its 12 th std students who secure cent present
in any subject in the board exams.
General Offer: When an offer is made to the world at large, it is known as a general offer. Any member of
public who is aware of such an offer may accept it.
Example: X offers a reward of Rs.50,000 to anyone who traces out his missing son. Y who is aware of the offer,
finds the boy. He can claim the reward.
Cross Offers: Sometimes two parties make similar offers to each other without knowing the offer made by the
other. These are called cross offers. In such a case, no binding contract will be created as no one has accepted
the offer made by the other.
Example: D of Delhi by a letter makes an offer to M of Mumbai to sell his car for Rs. 10,000. At the same time
M of Mumbai makes a similar offer to D of Delhi to buy his (D's) car for Rs. 10,000. Offers of both D and M
cross each other in the post. These offers are called cross offers. Such offers do not constitute acceptance of
one's offer by another. For example, it will not mean acceptance of D's offer by M or M's offer by D. Both are
making the offer and none of them is accepting the offer. Hence, there is no contract.
Tender: A continuous offer is called a standing offer. For example, in our daily life we do not ask the
newspaper vendor daily to supply the newspaper or the grocer to supply bread and butter. In such cases, we do
not repeat the offer to the supplier of the above articles every day. We make such offer once for all. If we do not
want the supply of such article in future, we ask the supplier to stop the supply of such goods. A tender is a
standing offer. It may be specific or continuous.
ACCEPTANCE
DEFINITION OF ACCEPTANCE:-[SEC 2(B)]
When one person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted.
A proposal, when accepted becomes a promise.
Legal Rules as to acceptance:The acceptance of an offer to be legally must satisfy the following conditions:
Acceptance must be Absolute and Unqualified (sec.7 (1)): In order to be legally effective it must be an
absolute and unqualified acceptance of all the terms of the offer. Even the slightest deviation from the terms of
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the offer makes the acceptance invalid. A qualified or a conditional acceptance is no acceptance at all. In fact, it
is only counter offer. A counter offer puts an end to the original offer and it cannot be revived by subsequent
acceptance.
Acceptance must be Communicated to offeror: The acceptance is completed only when it has been
communicated to the offeror. Until the acceptance is communicated it does not create any legal relations. A
mere mental acceptance is no acceptance.
Acceptance must be in the prescribed manner: Where the offeror prescribed a particular mode of acceptance
then the acceptor should follow that mode in the prescribed mode, the proposer may,
Acceptance must be in response to offer: There can be no acceptance without offer. Acceptance cannot
precede offer. For example: no allotment of shares n a company can be made unless the allottee has applied for
them beforehand. As such, acceptance should follow the offer and no precede it.
The acceptance must be by the offeree: An offer can be accepted only by the persons to whom it Is made. A
valid contract arises only if acceptance is communicated by a person who has the authority to accept. If it is
communicated by any unauthorized person, it will not create any legal relationship.
The acceptance must be given before the offer lapses or is revoked: Acceptance must be given within the
specified time limit, if any. And no time is stipulated, acceptance must be given within a reasonable time. The
term reasonable time depends upon the facts and circumstances of each case.
Acceptance may be implied or express: An acceptance, which is expressed by words, written or spoken, is
called express acceptance. The acceptance, which is expressed by conduct, is called an implied acceptance.
EXPLAIN THE REJECTION OR TERMINATION OR REVOCATION OF AN OFFER AND
ACCEPTANCE. WHEN DOES AN OFFER LAPSE? (SEC 6)
An offer comes to an end, and is no longer open to acceptance under the following circumstances:
1) By Notice: By giving the notice of revocation to the other party, the offeror can withdraw the offer, and the
offer comes to an end. But the fact is that an offer may be revoked any time before the acceptance but not
afterwards. Because once the offer is accepted there is a binding contract.
Suppose a proposal is sent by Sonali to Julia and is accepted by Julia by letter. However, the proposal might
have been revoked any time before the letter of acceptance was posted but it can not be revoked after is posted.
The notice of revocation does not take effect until it comes within the knowledge of the offeree.
2) By Lapse of Time: When the proposer prescribes a time within which the proposal must be accepted, the
proposal lapses as soon as the time expires.
3) After expiry of reasonable time: If no time has been prescribed, the proposal lapses after the expiry of a
reasonable time. What is reasonable time will depend on the circumstances of the cases.
4) By Failure of a Condition Precedent: An offer lapses by the failure of the acceptor to fulfil a condition
precedent to acceptance, where such a condition has been prescribed.
Example: Mr. Cotler says to Rabi, Ill sell my house at Banani, Dhaka to you for BDT. 2 crores if you are
married. The offer cannot be accepted until and unless Rabi is married.
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5) By Death or Insanity: An offer lapses by the death or insanity of the proposer, if the fact of his death or
insanity comes to the knowledge of the acceptor before acceptance.
6) Counter Offer: When the counter offer is given, then the original offer lapse.
7) By Refusal: A proposal once refused is dead and connot be revived by its subsequently acceptance.
Example: A offers to his farm to B for BDT. 50,000. B replies offering to pay BDT. 45,000. A refuses.
Subsequently B writes accepting the orginal offer. There in no contract because the orginal offer has lapsed.
REVOCATION OF AN ACCEPTANCE: (SEC 5)

An acceptance may be revoked at any time before the communication of the acceptance is complete as
against the acceptor but not after words. Infact, revocation of acceptance amounts to withdrawal of the
acceptance to be proposal by the offeree himself.
Example: A proposes, by letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by
post. B may revoke his acceptance any time before the letter communicating it reaches A but not afterwards.
COMMUNICATION OF OFFER AND ACCEPTANCE

Communication of Offer: An offer can be communicated by any act or omission of the offeror by which he
intends to communicate it (sec.3). The offer can be communicated in any way which has the effects of laying
before willingness to do or abstain from doing something.
The communication of an offer is complete when it comes to the knowledge of the person to whom it is
made (sec.4). When an offer is made by post, its communication will be complete when the letter containing the
offer reaches the offeree.
Example: Mr. A offers by a letter to sell his house to B at a certain price. The communication of the offer is
complete when B receives the letter.
Communication of Acceptance:
The acceptance can be communicated by any act or omission of the
acceptor by which he intends to communicate it or by any act or omission which has the effect of commanding
it (sec.3).
The communication of an acceptance is complete as against the proposer when it is put in a course of
transmission to him so as to be out of power of the acceptor. As against the acceptor the communication of an
acceptance is complete when it comes to the knowledge of the proposer.
The completion of communication of acceptance has two aspects viz.,
As against the proposer, and
As against the acceptor.
The communication of acceptance is complete:
As against the proposer, when it is put into a course of transmission to him, when it is put into a course
of transmission to him, so as to be out of the power of the person who makes it;
As against the acceptor, when it comes to the knowledge of the proposer.

15
Example: A proposes by a letter to sell his house to B at a certain price. B accepts As proposal by a letter sent
by post. The communication of acceptance is complete.
CONSIDERATION
DEFINE CONSIDERATION.
The term consideration has been defined in many ways we shall now see some important definition to
understand the term in a better way.
According to pallock, consideration is the price for which the promise of other is bought, and the
promise of other is bought, and the promise thus given for value is enforceable.
In simple words, the consideration is the price of the promise. The term is used in the sense of quid-proquo i.e. something in return. This something may be some benefit, right, interest or profit it may also be some
determinant, loss or responsibility upon the other party.
Example: A agrees to sell a house to B for Rs.100000. for As promise, the consideration is Rs.100000. for Bs
promise, the consideration is the house.
WHAT ARE THE ESSENTIALS OF A VALID CONSIDERATION?
Essential and legal rules for a valid consideration:
Essentials of consideration or the legal rules in respect of consideration to an agreement are as under:
Consideration must move at the desire of the promisor:
Indian Contract Act says that an act, which forms consideration for the promise, must be done or
promised to be done according to the desire of the promisor.
Example: Mr A sees Bs house on fire and helps in extinguishing it. B did not ask for his help. Thus, A cannot
demand payment for his services.
The consideration may be past, present or future:
A past consideration is something wholly done, before the making of the agreement. This is, present
promise is based on the consideration already taken place.
Example: A found Bs purse and gave it to him. B promised to give Rs.100 as a reward. Here for Bs promise,
the act of A in finding Bs purse is the past consideration.
Consideration which moves simultaneously with the promise is called present consideration. Cash sales
provide an excellent example of the present consideration.
When the consideration from one party to the other is to pass subsequently to the making of the contract,
it will be future consideration.
Example: A agreed to sell his car after two weeks at an agreed price. B agreed to pay the price on delivery.
Here, as the amount and the car are to be transferred in future, therefore, the consideration is future for both
the parties.
The consideration must be real not illusory:
Although considerations need not be adequate to the promise, it should be competent, real and valuable
in the eyes of the law. It should not be unreal or illusory. Where consideration is physically impossible, illegal
or illusory, it is not real and, therefore, shall not be a valid consideration.
Example: if A promises to put life in the dead body of B;s son for Rs.50000, the agreement is void because of
the physical impossibility of the performance.
The consideration must be lawful:
The consideration to a promise must be lawful. The consideration to an agreement is unlawful if:
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It is forbidden by law: or
It s of such a nature that, if permitted, it would defeat the provisions of any law; or
It is fraudulent; or
It implies injury to a person or property of another; or
The court regards it as immoral or opposed to public policy. Every agreement of which the consideration
is unlawful is void.
Consideration may be either positive or negative:
The consideration may be a promise to do something or abstain from doing something. That is,
consideration may be an act to do or not to do something- positive or negative.
Example: A requested B to sell certain goods on credit. B agreed to do so provided C will give guarantee for the
payment of price of goods supplied to A by B. C guaranteed the payment by B to A is the consideration for Cs
promise to guarantee the payment. This is a positive consideration.
STRANGER TO A CONSIDERATION CANNOT SUE. ARE THERE ANY EXCEPTIONS TO THIS

RULE?
If consideration is furnished not by the promisee but by a third person, the promisee becomes a stranger
to consideration. Similarly a person, who is not a party to a contract, cannot claim rights, even though the
contract is for his benefit. And such a person is known as stranger to contract.
Exceptions to the rule of contract:
The rule A stranger to a contract cannot sue, is subject to the following exceptions:
Beneficiaries in the case of trust:
An agreement to create a trust can be enforced by the beneficiary. Under such a contract, a benefit is
given to a person who is not a party to the contract. However, stranger must be clearly designated as a
beneficiary and the trust or charge in his favour must also be of some specific property.
Marriage settlement, partition and other family agreement:
Where a provision is made in a position or family arrangement for maintenance or marriage expenses of
female members, such members, though not parties to the agreement, can sue on the contract.
Acknowledgement of liability:
Sometimes one of the parties to contract acknowledges the payment to a third party or otherwise
constitutes himself as an agent of the third party. And that party acknowledges the payment to the third person
or constitutes himself as an agent of that third person, then the third person can recover the amount from such
party.
Contracts through agent:
Where a contract is entered into by an agent, the principal can sue on it.
Assignee of a contract:
Under certain circumstances a party to a contract can transfer his rights under the contract to third party.
A holder in due course of a negotiable instrument is a holder who has obtained the negotiable instruments in
good faith and for valuable consideration. He may sue the prior parties to the negotiable instrument.
NO CONSIDERATION NO CONTRACT. EXAMINE CRITICALLY.
No consideration No contract. Exceptions to the rule.
General rule of law is that an agreement without consideration is void. Sec.25 deals with exceptions to
this rule where a contract, even though without consideration, is enforceable. They are as follows:
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Natural love and affection:

Sec.25(1) of the Indian Contract Act, which reads as under: An agreement without consideration is
void, unless it is expressed in writing and registered under the law for the time being in force for the registration
of documents and is made on account of natural love and affection between parties standing in near relation to
each other.
The following conditions must be satisfied for the application of this exception;
The agreement is made by a written document.
The document is registered according to the law relating to registration in force the time.
The agreement is made on account of natural love and affection.
The parties to the agreement stand in a near relation to each other.
Voluntary compensation:
A promise made without any consideration is valid if, it is a promise to compensation wholly or in part,
a person who has already voluntarily done something for the promisor, or something which the promisor was
legally compellable to de.
The following conditions must be satisfied for the application of this exception:
a) The services should have been rendered voluntarily.
b) The services should have been done for the promisor.
Example: A found Bs purse and gave it to him. B promised to give Rs.1000 as reward. This is a valid contract.
Time barred debt:
Sec.25(3), a promise by a debtor to pay a time-board debt is enforceable that it is made in writing and is
signed by the debtor or his agent generally or specifically authorized in that behalf. The promise may be to pay
whole or part of the debt. Here it may be mentioned that a debt becomes time-barred if it not claimed for a
period of three years from the date it becomes due.
Example: D owes C Rs.1000 but the debt is barred by the limitation act. D signs a written promise to pay C
Rs.500 on account of the debt. This is a valid contract.
Agency: No consideration is required between the principal and agent to create an agency.
Completed gift:Sec.25, states that nothing in this section shall affect the validity as between the door and the
done, of any gift actually made.
CONTRACTUAL CAPACITY
DEFINE THE TERM CAPACITY TO CONTRACT.
Sec.10 states, All agreements are contracts, if they are made by the free consent of the parties
competent to contract. The capacity to contract means the competence i.e. capability of the parties to enter
into a valid contract.
The term capacity to contract is defined in sec.11 of the Indian Contract Act, every person is
competent to contract who is of the age of the majority according to the law to which he is subject, and who is
of sound mind, and is not disqualified from contracting by any law to which he is subject.
All persons are competent to make contracts except the following:
Minors
Persons of unsound mind
Persons disqualified by any law to which they are subject

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WHO IS MINOR? EXPLAIN THE POSITION OF A MINOR WITH REGARD TO THE CONTRACTS
ENTERED INTO BY HIM?
A minor is a person who has not attained the age of majority. For the purposes of entering into contract,
the age of majority is eighteen years. The term minor is explained in section.3 of the Indian Contact Act.1875,
a minor is a person who has not completed eighteen years of age.
Minors Agreement: The law regarding minors agreements may be summed up as under:
An agreement with a minor is void ab-initio: Law acts as the guardian of minors and protect their rights
because they dont possess the capacity to judge what is good and what is bad for them. Thus, agreement with a
minor is void ab-initio. An agreement with a minor does not create any legal rights and obligations between the
concerned parties.
No specific performance: Since an agreement by a minor is absolutely void, the court will never direct
specific performance of such an agreement by him. But a contract entered into, on behalf of a minor by his
guardian or by the manager of his estate, is binding on the minor and can be specifically enforced by or against
the minor provided: a) the contract is within the authority of the guardian or managed, and b) it is for the benefit
of the minor.
A minor can be an agent: An agent is merely a connecting link between his principal and third person.
Therefore, a minor can be appointed as an agent. But he will not be personally liable for any of his acts. Sec.184
of the Indian Contract Act, as between the principal and third persons any person may become an agent, but no
person who is not of the age of majority and of sound mind can became an agent so as to be responsible to his
principal.
The rule of estoppel does not apply to a minor: The rule of estoppel does not apply to a minor i.e. minor is
not estopped from pleading is infancy in order to avoid a contract, even if he has entered into an agreement by
falsely representing that he was a full age. In other words, where an infant represents fraudulently on otherwise
that he is of age and thereby induces another to enter into a contract with him, then in an action found on the
contract, the infant is not estopped from setting up infancy.
No ratification except in certain cases: A minor cannot be ordered to make compensation for a benefit
obtained under a void agreement, because section 64 and 65 of the contract act, which deal with restitution,
apply only to contracts between competent parties and are not applicable to a case where there is not and could
not have been any contract at all.
Thus, when the minor receives the benefits of money, he may be compelled to restore the same. This is
based on the principle that he, who seeks equity, must do equity.
Minors liability for necessaries: Minor is liable for necessaries supplied or necessary services rendered to
him or his minor dependents. In other words, if a person supplies necessaries to a person who is incapable of
entering into a contract or to anyone whom such incapable person is legally bound to support, then he can claim
re-imbursement from the property of such incapable person. For such contracts he cannot be held liable
personally. His property or estate alone will be liable.
No ratification: The term ratification may be defined as the act of approving or confirming. The doctrine of
no ratification implies that an agreement made by a minor (during the period of minority) cannot be confirmed
by him on attaining majority. This is so because minors agreement is void ab-initio and, therefore, cannot be
made valid by ratification.
Partnership by minor: The partnership of partners results from their agreement. A minor, being incompetent
enter into a contract, cannot be a partner in the firm. However, he may be admitted only to the benefits of the
firm.
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Minors cannot be declared insolvent: A minor cannot be adjudicated an insolvent, for, he is incapable of
contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable.
Minor cannot be a surety: A minor cannot be surety as he is not liable to pay or compensate anything under a
contract.
WHO ARE TREATED AS PERSONS OF UNSOUND MIND AND THE LEGAL POSITION OF
CONTRACTS WITH SUCH PERSONS?
According to sec.12 of the Indian Contract Act, a person is said to be of unsound mind for the purpose
of making a contract, if at the time when he makes it, he is capable of understanding it and of forming a rational
judgment as to its effect upon his interests.
Example: idiots, lunatics and drunken persons.
Legal positions of unsound mind persons:
Idiots: An idiot is a person who has completely lost his mental faculties of thinking. Idiocy is a congenital
defect caused by lack of development of the brain. He is incapable of entering into a contract with an idiot is
void.
Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal
experience but who has some lucid intervals of sound mind.
While he is of unsound mind- he cannot enter into any contract. Any agreement entered into by him during this
period is altogether void and he cannot be held liable thereon.
While he is of unsound mind- he can enter into a valid contract and he is liable for such contracts.
Drunken: Drunkard is a person who is under the influence of drinks or drugs or who is so drunk that he cannot
understand the terms of a contract or form a rational judgment as to its effect on his interest. He cannot enter
into valid contracts while such drunkenness lasts.
The persons disqualified by to enter into a valid contract are as follows:
Alien Enemies: All persons other than Indian Citizens are aliens. An alien is a person who is a foreigner to the
land. He may be either an alien friend or an alien enemy. An alien living in india can enter into contracts
with citizens of India during peace time only, and that too subject to any restrictions imposed by the government
in that respect. On the declaration of a war between his country and India, he becomes an alien enemy and
cannot enter into contracts.
Alien friend can contract but an alien enemy cant contract
Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those contracts in our courts
but they cannot be sued in our courts without the sanction of the Central government unless they choose to
submit themselves to the jurisdictions of our courts.
Convicts: A convict is a person who is sentenced by a competent court to the death sentence or imprisonment.
A convict cannot enter into a valid contract which undergoing sentence, nor can sue. His incompetent is over,
when the period of his sentence is over or he is pardoned.
FREE CONSENT
WHAT IS MEANT BY FREE CONSENT? OR EXPLAIN THE PROVISIONS RELATING TO FREE
CONSENT?
The term consent is defined in sec.13 of the Indian Contract Act, two or more persons are said to
consent when they agree upon the same thing in the same sense.

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Example: A had two cars, one is of green colour and the other is white. A offered to sell his green car to B for
Rs.50000. B accepted the offer believing it to be for the white one. In this case, no contract arises between A
and B as there is no real consent of the parties.
Example: X threatens to kill Y if he does not sell his house to X. Y agreed to sell his house to X in this case. Ys
consent has been obtained by coercion and
According to sec.14 consent is said to be free when it is not caused by:
Coercion (sec.15)
Undue Influence (sec.16)
Fraud (sec.17)
Misrepresentation (sec.18)
Mistake (sec.20, 21 and 22)
PROVISIONS OR ESSENTIALS OF FREE CONSENT:
1. Committing any act forbidden by the IPC.
2. Threatening to commit any act forbidden by the IPC.
3. Threat to commit suicide amounts to coercion.
4. Unlawful detaining of any property.
5. Unlawful threatening to detain any property.
6. The intention must be to compel the other person to enter into a contract.
7. Coercion may proceed either from the party or from a stranger.
8. Coercion may be directed against the party or any other person.
COERCION
WHAT IS MEANT BY COERCION?
Coercion means forcibly compelling a person to enter into a contract. Coercion is threat or force used by
one party against the other for making him to enter into an agreement. According to sec.15 of the Indian
Contract Act, coercion is the committing or threatening to commit, any act forbidden by the Indian penal
code, or threatening to detain, any property of any person with the intention of causing any person to enter into
an agreement.
Effect of Coercion:
The effect of coercion is that is makes the contract voidable at the option of the party whose consent is
obtained by coercion, that is, such party can put an end to the contract if he so chooses. The effect of coercion is
emphasized in sec.19 and 72 of the Indian Contract Act.
Section 19 states When consent to an agreement is caused by coercion, the agreement is a contract
voidable at the option of the party whose consent was so caused.
Section 72 states A person to whom money has been paid or anything delivered under coercion, must
repay or retain it
DURESS
In the English Law, the near equivalent of the term coercion is duress. The term coercion in India
covers much wider field than duress in England. Duress has been defined as causing, or threatening to cause,
bodily violence, or imprisonment, with a view to obtain the consent of the other party to the contract. In short,

21
for duress the act or threat must be aimed at the life or liberty of the party to the contract or the members of his
family. A threat destroy or detain property will not amount to duress.
DIFFERENCE BETWEEN COERCION AND DURESS
S.NO
1.
2.
3.
COERCION
DURESS
Coercion can be employed by any Duress can be employed only against the other
person.
party to the contract or the members of his
family.
Coercion may be employed by any Duress can be employed only by the party to
person, not necessarily by the promise.
the contract or his agent.
Coercion is wider in its scope and Duress on the other hand, does not include
includes unlawful detention of goods unlawful detention of goods.
also.
UNDUE INFLUENCE
What is undue influence? What are the effects of undue influence of the contract?
The term undue influence means the unfair use of ones superior power in order to obtain the consent
of a person who is in a weaker position. According to sec.16 (1) of the Indian Contract Act A contract is said to
be induced by undue influence where,
The relations subsisting between the parties are such that one of eth parties is in a position to dominate
the will of the other.
Use the position to obtain an unfair advantage over the other.
Effects of Undue Influence:
The effect of undue influence is that it makes the contract voidable at the option of the party whose
consent is obtained by undue influence i.e. such party can put an end to the contract.
According to sec. 19A when consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the party whereas consent was so caused.
any such contract may be set aside either absolutely, or, if the party who was entitled to avoid it has
received any benefit there under, upon such terms and conditions as the court may seem just.
FRAUD
DEFINE THE TERM FRAUD.
According to sec.17 of the Indian Contract Act, Fraud means and includes any of the following acts
committed by a party to a contract or with his convince, or by his agent, with intent to deceive another party
there to or his agent, or to induce him to enter into the contract:
The suggestion as to a fact, of that which is not true by one who does not believe it to be true.
A promise made without any intention of performing it.
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Any such act or omission as the law specially declares to be fraudulent.

