9

MERCANTILE LAW

P.M. Bakshi

This study deals with the major components of mercantile law in

India, namely: (1) Law of contracts; (2) Law relating to
negotiable instruments; (3) Law of partnership; (4) Law relating
to sale of goods. The Supreme Court through its numerous
decisions has examined and clarified the many well established
principles. Some important decisions have been discussed here.

Law of Contracts
Intention to Create Legal Relations
A contract, as a legal concept, postulates a proposal (offer) and its
acceptance. Under section 2(a) of the Contract Act, 1872 (the
Act), when one person signifies to another his willingness to do
or to abstain from doing anything with a view to obtaining the
assent of that other to such act or abstinence, he is said to make
a 'proposal'. The essential question, thus, is whether such
'willingness' has been 'signified .
Although the definition does not say so, an intention to create
legal relations is essential, in order to create a contract.1 Such
'Banwari Lai v Sukhdarshan Dayal (1973) 1 SCC 294.

MERCANTILE LAW

315

intention may be more readily presumed in commercial matters. 2

Absence of intent to create legal relations may be inferred, where
a person who is asked to accept an offer, intimates that he would
accept, after the agreement is reduced to writing. 3
Of course, neither an offer nor an acceptance is required to be
express. It can be implied, as is clear from section 9 of the Act.
Thus, non-repudiation of certain terms may be regarded as
acceptance thereof.4
The heart of the definition of 'proposal' in section 2(a)
Contract Act lies in the words, 'willingness to do or to abstain
from doing something 5 . Hence, a mere invitation to another
person to indicate that person's terms, is not a proposal or offer.
Thus, if in reply to an offer to purchase property for Rs 6,000,
the agent of the offeree merely says 'won't accept less than
Rs. 10,000', there is no offer by the agent.5

Acceptance of Offer
Section 2(b) of the Act provides that a proposal, when accepted,
becomes a 'promise'. Section 2(e) defines an 'agreement' as a
promise (or a set of promises forming the consideration for each
other). Section 2(h) defines a 'contract' as an agreement enforce
able by law. Thus, the pyramid that forms a contract must have,
at its base, an accepted offer. Section 5 of the Act provides that
an offer (proposal) may be revoked at any time before its
acceptance is complete as against offeror. It is against the
background of these provisions in N. Sesharatnam v Sub Collector
Land Acquisition, Vijaywadaf the Supreme Court held that if a
person whose land is to be acquired, shows his willingness
to accept the acquisition but withdraws the offer before it is
accepted by the Acquisition Officer, then he can challenge the
acquisition proceedings, if an (adverse) award is made, after such
withdrawal.
2

CWT v Abdul Hussain (1988) 3 SCC 562, 568; Cf Klerort Benson v

Malaysia Mining Corporation [1988] 1 All ER 714.
3
Thawadas Pherumal v Union of India AIR 1955 SC 468.
*Haji Mohd. hhaq v Mohd. labal (1978) 2 SCC 493, 500; Ramji
Dayawala & Sons v Invest Import (1981) 15 SCC 80.
s
Mc Pherson v Appana AIR 1951 SC 184.
'AIR 1992 SC 13.

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FIFTY YEARS OF THE SUPREME COURT

According to section 2(b), the acceptance of an offer requires

that the person to whom the proposal is made should signify his
assent. The court has elaborated this requirement, by pointing out
that mere intent to accept, or mere resolve to accept an offer, does
not give rise to a contract. There must be some external
manifestation of that intent by speech, writing or other act. 7
Acceptance must, of course be communicated to the person who
made the offer. This is the reason why it has been held that the
mere filing of a suit does not constitute a formal acceptance.8 As
regards such communication of an acceptance, section 4 of the
Act is relevant.
(a) Acceptance is complete as against the proposer, when it is put
in the course of transmission to him, so as to be out of the
power of the acceptor.
(b) It is complete as against the acceptor, when it comes to the
knowledge of the proposer.
Acceptance can be by phone. But difficult questions arise as
to the place where the contract is made in such cases. In England,
it has been held that in such cases of 'instantaneous
communication', the contract is made at the place where the
acceptance is received.9
This is also the view taken by the Supreme Court, by a
majority judgement in Bhagwandas Goverdbandas.10
Acceptance, of course must be total. N o contract arises, if only
a part of the offer is accepted.11 Acceptance should be unequivocal
and not provisional.12 There can be a series of contracts between
the parties. At each stage, there is a distinct offer and a distinct
acceptance. 13

Bhagwandas Goverdhandas v Girdhari Lai Parshottamdas & Co. AIR

1966 SC 593.
*Vtswesardas Gokuldas v B.K. Narayan Singh (1969) 1 SCC 547, 549.
9
Brinki Bon Ltd v Stahag Stabi (1982) 1 All ER 293 (HL).
10
Supm, note 7.
n
General Assurance Society Ltd v LIC AIR 1964 SC 692.
n
Lakhanlal v State ofCrissa (1976) 4 SCC 660.
13
Chathirbhuj Vtthalets v Moreshwar Pamshran AIR 1954 SC 236.

MERCANTILE LAW

317

A clause in a tender, authorising the party inviting tenders to

terminate the contract at any time for the future, does not destroy
the very basis of the contract and the clause is valid.14

Consideration for a Contract

What is 'good' consideration in law is one question that has come
up before the courts again and again. Following propositions
seem to emerge from the decisions of the Supreme Court:
(a) Consideration can be 'executed' or 'executory5. In the former
case, it is present consideration. In the latter case, the
consideration is a promise for a promise.15
(b) Reciprocal promises are sufficient to constitute a contract.16
(c) Consideration must17 be something which the law can regard
as having some value. This does not, of course, mean that it
must be quantitatively equal to the thing promised.18
(d) Where an agreement is arrived at between certain members of
a family, that is designed to promise 'grace and goodwill'.
This, by itself, is a good consideration in order to support the
transaction.19
Under section 2 (d), consideration can proceed from a person
other than the promisee. However, the question whether a third
party can sue on a contract is a different one and, in general, a
third party cannot sue.20
A contract may contain provisions for revision of its own
terms, such as (a) by providing for extension of time limits for
various acts, or (b) by providing for review of prices (say, by
escalation clauses). Such escalation clauses have been upheld, even
in public law.21
u

Union of Indi* v Maddata Thattiah AIR 1966 SC 1724.

Uniott of India v Chaman Lal Loma & Co. AIR 1957 SC 652.
l6
Pinka Bhargava v Mahiner Nath (1991) SCC 566.
l7
Chidambara v PS. Renga AIR 1965 SC 193, 197.
l8
A. Lakshmana Swami Mundatiar v LIC AIR 1963 SC 1185.
19
CWT v Her Highness Vtjayaba AIR 1979 SC 982.
M
M.C. Chachar v State Bank of Tmvancore AIR 1970 SC 504; PR.
Subramania Iyer v Lakshmi Ammal (1973) 2 SCC 54.
21
Delhi Cloth & General Milk v Rajasthan State Electricity Board (1986)
2 SCC 431.
15

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FIFTY YEARS OF THE SUPREME COURT

While dealing with insurance policies, the court has laid down
two very important propositions:
(a) Once the policy is issued, the contract is concluded and its
existence cannot be questioned by the insurer.
(b) It is the duty of the insurer (particularly if it is a state
instrumentality) to produce the policy in litigation. 22
Under section 5 of the Act (inter alia), acceptance of an offer
can be revoked before its communication is complete as against
the acceptor. In the case of auction sales, where confirmation of the
bid is prescribed by the conditions of revocation, acceptance (by
bid) can be revoked before such confirmation.23
The contract is conciliated only when confirmation is done
and communicated. 24 Non deposit of 25 per cent of the bid (as
required by rules) means that no contract arose even if the bid is
accepted.2

Competence to Contract
By reason of the combined operation of sections 10-11 of the
Act, a minor is incompetent to contract. 26 This incompetence
extends to release of proprietory rights 27 obviously because release
has also to be based on valid consent.
Where there are several trustees, one of them (unless
authorised by the trust deed), cannot contract on behalf of the
trust. 28

Consent
Consent (in relation to contract) may be vitiated by mistake (or
other flaws). Section 13 of the Act states that two or more
persons are said to consent, when they agree upon the same thing
22

National Insurance Co. Ltd v Jugal Kuhore AIR 1988 SC 719, 723.
Union of India v Walaiti Ram (1969) 3 SCC 146.
H
Hadwar Singh v Begum Sumbrui AIR 1972 SC 1242.
"State ofAiP v Gopardhandas AIR 1973 SC 1164.
K
Padma Vithopa Cbakkaya v Mohammad Multatn AIR 1963 SC 73, 74.
27
WaU Singh v Sohan Singh, AIR 1954 SC 263, 265.
M
Shanri Vtjay & Co. v Princess Fatima (1994) SCC 602.
23

MERCANTILE LAW

319

in the same sense. Mistake of identity would thus prevent

consent/
Mistake deliberately induced by another as to the character of
a document stands on a similar footing 30 and, in such a case, the
transaction is void (not merely voidable). This does not mean that
a person (who is not deceived) can plead that he did not read a
particular document containing legal terms, or that he was
ignorant of its precise legal effect.31 Mistake of law (e.g. mistake
as to the effect of registration upon the validity of a document)
does not nullify the contract. 32
Questions of undue influence (section 16 of the Act) as
vitiating the quality of consent, have often arisen in the context
of illiterate women. In Sethan v Bhana33 the following facts
showed that the purchaser of land was in a position to dominate
the will of the seller:
(a) The sale deed was by a tribal woman, who was old, illiterate
and blind.
(b) N o apparent evidence of the passing of consideration existed.
(c) The woman was living with the purchaser (till her death) and
was dependent on him.
It was held that the purchaser carried the burden of proving
that the sale deed was not executed under undue influence.
It is clear, that mere statutory compulsion is not to be regarded
as undue influence.34 Difficult questions, however, arise when one
member of the family is preferred in a testament to the total
exclusion of all others. In such cases, courts usually require proof
that undue advantage was taken of the situation that created
'dominance of will'. Mere preference is not a proof of undue
influence.

