UNIT I
LESSON 1:
INTRODUCTION TO LAW AND THE
MEANING AND ESSENTIALS OF
CONTRACT
Learning Outcomes
At the end of this chapter, you will be able to know:
• The meaning of law
• The main sources of mercantile law
• The meaning of contract
• The essential elements of valid contract
Introduction
Business laws are essential for the students of management to
understand the legal rules and aspects of business. Just like any
other study even business management is incomplete without a
proper study of its laws. Any form of business needs legal
sanction. Therefore, it is imperative that a manager understands
the various ways in which businesses can be organized. This
subject introduces some of the common forms of business
organizations, including some forms unique to India like the
Joint Hindu Undivided Family firm. Different types of
organizations like Sole Ownership, Partnership, Private Limited
Company, Public Limited Company, Joint Stock Company
along with the rationale for adopting these forms are explored.
What form of business organization is the best under a
particular set of conditions? What advantage or disadvantage
does it have over other forms of business? Formalities to be
gone through and some the quasi-legal processes required for
starting a business will be discussed in detail in this subject.
For the proper working of the society, there must exist a code
of conduct. As you all know, in the ancient times the society
was not organized. The rights of the individuals were not
recognized. Gradually, the society evolved and the state came
into being. As we all know, to regulate the state, there should be
a specific code of conduct, which should be followed by
everyone. As a result of which law evolved as a system of rights
and obligations including all the rules and principles, which
regulate our relations with other persons and with the state.
These rules and regulations took the form of statutes.
To enforce the law and to resolve the conflicts arising there
from, courts of law were setup by the state.
Laws were made to govern almost every walk of life. You all
must know that criminal laws were made to control criminal
activities in the society like Indian Penal Code, which enumer-
ates which activities are considered criminal and what will be the
punishment for committing a crime. Likewise, mercantile law
was evolved to govern and regulate trade and commerce. Hence,
the term mercantile law can be defined as that branch of law,
which comprises laws concerning trade, industry and commerce.
It is an ever-growing branch of law with the changing circum-
stances of trade and commerce.
Now the question arises as to what are the sources of mercantile
law in India. The answer is
The Indian statutes on mercantile law
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English/ Foreign law
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Precedents(previous judgments of the courts.)
Customs and usage
I must tell you that most of the Indian Mercantile Law is
contained in the statutes. The prime legislation is the Indian
Contract Act 1872 but it is not exhaustive to deal with all kinds
of contracts. In addition to this there are the Sale of Goods
Act, 1930, The Indian Partnership Act 1932, The Negotiable
Instruments Act 1881 etc. wherever the Indian Contract Act is
silent, the Indian courts may apply the principles of the English
Common Law.
It is interesting to know that in England there is no English
Contract Act in the form of a statute. It has been derived from
common law, the usage of merchants and traders in different
spheres of trade, substantiated or ratified by decisions in the
court of law. The judicial precedents are an important source of
law. Sometimes, there is no provision, which can answer a
particular question of law. In such cases the court will look into
the previous decisions on similar matters to find the relevant
law.
Custom and usage of a trade play an important role in business
dealings of that trade. To have a binding force, the custom or
usage must be certain, reasonable and well known.
Now it is more than a century that that the mercantile laws are
governing trade and commerce. The law of contract is the
foundation upon which the superstructure of modern business
is built. It is common knowledge that in business transactions
quite often promises are made at one time and the performance
follows later. In such a situation if either of the parties were free
to go back on its promise without incurring any liability, there
would be endless complications and it would be impossible to
carry on trade and commerce. Hence the law of contract was
enacted which lays down the legal rules relating to promises,
their formation, their performance, and their enforceability.
Explaining the object of the law of contract Sir William Anson
observes. “The law of contract is intended to ensure that what a
man has been led to expect shall come to pass, that what has
been promised to him shall be performed”.
The law of contract is applicable not only to the business
community but also to others. Every one of us enters into a
number of contracts almost everyday, and most of the time we
do so without even realizing what we are doing from the point
of law. A person seldom realizes that when he entrusts his
scooter to the mechanic for repairs, he is entering into a contract
of bailment; or when he buys a packet of cigarettes, he is
making a contract of the sale of good; or again when he goes to
the cinema to see a movie, he is making yet another contract;
and so on.
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 Besides, the law of contract furnishes the basis for the other
LEGAL ASPECTS OF BUSINESS
branches of mercantile law. The enactments relating to sale of
goods, negotiable instruments, insurance, partnership and
insolvency are all founded upon the general principles of
contract law. That is why the study of the law of contract
precedes the study of all other sub-division of mercantile law.
The Indian contract act was enacted from the 1st day of Septem-
ber; 1872.it is applicable to the whole of India except the state
of Jammu and Kashmir. There may be some occasions where
Indian law disagrees with the English laws. In such cases, the
Indian law will prevail.
Now we will move on to the definition and concept of the
contract.
The Indian Contract Act, 1972
The law of contract in India is contained in the Indian Contract
Act 1872. This Act is based mainly on English common law,
which is to a large extent made up of judicial precedents. (there
being a separate contract act in England). It extends to the
whole of India except the state of Jammu and Kashmir and
came into force on the first day of September 1872(Sec.1 Indian
Contract Act 1872). The act is not exhaustive. It does not deal
with all the branches of the law of contract. There are separate
acts, which deal with contracts relating to negotiable instru-
ments, transfer of property, sale of goods, partnership,
insurance, etc. Again the act does not affect any usage or custom
of trade (Sec.1).
Scheme of the Act.
The scheme of the Act may be divided into two main groups.
1. General principles of the law of contract (Secs. 1-75).
2. Specific kinds of contracts, Viz;
(a) Contracts of indemnity and Guarantee (Secs. 124-147).
(b) Contracts of Bailment and pledge (Secs. 148-181).
(c) Contracts of Agency (Secs. 182-238).
Before 1930 the Act also contained provisions relating to
contracts of sale of goods and partnership. Sections 76-123
relating to sale of goods were repealed in 1930 and a relating to
partnership were repealed in 1932 when the Indian separate Act
called the Sale of Goods Act was enacted. Similarly, sections
239-266 partnership Act was passed.
But we will not study the specific kinds of contracts for the time
being but only concentrate on contracts generally.
Before we take up the discussion of the various provisions of
the Indian contract Act. It will be proper to see some of the
basic assumptions underlying the Act.
Definition of contract
According to section 2(h) of the Indian Contract Act: “ An
agreement enforceable by law is a contract.” A contract therefore,
is an agreement the object of which is to create a legal obligation
i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially
consists of two elements: (1) An agreement and (2) Legal
obligation i.e., a duty enforceable by law. We shall now examine
these elements detail.
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1. Agreement. As per section 2 (e): “ Every promise and every
set of promises, forming the consideration for each other,
is an agreement.” Thus it is clear from this definition that a
‘promise’ is an agreement. What is a ‘promise’? the answer
to this question is contained in section 2 (b) which defines
the term.” When the person to whom the proposal is
made signifies his assent thereto the proposal is said to be
accepted. A proposal, when accepted, becomes a promise.”
An agreement, therefore, comes into existence only when
one party makes a proposal or offer to the other party and
that other party signifies his assent (i.e., gives his
acceptance) thereto. In short, an agreement is the sum total
of ‘offer’ and ‘acceptance’.
On analyzing the above definition the following
characteristics of an agreement become evident:
(a) At least two persons. There must be two or more
persons to make an agreement because one person
cannot inter into an agreement with himself.
(b) Consensus-ad-idem. Both the parties to an agreement
must agree about the subject matter of the agreement
in the same sense and at the same time.
2. Legal obligation. As stated above, an agreement to become
a contract must give rise to a legal obligation i.e., a duty
enforceable by law. If an agreement is incapable of creating
a duty enforceable by law. It is not a contract. Thus an
agreement is a wider term than a contract. “ All contracts are
agreements but all agreements are not contracts,”
Agreements of moral, religious or social nature e.g., a
promise to lunch together at a friend’s house or to take a
walk together are not contracts because they are not likely to
create a duty enforceable by law for the simple reason that
the parties never intended that they should be attended by
legal consequences.
I shall give you a very simple example to explain this point.
An agreement to sell a car may be a contract but an agreement to
go for lunch may be a mere agreement not enforceable by law.
Thus all agreements are not contracts. In business agreements
the presumption is usually that the parties intend to create legal
relations. Thus an agreement to buy certain specific goods at an
agreed price e.g., 200 bags of rice at Rs.100 per bag is a contract
because it gives rise to a duty enforceable by law, and in case of
default through a court provided other essential elements of a
contract was made by free consent of the parties competent to
contract, for a lawful consideration and with a lawful object .
Thus it may be concluded that the Act restricts the use of the
word contract to only those agreements, which give, rise to legal
obligations between the parties.
It will be appropriate to point out here that the law of contract
deals only with such legal obligations which arise form
agreements, obligations which are not contractual in nature are
outside the purview of the law of contract.
Before moving further we must know the conditions which
must be satisfied for the contract to become valid.
Essential Elements of a Valid Contract
A contract has been defined in section 2(h) as “an agreement
enforceable by law.” To be enforceable by law, an agreement
must possess the essential elements of a valid contract as
contained in sections 10, 29 and 56. According to section 10, all
agreements are contracts if they are made by the free consent of
the parties, competent to contract, for a lawful consideration,
with a lawful object, are not expressly declared by the Act to be
void, and where necessary, satisfy the requirements of any law as
to writing or attention or registration. As the details of these
essentials form the subject matter of our subsequent chapters,
we propose to discuss them in brief here.
The essential elements of a valid contract are as follows.
1. Offer and acceptance. There must a ‘lawful offer’ and a
‘lawful acceptance’ of the offer, thus resulting in an
agreement. The adjective ‘lawful’ implies that the offer and
acceptance must satisfy the requirements of the contract act
in relation thereto.
2. Intention to create legal relations. There must be an
intention among the parties that the agreement should be
attached by legal consequences and create legal obligations.
Agreements of a social or domestic nature do not
contemplate legal relations, and as such they do not give
rise to a contract. An agreement to dine at a friend’s house
in not an agreement intended to create legal relations and
therefore is not a contract. Agreements between husband
and wife also lack the intention to create legal relationship
and thus do not result in contracts.
Try to work out the solution in the following cases and then go
to the answer.
Illustrations.
(a) M promises his wife N to get her a necklace if she will
sing a song. N sang the song M did not bring the
necklace for her.
(b) The defendant was a civil servant in Ceylon. He and his
wife were enjoying leave in England. When the
defendant was due to return to Ceylon, his wife could
not accompany him because of her health. The
defendant agreed to send her £ 30 a month as
maintenance expenses during the time they were thus
forced to live apart. She sued for breach of this
agreement.
Answers
(a) N cannot bring an action in a court to enforce the
agreement as it lacked the intention to create legal
relations.
(b) Her action was dismissed on the ground that no legal
relations had been contemplated and therefore there
was no contract.(Balfour vs. Balfour)
In commercial agreements an intention to create legal relations is
presumed. Thus, an agreement to buy and sell goods intends
to create legal relationship hence is a contract, provided other
requisites of a valid contract are present. But if the parties are
under a legal obligation, even a business agreement does not
amount to a contract. The case of Rose & Frank co, vs.
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Crompton & Brothers Ltd. Provides a good illustration on the
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point.
Illustration In the above case R Company entered into an
agreement with C Company. By means of which the former was
appointed as the agent of the latter. One clause of the agree-
ment was as follows. “This arrangement is not entered into as a
formal or legal agreement. And shall not be subject to legal
jurisdiction in the law courts.” It was held that there was no
intention to create legal relations on the part of parties to the
agreement and hence there was no contract.
Now let us go to the third essential of a contract i.e.
3. Lawful consideration. The third essential element of a valid
contract is the presence of ‘consideration’. Consideration
has been defined as the price paid by one party for the
promise of the other. An agreement is legally enforceable
only when each of the parties to it gives something and
gets something. The something given or obtained is the
price for the promise and is called ‘consideration’ subject to
certain exceptions; gratuitous promises are not enforceable
at law.
The ‘consideration’ may be an act (doing something) or
forbearance (not doing something) or a promise to do or not
to do something. It may be past, present or future. But only
those considerations are valid which are ‘lawful’. The consider-
ation is ‘lawful’. unless it is forbidden by law; or is of such a
nature that, if permitted it would defeat The provisions of any
law; or is fraudulent; or involves or implies injury to the person
or property of another; or is immoral; or is opposed to public
policy (sec.23).
4. Capacity of parties. The parties to an agreement must be
competent to contract. But the question that arises now is
that what parties are competent and what are not. The
contracting parties must be of the age of majority and of
sound mind and must not be disqualified by any law to
which they are subject (sec.11). If any of the parties to the
agreement suffers form minority, lunacy, idiocy,
drunkenness etc. The agreement is not enforceable at law,
except in some special cases e.g., in the case of necessaries
supplied to a minor or lunatic, the supplier of goods is
entitled to be reimbursed from their estate (sec 68).
5. Free consent. Free consent of all the parties to an
agreement is another essential element. This concept has
two aspects.(1) consent should be made and (2) it should
be free of any pressure or misunderstanding. ‘Consent’
means that the parties must have agreed upon the same
thing in the same sense (sec. 13). There is absence of ‘free
consent,’ if the agreement is induced by (i)coercion, (ii)
undue influence, (iii) fraud, (iv) mis-representation, or (v)
mistake (sec. 14). If the agreement is vitiated by any of the
first four factors, the contract would be voidable and
cannot be enforced by the party guilty of coercion, undue
influence etc. The other party (i.e., the aggrieved party) can
either reject the contract or accept it, subject to the rules laid
down in the act. If the agreement is induced by mutual
mistake which is material to the agreement, it would be
void (sec. 20)
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 6. Lawful object. For the formation of a valid contract it is 3. A invites B to see a picture with him. B accepts the offer. A
LEGAL ASPECTS OF BUSINESS

also necessary that the parties to an agreement must agree purchase a ticket for B and waits for him outside the
for a lawful object. The object for which the agreement has cinema hall. B does not turn up has A any cause of action
been entered into must not be fraudulent or illegal or against B. [Hint: No]
immoral or opposed to public policy or must mot imply 4. A agrees with B to murder C for Rs. 10,000. Is this a valid
injury to the person or the other of the reasons mentioned contract?
above the agreement is void. Thus, when a landlord
[Hint: No]
knowingly lets a house to a prostitute to carry on
prostitution, he cannot recover the rent through a court of 5. X agrees to pay Y Rs. 1000 if Y writes 100 pages for him
law or a contract for committing a murder is a void contract in one minute. Is it a valid contract? [Hint: No]
and unenforceable by law. 6. State whether there is any valid contract in the following
7. Writing and registration. According to the Indian contract cases?
Act, a contract to be valid, must be in writing and 7. (i) X boards a DTC bus at Mayur Vihar for Shalimar
registered. For example, it requires that an agreement to pay Bagh.
a time barred debt must be in writing and an agreement to (ii) X and Y agree to go for fishing
make a gift for natural love and affection must be in
(iii) X buys an evening paper
writing and registered to make the agreement enforceable
by law which must be observed. (iv) X a minor borrows Rs. 5000 from Yand agreed to
repay back the same within a week.
8. Certainty. Section 29 of the contract Act provides that “
Agreements, the meaning of which is not certain or capable References
of being made certain, are void.” In order to give rise to a • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
valid contract the terms of the agreement must not be Sultan Chand and Sons, New Delhi.
vague or uncertain. It must be possible to ascertain the • http://www.indialawinfo.com/bareacts/soga.html
meaning of the agreement, for otherwise, it cannot be
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
enforced
House Pvt. Ltd, Delhi.
Illustation. A, agrees to sell B “ a hundred ton of oil” there is
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
nothing whatever to show what kind of oil was intended. The
Pvt. Ltd, Delhi.
agreement is void for uncertainly.
9. Possibility of performance. Yet another essential feature of
a valid contract is that it must be capable of performance. Notes:
Section 56 lays down that “An agreement to do an act
impossible in itself is void”. If the act is impossible in
itself, physically or legally, the agreement cannot be enforced
at law.
Illustration. A agrees with B, to discover treasure by magic. The
agreement is not enforceable.
10. Not expressly declared void. The agreement must not have
been expressly declared to be void under the Act. Sections
24-30 specify certain types of agreements that have been
expressly declared to be void. For example, an agreement in
restraint of marriage, an agreement in restraint of trade,
and an agreement by way of wager have been expressly
declared void under sections 26, 27 and 30 respectively.
Before dealing with the various essentials of a valid contract one
by one in detail, it will be appropriate to discuss the ‘kinds of
contracts’. First, because we shall be using the terms like
‘voidable contract’, ‘void contract’, ‘void agreement’, etc. very
often in the course of our discussion.
Here we end our discussion on essentials of a valid contract.
Now attempt the following questions for a better understand-
ing:
1. Comment that the all contracts are agreements but all
agreements are not contract.
2. What are the essential elements of a valid contract?

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LESSON 2
KINDS OF CONTRACTS
Learning Outcomes
By the end of the lecture we should be able to answer the
following questions:
• The different types of contracts with respect to
performance, enforceability, validity and formation
Introduction
First of all we will study
[I] Kinds of contracts from the point of view of Enforceability
• Valid contract
• Voidable contract.
• Void contract
• Unenforceable contract
• Illegal or unlawful contract
From the point of view of enforceability a contract may be
valid, voidable, void, unenforceable or illegal.
1. Valid contract. According to section 2(i), it is”an agreement
enforceable by law”, an agreement becomes enforceable by
law when all the essential elements of a valid contract as
were enumerated in the last lesson are present.
If one or more of these elements is/are missing the contract is
either void, voidable, illegal or unenforceable.
2. Voidable contract. According to section 2(i), “an agreement
which” is enforceable by law at the option of one or more
of the parties thereto, but not at the option of the other
or others, is a voidable contract.” Thus, a voidable contract
is one which is enforceable by law at the option of one of
the parties only. Until it is avoided or rescinded by the party
entitled to do so by exercising his option in that behalf, it
is a valid contract.
Usually a contract becomes voidable when the consent of one
of the parties to the contract is obtained by coercion, undue
influence, misrepresentation or fraud. Such a contract is voidable
at the option of the aggrieved party i.e., the party whose
consent was so caused (secs. 19 and 19A). but the aggrieved
party must exercise his option of rejecting the contract (i) within
a reasonable time, and (ii) before the rights of third parties
intervene, otherwise the contract cannot be repudiated.
Illustration.
(a) A : threatens to shoot B if he does not sell his new
Bajaj scooter to A for Rs. 2,000. B agrees. The contract
has been brought about by coercion and is voidable at
the option of B.
(b) A. intending to deceive B. falsely represents that five
hundred quintals of indigo are made annually at A’s
factory, and thereby induces B to buy the factory. The
contract has been caused by fraud and is voidable at the
option of B.
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LEGAL ASPECTS OF BUSINESS
other circumstances under which a contract becomes
voidable. The Indian contract act has laid down certain
other situations also under which a contract becomes
voidable. For example.
(i) When a contract contains reciprocal promises, and one
party to the contract prevents the other from performing
his promises, then the contract becomes voidable at the
option at the party so prevented (sec. 53).
Illustration. A. Contracts with B that A shall whitewash B’s
house for Rs. 100. A. is ready and willing to execute the work
accordingly, but B prevents him from doing so. The contract
becomes voidable at the option of A.
(ii) When a party to the contract promises to do a certain thing
within a specified time, but fails to do it, then the contract
becomes voidable at the option of the promisee. If the
intention of the parties was that time should be of the
essence of the contract. (sec.55)
Illustration. X Agrees to sell and deliver 10 bags of wheat to Y
for Rs. 2,5000 within one week. But X does not supply the
wheat within the specified time. The contract becomes voidable
at the option of Y.
Consequences of rescission of voidable contract. Section 64 lays
down the rights and obligations of the parties to a voidable
contract after it is rescinded. The section states that when a
person at whose option a contract has become has received any
benefit from another party to such contract, he must restore
such benefit. If an amount has been received as a security for
the due performance of the contract, such earnest money
deposit is not to be returned if the contract becomes voidable
under section 55 on account of the promisor’s failure to
complete the contract at the time agreed and has been rescinded
by the promisee because it is not a benefit received under the
contract.
3. Void contract. Literally the word ‘void’ means ‘not binding
in law’. Accordingly the term. ‘void contract’ implies a
useless contract which has no legal effect at all. Such a
contract is a nullity, as for there has been no contract at all.
Section 2(j) defines: A contract which ceases to be
enforceable by law becomes void, when it ceases to be
enforceable.” It follows form the definition that a void
contract is not void from its inception and that it is valid
and binding on the parties when originally entered but
subsequent to its formation it becomes invalid and
destitute of legal effect because of certain reasons.
The reasons which transform a valid contract into a void
contract, as given in the contract Act. Are as follows.
(a) Supervening impossibility (sec. 56) A contract becomes
void by impossibility of performance after the formation
of the of contract for example, A and B contract to marry
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mad. The contract to marry becomes void.
(b) Subsequent illegality (sec, 56) A contract also becomes void
by subsequent illegality. For example, A agrees to sell B 100
hags of wheat at Rs. 650 per bag. Before delivery the
government bans private trading in wheat. The contract
becomes void.
(c) Repudiation of a voidable contract. A voidable contract
becomes void, when the party, whose consent is not free,
repudiates the contract. For example, M by threatening to
murder B’s son, makes B agree to sell his car worth Rs.
30,000 for a sum of Rs. 10,000 only. The contract, being
the result or coercion, is voidable at the option of B. B may
either affirm or reject the contract. In case B decides to
rescind the contract, it becomes void.
(d) In the case of a contract contingent on the happening of
an uncertain future event, if that event becomes
impossible. A contingent contract to do or not to do
something on the happening of an uncertain future event,
becomes void, when the event becomes impossible
(sec.32).” for example, A contracts to give Rs. 1,000 as loan
to B marries C. C dies without being married to B. the
contract becomes void.
Void agreement- “An agreement not enforceable by law is said
to be void” [sec.2 (g)]. Thus, a void agreement does not give
rise to any legal consequences and is void agreement does not
give rise to any legal consequences and is void ab-initio. In the
eye of law such an agreement is no agreement at all from its very
inception. There is absence of one or more essential elements
of a valid contract, except that of ‘free consent,’ in the case of a
void agreement. Thus, an agreement with a minor is void ab-
initio as against him, because a minor lacks the capacity to
contract. Similarly, an agreement without consideration is void
ab-initio, of course with certain exceptions as laid down in
section 25. Certain agreements have been expressly declared void
in the contract act e.g., agreements which are in restraint of trade
or of marriage or of legal proceedings or which are by way or
wager.
A ‘void’ agreement should be distinguished from a ‘void
contract’. A ‘void agreement ‘ never amounts to a contract as it
is void ab-initio. A ‘void contract’ is valid when it is entered
into, but subsequent to its formation something happens
which makes it unenforceable by law, notice that a contract
cannot be void ab-initio and only an agreement can be void ab-
initio.
Obligation of person who has received advantage under void
agreement or contract that becomes void. In this connection
section 65 lays down that when an agreement is discovered to
be void or when a contract becomes void, any person who has
received any advantage under such agreement or contract is
bound to restore it. Thus, this section provides for restitution
of the benefit received. Thus both parties may stand un-
effected by the transaction in the following two cases.
(a) When an agreement is discovered to be void. In other
words, when an agreement is void being discovered at a
later stage. For example, A pays B Rs. 1,000 for B’s agreeing
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to sell his horse to him. It turns out that the horse was
dead at the time of the bargain, through neither party was
aware of the fact. In this case the agreement is discovered
to be void and B must repay to A Rs. 1,000. it should,
however, be noted that agreements which are known to be
void or illegal, when they are entered into, are excluded
from the purview of this section. Thus, if L pays Rs.
10,000 to M to murder Z, the money cannot be recovered.
Similarly, nothing can be recovered in the case of expressly
declared void agreements, of course, subject to the
following exceptions.
(i) In the case of an agreement caused by bilateral mistake of
essential fact (although it is expressly declared void under
section 20) restitution is allowed as it comes under the
category of ‘an agreement discovered to be void.’
(ii) In the case of an agreement with a minor who commits
fraud by misrepresenting his age (although agreement with
a minor is known to be void.) restoration is allowed in
specie on equitable grounds because a minor cannot be
allowed to cheat people, and also because the other party
has not lost his title to the thing in question.
(b) When a contract becomes void, restitution is also allowed
in the case of a void contract. For example, A agrees to sell
B after one month 10 quintals of wheat at Rs. 625 per
quintal and receives Rs. 500 as advance. Soon after the
contract, private sales of wheat becomes void but A must
return the sum of Rs. 500 to B. Similarly, where after
accepting Rs. 1,000 as advance for singing at a convert for B,
A is too ill to sing. A is not bound to make compensation
to B for the loss of the profits which B would have made
if A would have been able to sing, but A must refund to B
the 1,000 rupees paid in advance.
4. Unenforceable contract. An unenforceable contract is one
which is valid in itself, but is not capable of being enforced
in a court of law because of some technical defect such as
absence of writing, registration, requisite stamp, etc., or
time barred by the law of limitation. For example, an oral
arbitration agreement is unenforceable because the law
requires an arbitration agreement to be in writing. Similarly,
a bill of exchange or promissory note, though valid in
itself, becomes unenforceable after three years from the date
the bill or note falls due, being time barred under the
limitation act.
5. Illegal or unlawful contract. The word ‘illegal’ means
‘contrary to law’ and the term ‘contract’ means ‘an
agreement enforceable by law’. As such to speak of an
‘illegal contract’ involves a contradiction in terms, because it
means something like this an agreement enforceable by law
and contrary to law. There is apparent contradiction in
terms. Moreover, being of unlawful nature, such an
agreement can never attain the status of a contract. Thus, it
will be proper if we use the term ‘illegal agreement’ in place
of ‘illegal contract’ an illegal agreement is void ab-initio.
Some important comparisons
Agreement and Contract agreement with a minor is void as against him but not

LEGAL ASPECTS OF BUSINESS

An agreement is a promise or set of promises (s). A contract is essentially an agreement, i.e., a promise illegal. Again, an agreement the
or set of promise (s). terms of which are uncertain is
Differences void but such an agreement the
Enforceability – An agreement may or my not be A contract is an agreement which is enforceable at terms of which are uncertain is
enforceable at law. For example, social agreements are law.
generally not enforceable while business agreements void an agreement is not illegal.
are enforceable at law. (ii) An illegal agreement is
Effect – An agreement is not always a binding on the
wider in effect in relation to
concerned parties. A contract is always concluded and binding on the
Scope – All agreements are not contracts. concerned parties, collateral transactions than a void
All contracts are agreements. agreement. When an agreement is
illegal, other agreement which are
Agreement Contract incidental or collateral to it are also tainted with illegality,
hence void, provided the third parties have the knowledge
of the illegal or immoral design of the main transaction.
Illegal and Void Agreements The reason underlying this rule is that no person shall be
Similarities allowed to invoke the aid of the
These agreements are not enforceable at law. These agreements are not enforces able at law. court if he is himself implicated
Differences in the illegality. On the other
Scope- These agreements are narrower in scope. All These agreements are wider in scope.
hand, when an agreement is
illegal ag reements are void. An agreement may be void because of a reason other
than illegality. void (but not illegal),
Effect on collateral transaction – Collateral Collateral transaction of an agreement which is void agreements which are collateral
transaction of an illegal contract also becomes illegal for a reason other than illegality are enforceable at to it are not invalidated and
and contract not be enforced. law. remain valid.
Punishment – Parties may be punished for making Being void does not make a contract punishable.
illegal agreement. Illustrations. (a) A engages B to
Murder C and borrows Rs.
Illegal agreement Void agreement 5,000 from D to pay B. D is aware of the purpose of the loan.
Here the agreement between A and B. D is aware of the
Despite the similarity between an illegal and a void agreement purpose of the loan. Here the agreement between A and B is
that in either case the agreement is void ab- initio and cannot be illegal and the agreement between A and D is collateral to an
enforced by law, I will explain the above points in detail now. illegal agreement. As such the loan transaction is illegal and
void and D cannot recover the money. But the position will
(i) An illegal agreement is narrower in scope than a void change if D is not aware of the purpose of the loan. In that
agreement. ‘all illegal agreements are void but all void case the loan transaction is not collateral to the illegal agreement
agreements are not necessarily illegal.’ The object or and is a valid contract.
consideration of an agreement way not be contrary to law
but may still be void. For example, an agreement may not Void and Voidable Contract
be contrary to law but may still be void. For example, an Void Agreement and Void Contract
Similarities
Restitution – If any benefit is passed between the If any benefit is passed between the parties, it may be
parties, it may be restored back. restored back.
Differences
Definition – When a contract ceases to be enforceable It is a contract which is enforceable by law at the
at law, it becomes void contract. option of one or more parties thereof, but not at the
option of others.
Status – A void contract cannot create any legal rights. A voidable contract takes its full
It is a total nullity.
and proper legal effect unless it is
Nature – A void contract is valid when it is made. But
subsequently it becomes void due to one reason or disputed and set aside by the person
the other.
entitled to do so.
Rights – A void contract is valid when it is made. But A contract may be voidable since very beginning, or
subsequently it becomes void due to one reason or may subsequently become voidable.
the other.
A voidable contract gives rights to the aggrieved party
Effect – When a contract is void because of illegality, to rescind the contract, and claim the damages, etc. in
its collateral transactions also becomes void. certain cases.

A voidable contract does not effect the collateral

transactions.