WHAT ARE THE ESSENTIAL ELEMENTS OF FRAUD?
Making a false suggestion as to a fact: To constitute fraud there must be an ascertain of something false
within the knowledge of the party asserting it. That is, to constitute fraud, there must be a false representation or
a statement by a party to a contract who knows that the suggestion is false. There must be intention to deceive
the other party or the intention to induce him to enter a contract.
Example: The prospectus of a company did not refer to the existence of a document disclosing liabilities. This
gave the impression that the company was prosperous. If the existence of the document had been disclosed the
impression would have been quite different. Held, non-disclosure amounted to fraud and anyone who purchased
shares on the faith of this prospectus could avoid the contract.
Active Concealment of a Fact: A person making a false statement is not guilty of fraud if he honestly believes
in its truthfulness. The fraudulent act must have been made with the knowledge of its falsity (i.e. without belief
in its truth). It must be remembered that active concealment does not mean non-disclosure of material fact, since
the explanation to sec.17 clearly says that silence is not fraud except under certain circumstances.
A promise made without any intention of performing it: If a man while entering into a contract has no
intention to perform his promise, there is fraud on his part. Example: purchase of goods without any intention of
paying for them.
Any such act or omission as the law specially declared to be fraudulent: Sec.17 (5) refers to the provisions
in certain acts which make it obligatory to disclose relevant facts. Thus, under sec.55 of the Transfer of Property
Act, the seller of immovable property is bound to disclose to the buyer all material facts. Failure to do so
amounts to fraud.
The party subjected to fraud must have suffered some loss: It is a common rule of law that there is no fraud
without damages. As such fraud without damage does not give rise to an action of deceit.
MISREPRESENTATION
WHAT DO YOU MEAN BY MISREPRESENTATION?
The term misrepresentation is defined by sec.18 of the Indian Contract Act asThe positive ascertain, 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;
Any branch of duty which without an intent to deceive, gains an advantage to the person committing it,
or any one claiming under him, by misleading another to his prejudice or to the prejudice of anyone
claiming under him;
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.
EXPLAIN THE REQUIREMENTS OF MISREPRESENTATION?
A misrepresentation is relevant if it satisfies the following requirements.
It must be a representation of a material fact. Mere expression of opinion does not amount to
misrepresentation even if it turns out to be wrong.
It must be made before the conclusion of the contract with a view to inducing other party to enter
into the contract.
It must be made with the intention that it sh
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It must be actually have been acted upon and must have ould be acted upon by the person to
whom it is addressed. induced to contract.
It must be wrong but the person who made it honestly believed it to be true.
It need not be made directly the plaintiff (petitioner). A wrong statement of facts made to third
person with the plaintiff also amounts to misrepresentation.
`
DIFFERENTIATE BETWEEN MISREPRESENTATION AND FRAUD.
S.NO MISREPRESENTATION
FRAUD
1.
There is no intention to deceive the other There is intention to deceive.

party to the contract.
2.
It is not an act punishable by the Indian It is a criminal act punishable under Indian Penal
Penal Code. It is not an offence.
Code.
3.
It is an innocent wrong. The person making It is intentional or willful wrong. The person
the false statement believes it to be true.
making the false statement does not believe it to be
true.
4.
The aggrieved party cannot avoid the The contract is voidable even though the aggrieved
contract.
party has the means of discounting the truth with
ordinary prudence.
Consequences of Misrepresentation:
In the case misrepresentation by the other part, the aggrieved party can Avoid or rescind the contract (or)
Accept the contract but insist that he shall be placed in the position in which he would have been, if the
position in which he would have been, if the misrepresentation had been true.
PERFORMANCE OF CONTRACT
WHAT IS MEANT BY PERFORMANCE OF CONTRACT?
Performance of contract means fulfillment of legal obligations created by the contract. That is,
performance of contract means fulfilling of their respective legal obligations created under the contract by both
the promisor and the promise.
According to sce.37 of the Indian Contract Act, provides for two modes for performanceActual performance:
When a party has done, what he had undertaken to do and nothing is left the promise is said to be
performed his obligation to the contract called actual performance.
Attempted performance:
Attempted performance otherwise known as tender or offer of performance. The party bound to perform
a promise under a contract is ready and willing to perform it at the proper time and place. This willingness of
the party is known as attempted performance or offer to perform.
WHAT ARE THE ESSENTIAL REQUISITES OF A VALID TENDER OF PERFORMANCE?
A tender, to be legally valid, must fulfill the following conditions (sec.38):
It must be unconditional:
24
o A tender coupled with a condition is no tender. Valid tender of performance must be an

unconditional one.
It must be made at a proper time and place:
A tender before or after the due date or at a place other than agreed upon is not a valid tender. If the
place is not mentioned, the rule is that the debtor must find the creditor; where no time is fixed then it is valid to
make the tender within reasonable time.
Example: A owes B Rs.500 payable on 1st October with interest. B offers to pay the principal amount with
interest up to September 1st. It is not a valid tender as it not made at the agreed time.
It should be in respect of the whole obligation:
An offer to perform a promise in part is not valid tender. The tender must be whole and not of the part. If
a debtor offers to pay only the principal amount and not to pay only the principal amount and not the interest,
the tender is not valid. Part payment or part delivery of the goods contracted for, is not a valid tender.
It must provide reasonable opportunity:
If the tender relates to delivery of goods, it must give reasonable opportunity to the promise for
inspection of goods so that he may be sure that the goods tendered are of agreed description. A tender of goods,
when the other party cannot inspect the goods, is not a valid tender.
It must be in the proper form:
A tender of money must be in the legal tender money and not in any foreign currency. A person is not
bound to accept a cheque. But a payment by a cheque is valid tender if the person to whom it is made is ready
and willing to accept it.
It must be made to a proper person:
A valid tender must be made to a proper person, i.e. the promisee or his authorized agent. A tender of
performance made to a stranger or a third party is not a valid tender.
Example: A agreed to supply certain goods to B on 1 stJune, On the particular day, A supplied the goods to C, a
friend of B. It is not a valid tender.
The person making a tender must be able and willing to perform his obligation:
It must be made by a person who is in a position and is willing to perform the promise. A tender by a
minor or idiot is not valid tender. If the tender is of cash payment, actual cash must be available for ready
payment. A party cannot be said to be able and willing if he has neither possession nor control over the gods, he
had promised to supply.
STATE THE PERSONS BY WHOM THE CONTRACT SHOULD BE PERFORMED?
The promisor himself:
Promise must be performed by the promisor alone. It means that the promises depending upon the
personal skill or diligence or upon personal consideration between the parties, must be performed by the
promisor himself.
Example: A promises to paint a picture for B. A must perform this promise personally.
The agent:
In other cases, the promisor or his representatives may employ a competent person to perform it. The
contracts which do not involve any personal skill or consideration, can also be performed by an agent appointed
by the promisor.

25
Example: A promises to pay B a sum of money. A may perform this promise, either by personally paying the
money to B or by causing it to be paid to B by another, and , if A dies before the time appointed for payment, his
representatives must perform the promise or employ some proper person to do so.
The legal representative:
It need not require personal skill. In this case the legal representatives of a deceased promisor are bound
to perform contract.
Example: A promises to deliver goods to B on a particular day on payment of Rs.1000. A dies before that day.
As representatives are bound to deliver the goods to B and B is bound to pay Rs.1000 to As representatives.
The third person:
When a promisee accepts performance of the promise from the third person he cannot afterwards
enforce it against the promisor.
The joint promisors:
In case of joint promisors, a promisee may compel one or more of the joint promisors in the absence of a
contract to the contrary.
BRIEFLY EXPLAIN THE TIME AND PLACE OF PERFORMANCE OF A CONTRACT?
The time and place of performance of a contract is concerned, it must be agreed upon by the parties to
the contract themselves. Section 46 to 50 lay down rules in this regard.
Performance within a reasonable time (sec.46):
Section 46 states that, where by the contract, a promisor is to perform his promise without application by
the promisee, and no time for performance is specified, the engagement must be performed within a reasonable
time.
Performance of the promise where the time specified (sec.47):
When a promise is to be performed without application by the promisee, and not undertaken to perform
it without application by the promisee, the promisor may perform it at any time during the usual hours of
business on the such day and at the place at which the promise ought to be performed.
Example: A promises to deliver goods at Bs warehouse on the 1 st January. On that day A brings the goods to
Bs warehouse, but after the usual hours for closing and they are not received. A has not performed his promise.
Application for performance to be at proper time and place (sec.48): When a promise is to be performed on
a certain day, and promisor has not undertaken to perform it without application by the promisee, it is the duty
of the promisee to apply for performance at a proper place and within usual hours of business.
To appoint a reasonable place for performance (sec.49):
When a promise is to be performed without application on a certain day, and promisor has not
undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for
performance at a proper place and within usual hours of business.
Performance as prescribed by the promisee (sec.50):
The performance of any promise may be made in any manner, or at any time which the promisee
prescribes or sanctions.
Example: A owes B Rs.2000. B accepts As cycle valuing Rs.500 in reduction of the debts. The delivery of cycle
will amount to a part payment of the debt.
EXPLAIN THE STATEMENT TIME AS THE ESSENCE OF THE CONTRACT?
The time as the essence of the contract means that the time is an essential element, and the concerned
parties must perform their promise within specified time. The Indian Contract Act lays down the following
promises in the regard.
26
When time is the essence of the contract: When a party to a contract promises to do a certain thing at or
before a specified time or certain thing at or before specified times, and fails to do any such thing at or before
the specified time, or contract, or so much of it as has not been performed, becomes voidable at the option of the
promisee, if the intention of parties was that time should be of the essence of the contract.
Example: A promised to deliver goods to B on 1 st January. But he failed to deliver the goods by that time. The
contract was voidable at the option of B.
When time is not the essence of the contract: If it was not the intention of the parties that time should be of
the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the
specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him
by such failure.
STATE AND DISCUSS THE CIRCUMSTANCES UNDER WHICH CONTRACTS NEED NOT BE
PERFORMED?
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract
need not be performed (sec.62)
Example: A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth
accept C as his debtor instead of A. the old debt of A to B is at an end, a new debt from C to B has been
contracted.
Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or
may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit
(sec.63).
Example: A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to
perform the promise.
According to sec.64, when a voidable contract is rescinded, the other party need not perform his promise.
If any promisee neglects or refuse to afford the promisor reasonable facilities for the performance of his
promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby
(sec.67).
WHAT IS MEANT BY ASSIGNMENT OF CONTRACTS AND WHAT ARE THE WAYS OF
ASSIGNING A CONTRACT?
Transfer of liabilities and rights under a contract to a third party, is known as assignment of contract. The
assignment of contract may be by:
Assignment by the act of parties:
a) Assignment of contractual liabilities:
i)
Under Section 40, contracts involving personal ability of skill or any other personal qualification
cannot be assigned, for example, painting of a picture by a painter, acting in a film by the actor
engaged. Thus, it is the state where one party cannot delegate the act of performance to another.
ii)
A promisor cannot assign his liabilities under a contract. In other words, a promisee cannot be
compelled the promise.
Example: A owes Rs.1000 to B and B owes the same amount to C. B cannot ask C to record from A unless
there is another contract between A and C for the purpose.
b) Assignment of contractual rights: The rights and benefits under a contract cannot be assigned, if they are
of personal nature.
27
Example: A owes Rs.100. the creditor can transfer the right of recovery to C from A. it will be a valid
assignment must be given to the debtor.
Operation of Law: Assignment by operation of law takes place in case of death or insolvency of a party to
the contract.
DISCHARGE OF CONTRACT
WHAT DO YOU MEAN BY DISCHARGE OF CONTRACT? DISCUSS THE VARIOUS MODES BY
WHICH A CONTRACT MAY BE DISCHARGED?
The discharge of contract means that the parties are no more liable under the contract. In other words,
when the rights and obligations created by the contract come to an end, the contract is said to be discharged.
The discharge of contract may, therefore, be defined as the termination of contractual relationship between the
parties.
MODES OF DISCHARGE OF CONTRACT
By performance
Time
By mutual
By Impossibility
Agreement
By Breach of
By Operation
Contract
of Law
By Lapse of
Actual performance
Offer to performance Novation
At the time
Material alteration Anticipatory breach of contract
Alteration
of agreement Merger
Actual breach of contract
Remission
Unknown to
Insolvency
Rescission
both parties Death
Waiver
Known to both
the parties
DISCHARGE BY PERFORMANCE: When the parties to a contract perform their respective promises, the contract
is said to have been performed. This is the normal and natural mode of discharging of a contract.
Actual performance: The contract is said to have been performed, if both the parties to the contract have
performed their respective promises performance should be complete and precise. It should be according to the
terms of the agreement. Mostly contracts are discharged in this mode only.
Offer to perform or tender:
Tender is an offer to perform the obligation under the contract. When one party offers to perform its part
of the promise and the other party refuses to accept the performance, the first party is discharged from its
obligations provided the offer or tender to perform the contract as valid.
DISCHARGE BY AGREEMENT: A contract may be discharged by mutual agreement of the concerned parties. The
parties may enter into a fresh agreement, which provides for the extinguishments of their rights and obligations
created by the original contract.
Novation:
The term novation may be defined as the substitution of existing contract for a new contract. In
other words, when the parties to a contract agree to substitute the existing contract by a new contract, it is
known as novation. It may be noted that the novation must be with the mutual consent of all the parties.
28
Rescission: The term rescission may be defined as the 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.
Example: A promised to deliver certain goods to B on a certain date. Before the due date of performance, A and
B mutually agreed that the contract would not be performed. In this case, the parties have rescinded the
contract. And thus, the contract is discharged.
Alteration: The term alteration may be defined as change in one or more terms of the contract. The alteration
is valid when it is made with the contract of all the parties. And the valid alteration discharges the original
contract, and the parties become bound by the new contract (i.e. contract with altered terms).
Example: A agreed to supply to B 50 bags of rice at the rate of Rs.100 per bag. The delivery was to be made in
five equal instalments the first supply was to commence from 1 st May. Subsequently, A and B entered into an
agreement that the delivery would be made in two equal instalments and the price would be Rs.105 per bag. In
this case, the old contract is discharged and the parties become bound by the contract with changed terms.
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. In other words, the remission is the lesser
fulfillment of the promise made.
Example: A owed Rs.5000 to B, A paid Rs.2000 to B, and B accepted it in full satisfaction. In this case, A is
discharged from his liability of Rs.5000.
Waivers: The term waiver may be defined as the abandonment (i.e. giving up) of the rights by the party who
is entitled to claim performance of the contract. On the waiver, the other party to the contract is discharged from
the performance of his liabilities under the contract.
Example: A promised to paint a picture for B. afterwards B forbade him to do so. In this case, B has waived his
right to claim the performance. And thus, A is no longer liable to perform the promise.
DISCHARGE BY IMPOSSIBILITY: Sometimes, the performance of a contract is impossible. In such cases, the
contract is discharged because the parties cannot perform their respective obligations. The impossibility of
performance may be of the two types, namely 1. Initial impossibility, and 2. Subsequent impossibility.
Initial Impossibility: It is the impossibility, which exists at the time of formation of a contract. It makes the
contract void ab initio, i.e., void from the very beginning. And thus, the contract does not create any rights and
obligations on the contracting parties. This provision is contained in sec.56 of the Indian contract act, which
reads as an agreement to do an act impossible in itself, is void.
Example: A agreed with B to discover a treasure by magic. And B agreed to pay Rs.500 to A for this act. This
agreement is void due to initial impossibility.
Subsequent or supervening impossibility: Sometimes the performance of a contract is quite possible when it
is made. But subsequently, some event happens which renders the performance impossible or unlawful. Such
impossibility is called the post contractual impossibility.
Example: A and B contracted to marry each other. Before the time fixed for the marriage, A became mad. In this
case, the contract becomes void due to the subsequent impossibility, and thus discharged.
DISCHARGE BY OPERATION OF LAW: In certain cases, the contract is discharged by the operation of law. i.e. the
law regards the contracts as discharged. Following are the circumstances under which the law regards the
contract as discharges.
Material alteration: Sometimes, a contract is contained in a written document. And one party alters it in
material particulars without the consent of the other party. In such cases, the effect of alteration would be the
same as that of cancellation of the document. Thus, the material alteration discharges the parties from the
performance of their respective obligations under the contract.
29
Example: A contracted to sell his plot of 500 square yards to B for Rs.100000. the sale deed was executed
which was in possession of A. before the registration of the sale deed, A altered the deed and made it a deed for
the sale of 300 square yards plot for Rs.100000. in this case, the contract is discharged and B is not bound to
purchase the plot.
Insolvency: Sometimes, a person is declared insolvent by the court of law. In such cases, he is discharged from
all liabilities and debts incurred prior to the court orders.
Death of promiser: Sometimes, the contract involves personal skills or qualifications of the promisor himself.
In such cases, the contract is discharged on the death of the promisor.
Example: A, an expert, agreed with B to translate some part of book from French to English. A died before the
translation work started. In this case, the contract is of personal nature as it involves the personal qualification
of the promisor (A). And thus, the contract is discharged on the death of A.
Merger of rights:
Sometimes, the inferior rights and the superior rights coincide and meet in one and the
same person. In such cases, the inferior rights merge into the superior rights. On merger, the inferior rights
vanish and are not required to be enforced.
Example: A gave his land on lease to B. subsequently; B bought the land, which he was holding under the lease.
In this case, B becomes the owner of the property and his rights as a lessee merge into his rights as the owner.
And thus, his rights as a lessee vanish, and are not to be enforced.
DISCHARGE BY BREACH OF CONTRACT: The breach of contract means the failure of a party to perform his
obligations. And a breach of contract discharges the aggrieved party from performing his obligations. The
breach of contract is of the following two types:
Actual breach of contract: It occurs when on the due date of performance or during the performance, a party
fails to perform his obligations. Thus, the actual breach of contract may be discussed under the following two
heads: Actual breach of contract on the due date of performance:
Sometimes, on the due date of performance, one party fails to perform his obligations. In such cases, the
other party is discharged from the performance of his obligations, and can hold the quality party liable for the
breach of contract.
Example: A agreed to sell his car to B on 1 st June. A refused to sell the car to B. on As refusal to sell the car,
there occurred a breach of the contract. A and B can hold A liable for the breach of contract.
Actual breach of contract during its performance: Sometimes, one party performs his obligations under the
contract and the other party fails or refuses to perform this obligations. It is an actual breach of contract during its
performance. And sometimes, one party, no doubt, performs his obligations but not strictly according to the contract.
Example: A, a shoe manufacturer, contracted with B, a dealer in shoes, to supply him 500 pairs of shoes at a
certain price. The shoes were to be delivered in instalments. After the supply of 200 pairs of shoes, B told A that
no more shoes are required. In this case, the breach of contract was committed during the performance of the
contract.
Anticipatory breach of contract: It occurs when prior to the due date of performance, the promisor
absolutely refuses or disables himself from the performance of his obligations. In other words, it is a declaration
by one party of his intention not to perform his obligations under the contract. Thus, the anticipatory breach is
the premature destruction of the contract, i.e. the repudiation of the contract before due date of performance.
Example: A contracted to supply to B 100 pieces of spark plugs on 15 th Dec. but before the due date of
performance, A informed to B that he is not going to supply the spark plugs at all. On As refusal to supply the
goods, the anticipatory breach of the contract occurs. A and B may put an end to the contract.
DISCHARGE BY LAPSE OF TIME: As a matter of fact, the contracts must be performed within the period of
limitation i.e. the period specified by the Limitation Act. The Limitation Act lays down the different limitation
30
period for different kinds of contracts. If the contract is not performed and the aggrieved party does not enforce
his rights within the limitation period, then he is debarred from enforcing from the contract. In other words,
after the expiry of limitation period, the courts will not enforce the contract.
And thus, the contract is discharged, as the parties cannot enforce their respective obligations through
the courts of law.
Example: A borrowed Rs.5000 from B, a moneylender, and agreed to repay the loan on 31 st March 1983. On 31st
March 1983, A failed to repay the loan. But B did not take any legal action against A till 31at March. In this
case, B cannot recover the amount of loan from A as the limitation period for the recover of loan is 3 years from
the date of default, which has expired. And thus, A is discharged from his liability to pay the loan.
REMEDIES FOR BREACH OF CONTRACT
WHAT REMEDIES ARE AVAILABLE TO AN AGGRIEVED PARTY FOR THE BREACH OF A
CONTRACT? OR DISCUSS BRIEFLY THE REMEDIES ALLOWED BY THE INDIAN CONTRACT
ACT TO THE AGGRIEVED PERSON IN CASE OF BREACH OF A CONTRACT.
Types of remedies for breach of contract:
Following types of remedies are available to the aggrieved party (i.e. the party who is not at fault).
Suit for recession
Suit for damages
Suit for quantum meruit
Suit for specific performance
Suit for injunction
1. Suit for Rescission: The term rescission may be defined as the cancellation of the contract. In other words,
putting an end to the contract. Where a party commits a breach (i.e. refers to perform his obligations in the
contract), the other party becomes entitled to put an end to the contract. He may bring an action for the
rescission of the contract.
Example: A agreed to sell his car to B for Rs.50000. and B agreed to pay the price after the delivery of the car.
Subsequently, A refused to deliver the car to B. in this case, B becomes entitled to cancel the contract. And on
the cancellation, he shall be discharged from his obligations under the contract. And on the cancellation, he
shall be discharged from his obligations under the contract, i.e. he cannot be asked to perform the contract and
pay the price.
2. Suit for Damages: The term damages may be defined as the monetary compensation payable by the
defaulting party to the aggrieved party for the loss suffered by him. The aggrieved party may, therefore, bring an
action for damages against the party who is guilty of the breach of the contract. And the party, guilty of breach,
is liable to pay damages to the aggrieved party.
Types damages:
i.
Ordinary Damages: They are those, which naturally arise, in the usual course of things
from such breach. It is the different between the contract and market price of such goods on the date of
breach.
ii.
Special damages: Those, which may reasonably be supposed to have been in the
contemplation of both parties as the probable result of breach of contract.
iii.
Exemplary or punitive or vindictive damages: They are in the nature of punishment.
The court may award these damages in case of