"Central National Bank v United Industrial Bank AIR 1954 SC 18.

30
Dularia Devi v Janmardan Singh AIR 1990 SC 1173.
3l
Bihar State Electricity Board v Green Rubber Industries AIR 1990
SC 699.
32
Rolyanpur Time Works v State of Bihar AIR 1954 SC 165.
33
AIR 1993 SC 956.
34
Andhra Sugars Ltd v State of AP AIR 1968 SC 599.
3S
Afiar Sheikh v Soleman Bibi (1976) 2 SCC 142; Subhash Chandra v
Ganga Prasad AIR 1967 SC 878.

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FIFTY YEARS OF THE SUPREME COURT

Of course, the circumstances may be so outrageous, that (if one

may say so) the 'thing speaks for itself'. For example, where a
donor, suffering from several ailments, executed in the nursing
home a deed favouring one grandson and even almost totally
neglecting his wife and daughters, the presumption of undue
influence would be justified.36 Further, in the Indian context
transactions by pardanasheen women are very carefully scrutinised.37
Section 17 of the Act deals with fraud as vitiating consent. The
classes of acts constituting fraud are enumerated in the five
clauses of the section; but the mental element indicated by the
words 'with intent to deceive' (occurring in the opening part) is
the most important. Thus, if a husband persuades his illiterate
wife to sign two documents, telling her that her two lands were
being mortgaged to meet his debts when, in fact four lands were
mortgaged, deception was obvious. 38
Negative or passive silence (when there is no duty to speak or
disclose the facts) is not fraud.39 Duty to speak may arise when
the contract is one of 'absolute good faith'as for example,
contracts for life insurance.40
Section 23 of the Act provides that every agreement, of which
the object or consideration is unlawful, is void. The concept of
unlawful object or consideration is spelt out in five clauses of the
section. The emphasis in some of these cases is on avoiding
agreements which are in conflict with the law, or which are
immoral or opposed to public policy.
Cases of conflict with the law do not present much difficulty.
Sale of certain commodities without licence (required by statute)
is void. 41 A condition in a contract of carriage which would be
against section 10, Carriers Act 1865, is similarly void. 42
Statutory stage carriage permit, granted to a State Road Transport
Corporation, cannot be allotted to private operator. 43 In all such
36
Lakshmi Ammo, v T. Narayana Bhalla AIR 1970 SC 1367.
"Kharbuja Kuer v Jang Bahadur AIR 1963 SC 1203.
^Nyawwa v Byrappa AIR 1968 SC 956.
39
Shn Krishnan v Kuruksbetra University AIR 1976 SC 376.
w
Mithoo Lai Nayak v UC of India AIR 1962 SC 814.
*lKM. Kamath v K Bsmgappa Baliga & Co. AIR 1959 SC 781.
*2M.G. Brothers Lorry Service v Prasad Textiles AIR 1984 SC 15.
*3Brij Mohan v Shiv Narayan AIR 1987 SC 291.

MERCANTILE LAW

321

cases, the court examines whether the language of the statute

yields a definite prohibition. 44 Such a prohibition cannot be
changed by an agreement or compromise. 45
The same approach is adopted where the agreement would
defeat the legal structure or policy of the law (albeit indirectly)
for example, a benami transaction to evade taxes46 or to prevent
competitive bidding at court auctions.47
Where the attack on an agreement is based on morality or
public policy, the role of the court becomes a difficult one,
because, here, the court takes leave of definite boundaries and has
to enter an area that is unbounded, unaccepted and uncharted. It
has thus been held that a wagering agreement is not immoral. 48
Of course, there are some situations where conflict, with public
policy is writ large, for example, where the agreement is to
secure a favourable decision from the government, by wielding
influence.49 It seems that prevailing social values would be the
criterion for the decision of the court in this regard.50
Section 23 of the Act (last sentence) provides that every
agreement of which the object or consideration is unlawful, is
void. The first sentence of the section provides that the
consideration or object of an agreement is unlawul, inter alia, if
it would defeat the provisions of any law or if the court regards
it as immoral or opposed to public policy. Illustration (h) reads
as under:
A promise to drop a prosecution which he has instituted against A for
robbery and B promises to restore the value of the things stolen. The
agreement is void.
It is under the head of public policy that courts have held that
an agreement to stifle a prosecution is void.51 If the prosecution
is for a non-compoundable offence, l you cannot make a trade of
"Mannalal Khetan v Kedar Nath Khetan (1977) 2 SCC 424.
*5Nagindas v Dalpatram AIR 1974 SC 471.
"Surasaibalini Debt v Phanindra Mohan AIR 1965 SC 1364.
*7Kedar Nath Motani v Prahlad Rat AIR 1960 SC 213, 216.
*zGherulal Parkb v Mahadeo Das AIR 1959 SC 781.
*9Kaju Collieries v Jhakhand Mines AIR 1974 SC 1892.
50
Ratan Cband Hira Chanda v Askar Nawaz Jung (1991) 3 SCC 67.
51
Bhawanipur Banking Corp. v Durgesh Nandini AIR 1941 PC 95.

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FIFTY YEARS OF THE SUPREME COURT

a felony. One partner filed a criminal complaint against his co

partners for forgery and then the partners agreed to refer the
matter to arbitration, in pursuance of which the complainant
partner offered no evidence and his complaint was rejected. It was
held that the agreement was for an unlawful consideration and
void. 52
However, the court has made a distinction between 'motive'
and '-consideration'. If the consideration is lawful, then the
agreement is valid.53
Moreover, a compromise made before a complaint is filed,
would not amount to stifling a prosecution, even if its imple
mentation is delayed and actually takes place after the complaint
is filed.54
In Papaiah v State of Karnataka,55 the court held that where
land is assigned to a member of the depressed classes, its
assignment to a third person is against public policy, and the
purchaser does not get any right to such land. Similarly, a promise
to refund sales tax charged lawfully is unconstitutional and against
public policy and cannot be enforced in courts. This is so, even
if the circumstances constitute a prima facie case of promissory
estoppel. 56

Forum Selection Clauses

In a number of rulings, the Supreme Court has had the occasion
to deal with the validity of forum selection clauses, i.e.,
contractual clauses whereunder the parties seek to provide that
only a particular court shall have jurisdiction to decide disputes
under the contract.57

52

Narsimha Raju v Gummurthy Raju AIR 1963 SC 107.

Union Carbide Corporation v Union of India AIR 1992 SC 248.
54
Ouseph Poule v Catholic Union Bank AIR 1965 SC 166.
55
AIR 1997 SC 2670.
S6
Amrit Banaspati Co. Ltd v State of Punjab AIR 1992 SC 1075.
57
Hakam Singh v Gammon (1971) 1 SCC 286; A.B.C. Laminan Private
Ltd v A.P Agencies AIR 1989 SC 1239; Patel Roadways v Prasad Trading
Co. AIR 1992 SC 1514.
S3

MERCANTILE LAW

323

The position in this regard can be summed up as under:

(a) Where two or more courts have jurisdiction (under the
procedural law), the parties can provide that only one of
those courts shall have jurisdiction to deal with disputes
arising under the agreement.
(b) Such an agreement would not be violative of section 23 or
section 28 of the Act.
(c) But an exclusion clause which seeks to confer jurisdiction on
an incompetent court would be void.
(d) Such a clause (nominating a particular court as having
exclusive jurisdiction) will be valid only if it is brought to the
notice of and agreed to by both the parties.
(e) Besides this, the intention to exclude the jurisdiction of other
courts should be expressed clearly, say by using words such as
'only, 'exclusive', 'alone' or other similar phraseology.
While section 23 of the Act invalidates illegal agreements,
section 24 provides for severability. If the unlawful portion can be
separated from the lawful portion, then only the latter is void.
This principle is applicable not only to contracts of service,58 but
also to certain other agreements. Thus, where a transaction
consisted of two portions(i) ready sale of securities (which was
valid) and (ii) forward transactions (prohibited by a statutory
notification), then only the latter part was held to be void,
because the two parts could be separated from each other.59

Agreements in Restraint of Trade

The subject of agreements in- restraint of trade is governed by
section 27, whereunder every agreement by which any one is
restrained from exercising a lawful profession, trade or business of
any kind is void.
Read literally, this section would seem to prohibit every
restrainteven a restraint limited geographically (in point of
area), or duration. But, pragmatic considerations seem to have
induced some high courts in India to dilute the rigour of the
section by upholding partial restraints, if they are reasonable.
ss
Central Inland Water Transport Corporation v Brojo Nath
AIR 1980 SC 1571.
59
JB.Q7. Finance Ltd v Custodian AIR 1997 SC 1952.