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11.555 7
LEGAL ASPECTS OF BUSINESS
Similarities
A void agreement cannot create any legal rights. It is a
total nullity.
Differences
It is an agreement. It never takes form of a contract.
It is a nullity since very beginning.
Kinds of contracts from the point of view of mode
of creation
From the point of view of mode of creation a contract may be
express or implied or constructive.
1. Express contract. Where both the offer and acceptance
constituting an agreement enforceable at law are made in
words spoken or written, it is an express contract. For
example. A tells B on telephone that he offers to sell his car
for Rs. 20,000 and B in reply informs A that he accepts the
offer, there is an express contract.
2. Implied contract. Where both the offer and acceptance
constituting an agreement enforceable at law are made
otherwise than in words i.e., by acts and conduct of the
parties, it is an implied contract. Thus, where A, a coolie in
uniform takes up the luggage of B to be carried out of the
railway station without being asked by B, and B, allows
him to do so, then the law implies that B agrees to pay for
the services of A, and there comes into existence an
implied contract and N is under obligation to pay to M.
It is relevant to state in respect of mode of creation, certain
contracts may be a mixture of the ‘express’ and ‘implied’ types
of contracts, that is, where out of the two components of an
agreement, namely, offer and acceptance, one is expressed in
words and the other is implied from acts and circumstances.
Such contracts may be called as contracts of mixed character. For
example, A offers to buy B’s scooter for Rs. 4,000 and B accepts
the offer by sending the scooter itself. Here A’s offer is expressed
in words and B’s acceptance is implied form his conduct. It is a
contract of mixed character.
1. Constructive or quasi contract. The term ‘constructive or
quasi contract is a misnomer, the cases grouped under this
type of contracts have little or affinity with contract. Such a
contract does not arise by virtue of any agreement, express
or implied between the parties but the law infers or
recognizes a contract under certain special circumstances.
For example, obligation to finder of lost goods to return
them to the true owner or liability or person to whom
money is paid under mistake to repay it back cannot be said
to arise out of a consent, but these are very mush
conversed under quasi contracts as per sections 71 and 72
respectively. The contract act has rightly named such
contracts as “ certain relations resembling those created by
contract”.
A quasi contract is based upon the equitable principle that a
person shall not be allowed to retain unjust benefit at the
expense of another. Sections 68-72 of the contract act describe
the cases which are to be deemed ‘quasi contracts’”.
Now we come to-
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A void contract cannot create any legal rights. It is a
total nullity.
It is a contract.
When it is formed it is perfectly valid.
Subsequently it becomes a nullity.
example, and A says to B, If you dig my garden next Sunday, I
will pay you Rs. 500.’ B makes no commitment, but says, I am
not sure that I shall be able to, but if I do, I shall be happy to
take Rs. 500. This arrangement is not bilateral. A has committed
himself to pay Rs. 500 in certain circumstances, but B has made
no commitment at all. He is totally free to decide whether he
wants to dig A’s garden or not. If B does not turn up on
Sunday to dig the garden, A cannot do anything about is. If,
however, B reaches to A’s place on Sunday to do the work, it will
amount to his acceptance a contract will be formed where both
parties will be bound by their performance.
Before I end the discussion on kinds of contracts I would like
to discuss another kind of contract called the Standard Form
Contract
When a large number of contracts have got to be entered into
by a person, from a practical point of view and for the sake of
convenience, a standard form for the numerous contracts may
be used. An insurance policy, shares or a railway ticket are few
examples of such standardized contracts. The “special terms
and conditions” become binding as part of the contract only if
they are brought to the notice of the acceptor before or at the
time of the contract. In view of the unequal bargaining power
of the two parties, the courts and the legislature have evolved
certain rules to protect the interest of the weaker party:-
(1) Reasonable notice – e.g. by printing on a ticket, “For
conditions see back”, or obtaining signatures on the
document containing terms, or otherwise explaining the
the terms,. Where an adequate notice is not given the
offeree is not bound by the terms.
(2) Notice should be contemporaneous with the contract – if a
party to the contract wants to have exemption from liability
he must give a notice about the exemption while the
contract is being entered into and not thereafter ( Olley Vs.
Marlborough Court. Ltd.)
(3) Terms of contract should be reasonable – if the terms of
the contract are unreasonable and opposed to public policy,
they will not be enforced.
(4) Fundamental breach of contract – no exemption clause is
allowed to permit the non-compliance of the basic
contractual obligation i.e. obligation which is fundamental
or core of the contract. Thus, the dry cleaner has to be
answerable , even if the contract contains all sorts of
exemption clauses, if the cloth is altogether lost.
(5) Strict construction – a strict construction shall be applied to
exemption clause, and any ambiguity is to be resolved in
favour of the weaker party.
(6) Statutory protection – The English Unfair Contract Terms
Act, 1977 severely limits the right of the contracting parties
 to exclude or limit their liability through exemption clauses
in the agreement. India lacks such an Act.
Practical Problems
Attempt the following problems, giving reasons for your
answers.
1. A invites B to a dinner. B accepts the invitation. A made
elaborate arrangement but B failed to turn up. Can A sue B
for the loss he has suffered?.
[Hint. No, A cannot sue B for the loss he suffered because
the agreement was of a social nature and hence lacked the
intention to create legal relationship— one of the essentials
of a valid contract.]
2. M agrees to pay N Rs. 100 and in consideration N agrees in
write for him 100 pages within five minutes. Is it a valid
contract?
[Hint. No, it is not valid contract. It is a void agreement
because as per section 56 “ an agreement to do an act
impossible in itself is void.”]
3. C orally offered to pay A, an auto mechanic, Rs.50 for
testing a used car which C was about to purchase from D.
A agreed and tested the car. C paid A Rs. 50 in cash for his
services. Is the agreement between A and C
(a) Express or implied
(b) Executed or executory
(c) Valid, voidable or void
6. A promises to pay B Rs.500 if beats C.B beats C but A
refuses to pay. Can B recover the amount?
( Hint : No as the agreement is illegal.)
4. X invites Y to dinner. Y accepts the invitation but fails to
turn up. Can X sue Y for the damage?
Solution: X cannot claim any damages from Y because the
agreement between X and Y is not enforceable by law. It is a
social agreement and the usual presumption in such agreement
is that the parties do not intend to create legal relationship.
5. X makes a promise to his wife Y to give her pocket money
of Rs 1,000 per month. After 6 months, he stops making
the payment. Can Y claim damages from X
Solution: Y cannot claim any damages from X because the
agreement between X and Y is not enforceable by law. It is a
social agreement and the usual presumption in such agreement
is that the parties do not intend to create legal relationship.
6. X promises Y to give a diamond ring at the time of
his marriage. X fails to give the ring. Can Y claim the
ring?
Solution: Y cannot claim the diamond ring because there is no
consideration from Y.
7. X polished Y’s shoes without being asked by Y to do so. Y
does not make any attempt to stop X from polishing the
shoes. Is Y bound to make payment to X?
Solution: Y is bound to pay because he has accepted X’ s
implied offer by conduct (i.e. by not stopping X from polishing
the shoes). 9. X agreed to sell a particular horse to Y. Later on, it
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11.555
was discovered that the horse was dead at the time of making
LEGAL ASPECTS OF BUSINESS
the contract. Advise the parties.
Solution:. The agreement is void because both the parties were
under a mistake of fact regarding existence of the subject
matter.
8. X agrees to let his flat to Y for use as a gambling den on a
monthly rent of Rs 10,000. After 3 months, Y stops
making the payment of rent. Advise X.
Solution: X cannot recover anything. The agreement between X
and Y is void because the object of the agreement is unlawful.
9. X threatens to kill Y if he does not sell his house to X for
Rs 1,00,000. Y agrees. X borrows Rs 1,00,000 from Z who
is also aware of the purpose of the loan. What is the
nature of the agreement between X and Y, and X and Z?
Solution: The contract between X and Y is a contract which is
voidable at the option of Y because Y’s consent is not free as it
has been obtained by coercion. The contract between X and Z is
a valid contract because the object of contract (i.e. borrowing for
the purchase of a house) is lawful.
10. X agrees to pay Y Rs 1,00,000 if Y kills Z. To pay Y, X
borrows Rs 1,00,000 from W who is also aware of the
purpose of the loan. Y kills Z but X refuses to pay. X also
refuses to repay the loan to W. Advise Y and W.
Solution: The agreement between X and Y is an illegal agree-
ment because its object is unlawful. Hence, Y cannot recover
anything from X. Since the main agreement between X and Y is
illegal, the agreement between X and W which is collateral to the
main agreement is also void and hence W cannot recover
anything from X.
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.
Notes:
9
LEGAL ASPECTS OF BUSINESS
LESSON 3:
ACCEPTANCE
Learning Outcomes
After todays class you should be able to answer the following
questions:
• The meaning of offer and acceptance
• The communication of offer and acceptance
• The revocation of offer and acceptance
Introduction
By now you must be aware of the essentials of a contract. In
today’s lecture we shall do a detailed study of the concept of
offer
The four basic elements of a contract are offer, acceptance,
consideration and contractual capacity out of which we shall
study the first one in this lesson.
While discussing the essential elements of a valid contract in the
preceding chapter we observed that as a first step in the making
of a contract there must be a ‘lawful offer’ by one party and a
‘lawful acceptance’ of the offer by the other party, thus where A,
offers to sell a wrist watch to B for Rs. 200 and B accepts the
offer, a contract comes into being provided other essentials of a
valid contract like that of competency of parties to contract, etc.
are present. We propose to discuss now the legal rules relating
to a ‘lawful offer’.
The Proposal or Offer
The words ‘ proposal’ and ‘offer’ are synonymous and are used
interchangeably. Section 2 (a) of the Indian contract act defines a
‘proposal’ as, “ when one person signifies to another his
willingness to do or to abstain form doing anything, with a
view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal”. This definition
reveals the following three essentials of a ‘proposal’.
(i) One person signifies to another; it must be an expression
of the willingness to do or to abstain from doing
something. According to section 3 to signify means that
the proposal must be communicated to the other party.
(ii) The expression of willingness to do or to abstain form
doing some thing must be to another person. There can be
no ‘proposal’ by a person to himself
(iii) The expression of willingness to do or to abstain from
doing some-thing must be made with a view to obtaining
the assent of the other person to such act or abstinence.
Thus a casual enquiry “ do you intend to sell your
motorcycle?” is not a ‘proposal’. Similarly, a mere statement
of intention” I may sell my motorcycle if I can get Rs.
14,000 for it” is not a ‘proposal’. But if M says to N, “ will
you buy my motorcycle fro Rs. 14,000,” or “ I am willing
to sell my motorcycle to you for Rs. 14,000”, we have a
‘proposal’ as it has been made with the object of
obtaining the assent of N.
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10
The person making the ‘proposal’ or ‘offer’ is called the
‘promisor’ or ‘ offeror’, the person to whom the offer is made
is called the ‘offeree’, and the person accepting the offer is called
the ‘promisee’ or ‘acceptor’.
Legal Rules Regarding a Valid Offer
A valid offer must be in conformity with the following rules:
1. An offer may be’ express’ or ‘implied’. An offer may be
made either by words or by conduct. An offer which is
expressed by words, spoken or written is called an ‘express
offer’ and the one which is inferred form the conduct of a
person or the circumstances of the case is called an ‘implied
offer.’ Thus stepping into a taxi and consuming eatables at
a restaurant both create implied promise to pay for benefits
employed. In Upton Rural District Council v Powell, a fire
broke out in the defendant’s farm . believing that he was
entitled to the free service of Upton Fire Brigade (which he
was not) he summoned it. Upton claimed compensation
for its services. Held services were rendered on an implied
promise to pay for them.
I will give a few more illustrations in this regard.
Illustration
(a) M says to N that he is willing to sell his motorcycle to him
for Rs. 20,000. this is an express offer.
(b) X writes to Y he offers to sell his house to him for Rs.
80,000. there is an express offer.
(a) The Delhi Transport Corporation runs omnibuses on
different routes to carry passengers at the scheduled fare.
This is an implied offer by the D.T.C.
(b) A shoe shiner starts shining some one’s shoes, without
being asked to do so, in such circumstances that any
reasonable man could guess that he expects to be paid for
this, he makes an implied offer.
The second essential of a valid offer is intention.
2. An offer must contemplate to give rise to legal
consequences and be capable of creating legal relations.
If the offer does not intend to give rise to legal consequences, it
is not a valid offer in the eyes of law. An offer to a friend to
dine at the offeror’s place, or an offer to one’s wife to show her a
movie is not a valid offer and as such cannot give rise to a
binding agreement, even though it is accepted and there is
consideration, because in social agreements or domestic
arrangements the presumption is that the parties do not intend
legal consequences to follow the breach of agreement. But in
the case of agreements regulating business agreements it is
taken for granted that parties intend legal consequences to
follow. Even in the case of a business agreement if the parties
agree that the breach of the agreement would not confer on
either of the parties a right to enforce the agreement in a court
11.555
of law, there is no contract (Rose & Frank Co. vs. Crompton &
Brothers Ltd.)
3. The terms of the offer must be certain and not loose or
vague. The terms of the offer must be certain and not
vague (sec 29). Mangham L.J. has rightly observed: “ unless
all the material terms of the contract are agreed, there is no
binding obligation.” Thus an agreement to agree in future
is not a contract, because the terms of agreement are
uncertain as they are yet to be settled.
Let us try to work out these problems on our own
Illustrations.
(a) X purchased a horse form Y and promised to buy another,
if the first one proves lucky. X refused to buy the second
horse.
(b) A offers to B lavish entertainment. If B does a particular
work for him.
(c) A agrees to sell to B “my white horse for Rs. 500 or Rs.
1000”
Answers
(a) Y could not enforce the agreement, it being loose and
vague (Taylor vs. Porting ton)
(b) A’s offer does not amount to lawful offer being vague and
uncertain.
(c) There is nothing to show which of the two prices was to
be given, thus it is not a valid offer.
3. An invitation to offer is not an offer. An offer must be
distinguished form an ‘invitation to receive offer’ or as it is
sometimes expressed in judicial language an ‘invitation to
treat.’ In the case of an ‘invitation to offer’ the person
sending out the invitation does not make an offer but only
invites the other party to make an offer. His object is
merely to circulate information that he is willing to deal
with anybody who, on such information, is willing to open
negotiations with him. Such invitations for offers are
therefore not offers. In the eyes of law and do not become
agreements by their acceptance. We may give some
examples of them here.
(a) An advertisement for sale of goods by auction does not
amount to an offer to hold such sale. It merely invites
offers. Actual bids made at the auction are ‘ offers’, each
higher bid superseding the previous one, and when the
hammer falls on the higher bid, there is an acceptance and
the contract becomes complete. An advertisement for an
auction sale does not even bind the auctioneer to hold the
auction and the prospective bidders have no legal right to
complaint if they have wasted their time and money in
coming to the advertised place of the auction sale (Harries
vs. Nickerson)
(b) There is a self-service system in a shop. A customer selects
the goods and takes them to the cashier for payment of the
price. The cashier totals the price and accepts the amount.
The contract, in this case in made, not when the customer
selects the goods, but when the cashier accepts the offer by
accepting the payment. The selection of goods by the
customer constitutes an ‘implied offer’ to buy goods and
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the acceptance of payment by the cashier constitutes
LEGAL ASPECTS OF BUSINESS
‘acceptance’ of the offer. [Pharmaceutical society of Great
Britain vs. Boots cash Chemists (southern). Ltd.]
(c) A notice that goods will be sold by ‘tender’ does not
amount to an offer. It is only an attempt to ascertain
whether an offer can be obtained within such a margin as
the seller is willing to adopt (Spencer vs. Harding) the
tenders to accept them or not.
(d) In Mc Pherson vs Appanna it was held that mere statement
of the lowest price at which the offerer would sell contains
no implied contract to sell at that price.
(e) In the case of Harvey vs Facey the plaintiffs telegraphed to
the defendants writing; “ will you sell us Bumper Hall Pen?
Telegraph lowest cash price.” The defendants replied, also
by a telegram: “Lowest price for pen, £900”. The plaintiffs
immediately sent their last telegram stating: “ We agree to
buy Pen for £900 asked by you”. The defendants, however,
refused to sell the plot of land at that price. The court
observed that the defendants had made no offer. The
plaintiffs’ last telegram was an offer to buy, but that was
never accepted by the defendants.
5. An offer may be a ‘specific’ or ‘general’. There are two kinds
of offers - general and specific. The specific order is made
to a specific person, while a general offer is made to the
world or public at large. However, in case of general offers
the contract is made only with that person who comes
forward and performs the conditions of the proposal as
such performance amounts to the acceptance of
performance. Such an offer can be accepted only by the
person or persons to whom it is made. Thus, where M
makes an offer to N to sell his bicycle for Rs. 200, there is a
specific offer and N alone can accept it. A ‘general offer’ on
the enter hand is one which is made to the world at large or
public in general and may be accepted by and person who
fulfils the requisite conditions. The leading case on the
subject of ‘general offer’ is that of Carlill vs Carbolic
smoke Ball co,”
Illustration
In the above case the carbolic smoke Ball co. issued an advertise-
ment in which the company offered to pay £ 100 to any person
who contract influenza, after having used their smoke Balls
three times daily for two weeks, according to the printed
directions. Mrs. Carlill, on the faith of the advertisement,
bought and used the Balls according to the directions, but she
nevertheless subsequently suffered from influenza. She sued the
company for the promised reward. The company was held
liable.
Offers of reward made by way of advertisement, addressed to
the public at large, for the rendering of certain services, or the
restoration of lost article are also examples of general offers.
Such offers may be accepted by performance of the conditions
by an individual person in order to give rise to a contractual
obligation to pay the reward. It is worth noting that there
cannot result into a contract until it has been accepted by an
ascertained person. If a large number of persons accepted a
general offers of continuing nature, as it was in the smoke Ball
11
 company case discussed above, which can be accepted by
LEGAL ASPECTS OF BUSINESS
number of persons. In case of general offer of reward for some
information or restoration of a missing thing, the offer is open
for acceptance to only one individual who performs the required
condition first of all, and as soon as the condition is first
performed the offer is closed.
6. An offer must be communicated to the offeree. The
communication of a proposal is complete when it comes
to the knowledge of the person to whom it is made (Secn
4). An offer is effective only when it is communicated to
the offeree. Until the offer is made known to the offeree,
there can be no acceptance and no contract. Doing anything
in ignorance of the offer can never be treated as its
acceptance, for there was never a consensus of wills. This
applies to both ‘specific’ and ‘general’ offers.
Illustrations (a) A. without knowing that a reward has been
offered for the arrest of a particular criminal, catches the criminal
and gives the information to the superintendent of police. A
cannot recover the reward as he cannot be said to have accepted
the offer when he was not at all aware of it.
In Lalman Shukla vs. Gauri Datt. “ the defendant’s nephew
absconded from home. He sent his servant, the plaintiff, in
search of the boy. After the servant had left. The defendant
announced a reward of Rs. 501 to anybody giving information
relating to the boy. The servant, before seeing the announce-
ment, had traced the boy and informed the defendant. Later, on
reading the notice of reward, the servant claimed it. His suit was
dismissed on the ground that he could not accept the offer,
unless he had knowledge of it.
The court observed: “ where an offer has been accepted with
knowledge of the reward the fact that the informer was
influenced by motives other than the reward will be immate-
rial.” In Williams vs. Carwardine where information was given
about the murderers of her husband of a woman, not so much
for reward, but to assuage her feelings, she was allowed to
recover. The court further observed that in the case of public
advertisements offering a reward, the performance of the act
raises an inference of acceptance. But in the case of Lalman
Shukla vs Gauri Dutt , the plaintiff being a servant was already
under an obligation to do what he did and therefore the
performance of act cannot be regarded as a consideration for
defendant’s promise.
7. Cross offers – when two parties make identical offers to
each other, in ignorance of each other’s offer, the offers are
cross offers. Such offers do not constitute acceptance of
one’s offer by the other and as such there is no completed
agreement. For eg. A wrote to B offering to sell him certain
goods. On the same day, B wrote to A offering to buy the
same goods. The letters crossed in the post. There is no
concluded contract between A and B.
Let me give you an example so that you can understand it
better. Suppose on 15 October, 1989 A wrote to B offering to
sell him 100 tons of iron at Rs. 8,800 per ton. On the same day,
B wrote to A offering to buy 100 tons of iron at Rs. 8,800 per
ton. The letters crossed in the post. There is no concluded
contract between A and B, because the offers were simulta-
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12
neous. Each being made in ignorance of the other, and there is
no acceptance of each other’s offer.
You all must be thinking about the contracts which are entered
into a by large number of people at the same time. These are
called standard form contracts we have already discussed them
in brief but now I would like to take up a few examples of
such contracts.
Communication of special terms (Standard Form Contracts)
Regarding the communication of the special terms of the
contract as contained in a ticket, receipt, or, ‘standard form
documents’, the more important rules adopted by the courts
are as follows.
(i) If the acceptor or the promisee had no knowledge of
special terms. Before or at the time of the contract, they are
not binding upon the acceptor.
Illustration In Handerson vs. Stevenson. “ the plaintiff bought
a steamer ticket which bore on its face the words. ‘Dublin to
white haven’ on the back of the ticket certain special terms were
printed one of which excluded the liability of the company for
loss, injury or delay to the passenger or his luggage. The
plaintiff never looked at the back of the ticket bore no reference
to the back. The plaintiffs luggage was lost in the shipwreck
caused by the fault of the company’s servants. He claimed
damages for its loss. It was held that the plaintiff was entitled
to recover his loss from the company as there was not sufficient
communication of the terms and conditions contained on the
back of the ticket.
(ii) If the acceptor or the promisee had the knowledge or may
be presumed to have the knowledge; because a reasonably
sufficient notice has been given to him by suitable words
on the document; of special terms, before or at the time of
the contract, the terms are binding upon the acceptor
whether he has read them or not is immaterial. The leading
case on the point is Parker vs. South Eastern Railway co.
Illustration. in the above case P deposited his bag at the cloak –
room at a railway station and received a ticket containing on its
face the words, ‘see back’. On the back of the ticket there was a
condition that, “ the company will not be responsible for any
exceeding the value of £10 unless extra charge was paid”. A
notice to the same effect was hung up in the cloak- room P’ s
bag was lost and he claimed the actual value of the lost bag. £
24 sh 10 P, admitted knowledge of the printed matter on the
ticket, but denied having read it. It was held that, even though
he had not read the exemption clause, he was bound by it. As
the defendants had done what was reasonably sufficient to give
him notice of its existence, and therefore P was entitle the
recover only £ 10.
Again, where the terms are printed in a language which the
acceptor does not understand, he cannot set up this fact as a
reason for not being bound by the terms, provided his
attention is drawn to them by suitable words on the document.
It is the acceptor’s duty to ask for a translation of the terms
before he actually accepts the offer and if he did not ask, he
must suffer for his ignorance (MacKillican vs. the Compagnie
Markemas de France.) similarly, the acceptor cannot plead that he
was illiterate or blind, provided the notice is reasonably
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sufficient for the class of persons to which he belongs (Thomp-
son vs. L.M. & S. Railway co.)
It is important to note that the special terms and conditions
become binding as part of the contract only if they are brought
to the notice of the acceptor before or at the time of contract. A
subsequent communication will not bind the contracting party
unless he has assented thereto. The facts of Olley vs.
Marlborough court LTD. Case provide a good illustration on
the point.
Illustration. in the above case Olley and her husband hired a
room at a hotel and paid for a week’s board and lodging in
advance. When they went to occupy the room there was a notice
on one of the walls which contained the clause. ‘ the proprietors
will not hold themselves responsible for articles lost or stolen,
unless handed to the manageress for safe custody. Owing to the
negligence of the hotel staff, a thief entered the room and stole
some of their property. The owner of the hotel was held liable
since the notice formed no part of the contract as it came to the
knowledge of the plaintiff after the contract had been entered
into.
Again, where the terms are printed in a language which the
acceptor does not understand, he cannot set up this fact as
defence. He must suffer for his ignorance (Mackillican vs. the
companies Marukemas de France) similarly, the acceptor cannot
plead that he was illiterate of blind the contracting party unless
he has assented thereto. The facts of olley vs. Marlborough
court Ltd. Case provide a good illustration on the point.
Finally, we must note that even where adequate notice of the
terms and conditions in a document has been given, the
doctrine of fundamental breach and strict construction protects
the contracting party form the unreasonable consequences of
wide and sweeping exemption clauses. Thus a dry-cleaner’s
terms that he will pay only eight times the amount of cleaning
charges, for any damage to or loss of garments has been held to
be unreasonable (M. siddalingappa vs. T. Nataraj).
7. An offer should not contain a term the non- compliance of
which would amount to acceptance. Thus an offeror cannot
say that if acceptance is not communicated up to a certain
date, the offer would be presumed to have been accepted.
If the offeree does not reply, there is no contract, because
no obligation to reply can be imposed on him, on the
grounds of justice.
The question that comes up now is whether any terms or
conditions can be attached to an offer:
8. An offer can be made subject to any terms and conditions.
An offeror may attach any terms and conditions to the
offer he makes. He may even prescribe the mode of
acceptance. The offeree will have to accept all the terms of
the offer. There is no contract, unless all the terms of the
offer are complied with and accepted in the mode
prescribed. As regards mode of acceptance, it must be
noted that in case of deviated acceptance, for example, if
the offeror asks for sending the acceptance ‘by telegram’
and the offeree sends the acceptance ‘by post’ the offeror
may decline to treat that acceptance as valid acceptance
provided the gives a notice to that effect to the offeree
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within a reasonable time after the acceptance is
LEGAL ASPECTS OF BUSINESS
communicated to him. If he does not inform the offeree
as to this effect, he is deemed to have accepted the deviated
acceptance. (sec. 7)
Now we come to revocation of the offer
Lapse and Revocation of offer
An offer lapses and becomes invalid (i.e., comes to an end) in
the following circumstances.
1. An offer lapses after stipulated or reasonable time. An offer
lapses if acceptance is not communicated within the time
prescribed in the offer, or if no time is prescribed, within a
reasonable time. [sec. 6 (2)]. What is a reasonable time is a
question of fact depending upon the circumstances of each
case. for example, an offer made by telegram suggests that
a reply is required urgently and if the offeree delays the
communication of his acceptance even by a day or two, the
offer will be considered to have lapsed.
In Ramsgate Victoria Hotel Co. vs. Montefiore. An application
for allotment of shares was made on 8 June. The applicant was
informed on the 23 November that shares were allotted to him.
He refused to accept them. It was held that his offer had lapsed
by reason of the delay of the company in notifying their
acceptance, and that he was not bound to accept the shares.
2. An offer lapses by not being accepted in the mode
prescribed, or if no made is prescribed, in some usual and
reasonable manner. But, according to section 7, if the
offeree does not accept the offer according to the mode
prescribed, the offer does not accept the offer according to
the mode prescribed, the offer does not lapse automatically.
It is for the offeror to insist that his proposal shall be
accepted only in the prescribed offeror to insist that his
proposal shall be accepted only in the prescribed manner,
and if he fails to do so he is deemed to have accepted the
acceptance.
3. An offer lapses by rejection. An offer lapses if it has been
rejected by the offeree. The rejection may be express i.e., by
words spoken or written, or implied. Implied rejection is
one(a) where either the offeree makes a counter offer, or (b)
where the offeree gives a conditional acceptance.
How about some examples in this context
(i) A offered to sell his house to B for Rs. 90,000. B offered
Rs.80,000 for which price A refused to sell. Subsequently B
offered to purchase the house for Rs.90,000. A, declined to
adhere to his original offer. B filled a suit to obtain specific
performance of the alleged contract. Dismissing the suit,
the court held that A was justified because no contract had
come into existence, as B, by offering Rs. 80,000, has
rejected the original offer. Subsequent willingness to pay
Rs. 90,000 could be no acceptance of A’s offer as there was
no offer to accept. The original offer had already come to an
end on account of ‘counter’ ( Hyde vs. wrench).
(ii) A offered to sell his motorcar to B for Rs. 25,000. B said
that the he accepted the offer if he was offeror. For
example, C makes an offer to D by letter. Immediately on
receiving the letter D writes a letter rejecting the offer.
13
 Before the rejection reaches C, D changes his mind hand
LEGAL ASPECTS OF BUSINESS
telephones his acceptance. There would be a contract C and
D and the rejection shall not be effective.
It is worth noting that a rejection is effective only when it comes
to the knowledge of the offeror. For example, C makes an offer
to D by letter. Immediately on receiving the letter D writes a
letter rejecting the offer. Before the rejection reaches C, D
changes his mind and telephones his acceptance. There would
be a contract between C and D and the rejection shall not be
effective.
4. An offer lapses by the death or insanity of the offeror or
the offeree before acceptance. If the offeror dies or becomes
insane before acceptance, the offer lapsed provided that the
fact of his death or insanity comes to the knowledge of the
acceptor before acceptance [sec. 6 (4)]. From the language of
the section, it may be inferred that an acceptance in
ignorance of the death or insanity of the offeror, is a valid
acceptance, and gives rise to a contract. Thus the fact of
death or insanity of the offeror would not put an end to
the offer until it comes to the notice of the acceptor before
acceptance. An offeree’s death or insanity before accepting
the offer puts an end to offer and his heirs cannot accept
for him (Reynolds vs. Atherton).
5. An offer lapses by revocation. An offer is revoked when it
is retracted back by the communication of notice of
revocation by the offeror to the other party [sec. 6(1). For
example, at an auction sale, A makes the highest bid. But
he withdraws the bid before the fall of the hammer. There
cannot be a concluded contract because the offer has been
revoked before acceptance;
Further, an offer, agreed to be kept open for a definite period,
may be revoked even before the expiry of that period, unless
there is some consideration for so keeping it open. The effect of
facing a time for acceptance is merely to fix a tie beyond which
the offer cannot be accepted. Where no time limit is set, the
offer open for a definite period, unsupported by consideration,
is regarded as a ‘bare pact,’ and hence not offer open, supported
by consideration, is called an ‘option’ an ‘option’ is in effect a
separate contract making the promisor liable for breach if he
revokes the offer before the expiry o f agreed time.
Illustration. M. offers to sell his house to N for Rs. 1,40,000. N
says to M that if he agree the offer open for 10 days he (N) will
pay him Rs. 1,000. M agrees M cannot revoke the offer before
the expiry of 10 days, as N has obtained an option to purchase
the house within 10 days. If M revokes the offer before the
expiry of 10 days. He can be sued for breach of option contract.
Revocation of an offer must be communicated or made known
to the offeree, otherwise the revocation does not prevent
acceptance. Revocation of a ‘general offer’ must be made
through the same channel by which the original offer was
made. Again, revocation must always be express and must be
communicated by the offeror himself or his duly authorized
agent to the other party.
Revocation of standing offer or tender. Where a person offers
to another to supply specific goods, up to a stated quality or in
any quality which may be required, at a certain rate, during a
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14
fixed period, he makes a standing offer. A standing offer is in
the nature of an open or continuing offer. An acceptance of
such an offer merely amounts to an intimation that the offer
will be accepted from time to time by placing order for specified,
quantities. Each successive order given, while the offer remains
in force, is an acceptance of the standing offer as to the quantity
ordered, and creates a separate contract. In view of this legal
position, the offeror is free to revoke the standing offer with
regard to further supply, at any time, by giving a notice to the
offeree, except where consideration is given for it.
6. Revocation by non- fulfillment of a condition precedent
to acceptance. An offer stand revoked if the offeree fails to
fulfill a condition precedent to acceptance [sec. 6 (3)]. Thus,
where A, offers to sell his scooter to B for Rs. 4,000. if B
joins the lions club within a week the offer stands revoked
and cannot be accepted be B if B fails to join the lions
club.(in default of payment of earnest money.)
7. An offer lapses by subsequent illegality or destruction of
subject matter. An offer lapses if it becomes illegal after it is
made, and before it is accepted. Thus, where an offer is
made to sell 10 bags of wheat for Rs. 6,500 and before it is
accepted, a law prohibiting the sale of wheat by private
individuals is enacted, the offer comes to an end. In the
same manner, an offer may lapse if the thing, which is the
subject matter of the offer, is destroyed or substantially
impaired before acceptance.
Practice Questions
I. Comment on the following statements
(1) Offer must be communicated to the offeree.
(2) Terms of an offer must be certain.
(3) An offer must be distinguished from an invitation to
offer.
(4) A proposal cannot be revoked otherwise than by
communication.
II. Define the term offer. Explain the legal rules regarding the
term offer.
III. How does an offer get terminated?
IV. Distinguish between
(1) General offer and specific offer
(2) Offer and an invitation to offer
(3) Cross offer and counter offer
V. Solve the following problems giving reasons
(1) A garment store gave a following advertisement in the
newspaper :
“ Special sale for tomorrow only. Men’s nightsuits reduced from
Rs.200 to Rs.100 only” is it a valid offer or not.
(2) A sees a rare book displayed in a shop. It is labelled ‘ First
Edition Rs.15’. a enters the shop and puts Rs.15 on the
counter and asks for the book. The bookseller does not
agree to sell saying that the real price of the book is
Rs.50and that it had been marked as Rs.50 by mistake. Is
the bookseller bound to sell the book for Rs.15?
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(3) A sent a telegram to B, ‘will you sell your car? Quote lowest

LEGAL ASPECTS OF BUSINESS

price.’ B sent a reply, ‘lowest price Rs.25000.’ A sent a
second telegram to B, ‘I agree to buy your car at Rs.25000.’
B thereafter refuses to sell. Can a compel B to do so. Is
there a contract between A and B?
References:
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.

Notes:

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LEGAL ASPECTS OF BUSINESS
LESSON 4:
ACCEPTANCE OF AN OFFER
Learning Outcomes
After today’s class you should be able to answer the following
questions:
• The meaning of acceptance
• The essentials elements of acceptance
• The communication of an acceptance
Introduction
Today first we will start with the meaning of acceptance
A contract as already observed, emerges from the acceptance of
an offer. Section 2(b) states that “ A proposal when accepted
becomes a promise” and defines ‘ acceptance’ as “ when the
person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted.” Thus, ‘ acceptance’
is the manifestation by the offeree of his assent to the terms of
the offer. Thus there are two essential requirements of a valid
acceptance
• Firstly the offeree to the offeror should communicate
acceptance.
• Secondly, acceptance should be absolute and unqualified.
Legal Rules Regarding a valid Acceptance
A valid acceptance must be in conformity with the following
rules.
1. Acceptance must be given only by the person to whom the
offer is made.
An offer can be accepted only by the person or persons to
whom it is made and with whom it imports an intention
to contract. It cannot be accepted by another person
without the consent of the offeror. The rule of law is clear
that “ if you propose to make a contract with A. then B
can’t substitute himself for A without your consent.” An
offer made to a particular person can be validly accepted by
him alone. Similarly an offer made to a class of person s
(i.e., teachers) can be accepted by any member of that class.
An offer made to the world at large can be accepted by any
person who has knowledge of the existence of the offer.
Let us suppose A sold his business to his manager B without
disclosing the fact to his customers. C, a customer, who had a
running account with A, sent an order for the supply of goods
to A by name. B received the order and executed the same. C
refused to pay the price. It was held that there was no contract
between B and C because c never made any offer to B and as
such C was not liable to pay the price to B (Boulton vs. Jones).
I will give you another example. In Felthouse vs Bindley the
nephew intended his uncle to have the horse but had not
communicated this to the uncle, instead he told the auctioneer
not to sell the horseas it was already sold to his uncle. It was
thereby held that the communication to a stranger like the
auctioneer in this would not do. A communication to any other
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16
person is no communication in the eyes of law. The offeror
cannot say that if no answer is received in a certain time the offer
is deemed to be accepted. Mere silence is no acceptance of the
offer.
2. Acceptance must be absolute and unqualified [sec. 7(1)]. In
order to be legally effective it must be an absolute and
unqualified acceptance of all the terms of the offer. Even
the slightest deviation from the terms of the offer makes
the acceptance invalid. In effect a deviated acceptance is
regarded as a counter offer in law.
Illustration. L offered to M his scooter for Rs. 4,000 M accepted
the offer and tendered Rs. 3,900 cash down, promising to pay
the balance of Rs. 100 by the evening. There is no contract, as
the acceptance was not absolute and unqualified.
Other important features that we must know in respect of
acceptance would be
3. Acceptance must be expressed in some usual and
reasonable manner, unless the proposal prescribes the
manner in which it is to be accepted. [sec. 7(2)]. If the
offeror prescribes no mode of acceptance, the acceptances
must be communicated according to some usual and
reasonable mode. The usual modes of communication are
by word spoken or written or by conduct, it is called an
implied or tacit acceptance. Implied acceptance may be given
either by doing some required act, for example, tracing the
lost goods for the announced reward, or by accepting some
benefit or service, for example, stepping in a public bus by
a passenger.
If the offeror prescribes a mode of acceptance, the acceptance
given accordingly will no doubt be a valid acceptance, even if the
prescribed mode is funny. Thus, if an offeror prescribes lighting
a match as a mode of acceptance and the offeree accordingly
lights the match, the acceptance is effective and complete. But
what happens if the offeree deviates from the prescribed mode?
The answer to this query is given in section 7(2) itself which
states that in cases of deviated acceptances ‘the proposer may,
within a reasonable time after the acceptance is communication
to him, insist that his proposal shall be accepted in the pre-
scribed manner, and not otherwise; but, if he fails to do so, he
accepts the (deviated) acceptance.”
For Example If the offeror prescribes ‘acceptance by telegram’
and the offeree sends acceptance through a messenger, there is
no acceptance of the offer, if the offeror informs the offeree
that the acceptance is not according to the mode prescribed. But
if the offeror fails to do so, it will be presumed that he has
accepted the acceptance and a valid contract will arise.
It should be noted that law does not allow an offeror to
prescribe ‘silence’ as the mode of acceptance. Thus, a person
cannot say that if within a certain time acceptance is not
communicated the offer would be considered as accepted.
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Similarly, a trader who, of his own without receiving any order,
sends goods to some person with a letter saying “ if I do not
hear from you by the next Monday, I shall presume that you
have bought the goods”, cannot impose a contract on the
unwilling recipient. It is so because in the absence of such a rule
the offeree’s will be at the mercy of offeror’s, unless they replay
all such offers in negative which will certainly be causing a lot of
inconvenience and financial burden to them.
Now what about the cases where no acceptance is communi-
cated although there is an intention of entering into a contract.
Mental acceptance ineffectual. Mental acceptance or quiet assent
not evidenced by words or conduct does not amount to a valid
acceptance, and this is so even where the offeror has said that
such a mode of acceptance will suffice. Acceptance must be
communicated to the offeror, otherwise it has no effect. Thus,
if an oral acceptance is spoken into a telephone after the
telephone has gone dead, there is in effect no acceptance. This
rule is based on the theory of consensus ad idem or of identity
of minds. Unless the acceptance of the offer comes to the
knowledge of the offeror, there is no identity of mind and
therefore no contract.
(a) A person received an offer by letter. In reply he wrote a
letter of acceptance. Put the letter in his drawer and forgot
all about it. Held, this uncommunicated acceptance did not
amount to acceptance and so did not complete the contract.
(Brogden vs. Metropolitan Rly co)
4. Acceptance must be communicated by the acceptor. For an
acceptance to be made it should be made by the offeree but
must also be communicated by, or with the authority of,
the offeree (or acceptor) to the offeror.
In the landmark case of Powell vs. Lee, P was a candidate for
the post of headmaster in a school. The managing committee
of the school passed a resolution selecting him for the post. A
member of the managing committee, acting in his individual
capacity, informed P that he had been selected, but P received no
other intimation. Subsequently, the resolution was cancelled,
and P was not appointed no other intimation. Subsequently,
the resolution was cancelled, and P was not appointed to the
post. P filed a suit against the committee for breach of contract.
The court held that in the absence of an authorized communi-
cation form the committee there was no binding contract.
5. Acceptance must be given within a reasonable time and
before the offer lapses and/or is revoked. To be legally
effective acceptance must be given within the specified time
limit, if any, and if no time is stipulated, acceptance must
be given within a reasonable time because an offer cannot
be kept open indefinitely (shree Jaya Mahal cooperative
Housing society vs. Zenith chemical works pvt. Ltd.)
where M applied for certain shares in a company in June
but the allotment was made in November and he refused
to accept the allotted shares. It was held that the offeror M
could refuse to take shares as the offer stood withdrawn
and could not be accepted because the reasonable period
during which the offer could be accepted had elapsed
(Ramsgate Victoria Hotel co. vs. Monteforte). Again the
acceptance must be given before the offer is revoked or
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lapses by reason of offeree’s knowledge of the death or
LEGAL ASPECTS OF BUSINESS
insanity of the offeror.
6. Acceptance must succeed the offer. Acceptance must be
given after receiving the offer. It should not precede the
offer. In a company shares were allotted to a person who
had not applied for them. Subsequently he applied for
shares being unaware of the previous allotment. It was
held that the allotment of shares previous to the
application was invalid.
7. Rejected offers can be accepted only, if renewed. Offer once
rejected cannot be accepted again unless a fresh offer is
made (Hyde vs. Wrench).
Communication of Acceptance and Revocation
When the contracting parties are face to face and negotiate in
person, there is instantaneous communication of offer and
acceptance, and a valid contract comes into existence the
moment the offeree gives his absolute and unqualified accep-
tance to the proposal made by the offeror. The question of
revocation of either offer or acceptance does not arise, for, in
such cases a definite offer is made and accepted instantly at one
and the same time.
But where services of the post office are utilized for communi-
cating among themselves by the contracting parties because they
are at a distance form one another, it is not always easy to
ascertain the exact time at which an offer or /and an acceptance is
made or revoked. In these cases the following rules, as laid
down in section 4 and 5, will be applicable;
1. Communication of an offer. The communication of an
offer is complete when it comes to the knowledge of the
person to whom it is made, i.e., when the letter containing
the offer reaches the offeree.
2. Communication of an acceptance. The communication of
an acceptance has two aspects, viz., as against the proposer
and as agonist the acceptor. The communication of an
acceptance is complete (a) as against the proposer, when it
is put in a course of transmission to him, so as to be out
of power of the acceptor, and (b) as against the acceptor,
when it comes to the knowledge of the proposer i.e., when
the letter of acceptance is received by the proposer.
Illustrations
(i) A proposes, by letter, to sell a house to B for Rs. 80,000.
the letter is posted, on 6th instant. The letter reaches B on
8th instant. The communication on the offer is complete
when B, the offeree, receives the letter i.e., on 8th.
(ii) B accept A’s proposal, in the above case, by a letter sent by
post on 9th instant. The letter reaches A on 11th instant. The
communication of the acceptance is complete. As against A
when the letter is posted i.e., on 9TH, and as against B, when
the letter is received by A. i.e., on 11th.
3. Communication of a revocation. The communication of a
revocation is complete. (a) as against the person who
makes it, when it is put into a course of transmission to
the person to whom it is made, so as to be out of the
poser of the person revoking, i.e., when the letter of
revocation is posted, and (b) as against the person to
17
 whom it is made, when it comes to his knowledge, I.e.,
LEGAL ASPECTS OF BUSINESS
when the letter of revocation is received by him.
Illustration
(a) In the illustration (i) given above. A revolves his offer by
letter on 8th instant. The letter reaches B on 10th instant.
The revocation is complete as against A on 8th, when the
letter of revocation is received by him.
(b) In the illustration (ii) given above, B revokes his acceptance
by letter on 10th instant. The letter reaches A on 12th instant.
The revocations complete as against B on 10th, the date on
which the letter of revocation is posted and as against A on
12th, the date on which the letter reaches him.
Time during which an offer or acceptance can be revoked. In the
illustrations (a) and (b) given above, there arises a question.
Whether the revocation of offer by A is operative or not, or
whether the revocation of acceptance by B is operative or not?
For answering this question, it is necessary to know the limit of
time within which an offer or acceptance can be revoked. Section
5 deals with this question and provides as follows.
“A proposal may be revoked at any time before the communica-
tion of its acceptance is complete as against the proposer, but
not afterwards. An acceptance may be revoked at any time before
the communication of the acceptance is complete as against the
acceptor but not afterwards.
Applying section 5 to our illustrations given above. A may
revoke his offer at any time before or at the moment when B
posts his letter of acceptance i.e., 9th, but not afterwards. B may
revoke his acceptance at any time before or at the moment when
the letter of acceptance reaches A. i.e., 11th, but not afterwards.
While discussing the rule regarding communication of accep-
tance is complete as against A on the day of posting itself i.e.,
9th, A’s revocation of his offer, which is complete as against B on
10th is inoperative. B’s acceptance is valid and there shall be a
binding contract.
For the sake of practice of the rules regarding communication
of offer, acceptance and revocation discussed above, we take
another illustration.
Illustration
(i) A offers, by letter, to sell his car to B for Rs. 75,000 on 1st
August B receives the letter on 3rd august.
(ii) B puts the letter of acceptance in post on 4th August, which
reaches A on 6th.
(iii) A write a letter of revocation of his offer and posts it on
3rd August i.e., which reaches B on 5th August.
Rules Applied
(i) Communication of offer is compete on 3rd August i.e.,
when it comes to the knowledge of B.
(ii) Communication of acceptance is complete as against the
proposer i.e.,. A when the letter of acceptance reaches the
proposer i.e., on 6th August.
(iii) Revocation of offer is complete as against A on 3rd August,
when the letter or revocation is posted, and as against B on
5th August, when the letter of revocation is received by him.
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18
(iv) As B has put his acceptance into transmission on 4th
August and revocation of offer is communicated to him
on 5th August, his acceptance is valid and there shall be a
binding contract. A cannot revoke his offer after 4th August,
when the communication of acceptance is complete as
against him.
Effect of delay or loss of letter of acceptance in postal transit.
So for as the offeror is concerned, he is bound by the acceptance
the moment the letter of acceptance is posted. Although the
letters delayed or wholly lost through an accident of the post
and the letter never in fact reaches him. But in order to bind the
offeror, the letter of acceptance must be correctly addressed,
properly stamped and actually posted. If the letter of acceptance
is misdirected because it has not been addressed correctly, there
would in law, be no communication of the acceptance; but if
the wrong address is furnished by the offeror himself, he will be
bound. So far as the acceptor is concerned. He is not bound by
the letter of acceptance till it reaches the offeror, the contract
remains voidable at the instance of the acceptor. He can compel
the offeror to enforce the contract or he may revoke his accep-
tance by communicating his revocation at any time before the
letter reaches the offeror. Thus the acceptor is at an advantage if
the letter is delayed or lost in transit.
Accidental formation of contract. There remains yet another
query; what happens if both the letter of acceptance’ and the
‘telegram of revocation of acceptance’ are delivered to the to the
offeror at the same time? In such a situation the formation of
contract will depend on a matter of chance. If the offeror reads
the letter of acceptance first and then the telegram, a binding
contract will arise. But if the offeror reads the telegram of
revocation of acceptance first and then the letter of acceptance,
there will be no binding contract because the communication of
revocation comes to the offeror’s notice first than the communi-
cation of acceptance. It will be seen that the formation of
contract in the aforesaid circumstance depends on a matter of
chance and therefore such contracts are called ‘ accidental form of
contracts,’
Contracts Over the Telephone
External manifestation or overt act
The definition clearly require that the assent should be signified,
it may be signified or expressed by an act or omission by which
the party accepting intends to communicate his assent or which
has the effect of communicating it. A very common instance of
an act amounting to acceptance is the fall of the hammer in the
case of an auction sale. The principle is that there should be
some external manifestation of acceptance. A mere mental
determination to accept unaccompanied by any external
indication will not be sufficient.
Such manifestation may be in the form of express words,
written or spoken or may be signified through conduct. An
illustration of acceptance by conduct is the decision of the
House of Lords in Brogden v. Metropolitan Railway Co.
B had been supplying coal to a railway company without any
formal agreement. B suggested that a formal agreement should
be drawn up. The agents of both the parties met and drew up a
draft agreement. It had some blanks when it was sent to B for
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his approval. He filled up the blanks, including the name of an
arbitrator and then returned it to the company. The agent of the
company put the draft in his drawer and it remained there
without final approval having been dignified. B kept up his
supply of coals but on the new terms and also received
payment on the new terms. A dispute having arisen B refused
to be bound by the agreement.
The conduct of the company agent in keeping the agreement in
his drawer was an evidence of the fact that he held mentally
accepted it. But he had not expressed his mental determination
and retention of the agreement was not be sufficient acceptance.
But the subsequent conduct of the parties in supplying and
accepting coal on the basis of proposed agreement was a
conduct that given. Said Lord CAIRNS LC “when the company
commenced a course of dealing which is referable only to the
contract and when that course of dealing was accepted and acted
upon by B in the supply of coals.
This rule, that the communication of an acceptance is complete
as against the proposer when the letter is posted, is probably
intended to apply only when the parties are at a distance and
they communicate by post. “Where, however, the parties are in
each other’s presence or, though separated in space”, they are in
direct communication, as, for example, by telephone, no
contract will arise until the offer or receives the notification of
acceptance. This appears from the speeches delivered in Entores
Ltd. v. Miles Far East Corporation. Denning U observed as
follows:
Let me first consider a case where two people make a contract by
word of mouth in the presence of one another. Suppose, for
instance, that I shout an offer to a man across a river or a
courtyard but I do not hear his reply because it is drowned by
an aircraft flying overhead. There is no contract at that moment.
It he wishes to make a contract, he must wait till the aircraft is
gone and then shout back his acceptance so that I can hear what
he says.... Now take a case where two people make a contract by
telephone. Suppose, for instance, that I make an offer to a man
by telephone and, in the middle of his reply, the line goes ‘dead’
so that I do not bear his words of acceptance. There is no
contract at that moment.
The facts of the case were that an offer was made from London
by Telex to a party in Holland and it was duly accepted through
the Telex, the only question being as to whether the contract
was made in Holland or in England. The Court of Appeal held
that Telex is a method of instantaneous communication and
“the rule about instantaneous communications between the
parties is different from the rule about the post. The contract is
only complete when the acceptance is received by the offer or
and the contract is made at the place where the acceptance is
received.”
Where, however, the proposal and acceptance are made by
letters, the contract is made at the place where the letter of
acceptance is posted. It has been observed by the Supreme
Court that “authorities in India exhibit a fairly uniform trend
that in case of negotiations by post the contract is complete
when acceptance of the offer is put into a course of transmis-
sion to the offeror”. Thus where a premium due on a life
insurance policy was sent by money order, it was held that the
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policy had revived from the date of the money order and not
LEGAL ASPECTS OF BUSINESS
from the late of its receipt by the company. The assured having
died in the mean times widow recovered the proceeds.
Whatever merit this rule may have from the point of view of
the assured or the offered, it certainly makes the position of the
offer or miserable. The current feeling, therefore, is that even in
reference to postal communications the principle of consensus
or “meeting of minds” should be adhered to and there should
be no contract till the acceptance is received. Thus in Holwell
Securities v. Hughes an option to purchase land was exercisable
by notice, it was held that the mere posting of the notice which
was never delivered was not a valid exercise of the option.
Supreme Court approval of Entores case
The principle of the Entores case has been endorsed by the
Supreme Court in Bhagwandas Goverdhandas Kedia v.
Girdharilal Parshottamdas & Co. In this case, the plaintiffs
made an offer from Ahmedabad to the defendants at
Khamgaon to purchase certain goods and the defendants
accepted the offer. The question was whether the conversation
resulted in a contract at Khamgaon at Ahmedabad. A majority
of the judges preferred to follow the English rule as laid down
in the Entores case and saw no reason for extending the post
office rule to telephonic communications but section 4 does not
imply that the contract is made qua the proposer at one place
and qua the acceptor at another place. The contract becomes
complete... when the acceptance of offer is intimated to the
offeror. It was further contended, that the draftsman of the
Indian Contract Act could not have envisaged use of telephone
because it had not yet been invented and, therefore, the words
of the section should be confined to communications by post.
The judge was, on the other hand, convinced that though “the
law was framed at a time when telephones, wireless, Telstar ‘and
Early Bird were not contemplated”, the language of Section 4 is
flexible enough to cover telephonic communications. The
courts should not completely ignore the language of the Act.
When the words of acceptance are spoken into’-the telephone,
they are put into the course of transmission to- the offeror so
as to be beyond the power of the acceptor; the acceptor cannot
recall them. The communication being instantaneous the
contract immediately arises
In the case of contracts over the telephone, each contracting
party is able to hear the voice of the other. There is instanta-
neous communication of offer and acceptance, rejection and
counter offer. And therefore, the rule which applies to contracts
negotiated orally by the parties in the physical presence of each
other i.e., the contract is complete only when the acceptance is
received by the offeror also applies to contracts made over the
telephone. If the acceptance is not in fact communicated to the
offeror because the telephone suddenly goes dead there will be
no contract ( Entores Ltd. Vs. miles for east corporation). The
offeree, therefore must make sure that his acceptance is received
(heard and understood) by the offeror, otherwise there is no
binding contract. The observation made by denning, L. J., in
Entores case is enlightening in this connection.
“Now take a case where two people make a contract by
telephone. Suppose for instance, that I make an offer to a man
by telephone and in the middle of his reply, the line goes ‘dead’
19
 so that I do not hear his words of acceptance. There is no
LEGAL ASPECTS OF BUSINESS
contract at that moment. The other man may not know the
precise moment when the line failed. But he will know that the
telephonic conversation was abruptly broken off, because
people usually say something to signify the end of the conver-
sation. If he wishes to make a contractor, he must, therefore,
get through again so as to make sure that I heard. Suppose next
that the line doesn’t go dead but it is nevertheless so indistinct
that I do not catch what he says and I ask him to repeat it. He
then repeats it and I hear, but only the second time when in do
hear. If he does not repeat it, there is no contract. The contract
is only complete when I have his answer accepting the offer.”
In Kanhialal vs. Dineshchandra it has been so held in India as
well that where a contract is effected by telephonic conversation,
the contract is not complete till acceptance of the offer by the
offeree is clearly heard and understood by the offeror.
No question of revocation. When the parties negotiate a
contract over telephone, no question of revocation can possibly
arise, for in such instantaneous communication, a definite offer
is made and accepted at one and the same time. An offer when
accepted, explodes into a contract and cannot be revoked. In the
words of sir Anson’ “ Acceptance is to an offer what a lighted
match is to a train of gunpowder. It produces something which
cannot be recalled or undone.
Here we end our discussion on acceptance of an offer.
Test Questions
Comment on the following
1. Offer must be communicated to the offeree.
2. Terms of an offer must be certain
3. Counter offer to an offer lapses the offer
4. An invitation to an offer is not an offer
Practical Problems
Answer the following problems, giving reasons for your
answers.
1. Harish says in conversation to suresh that he will give Rs.
10,000 to a person whosoever marries his daughter. Alok
marries Harish’s daughter and files a suit to recover Rs.
10,000 will he succeed?
[Hint. No, Harish has expressed his wish only, and has
never made an offer with a view to obtaining the assent of
the other party.]
2. X sees a book displayed in a shelf of a book shop with a
price tag of Rs. 85. X tenders Rs. 85 on the counter and
asks for the book. The bookseller r3fuses to sell saying that
the book has already been sold to someone else and he
does not have another copy of that book in the stock. Is
the bookseller bound to sell the book to X?
[Hint. No. a display of goods with prices marked thereon
is only an invitation for offer, and not an offer itself. Hence
the bookseller is free to accept the offer or not.]
3. B offered to sell his car to A for Rs. 95,000. A accepts to
purchase it for Rs. 94,500. B refused to sell the car Rs.
94,500. subsequently A agree to purchase the car for Rs.
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95,000 but B refused to sell the car. A sues B for the specific
performance of the contract. Will he succeed?
[Hint. No. B’s offer comes to an end by the counter offer
of A, and there, was no offer available for acceptance
subsequently.]
4. P sold his business to Q disclosing this to his customers.
M, an old customer sent an order for goods to P by name.
Q, the new owner, executed the order. Is M bound to
accept the goods?
[Hint. No. M is not bound to accept the goods because a
specific offer made to P can be accepted only by P and none
else (Boulton vs. Jones.]
5. X wrote to Y, his would be son-in-law, that his daughter
would have a share of what he left after the death of his
wife. Is the letter a valid offer by X to Y?
Solution: The letter was a mere statement of intention and not
an offer at all. [Farina v. Fickus]
6. A notice that the goods stated in the notice will be sold by
tender. Is the notice a valid offer to sell?
Solution: The notice was mere a statement of intention and not
an offer to seen. [Spencer v. Harding]
7 X and Mrs X hired a room in a hotel for a week. When
they entered the room, they found a notice on the wall
disclaiming the owner’s liability for damages; loss or theft
of articles. Some of their items were stolen. Discuss the
legal position.
Solution: The owner of the hotel was liable because the special
terms (i.e. notice) were communicated after the formation of
the contract. [Leading case: Olley v. Marlborough Court Ltd.]
8. X sold his business to Y but this fact was not known to an
old customer Z. Z placed an order for certain goods to X
by name. Y supplied the goods to Z.
Is there a valid contract?
Solution: There was no contract at all between Y and Z because
Z’s offer was a specific offer to X and X alone could accept it.
[Leading case: Boulton v. Jones]
9. X offered to sell his .car for Rs 1,00,000 to Y. Y replies “I
will pay Rs 90,000 for it.” X refuses to sell at this price. Y
then attempts the original offer but X refuses to sell his
car. Discuss the legal position.
Solution: Y’s first reply is a counter offer and not an acceptance
of X’ s offer and has put an end to the original offer. After
having made the counter offer, Y cannot accept the original offer
which has already come to an end. Hence, X is not bound to sell
his car to Y. [Leading case: Nihal Chand v. Amar Nath]
10. X offered to sell two plots of land to Y at a certain price. Y
accepted the offer for one plot. Is there a valid contract?
Solution: This is not a contract at all because the acceptance was
not valid as it
was not for the whole of the offer. [Bhawan v. Sadula]
11. F offered by a letter to buy his nephew’s horse for Rs 100
saying “If I hear
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no more about him, I shall consider the horse mine.” The