31
1.
A breach of promise to marry, where damages shall be calculated on the basis of

mental injury sustained by the aggrieved party.
2.
Wrongful dishonour of a cheque by a banker
iv.
Nominal Damages: They are those, which are awarded where there is only a technical
violation of a legal right but the aggrieved party has not in fact suffered any loss because of breach.
v.
Damages for inconvenience & discomfort: The damages can be recovered for physical
inconvenience & discomfort but the aggrieved party has not in fact suffered any loss because of breach.
vi.
Liquidated damages & Penalty: When parties to a contract at the time of formation of
contract, specify a sum which will become payable by the party responsible for breach.
vii.
Stipulation for interest: If the stipulation of interest is in the nature of penalty, the court
may award reasonable compensation only.
3. Suit for Quantum Meruit: Literally, the expression quantum meruit means as much as earned. In legal
sense, it means the payment in proportion to the work done. i.e. a person can recover compensation in
proportion to the work done by him. This doctrine is applied where there is no express promise to pay definite
remuneration to a person. And the person claims reasonable remuneration for the services rendered by him.
4. Suit for Specific Performance: The term specific performance may be defined as the actual carrying out
the respective obligations of both the parties. Sometimes, the damages are not an adequate remedy for breach of
the contract. In such cases, the party aggrieved by the breach may bring an action for specific performance of
the contract.
Example: A agreed to sell an old painting of Mughal period to B for Rs.5000. but subsequently, A refused to
sell the painting. In this case, B may file a suit against A for the specific performance of the contract. And the
court may order A to sell the painting to B as agreed.
5. Suit for Injunction: The term injunction may be defined as an order of the courts warning a person from
doing something, which he promised not to do. In this case also the courts are at discretion to issue an
injunction order. It is, usually, issued in cases where the compensation in terms of money is not an adequate
relief.
WHAT DO YOU MEAN BY DAMAGES FOR BREACH OF CONTRACT? EXPLAIN THE VARIOUS
KINDS OF DAMAGES AWARDED ON THE BREACH OF CONTRACT?
The term damages my be defined as the monetary compensation payable by the defaulting party to the
aggrieved party for the loss suffered by him. On the breach of contract, the aggrieved party may file a suit for
damages against the party who is guilt of the breach of the contract. And the guilty party is liable to pay
damages to the aggrieved party.
KINDS OF DAMAGES:
Ordinary damages: Ordinary damages are those which naturally arose in the usual course of things from such
breach. Damages, awarded to compensate the injured party for the actual amount of loss suffered by him
consequent upon the breach, are known as general damages. General damages are usually assessed on the basis
of actual loss. The measure of ordinary damage is the difference between the contract price and market price at
the date of breach.
Example: A contracts to deliver 100 bags of rice at Rs.1000 a bag on a future date. On the due date he refuses
to deliver. The price on that day is Rs.1100 per bag. The measure of damages is the difference between the
market price on the date of breach and the contract price i.e. Rs. 10000.
Special damages:
Special damages are those resulting from a breach of contract under some special or
unusual circumstances. These damages constitute the indirect loss suffered by the injured party due to the
32
breach of contract. These are the damages which parties knew, when they made the contract, as likely to arise
from the breach of the contract.
Example: A builder, contracts to erect and finish a house by first of January, in order that B may give
possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B
and C. A builds the house so badly that, before the first January, it falls down and has to be rebuilt by B, who,
in consequency, loses the rent which he was to have received from C and is obliged to make compensation to C
and is obliged to make compensation to C for the breach of his contract. A must make compensation to B for the
cost of rebuilding the house, for the rent lost, and for the compensation made to C.
Exemplary damages: These are damages which are awarded by way of compensation for the loss suffered and
not by way of punishment. Exemplary damages are granted for injured feeling, sufferings etc. where courts take
into account the feelings of the aggrieved party, exemplary damages may be ordered. Exemplary damages have
no place in the law of contract and are not recoverable for a breach of contract.
Nominal damages: These are the damages which are very small in amount. In some cases there may be a
breach of contract but no material loss would have been caused thereby. Thus nominal damages are awarded
only for the name sake. Nominal damages are awarded simply to recognize the right of the party to claim
damages of the breach of the contract even though the party suffered no loss.
QUASI CONTRACT
Definition
An obligation imposed by law to prevent unjust enrichment. Also called a contract implied in law or a
constructive contract, a quasi contract may be presumed by a court in the absence of a true contract, but not
where a contracteither express or implied in factcovering the same subject matter already exists.
Because a quasi contract is not a true contract, mutual assent is not necessary, and a court may impose an
obligation without regard to the intent of the parties. The remedy is typically restitution or recovery under a
theory of quantum meruit. Liability is determined on a case-by-case basis.
An example of a quasi-contract is the case of a plumber who accidentally installs a sprinkler system in
the lawn of the wrong house. The owner of the house had learned the previous day that his neighbor was getting
new sprinklers. That morning, he sees the plumber installing them in his own lawn. Pleased at the mistake, he
says nothing, and then refuses to pay when the plumber hands him the bill. Will the man be held liable for
payment? Yes, if it could be proven that the man knew that the sprinklers were being installed mistakenly, the
court would make him pay because of a quasi-contract. If that knowledge could not be proven, he would not be
liable
Thus
the
principle
of
unjust
enrichment
requires:
1st
that
the
defendant
has
been
'enriched'
by
the
receipt
of
a
benefit
:
2nd
that
this
enrichment
is
at
the
expense
of
the
plaintiff:
and
3rd that the retention of unjust of the enrichment is unjust [mahabir kishore vs. state of M.P.,AIR.
(1990)S.C.313]
Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi
-contract ,on the other hand , is created by law.

33
In an American case MILLER VS. SCHLOSS,918N.Y.400,N.E.337, it was observed: "In truth it is not a
contract at all. It is an obligation which the law creates in the absence of any agreement, when the acts of the
parties or others have placed in the possession of one person, money or its equivalent, under such circumstances
that in equity and good conscience he ought not retain it, and which ex aequo et bono (in justice and fairness)
belongs to another".
EXPLAIN THE KINDS OR TYPES OR CLASSIFY QUASI CONTRACT.
Kinds of Quasi Contract
(1) SUPPLY OF NECESSITIES (Sec.68): If a person, incapable of entering into a contract, or anyone whom
he is legally bound to support, is supplied by another with necessaries suited to his condition in life, the person
who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.
Ex. A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from
B's property.
(2) PAYMENT BY AN INTERSTED PERSON (sec. 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.
Ex. B holds land in Bengal, on a lease granted by A, the Zamindar. The revenue payable by A to the govt. being
in the arrears, his land is advertised for sale by the govt. under the revenue law the consequences of such sale
will be annulment of B's lease. B to prevent the sale and the consequent annulment of his own lease, pays to the
government the sum due from A. A is bound to make good to B the amount so paid.
The conditions of the liability under sec. 69 are:

1. The plaintiff should be interested in making the payment. It is not necessary that he should have a legal
proprietary interest in the property in respect of which the payment is made. However, often it is used to
determine whether plaintiff was interested. Sec. 69 does not invite such judicial limitation that a person
who has not an interest in the property can be interested in a payment of that property.
2. The plaintiff himself should not be bound to pay. He should only be interested in making the payment in
order to protect his own interest.
3. The defendant should be under legal compulsion to pay.
4. The plaintiff should have made the payment to another parson and not to himself.
(3) OBLIGATION TO PAY FOR NON-GRATUITOUS ACTS (Sec. 70)
When 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 benefit thereof, the latter is bound to make compensation to the
former in respect of, or to restore, the things so done or delivered.
Ex. 1. A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay
for them to A.

34
Ex 2. A saves B's property from fire. A is not entitled to compensation from B, if the circumstances show that he
intended to act gratuitously.
Before any right of action under
(1) The thing must have been done lawfully.
sec.
70
arises,
conditions
must
be
satisfied:
(2) The person doing the act should not have intended to do it gratuitously.
(3) The person for whom the act is done must have enjoyed the benefit of the act[union of India vs. Sita ram,
AIR 1977,S.C. 329]
EX. A village was irrigated by a tank. The government effected certain repairs to the tank for its preservation
and had no intention to do so gratuitously for the zamindars. The zamindars enjoyed the benefits thereof. Held,
they were liable to contribute {Damodar mudaliar vs. secretary of state for India, 1894, 18 Mad. 88}.
(4) RESPONSIBILITIES OF FINDER OF GOODS (Sec. 71)
A person, who finds goods to another and takes them into his custody, is subject to the same responsibilities as a
bailee. He is bound to take as much care of the goods as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quality and value. If he does not, he will be guilty of
wrongful conversion of the property. Till the owner is found out, the property in goods will vest in the finder
and
he
can
retain
the
goods
as
his
own
against
the
whole
world.
Ex. F picks up a diamond on the floor on k's shop. He hands it over to K to keep it till true owner is found out.
No one appears to claim it for quite some weeks in spite of the wide advertisement in the newspapers. F claims
the diamond from K Who refuses to return. K is bound to return the diamond to F who is entitled to retain the
diamond against the whole world except the true owner.
(5) MISTAKE OR COERSION (Sec. 72)
A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or
return it to the person who paid it by mistake or under coercion.
Ex. (1) A pays some money to B by mistake. It is really due to C. B must refund the money to A. C, however,
cannot recover the amount from C is no privity of contract between B and C.
(2) A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an
illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to
recovers so much of the charge as is illegally excessive.
QUANTUM MERUIT
Define: Quantum Merit means "As much as earned or deserved", "as much as is merited". The principle of law
provides for payment of compensation under certain circumstances, to a person who has rendered goods or
services to another person under a contract which could not or has not been fully performed. The action of
35
Quantum Meruit is allowed in Indian Courts under Section 70 of the Contract Act. The claim of quantum
merit arises in the following cases:
1. Breach of Contract: Where there is a breach of contract, the injured party is entitled to claim reasonable
compensation for what he has done under the contract.
2. When a contract is discovered to be void: When a agreement is discovered to be void or when a contract
becomes void, any person who has received any advantage under such agreement or contract is bound to restore
it, or to make compensation for it, to the person from whom he received it. (Section 65).
3. Where something has been done non-gratuitously: Where work is done or goods delivered by a person
without an intention to do so gratuitously, and the benefit of the same is enjoyed by the other party, the latter is
bound to make compensation to the former in respect of, or to restore, the thing so done or so delivered.
For example, X forgets certain goods at Y's house. He had no intention to leave them with him gratuitously. Y
uses those goods for his personal benefit. X can compel Y to pay for those goods.
4. Where the contract is divisible: Where a contract is divisible, and a party to the contract has done a part of
his obligation, he may sue on quantum merit. This rule applies even though the party claiming on quantum
merit is himself guilty of breach of contract.
DOCTRINE OF 'QUANTUM MERIT IS, HOWEVER, SUBJECT TO THE FOLLOWING TWO

LIMITATIONS:
1. In a contract which is not divisible into parts and a lumpsum of money is promised to be paid for the
complete work, part performance will not entitle the party to claim any payment.
2. A person, who himself is guilty of breach of contract, cannot be allowed to claim any payment under the
doctrine of quantum merit.
But this rule is subject to following exceptions:
1. If the contract is divisible, part performance will also entitle the defaulting party to claim compensation on
the basis of quantum merit if the other party has taken the benefit of what has been done.
2. If a lump sum is to be paid for the compensation of an entire work and the work has been completed in full
though badly, the defaulting party can recover the lumpsum less a deduction for bad workmanship.
Hoeing vs Isaacs. In this case, A agreed to decorate B's flat for a lump sum of Rs. 750. A did the work, but B
complained of faulty workmanship. B got the defect removed by paying Rs. 294. Held, A could recover Rs. 750
less 294.

36
3. Any claim based upon the doctrine of quantum merit cannot be entertained unless there is an evidence of an
express or implied promise to pay for the work which has already been done.
4. Where one party to the contract is prevented from performing the contract by the other party or by
impossibility or illegality.
Clay vs Yates. In this case, printing of a book had to be abandoned as it contained libelous matter. He was held
entitled to recover on quantum merit.
Suit for Specific Performance:
Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances, an
aggrieved party may file a suit for specific performance i.e. for a decree by the court directing the defendant to
actually perform the promise that he has made. Such a suit may be filed either instead of or in addition to a suit
for damages.
Specific performance is a discretionary order which is allowed only in a limited number of cases. Rules
regarding the granting of this relief are contained in the specific Relief Act. Under the provisions of this Act,
specific performance is granted in the following cases:
1. Where monetary compensation is not an adequate remedy for breach of contract.
2. When there is no standard for ascertaining an actual damage caused by the non-performance.
3. When it is probable that compensation in money on non-performance of the contract cannot be obtained.
But specific performance will not be granted:
(a) To enforce a contract for personal service/personal nature, e.g., a contract to marry, or to paint a picture etc.
[Executive Committee of Vaish Degree College, Shamli (U.P) vs. Dr. Laxmi Narayan,
(b) In cases where court cannot supervise performance of contract;
(c) Where damages are adequate remedy;
(d) Contract contains ambiguous terms;
(e) Contract by its nature is revocable;
(f) The contract is made by trustees in breach of their trust;
(g) Contract which can be performed in more than three years;
(h) Where subject matter or major part of such subject matter of contract has unknown to both parties, ceased to
exist before contract is made;
37
(i) If the agreement has been made without consideration;

(j) If it will be inequitable, i.e. not fair and just; for either party;
(k) The contract is made by a company in excess of its powers, as laid down in its Memorandum of Association.
In case of sale of goods, specific performance will only be granted where the goods are specific. It will not be
granted as a rule unless the goods are unique and cannot easily be purchased in the market, or are of special
value to the party suing for it. In contract for sale of land, rare articles, antiques, etc. courts generally order for
specific performance of the contract.
Suit for Injunction :
This is another discretionary remedy granted to secure specific performance of negative terms of the contract.
Injunction restrains a person from doing or continuing to do something which amounted to breach of contract.
Thus injunction is a mode of securing the specific performance in negative terms.
Illustration :
A agrees to sing at B's theatre for one year and not to sing elsewhere. During the year A agrees to sing at C's
theatre, thus, refuses to sing at B's theatre. In this case, contract is of personal nature there fore court cannot
order specific performance as it cannot effectively supervise performance but can grant injunction order
restraining, A to sing at C's theatre thus indirectly compelling A to sing at B's theatre.
Rectification or Cancellation :
When through fraud or a mutual mistake of the parties, a contract or other instrument does not express their real
intention, either party may institute a suit to have the instrument rectified. In such a case, if the Court finds that
there has been a fraud or mistake, it may ascertain the real intention of the parties, and may in its discretion,
rectify the instrument so as to express that intention. But this must not prejudice the rights acquired by third
persons in good faith and for value. If rectification is not possible, the Court shall order for the cancellation of
the contract.
Illustration:
A agreed to hire B's auditorium at Rs. 800 per day, but while writing the agreement, by mistake, the figure was
written as Rs. 8000 per day. The Court can adjudge the document as void or may rectify it. A written document
which is void or voidable against a person may cause him in some cases a serious injury, if it is left outstanding.
In such a case, if he has any such apprehension, he may file a suit to have the document, adjudged void or
voidable. The Court may, in its discretion, adjudge such a document void or voidable and order it to be
delivered up and cancelled.
CONTINGENT CONTRACT
WHAT IS CONTINGENT CONTRACT?
38
A contingent contract is a contract that contains terms which relies on the choice of a party or a state of the
world. An example of a contingent contract is an option. Generally, a contract is a set of agreements between
agents.
EXPLAIN THE RULES REGARDING CONTINGENT CONTRACT

The rules regarding contingent contracts are summarized here under (Section 32 to 36).
1. Contracts contingent upon the happening of a future uncertain event cannot be enforced by law unless and
until that event has happened. And, if, the event becomes impossible, such contract becomes void (S.32).
For example:
A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced by law unless and
until C dies in A's life-time.
In Chandulal Harjivandas Vs. CIT, Gujarat, AIR 1967, SC 816, in this case there was an agreement to pay
taxed costs to the agent for appearing in the case in the Supreme Court on being successful-held that the
obligation which was contingent on winning of case would ripen into an absolute obligation in the event of
success of the case only.
2. Contracts contingent upon the non-happening of a certain future event can be enforced when the happening
of that event becomes impossible, and not before. For example: A agrees to pay B a sum of money, if a certain
ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.(S.33)
3. If a contract is contingent upon as to how a person will act on an unspecified time, the event shall be
considered to become impossible when such person does anything, which renders it impossible that he would so
act within any definite time or otherwise than under further contingencies (Section 34). For example: A agrees
to pay B a sum of money, if B marries C. But C marries D. The marriage to C must now be considered
impossible, although it is possible that D may die and that C may afterwards marry B.
4. Contracts contingent upon the happening of an uncertain specified event within a fixed time become void, if
at the expiration of the time fixed, such event has not happened or if, before the time fixed, such event becomes
impossible (S..35). For example: A promises to pay B a sum of money if a certain ship returns within a year.
The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the
year.
5. Contracts contingent upon the non-happening of a specified event 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 expired, if it becomes
certain that such event will not happen (S.36). For example: A promises to pay B a sum of money if a certain
ship does not return within a year. The contract may be enforced if the ship does not return within the year or is
burnt within the year.

39
6. Contingent agreement to do or not to do any things, if an impossible event happens, are void, whether the
impossibility of the event is known or not to the parties to the agreement at the time when the contract was
entered in to. For example: A agrees to pay B Rs. 1,000 if B will marry A's daughter C and C was dead at the
time of the agreement. The agreement is void.
DIFFERENCE BETWEEN CONTINGENT AND WAGERING CONTRACT

Although wager is a contingent agreement, yet there are certain points of difference between the two:
Contingent Contract
1. A contingent contract has been defined as a contract to do or not to do something, if some event collateral to
such contract does or does not happen. A contingent contract is wider in scope.
2. A contingent contract thus includes a wager. In other words a wagering agreement is a contingent agreement
(contract).
3. In a contingent contract mutual promises are not necessary.
4. Example. A promises B to pay Rs. 1,000 if a ship does not return. Here A is making a promise to pay but B is
not making a similar promise to pay A. thus there is no mutuality of promises in a contingent contract.
5. In a contingent contract there is an independent interest. Example. A gets his house insured. It is a contingent
contract as A has independent interest in this case.
6. In a contingent contract determination of an uncertain event is not the sole condition.
7. A contingent contract is valid.
Wagering Agreement
1. A wager is a promise to pay money or money's worth on the happening or non-happening of an uncertain
event.
2. A contingent contract need not necessarily be a wager. Thus we can say that all wagering agreements are
contingent but all contingent contracts are not wager.
3. In case of a wagering agreement promise must be mutual.
4. Example. In wagering agreement A agrees to pay B 20 rupees if it rains on Monday and if it does not rain B
will pay 20 rupees to A. In the above example there is mutuality of agreement but this mutuality of promises is
not necessary in case of a contingent contract.

40
5. In a wagering agreement there is no independent interest apart from the money to be won or lost.
6. Example. A promises to pay Rs. 100 to B if it rains on Monday. It is a wagering agreement as A has no
independent interest.
7. In a wagering agreement determination of an uncertain event is the main condition of the contract.
A wagering agreement is void/ illegal
WAGERING CONTRACT
Definition: Literally the word wager means a bet something stated to be lost or won on the result of a
doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting agreements.
Section 30 of the Indian Contract Act talks about wagering agreements, which reads as agreements by way of
wager are void. The section does not define wager. Section 30 states that,
Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won
on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any
wager is made.
EXCEPTIONS FOR WAGERING CONTRACT

Exception in favour of certain prizes for Horse racingThis section shall not be deemed to render unlawful a
subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any
plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the
winner or winners of any Horse race.
Section 294-A of the Indian Penal Code not affectedNothing in this section shall be deemed to legalize any
transaction connected with horse racing, to which the provisions of section 294-A of the Indian Penal Code
apply.
Section 30 only says that agreements by way of wager are void. The section does not define wager. Subba
Rao J in Gherulal v. Mahadeo said: Sir William Ansons definition of wager as a promise to give money or
moneys worth upon the determination or ascertainment of an uncertain event, brings out the concept of wager
declared void by section 30 of the contract act.
ESSENTIALS OF SECTION 30:

41
Mutual chances of gain and loss: There must be two parties, or two sides, and mutual chances of gain and
loss,[iii] i.e., one party is to win and the other to lose upon the determination of the event. It is not a wager
where one party may win but cannot lose, or if may lose but cannot win, or if he can neither win nor lose, if
one of the parties has the event in his own hands, the transaction lacks an essential ingredient of wager.[iv] It
is of the essence of the wager that each side should stand to win or lose according to the uncertain or
unascertained event in reference to which the chance or risk is taken.[v]
Two parties: There must be two persons, either of whom is capable of winning or losing.
.you cannot have two parties or more than two sides to bet. You may have a multi partite agreement to
contribute to a sweepstake(which may be illegal as a lottery if the winner is determined by skill), but you cannot
have a multipartite agreement for a bet unless the numerous parties are divided in to two sides, of which one
wins or the others loses, according to whether an uncertain event does not happen.[vi]
Uncertain Event: Uncertainty in the minds of the parties about the determination of the event in one way or
other is necessary. A wager generally contemplates a future event; but it may even relate to an event which has
already happened in the past, but the parties are not aware of its result or the time of its happening
The first thing essential to wager is that the performance of the bargain must depend upon the determination of
an uncertain event. A wager generally contemplates future events; but it may even relate to an event which has
already happened in the past, but it may even relate to an event which has already happened in the past, but the
parties are not aware of its result or the time of its happening. [vii]
No interest other than stake: Neither party should have any interest in the happening of the event other than
the sum or stake he will win or lose. To constitute a wager, the parties must contemplate the determination of
the uncertain event as the sole condition of their contract. The stake must be the only interest which the parties
have in the contract.[viii]
Neither party to have control over the event: Lastly, neither party should have control over the happening of
the event one way or the other. If one of the parties has the event in his own hands, the transaction lacks an
essential
ingredient
of
a
wager.
[ix]
EFFECTS OF WAGERING AGREEMENT: A wagering agreement is void ab initio, and S. 65 has no
application to it.[x] Money paid directly by a third party to a winner of a bet cannot be recovered from the
loser.[xi] Even if a loser makes a new promise to pay for his losses in consideration of his not being posted, the
promise cannot be enforced; but if he gives a cheque in discharge of his liability, the cheque may not be tainted
with illegality because of the winners promise not to have the name posted. The cheques will not be enforceable
by the original payee, but may be enforced by a third party holder of the cheque, even if he knew of the facts
leading up to giving of the cheque.
It has been laid down by the Supreme Court, in Gherulal Parekh v.Mahadeo Das[xii] that though a wager is
void and unenforceable it is not forbidden by law .Hence a wagering agreement is not unlawful under section
23 of the Contract Act and therefore the transactions collateral to the main transaction are enforceable.

