VENKATESWARA ACADEMY

CHARTERED ACCOUNTANCY COMMON PROFICIENCY TEST

MERCANTILE LAW
STUDY MATERIAL PREPARED BY
N.VENKATESWARAN. B.Sc.,FCA.,ACS.,CAIIB.,AMIMA.
01/02/2009
CHAPTER I INTRODUCTION
LAW is a set of Rules framed and enforced by Government in the process of administration of justice
to the public.
It include Rules, Regulations, Guidelines, Principles etc to regulate the relationship between
public and the State and among public themselves.
It is that body of principles recognied and applied by the State in the administration of
justice! " S#$%&'(
It causes to issue orders regarding what is right and what is wrong.
It can be implemented either through legislation or through practice. )$aw of *+uity, $aw of
custom, ,an-ing $aw and Practice.
It classified into /I0I$ $#1 and /RI%I'#$ $#1
MERCANTILE LAW is that part of /I0I$ $#1 which is framed to regulate 2rade and /ommerce
in a society. It is also -nown as /ommercial $aw.
It creates rights and obligations arising out of commercial transactions and also regulates them.
LAW OF CONTRACT " /&'2R#/2 #/2 3456.
It is the most important segment of %ercantile $aw.
It is that part of the law which deals with the general principles of "
3. 7ormation of contracts,
6. $egal re+uirement of a valid contract,
8. Performance of contract,
9. ,reach or non:performance of contract,
;. Remedies for breach of contract,
<. (ischarge of contract
5. Special types of contracts ),ailment, Pledge, Guarantee, Indemnity etc..
It applies to whole part of India e=cept >ammu ? @ashmir.
1hile contractual rights are Rights in Personam! )Rights enforceable only by one party to the
agreement against the other party to that agreement:# is entitled to receive a sum of money from ,.
2his right can be enforced only by # and not by others. 2his is Right in Personam!. the rights to
property are Rights in rem! )Rights in respect of an asset or property. # owns a property. #As right of
possession is not only against his neighbour but against the whole world. 2his is right in rem!. .
Salmond says $aw of /ontract is neither the whole law of agreements nor the whole law of
obligations. It is the law of those agreements which create legal obligations and those obligations
which have their sources in agreements.! 2here are several social agreements which do not give rise
to legal obligations and certain obligations which do not arise from agreements:2orts or civil wrongsB
Cuasi contracts, /ourt decrees.
CONTRACT " (efinition " Sec 6DhE "
Contract is an agreement enforceable by law. /ontract F #greement G $egalityH obligation
7rom the above definition it is clear that two important ingredients of contract areI
3.#n agreement 6. 2hat agreement must be enforceable by law.
#ccording to J#$S,KRL # contract is an agreement made between two or more persons, which is
intended to be enforceable by law and is constituted by acceptance by one party to an offer made to
him by other party, to do or abstain from doing some act.
#GR**%*'2 " (efinition " Sec 6DeE )#greement F &ffer G #cceptance.
#greement is defined as *very promise and H or set of reciprocal promises forming the consideration
for each other!.
PR&%IS* " (efinition " Sec 6DbE Promise F accepted proposal
Promise is defined as a proposal when accepted, become promise!.
PR&P&S#$ "
1hen a person signifies to another his willingness to do or abstain from doing anything with a view to
obtain the assent of the other to such act or abstinence, he is set to ma-e a proposal.
#greement is an accepted proposal
#n agreement can be social or legal,
# social agreement is not a contract and hence not enforceable in /ourt of $aw,
#greements which are legal are enforceable in /ourt of $aw,
Jence, all contracts are agreements but all agreements are not contracts. &nly those agreements
which are enforceable under law are contracts.
ACCEPTANCE
1hen the person to whom the proposal is made signifies his assent there to, the proposal is said to be
accepted. &nly when the proposal is accepted it becomes promise.
SUMMARY.
2here must be an offer or proposal from one person to the other,
2hat other must accept such offer -nowingly that such an acceptance will become agreement and give
rise to a contract,
,ut an agreement will become contract only if it is legally enforceable,
,ut to be legally enforceable, the agreement has to pass through certain conditions as per /ontract #ct
3456,
Such conditions are -nown as *ssential *lements of a 0alid /ontract!
#s per section 3M of the /ontract #ct, All agreements are contract if they are made by the free
consent of parties competent for a lawful consideration and with a lawful object and are not expressly
declared to be void.!
*ssential elements of a valid contract areI
3. &ffer and acceptance )/onsensus ad idem.,
6. Intention to create legal relationship,),alfour 0s ,alfour D3N3NE.
8. $awful consideration,)'udum Pactum.
9. Parties competent to contract,)minor, lunatic.
;. 7ree and genuine consent,)coercion, undue influence.
<. $awful object,)illegal, immoral, opposed to public policy.
5. #greement not declared as void or illegal,
4. /ertainty of meaning,
N. Possibility of performance,)magic.
3M. 'ecessary of legal formalities,)registration.
7R&% 2J* #,&0* 7&$$&1I'G SI2K#2I&'S #RIS*SI
3.&ffer and #cceptanceI 2here must be at least two parties to an agreement, one of them ma-ing an
offer -nown as offeror! and the other accepting it -nown as offeree!.
O#A offers to sell his house for Rs.;lacs. O,A ma-es a counter offer to buy that for Rs.9 lacs. # -eeps
silent. , send a che+ue for Rs.9lacs and demand sale of that house. #s there was no consensus on price
this is not an agreement and hence canAt be a contract.
6.$egal RelationshipI Parties to the agreement must intend to create a legal relationship in case one
party to the agreement fails to fulfill his obligations. ) ,alfour couple went on a holiday to $ondon
from /eylon. #fter vacation %r.,alfour returned to /eylon leaving his wife at $ondon for medical
reason. Je promised to pay P8M per month and did so for few months and stopped. 1ife sued for
payment of arrears but the court held it is not justiciable as it was only family arrangement and not
intended to be enforced through legal remedies.. )1ee-s 0s. 2aybold,D3NM;E Rose and 7ran- co 0s
/rompton ,ros.: In this case the agreement contained a clause this agreement is not a formal or legal
agreement and shall not be subject to legal jurisdiction. It was held that it is not a contract as there was
no legal obnligation..
8.$awful /onsiderationI /onsideration is counter offer and it need not be in cash or -ind. It may be an
act or even abstinence. It is a promise to do or not to do something. It may be past, present or future. It
must be real and legal.
'K(*% P#/2K% means a promise not supported by any consideration D i.e. a bare promiseE, and
hence not enforceable by law.
9./ompetency of Parties to the /ontractI #ccording to Sec33 of the /ontract #ct Every person is
competent to contract who is of the age of majority, who is of sound mind and is not disualified from
contracting by any law to which he is subject.
#s per this section following persons are incompetent to contractI
3. # minor,
6. # person of unsound mind,
8. # person e=pressly declared as dis+ualified to enter into a contract under any law
)Insolvent, $unatic, Idiot, (run-ard etc..
;.7ree /onsentI #ccording to section 38 !wo or more parties are said to consent, when they agree
upon the same thing in the same sense
/&'S*'SKS:#(:I(*% means the identity or agreement of mind between the parties to the
agreement. It emphasies that parties to the contract must agree upon the subject matter of the contract
in the same manner, sense and at the same time.
Knder sec.39, the consent is said to be free, when it is not induced byI
3. /oercion,
6. %isrepresentation,
8. 7raud,
9. Kndue influence,
;. %ista-e.
<.#greement not declared as void or illegalI 0oid agreement is one without any legal effects. Illegal
agreements are e=pressly or impliedly prohibited by law.
5.Knlawful &bjectI 1hen the object of the agreement is Illegal, immoral, opposed to public policy it is
unlawful.
4. /ertainty of %eaningI #s per Sec6N of the #ct, #greements the meaning of which are not certain
or capable of being made certain are void.!
N. Possibility of PerformanceI #ny agreement which involves an act which is impossible of
performance legally or physically is unenforceable. )# agrees with , to discover treasure by magic.
3M. 'ecessary of legal formalitiesI /ontracts of Sale, mortgage, lease, gift of immovable assets,
negotiable instruments are to be in writing and registered.
33. #greements not declared to be void or illegalI Sec 69 " 8M declares that agreements that are
e=pressly declared void are not contracts.)#greement in restraint of trade, marriage or legal
proceedings..
0oid ab initioI #greement which is legally not enforceable even at the time of entering itself is called
void "ab "initio.
TYPES OF CONTRACTSI
0alid contract I #n agreement enforceable by law. It refers to an agreement which fulfill all essentials
of sec3M.
Kn enforceable contractI It is a contract which is otherwise valid but can not be enforced due to
technical defect.)Knder stamped Pronote.
0oid /ontractI # contract which ceases to be enforceable by law becomes void due to supervening
impossibility of performance when it ceases to be enforceable.)sec6DjE: contract between to parties of
different countries which declared war afterwards..
0oidable /ontractI It is an agreement which is enforceable at the option of one or more of the
parties there to but not at the option of the other or others. )sec.6DiE.
# contract becomes voidable if,
3. 2here is flaw in consent, i.e consent is not free or obtained by undue influence, coercion,
misrepresentation or fraud.) # falsely induces , to buy a factory by giving false production
details..
6. &ne of the parties to the contract prevents the other from performing the contract,
8. 1here the person fails to perform his promise within a specified time
Remedy for a voidable contract is to repudiate the contract.
It may be noted that only an aggrieved party can repudiate the contract.
#n aggrieved party can repudiate a voidable contract,
3. 1ithin a reasonable time,
6. ,efore any other person ac+uires any interest,
8. Je must restore any benefit derived by him from the other party to the contract.
$egal 'ecessitiesI #n agreement may be oral or in writing. 1here it is to be registered it must be
properly registered.
(IS2I'/2I&' ,*21**' 0&I( #'( 0&I(#,$* /&'2R#/2I
2hrough (efinitionI
D3E #s per Sec6DjE : # contract which ceases to be enforceable by law becomes void when it becomes
so.
#s per Sec6DiE: 0oidable contract is an agreement which is enforceable at the option of
of one or more aggrieved parties to the contract but not by others.
D6E.'atureI # void contract is valid when it is made but subse+uently become unenforceable on certain
grounds, Grounds on which a contract will become unenforceableI
" supervening impossibility, subse+uent illegality, repudiation of voidable contract, a contingent
depending upon happening of an uncertain even, when such event becomes impossible.
D8E.Remedies or RightsI # void contract does not provide any legal remedyB they can not get it
performed even if they want it,
1hereas a voidable contract remains valid until it is rescinded. If the aggrieved party does not rescind
it within reasonable time, the contract remains valid
D9E.causesI /ontract caused by coercion, undue influence, fraud and misrepresentation are voidable,
but in case contract is caused by mista-e of fact, it is void.
I$$*G#$ /&'2#/2I It is a contract which the law prohibits from ma-ing. 2he court will not only
refuse to enforce such a contract but also the connected contacts.
#ll illegal agreements are void but all void agreements or contracts are not necessarily illegal.
*=ample: contract to commit a crime, contracts which are immoral and opposed to Public Policy are
illegal.
0oid and illegal agreementsI sec6DgE: An agreement not enforceable by law is void. 2he reasons for
such non enforceability under law is unlawfulness of object and the consideration.
2hough illegal and void agreements are not enforceable by law they differ as followsI
ScopeI #n illegal agreement is always void but all void agreements need not be illegal. 7or e=ample an
agreement terms of which are not certain is void but not illegal.
*ffect on collateral transactionsI /ollateral transactions to a void but not illegal agreement /#' ,*
*'7&R/*( whereas in case of illegal agreements even they can not be enforced.
PunishmentI there is no punishment for parties to a void agreement but parties to an illegal agreement
will be punished.
0oid:ab:initioI Illegal agreements are void:ab:initio
Knenforceable contractI 1here a contract is good in substance but due to any technical reason one or
both parties can not see- legal remedy, it is described as an unenforceable contract. 2he technical
reasons may be DaE not in writing D6E barred by limitation etc.
*=press contractI a contract which is spo-en or writtenB where a proposal or acceptance is made in
words the promise is said to be e=press.
Implied contractI 1hen law implies a contract even though parties never intended the contract is said
to be implied contract, i.e. implied by law. #s per section N of the #ct, if a proposal or acceptance is
made otherwise than in words, the promise is said to be implied. 1rong delivery creates implied
contract even though there is no contract between the original supplier and the receiver of goods.
2acit contractI # contract is said to be tacit when it has to be inferred from the conduct of parties. *.g.
sale of auction by hammer or bell.
*=ecuted contract " if the consideration for the promise is already performed , then such contract is
called contract with e=ecuted consideration.
*=ecutory contract " if in a contract reciprocal promises or obligation which serves as consideration is
to be performed in future.
Knilateral contract " it is a one sided contract in which only one party has to perform his promise or
obligation. 2o do or forbear.
,ilateral contract " when both parties to the contract are yet to perform their part it is -nown as
bilateral contract.
7ormal contracts " it includes contract of record and contract under common seal.
DaE /ontract of recordI It is either a judgment of a court or a recogniance.
It is an obligation imposed by a court on one in favour of others. It is not a contract in the real sense
since it is not based upon any agreement between the parties. *.g. surety for bail.
/ontract under sealI a contract which derives its binding force from its form alone is -nown as
contract under seal. It is signed, sealed and delivered. It is also called a special contract or deed.
Such contracts are said to be completed only if all set formalities are completed. 2he following
contracts must be under seal, /ontracts made by company,
/ontracts of lease of land for a period more than 8 years,
/ontracts of transfer of immovable properties, which are to be registered.
Simple contractsI /ontract which are not formal are simple. 2hese are also -nown as parol! contracts.
2hey may be in e=pressed or implied. #ll simple contracts must be supported by consideration.
CHAPTER - II - OFFER AND ACCEPTANCE
07/02/2009
&ffer or Proposal is the starting point of a contract.
&77*R " S*/:6DaE "hen a person signifies to another his willingness to do or to abstain from
doing anything with a view to obtaining the assent of the other to such act or abstinence he is said to
ma#e a proposal or offer
Proposal is oneAs willingness to do or not to do.
#n offer is a proposal by one party to another to enter into a legally binding agreement with him.
2here must be two parties to an offer "
Person who ma-es an offer " @nown as &fferor, Promisor or Proposor.
Person to whom the offer is made " @nown as offeree or Promisee
0arious types of offer areI:
3. General offer " an offer made to the public in general,
6. Special &ffer " an offer made to a specific or a definite person,
8. /ross &ffer " *=change of identical offer without -nowing each others offer or ignorance of
otherAs offer. In this case there is no binding contract as oneAs offer is not an acceptance of the
otherAs offer.
9. /ounter &ffer " It amounts to rejection of original offer and hence results no agreement.
;. Standing, &pen or continuing offerI #n offer -ept open for a period for acceptance )*=ample:
2ender for supply of goods..
<. *=press and Implied offer! #n e=press offer is made by word of mouth or writing whereas
implied offer is made by conduct, )Patient to (octor, Passenger in a bus, /ustomer in a
Restaurant.
5. /onditional offerI #n offer to be valid may contain a condition and in that case it has to be
accepted as per the condition specified. Jowever no offer can contain a condition that non
compliance of which would amount to acceptance.
#n offer is different fromI DaE # mere statement of intention, D6E #n invitation to offer, D8E # mere
communication of information, D9E /asual en+uiry, D;E # Prospectus, D<E #dvertisement.
Offer and an invitation to offer:
3. 1hile offer is to get the consent of the other party to whom it is made, an invitation to offer is
made to initiate the offer according to an invitation.
6. &ffer is made with an intention of performance, if accepted, whereas in case of an invitation to
offer there is no +uestion of performance at that stage.
8. &ffer is made either in general or is specific to an individual, while an invitation to offer is
always general,
9. &ffer is a re+uest, while invitation to offer is an information in general,
;. In the case of an offer there are two or more parties, while in case of an invitation to offer thee
is only one,
<. 2he object of an offer is to ma-e a contract, whereas in case of invitation to offer no contract is
formed but information is given in general,
5. /ommunication of an offer is necessary, while there is no +uestion of communication of offer
in case of invitation of offer.
ESSENTIALS OF A VALI OFFER I
3. #n offer must be capable of creating a legal relationship, ),alfaur v ,alfaur.
6. #n offer must be distinguished from mere statement of intention, )Jarris 0s 'ichenson.
8. #n offer must be different from an invitation to receive offer, )price tags, advertisement.
9. #n offer may be e=press or implied
;. #n offer may be general or specific,) %rs./arlil 0 /arbolic Soap ,all /o..
<. #n offer may be conditional, )2hompson 0 S.Railway.
5. 2he terms of an offer must be certain, definite and not vague,)2ailor 0 Porington.
4. #n offer must be communicate to the other party to whom it is intended, )$alman Shu-la v
Gauri (utt.
N. 2he offer must be made with a view to get the consent offeree. )Jaris 0 'ichenson.
3M. &ffer should not see- consent through negative action or silence. )Silence is not consent.
Co!!"ni#ation of offerI )sec:8.
#n offer can be communicated in any way which has the effect of presenting before the offeree, the
offerorAs willingness to do or abstain from doing something. 2hus an offer can be by words, spo-en or
written, or by conduct.
#s per sec:9 the communication of an offer is complete when it comes to the -nowledge of the person
to whom it is made )&fferee.. 1hen a proposal is sent by post, its communication is complete when
the letter reaches the person to whom it is made.