LEGAL ASPECTS OF BUSINESS

nephew sent no reply at all but told B his auctioneer not to’ sell
that particular horse as he intended to sell that horse to F. B
sold the horse by mistake. F filed a suit against B. Will he
succeed?
Solution: F will not succeed because his nephew had not
communicated accep-tance to him. [Felt house v. Bindley]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.
Notes:

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LEGAL ASPECTS OF BUSINESS
LESSON 5:
CONSIDERATION
Learning Outcomes
After todays class you should be able to answer the following
questions:
• The meaning of consideration
• The essentials of consideration
• The exceptions to the doctrine of consideration
Introduction
By now you all must have understood the concept and
definition of contract and its essentials. Our next topic of study
shall be consideration. Consideration constitutes the very
foundation of the contract. As you all know that as per section
10 of the Indian Contract Act there must be a consideration for
an agreement to become a contract and that consideration must
also be lawful. An agreement not supported by consideration is
void.
Consideration is one of the essential elements of a valid
contract (Sec. 10). The fact. of its existence serves to distinguish
those promises by which the promisor intends to be legally
bound from those which are not” seriously meant.
In the words of Blackstone: “A consideration of some sort or
other is so necessary to the forming of a contract, that a nudum
pactum, or agreement to do or pay something on one side,
without any compensation on the other, will not at law support
an action; and a man cannot be compelled to perform it. The
law supplies no means nor affords any rem-edy to compel the
performance of an agreement made without consideration. If I
promise a man £ 100 for nothing, he neither doing nor
promising anything in return or to compensate me for my
money, my promise has no force in law.”
Anson said that the offer and acceptance bring the parties
together and constitute the outward semblance of a contract
but most systems of law require some further evidence of the
intention of the parties, which is provided by consideration and
form. It may be noted that consideration is a cardinal necessity
for the formation of a contract., but no consideraion is
necessary for the discharge or modification of a contract.
The breach of a gratuitous promise cannot be redressed by legal
remedies. It is only when a promise is made in return of
‘something’ from the promisee, that such promise can be
enforced by law against the promisor. This ‘something’ in
return is the consideration for the promise. In the language of
purchase and sale Pollock has observed: “Consideration is the
price for which the promise of the other is bought”. Anson
said that an offer and acceptance bring the parties together and
constitute the outward semblance of a contract.
Definition
Section 2(d) of the Indian Contract Act defines consideration as
follows
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“When at the desire of the promisor, the promisee or any other
person has done or abstained from doing, or does or abstains
from doing, or promises to do or to abstain from doing
something, such act or abstinence or promise is called a
consideration for the promise. “An analysis of the above
definition will show that it consists of the following four
components:
(a) The act or abstinence or promise which forms the
consideration for the promise, must be done at the desire
of the promisor:
(b) It must be done by the promisee or any other person
(c) Tt may have been already executed or is in the process of
being done or may be still executory;
(d) Tt must be something to which the law attaches a value.
The concept of consideration will become more clear to you
after reading these illustrations.
Illustrations
(i) A agrees to sell his house to B for Rs 10,000. Here B’s
promise to pay the sum of Rs10,000 is the consideration
for A’s promise to sell the house, and A’s promise to sell
the house is the consideration for B’s promise to pay the
sum of Rs10,000.
(ii) A promises to maintain B’s child and B promises to pay A
Rs 1,000 yearly for the purpose. Here the promise of each
party is the consideration for the promise of the other
party.
(iii) A promises to pay B Rs 1,000 at the end of six months, if
C, who owes that sum to B, fails to pay it. B promises to
grant time to C accordingly. Here the promise of each party
is the consideration for the promise of the other party.
(iv) A promises his debtor B not to file a suit against him for
one year on B’s agreeing to pay him Rs.100 more. The
abstinence of A is the consideration for B’s promise to pay.
(v) A promises to type the manuscript ‘of B’s book, and in
return B promises to teach A’s son for a month. The
promise to each party is the consideration for the promise
of the other party.
(vi) A person had a. daughter to marry and in order to raise
funds for her marriage he intended to sell a property. His
son promised that if the father would forbear to sell, he
would pay the father Rs. 50,000. The father accordingly
forbore. The abstinence of the father is the consideration
for son’s promise to pay. -
Essentials of Valid Consideration
The four component parts of the definition of consideration
(given above) may well be described as the essentials of valid
consideration. We shall now discuss these essentials one by one
in detail.
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1. Consideration must move at the desire of the promisor.
In order to constitute legal consideration the act or
abstinance forming the consideration for the promise must
be done at the desire or request of the promi-sor. Thus
acts done or services rendered voluntarily, or at the desire
of the third party, will not amount to valid consideration
so as to support a contract. The logic for this may be found
in the worry and expense to which every one might be
subjected, if he were obliged to pay for services, which he
does not need or require.
We shall study some more examples to make this concept
clearer
Illustrations
(a) A sees B’s house on fire and helps in extinguishing it. He
cannot demand payment for his services because B never
asked him to come for help.
(b) D had built, at his own expense, a market at the request of
the Collector of the District. The shopkeepers in the
market promised to pay D a commission on the articles
sold by them in the market. When D sued the shopkeepers
for the commission, it was held that the promise to pay
commission did not amount to a contract for want of
consideration, because D (the promisee) had constructed
the market not at the desire of the shopkeepers (the
promisors) but at the desire of the Collector to please him
(Durga Prasad vs Baldeo)
It must be noted that this essential does not require that the
considera-tion must confer ‘some benefit’ on the promisor. It
would be enough if the act or forbearance or promise constitut-
ing the consideration was done or given at the promisor’s
request, the benefit may accrue to a third party. We call this
concept Privity of Consideration
For Example
(a) B requests A to sell and deliver to him goods on credit. A
agrees to do so, provided C will guarantee the payment of
the price of the goods. C promises to guarantee the
payment. The contract between A and C is a ‘contract of
guarantee’ and is perfectly valid though the benefit which A
confers in return of C’s guarantee is conferred not on C but
on B (in the shape of sale of goods on credit). A’s promise
to deliver the goods is the consideration for C’s promise of
guarantee. (Illustration appended to Section 127).
(b) A, who owed Rs 20,000 to B, persuaded C to pass a
promissory note for the amount in favour of B. C
promised B that he would pay the amount (by passing on
a promissory note), and B credited the amount to A’s
Account in his books. The discharge of A’s Account was
consideration for C’s promise (though C the promisor had
received no benefit) (National Bank afUpper India vs
Bansidhar).
2. Consideration may move from the promisee or any other
person. The second essential of valid consideration, as
contained in the definition of consideration in Section 2
(d), is that consideration need not move from the
promisee alone but may proceed from a third person.
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Thus, as long as there is a consideration for a promise, it is
LEGAL ASPECTS OF BUSINESS
immaterial who has furnished it. It may move from the
promisee or from any other person. This means that even a
stranger to the consideration can sue on a contract,
provided he is a party to the contract. This is sometimes
called as ‘Doctrine of Constructive Consideration’. Under
English law, however there is privity of consideration i.e.
consideration must move from the promisee and
promisor only, a stranger cannot furnish consideration.
The leading case of Chinayya vs Ramayya provides a good
illustration the point.
Let me tell you the facts of that case now.
Illustration in the. above case A, an old lady, by a deed of gift,
made over certain property to her daughter R, with a direction
that the daughter should pay an annuity to A’s sister C, as has
been done by A. Accordingly, on the same day R, the daughter,
executed a writing in favour of her maternal aunt C agreeing to
pay the annuity. Afterwards she declined to fulfill her promise
saying that no consideration had moved from her maternal
aunt i.e., the promisee. It was held that the words “the
promisee or any other person” in Section 2 (d) clearly show that
a stranger to consideration may maintain a suit. Hence the
maternal aunt, though a stranger to the consideration (as the
consideration indirectly moved from her sister) was entitled to
maintain the suit.
Another important illustration that would make you under-
stand the concept better is the case of Dutton vs Poole, a
person intended to sell wood in order to provide his daughter a
marriage portion. His son(defendant) promised that if he
abstains from selling he would pay the daughter £1,000. The
father accordingly forebore but the defendant did not pay. The
daughter and her husband (plaintiffs) sued the defendants for
the same. Held that….as the consideration moved indirectly
from the plaintiff to the defendant and the action of the
defendant operated to shut out the plaintiff from a certain
benefit, the plaintiff can sue. It is a legal common place that if a
promise causes some loss to a promisee, that is sufficient
consideration for the promise.
A stranger to a contract cannot sue. A person may be a stranger
to the consideration but he should not be a stranger to the
contract because ‘privities of contract’ is essential for enforcing
any of the rights arising out of the contract. It being a funda-
mental principle of the law of contracts that a stranger to a
contract cannot sue only a person who is a party to a contract can
sue on it.
Thus, where A mortgages his property to B in consideration of
B’s promise to A to pay A’s debt to C, C cannot file a suit
against B to enforce his promise, C being no party to the
contract between A and B (Iswaram Pillai vs Sonnivaveru).
Exceptions to the Privity rule
In the course of time, the courts have introduced a number of
exceptions in which the rule of privity of contract does not
prevent a person from enforcing a contract, which has been
made for his benefit but without he being a party to it. The
different exceptions are as follows:
23
 • Trust or Charge
LEGAL ASPECTS OF BUSINESS
• Marriage settlement, partition or other Family
arrangements
• Acknowledgement or Estoppel
• Covenants running with land
• Agency
• Assignment
Now let me discuss them in detail
(i) Where an express or implied trust is created. A trust is the
property held and managed by one or more persons for
another’s benefit as in Chinnaya case. In case of a trust, the
beneficiary can sue in his own right to enforce his rights
under the trust, though he was not a party to the contract
between the settler and the trustees.
Illustrations
(a) A transfers certain properties to B to be held by B in
‘trust for the benefit of M. M can enforce the
agreement i.e., trust (M.K.Rapai vs John).
(b) An addressee of an insured article is entitled to sue the.
Post Office in case V- of loss, as on receipt of such
article, the Post Office becomes in law a constructive
trustee for the addressee (Amir ullah vs. Central Govt).
(c) In Khwaja Mohammad Khan vs Hussaini Begum,
there was an agreement between the lady’s father in law
and her father that in consideration of her marriage
with his son, he would pay to her Rs.500 per month in
perpetuity for the betel leaf expnses. Some immovable
property was specifically charged for this purpose. A
suit by the wife (not a party to the agreement ) for the
recovery of arrears of annuity was upheld.
(ii) Family settlement. Where a provision is made in a partition
or family arrangement for maintenance or marriage
expenses of female mem-bers; such members, though not
parties to the agreement, can sue on the footing of the
arrangement.
Illustration. A daughter along with her husband entered into a
contract with her father whereby it was agreed that she will
maintain her mother and the property of the father will be
conveyed to them. The daughter subsequently refused to
maintain the mother. On a suit it was held that the mother was
entitled to require her daughter to maintain her, though she was
a stranger to the contract (Veeramma vs Appayya).
Where a girl’s father entered into an agreement for her marriage
with the defendant, it was held that the girl could sue the
defendant for damages for the breach of the promiseof
marriage even though she was not a party to the agreement.
(Rose vs Joseph)
(iii) When the defendant constitutes himself, as the agent of
the third party/ Acknowledgement or Estoppel. Whereby
the terms of a contract a party is required to make a
payment to a third person (viz. while making a part
payment), a binding obligation is thereby incurred towards
him.. acknowledgement can be express or implied. Thus if
A receives some money from B to be paid over to C and he
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24
admits of this receipt to C, then C can recover this amount
from A who shall be regarded. as the agent of C (Surjan vs
Nanat)
(iv) In case of agency. Where a contract is entered into by an
agent, the principal can sue on it.
(v) In case of assignment of rights under a contract in favour
of a third party either voluntarily or by operation of law,
the assignee can enforce the benefits of the contract, e.g.,
the assignee of an insurance policy or the official assignee
on the insolvency of a person can sue on the contract even
though originally they were not parties to it
(vi) Covenants running with land. A person who purchases a
land with notice that the owner of the land is bound by
certain duties created by an agreement or covenant affecting
the land, shall be bound by them although he was not a
party to the agreement.
Now we shall discuss the third essential of consideration i.e.
3. Consideration may be past, present or future. The words,
“has done or abstained from doing; or does or has
abstained from doing; or promises to do or to abstain
from doing,” used in the definition of consideration clearly
indicate, that the consideration may consist of either
something done. or not done in the past, or done or not
done in the present, or promised to be done or not done
in the future, To put it briefly, consideration may consist of
past, present, or future act or abstinence,
Consideration may consist of an act or abstinence. Consider-
ation may consist of either a positive act or abstinence i.e. a
negative act. Thus, an agreement between B and A, under which
B; on failing to pay the debt amount on the due date to A;
promises to raise the rate of interest from 9 per cent to 12 per
cent in consideration of A promising not to file a suit against
him for another one year, is a valid contract; A’s abstinence being
the consideration for B’s promise.
Now the question that comes up is that what do we mean by
past, present or future consideration.
Past consideration. When something is done or suffered before
the date of the agreement, at the desire of the promisor, it is
called ‘past considera-tion.’ It must be noted that past consider-
ation is good consideration only if it is given by the promisee,
‘at the desire of the promisor. Under English law, past
consideration is no consideration. In India sec 25(2) adequately
covers a past voluntary service.
Let us discuss some examples of this.
Illustrations
(a) A teaches the son of B at B’s request in the month of
January, and in February B promises to pay A a sum of Rs
200 for his services. The services of A will be past
consideration.
(b) A lawyer, gave up his practice and served as manager of a
landlord at the latter’s request in lieu of which the landlord
subsequently promised a pension. It was held that
there was good past consideration. (Shiv Saran vs Kesho
Prasad)
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Present consideration. Consideration which moves simulta-
neously with the promise, is called ‘present consideration’ or
‘executed consideration’. For example, A sells and delivers a
book to B, upon B’s promise to pay for it at a future date. The
consideration waiting from A is present or executed consider-
ation since A has done his act of delivering the book
simultaneously. with the promise of B. It should, however, be
noted that it is said to be . ‘present consideration’ when at the
time of the agreement it is executed on one side and executory
on the other. If both parties have done their part under the
contract, e.g., where A sells a book to B and B pays its price
immediately, it is a case of executed contract (where nothing
remains to be done) and not of executed or present consider-
ation.
Future consideration. When the consideration on both sides is
to move at a future date, it is called ‘future consideration’ or
‘executory considera-tion’. It consists of an exchange of
promises and each promise is a consid-eration for the” other.
For example, X promises to sell and deliver 10 bags of wheat
to Y for Rs 6,500 after a week, upon Y’s promise to pay the
agreed price at the time of delivery. The promise of X is
supported by promise of Y and the consideration is executory
on both ides. It is to be observed that in an ‘executed consider-
ation’, the liability ‘is outstanding against only one side whereas
in an ‘executory consideration’ it is outstanding on both ends.
4. Consideration must be ‘of something’ The fourth and last
essential of valid consideration is that it must be
‘something’ to which the law attaches a value. The
consideration need not be adequate to the promise for the
validity of an agreement. The law only insists on the
presence of consideration and not on the adequacy of it. It
leaves the people free to make their own bargains. Thus,
where A agrees to sell his motorcar worth Rs 20,000 for Rs
1,000 only and his consent is free, the agreement is a valid
contract, notwithstanding the inadequacy of the
consideration. However, if the consideration be grossly or
shockingly inadequate, and if one of the parties to the
contract alleges that his consent was obtained by fraud,
coer-cion Or undue influence, the court will treat
inadequacy .of consideration as an evidence in support of
such allegation and. will declare the contract void.
Inadequacy of consideration being no bar to a valid contract,
unless it is an evidence of un free consent, it has been correctly
observed that “in many cases, the doctrine o f consideration is a
mere technicality irreconcil-able either with business expediency
or common sense:”
Consideration must be real Though consideration need not be
ade-quate, it must be of some value in the eye of law, i.e., it
must be real and competent. Where consideration is physically
impossible, illegal, uncertain or illusory, it is not real and
therefore shall not be a valid consideration.
(i) Physically impossible. A promise to do something which is
physi-cally impossible, e.g., to make a dead man alive or to
run at a speed of 100 kilometres per hour, does not form
valid consideration.
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(ii) Legally impossible A promise to do something which. is
LEGAL ASPECTS OF BUSINESS
illegal, e.g., a promise for illegal cohabitation, does not
amount to good considera-tion.
(iii) Uncertain consideration. A promise to do something
which is too vague and uncertain, e.g., a promise to pay
such remuneration “as shall be deemed right,” is no
consideration in the eye of law. -
(iv) Illusory consideration Again, an illusory or deceptive
consideration does not amount to a valid consideration.
Consideration is illusory if it consists in a promise to
perform a public duty, or to perform a contract already
made with the promisor.
Illustrations
(a) C (the plaintiff) received a subpoena (a kind of sum-mon)
to appear at a trial as a witness on behalf of G (the
defendant). G promised him a sum of money for his
trouble. On default by G, C filed the suit for the recovery
of the promised sum. It was held that C being under a
public duty to attend and give evidence, there was no.
consideration for the promise and hence the promise is
unenforceable. (Collins vs Godefroy)
(b) Two of the crew of a ship deserted it half way while the
ship was on a voyage from London to the Baltic and back.
The captain, being unable to supply their place, promised
the rest of the crew that, if they would work the vessel
home, the wages of the two deserters should be equally
divided amongst them. The agree-ment was held to be
void for want of consideration because it was the
contractual duty of the mariners who remained with the
ship to exert themselves utmost in any emergency of the
voyage to’ bring the ship in safety to her destined port. The
desertion of a part of the crew is to be considered an
emergency of the’ voyage as much as their death. (Stilk vs
Myrick)
Performance of Existing Duties
(1) Performance of Legal obligation – in order to constitute
proper consideration there should be a promise to do
something more than what a person is already bound to
do. Doing of something, which a person is already legally
bound to do, is no consideration. For instance, where a
person having received summons to give evidence in a case;
a promise to pay such a person for appearing in case is o
consideration. Similarly, a promise to pay a sum of money
to a police officer for investigating into the crime will be
without consideration. However, where the police authority
provides a special form of protection outside the scope of
their public duty (e.g. performing an extraordinary act) they
may demand payment of it.
(2) Performance of Contractual Obligations
(a) Pre –existing contract with promisor - If A is already
bound to perform a particular contractual duty owed to
B, B’s promise to pay something additional for the
same promise is no consideration. Likewise, a promise
to pay a special reward to a pleader (apart from usual
fee) if the suit decided in the promisor’s favour, does
25
 not constitute consideration. I am sure you all must be
LEGAL ASPECTS OF BUSINESS
familiar with the Lalman Shukla’s case.
On the same principle, a promise to pay less than what is due
under a contract cannot be regarded as a consideration. How-
ever, there are certain exceptions to this rule. Thus, part payment
by a third party may be good consideration for the discharge of
the whole debt. In India the promisee may accept in satisfaction
of the whole debt an amount smaller than that. No consider-
ation is needed for such a promise.
(b) Pre existing contract with third party – Where a person
has contracted to do an act, and a third person
promises to pay him a sum of money if he would go
ahead with the performance, is there a consideration for
the promise? In Shadwell vs Shadwell, the plaintiff A had
already promised to marry one Miss Nicholl. A’s uncle
sent him a letter; “I am glad to hear of your starting
intended marriage with Nicholl; and as I promised to
assist you at starting , I will pay to you £ 150 yearly
during my life…” thereafter A married Nicholl. The
majority judgement was that there is a sufficient
consideration for the promise. The promise of the
annuity might’ve intended as an inducement to the
marriage.
Exceptions to the Rule, “No Consideration, No
Contract”
Consideration being one of the essential elements of a valid
contract the general rule is that “an agreement made without
consideration is void. But there are a few exceptions to the rule,
where an agreement without consideration will be perfectly valid
and binding. These exceptions are as follows:
Agreement made on account of natural love and affection [Sec.
25 (1)]: An agreement made without consideration is enforce-
able. If it is
(i) Expressed in writing
(ii) Registered under the law for the time being in force for
the registration of documents
(iii) Is made on account of natural love and affection
(iv) Between parties standing in a near relation to each
other.
Thus there are four essential requirements which must be
complied with to enforce an agreement made without consider-
ation, as per Section 25 (1).
Let us now study some some illustrations in this behalf
(a) A promises, for no consideration, to give to B Rs 1,000.
This is a void agrpement
(b) A for natural love and affection, promises to give his son
B, Rs 1,000. A puts his promise to B into writing and
registers it This is a contract.
(c) A registered agreement, whereby an elder brother, on
account of natural love and affection, promised to a the
debts of his younger brother, was held to be valid and
binding an the younger brother cause the elder brother in
the event of his not carrying out the agreement
(Venkatasamy vs Rangasami)
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It should, however, be noted that mere existence of a near
relation between the parties does not necessarily import natural
love and affection. Thus where a Hindu husband, after referring
to quarrels and disagreement between him and his wife,
executed a registered document in favour of his wife, agreeing
to pay for separate residence and maintenance, it was held that
the agreement was void for want of consideration because it
was not merely out of natural love, and affection. (Rajlakhi Devi
vs Bhootnath)
2. Agreement to compensate for past voluntary service (Sec.25
(2)].
A promise made without consideration is also valid, if it is a
promise to compensate, wholly or in part, a person who has
already voluntarily done something for the promisor,’ or done
something which the promisor was legally compellable to do.
Illustrations
(a) A finds B’s purse and gives it to him. B promises to give A
Rs 50. This is a contract.
(b) A supports B’s infant son. B promises to pay A’s expenses
in so doing. This is a contract. (Note that B was legally
bound to support his infant son).
(c) A rescued B from drowning in the river, and B,
appreciating the service that had been rendered, promises
to pay Rs 1,000 to A. There is a contract between A and B.
In order to attract this exception, the following points should
be noted:
(i) The service should have been rendered voluntarily for the
promisor. If it is not voluntary but rendered at the desire
of the promisor, then it is covered under ‘past
consideration’ [as per Sec. 2(d) and not under this
exception].
(ii) The promisor must be in existance at the time the service
was, rendered. Thus where services were rendered by a
promoter for a company not then in existence, a
subsequent promise by the company to pay for them could
not be brought within the exception. (Ahmedabad Jubilee
Spinning Co. vs Chhotalal).
(iii) The promise must be to compensate a person who has
himself done something for the promisor and not to a
person who has done nothing for the promisor. Thus,
where B treated A during his illness but refused to accept
payment from A; they being friends; and A in gratitude
promises to pay Rs 1,000 to B’s son D, the agreement
between A and D is void for want. of consideration as it is
not covered under the exception.
(iv) The intention of the promisor ought to be to compensate
the promisee. A promise given for any motive other than
the desire to compensate the promisee would not fall
within the exception. (Abdulla Khan vs Parshottam)
(v) The promisor to whom the service has been rendered
needed competence to contract at the time the service was
rendered. Thus a promise- made after attaining majority to
pay for goods supplied voluntarily to the promisor during
his minority has been held valid and the promisee could
enforce it ,(Karam Chand vs Basant Kaur). The court in
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 that case ob-served that they failed to see how an
agreement made by a person of full age to compensate
wholly or in part a promisee, who had already volun-tarily
done something for the promisor, even at a time when the
promisor was a minor, did not fall within the purview of
Sec. 25(2) of the Contract Act. The reasoning of the court
is, that at the time the thing was done the minor was
unable to contract, and therefore the person who did. it for
the minor must in law be taken to have done it voluntarily.
In their opinion the ‘provisions of Sec. 25(2) applied
equally to a contract by a major, as well as by a minor, to
pay for past services. In this connection it is important to
note that this exception does ‘not cover a promise by a
person on attaining majority to repay the money borrowed
during his minority because such a promise cannot be said
to be a promise to compensate a person who has already
voluntarily (without any promise of compensation) done
something for the promisor. ‘Advancing money as a loan’
necessarily implies a promise to compensate (i.e., a promise
to repay the loan) on the part of the borrower, Thus a
promise made by a minor after attaining majority to repay
money advanced during his minority has been held invalid
and beyond the purview of Section 25(2) of the Contract
Act (Indran Ramaswami vs Anthappa).
(vi) The service rendered must also be legal. Thus past
cohabitation will not make a promise to pay for it
enforceable under this exception (Sabava vs Yamanappa).
3. Agreement to pay a time-barred debt (Sec. 25 (3)]. Where
there is an agreement, made in writing and signed by the
debtor or by his au-thorised agent, to pay wholly or in part
a debt barred by the law of limi-tation, the agreement is
valid even though It is not supported by any con-
sideration. A time barred debt cannot be recovered and
therefore a promise to repay such a debt is without
consideration, hence the importance of the present
exception.
But before the exception can apply, it is necessary that:
(i) The debt must be such of which the creditor might’ have
enforced payment but for the law for the limitation of
suits.
(ii) The promisor himself must be liable for the debt. So a
promissory note executed by a widow in her personal
capacity in payment of time-’ barred debt of her husband
cannot be brought within the exception (Pestonji vs
Maherbai28);
(iii) There must be an ‘express promise to pay’ a time barred
debt as distinguished from a mere ‘acknowledgement of a
liability’ in respect of a debt. Thus. a debtor’s letter to his
creditor, “I owe you Rs. 1,000 on account of my time-
barred promissory note” is not a contract. There must be a
distinct promise to pay; and
(iv) The promise must be in writing and signed by the debtor
or his agent. An oral. promise to pay a time-barred debt is
unenforceable.
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The logic behind this exception is that by lapse of time the debt
LEGAL ASPECTS OF BUSINESS
is not destroyed but only the remedy is” lost. The remedy is
revived by a new promise under the exception.
Illustration. A owes B Rs 1,000, but the debt is barred by the
Limitation Act. A signs a written promise to pay BRs 500 on
account of the debt. This is Ii contract (Appended to Sec. 25).
4. Completed gift. A gift (which is not an agreement) does
not require consideration in order to be valid “As between
the donor and the done any lift actually made will be valid I
and binding even though without consideration”
[Explanation 1, to Section 25]. In order to attract this
excep-tion there need not be natural love and affection or
nearness of relationship between the donor and done. The
gift must, however, be complete.
5. Contract of agency. Section 185 of the Contract Act lays
down that no consideration is necessary to create an agency.
6. Remission by the promisee, of performance of the
promise (Sec. 63). For compromising a due debt, i.e.,
agreeing to accept less than what is due, no consideration is
necessary. In other words, a creditor can agree to give up a
part of his claim and. there need be no consideration for
such an agreement. Similarly, an agreement to extend time
for performances of a contract need not be supported by
consideration (Sec.63).
7. Contribution to charities. A promise to contribute to
charity, though gratuitous, would be enforceable, if on the
faith of the promised subscrip-tion, the promisee takes
definite steps in furtherance of the object and undertakes a
liability, to the extent of liability incurred, not exceeding the
promised amount of subscription. In Kedar Nath vs
Ghorie Mohammad, the defendant had agreed to subscribe
Rs 100 towards the construction of a Town Hall at
Howrah. The plaintiff (secretary of the Town Hall) on the
faith of the promise entrusted the work to a contractor and
undertook liability to pay him. The defendant was held
liable. But where the promisee had done nothing on the
faith on the promise, a promised subscription is not legally
recoverable. Accordingly, in Abdul Aziz vs Masum Ali, the
defendant promised to subscribe Rs 500 to a fund started
for building, a Mosque but steps had been take to carry out
the repairs. The defendant was held not liable and the suit
was dismissed.
Comment on the following
1. For every valid agreement there should be a consideration
2. A stranger to a consideration can sue
3. Consideration can be past, present and future.
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1. M offered a reward to anyone who would rescue his wife
dead or alive from a burning building. A fireman risking
his life brought out the wife’s dead body. Is he entitled to
recovery of the reward?
[Hint. Yes. In the instant case the fireman took an extra risk of
endangering his life, which does not fall in his normal duties in
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 connection with rescue opera-tions. As such the consideration’s
LEGAL ASPECTS OF BUSINESS
is not illusory and the fireman is entitled to reward.]
2. A and B are friends. B treats A during A’s illness. B does
not accept payment from A for the treatment and A
promises B’s son, X, to pay him Rs 1,000. A being in poor
circumstances, is unable to pay. X sues A for the money.
Can X recover?
[Hint. No, X cannot recover the money from A. The agreement
between X and A is not a contract in the absence of consider-
ation. In this case X’s father, B, voluntarily treats A during his
illness. Apparently it is not a valid consideration because it is
voluntary, whereas consideration to be valid must be given at
the desire of the promisor-vide Section 2(d). The question now
is whether this’ case is cov-ered by the exception given in Section
25(2) which inter-alia provides: “If it is a promise to compensate
a person who has already voluntarily done something for the
promisor...” Thus as per the exception the promise must be to
compensate a person who has himself done something for the
promisor and not to a person who has done nothing for the
promisor. As B’s son, X, to whom the promise was made, did
nothing for A, so A’s promise is not enforceable even under the
exception.]
3. X, a social reformer, promised Y a reward of Rs 1,000 if he
refrained from smoking for two years does so. Is he
entitled to the reward?
[Hint. Yes, Y is entitled to the reward from X. In the instant
case, Y at the desire of X refrained from smoking for two years.
This is a valid consideration in the form of an act of abstinence-
vide Section 2(d).]
4. A writes to B, “at the risk of your own life, you saved me
from a serious motor accident. I promise to’ pay you Rs
1,000.” A does not pay. Advise B as to his legal rights.
[Hint. B is advised, to file a suit for recovery for Rs 1,000. Under
Section 25 (2) of the Contract Act, a promise to compensate for
voluntary acts done in the past is valid even though without
consideration. As the instant case is fully covered by the above
Section, A cannot avoid his liability later on.]
5. For a valid consideration from B, A makes a promise to B
to render some service to C. C sues A on the promise.
Discuss whether he can succeed?
[Hint. C cannot succeed. The general rule of law is that “a
stranger to a contract cannot sue.’; In the instant case, C is not a
party to the contract and therefore he cannot enforce the
promise.]
6. X gifted Rs 50,000 to Y his neighbor’s wife by executing a
registered gift deed without any consideration. There is no
near relation between X and Y.
Is this gift valid?
Solution: Section to which the given problem relates: Explana-
tion I to Section 25. Decision: The gift is valid.
Reason: A completed gift needs no consideration. and’ need
not be a result of natural love and affection or near relation.
7. X promises to make a gift of Rs 50,000 to Y, his neighbors
wife. Is this promise valid?
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28
Solution: Section to which the given problem relates: Explana-
tion 1 to Section 25. Decision: A promise to gift is not valid.
Reason: This agreement is void for want of consideration and
at the same time, there is only a promise to gift and not a
completed gift.
8. X who was badly in need of money offered to sell his car
worth Rs 1,00,000 to Y for Rs 10,000. Before the car was
delivered, X received an offer of Rs 20,000 and refused to
carry out the contract on the ground of inadequacy of
consideration. Is X liable to Y for damages?
Solution: Section to which the given problem relates: Explana-
tion 2 to Section 25.
Decision: X is liable to Y for damages.
Reason: An agreement to which the consent of the party is
freely given is not void merely because the consideration is
inadequate.
True or False
1. An act constituting consideration must be done by the
promisee only. 3. Consideration must result in a benefit to
both parties. (False)
2. Consideration must result in a detriment to both parties.
(True)
3. Consideration must result in a benefit to the promisor and
detriments to promisee.( F)
4. Past consideration is no consideration in India. (F)
5. Consideration must be adequate. (F)
6. An agreement to which the consent of the promisor is
freely given is not void merely because the consideration is
inadequate. (T)
7. The inadequacy of the consideration may be taken into
account by the Court in determining the question whether
the consent of the promisor was freely given.( T)
8. Consideration must be something, which a promisor is
not already bound to do. (T)
9. A stranger to consideration can sue. (T)
10. A stranger to a contract cannot sue. (T)
11. In case of trusts, the beneficiary being a stranger to a
contract cannot sue. (F)
12. An assignee cannot enforce the contract because he is a
stranger to a contract. (F)
13. Nearness of relation by itself does not necessarily import
natural love and affection.(T)
14. Natural love and affection by itself does not necessarily in
nearness of relation. (T)
15. A promise made without consideration to compensate the
person who has already done something voluntarily is valid
if it is made in writing. (F)
16. A verbal promise to pay a time barred debt is valid. (F)
17. Completed gifts need no consideration. (T)
18. Completed gifts without consideration are valid only if
they are out of natural love and affection, and near relation.
-(F)
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19. A promise to gift to wife is valid. (F)