Ganguly

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FIFTY YEARS OF THE SUPREME COURT

As for the Supreme Court, it has been mainly concerned with

restraints imposed on employees, whereunder the employee is
prohibited from carrying on a certain trade or from undertaking
a certain employment.
In Nimnjan Sbankar Golikari v Century Spinning Co.60 the
Supreme Court upheld the restraint which is operative during the
period of employment. In that case an Indian company manu
facturing tyre cord yarn was offered collaboration by foreign
producers on certain conditions. These conditions imposed the
duty of maintenance of secrecy of all technical information,
including the obtaining of a corresponding undertaking from the
employees of the company. Accordingly the company, while
engaging the defendant as its employee secured an undertaking
from him that for five years, he, shall not serve anywhere else,
even if he left the employment of the company. This condition
was upheld as valid by the Supreme Court, pointing out that the
agreement was only for five years and was not unconscionable.
However, the court has held that a restraint beyond the term
of service would be valid only if it falls within the exception to
section 27, which saves a restraint necessary for protecting the
employer's goodwill. Even such a restraint would not be appli
cable if the employee is wrongfully dismissed earlier than his
agreed period. 61

Restraint of Legal Proceedings

Section 28 (main paragraph), before its amendment by Act 1 of
1997 provided as follows:
Every agreement by which any party thereto is restricted absolutely
from enforcing his rights under or in respect of any contract by the
usual legal proceedings in the ordinary tribunals or which limits the
time within which he may thus enforce his rights is void to that
extent.
After the amendment, section 28 (main paragraph), reads as
under:
Every agreement,
(a) by which any party thereto is restricted absolutely from enforcing his
rights under or in respect of any contract, by the usual legal
^AIR 1967 SC 1098.
^Superintendence Co. of India v Krishna Murgai AIR 1980 SC 1717.

MERCANTILE LAW

325

proceedings in the ordinary tribunals or which limits the time within

which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges any
party thereto from any liability, under or in respect of any contract
on the exipiry of the specific period so as to restrict any party from
enforcing his rights, is void to that extent.

This section overrides the maxim that custom and agreement

may override the law (modus et conventio vincunt leggern).
Interpreting section 28 of the Contract Act (as it stood before
its 1997 amendment), the Supreme Court has held that the
following clause in an insurance policy is valid:
In no case whatever shall the company be liable for any loss/damage
after the expiration of 12 months from the happening of loss/damage,
unless the claim is the subject of pending action or arbitration.
The reason is that such a clause does not affect the period of
limitation but forfeits the right itself.62 This was previously valid.
The question of a civil court's local jurisdiction figured before
the Supreme Court in Patel Roadways Ltd. v Prasad Trading Co.63
It was held that where, in a suit for damages for loss of goods
caused by fire in the godown of the carrier, the defendant
corporation had its subordinate office at the respective place
where the goods were delivered to it for the purpose of transport,
the court at the place of its principal office would have no
jurisdiction. In another case, the Court has held that a clause to
the effect that if no claim is made within 6 months dien no rights
shall accrue is valid.64
A clause limiting the guarantor's liability to a particular period
has been held to be valid.65 However, it should be stated that
these decisions were rendered under section 28, Contract Act, as
it stood before 1997.
62

National Insurance Co. Ltd v S. Ganesh Naik & Co. AIR 1997 SC
2049. See also Vulcan Insurance Co. Ltd v Maharaj Singh AIR 1976 SC
287.
63
AIR 1992 SC 1514.
"National Insurance Co. v Ganesh Nayak & Co. AIR 1997 SC 2049.
65
State of Maharashtra v M.N. Kaul AIR 1967 SC 1634, followed in
Kerala Electrical and Allied Engineering Co. v Caara Bank AIR 1980 Ker
151.

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FIFTY YEARS OF THE SFREME C O U R T

Arbitration Clauses
Some significant points have arisen in regard to arbitration
clauses-particularly as to their validity vis--vis the validity of the
main agreement. It is possible that an arbitration clause may
survive the main contract or, conversely, the main contract may be
valid, but not the arbitration clause/' 6
Of course an arbitration agreement (like any other agreement)
would be void, if the constitutional formalities (as to government
contracts) are not observed.67 However, subject to these special
principles, it can be stated that if the main agreement is valid,
then the arbitration clause is also valid.
A clause providing that if arbitration is not demanded within
28 days after the architect's certificate, then no claim shall be
admissible under the agreement, has been held to be valid.68

Uncertain Agreements
Agreements, the meaning of which is not certain or capable of
being made certain are void, as provided by section 29 of the
Act. A provision in a contract, employing the phrase 'usual
condition of acceptance only' is void, if there is no evidence of
such usual conditions. 70 In contrast, a clause in an agreement
subject to the usual force majeure clause is valid.71 However, an
agreement is not void, force majeure clause is valid, merely
because it does not mention the source from which funds would
be available.72

Wagers
Section 30 of the Act (with certain exceptions) provides that
'agreements' by way of wager are void. The section does not
6b

Jawahar Lai Barman v Union of India AIR 1962 SC 378.

Union of India v Rallia Ram AIR 1963 SC 1985.
b8
State of Maharashtra v M.N. Kaul, Supra, note 65.
69
Keshavlal Lallubhai Patel v Lakhan Trikamdas Mitts Ltd AIR 1958 SC
512.
70
Kolliapara Snramula v T. Awastha Narayana AIR 1968 SC 1028.
7l
Dhanrajmal Gobindmm v Shamji Kalidas & Co. AIR 1961 SC 1285.
72
Sobhat Dei v Dei Devi Phal AIR 1972 SC 2192.
67

MERCANTILE LAW

327

define the expression 'wager'. However Anson defines it as a

promise to pay money or moneys worth upon the determination
or ascertainment of an uncertain event. The Supreme Court
adopted this definition in Gherulal v Mahadev.73 It may be added
that wagering transactions, though void, are not 'unlawful'.
Hence, connected agreements remain enforceable.74

Contingent Contracts
The Act has coined the expression 'contingent contracf and made
certain provisions (sections 31 to 36) regarding their effect. The
classical example of a contingent contract is the contract of
insurance. 75 The heart of the concept of contingent contract lies
in the definition (section 31), which states that a contingent
contract is a contract to do, or not to do, something, if some
event, collateral to such contract, does or does not happen. This
aspect is important inter alia for the purpose of limitation. 76
How far a stipulation in a contract makes a 'contingent contract5
depends on construction of the contract. 77 It is obvious that once
the contingency happens, the obligation undertaken matures. 78

Performance of Contracts
The parties to a contract must perform their contract unless
excused by law. This elementary principle (section 37) carries
with it a heavy load of implications. Thus until the exact date has
arrived, performance cannot be demanded.
As to the party bound to perform the contract, again the
obligation to perform lies on the party himself (section 41). 7 9
But, if a third party performs the contract and the performance
is accepted by the promisee then the promisee cannot demand
performance from the promisor.80
73

AIR 1959 SC 781.