LAPSE OF AN OFFER: It means an end of an offer. #n offer must be accepted before I lapses. #n
offer may come to an end in any of the following ways. Sec:<, of the #ct.
3. ,y communication through notice of revocation,
6. ,y lapse of time,
8. ,y failure to accept the condition precedent,
9. ,y death or insanity of the offeror,
;. :,y counter offer by the offeree,
<. ,y not accepting the offer, according to the prescribed or usual mode,
5. ,y rejection of offer by offeree,
4. ,y change in law.
ACCEPTANCE:
1J*' 2J* P*RS&' 2& 1J&% 2J* &77*R IS %#(* SIG'I7I*S JIS /&'S*'2, SK/J
/&'S*'2 IS @'&1' #S #//*P2#'/*.
#s per sec6DbE A proposal is said to be accepted, when the person to whom the proposal is made
signifies his assent thereto
#cceptance is to offer is what a lighted matchstic- to a train of gun powder.
#n offer when accepted becomes a promise.
3. #cceptance should be absolute and un+ualified,
6. #cceptance with a variation from offer is not acceptance but a counter offer.
8. #cceptance must be communicated to the offeror. 2hus an acceptance from an intended offeree
to the un-nown offeror is not an acceptance.
9. #cceptance to be in the mode prescribed,)sec:5.. 1here no mode is prescribed the acceptance
must be in usual or reasonable manner. In case the acceptance is not in the prescribed mode,
the offeror may accept or reject it. If he rejects the acceptance then he must inform the acceptor
within a reasonable time.
;. #cceptance must be within reasonable time or before the offer lapses.
<. Silence is not an acceptance.
5. #cceptance can be by conduct also.
4. #n acceptance can be e=press or implied.
N. the acceptance must show an intension that acceptor is willing to fulfill the terms of the offer,
3M. #cceptance must be absolute and unconditional.
# general offer can be accepted by any one having the -nowledge of offer but a specific offer can be
accepted only by the person to whom it is made.
Co!!"ni#ation of a##e$tan#e is complete as against the proposer, when it is put in course of
transmission to him so as to be out of power of acceptor to withdraw the same.
/ommunication of acceptance is complete as against the acceptor when it comes to the -nowledge of
proposer.
REVOCATION %SEC&'(: ,oth offer as well as acceptance can be revo-ed. #s per sec:; of the #ct,
An offer can be revo#ed any time before its acceptance
RULES AS TO REVOCATION OF OFFER I
$. Revocation of offer should always be e=press,
%. Revocation of offer should move from the offeror,
&. 'otice of revocation of offer must be given through same channel, by which the original offer
was made,
'. &ffer can not be revo-ed once acceptance is complete against the offeror even if the letter of
offer is lost or delayed in transit. )2he communication of acceptance is complete as against the
offeror when the letter of acceptance is properly posted by acceptor, whereas it is complete as
against the acceptor only when it is received by offeror..
(. 2he effect of revocation is that both parties free themselves and no longer bound by any
obligations to perform under the offer or acceptance as the case may be.
). In fact, the offer or the acceptance comes to an end by valid revocation.
*. Revocation of an offer means withdrawal or ta#ing bac# of an offer
RULES AS TO REVOCATION OF ACCEPTANCEI
Revocation of acceptance means withdrawal or ta-ing bac- of the acceptance by the acceptor.
#s per sec:; of the #ct, An acceptance may be revo#ed at any time before its communication is
completed as against the acceptor, but not afterwards. +nce the acceptance reaches the proposer, the
acceptance can not be revo#ed.
CHAPTER III CONSIDERATION
1/02/2009
/&'SI(*R#2I&' is an essential element of a contract without which no single promise is legally
enforceable. It is the foundation for every contract. $aw enforces only those contracts which are
made for consideration. ) *=ceptions are listed in sec6;.
/onsideration is the price agreed to be paid by the promisee for the obligation of the promisor,
It is some right, interest, profit or benefit accruing to the promisor or forbearance, detriment, loss
or responsibility given, suffered or underta-en by the promisee! at the re+uest of the promisor.
It means something in return!.
#s per sec 6DdE of 2he #ct, when, at the desire of the promisor, the promisee or any other person has
done or abstained from doing or does or abstains from doing, or promises to do or abstain from doing
something, such act or abstinence or promise is called a consideration for the promise.
2hus a consideration must beI:
#t the desire of the promisor,
Promisee or any other person,
Jas done an act or abstinence or promise to do Di.e. past, present or futureE,
/onsideration need not be ade+uate but must be real,
2he promisor may or may not derive any benefit from the consideration given by the promisee.
Performance of an act by a person who is legally bound to perform the same can not be
consideration for a contract,
1hen a person promises to do more than he is legally bound to do so, such a lawful promise is
a consideration,
/onsideration must not be unlawful, immoral or opposed to public policy.
*SS*'2I#$S &7 # 0#$I( /&'SI(*R#2I&'I
3. /onsideration must move at the desire or re+uest of the promisor, )# sees , drowning
and saves his lifeB , canAt demand any payment because # did not see- his service..
case " (KRG#PR#S#( 0s ,#$(*&D344ME
6. /onsideration may be from promisee or third party, even a stranger,)/#S* $#1:
/JI''#LL# 0s R#%#LL# " Gift by mother to daughter with an annuity to uncle..
In *nglish $aw consideration must move either from promisee or at the desire of the
promisor..
8. /onsideration may be past, present or future,) In *nglish $aw consideration must be
present or future and canAt be past.
9. /onsideration need not be ade+uate, )1here, in an agreement the consent of the
promisor has been freely given, the inade+uacy of the consideration will not render it
invalid.
;. /onsideration must be real and not illusory i.e. competent and of some value,
<. /onsideration may not be real because of DiE Physical impossibility, DiiE $egal
impossibility, DiiiE Kncertainty, DivE Illusory consideration.
5. /onsideration must be something which the promisor is not already bound to do " it is
because the performance of a pre e=isting obligation is no consideration.
4. /onsideration must be lawful. 2he consideration to an agreement is unlawful if it is "
: 7orbidden by law,
: If permitted it will defeat the provisions of any law,
: It is fraudulent,
: If it involves or implies injury to any person or property of another,
: Immoral or opposed to public policy or unlawful.
STRAN)ER TO A CONSIERATION:
Knder Indian law even a stranger to the consideration can also enforce the contract even though he is
only a beneficiary under the contract, which is not the case in *nglish $aw. )/ase $aw:/JI''#LL#
0s R#%#LL# D3446E.. In Indian $aw consideration may move from a stranger but not so under
*nglish $aw.
STRAN)ER TO A CONTRACT:
Provisions Relating to Suit by a 2hird Party on an #greementI
#s per *nglish law, consideration must move from promisee and not from a third partyB but in Indian
law consideration may move from promisee or any other person. It means, a person can sue on a
contract even if the consideration for the promise moves from a third party.
'ormally only a party to the contract can sue for its fulfillment.
In *nglish law a stranger to a contract can not sue on the contract because third party consideration is
not permitted under that lawB
Knder Indian law even third party to a contact has a right to sue if consideration flows from a stranger.
#s per general provisions of law only a party to a contract can sue for performance of other party. 2he
e*#e$tion+ to this law areI
3. In case of a trust, beneficiary can sue though he is not a party to the original contract, DSettlor
and the 2rustee are the party to the trust deed and beneficiary is not party to the contractEB
6. %embers of a family in case of a written settlement even though they are not party to the
settlementB
8. 7emale member of a family for her marriage e=pensesB
9. #ssignee under a contract of assignment,
;. In case of an estoppels by ac-nowledgement of liability or part performance there of, i.e. when
one admits itB
<. In case of covenants on land deals,
5. /ontract entered by an agent can be enforced by the principal.
1J*' #' #GR**%*'2 1I2J&K2 /&'SI(*R#2I&' IS 0#$I(Q &R *=ception to the
Rule:'o /onsideration means no contract.!
Sec 6; deals with e=ception to the Rule that agreement without consideration are voidI
#s per this section in following cases agreement without consideration is validI
3. 'atural love and affection )sec.6; D3E.,: #n agreement without consideration will be valid if it
is in writing, registered as per law, made on account of natural love and affection between
parties standing in near relationship to each other. #ll these essentials must be present and not
only one or other.
6. /ompensation for voluntary services )sec.6; D6E., : finder of the lost goods: 2he #ct is done
voluntarily for the promisor and the promisor has agreed to compensate the person.
8. Promise to pay time barred debt )sec.6; D8E., : it must be in writing and signed by the promisor
or his agent.
9. /ompleted gifts )e=planation to Sec.6;D3E.,
;. In case of agency )Sec.34;.,
<. Guarantee made without consideration )Sec365.
5. Remission " to receive less that what is due )Sec:<8.
CHAPTER IV OTHER ESSENTIAL ELEMENTS OF A CONTRACT
21/02/2009
1e have already seen that under Sec.3M of the #ct, that an agreement to be a contract has to fulfill the
following conditions also namely,
$. 2here must be free consent of parties,
%. 2here must be consensus ad idem,
&. 2here must be an intention to create legal relationship,
'. Parties must be competent to contract,
(. /ontract must be for lawful object supported by lawful consideration,
). #nd it should not have been e=pressly declared as void by law.
PERSONS COMPETENT TO CONTRACT:
#s per sec.33 of the #ct, a person who complies with following conditions is competent to contract.
3. # minor i.e. a person who has not completed 34years of age )as per Indian %ajority #ct i= of
345;. ,ut where a Guardian has been appointed by court under Guardian and 1ards #ct 34NM
where the minorAs properties are managed under court supervision then he is minor till he
completes 63 years..
6. Person of sound mind at the time of ma-ing the contract )he is capable of understanding it and
forming a rational judgment as to its effect upon his interest. # person usually of unsound mind
but occasionally of sound mind can enter into a contract when he is of sound mind. So also a
person usually of sound mind but occasionally of unsound mind can not enter into a contract
when he is of unsound mind..
8. Person who is not dis+ualified from contracting.)a ban-rupt or insolvent.
Po+ition of Minor,+ a-ree!ent.
3. #n agreement entered into by a minor is altogether void against the minor. )Reason being that
a minor is incapable of giving a promise imposing a legal obligation. /$I %&J&RI 0s.
(J#R%& (#S GJ&S*D3NM8E. ,ut this decision is no more in vogue and the present position
is that if a guardian, on behalf of minor enters into an agreement for the benefit of minor, it is
enforceable..
6. %inor can be a promise or beneficiary )%inor admitted to the benefit of partnership uHs.8M of
Partnership #ct. 2he infancy of one party to the contract does not affect otherAs liability.
8. %inor can always plead minority. )In case of borrowing by a minor falsely representing that he
is major or of full age, he can still plead minority and escape liability. ,ut in case he had
mortgaged or sold assets misrepresenting his full of age, then the lender or the buyer must be
compensated..
9. Ratification on attaining majority is not allowed. )# minor borrows on e=ecuting a promissory
note. Je attains full of age and e=ecute another promissory note in place of the one already
e=ecuted. 2he fresh one is also void, because there is no consideration. /$:#rumugan 0s.
(uraisinga.
;. # person who supplies necessities of life to a minor or to whom the minor is legally bound to
support, is entitled for reimbursement from minorAs property.)sec:<4.R
<. /ontract by guardian on behalf of minor is enforceable according to circumstances.
5. 'o estoppels against a minor. 1here a minor misrepresent his age and enters into a contract
still he canAt be made liable to the contract.
4. 'o specific performance e=cept in certain cases.
N. $iability for torts )civil wrong.
3M. 'o insolvency: a minor canAt be declared insolvent as he canAt contract debt.
33. %inor can be an agent but he will not be liable to his principal for his acts. ,ut he can deliver
and endorse negotiable instruments without himself being liable.
36. %inor canAt bind parent or guardian. 2he parents will be liable only when the child is acting as
agent of parents.
38. 1here the contract is entered jointly by a minor and adult, the adult alone will be liable on the
contract.
39. Surety for a minor is liable to third party as if it is a direct contract.
3;. %inor through his guardian become a shareholder by transfer or transmission and not by direct
application.
3<. %inor is liable for his necessaries.
CONTRACT .Y PERSON OF UNSOUN MIN:
I(I&2S, $K'#2I/S #'( (RK'@*R*( are persons of unsound mind.
Persons of unsound mind are those who are not capable of understanding it and forming a
rational judgment as to its effect on his interests.
2he liability for necessaries of life supplied to persons of unsound mind is also same as for
minors.
Knsoundness of mind may arise from Idiocy, lunacy or insanity, drun-enness, Jypnotism and
%ental decay.
CONTRACT .Y IS/UALIFIE PERSONS:
# person declared as dis+ualified proprietor! can not enter into any contract related to
property.
#n alien enemy, during war, canAt enter into a contract with an Indian subject.
# company can not enter into a contract which is ultravires its %emorandum.
%unicipal bodies are dis+ualified from contracts which are not within their statutory powers.
Sovereign States, #mbassadors and (iplomats can not be proceeded against in Indian courts.
Insolvents during his period of insolvency,
/onvicts until they are discharged or freed from punishment,
Professional:$awyers and (octors in *ngland or prohibited from entering into a contract for
their fees. ,ut in India this is not applicable.
CHAPTER V ! FLAW IN CONSENT.
2"/02/2009
FREE CONSENT:
#s per section 38 of the #ct two or more persons are said to have consented when they agree upon
the same thing in the same sense.
3. 1hen there is fundamental error as to the nature of the transaction, or to the person dealt with,
or as to the subject matter of the agreement, they can not be said to have consensus ad idem.
6. 1hen there is no consensus ad idem then there is no consent and hence there is no contract.
8. /onsent can be free or not free. #greement with free consent will only result in valid contract.
9. /onsent is said to be free when it is obtained without coercion, undue influence, fraud
misrepresentation or mista-e.)sec.39.
;. 1hen the consent is not free due to mista-e, the agreement is void.
<. In all other cases when consent is not free, the contract is voidable at the option of the party
whose consent was obtained by other means.
ELEMENTS VITIATIN) FREE CONSENT:
COERCION: #s per sec.3; of the #ct, Coercion is the committing, or threatening to commit any
act forbidden by the ,ndian -enal Code .sec'( of ,-C/ 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.
#n agreement induced by coercion is voidable and hence can be enforced only by the person
coerced and not by the person who used coercion.)sec:3N.
# person to whom the money has been paid or anything delivered under coercion, must repay
or return it.Dsection 53E
$eading case is Ranganaya-amma 0s #lwar)344N.
2he act of coercion may even proceed from or against a stranger to the contract ,
"re++ and Coer#ion:
In *ngland coercion is -nown as duress. If the consent is obtained under fear caused by threats
of bodily harm it is -nown as duress. Jence scope of coercion is wider than duress.
/oercion can be directed by or against third party to the contract but duress is caused among
the contracting parties or their family only,
/oercion is aimed against person or property but duress is against life or liberty,
In case of coercion no immediate violence is necessary but in case of duress there is immediate
violence.
UNUE INFLUENCE: #s per sec.3< of the #ct, 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 of the
other. A person is deemed to be in a position to dominate the will of the other, when he holds
authority, real or apparent over the other, or when he stands in a fiduciary relation to the other.
*=amples of such relationshipsI
7ather and son H daughter,
Solicitor and his client,
2rustee and a beneficiary,
(octor and his patient,
# person is deemed to be in a position dominate the will of the other if,
3. Je holds a real or apparent authority over the other due to relationshipB
6. Je stands in a fiduciary! relationship, a relationship of mutual trust and confidenceB
8. Je contracts with a person whose mental capacity is affectedB
Kndue influence is suspected under following situationI
3. Inade+uacy of consideration,
6. Ine+ualities between parties to the contract,
8. 7iduciary relationship e=ists between parties,
9. Pardhanishin women is one of the party,
;. Knconscionable )unfair. bargain.
Coer#ion and Und"e inf0"en#e differen#e:
3. /oercion is use of physical force but undue influence is by moral pressure.
6. /oercion can proceed from or directed against third partiesB but undue influence must be due to
the relationship between contracting parties only,
8. 1hen consent is given under coercion, the contract is voidable at his option. In case of undue
influence court may set aside or enforce it in modified form.
9. /oercion involves criminal act but no such criminality act in undue influence.
FRAU: 7raud is willful representation with intent to deceive the other to induce him to enter into a
contract. #s per sec.35 of the #ct, 0raud means and includes any of the following acts committed
by the party to a contract or with his connivance or by his agent with intent to deceive another party
thereto his or his agent, or to induce him to enter into the contract.
$. !he suggestion, as to a fact, of that which is not true by one who does not believe it to be true,
%. !he active concealment of a fact by one having #nowledge or belief of that fact,
&. A promise made without any intention of performing it,
'. Any other act fitted to deceive,
(. Any such act or omission as to law specially declared to be fraudulent.
E#$%$&'( )* *+,-.1
3. 2he fraud must have been committed by a party to the contract or with his consent by his
agent. 7raud by stranger to a contract does not invalidate it.
/ase $aw " River Silver %ining /o v. Smith $.R.9.J.$. (irector of a company issued a false
prospectus to S on the basis of which S subscribed to the shares. /ontract can be avoided as directors
are deemed to be the agents of the company.
6. 2here must be any one of the five above mentioned ingredients.
8. 2he act of fraud must have been committed with intent to deceive and must actually deceive.