LEGAL ASPECTS OF BUSINESS

20. No consideration is required to create an agency.(T)
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.

Notes:

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LESSON 7
CAPACITY OF PARTIES
Learning Outcomes
In today’s lecture we shall study about capacity of a party to a
contract.
• In particular we shall do today
• Nature of minor’s agreement
• Effects of minor agreement
• Persons of unsound mind
• Other persons incompetent to contract
Intoduction
Today we will discuss what exactly is meant by competence to
enter into a contract
According to section 10 an essential ingredient of a valid
contract is that the contracting parties must be “competent to
contract’. Section 11 lays down that “Every person is competent
to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.”
Thus the section declares that a person is incompetent to
contract under the following circumstances:
• If he is a minor according to the law to which he is subject,
• If he is of unsound mind, and
• If he is disqualified from contracting by any law to which
he is subject.
Thus minors, persons of unsound mind and persons disquali-
fied by law are incompetent to contract.
We shall now discuss them one by one in detail.
I. Minor
First of all let us understand who is a minor
According to section 3 of the Indian majority Act 1875, a
person domiciled in India, who is under 18 years of age is a
minor. Accordingly every person who has completed the age of
18 years becomes a major. But minors of whose person or
property or both a guardian is appointed by a court, and minors
of whose property superintendence has been assumed by a
court of wards, attain majority at the age of 21 years. However,
by an amendment in 1999 in the Indian Majority Act1875, the
age of majority is fixed as 18 years for every person (irrespective
of the fact of appointment of a guardian.)
Section 11 expressly provides that the age of majority of a
person is to be determined “according to the law to which he is
subject.” The courts of law used to decide the age of majority
(competency to contract) by the law of domicile and not by the
law of the place where the contract is entered into (Kashiba Vs
Shripat). But the later trend of law for determining the age of
majority is:
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11.555
LEGAL ASPECTS OF BUSINESS
In the case of contracts relating to ordinary mercantile transac-
tions, the age of majority is to be determined by the law of the
place where the contract is made, and
In the case of contracts relating to land, the age of majority is to
be determined by the law of the place where the land is situated.
Thus, where a person aged 18 years, domiciled in India,
endorsed certain negotiable instrument in Ceylon, by the laws
of which he was a minor, he was held not to be liable as an
endorser.
Minor’s Agreements
The law regarding minor’s agreements may be summed up as
under:
An agreement by a minor is absolutely void and inoperative as
against him. Law acts as the guardian of minors and protects
their rights, because their mental faculties are not mature – they
don’t possess the capacity to judge what is good and what is
bad for them. Accordingly, where a minor is charged with
obligations and the other contracting party seeks to enforce
those obligations against minors, the agreement is deemed as
void ab-initio.
In the leading case of Mohiri Bibi Vs Dharmo Das Ghosh, a
minor executed a mortgage for Rs. 20,000 and received Rs. 8,000
from the mortgage. The mortgage filed a suit for the recovery
of his mortgage money and for sale of the property in case of
default. The Privy Council held that an agreement by a minor
was absolutely void as against him and therefore the mortgagee
could not recover the mortgage money nor could he have the
minor’s property sold under his mortgage.
No restitution except in certain cases. A minor cannot be
ordered to make compensation for a benefit obtained under a
void agreement, because sections 64 and 65 of the contract Act,
which deal with restitution, apply only to contracts between
competent parties and are not applicable to case where there is
not and could not have been any contract at all. The court may,
however, in certain cases, while ordering for the cancellation of
an instrument, at the instance of a minor, require the minor
plaintiff to make compensation to the other party to the
instrument. This is so as per section 33 of the Specific Relief
Act, 1963 which states as follows:
“On adjudging the cancellation of an instrument, the court may
require the party to whom such relief is granted, to restore, so
far as may be, any benefit which he may have received from the
other party and to make any compensation to him which justice
may require.”
Thus, the court will compel restitution by a minor when he is a
plaintiff. For example, if a minor sells a house for Rs.50,000
and later on files a suit to set aside the sale on the ground of
minority, he may be directed by the court to refund the purchase
money received by him before he can recover possession of the
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 property sold. It may be emphasized that section 33 of the
LEGAL ASPECTS OF BUSINESS
Specific Relief Act, 1963 is framed so as to afford relief only in a
case where the minor himself as plaintiff seeks the assistance of
court and the section is inapplicable if he happens to be merely
a defendant in a suit by the person who dealt with him when he
was a minor. This section is based on the well known principle
that “he who seeks equity must do equity”
Beneficial Contracts
The meaning of the proposition that an infant is incompetent
to contract or that his contract is void is that the law will not
enforce any contractual obligation of an infant. The decision in
Mohiribibi case is confined to cases is confined to cases where a
minor is charged with obligations and the other contracting
party seeks to enforce those obligations agreements against him.
Accordingly, a minor is allowed to enforce a contract, which is of
some benefit to himand under which he is required to bear ni
obligation. A minor will have the option of retiring from a
beneficial contract on attaining majority.
Beneficial agreements are valid contracts. The decision in
Mohiribi case as observed earlier, the court protects the rights of
minors. Accordingly, any agreement, which is of some benefit
to the minor and under which he is required to bear no
obligation, is valid. In other works, a minor can be a beneficiary
e.g. a payee, an endorsee or a promisee under a contract. Thus
money advanced by a minor can be recovered by him by a suit
because he can take benefit under a contract. The Hindu
Minority and Guardianship Act, 1956, also provides to the
same effect, namely, a natural guardian is empowered to enter
into a contract on behalf of the minor and the contract would
be binding and enforceable if the contract is for the benefit of
the minor.
Illustrations
(a) A duly executed transfer by way of sale or mortgage in
favor of a minor, who has paid the whole of the
consideration money. The contract is enforceable by him or
by any other person on his behalf.
(b) Where a minor as a purchaser of immovable property was,
subsequent to his purchase, dispossessed by a third party,
it was held that the minor could recover from his vendor
the sum which he has paid as purchase money.
(c) A minor purchaser of immovable property was held
entitled to recover possession of property purchased from
his vendor, when refused by vendor.
(d) A promissory note executed in favor of a minor is valid
and can be enforced in a court.
(e) Where a minor had performed his part of the agreement
and delivered the goods, he was held entitled to maintain a
suit for the recovery of their price.
(f) A contract for marriage of a minor is also prima facie for
hos or her benefit. While a contract of marriage could be
enforced against the other contracting party at the instance
of the minor, it can not be enforced against the minor.
(g) A lease to a minor is void.
(h) A minor can also be supplied with necessaries suited to his
conditions in life(e.g. food, lodging, education)and the
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supplier of such necessaries is entitled to be reimbursed
from the property of the minor.
Contracts of apprenticeship and service by a minor.
A contract of apprenticeship stands on a different footing than
an agreement of service by a minor. A contract of apprentice-
ship is valid and binding upon a minor because such a contract
is protected by the Apprentices Act, 1961 provided the case falls
within the terms of that act. The act inter alia, provides that the
minor must not be less than fourteen years of age and the
contract must be entered into on behalf of the minor by his
guardian. The act was passed with a view to enabling children to
learn trades, crafts and employments, by which, when they come
to full age, they may gain a livelihood.
So far as an agreement of service by a minor is concerned it is
void because a minor’s promise to serve would supply no
consideration for the promise of the defendant to pay him/her
a salary. In that case the court said that the contract of appren-
ticeship entered into by the guardian is protected by the
apprentices act provided the case falls within the terms of that
act, but no such exception is made in the case of contracts of
service of course, where a minor has already served under a
contract of service, he is entitled to enforce the contract not by
virtue of the contract but by reason of the relationship
resembling those created by the contract under section 70 of the
contract Act.
No ratification on attaining the age of majority. Ratification
means the subsequent adoption and acceptance of an act or
agreement. A minor’s agreement being a nullity and void ab-
initio has no existence in the eye of law. It cannot be ratified by
the minor on attaining the age of majority, for, an agreement
void ab – initio cannot be made valid by subsequent ratification.
Thus, if an advance is made to a minor during his minority, a
promise to pay for such amount after he attains majority would
not be enforceable. “the consideration which passed under the
earlier contract cannot be implied into the contract into which
the minor enters on attaining majority”.
In Arumugam Chetti vs Duraisings Tevar, it was held that there
can be no ratification of a transaction which is void owing to
the provisory possessing no contractual capacity at the time. Nor
can a void deed form a good consideration for a fresh contract
madebytheminoronattainingmajority.SimilarlySuraj ,in
Narain Vs Sukhu Ahir, where a minor borrowed a sum of
money by executing a promissory note, and after attaining
majority executed a second bond in respect of the original loan,
the court held that a suit upon the second bond was not
maintainable as that bond was without consideration. Since
ratification relates back to the date when the contract was
originally made, it is necessary for a valid ratification that the
person who purports to ratify must be competent to contract at
the time of the contract. But if services are rendered or an
advance is made to a minor during his minority and the services
are continued or a further advance is made after he attains
majority, a promise to pay for such services or amount as a
whole would be valid and enforceable.
Let us now discuss the liabilities of a minor under different
circumstances
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No Estoppel Against A Minor
The rule of estoppel does not apply to a minor. Section 115 of
the Indian Evidence act explains “Estoppel” as follows: “Where
one person has, by his declaration, act or omission, intentionally
caused or permitted another person to believe a thing to be true
and to act upon such belief, neither he nor his representatives
shall be allowed, in any suit or proceeding between himself and
such person or his representative, to deny the truth of that
thing.”
In the words of Lord Halsbury: “Estoppel arises when you are
precluded from denying the truth of anything, which you have
represented as a fact, although it is not a fact.” The rule of
estoppels does not apply to a minor i.e. a minor is not a fact.”
The rule of estoppels Does not apply to a minor i.e. a minor is
not stopped from pleading his infancy in order to avoid a
contract, even if he has entered into an agreement by falsely
representing that he was of full age. In other words, where an
infant represents fraudulently or otherwise that he is of full age
and thereby induces another to enter into a contract with him
them in an action founded on the contract, the infant is not
estopped from setting up infancy.
But if any thing is traceable in the hands of minor, out of the
proceeds of the contract made by fraudulently representing that
he was of full age, the court, may direct the minor to restore
that thing to the other pary, on equitable considerations, for
minors can have no privilege to cheat man”.Whenever the
infant is still in possession of any property in specie which he
has obtained by his fraud, he will be made to restore it to its
former owner. But I think that it is incorrect to say that he can
be made to repay money which he has spent, merely because he
received it under a contract induced by his fraud”. Similarly, the
infant will be made to restore to the person deceived, any
property purchased out of, or money received as a result of, sale
proceeds of the goods obtained by his fraud. Thus if a minor
obtains a loan by fraudulent representation and purchases a
motorcar out of that, although the loan transaction is invalid,
the court may direct the minor to restore the motorcar to the
lender. But once the identity of the property of money has
been lost because it has been spent wastefully, it is no longer
possible to invoke the aid of the ‘equitable doctrine of
restitution’.
Again, it may be noted that restoration is allowed only when a
minor commits fraud by misrepresenting his age because
section 65 expressly prohibits restoration in cases which are
known to be void.
Minor’s Liability for Necessaries.
The case of necessaries supplied to minor is governed by
section 68 of the contract act which provides that “if a person
incapable of entering into a contract, or any one whom he is
legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the
property of such incapable person.”
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11.555
Illustrations
LEGAL ASPECTS OF BUSINESS
(a) A supplies B, a lunatic, with necessaries suitable to his
condition in life. A is entitled to be reimbursed from B’s
property.
(b) A supplies the wife and children of B, a lunatic, with
necessaries suitable to their condition in life. A is entitled to
be reimbursed from B’s property.
Thus section 68 confers a quasi-contractual right on the supplier
of “necessaries” to a person incapable of entering into a
contract, or to any one whom he is legally bound to support.
But a minor is not personally liable, it is his property only which
is liable. Therefore. If a minor owns no property, the supplier
will lose the price of necessaries. Even where a minor owns
property, the supplier will get a reasonable price and not the
price agreed to by the minor.
Now let us discuss as to”what is a necessary
article,”
This is to be determined with reference to the status and
circumstances of the particular minor. Objects of mere luxury
are not necessaries, nor are objects, which though of real use, are
excessively costly. Food and clothing may be taken as simple
examples of necessaries. The necessaries would also includes the
infant’s lodging expense, medical attendance, cost of defending
a minor in civil and criminal proceedings. Loans taken by a
minor to obtain necessaries also bind him. But where a minor
is engaged in trade, contracts entered into by him for trading
purposes are not for necessaries and are not binding on him.
Specific Performance.
Specific performance means the actual carrying out of the
contract as agreed. Since an agreement by a minor is absolutely
void the court will never direct ‘specific performance’ of such an
agreement by him. But a contract entered into on behalf of a
minor, by his guardian or by the manager of his estate, is
binding on the minor and can be specifically enforced by or
against the minor, provided:
(a) The contract is within the authority of the guardian or
managers; and
(b) It is for the benefit of the minor. Thus it was held in
Gujoba Tulasiram vs Nilkanth, that a contract of sale of
immovable property by the guardian of minor, for the
minor benefit, may be specifically enforced by either party
to the contract.
Similarly, in Ramalingam vs Babanambal, it was held that a
Hindu minor is bound by a contract entered into by his mother
as his guardian for sale of his property, however a guardian has
no power to bind the minor: (i) by a contract, for the purchase
of immovable property (Mir Sarwarjan vs Fakruddin) and (ii)
ByaContractofserviceonhisbehalf Raj
( Rani vs Prem Adib),
and therefore such contracts cannot be specifically enforced by or
against the minor.
Minor Partner.
A minor being incompetent to contract cannot be a partner in a
partnership firm, but under section 30 of the Indian partner-
ship act he can be admitted to the ‘benefits of partnership’ with
the consent of all the partners by an agreement executed
33
 through his lawful guardian with the other partners. Such a
LEGAL ASPECTS OF BUSINESS
minor will have a right to such share if the property or profits
of the firm as may be agreed upon and he would have access to
and inspect and copy any of the accounts of the firm. The
minor cannot participate in the management of the business
and shall not share losses except when liability to third parties
has arisen but then too up to his share in the partnership assets.
He cannot be made personally liable for any obligations of the
firm, although he may after attaining majority accept those
obligations if he thinks fit to do so.
Minor Agent
A minor can be an agent. He shall bind the principal by his acts
done in the course of such an agency, but he cannot be held
personally liable for negligence or breach of duty. Thus in
appointing a minor as an agent, the principal runs a great risk.
Minor and Insolvency
A minor cannot be adjudicated an insolvent, for, he is incapable
of contracting debts. Even for necessaries supplied to him, he is
not personally liable, only is property is liable
Contract by minor and adult jointly. Where a minor and an
adult jointly enter into an agreement with another person, the
minor has no liability but the contracts as a whole can be
enforced the contract against the major vendee.
Surety for a Minor
When in a contract of guarantee, an adult stands surety for a
minor the adult is liable under the contract, although the minor
is not (as for three is a direct contract between the surety and the
third party). In fact in such a case there cannot be a contract of
guarantee in true sense. The Bombay high court considered the
question in Manju Mahadeo vs Shivappa Manju, and held that
“… if a minor could not default, the liability of the guarantor
being secondary, does not arise at all”. Similar decision has been
given by Madras High Court in Edvavan Nambiar vs Moolaki
Raman.
Position of Minor’s Parents.
The parents of a minor are not liable for agreements made by a
minor, whether the agreement is for the purchase of necessaries
or not. The parents can be held liable only when the child is
contracting as an agent for the parents.
Minor Shareholder.
A minor, being incompetent to contract, cannot be a share-
holder of the company. A company can also refuse to register
transfer or transmission of shares in favor of a minor unless
the shares are fully paid. It follows from it that a minor, acting
through his lawful guardian, may become a shareholder of the
company, in case of transfer or transmission of fully paid shares
to him. Logically also, if a minor could legally hold property in
his name, it would be wrong to debar him from holding fully
paid up shares in his own name.
Minor’s Liability in Tort.
First of all let me tell you what is a tort?
A tort is a civil wrong (not having its genesis in contractual or
equitable relationship) for which the ordinary remedy is
damages. A minor is liable for his tort, unless the tort is in
reality a breach of contract. Thus where a minor hired a horse
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for riding and injured it by overriding, he was not held liable.
The court observed in that case, “if an infant in the course of
doing what he is entitled to do under the contract is guilty of
negligence, he cannot be made liable in tort if he is not liable on
the contract.” But if the wrongful action is of a kind not
contemplated by the contract, the minor may be held liable for
tort. Thus, where a minor hired a horse for riding under express
instructions not to jump, he was held liable when he lent the
horse to one of his friends who jumped it, whereby it was held
liable when he lent the horse to one of his friends who jumped
it, whereby it was injured and ultimately died. The court
observed, “ it was a bare trespass, not within the object and
purpose of the hiring, for which the defendant was liable”
II. Persons of Unsound Mind
As stated earlier, as per section 11 of the contract Act for a valid
contract, it is necessary that each party to it must have a sound
mind.
What is a ‘sound mind’?
Section 12 of the contract act defines the term ‘sound mind’ as
follows: “A person is said to be of sound mind for the
purpose of making a contract, if at the time when he makes it,
he is capable of understanding it and of forming a rational
judgment as to its effects upon his interests.”
According to this section, therefore, the person entering into the
contract must be a person who understands what he is doing
and is able to form a rational judgment as to whether what he is
about to so is to his interest or not. The section further states
that:
“A person who is usually of unsound mind, but occasionally
of sound mind, may make a contract when he is of sound
mind.” Thus a patient in a lunatic asylum, who is at intervals of
sound mind, may contract during those intervals.
“A person who is usually of sound mind, but occasionally of
unsound mind, may not make a contract when he is of
unsound mind.” Thus, a sane man, who is delirious from
fever, or who is so drunk that he cannot understand the terms
of a contract, or from a rational judgment as to its effect on his
interest, cannot contract whilst such delirium or drunkenness
lasts.
In Halsbury’s Lawa of England, it is stated: “The general theory
of the law in regard to acts done, contracts made by parties
affecting their rights and interests, is that in all cases there must
be a free and full consent to bind the parties, consent is an act
of reason accompanied by deliberate consent that the convey-
ance and contracts of unsound mind are generally deemed to be
invalid; or in other works, (subject to exceptions), there cannot
be a contract by a person of unsound mind.
Unsoundness of mind may arise from:
(a) Idiocy – it is god given and permanent, with no intervals
of saneness. The mental powers of an idiot are completely
absent because of lack of development of the brain;
(b) Lunacy or Insanity – it is a disease of the brain. A lunatic
loses the use of his reason due to some metal strain or
disease. Of course he may have lucid intervals of sanity;
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(c) Drunkenness – it produces temporary incapacity, till the
drunkard is under the effect of intoxication, provided it is
so excessive as to suspend the reason for a time and create
impotence of mind;
(d) Hypnotism – it also produces temporary incapacity, till the
person is under the impact of artificially induced sleep;
(e) Mental decay on account of old age, etc. In case where the
contract is sought to be avoided on any of the above
grounds, the burden of proof lies on the party who sets
up such a disability; but if unsoundness of mind is once
established, the burden of providing a lucid interval is on
him, who sets it up (Mohanlal vs Vinayak).
Effects of agreements made by persons of unsound mind. An
agreement entered into by a person of unsound mind is treated
on the same footing as that of minor’s, and therefore an
agreement by a person of unsound mind is absolutely void and
inoperative as against him but he can derive benefit under
it(Jugal Kishore vs Cheddu). The property of a person of unsound
mind is however, always liable for necessaries supplied to him
or to any one whom he is legally bound to support under
section68 of the act.
III . Disqualified Persons
The third type of incompetent persons, as per section 11, are
those who are “ disqualified from contracting by any law to
which they are subject.”
Who are disqualified Persons
Alien enemies. An alien (citizen of a foreign country) living in
India can enter into contracts with citizens of India during peace
time only, and that too subject to any restrictions imposed by
the government in that respect. On the declaration of a war
between his country and India, he becomes an alien enemy and
cannot enter into contracts. “Alien friend can contract but an
alien enemy can’t contract.” Contracts entered into before the
declaration of the war stand suspended and cannot be per-
formed during the course of war, of course, they can be revived
after the war is over provided they have not already become
time- barred.
Foreign sovereigns and ambassadors. One has to be cautious
while entering into contracts with foreign sovereigns and
ambassadors, because whereas they can sue others to enforce the
contracts entered upon with them, they cannot be sued without
obtaining the prior sanction of the central Government. Thus
they are in a privileged position and are ordinarily considered
incompetent to contract.
Convict. A convict is one who is found guilty and is impris-
oned. During the period of imprisonment, a convict is
incompetent (a) to enter into contracts, and (b) to sue on
contracts made before conviction. On the expiry of the sentence,
he is at liberty to institute a suit and the law of limitation is
held in abeyance during the period of his sentence.
Married women. Married women are competent to enter into
contracts with respect to their separate properties provided they
are major and are of sound mind. They cannot enter into
contracts with respect to their husbamds’ properties. A married
woman can, however, act as an agent of her husband and bind
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11.555
her husband’s property for necessaries supplied to her, if he
LEGAL ASPECTS OF BUSINESS
fails to provide her with these.
Insolvent. An adjudged insolvent (before an ‘order of dis-
charge’) is competent to enter into certain types of contracts i.e.
he can incur debts, purchase property or be an employee but he
cannot sell his property which vests in the official receiver.
Before ‘discharge’ he also suffers from certain disqualifications
e.g. can’t be a magistrate or a director of company or a member
of local body but he has the contractual capacity except with
respect to his property. After the order of discharge,’ he is just
like an ordinary citizen.
Joint-stock company and corporation incorporated under a
special act. A company/ corporation is an artificial person created
by law. It cannot enter into contracts outside the power
conferred upon it by its memorandum of association or by the
provisions of its special act, as the case may be. Again being an
artificial person(and not a natural person) it cannot enter into
contracts of a strictly personal nature e.g. marriage.
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1. A, an infant, obtains a loan from B. Can A be asked to
repay the money?
[Hint. No, A cannot be asked to repay the money. A minor’s
agreement is void ab-initio as against him
2. A, a minor lends Rs. 1000 against a promissory note
executed in his favor. Is the borrower liable to repay the
money?
3. A minor fraudulently represented to a money lender that
he was of full age, and obtained a loan of Rs. 500. has the
money lender any right of action against the minor for the
money lent, or for damages for fraudulent
misrepresentation?
4. A, an infant, borrows Rs 2000 form B and executes a
promissory note for the amount in favor of B. on his
attaining majority, the minor executes another promissory
note in lieu of the first which is then cancelled. Is the
second promissory note valid?
5. X, a guardian, on behalf of Y, a minor, entered into a
contract with Z for the purchase of a movable property for
the benefit of the minor. Is the contract valid?
Solution: Section to which the given problem relates: Section 10
and Section 11. Decision: This contract is valid provided this
contract is within the scope of the authority of guardian.
Reason: This contract is for the benefit of minor.
[Leading case: Subramanayan v. Subba Rao]
6. X, a minor entered into contract with Y to supply food and
clothes to his dependents. Y supplied the same but X
refused to pay for the same. Can Y recover anything?
Solution: Section to which the given problem relates: Section 68.
Decision: Y is entitled to be reimbursed from the property of
such minor.
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 Reason: A person who has supplied the necessaries to a minor
LEGAL ASPECTS OF BUSINESS

or those who are dependents on him is entitled to be reim-

bursed from the property of such minor.
7. X, a guardian, on behalf of Y, her minor daughter, entered
into a contract with Z whereby Z promised to marry her.
Later on Z refused to marry. Can Y sue Z for damages?
Solution: Sections to which the given problem relates: Sections
10 and 11. Decision: Y can sue Z for damages.
Reason: This contract was for the benefit of minor and a minor
can be promisee. [Leading case: Mohari Bibee v. Dharmodas
Ghosh]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.

Notes:

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36 11.555

LESSON 8:
FREE CONSENT
Learning Outcomes
After today’s class you should be able to answer the following
questions:
• The meaning of consent
• The various factors vitiating consent
Introduction
In today’s lecture we shall study about another essential
element of a contract that is free consent.
It has already been pointed out in the earlier lecture that,
according to Section 10’ free consent’ of all the parties to an
agreement is one of the essential elements of a valid contract.
But students do you know what is meant by consent?
‘Consent’ Defined
Section 13 of the Contract Act defines the term ‘consent’ and
lays down that “Two or more persons are said to consent when
they agree upon the same thing in the same sense. “Thus,
consent involves identity of minds or consensus ad-idem i.e.,
agreeing upon the same thing in the same sense. If, for
whatever reason, there is no consensus ad item among the
contracting parties, there is no real consent and hence no valid
contract.
Now we come to free consent
‘Free Consent’ defined. Section 14 lays down that “Consent is
said to be ‘free’ when it is not caused by-
1. Coercion, as defined in Section 15, or
2. Undue influence as defined in Section 16, or
3. Misrepresentation as defined in Section 18, or
4. Fraud, as defined in Section 17, or
5. Mistake, subject to the provisions of Section, 20, 21
and 22.
Henceforth the various factors which vitiate consent are
• Coercion,
• Undue influence
• Misrepresentation
• Fraud
• Mistake
“Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence,
misrepresentation, fraud or mistake” (Sec. 14). This means that
in order to bring a case within this Section, the party, who
alleges that his consent has been caused by any of the above
elements which vitiate consent, must show that, but for the
vitiating circumstance the agreement would not have been
entered into. To put it differently, in order to prove that his
consent is ‘not free’, the complainant must prove that if he had
known the truth, or had not been forced to agree, must prove
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11.555
LEGAL ASPECTS OF BUSINESS
that if he had known the truth, or had not been forced to agree,
he would not have entered into the contract.
In the absence of ‘free consent’, the contract may turn out to be
either voidable or void depending upon the nature of the flaw
in consent to an agreement is caused by coercion, undue
influence, misrepresentation or fraud, there is ‘no free consent’
and the contract is voidable at the option of the party whose
consent was so caused (Sec. 19 and 19A).
But when consent is caused by ‘bilateral mistake’ as to a matter
of fact essential to the agreement, the agreement is void (Sec.
20). In such a case there is ‘no consent’ at all.
The various causes leading to ‘flaw in consent’ will now be
discussed one by one in detail.
Coercion
Let us first define coersion
Definition
Section 15 of the Contract Act defines ‘Coercion’ as follows:
“Coercion is the committing or threatening to commit, any act
forbidden, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into
an agreement.”
The Explanation to the Section further adds that “it is immate-
rial whether the Indian Penal Code is or is not in force in the
place where the coercion is employed,”
Illustrations
(i) A Madrasi gentleman died leaving a young widow. The
relatives of the deceased threatened the widow to adopt a
boy otherwise they would not allow her to remove the
dead body of her husband for cremation. The widow
adopted the boy and subsequently applied for cancellation
of the adoption. If was held that her consent was not free
but induced by coercion, as any person who obstructed a
dead body from being removed for cremation, would be
guilty of an offence under Section 297 of the I.P.C. The
adoption was set aside (Ranganayakamma vs Alwar Setti).
(ii) L threatens to shoot M. if he does not let out his house to
him . M agrees to let out his house to L. The consent of M
has been induced by coercion.
(iii) An agent refused to hand over the account books of the
business to the new agent sent in his place, unless the
principal released him from all liabilities. The principal had
to give a release deed as demanded. Held, that the release
deed was voidable at the instance of the Principal who was
made to execute the release deed under coercion ( Muthia
vs Karuppan).
(iv) The Government gave a threat of attachment against the
property of A, for the recovery of a fine due from B, the
son of A. A, paid the fine. Held, The payment of fine was
37
 induced by coercion and therefore A was entitled to recover
LEGAL ASPECTS OF BUSINESS
the money paid to remove wrongful attachment (Bansraj
vs The Secy of State).
2. The act constituting coercion, may be directed at any
person, and not necessarily at the other party to the
agreement. Likewise it may proceed even from a stranger to
the contract.
Illustrations
(a) A. threatens to shoot B, a friend of C if C does not let out
his house to him. C agrees to do so. The agreement has
been brought about by coercion.
(b) A. threatens to shoot B if he does not let out his house to
C. B agrees to let out his house to C. B’s consent has been
caused by coercion.
3. It does not matter whether the Indian Penal Code is or is
not in force in the place where the coercion is employed . If
the suit is filed in India, the above provision ( i.e. Sec. 15)
will apply.
Illustration (Appended to Sec. 15) A, on board an English ship
on the high seas, causes B to enter into an-agreement by’ an act
amounting to criminal’ intimidation under the Indian Penal
Code. A, afterwards sues B for breach of con-tract, at Calcutta.
A, has employed coercion, if though his act not an offence by
the law of England and although Section 506 of the Indian
Penal Code was not in force, at the time or place where, the act,
was done.
Threat to file a suit. To threaten a criminal or civil prosecution
does not constitute coercion because it is not an act forbidden
by the Indian Penal Code. But a threat to file a suit of a false
charge constitutes coercion, for such an act is forbidden by the
I.P.C. (Askari Mirza vs Bibi Jai Kishori)
Threat to commit suicide. Neither suicide nor threat to commit
suicide is punishable under the Indian Penal Code: Only an
attempt to commit suicide is punishable under it. In Chikkam
Ammiraju vs Chikkam Seshamma, there arose a question as to
whether a threat to commit suicide amounts to coercion, and
the Lordships of the Madras High Court answered the
question in the affirmative holding that this amounts to coer-
cion. In that case a person, by a threat to commit suicide,
induced his wife and son to execute a lease deed, in favor of his
brother in respect of certain properties which they claimed as
their own. The transaction was set aside on the grounds of
coercion. It was stated by the majority footings that though a
threat to commit suicide was not punishable under the Indian
Penal Code, it must be deemed to be forbidden by that Code as
an attempt to commit suicide was punishable under section 09
of that Code. Their Leadership observed “ “The term any act
forbidden by the Indian Penal Code’ is wider than the term
‘punishable by the Indian Penal Code.’ . S’iinp1y’ because a _an
episcopes punishment, it does not follow that the act , is not
forbidden by the Penal code. For-example, a lunatic or a minor.
May not be punished. This does not show that their criminal
acts are not forbidden by the Penal Code.”
Duress. The term ‘duress’ is used in English Law to denote
illegal imprisonment or either actual or threatened violence over
the person ( body) of another party of his wife or children with
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38
a view to obtain the consent of that party to the agreement. In
short, for ‘duress’ the act ,or threat must be aimed at the life or”
liberty of the other patty to the contract or the members of his
family: A threat to destroy or detain property will not amount
to ‘duress.’ Thus the scope of the term ‘coercion,’ as defined in
Section 15, is wider, because it includes threats over property
also. ‘
Effect of Coercion
A contract brought about by coercion is voidable at the option.
of the party whose consent was so caused (Sec. 19). This means
that the aggrieved party shall either exercise the option to affirm
the transaction and hold the other party bound by it, or
repudiate the transaction by exercising a right of rescission. As
per Section 64, if the aggrieved party opts to rescind a voidable
contract, he must restore any benefit received by him under the
contract to the other party from whom received.
The burden of proof that coercion was used lies on the party
who wants to set aside the contract on the plea of coercion.
The second factor vitiating consent is
Undue Influence
Definition
Section 16(1) defines the term ‘Undue influence’ as follows:
“A contract is said to be induced by undue influence where, (i)
the relations subsisting between the. parties are such that one
of the parties is in a position to obtain an unfair advantage over
the other.”
The phrase “in a position to dominate the will of the other” is
clarified by the same section under sub-section (2), thus:
Under section 16(2)
- A person is deemed to be in a position to dominate the will
of another-
(a) Where he holds a real or apparent authority over the other,
e.g., the relationship between master and the servant, police
officer and the accused; or
(b) Where he stands in a fiduciary relation to the other.
Fiduciary, relation means a relation of mutual trust and
confidence. Such a relationship is supposed to exist in the
following cases; father and son, guardian and ward,
solicitor and client, doctor and patient, Guru (spiritual
adviser).and disciple, trustee and beneficiary, etc: or
(c) Where he makes a contract with a person whose mental
capacity of is temporarily or penitently affected by reason
of age, illness, or mental or bodily distress, e.g., old
illiterate persons.
It is to be observed that for proving the use of undue-influence
both the elements mentioned above, namely, (i) the other party
was in a position to dominate, his will, and (ii) the transaction
was an unfair one, must be established.
Presumption of Undue Influence
Undue influence is presumed to exist under the circumstances
men-tioned above in sub-clauses (a), (b) and (c). In other
words, for example, where the relationship between the
contracting parties is that of master and servant, father and son,
doctor and patient, solicitor and client, etc., or where one of the
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parties to the contract is an old illiterate person, there is no need
of proving the use of undue influence by the party whose
consent was so caused. Merely status of parties is enough to
weave the existence of undue influence in these cases. Presump-
tion of undue influence is also there, in case of a contract by or
with a ‘pardanashin woman.
There is, however, no presumption of undue influence in the
following cases:
(i) Husband and wife (In case of persons engaged to marry,
the pre-sumption of undue influence will arise)
(ii) Mother and daughter
(iii) Grandson and grandfather.
(iv) Landlord and tenant.
(v) Creditor and debtor.
In these cases, undue influence shall have to be proved by the
party alleging that undue influence existed.
Burden of proof and rebutting the presumption.
In cases where there is a presumption of undue influence the
burden of proving that the person who was in a position to
dominate the will of another, did not use his position to
obtain an unfair advantage, will lie upon the person who was in
a position to dominate the will of the other [Sec.16(3)]. He can
rebut or oppose the presumption
(i) That disclosure of facts was made,
(ii) That the price was adequate,
(iii) That the other party was in receipt of competent
independent advice and his consent was free
Let us study some illustrations in this repect
Illustrations
(a) A, having advanced money to his son B. obtains, by
misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advance. A
employs undue influence. As undue influence is pre-sumed
to exist if the relationship between contracting parties is
that of father and son, the burden of proof lies on A, the
father. It will be for A to prove that he did not employ
undue influence, of a suit by B alleging undue influence.
(b) A,on1st Jan enfeebled by disease or age, is induced, by B’s
influence over him as his medical attendant, to agree to pay
B an unreasonable sum for his professional services. B
employs undue influence. On a petition by A alleging
undue influence, it lies on B, the doctor, to prove that the
contract was not induced by undue influ-ence.
(c) An old illiterate woman made a gift of almost the whole
of her property to her nephew, who was managing her
estate. On a petition by the old lady for setting aside the
gift deed on the ground of undue Influence, the onus has
on the nephew to prove that the transaction is bona fide,
well understood and free from undue influence, because
undue influence is presumed in such a case.
Effect of Undue Influence
“When consent to an agreement is caused by undue influence,
the agreement is a contract voidable at the option of the. party
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whose consent was so caused. Any such contract may be set
LEGAL ASPECTS OF BUSINESS
aside either absolutely or, if the party who was entitled to avoid
it has received any benefit there under, upon such terms and
conditions as the court may seem just.” (Sec. 19-A)
Illustrations (Appended to Sec. 19-A).
(a) A’s son has forged B’s name to a promissory note. B, under
threat of prosecuting A ‘s son, obtains a bond from A for
the amount of the forged note. If B sues on this bond,
the Court may set the bond aside.
(b) A, a money lender, advances Rsl00 to B. an agriculturist,
and by undue influence, induces B to execute a bond for
Rs200 with interest at 6 percent per month. The Court may
set the bond aside, ordering B to repay the Rs100 with
such interest as may seem just.
Thus, it will be noticed that Section 19-A also declares a contract
brought about by undue influence vojdable at the option of the
aggrieved party, just as section 19 so declares. In case of a
contract brought about by coercion, misrepresentation or fraud,
the special feature of Section 19, is that while in the case of
rescission of a contract procured by coercion, misrepresentation
or fraud, any benefit received by the aggrieved party has to be
restored under Section 64 of the Contract Act; under
Section19A, if a contract procured by undue influence is set
aside, the Court has discretion to direct the aggrieved party for
refunding the benefit whether in whole or in part or set aside
the contract without any direction for refund of benefit.
The following points must also be noted in this, connection:
(i) Lack of judgment, lack of knowledge of facts or absence
of foresight are generally not by themselves sufficient
reasons for setting aside a contract on the ground of
undue influence. Persuasion and argument are also not in
themselves undue influence. Undue influence implies
mental and moral coercion so as to make the consent of
one of the parties to the contract without freedom.
(ii) Undue influence by a person, who is not a party to the
contract, may make the contract voidable in other words, it
is not necessary that the person in a position to dominate
the will of the other party use himself be benefited. It is
sufficient If the third person m whom he is interested is
benefited (Chirmamma vs Devenga Sangha).
Unconscionable Transactions
Unfair or unreasonable bargains belong to the category of
unconscionable transactions. These are such transactions where
as between two con-tracting parties, one is in a dominant
position and makes an exorbitant profit of the others distress -
High rate of interest.
Unconscionable bargains take place mostly in money lending
transactions where moneylenders charge high rates of interest
from needy borrower. The presumption of undue influence on
the ground of high rate of interest is raised only when the
following two things are proved:
1. That the moneylender was in a position to dominate the
will of the borrower, and
2. That the bargain is unreasonable i.e., rate of interest is
excessive without any valid reason.
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 In such cases the law presumes that consent must have been
LEGAL ASPECTS OF BUSINESS
obtained by undue influence and the burden of proving that
there was no undue influence lies on the creditor. It must be
noted that both the above conditions must be proved for
giving rise to a presumption of undue influence. There will be
no presumption of undue influence and a transaction will not
be set aside on ground of undue influence, merely because the
rate of interest is high if both the parties are, on equal footing
(i.e. none of the parties is in a position to dominate the, will of
the other party) or if there exists valid reason (like tight market
conditions) for charging high rate of interest
Illustrations
(a) A being in debt ,to B, the moneylender of his village, -
contract a fresh loan on terms which appear to be
unconscionable. It .lies on B to prove that the ‘contract was
not induced by undue influence [Illustration (c) to Section
16].
(b) A poor Hindu widow borrowed Rs 1,500 ;from a
moneylender at 100 per cent per annum rate of interest for
the purpose of enabling her to establish her right to
maintenance. It lies on the moneylender to prove that there
was no undue influ-ence (Rannee Annapurni vs
Swaminatha).
(c) A, applied to a banker for a loan at the time when there is
stringency in the money market. The banker declines to
make the loan except at an unusually high, rate of interest.
A, accepts the loan on these terms. This is a transaction in
the ordinary course of business, and the contract is not
induced by undue influence [Illustration (d) to Section 16].
Pardanashin Woman
As observed earlier, there is a presumption of undue influence
in case of a contract by or with a ‘pardanashin woman’. She can
avoid any contract entered .by her on the plea of undue
influence and it is for the other party to prove that no undue
influence was used. For proving the absence of undue influ-
ence, the other party will have to satisfy the Court (i) that the
terms of the contract were fully explained to her, (ii) that she
understood their implications, and was free to have indepen-
dent advice in the matter, and (iii) that she freely consented to
the contract. It may be noted that the term ‘pardanashin’ here
refers to a woman who observes complete seclusion (parda) from
contact with people outside’ her own family, because of the
custom of her community, and one does not become
‘pardanashin’ simply because she lives in some degree of
seclusion Shaik Ismail vs Amir Bibi
Further note that the protection ranted to ardent in woman is
so extended to illiterate and ignorant ladies, who are equally
exposed to the danger and risk of an unfair deal (Sonia Parshini
vs’,S.M. Baksha).
Distinction between Coercion and Undue 1n.i1uence
Both, coercion and undue influence, vitiate consent and make
the consent of one of the parties to the contract unfree.’ But the
following are the points of distinction between the two:
1. In coercion, the consent of the aggrieved party is obtained
by committing or threatening to commit an act forbidden
by Indian Penal Code or detaining or threatening to detain
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some property unlawfully. While in undue influence, the
consent of the aggrieved party is affected from the
domination of the will of one person over another.
2. Coercion is mainly of a physical character involving mostly
use of physical or violent force. Whereas undue influence is
of moral character involving use of moral force or mental
pressure.
3. There is no presumption of coercion by law under any
circumstance. The burden of proof that coercion was used
lies on the party whose consent was so caused. In the case
of undue-influence, however, there is presumption as to
the same in the case of certain relationships. In these cases
there is no need of proving the use of undue-influence by
the party whose consent was so caused.
4. While in the case of rescission of a contract procured by
coercion, any “benefit received by the aggrieved party has to
be restored under Section 64, of the Contract Act; in the
case of rescission of a contract procured by I undue
influence, as per Section 19-A, the, Court has discretion to
direct the aggrieved party for restoring the benefit
whether in whole or in part or set aside the contract with
any direction for refund of benefit.
5. The party exercising coercion exposes himself to criminal
liability under the Indian Penal Code, besides an action on
contract. There is no criminal liability case of undue-
influence.
Misrepresentation
A representation means statement of fact made by one party to
the other, either before or at the time of contract, relating to
some matter, essential to the formation of the contract, with
an intention to induce the other party to enter into the contract.
It may be expressed by words spoken or written or implied
from the acts or conducts of the parties (e.g., by any half
statement of truth).
A representation when wrongly made, either innocently or
indecently , is termed as a mi-representation. To put in differ-
ently, misrepresent- may be either innocent or intentional or
deliberate with an intent to deceive the other party. In law, for
the former kind, the term ‘misrepresen-tation’ and for the latter
the term ‘fraud’ is used.
Definition
According to Section 18 ‘Misrepresentation’ means and
includes:
(a) The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
true, though he believes it to be true; or
(b) Any breach of duty which, without an intent to deceive,
gains an advantage to the person committing it, or anyone
Claiming under-him, by misleading another to the
prejudice or to the prejudice of any one claiming under
him; or
(c) Causing, however innocently, a party to an agreement, to
make a mistake as to the substance of the thing which is
the subject of the agreement.
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Thus, as per Section 18, there is misrepresentation in the
following three cases:
(a) Positive assertion of unwarranted statements of material
facts believing them to be true. If a person makes an
explicit statement of fact not warranted by his information
(i.e., without any reasonable ground), under an honest
belief as to its truth though it is not true, there is
misrepresentation.
Illustration. A says to B who intends to purchase his land, “My
land produces 10 quintals of wheat per acre. A, believes the
statement to be true, although he did not have sufficient
grounds for the belief later on, it transpires! that the land
produces only 7 quintals of wheat, ‘per are. This is ‘a misrepre-
sentation.
It may be noted that a mere expression of opinion or words of
commen-dation for example in a sale of land a mere general
statement that the land is fertile, cannot be held to amount to a
positive assertion.
(b) Breach of duty which ‘brings an advantage to the person
committing it by misleading the other to his prejudice.
This clause comes those cases where a statement when
made was true but subsequently before it was acted upon,
it became false to the knowledge of the person making it.
In such a case, the person making the statement comes
under an obligation to disclose the change in circumstances
to the other party, Otherwise he will be guilty of
misrepresentation.
Illustration
A before signing a contract with B for the sale of business,
correctly states that the monthly sales are Rs. 50,000. Negotia-
tions lasted for five months, when the contract of sale was
signed. During this period the sales dwindled to Rs.5,000 a
month. A, unintentionally keeps quite. It was held that there
was misrepresentation and B was entitled to rescind the contract
( With vs O’Flanagan).
Note, that a partial non-disclosure may also constitute a
misrepresen-tation, for instance, where a vendor of land told a
purchaser that all the farms on the land were fully let, but
inadvertently omitted to inform him that the tenants had given
notice to quit, he was held guilty of misrepresen-tation
(Dimmock vs Hallett). .
(c) Causing mistake about subject-matter innocently If one of
the parties induces the other, though innocently, to
commit a mistake as to the quality or nature of the thing
bargained, there is misrepresentation.
Illustration. in a contract of sale of 500 bags of wheat , the
seller made a representation that no sulphur has been used in
the cultivation of wheat. Sulphur, however, had been used in 5
out of 200 acres of land. The buyer would not have purchased
the wheat but for the representation. There is a misrepresenta-
tion.
Let us now understand the essentials of misrepresentation
Essentials of misrepresentation. From the foregoing discus-
sion, It follows that for alleging misrepresentation, the
following four things are nec-essary
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11.555
(i) There should be a representation; made innocently, with an
LEGAL ASPECTS OF BUSINESS
honest belief as to its truth and without any desire to
deceive the other party, either expressly or impliedly.
(ii) The representation must relate to facts material to the
contract and not to mere opinion or hearsay
(iii) The representation must be, or must have become untrue
(iv) The representation must have been instrumental in
inducing the other party to enter into a contract (As per the
Explanation to Section 19).
Effects of Misrepresentation
In case of misrepresentation, the aggrieved party has two
alternative courses open to him
(i) He can rescind the contract, treating the contract as
voidable; or
(ii) He may affirm the contract and insist that he shall be put
in the position in which he would have been; if the
represen-tation made had been true (Sec. 19).
Misrepresentation does not entitle the aggrieved party to
claim damages by way of interest or otherwise for expens-
es occurred.
Illustration A, innocently in good faith tells B that his T.V. set is
made in Japan. B. thereupon buys the T.V. set. However, it
comes out to be an Indian make. A. is guilty of misrepresenta-
tion. B. may either avoid the contract or may insist on its being
carried out. In the latter case, B may either ask for replacing the
set by a Japanese make set or may keep the Indian make set and
claim the difference in price between that set and a Japanese
make set.
Exception. The above remedy is lost, if the party whose
consent was caused by misrepresentation, had the means of
discovering the truth with ordinary diligence.
Illustration A. by a misrepresentation, leads B erroneously to
believe that 500 maunds of indigo are made annually at A’s
factory. B examines the accounts of the factory, which show that
only 400 maunds of indigo have been made. After this B buys
the factory. The contract is not voidable on account of A ‘s
misrepresen-tation (Illustration ( b) to Section 19].
Fraud
The term ‘fraud’ includes all acts committed by a person with
an intention to deceive another person. -
Definition
According to Section 17, ‘fraud means and includes any of the
following acts committed by a party to a contract, or with his
connivance, or by his agent,. with intent to deceive or to induce
another party thereto or his agent, to enter into the contract:
1. The suggestion that an act is true when it is not true by
one who does not believe it to be true. Thus a false
statement intentionally made is fraud. An absence of
honest belief in the truth of the statement made is
essential to constitute fraud. If a representor honestly
believes his statement to be true, he cannot be liable in
deceit no matter how ill-advised, stupid, or even negligent
he may have been. In order to be called fraudulent
representation the false statement must be made
intentionally. Lord Herschell gave the definition of fraud in
41
 Derry vs Peep as, “a false statement made knowingly or
LEGAL ASPECTS OF BUSINESS
without belief in its truth, or recklessly careless whether it
be true or false.”
2. The active concealment of a fact by a person who has
knowledge or belief of the act. Active concealment of a material
fact is taken as much and as if the existence of such fact was
expressly denied or the reverse of it expressly stated. Mere non-
disclosure is not fraud, where there is no duty to disclose.
Caveat Emptor or ‘Buyer Beware’ is the principle in all contracts
of sale of goods. As a rule the seller is not bound to disclose to
the buyer the faults in the goods he is selling.
Illustrations
(a) A, a horse dealer sells a mare to B. A knows that the mare
has a cracked hoof which he fills up in such a way as to defy
detection or on enquiry from B, A affirms that the mare is
sound. The defect is subsequently dis-covered by B. There
is ‘fraud’ on the part of A and the agreement’ can be
avoided by B as his consent has been obtained by. fraud.
(b) A, sells by auction, to B a horse, which he knows to be
unsound. A says nothing to B about the horse’s
unsoundness. This is not ‘fraud’ because A is under no
duty to disclose the fact to B. the general rule of law being
‘let the buyer beware’ [Illustration (a) to Section 17].
3. A promise made without any intention of performing it.
If a man while entering into a contract has no intention to
person his promise, there is fraud on his part.
Illustrations
(a) X purchases certain goods from Y on credit without any
intention of paying for them as he was in insolvent
circumstances. It is a clear case of fraud from X’s side. Note
that mere failure to pay, where there was no original
dishonest intention, is not fraud.
(b) Where a man and a woman went throug a ceremony of
marriage without any intention on the part of the husband
to regard it as a real marriage, it was held that the consent
of the wife was obtained by fraud and that the marriage
was mere pretence. (Shireenl vs John J J. Taylor).
4. Any other act fitted to deceive. “the fertility of man’s
invention in devising new schemes of fraud is so great that
it would be difficult, if not impossible, to confine fraud
within the limits of any exhaustive definition. All surprise,
trick, cunning, dissembling and other unfair way that is
used to cheat anyone is considered fraud and sub-section
(4) is obviously intended to cover all those cases of fraud
which cannot appropriately be covered by the other sub-
sections.
5. Any such act or omission as the law specially declares to be
fraudulent. This sub-section refers to the provisions in
certain Acts which make it obligatory to disclose relevant
facts. Thus, for instance under Section 55 of the Transfer
of Property Act, the seller of immovable property is
bound to disclose to the buyer all material defects in the
property (e.g., the roof has a crack) or in the seller’s title
(e.g., the property is mortgaged). An omission to make
such a disclosure amounts to fraud.
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Thus, in order to allege fraud, the act complained of must be
brought within the scope of the acts enumerated above. A mere
expression of opinion or commendatory express is not fraud.
“The land is very fertile” is simply a statement of opinion or
‘fur products are the best in the market” is merely a commenda-
tory expression. Such statements do not ordinarily amount to
fraud.
Can Silence be Fraudulent?
The Explanation to Section 17 deals with cases as to when
‘silence is fraudulent’ or what is sometimes called ‘constructive
fraud,’ The-explanation declares that “mere silence as to facts
likely to affect the willingness of a person to enter into a
contract is not fraud, unless
(i) The circumstances of the case are such that, regard being
had to them, it is the duty of the person keeping silence to
speak, or
(ii) Silence is, in itself, equivalent to speech.”
It therefore follows that
1. As a rule mere silence is not fraud because there is no duty
cast by law on a party to a contract to make a disclosure to
the other party, of material facts within his knowledge.
Illustration A and B, being traders, enter upon a contract. A has
private information of a change in prices which would affect B’s
willingness to proceed with the contract. A is not bound to
inform B [Illustration (d) to Section 17].
2. Silence is fraudulent, if the circumstances of the case are
such that it is the duty of the person keeping silence to
speak ‘. In other words, silence is fraudulent in contract of
‘utmost good faith’ i.e contracts ‘unberrimae fides’. These
are contracts in which the law imposes a duty of abundant
disclosure on one of the parties thereto, due to peculiar
relationship of the parties or due to the fact that one of
the parties has peculiar means of knowledge which are not
accessible to the other. The following contract come within
the class of ‘unberrimae fides’ contracts;
(a) Fiduciary relationship. When the parties stand in a fiduciary
rela-tion to each other, the person in whom confidence is
reposed is under a duty to act with utmost good faith and
to make a full disclosure of all material facts concerning the
transaction known to him. Examples of a fiduciary
relationship include those of principal and agent, solicitor
and client, guardian and ward, and trustee and beneficiary.
Illustrations
(i) Where a broker who was employed to buy shares for the
client, sold his own shares to the client, without disclosing
this fact to him and without obtaining his consent
therefore, it was held that the sale can be avoided by the
client (Regier vs Campbell-Stuart).
(ii) Where solicitor purchased certain property from his client
nominally for his brother, but really for himself; it was held
that the sale can be avoided by the client, even if the
transaction was perfectly proper one (Macpherson vs Watt).
(b) Contract of insurance-In contracts of marine, fire and life
insurance, the insurer contracts on the basis that all material
facts have been communicated to him; and it is an implied
11.555
 condition of the contract that full disclosure shall be made,
and that if there has been non: disclosure he shall be
entitled to avoid the contract. The assured, therefore must
disclose to the insurer all material facts concerning the risk
to be undertaken e.g., disease etc., in case of life insurance. A
concealment or misstatement of a material fact will render
the contract void (Ratan Lal vs Metropolitan Co.).
(c) Contract of marriage engagement . Every material fact must
be disclosed by to parties to a contract of marriage
otherwise the other party is justified in breaking off the
engagement (Haji Ahmed vs Abdul Ganj).
(d) Contracts of family settlements. Contracts of family
settlements and arrangements also require full disclosure
of all material facts within the knowledge of the parties to
such contracts. Such a contract is not binding if either party
has been misled by the concealment of material facts.
(e) Share allotment contract: Promoters and directors, who
issue the ‘prospectus’ of a company to invite the public to
subscribe for shares and debentures, possess information
which is not available to general public and as such they are
required to. disclose all information regarding the’ company
with strict and scrupulous accuracy.
3. Silence is fraudulent where the circumstances are such that
“silence is, in itself, equivalent to speech.” “Where, for
example, B says to A-”If you do not deny it, I shall
assume hat the horse is sound.” A says nothing. Hence A’s
silence is equivalent to speech. If the horse is unsound A’s
silence is fraudulent [Illustration © to Section 17].
Effect of Fraud
A party who has been induced to enter into a contract by fraud,
has the following remedies open to him:
1. He can rescind the contract i.e he can avoid the
performance of the contract; contract ‘being voidable at his
option (Sec. 19); ,or
2. He can ask for restitution and insist that the contract shall
be per-formed, and that he shall be put in the position in
which he would have been, if the representation made had
been true (Sec. 19).
Illustration A, fraudulently informs B that A’s estate is free from
en-cumbrance. B thereupon buys the estate. The estate is subject
to a mortgage. B may either avoid the contract, or’ may insist on
its being carried out and the, mortgage debt of deemed.
[Illustration (c)to Section 19].
The aggrieved party can also sue for demand if any. Fraud is a
‘civil wrong’ hence compensation is payable. For instance, if the
party suffers injury because of unsound horse, which was not
disclosed despite enquiry, compensation can be demanded.
Similarly, where a man was fraudulently induced to buy a house,
he was allowed to recover the expense involved in moving into
the house as damages (in addition to rescission. of the contract)
[Doyle vs Olby (Ironmongers) Ltd ].
Special points- For giving rise to an action for deceit, the
following points deserve special attention:
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11.555
(i) Fraud by a stranger to the contract does not affect contract.
LEGAL ASPECTS OF BUSINESS
It may, be recalled that ‘coercion’ as ‘undue influence’ by a
stranger to a contract affect the contract.
(ii) Fraudulent representation must have been instrumental in
inducing the other party to enter into the contract i.e., but
for this, the aggrieved party would not have entered into
the contract.
(iii) The plaintiff must have been actually deceived by
fraudulent state-ment. A deceit which does not deceive
gives no ground for action.
(iv) The plaintiff must be thereby idemnified. Unless the
plaintiff has sustained a damage or injury, no action will lie.
It is a common saying that “there is no fraud without
damages.”
In cases. of fraudulent silence, the contract is not voidable, if
the party whose consent was so caused had the means of
discovering the truth with ordinary diligence ( Exception to Sec.
19 given in the Act). Note that in other cases of fraud, this is no
defence i.e., the contract is voidable even if the fraud could be
discovered with ordinary diligence.
Distinction Between ‘Fraud and Misrepresentation
The following are the points of distinction between the two:
1. Fraud implies an intention to deceive, it is deliberate or
wilful; whereas misrepresentation is innocent, without any
intention to deceive.
2. Fraud is a civil wrong which entitles a party to. claim
damages in addition to the right of rescinding the contract.
Misrepresentation, gives only the right to avoid the
contract and there can be no suit for damages
3. In case of misrepresentation, the fact that the aggrieved
party had the means to discover the, truth with ordinary
diligence will prevent the party from avoiding the contract.
But In case of fraud: excepting fraud by silence, the contract
is voidable even though the party defrauded had the means
of discovering the truth with ordinary diligence,
Loss of Right of Rescission
We have observed earlier that a contract brought about by
coercion, undue influence, misrepresentation or fraud is
voidable at the option of the party whose consent was so
caused. He has the ‘option either to rescind the contract or to
affirm it. But his right of rescission is lost in the following
cases:
1. Affirmation. If after becoming aware of ‘his right to
rescind, the aggrieved party affirms the transaction either by
express words or by an act which shows an intention to
affirm it, the right of rescission is lost. So, for example, if a
person, who has purchased shares on the faith of a
misleading prospectus, subsequently becomes aware of its
falsity, but accepts dividends paid to him, he will not be
permitted to avoid the contract. Paying for the goods
purchased (if not paid so far), attempting to sell the good
are some other examples of implied affirmation.
2. Resestitution not possible. If the party seeking rescission is
not in a positiol’1 to restore the benefits he may have
obtained under the contract, e.g., where the subject-matter
43
 of the contract has been consumed or destroyed, the right
LEGAL ASPECTS OF BUSINESS
to rescind the contract cannot be exercised.
3. Lapse of time. It may be treated as evidence of affirmation
where the party misled fails to exercise his rights promptly
on discovering the representation to be untrue of’ on
becoming aware of –the fraud ‘of coercion. As ‘such the
right of rescission may also be lost be too long-a-delay
4. Rights of third parties. Since the, contract is valid until
rescinded, being a voidable contract, if before the contract is
rescinded third parties, bona fide for value, acquire rights in
the subject matter of the contract, those rights are valid
against the party misled, and the right to rescind will no
longer be available.34 Thus where a person obtains goods
by fraud and, before the seller rescinds the contract,
disposes them off to a bona fide party, the seller cannot
then rescind (Phillips vs Brooks Ltd 35).
Mistake
Mistake may be defined as an erroneous belief concerning
something. It may be of two kinds:
1. Mistake of law.
2. Mistake of fact.
Mistake of Law
Mistake of law may be of two types:
(a) Mistake of law of the country;
(b) Mistake of foreign law.
(a) Mistake of law of the country or Mistake of law. Every one
is deemed to be conversant with the law of his country,
and hence the maxim “ignorance of law is-no excuse.”
Mistake of law, therefore, is no excuse and It does not give
right to the parties to avoid the contract Stating the effect
of mistake as to law, Section 21 declares that “a contract is
not voidable because it was caused by a mistake as to .any
law in force in India. Accordingly, no relief can be granted
on the ground of mistake of law of the country.
Illustration (To Sec. 21). A and B make a contract grounded on
the erroneous belief that a particular debt is barred by the
Indian Law of Limitation: the contract is not voidable (i.e., the
contract is valid).
However, if one of the parties makes a ‘mistake of law’
through the inducement, whether innocent or otherwise, of the
other party, the contract may be avoided
(b) Mistake of foreign law. Mistake of foreign law stands on
the same footing as the ‘mistake of fact’. Here the
agreement is void in case of ‘bilateral mistake’ only, as
explained under the subsequent heading.
Mistake of Fact
Mistake of fact may be of two types:
i. Bilateral mistake; or
ii. Unilateral mistake.
1 Bilaterial mistake. Where the parties to an agreement
misunderstood each other and are at cross purposes, there
is a bilateral mistake. Here there is no real correspondence
‘of offer acceptance, each party obviously understanding
the contract in a different way. In fact in such cases, there is
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44
no agreement at all, there being entire absence of consent.
This has been termed by Salmond as ‘error in consensus as
distinguished from ‘error in causa’ (i.e. where consent is
not free and is caused by coercion, undue influence,
misrepresentation or fraud). In case .of bilateral mistake of
essen-tial fact, the agreement is void ab-initio. Section 20
provides that “where both the parties. to an agreement are
under a mistake as to a matter of fact essential to the
agreement, the agreement is void Thus for declaring an
agreement void ab-inito under this Section, the following
three conditions must be fulfilled
(i) Both the parties must be under a mistake i.e., the mistake
must be mutual. Both the parties should misunderstand
each other so as to nullify consent.
Illustration M, having two houses A and B, offers to sell house
A, and N not knowing that M has two houses, thinks of house
B and agrees to buy it. Here there is no real consent and the
agreement is void.
(ii) A stake must relate to some fact and not to judgement or
opinion etc. An erroneous opinion as to the value of the
thing which forms the subject-matter of the agreement is
not to be deemed a mistake as to a matter of fact
(Explanation to Section 20)
Illustration
(i) If A buys a motorcar, thinking that it is worth Rs 80,000,
and pays Rs. 80,000 for it, when it is only worth Rs 40,000,
the contract remains good. A has to blame himself for his
ignorance of the true value of the motorcar and he cannot
avoid the contract on the ground of mistake.
(ii) The fact must be essential to the agreement -i.e., the fact
must be- such which goes to the very root to the
agreement. On the basis of judicial decisions, the mistakes
which may be covered under this condition may broadly be
put into the following heads
(a) Mistake as to the existence of the subject-matter of the
agreement. If at the time of the agreement and unknown
to parties, the subject-matter of the agreement has ceased
to exist, or if it has never been in existence, then the
agreement is void (Bell vs Lever Bros.).
Illustrations
(a) A agrees to sell to B a specific cargo of goods supposed
to be on is way from England to Bombay. it turns out
that, before the day of the bargain, the ship conveying
the cargo had been cast away, and the goods lost.
Neither party was aware of these facts. The agreement
is void.
(b) A. agrees to buy from B a certain horse. It turns out
that the horse was dead” at the time of-the bargain,
though neither party was aware of the fact. The
agreement is void.
(b) Mistake as to the identity of the subject-matter. “ Where
both parties are working under mistake as to the-identity
of the - subject-matter i. e., one, party had one thing in
mind and the other party had another, the agreement is
void for want of consensus-ad-idem
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Illustration.
Where there was a contract of the sale of ascertain quantity of
cotton arriving per ‘ex ship Peerless, and there were two ships of
that name sailing, and the parties had in mind different ships at
the time of entering into the contract, held here was no contract.
The Court observed: “the defendant meant one peerless and
the Plaintiff another. That being so, there was no consensus-ad-
idem and therefore’ no binding contract.” (Reffles vs Wichelaus)
(c) Mistake as to the title of the subject-matter. Normally a
mistake as to ‘title of the seller’ does not affect the validity
of the contract because Section 14 of the Sale of Goods
Act, 1930, imposes an implied ‘condition’s to the title of
the seller in a contract of sale, unless otherwise agreed.
Accordingly, a .seller is taken to warrant his title to the
property sold and he may be made liable in damages for
breach of the condition, even though both the parties
contract under a mistaken belief as to the title of the seller.
It is. only in a very special circumstance, where a person
agrees to purchase property or goods which unknown to
himself and the seller, is” his own already,’ that the
agreement is void ab-initio and none of the parties can be
made liable in damages.
Illustration.
(a) A agreed to take a lease of fishery from B, though
contrary to the belief of both parties at the time A was
tenant for life by inheritance of the fishery and B had
no title at all. It was held that the lease agreement was
void (Copper vs Phibbs).
(d) Mistake as to the quantity of the Subject Matter. If both
the parties are working under a mistake as to the quantity
of the subject-matter, the agreement is void.
Illustration
P enquired about the price of rifles from H stating that he may
buy as many as 50. H quoted the price. P telegraphed “Send
three rifles.” The telegraph clerk transcribed the message as
“Send the rifles.” H sent 50 rifles. P accepted only three and
returned 47. H filed a suit for damages for non-acceptance of 47
rifles. It was held that there was no contract as there was no
consent and it made no difference even if the mistake was
caused by the negligence of a third party. Of course P must pay
the price of three rifles accepted by him (Henkel vs Pope).
(e) Mistake as to the quality of the subject – matter. If there is
a mutual mistake of both the parties as to the quality of
the subject-matter I.e., if the subject-matter is something
essentially different, from what the parties be- lieved it to
be, the agreement is void.
Illustrations
(a) A set of table-linen was sold at an auction by a ‘de-
scription ‘with the crest of Charles I and the authentic
property of that monarch.’ In.’ fact the linen was
Georgian and there was a mutual mistake of both
parties as to the quality of subject-matter. Held . the
agreement was void ( Nicholson & I’enn. Vs Smith
Marriott).
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(b) A, contracts to sell B a particular horse, which is
LEGAL ASPECTS OF BUSINESS
believed by both the parties to be a race horse. But later
on it’ time out to be a cart horse. The agreement
Strictly speaking it is the mistake as to ‘substance’ of the
subject-matter going to the very root of the agreement and
affecting .the whole consideration which makes it void and not
the mistake as to ‘quality’. For, the principle of caveat emptor
(let the buyer beware) clearly states that there is no implied
warranty or condition as to the quality or fitness for any partic-
ular purpose of goods supplied under a contract of sale and the
buyer must be held to have taken the risk that the goods sold
might prove defective or might in some way be different item
that which the parties believed it to be, in the absence of any
misrepresentation or guarantee by the seller.
Illustration.
A sold certain seeds to B. Both parties honestly believed that the
seeds were two years old. Actually the seeds proved to be only
one year eleven months old. The contract cannot be avoided as
the mistake does not affect the substance of the transaction.
(f) Mistaken assumption going to the root of agreement.
Thus, where a man and woman entered into an
agreement for separation on the erroneous assumption
that their marriage was valid, the agreement was held
void as the parties entered into the contract under a
false and fundamental assumption that they were lawfully
married. (Galloway vs Galloway).
2. Unilateral mistake. Where only cine of the contracting
parties is mistaken as to a matter of fact, the mistake is a
unilateral mistake. Regard-ing the effect of unilateral
mistake .on the validity of a contract, Section 22 provides
that “a contract is not voidable merely because it was caused
by one of the parties to it being under a mistake as to a
matter of fact.” Accord-ingly, in case unilateral mistake a
contract remains valid unless the mistake is caused by
misrepresentation or fraud, in which case the contract is
voidable at t e option of aggrieved art. n t e basis of
judicial deci-sions, however, in certain exceptional cases
even an unilateral mistake, whether caused by fraud,
misrepresentation, etc., or otherwise, may make an
agreement void ab-intio.
With a view to elucidating the above mentioned various
possibilities regarding the validity of a contract under unilateral
mistake, we shall now discuss them in some detail.
Contract valid. If a man due to his own negligence or lack of
reasonable care does not ascertain what he is contracting about,
,he must ,blame himself and cannot avoid the contract. Thus as
rule, an unilateral mistake is, not ,allowed as a defence in
avoiding. The contract i. e., it has no’ effect on the contract and
the contract remains valid.
Illustrations
(a) Where the government sold by auction the right of fishery
and the plaintiff offered the highest bid thinking that the
right was sold for three years, when in fact it was for one
year only, he could not avoid the contract because it was his
unilateral mistake caused by his own negligence. He ought
45
 to have ascertained the tenure of fishery before bidding at
LEGAL ASPECTS OF BUSINESS
the auction (A.A. Singh vs ‘Unon of India).
(b) X buys rice from Y, by sample under the impression that
the rice is old. The rice -is, however, new. X cannot avoid
the contract. The rule of caveat emptor (let the buyer
beware) of the Sale of Goods Act is generally applicable in
such cases of unilateral mistake as to quality of subject-
matter of a contract, and despite the mistake the contract
remains valid.
Contract voidable. If the unilateral mistake is caused by fraud or
misrepresentation, etc., on the part of the other party, the
contract is void-able and can be avoided by the injured, party.
Illustration. A, has a horse with a’ hole in the hoof. A, so fills it
up that the defect cannot be discovered on a reasonable
examination. B. purchases the horse under the impression that
the horse is sound. Here A, is guilty of fraud and as such on
discovery of the defect B can avoid the contract because his
unilateral mistake has been caused by A’s fraud
Agreement void ab-initio. In the following two cases, where the
con-sent is given by a party under a mistake which is so
fundamental as goes to the root of the agreement and has the
effect of nullifying consent, no contract will arise even though
there is a unilateral mistake only:
1. Mistake as to the identity _contracted with. where such
identity is important. The rule of law is that a contract
apparently made between A and C is a complete nullity, if
the inference from the faces is that to the knowledge of C,
it was the intention of A to contract only with B, for, there
can be no real formation of an agreement by proposal and
acceptance unless a proposal is accepted by the person to
whom it is made. Thus, whenever the identity of the
person with whom one intends to contract is important
element of the contract, a mistake with regard to the
person contracted with destroys his consent and
consequently annuls the contract. Identity of person
contracted ‘with is important either when there is a credit
deal or when one party has a set-off agilest the other party.
It is important to note that in case of mistake as to identity
of person contracted with, even if the mistake is
committed because of fraud or misrepresentation of
another party, the contract is not merely voidable but is
absolutely void.
Illustrations. (a) In Boulton vs Jones Boulton had. taken over
the business of one Brocklehurst, with whom the defendant,
Jones, had been accustomed to deal, and against whom” he had
a set-of. Jones sent an order for goods to. Brocklehurst; which
Boulton supplied without informing hi131 that the business
has . changed hands. Jones consumed the goods of the belief
that thy had been supplied by Brocklehurst. When Boulton
demanded. the payment the of the goods supplied, Jones
refused to pay, alleging that he had intended to contract with
Brocklehurst personally, since he had a set-off which he wished
to enforce against him. Boulton, therefore, sue3d Jones for the
price. It was held that Jones was not liable to pay for the
goods. Pollock C.B. observed, “it is a rule of law that if a
person intends to contract with A, B cannot give himself any
right under it.”
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(b) In Said vs Butt Butt, the managing director of a theatrical
company, gave instructions that no ticket was to be sold to
Said, who was a very bad critic of all the plays of _11e
company. Said, knowing this, asked a friend to buy a ticket
for him. With this ticket Said went to the theatre but was
refused admission. Said filed a suit for damages for breach
of contract. Held that there was no contract because the
theatrical company never intended to contract with Said.
(Notice that in the given circumstances the identity of the
plaintiff was a material element in the formation of the
contract.)
(c) In Cundy vs Lindsay A fraudulent person named Blenkarn,
taking advan-tage of the similarity of his name with that
of a big company named Blenkiron & Co., in the same
town, placed an order with Lindsey & Co., for supply of
certain goods on credit and signed the order in such a way
as to look like that of Blenkiron & Co. Lindsay & Co.,
mistook ‘his order for that of Blenkiron & Co., and
dispatched the goods. Blenkarn took delivery of the goods
and sold them to Cundy & Co., a bona fide purchaser for
value, and did not pay Lindsay & _o., for them. On coming
to know the true facts, Lindsay & Co., filed a suit on Cundy
& Co., for recovery of goods. The Court of Appeal held
that owing to mistake as to identity of contracting party
caused by Blenkarn, the rogue, there was no consensus of
mind which could lead to any agreement whatever between
Blenkarn and Lindsay & Co., and hence the agreement was
void ab-initio and Blenkarn got no title to the goods which
he could pass to Cundy & Co. As Cundy & Co., obtained
no title to the goods, it must return them or pay their price
to Lindsay & Co.
Notice that in the above case if the contract between Blenkarn
and Lindsay & Co., would have been merely voidable for fraud,
Cundy & Co., would have been entitled to retain the goods as it
had taken them in good faith for value, because in case of a
voidable contract before it is repudiated, one can pass a good
title to a bonafide purchaser for value. Hence the specialty of a
mistake as to the identity of person contracted with becomes
clear. that in such a case, even if the mistake is committed
because of misrepresentation or fraud of another party, the
contract is absolutely void. to the prejudice of third parties who
later deal in good faith with the fraudulent person.
Further, “mistakes to the identity” of a party is to be distin-
guished from “mistake as to the attributes” of the other party.
Mistake as to attributes, for example, as to the solvency or social
status of that person, cannot negative the consent. It can only
Vitiate consent.. It, therefore, makes the’ contract merely
voidable for fraud. Thus where X enters into a contract ‘with’ Y,
falsely representing himself to be a richman, the contract is only
voidable at the option of Y. Again where the identity of the
party contracted with is. immaterial, mistake as to identity will
not avoid a contract. Thus if X enters a shop, introduces
himself as Y and purchases some goods for cash, the contract is
valid.
2. Mistake as to the nature and character of a written
document. The second circumstances which even an
unilateral mistake may make a ‘ con-tract absolutely void is
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 where the consent is given by a party under a mistake as to
the nature and character of a written document. The rule
of law is that where the mind of the signer did not
accompany the signature; i. e., he did not intend to sign; in
contemplation of law, he never did sign the contract to
which his name is appended and the agreement is void ab-
initio.
Illustrations
(a) An old illiterate woman executed a deed under the
impression that she was executing a power of attorney
authorising her nephew to manage her estate, while in fact
it was a deed of gift in favour of her nephew. The evidence
showed that the woman never intended to execute such a
deed of gift nor was the deed read or explained to her. The
document was held to be void, as her mind did not go
with her signature (Bala Devi vs Santi Mazllmda).
(b) A blind man signed what he thought was a compromise
petition, but was in fact a release, on the fraudulent
representation of another, the document was held to be
void (Hem Singh vs Bhaar).
(c) M, an old man with feeble sight, signed a bill of exchange
for £ 3,000 thinking it was a guarantee. It was held that M
was not liable (Foster vs Mackin-non). In this case made a
very interesting observation was made: “It was as if he had
written his name in a lady’s album, or on an order for
admission to the Temple Church, or in the fly-leaf of a
book, and there had already been without his knowledge, a
bill of exchange ... on the other side of the paper.”
It should be borne in mind that in the aforesaid type of
mistake, even if one party’s consent is induced by misrepresen-
tation of another, the con-tract is not merely voidable but is
entirely void and the third party would acquire no rights
(Ningawwa vs Byrappa). .
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1. A, sells a horse to B knowing fully well that the horse is
vicious. A does not disclose the nature of the horse to B.
Is the sale valid?
[Hint. Yes, the sale is valid, because A is under no duty to
disclose the fault to B. the general rule of law being “let the
buyer beware.”]
2. A, who is trying to sell an unsound horse, forges a
veterinary surgeon’s certificate, stating that the horse is,
sound and pins it on the stable door. B comes to examine
the horse but the certificate goes unnoticed by him. He
buys the horse and finds later on the horse to be unsound.
He wants to avoid the agreement under the plea that he has
been defra6ded. Will he succeed?
[Hint. B will not succeed because he bought the horse after his
examination and not on the basis of the Certificate. B has not
therefore been deceived by the Certificate actually and a deceit
which does not deceive is not fraud-.]
3. X offers to sell Y a painting which X knows is a copy of a
well known masterpiece. Y, thinking that the painting is an
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11.555
original one and that X must be unaware of this,
LEGAL ASPECTS OF BUSINESS
immediately accepts X’s offer. Does this result in ac6ntract?
[Hint. Yes, there is a contract. The rule of Caveat Emptor applies
in case of unilateral mistake as to quality of subject – matter of
a contract, and despite the mistake the contract remains valid.]
4. X buys from Y a painting which both believe to be the
work of an old master and for which X pays a high price.
The painting turns out to be only a modern copy. Discuss
the validity of the contract?
[Hint. The contract is absolutely void as there is a mutual
mistake of both the parties as to the substance or quality of the
subject-matter going to the very root of the contract. In case of
bilateral mistake of essential fact, the agreement is void ab-initio,
as’ per Section 20.] .
5. X threatens to kill Y if he does not sell his house to X for
Rs 1,00,000. Y assigns the necessary documents for the sale
of house and receives the pay-ment. Later on, Y wants to
avoid the contract. Will he succeed?
Solution: Sections to which the given problem relates: Sections
15 and 72. Decision: Y can avoid the contract on the ground of
coercion but he will have to return Rs 1,00,000 which he has
received from X.
Reason: Y’s consent is not free as it has been obtained by giving
a threat to commit an act which is forbidden by the Indian
Penal Code.
6. X threatens to kill Y’s son if Y does not sell his house to X
for Rs 1,00,000. Y signs the necessary documents for the
sale of house and receives the pay-ment. Later on, Y wants
to avoid the contract. Will he succeed?
Solution: Sections to which the given problem relates: - Sections
15 and 72. Decision: Y can avoid the contract on the ground of
coercion but he will have to return Rs 1,00,000 which he has
received from X.
Reason: Y’s consent is not free, as it has been obtained by
committing an act, which is forbidden by the Indian Penal
Code.
7. X threatens to kill Y’s son if Y does not sell his house to Z
for Rs 1,00,000. Y signs the necessary document for the sale
of house and receives the pay-ment. Later on, Y wants to
avoid the contract. Will he succeed?
Solution: Sections to which the given problem relates: Sections
15 and 72. Decision: Y can avoid the contract on the ground of
coercion but he will have to return Rs 1,00,000 which he has
received from X.
Reason: Y’s consent is not free as it has been obtained by
committing an act which is forbidden by the Indian Penal Code.
8. X, by a threat to commit suicide induced Y, his wife, and Z,
his son, to execute a release deed in favor of his brother in
respect of certain property. Are Y and Z bound by such
release deed?
Solution: Section to which the given problem relates: Section 15.
Decision: Y and Z are not bound by such release deed.
47
 Reason: The consent of Y and Z is not free as it has been
LEGAL ASPECTS OF BUSINESS

obtained by threatening to commit an act which is deemed to

be forbidden by the Indian Penal Code.
[Leading case: Ammiraju v. Seshamma]
9. X, an illiterate old man of about 90 years, physically infirm
and mentally in distress, executed a gift deed of his
properties in favour of Y his nearest relative who was
looking after his daily needs and managing his
cultivation.Is X bound by this gift deed?
Solution: Section to which the given problem relates: Section
16(2). Decision: No. X is not bound by this gift deed.
Reason: Y’s consent is not free as it has been obtained by
exercising undue influence because Y was in position to
dominate the will of X
[Leading case: Sher Singh v. Prithi Singh]
10. X, a poor Hindu widow, was in great need of money to
establish her right to maintenance. She took a loan of Rs
1,500 bearing a rate of interest of 100% p.a.
Is this transaction an unconscionable?
Solution: Section to which the given problem relates: Section
16(3). Decision: This transaction appears to be an unconscio-
nable.
Reason: Not only the rate of interest is too high but also the
lender has used the circumstances of poor Hindu widow to
obtain an unfair advantage.
[Leading case: Ranee Annapurni v. Swaminatha]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.