Kishanlal v Bhanwar AIR 1954 SC 500.
7S
Commissioner of Excess Profits Tax v Ruby Gen. Ins. Co. AIR 1957
SG 669.
76
Rojasara Ramjibhai v Jani Marottandas AIR 1986 SC 1912.
77
CfRammn v Hussain AIR 1990 SC 529.
7S
Bashir Ahmad v Government ofAndhra Pradesh AIR 1970 SC 1089.
79
Vtdya Van v Devi Das (1977) 1 SCC 293.
80
Kapur Chand v Mir Nawah Himayat Alt Khan Azamjah AIR 1963
SC 250.
7i

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FIFTY YEARS OF THE SUPREME COURT

Some complex issues arise, where two or more persons make

a joint promise. Under section 43 of the Act, the promisee has
the right to demand performance from any one of them; and it
would be illegal to pass a decree directing that one of the
promisors should perform, in the first instance.81
Contracts usually involve reciprocal promises.82 If they are to
be performed in a particular ordereither by express contract or
because of the nature of the transactionthat order should then
be adhered to (section 52). If the promisee himself or through his
officers, obstructs performance of the promise, then it need not
be performed.83
Sometimesas is envisaged by section 54one party (while
not obstructing performance by the other party), fails to perform
his own part of the promise then he cannot sue for breach. Thus,
if the land agreed to be sold is agricultural land, the seller should
ensure that his own name is recorded as the owner in
Government records and also, where necessary that government's
permission is obtained for the sale.84

Time when of an Essence

Stipulations as to the time of performance of a contract often raise
questions as to whether the time so fixed is 'of the essence'. Under
section 55, if the agreement does not make any express provision
in this regard, then the position has to be ascertained from the
various facts, including the intention of the parties and the nature
of the contract. However, in practice, courts act on certain broad
principles. Thus, in commercial contracts, time is usually of the
essence. Even where the contract is made 'subject to import licence'
and provides that 'the shipment date is not guaranteed' the date is
still of the essence, the only qualification being that delay
atributable to licmnngfimnalitieswould be excused. The time of
payment may also be of the essence, where without such payment,
various obligations of the other party cannot be performed.86
sl

Rama Shankar Singh v Shyamlata Devi AIR 1970 SC 716; Mukund

Das v State Bank of Hyderabad AIR 1971 SC 449.
s2
R*dhkrisbna S. Rat v T. Dawoodbhai AIR 1962 SC 538.
s3
Ubero Mohinder Singh v State of Haryana (1991) 2 SCC 362.
M
Nathulal v Phootchand AIR 1970 SC 646.
iS
China Cotton Exporters v B.R.C. Cotton Milk AIR 1961 SC 1295.
Z6
Mahabir Prasad Rungta v Durga Datt AIR 1961 SC 1990.

MERCANTILE LAW

329

Time is not regarded as of the essence of the contract, where

the contract is for the sale of immovable property.87 However, the
court may infer that the contract is to be performed within a
reasonable time, having regard to express terms of the contract,
the nature of the contract and the other surrounding circum
stances (e.g. the object of making the contract). Accordingly,
where the purchaser refused to make part payment within the
specified time unless certain conditions (contrary to the
agreement) were fulfilled, the court held that the purchaser was
not entitled to specific performance. 88
The Supreme Court emphasised in KS. Vnidyatmthan v Vaira
Van*9 that having regard to the nature of the property, for
example, urban houses the purchaser who delays payment for 2Vi
years, when the agreement allowed him only 6 months, cannot
seek specific performance. The court further observed that the
rule that time is not of the essence, for immovable property, now
needs to be relaxed, if not modified. Moreover, a right to renew
a lease must be exercised strictly within the time limited by
contract. 90 In a contract for the re-conveyance of immovable
property, time is of the essence.91

frustration of Contracts
The law of contracts recognises the principle that if the
performance of a contract becomes impossible, or unlawful, by
reason of subsequent event, then the contract becomes void.
Section 56(2) of the Act, provides in this regard, as under:
A contract to do an act which after the contract is made becomes
impossible, or by reason of some event, which the promisor could not
prevent, unlawful, becomes void when the act becomes impossible or
unlawful.
The question that arises in practice is thatwhat is the precise
scope of the word 'impossible'? Dealing with this question in
Satyabrata v Mttgneeram,92 the Supreme Court has expressed the
i7

Gomathinayunm PiUai v Paliniswami Mindaw AIR 1967 SC 868.

Chtmd Rani v Kamal Rani AIR 1993 SC 1742.
89
AIR 1997 SC 1751.
^Ctdtex (India) Ltd v Bhagwan Devi Marodia AIR 1969 SC 405.
91
Ibid. BismiUah Begum v Rahamolulhb Khun AIR 1998 SC 970.
92
AIR 1954 SC 44.
m

330

FIFTY YEARS OF THE SUPREME COURT

view that the word 'impossible' has not been used here, in the sense
of physical or literal impossibility. The performance of an act may
not be literally impossible, but may be impracticable and useless
from the point of view of the object or purpose which the parties
had in view and, 'if an untoward event or change of circumstances
totally upset the very foundation upon which the parties rested
their bargain, it can very well be said that the promisor finds it
impossible to do the act which he promised to do.'
Thus, the change of circumstances, and the consequential impact
upon the foundation of the contract have been stressed in the above
ruling. At the same time, the words, 'totally upsets the foundation'
seem to indicate, that there is a distinction between total upsetting
and partial upsettingin other words, that there may be differences
of degree, which may have to be considered. It is these differences
of degree that often prove to be material in various situations.
An inquiry on the point of interpretation has to begin with the
language of the contract. Take, for example, the case of Ganga
Sarn v Ram Charon Ram Gopal.93 A contract to supply cloth
manufactured by the New Victoria Mills, Kanpur, contained the
following clause:
"We shall go on supplying goods to you of the Victoria Mills as soon
as they are supplied to us by the said Mills."
The mill failed to supply the goods. The plea of frustration did
not succeed. The quoted words 'as soon as' did not constitute a
condition but indicated only the process of delivery. The
foundation of the contract had not disappeared.
How far a rise in prices leads to frustration, is a question, the
answer to which brings out the element of degree. A normal rise
in prices does not frustrate the contract.94 But an abnormal price
rise may be positively considered. Thus, where the rates payable
to the contractor were related to an investment of Rs 2 crore by
the contractor (in the import of equipment and know how, in
foreign exchange), and circumstances beyond his control made
those rates 'irrelevant', it was held that it was open to the
contractor to make a claim for compensation. 95
93

AIR 1952 SC 9.
^Continental Construction Co. Ltd v Stall of MP AIR 1988 SC 1166;
Parshad and Sons v Union of India AIR 1960 SC 588, 593, 594.
95
Tarapore & Co. v Cochin Shipyard Ltd (1984) 2 SCC 680.

MERCANTILE LAW

331

Frustration may result from the action of state authorities

executive or judicial. Thus, a contract for the export of silver is
frustrated, if export is totally banned. A stay order may frustrate an
auction for the sale of trust property.96 In contrast, Naihati Jute
Mills v Khyaliram Jagnnath?7 it was held that a marginal or partial
restriction, imposed by government may not frustrate a contract.
Here, the buyer agreed to purchase raw jute, to be imported from
East Pakistan. The buyer was to obtain the import licence. He
applied for the same, but the licence was refused because he had
stock in his mill, which was sufficient for two months. He applied
again, but this time the application was refused, because, as per
the changed rules, he had to show that he had used equal quantity
of Indian jute. He was sued for breach of contract. His plea, that
the contract had been frustrated, did not succeed. The apex court
made a distinction between total ban on import and a restriction
in the nature of licensing.
But where the sale of certain imported goods (Chicory) is
totally banned, then an agreement for its sale becomes void. 98
How far leases are subject to the doctrine of frustration, was
the subject of controversy in England. 99 The Supreme Court has
taken the view 100 that a lease, being a completed transfer, is
outside section 56. But an agreement of lease may come to an end
by frustration, if, before its completion, events beyond the parties'
control render completion impossible.101
Of course, in applying the doctrine of frustration, the terms of
the contract have to be kept in mind. If, under a contract of
tenancy, the tenant is entitled to erect a permanent structure on
the land within 5 years from the date of the contract, and the
tenant does build a structure accordingly, then the mere des
truction of the structure by fire does not entide the landlord to
eject the tenant. 102
96

Shanti Vtjay & Co. v Princes Fatima Fauzia AIR 1980 SC 17; Union
of India v C. Damani & Co. AIR 1980 SC 114.
97
AIR 1968 SC 522.
9Z
Boothatinga Agencies v VT. Porta Swami Nadar AIR 1969 SC 110.
"National Carriers Ltd v Panalpina {Northern) Ltd (1981) 2 WLR 45
(HL).
100
Raja Dhruva Chand v Raja Harmobinder Singh AIR 1968 SC 1024.
l01
Sushila Devi v Hart Singh AIR 1971 SC 1956.
102
Karuna Ram v Kamakhya Prasad (1997) 5 SCC 530

332

FIFTY YEARS OF THE SUPREME COURT

Frustration may terminate a contractual liability, but does not

extinguish the contract itself. Thus, an arbitration clause may
survive.103 Besides this, there are statutory provisions, e.g.,
section 65 of the Act, which may still remain relevant.104
It is evident from the various decisions of the court involving
issues of frustration of a contract that on the one hand, it has
tried to preserve and promote the concept of sanctity of contract
and on the other hand, it has kept in mind the aspects of serious
injustice and extreme hardship to the affected party.
The Indian courts have not, in general, devoted themselves to
a discussion of the theories underlying frustrationsuch as the
theory of 'implied term', the theory of qualifying power of the
court, exercisable in order to do what is just and reasonable in the
new situation and so on. However, the Supreme Court in
Satyabmta v Mugneeram105 authoritatively stated that section 56
lays down a rule of positive law and does not leave the matter to
be determined according to the intentions of the parties.