'o cause of arises when there is fraud without damage or damage without fraud. 2he contract
becomes void only when these two occur together.
9. 2he fraud must have been aimed at the other party or his agent and with a view to induce him
into the contract. Jence the fraud must have been committed before the conclusion of contract.
;. 2he other party must have suffered loss.
<. # mere silence is not fraud. " /aveat *mptor! &R buyer beware.: 2here is no duty to spea- in
case of every sale contract and hence mere silence does not amount to fraud. Similarly there is
no duty to disclose facts which are within the -nowledge of both parties. )1ord v. J&,JS.
D3454E 9 #/ 38 " J sold some pigs to 1 which were to his -nowledge suffering from fever.
Pigs were sold Owith all faultsA and J did not disclose the fact of fever to 1. Jeld there was no
fraud.
5. Silence is fraud whereI
DaE2he circumstances of the case cast a duty on the person observing silence to spea- " a contract of
uberrimae fidei! Dcontract of at most good faithE. 7ollowing contracts fall within this groupI
7iduciary relationship, /ontracts of insurance, /ontracts of marriage, 7amily settlements, Share
allotment.
DbE 1here the silence itself is e+uivalent to speechB
T Jalf truth,
DdE /hange of /ircumstances
MISREPRESENTATION:
0//00/2009
Representation means a statement of fact with regard to an e=isting fact or some past event which
materially induces the formation of the agreement. # wrong representation when made innocently with
an honest belief as to its truth by a party without any intention to deceive the other is
misrepresentation. )case law " (erry 0 Pee- D344NE.
#ccording to sec34, misrepresentation means and includesI:
2he positive assertion " an absolute, full and clear statement of a factB
constructive fraud! " any breach of duty without an intent to deceive, or those cases where a
statement when made was true but subse+uently before it was acted upon, became false to the
-nowledge of the person ma-ing it.
%ista-e as to the substance " %ista-e must have been such that there is a difference between the thing
obtained and the thing bargained.
E++entia0 re1"ire!ent+ of Mi+re$re+entation:
3. 2here should be a representation or assertion,
6. %ust relate to the matter of fact that has become untrue,
8. It was made before completion of transaction and with a view to induce the other into the contract,
9. &ther party must have acted upon it,
;. It must have been made by either the party or his agent.
Con+e1"en#e+ of Mi+re$re+entation: 2he aggrieved party has following options "
%ay rescind the contract,
#ffirm the contract and insist on the misrepresentation being made goodB
Je may rely on the misrepresentation, as a defense to an action on the contractB
ifferen#e 2et3een !i+re$re+entation and fra"d:
3. # false statement with intention to deceive is fraudB a false statement without that intention to
deceive is misrepresentationB
6. In case of misrepresentation, party had the means of discovering the truth is a good plea, but in
case of fraud the contract is voidable.
8. In case of fraud the affected party can claim damages which is not available in case of
misrepresentationB
9. 7raud is a criminal action but misrepresentation is notB
;. 7raud is of many types but misrepresentation is not.
MISTA4E
%ista-e is an erroneous belief about something.
%ista-e may be of two types " %ista-e of $aw and %ista-e of 7act.
%ista-e of law is of 2JR** -inds:
3. %ista-e of general law of the country,
6. %ista-e of foreign law,
8. %ista-e of private rights on a property or goods.
In case of mista-e of general law of the country, the contract is binding since ignorance of law is not
an e=cuse. #s per sec63 a contract is not voidable because it was caused by a mista-e as to any law in
force in India.!
In case of mista-e of foreign law and private rights of a party, it is to be treated as mista-e of fact.
Jence the agreement will be void only in case of bilateral mista-e.
MISTA4E OF FACT: SEC.56
1here both parties are under a mista-e as to a matter of fact, essential to the agreement, the
agreement is void.! %ista-e of fact in the minds of both parties negatives consent and hence there is
no consensus ad idem and the contract become void.
7ollowing four conditions must be fulfilled for a contract to be void under mista-eI
3. %ista-e is to the formation of the contractB
6. %ista-e is of both the partiesB
8. %ista-e of fact and not of lawB
9. %ista-e is about a fact essential to the agreement.
#ny erroneous opinion about the price of the thing is not deemed to be a mista-e as to a matter of fact.
.ILATERAL MISTA4E:
I. %ista-e as to subject matterI:
3. %ista-e as to the e=istence of the subject:matter as on the date of contract : the contract is
void.
6. %ista-e as to the identity of the subject: matter " the contract is void. *ven if the mista-e is
caused by a third party the contract is void. /ase $aw " Jen-el 0 Jope.
8. %ista-e as to the price of the subject " matter. If there is a genuine mista-e as to the price of a
good for sale the contract is void.
9. %ista-e as to the +uantity of subject:matterI If the difference between the +uantity ordered and
sold the contract is void.) Jen-el 0s Pope. 2hree rifles ordered but ;M rifles supplied..
;. %ista-e as to the +uality of the subject:matterI It does not affect the validity unless it is a
mista-e of both parties. ,ut if the mista-e is fundamental it is void.)e=ample: the horse for
sale is cart horse but buyer thought it as race horse.
II. %ista-e as to the possibility of performing the contractI:
Physical impossibility " #greement is void. )case law:Griffith 0s ,rymer " room boo-ed but
coronation procession already cancelled..
$egal impossibility " #greement is void.
UNILATERAL MISTA4E: Se#.55 " If one party alone is under a mista-e of fact, the contract is not
voidable. 1here the unilateral mista-e is fundamental and affects the character of the contract, the
innocent party is freed from liability.
/ase of unilateral mista-e where the contract would be voidI
%ista-e as to the nature of contract " ,lind or an illiterate man signing the document read over to him
wrongly.
%ista-e as to the identity of the person contracted with " )case law: /undy 0s $indsay " # person
ordering for goods to $indsay by forging the signature of a big firm, getting the goods on credit ,
selling it to /undy collected the money and ran away without paying $indsay. Jeld /undy has to
return the goods to $indsay he had no title to the goods..
CHAPTER VI. LE1ALITY OF OB2ECT AND CONSIDERATION .
1/00/2009
#ccording to Sec68 an agreement of which the object or consideration is unlawful is void. Sec
6<,65,64 and 8M of the #ct deals with such situations.
#n agreement is unlawful in the following casesI
3. If it is forbidden by lawB
6. If it is of such a nature that if permitted it will defeat the provisions of any lawB
8. If it is fraudulentB
9. If it involves or implies injury to the person or property of anotherB
;. If the court regards it as immoralB
<. If the court regards it as being opposed to public policy under following circumstancesI
aE 2rading with enemy
bE Stifling prosecution " Preventing proceedings already initiated in the court from
running their normal course or to prevent the compromise of a prosecution is illegal and
void. # pro note e=ecuted as consideration for compounding charge of grievous hurt is
void. ,ut an agreement for compounding of a compoundable offence is not void. #
compromise agreement is made before any complaint is filed, it would not amount to
stifling prosecution.
cE %aintenance and /hampertyI %aintenance is an agreement whereby a person promises
to maintain )finance. a suit in which he has no interest. /hamperty is an agreement
whereby a person assist another in litigation in e=change of a portion of the proceeds he
will win in that case. In case of *nglish law both are illegal. In India both are valid and
not opposed to public policy unless unreasonable or made with a malicious motive.
dE 2raffic relating to public office,
eE #greements tending to create interest opposed to duty,
fE #greements of marriage bro-erage,
gE #greements tending to create monopolies,
hE #greements to influence elections to public offices,
iE #greement in restraint of personal liberty,
jE #greements interfering with marital duties.
#s per Sec 64 of the #ct, where the consideration or object of the agreement is unlawful in part,
If the unlawful part is not separable, than whole agreement is voidB
If the unlawful part is separated from lawful part, then lawful part is enforceable and the
unlawful part is void.
CHAPTER VII ! VOID A1REEMENT
1/00/2009
#s per Sec 6DgE an agreement not enforceable by law is void.
&nly those agreements which fulfill the essentials laid down KHS.3M are enforceable by law.
#n illegal agreement is forbidden by law, but a void agreement is not prohibited under lawB
In case of an illegal agreement, even the collateral transaction is not enforceable but in case of
void agreement collateral agreements are enforceable. )e.g. lending money to meet a loss in
wager agreement and financing a smuggling activity..
2he following agreements are e=pressly declared void by the #ctI
3. #greements made by incompetent parties )Sec:33.
6. #greements made under mutual mista-e of fact " ,ilateral mista-e )Sec:6M.
8. #greement, the consideration or object of which is unlawful.)Sec:68.
9. #greements made without consideration. )Sec:6;.
;. #greements in restraint of marriage of any person other than a minor.)Sec:6<.
<. #greements in restraint of trade subject to following e=ceptionsI )Sec:65.
Stat"tor7 e*#e$tion+ I
&nce there is a sale of goodwill the buyer of goodwill may enforce on the seller a reasonable restraint
on his doing the similar business within reasonable area or period.
Knder Partnership #ct 3N86I
3. #ny Partner may be restrained from doing similar to the business of the firm, )Sec 33D6E.
6. #n outgoing partner may be restricted from doing similar to the business of the firm within a
reasonable area or time.)Sec:8<D6E.
8. #t the time of dissolution of the firm, some or all partners may agree not to carry on the firmAs
business for a reasonable time or within local limits.)Sec:;9.
9. #ny partner who has sold his share of goodwill in firmAs business or accepted his share of
goodwill.)Sec:;;D8E.
*=ceptions under the common lawI
(uring employment between employer and employee " any such restraint is allowed only
during the period of employment and not after cessation of employment unless the restraint is
to protect employerAs goodwill and trade secrets.
2hrough 2rade #greements of 2rade #ssociations for mutual benefit and not to create any
monopoly.
#greements in restraint of legal proceedings when they are referred to arbitration! or to sue
in a particular court only.!)Sec:64.
K'/*R2#I' #GR**%*'2S )Sec:6N. B: An agreement the meaning of which is not certain or
capable of being made certain is void #n agreement with ambiguity in the wording " agreement to
sell at concessional rate without mentioning the concession.
#n agreement to agree in future is void.
WA)ER A)REEMENTS: Se#&86.
1ager means a ObetAB it is a promise to give money or moneyAs worth upon the ascertainment of an
uncertain event.
1ager agreements are voidB 'o suit will lie for recovery of money won on any wager.
2o be a wager, following conditions must be fulfilledI
3. 2here must be a promise to pay money or moneyAs worthB
6. Promise must be conditional on an event happening or not happeningB
8. 2here must be uncertainty of event:past, present or future.
9. *ach party must stand to win or loseB
;. 2here must be a common intention to betB
<. Parties should not have any other interest e=cept for sta-e.
*ffect of transactions collateral to wagerI *=cept in Gujarat and %aharashtra, where wager is illegal
and void, in all other places it is only void and not illegal. Jence e=cept in those two states in other
places collateral transactions to wager are enforceable.
Lotter7: It is illegal and punishable uHs.6N9# of the Indian Penal /ode.
INSURANCE CONTRACTS are not wager even though the object of these contracts is uncertain
because they are based on insurable interest. In insurance contract, the insured has insurable interest on
the asset insured but in a wager the parties should not have any other interest e=cept the sta-e. #ny
insurance contract without insurable interest is void as it is a wager.
CHAPTER VIII. CONTIN1ENT CONTRACTS
22/00/2009
#s per Sec 83 # contract to do or not to do something if some event collateral to such contract does
or does not happen!. It is a conditional contract in which performance become due only on the
happening or non happening of some event which is of uncertain nature.
*=ample " # contracts to pay , Rs.3M,MMMH: if ,As house is destroyed by fire.
# contract to pay a sum of money after a fi=ed time or on the death of a person is '&2 a
contingent contract because these two are certain to happen. #ll insurance contracts e=cept $ife
#ssurance! are contingent contract.
2he event on which the performance of the contract is made to depend must be collateral to the
contract. 2he event must be unessential to nature of the matter covered by the contract.
# contingent contract differs from a reciprocal promise as it creates obligation on one side only.
E++entia0+ of a #ontin-ent #ontra#t:
3. It must be a contract to do or not to do something,
6. It must depend on the happening or non:happening of an uncertain future event,
8. 2he event must be collateral or incidental to the contract.
# contingency dependent on the mere will and pleasure of one of the parties is not enough.
RULES RE)ARIN) CONTIN)ENT CONTRACTS:
$. /ontingent contracts to do or not to do anything, if an uncertain future event happens, can not
be enforced by law unless and until that event has happenedB DSec:86EU
%. #ny contingent contract depending on the happening of an event can be enforced only on the
happening of such an event. If that event becomes impossible of performance the contract
becomes void. &nce that event has happened that contract has become absolute.
&. /ontingent contract based on uncertain future event does not happening, then such contract can
be enforced only when such future event becomes impossible of happening and not before
DSec:88E.
'. If the future event on which a contract is contingent upon how a person will act at an
unspecified time the event shall be considered to become impossible when such person does
anything which renders it impossible to do the specified future event within a definite time.
Dsec:89E
(. 1hen a contract is made contingent on the happening of an uncertain event with in a fixed
time, it becomes void when the time expires before that event happens or that the said event
becomes impossible of happening with in the said fixed time..sec2&(/
). # contract contingent upon an uncertain event not happening within a fixed time may be
enforced when the fixed time has expired before that event has happened or it has become
certain that the event will not happen.
*. #greements are void when they are contingent on impossible events, whether or not the fact is
-nown to the parties at the time when the contract is made.Dsec8<E
IFFERENCE .ETWEEN A WA)ER AN A CONTIN)ENT CONTRACT:
3. In a wagering contract there is a mutual promise but in a contingent contract mutual promises
are not necessary.
6. In a wagering contract the parties must contemplate the determination of the uncertain event
but in contingent contract the future event is merely collateral to the contractB
8. In wagering contract neither party intends to perform the contract but in contingent contract
parties intend to perform their respective obligationsB
9. 1agering contracts are void uHs.8M but contingent contracts are good unless they are bad in
lawB
;. In wagering contract the parties have no other interest e=cept their sta-e but in contingent
contracts parties have interest in the occurrence or non occurrence of the event.
<. In wagering contract there is a sense of contingencyB in contingent contract there is no sense of
contingency.
CHAPTER I3 PERFORMANCE OF CONTRACTS.
22/00/2009
Performance of a contract consists in doing or causing to be done what the promisor has promised to
do # contract is said to be performed when parties ma-e #ctual Performance! or #ttempted
Performance or offer to perform!. #s per sec 85 of the #ct, the parties to the contract either DiE perform
their respective obligations or DiiE offer to perform the same, unless DiiiE such performance is dispensed
with or DivE e=cused under this #ct or any other law.
# contract is said to performed through, DiE #ctual performance or DiiE #ttempted performance or offer
to perform. &ffer of performance is also -nown as 2ender!.
1here a promisor has made an offer of performance and the offer has been refused, the promisor is
not only not responsible for non:performance but also can sue the promisee for breach of contract.
ESSENTIALS OF A VALI TENER: %SEC89(
3. It must be unconditional )tender with a re+uest for an ac-nowledgement is valid..
6. It must be made at a proper time and place,
8. 1here no time is fi=ed it is reasonable to ma-e the tender at any reasonable time.
9. # person to whom the tender is made must have reasonable opportunity for inspection of the
goods.
;. # tender must be whole and not of the part.
<. # tender must be in the proper form,
5. # tender must be to a proper person,
4. 2ender for delivery of the goods must be for the +uantity and +uality as stipulated in the
contract.
N. # tender made to the one of the several joint promisees has the same legal conse+uences as a
tender to all of them,
Effe#t of ref"+a0 to a##e$t a tender %+e#89(:
1here a tender by a promisor is not accepted by the promisee,
2he promisor is not responsible for the non performance B nor does he thereby lose his rights under the
contract.
CONTRACTS W:IC: NEE NOT .E PERFORME:
3. If the both parties to the contract agree for novation, rescission or alteration, the original
contract need not be performed. )sec<6.
6. If the promisee dispense with or remit the performance by the promisor in total or in part or
e=tend the time for performance or accept any accord and satisfaction then the contract need
not be performed,)sec<8.
8. 1hen a voidable contract is rescinded,)sec<9.
9. 1here the failure of performance has been caused by promiseeAs neglect or refusal.)sec<5.
.Y W:OM T:E CONTRACT MUST .E PERFORME:
3. ,y the promisor himself, where his personal performance is essentialB
6. ,y the agent, where promisorAs personal s-ill is not essence of contractB
8. ,y the representative,
9. ,y the third person, if the promisee accepts such performance.
1J& /#' (*%#'( P*R7&R%#'/* Q &nly the promisee or his agent can demand performance.
In certain cases third person can to the contract can also demand performance.
TIME AN PLACE OF PERFORMANCE %SEC&;<&'6(:
3. 1here no time limit is fi=ed it must be done within a reasonable time,
6. 1hen it is to be performed on a particular day, then it must be performed on that day during
the usual business hours and at a place at which it is to be normally performedB
8. 1here the promise is to be performed only after the application by the promisee, the promisee
is bound to apply for the performance at proper time and place and within the usual hours of
business )sec94..
9. 1here no place is mentioned for performance, the promisor has to apply to promisee for fi=ing
the place of performance and perform it at that place.)sec9N.
;. # contract should be performed in the manner and at the prescribed time in the contract.)sec;M.