Notes:

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LESSON 9:
LEGALITY OF OBJECT AND CONSIDERATION
Learning Outcomes
After todays class you should be able to answer the following
questions:
• The legality of object and consideration
• The consequence of the unlawful object or
consideration
• The effect of illegal agreement on collateral transaction
Introduction
In today’s lecture we shall study about another essential element
of a contract that is legality of object and consideration
The object of consideration of an agreement must be lawful, in
order to make the agreement a valid contract, for, Section 10 lays
down that all agreements” are contracts if made for lawful
consideration and with a lawful object. Section 23 declares what
kinds of considerations and objects are not lawful. If the object
or consideration is unlawful for one or the other of the reasons
mentioned in Section 23, the agreement is ‘illegal’ and therefore
void (Sec. 23).
The use of the word ‘illegal’ is somewhat a misnomer here. It
usually connotes a punishable offence, but the parties to a so
called “illegal agreement,” unless it is expressly punishable by
law or amounts to a criminal conspiracy are not liable to
punishment. They have committed no offence. They have
merely concluded a transaction that will be spurned by the
courts.’
The words ‘object’ and ‘consideration’ used in Section 23 are
not synonymous. The word ‘object’ here means ‘purpose or
design.’ Thus, where a person, while in insolvent circumstances,
transferred his property to one of his creditors with the object
of defrauding his other creditors, it was held that the agreement
was void and the transfer was inoperative (Jajlar Meher Ali vs
Budge Budge Jute Mills Co. ). The court observed that although
the consideration of the contract was lawful but the object was
unlawful because the purpose of the parties was to defeat the
provisions of the Insolvency Law.
What Considerations and Objects are Unlawful?
According to Section 23, every agreement of which the object or
con-sideration is unlawful is void, and the consideration or the
object of an agreement is unlawful in the following cases:
1. If it is forbidden by law.
This clause refers to agreements which arc declared illegal by law.
If the consideration or object for a promise is such as is
forbidden by law, the agreement is void. An act or an undertak-
ing is forbidden by law:
a. When it is punishable by the criminal law of the
country, or
b. When it is prohibited by special legislation or
regulations made by a competent authority under
powers derived from the legislature.
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11.555
LEGAL ASPECTS OF BUSINESS
Illustrations
(a) Agreements for sale or purchase above the standard
price fixed by the relevant law (e.g Commodity’s Act. 1955)
with regard to “a controlled article are illegal and hence void
(Sua Ram vs Kunj LaI).
(b) An agreement to pay consideration to a tenant to induce
him to’ vacatepremises governed by the Rent Restriction
Act is illegal and cannot be enforced because such an act is
forbidden by the said Act (Mohanchana vs Manindta).
2. If it is of such a nature that, if permitted, it would defeat
the provision of any law. This clause refers to cases where
the objector consideration to an agreement is of such a
nature that, though not directly forbidden by law, it would
indirectly lend to a violation of law, whether enacted or
otherwise (e.g., Hindu and Mohammedan Laws). Such an
agree-ment. is also void.
Illustrations
(a) A loan granted under a promissory note to the guard-ian
of a minor to enable him to. celebrate the minor’s marriage
in contravention of the Child Marriage Restraint Act was
held illegal and could not be recovered back (Chandra
Shrinivisa Rao vs Korrapati Raja Rama Mohana Rao).It will
be seen that the purpose of borrowing in this case is of
such a nature that if permitted it would defeat the
provisions of Child Marriage Restraint Act of 1929, for the
money was lent to enable the guardian to celebrate the
marriage contrary to the provisions of the said Act.
(b) An agreement by the debtor not to raise the plea of
limitation, should a suit have to be filed, is void as tending
to limit the provisions of the Limitation Act (Rama
Murthy vs Gopayya).
(c) An agreement between husband and wife to live separately
is invalid as being opposed to Hindu Law (A. E.
Thimma/ Naidu vs Rajamma).
3. If it is fraudulent.
An agreement whose object or consideration is to defraud
others, is unlawful and hence void.
Illustrations.
(a) A, promises to pay Rs 200 to B, if B would commit fraud
on C. B agrees. B’s agreeing to defraud is unlawful
consideration for A’s promise to pay. Hence the agreement
is illegal and void.
(b) A, B and Center into an agreement for the division among
them of gains acquired, to be acquired, by them by fraud.
The agreement is void, as its object is unlawful.
[Illustration (e) to Section 23] -
(c) A, being agent for a landed proprietor, ‘agrees for money,
without the, knowl-edge of his principal, to obtain a lease
49
 of land belonging to his principal . The agreement between
LEGAL ASPECTS OF BUSINESS
A and B is void as it implies a fraud by concealment by A
upon his principal. [Illustration (g) to Section 23].
4. If it involves or implies in fury to the person or property
of an-other. If the object or consideration of an agreement
is injury to the person or property of another, it is void,
being an lawful agreement.
Let us now do some illustrations in this respect
Illustrations
(a) An agreement to commit an assault or to beat a man has
been held unlawful and void (Allen vs Raucously).
(b) An agreement to put certain property to fire is unlawful
and void under this clause.
(c) An agreement involving the publication of a libel
(defamatory article against someone) has been held
unlawful and void (Clay vs Yates).
(d) An agreement by which a debtor, who borrowed Rs 100,
promised to do manual labour without pay for the
creditor, so long as the debt was not repaid in full has been
held to be void, as it involved injury to the person of the
debtor (Ram Sarup vs Bansi Mandar)
5. If. the court regards it as immoral. An agreement whose
object orconsideration, is immoral, is illegal and therefore
void. The scope of the word ‘immoral’ here extends to the
following:
(i) Sexual immorality e.g., illicit cohabitation or concubinage or
pros-titution.
Illustrations
(a) A, agrees to let her daughter to hire to B for concubi-nage.
The agreement is void, because it is immoral, though the
letting may not be punishable under the Indian Penal
Code. - [Illustration (k) to Section 23]
(b) A gift deed executed in consideration of illicit intercourse
has been held void as its object was immoral (Ghumma vs
Ram Chandra ).
It may be noted that an agreement to pay for ‘past’ or ‘future’
illicit cohabitation is also void, as being immoral. Consideration
which is immoral at the time when it passes cannot become
innocent by passage of time and therefore the .consideration for
past cohabitation is unlawful as being immoral (Hussenali vs
Dinbai). Similarly, a promise to pay for the purpose of future
cohabitation, which comprised the consideration, was held
illegal and void (Lakshminarayana vs Subhadri).
(ii) Furtherance of sexual immorality.
Illutration
(a) A prostitute was sued for the hire money of a carriage in
which she used to go every evening in order to make a
display of her beauty and thus to attract customers. The
suit was dismissed on the ground that the plaintiff
contributed towards the performance of an immoral and
illegal act and hence he was liable to suffer ( Pearce vs
Brooks).
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50
(b) A man who knowingly lets out his house for prostitution
cannot recover the rent, it being an act for furtherance of
sexual immorality ( Choga Lal vs Piyasi).
The landlord may, however, recover if he did not know the
purpose.
Illustrations
(a) Money advanced to a married woman to enable her to
procure a divorce and to marry the plaintiff could not be
recovered back as the object of the agreement was held
immoral (Bai Vij/i vs Nansa Nagar).
(iii) An agreement for future separation between a husband
and wife is void ab--initio, it being immoral in the eye or
law.
(iv) Such acts which are against good public morals.
Illustrations
(a) An agreement for future marriage, after the death of first
wife is against good morals and hence would be void
(Wilson vs Comleyl)
(b) A who is B’s mukhtar, promises to exercise his influence,
as such with B in favour of C and C promises to pay Rs
1,000 to A. The agreement is void, because it is immoral.
[Illustration to Section 23]
6. If the court regards it as opposed to public policy. An
agreement is unlawful if the court regards it as ‘opposed to
public policy.’ It is not possible to give a precise or exact
definition of the term ‘public policy.’ It is rather an elastic
term and its connotation may vary with the social structure
of a state. Public policy is a principle of law which holds
the no citizen can lawfully do that which is injurious to the
public or is against the interests of the society or the state.
Broadly speaking, an agreement which tends to promote
corruption or injustice or immorality is said to be opposed
to public policy. It is interesting to note that ‘opposed to
public policy’ and ‘immoral,’ both are very much similar in
nature because what is ‘immoral’ must be ‘opposed to
public policy’ and reverse is also true in most cases.
Public policy is an illusive concept. It has been described as an
‘un-trustworthy guide’ ‘unruly horse’ etc., and therefore, the
doctrine of public policy is generally governed by precedents. In
Gherulal vs Mahadeodas the Supreme court served, “, though
the heads (of public policy) are not closed and though theoreti-
cally it may be permissible to evolve a new head under
exceptional circumstances of a changing world, it is advisable in
the interest of stability of society not to make any attempt to
discover new heads in these days.” The courts, thus, are
generally disinclined to invent new heads of public policy.
On the basis of decided cases. on the subject the following’
agreements have been held to be against -public polity:
(i) Trading with an alien enemy. It is now fully established
that trading with an alien enemy ( i.e. a citizen of the other
country at war with the state ) is against public polity in so
far as It tends to aid the economy of the enemy country.
Such agreements are therefore illegal, unless made with the
special permission of Government. It is to be noted that
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 an agreement to promote hostile action in a friendly state is
also illegal and void as being opposed to public policy.
(ii) Agreements interfering with the course of justice, An
agreement the object of which is to interfere with the
course of justice, e.g., an agreement not to disclose
misconduct to the other interested party or an agreement
to influence a judge to induce him to decide the case in a
party’s favour, is obviously opposed to public policy and is
void. But an agreement to refer present or future disputes
to ‘arbitration is a valid agreement.
(iii) Agreements for stifling criminal prosecution:. It is well
settled law that if a-person has committed a crime, he
must be punished. Hence any agreement which seeks to
prevent the prosecution of a guilty party is opposed to
public policy and is void” In Sudhindra Kumar vs Ganesh
Chand, it was observed: “No court of law can countenance
or give effect to an agreement which attempts to take the
administration of law out of the hands of the judges and
put it in the hands of private individuals.” Where, there
fore, A promises B to drop a prosecution which he has
instituted against B for robbery, and B promises to restore
the value of the thing taken, the agreement is void, as its
object is unlawful.
Similarly, the compromise of a public offence is illegal . It is
obvious that if such a course is allowed to be adopted and
agreements made between the parties based solely on the
consideration of stifling criminal prosecutions are sustained, the
basic pur-pose of Criminal Law would be defeated. However,
under the Indian Criminal Procedure Code there are certain
compoundableoffence(e.g., s assault) which can be compro-
mised and agreements for the compromise of such offences are
valid (Ramachandra vs Bhauwari Bai).
(iv) Maintenance and Champertv: ‘Maintenance’ may be
defined as an agreement whereby a stranger promises to
help another person by money or otherwise in litigation in
which that -third person has himself no legal interest.
‘Champerty’ is an agreement whereby a person agrees to
assist another in litigation in exchange promise to hand
over a portion of the proceeds of the action. Thus, in both
cases financial or professional assistance is provided with a
view to assisting another person in litigation but in case of
champerty the party helping in litigation also shares in the
gains of the litigation in addition to interest on money
advanced or fees for professional services.
Under the English Law such agreements are absolutely void.’
The Indian Law, however, does not make them absolutely void
because of the peculiar position of Indian litigants many of
whom are too poor to afford expensive litigation. “The
uncertainties of litigation are proverbial; and if the financier
must need risk losing his money he may well be allowed some
chances of exceptional advantage” (Ram Sarup vs Court of
Wards).
The rules applied in India are as follows: - - been held to be void and illegal as being against public
I. An agreement for supplying funds by way of ‘maintenance for
‘Champerty’ is valid unless:
(a) it is unreasonable so as to be unjust to the other party, or
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11.555
(b) It is made by a malicious motive like that of gambling in
LEGAL ASPECTS OF BUSINESS
litigation or oppressing other party by encouraging
unrighteous suits, and not with the -bona fide object of
assisting a claim believed to be just (Bhagwat Dayal -Singh
vs Debi D “I Sahu ).
II. An agreement for providing professional services is valid if
it is made by way of maintenance’ and with a bona fide
object of assisting a claim believed to be-just and obtaining
a reasonable recompense therefore. But if it is made by way
of ‘Champerty’, i.e., making the remuneration dependent
to any extent whatsoever upon the result of the suit, it is
void (Ko/hi Jairam vs Vishvanat).
Illustrations
(a) Where 75 paise in a rupee was agreed as the share of the
financier, out of the prop recovered, It was held that the
agreement was unreasonable and hence void. However, the
plaintiff (financier) was awarded the expenses legitimately
incurred by him with interest (Nuthaki Venkataswami vs
Katta Nagi Reddy).
(c) An agreement by a client to pay his lawyer according to the
result of the case was held opposed to public policy and
void, it being against the professional code of conduct
(Kothi Jairam vs Vishvanath).
(v) Traffic in public offices. Agreements for sale or transfer of
public offices or for appointments to public offices in
consideration of money are -illegal, being opposed to
public policy. Such agreements, if enforced, would lead to
inefficiency and corruption in public life.
Illustrations.
(a) A, promises to obtain for B an employment in the public
service, and B promises to pay Rs. 1,000 to A. The
agreement is void as the consideration for it is unlawful
[Illustration (f) to Section 23].
(b) So also a promise to pay money to a public servant to
induce him to retire and make way for the appointment of
the promisor is void ( Saminatha vs Muthusami).
(vi) Agreements creating an interest opposed to duty. An
agreement which tends to create a conflict between interest
and duty is illegal and. void on. the ground that it is
opposed to public policy.
Illustrations.
(a) A, agrees to pay B, the lieutenant colonel in the army,
Rs10,000 if he will assist her brother to desert the army.
The object of the agreement is opposed to public policy
and .hence the agreement is void and illegal.
(b) An agreement by an agent with a third party whereby he
would be enabled to make secret profits is illegal and void
as it tends to create a conflict between interest and duty.
(vii) Agreements unduly restraining personal liberty:
Agreements which unduly restrict personal freedom have
policy.
51
 Illustration.
LEGAL ASPECTS OF BUSINESS
A, borrowed money from B, a moneylender, and agreed that he
.would not, without the written consent of B, leave his job,
borrow money, dispose of his property or change his residence.
It was held that the agreement was illegal as it unduly restricted
the liberty of A ( Harwood vs Miller’s Timber and Trading Co ).
(viii)Agreements interfering with parental duties. A father, and
in his absence the mother, is the legal guardian of his/her
minor child. The au-thority of a guardian is to be exercised
in the best’ interest of the child, in accordance with good
public morals. If, therefore, the right of guardianship is
bartered away by any agreement, which is - inconsistent
with the duties arising out of such custody such an
agreement shall be void on the ground of public policy.
Illustration.
For monetary consideration, A agrees to place his daughter at
the disposal of B to be married as B likes. The agreement is
illegal and void as B it would interfere with A’s parental duty to
select a husband in the best interests of the girl (Alma Ram vs
Banku Mal)
(ix) Marriage brokerage agreements. These are agreements for
the- payment of money in consideration of procuring for
another in marriage a husband or a wife. Such agreement
its are illegal and void as being contrary to public policy.
Thus, when a ‘profit’ was promised Rs 200 in considera-
tion of procuring a wife for the defendant, the agreement
was held, invalid and the money could} recovered
(Pitamber vs. Jagjiwan). . Illustrations
Further, an agreement of dowry i.e., to give money or property
to the parents of the bride or the bridegroom in connection of
their agreeing to the contract of marriage is also illegal and
cannot be enforced. But such an agreement is illegal in respect
of payment only; the validity of marriage is not affected. So,
once the marriage is solemnized, money if actually paid cannot
be recovered back, and if not paid, a suit therefore would not
lie, because the agreement to pay is illegal. Of course the money
can be recovered when the marriage is not performed
(Dharnidhar vs. Kanhji Sahay). Similarly, clothes and ornaments
or their value can be recovered if the marriage does not take
place (Girdhari Singh vs Neelandhar Singh ).
(x) Miscellaneous cases. The following agreements have also
been held to be against public policy:
(a) Agreements “tending to create monopolies” are illegal and
void (Kameshwar Singh vs Yasin Khan). .
(b) Agreements to the fraud revenue authorities are void and
illegal. For example, an agreement by which’ an employee
was to get, in addition to salary, an expense allowance
grossly in excess of the expenses actually incurred by him,
was held illegal because the provision as to expenses was ‘
contrary to public policy being merely a device to defraud
the income-tax authorities (Napeier vs National Business
Agency Ltd).
(c) Agreements whereby money is given to induce persons to
give evidences in a civil court are void because every one is
expected to perform his legal duty ( Adhiraja Shatty vs
Vittil Bhatta).
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52
Object or Consideration Unlawful in Part
Section 23 (already discussed) deals with cases in which object
or/and consideration are unlawful. Now we come to those
cases where object/consideration are unlawful in part
The Dowry Prohibition Act, 1961 had defined dowry as
property given directly or indirectly by one party to another, by
parents of one party to either party at or before or after the
marriage or in consideration of marriage. The Dowry Prohibi-
tion (Amendment) Act, 1984 has changed the definition of
dowry slightly. The new Act has defined dowry as property
given in connection (not consideration) with marriage. The
Amendment Act however clarifies that presents given to the
bride or the bridegroom at the time of marriage voluntarily,
without a demand being made, will not be treated as dowry.
But these presents will have to be carefully listed in accordance
with the rules of the Amendment Act. In this case consider-
ation is wholly illegal.
But what is the position if the same agree-ment contains, both
1egal and illegal terms, i.e., it is partly legal and partly illegal?
Sections 24, 57 and 58 of and 58 of the Contract Act provide
for such cases. Accordingly, if the object or consideration is
partially unlawful, the following rules will apply:
1. When an agreement contains several distinct promises to
do things legal and also other things illegal, and the legal
part cannot be separated from the illegal part (i.e., the
consideration for different promises is a single sum of
money), the whole agreement is illegal and void (Sec.24).
(a) A promises to superintend, on behalf of B, a legal
manufacturer of indigo and an illegal traffic in other
articles. B promises to pay to A a salary of Rs. 10,000 a year.
The agreement is void and unlawful. Here a part of the
object is legal and a part is illegal which are not severable
because the consideration for both promises is a single
sum (illustration to Section 24).
(c) A agrees to serve B as his housekeeper and also to live in
adultery with him at a fixed salary. The whole agreement is
unlawful and void. A cannot sue even for service rendered
as housekeeper because it cannot be ascertained as to what
was due on account of adulterous intercourse and what
was due for housekeeping (Alice Hill vs. William Clarke).
2. Where there is reciprocal promise to do things legal and
also other things illegal and the legal part can be separated
from the illegal part (i. e., there is a separate consideration
for different promises), the legal part is a contract and the
illegal part is a void agreement (Sec. 57).
Illustration. A and B agree that A shall sell B a house for Rs
10,000, but that, if B uses it is as a gambling house he shall pay
A Rs50,000 for it. The first set of reciprocal promises, namely,
to sell the house and to pay Rs10,000 for it is a contract. The
second set is for an unlawful. object, namely, that B may use the
house as a gambling house, and is a void and illegal agreement.
(Illustration to Section 57). Here it is to be noted that the two
promises are distinct and severable with a separate consideration
for each such promise. The promises are thus inde-pendent of
each other except that they form part of the same contract.
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3. In the case of an alternative promise, one branch of which’
is legal and the other. illegal, the illegal branch alone can be
enforced (Sec. 58).
Illustration. A and B agree that A shall pay B Rs1,000 for which
B shall afterwards deliver to. A either rice or smuggled opium.
This is a valid contract to deliver rice and a void and unlawful
agreement as to opium (Illustration to Section 58).
Effect of Illegal Agreements on Collateral
Transactions
While discussing different kinds of contracts in Chapter Lesson
3 we have already seen that an ‘illegal agreement’ like the ‘void
agreement’ is unen-forceable as between the immediate parties.
But an ‘illegal agreement’ has this further effect that other
transactions whether incidental or collateral to it are also tainted
with illegality and, therefore, are not enforceable, provided the
parties to the collateral transaction had the knowledge of the
illegal or immoral design of the main or primary agreement ( a
void agreement does not invalidate collateral transaction).
Illustrations
(a) A enters into a smuggling of goods agreement with B and
borrows Rs 1,000 from C for giving an advance to B. C
cannot recover the money lent - if he knew the illegal
purpose, because his loan agreement was a collateral
transaction to an illegal agreement. Of course if C. did not
know the purpose of the loan, he can recover even though
A had used the money for an illegal object. -
(c) A bets on - a horse race with B and borrows Rs 500 from C
for this purpose. C can always recover the money lent,
whether he knew the purpose of loan or’ not, because his
loan agreement was collateral of a void (wagering)
agreement only.
No restitution is allowed. Parties to an illegal agreement cannot
get all help from a court of law, for, “no polluted hand shall
touch the pure fountain of justice.” So, nothing can be
recovered under an illegal agreement and if something has been
paid it cannot be recovered back, whether the illegal object has
been carried out or has not been carried out, is immaterial. The
rule of law is that “no action is allowed on a illegal agreement”
and “in case of equal guilt, the position of the defendant is
better than that of the plaintiff.
Illustration X promises Y to pay Rs 10,000 if he murders Z. If
Y commits the murder, he cannot recover the amount from X.
If X has already paid the amount and Y fails in murdering Z, X
cannot recover the amount back.
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1. A promises to pay a certain ‘slim of money to B,”
wHs.f’is’8l1' intended witness in a suit against A, in
consideration of B’s absenting hit P self-at-the trial. B
absents I but fails to get the money. Can he recover?
(Hint. B cannot recover the money because an agreement, which
tends to create a conflict, between interest and duty is illegal and
void being opposed to public
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11.555
2. In a suit by A against B for the recovery of Rs 5,000, A is in
LEGAL ASPECTS OF BUSINESS
need of money. C agrees to provide funds to A in
consideration of sharing one-fourth’ of the money
recovered from B.’ Decide the validity of the agreement
between C and A.
[Hint. The agreement between C and A is valid. It is a champer-
tous agreement which is valid provided its terms are fair and
reasonable and is made with a bona fide object of. assisting a
just claim.]
3. A, while his wife B was alive, promised to marry C in the
event of B’s death. Subsequently B died but A refused to
marry. C sues A for damages for breach of promise.
Decide.
[Hint. C will not succeed because an agreement for future
marriage, after the death of first wife is against good public
morals and hence illegal and void (Wilson vs Carnley, 1908, 1
K.B. 729)]
5. A, entered into an agreement with B and engaged B for the
purpose of informing puja (prayer) for A’s success in a suit
which he had before the court and promised to pay Rs
2,000 in the event of success. A succeeded in the suit. B
sued A for the amount agreed upon. Will B succeed?
[Hint. ‘No, B will not succeed as the object of the agreement is
to interfere with the course of justice, making the agreement
illegal and void. It has been held that where the object of an
agreement is to exercise some extraneous influence, unautho-
rized by law, on the mind of the court, the agreement is
contrary to public policy and hence void [Bhagwan Datt Shastri
vs Raja Ram, (1927) All. 406]. However, in Balasundara
Mudaliar vs Mahomed Usman, A.I.R. (1929) Mad. 812, a
promise of reward by a Muslim litigant to a Hindu devotee in
consideration of offering prayers for the success of his suit has
been held not against public policy. Thus accordingly the
agreement between A and B is valid and B must succeed.]
6. X’s estate is sold for arrears of revenue under the
provisions of an Act of the Legislature, by which a
defaulter is prohibited from purchasing the estate. Y, upon
the understanding with X, becomes the purchaser and
agrees to convey the estate to X for the price, which Y has
paid. Is this agreement valid?
Solution: Section to which the given problem relates: Section 23.
Decision: The agreement is void.
Reason: This agreement results in an indirect purchase by the
defaulter and hence it defeats the object of the law by which a
defaulter is prohibited from purchasing the estate.
7.” X, Y and Z enter into an agreement for the division among
them of gains acquired or to be acquired by them by fraud.
Is this agreement valid?
Solution: Section to which the given problem relates: Section 23.
Decision: This agreement is void.
Reason: The object of this agreement is unlawful as it is
fraudulent.
8. X borrowed Rs 1,000 from Y. X executed a bond
promising to work for Y without pay for 2 years and in
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 case of default agreed to pay interest at 10% per month
LEGAL ASPECTS OF BUSINESS

and the principal amount at once. Is this agreement valid?

Solution: Section to which the given problem relates: Section 23.
Decision: This agreement is void.
Reason: The object of this agreement is unlawful as it involves
an injury to another person. [Leading case: Ram Saroop v. Bansi
Mandar]
9. X let a flat on hire to y, a prostitute, knowing that it would
be used for immoral purposes. Is this agreement void?
Solution: Section to which the given problem relates: Section 23.
“Decision: The agreement is void. Reason: The object of this
agreement is immoral. -[Leading case: Pearce v. Brooks]
10. X knowing that Y has committed a murder, obtains a
promise from Y to pay him (X) Rs 5,00,000 in
consideration of not exposing Y. Is this agreement valid?
Solution: Section to which the given problem relates: Section 23.
Decision: The agreement is void.
Reason: This agreement is opposed to public policy as it is for
stifling prosecution.
11. X promises to pay Y Rs 1,00,000 if Y secures him an
employment in the public service. Is tip’s agreement valid?
Solution: Section to which the given problem relates: Section 23.
Decision: The agreement is void.
Reason: The agreement is opposed to public policy as it is for
the sale of public office.
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.

Notes:

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54 11.555

LESSON 10:
VOID AGREEMENTS
Learning Outcomes
After today’s class you should be able to answer the following
questions;
• The agreements expressly declared to be void
• The uncertain agreements
• The wagering agreements
Introduction
In today’s lecture we shall study about void agreements and
their different classes
You all must be aware by now that
“An agreement not enforceable by law is said to be void”
[Sec.2(g)]. Thus a void agreement does not give rise to any legal
consequences and is void ab-initio. In the eye of law such an
agreement is no agreement at all from its very inception.
We have already dealt with the following types of void agree-
ments in the preceding chapters, and will not therefore discuss
them here again: The preceding chapters, and will not therefore
discuss them here again:
1. Agreements by a minor or a person of unsound mind
(Sec. 11).
2. Agreements made under a bilateral mistake of fact material
to the agreements(Sec. 20).
3. Agreements of which the consideration or object is
unlawful (Sec. 23).
4. Agreements of which the consideration or object is
unlawful in part and the illegal part cannot be separated
from the legal part (Sec. 24).
5. Agreements made without consideration (Sec. 25).
Expressly Declared Void Agreements
The last essential of a valid contract as declared by Section 10 is
that it must not be one which is ‘expressly declared’ to be void
by the Act. Thus, there arises a question, as to what are
‘expressly declared’ void agreements? The following agreements
have been ‘expressly declared’, to be void by the Indian
Contract Act:
1. Agreements in restraint of marriage (Sec. 26).
2. agreements in restraint of trade (Sec. 27).
3. Agreements in restraint of legal proceedings (Sec. 28).
4. Agreements the meaning of which is uncertain (Sec. 29)
5. Agreements by way of wager (Sec. 30).
6. Agreements contingent on impossible events (Sec. 36).
7. Agreements to do impossible acts (Sec. 56).
At the very outset, it may be borne in mind that the law
declares these agreements void ab-initio and not illegal, and
therefore transactions collateral to such agreements are not
made void. In fact it is for this reason that these agreements
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LEGAL ASPECTS OF BUSINESS
have not been discussed in the preceding chapter. Illegal
agreements are also ‘unlawful agreements’ as they are expressly
declared void by the Contract Act. It may be recalled that in the
case of illegal agreements, transactions collateral to them are also
tainted with illegality and hence void.
1. Agreements in Restraint of Marriage
Every individual enjoys the freedom to marry and so according
to Section 26 of the Contract Act “every agreement in restraint
of the marriage of any person, other than a minor, is void.”
The restraint may be general or partial but the agreement is
void, and therefore, an agreement agreeing not to marry at all, or
a certain person, or a class of persons, or for a fixed period, is
void. However, an agreement restraining the marriage of a
minor is valid under the Section.
It is interesting to note that a promise to marry a particular
person does not imply any restraint of marriage, and is,
therefore, a valid contract.
Illustrations
(a) Agrees with B for good consideration that he will not
marry C. It is a void agreement.
(b) A agrees with B that she will marry him only. It is a valid
contract of marriage.
2. Agreements in Restraint of Trade
The Constitution of India guarantees the freedom of trade and
commerce to every citizen and therefore Section27 declares
“every agreement by which any one is restrained from exercising
a lawful profession, trade or business of any kind, is to that
extent void,” Thus no person is at liberty to deprive himself of
the fruit of his labour, skill or talent, by any contracts that he
enters into.
It is to be noted that whether restraint is reasonable or not, if it
is in the nature of restraint of trade, the agreement is void
always, subject to certain exceptions provided for statutorily.
Illustration.
An agreement whereby one of the parties agrees to close his
business in consideration of the promise by the other party to
pay a certain sum of money, is void, being an agreement in
restraint of trade, and the amount is not recoverable, if the
other party fails to pay the promised sum of money ( Madhub
Chander vs Raj Kumar)
But agreements merely restraining freedom of action necessary
for the carrying on of business are not void, for the law does
not intend to take away the right of a trader to regulate his
business according to his own discretion and choice.
Illustration
An agreement to sell all produce to a certain party, with a
stipulation that the purchaser was bound to accept the whole
quantity, was held valid because it aimed to promote business
55
 and did not restrain it (Mackenzie vs Striramiah). But where in a
LEGAL ASPECTS OF BUSINESS
similar agreement the purchaser was free to reject the goods (i.e.,
was not bound to accept the whole quantity tendered) it was
held that the agreement was void as being in restraint of trade
(Sheikh Kalu vs Ram Saran).
Exceptions
An agreement in restraint of trade is valid in the following cases
(i) Sale of goodwill. The seller of the ‘goodwill’ of a business
can be restrained from carrying on a similar business,
within specified local limits, so long as the buyer, or any
person deriving title to the goodwill from him, carries on a
like business therein, provided the restraint is reasonable in
point of time and space (Exception to Sec. 27).
Illustrations
(a) A after selling the goodwill of his business to B promises
not to carry on similar business “anywhere in the world.”
As the restraint is unreasonable the agreement is void.
(b) C a seller of imitation jewellery in London sells his
business to D and promises that for a period of two years
he would not deal: (a) in imitation jewellery in England,
(b) in real jewellery in England, and (c) in real or imitation
jewellery in certain foreign countries. The first promise
alone was held lawful. The other two promises, namely (b)
and (c), were held void as the restraint was unreasonable in
point of space and the nature of business (Goldsoll vs
Goldma).
(ii) Partners’ agreements. An agreement in restraint of trade
among the partners or between any partner and the buyer
of firm’s goodwill is valid if the restraint comes within any
of the following cases:
(a) An agreement among the partners that a partner shall not
carry on any business other than that of the firm while he
is a partner .
(b) An agreement by a partner with his other partners that. on
retiring from the partnership he will not carry on any
business similar to that of the firm within a specified
period or within specified local limits, provided the
restrictions imposed are reasonable [Section 36(2) of the
Partnership Act}.
(c) An agreement among the partners, upon or in anticipation
of the dissolution of the term, that some or all of them
will not carry on a business similar to that of the firm
within a specified period or within specified local limits,
provided the restrictions imposed are reasonable (Section
54 of the Partnership Act).
(d) An agreement between any partner and the buyer of the
firms that such partner will not carry on any business
similar to that of the firm within a specified period or
within specified local limits, provided the restrictions
imposed are reasonable [Section 55(3) of the Partnership ,
Act.]
(iii) Trade combinations. As pointed out earlier, an agreement,
the Ii primary object of which is to regulate business and
not to restrain it, is valid. Thus, an agreement in the nature
of a business combination between traders or
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56
manufacturers e.g., not to sell their goods below a certain
price, to pool profits or output and to divide the same in
an agreed proportion, does not amount to a restart of
trade and IS perfectly valid (Fraser & Co. v Bombay Ice
Company5). Similarly, an agreement amongst the traders
of a, particular locality with the object of keeping the trade
in their own hands is not void merely because it hurts a
rival in trade (Bhola Nath vs Lachmi Narain). But if an
agreement attempts to create a monopoly, it would be void
(Kameshwar Singh vs Yasin Khan). Agreements tending
to create monopolies are now also governed by the
provisions of the Monopolies and Restrictive Trade
Practices Act, 1969, which forbids certain types of trade
agreements.
(iv) Negative stipulations in service agreements. An agreement
of service by which a person binds himself during the
term of the agreement, not to take service with anyone
else, is not in restraint of lawful profession and is valid.
Thus a chartered accountant employed in a company may
be debarred from private practice or from serving elsewhere
during the con-tinuance of service (Maganlal vs Ambica
Mills Ltd. 8) But an agreement of service which seeks to
restrict the freedom of occupation for some period, after
the termination of service, is void. Thus, where S, who
was an employ-ee of Brahmputra Tea Co. Assam, agreed
not to employ himself or to” change himself in any similar
business within 40 miles from Assam, for a period of five
years from the date of the termination of his service, it was
held that the agreement is in restraint of lawful profession
and hence void (Brahamputra Tea Co. vs Scarth).
3. Agreements in Restraint of Legal Proceedings
Section 28, as amended by the Indian Contract
(Amendment) Act, 1996, declares the following three kinds
of agreements void:
(a) An agreement by which a party is restricted absolutely nom
taking usual legal proceedings, in respect of any rights
arising Item a contract.
(b) An agreement which limits the time within which one may
enforce his contract rights, without regard to the time
allowed by the Limitation Act.
(c) An agreement ‘which provides for forfeiture of any rights
arising from a contract, if suit is not brought within a
specified period, without regard to the time allowed by the
Limitation Act.
Restriction on Legal proceedings. As stated above Section 28
renders every agreement in restraint of legal proceedings void.
This is in furtherance of what we studied under the definition
of a ‘contract’, namely, agreement plus ‘enforceability at law is a
contract. Thus if an agreement inter-alia provides that no party
shall ‘-go to a court of law, in case of breach, there is no contract
and the agreement is void ab-initio. In this connection the
following points must also be borne in mind:
(a) The Section applies only to rights arising from a contract. It
does not apply to cases1o of civil or criminal wrongs or
torts.
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(b) This Section does not affect the law relating to arbitration
e.g., if the parties agree to refer to arbitration any dispute
which may arise between them under the contract, such a
contract is valid (Exceptions 1 and 2 to Section 28).
(c) The Section does not affect an agreement whereby parties
agree “not to file an appeal” in a higher court. Thus where
it was agreed that neither party shall appeal against the trial
court’s decision, the agreement was held valid, for, Section
28 applies only to absolute restriction on taking the legal
proceedings, whereas here the restriction is only partial as
the parties can go to a court of law alright and the only
restriction is that the losing party cannot file an appeal
(Kedar Nath vs Ramlal).
(d) Lastly, this Section does not prevent the parties to a
contract from selecting one of the two courts which are
equally competent to try the suit. Thus in A. Milton & Co.
vs qjha Automobile Engineering Company’s Casel2, there
was an agreement which inter-alia provided “Any litigation
arising out of this agreement shall be settled in. the High
Court of Judicature at Calcutta, and in no other court
whatsoever.” The defendants filed a suit in Agra whereas
the plaintiff brought a suit in Calcutta. It was held that the
agreement was binding between the parties and it was not
open to the defendants to proceed with their suit in Agra.
Curtailing the period of limitation. Any agreement curtailing
the period of limitation prescribed by the Limitation Act is also
void under .section 28. Thus, if a clause in an agreement
between A and B provides that either party can sue for breach
within a year of breach only, the clause is void and despite the
clause the parties have a right to sue in case of breach Such cases
come under “Agreements Stifling Prosecutions” which have
been discussed in the preceding chapter.by either party within
the time allowed by the Limitation Act i. e.. within three’ years
from the date of breach. It is relevant to state that agreements
extend tile period of limitation prescribed by the Limitation Act
are also void, not under this Section but under Section 23, as
the object will be to defeat the provisions of the law (Rama
Murthy vs Gopayya).
Forfeiture of contract rights. Under Clause (c) of Section 28
(stated above) an agreement which provides for forfeiture of
any rights arising from a contract, if suit is not brought within a
specified time (say 3 months) is also void. This Clause was’
inserted by the Indian Contract (Amendment) Act, 1996.
The distinction between Clause (b) and Clause (c) of Section 28
(stated above) may be noted. Under Clause (b), the agreement
limits the time within
which one may enforce his contract rights thereby curtailing the.
period of limitation prescribed by the Limitation Act, whereas
under Clause (c), the agreement limits the time within which
one is to have any contract tights to enforce. Thus, Clause (c)
refers to an agreement which does not affect the remedy for
breach but which extinguishes the right itself after the specified
time and such a stipulation has also been declared void.
The background behind the passing of the Indian Contract
(Amend-ment) Act, 1996 may be briefly stated as follows. Prior
to this Amendment Act, the insurance policy documents issued
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by general insurance companies invariably provided that if a
LEGAL ASPECTS OF BUSINESS
claim is rejected and a suit is not tiled within three months after
such rejection, all benefits under the policy shall be forfeited.
Such a provision was held valid and binding on the ground that
it is outside the scope of Section 28 (Baroda Spinning Co. Ltd.
vs Satya-narayan Marine & Fire Insurance Co. Ltd. 14). The
learned judge observed: “what the plaintiff was forbidden to
do was to limit the time within which he was to enforce his
rights; what he has done is to limit the time within which he is
to have any rights to enforce; and that appears to me to be a
very different thing”. However, the Supreme Court in the Food
Corporation of India vs New India insurance Co. Ltd. (1994)
.Case held that insurance contracts restraining the time period
within which one is to have any con-tract rights to enforce were
violative of the Limitation Act. The Parliament
has therefore amended Section 28 by inserting a new clause.
Accordingly henceforth general insurance companies cannot
insist that suits for claims be brought within a period of time
smal1er than the period provided under the Limitation Act,
otherwise all benefits under the policy shall be forfeited.
Uncertain Agreements
“Agreements, the meaning of which is ‘not certain, or capable
of being made certain, are void” (Sec. 29). Through Section 29
the law aims to ensure that the parties to a contract should be
aware of the precise nature and scope of their mutual rights and
obligations under the contract: Thus, words used by the parties
are vague or indefinite, the law cannot enforce the agreement.’
Illustrations (to Sec. 29).
(a) A agrees to sell to B ,”a hundred tons of lories nothing
whatever to’ show what kind of oil was intended. The
agree void for uncertainty.
(b) A, who is a dealer in coconut oil only, agrees to sell to B
“one hundred tons. The nature of A ‘s trade affords an
indication of the meaning of the words, last entered into a
contract for the sale of one hundred tons of coconut oil.
(c) A agrees to sell to B “one thousand mounds of rice at a
price to be fixed As the price is capable of being made
certain, there is no uncertainty here the agreement void.
(d) A agrees to sell to B “his white horse for rupees five
hundred or rupees one oil.” There is nothing to show
which of the two prices was, to be given. The agreement is
void.
Further, an agreement of to enter into an agreement in future”
is void certainty unless all’ the terms of the proposed agreement
are agreed sly or implicitly. Thus, an agreement to engage a
servant some time next year, at a salary to be mutually agreed
upon is a void agreement.
5. Wagering Agreements
What is a wager? Literally the word ‘wager’ means a ‘a bet.:
something to be lost or won on the result of a doubtful issue”
and, therefore, wagering agreements are nothing but ordinary
betting agreements. Thus A and B mutually agree that if it rains
today A will pay B Rs 100 it does not rain B will pay A Rs 100
or where C and D enter into agreement that on tossing up a
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 coin, if it falls head upwards C will pay O and if it falls tail
LEGAL ASPECTS OF BUSINESS
upwards D will pay C Rs 50; there is, a wagering agreement
A ‘wager’ can be described as, follows: “The agreement of
gaming and wagering’ is that one party is to win and the other e
upon a future every which at the time C the contract is of an a
in nature - that is to say, if the event turns out one way A will
lose; I it turns out the other way he will win.”
Possibly the most expressive and all-encompassing definition
of a “was agreement” was given by, Hawkins., in Carlill vs
Carboli,c Smoke Ball Co.
‘A wagering contract is one by which two persons professing to
hold opposite views touching the issue of a future uncertain
event mutually agree independent upon the determination of
that event, one shall win from the and the other shall pay or
hand over to him, a sum of money or other neither of the
contracting parties having any other interest ill that contract than
the sum of stake he will so win or lose, there being ‘no other
real consideration ‘for the making of such contract by either of
the parties. It is essential to a wagering contract that each party
may under it either win or lose, whether he will win or lose
being dependent on the issue of the event, and, therefore,
remaining ‘uncertain until that issue is known. If either’ of the
parties may win but cannot lose, or may lose but cannot win, it
is not a wagering contract.”
Certain aspects of the above definition require to be
emphasised. In me first place, wager is a game of chance in
which the contingency of either gain or loss is wholly depen-
dent on an ‘uncertain event.’ An event may be uncertain., not
only because it is a future event, but because it is not yet known
to the parties. Thus a wager may be made upon the result of
the cricket match which is to take place”, next month in Calcutta,
or upon the result of an election which is over, if the parties do
not know the result. Secondly, the parties to a wager must have
no interest in the event’s ‘hap-pening or non-happening except
the winning or losing of the bet laid be-tween them. It is here
that wagering agreements differ from insurance contracts which
are valid because parties have an interest to protect the life or
property, and have, for that very reason, entered into the
contract of insurance.
Essential features of a wager. The essentials of a wagering
agreement may thus be summarised as follows:
(a) There must bean promise to pay money or money’s
worth,_
(b) The promise must be conditional on an event’s happening
or not happening
(c) The event must be an uncertain one. If one of the parties
has the event in his own hands, the transaction is not a
wager.
(d) Each party must stand to win or lose under the terms of
agreement. An agreement is not a wager if one party- may
only win and cannot lose, or if he may lose but cannot
win, or if he can neither win nor lose.
(e) No party should have a proprietary interest in the event.
The stake must be the only interest which the parties have
in the agreement.
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58
An agreement by way of a wager , void. Section 30 lays down
that “agreements by way of wager are void; and no suit shall be
brought or recovering anything alleged to be won on any wager,
or entrusted to any person to abide the result of any game or
other uncertain event on which any wager if made.” Thus,
where A and B enter into an agreement which provides that if
England’s cricket team wins the test match, A will pay B Rs,
100, and if it loses B will pay Rs. 100 to A, nothing can be
recovered by the winning party under the agreement, it being a
wager. Similarly, where C and D enter into a wagering agreement
and each deposits Rs 100 with Z. instructing him to, pay or give
the total sum to the winner, no suit can ‘be brought by the
winner for recovering the. bet amount from Z, the stake-holder.
Further, if I.. had paid the sum to the winner, the loser cannot
bring a suit. for recovering his Rs 100, either against the winner
or against Z, the stake-holder, even if Z had paid after the
loser’s definite instructions not to pay. Of course the loser can
recover back, his deposit if he makes the demand before the
stake-holder’ had paid it ovation the winner (Ratnakalli vs
Vochalapu).
But even such a deposit cannot be recovered by a loser. in the
States of Maharashtra and Gujarat. where such an agreement is
void and illegal.
The Section makes an exception in favour of certain prizes for
horse racing by providing further that “This Section shall not be
deemed to render unlawful’” a subscription, or contribution, or
agreement to subscribe or con-tribute, made or entered into for
or toward any plate, prize or sum of money, of the value or
amount of five hundred rupees or upwards, to be awarded to
the winner or winners of any horse race.” Thus, a bet on a
horse race carrying a prize of Rs 500 or more to the winners has
been made valid under the exception. But with a view to
protecting the poor persons from gambling, a bet on a’ horse
race carrying a prize of less than Rs 500 remains a wager.
It is important to note that in the States of Maharashtra and
Gujarat wagering agreements are, by a local statute, not only
void but also illegal. As a result in these states the collateral
transactions to wagering agreements become tainted with
illegality and hence are void.
Special cases. We now turn to certain special cases in order to
examine as to whether they are wagers:
Commercial transactions. Agreements for sale and purchase of
any commodity or share market transactions, in which there is a
genuine inten-tion to ‘do legitimate business i. e., to give and
take delivery of goods or shares, are not wagering agreements.
If there is no such genuine intention and parties only want to
gamble on the rise or fall of the market by paying or receiving
the differences in prices only, the transaction would be a wa-
gering agreement and therefore void. “In order to constitute a
wagering contract, neither party should intend to perform the
contract itself, but only to pay the differences”
Lotteries. A lottery is a game of chance. Hence the lottery
business is a wagering transaction. Such a transaction is not only
void but also illegal because 294-A of the Indian Penal Code
declares ‘conducting of lottery a punishable offence. If a lottery
is authorized by the Government, the only effect of such
permission is that the persons conducting the lottery (i. e., the
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persons running the lottery and the buyer of lottery ticket) will
not. be guilty of a criminal offence, but the lottery remains a
wager alright (Dorabji Tata vs Lance). . .
Crossword puzzles. Where prizes depend upon a chance, it is ‘a
lottery and therefore a wagering transaction. Thus a crossword
puzzle, in which prizes depend upon correspondence of the
competitor’s solution with a previously prepared solution, is a
wager. But if prizes depend upon skill and intelligence, it is a
valid transaction. Thus prize competitions which are games of
skill and in which an effort is made to select the best competitor
e.g., picture puzzles, literary competitions and athletic competi-
tions are not wagers. Even in such competitions .the amount
of prize should not exceed Rs 1,000, otherwise they shall be
wagers as per the provisions of the Prize Competition Act,
1955.
Insurance contracts. Insurance contracts are valid contracts even
though they provide for payment of money by the insurer ,on
the happening of a future uncertain event. Such contracts differ
from wagering agreements mainly in three respects:
(a) The holder of an insurance policy must have an ‘insurable
interest’ in the event upon which the insurance money
becomes payable. ‘thus con-tracts of insurance are entered
into to protect an interest. In a wagering agreement there is
no interest to protect and the parties bet exclusively because
they can thereby make some easy money.
(b) Contracts of insurance are based on scientific and actuarial
calculation whereas wagering agreements are a gamble
without any scientific calculation of risks.
(c) Contracts of insurance are regarded as beneficial to the
public, whereas wagering agreements do not serve any
useful purpose.
6. Agreements Contingent on Impossible Events
“Contingent agreement to do or not to do anything, if an
impossible event happens, are void, whether the impossibility
of the event is known or not to the parties to the agreement at
the time when it is made.” (See.. 36)
Illustrations (to Sec. 36).
(a) A agrees to pay B Rs 1,000 (as a loan) if two straight lines
should enclose a space. The agreement is void.
(b) A agrees to pay B Rs. 1,000 (as a loan) if B will marry A’s
daughter, C. C was dead at the time of the agreement. The
agreement is void.
7. Agreements to do Impossible Acts
“An agreement to do an act impossible in itself is void.” (Sec.
56 Para 1
Illustrations
(a) A agrees with B to discover treasure by magic. The
agreement is void [Illustration (a) to Section 56].
(b) A agrees with B to run with a speed of -100 Kilometers per
hour. The agreement is void.
No Restitution
The term ‘restitution’ means ‘return’ or ‘restoration’ of the
benefit received from the plaintiff under the agreement. As per
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Section 65 , no restitution ,of the benefit received is allowed in
LEGAL ASPECTS OF BUSINESS
the’ case of expressly declared void agreements.
Practical Problem
Attempt the following problems, giving reasons for your
answers:
1. A agrees to sell all the goods manufactured by him in the
ensuring season to B. In breach of the said agreement A
sold some goods manufactured during the said season to
C. Thereupon B sued A for breach of contract. Will B
succeed?
{Hint: Yes, B will succeed because the agreement between him
and A is valid as it aims to promote business and does not
restrain it.}
2. A agrees to sell his cow to B for Rs 500 if the cow gives 6
kg milk every day, but for Rs 10 only if it fails to do so. The
cow fails, whereupon B demands the cow for Rs. 10 as
agreed. A refuses. Bbrings a suit against him. Will B
succeed?
[Hint: No, B will not succeed as the transaction, through
ostensibly a sale, is in reality a wager ( Brogden vs Marriott)
3. A lends money to B to enable him to pay off the loss
which he has sustained in a wagering transaction with C.
Can A recover the money lent by him?
[ Hint: A can recover, because an agreement collateral to a
wagering agreement remains valid except in Maharashtra and
Gujarat States where wagering agreements are illegal.]
4. A and B are partners in a business. They enter into a
wagering agreement with a third party. On losing the bet A
satisfies his own and also B’s liability under the agreement.
Can A claim from B the amount paid on his behalf?
[Hint. Yes, A can claim the amount from B because a wagering
agreement is only void and not illegal and therefore a collateral
contract can be enforced.]
True or False Questions
State whether the following statements are true or false:
1. The performance of a contingent contract depends upon
the happening of some future event.
2. The performance of a contingent contract depends upon
the non-happening of some future event.
3. The event in. a contingent contract must be essential to the
contract. 4. The event in a contingent contract may be
certain, or uncertain.
5. The performance of a contingent contract must not
depend upon mere will of the promisor.
6. Contracts contingent upon the happening of an uncertain
future event be- comes avoidable at the option of
promisee if that event becomes impossible.
7. Contracts contingent upon the non-happening of a certain
future event cannot be enforced if the happening of that
event becomes impossible.
8. Contracts contingent upon the happening of an uncertain
specified event within a fixed time can become void only
after the expiry of the fixed time.
59
 9. Contracts contingent upon the non-happening of an
LEGAL ASPECTS OF BUSINESS