42
CAVEAT EMPTOR RULE

Meaning: While purchasing goods buyer must be very careful, at his own interest, buyer has to select such
goods only which are not of defective nature. In case where buyer, negligently purchases defective goods, he
cannot repudiate the contract of sale. It is caveat emptor rule.
A case on this point is Ward Vs Hobbs. In this case a contract of sale gets formed between A and B
according to the terms of which A has to sell an animal from his farm to B. Negligently B selects an animal
which has been suffering from some sickness. That sickness is characterized by propagation from one animal to
the other and the ultimate effect is death of the animal. It should be noted that the sickness is externally visible.
B, negligently selects such animal and as a result all animals present in B`s farm comes across death. B sues A.
Court decides that B is negligent, he cannot blame the seller for his (A) own negligence and therefore B cannot
claim any compensation. Thus cavit emptor rule protects the seller. This rule is unfavorable to buyer.
EXCEPTIONS FOR CAVEAT EMPTOR RULE
The shelter of caveat emptor rule is not available to shelter on the following occasions; When caveat emptor is
not applicable buyer can repudiate the contract.
When Sale is need by means of description: When goods are sold on the basis of description, the delivered
goods must be in accordance with description. If it is not so, sellers fraudulent behavior can be observed and
there is no ground to say that buyer is negligent. Then caveat emptor rule is not applicable and buyer can
repudiate the contract.
A case on this point is Vorley Vs Whipp. In this case, there is a sale between A and B according to which A has
to sell his harvester to B. While selling A gives a lot of description about the machine. There after B comes to
know that the delivered machine is not in accordance with given description. B Sues for repudiation of contract
of sale. Court decides that as delivered goods are not in accordance with given description, caveat emptor rule
is not applicable and hence buyer can repudiate the contract.
When sale is made by means of sample: When goods are sold on the basis of sample, the delivered goods
must be in resemblance with sample. Otherwise seller cannot claim the shelter of caveat emptor rule.
Related case is Wallis Vs Prat. In this case a contract of sale gets formed between A and B according to which
A has to supply English sain fain seeds. The contract is based on samples. But A supplies giant sain fain seeds.
Court decides that buyer can repudiate the contract of Sale.
When purpose is mentioned: at the time of purchasing the goods if buyer communicates the purpose for the
sake of which he is purchasing the goods seller should sell such goods only which are suitable to that purpose
otherwise caveat emptor rule is not applicable.
A case on the point is Priest Vs Laste. In this case, B purchases a bottle from A. At the time of purchasing the
bottle the buyer says that it should be qualified for storage of hot water. Thus here purpose is mentioned but the
seller sells such a bottle which is not qualified for storage of hot water. As a consequence buyers wife gets
injured. Court decides that buyer can claim compensation.
When concealment is made: In case where buyer conceals material facts and thus fraudulently sells goods,
then also caveat emptor rule is not applicable.
A case on this point is Smith Vs Green. In this case a contract of sale gets formed between A and B according to
which A has to sell an animal to B out of his (A`s) farm. B selects an animal and requests A to confirm that
there is no any sickness to that animal. Actually the animal has been suffering from some sickness and A
conceals the fact. There after it comes across death and court decides that B can get the amount back.
When mis-representation is made: When seller sells the goods by giving mis-representation, he cannot claim
the protection of caveat emptor rule. Hence buyer can repudiate the contract. Under first point Vorley Vs Whipp
43
is explained. In the same case mis-representation or wrong description can be seen in connection with
Harvester.
(UNIT I COMPLETED)
What is Law?
Set of rules
Mercantile law or commercial Law?Sources of mercantile Law:-English Law:Indian Statute Law
Judicial Decision
Customs and Usages
The different types of Law are: Public law, Criminal law, Tort Law, Trusts law, Civil law, Family law,
Mesothelioma law, corporate law, Elder law, Employment law, Admiralty law, Aviation law, Bankruptcy law
and Consumer law.
Definitions:
Proposal - When one person signifies to another his willingness to do or to abstain from doing anything, with a
view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
Promise - When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted. A proposal, when accepted, becomes a promise. The person making the proposal is called the
"promisor and the person accepting the proposal is called the It promise":
Consideration - When, at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such Act or
abstinence or promise is called a consideration for the promise.
It must move at the desire of the promisor
It may move from promisee or any other person
It may be act, abstinence,
It may be past, present, future
Need not be adequate
It must be real and not illusory
It must not be something which the promisor is already bound to do
It must not be illegal / immoral
Stranger to the Contract
Agreement - Every promise and every set of promises, forming the consideration for each other, is an
agreement.
Contract - An agreement enforceable by law is a contract. An agreement not enforceable by law is said to be
void.
Sec 2(h)Contract - An agreement enforceable by law is a contract.
Sec 10:-All agreements are contracts if they are made by the free consent of parties competent to contract, for a
lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
Kinds of Contract.
44
Void contract A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable.
Executed contract Where both the parties have performed their obligations, it is executed contract.
Executory Contract - Where neither of the parties have performed their obligations, i.e. both the parties are yet
to perform their promises, the contract is executory.
Implied Contract The terms of a contract are inferred from the conduct or dealings between the parties.
When proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied.
Such implied promise leads to Implied Contract.
Quasi Contract Certain relations resemble those created by a contract. Certain obligations which are not
contracts in fact but are so in contemplation of law are Quasi Contracts.
Contingent Contract - It is a contract to do or not to do something, if some event, collateral to such contract,
does or does not happen.
Voidable Contract A contract is voidable when one of the parties to the contract have not exercised their free
consent.
Speciality Contract It is a contract which is in writing, signed, sealed & delivered by the parties.
Essential elements of a Valid Contract.
1. Proposal & Acceptance.
2. Consideration.
3. Capacity of parties to contract.
4. Free Consent.
5. Agreement should not be expressly declared void.
6. Writing & Registration, if so required by law.
7. Legal Relationship.
8. Certainity.
9. Possibility of Performance.
10. Enforceable by law.
Proposals :
Proposal - When one person signifies to another his willingness to do or to abstain from doing anything, with a
view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
Essentials of Proposal:
1. Beyond expression of willingness, there must be something in the nature of a request.
2. Proposer cannot dictate terms.
3. An offer must be intended to create & capable of creating legal relations.
Communication of proposals.
The communication of a proposal is complete when it comes to the knowledge of the person to whom it is
made.
Eg - A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete
when B receives the letter.
Acceptance
When one person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
Proposal when accepted becomes promise.
The person making the proposal is called the Promisor and person accepting the proposal becomes Promisee.
45
Essentials of Acceptance.
1. Acceptance must be absolute and unqualified.
2. It must be expressed in some usual & reasonable manner.
3. Mental Acceptance is not sufficient in Law.
4. Acceptance must be communicated to the offerer.
5. Acceptance must be by a certain person.
6. Acceptance must be given within a reasonable time.
7. Acceptance must be given before the offer lapses or is revoked or is withdrawn.
8.Acceptance of proposal is acceptance of all terms.
Communication of an acceptance
The communication of an acceptance is complete, as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the
acceptor; as against the acceptor, when it comes to the, knowledge, of the proposer.
Eg : B accepts A's proposal by a letter sent by post. The communication of the acceptance is complete, as
against A when the letter is posted as against B, when the letter is received by A.
Capacity of parties to Contract.
An agreement becomes a contract if it is entered between the parties who are competent to Contract.
Every person is Competent to contract
1. Who is of the age of majority according to the law.
2. Who is of sound mind.
3. Who is not disqualified by any law.
Monors Contract
Void-ab-initio
Cant rectified by minor on Majority
Cant asked to refund benefit
No Estoppels to plead minority
Partner for benefit in firm
Minors Estate liable for necessaries of life
Parents/Guardian not responsible
Agent/ Not Bankrupt
Free Consent
"Free consent" - Consent is said to be free when it is not caused by
1) coercion,
2) undue influence
3) fraud,
4) misrepresentation,
5) mistake.
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
Coercion is 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 whatever, with the
intention of causing any person to enter into an agreement.
Eg - A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to
46
criminal intimidation under the Indian Penal Code.

Undue influence
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.
Fraud
"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 of his agent, or to induce him to enter
into the contract
1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2) The active concealment of a fact by one
having knowledge or belief of the fact.
3) A promise made without any intention of performing.
4) Any other act fitted to deceive;
5) Any such act or omission as the law specially declares to be fraudulent.
Misrepresentation
"Misrepresentation" means and includes
1) 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.
2) any breach, of duty which, without an intent to deceive, gains an advantage to the person committing it, or
any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming
under him.
3) 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.

47
UNIT II
INDEMNITY AND GUARANTEE CONTRACT
Indemnity Contract: A contract where one party promises to save the other from any loss caused to him by the
conduct of promissor himself or any other person is called contract of indemnity, (Section 124) Indian Contract
Act, 1872.
Indemnity contract includes two parties namely; Indemnifier and Indemnity holder. The person who is
promising to pay compensation is called Indemnifier and the person who`s loss is compensated is called
Indemnity holder.
Example: There is a contract between X and Y according to which X has to Sell a tape recorder (which is
selected) to Y after three months. On the next day of their contract Z has come to X and has insisted on selling
the same tape recorder to him (Z). Here Z is promising to compensate X for any loss faced by X, due to selling
the tape recorder to Z. X has agreed. Now the contract which has got formed between X and Z is called
indemnity contract, where Z is indemnifier and X is indemnity holder.
Guarantee Contract: A contract to perform the obligation or to discharge the liability of a third party in case of
its default is called contract of guarantee, (Section 126) Indian Contract Act, 1876.
Guarantee contract includes three parties namely; Creditor, Principal Debtor and Surety. The person who is
granting the loan, the person who is utilizing the amount of loan is principal debtor and the person who is giving
guarantee is called surety or guarantor or favored debtor. In case of guarantee contract there will be two types of
liabilities namely; Primary liability and secondary liability. Primary liability will be with principal debtor and
Secondary liability goes to surety.
Example: Y is in need of Rs. 10000/-. Upon guarantee by Z, Y has got the amount from X. Here X, Y and Z are
creditor, principal debtor and surety respectively.
DIFFERENCE BETWEEN INDEMNITY CONTRACT AND GUARANTEE CONTRACT
Number of Parties: Indemnity contract includes two parties namely, indemnifier and indemnity holder. But
guarantee contract includes three parties namely creditor, Principal debtor and surety.
Number of Contracts: In case of indemnity contract, as there are only two parties, there is possibility for
existence of one contract only. But a contract of guarantee includes three sub-contracts.
Nature: As indemnity contract includes two parties and one contract, it can be said that indemnity contract is
simple in nature. But guarantee contract includes three parties and three sub-contracts and hence be said that
guarantee contract is complex in nature.
Liability: In contract of guarantee there will be two types of liabilities namely; primary and secondary
liabilities which will be with principal debtor and surety respectively. But in contract of indemnity there is no
classification and sharing of liability where the absolute liability rests with indemnifier.
Recovery: In case of indemnity contract the indemnifier, after compensating indemnity holder`s loss, cannot
recover that amount from any person. But in contract of guarantee, if surety makes payment to creditor, he
(surety) can recover that amount from principal debtor.
Interest of parties: Indemnity contract gets formed upon indemnifier`s interest and guarantee contract gets
formed upon principal debtor`s interest.

48
LAW OF SALE OF GOODS ACT 1932

WHAT DO YOU MEAN BY CONTRACT OF SALE OF GOODS? EXPLAIN ITS ESSENTIALS
Meaning & Definition: According to Sec.4 (1) of the Sale of Goods Act, 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.
Thus under a contract of sale the property in goods is transferred from the seller to a buyer for a value.
ESSENTIALS OF CONTRACT OF SALE:
1. Two parties: There must be at least two parties: a seller and a buyer and both must be competent to contract.
2. Goods or property: The contract of sale relates to goods i.e., movable property, and transactions involving
the purchase and sale of immovable property do not come under the provision of sale of goods act.
3. Price: The consideration for the contract of sale is the price, which must be in terms of money.
4. Transfer of ownership: There must be transfer of ownership (the property in goods) to the buyer. The
transfer of ownership can be immediate or at a future date. It is not necessary that the possession may be
transferred; only the transfer of ownership is sufficient.
5. A contract of sale includes a sale and an agreement to sell.
6. Delivery of goods or payment of price in installments: Arrangement is possible for the immediate delivery
of goods or immediate payment of price or both, or for the delivery or payment by installments (Sec.5 (1))
7. Contract of sale may be in writing, words spoken or implied: It may be either in writing, or by words
spoken or implied; it may also be partly in writing and partly by words spoken.
8. It may be absolute or conditional: Contract of sale may be either absolute or conditional.
9. Contract of sale by co-owner: A co-owner can enter into a contract of sale with another person or co-owner
of that person.
10. Presence of essential elements of a valid contract: All essential elements of a valid contract must be
present in the contract of sale.
WHAT DO YOU MEAN BY GOODS?
Goods: The subject matter of contract of sale:
Goods form the subject matter of contract of sale. According to Sec.2 (7) of the Sale of Goods Act, 1930
Goods means every kind of movable property other than actionable claims and money; and includes stock and
shares, growing crops, and things attached to ore forming part of the land which are agreed to be served before
sale or under the contract of sale.
Thus, every type of movable property comes within the definition of the term goods. Goodwill, patents,
trademarks, copyrights, etc. are considered as movable properties. However, actionable claims and money have
been excluded from the term goods. The term actionable claims means a claim, which can be recovered only by
means of in suit, filed or an action in he court of law, namely a debt. Money here means current money i.e., the
recognized currency in circulation in the country, but not the rare or old coins which may be treated as goods
and bought and sold as such.
STATE THE EFFECT OF DESTRUCTION OF GOODS.
In case of contract of sale SEC.7: The contract of sale is void if the following three conditions are satisfied:
The must be a contract of sale for specific goods
49
The goods must have perish or become so damaged as no longer to answer their description in the
contract, before making of the contract.
The seller must not be aware about the destruction of goods
Example: X sold to Y all 700 bags of cement lying in his delhis godown. State the legal position
1] if unknown to x, all bags had been stolen before the contract was made,
2] if unknown to x, the cement had become stolen as a result of heavy rainfall
3] if unknown to x, 100 bags had been stolen at the time of making the contract
Solution:
1] the contract is void because the goods have perished before making of the contract
2] The contract is void because the goods become so damaged as no longer to answer this description
3] The contract has become void and y cannot be compelled to accept 600 bags because the contract is
indivisible.
In case of agreement to sell SEC.8: An agreement to sell becomes void if the following four conditions are
satisfied:
There must be an agreement to sell specific goods
The goods must have perish or become so damaged as no longer to answer their description in the
agreement
There must not be any fault of buyer or seller
STATE THE SUBJECT MATTERS OF CONTRACT OF SALE OR CLASSIFICATION/TYPES OF

GOODS:
Sec. 6 (1 and 2) of the act classifies the goods as:
1. Existing goods:
Goods owned or possessed by the seller at the time of making the contract of sale is called existing goods. The
existing goods my be:
Specific goods- It is the goods identified and agreed upon at the time of making of the contract of sale.
To be specific the goods must be actually identified, not merely identifiable.
Ascertained goods Goods identified subsequent to the formation of the contract of sale is known as
Ascertained goods. Ascertained goods, though sometimes used, as specific goods are not always
identical with specific goods. Ascertained goods would not be specific goods as defined by Sec.2 (4) of
the act.
Unascertained or generic goods unascertained goods are those goods, which are not specifically
identified by the buyer, but are contracted on the basis of description. In other words, goods are not
identified at the time of making of the contract of sale.
Example: X has ten cows. He promises to sell one of them but does not specify which cow he will sell. It is a
contract of sale of unascertained goods.
2. Future goods:
Future goods are those goods, which a seller does not possess or own at the time of the contract, he will
manufacture or produce or acquire after the making of the contract. Future goods are not eh same as
unascertained goods, which form a class of existing goods.
Example: A contracts on January 1, to sell 100 shares of Oriental Bank to b, to be delivered and paid for, on
the March 1, of the same year. At the time of making the contract A was not in possession of any shares. The
contract is for the sale of future goods.
50
3. Contingent goods:
In a contract of sale, a seller may contract unconditionally to sell goods to be acquired afterwards, or he may
contract to sell goods to arrive or agree to sell a crop, which is to be sown. Thus, contingent goods is a type of
future goods, the acquisition of which by the seller depends upon a contingency which may or may not happen
(Sec.6(2))
Example: A, contracts to sell 100 units of a particular article provided the ship which is bringing them reaches
the port safely. This is an agreement for the sale of contingent goods.
EXPLAIN THE DISTINCTION BETWEEN SALE AND AGREEMENT TO SELL (OR)
DISTINCTION BETWEEN SALE AND AGREEMENT TO SELL
Basis of Difference
Sale
Agreement to sell
1.
Nature of contract
Sale is an executed contract
Agreement to sell is an executory
contract
2.
Transfer
of Sale gives to the buyer the An agreement to sell is mere a
ownership
absolute ownership of the goods contract which secures to the buyer
and can use them in the way he only the right against a particular
likes
individual
3.
Subject matter
In case of sale the goods may be In the case of agreement to sell, the
ascertained or specific
goods will be unascertained.
4.
Nature of buyers Sale is a contract plus An agreement to sell is a contract
right
conveyance, and creates jus in pure and simple, and thus creates
rem, i.e., gives right to the buyer merely just in personam, i.e., gives
to enjoy goods as against the a right either to buyer or to seller
whole world
against the other for any default in
fulfilling his part of the agreement.
5.
Risk of loss
In case the goods are destroyed, In case the goods are destroyed, the
the loss falls on the buyer even if loss falls on the seller even if the
the goods are in possession of goods are in possession of the
the seller
buyer.
6.
Remedy for branch
In a sale, the sellers breach In an agreement to sell, the seller
gives the buyer double remedy; a being still the owner, he can sell
suit for damages against the those goods to anyone he likes.
seller, and the proprietary
remedy in respect of the goods
so that if the goods are soled to
third parties, he can sue and
recover them as owner from the
third party.
7.
Insolvency of the In a sale, on the seller becoming In an agreement to sell, if the buyer
seller
insolvent, the buyer as an owner who has paid the price, finds that
would be entitled to recover the the seller has become insolvent, can
goods from the official receiver claim only a retable dividend.
or assignee in insolvency
8.
Insolvency of the In a sale, the seller in the In an agreement to sell, if the buyer
51
buyer
absence of a lien over the goods,

must deliver to the official
receiver and will be entitled only
to a retable dividend for the
price due.
In a sale, the seller can sue for
the price, even though goods are
in possession of the seller
9.
Right to sue
10.
Present of future time
11.
Result of
12.
Tax liability
is adjudged as insolvent before he

pays for the goods, the seller may
refuse to deliver the goods unless
paid for, as the ownership has not
passed to the buyer.
In an agreement to sell, his only
remedy is to sue for damages, if the
buyer fails to accept and pay for the
goods.
Sale is related with present time. Agreement to sell is related with
future time.
Sale is the result of a contract of Agreement to sell is not the result
sale
of the contract of sale.
In the case of sale, the seller is There is no such liability in the case
liable to pay the taxes.
of agreement to sell.
EXPLAIN THE DISTINCTION BETWEEN SALE AND BAILMENT (OR) DISTINCTION

BETWEEN SALE AND BAILMENT
Basis of Difference
Sale
Bailment
1.
Object
The object of sale is to the The purpose of bailment is to
transfer the ownership on goods deliver the goods by one person to
for a price
another for certain purpose
2.
Time of transfer
Sale is the actual transfer of In bailment goods are transferred
goods on a permanent basis
for a specified period of time.
3.
Transfer
of In a sale the ownership is No ownership is transferred in
ownership
transferred from the seller to bailment.
buyer.
4.
Use of goods
The buyer of goods can use the In bailment, the bailee cannot use
goods in a way as he likes.
the goods as he likes and, only
authorised use is permitted.
5.
Consideration
Consideration necessary in a sale It may be gratuitous
6.
Act enforceable
Sale is dealt with under the Bailment is dealt with under the
provisions of sale of goods act, provision of Indian Contract Act,
1930.
1892.
7.
Right on the subject Even after the sale, the seller can After the bailment is discharged, the
matter
exercise a right of lien on the bailee will have no right on the
subject matter
goods bailed. The goods are
returned to the bailor.
EXPLAIN THE DISTINCTION BETWEEN SALE AND HIRE PURCHASE (OR)
DISTINCTION BETWEEN SALE AND HIRE PURCHASE
Basis of Difference
Sale
Hire-purchase
1.
Transfer
of In the case of sale, ownership of In the case of hire-purchase, the
ownership on goods
goods is immediately transferred possession of goods is transferred to
to the buyer
the hirer, but the ownership is
52
2.
3.
4.
5.
6.
7.
transferred only after the payment

of installments.
Payment
In the case of sale, payment is In hire-purchasing the payment is
made immediately or on made in installments only
fulfillment of certain conditions
Position
In a sale, the position of the In a hire-purchase the buyer is only
buyer is that of the owner of the in the position of a bailee
goods.
In case of part In case the buyer has to pay the This will be decided only when the
payment
price in installments, each buyer exercises his option to buy
installment will be taken as a the article. In case he decides
part payment towards the price otherwise, the installment payment
of the goods
will be taken as hire charges for the
use of the article.
Termination
The buyer cannot terminate the The hire-purchaser has an option to
contract of sale as such, he is terminate the contract at any stage
bound to pay the price of the and cannot be forced to pay the
goods
installments.
Right to sell or The buyer of goods has full right Since the hirer is not the owner of
pledge
to resell or pledge the goods as the goods, but only the bailee, he
he has the ownership of the cannot resell or pledge the goods or
goods
he cannot pass on any title even to
innocent and bonafied third parties.
In case of insolvency. In a sale, seller must deliver the If the hirer becomes insolvent, the
goods to the official receiver in owner may seize the goods and sue
case of insolvency of the buyer for arrears of installments up to the
and will be entitled to only a time of seizure (as these are treated
ratable dividend for the price as hire charges, no benefit being
due.
allowed to the hirer for the fact that
the owner has resold the goods at
higher price).
CONDITIONS AND WARRANTIES

DEFINE CONDITION IN A CONTRACT OF SALE OF GOODS.
According to sec.12 (2) a condition is a stipulation which is essential to the main purpose of the
contract, and the breach of which gives the aggrieved party a right to terminate the contract.
Example: X asked a car dealer to suggest him a car suitable for touring purposes. The dealer suggested a
Buggati car. Accordingly, X purchased it but found it unsuitable for touring purpose. In this case, suitability
of car for touring purpose was a condition of contract. X was, therefore entitled to reject the car and have
refund of the price paid.
WHAT IS A WARRANTY IN A CONTRACT OF SALE?