TIME AS T:E ESSENCE OF T:E CONTRACT:
#s per law, one who does not perform in full his own promise within the time specified can not
maintain any action for the enforcement of a return promise )sec;;.
1hen time is the essence of the contractI 2he party has to perform his promise within the specified
time failing which the contact become voidable at the option of the other party. 2he intention to ma-e
the time essence of the contract must be e=pressed in a very clear language. 2ime is always considered
essence of the contract in the following casesI
3. 1here the parties have e=pressly provided,
6. 1here delay operates as an injury,
8. 1here the party see- permission for e=tension of time
TIME IS NOT T:E ESSENCE OF T:E CONTRACT:
1hen time is not the essence of contract, the promisee is not entitled to avoid the contract even if the
promisor fails to perform it within the stipulated time.
ACCEPTANCE OF PERFORMANCE OUT OF TIME: 1hen the promisee accepts the
performance at any time other than agreed time, it is treated as acceptance and the promisee can not
demand any compensation for the delay unless at the time of such acceptance he gives notice to the
promisor of his intention to do so.
EVOLUTION OF =OINT RI):TS AN RESPOSI.ILITIES:%SEC;5&;'(
3. If two or more persons have made joint promise, all of them must jointly perform the promise.
If one of the joint promisor has died than his legal heirs along with other promisors or if all the
promisors have died the legal representatives of all the promisors must jointly perform unless
otherwise stated n the contract.)sec96.
6. In case of joint promisors, the promisee is entitled, in the absence of a contract to the contrary,
to compel any one or more of the joint promisors to perform the promise. 2hus in case of a
joint promisors the liability to perform is joint and several. )sec:98.
8. 1hen one of the several joint promisors have performed the whole of the promise, he is
entitled to claim e+ual contribution from the other promisors.
9. If a joint promisor ma-es default in such contribution the remaining promisors must share the
loss e+ually. 2his right of contribution e=its between co:sureties also.
;. # release of one of the joint promisors by the promisee does not discharge the other promisors.
)sec99.. Knder *nglish law discharge of one of the joint promisors will release all the joint
promisors.
<. In case of joint promisees, all of them jointly or in case of death of any one or more, the legal
representatives of deceased promisees together with other surviving promisees can jointly
demand the performance. If some only join and demand performance, their suit is liable for
dismissal)sec9;.
PERFORMANCE OF RECIPROCAL PROMISE:
Promises which form the consideration or part of the consideration for each other are -nown as
reciprocal promises. Rules as regard to the performance of reciprocal promises areI:
Simultaneous reciprocal promises are -nown as mutual and concurrent. #s per sec;3 both
promises are to be performed simultaneously and one need not perform his part unless the other is
also ready to perform.
/onditional reciprocal promisesI
1here order in which the reciprocal promises are to be performed in a set order then it shall be
performed in that orderB when no order is fi=ed it shall be performed in their natural order.)sec;6.
1hen one party prevents the other from performing, the contract become voidable at the option of
the party so prevented and he is entitled for compensation for any loss from the other party.
Se+uential reciprocal promises implies that the promisor who has to fulfill the first promise can not
demand the performance of the other to perform unless he complete his promise first. Je must also
compensate the other party for his own non performance.)sec:;9.
Reciprocal promises when one is legal and the other is illegal, and if the legal part is separable
from the illegal part, than the legal part is only enforceable. If both parts are not separable, than the
whole contract is void.)sec;5.
In case of #lternative Promises, one part is legal and the other being illegal only the legal part is
enforceable. )sec;4.
APPROPRIATION OF PAYMENTS
1here there are several debts and the payment made by the debtor is insufficient to meet the entire
debt, the +uestion arises as to which debt is to be appropriated first.
#ppropriation is the right given to the debtor for his benefit.
A$$ro$riation 27 de2tor %+e#'>(: 2he debtor has a right to appropriate it either e=pressly or by
implication towards any debt due to his creditor. 1here debtor does not ma-e any direction, the
intention may be inferred from the nature of transaction.
A$$ro$riation 27 #reditor.%+e#<6(I If the debtor does not give any direction, the creditor has the
option to appropriate the amounts to the satisfaction of any legally and undisputed debt, even
though such debt may be time barred debt. 2he creditor is entitled to appropriate payments in the
manner most advantageous to him. #ppropriation once made can not be altered.
A$$ro$riation 27 0a3 %+e#<6(I 1here neither party ma-es an appropriation, the payment shall be
appropriated in the chronological order not withstanding some of them are time barred debts.
1here all the debts are of e+ual standing, the payments will be e+ually distributed.
Prin#i$a0 and intere+tI 1hen the principal and interest are due, the debtor can decide that
particular payment to be appropriated towards the principal, -eeping the interest due. If the
creditor accepts the payment, he has to accept the debtorAs appropriation. ,ut if the payments are
made without appropriation from debtor, the creditor can apply the payment first to interest and
then to principal.
A++i-n!ent of #ontra#tI #ssignment means transfer. #ssignment of contract stands for transfer of
contractual rights and liabilities by a party to the contract to the some one who is not a party. &n
assignment an assignee can bring an action on his own initiative. 2he #ct has no specific
provisions dealing with assignment of contracts. 2he common rule as to assignment isI
DiE #ssignment can be by an act of parties or by operation of law. DiiE /ontracts involving personal
performance can not be assigned, DiiiE &bligations under a contract can not be assigned with out
the consent of the promisee, DivE 2he creditor can assign the rights to any one, DvE #ssignment by
operation of law ta-es place due to death or insolvency of parties.
C:APTER ?. ISC:AR)E OF CONTRACT
6;@6;@566>
# contract is discharged when the rights and obligations created by it are e=tinguished.
2he various modes in which a contract may be discharged areI
3. (ischarge by agreement. Dsec <6,<8E
6. (ischarge by operation of lawB
8. (ischarge by breach, Dsec 8NE
9. (ischarge by performance, Dsec 85, 84E
;. (ischarge by impossibility, Dsec;<E
<. (ischarge by lapse of time.
I.ISC:AR)E .Y A)REEMENTA
# contract can be discharged with out performance by means of an agreement between parties.
NOVATION: 1hen a new contract, either between the same parties or between new parties, is entered
into, to substitute the old contract, it is novation. 2he consideration for the new contract is the
discharge of the old contract. Knless there is an e=tinguishment of all rights and obligations under the
old contract, there is no novation. 2he old agreement should be valid and enforceable and when it
become unenforceable the old one will revive.
E++entia0+ of novation are: DiE consent of all the parties to the old contract. DiiE 'ew one is capable of
being enforceable by lawB DiiiE new contract must be made before the e=piry of the old contract.
ALTERATION: It means a change in one or more terms of the contract made with the consent of all
the parties. In alteration there is only a change in the terms of the contract and not in the parties.
#lteration with the consent of all the parties discharges the original contract.
RESCISSION: Dsec:<9E If all the parties to the original contract agree to rescind it, the original
contract is discharges. Rescission means the cancellation of the contract. (ischarge by rescission
re+uires mutual consent and consideration. Rescission results in dissolution of the contract. # contract
can be rescinded by DiE %utual consent, DiiE ,y the aggrieved party in case of a breach of contract by
the other party, DiiiE ,y the party whose consent is not free.
REMISSION: It means acceptance of lesser degree of performance than what was due under the
contract. It is a unilateral act of promisee discharging the obligation of another. Indian law there is no
need for fresh consideration for remission but in *nglish law a person can not remit unless there is
consideration for the fresh promise.
WAIVER: It means abandonment of right. 2o constitute waiver there is no need for agreement or
consideration.
ACCOR AN SATISFACTION: #ccord means to accept less than what is due under the old
contract. Satisfaction means the fulfillment of the smaller obligation. #n accord alone is not
enforceableB but an accord followed by satisfaction discharges the pre e=isting obligation.Dsec:<8E
II.ISC:AR)E .Y PERFORMANCE.
&n the performance of the obligation underta-en by the parties, the contract is automatically
discharged. If one party only performs, he alone is discharged and ac+uires a right of action against the
other who is guilty of breach. 1here a party has offered to perform the promise, but he was prevented
by the other, he will be deemed to have performed the promise.
III.ISC:AR)E .Y OPERATION OF LAW:
3. &n Insolvency, the rights and liabilities of the insolvent are transferred to the &fficial assignee
or the &fficial receiver.
6. &n %erger, the liabilities are merged with another and greater right is in position.
8. #ny material #lteration in a written contract made without the consent of the other has the
effect of discharging the other. %aterial #lteration! is an alteration which significantly
changes the rights and liabilities of the parties to the contract.
9. &n (eath of the promisor, where his personal performance is the essence of the contract, the
contract is discharged.
IV.ISC:AR)E .Y .REAC::
If any party fails to perform his obligations, there is a breach of contract. # breach of contract is
actual or anticipatory.
#ctual breach of contract ta-es place when a person does not perform his obligations when it is
due &R when one of the party perform, the other party alleges that it is not a proper performance
as per terms of contract and such breach is of essential condition of contract. In such actual breach
the contract is discharged.
#nticipatory breach of contract involves refusal by the promisor to perform his part before the due
date of performance. It is the premature destruction of the contract rather than a failure to perform.
/onse+uences of anticipatory breachI
2o treat the whole contract as bro-en and to claim damages even though there is still time to
perform the contractB
2o treat the contract as still alive and wait till the e=piry of time period stated in the contract and
then hold the other party responsible for failure. ,ut if promisee elects this, the contract is still in
force for the benefit of both parties and if some supervening impossibility of performance happens,
the promisor is also entitled to ta-e advantage of that situation. )#very v ,owdenD34;<E.
%easure of damages for #nticipatory breachI
If the contract is ended immediately, the damage will be measured by the difference of price
prevailing on the date of breach and the contract priceB
If the contract is -ept alive, the damage will be the difference between the contract price and the
price prevailing on the due date fi=ed for performance as per the contract.
In case of an anticipatory breach, the aggrieved party may claim damage for breach, but he has to
ma-e good to the other party the benefits he might have received under the contract.
V.IC:AR)E .Y IMPOSSI.LITY OF PERFORMANCE:
Impossibility of performance may appear on the face of the contract &R may e=ist un-nown to the
parties at the time of ma-ing the contract &R may arise subse+uently after the contract is made.
#greements which are impossible on the face of the contract are void because $aw does not
compel the impossible.
If, however, the promisor alone -nows the impossibility then e=isting, the contract become
voidable, and he is bound to compensate the promisee for any loss he may suffer on account of non
performance of the promise.
(&/2RI'* &7 7RKS2R#2I&'I Dsec:;<E
7RKS2R#2I&' means the discharge of a contract rendered impossible of performance by
external causes beyond the contemplation of the parties. Such impossibility should not be self
induced by the promisor. )*=ample: an actor contracts to perform for many days but could not do
so on few days due to illness..
Instances /overed Knder the Supervening Impossibility of PerformanceI
3. # contract may become impossible of performance after the due date byI:
6. (estruction of the subject matter,)case law:2#L$&R 0 /#$(1*$$D34<8E: If the subject
matter of the contract is destroyed the contract is discharged.. ,ut where only a part of the
subject matter of the contract is destroyed and such destruction does not absolve the
promisor from performing the balance part, he has to complete such balance part.
8. (eath or personal incapacity,
9. /hange of law: subse+uent impossibility created by change in law,
;. 'on:e=istence or non:occurring of a particular state of things,) case law: @R*$$ 0
J*'RL D3NM8E " If a contract depends on the occurrence of an event, which does not in
fact happen the contract is discharged, : hotel boo-ing for viewing -ingAs coronation
procession..
<. (eclaration of war,
E?CEPTION TO T:E PRINCIPLE OF SUPERVENIN) IMPOSSI.ILITY:
3. (ifficulty of performance,
6. /ommercial impossibility,
8. Impossibility due to failure of third person on whose wor- the promisor relied,
9. Self induced impossibility,
;. 7ailure of one of the object,
<. Stri-es, $oc-:outs and /ivil disturbances,
EFFECT OF IMPOSSI.LITY OF PERFORMANCE:
/ontract become void )sec:;<D3E #'( ;<D6E.
,enefit to be restored )sec<;.
/ompensation for non:performance)sec:;<D8E: this clause provides that a contract may be void due
to impossibility of performance
and yet compensation may be payable by the person who -nows but hide it from the other..
VI.ISC:AR)E .Y LAPSE OF TIME:
$imitation #ct 3N9M lays down the time limit for every type of contract to be performed. # money
debt gets time barred after 8 years. # mortgaged debt gets time barred after 36 years and so on.
2hus if a contract is not performed and no legal action is initiated by the promisee within the
period of limitation, he is deprived of his remedy at law and the contract is discharged by lapse of
time.
CHAPTER 3I. 4UASI CONTRACTS.
11!0!2009
In an ordinary contract, the parties ma-e actual promises -nowing fully well that legal
relationship will come into e=istence. ,ut sometimes there is no intention on the part of the
parties to enter in to a contract but obligations resembling those created by contract are
imposed by law. 2his is termed as +uasi:contract.
3. # +uasi:contract is not in fact a contract at all, but merely resembles one and produces
similar effect.
6. It is a contract implied by law.
8. Cuasi:contracts are not founded on actual promises but created by circumstances.
9. 2he aggrieved party is placed in the same position as if the actual contract e=ists on the
footing that such obligations must be fairly compensated.
;. 2he basis of +uasi:contract is to prevent unjust enrichment out of other personAs loss.
CASES OF EEME /UASI&CONTRACTS:
3. /laims for 'ecessaries Supplied )sec:<4. " 'ecessary suited to the conditions of life of
minor, lunatic and their dependants: 2he goods supplied are necessary and not already
possessed by him: 2he claim is only against their estate and not personally against them.
2he term necessary items is not confined to goods only and include education, house etc.
2he obligation under this section is to pay a reasonable price and not the agreed price.
Similarly creditors are entitled to the value of the necessaries but not the interest there on.
6. Payment by an Interested Person )sec <N. " # person, who is interested in the payment of
money which another is bound to pay by law to pay and who, therefore, pays it, is entitled
to be reimbursed by the other.) Payment of property ta= by tenant . 2he payment must be
bona fide. If he has no interest in such payment, he ca not claim protection.
8. &bligation of a person enjoying benefit of non gratuitous act )sec:5M. " 1here a person
lawfully does anything or delivers him any thing not intending to do so gratuitously, and
such other person enjoys the benefit there of, the latter is bound to ma-e compensation or
restore the thing so done or delivered.)case law: (amodar %udaliar 0 Secretary of State
for India.D34N9E: sec5M is not based on contract but embodies the e+uitable principles of
restitution and prevention of unjust enrichment. It has no application to persons
incompetent to contract. 2his section applies as much as to corporations and Governments
as to individuals.
9. Responsibility of finder of goods,)sec:53. " # person who finds goods of another is subject
to the same responsibility as a bailee. Je can not appropriate the goods without ta-ing
proper steps to find out the owner. 2he finder of the goods is entitled to retain the goods
against the owner until he receives the compensation from him. Je is also entitled to the
possession of the goods as against the whole world e=cept the true owner. Je can enjoy the
goods if DiE the thing found is in danger DiiE 2he owner can not be found out, DiiiE where the
owner is found but he refuses to pay lawful charges of the finder and such charges amount
to two:third of of the value of the thing found. )case law " Jollins 0 7owler "employee
pic-ed a diamond ring from shop floor and gave it to shop owner and demanded it later
when he could not find the true owner even after reasonable search..
;. %oney paid by mista-e or under coercion)sec56.I : # person to whom money or a thing
has been paid or delivered by mista-e or under coercion must repay or return it. Payment
by mista-e here must refer to a payment which was not legally due. %ista-e must be as to
the e=istence of the obligation and not merely as to some collateral matter. %ista-e must be
either of a fact or law.)case law: Sales 2a= &fficer v @anhaiya $al %u-und $al SarafD3N;NE
" If a person pays money to another by mista-e or under coercion than money must be
repaid to him.
#ny person injured by the failure to discharge of a +uasi:contract is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and
bro-en his contract.
/"ant"! !er"it: 1hat one deserves: it is available only if DiE original contract is discharged
and DiiE the claim is brought by party not in default. (amages are compensatory in nature while
+uantum meruit is restitutory.
C:APTER ?II REMEIES FOR .REAC: OF CONTRACT.
B9@6;@566>
,oth parties to a contract have to perform their obligations. 1hen one of them repudiates to
perform his obligations, he is said to have committed breach of contract. In such a case, the law
provides the following remedies to the injured party.
Can#e00ation or Re+#i++ion: Rescission is the revocation of a contract. 1hen one party commits a
breach, the other can treat the contract as rescinded and he is freed from all obligations under the
contract. 2he party rescinding a voidable contract shall if he has received any benefit there under
from the other must restore such benefit form whom it is received.)sec<9. #lso a person who has
rightfully rescinds the contract is entitled to a compensation for any damage sustained by him
through the non fulfillment of the contract)sec5;.. )*=ample: singerAs contract with a theatre..
Rescission will be granted by court only if the contract is voidable and where the contract is
unlawful for causes not apparent on its face and the defendant is more to blame that the plaintiff.
Rescission will not be granted by court where, DiE the plaintiff has impliedly or e=pressly ratified
the contractB DiiE parties can not be restored to their original positionB DiiiE third parties have
ac+uired right in good faith and for valueB DivE only a part of the contract is sought to be rescinded
and that part is not severable from the rest of the contract.