uncertain specified event within a fixed time can be

enforced only after the expiry of the fixed time.
10. Agreements contingent upon impossible events are void
only if the parties to the agreements at the time when these
are made know the impossi-bility of the event.
Answers
1. False 2. False 3. False 4. False
5. True 6. . False 7. False 8. False
9. False 10. False

References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi

Notes

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60 11.555

LESSON 11:
QUASI CONTRACTS AND CONTINGENT CONTRACTS
Learning Outcomes
After today’s class you should be able to answer the following
questions:
• The meaning of quasi contract
• The different types of quasi contract
• The meaning of contingent contract
• The nature and effect of contingent contract
• The differences between wagering and contingent
contracts.
The first of all we will start with the Quasi Contracts
Quasi Contracts
Introduction
We have seen that a contract is the result of an agreement
enforceable by law. But in some cases there is no offer, no
acceptance, no consensus ad idem and in fact no intention on the
part of parties to enter into a contract and still the law, from the
conduct and relationship of the parties, implies a promise
imposing obligation on the one party and conferring a right in
favour of the other.
In other words under certain special circumstances obligations
resembling those created by a contract are imposed by law
although the parties have never entered into a contract. Such
obligations imposed by law are referred to as ‘Quasi-Contracts’
or ‘Constructive Con-tracts’ under the English law, and “certain
relations resembling those cre-ated by contracts” under the
Indian law. The term’ quasi-contract’ has been used because
such a contract resembles with a contract so far as result or effect
is concerned but it has little or no affinity with a contract in
respect of mode of creation.
A quasi-contract rests upon the equitable “doctrine of unjust
enrich-ment” which declares that a person shall not be allowed
to enrich himself unjustly at the expense of another. Duty, and
not a promise or agreement, is the basis of such contracts. It
may be noted that a suit for damages for the breach of the
contract can be filed in the case of a quasi-contract in the same
way as in the case of a completed contract (Sec. 73).
The Contract Act deals with ‘quasi-contractual obligations’
under Sections 68 to 72, which are discussed below:
I. Claim for necessaries supplied to a person incapable of
contract-ing or on his account (Sec. 68). “If a person,
incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another person
with necessaries suited to his condition in life, the person.
who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.”
This provision has already been considered in connection with
minor’s agreements in the chapter of “Capacity of Parties.”
With a view to recapitu-late it may be stated here that although
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LEGAL ASPECTS OF BUSINESS
agreements by minors, idiots, luna-tics, etc., are void ab-initio,
but Section 68 makes an exception to this rule by providing that
their estates are liable to reimburse the supplier who supplies
them or to some one whom they are legally bound to support
with ‘necessaries’ of life. The following points need to be
emphasized:
(i) The Section does not create any personal liability but only
the estates are liable.
(ii) The things supplied must come within the category of
‘necessaries’. The word ‘necessaries’ here covers not only
bare necessities of existence, e.g.. food and clothes, but all
things which are reasonably necessary to the incompetent
person, having regard to his status in society, e.g., a watch, a
radio, a bicycle may be included therein.
(iii) Necessaries should be supplied only to such incompetent
person or to some one
whom he is legally bound to support such as his wife and
children.
(iv) Incompetent person’s property is liable to pay only
reasonable price for the goods or services supplied and not
the price which the incompetent person might have agreed
to pay(legally speaking an incompetent person cannot agree
to anything).
Illustrations (to See 68)
(a) A supplies B, a lunatic, with necessaries suitable to his
condition in life. A is entitled to be reimbursed from B’s
property.
(b) A supplies the wife and children of B, a lunatic, with
necessaries suitable to their condition in life. A is entitled to
be reimbursed from B’s property.
2. Reimbursement of person paying money due by another,
in pay-ment of which he is interested (Sec. 69). “A person
who is interested in the payment of money which another
is bound by law to pay, and who therefore pays it, is
entitled to be reimbursed by the other.”
Illustration (to Sec. 69).
B holds land in Bengal, on a lease granted by the zamindar. The
revenue payable by A to the Government being in arrear, his
land is advertised for sale by the Government. Under the
revenue law, the. conse-quence of such sale will be the annul-
ment of B’s lease. B, to prevent the sale and the consequent
annulment of his own lease, pays to the government the sum
due from A. A is bound to make good to B the amount so
paid.
In order to make Section 69 applicable, the following conditions
must be satisfied:
(i) The plaintiff should be interested in making the payment
in order to protect his own interest and the payment
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 should not be voluntary one. Moreover, the payment must
LEGAL ASPECTS OF BUSINESS
have been done in good faith and not to manufacture
evidence of title to land or any other thing.
Illustrations.
(a) A sub-tenant pays the arrears of rent due by the tenant the
landlord, in order to save the tenancy from forfeiture. The
sub-tenant is entitled to recover from the tenant, the
amount paid by him to the landlord, although there is no
contract between the two.
(b) A, pays the arrears of rent of his neighbour B, just to
avoid a struggle between B and his landlord. A cannot
recover from B as he acted voluntarily and had no interest
of his own in the payment. [But if B should agree to
reimburse A, this would be a good contract under Section
25(2).]
(ii) The payment must be such as the other party was bound
by law to pay.
Illustration a’s goods were wrongfully attached to. realise the
arrears of Government revenue due by B. A pays the dues to
save the goods from being sold. He is entitled to recover the
amount from B (Abid Hussain vs Ganga Sahai).
(iii) The payment must not be such as the plaintiff himself
was bound to pay. He should only be interested in making
the payment. In other words, a suit under this section is
maintainable only for reimbursement and not for
contribution. Thus, where there is a joint liability on joint
wrong doers and only one of them discharges the liability,
no suit for contribution from the other would be
maintainable under this Section (Ramkrishna vs
Radhakrishana). [A suit for contribution from the other
joint promisor would be maintainable under Section 43.]
Illustration A and B have been fined jointly Rs500 for selling
adulter-ated ghee. A alone pays the amount of fine in good
faith, A cannot later claim contribution from B under Section
69. Notice that although B was bound by law to pay and A has
paid B’s share in good faith, yet A cannot recover as he himself
was bound to make the payment, being jointly liable with B
and was not simply inter-ested in making the payment. [A can,
however, claim contribution form B under action 43.]
3. Obligation of person enjoying benefit of non-gratuitous
act (Sec. 70). This is the third type of quasi-contract
provided in the Contract Act. Section 70 lays down thus,
“Where a person lawfully does anything for another
person, or delivers anything to him, not intending to do
so gratui-tously, and such other person enjoys the benefit
thereof, the latter is bound to make compensation to the
former in respect of, or to restore, the thing so done or
delivered.”
For giving rise to a right of action under this Section, the
following three conditions must be fulfilled:
(i) The thing must have been done lawfully in good faith.
This means that the act done must be in pursuance of the
implied wishes (because there should not be any request in
the case of a quasi-contract) and in the presence of the
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other party, giving him the full choice to reject the thing or
service.
(ii) The thing must have been done by a person not intending
to act gratuitous i.e., it must have been done with the
intention of being paid for. .
(iii) The person for whom the act is done must have enjoyed
the benefit of the act.
Illustrations
(a) A, a tradesman, leaves goods at B’s house by mistake. B
treats the goods as his own. He is bound to pay A for
them. [Illustration to Section 70].
(b) A saves B’s property from fire. A is not entitled to.
compensation from B if the -circumstances show that he
intended to act gratuitously. [Illustration to Section 70]
(c) Where a coolie takes the luggage at the railway station
without being asked by the passenger or a shoe-shiner
starts shining shoes of the passenger without being asked
to do so, and if the passenger does not object to that, then
he is bound to pay reasonably for the same as the work was
not intended to be gratuitous. .
4. Responsibility of finder of goods (Sec. 71). Section 71 lays
down another circumstance in which also a quasi-
contractual obligation is to be presumed. It says: “A
person.. who finds goods belonging to another and takes
them into his custody, is subject to the same responsibility
as a bailee. Thus law between the owner and finder of the
goods also implies an agreement and the latter is deemed
to be a bailee.
Duties of finder of goods. He must try to find ‘out the real
,’owner of the goods and must not appropriate the property to
his own use. If the real owner is traced, he must restore the
goods to him on demand. If he does not take these measures,
he will be guilty of criminal misappropriation of the property
under Section 403 of Indian Penal Code. Further, till the goods
are in possession of the finder, he must take as much care of
the goods as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quality
and value (Sec. 151).
The rights of a finder of goods have been discussed in Sections
168-.169 which provide as follows:
Rights of finder of goods. Till the true owner is found out, he
can retain possession of the goods against everybody in the
world. He is entitled to receive from the true owner, all expenses
incurred by him for preserving the goods or finding the true
owner. He has a lien on the goods for the money so spent i.e.,
he can refuse to redeem the goods to the true owner until these
moneys are paid. He is not entitled to file a suit for the recovery
of such sums. But he can file a suit against the owner to recover
any reward, which was offered by the owner for the return of
the goods, provided he came to know of the offer of reward
before actually finding out the goods.
The finder of goods is entitled to sell the goods if the owner
cannot be found out or if he refuses to pay the lawful charges
of the finder, in the following two situations only:
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(a) When the thing is in danger of perishing or of losing the
greater part of its value, or
(b) When the lawful charges of the finder amount to two-
thirds of the value of the goods found. The true owner is
entitled to get the balance of sale proceeds, if there is
surplus after meeting the lawful charges.
It is to be noted that no one except the real owner can claim
possession of goods from the finder. If anybody deprives him
of the possession of the goods, he can file a suit for damages
for trespass.
Illustration. H picked up a diamond on the floor of F’s shop
and handed it over to F to keep it till the owner appeared. In
spite of best efforts the true owner could not be searched. After
the lapse of some weeks, H tendered to F the lawful expenses
incurred by him for finding the true owner and an indemnity
bond and requested him to return the diamond to him (i.e.,
H). F refused to do so. Held, F must return the diamond to H
as he was entitled to retain the goods as against everybody
except the true owner (Hollinsvs FowlerS).
5. Liability of person to whom money is paid, or thing
delivered by mistake or under coercion (Sec. 72). This is the
fifth and the last kind of quasi-contract mentioned in the
Act. Section 72 declares thus, “A person to whom money
has been paid, or anything delivered, by mistake or under
coercion, must repay or return it.” Accordingly, if one party
under a mistake pays to another party money, which is not
due by contract or otherwise, that money must be repaid.
The term ‘mistake’ has been used in the Section without any
qualifi-cation or limitation whatever and comprises within its
scope a mistake of law as well as a mistake of fact (Sales Tax
Officer vs Kanhaiyalal Mukund). The term ‘coercion’ has been
used in its ordinary sense ‘and not as defined in Section 157
(Pep/ad Bulakhidas Mills vs Union of India). Here ‘coercion’
means ‘under pressure’.
Illustration
(a) A and B jointly owe Rs 100 to C. A alone pays the amount
to C, and 13, not knowing this fact, pays Rs 100 over again
to C. C is bound to repay the amount to B [illustration to
Section 72].
(b) A railway company refuses to deliver up certain goods to
the consignee, except upon the payment of an illegal charge
for carriage. The consignee pays the sum charged in order
to obtain the goods. He is entitled to recover so much of
the charge as was illegally excessive (illustration to Section
72).
(c) A pays some money to B by mistake. It is really due to C. B
must refund the money to A. C, however, cannot recover
the amount from B in the absence of privities of contract
between B and C.
(d) A fruit parcel is delivered under a mistake to R who
consumes the fruits thinking them as birthday present, R
must return the parcel or pay for the fruits.
Rnand the true owner,
Althoughthereisnoagreement betwee
yet he is bound to pay as the law regards it a quasi-contract.
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It is to be noted, that this Section does not cover a, base Where
LEGAL ASPECTS OF BUSINESS
money has been paid in payment of a natural obligation. Thus”
where one has paid up a time-barred debt, he cannot recover it.
Similarly the Section does not apply when there is a deliberate
disregard of law e.g., where moneys are paid voluntarily
knowing fully well that the contract has become void, it cannot
be recovered under the Section (Ananth Bandhu vs Union of
India).
Contingent Contracts
First let us define a contingent contract
Definition
Section 31 of the Contract Act defines a contingent contract as
follows:
“A contingent contract is a contract to do or not to do some-
thing, if some event, collateral to such contract does or does not
happen.” Thus it is a contract, the performance of which is
dependent upon, the happening or non-happening of an
uncertain event, collateral to such contract.
Illustration A contract to indemnify B upto Rs20,000, in
consideration of B paying Rs1,000 annual premium, if B’s
factory is burnt. This is a contingent contract.
Any ordinary contract can be changed into a contingent contract,
if its performance is made dependent upon the happening or
non-happening of an uncertain event, collateral to such contract.
For example, the following are contingent contracts:
(a) A contracts to sell B 10 bales of cotton for Rs20, 000, if the
ship by which they are coming returns safely.
(b) A promises to give a loan of Rs1, 000 to B, if he is elected
the president of a particular association.
(c) A promises to pay Rs50, 000 to B if a certain ship does not
return, of course after charging usual premium. (It is a
contract of insurance.)
(d) C advances a loan of Rs10, 000 to D and M promises to C
that if D does not repay the loan, M will do so. (It is a
contract of guarantee.)
Contracts of insurance and contracts of indemnity and
guarantee are popular instances of contingent contracts.
As the performance of a contract is made dependent upon a
contingency, contingent contracts are also known as ‘conditional’
contracts. But in certain cases a contract may look like a ‘condi-
tional’ contract, whereas in fact it may be simply an ordinary
absolute contract where the promisor undertakes to perform
the contract in all events. For example, where A promises to pay
Rs.500 to B, a property broker, if B manages to get a two
rooms accommodation for him at a rental of Rs2,500 per
months, it is not a contingent contract, though on the face of it,
it appears like a conditional contract. It is an ordinary absolute
contract because the uncertain event (namely, managing to get an
accommodation) itself forms the consideration of the contract
and is not a collateral event. Hence it must be clearly understood
that in the case of contingent contracts the uncertain events
must be collateral to such contracts.
Collateral event. According to Pollock and Mulla, a collateral
event, means an event which is “neither a performance directly
promised as part of the contract, nor the whole of the consider-
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 ation for a promise.” Thus, where C contracts to pay Rs100 to
LEGAL ASPECTS OF BUSINESS
D for white-washing his house on the terms that no payment
shall be made till the completion of the work, it is not collateral
to the contract, but is itself a reciprocal promise or is the very
thing contracted for, and is thus an integral part of the contract.
Similarly, a contract for the sale of goods wherein the seller
agrees to give delivery of goods after a week provided the
purchaser makes the payment within two days, is an absolute
contract and not a contingent contract because the event
(making payment by the buyer) is an integral part of the
contract ( a condition precedent ) and not collateral to the
contract.
In simple words, the collateral event is one, which does not
form part of consideration of the contract, and is independent
of it. For example, A contracts to pay Rs50,000 to B, a contrac-
tor, for constructing a building, provided the construction is
approved by an architect. It is a contingent contract because the
consideration of the promise to pay Rs50,000, is the construc-
tion of the building, and the event, namely, approval by an
architect, is a collateral event, which is independent of the
consideration, and it is on the happening of this collateral event
that the contract shall be enforced.
Essentials of Contingent Contract
From the foregoing discussion the following two essentials of
a contingent contract become evident:
1. The performance of such a contract depends upon the
happening or non-happening of some future uncertain
event.
2. The future uncertain event is collateral i.e., incidental to the
contract.
Rules Regarding the Performances of Contingent
Contracts
The rules regarding the performance of contingent contracts, as
contained in Sections 32 to 36 of the Contract Act, are given
below:
1. Contingent contracts to do or not to do anything if an
uncertain future event happens, it cannot be enforced by
law unless and until that event has happened. If the event
becomes impossible, such contracts become void (Sec. 32).
Illustrations
(a) A makes a contract with B to buy B’s horse if A survives C.
The contract
cannot be enforced by law unless and until C, dies in A’s
lifetime.
(b) A makes a contract with B to sell a horse to B at a specified
price, if C, to whom the horse has been offered, refuses to
buy it. The contract cannot be enforced by law unless and
until C refuses to buy the horse.
(c) A contracts to pay B a sum of money (as loan when B
marries C. C dies without being married to B. The contract
becomes void.
2. Contingent contracts to do or not to do anything if an
uncertain future event does not happen, it can be enforced
when the happening of that event becomes impossible,
and not before (Sec. 33).
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Illustration ( to Sec. 33). A agrees to pay B a sum of money (as
insurance claim) if a certain ship does not return (of course
after charging premium). The ship is sunk. The contract can be
enforced when the ship sinks.
3. If a contract is contingent upon how a person will act at an
unspecified time, the event shall be considered to become
impossible when such person does anything which renders
it impossible that he should so act within any definite
time, or otherwise than under further contingencies (Sec.
34).
Illustration (To Sec. 34). A agrees to pay B a sum of money (as
loan) if B marries C. C marries D. The marriage of B to C must
now be considered impossible, although it is possible that D
may die and that C may afterwards marry B. [If later B actually
marries C (the D’s widow), it will not revive the old obligation
of A to pay the sum, because that came to an end when C
married D].
4. Contingent contracts to do or not to do anything, if a
specified uncertain event happens within a fixed time,
becomes void, if, at the expiration of the time fixed, such
event has not happened, or if, before the time fixed, such
event becomes impossible [Sec. 35 (1)].
Illustration ( to Sec. 35). A promises to pay B a sum of money
(as loan) if a certain ship returns within a year. The contract may
be enforced if the ship returns within the year, and becomes
void if the ship is burnt within the year or if the ship does not
return within the year.
5. Contingent contracts to do or not to do anything, if a
specified uncertain event does not happen within a fixed
time, may be enforced by law when the time fixed has
expired and such event has not happened, or, before the
time fixed has expired, if it becomes certain that such event
will not happen [Sec. 35 (2)].
Illustration ( to Sec, 35). A promises to pay B a sum of money
( as insurance claim) if a certain ship does not return within a
year. The contract may be enforced if the ship does not return
within the year, or is burnt within the year.
6. Contingent agreements to do or not to do anything, if an
impossible event happens, are void, whether the
impossibility of the event is known or not to the parties to
the agreement at the time when it is made (Sec. 36).
Illustrations (to Sec. 36). (a) A agrees to pay B Rs. 1,000 (as a
loan), if two straight lines should enclose a space. The agree-
ment is void.
(a) A agrees to pay B Rs. 1,000 (as a loan), if B will marry A’s
daughter C. C was dead at the time of the agreement. The
agreement is void.
Difference between a Contingent Contract and a Wagering
Agreement
The main points of distinction between the two are as under:
1. A contingent contract is a valid contract but a wagering
agreement is absolutely void.
2. In a contingent contract the parties have real interest is the
occurrence or non-occurrence of the event e.g., insurable
interest in the property insured, but in a wager the parties
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 are not interested in the occurrence of the event except for References

LEGAL ASPECTS OF BUSINESS

the winning or losing the best amount. • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
3. In a contingent contract the future uncertain event is merely Sultan Chand and Sons, New Delhi.
collateral whereas in a wagering agreement the uncertain • http://www.indialawinfo.com/bareacts/soga.html
event is the sole determining factor of the agreement.
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
Attempt the following problems, giving reasons for your
House Pvt. Ltd, Delhi.
answers:
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Practical Problems Pvt. Ltd, Delhi.
1. A, a Hindu minor, fraudulently representing himself as • Rohini Aggarwal(2003), “Student’s Guide To Mercantile
major, takes a loan of Rs 5,000 for the marriage of his And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
sister from B at 8 per cent interest. Can B recover the loan Delhi.
and the interest? ‘
Notes:
[Hint. Although the minor cannot be estopped from setting up
his minority. Yet B can recover the loan out of A’s property. If
any, because marriage expenses of one’s sister are included
within the scope of ‘necessaries. (Nanadan Pd. Vs Ajundhia pd.
1910, 32 All. 325). Interest, of course , will not be allowed.]
2. A contracts to sell a part of a specific crop of potatoes to be
grown on his farms to B for Rs1,000. The delivery is to be
made after two months and the payment is to be made
one month before delivery. Soon after the crop is destroyed
by a pest to the knowledge of both the parties but still
makes the payment as agreed. On the expiry of two
months, when no potatoes are delivered to B, B sues A for
breach of the contract and for refund of the purchase price.
Will B succeed’?
[Hint. No, B will not succeed. The contract in question stands
discharged by subsequent destruction of subject-matter and
hence there arises no question of its breach. As regards the
refund of purchase price. it also cannot be recovered because Sec.
72 does not apply when there is a deliberate disregard of law
(Ananth Bandhu vs Dom. of India, A.J.R. 1955. Cal. 626).
3. A agreed to construct a building for B for Rs. 2 lakhs, on
the terms that no payment shall be made till the
completion of the work. Is this a contingent contract?
[Hint. No, this is not a contingent contract because the uncertain
event ( i.e., A’s completing the work ) is not collateral to the
contract but is the very thing contracted for, and is thus an
integral part of the contract.]
4. A agrees to sell land to B at a price to be fixed by C. C
refuses to fix the price, the contract enforceable?
[Hint. No, the contract is not enforceable because by C’s refusal
to fix the price the agreement becomes void for uncertainty in
terms.]
5. A promises to pay B for his services whatever A himself
will think right or reasonable. Later, being dissatisfied with
the payment made, B sues A. Decide.
[Hint. B’s suit will not be admitted by the Court because if the
performance of a promise is contingent upon the mere will and
pleasure of the promisor, certain, or capable of being made
certain, are void” (Sec. 29).]

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11.555 65
LEGAL ASPECTS OF BUSINESS
LESSON 12:
PERFORMANCE AND DISCHARGE OF A CONTRACT
Learning Outcomes
After todays class you should be able to answer the following
questions:
• The performance of a contract
• The time and place of performance
• The performance of reciprocal promises
• The appropriation of payment
• The contracts which need not be performed
• The modes of discharge of a contract
Introduction
Let us first learn about the performance of a contract
Section 37 lays down that the parties to a contract must either
perform, or offer to perform, their respective promises, unless
such performance is dispensed with or excused under the
provisions of this Act, or of any other law. Promises bind the
representatives of the promisors in case of death of such
promisors before performance, unless a contrary intention
appears from the contract.
Illustrations
(a) A promises to deliver goods to B on a certain day on
payment of Rs. 1,000. A dies before that day. A’s
representatives are bound to deliver the goods to B, and B
is bound to pay Rs. 1,000 to A’s representatives.
(b) A promises to paint a picture for B by a certain day, at a
certain price. A dies before the day. The contract cannot be
enforced either by A’s representative or by B [section 37].
The performance can be ‘actual performance’ or ‘attempted
performance’, i.e. ‘offer to perform’.
Section 38 specifies that where a promisor has made an offer of
performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance,
nor does he thereby lose his rights under the contract.
Every such offer must fulfill the following conditions:
(1) It must be unconditional;
(2) It must be made at a proper time and place, and under such
circumstances, that the person to whom it is made may
have a reasonable opportunity of ascertaining that the
person by whom it is made is able and willing there and
then to do the whole of what he is bound by his promise
to do;
(3) If the offer is an offer to deliver anything to the promisee,
the promisee must have a reasonable opportunity of seeing
that the thing offered is the thing which the promisor is
bound by his promise to deliver.
An offer to one of several joint promisees has the same legal
consequences as an offer to all of them.
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Effect of refusal of party to perform promise wholly (Section
39) When a party to a contract has refused to perform, or
disabled himself from performing, his promise in its entirety,
the promisee may put an end to the contract, unless he has
signified, by words or conduct, his acquiescence in its continu-
ance.
Now a question arises who are the persons who should
perform the contract
By Whom Contracts Must be Performed
Section 40 specifies that if it appears from the nature of the case
that it was the intention of the parties to any contract that any
promise contained in it should be performed by the promisor
himself, such promise must be performed by the promisor. In
other cases, the promisor or his representatives may employ a
competent person to perform it.
Effect of accepting performance from third person (Section
41)- When a promisee accepts performance of the promise
from a third person, he cannot afterwards enforce it against the
promisor.
Devolution of joint liabilities (Section 42)- When two or more
persons have made a joint promise, then, unless a contrary
intention appears by the contract all such persons, during their
joint lives, and, after the death of any of them, his representa-
tive jointly with the survivor or survivors, and, after the death
of the last survivor, the representatives of all jointly, must
fulfill the promise.
Any one of joint promisors may be compelled to perform (
Section 43) When two or more persons make a joint promise,
the promisee may, in the absence of express agreement to the
contrary, compel any [one or more] of such joint promisors to
perform the whole of the promise.
Each promisor may compel contribution.- Each of two or
more joint promisors may compel every other joint promisor
to contribute equally with himself to the performance of the
promise, unless a contrary intention appears from the contract.
Sharing of loss by default in contribution.- If any one of two
or more joint promisors makes default in such contribution,
the remaining joint promisors must bear the loss arising from
such default in equal shares. Explanation.— Nothing in this
section shall prevent a surety from recovering from his principal,
payments made by the surety on behalf of the principal, or
entitle the principal to recover anything from the surety on
account of payments made by the principal.
As the liability is joint and several under Sec. 43 of the Contract
Act, D1 cannot escape from his liability merely because the claim
as against D2 stood abated. Therefore, there is not any illegality
in the decree granted by the lower Court as against D1.
Effect of release of one joint promisor (Section 44) Where two
or more persons have made a joint promise, a release of one of
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such joint promisors by the promisee does not discharge the
other joint promisor or joint promisors, neither does it free the
joint promisors so released from responsibility to the other
joint promisor or joint promisors.
Devolution of joint rights (Section 45)- When a person has
made a promise to two or more persons jointly, then, unless a
contrary intention appears from. the contract, the right to claim
performance rests, as between him and them, with them during
their joint lives, and, after the death of any of them, with the
representative of such deceased person jointly with the survivor
or survivors and, after the death of the last survivor, with the
representatives of all jointly.
The time and place of performance is very important in the
context of a valid performance of a contract
Time and Place For Performance
Time for performance of promise, where no application is to be
made and no time is specified (Section 46) Where, by the
contract, a promisor is to perform his promise without
application by the promisee, and no time for performance is
specified the engagement must be performed within a reason-
able time.
Explanation
The question “what is a reasonable time” is, in each particular
case, a question of fact.
Time and place for performance of promise, where time is
specified and no application to be made (Section 47) When a
promise is to be performed on a certain day, and the promisor
has undertaken to perform it without application by the
promisee, the promisor may perform it at any time during the
usual hours of business on such day and at the place at which
the promise ought to be performed.
Application for performance on a certain day to be at proper
time and place. (Section 48) When a promise is to be performed
on a certain day, and the promisor has not undertaken to
perform it without application by the promisee, it is the duty of
the promisee to apply for performance at a proper place and
within the usual hours of business.
Explanation.- The question “what is a proper time and place”
is, in each particular case, a question of fact.
(Section 49) Place for performance of promise, where no
application to be made and no place fixed for performance.-
When a promise is to be performed without application by the
promisee, and no place is fixed for the performance of it; it is
the duty of the promisor to apply to the promisee to appoint a
reasonable place for the performance of the promise, and to
perform it at such place.
(Section 50) Performance in manner or at time prescribed or
sanctioned by promisee.- The performance of any promise may
be made in any manner, or at any time which the promisee
prescribes or sanctions.
Let us learn about the performance of reciprocal promises
Performance of Reciprocal Promises
Promisor not bound to perform, unless reciprocal promisee
ready and willing to perform. - (Section 51) When a contract
consists of reciprocal promises to be simultaneously per-
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formed, no promisor need perform his promise unless the
LEGAL ASPECTS OF BUSINESS
promisee is ready and willing to perform his reciprocal promise.
Section 52 states that where the order in which reciprocal
promises are to be performed is expressly fixed by the contract,
they shall be performed in that order; and where the order is
not expressly fixed by the contract, they shall be performed in
that order which the nature of the transaction requires.
Section 53 states that when a contract contains reciprocal
promises, and one party to the contract prevents the other from
performing his promise, the contract becomes voidable at the
option of the party so prevented; and he is entitled to compen-
sation1 from the other party for any loss which he may sustain
in consequence of the non-performance of the contract.
Effect of default as to that promise which should be first
performed, in contract consisting of reciprocal promises
(Section 54) When a contract consists of reciprocal promises,
such that one of them cannot be performed, or that its
performance cannot be claimed till the other has been per-
formed, and the promisor of the promise last mentioned fails
to perform it, such promisor cannot claim the performance of
the reciprocal promise, and must make compensation to the
other party to the contract for any loss which such other party
may sustain by the non-performance of the contract.
Effect of failure to perform at fixed time, in contract in which
time is essential. - - (Section 55) When a party to contract
promises to do a certain thing at or before a specified time, or
certain things at or before specified times, and fails to do any
such thing at or before the specified times, the contract, or so
much of it as has not beer performed becomes voidable at the
option of the promisee, if the intention of the parties was that
time should be of the essence of the contract.
Effect of such failure when time is not essential.- If it was not
the intention of the parties that time should be of the essence
of the contract, the contract does not become voidable by the
failure to do such thing at or before the specified time; but the
promisee is entitled to compensation from the promisor for
any loss occasioned to him by such failure.
Effect of acceptance of performance at time other than that
agreed upon.- If, in case of a contract voidable on account of
the promisor’s failure to perform his promise at the time
agreed, the promisee accepts performance of such promise at
any time other than that agreed, promisee cannot claim
compensation for any loss occasioned by the non-performance
of the promise at the time agreed, unless, at the time of such
acceptance, he gives notice to the promisor of his intention to
do so.
Section 56 states that an agreement to do impossible act in itself
is void.
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. Where one person has
promised to do something which he knew, or, with reasonable
diligence, might have known, and which the promisee did not
know, to be impossible or unlawful, such promisor must make
compensation to such promisee for any loss which such
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 promisee sustains through the non-performance of the
LEGAL ASPECTS OF BUSINESS
promise.
Section 57 - Reciprocal promise to do things legal, and also
other things illegal.- Where persons reciprocally promise, firstly
to do certain things which are legal, and, secondly, under
specified circumstances, to do certain other things which are
illegal, the first set of promises is a contract, but the second is a
void agreement.
Section 58- Alternative promise, one branch being illegal.- In
the case of an alternative promise, one branch of which is legal
and the other illegal, the legal branch alone can be enforced.
Let us now learn about the appropriation of payments
Appropriation Of Payments
Section 59 specifies that an application of payment where debt
to be discharged is indicated.- Where a debtor, owing several
distinct debts to one person, makes a payment to him, either
with express intimation, or under circumstances implying, that
the payment is to be applied to the discharge of some particular
debt, the payment, if accepted, must be applied accordingly.
Section 60 states about an application of payment where debt
to be discharged is not indicated.- Where the debtor has
omitted to intimate, and there are no other circumstances
indicating to which debt the payment is to be applied, the
creditor may apply it at his discretion to any lawful debt actually
due and payable to him from the debtor, whether its recovery is
or is not barred by the law in force for the time being as to the
limitation of suits. Section 61 states that where neither party
makes any appropriation, the payment shall be applied in
discharge of the debts in order of time, whether they are or are
not barred by the law in force for the time being as to the
limitation of suits. If the debts are of equal standing, the
payment shall be applied in discharge of each proportionately.
You may be thinking that is it necessary that every contract need
to be performed
What are the contracts, which need not be performed?
Contracts, Which Need Not be Performed
Section 62 states the Effect of novation, rescission and alter-
ation of contract.- If the parties to a contract agree to substitute
a new contract for it, or to rescind or alter it, the original contract
need not be performed.
Promisee may dispense with or remit performance of promise
(Section 63) Every promisee may dispense with or remit,
wholly or in part, the performance of the promise made to
him, or may extend the time for such performance, 3 or may
accept instead of it any satisfaction which he thinks fit.
Consequences of rescission of voidable contract (Section 64)
When a person at whose option a contract is voidable rescinds
it, the other party thereto need not perform any promise therein
contained in which he is promisor. The party rescinding a
voidable contract shall, if he has received any benefit thereunder
from another party to such contract, restore such benefit, so far
as may be, to the person from whom it was received.
Obligation of person who has received advantage under void
agreement or contract that becomes void (Section 65) When an
agreement is discovered to be void, or when a contract becomes
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void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make
compensation for it, to the person from whom he received it.
Mode of communicating or revoking rescission of a voidable
contract (Section 66) The rescission of a voidable contract may
be communicated or revoked in the same manner, and subject
to the same rules, as apply to the communication or revocation
of a proposal.
Effect of neglect of promisee to afford promisor reasonable
facilities for performance (Section 66) If any promisee neglects
or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such
neglect or refusal as to any non-performance caused thereby.
This was all-important about the performance of a contract. Let
us now learn about the modes of a discharge of a contract.
Discharge of a Contract
Discharge of a contract means termination of the contractual
relations between the parties to a contract. A contract is said to
be discharged when the rights and obligations of the parties
under the contract come to an end.
Modes of discharge of contract
A contract may be discharged in various modes as discussed
below:
Discharge by Performance
A contract can be discharged by performance in any of the
following ways:
(a) By Actual Performance A contract is said to be discharged
by actual per-formance when the parties to the contract
perform their promises in accordance with the terms of the
contract.
(b) By Attempted Performance or Tender A contract is said to
be discharged by attempted performance when the
promisor has made an offer of performance to the
promisee but it has not been accepted by the promisee.
Discharge by Mutual Agreement
Since a contract is created by mutual agreement, it can also be
discharged by mutual agreement. A contract can be discharged
by mutual agreement in any of the
following ways:
a) Novation [Section 62] Novation means the substitution of
a new contract for the original contract. Such a new contract
may be either between the same parties or between
different parties. The consideration for the new contract is
the discharge of the original contract.
Example
i) A owes money to B under a contract. It is agreed between
A, Band C that B shall henceforth accept C as his debtor,
instead of A. The old debt of A to B no longer exists and
a new debt from C to B has been contracted.
ii) A owes B Rs 10,000. A enters into an agreement with B,
and gives B a mortgage of his (A’s) estate for Rs 5,000 in
place of the debt of Rs 10,000. This is a new contract and
extinguishes the old.
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(c) Rescission [Section 62] Rescission means cancellation of
the contract by any party or all the parties to a contract.
Example X promises Y to sell and deliver 100 Bales of cotton
on 1st Oct. at his god own and Y promises to pay for goods on
1st Nov. X does not supply the goods. Y may rescind the
contract.
(d) Alteration [Section 62] Alteration means a change in the
terms of a contract with mutual consent of the parties.
Alteration discharges the original contract and creates a new
contract. However, parties to the new contract must not
change.
Example X promises to sell and deliver 100 bales of cotton on
1st Oct. and Y promises to pay for goods on 1st Nov. After-
wards, X and Y mutually decide that the goods shall be
delivered in five equal installments at Z’s godown. Here,
original contract has been discharged and a new contract has
come into effect.
(e) Remission [Section 63] Remission means acceptance by the
promisee of a’ lesser fulfillment of the promise made.
According to Section 63, “Every promisee may dispense
with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction
which he thinks fit.”
Example i) A promises to paint a picture for B. B afterwards
forbids him to do so. A is no longer bound to perform the
promise.
ii) A owes B Rs 5,000. A pays to B, and B accepts, in
satisfaction of the whole debt, Rs 2,000 paid at the time
and place at which Rs 5,000 were payable. The whole debt
is discharged.
iii) A owes B, under a contract a sum of money, the amount
of which has not been ascertained. A, without ascertaining
the amount, gives to B, and B, in satisfaction thereof,
accepts the sum of Rs 2,000. This is a discharge of the
whole debt;
whatever may be its Case
amount. I Where both the promisor and promisee know Such agreement is void ab initio.
about the initial impossibility
iv) A owes B Rs 2,000,
and is also indebted
to other creditors. A II. Where both the promisor and promisee do not Such agreement is void on the ground of mutual
makes an know about the initial impossibility
arrangement with
his creditors,
including B, to pay
them a composition
of 50 paise in a III. Where the promisor alone knows about the Such promisor must compensate for any loss which
rupee upon initial impossibility
respective demands.
Payment to B of Rs
1,000 is a discharge
of B’s demand.
(f) Waiver Waiver
means intentional
relinquishment of a right under the con-tract. Thus, it
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amounts to releasing a person of certain legal obligation
LEGAL ASPECTS OF BUSINESS
under a contract.
Example A promises to supply goods to Y. Subsequently, Y
exempts X from carrying out the promise. This amounts to
waiving the right of performance on the part of Y.
Discharge by Operation of Law
A contract may be discharged by operation of law in the
following cases:
(a) By Death of the Promisor A contract involving the
personal skill or ability of the promisor is discharged on
the death of the promisor.
(b) By Insolvency When a person is declared insolvent, he is
discharged from his liability up to the date of his
insolvency.
(c) By Unauthorised Material Alteration If any party makes any
material alteration in the terms of the contract without the
approval of the other party, the contract comes to an end.
(d) By the Identity of Promisor and Promisee When the
promisor becomes the promisee, the other parties are
discharged.
Example X draws a bill receivable on Y who accepts the same. X
endorses the bill in favour of Z who in turn endorses in favour
of Y. Here, Y is both promisor and promisee and hence the
other parties are discharged.
Discharge by Impossibility of Performance
The effects of impossibility of the performance of a contract
may be discussed under the following two heads:
(a) Effects of Initial Impossibility
(b) Effects of Supervening Impossibility
(a) Effects of Initial Impossibility [Section 56] Initial impos-
sibility means the impossibility existing at the time of
making the contract. The effects of initial impossibility are
as under
Effect
Example X undertakes to put life into the dead wife
of Y. This agreement is void.
mistake.
Example X agrees to sell his horse to Y. Unknown
to both the parties; the horse was dead at the time
of making the agreement. This agreement is void.
such promisee sustains through the non-
performance of the promise. Example A contracts
to marry B, being already married to C, and being
forbidden by the law to which he is subject to
practise polygamy. A must make compensation to B
for the loss caused to her by the non-performance
of his promise.
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 (b) Effects of Supervening Impossibility [Section 56] the land. The contract was discharged. [Shyam Sunder v.
LEGAL ASPECTS OF BUSINESS