Discharge of Agreement
'Those who, create a thing can also put an end to it.' Adopting
this principle, section 62 of the Act allows the parties to
substitute a new contract or to rescind an existing contract or to
alter its terms.
Rescission may, for example, be the only advisable course,
where the particulars of quantity and quality of goods that are
actually available, differ substantially from that which had been
contracted for.106
As regards the substitution of a new contract, it is clear that
henceforth, the new contract will govern the relations of the
parties, and even if the new contract is breached, such breach does
not, by itself, revive the old contract, unless the parties so
agree.1
Apart from novation or rescission (which would be usually
effected expressly), it is also permissible to dispense with, or
m

Supra, note 97.

Bombay Dyeing & Mfg. Co. Ltd v State of Bombay AIR 1954 SC 44.
105
AIR 1954 SC 44, 48.
106
Syed IssarMasood v State of MP (1981) 4 SCC 289.
107
R.N. Kumar v R.K. Soral AIR 1988 SC 1205.
104

MERCANTILE LAW

333

remit, the performance of the contract (section 63). In this

context, where a creditor accepts a lesser sum (by remitting the
balance), he loses his right to sue the debtor for the balance.108
Sometimes, questions of waiver are raised in the context of
contractual rights. But the Supreme Court has reiterated the
insistence on clear evidence of waiver.109
As regards extension of time of performancewhich also is
allowed under section 63, it has been pointed out that the
promisee cannot, by a unilateral act, extend the time for
performance.110

Benefits Received under Void Agreements

When an agreement is void ab initio or becomes void later (by
subsequent events), the question arises as to how to adjust the
equities between the parties in respect of benefits received by one
party from another under the contract. Most systems of law
provide for restitution in such cases, either by statute or
otherwise. Section 65 of the Act provides that in such cases, one
who has received a benefit under the agreement must restore it to
the party from whom he received it.
Where the voidness of the agreement is by reason of
unlawfulness and one party is more in the wrong than the other,
then the doctrine of pan delicto may apply. But where one party
is a victim of exploitation by another party, the doctrine would
not be applied and restoration of benefits would be orderedas
was done in a case where a tenant had been forced to make, to
the landlord, an advance prohibited by statute. The court in
Mohd. Salimuddin v Mim Lal,ln ordered that the advance should
be adjusted towards future rent. Under section 65 (or by way of
analogy) the court also ordered relief by way of quantum
meruit.112
10S

Kapur Chand Godha v Mir Nawab Himayat AM Khan AIR 1963 SC

250; Hart Chand Madan Gopal v State of Punjab AIR 1973 SC 381.
m
Sham Singh v State of Mysore AIR 1972 SC 2440.
n0
Keshilal LaUubhai Patel v Lalbhai Tnkamlal MM AIR 1958 SC 512.
U1
AIR 1986 SC 1019.
n2
Puran Lai Sah v State of UP (1971) 1 SCC 424; State ofRajasthan
v Associated Stone Industries AIR 1985 SC 466.

334

FIFTY YEARS OF THE SUPREME COURT

Unjust Enrichment
Section 72 of the Act is usually regarded as dealing with the
doctrine of 'unjust enrichment'. The juristic origin of this section
perhaps lies in the famous judgment of Lord Mansfield in Moses
v Macfertan.113 He observed, inter alia, that an action lies for
money paid by mistake; or upon a consideration which happens
to fail or for money got through imposition, extortion or
oppression. The gist of this kind of action is that the defendant,
in the circumstances of the case, is obliged by ties of natural
justice and equity, to refund the money. The view of Lord
Mansfield on 'equity5 has been accepted by the Supreme Court in
Mafatlal Industries Ltd. v Union of India.Ui
Before this judgement, it was held by several high courts that
'mistake' includes mistake of law, as well as mistake of fact.115
Most of these rulings permit refund of taxes illegally realised by
the State, so long as the person paying the tax to the State has not
passed on the burden to consumers. If the burden has been passed
on to the consumers, then no refund can be given. The Supreme
Court in Mafatlal Industries116 has accepted this viewpoint of the
high courts on equitable considerations. The judgment holds that
when excise or customs duty is levied upon an erroneous view of
the law and the assessee has passed on the burden to third
persons, no suit would lie against the State for refund on the
ground of mistake of law. The court took the view that refund in
such a case would result, in a windfall to the assessee. As the
assessee himself has suffered no loss, equity demands that no
relief be given to him. A person claiming restitution should prove
a loss or injury to him.
In Dyanyalakshmi Bice Mills v Commissioner of Civil Supplies,117
the court has taken the view that payments made by way of
surcharge for grant of export licence cannot be claimed back even
113

(1760) 2 Burr 1005, 1012: [1558-774] All ER 581.

(1997) 5 SCC 536.
U5
S.rO. Baaras v KanhaiyalalMukund Law Saraf AIR 1959 SC 135;
Mahabir Kishore v State ofMP (1989) 4 SCC 1; Tokchand Motichand v
C.S.T AIR 1970 SC 898; Nagar Mahapalika Kanpur v Shri Ram
Mabadeo AIR 1990 SC 276.
ll6
Supra, note 114.
117
AIR 1976 SC 2243.
114

MERCANTILE LAW

335

though the levy was subsequently found to be unauthorised. But

a company is entitled to refund of octroi duty, if octroi is not
shown to be already charged and collected by the company, from
the dealers to whom goods were sold. 118

Damages
On damages for breach of contract, sections 73-74 provide:
(a) Compensation is allowed, for loss which naturally arose in the
usual course of things from the breach of contract;
(b) It is also allowed, for loss which the parties knew, when they
made the contract, to be likely to result from the breach;
(c) Where the parties have specified a sum as payable for breach
or where the contract contains 'any other stipulation by way
of penalty', reasonable compensation is allowed, not ex
ceeding the above sum or penalty;
(d) In every case, duty to mitigate the loss remains, on the party
seeking the compensation.
The object of damages is to put the suffering party in the same
position as if the contract had been performed. Hence, loss of
profits can be awarded, as part of damages. 119 But there are no
limitations as to the classes of contracts for which damages can be
awarded. Damages can, for example, be recovered in case of short
fall at an auction sale. 120
In case of anticipatory breach of contract, section 39 allows the
promisee to put an end to the contract, unless he has acquiesced
in continuance of the contract. As per judicial decisions, he can
(subject to the provisions of section 64 of the Act) sue for
damages. 121
What is a 'penalty is not always easy to decide. However,
where a party is required to forfeit or pay a sum which he has

ns

Tata Engineering and Locomotive Company Ltd v The Municipal

Corporation of the City of Thane AIR 1992 SC 645.
U
*A.T. Brij Paul Singh & Bros v State of Gujarat AIR 1984 SC 1703.
120
M. Lachia Setty & Sons v Coffee Board AIR 1980 SC 162.
ni
Jug[ailal Kamplupal v Pratapmal Rameshwar (1978) 1 SCC 69;
Bhagat Ram Batra v Union of India (1976) 2 SCC 416.

336

FIFTY YEARS OF THE SUPREME COURT

already paid, it is a penalty.

However, every payment cannot be
regarded as 'penalty5.123
The words 'whether or ^ actual damage or loss is proved to
have been caused thereby, (in section 73), have created problems.
It has been held that these words are intended to cover different
classes of contracts, which come before the courts. In case of
breach of some contracts, it may be impossible for the court to
assess the compensation arising from breach while in some cases,
compensation can be calculated as per established rules. 124
According to an earlier ruling in Fateh Chand v Balkisbtm Dasus
the words 'whether or not5 do not mean that where there is no
legal injury, compensation can still be claimed, However, in
Dwarka Das v State ofMP,126 the court held that a claim cannot
be disallowed merely on the ground that there was no proof of
actual loss.

Special Contracts
The Contract Act from section 124 onwards deals with certain
special types of contracts, covering indemnity, guarantee,
bailment, pledge, and agency.
According to the court, the essence of a guarantee (defined in
section 126) is the obligation undertaken in case of a default.127
Section 128, of the Act provides for the liability of the surety. The
section has come up for interpretation in the Supreme Court,
more than once. The court has held that where a loan given by
a bank is not repaid and the surety is sued by the bank the decree
passed in the suit cannot impose a condition, that the bank must
first exhaust its remedies against the principal debtor. 128
Similarly, the court has held that where the management of a
company is taken over under the Sugar Undertakings (Taking

122

Maula Bux v Union of India AIR 1970 SC 1955.