Re+tit"tion: sec:<;. 1hen an agreement is discovered to be void or when it becomes void, any
person who has received any advantage is bound to restore it or ma-e compensation for it.
)*=ample: # sells his horse receive Rs.;MMMH:. 2he horse is dead at the time of contract but -nown
only latter. # has to return the money to the buyer..
S$e#ifi# Perfor!an#e: 2his is a discretionary remedy allowed by court only in few cases whereC
DiE %onetary consideration is not ade+uateB DiiE #ctual damage is not ascertainable.
Specific performance will not be granted where, DiE contract needs personal performanceB DiiE
(amages are an ade+uate remedy.
InD"n#tion: It is an order of the court restraining the wrong doer from doing or continuing the
wrongful act. It is usually granted to enforce negative stipulations in cases where damages are
inade+uate. It is a preventive relief particularly in case of anticipatory breach of contract.)case law:
1arner ,ros v 'elson..
/"ant"! Mer"it: It means payment in proportion to the wor- done!. It arises where a contract,
partly performed by one party, has been discharged by the breach of the other party. 2his right is
founded not on the original contract but on the implied agreement to pay for what has been done.
a!a-e+: # person who commits a breach of contract must ma-e compensation to the injured
party. 2he amount of damage is compensation in money as a substitute for the promised
performance. #warding damages is to put the injured person in a position as if he would have been
if performance has been rendered as promised. 2he court will compel the party in breach to ma-e
good the loss to the other party by paying the damages. 2he damages are of four -indsI:
3. General or ordinary damages " 2hese arise naturally in the usual course of things of the
breach of contract. 2hese are awarded with a view to compensate the injured and not with a
view to punish the party at default. It is usually assessed on the basis of actual loss suffered.
6. Special damages: this arise due to the unusual circumstances affecting the injured. 2he
condition is that the special circumstances must be -nown the party against whom the
special damages are claimed and that too at the time of the entering into the original
contract and not subse+uently.
8. 0indictive or e=emplary damages: 2hese are awarded with a view to punish the wrong
doer. 2hey are normally awarded only in actions of tort " breach of duty. Generally
e=emplary damages are awarded only in case of DiE breach of contract to marry and DiiE
breach of contract by a ban-er having sufficient funds in the customers account but dis
honour his che+ues.
9. 'ominal damages " 2hese are awarded where the injured party has not suffered substantial
damages. 1here the breach is technical, or the injured has no intention of performing the
contract or injured is not able to prove the actual damage or it was more due to the fault of
the injured the court will order only nominal damages.
MEASURE OF AMA)ES: 2he principle on which the damages are awarded is that the injured
party must be placed in the same position as he would have occupied if the breach has not ta-en
place.
2he leading case is " Jadley 0. ,a=andale.D34;9E Knless the special circumstances are brought to
the notice of the parties, special damages can not be claimed. Sec.58 dealing with the measure of
damage is based on this decision. 2he rules laid down are as followsI
3. RestitutionI 2he injured party is entitled to be placed in the same position as if the contract had
been performed.
6. General (amagesI 2he injured party is entitled to only such damages which arise naturally in
the usual course of things as a result of such breach. Such compensation is not to be given for
any remote and indirect loss.
8. Special (amagesI 1here a party claims special damages he must prove that the other party
-new that at the time of ma-ing the contract that special loss was li-ely to result from the
breach of the contract.
9. Remote (amagesI $aw normally does not award indirect or remote damages which are not
direct conse+uent flow out of the breach.
;. Performance &bligationI # person who claims damages for a breach of a contract should have
performed or ever ready to perform his part of the obligations arising under the contract.
<. %itigation of $ossI # person who sues for damages for a breach is bound to ta-e all reasonable
steps to mitigate Dreduce in effectE the loss and can not claim as damages any sum which is due
to his own neglect. # plaintiff can not be allowed to accumulate damages by his own inaction.
5. $i+uidated (amagesI 1here the parties already agree about the damages for breach of
contract, no additional amount will be awarded.
4. 0indictive (amagesI 0indictive or e=emplary damages are allowed only in case of breach of
contract of marriage or wrongful refusal by the ban- to honour the customerAs che+ue. Such
damages are awarded by way of a lesson or punishment to the wrong doer.
N. (amages in Cuasi /ontractI 1here an obligation created by the +uasi contract is not
discharged, the compensation is the same as in the case of a regular contract.
3M. (ifficulty in calculating damages is no ground for refusing damages.
PENALTY AN LI/UIATE AMA)ES: SEC&E;
1here the parties provide before hand, the amount of compensation payable may be penalty or
li+uidated damages. 2he Indian law does not ma-e any distinction. Sec 59 only states that the court
will never allow damages more than what is agreed but it may allow less. #s per this sec the injured
party can only claim reasonable compensation and will not realie any penalty.
i+tin#tion 2et3een 0i1"idated da!a-e+ and $ena0t7:
3. ,oth are payable on the occurrence of a breach of contract.
6. If the sum payable is for in e=cess of actual damage it is penaltyB
8. If the sum e=pressed is payable on a certain date and a further sum is payable in the event of
default, the latter sum is penalty, since mere delay in payment is unli-ely to cause damage.
9. 2he e=pression used by parties is not finalB if the sum is e=orbitant, the court will regard it as
penalty even if it is termed as li+uidated damages.
;. 2he essence of penalty is stipulation as a terrorem of the offending party. 2he essence of
li+uidated damages is a genuine pre estimate of the damage.
<. *nglish law distinguishes between penalty and li+uidated damages but no such distinction in
Indian law. 2he courts in India ascertain the actual loss and award the same after ensuring
that it does not e=ceed the already agreed amount.
R"0e+ re-ardin- $a7!ent of intere+t:
3. #ny stipulation for increased rate of interest from beginning in case of default is penaltyB
6. In case of stipulation of increased interest from the date of default is treated as penalty if such
rate is unreasonable.B
8. Stipulation of payment of compound interest in case of default at the same rate as simple
interest is not penalty but at an increased rate is penalty.
9. 1hen in a contract no interest is payable, but interest is payable upon default, the such
stipulation is penalty.
;. #n agreement to pay interest with a proviso that a reduced rate will be accepted if repayments
are regular is not a penalty.
THE SALE OF 1OODS ACT 1900
CONTRACT OF SALE OF 1OODS.
25/0/2009
Sale of Goods #ct, 3N8M contains << sections and came into force from M3HM5H3N8M and e=tends to
all Sates e=cept >?@.
# contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to a buyer for a price!. Jere contract means an agreement enforceable by lawB
Goods means any -ind of movable assets other than %oney and other #ctionable claim. Property
means the title or ownership rightsB Price means money e+uivalent payable for the transfer of
goods.
Sale or #bsolute saleI 1here the property in the goods is immediately transferred from the seller to
the buyer and nothing is left on the part of the seller to perform, there is a sale or absolute sale.
1here the transfer of property in the goods shall ta-e place in future or on the fulfillment of
certain conditions it is an #greement to sell! or a conditional sale. #n agreement to sell becomes
sale once the condition set for transfer of property is fulfilled and the ownership is transferred.
ESSENTIALS OF A CONTRACT OF SALE:
3. # 0alid /ontract " it must fulfill all conditions of sec3M of /ontract #ct.
6. 2wo parties " #s it is a contract there must be at least two parties to it. *=ceptions to this
rule areI
In case of sale in e=ecution of decree, the present owner himself can but it.
# part owner can sell his part to another owner,
# partner may buy goods from his own firm and vice versa,
1here a pawnee sells the goods pledged to him, the pawnor may himself buy those goods,
1here there is a sale by auction, the seller may reserve the right to ma-e bid and buy own
goods.
8. #greement for the transfer of ownership " 2here must be an immediate transfer or an
agreement to transfer general property in the goods.
9. Goods " #ll type of movable assets e=cept money and actionable claims. 2he seller must be
the owner of the goods which he wants to transfer. # debt is not goods as it is only
assignable as per 2ransfer of Property #ct but can not be sold. Growing /rops are also
goods as it can be severed before sale. Shares and Stoc-s are also goods. Right in
partnership is also goods.
;. %oney, #ctionable /laims and Immovable Property are e=cluded from the definition of
goods!
<. Price " 7or a 0alid contract of sale consideration for transfer must be money paid or
promised. Jowever the consideration can be partly in money and partly in goods.
5. # contract of sale can be e=pressed or implied.
ISTICTION .ETWEEN SALE AN A)REEMENT TO SELL:
PARTICULARS SALE A)REEMENT TO SELL
'ature &f /ontract *=ecuted *=ecutory
2ransfer &f Property Immediate In future or subject to
completion of conditions
Ris- &f $oss &n buyer as it passes with the
ownership
&n seller as ownership has not
passed.
/onse+uences &f ,reach ,y
Seller to Sell
,uyer may sue for delivery as
well as claim damages
&nly personal remedy against
seller for damages.
/onse+uences &f ,reach ,y
,uyer to #ccept the Goods.
Seller may sue only for the price
and can not repossess the goods.
Seller can only sue for damages
and not for price but can
repossess the goods.
Insolvency of the ,uyer Seller is bound to deliver the
goods and ran- for a ratable
dividend for the price.
Seller need not part with the
goods.
Insolvency of Seller ,uyer is entitled to recover the
goods as the property of the
goods is with the buyer
If the buyer has already paid the
price, he can only claim ratable
dividend from sellerAs estate.
General and Particular Property It creates Right in rem!. 2he
buyer gets absolute ownership
against the whole world.
It creates only Right in
Personam!. 2he buyer can only
sue for breach.
Right of Resale. Seller can not resell even if he is
in possession of goods and if he
do so the new buyer do not get
good title. &riginal buyer gets
the right to sell.
Seller can sell the goods to a
new buyer but by doing so he is
liable for breach. 2he new buyer
gets good title. &riginal buyer
can not sell the goods as he does
not get title.
.2he difference between Sale and ,ailment are as followsI
3. In sale property in the goods is transferred but in a bailment only possession is transferred.
6. In sale buyer being the owner, he can deal with the goods in any way, but a bailee can only
deal with the goods according to the directions of bailor.
8. Goods once sold are not returned unless there is breach of any conditionB bailee must return
the goods to bailor.
9. In a sale consideration is price but in bailment the consideration is underta-ing to return the
goods.
Sale and Gift " Sale is for price consideration whereas gift is without price consideration.
Sale and ,arter " where consideration for transfer of goods is delivery of other goods it is barter,
whereas consideration for sale is price money or partly in goods and partly in money.
Sale and %ortgage "
3. In a sale there is transfer of whole interest in the goods but in mortgage there is transfer of
limited interest only.
6. In sale buyer becomes absolute owner but in mortgage ownership still remains with
mortgagor,
8. In sale consideration is price but in mortgage consideration is loan amount and securing of
the debt.
Sale and contract for wor- and $abourI Sale involves delivery of goods but a contract for wor- and
labour involves s-ill and labour by one party and material supplied by another, the delivery of
goods being subsidiary or incidental to the contract. 1here there is transfer of property for money
it is saleB where the substance of contract is e=ercise of s-ill or labour it is not sale.
ISTINCTION .ETWEEN SALE AN :IRE PURC:ASE:
PARTICULARS SALE :IRE PURC:ASE
'ature of contract *=ecuted contract *=ecutory contract
2ermination of contract ,uyer can not terminate and has
to pay the price
2he hire purchaser can stop
payment at any time
Ris- of loss due to insolvency of
buyer
Seller ta-es the ris- Seller has no ris- as he can ta-e
bac- the goods.
Implied conditions and
warranties.
# sale is subject to these
provisions of the #ct.
It is not subject to these
conditions of the #ct but subject
only to the provisions of Jire
Purchase #greement.
*ffect of payments. Payment is towards the price of
goods.
Payment is towards hire charges.
Resale 2he buyer can resell the goods
even before all installments are
paid.
2he hire purchaser can sell only
after payment of all installments
# contract of sale is made by an offer to buy or sell for a price and completed when such offer is
accepted by the other party. # contract of sale may be e=pressed or implied.
/lassification of goods " *=isting goods, 7uture goods and /ontingent goods.
2he e=isting goods can be further divided into "
Specific goods, #scertained goods, Knascertained goods.
*=isting goods " Goods owned and possessed by the seller at the time of ma-ing the contract of
sale.
Specific Goods! are those goods which are identified and agreed upon at the time of contract of
sale. Goods, merely in an identifiable position, does not ma-e the them specific.
#scertained Goods! are those goods which are identified after the contract of sale. Jere the goods
are almost of same type but the buyer has to select -eeping in mind the defective pieces.
Knascertained Goods! are those which are not separately identified at the time of contract.
7uture Goods! are those goods which are to be produced or ac+uired by the seller after entering
into the contract. 2he contract for sale of future goods is always an agreement to sell.
/ontingent Goods! are a type of future goods, the ac+uisition of which by the seller depends upon
a contingency which may or may not happen. *=amples " Goods to arrive, 7uture crops, eggs.
Goods perishing before the ma-ing of contractISec:5.
1here there is a contract of sale of specific goods and the goods are destroyed without the
-nowledge of seller before entering into the contract, then the contract is void. If the buyer had the
-nowledge of the perishing of goods, but not the seller, he but not the seller will be estopped from
setting up a contract.
Goods perishing before sale but after agreement to sellI Sec:4.
It deals with a case where the goods are in e=istence at the time of ma-ing the contract but perish
without the fault of either party before the transfer of the property. In this situation performance on
either side is e=cused as from the time of the perishing of the goods.
#ccording to sec4, a contract can be avoided on the grounds of impossibility of performance on
following conditionsI
3. It is an agreement to sell and not a sale,
6. $oss must relate to specific goods,
8. Goods must have perished before the ris- passes to the buyer,
9. 2he perishing was not due to the fault of anyone,
If the specific goods agreed to be sold, subse+uently perish,
If it is due to the fault of any party, the party in default is liable for non delivery or to pay
for the goods as the case may be,
If there is no such fault,
If the ris- has not passed on to the buyer, the agreement is avoided and the seller is not
liable for non delivery, but has to bear the lossB
If the ris- is passed on to the buyer, then he must pay for the goods even though it is not
delivered.
PRI/* is the money consideration for sale of goods.
Sec N provides following mode of fi=ing the price.
Price may be e=pressly provided in the contract,
/ontract may provide the manner in which the price is to be determined,
2he price may be determined in the course of dealing between the parties.
Price may be fi=ed by the valuation of third party,
2he price is to be paid by cash, che+ue or draft or letter of credit o ban- guarantee or by
any other mode.
CONITIONS AN WARRANTIES
5'@6;@566>
# statement made before entering into the contract with a view to induce the other party to enter
into a contract is -nown as Representation!. # representation may be a mere e=pression of an
opinion or commendation by the seller of his goods. Such representation may or may not be a part
of the contract. 1here it is not a part of the contract it has no legal implications. If it forms an
integral part of the contract and the other party relies upon that representation, then it is
stipulation! and such stipulation may be either treated as condition or warranty. )Sec36.
A stipulation in a contract of sale with reference to goods which are subject matter there of may
be condition or a warranty34ec$%.$/5. Some of them are essential to the main purpose of the
contract -nown as conditions! whereas others which are only collateral to the main purpose are
called warranties!.
Condition: # condition is a stipulation essential to the contract, the breach of which gives rise to
a right to treat the contract as repudiated!)Sec:36D6E.
*ssentials of a condition are:
3. It is essential to the main purpose of the contract,
6. 'on fulfillment of condition causes irreparable damages to the aggrieved party,
8. 2he breach of condition gives a right to the aggrieved party to rescind the contract and
recover damages.
Warrantie+:)Sec:36D8E. A warranty is a stipulation collateral the main purpose of the contract,
the breach of which gives rise only to a claim for damages but not to a right to rescind the contract
and return the goods.
2he *ssentials of a warranty are:
3. It is only collateral to the main purpose of the contract,
6. Its breach causes only damage to the aggrieved party and not defeat the main purpose of
the contract,
8. 2he aggrieved party can only claim damages for the breach of warranty and can not
repudiate the contract.
1hether a stipulation in a contract is condition or warranty depends on each case.
Stipulation as to time " D3E #s to time of payment, D6E #s to performance of the contract.
Knless it is specifically agreed, stipulation as to time of payment is only warranty.
IFFERENCE .ETWEEN A CONITION AN WARRANTY.
3. /ondition is essential to the main purpose of the contract while warranty is only a
collateral.
6. ,reach of condition gives right to the aggrieved party to repudiate the contract and claim
damages whereas the breach of warranty gives right to claim damages only.
8. 2he aggrieved party may treat the breach of condition as breach of warranty only and
merely claim damages but a breach of warranty can not be treated as breach of condition.
9. # buyer can elect to waive the condition and treat the breach of condition as breach of
warrantyB
;. 1here the contract of sale is not severable, and the buyer has accepted he goods or pat
thereof, breach of any condition can only be treated as breach of warranty,
<. 1here the contract is divisible, the buyer can accept part of the goods and reject the
balance.
5. /onditions and warranties can be e=pressed or implied.
IMPLIE CONITIONS:
3. Condition a+ to tit0e DownershipE " Sec:39.D3E.2he seller must have the right to
sell. 'obody holds a title superior to that of vendor. D6E. Right to sell means not
mere possession of defect free title to goodsB it also means that the seller should not
infringe on the trade mar- of other seller.