53
According to sec.12 (3) a warranty is a stipulation which is collateral to the main the purpose of the
contract, and the breach of which gives the aggrieved party a right to claim damages but not a right to reject
goods and to terminate the contract.
Example: X asked a car dealer to suggest him a good car and while suggesting the car, the dealer said that it
could run for 20km per litre of petrol. But the car could run only 15kms per litre of petrol. In this case, the
statement made by the seller was a warranty. X was, therefore not entitled to reject the car but he was entitled
to claim the damages.
DISTINGUISH BETWEEN CONDITION AND WARRANTY.

S.N
BASIS OF
CONDITION
O
DISTINCTION
WARRANTY
1.
Essential
collateral
vs. It is stipulation which is essential to It is stipulation which is only

the main purpose of the contract.
collateral to the main purpose of the
contract.
2.
Right in case of The aggrieved party can terminate the The aggrieved party can claim
breach
contract.
damages but can not terminate
contract.
3.
Treatment
A breach of condition can be treated A breach of warranty cannot be

as a breach of warranty. For example, treated as a breach of condition.
a buyer may like to retain the goods
and claim only for damages.
EXPLAIN THE EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES IN CONTRACT OF

SALE AS PROVIDED IN THE SALE OF GOODS ACT?
Conditions and Warranties may be either express or implied. When the conditions and warranties are
definitely written in the contract they are known as Express Conditions and Warranties. When the Conditions
and Warranties are not written in the contract but are attached to the contract by operation of law or custom,
they are called Implied Conditions and Warranties.
EXPRESS CONDITIONS: These are expressly provided in the contract. For example, a buyer desires to buy a
SONY TV Model No.1342. Here, model no. is an express condition. In an advertisement for Khaitan fans,
guarantee for 5 years is an express warranty.
IMPLIED CONDITIONS AND ITS REMEDIES: These are implied by law in every contract of sale of goods unless
a contrary intention appears from the terms of the contract.
The various implied conditions are given below:
Condition as to Title [sec.14 (a)]: In every contract of sale of Goods, there is an implied condition that the
seller has right to sell the goods at the time the sale is affected. In case of an agreement to sell, the seller will
have the right to sell the goods at the time when the property is to pass from the seller to the buyer. This
condition is called a condition as to title.
The condition as to the sellers title is very essential to protect the interest of the innocent buyers. The
whole object of the sale is to transfer the property from one person to another.
54
Example: A purchased a second hand car from B, a car dealer. After a few months, the car was taken by the
Police because, it was a stolen one. A was forced to return the car to the true owner. Held, A could recover the
full price from B. Here there was a breach of condition as to title because B had no right to sell the car.
Condition as to Description [sec.15]:
Where there is a contract of sale of goods by description, there is
an implied condition that the goods shall correspond with description. The main idea is that the goods supplied
must be same as were described by the seller. Sale of goods by description includes many situations as under:
Where the buyer has never seen the goods and guys them only on the basis of description given by the
seller.
Where the buyer has seen the goods but he buys them only on the basis of description given by the
seller.
Where the method of packing has been described.
Condition as to Sample [sec.17]: In case of a contract of sale by sample, the implied conditions are:
The goods delivered shall correspond with the sample.
Buyer shall have a reasonable opportunity of comparing the goods with the sample.
Goods shall be free from apparent (noticeable) defects.
Condition as to Sample as well as Description [sec.15]: In case of a contract of sale by sample and
description, the implied condition is that the goods shall correspond with both, the sample as well as
description.
Condition as to Quality [sec.16 (1)]:
The general rule is caveat emptor, i.e., let the buyer beware.
So, the seller need not disclose the faults in the goods he sells. The buyer must buy the goods after having
satisfied himself about the quality and fitness. According to sec.16 of the Sale of Goods Act, there shall be no
implied condition as to Quality for particular purpose. But, there is an implied condition as to Quality only if the
following requirements are fulfilled.
The goods are required by the buyer for a particular purpose.
The buyer should make known to the seller with regard to the particular purpose.
The buyer should rely on the skill or judgement of the seller.
Condition as to Merchantability Quality [sec.16 (2)]:
When the goods are sold by description it is implied
that the goods shall correspond with the description and also that they shall be a Merchantable Quality i.e. a
quality that is ordinarily accepted in the market. Goods will be unmerchantable if they have defect which will
make them unfit for ordinary use or are such that a reasonable person knowing of their condition would not buy
them.
Condition as to Wholesomeness: In the case of eatables and provisions or foodstuffs, there is an implied
condition as to wholesomeness. Condition as to wholesomeness means that the goods shall be fit for human
consumption.
Example: X bought milk from Ys diary. The milk contained typhoid terms. Xs wife consumed milk, became
infected and died. Y was liable for damages because the milk was not fit for human consumption.
EXPRESS WARRANTIES: It is a warranty which has been expressly agreed upon both parties at the time of
contract of sale. It may be noted that it is open to both the parties to include in their contract many number of
express warranties.
IMPLIED WARRANTIES AND ITS REMEDIES: It is the warranty that the law implies into the Contract of Sale.
That is, it is the stipulation which has not been included in the contract of sale in express word. But the law

55
presumes that the parties have incorporated in into their contracts. Following are the implied warranties that are
contained in the Sale of Good Act.
Warranty as to Quiet Possession [sec.14 (b)]: As per this warranty, the buyer shall have and enjoy the Quiet
Possession of the goods. If buyers right of possession and enjoyment is disturbed by anyone, then the buyer can
recover the damages from the seller through the court of law.
Warranty as to Free from Encumbrance [sec.14 (c)]: There is an implied warranty that the goods are free
from any charge or encumbrance in favour of any third person if the buyer is not aware of such charge or
encumbrance. The breach of this warranty gives a right to claim damages from the seller.
Warranties implied by Customer: As the parties enter into an agreement subject to the known customs or
usage of trade, implied warranties may be attached to a contract of sale by custom or usage of trade.
TRANSFER OF PROPERTY
What do you mean by transfer of property? State the significance of transfer of property and the legal
rules relating thereto.
Meaning: The Transfer of property in goods means transfer of ownership of goods. The term property in the
goods may be defined as the legal ownership of the goods. The term property in the goods must be
distinguished from the term possession of the goods. The term property in the goods means the ownership of
the goods, whereas the term possession of the goods simply mean the custody or physical control over the
goods. The expression transfer of property means the transfer of ownership of the goods from seller to the
buyer so as to constitute the buyer the owner thereof.
IMPORTANCE OF TRANSFER OF PROPERTY
The right and liabilities of the parties are linked with the transfer of ownership. The following points are
significant for the transfer of ownership of the goods.
1. Risk follows ownership: Risk passes to the buyer as property in the goods passes to him. The risk of
destruction or loss of goods sold falls on the buyer and not on the seller through the goods may still be in
the possession of seller.
2. Action against third parties: When there is danger to the goods being damaged by the action of third
parties. It is only the owner who can take action. That is the right to proceed against a third party for
destruction or damage to the goods depends not on possession but on the transfer of property.
3. Suit for price: The seller can see for the price, unless otherwise agreed, only if the goods have become
the property of the buyer. That is, the transfer of property confers upon the seller the right to see the
buyer for the prices.
4. Insolvency: hen the buyer or seller becomes insolvent, the official assignee to determine the insolvent is
the owner of the goods at the time of his becoming insolvent. If he finds that he is the owner of the
goods he can take over the goods otherwise he cannot take over it.
PROVISIONS AND RULES REGARDING TRANSFER OF PROPERTY
Goods to be Ascertained: According to sec.18, where there is a contract for the sale of unascertained
goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained.
Parties Intention: According to sec.19 (1), where there is a contract for the sale of specific goods, the
property in them is transferred to the buyer at such time as the parties to the contract intend it to be
transferred.
56
When no intention is expressed: According to sec.19 (3), unless a different intention appears, the
rules contained in section 20 to 24 of the Sale of Goods Act are rules for ascertaining the intention of the
parties as to the time at which the property in the goods is to pass to the buyer.
DOCUMENTS OF TITLE TO GOODS
A document of title to goods is a proof of the ownership of the goods. It authorizes its holder to receive
goods mentioned therein or to further transfer such right to another person by proper endorsement and delivery.
Bill of lading: A bill of lading is a receipt given by the ship owner acknowledging the receipt of goods
for carriage.
Dock Warrant: A dock warrant is document which is issued by a dock owner. It authorizes the person
holding it to receive the possession of the goods.
Warehouse keepers certificate: Warehouse keepers certificate is a document which issued by the
warehouse keeper. It is a certificate by the warehouse keeper that the goods specified in the document
are in the warehouse.
Railway receipt: A railway receipt is a document which issued by the railways as the acknowledgement
of the receipt of goods. It provides that on surrender of the receipt at the destination of the goods by the
consignee the goods mentioned therein will be delivered to him.
Delivery order: A delivery order is an order which has given by the owner of goods directing a person
who holds the goods on his behalf to deliver them to a person named therein.
SALE BY NON-OWNERS
ENUMERATE THE CIRCUMSTANCES WHEN A NON-OWNER CAN TRANSFER A BETTER
TITLE THAN WHAT HE HIMSELF POSSESS? WHAT IS MEANT BY NAMO DAT QUOD NON
HABET?
Sale by non-owners
The general rule is expressed by the Latin maxim Namo dat quod non habet, which means that no
one can give what he does not himself possess. If the sellers title to the goods is defective, the buyers title
will also be defective because the buyer acquires his title to the goods from the seller. Hence, the seller cannot
give a better title to the buyer than he himself has.
Example: X stole a TV and delivered it to Y, an auctioneer. Y sold the TV to Z at auction. It was held that Z
obtained no title to the TV because X had no title to it.
EXCEPTIONS TO THE TRANSFER OF PROPERTY OR GENERAL RULE
The circumstances under which a seller can give a better title than what he himself has have been given
below:
1. Sale by a mercantile Agent: According to section 27, the agent must be in possession of goods or a
document title to the goods with the consent of the owner. The agent must have sold the goods in the
ordinary course of business as a mercantile agent.
Example: P, the owner of the car instructed an agent A to sell his car at not less than Rs.50, 000. But A sold the
car for Rs.40000 and misappropriated the money. B acted in good faith and without notice of the above
instruction to agent. Here, B got a good title to the car and the real owner P cannot recover the car from B.
Exceptions to the General
Rule
57
By a
Mercantile
agent
By one
of the
Joint
owners
By a
person in
Possession
under
voidable
contract
By seller in
Possession
after sale
By buyer in
possession
before
transfer of
ownership
By an
unpaid
seller
By a
finder of
goods
By a
Pawnee
or
pledge
1. Sale by one of the joint owners: According to section 28, the joint owner must be in the sole possession
of goods with the consent of the other co-owners. The buyer must have bought the goods in good faith. The
buyer must have no knowledge that the seller had no authority to sell.
Ex: X, Y and Z were the co-owners of some goods. X was in the possession of those goods with the consent of Y
and Z. X sold those goods to be B who bought them in good faith and without notice that X had no authority to
sell. In this case, B got a good title to the goods and Y and Z cannot recover the goods from B.
2. Sale by a person in possession under voidable contract:
The seller must be in possession of goods under a contract voidable 19 of Indian Contract Act, 1872 on
ground of coercion, undue influence, misrepresentation or fraud.
Example: X, by fraud obtained the possession of a diamond ring from Y. X sold the ring to B before Y rescinded
the contract. B bought the ring in good faith and without notice of Xs defective title. B got a good title and Y
cannot recover the ring from B.
3. Sale by seller in possession after sale:
According to section 30(1), the seller must be in possession of goods or a document of title to the
goods, in the capacity of a seller and not in any other capacity such as bailee. The buyer must have bought the
goods in good faith.
4. Sale by a buyer in possession before the transfer of ownership:
According to section 30(2), the buyer must be in possession of the goods or a document of title to the
goods, with the consent of the original seller and must have bought or agreed to buy the goods. The new buyer
must have bought the goods in good faith.
5. Sale by an unpaid seller:
According to section 54(3), an unpaid seller must have exercised his right of stoppage in transit.
6. Sale by a finder of goods:
The owner, if found refuses to pay the lawful charges of finder, if the goods are in danger of perishing or
of losing the greater part of its value or if the lawful charges of the finder in respect of the thing found amounts
to two third of its value.
7. Sale by a Pawnee or pledge:
The pawnor or pledger must have made a default in the payment of the debt or the performance of the
promise at the stipulated time. The Pawnee or pledge must have given a reasonable notice to the pawnor or
pledger.
PERFORMANCE OF CONTRACT
DEFINE THE TERM DELIVERY OF GOODS.
Introduction: According to section 2(2), delivery means voluntary transfer of possession from one person to
another. Delivery is a bilateral act. It requires two parties to act. If transfer of possession of goods is not
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voluntary i.e. possession is obtained by theft etc., there is no delivery. The performance is mutual and is laid
down in section 31 of the Act states that, it is the duty of the seller to deliver the goods and of the buyer to
accept and pay for them, in accordance with the terms of the contract of sale.
MODES OR TYPES OF DELIVERY
The delivery of goods may be of the following three types:
Actual Delivery: Delivery is said to be actual where the goods are physically handed over to the buyer
or his authorized agent.
Example: X sells to Y 1oo bags of wheat lying in Zs warehouse. X orders Z to deliver the wheat to Y. Z delivers
to Y. in this case there is an actual delivery of goods.
Symbolic Delivery: Delivery is said to be symbolic where some symbol of the real possession or
control over the goods is handed over to buyer.
Example: X sells to Y 100 bags of wheat lying in Zs warehouse and hands over the key of Zs warehouse to Y. in
this case, there is symbolic delivery of goods.
Constructive Delivery: Delivery is said to be constructive where a person who is possession of the
goods, acknowledges to hold the goods on behalf of the buyer.
Example: X sells to Y 100 bags of wheat lying in Zs warehouse. Y orders Z to deliver the wheat to Y, Z agrees to
hold the 100 bags of wheat on behalf of Y and makes the necessary entry in his books. In this case, there is
symbolic delivery of goods.
RULES TO DELIVERY OF GOODS
Payment and Delivery to be Concurrent [section 32]: Delivery of the goods and payment of the price
are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the
goods to the buyer and the buyer must be ready and willing to pay the price.
Mode of Delivery [section 33]: Delivery must have the effect of putting the goods into the buyers or
his authorized agents possession.
Effect of Part Delivery [section 34]: A delivery of part of goods with an intention of giving the
delivery of the whole amounts to the delivery of the whole for the purpose of transfer of ownership of
goods, but a delivery of part of goods with an intention of separating it from the whole lot does not
amount to the delivery of the whole of the goods.
Buyer to Apply for Delivery [section 35]: Unless otherwise agreed, the seller of the goods is not bound
to deliver them until the buyer applies for delivery.
Place of Delivery [section 36(1)]: It should be specified in the contract. Further, the goods must be
delivered at that place during hours on a working day.
Time of Delivery [section 36(2)]: Where under the contract of sale the seller is bound to send the goods
to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable
time.
Expenses of Delivery [section 36(5)]: Unless otherwise agreed, the expenses of putting the goods into a
deliverable state shall be borne by the seller.
Delivery of Wrong Quality [section 37]: Subject to any usage of trade, special agreement or course of
dealing the parties, the rules as to the delivery of wrong quantity are summarized as under:
The buyer may accept the goods so delivered or
The buyer may reject the goods or
The buyer may accept the goods so delivered or
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The buyer may reject the whole or

The buyer may accept the goods which are in accordance with the contract and reject the rest.
Delivery by Installments [section 38]: Unless otherwise agreed, the buyer of goods is not bound to
accept delivery by installments.
WHAT ARE THE RIGHTS AND DUTIES OF THE BUYER AND SELLER?
RIGHTS OF A BUYER:
Right to have Delivery of Goods (sec.32): The buyer has the right to take delivery of the goods on
payment of price when delivery of goods and payment of price are concurrent conditions in the contract
of sale.
Right to Reject the Goods (sec.37): The buyer is entitled to reject the goods in the following cases:
Where the seller delivers lesser quantity than that contracted for;
Where the seller delivers larger quantity than that contracted for;
Where the seller mixes the contracted goods with goods of a different description.
Right not to Accept Installments (sec.38): Subject to contract, the buyer is under no obligation to
accept delivery of the goods by installments. He can reject contract in such circumstances.
Right to Examine the Goods (sce.41): The buyer is not deemed to have accepted the goods unless and
until:
i.
He has reasonable opportunity to examine the goods;
ii.
He is afforded a reasonable opportunity of examining the goods to see whether the goods
are in conformity with the contract.
Right not to return the Rejected Goods (sec.43): Subject to agreement, the buyer is not liable to return
the goods rejected by him rightfully. It is sufficient if he intimates the seller that he refused to accept the
goods.
Right to the Notice of Insurance [sec.39 (3)]: It is the duty of the seller to give notice to the buyer to
enable him to insure the goods during the sea transit. If he fails to do so, the buyer is not liable for
destruction of goods in transit.
DUTIES OF THE BUYER
The buyer, in respect to the contract of sale, has to perform the following duties:
Duty to pay price and accept the goods [sec.31]: It is the duty of the buyer to take the delivery of the
goods and pay for them in accordance with the terms of the contract.
Duty to apply for delivery [sec.35]: The seller is not bound to deliver the goods to the buyer until the
buyer applies for delivery, in the absence of any contract of the contrary.
Duty to demand delivery at a reasonable hour [sec.36 (4)]: As per sec. 36 (4), demand or tender of
delivery may be treated as incompetent unless made at a reasonable hour.
Duty to accept installment delivery and pay for it [sec.38 (2)]: Where there is a contract for the sale
of goods to be delivered by stated installments which are to be separately paid for, it is the duty of the
buyer to accept the installment delivery and pay for it.
Duty to take delivery [sec.44]: It is the duty of the buyer to take delivery of the goods within a
reasonable time after the tender of delivery. He becomes liable to the seller for any loss occasioned by
his neglect or refusal to take delivery.
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Duty to intimate the seller when reject the goods [sec.43]: Unless otherwise agreed, it is the duty of
the buyer to inform the seller in case he refuses to accept the goods.
RIGHTS OF SELLER
Right to claim compensation [sec.44]: It is the right of the seller to claim compensation for the loss
occasioned by the buyers neglect or refusal to take delivery and also reasonable charges for the care and
custody of the goods.
Right to sue for price [sec.55 (1)]: Under a contract of sale the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the
contract, the seller may sue him for the price of the goods.
Right to sue for price against contract [sec.55 (2)]: Under a contract of sale the price is payable on a
certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller
may sue him for the price although the property in the goods has not passed and the goods have not been
appropriated to the contract.
Right to sue 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.
Right to treat the contract as subsisting [sec.60]: Where the buyer repudiates the contract before the
date of delivery of goods, seller may either treat the contract as subsisting and wait till the date of
delivery, or he may treat the contract as repudiated and sue for damages for the breach.
DUTIES OF SELLER
Duty to deliver the goods [sec.31]:
It is the duty of the seller to deliver the buyer goods in accordance with the terms of the contract.
Duty to deliver the goods at the agreed place [sec.36 (1)]:
It is the duty of the seller to send the goods to the buyer within the fixed time or within
reasonable time when no time for spending the goods is fixed.
Duty to send the goods at reasonable hour [sec.36 (4)]:
Tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is
reasonable hour is a question of fact.
Duty to give notice to the buyer [sec.39 (3)]:
Subject to the agreement, it is the duty of the seller to give notice to the buyer to get the goods
insured while the goods are sent by a route involving sea transit. If he fails to do so, goods shall be
deemed to be sellers risk during such sea transit.
UNPAID SELLER
Meaning: Section 45 lays down that a seller is unpaid :
(1) When the whole of the price has not been paid or tendered.

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(2) When a negotiable instrument or a bill of exchange has been received as conditional payment and the
condition in which it was received has not been fulfilled by reason of the dishonor of the instrument or
otherwise.
The seller remains as unpaid seller as long as any portion of the price, however small, remain unpaid.
Where the whole of price has been tendered, and the seller refused to accept such a tender, seller ceases to be an
unpaid seller. In such a case the seller loses all high right against the goods.
If there is a period of credit then the seller is not unpaid until the price become due. Against if there is a
condition attached to payment it must be fulfilled.
The unpaid sellers right can be exercised by an agent of the seller to whom the bill of leading has been
endorsed, or a consignor or an agent who has himself paid, or is directly responsible for the price.
EXPLAIN THE RIGHTS OF AN UNPAID SELLER.