Sova Ray v Gostha Gopal Day AIR 1988 SC 981.
124
AIR 1970 SC 1985.
125
Fateh Chand v Balkisban Das AIR 1963 SC 1405.
126
AIR 1999 SC 1031.
U7
Punjab National Bank v Sri Vtkram Cotton Mills AIR 1970 SC 1973.
llg
Bank of Bihar v Damodar Prasad AIR 1969 SC 297.
123

MERCANTILE LAW

337

Over of Management) Act, 1978, that does not discharge the

company's surety from their liabilities in respect of the debts of
the company, because the Act in question did not provide that
when the management is taken over, the remedies against the
guarantors shall stand suspended. 129
Where there is a composite money decree, being both a
personal decree against all defendants (including the guarantor)
and a mortgage decree without limitation on execution, the
decree-holder cannot be forced to first exhaust the remedy by way
of the execution of mortgage decree alone and then to proceed
against the guarantor.' 30
However, in Union of India v Manku Naraycma,m the court
held that the creditor must first proceed against the mortgaged
property and then against the surety, for the balance.
In the case of bank guarantees it is now well settled that an
unconditional guarantee must be complied with by the bank,
without raising questions as to whether there was really any
default by the principal party 132 It is onlv where fraud (or other
similar circumstances raising equitable considerations) is estab
lished that an exception can be made and an injunction be issued
to prevent encashment. 133
In the ordinary type of guarantee, any variation made without
the surety's consent between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the
variation (section 133). However, this provision does not apply
where the alteration is insubstantial or for the benefit of the
surety.
Release or discharge of the principal debtor (by the creditor)
discharges the surety, as provided in section 134 of the Contract
u9

State Bank of India v Saksaria Sugar Ltd AIR 1986 SC 868.

State Bank of India v Messrs Indexport Registered AIR 1992 SC 1740
followed in State Bank of India v MP Iron & Steel Works AIR 1998
MP 93.
131
AIR 1987 SC 1078.
lu
United Commercial Bank v Bank of India AIR 1981 SC 1426;
Maharastra State Electricity Board v Official Liquidator AIR 1982 SC
1497.
]33
UP Co-op. Federation Ltd v Singh Consultants and Engineers (1988) 1
SCC 174; S.T.C. v Jainsons Clothing AIR 1994 SC 2778.
U4
M.S. Anirudhan v Thomas Bank Ltd AIR 1963 SC 746.
li0

338

FIFTY YEARS OF THE SUPREME COURT

Act. Obviously, the law has in mind a consensual discharge and

not a discharge resulting from the operation of law for example,
insolvency laws.135
Section 137 of the Act provides that mere forbearance by the
creditor to sue the principal debtor does not discharge the surety.
The court has held that mere omission by the creditor to sue the
principal debtor within limitation does not discharge the surety.136
Sometimes the creditor may do certain acts, which damage the
surety's rights. Such acts discharge the surety, (section 139), such
as where the bank (creditor) by its negligence lost goods given as
security.137
The same consequence (discharge of surety) was applied in a
case where in contravention of terms of the guarantee, the
government allowed the contractor to remove felled trees from
the forest without payment of price. 138 Release of one co-surety
does not discharge the other sureties. Even after such release the
released surety remains liable for contribution. 139

Bailment
The concept of bailment which was meticulously cultivated by the
jurists during Roman times does not nowadays attract much
attention. But the Indian Act does justice to it by devoting 34
sections (148-81) to bailment and pledge.
Bailment commences with the delivery of goods by one person
to another, for some purpose, upon a contract for its return
(section 148). Express contract is not needed. Thus, acceptance of
article by the post office as VEP constitutes bailment. 140 Similarly
delivery of railway receipt amounts to constructive delivery of the
goods.
Delivery may be made by some other person on behalf
of the owner. For example, if the owner of car, damaged in an
xi%

Maharashtra State Electricity Board v Official Liquidator AIR 1982

SC 1497.
Ub
Mahant Singh v Ubaye AIR 1939 SC 410.
U7
State Bank ofSaurashtra v Chitranjan Ranganath Raja AIR 1980 SC
1528, cf, section 141, Contract Act.
l3S
State of MR v Kaluram AIR 1967 SC 1105.
li9
Sri Chand v Jagdish Prashad Kishan Chand AIR 1966 SC 1427.
H0
I.T.C. v P.M. Rathod AIR 1959 SC 1394.
ul
Morri Mercantile Bank v Union of India AIR 1965 SC 1954.

MERCANTILE LAW

339

accident delivers it (under the policy) on behalf of the insurer to

the nearest garaged for repair, then a bailment is created.142 A
fortiori if goods are delivered on hire purchase, the transaction
becomes a bailment even though there is also an option to
purchase. 143 If, in this manner the range of bailment is wide
enough, it should also be noted that a bailee is not an agent. He
has no power to make contracts on behalf of the bailor.144
Prima facie, the bailee's liability is only for negligence.145 The
duty of the 'bailee bank' has been elaborated in UCO Bank v Hem
Chandra Sarkar.146 The court observed that a paid bailee must use
'the greatest possible care'.
One question that whether section 151 is subject to a contract
to the contrary has created a conflict of decisions147 and the point
has not yet been decided by the Supreme Court.
The bailee cannot deliver goods to a third person and cannot
plead jus tertii (sections 166-67). However, the bailee cannot
be held liable, if the goods are seized under statutory
authority}**

Liens
The Contract Act in section 171, recognises the general lien, of
bankers, factors and other persons, being a right to retain, as a
security for general balance of account any goods bailed to them.
This section has been the subject of interpretation in several
rulings of the Supreme Court and it has been held that this right
can be exercised for the realisation of a debt, even when an action
for recovery of the debt would be barred. 149 It has further been
U1

N.R. Snnivasa Iyer v New India Insurance Co AIR 1983 SC 899.

^Instalment Supply Ltd v Union of India AIR 1962 SC 53.
144
UCO Bank v Hem Chandra Sarkar AIR 1990 SC 1329; Vtjaya Bank
v United Corp. AIR 1991 Ker 209.
li5
Union of India v Amar Singh AIR 1960 SC 233.
146
UCO Bank, supra, note 144.
147
'See State Bank of India v Quality Board Factory AIR 1983 P&H
244.
ui
Jugilal Kamalapat Oil MiUs v Union of India (1976) 1 SCC 893.
l49
Bombay Dyeing & Mfy. Co. Ltd v State of Bihar AIR 1958 SC 328;
United Commercial Bank v Okara Graenb Buyer Syndicate AIR 1968
SC 1115.

340

FIFTY YEARS OF THE SUPREME COURT

held that, where a garneshee notice is issued to a bank for

attachment of certain fixed deposit receipts, and the bank happens
to have certain dues outstanding against the holder of the deposit,
the bank is at liberty to adjust its dues against the fixed deposit
receipts. If, thereafter, any balance is left, only that balance will be
the amount due to the judgment debtor and only that can be
attached in execution of the decree.150 At the same time, a bank
cannot detain goods of firm against the individual accounts of the
partner. 151

Pledge
In the Act, pledge is defined as the bailment of goods as a security
for payment of a debt or performance of a promise (section 172).
Delivery is essential in pledge, which may be constructive. Hence
in Morvi Mercantile Bank v Union of India,152 it was held that
delivery of documents of title, which would enable the pledgee to
obtain possession, can create a pledge. It was further held that the
pledgee, holding a railway receipt is entitled to sue for the whole
value of the goods and not merely for the amount of his advance.
The pledgee has the right to retain the goods until his advance
is paid and also the right to sell the goods if the loan is not repaid
in time (section 173 to 176). It is of course, a higher right than
mere lien as the pledgee has a special property or interest which
is distinct from the mere right of retention, which the holder of
a lien possesses. 153 The pledgee, however, has no right to
foreclose the pledgea negative feature which distinguishes it
from a mortgage. 154
It goes without saying that a person does not become a
pledgeeand therefore does not acquire a right of sale merely
because certain goods come into his possession under a statutory
order. 155 Even if he has given a loan to a person and has the
^Syndicate Bank v Vtjay Kumar AIR 1992 SC 1066.
m
Gurbax Rat v Punjab National Bank AIR 1984 SC 1012.
152
Supra, note 141.
lsi
Bank of Bihar v State of Bihar AIR 1971 SC 1210.
xs
*Jaswantrai v State of Bombay AIR 1956 SC 575; Balkrishna v Swadesh
Polytex AIR 1985 SC 520.
lS5
Ram Prasad v State of MP AIR 1970 SC 1818.

MERCANTILE LAW

341

goods of the latter in his possession he does not become a

pledgee. 156 The reason is obvious. A pledge requires bailment and
security for the payment of a debt or performance of a promise
(section 171). Section 178 of the Act permits a mercantile agent
to effect a pledge, provided he is in possession of the goods (or
of documents of title of goods) with the consent of the owner.
The concept of 'consent' here is to be interpreted as agreeing on
the same thing in the same sense. 157 Hence if the transaction is
itself void, because there is no real consensus of minds then the
pledge would not be valid. 158

Agency
Agency is a simple concept but can have several ramifications,
mainly because three persons are involvedthe principal, the
agent and the third person with whom they have dealings.
The Act makes it clear that an agent is a person employed to
do any act for another or to represent another (in dealings with
third persons) (section 182). Its essence, which is the power to
'represent' and the power to effect 'dealings'an element which
rules out a person who performs merely ministerial acts. 159 Any
person may employ an agent including the State. 160 An agency
postulates the conferment of authority to deal with third persons.
If there is no such authority, then a purely bipartite relationship
e.g., as buyer and sellerdoes not amount to agency.161

Agency, Service and Bailment

An agent normally is not subject to the control of his principal in
regard to the manner of performance of his functions. This
lS6

PS.NA. Chettiar v Express Newspaper Ltd AIR 1968 SC 741.