6. Sa0e 27 de+#ri$tion DSec 3;E : 1here goods are sold by description, implied
condition is that goods shall correspond with the description. 2he word description
includes anything said as to +uality, fitness place of origin, source of manufacture,
mode of pac-ing etc. the seller must supply the goods which answer the description
given in the contract. Sale by description includes many situations. D3E ,uyer has
never seen the goods and buys the on the basis of description given by the seller. D6E
1here buyer has seen the goods but rely not on what he has seen and only on the
statement of sellerB D8E Pac-ing of the goods also forms part of the description.
8. Sa0e 27 +a!$0e a+ 3e00 a+ 27 de+#ri$tion )Sec 3;. " Implied condition is that the
goods sold must correspond both with the sample as well as with the description.
9. Condition a+ to 1"a0it7 or fitne++ " Generally there is no implied condition as to
the +uality or fitness under a contract of sale. 2he implied condition as to +uality or
fitness will operate only if following conditions are fulfilledI
aE 2he buyer re+uires the goods for a particular purpose,
bE 2he buyer ma-es -nown to the seller the particular purpose,
cE 2he buyer relies on the sellerAs s-ill or judgment,
dE 2he sellersA business is to sell such goods.
eE 1here an article is fit for one purpose only and turns out to be unfit for that purpose,
then the condition as to fitness is breached. 1here the goods are usable for various
purposes, the buyer must inform the seller his specific purpose and if this is not done
the buyer will have no remedy merely because it was unfit for his purpose. $eading
case " Grant 0 #ustralian @nitting %ills $2(D3N8<E
fE 2he seller always deals with normal and not with abnormal cases. If a person is buying
an article is suffering from an abnormality and it is not made -nown to the seller,
implied condition as to fitness will not apply.
gE Generally where goods are sold under its patent or trade mar- name, there is no implied
condition as to its fitness for any particular purpose. Jowever where the buyer as-s the
seller to supply an article by trade name but indicate to seller that he relies on his s-ill
and judgment for its fitness to the purpose on hand, the implied condition as to +uality
and fitness will apply.
;. Condition+ a+ to !er#Fanta2i0it7: 2he implied condition is that the goods sold should
be of merchantable +uality and the re+uirements are that D3E the goods are sold by
description and D6E the seller deals in the goods of that description. 2he term
merchantable means the goods comply with the description mentioned in the contract.
Goods are un merchantable because D3E it has defect in its conditions, D6E it infringes a
trade mar-, D8E it is unfit for use,D9E its usage is injurious in a way.
# seller who deals in goods by description is bound to deliver goods of merchantable
+uality. /ase law " %&R*$$I 0s 7I2/J #'( GI,,&'SD3N64E. /ondition as to
merchantability would not be applicable where the buyer has e=amined the goods and
satisfied about its condition. ,ut where the goods have patent defects which could not be
discovered with such latent e=aminations, there is an implied condition that goods are free
from patent defects. #nother implied condition is that the goods must be wholesome and
should be fit for consumption.
<. Sale by sampleI: 2he implied condition in case of sale by sample are " D3E bul- will
correspond with sample in +uality, D6E buyer shall have reasonable opportunity of verifying
the bul- with sample, D8E goods shall be free from any defect ma-ing them un
merchantable.D9E where the contra is severable, buyer can retain the goods which
corresponds with the sample and reject the rest. D;Ewhere it is not severable, the buyer can
reject the whole or accept the whole and claim for damages for the inferior.
5. /onditions implied by custom or usage of tradeI #n implied condition as to +uality or
fitness for a particular purpose may be anne=ed by custom or usage of trade.)Sec3<D8E.
IMPLIE WARRANTIES:
3. Implied warranty of +uite possession " the buyer shall have the peaceful possession and
enjoyment of the goods sold to him. If there is breach of this warranty, the seller is liable to
the buyer in damages.
6. Implied warranty of freedom from encumbrancesI :Goods sold by seller must be free from
all charges and encumbrances. 2his warranty is not applicable where it is declared to the
buyer about the previous encumbrances.
8. Implied warranties anne=ed by usage of trade. # warranty as to fitness for a particular
purpose may be anne=ed to the contract of sale by a custom or usage of trade.)Sec:3<D8E.
Implied conditions and warranties in a contract of sale may be negatived or varied by D3E e=press
agreement. D6E course of dealing between parties, D8E custom or usage of trade.
CAVEAT EMPTOR: GLET .UYER .EWAREH
It is not a part of sellerAs duty to give the buyer, an article suitable for a particular purpose
unless such purpose is made -nown to the seller. 2here is no implied condition or warranty
as to the +uality or fitness for any particular purpose of goods supplied under a contract of
sale.)Sec3<.
#t common law it is presumed that where the buyer could e=amine the goods even though
he did not, he relied upon his own s-ill and judgment.
2his rule has no application where the seller has underta-en and the buyer has left it to the
seller, to supply goods to be used for a purpose -nown to both parties at the time of the
sale.
*=ceptions to the rule of caveat emptor )sec3<.I
3. 1here the buyer relies on the s-ill and judgment of the seller,
6. 1here the goods are bought by description, the goods shall be of merchantable +uality,
8. 1here the consent of the buyer was obtained by seller by fraud,
9. 1here by usage of trade implied conditions and warranties may be anne=ed by the usage of
trade,
TRANSFER OF OWNERS:IP
65@6'@566>
Performance by seller in a contract of sale consists of aE 2ransfer of possession of goods and
bE 2ransfer of property DownershipE in the goods. 2he transfer of possession is different from
transfer of property. 1hen property passes from seller to buyer the following happensI
Ri+I of Lo++: 2he ris- of loss also passes along with passing of property in the goodsB
On07 O3ner #an S"e: 1here the goods are destroyed or damaged by third party, only the owner
can sueB
In+o0ven#7 of ."7er or Se00erI In such a case the +uestion of rights of &fficial Receiver ta-ing
over of the goods depends up on the ownership in goods at that time.
S"it for Pri#eI Seller can sue for the price only when the goods have become the property of buyer
Ti!e WFen Pro$ert7 Pa++e+: %+e#&B9(
Generally the property in goods passes to buyer immediately after sale or at a future time or on the
performance of some condition.
R"0e+ Re0atin- to Pa++in- of Pro$ert7 are:
In case of unascertained goods no property passes unless and until the goods are ascertained. 2he
individuality of the thing must be established before property in it can pass from seller to buyer.
In Ca+e of A+#ertained )ood+: In case of sale of specific or ascertained goods, the property in
them passes as per the intention of the contracting parties.
R"0e+ a+ to Pa++in- of Pro$ert7: )sec.6M:69.
7undamental rule is that the property shall pass when the parties intend it to pass.
3. In case of Specific Goods in (eliverable State, the property passes to the buyer when the
contract is made. It is immaterial that the time of payment andHor the delivery is postponed.
2he goods are said to be in deliverable state! if the buyer would under the contract be
bound to ta-e delivery.)sec6M.
6. Specific Goods not in (eliverable stateI where the goods are not in deliverable state, the
property does not passes to buyer until the seller put the goods in deliverable state and the
buyer has the notice there of.)sec:63.
8. 1hen the Goods are to be measured , tested etc.I 1hen the goods under sale are specific
and in deliverable state but still it is to be weighed or measured or tested to do some other
thing for ascertaining its price, then the property passes only when such a thing is done and
the buyer has the notice of the same.)sec:66.
9. Knascertained goods and its appropriationI 1here the goods are unascertained or future
goods by description, when the goods are unconditionally appropriated to the contract
either by the seller with the consent of buyer or by the buyer with the consent of seller, the
property in goods passes to the buyer. It is essential that the appropriation of the goods
must ta-e place before the breach of contract by any one. 2he selection of the goods by one
and its adoption by the other converts agreement to sell as sale. 2he assent may be
e=pressed or implied.)sec:68.
;. 1here the seller delivers the goods to the buyer or to carrier to other bailee for the purpose
of transmission to the buyer and does not reserve the right to recall or disposal, he is
deemed to have unconditionally appropriated the goods to the contract. In this situation the
carrier at once become the agent of buyer.
<. Seller is deemed to have reserved the right of disposal or recall to him self DaE if the RR or
$R or ,$ is drawn deliverable the order of himself or his agent.DbE if the seller draw a ,ill
of *=change for the price and send it along with RR or $R, property in the goods does not
pass to the buyer unless he accepts the ,ill of *=change.
5. Goods Sent on #pproval or &n Sale or Return! )Sec:69. " Such a sale is only a
conditional sale.
4. Property in the goods passes on to buyer "
aE 1hen he signifies his approval or acceptance to the seller,
bE (o any other act adopting the transactionB e.g. sells or pledge them to third parties.
cE Retains the goods without giving notice of rejection for an unreasonable timeB
Pa++in- of ri+I: Ris- prima facie passes with the property. 2hus delivery of goods is immaterial.
TFe e*#e$tion to tFe -enera0 r"0e tFat ri+I $a++e+ 3itF tFe $ro$ert7 are: %SEC&5<(
aE 1here the parties have come to an agreement to the contrary,
bE 1here the delivery is delayed due to the fault of buyer or seller,
cE 2he rule does not affect the rights and liabilities of the seller or buyer as bailee of goods for
the other even when the ris- is passed.
C.I.F.CONTRACT: COSTC INSURANCE AN FREI):T.
Seller has to pay for cost, insurance and freight. Price +uoted includes all these e=penses. 2he
property in the goods under /I7 contract passes to the buyer as soon as the goods are shipped,
unless the seller retains a right of disposal. #ll /I7 contracts are sale by description.
F.O.. CONTRACT: GFree on .oardH " 2he seller must put the goods on board of a ship at his
own e=penses and must inform the buyer. 2he carriage cost to be bourn by the buyer. 2he seller
does not insure the goods and it is to be done by buyer. Payment in an 7&, contract becomes
payable immediately on the delivery of the goods to the carrier.
E*&+Fi$ Contra#t+: Jere the seller underta-es to give delivery from a ship which has arrived at
the port of delivery. 2he seller has to pay the freight. 2ill this is done the buyer need not pay for the
goods. 2he goods will be at sellerAs ris- during the voyage. 2he property in the goods passes to the
buyer only when it is delivered to the buyer at the port of delivery.
SALE .Y NON OWNERS:
In case of transfer of ownership from seller to buyer it is presumed that seller is the full owner of
the goods and on transfer the buyer gets absolute title. ,ut where the seller is not an absolute
owner of goods, the buyer will not get a better title than the seller. 'emo (at Cuod 'on Jabet!
meaning 'o one can pass a better title than he himself has! or # person who has no title to
property can convey none!)sec:65.. *=ceptions to this rule areI
B. Sa0e 27 !er#anti0e a-ent, provided the buyer has acted in good faith, the agent has
possession of goods or documents of title with the consent of true owner and he has no
notice of from seller that the agent has no authority,
5. Sa0e Under I!$0ied A"tForit7 of O3ner or Tit0e 27 E+to$$e0:
8. Knder certain circumstances the true owner may be prevented by his conduct from denying
the sellerAs authority to sell even though he did not have the ownership.)sec:65.
;. Sa0e 27 one of tFe Doint o3ner+: 1here one of the joint owners, who has the sole
possession of goods with the consent of the other owners, transfer to the buyer the property
in the goods then such transfer is valid provided the buyer buys the goods in good faith and
with out notice of the sellerAs defect of title.
'. Sa0e 27 a $er+on in $o++e++ion of -ood+ "nder a voida20e #ontra#t: %+e#&5>(
<. 2his e=ception is limited to contracts of sale voidable under Sec3N and 3N# of /ontract #ct
i.e. on the ground of coercion, fraud, misrepresentation, and undue influence and not in
respect of any other voidable contract. In order to attract this provision following
conditions must be satisfiedI
DiE 2he goods must be in the possession of buyer, DiiE the possession must
have been under a voidable contract under Sec3N and 3N#, DiiiE 2he
contract must not have been rescinded at the time of sale, DivE 2he buyer
must buy the goods in good faith and without notice of sellerAs defective
title. If the contract under which the seller obtains goods is void, then
even an innocent buyer from such a seller does not ac+uire good title.
E. Sa0e 27 Se00er in $o++e++ion after +a0e: )Sec:8MD3E.1here a seller may continue to hold
possession of sold goods or documents of title of them, he may sell them to a third person
and if the person obtains delivery of goods without notice of previous sale and in good
faith, he gets a good title.
9. Sa0e 27 2"7er in $o++e++ion after +a0e: )Sec:8MD6E.
>. 1here a buyer having agreed to buy, obtains with the consent of seller possession of the
goods or documents of title to goods and sells them to a bonafide third party, the sale is
valid even though he has entered into only an agreement to sell.
B6. Sa0e 27 an "n$aid +e00er: 1here an unpaid seller who has right of lean or stoppage of
goods in transit, resells the goods, the new buyer ac+uires a good title thereto as against the
original buyer.
BB. E*e!$tion "nder otFer A#t+: KHS.3<N of /ontract #ct, a finder of lost goods may sell the
goods under certain conditions and the buyer will ac+uire better title. KHS 35< of /ontract
#ct, a Pawnee has the power to sell the goods pawned under certain circumstance.
B5. &fficial $i+uidators, Receivers, /ustom officers etc are permitted to sell othersA goods and
pass on better title.
PERFORMANCE OF T:E CONTRACT.
6>@6'@566>
# contract of sale demands delivery of goods by seller and payment for the goods by buyer.
(elivery means voluntary transfer of possession of goods by one person Dseller or his agentE to
another Dbuyer or his agentE
Mode of de0iver7: DaE Physical or actual delivery, DbE Symbolic delivery " giving godown -eys,
delivery of documents of title etc. DcE /onstructive delivery or delivery by attornment " person
who is already in possession of the goods on behalf of seller transfer the ownership by
ac-nowledging that he hold the goods for buyer " warehouse receipt.
RULES RE)AEIN) ELIVERY:
B. MOE OF ELIVERY Se#&88 #ctual, Symbolic and /onstructive.
5. (elivery of goods and payment of price must be simultaneous unless otherwise agreed.
8. Effe#t of $art de0iver7I # delivery of the part of the goods has the same effect as a
delivery of the whole for the purpose of passing of property. ,ut a part delivery of goods
with an intention of severing it from the whole does not operate it as a delivery of the
reminder.)Sec:89.
;. ."7er to a$$07 for de0iver7I In the absence of an agreement to the contrary, the seller is
under no obligation to deliver the goods unless the buyer applies for delivery.)Sec:8;.
'. P0a#e of de0iver7: Knless otherwise agreed, goods sold are to be delivered at the place at
which they are at the time of sale, goods agreed to be sold are to be delivered at the place at
which they are at the time of agreement to sell, where it is future goods same are to be
delivered at the place at which they are to be manufactured or procured.)Sec:8<D3E.
<. Ti!e of de0iver7: (elivery to be made within reasonable time )Sec:8<D6E
E. Manner of de0iver7: 1here the goods are in third party custody, there is no delivery unless
and until such third person ac-nowledges to the buyer that he holds the goods on his behalf.
)Sec:8<D8E.
9. E*$en+e+ of de0iver7: unless otherwise agreed, the e=penses of putting the goods in
deliverable state shall be borne by seller. 2he e=penses incidental to receiving delivery
must be borne by buyer.)Sec:8<D;E.
>. e0iver7 of 3ron- 1"antit7: 2he delivery must always be for the e=act +uantity ordered
and must be of the same description contracted. 1here the delivery is for lesser +uantity
the buyer has the option to reject all or to accept and pay for what is delivered only. ,y
accepting the lesser +uantity the buyer is not debarred from suing for damages for short
delivery. E*#e++ de0iver7I In this case the buyer has three options namely D3E to accept all
and pay for the same at agreed priceBD6E accept only the contracted +uantity and reject the
balance D8E to reject the whole. Mi*ed de0iver7: 1here the goods of different description
other than contracted are included in the delivery, the buyer can either reject the whole and
repudiate the contract or accept those which conform to the contract and reject the rest and
sue for damages. )Sec:85.
B6. In+ta00!ent+ de0iverie+: )Sec:84. In the absence of an agreement to the contrary, the buyer
is not bound to accept the delivery in installments. 1here it is agreed for delivery by
installment and its payment also in installments, the failure of a party to deliver or pay for
one or more installments does not necessarily put an end to the contract.
BB. e0iver7 to #arrier or 3areFo"+eI )Sec:8N. 1here the goods are entrusted with the carrier
or warehouse for delivery to the buyer or for safe custody on behalf of buyer, it is prima
facie deemed to be delivery of goods to buyer. In the eyes of the law they become bailee of
the buyer.
B5. )ood+ de0ivered at a di+tan#e $0a#eI 1here the seller of the goods agrees to deliver the
goods at his own ris- at a place other than that where that is sold, the buyer shall ta-e ris-
of any natural deterioration in the goods incident to the transit unless otherwise agreed.
)Sec:9M.
B8. E*a!inin- tFe -ood+ on de0iver7I 1here there has been no previous e=amination of the
goods the mere fact that the buyer has ta-en delivery of them does not amount to an
acceptance until he has had a sufficient opportunity of e=amining the goods to ensure that
they correspond with the contract.)Sec:93.
B;. WFen a##e$tan#e i+ #o!$0ete on de0iver7I 2he buyer is deemed to have accepted the
goods if he D3E intimates the seller of his acceptance, or D6E does any act in relation to those
goods which is inconsistent with the ownership of themB or D8E he retains the goods beyond
reasonable time with out intimation to seller of his non acceptance. )Sec:96.