The sale of Goods Act has expressly given two kinds of right to an unpaid seller of goods, namely :
Rights Against The Goods
a) Where the property in the goods has passed to the buyer.
i.
Right of Lien -- 'Lien is the right to retain possession of goods until certain charges in respect thereof
are paid. An unpaid seller who is in possession of the goods is entitled to retain them until payment of
the price, where
a) The goods have been sold without any stipulation s to credit;
b) The goods have been sold on credit, but the term of credit has expired or
c) The buyer becomes insolvent.
Where the goods have been sold on credit, the right of lien shall remain suspended over the period of credit and
shall revive on the expiry of that period.
The right of lien is linked with possession of the goods and not with the title. It is not affected even if the seller
has transferred the documents of title till he remains in possession of the goods. However, if the buyer has
further transferred the documents of title to a bona fide purchaser the seller's lien is defeated.
ii.
Right of Stoppage in transit --The right of stoppage of goods in transit, arises to an unpaid seller after
he has parted with the possession of the goods. The seller has the right to resume possession of the
goods while they are in the course of transit and to retain them until payment or tender of the price.
The right of stoppage in transit is available to an unpaid seller, when the buyer becomes insolvent and the goods
are in transit.
The buyer is said to be 'insolvent' when he has ceased to pay his debts in the ordinary course of business, or
cannot pay his debts as they becomes due whether he has committed an act of insolvency or not.
iii.
Right of Resale -- The rights of lien and stoppage in transit, would not have been of much value if he
seller had no right to resell the goods, because the seller cannot continue to hold the goods indefinitely.
Section 54 provides an unpaid seller with a limited right to resell the goods.
An unpaid seller may resell the goods -1. When the goods are of perishable nature, without giving any notice to the buyer, of the resale.
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2. In case of other goods, when after giving a notice to the buyer of his intention to resell the goods, the
buyer does not pay the price within a reasonable time; and
3. Where the seller has expressly reserved the right of resale in the contract. No notice to the buyer is
required in that case.
Where the property in the goods has not passed to the buyer
Right of with holding Delivery -- Where the property in the goods has not passed to the buyer, the unpaid
seller has the right to withhold delivery of the goods, which is similar to and co-extensive with his rights of lien
and stoppage in transit which he would have had if the property had passed.
(2) Against the buyer personally
Rights Against the Buyer Personally (Seller's Remedies Against buyer for Breach of Contract)-- Besides, the
above rights against the goods, an unpaid seller has certain rights against the buyer personally. The seller enjoys
the following rights in personam (also known as remedies for breach of contract).
1. Suit for Price -- When the property in the goods has passed to the buyer, and the buyer wrongfully
neglects or refuses to pay the price, the seller is entitled to sue him for the price.
Where under a contract of sale the price is payable on a certain day irrespective of delivery or passing of
property, and the buyer refuses or neglects to pay on that day, the seller may sue him for the price.
2. Suit for Damages for Non-Acceptance -- Where the buyer wrongfully neglects or refuses to pay for the
goods, the seller may sue him for damages for non-acceptance.
3. Suit for Damages for Repudiation of contract before date of delivery Where the buyer repudiates the
contract before the date of delivery, the seller may adopt any of the following two courses of action,
viz.a) The seller may treat the contact as rescinded and sue the buyer for damages. This is also known as
'damages for anticipatory breach'. The damages will be assessed according to the prices prevailing on the
date of breach.
b) The seller may treat the contract as subsisting and wait till the date of delivery. The contract remains
open at the risk and for the benefit of both the parties. If the buyer subsequently chooses to perform
there shall be no damages; otherwise he shall be liable to damages assessed according to the prices on
the day stipulated for delivery.
4. Suit for Interest --The seller may recover interest or special damages whereby law interest or special
damages may be recoverable.
WHAT ARE THE REMEDIES FOR BREACH OF CONTRACT OF SALE?
Remedies for Breach of Contract of Sale:
The sale of Goods act gives the following remedies to a seller and a buyer for breach of a contract of
sale.
Remedies available to seller:
Suit for price (sec.55): Where under a contract of sale, the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract,
the seller may sue him for the price of goods.
Suit for damages for non acceptance (sec.56): Where the buyer wrongfully neglects or refuses to
accept the goods and pay for the goods, the seller may sue him for damages for non acceptance of the goods.
Suit for repudiation of the contract before due date (sec.60): Where buyer repudiates the contract
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before the due date of delivery, the seller may sue him for damages for non-acceptance of goods.
Suit for interest (61): 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.
Buyer's Remedies Against Seller For Breach of Contract
A buyer also has certain remedies against the seller who commits a breach. These are:
1. Suit for Damages for Non-Delivery- When the seller wrongfully neglects or refuses to deliver the goods to
the buyer, the buyer may sue the seller for damages for non-delivery. This is in addition to the buyer's right to
recover the price, if already paid, in case of non-delivery.
2. Suit for price- Where the buyer has paid the price and the goods are not delivered to him, he can recover the
amount paid.
3. Suit for specific performance- When the goods are specific or ascertained, a buyer may sue the seller for
specific performance of the contract and compel him to deliver the same goods. The court orders for specific
performance only when the goods are specific or ascertained and an order for damages would not be an
adequate remedy. Specific performance is generally allowed where the goods are of special significance or
value e.g. a rare paining, a unique piece of jewellery, etc.
4. Suit for Breach of Warranty- Where there is a breach of warranty by the seller, or where the buyer elects or
is compelled to treat the breach of condition as breach of warranty, the buyer cannot reject the goods. The buyer
may, (a) set up the breach of warranty in extinction or diminution of the price payable by him, or (b) sue the
seller for damages for breach of warranty.
5. Suit for Damages for Repudiation of contract before Due date-Where the seller repudiates the contract
before the date of delivery, the buyer may adopt any of the following two courses of action -A. He may treat the contract as rescinded and sue the seller for damages. This is also known as 'damages
for anticipatory breach'. The damages will be assessed according to the prices prevailing on the date of
breach.
B. He may treat the contract as subsisting and wait till the date of delivery. The contract remains open at the
risk and for the benefit of both the parties. If the seller subsequently chooses to perform there shall be no
damages otherwise he shall be liable to damages assessed according to the prices on the day stipulated
for delivery.
6. Suit for interest- The buyer may recover such interest or special damages, as may be recoverable bylaw. He
may also recover the money paid where the consideration for the payment of it has failed.
In the absence of a contract to the contrary, the court may award interest, to the buyer, in a suit by him for the
refund of the price in a case of a breach on the part of the seller, at such rate as it thinks fit on the amount of the
price from the date on which the payment was made.
AUCTION SALE
Meaning: Auction sales are events whereby personal or commercial property and merchandise are sold at the
highest price to bidders who place monetary offers on the items. Auction sales can take many forms from selling
wholesale merchandise on an online auction site to holding an auction at a particular location to sell off
unwanted belongings or settle debts. Some auction sales are conducted remotely by unseen bidders via the
computer or telephone while other auctions sales are live and bidders place their bids in person in a fast-paced
fashion.
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Auction sales generally use similar formats, in that property is presented as available for viewing and purchase
to others. The property can be anything from personal or household belongings to vehicles, real estate and
promised goods or services. Many times, auctions are good ways for buyers to find bargains on the items they
most want and make purchases that are far below current market value.
CREATION OF AGENCY
Who can be a Principal?
Any person who has the legal capacity (meaning that they are not insane, or in certain circumstances a minor) to
perform an act may be a principal and empower an agent to carry out that act. Persons, corporations,
partnerships, not-for-profit organizations, and government agencies may all be principals and appoint agents.
What is the purpose of this relationship (called Agency)?
A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and
not that of the agent. It allows the principal to authorize somebody to carry out her duties, either for a specific
purpose (i.e., purchasing a house) or generally (i.e., to conduct many transactions). The agency relationship is
usually entered into by informal agreement, but also can occur by formal agreement (in certain cases, the
agency relationship must be specified in writing). The acts must be legal (i.e., principal can not hire agent to kill
the professor).
Creation of Agency: A person who has capacity to contract can enter into contract either by himself or though
some other person. If he adopts the first method there is no question of agency. If he adopts the second method,
then there is agency. The person who represents another in his dealing with third parties is called agent and that
person who is so represented by agent is called principal.
Agent compared with employee:
An employee is subject to the direct control and supervision of his employer and has to obey the lawful and
reasonable order and instruction of his employer in respect of matters falling within his scope of employment.
An employee is often the agent of his employer for certain purposes, but not all agents are employees of their
principals.
Agent compared with independent contractor: Unlike an agent, an independent contractor does not normally
have authority to enter into a binding contract on behalf of his employer with a third party.
Agent compared with attorney: An attorney is a special form of agent appointed by a principal by deed
(known as "power of attorney") to create a legally binding contract on behalf of the principal with a third party
or to do any other acts on behalf of the principal. Only a duly appointed attorney by deed can execute a deed on
behalf of his principal.
Agent compared with broker: A broker is a mercantile agent who is appointed to
make contracts for the purchase and sale of goods, but is usually not entrusted with possession of the goods. His
remuneration consists of commission (brokerage) and a broker generally contracts in the name of his principal.
EXPLAIN THE TYPES OR KINDS OR CLASIFICAITON OR MODES OF CREATION OF AGENCY
The following are different modes of creation of agency.
1. Agency by Express agreement.
2. Agency by Operation of law.
3. Agency by Ratification.
4. Agency by Implied authority.
Agency by Express agreement or Agency by appointment
a. An agency is created by express appointment when the principal appoints the agent by express agreement
with the agent. This express agreement may be an oral or written agreement between the principal and the
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agent.
b.
Contract law principles apply to an agency agreement. An agent may agree to act in consideration for a
reward. On the other hand, an agency is gratuitous if the agent agrees to act for no consideration.
c.
The general rule is that agency may be created orally and there is no formality for the creation of agency by
express agreement, except for one situation which is discussed below. This general rule applies even to
cases of appointing agents for the signing of agreements for sale and purchase of immovable property,
whether on behalf of the vendor or the purchaser.
The one exception is where an agent is appointed to execute a deed on behalf of the principal. In this case,
the agent will have to be appointed by deed, which is called a power of attorney.
Agency by operation of law: At times contract of agency comes into operation by virtue of law.
For example: According to partnership act, every partner is agent of the firm as well as other parties. It is
implied agency. On account of such implied agency only a partner can bind over firm as well as other partners,
to his activities. In the same way according to companies act promoters are regarded as agents to the company.
Agency by Ratification
Agency by ratification arises when a person (the principal) ratifies (that is, approves and adopts) an act which
has already been done in his name and on his behalf by another person (the agent) who in fact, had no actual
authority (whether express or implied) to act on his (the principal's) behalf when the act was done.
b. Ratification by itself only creates an agency relationship between the principal and the agent in respect of the
act ratified by the principal, but not in respect of any other act, whether past or future.
c. The person who ratifies an act of another person must have been in existence and have the legal capacity to
carry out that act himself both at the time when the act was done and at the time of ratification. A person may
lack legal capacity on grounds of bankruptcy, infancy or mental incapacity.
Subsequent adoption of an activity is called ratification. Soon after ratification, the person who has done the
activity becomes agent and that person who has given ratification becomes principal.
Ratification is of two types. Namely;
Express Ratification and
Implied Ratification.
The ratification where there is wording and expression is called express ratification. For example: Without A`s
direction, B has purchased goods for the sake of A from C. There after, A has given his Support to B`s activity, it
is called ratification and now A is principal and b is agent.
The ratification where there is no expression is called implied ratification. Here the mode of behavior of the
party indicates that support is given to activity concern. For example: Mr. Q has P`s money with him. Without
P`s direction Q has lent that amount to R. Thereafter, R pays interest directly to P and P has taken the amount of
interest. It indicates that P has given his support to Q`s activity.
Essentials of Valid Ratification:
1. The person, who is going to give ratification, must be in existence at the time of activity. Let us consider
pre-incorporation contracts made by promoters. Company comes into existence on the date of
incorporation. Therefore company is not in existence at the time of pre-incorporation contracts. If
company gives ratification to pre incorporation contracts, it is not valid ratification. Hence to preincorporation contracts, promoters are personally liable.
2. The person who is going to give ratification should have capacity to contract, at the time of activity as
well as at the time of ratification. In Armugan Vs Dorai Singh the minor obtains loan from money lender
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and executes a deed. Before repayment of debt, he becomes a major and executes another bond. Court
decides that the second bond also is not valid because the person who has given ratification has no
capacity to contract at the time of activity i.e. at the time of getting loan.
3. Ratification should be given within reasonable period after the activity the concept of reasonable period
depends upon nature of the situation.
4. Ratification must be absolute. To entire activity ratification is to be given. Partial ratification carries no
validity.
5. The fact of ratification must be communicated to all parties in connection with the activity.
6. Ratification attains validity only when it is given with full knowledge of facts relating to the activity.
7. The activity which is going to be ratified must be a lawful activity. For example: for the sake of A, B has
murdered C. If A gives his support to B`s activity, it is not valid ratification.
8. The person who is going to give ratification should have right to do such activities. For example: If
company gives ratification to an Ultravires activity it is not valid.
9. Ratification relates back to date of activity. Though ratification takes place after the date of activity, it
will be assumed that ratification is given on the date of activity.
10. Ratification should not lead to breach of contract. In other words ratification should not be harmful to
third party. For example: There is a rental agreement between A and B according to which three months
notice is needed at the time of vacation of house. On one day C, A`s son, has asked B to vacate the
house on that day itself. A has given his support to C`s activity. It is not valid ratification because it leads
to breach of rental agreement and at the same time it is harmful to B.
Agency by implied authority or estoppel: Agency by estoppel arises when A makes a representation to a third
party, whether by words or conduct, that B is his agent, and subsequently that third party deals with B as A's
agent in reliance on such representation. A will not be permitted (is estopped) to deny the existence of the
agency if to do so would cause damage (usually financial loss) to that third party.
b. The person who makes such representation ("A" in paragraph (a) above) is treated as having created an
agency relationship between himself as the principal and the other person ("B" in paragraph (a) above) as his
agent, although there is in fact no agreement between the two parties ("A" and "B" in paragraph (a) above) as to
the creation of the agency relationship. Agency by estoppel is sometimes called implied appointment of agent.
c. In agency by estoppel, the authority of the agent is described as only apparent or ostensible but not actual, as
the principal has, in fact, not granted the agent such authority to act on the principal's behalf. d. The extent of
apparent or ostensible authority of the agent in an agency by estoppel depends largely upon the contents of the
representation made by the principal to the third party who relies and acts on the representation. The principal is
said to "hold out" a person as his agent with such authority as the principal may induce the third party to believe
and is estopped from denying the existence of agency.
For example: A and B are brothers, A has got settled in foreign country without any request from A, B has
handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting the amount of rent
to A. Here automatically A becomes principal and B becomes his agent.
Agency by implied authority is of three types as shown below;
Agency by Necessity
Agency by Estoppel
Agency by Holding out.
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By Necessity: At times it may become necessary to a person to act as agent to the other. For example: A has
handed over 100 quintals of butter for transportation, to a road transport company. Actually it is bailment
contract, assume that in the transit all vehicles has got stopped where it takes one week for further movement.
So the transport company authorities have sold away the butter in those nearby villages. Here agency by
necessity can be seen.
By Estoppel: In presence of A , B says to C that he (B) is A`s agent though it is not so actually. A has not
restricted B from making such statement. Here agency by Estoppel can be seen
By Holding out: B is A`s servant and A has made B accustomed to bring good on credit from C. On one
occasion A has given amount to B to bring goods from C on cash basis. B has misappropriated that amount and
has brought goods on credit as usually, Here is agency by holding out and therefore A is liable to pay amount to
C.
EXPLAIN THE TYPES OF AGENTS.
Specific or particular agent: Specific or particular agent is an agent who is appointed to do a single act for the
principal. He is appointed mostly by a special power of attorney. He is also called a Special Agent. His authority
ends no sooner the particular act is performed.
General agent: General agent is an agent who is appointed to do all or general acts concerning a particular
trade or business of the principal. He is appointed mostly by general power of attorney. His authority continues
until it is terminated.
Mercantile agents:
Broker: He brings two parties together into a contract. He is employed to find a buyer or seller. He is
intermediary. He has no possession of the goods and the contract is entered into by parties directly. He
buys and sells goods on behalf of another. His contract is essentially wit a person who employs him. He
is an agent of both the seller and the buyer. He negotiates and contracts for the principal. He cannot act
or sue in his own name. He has no implied power to delegate his authority.
Commission agent: he buys or sells the goods for the buyer or the seller and receives commission. He
may or may not have possession of the goods.
Factor: He is entrusted with the possession of the goods with discretionary authority to sell, pledge or
create any right on the goods with the third person. He sells the goods in his own name at such price as
he thinks fit. He has the authority to receive the price of the goods. He has a general lien on the goods
for the monies due to him.
Auctioneer: He has an authority to sell the goods of his principal in public auction. He has no implied
authority to sell by private contract. He has the possession of the goods. He cannot sell the goods on
credit. He cannot accept any payment other than each. He performs a dual role. He is the agent of the
seller till the time of sale and when the goods are sold, he becomes the agent of the purchaser. He has
aright of a particular lien on the goods. He has authority to receive the price of the goods. He can sue the

68
buyer in his own name or the whole of the purchase price. He has an implied authority to sell without
any restrictions.
Del-credere agent: he is an agent who for an extra commission or remuneration guarantees the
performance of the contract by the third person with whom he enters into the contract on behalf of his
principal. His extra commission is known as del-credere commission. He becomes responsible if the
other party does not perform the contract. His liability is therefore secondary. His legal position is partly
that of an insurer and partly that of a surety. However, if the default is on the part of the principal and the
buyer refuses to buy, del credere agent is not liable. A del-credere agency may be inferred from the
course of dealings.
Sub agent: An agent appointed by the original agent is called a sub agent. He is under the control of the
original agent to the business of the agency (Sec 191).
Co-agent: When two or more persons are appointed as agents by the principal to act as such jointly or
severally, they are called Co-Agents. Co-Agents should concur together in exception of their authority to
bind the principal. Unless contrary is proved, they are jointly responsible. An agent who is appointed as
co-agent must exercise some amount of discretion as a man of ordinary prudence would exercise in his
own case. If he does this, he is not responsible to the principal for acts of negligence of the co-agent.
Substitute agents: (Sec 194 & 195) Where an agent holding an express or implied authority to name
another person to act for the principal in the business of the agency, has named another person
accordingly, such person is not a sub agent, but an agent of the principal for such part of the business of
the agency as is entrusted to him. Such as agent is called substitute agent. A substitute agent is the agent
of the principal and as much he is responsible to the principal.
RIGHTS AND DUTIES OF AGENCY OR AGENTS
RIGHTS OF AGENTS
1. Right of Retainer: Agent has right to deduct the amount which is due to him by principal, from amount
payable to principal.
2. Right of stoppage in transit: In case where agent is personally liable, he has right to stop the goods in
transit. The good may be moving towards customer or principal.
3. Right to claim Remuneration: As per the terms of agency contract, agent has rights to claim
remuneration.
4. Right of Indemnity: Principle of indemnity gets operated between principal and agent where principal is
implied indemnifier and agent is implied indemnity holder. So agent can make principal answerable for
all types of sufferings.
5. Right of lien: Agent can exercise right of lien but contract act has not specified whether it is general lien
or particular lien. Therefore the nature of agents lien depends upon mutual understanding.
DUTIES OF AN AGENT:

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1. To conduct principal's business according to his directions (Sec. 211): By far the most important duty of
the agent is to carry out the lawful directions of his principal. An agent is bound to conduct the business of his
principal, according to the directions given by the principal. If the principal does not give any directions, then
the agent has to conduct the business according to the custom which prevails in doing business of the same kind
at the place where the agent conducts such business. When the agent acts otherwise, and the principal suffers
any loss thereby, he must make good his loss.
Example: A asks his agent B to sell goods on cash basis. B sells goods on credit and the amount becomes
irrecoverable due to the buyer's insolvency. A must make good the loss.
2. To conduct his business with reasonable skill and diligence (Sec. 212): An agent is bound to conduct the
business of the agency with as much skill as is generally possessed by a person engaged in similar business,
unless the principal is aware of the lack of skill of the agent. If the principal suffers any loss caused directly due
to the agent's negligence, the agent must make compensation to his principal. However, an agent is not liable for
remote or indirect loss.
Examples: 1. A, an agent for the sale of goods having an authority to sell on credit, sells to B on credit without
making proper and usual enquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make
compensation to his principal in respect of any loss thereby sustained.
2. A, an insurance broker employed by B to effect an insurance on a ship, omits to see that the usual clauses are
inserted in the policy. In consequence of the omission of the clauses, nothing can be recovered from the
insurance company. A is bound to make good the loss to B.
3. To render proper accounts to his principal on demand (Sec. 213): An agent is bound to render proper
accounts to his principal on demand.
4. To communicate and obtain instructions in case of difficulty (Sec. 214): It is the duty of an agent, in case
of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his
instructions. In an emergency, however, when an agent cannot communicate with his principal, he should take
reasonable steps to protect his (principal) interest.
5. Not to deal on his own account (Sec. 215): In case an agent deals on his own account in the business of the
agency, without obtaining prior permission of his principal, the principal may repudiate the transaction. He may
repudiate the contract if any material fact has been dishonestly concealed from him by the agent, or if the
dealing of the agent has been disadvantageous to him.
Examples:A directs B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering that B
has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any
material fact, or if the sale has been disadvantageous to him.
6. Not to make any secret profit (Sec. 216): An agent has to restore the benefit gained by him to the principal,
by dealing on his own account, without the consent of the principal. He must not make any profit beyond his
remuneration.
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Example: A directs B, his agent to buy a certain house for him. B tells A that it cannot be purchased and buys
the house for himself. A may, on discovering that B has bought the house, compel him to sell it to him (A) at the
price B gave for it.
7. To account for the money received for the principal (Sees. 217 and 218): An agent after deducting all
sums due to him in respect of advances made or expenses properly incurred, is bound to pay to his principal, all
sums received on his account.
8. Liability for misrepresentation or fraud (Sec. 238): In case the misrepresentations made or frauds
committed by the agent fall outside his authority, the agent is personally liable.
9. Not to delegate authority (Sec. 190): An agent must perform acts personally which he has expressly or
impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or from the
nature of the agency, sub-agent must be employed.
10. Liability for the acts of the sub-agent (Sees. 192 and 193): An agent is liable for the acts of the sub-agent.
Where appointment of the sub-agent is legally justified, the agent is liable only to the principal. However, in
case the appointment is not legally justified, the agent is liable both to the principal and the third party.
11. Agent's duty in naming a sub-agent: An agent is bound to exercise the same amount of discretion as a man
of ordinary prudence would exercise in his own case in selecting or naming a sub-agent.
12. Not to set up an adverse title: An agent is duty-bound not to set up an adverse title. An agent must not set
up his own title or that of the third party to the goods received from the principal.
13. Not to use information obtained in the course of the agency against the principal: An agent cannot use
any information obtained in the course of agency against the Principal. If the agent uses such information, he
can be restrained by means of an injunction order.
LIABILITIES OF AGENTS.
Actually agents binds over principal to his activities but there are some situations where agent comes across
personal liability. Those situations are as follows;
1. Terms of contract of agency may create personal liability to agent.
2. The tradition which is in operation in that particular type of business. May also create personal liability
to agent.
3. If agent does not behave in his capacity as agent and thus runs the transaction in his own way, personal
liability arises.
4. When agent acts for foreign principal, agent is personally liable.
5. Pretending agent is personally liable.
6. When agent acts for principal who has not come into existence, agent is personally liable.
7. In case where principal cannot be sued, Customer sues agent and thus agent is personally liable.
8. When agency is coupled with interest then also agent is personally liable.
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EXPLAIN THE RIGHTS OF PRINCIPAL.