Central National Bank v United Industrial Bank AIR 1954 SC 181.
158
Ibid.
159
Mohan Lai Jain v Swat Man Singh AIR 1962 SC 73; Syed Abdul
Khader v Ram Reddy AIR 1959 SC 553.
l60
Hari Chand Madan Copal v State of Punjab AIR 1973 SC 381.
161
Gordon Woodruffe & Co. v Shaik MA Majid & Co. AIR 1967 SC
181; Khedut Sabakari Ginning & Pressing Society v State of Gujarat AIR
1972 SC 1786.
li7

342

FIFTY YEARS OF THE SUPREME COURT

feature (along with several other features) distinguishes an agent

from a servant.162
The same person may, of course, be a bailee and an agent but
it seems that the courts do not easily draw an inference of such
a dual characterparticularly in the case of banker to whom a
customer has entrusted his own goods. 163 An agent can himself
(with the principal's knowledge and consent) buy the principal's
goods, evolving thereby a dual relationship.164
Agency is sometimes effected through a power of attorney. It
has been held that three persons can jointly sign a power of
attorney, even when they are not joint owners. 1
It is the agents duty, inter alia, to conduct business according
to the principal's instructions and he must compensate the
principal for loss caused by failure to do so. In Punnalal Jankidas
v Mohanlal,166 the explosion in the Bombay Docks (1944) led to
litigation which brought out this aspect in a case where, a
commission agent (disregarding his principal's instructions) failed
to insure goods pending their despatch. Loss caused by the
explosion had to be compensated by him. The loss was held to be
the direct result of the agent's negligence.
An agent lawfully appointed by an agent is called 'substituted
agent' (sections 194-5). However, the principal cannot escape
liability for agent's negligence.167
The Act gives the principal the right to accounts (section 213).
The agent is not given any such right by statute but the court has
held that the agent has such a right in order to enforce his right
to remuneration (section 219). l 8
Coming to the question of agent's authority, the Act (sections
186-7) provides for express or implied authority and ostensible
l(,1

Lakshmi Narayan Ram Gopal & Sons v Hydrabad Government AIR

1954 SC 364.
l63
UCO Bank v Hemchand Chandra Sarkar AIR 1990 SC 1329.
l64
Gordon Modruffe & Co. supra, note 161.
165
Syed Abdul v Rani Reddy AIR 1979 SC 553, 557. See Halsbury, 4th
Edition Vol. 1, para 726, for English Law.
166
AIR 1951 SC 144, 146.
l67
Union of India v Mohd. Nazim (1980) 1 SCC 284; Aggarwal
Chamber of Commerce v Ganpat Rat Hira Lai AIR 1958 SC 269.
l68
Narandas v S.PAM. Papammal AIR 1967 SC 333, 335; Ram Prasad
v State ofMP (1969) 3 SCC 24.

MERCANTILE LAW

343

authority (section 237). Express authority is limited by words.

Implied authority depends on a variety of factors, including
course of conduct and acquiescence. 170 As regards ostensible
authority, the principal is bound by the agent's unauthorised acts
if the principal has, by his words or conduct, induced third person
to believe that such acts and obligations are within the scope of
the agent's authority. In such a case the principal cannot rely on
restrictions privately imposed by him. 171
Act of an agent, not previously authorised by the principal, can
still be ratified by the latter (section 196-200). However, this is
subject to certain limitations. One of these limitations is that an
agreement made in violation of constitutional requirement cannot
be ratified.172
An agency can be terminated in accordance with the Act
(sections 201-9). One mode of termination is by revocation of
authority. In this context, the court has held that the agents
authority cannot be revoked where the agency is created for
valuable consideration and the agent is given his authority in
order to secure his interest. 173
Section 212 lays down the standard of care and skill required
of an agent, which include the following:
(a) The agent is always bound to conduct the business of agency
with as much skill as is generally possessed by persons
engaged in similar business.
(b) The agent must always act with reasonable diligence.
.(c) The agent must pay compensation to the principal in respect
of the direct consequences of his own neglect, want of skill or
misconduct, but not in respect of loss or damage which are
indirectly or remotely caused by such neglect, want of skill or
misconduct. 174

Irmaso Ltd v Jorge Anbal Matos Scqucira (1977) 3 SCC 274.

Foujddar Kamleshwar Dutt Singh v Cbandandas (1987) Supp 5
SCC 689.
l7l
Chhady Lai v R.K. Rey AIR 1932 All 540; Ram Pertab v G. Marshal
(1899) ILR 26 Col 701."
u2
State of UP i> Muran Lai AIR 1971 SC 2210.
X7i
Loonkaran Scthiya v Ivan E. John AIR 1969 SC 73.
l7
*Trojan & Co. v Nagappa Chettiar AIR 1953 SC 235.
W0

344

FIFTY YEARS OF THE SUPREME COURT

An agent is bound to conduct the business of his principal

according to the directions given by the principal. In Jayabharat
Corporation v S.VP.N.S.N. Rajeshkhera Nadar,
an agent autho
rised to purchase certain commodities neglected to inform his
principal and committed misconduct in respect of certain
transactions of purchase. He was held to be liable in damages,
The extent of an agent's authority was at issue in State ofOrissa
v United India Insurance Co. Ltd.
It was held that the branch
manager of the Oriental Insurance Co. had exceeded his authority
as an agent in undertaking liability (for his company) for risk of
loss on account of non-supply. He had no express authority to do
so and the provisions of section 237 (ostensible authority) also
did not apply.

Law of Negotiable Instruments

In India, the law on the subject of certain types of negotiable
instrumentsmainly bills of exchange, promissory notes and
chequesis mainly dealt with in the Negotiable lnstrumcns Act
1881. Only a few points concerning the Act have been so far dealt
with by the Supreme Court.

Bill of Exchange
Section 7 of the Act defines an 'acceptor' of a bill of exchange as
one who has 'signed his assent thereto'. 177
Section 9 defines the expression 'holder in due course'. One of
the essential ingredients is that the holder must be a person who
takes the instrument 'without having sufficient cause to believe
that any defect existed in the title of the person from whom he
derives his title.' The Supreme Court has held that a holder's
failure to prove his bona fides or absence of negligence does
not negate his claims to be such holder. Of course, if the
circumstances amount to a 'red flagf which arouses suspicion, the
holder must make the inquiries.1
175

AIR 1992 SC 596.

AIR 1997 SC 267.
177
AIR 1954 SC 554, 557.
178
C/. Ponnappa Moothan Sons v Catholic Syrian Bank Ltd AIR 1991
SC 441.
176

MERCANTILE LAW

345

By section 87, a material alteration of a negotiable instrument

renders it void as against non-consenting parties. This principle
would apply to other instruments alsobut not where the
alteration is not of a substantial character.179
A negotiable instrument is presumed to have been made for
consideration. The onus of rebutting this presumption lies on the
person who pleads want of consideration. 180

Forgery of Signature
A banker cannot pay a cheque if the bearer's signature is forged.
Even though section 85 of the Act protects the banker if the
payer's endorsement is forged, it does not cover the above
situation. 181 This is the position even where the customer himself
has failed to notify the bank that (as per entries in the statement
of accounts), the bank had been paying cheques that were not
really drawn by the customer.182

Employees' Fraud
While a banker handling the affairs of its customers is liable for
the fraudulent acts of its employees, such liability does not extend
to acts outside the employee's course of employment. Hence if a
customer gives a cheque to an employee in the latter's private
capacity, and the employee misappropriates the cheque, the bank
is not liable. 183

Criminal Prosecution for Dishonour of Cheque

By virtue of sections 138 et seq of the Negotiable Instruments Act
(as amended in 1988), if a cheque is dishonoured by the drawee
bank owing to 'insufficiency of funds' in the drawer's account, the
drawer can be prosecuted if certain formalities are completed
l79

Loonkaran Sethiya v Ivan E. John (1977) 1 SCC 379, 394; M.S.

Anirudhan v Thomco's Bank Ltd AIR 1963 SC 746, 750.
lS0
Bharat Barrel and Drum Manufacturing Co. v Amin Chand Pyarelal
AIR 1999 SC 1008
lsl
Bihta Co-operative Development and Cane Marketing Union Ltd v
Bank of Bihar AIR 1967 SC 389, 394.
lS2
Canara Bank v Caara Sales Corporation AIR 1987 SC 1603.
1S3
State Bank of India v Shyama Den AIR 1978 SC 1263.