B'. ."7er i+ not 2o"nd to ret"rn tFe reDe#ted -ood+I It is sufficient for the buyer to inform
seller about his refusal to accept the goods nd he need not return the rejected goods.)Sec:
98.
B<. Lia2i0it7 of 2"7er for ne-0e#tin- or ref"+in- de0iver7 of -ood+I 1hen the seller has
arranged for delivery of the goods or informed the buyer of his readiness to do so, and the
buyer does not ta-e delivery within a reasonable time, then buyer is liable to seller D3E for
any loss incurred by hin due to his neglect or refusal to ta-e delivery and D6E to pay
reasonable charge if any for the care and custody of those goods. 2he seller is entitled to
the above remedies even though buyers refusal amounts to repudiation of the contract.)Sec:
99.
RI):TS OF UNPAI SELLER.
B<@6'@566>
#s per Sec:9;, where the whole of the price has not been paid or when a negotiable instrument
paid for the price has not been honoured , the seller remains as an unpaid seller. 1here the whole
of the price is tendered but the seller refuses that, he is not an unpaid seller. If there is a period of
credit for payment and it remains unpaid even after the due date in spite of all the conditions
attached to the payment are fulfilled, then also the seller is an unpaid seller.
Ri-Ft+ of "n$aid +e00er:
A-ain+t tFe -ood+: DaE 1hen the property in the goods are not transferred. : D3E Right of lien,
D6ERight of stoppage of goods in transit, D8E Right of resale. 2he rights of unpaid seller do not
depend on the agreement between the parties and it arises by the implication of law.
DbE 1hen the property in the goods is passed.: D3E Right of with holding the delivery.
A-ain+t tFe 2"7er $er+ona007: D3E Right to sue for the priceB D6E to claim damagesB D8E to claim
interest.
Ri-Ft of 0ien: %S*/ " 95 2& 9N.
O$ienA is the right to retain possession of goods until payment is received. 2his right can be
e=ercised where D3E goods are sold without any credit or D6E goods are sold on credit but the credit
period has e=pired, or D8E the buyer has become insolvent. Right of lien is lin-ed with possession
and not title. &nce the possession is lost the lien is lost. 2he lien of the unpaid seller is for the price
only and does not e=tend to any other charges. Right of lien is indivisible in nature. 2his right is
available even after part delivery on the remaining goods unless the agreement is contrary to that.
)Sec94.
Ter!ination of 0ien: Right of lien is lost if possession of goods is lost. Knpaid seller losses lienI:
3. .7 de0iver7 to #arrier: 1here the seller has delivered the goods to the carrier for transmission
to the buyer without retaining the right of lien then he looses the right of lien. ,ut he has the
right of stoppage in transit where by he can repossess the goods and e=ercise right of lien. ,ut
if the seller ta-es bac- the goods from the carrier for any other purpose he can not revive the
lien.
6. .7 de0iver7 to Fe 2"7er: Right of lien is lost if when the goods are delivered to the buyer or
his agent. ,ut the sellerAs lien is not lost if the goods are ta-en by buyer with out the consent of
seller.
8. .7 3aiver: 1here the seller has waived the right of lien e=pressly or impliedly the lien is
terminated.
9. .7 tender of $ri#e: 1here the buyer has paid for the goods the right of lien is lost.
Ri-Ft of Sto$$a-e in Tran+it: )Sec:;M:;6.
Secondly the unpaid seller has Right of stoppage in transit. 2he right of stoppage means the right
to stop further transit, to resume possession, and e=ercise right of lien. 2he right of stoppage in
transit arises only after the unpaid seller has parted with the goods, it has not reached buyer or his
agent, in the possession of carrier or bailee and the buyer has become insolvent in between.
(uration of transitI 2he capacity in which the carrier holds the goods in duration of transit isI
3. 1hen goods are under sellerAs lien as sellerAs agent,
6. 1hen the seller does not retain the right of stoppage in transit, the carrier is buyerAs agent,
8. 1hen carrier is an independent contractor, the unpaid seller can e=ercise the right of
stoppage in transit. 2he transit comes to an end DaE if goods are received by buyer or his
agent, DbE the carrier inform the buyer or his agent that the goods have reached destination
and he holds them on his behalf, DcE the carrier wrongfully rejects to deliver the goods. 2he
transit does not come to an end if the buyer rejected the goods and the carrier holds the
goods with himself.
9. the unpaid seller may e=ercise his right of stoppage in transit by DaE actually ta-ing
possession of the goods or DbE giving notice of his claim to the carrier.
Ri-Ft of Re+a0e: )Sec:;9. 2he unpaid seller can e=ercise the right of resale and the rules
applicable areI
3. 1here the goods are of perishable nature no notice to the buyer is essential.
6. 1hen the unpaid seller has e=ercised the right of lien or stoppage in transit, he has to give
notice to buyer of his intention to resell the goods. In this situation he can also recover the
loss if any from buyer on account of resale.
8. 1hen the unpaid seller has e=pressly reserved the right of resale in the original agreement
itself.
2he unpaid seller has got the right of withholding the delivery of goods if the property in the goods
have not passed on to the buyer.
Ri-Ft+ of "n$aid +e00er a-ain+t tFe 2"7er $er+ona007:
D3E Suit for priceB )Sec:;;. D6E Suit for damages for non acceptanceB )S*/:;<. D8E Suit for interestB
)Sec:<3. #n unpaid seller can recover interest only if he has recovered the price.
Effe#t of +"2 +a0e or $0ed-e 27 2"7er: %Se#&'8(
2he right of unpaid seller for lien on the goods or stoppage in transit is not affected by any sale or
pledge by the buyer. 2hat is to say the subse+uent buyer or Pawnee gets the title subject to the
rights of the unpaid seller. Jowever subse+uent sale or pledge with the consent of unpaid seller
will defeat the sellerAs lien.
CONSE/UENCES OF .REAC: OF T:E CONTRACT OF SALE:
SELLER,S REMEIES: DiE Suit for priceB DiiE Suit for interestB DiiiE Suit for damages for non
acceptance of goodsB DivE Suit for damages for repudiation of contract by the buyer before due
date. 2his situation is to be treated as anticipatory breach under the /ontract #ct.
.UYER,S REMEY: DiE Suit for damages for non delivery of goods )sec:;5.B DiiE Suit for
specific performance )sec:;4.B DiiiE Suit for breach of warranty)sec;N.B DivE Suit for damages for
repudiation of contract by the seller before the due date)sec:<M.B DvE Suit for interest )sec:<3..
INIAN PARTNERS:IP ACT B>85.
)ENERAL NATURE OF A PARTNERS:IP.
58@ M; @566>
Partnership is an agreement between two or more persons to share the profits of a business that
must be carried on by all or any of them acting for all.
TFe e++entia0 e0e!ent+ of Partner+Fi$ are:
#greement " Partnership always arises out of a contract between partnersB it is a creation only of a
mutual agreement. It is voluntary and contractual. It may be oral or writing.
Sharing profit of businessI 2here must be a business and it includes every trade, occupation and
profession. 2hus the e=istence of business is essential. 2he motive of the business is sharing of the
gains made in business. It is to be noted that sharing of losses is not an essential element. Jowever
in case of losses, same is to be shared in the same ratio of sharing of profits.
,usiness carried on by all or any of them acting for allI 2his is the cardinal principle of law. *ach
partner carrying on the business is the principal as well as the agent for all the other partners. 2hus
the acid test for the partnership is mutual agency! rather than sharing of profits. Jence the act of
one partner in the partnership business is binding on all the partners.
(istinction between partnership and firmI Persons who have agreed together to run the business
are called Partners! and collectively! the name under which the business is carried on is firm!.
Partnership is thus that invisibility which binds the partners together and firm is the visible form of
those partners who are thus bound together.
# partnership differs from a >oint Stoc- /ompany in the following areasI
3. PersonalityI # firm! is not a legal entity where as a registered company is a distinct judicial
person from its members. Jence a member of a company can enter into a contract with the
company but a partner can not enter into a contract with the firm.
6. #gencyI In a partnership every partner is an agent of the other but in a company every member
is not an agent of the other members.
8. (istribution of profitsI 7irmAs profits are distributed among partners as per agreement but there
is no compulsion as to distribution of companyAs profits. 'ormally only some portion of profits
are distributed as dividend.
9. *=tent of liabilityI In a firm, liability of partnersA is unlimited but from M3HM9H6MMN $imited
liability partnership has come into e=istence. In company, shareholdersA liability is limited to
unpaid share capital on his shares.
;. PropertyI 2he firmAs property is joint estate! of all the partners and it does not belong to a
body distinct in law from its members. In case of company, its property is different from that of
its members who can receive it only in the form of dividend or return of capital.
<. 2ransfer of sharesI # share in a partnership can not be transferred without the consent of other
partners but in a company a shareholder can transfer his shares subject to provisions in the
#rticles.
5. %anagementI Subject to an agreement, all partners are entitled to participate in the
management of the firm. In case of a company all members can not participate in the
management but only the elected ,&#R( of (irectors only can manage.
4. 'umber of membershipI In case of firms carrying on business other than ban-ing, the partners
should not e=ceed 6M and in case of ban-ing it should not e=ceed 3M. in case of a private
company the membership is minimum 6 and ma=imum ;M e=cluding present and past
employees of the company. In case of public company the minimum membership is 5 and
ma=imum is unlimited.
PARTNERS:IP v+. CLU.I # club is an association of person with object being not of earning of
profit but promoting of a common goal. In a /lub, members are not agent of others. 2here is no
mutual agency among members. # member of a club has no interest in the property of the club.
PARTNERS:IP V+ :INU UNIVIE FAMILYI
3. /reationI 2he relation of partnership is created by agreement but the right in JK7 is created by
status, i.e. by birth.
6. (eathI (eath of a partner ordinarily leads to dissolution of partnership, but the death of a
member in JK7 does not dissolve the family business.
8. %anagementI 2he right of management in JK7 business generally vests with @arta, the eldest
male member of JK7. In case of partnership the management rests with all the partners.
9. #uthority to bind the firmI *very partner by his act can bind the firm, but in JK7 only the
@arta has got the authority.
;. $iabilityI In a partnership, the liability of a partner is unlimited, but in JK7 only the liability of
the @arta is unlimited. 2he liabilities of other members are limited to their share in the profits
of the family business only.
<. /alling for accountsI %embers of JK7 are not entitled to as- for account evening case of
separation, but every partner can bring suit against the firm for accounts, provided he also
see-s the dissolution of the firm.
5. Governing lawI Partnership is governed by the Partnership #ct and JK7 business is governed
by Jindu $aw)%itha-shara school and (ayabagha school.
4. %inorAs capacityI In a partnership minor can not become a partner but can be admitted only to
the benefits of partnership, that too with the consent of all the partners only. In case of JK7
business, a minor becomes a member of the business by the incidence of his birth. Je need not
wait for attaining majority.
N. /ontinuityI JK7 has continuity till it is divided. 2he status of the JK7 is not affected by the
death of a member but a firm, subject to the contract between partners, gets dissolved on the
death or insolvency of any partner.
PARTNERS:IP V+ CO&OWNERS:IP:
3. Partnership always arises out of agreement but co ownership may arise either from agreement
or by the operation of law.
6. In a partnership there is community of interest but in co ownership there is no need for sharing
of profits or losses.
8. In a partnership every partner is an agent of other partners but in a co owner is not an agent of
other co owner.
9. # partner can transfer his share in the firm only with the consent of other partners but a co
owner can transfer his share without the consent of other co owner.
PARTNERS:IP V+ ASSOCIATION:
Partnership is for sharing of gain in business but #ssociation is completing a social goal.
Partnership does not e=ist between members of mutual insurance society.
In a trade combine, the relationship among members is not that of partnership.
TYPES OF PARTNERS:
#ctive partnerI # partner who actively participate in the firmAs business.
Sleeping or (ormant partnerI # partner who lend his name or capital to the firm but does not ta-e
active part in the management.
Partner by estoppel or holding outI 1hen a person D3E represents himself orDiiE -nowingly permits
himself to be represented as a partner in a firm Dwhen in fact he is notE he is liable li-e a partner in
the firm to any one who on the faith of such representation has dealing with the firm and suffered
damage.)sec:64. It is only the person to whom the representation has been made and who has acted
there on has right to enforce liability arising out of holding out!. 2his rule is also applicable to a
former partner retiring without giving proper notice.
Sub partnershipI It arises conse+uent upon the agreement between a partner and a stranger, the
latter is vested with interest jointly with that partner so for as his share in the firm is concerned.
2his will not ma-e the stranger a partner of the main firm. # sub partner can claim his share only
from the partner with whom he has entered in to an agreement and he has no right against the main
firm and he can not ta-e part in the business of the firm or demand for its accounts.
%I'&RAS P&SI2I&' I' # P#R2'*RSJIPI
%inor can not become a partner but can only be admitted to the benefits of the partnership with the
consent of all the partners. Jis Rights areI D3E #greed share of his profits of the firm. D6E /all for
and inspect the boo-s of accounts and ta-e copy. D8E Je can sue for the accounts or payment of his
share only when severing his connection with the firm,D9E &n attaining majority he may with in <
months by giving notice to elect to become a partner or not . if he elects he is entitled to his share
as minor and if he does not, his share of assets of the firm is not liable to any acts of the firm after
the date of his public notice.
$iabilitiesI D3E &nly the minorAs share of assets is liable for the acts of the firm and he is not
personally liable. D6E 1ithin < months of his attaining majority, or his obtaining -nowledge of his
admission to the partnership, whichever date is later, he may elect not to become partner by giving
public notice and his notice shall decide his position. If he fails to give notice he will become
partner on the e=piry of the si= months. If he elects to become partner or fails to give notice, he
becomes personally liable to third parties for all the acts of the firm. 1here the minor decides to
severe his connections with the firm, D3E Jis rights and liabilities continues to be those of a minor
up to the date of giving public notice. D6E Jis share will not be liable for any acts of the firm done
after that date of notice, D8E Je shall be entitled to sue the other partners for his share of profits and
property and for copy of accounts.
RELATIONS:IP .ETWEEN PARTNERS.
58@6'@566>
M"t"a0 Ri-Ft+ and "tie+ of Partner+: 2hese are governed by their contract and implied by the
course of dealing. 2he contract may restrict a partner from doing any business other than that of
the firm while being a partner.)Sec:33.
Ri-Ft+ of Partner+: DiE Right to ta-e part in the conduct of business. In case if a partner is
restrained by others from ta-ing part in business, the aggrieved partner can sue for dissolution or
sue for accounts with out dissolution. 2his right is subject to the contract between the partners.
DiiE *very partner has a right to be consulted on every business matter of the firm and in case of
difference in views, every partner has a right to e=press his views and the decision will be based on
majority opinion and such majority decision must be ta-en in good faith. #ny change in the nature
of business or in the nature of firm must be based on unanimous decision of all partners only.
DiiiE Right of access to boo-sI *very partner, whether active or sleeping, is entitled to access any
boo-s of the firm, inspect them and ta-e a copy of hem and this right must be e=ercised ,ona fide.
DivE Right to remunerationI 1here it is customary to pay remuneration for conducting the business
of the firm, a partner can claim it even in the absence of a contract for the payment of the same.
&therwise a partner is not eligible to claim salary for conducting the business as he is entitled to
share the profit only. DvE Right to share profitsI Subject to the contract between them, partners have
to share the profits e+ually and contribute to the loss also e+ually. 2here is no relationship between
their capital contribution and sharing of the profit. DviERight to interest on /apitalI Knless provided
in the deed of partnership no interest on capital of partners is payable. If interest is payable, the
same is to be paid out of profit only and not in case of loss. Interest on capital stops when the
dissolution of the firm starts. DviiE Right to interest on loansI *very partner is entitled for interest
on loan he has given to the firm at a rate agreed between them or at <Vp.a. if no rate is agreed.
Interest on loan is payable even if there is no profit in the firm. Interest on partnersA loan is
payable even after dissolution till date of final repayment. DviiiE Right to be indemnifiedI *very
partner has the right to be indemnified by the firm in respect of all payments made by him and all
liabilities incurred by him in the ordinary and proper conduct of business of the firm and in respect
Di=E Right to stop admission of a new partnerI *very partner has right to prevent the introduction of
a new partner. # new partner can be admitted only with consent of all partners and the new
partnerAs liability for the act of the firm will commence from his date of admission to the
partnership.)Sec:83. D=E Right to retirementI *very partner has a right to retire with the consent of
other partners by giving notice to that effect. )Sec:86D3E. D=iE Right not to be e=pelledI *very
partner has the right not to be e=pelled from the firm by the majority of partners.)Sec:88. D=iiE
Right of outgoing partner to carry on competing businessI #ny out going partner can carry on
business competing with that of the firm and even solicit customers of the old firm subject to the
agreement to the contrary.)Sec:8<D3E.. D=iiiE Right of out going partner to share subse+uent profitI
1here any partner has ceased to be the partner but his due are not yet settled by the firm and the
firm continues with the business as usual, the out going partner or his estate will be entitled for his
share of profit or <V return whichever is higher.)Sec:85. D=ivE Right to dissolve the firmI # partner
has the right to dissolve the partnership with the consent of all other partners.)Sec:9M.