Rights of principal:
To repudiate contract: (Sec 215) If an agent deals on his own account in the business of the agency, without
first obtaining the consent of his principal and acquainting him with all material circumstances which have
come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either
that any material fact has been dishonestly concealed from him by the agent or that the dealings of the agent
have been disadvantageous to him.
As a rule, an agent cannot deal on his account/. Only after obtaining the consent of the principal and full
disclosure of all material facts, agent may act on his own account. However, where agents personal interest is
to conflict with principals interest, he cannot act on his own account. Where the agent acts on his own account,
principal has following rights:
1) he may repudiate the transaction
2) he may affirm the transaction and claim the benefits
3) he may claim damages for loss caused to him.
To claim benefit (Sec 216) if an agent without the knowledge of the principal, deals in the business of the
agency on his own account instead of on account of his principal, the principal is entitled to claim from the
agent any benefit which may have resulted to him from the transaction.
The principal must show that a material fact has been dishonestly concealed or the dealing of an agent has been
disadvantageous to him. All profits and advantages made by the agent in the business conducted by him for his
principal must be paid over to the principal. Agent cannot make any secret profits or receive bribes. Principal is
entitled to receive all such sums and also interest on them. The position of an agent being fiduciary in character,
he cannot conflict his personal interest with his duty to the principal.
To ratify or disown agents acts: (Sec 196) where acts are done by one person on behalf of another but without
his knowledge or authority, he may elect to ratify or disown such acts.
To revoke agents authority: (Sec 203) the principal may revoke the authority given to his agent by giving a
reasonable notice of revocation at any time before the authority has been exercised so an to bind the principal.
To claim loss or profit: (Secs 211 & 212) the principal is entitled to compensation for any loss sustained by
him or to any profits accrued
1) where the agent acts contrary to the directions given by the principal; or
2) where loss is caused due to agents neglect, want of skill, or misconduct.
To demand accounts: (Sec 213) Principal is entitled to demand proper accounts from the agent.

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To refuse remuneration when agent is guilty of misconduct: (Sec 220) The principal has a right to refuse
remuneration to the agent who is guilty of misconduct in the business of the agency.
EXPLAIN TERMINATION OR CANCELLATION OF AGENCY

Termination of agency may take place in two ways either by the operation of law or by the act of parties.
A contract of agency is a species of the general contract. As such, an agency may terminate in the same way as a
contract is discharged except where the agency is irrevocable. Broadly speaking, an agency may be terminated
either by the act of parties or by the operation of law.
(a) Termination by act of parties:
A contract of agency may come to an end by the act of the parties as follows:
1. By agreement: An agency is generally created by an agreement, it may also be terminated by an agreement
so far as future transactions are concerned. Transactions that took place prior to the termination shall continue to
bind the principal. However, notice to third party is necessary.
2. By revocation by the principal: Sec. 203 provides that the principal may, except where the agency is
coupled with interest, revoke the agency at any time before the authority has been exercised so as to bind the
principal.
However, where the authority has been partly exercised the principal cannot revoke the authority in respect of
acts and obligations already undertaken.
Further, if the agency is for a particular period and it is revoked earlier, without sufficient cause, the principal
must compensate the agent. A reasonable notice of revocation to the agent and third party must be given,
otherwise the principal will be liable to third party for the acts of the agent and to the agent for compensation.
Revocation may be express or implied in the conduct of the principal or agent.
3. By revocation by the agent: An agent has also a right to revoke the agency by giving a reasonable notice in
the same manner and with same liabilities regarding compensation, as discussed above in the case of revocation
by the principal.
4. By notice:
i. If the agency agreement provides that the agency may be terminated upon either party serving on the other
written notice of a specified duration, for example, three months' written notice, either party may terminate
the agency agreement by serving the required notice on the other party.
ii.
However, if the agency agreement does not contain any termination provision, the general rule is that
reasonable notice has to be given to the other party to terminate the agency.
(b) Termination by operation of law:

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An agency is terminated by operation of law as follows:

1. By performance or completion of the act of agency: It is, by far, the most usual manner in which an
agency is terminated.
2. By expiry of time: If the agent is appointed for a particular period, the agency is terminated, on the expiry of
that period even if the whole of the work or purpose of the agency has not been accomplished.
3. By death or insanity of either the principal or agent: Knowledge of the death or insanity of either the
principal or the agent terminates the agency.
4. By insolvency of the principal: Similarly, knowledge of the insolvency of the principal will terminate the
agency. As regards insolvency of the agent, the Act is silent. However, it is logical to say that the insolvency of
the agent also terminates the agency.
5. By dissolution of a company: A company being an artificial person cannot be declared insolvent. However,
when it is not able to pay its debt, it can be wound up. Hence on dissolution of a company, the agency is
terminated.
6. By destruction of the subject-matter: When the subject matter, for which the agency was created, is
destroyed, the agency is terminated. For example, A is employed to sell a scooter. Before the sale is negotiated,
the scooter is destroyed by fire, the agency is terminated.
7. By the principal or agent becoming alien enemy: When the principal or agent becomes an alien enemy, the
agency is terminated, e.g., when a war breaks out between two countries, the agency is at an end. It may be
revived after the war is over.
8. By termination of sub-agent's authority: A sub-agent derives his authority through the agent. Hence
termination of an agent's authority also puts an end to the sub-agent's authority (Sec. 210).
WHEN TERMINATION OF AGENCY TAKES EFFECT?

The termination of authority of an agent does not take effect until it becomes known to the parties concerned,
i.e., the agent and third party (Sec. 208).
Examples:
(1) A directs B to sell goods for him, and agrees to give B 5% commission on the price fetched by the goods.
Later on a through, by a letter, revokes B's authority. B, after the letter is sent, but before he receives it, sells the
goods for Rs. 1,000. The sale is binding on A, and B is entitled to his commission.
(2) A at Chennai, through a letter, directs B to sell for him some cotton lying in a warehouse in Mumbai and
afterwards, through another letter revokes his authority to sell, and directs B to send the cotton to Chennai. B
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after receiving the second letter, enters into a contract with C who knows about the first letter, but not about the
second, for the sale of the cotton to him. C pays B the money, with which B absconds, C's payment is good as
against A.
Sec. 210 provides that the termination of the agent's authority will also put an end to the sub- agent's authority.
However, termination of an agent's authority does not ipso facto terminate the authority of the substituted
agent. Therefore, a separate notice of termination of substituted agent's authority is necessary.
INDIAN PARTNERSHIP ACT, 1932

WHAT IS A PARTNERSHIP?
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses
of the business undertaking in which all have invested. Partnerships are often favored over corporations for
taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to
the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the
jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they
would as shareholders of a corporation.
CHARACTERISTICS OR ESSENTIALS OR FEATURES OF PARTNERSHIP

If the entrepreneur individually unable to take up the business because of shortcomings attached to sole
proprietor form of business, he may go for partnership form of business nose characteristics or essential features
are as follows:
Association of two or more persons: Partnership is formed by the association of two or more persons.
However, the maximum number of partners cannot exceed ten in case banking business and twenty in case of
other business, otherwise it will be illegal.
Contractual relationship: Partnership arises from contract as the partners enter into agreement to carry on a
business. The contract may be oral or written. To become a partner must be of the age of majority and is of
sound mind. A minor cannot be a partner but can admitted to the partnership for benefits only with the consent
of all the partners.
Existence of lawful business: Partnership is formed for the purpose of carrying on lawful business only. The
term business is very wide and includes every trade, occupation or profession. But when the purpose is to do
some charitable work or to share the income of property held in joint ownership, it will not constitute
partnership.
Sharing of profits on agreed basis: Sharing of profits is one of the essential characteristics of partnership. The
partners share the profits as per agreement. This implies at the partnership must have the motive to earn profit.

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Therefore, business carried on with philanthropic motive or only one partner entitled to the entire profit of the
business shall 3t be considered as a partnership.
Principal-agent relationship: In partnership, there is existence of principal-agent relationship. Every partner is
entitled to take part in the management of the business. When one or few partners do manage the business they
represent the firm and other partners. As gents, they can bind the firm and the other partners for their action in
the ordinary course of business. The principal-agent relationship is a real test of the existence of partnership.
Unlimited liability: The liability of the partners is unlimited. This implies that the private properties of the
partners are at risk as these can be used to meet the obligations of tie firm when the assets of the firm are not
sufficient for the purpose. Each partner is jointly id severally liable for the debts and obligations of the business.
Restriction on transfer of shares: A partner cannot transfer his share in the business an outsider without the
consent of all other partners. When there is transfer of share, a new partnership comes into existence even
though the same business is continued. Every addition pr deletion of a partner changes the entire partnership
deed.
Utmost good faith: Partnership is a contract of uberrimae fidei, i.e. utmost good faith. There is mutual trust and
confidence among the partners. Therefore, every partner must be just and faithful to one another, render true and
proper accounts and provide full information concerning the business.
ADVANTAGES OF PARTNERSHIP
Easy to set up
More capital can be brought into the business.
Partners bring new skills and ideas to a business
Decision making can be much easier with more brains to think about a problem.
Partners share responsibilities and duties of the business.
Division of labour is possible as partners may have different skills.
DISADVANTAGES OF PARTNERSHIP
There is unlimited liability: All the partners are responsible for the debts of the firm and if the business
goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal
belongings.
Disagreement among the partners can lead to problems for the business.
There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the
business may find it difficult to expand after a certain limit.
There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or
becomes bankrupt.

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PARTNERSHIP DEED
Before starting a partnership business, all the partners have to draw up a legal document called a Partnership
Deed
of
Agreement.
It
usually
contains
the
following
information:
There are many parts that should be included in any articles of partnership. These are:
Names of included parties - includes all names of people participating in this contract
Commencement of partnership- includes when the partnership should begin. The date of the contract is
assumed as this date, if none is given.
Duration of partnership - includes how long the partnership should last. It is automatically assumed that
the death of one of the contracting parties breaks the contract, unless otherwise stated.
Business to be done - includes exactly what will be done in this partnership. This section should be very
particular to avoid confusion and loopholes.
Name of firm - includes the name of the business entity.
Initial investments - includes how much each partner will invest immediately or by installments.
Division of profits and losses - includes what percentages of profits and losses each partner will receive.
If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all
partners' debts, including their own).
Ending of the business - includes what happens when the business winds down. Usually this includes
three parts: 1) All assets are turned into cash and divided among the members in a certain proportion; 2)
one partner may purchase the others' shares at their value; 3) all property is divided among the members
in their proper proportions.
Date of writing - includes simply the date that the contract was written.
EXPLAIN THE TYPES OR KINDS OR CLASSIFICATION OF PARTNERSHIP AND PARTNERS

There are four kinds of partnership
1. General partnership: In a general partnership, the liability of each partner is unlimited. It means that the
firm's creditors can realise their dues in full from any of the partners by attaching their personal property if the
firm's assets are found to be inadequate to pay off its debts.
An exception is made in the case of a minor partner whose liability is limited to the amount of his share in the
capital and profits of the firm. In India all partnership firms are general partnerships.
Each partner of a general partnership is entitled to take active part in the management of the firm, unless
otherwise decided by the other partners.
2. Limited partnership: A limited partnership is a partnership consisting of some partners whose liability is
limited to the amount of capital contributed by each. The personal property of a limited partner is not liable for
the firm's debts.
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He cannot take part in the management of the firm. His retirement, insolvency, lunacy or death does not cause
dissolution of the firm. There is at least one partner having unlimited liability. A limited partnership must be
registered.
Limited partnership is now allowed in India under the Limited Liability Partnership Act. In England limited
partnership can be formed under the Limited Partnership Act, 1907 and in the USA under the Partnership Act,
1890
The chief characteristics of a limited partnership are as follows:
1. There must be at least one partner with unlimited liability. The liability of the remaining partners is limited to
their capitals in the firm. Thus, a limited partnership consists of two types of partners, general partner and
limited partner.
2. The limited partner cannot take part in the management of the firm. He has no implied authority to represent
and bind the firm. However, he is allowed to inspect the books of accounts of the firm.
3. The limited or special partner cannot assign his share to an outsider without the consent of the general
partner.
4. The limited partner cannot withdraw any part of his capital.
5. A limited partnership must be registered.
Advantages
Limited partnership offers the following benefits:
i. It enables people to invest in a business without assuming unlimited risk and without devoting much time and
attention in management of business.
ii. It permits the mobilisation of larger financial resources from cautious and conservative investors.
iii. It provides an opportunity to able and experienced persons to manage the business without any interference
from other partners. Complete control and personal supervision help to ensure prompt decisions and uniform
actions.
iv. It is more stable than general partnership because it is not dissolved by the insolvency, retirement, incapacity
or death of limited partner.
Disadvantages
Limited partnership suffers from the following drawbacks:
(i) The limited partners are deprived of the right to manage. They remain at the mercy of the general partner.
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(ii) The general partner may misuse his power to exploit the limited partners.
(iii) A limited partnership enjoys little credit standing as the liability of some partners is limited. It has to be
registered.
3. Partnership at will: It is a partnership formed for an indefinite period. The time period or the purpose of the
firm is not mentioned at the time of its formation. It can continue for any length of time depending upon the will
of the partners. It can be dissolved by any partner by giving a notice to the other partners of his desire to quit the
firm.
4. Particular partnership: It is a partnership formed for a specific time period or to achieve a specified
objective. It is automatically dissolved on the expiry of the specified period or on the completion of the specific
purpose for which it was formed.
TYPES OF PARTNERS
There can be the following types of partners:
1. Active or working partner: Such a partner contributes capital and also takes active part in the management
of the firm. He bears an unlimited liability for the firm's debts. He is known to outsiders. He shares profits of
the firm. He is a full-fledged partner.
2. Sleeping or dormant partner: A sleeping or inactive partner simply contributes capital. He does not take
active part in the management of the firm. He shares in the profits or losses of the firm. His liability for the
firm's debts is unlimited. He is not known to the outside world.
3. Secret partner: This type of partner contributes capital and takes active part in the management of the firm's
business. He shares in the profits and losses of firm and his liability is unlimited. However, his connection with
the firm is not known to the outside world.
4. Limited partner: The liability of such a partner is limited to the extent of his share in the capital and profits
of the firm. He is not entitled to take active part in the management of the firm's business. The firm is not
dissolved in the event of his death, lunacy or bankruptcy.
5. Partner in profits only: He shares in the profits of the firm but not in the losses. But his liability for the
firm's debts is unlimited. He is not allowed to take part in the management of the firm. Such a partner is
associated for his money and goodwill.
6. Nominal or ostensible or quasi partner: Such a partner neither contributes capital nor takes part in the
management of business. He does not share in the profits or losses of the firm. He only lends his name and
reputation for the benefit of the firm.

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He represents himself or knowingly allows himself to be represented as a partner. He becomes liable to

outsiders for the debts of the firm. A nominal partner can be of two types:
(a) Partner by estoppels: A person who by his words (spoken or written) or conduct represents himself as a
partner becomes liable to those who advance money to the firm on the basis of such representation.
He cannot avoid the consequences of his previous act. Suppose a rich man, Mohan, is not a partner but he tells
Sohan that he is a partner in a firm called Shipra Enterprises.
On this impression, Sohan sells good worth Rs. 20,000 to the firm. Later on the firm is unable to pay the
amount. Sohan can recover the amount from Mohan. Here, Mohan is a partner by estoppels.
(b) Partner by holding out: When a person is declared as a partner and he does not deny this even after
becoming aware of it, he becomes liable to third parties who lent money or credit to the firm on the basis of
such a declaration.
Suppose, Shipra tells Sohan in the presence of Mohan that Mohan is a partner in the firm of Shipra Enterprises.
Mohan does not deny it. Later on Sohan gives a loan of Rs. 20,000 to Shipra Enterprises on the basis of the
impression that Mohan is a partner in the firm. The firm fails to repay the loan to Sohan. Mohan is liable to pay
Rs. 20,000 to Sohan. Here, Mohan is a partner by holding out.
7. Minor as a partner: A minor is a person who has not completed 18 years of age. A minor cannot become a
partner because he is not qualified to enter into a contract. But he may be admitted to the benefits of partnership
with the mutual consent of all the partners.
On being so admitted, a minor becomes entitled to a share in the profits of the firm. He can inspect and copy the
books of account of the firm but he cannot take active part in the firm's management.
His liability is limited to the extent of his share in the capital and profits of the firm. He cannot file a suit against
the firm or its partners to get his share except when he wants to disassociate himself from the firm.
After becoming a major, the minor must give a public notice within six months if he wants to break off his
connections with the partnership firm.
If he does not give such a notice within six months or if he decides to remain in the firm, he becomes liable to
an unlimited extent for the debts of the firm from the date he was admitted to the benefits of partnership. He
also becomes entitled to take active part in the management of the firm's business.
8. Sub partner: He is a third person with whom a partner agrees to share his profits desired from the firm. He
does not take part in the management of the firm. He is not liable for the firm's debts.
EXPLAIN THE RIGHTS, DUTIES AND LIABILITIES OF PARTNERS

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The Partnership Deed contains the mutual rights, duties and obligations of the partners, in certain cases, the
Partnership Act also makes a mandatory provision as regards to the rights and obligations of partners. When
there is no Deed or the Deed is silent on any point, :ne rights and obligations as provided in the Partnership Act
shall apply.
Rights of a Partner:
The rights of a partner are as follows:
i. Right of the partner to take part in the day-to-day management of the firm.
ii. Right to be consulted and heard while taking any decision regarding the business.
iii. Right of access to books of accounts and call for the copy of the same.
iv. Right to share the profits equally or as agreed upon by the partners.
v. Right to get interest on capital contributed by the partners to the firm.
vi. Right to avail interest on advances paid by the partners for business purpose.
vii. Right to be indemnified in respect of payment made or liabilities incurred or for protecting the firm from
losses.
viii. Right to the use of partnership property exclusively for partnership business only not himself.
ix. Right as agent of the firm and implied authority to bind the firm for any act done in carrying the business.
x. Right to prevent admission of new partners/expulsion of existing partners.
xi. Right to continue unless and otherwise he himself cease to become partner.
xii. Right to retire with the consent of other partners and according to the terms-and conditions of deed.
xiii. Right of outgoing partner/legal heirs of deceased partner.
2. Duties of a Partner:
The duties of a partner are as follows:
i. To carry on the business to the greatest common advantage: Every partner is bound to carry on the
business of the firm to the greatest common advantage. In other words, the partner must use his knowledge and
skill in the conduct of business to secure maximum benefits for the firm.

81
ii. To be just and faithful to each other: Every partner must be just and faithful to other partners of the firm.
Every partner must observe utmost good faith and fairness towards other partners in business activity.
iii. To render true accounts: Every partner must render true and proper accounts I his co-partners. Each and
every entry in the books must be supported by vouchers and di explanations if demanded by other partners.
iv. To provide full information: Every partner must provide full information of activities affecting the firm to
the other co-partners. No information should be concealed, kept secret.
v. To attend diligently to his duties: Every partner is bound to attend diligently to duties in the conduct of the
business of the firm.
vi. To work without remuneration: A partner is not entitled to receive any kind remuneration for taking part in
the conduct of the business. But in practice, the working partners are generally paid remuneration as per
agreement, so also commission in some case.
vii. To indemnify for loss caused by fraud or willful neglect: If any loss is caused to the firm because of a
partner's willful neglect in the conduct of the business or fraud commit by him against a third party then such
partner must indemnify the firm for the loss.
viii. To hold and use partnership property exclusively for the firm: The partners must hold and use the
partnership property exclusively for the purpose of business of the firm not for their personal benefit.
ix. To account for personal profits: If a partner derives any personal profit from partnership transactions or
from the use of the property of the firm or business connection the firm or the firm's name, he must account for
such profit and pay it to the firm.
x. Not to carry on any competing business: A partner must not carry on competing business to that of the
firm. If he carries on and earns any profit then he must account for the profit made and pay it to the firm.
xi. To share losses: It is the duty of the partners to bear the losses of the firm. ' partners share the losses equally
when there is no agreement or as per their profit share ratio.
xii. To act within authority: Every partner is bound to act within the scope of authority. If he exceeds his
authority and the firm suffers from any loss, he shall have compensate the firm for such loss.
xiii. Duty to be liable jointly and severally: Every partner is jointly and individual liable to the third parties
for all acts of the firm done while he is a partner.
xiv. Duty not to assign his interest: A partner cannot assign or transfer his partner interest to an outsider so as
to make him the partner of the firm without the consent of other partners. However, he can assign his share of
the profit and his share in the assets the firm where the assignee shall not be entitled to interfere in the conduct
of the business

82
3. Liabilities of a Partner to Third Parties:

The following are the liabilities of a partner to third parties:
i. Liability of a partner for acts of the firm: Every partner is jointly and severally liable for all acts of the firm
done while he is a partner. Because of this liability, the creditor of the firm can sue all the partners jointly or
individually.
ii. Liability of the firm for wrongful act of a partner: If any loss or injury is caused to any third party or any
penalty is imposed because of wrongful act or omission of a partner, the firm is liable to the same extent as the
partner. However, the partner must act in the ordinary course of business of the firm or with authority of his
partners.
iii. Liability of the firm for misutilisation by partners: Where a partner acting within his apparent authority
receives money or property from a third party and misutilises it or a firm receives money or property from a
third party in the course of its business and any of the partners misutilises such money or property, then the firm
is liable to make good the loss.
iv. Liability of an incoming partner: An incoming partner is liable for the debts and acts of the firm from the
date of his admission into the firm. However, the incoming partner may agree to be liable for debts prior to his
admission. Such agreeing will not empower the prior creditor to sue the incoming partner. He will be liable only
to the other co-partners.
v. Liability of a retiring partner: A retiring partner is liable for the acts of the firm done before his retirement.
But a retiring partner may not be liable for the debts incurred before his retirement if an agreement is reached
between the third parties and the remaining partners of the firm discharging the retiring partner from all
liabilities. After retirement the retiring partner shall be liable unless a public notice of his retirement is given.
No such notice is required in case of retirement of a sleeping or dormant partner.
DIFFERENCE BETWEEN PARTNERSHIP AND CO OWNERSHIP

The major difference between a partnership a co-ownership may be noted:
1. Mode of creation: Partnership necessarily arises from contract. But co-ownership may arise from contract or
from the operation of law or from status.
Business: Partnership exists for carrying on some business and to share the profits c: such business- Coownership may not lead to business activities for the purpose of profit.
Nature of interest: Partnership involves community of interest, whereas co-ownership cay not necessarily
involve any such interest.