346

FIFTY YEARS OF THE SUPREME COURT

with. If a drawer gives to his bank instructions to 'stop payment1

and the cheque remains unpaid the drawer can be prosecuted. 184
However, the formalities prescribed by the Act must be strictly
complied with. 185 In this context, the Supreme Court has held
that in computing the periods prescribed by these provisions for
giving various notices, the first day is to be excluded.186
It has also been clarified that the cause of action for a
complaint under these provisions arises as soon as a cheque is
presented and dishonoured on its first presentation. Subsequent
presentations of the cheque do not give a fresh cause of action for
such a complaint. 187
Sometimes, a cheque is returned by the bank unpaid because
the account is closed. Such a situation has been held to fall within
the penal provisions mentioned above. 188

Law of Partnership
The law of partnership in India is contained in the Partnership
Act, 1932. According to section 4 of the Act, partnership arises
from an agreement between two or more 'persons' intended to
create this relationship, i.e., carry on business and sharing profits
thereof. The business being one carried on by all or by any of
them acting for all. In Chandrakant Manilal Shah v CIT,189 the
Supreme Court held that undivided members of a Hindu
undivided family (HUF) can form a partnership with the Karta.
Subject to the provisions of the Companies Act, 1956, two
companies can form a partnership. 190
But two firms, as such, cannot enter into partnership, 191 though
the partners of a firm can, in their individual capacity, enter into
partnership with another individual.192 It shall be mentioned that
1M

Modi Cements Ltd v K.K. Nandi AIR 1998 SC 1057 (overruling two
earlier judgements).
l85
Tony Jacob Kattikaran v Dr. Thomas Manjele AIR 1998 SC 368.
1S6
Saketh India Ltd v India Securities AIR 1999 SC 1090.
18
''Sadanandan Bhadran v Madhav Sunil Kumar AIR 1998 SC 3643.
1
NEPC Micon Ltd v Magna Leasing AIR 1999 SC 1952.
189
AIR 1992 SC 1.
l90
Steel Brothers & Co. Ltd v CIT AIR 1958 SC 315.
191
Dulichand v CIT AIR 1956 SC 354, 358.
192
C7T v Jadavji Narsidas & Co. AIR 1963 SC 1997.

MERCANTILE LAW

347

for the purposes of the Income Tax Act 1961, two firms, carrying
on two businesses under separate agreements are to be assessed
separately.193

Dissolution of Partnership
The Act contains detailed protections (sections 40-4) regarding
dissolution of firms. Partnership can be dissolved by notice. But if
the agreement is that partnership would continue as long as there
were at least two partners, it cannot be 'dissolved' by notice.194
Conversely, where partnership consists of two partners, 'retirement'
of a partner would really mean dissolution of the firm.195

Partnership at Will
Where the partnership agreement contains no provision as to its
duration nor any provision regarding its termination, it becomes
a 'partnership at will' (section 7). But if the agreement con
templates some duration (though the duration is not expressly
fixed in the agreement), it is not a partnership at will, 196
particularly if the agreement provides that heirs of a partner will
participate in the management of the business.
However, if a licence is issued to a partner in his individual
capacity, it does not become partnership property. 197 A still
stronger case is that in which the railway had allotted premises to
one person for business. The fact that the person had formed a
partnership for the business did not make the premises as
partnership property. 198

Minors
A minor (being incompetent to contract) cannot become a
partner. 199 However, as provided by section 30 of the Act, a
m

Deputy CSTv K. Kalukutty AIR 1985 SC 1143.

M.O.H. Uduman v M.O.H. Mum AIR 1991 SC 1020.
l9s
Erach ED. Mehta v Minoo ED. Mehta AIR 1971 SC 1653.
196
K.T. Chettiar v EM. Mathiappa AIR 1961 SC 1225.
l97
Ved Gupta v Apsara Theatres (1983) 4 SCC 323.
l98
Shyam Sunder Shaw v Neta Chand Shaw (1987) 3 SCC 461.
l99
C.I.T. v Dwarkadas Khetan & Co. AIR 1961 SC 680; CIT v Shah
Mohandas AIR 1966 SC 15.
m

348

FIFTY YEARS OF THE SUPREME COURT

minor can be admitted to the benefits of partnershipbut this

requires the consent of all the partners.

Law Relating to Sale of Goods

The Sale of Goods Act, 1930 contains the Indian law relating to
the sale of goods.
There is much case law on the subject. Section 4 of the Act
defines 'sale of goods' as a contract whereby the seller transfers or
agrees to transfer the property in the goods to the buyer for a
price. The 'price' may even be fixed by or under the statute. 200
The term 'price' is defined in section 2(10) of the Act as the
money consideration for the sale of goods. It follows that
exchange of goods for goods is not a 'sale' but a barter.201

Ancdogous Contracts
A good deal of case law has arisen as to whether contracts of work,
labour, supply etc. amount to sale. Here, it will be possible to
mention only the essential gist of the legal propositions as under:
(a) As regards work contracts, the test is, whether work or ,
labour, is of the essence.202
(b) Supply of food to lodgers in a hotel is not a contract of sale,
because such supply is incidental to residential facilities.203
Conversely, where food is supplied in a restaurant, the
transaction is a sale; other services; if any, provided in the
restaurant, are incidental.204
(c) Where materials are supplied by a customer to a contractor
who has to do some work upon them,
(i) the contract is one of work if labour is the predominant
element; 205
200

New India Sugar Mills v CST AIR 1963 SCC 1207.

Commissioner of Income Tax v Motor and, General Store (Private) Ltd
AIR 1968 SC 200.
202
Sundaram lyengar v State of Madras AIR 1974 SC 2309; Asstt. STO
>> B.C. Kame AIR 1977 SC 1642.
20i
State of HP v Associated Hotels of India Ltd AIR 1972 SC 1131.
204
Northern India Caterers v Lt. Governor, Delhi AIR 1980 SC 674.
20S
Sentinel Rolling Shutters v CST (1978) 4 SCC 260, 267; State of
Gujarat v Variety Body Builders AIR 1976 SC 2108.
201

MERCANTILE LAW

349

(ii) The contract is one of sale, if the work is incidental.206

(d) Transactions, such as hire purchase, in which the other party
does not promise to buy, is not a contract of sale.207

Conditions and Warranties

Although there is considerable case law on the subject of
conditions and warranties, the point has not so far come up
before the Supreme Court.

Passing of Property in the Goods

Property in goods, which are specific and in a deliverable state,
passes on an unconditional sale and if sanction of a higher
authority is required, the sanction, when granted dates back to
the contract. 208
In the case of unascertained goods property passes on
unconditional appropriation of the goods to the contract. Hence,
if goods are sent by F.O.R. and the seller does not reserve a right
of disposal, property passes on loading on railway and therefore
risk also passes under section 26. 209
If the agreement provides for delivery and scrutiny, weighment
etc. at the buyer's place then the property passes when the buyers
manager accepts the goods. 210
Intention of the parties is crucial on the question of passing of
property. Unconditional contract 211 for the sale of ascertained
goods has the effect of passing the property as soon as the
contract is made. In such circumstances, payment of price or
delivery of goods is not essential. 212 In Agricultural Market
Committee v Shalimar Chemical Works,,213 the seller in the State of
Kerala loaded the goods (copra) on the lorry and despatched the
206

7:7S. lyengar & Sons v State of Madras AIR 1974 SC 2309.

K.L. Johar & Co. v Deputy C.T..O. AIR 1965 SC 1082.
im
Babu Prasad v State of MP AIR 1966 SC 58.
109
Marwar Tent Factory v Union of India AIR 1990 SC 1753.
210
CST v Husenah Adatnji & Co. AIR 1959 SC 887.
211x
Agricultural Produce Committee v Shalimar Chemical Works AIR
1997 SC 2502.
2U
Consolidated Coffee Ltd v Coffee Board (1980) 3 SCC 358.
213
AIR 1997 SC 2502.
207

350

FIFTY YEARS OF THE SUPREME COURT

same to Hyderabad (in the State of Andhra Pradesh). The

contract provided that the seller shall not be liable for any future
loss of goods. The goods were despatched at the risk of the
purchaser who had insured the goods and paid the premium. It
was held that property passed in Kerala. The fact that weighment
took place in Hyderabad or documents were collected on payment
of price was not material.

Passing of Risk
Subject to agreement to the contrary, when property in the goods
sold passes, the risk also passes (section 26). In many cases, until
delivery to the buyer, the risk does not pass to him. If the
consignee of the goods, sent by railway, has not been given actual
delivery then the risk does not pass to him even if he has (in
advance) delivered to the railway the railway receipts. 214

Re-sale by Unpaid Seller

An unpaid seller can re-sell the goods, under section 54(2) of the
Act provided the case falls within that provision and provided he
gives to the buyer the notice required thereunder. On such a valid
re-sale, he can claim from the buyer the difference between the
market price and the resale price. Otherwise, he can only recover
damages under section 73 of the Contract Act. 215
If the buyer fails to pay the price, the seller can sue him for the
price. If he wrongfully refuses to accept the goods and pay for
them, seller is entitled to damages for breach of contract.
Obviously if the property in the goods has not yet passed to the
purchasersay because the purchaser wrongfully and prematurely
terminates the contract, he can sue only for damages. 216

2li

Union of India v West Punjab Faetones AIR 1966 SC 395.

P.S.N.SA. Chettiar & Co. v Express Newspapers Ltd AIR 1986
SC 741.
216
Buy#o Steel Furniture v Union of India AIR 1967 SC 378.
n5