UTIES OF PARTNERS:
3. Partners are bound to carry on the business of the firm DiE to the greatest common advantage of
the firm, DiiE to be just and faithful to each other, DiiiE to render true account of the firm to other
partners.)Sec:N.
6. *very partner is liable to indemnify the firm for any damage caused to it by his fraud in the
conduct of the business.)Sec:3M.
8. *very partner is bound to attend diligently to his duties relating to the firm.)Sec:36DbE..
9. # partner is not entitled to any remuneration for participating in the business.)Sec:38DaE.
;. *very partner is bound to let his partners have the advantage of his -nowledge and s-ill.
<. *very partner, subject to the agreement, has to contribute e+ually to the loss of the firm.
5. *very partner has to indemnify the firm for any loss caused to it by his willful neglect)Sec:
38DfE.
4. If a partner derives a profit for himself through the connections of the firm, then he is bound to
account for the profit and refund the profit to the firm.)Sec:3<DaE..
N. If a partner carries on business of the same nature as and competing with that of the firm, then
he must account for and pay to firm all profits made by him in the business )Sec:3<DbE.. 2he
firm will not be liable for any loss.
PARTNERS:IP PROPERTY: 2he property of the firm includes all property, rights and interests
brought in by partners as their contribution to the common business. DiiE #ll the property, rights
and interests ac+uired by the firm during the course of business. DiiiE Goodwill of the business.
1hether a particular property is or is not the property of the firm ultimately depends on the
agreement of the partners. Jence the mere fact that a property of the partner is used by the firm for
its business shall not by itself ma-e it the property of the firm.
)ood3i00: Goodwill of a business is subject to a contract between the partners to be regarded as
property! of the firm. 1hen the firm is dissolved every partner has got a right, in the absence of
any agreement to the contrary, to have the goodwill of the business sold for the benefit of all the
partners. Goodwill can be sold separately or along with the other properties of the firm.
PERSONAL PROFITS EARNE .Y PARTNERS: 1here a partner derives any profit for him
from any transaction of the firm or from the use of the property or business connection of the firm
or firm name, he must account for that profit and pay it to the firm. 1here a prtner a partner carries
on a competing business, he must account for and pay to the firm all profits made by him in the
business. #t the same time he is not re+uired to account for the profits of non competing business,
even if his connection with the firm helps him to promote his private business. It may be noted that
as per Sec:33 D6E, partners may among themselves contract not to carry any private business. #ny
breach of this provision may give right only to sue for damages from the defaulting partner and not
for accounting of profits to his co partners by the defaulting partner unless such private business is
in competition to firmAs business.
Ri-Ft+ and d"tie+ of $artner+ after #Fan-e in tFe #on+tit"tion of tFe fir!:
/hange in constitution of the firm arises due to D3E where new partner is admittedB D6E where any
partner goes out or diesB D8E where there is a change in business carried on by the firmB D9E where
the business is carried on after the e=piry of the term fi=ed for the purpose. #s per Sec:35, DaE
where change in constitution occurs due to first three reasons mentioned above, the mutual rights
and duties of partners in the reconstituted firm remain the same as they were before. DbE In respect
of last reason, the mutual rights and duties will continue as the same before e=piry of time but
notice from the retiring partner is not re+uired. D cE where the firm carries out other ventures than
the original one underta-en, the mutual rights and duties of partners in respect of new ventures also
will remain as in respect of the original ventures.
2he above mentioned rules are subject to contract between the parties.
RELATION OF PARTNERSTO T:IR PARTIES: )Sec:34.
*very partner, as for his acts for himself and in his own interest in the common concern of the
partnership, he may deemed a principal and so far as he acts for his partners, he may be deemed as
an agent. Je has a community of interest with other partners, whereas ordinary agent has his
interest alone in mind. # partner is an agent of the firm for the business of the firm only.
IMPLIE AUT:ORITY OF A PARTNER OF T:E FIRM:
2he act of a partner which is done in the usual way! business of the -ind carried on by the firm
binds the firm, provided that the act is done in the firm name or any manner e=pressing or
implying an intention to bind the firm. Such an authority of a partner to bind the firm is called his
implied authority. 2he word in the usual way! indicate that if a usual act is done in an unusual
way, the outsider may well be put on caution and en+uiry in to the unusual circumstances under
which he being called upon to act. It is his duty to as- whether the partner has authority to act so in
the unusual manner. If the outsider chooses to neglect what is unusual, he can not see- to charge
persons other than the one with whom he is dealing. If the act is outside the usual course of the
business of the firm!, it will not bind the firm even if it is prudent or beneficial to the firm unless it
is ratified by all the partners. Power to do the usual does not include power to do the unusual!
# partner has implied authority to bind the firm by all acts done by him in all matters connected
with the firmAs business and which are done in the usual way and are not in their nature beyond the
scope of partnership.
ACTS .EYON IMPLIE AUT:ORITY: %Se#&56( If there is no usage or custom to the
contrary, the implied authority of the partner does no empower him toI
3. Submit a dispute relating to the firm to arbitration,
6. &pen a ban- account on behalf of the firm in his own name,
8. /ompromise or relin+uish any claim by the firm against the third party,
9. 1ithdraw a suit or proceedings filed on behalf of the firm,
;. #dmit any liability in a suit or proceedings against the firm,
<. #c+uire immovable property on behalf of the firm,
5. 2ransfer immovable property belonging to the firm,
4. *nter into partnership on behalf of firm.
*=tension and restriction of partnerAs implied authorityI PartnersA implied authority can be
e=tended or restricted by a contract between them. Jowever a third party is not affected by a secret
limitation of a partnerAs implied authority unless he had actual notice of it. 2his e=tension or
restriction is possible only with the consent of all the partners.
#cts in emergencyI Sec:6M *ach partner can bind the firm by all his acts done in an emergency,
with a view to protect the firm from any loss, provided he has acted as a prudent man.
#dmission by partner " its effects DSec:68E #n admission or representation by a partner will not
however, bind the firm if his authority on the point is limited and the other party -nows of this
restriction. Jowever a provision of this section is not applicable to disputes between partners.
'otice to an acting partnerI )Sec:69. #ny notice by third parties to an active partner, on matters
relating to firmAs business, operates as notice to the firm, e=cept in the case of a fraud on the firm
committed by or in connivance of that partner. 2hus notice to one is notice to the rest of partners
just as notice to the agent is a notice to the principal. ,ut his notice must be actual and not
constructive, it must relate to the firmAs business and not to other matters, it must be given to an
active partner and not to a sleeping partner. 2he only e=ception is in case of fraud.
LIA.ILITY OF PARTNERS TO T:IR PARTIES:%+e#&5' 5E(
Contra#t"a0 0ia2i0it7: 7or the acts of the firm done during his partnership, every partner is
severally and jointly liable. 2he act of the firm! means any act or omission by all the partners or
any partner or agent of the firm. It is necessary that to bind a partner with liability the act must
have been done while he was a partner. #lso it is immaterial when the damage arose but he act
must have been done while he was a partner.
Lia2i0it7 for tort or 3ron-f"0 a#t: 2he firm is liable to the same e=tent as the partner for any
wrongful act done by a partner during the normal course of business of the firm with the authority
of the partners. 2he method employed by or the partner in doing it was un authoried or wrongful
would not affect the +uestion.
Lia2i0it7 for !i+a$$ro$riation 27 a $artner: 2here are two situations dealt with. DaE when a
partner acting within his apparent authority receives money or other property from a third person
and misapplies it or DbE where a firm in the ordinary course of business received money or property
from a third person and the same is misapplied by a partner, while it is in the custody of the firm.
In both cases the partner responsible for the act is liable to ma-e good the loss. 2he first case
covers the misapplication of money or property belonging to the third party made by the partner
receiving the same. 7or this provision to be attracted it is not necessary that the money should have
actually come into the possession of the firm. &n the other hand provision of clause DbE would be
attracted when such asset has come in to the custody of the firm and it is misapplied by any of the
partners. In both cases firm will be liable. In case of DaE, if receipt of money by one partner is
outside the scope of his apparent authority, his receipt can not be regarded as a receipt by the firm
and other partners are not liable.
RI):TS OF TRANSFER OF A PARTNER,S S:ARE %SEC&6N.I # share in a partnership is
transferable li-e any other assets, but the transferee or assignee of a partnerAs share can not become
a partner in the firm unless he is admitted by all other partners. 2he buyer or assignee of the
partnerAs share can enjoy only the rights to receive the share of the profits of the partner. (uring
the continuance of the partnership business the transferee is not entitled to DaE interfere in the
conduct of the business, DbE re+uire for accounts, DcE inspect boo-s of the firm. 2he transferee can
only receive the share of the transferor profit as agreed by the other partners and he can not
challenge the accounts. &n the dissolution of the firm or on retirement of the transferor partner the
transferee is entitled to DaE receive the share of transferorAs share of assets of the firm, DbE an
account of the firm from the date of dissolution. # partnerAs interest in the partnership can be
regarded as an e=isting interest and tangible property which can be assigned. 2he partners are
entitled to determine their rights and obligations among themselves as per contract between them.
LE)AL CONSE/UENCES OF PARTNER COMIN) IN )OIN) OUT %SEC&8B&89(
Introd"#tion of a ne3 $artner: Subject to the contract between the partners, the liabilities of
new partner ordinarily commence from the date of his admission to the partnership. In case the
liability is to be bac- dated, the creditors consent is also re+uired.
Retire!ent of a $artner: # partner may retire DaE with the consent of all other partners, DbE by
virtue of an e=press agreement between the partners, DcE in the case of a partnership at will, by
giving notice in writing to all other partners. 2he retiring partner is liable to the third party for the
act of the firm after his retirement till the public notice of his retirement is give. If the latter deals
with the firm without -nowing that the retired partner was a partner than the retired partner was
not liable.
Ri-Ft+ of o"t-oin- $artner: Subject to the contract to the contrary, an outgoing partner can carry
on business competing with that of the firm. but he can not use the name of the firm or can not
represent as a partner of that firm.
2he retiring partner has the right to receive his share of assets of the firm. 2he assets are to be
valued as on date of retirement and not as per boo-s of accounts.
1hen the firmAs business is continued even after retirement, the retiring partner is entitled to his
normal share of profit or <V per annum on the amount of his share of firmAs property whichever is
higher.
In case there is an agreement among the partners that the share of retiring partner will by
purchased by any of the e=isting partner than the firm will not be liable to the retiring partner. &nly
the partner who agree to buy retiring partnerA share will be personally liable.
Lia2i0itie+ of an o"t-oin- $artner: # retiring partner continues to be liable to third party for the
acts of the firm after his retirement until public notice of his retirement is given. #s regards to the
act of the firm done before his retirement he continues to be liable unless otherwise agreed.
E*$"0+ion of $artner: 'o partner can be e=pelled by a majority of partners e=cept in e=ercise,
DaEin good faith , DbE the power of e=pulsion must have been there in contract. 2he test of good
faith lies in DiE e=pulsion must be in the interest of partnership, DiiE the partner to be e=pelled must
be served with a show cause notice, DiiiE that partner to be given an opportunity of being heard. If a
partner is otherwise e=pelled, the e=pulsion is null and void and the affected partner can see-
judicial dissolution. 2he invalid e=pulsion of a partner does not put an end to the partnership.
)sec88.
In+o0ven#7 of a $artner: 1hen a partner is adjudicated as insolvent, he ceases to be a partner on
the date of the order of adjudication. Jis estate will not be liable for the act of the firm done after
that date. 2he firm is also not liable for any act of that partner after such date. &rdinarily but not
invariably! the insolvency of a partner results in dissolution of the firm. )sec:89.
eatF of a $artner: 1here as per contract the firm is not dissolved after the death of a partner, the
estate of the deceased partner is not liable for the act of the firm after his death. In case of death
there is no need for public notice.
Revo#ation of #ontin"in- -"arantee 27 #Fan-e in fir!%+e#&89( : # continuing guarantee given
to a firm or to third party in respect of the transaction of a firm is, in the absence of of an
agreement to the contrary, stands revo-ed as to future transactions from the date of any change in
the constitution.
S"!!ar7: 2he mutual rights and duties of partners are regulated by the agreement between them.
Such an agreement maybe implied also. #s regards to the third parties, a partner is the agent of the
firm for all purposes within the scope of the partnership concern.
RE)ISTRATION AN ISSOLUTION OF A FIRM
86@6'@566>
Mode of Effe#tin- Re-i+tration: Registration of a firm can be affected at any time. It is not
necessary that the fir is to be registered from the very beginning. 2he procedure for registration of
a firm Dsec:84E includes filing of a statement in the prescribed form stating there in D3E 'ame of the
firm, D6E the principal place of business, D8E addresses of other places of business, D9E the date of
joining of all the partners, D;E the names of all the partners and their permanent addresses D<E the
duration of the firm along with prescribed fee. *ach partner or their agents specifically authoried
for this purpose must sign the statement. 2he registration will come into effect from the date of
filing the statement in complete respect with the Registrar and not from the date of entering in the
register. Subse+uent alterations in the name, place, constitution, etc, of the firm or its partners must
also be registered. Knder *nglish law registration is compulsory but not so under Indian law.
Con+e1"en#e+ of Non Re-i+tration: Indian Partnership #ct does not ma-e the registration of
firms compulsory nor does it impose any penalty for non registration. Sec <N of the #ct deals with
the disabilities arising out of non registration. 2hese disabilities are DiE the firm or its partner can
not bring an action against the third party for breach of contract entered into by the firm, unless the
firm is registered and the partners suing are shown as partners in the firm.DiiE if any action is
brought in by any third party, then neither the firm nor the partners can claim any set off, DiiiE any
partner of unregistered firm is prevented from bringing any legal action against the firm. DivE even
in case of unregistered firm, any partner can sue for the dissolution of the firm or for accounts of
the firm when it is dissolved. DvE non registration of the firm does not affect the right of third
parties against the firm or its partners. 1hen ever a new partner is introduced, it should be
registered with registrar of firms.
i++o0"tion of tFe fir! taIe+ $0a#e: %Se#&8>&;;(
3. #s a result of an agreement of the partners,
6. #djudication of all or all but one partner as insolvent,
8. Subject to an agreement, dissolution of the firm ta-es place due to the efflu= of the agreed time
or completion of the venture or death of a partner or insolvency of a partner.
9. # partner giving notice to other partners his intention to dissolve the firm,
;. ,y the intervention of the court due to DiE a partner becoming of unsound mind, DiiE permanent
incapacity of a partner, DiiiE misconduct of a partner affecting the business,DivE willful or
persistent breaches of agreement by a partner, DvE transfer or sale of the whole interest of a
partner, DviE improbability of carrying on of the firmAs business due to persistent loss, DviiE if
the court feels for any reason that it should be dissolved.
Con+e1"en#e+ of di++o0"tion:%Se#&;'&'5(
2he firm and its partners are liable to third party for all the transactions entered until public notice
is given. 2he above rule is subject to following e=emptions namely DiE the estate of the deceased
partner, DiiE an insolvent partner, and DiiiE a dormant partner.
&n dissolution every partner has right to DiE have the property of the firm is applied for payment of
the debts of the firm and DiiE to have the surplus distributed amongst the partners.
2he mutual agency among the partners continue DiE so far as may be necessary to wind up the firm,
DiiE to complete the unfinished transactions pending on the date of dissolution and no other.
Subject to an agreement between partners, the partners have to follow the set rules for distribution
of assets of the firmI
3. $osses including the deficiencies of capital are to be paid out of profits, then out of capital, and
lastly by the partners individually in the proportions in which they were entitled to share
profits.
6. 2he assets of the firm, including the amount contributed by the partners to ma-e up the
deficiencies of capital must be applied in the following mannerI DiE in paying the debts of the
third partiesB DiiE paying to each partner ratably partnerAs loan, DiiiE paying ratably partnersA
capital Din the ratio of their capitalE DivE distributing the residual profits among the partners in
the profit sharing ratio.
8. In case the assets of the firm are insufficient to pay off firmAs liabilities including the capital of
the partners, each partner would individually liable to bring towards the losses including the
deficiencies of capital in the profit sharing ratio.
9. 1here there are joint debts due from the firm and also separate debts due from any partnerI DiE
2he property of the firm shall be first applied in payments of the debts of the firm and if there
is surplus, the share of each partner shall be applied to the payment of his private debt or paid
to himBDiiE 2he separate debts of any partner is paid out of his personal assts first and the
remaining balance, if any, is used in the payments of the debt of the firm.
;. # partner paying goodwill on entering into partnership for a fi=ed period, subject to an
agreement to the contrary is entitled to proportionate refund of the goodwill from the partnerDsE
who have enjoyed it before, if the dissolution of the firm ta-e place before such time decided.
2his rule is not applicable in case the dissolution is due to DiE death of one of the partners, DiiE
due to the misconduct of the partner paying the premium.
)ood3i00 on di++o0"tion: %Se#&''(
1hat the purchaser of the goodwill ac+uires isI DiE right to carry on the same business in the old
name, DiiE to represent himself as successor of the firm to others. 2he partners selling the goodwill
of the firm can DiE carry on similar businessB DiiE compete with the old business which has been
soldBDiiiE advertise for their new business.
%ode of giving public noticeI Public notice is always to be given in the DiE &fficial Gaette and DiiE
at least in one vernacular newspaper circulating in the district where the firm to which it relates has
its place or principal place of business. In the case of registered firm notice is also to be given to
registrar of firms.