83
Transfer of shares: A partner cannot transfer his shares to an outsider without the consent of all the other
partners. A co-owner can do so.
Number of members: In partnership, the maximum number of members cannot exceed 10 in banking business
and 20 in any other type of business, whereas there is no maximum limit of members in case of co-ownership.
Agency relationship: A partner acts as an agent and can bind the firm for his acts in the ordinary course of
business. A co-owner is not an agent of the other co-owners.
Partition of joint property: A partner has no right to demand partition of joint property in specific but he can
sue his co-partners for dissolution of the firm and accounts. A c 3-owner is entitled to sue for the partition of the
joint property.
Lien for expenses: A partner has a lien on the partnership property for the expenses incurred by him on such
property on behalf of the firm. A co-owner has no such lien for expenses incurred or payment of a common
debt.
Regulating law: Partnership is governed by the Indian Partnership Act, 1932 but there is no statute law to
govern co-ownership.
DIFFERENCE BETWEEN PARTNERSHIP AND COMPANY

The following are the main distinctions between a partnership firm and a company.
(1) Registration : A company comes into existence only after its registration under the Companies Act, 1956.
In case of partnership, the registration is not compulsory.
(2) Legal Status: company is a legal person and regarded by law as a single person. A partnership is a
collection of individual.
(3) Minimum number of persons: The minimum number of persons required to form a company is two in case
of private companies and seven in the case of public companies. The minimum number of persons required to
form a partnership is two.
(4) Maximum number of persons: A public company may have any number of members. In case of a private
company the maximum number cannot be more than fifty. In trading partnership the maximum number of
partners is twenty, in a banking business, the maximum number if ten.
(5) Transferability: A shareholder can transfer his share without the consent of other shareholders. In case of
partnership, a partner cannot transfer his share without the consent of other partners.
(6) Liability of members : The liability of the members of a company is limited whereas liability of partners
for debts of a firm is unlimited.

84
7) Contractual capacity: The shareholders of a company can enter into contract with the company and can be
employees of the company. Partners can contract with other partners but not with firm as a whole.
(8) Length of existence: The death or retirement of a partner dissolves the partnership. But company having
legal existence can continue inspite of death and insolvency of the members. It has a perpetual existence.
9) Statutory obligations: A company is required to comply with various statutory obligations regarding
management e.g.; filing balance sheet, maintaining prescribed registers. In case of partnership, there are no
statutory obligations.
10) Authority of members: Management of a company vests in the hands of a few directors elected from
amongst and by the shareholders. A shareholder has no say in the management. Whereas in the case of
partnership all partners are entitled to share in the management of a firm. A partner is an agent of the firm and
can bind it by his acts.
(11) Distribution of Profits: Profits of a firm are distributed in agreed proportion or equally in absence of
agreement among the partners but profits in case of a company can be distributed according to the provision of
the articles by the directors.
(12) Audit: Audit in case of company is compulsory but in case of partnership firm it is not compulsory.
DIFFERENCE BETWEEN PARTNERSHIP AND JOINT HINDU FAMILY BUSINESS

PARTNERSHIP
JOINT HINDU FAMILY BUSINESS

85
# Section 5 of the IPA says that Partnership is created

by status. In particular, the members of a Hindu
undivided family carrying on a family business as
such or a Burmese Buddhist husband and wife
carrying business as such are not partners in such
business.# The relationship of partnership arises from
contract.
# It can arise by an agreement.
# New members can be entered into by the consent of
all the members.
# Females can be members too.
# A partner cannot be a minor except in case of
benefits of an already existing partnership.
# Death of a partner dissolves the firm unless agreed
otherwise.
# Mutual agency is important. Here, every partner is
an agent of the rest of the partners and his acts bind
the firm.
# The remedy for a partner is a suit for dissolution and
accounts.
# The act does not prohibit the members of the joint

Hindu family to enter into partnership amongst
themselves.# It exists because of the status.
# One becomes a member by birth.
# A family always arises by the operation of law and
not contract.
# The family members are not mutual agents.
# Females cannot be members.
# Minors are members from the date of their birth.
# Death leaves the business unaffected.
# The karta has the authority to contract and bind the
family; the other coparceners cannot do so.
# Only karta is liable unlimitedly; other members are
liable only to the extent of share in profits of the
family business unless they took part in the act or
transaction done by the karta.
# The remedy for a co-parcener is a suit for partition.
PROCEDURE FOR REGISTRATION OF PARTNERSHIP FIRM IN INDIA
The law relating to a partnership firm is contained in the Indian Partnership Act, 1932.
Under Section 58 of the Act, a firm may be registered at any time ( not merely at the time of its
formation but subsequently also ) by filing an application with the Registrar of Firms of the area in
which any place of business of the firm is situated or proposed to be situated.
o Application shall contain: name of the firm
place or principal place of business
names of any other places where the firm carries on business.
date on which each partner joined the firm
name in full and permanent address of partners.
duration of the firm
o Application shall be signed and verified by all the partners or their duly authorized agents.
o Application shall be accompanied by prescribed fee as well as the following documents:

86
Prescribed Registration Form for Incorporation of a Company. (Form No. 1 and

Specimen of Affidavit)
certified true copy of the Partnership deed entered into.
ownership proof of the principal place of business
o Name of the firm should not contain any words which may express or imply the approval or
patronage of the government except where the government has given its written consent for the
use of such words as part of the firms name.
Under Section 59 of the Act, when the Registrar of Firms is satisfied that the provisions of section 58
have been duly complied with, he shall record an entry of the statement in the Register of Firms and
issue a Certificate of Registration.
penalty for furnishing false particulars (Section 70)
Any person who signs any statement, amending statement, notice or intimation under this Chapter
containing any particular which he knows to be false or does not believe to be true or containing
particulars which he knows to be incomplete or does not believe to be complete, shall be punishable
with imprisonment which may extend to three months, or with a fine or with both.
Any alterations, subsequent to Registration shall be notified to the registrar:o Change in firm name and principal place of business (Section 60) shall require sending of a new
application form along with the prescribed fee, duly signed and verified by all the partners.
o Change relating to opening and closing of branches. (Section 61)
When a registered firm discontinues business at any place or begins to carry on business at any
place, such place not being its principal place of business, any partner or agent of the firm may
send intimation thereof to the Registrar.
o
Change in the name and permanent address of any partner (Section 62)
When any partner in a registered firm alters his name or permanent address, an intimation of the
alteration may be sent by any partner or agent of the firm to the Registrar
Change in the constitution of the firm and its dissolution [Section 63(1)]
when change occurs in the constitution of the firm, any of the new, continuing or the outgoing
partner, while when a registered firm is dissolved , any person who was a partner immediately
before the dissolution or the agent of any such partner or person specially authorized on his
behalf, may give notice of such a change to the Registrar, specifying the date thereof.
o Under Section 63(2), when a minor who has been admitted to the benefits of partnership in a
firm attains majority and elects to become or not to become a partner, he or his agent specially
authorized in this behalf, may give notice to the Registrar that he has or has not become a
partner.

87
o Accordingly, the various forms prescribed under the Indian Partnership Act, 1932, for the
alterations
in
the
registered
partnership
firm
are:a. Form No. II :- For change of principle place of business & change in the name of the firm.
b. Form No. III :- For change of the other then principle place of business.
c. Form No. IV :- For change of name of the partners & permanent address of the partners.
d. Form No. V :- For change of constitution of forms & addition or retirement of partner.
e.
Form
No.VI
:-
For
dissolution
of
the
firm
f. Form No. VII :- For minor partner attains the age of majority.
Partnership Act, 1932 does not provide for compulsory registration of firms. It is optional for partners to
set the firm registered and there are no penalties for non-registration.
However, Section 69 of the Act which deals with the effects of non-registration denies certain rights to
an unregistered firm. Under the Act :-
o A partner of an unregistered firm cannot file a suit in any court against the firm or other partners
for the enforcement of any right arising from a contract or right conferred by the Partnership Act
unless the firm is registered and the person suing is or has been shown in the Register of Firms as
a partner in the firm.
o No suits to enforce a right arising from a contract shall be instituted in any Court by or on behalf
of a firm against any third party unless the firm is registered and the persons suing are or have
been shown in the Register of Firms as partners in the firm.
o An unregistered firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts
owned by the disputant parties to one another) or other proceedings in a dispute with a third
party.
Hence, every firm finds it advisable to get itself registered sooner or later.
However, non-registration of a Partnership firm shall not affect:o The rights of third parties to sue the firm and/or its partners.
o The firms or partners in the firms which have no place of business in the territories to which this
Act extends, or whose places of business in the said territories are situated in areas to which the
act does not apply.
o any suit or claim or set-off not exceeding one hundred rupees in value which, in the Presidencytowns, is not of a kind specified in Section 19 of the Presidency Small Cause Courts Act, 1882
(15 of 1882), or outside the Presidency- towns, is not of a kind specified in the Second Schedule
to the Provincial small Cause Courts Act, 1887 (9 of 1887), to any proceeding in execution or
other proceeding incidental to or arising from any such suit or claim.
o the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved
firm, or any right or power to realise the property of a dissolved firm.
88
o the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act,
1909 (3 of 1909), or the Provincial Insolvency Act, 1920 (5 of 1920), to realise the property of an
insolvent partner.
Rectification of mistakes (Section 64 of the Act)
o The Registrar shall have power at all times to rectify any mistake in order to bring the entry in
the Register of Firms relating to any firm into conformity with the documents relating to that
firm filed under this Act.
o On application made by all the parties who have signed any document relating to a firm filed
under this Act, the Registrar may rectify any mistake in such document or in the record or note
thereof made in the Register of Firms.
Inspection of Register and filed documents (Section 66 of the Act:)
o The Register of Firms shall be open to inspection by any person on payment of such fee as may
be prescribed.
o All statements, notices and intimations filed under this Act shall be open to inspection, subject to
such conditions and on payment of such fee as may be prescribed.
Grant of copies (Section 67 of the Act): The Registrar shall on application furnish to any person, an
payment of such fee as may be prescribed, a copy, certified under his hand, of any entry or portion
thereof in the Register of Firms.
RECONSTITUTION OF A PARTNERSHIP FIRM

Reconstitution of a partnership refers to a situation when there is a change in the existing partnership agreement.
A Partnership agreement is an agreement between two or more persons for carrying out various business
activities. In case of reconstitution, a new partnership agreement is formed to replace the old partnership
agreement. It means the firm continues to exist and the only change will take place in existing partnership
agreement.
Thus, the cases such as admission of a new partner, death / retirement / insolvency of a partner, change in profit
sharing ratio, etc., leads to a reconstitution of partnership.
Reconstitution of the firm may happen under any of the following circumstances and as a result there will be a
change
in
the
profit
sharing
ratio:
1)
Change
in
the
profit
sharing
ratio
amongst
the
existing
partners:
The partners of a firm may decide to change their profit sharing ratio and in such eventuality, the gaining
partner (i.e. the partner whose share has been reduced) unless otherwise agreed should be paid some
compensation and the compensation is the value of goodwill represented by the gain because the change in
profit sharing ratio means that one partner is purchasing from another partner of the profits.
2) Admission of a new partner;
3) Retirement of an existing partner;
4) Death of a partner and

89
5) Amalgamation of two partnership firms
DISSOLUTION OF PARTNERSHIP AND PARTNERSHIP FIRM

EXPLAIN THE MODES OR WAYS AVAILABLE TO DISSOLUTION OF PARTNERSHIP OR
PARTNERSHIPFIRM.
The Indian Partnership Act makes a distinction between dissolution of firm and dissolution of partnership.
Section 39 provides that the dissolution of partnership between all the partners of a firm is called the dissolution
of the firm.
Therefore, dissolution of the firm denotes complete breakdown of the contractual relationship between all the
partners or termination of the partnership business. But when the existing contractual relationship is terminated
and the business continues, it is a case of dissolution of partnership.
Therefore, in dissolution of partnership the change in contractual relation of the partners may arise because of
admission of new partners, retirement of partners, expulsion or insolvency or death of a partner etc. Dissolution
of the firm involves dissolution of partnership but dissolution of partnership may not imply dissolution of firm.
MODES OF DISSOLUTION OF A FIRM:

A partnership firm may be dissolved under the following circumstances:
1. Dissolution by Agreement: Partnership arises from contract and can come to an end by contract. Therefore,
the firm may be dissolved with the consent of all the partners or in accordance with a contract between the
partners.
2. Dissolution by Notice: Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing of his intention to dissolve the firm. The firm is dissolved from the date mentioned in the
notice as the date of dissolution. An individual partner is empowered to bring an end to the firm.
3. Dissolution on the happening of certain contingencies: Subject to contract between the partners, a firm can
be dissolved on the happening of following circumstances :
i. Expiry of the term when constituted for a fixed term.
ii. Completion of the venture or undertaking when the firm constituted to carry on a venture or undertaking.
iii. Death of a partner.
iv. Adjudication of a partner as an insolvent.
90
The partnership agreement may provide that the firm will not be dissolved in any of the above circumstances.
4. Compulsory Dissolution: A firm is compulsorily dissolved under any of the following circumstances :
i. When all the partners or all but one are adjudged insolvent.
ii. When the business of the firm becomes unlawful because of happening of some event.
5. Dissolution by the Court: When the partners are having difference of opinion regarding dissolution of the
firm on certain grounds, a suit can be filed by any partner in the court to dissolve the firm. Depending upon the
merits of the matter, the court may order for dissolution of the firm. Under Section 44 of the Act, the court may
dissolve the firm on the following grounds :
i. Insanity: When.a partner becomes insane, the court may order to dissolve the firm. The suit can be filed by
any of the other partners or even by any friend of the insane partner.
ii. Permanent incapacity: When a partner becomes permanently incapable of doing his duties as a partner, the
court may dissolve the firm. The suit for dissolution must be filed by a partner other than the incapacitated
partner.
iii. Misconduct: When a partner, other than the partner suing is guilty of misconduct and such misconduct is
likely to affect the carrying on of the business, the court may dissolve the firm. The misconduct may be outside
the business (punishment for an offence, adultery of a partner etc.
iv. Persistent breach of agreement: When a partner persistently or willfully commits breach of agreement or
conducts himself in such a manner that it is impossible on the part of other partners to carry on the business
with him, the court may dissolve the firm. Maintaining wrong accounts, taking away the books of accounts,
continuous quarreling with other partners are good grounds.
v. Transfer of interest: When a partner transfers his whole interest in the firm to a third party or all his shares
are sold or attached by the court under a decree, the court may dissolve the firm.
vi. Continuous losses: When the business cannot be carried on except at a loss, the court may dissolve the firm.
vii. Any other ground: The court may dissolve the firm on any other ground where the court considers it just
and equitable to wind up the business.
RIGHTS AND LIABILITIES OF PARTNERS ON DISSOLUTION

The rights of a partner on dissolution of a firm are as under :

91
(i)
Right to an equitable lien Under Section 46 every partner is entitled to have the property of the firm
applied in payment of outside debts and liabilities of the firm and to have the surplus distributed among the
partners in accordance with their rights. Such a right of a partner is called as equitable lien of partners.
(ii)
Right of partners to have the business wound up The authority of each partner to bind the firm and
the other mutual rights and obligations of the partners continue to wind up the affairs of the firm (Section 47).
(iii)
Right to have the debts of the firm settled out of the property of the firm When a firm is
dissolved, the debts of the firm are settled out of the property of the firm, and if there is any surplus it is utilized
towards the payment of the private debts of the partners. Similarly, the separate property of any partner (private
estate) shall be applied first in the payment of his separate debts and surplus, if any, in the payment of debts of
the firm (Section 49).
(iv)
To account for personal profits after dissolution In case of transactions by any surviving partner or
by the representatives of a deceased partner undertaken after the firm is dissolved on account of the death of a
partner and before its affairs have been completely wound up, he shall account for the profits he derives from
such transactions and pay it to the firm. However, this rule will not apply in cases where any partner or his
representative has bought the goodwill of the firm on its dissolution. [Section 16(a) and Section 50].
(v)
Right to return of premium on premature dissolution (Section 51) Where a partner has paid a
premium on entering into partnership for a fixed term and the firm is dissolved before the expiration of the term,
he is entitled to repayment of the whole or part of the premium. However, no refund shall be paid to him if the
dissolution
(a) Is due to the death of a partner
(b) Is due to the misconduct of the partner who has paid the premium or
(c) Is in the pursuance of an agreement which contains no provision for the refund of the premium.
(vi)
Right where partnership contract is rescinded for fraud or misrepresentation (Section 52) Where
partnership is rescinded on the ground of fraud or misrepresentation of one of the partners, the partner entitled
to rescind has the following rights (a) Right to lien on the surplus assets He has a lien on the surplus assets after the debts of the firm have been
paid, for any sum paid by him for the purchase of his share in the firm and for any capital contributed by him.
(b) Right of subrogation If a partner pays off a creditor from his pocket, he steps into the shoes of that creditor
and can claim money from the firm as that creditor.
(c) Right to be indemnified He also has a right to be indemnified by the partners or partner guilty of fraud or
misrepresentation against all the debts of the firm.
(vii)
Right to restrain from use of firm name or firm property (Section 53) After the firm is dissolved,
every partner may restrain any other partner from carrying on a similar business in the firms name or from
92
using any of the property of the form for his own benefit, until the affairs of the firm have been completely
wound up, unless a partner has purchased the goodwill of the firm.
The liabilities of a partner on dissolution are as under:

(i)
Liability for acts of partners done after dissolution Until public notice of dissolution of the firm is
given, partners continue to be liable to third parties for any act done by any of them. However this liability does
not apply to a partner who is dead or who is adjudged as insolvent or a sleeping partner.
(ii)
Continuing authority of partners for purpose of winding up After dissolution of a firm, the
authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue, so
far as may be necessary
(a) to wind up the affairs of the firm and
(b) To complete transactions began but unfinished, at the time of the dissolution.
(iii)
Liability to share profits earned after dissolution If any partner earns any profit from any
transaction connected with the firm, after the dissolution, he must share it with the other partners and the legal
representative of any deceased partner.
(UNIT II CONTD)


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1

INDIAN CONTARCT ACT, 1872

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

DISTINGUISH BETWEEN AN AGREEMENT AND A CONTRACT

DISTINGUISH BETWEEN VOID AND VOIDABLE CONTRACT

OFFER AND ACCEPTANCE

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

An offer to be completed must be communicated to the person to whom it is made.

WHAT ARE THE DIFFERENT TYPES OF OFFER?

REVOCATION OF AN ACCEPTANCE: (SEC 5)

COMMUNICATION OF OFFER AND ACCEPTANCE

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

STRANGER TO A CONSIDERATION CANNOT SUE. ARE THERE ANY EXCEPTIONS TO THIS

Natural love and affection:

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Any such act or omission as the law specially declares to be fraudulent.

There is no intention to deceive the other There is intention to deceive.

o A tender coupled with a condition is no tender. Valid tender of performance must be an

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

A breach of promise to marry, where damages shall be calculated on the basis of

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

The conditions of the liability under sec. 69 are:

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

DOCTRINE OF 'QUANTUM MERIT IS, HOWEVER, SUBJECT TO THE FOLLOWING TWO

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

(i) If the agreement has been made without consideration;

EXPLAIN THE RULES REGARDING CONTINGENT CONTRACT

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

DIFFERENCE BETWEEN CONTINGENT AND WAGERING CONTRACT

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

EXCEPTIONS FOR WAGERING CONTRACT

ESSENTIALS OF SECTION 30:

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

CAVEAT EMPTOR RULE

criminal intimidation under the Indian Penal Code.

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

LAW OF SALE OF GOODS ACT 1932

STATE THE SUBJECT MATTERS OF CONTRACT OF SALE OR CLASSIFICATION/TYPES OF

absence of a lien over the goods,

Present of future time

is adjudged as insolvent before he

EXPLAIN THE DISTINCTION BETWEEN SALE AND BAILMENT (OR) DISTINCTION

transferred only after the payment

CONDITIONS AND WARRANTIES

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

DISTINGUISH BETWEEN CONDITION AND WARRANTY.

vs. It is stipulation which is essential to It is stipulation which is only

A breach of condition can be treated A breach of warranty cannot be

EXPLAIN THE EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES IN CONTRACT OF

Udayakumar Nagarajan, Assistant Professor, Department Of Management Studies,

The buyer may reject the whole or