Supervening impossibility means impossibility which does Durga]

not exist at the time of making the contract but which (e) Non-existence or Non-occurrence of a Particular State of
arises subsequently after the formation of the contract. The Things Necessary for Performance The contract is
effects of supervening impossibility are as under discharged if that particular
Case Effect state of thing which forms
1. Where an act becomes impossible after the The contract to do such an act becomes void when the basis of a contract,
contract is made the act becomes impossible. [Section 56 Para 2] ceases to exist or occur.
II. Where an act becomes unlawful by reason of some The contract to do such an act becomes void when Example a) X and Y
event beyond the control of promisor the act becomes unlawful. [Section 56, Para 2] contract to marry each other.
Before the time fixed for the
III. Where the promisor alone knows about the Such promisor must compensate the promisee for any marriage X goes mad. The
impossibility loss which such promisee might have suffered on
contract becomes void.
account of non-performance of the promise.
[Section 56 Para 3]
b) X hired a room from Y
Any person who has received any benefit under such
IV. Where an agreement is discovered to be void or agreement or contract is bound to restore it or to for viewing the coronation
where a contract becomes void make compensation for it, to the person from whom process of King Edward
he received it. [Section 65] VII. The procession was
Example X contracts to sing for Y at a concert for Rs cancelled because of King’s
1,000, which is paid in advance. X is too ill to sing. Xillness. It was held that X
must refund Rs 1,000 to Y.
was not liable to pay the
Let us discuss some of the cases when a Contract is discharged room rent because the procession, which formed the basis of
on the ground of Supervening Impossibility the contract, did not occur. (Krell v. Henry)
A contract is discharged by supervening impossibility in the Cases when the Contract is not Discharged on the Ground of
following cases: Supervening Impossibility
(a) Destruction of Subject Matter: The contract is discharged if Impossibility of performance is, as a rule, not an excuse from
the subject matter of the contract is destroyed after the performance. It means that when a person has promised to do
formation of the contract without any fault of either party. something, he must perform his promise unless the perfor-
mance becomes absolutely impossible. A contract is not
Example X agreed to sell his crop of wheat. The entire crop was
discharged by the supervening impossibility in the following
destroyed by fire though no fault of the party. The contract was
cases:
discharged.
(a) Difficulty of Performance A contract is not discharged
Example A music hall was rented out for a series of concerts
simply on the ground that its performance has become
on certain days. The hall caught fire before the date of first
more difficult, more expensive or less profitable than that
concert. It was held, the contract has become void on ground of
agreed at the time of its formation.
supervening impossibility.
Example X agreed to supply coal within a specified time. He
(b) Death or personal incapacity: The contract is discharged on
failed to supply in time because of government’s restriction on
the death or incapacity or illness of a person if the
the transport of coal from collieries. Here X will not be
performance of a contract depends on his personal skill or
discharged because the coal was available in the open market
ability.
from where X could have obtained it.
Example X agreed to sing on a specified day. X fell seriously ill
(b) Commercial Impossibility A contract is not discharged
and could not perform on the day. The contract was discharged.
simply on the ground of commercial impossibility, i.e.
(c) Declaration of War The pending contracts at the time of when the contract becomes commercially unviable or
declaration of war are either suspended or declared as void. unprofitable.
Example X contracts to take in cargo for Y at a foreign port. X’s Example X, a furniture manufacturer agreed to supply certain
government afterwards declares war against the country in which furniture to Y at an agreed rate. Afterwards, there was a sharp
the port is situated. The contract becomes void when the war is increase in the rates of the timber and rates of wages. Since, it
declared. was no longer profitable to supply at the agreed rate, X did not
(d) Change of Law The contract is discharged if the supply. X will not be discharged on the ground of commercial
performance of the contract becomes impossible or impossibility.
unlawful due to change in law after the formation of the (c) Default of a Third Party A contract is not discharged if it
contract. could not be performed because of the default of a third
Example X agreed to sell his land to Y. After the formation of party on whose work the promisor relied.
the contract, the Government issued a notification and acquired Example X entered into a contract with Y for the sale of goods
to be manufactured by Z, a manufacturer of those goods. Z

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70 11.555
did not manufacture those goods. X will not be discharged and
will be liable to Y for damages.
(d) Strikes, Lockouts and Civil Disturbances A contract is not
discharged on the grounds of strikes, lockouts and civil
disturbances unless otherwise agreed by the parties to the
contract.
Example X agreed to supply to Y certain goods to be imported
from Algeria. The goods could not be imported due to riots in
that country. It was held that this was no excuse for non-
performance of-the contract. [Jacobs v. Credit Lyonnais]
(e) Partial Impossibility A contract is not discharged simply on
the ground of impossibility of some of the objects of the
contract.
Example X agreed to let a boat to H (i) to view the naval review
at the coronation. of king and (Ii) to cruise round the fleet. Due
to the illness of the king, the naval review was cancelled but the
fleet was assembled and the boat could have been used to cruise
round the fleet. It was held that the contract was not discharged.
[H.B. Steamboat Co. v. Hutton]
Discharge by Lapse of Time
A contract is discharged if it is not performed or enforced
within a specified period, called period of limitation. The
Limitation Act, 1963 has prescribed the different periods for
different contracts, e.g. period of limitation for exercising right
to recover a debt is 3 years, and to recover an immovable
property is 12 years. The contractual parties cannot exercise their
rights after the expiry of period of limitation.
Example On 1st July, 2001 X sold goods to Y for Rs 1,00,000
and Y has made no payment till Aug. 2004. State the legal
position as on 1st Aug. 2004 if no credit period was allowed (b)
if 2 months credit period was allowed.
Solution
Case (a) The contract is discharged by lapse of time (i.e. 3 years)
from 1st July 2001 because the debt has become time barred
and hence X cannot exercise his right to recover this debt.
Case (b) The contract is not discharged by lapse of time because
the period of limitation is yet to expire on 31st Aug. 2004 (3
years from the expiry of the credit period)
Discharge by Breach of Contract
A contract is said to be discharged by breach of contract if any
party to the contract refuses or fails to perform his part of the
contract or by his act makes it impossible to perform his
obligation under the contract. A breach of contract may occur in
the following two ways:
(a) Anticipatory Breach of Contract Anticipatory breach of
contract occurs when party declares his intention of not
performing the contract before the performance is due.
(b) Actual Breach of Contract Actual breach of contract occurs
in the follow-ing two ways:
(i) On Due Date of Performance: If any party to a contract
refuses or fails to perform his part of the contract at the
time fixed for performance, it is called an actual breach of
contract on due date of performance.
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During the Course of Performance: If any party has performed
LEGAL ASPECTS OF BUSINESS
a part of the contract and then refuses or fails to perform the
remaining part of the contract, it is called an actual breach of
contract during the course of performance.
Consequences of Breach of Contract
The aggrieved party (i.e. the party not at fault) is discharged
from his obligation and gets rights to proceed against the party
at fault. The various remedies available to an aggrieved party will
be discussed with you in detail in the next class.
Solve the following problems for a better understanding:
Practical Problems
1. X undertakes to put life into the dead wife of Y and takes
his fees Rs 5,000 in advance. X fails to do so. Y claims Rs
5,000. Is Y’s claim valid? Solution: Section to which the
given problem relates: [Section 56 (Para 1), and Section 65].
Decision: Y’s claim is void.
Reason: (a) The agreement is void ab-initio [Section 56 (Para 2)].
(a) The person who received any advantage under a void
agreement, is bound to restore it [Section 65]
2. X of Delhi agreed to sell 100 bales of cotton @ Rs 1,000
per bale and to deliver within a fortnight at buyer’s
godown at Lahore. X failed to supply these goods. State
the legal position in each of the following alternative cases:
Case (a) If, unknown to both the parties, the goods were
destroyed by fire at the time of agreement
Case (b) If X knew that goods were destroyed by fire at the
time of agreement. Case (c) If the goods were destroyed by
fire after the formation of agreement. Case (d) If war is
declared between India and Pakistan.
Case (e) If these goods were to be manufactured by Z who
is ready to supply @ Rs 1,100 per bale because of
unexpected increase in the cost of material and labour.
Case if) If these goods were to be manufactured by Z who
did not manufacture those goods.
Case (g) If these goods could not be delivered because of
strike of transport operators.
Solution: Section to which the given problem relates: Section 56.
Decision and Reason
Case(a) The contract is void on the ground of mutual
mistake.
Case (b) The contract is void but X; the promisor, must
compensate the buyer for the promisee for any loss which
such promisee sustains through the non-perfor-mance of
the promise.
Case (c) & (d) The contract has become void on the ground
of supervening possibility
Case (e) The contract is not discharged because of
commercial impossibility. Case (j) The contract is not
discharged because of default of third party. Case (g) The
contract is not discharged because of non-performance due
to strikes, lock-out or civil disturbance
4. Mr X a Hindu contracts to marry Y a Muslim. State the
legal position in each of the following alternative cases:
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 Case (a) If Mr X is already married to Z who lives with X;
LEGAL ASPECTS OF BUSINESS

Case (b) If Mr X goes mad before the date fixed for

marriage;
Case (c) If Mr X dies before the date fixed for marriage.
Solution: Section to which the given problem relates: Section 56
Decision and Reason:
Case (a) The contract is void ab-initio because such contract
is forbidden by law. X must compensate Y for the loss
caused to her by the non-performance of the promise.
Case (a) The contract becomes void because of change in
the state of things which formed the basis of the contract.
Case (c) The contract is discharged on the death of X.
5. X, a singer enters into a contract with Y, the manager of a
theatre, to sing at his theatre two nights every week during
the next two months and Y engages to pay her at the rate
of Rs 100 for each night on completion of the contract.
State the legal position in each of the following alternative
cases:
Case (a) On sixth night if X willfully absents herself from
the theatre and wants to sing on the seventh night but Y
does not allow her to sing on the seventh night. Case (b)
On the sixth night if X willfully absents herself from the
theatre and Y allows X to sing on seventh night.
Case (c) On sixth night, X is too ill to sing.
Case (d) On sixth night, X dies before she sings
Solution: Section to which the given problem relates: Sections
39, 56. Decision and Reason:
Case (a) Y can rescind the contract and can claim the
damages for the breach of contract [Section 39].
Case (b) Y cannot rescind the contract but can claim the
compensation for the damages sustained by him through
X’s failure to sing on the sixth night [Section 39].
(c) & (d) X is discharged on the sixth night because of her
incapability to sing and Y cannot claim the compensation
for the damages sustained by him through Y’s failure to
sing on the sixth night.
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.
Notes:

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72 11.555

LESSON 13 :
REMEDIES FOR BREACH OF CONTRACT
Learning Outcomes
At the end of this chapter, you would be able to:
• Identify the remedies for breach of the Contract
• Rescission of the contract
• Suit for damages
• Suit upon quantum meruit
• Suit for specific performance of the contract
• Suit for an injunction
Introduction
There are the following remedies available to the aggrieved party
for the breach of the Contract
Let us first start with the Rescission of the Contract
Rescission of the Contract
When there is a breach of contract by one party, the other party
may rescind the contract and need not perform his part of the
obligations under the contract and may sit quietly at home if he
decides not to take any legal action against the guilty party. But
in case the aggrieved party intends to sue the guilty party for
damages for breach of contract, he has to file a suit for rescis-
sion of the contract. When the court grants rescission, the
aggrieved party is freed from all his obligations under the
contract; and becomes entitled to compensation for any damage
which he has sustained through the non-fulfillment of the
contract (Sec. 75). .
Illustration A contracts to supply 100 kg of tea leaves for Rs
8,000 to B on 15 April. If A does not supply the tea leaves on
the appointed day, B need not pay the price. B may treat the
contract as rescinded and may sit quietly at home. B may also file
a suit for rescission and claim damages.
Thus, applying to the court for ‘rescission of the contract’ is
necessary for claiming damages for breach or for availing any
other remedy. In prac-tice a ‘suit for rescission’ is accompanied
by a ‘suit for damages,’ etc., in the same plaint.
It is worth noting that in certain cases a suit for ‘rescission of
the contract’ may be filed even when no damages are to be
claimed, for example, in case of pledge of movable goods, say
gold ornaments, if the pledger does not pay as per agreement,
the pledgee may file a suit for rescission of the contract (of
course within the period of limitation which is 30 years in this
case), in order to free himself from his obligation to return the
ornaments on payment and to become entitled to sell the
ornaments in order to realise his debt.
Suit for Damages
Damages are monetary compensation allowed to the injured
party for the loss suffered by him as a result of the breach of
contract. The fundamental principle underlying damages is not
punishment but compensation. By awarding damages the court
aims to put the injured party into the position in which he
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LEGAL ASPECTS OF BUSINESS
would have been had there been performance and not breach,
and not to punish the defaulter party. As a general rule,
“compensation must be commensurate with the injury or loss
sustained, arising naturally from the breach.” “If actual loss is
not proved, no damages will be awarded.
Assessment of damages. We will now consider the extent to
which a plaintiff is entitled to demand damages for breach of
contract. The rules in this regard have been laid down by Section
73. Accordingly, an injured party is entitled to receive from the
defaulter party:
(a) Such damages which naturally arose in the usual course of
things from such breach. No compensation is to be given
generally for any remote or indirect loss sustained by reason
of the breach (Ordinary Damages).
(b) Such damages which the parties knew, when they entered
into the contract, as likely to result from the breach (Special
Damages).
(c) In estimating the loss or damage caused to a party by
breach, the means which existed of remedying the
inconvenience caused by the breach must also be taken into
account (Explanation to Sec.73). (Duty to mitigate damage
suffered.)
With a view to making the study of the quantum of damages
easily comprehensible, the above rules, as enunciated in Section
73 may now be considered in some more details under
appropriate heads.
Different kinds of damages. Damages may be of four kinds:
1. Ordinary or General or Compensatory damages (i.e.,
damages arising naturally from the breach).
2. Special damages (i.e., damages in contemplation of the
parties at the time of contract).
3. Exemplary, Punitive or Vindictive damages.
4. Nominal damages.
We shall now see these kinds one by one.
1. Ordinary Damages
When a contract has been broken, the injured party can, as a
rule, always recover from the guilty party ordinary or general
damages. These are such damages as may fairly and reasonably
be considered as arising natu-rally and directly in the usual course of
things from the breach of contract itself. In other words,
ordinary damages are restricted to the “direct or proximate
consequences” of the breach of contract and remote or indirect
losses, which are not the natural and probable consequence of
the breach of contract, are generally not regarded.
73
 Illustrations
LEGAL ASPECTS OF BUSINESS
(a) The leading case of Hadley vs Baxendale, which is said to
be the foundation of modern law of damages in England
and India (as Sec, 73 is almost based on the rules laid down
in this case); is an authority on the point. In that case:
H’s mill was stopped by a breakage of the crankshaft. H
delivered the shaft to B, a common carrier, to take it to the
manufacturers at Greenwich as a pattern for a new one. The
only information given to B was that the article to be carried was
the broken shaft of the mill. It was not made known to B that
delay would result in loss of profits. By some neglect on the
part of B the delivery of the shaft was delayed beyond a
reasonable time. In consequence the mill remained idle for a
longer period than should have been necessary. H brought an
action against B claiming damages for loss of profits, which
would have been made during the period of delay. Held that B
was not liable for loss of profits caused by the delay because it
was a remote consequence, and only nominal damages were
awarded. The Court pointed out that B, the defendant, was
never told that the delay in the delivery of the shaft would entail
loss of profits of the mill; the plaintiffs might have had
another shaft, or there might have been some other defect in
the machinery to cause the stoppage, or for any other reason
there might have been loss actually. Accord-ingly it was not a
direct consequence of the breach and hence not recoverable.
(b) A contracts to pay a sum of money to B on a specified day.
A does not pay the money on that day. B, in consequence
of not receiving the money on that day, is unable to pay his
debts, and is totally ruined. A is not liable to make good to
B anything except the principal sum he contracted to pay,
together with interest upto the date of payment
[Illustration (n) to Section 73]. (If a suit has been filed
then A will have also to pay ‘cost of the suit’ to B.)
(c) A contracts to sell and deliver 500 bales of cotton to B on a
fixed day. A knows nothing of B’s mode of conducting his
business. A breaks his promise, and B, having no cotton, is
obliged to close his mill. A is not responsible to B for the
loss caused to B by the closing of the mill [Illustration (p)
to Section 73]. (B, however, can claim damages for the
breach of ‘contract. He cannot claim the loss of profits
callused by the closing of the mill because it cannot be
considered to have been in contemplation of both the
parties when they made the contract and thus is a remote
consequence of the breach.)
In the case of a contract for ‘sale and purchase’ the general rule
as regards measure of damages is that the damages would be
assessed on the difference between the contract price and the
market price at the date of breach and any subsequent increase
or decrease in the market price would not be taken note of. If
there is no market price for the subject matter of the contract,
the rule is to take the market price of the nearest substitute. If
there is no nearest substitute, the market price is to be ascer-
tained by adding to the price at the place of purchase, the
conveyance charges to the place of delivery plus the usual profit
of the importer (Hajee Ismail & Sons vs Wilson & Co). If the
delivery is to be made in instalments, then the due date of each
instalment is taken as the date of breach and the measure of
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74
damages is the sum of the difference of the market value at the
several dates of delivery.
Illustrations
(a) A agrees to sell to B 5 bags of rice at Rs 500 per bag,
delivery to be given after two months. On the date of
delivery the price of rice goes up and the rate is Rs550 per
bag. A refuses to deliver the bags to B, B can claim from A
Rs 250, as ordinary damages arising directly from the
breach, being the difference between the contract price (i.e.;
Rs 500 per bag) and the market price (i,e” Rs 550 per bag)
on the date of delivery of 5 bags. Notice that if Rs 250 are
paid to B by way of damages, then he will be in the same
position as if the contract has been performed.
(b) A contracts to buy from B, at a stated price, 50 maunds of
rice, no time being fixed for delivery: A afterwards informs
B that he will not accept the rice if tendered to him. B is
entitled to receive from A, by way of compensation, the
amount, if any, by which the contract price exceeds that
which B can obtain for the rice at the time when A informs
B that he will not accept it [Illustration (c) to Section 73].
(c) A contracts to buy B’s ship for Rs 60,000, but breaks his
promise. As a consequence of breach B sold the ship in the
open market and he could only get Rs 52,000 for the ship.
B can recover by way of compensation Rs 8,000, the excess
of the contract price over the actual sale price [Adapted
from Illustration (d) to Section 73].
Under a contract of ‘sale of goods,’ if there is a breach of
‘warranty,’ the seller is liable to pay all damages which the
purchaser has to pay to the person to whom the goods are sold
by him, whether the seller is aware of such a sale or not. In
order that the purchaser should be able to claim such damages
and costs it is an overriding requirement that the sub-contracts
should have been made on the same terms and conditions as
the first contract.
Illustration A sells certain’ merchandise to B, warrant-ing it to
be of a particular quality, and B, in reliance upon this warranty,
sells it to C with a similar warranty. The goods prove to be not
according to the warranty, and B becomes liable to pay C a sum
of money by way of compensation. B is entitled to be reim-
bursed this sum by A.
2. Special Damages
Special damages are those which arise on account of the special
or unusual circumstances affecting the plaintiff. In other words,
they are such remote losses which are not the natural and
probable consequences of the breach of contract. Unlike
ordinary damages, special damages cannot be claimed as a
matter of right. These can be claimed if the special circum-
stances which would result in a loss in case of breach of
contract are brought to the notice of the other party. It is
important that such damages must be in contemplation of the
parties at the time when the contract is entered into. Subsequent
knowledge of the special circumstances will not create any special
liability on the guilty party.
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Illustrations
(a) A having contracted with B to supply B 1,000 tons of iron
at Rs 100 a ton, to be delivered at a stated time, contracts
with C for the purchase of 1,000 tons of iron at Rs 80 a
ton, telling C that he does so for the purpose of
performing his contract with B, C fails to perform his
contract with A, and A could not procure other iron, and B,
in consequence rescinds the contract. C must pay to A Rs
20,000 being the profit which A would have made by the
perform-ance of his contract with B. [Illustration to Section
73]. (If C was not told of B’s contract then only the
difference in contract price and market price, if any, could be
claimed.)
(b) A contracts with B to make and deliver to B, by a fixed day,
for a specified price a certain piece of machinery. A does not
deliver the piece of machinery at’ the time specified, and, in
consequence of this, B is obliged to procure another at a
higher price than that which he was to be paid to A, and is
prevented from performing a contract which B had made
with a third person at the time of his contract with A, (but
which had not been then communicated to A), and is
compelled to make compensation for breach of that
contract. A must pay to B, by way of compensation, the
difference between the contract price of the piece of
machinery and the sum paid by B for another, but not the
sum paid by B to the third person by way of
compensation [Illustration to Section 73].
(c) A,a builder, contracts to erect and finish a house by the first
of January, in order that B may give possession of it at
that time to C, to whom B has contracted to ‘let it. A is
informed of the contract between Band C. A builds the
house so badly that, before the first of January, it falls
down, and has to be rebuilt by B, who, in consequence
loses the rent which he was to have received from C, and is
obliged to make compensation for’ breach of that contract.
A must pay to B, by way of compensation, (i) for the cost
of rebuilding the house, (ii) for the rent lost, and (iii) for
the compensation made to C. [Illustration (l) to Section
73]
3. Exemplary or Vindictive Damages
These are such damages which are awarded with a view to
punishing the guilty party for the breach and not by way of
compensation for the loss suffered by the aggrieved party. As
observed earlier,’ the cardinal principle of the taw of damages
for a breach of contract is to. compensate the injured party for
the loss suffered and to punish the guilty party. Hence, obvi-
ously exemplary damages have no place in the law of contract
and are not recoverable for a breach of contract. There are,
however, two exceptions to this rule.
(a) Breach of a contract to marry. In this case the amount of
the damages will depend upon the extent of injury to the
party’s feelings. One may be ruined, other may not mind so
much.
(b) Dishonour of a cheque by a banker when there are
sufficient funds to the credit of the customer. In this case
the rule of ascertaining damages is, “the smaller the cheque,
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11.555
the greater the damage.” Of course, the actual amount of
LEGAL ASPECTS OF BUSINESS
damages will differ according to the status of the party.
4. Nominal Damages
Nominal damages are these which are awarded only for the
name sake. These are neither awarded by way of compensation
to the aggrieved party nor by way of punishment to the guilty
party. These are awarded to establish the right to decree for
breach at contract when the injured party has not actually
suffered any real damage and consist of a very small sum of
money, say, a rupee or two. For example, where in a contract of
sale of goods, if the contract price and the market price is
almost the same at the date of breach at the contract, then the
aggrieved party is entitled only to nominal damages.
Duty to Mitigate Damage Suffered
It is the duty of the injured party to mitigate damage suffered
as a result of the breach of contract by the other party. He must
use all reasonable means of mitigating the damage, just as a
prudent man would, under similar circumstances in his own
case. He cannot recover any part of the damage, traceable to his
own neglect to mitigate. The onus of proof, however, is on the
defendant to show that the plaintiff has failed in his duty of
mitigation and the plaintiff is free from the burden of proving
that he tried his best to mitigate the loss (Pauzu, Ltd. vs
Saunders).
“The rule in regard to mitigation must be applied with
discretion and a man who has already put himself in the wrong
by breaking his contract has no right to impose new and
extraordinary duties on the aggrieved partys. Courts should take
care to see that they have put the plaintiff in the same position
as if the contract had been performed, and have been overgener-
ous to the contract-breaker by too severe an application of the
rule that the plaintiff must take reasonable steps to mitigate
damages.
Illustrations
(a) Where a servant is dismissed, even though wrongfully, it is
his duty to mitigate the damages by seeking other
employment. He can recover only nominal damages if he
refuses a reasonable offer of fresh employment. But if it
cannot be proved that he has failed in his duty of
mitigation, he will be entitled to the full salary for the
whole of the unexpired period of service, if the contract
of employment was for a fixed period. If the contract of
employment was not for a fixed term, then the principle of
awarding damages for a reasonable period of notice comes
into play (S S Shetty vs Bharat Nidhi Ltd. ).
(b) A took a shop on rent from B and paid one month’s rent
in advance. B could not give possession of the shop to A.
A chose to do no business for 8 months though there
were other shops available in the vicinity. A sued B for
breach of contract and claimed damages for the loss
suffered. Held, he was entitled only to a refund of his
advance, and nothing more, as he had failed in his duty to
minimize the loss by not taking another shop in the
neighborhood (Neki vs. Pribhu).
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 Liquidated Damages and Penalty
LEGAL ASPECTS OF BUSINESS
Let us first know what we mean by the two terms. ‘Liquidated
dam-ages’ means a sum fixed up in advance, which is a fair and
genuine pre--estimate of the probable loss that is likely to result
from the breach. ‘Pen-alty’ means a sum fixed up in advance,
which is extravagant and uncon-scionable in amount in
comparison with the greatest loss that could conceiv-ably be
proved to have followed Item the breach. Thus the essence of a
penalty is a payment of money stipulated as per the terms of
the offending party.
Sometimes the parties fix up at the time of the contract the
sum payable as damages in case of breach. In such a case, a
distinction is made in English Law as to whether the provision
amounts to ‘liquidated damages’ or a ‘penalty’. Courts in
England usually allow ‘liquidated damages’ as stipulated in the
contract, without any regard to the actual loss sustained.
‘Penalty’ clauses, however, are treated as invalid and the courts in
that case calculate damages according to the ordinary principles
and allow only rea-sonable compensation.
Under the Indian Law Section 74 does away with the distinction
be-tween ‘liquidated damages’ and ‘penalty’. This Section lays
down that the Courts are not bound to treat the sum men-
tioned in the contract, either by way of liquidated damages or
penalty, as the sum payable as damages for the breach. Instead
the courts are required to allow reasonable compensation so as
to cover the actual loss sustained, not exceeding the amount so
named in the contract. Thus, according to the section, the
named sum, regardless whether it is a penalty or not, deter-
mines only the maximum limit of liability in case of the breach
of contract. The section does not confer a special benefit upon
any party; it merely declares the law that notwithstanding any
term in the contract pre-determining damages or pro-viding for
forfeiture of any property by way of penalty, the Court will
award to the party aggrieved only reasonable compensation not
exceeding the amount named or penalty stipulated.
Exception. There is, however, one exception provided for by
Section 74 to the above rule. When any person enters into any
bailbond, recognizance or other instrument of the same nature,
or under the provisions of any law or under the orders of the
Government, gives any bond for the performance of any public
duty or act in which the public are interested, he shall be liable to
pay the whole sum mentioned therein upon breach of the
condition of any such instrument.
Illustrations
(a) A contracts with B to pay Rs 1,000 if he fails to pay B Rs
500 on a given day, A fails to pay B Rs 500 on that day. B is
entitled to recover from A such compensation, not
exceeding Rs 1,000 as the court considers reason-able.
[illustration (a) to Section 74]
(b) A undertakes to repay B a loan of Rs 1,000 by five equal
monthly installments with a stipulation that, in default of
payment of any installment, the whole shall become due.
This stipulation is not by way of penalty and the contract
may be enforced according to its terms. [Illustration (j) to
Section 74]
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76
(c) A borrows Rs 100 from B, and gives him a bond for Rs
200 payable by five yearly installments of Rs 40, with a
stipulation that, in default of payment of any installment,
the whole shall become due. This is a stipulation by way of
penalty. [illustration (g) to Section 74]
Stipulation regarding payment of interest. The Explanation
added to Section 74 states, “a stipulation for increased interest
from the date of default may be a stipulation by way of
penalty.” It implies that such a stipulation maybe considered a
penalty clause and disallowed by the courts, if the enhanced rate
is exorbitant.
Illustration [(d) to Sec. 74]. A gives B a bond for the repayment
of Rs 1,000 with interest at 12 percent per annum at the end of
six months, with a stipulation that in case of default interest
shall be payable at the rate of 75 per cent p.a. from the date of
default. This is a stipulation by way of penalty and B is only,
entitled to recover from A such compensation as the court
considers reasonable.
The following rules must also be noted in connection with
payment of interest
(a) Unless the parties have made a stipulation for the payment
of interest or there is a usage to that effect, interest cannot
be recovered legally as damages, generally speaking
{Mahabir Prasad vs Durga Datt).
(b) Where a contract provides that the amount should be paid
without interest by a particular date and on default it will
be payable with interest, such a stipulation may be allowed
if the interest is reasonable. If the interest is exorbitant, the
courts will give relief.
(c) Payment of compound interest on default is allowed, only
if it is not at an enhanced rate (Bhushan Rao vs Subayyal).
Earnest money. Money deposited as security for the due
performance of a contract is known as earnest money. Forfeiture
of earnest money is allowed if the amount is reasonable. But
where it is in the nature of penalty, the court has jurisdiction to
award such sum only as it considers reasonable but not
exceeding the amount so agreed (Fateh Chand vs Balkishen
Dass). The proportion the amount bears to the total sale price,
the nature of the contract and other circumstances have to be
taken into account in ascertain-ing the reasonableness of the
amount.
Cost of Suit
The aggrieved party is entitled, in addition to the damages, to
get the costs of getting the decree for damages tram the
defaulter party. The cost of suit for damages is in the discretion
of the court.
Summary of the Rules Regarding the Measure of Damages
The principles governing the measure of damages discussed
above may be summarised as under:
1. The damages are awarded by way of compensation for the
loss suffered by the aggrieved party and not for the
purpose of punishing the guilty party for the breach.
2. The injured party is to be placed in the same position, so
far as money can do, as if the contract had been performed.
11.555
3. The aggrieved party can recover by way of compensation
only the actual loss suffered by him, arising naturally in the
usual course of things.
4. Special or remote damages, i.e., damages which are not the
natural and probable consequence of the breach are usually
not allowed until they are in the knowledge of both the
patties at the time of entering into the contract.
5. The fact that damages are difficult to assess does not
prevent the injured party from recovering them.
6. When no real loss arises from the breach of contract, only
nominal damages are awarded.
7. If the parties fix up in advance the sum payable as damages
in case of breach of ,contract, the court will allow only,
reasonable compensation so as to cover’ the actual loss
sustained, not exceeding the amount so named in the
contract.
8. Exemplary damages cannot be awarded for breach of
contract except in case of breach of contract of marriage or
wrongful refusal by the bank to honour the customer’s
cheque.
9. It is the duty of the injured party to minimise the damage
suffered.
10. The injured party is entitled to get the costs of getting the
decree for damages from the defaulter party.
Suit Upon Quantum Meruit (Sections 65 and 70)
The third remedy for a breach of contract available to an injured
party against the guilty party is to file a suit upon quantum
meruit. The phrase quantum meruit literally means “as much as
is earned” or “in proportion to the work done.” A right to use
upon quantum meruit usually arises where after part perfor-
mance of the contract by one party, there is a breach of contract,
or the contract is discovered void or becomes void. This remedy
may be availed of either without claiming damages (i. e.,
claiming reason-able compensation only for the work done) or
in addition to claiming damages for breach (i.e., claiming
reasonable compensation for part per-formance and damages
for the remaining unperformed part).
The aggrieved party may file a suit upon quantum meruit and
may claim payment in proportion to work done or goods
supplied in the follow-ing cases:
I. Where work has been done in pursuance of a contract,
which has been discharged by the default of the defendant.
Illustrations
(a) P agreed to write a volume on ancient arm our to be
published ,in a magazine owned by C. For this he was to
receive $ 100 on comple-tion. When he had completed part,
but not the whole, of his volume, C abandoned the
magazine. P was held entitled to get damages for breach of
contract and payment quantum meruit for the part already
completed (Planche vs Colburn).
(b) A, engages B, a contractor, to build a three storied house.
After a part is constructed A prevents B from working any
more. B, the contractor, is entitled to get reasonable
compensation for work done under the doctrine of
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11.555
quantum meruit in addition. to the damages for breach of
LEGAL ASPECTS OF BUSINESS
contract.
Notice that in both the above cases the contract was wrongfully
terminated by the defendant, and both damages as well as
payment quantum meruit have been allowed. It is important that
in the case of a wrongful breach of contract the injured party can
always claim payment quantum meruit, whether the contract is
divisible or indivisible.
2. Where work has been done in pursuance of a contract
which is discovered void’ or ‘becomes void,’ provided the
contract is divisible.
Illustrations.
(a) C was appointed as managing director of a company by the
board of directors under a written contract which provided
for his remunera-tion. The contract was found void
because the directors who constituted the ‘Board’ were not
qualified to make the appointment. C nevertheless,
purporting to act under the agreement, rendered services to
the company and sued for the sums specified in the
agreement, or, alternatively, for a reasonable, remuneration
on a quantum meruit. Held, C could recover on a quantum
meruit. (Craven-Ellis vs Canons Ltd. ).
(b) A contracts with B to repair his’ house at a piece rate. After
a part of the repairs were carried out, the house is
destroyed by lightning. Although the contract becomes
void and stands discharged because of destruction of the
house, A can claim payment for the work done on
‘quantum meruit’. Note that if under the contract a lump
sum is to be paid for the repair job as a whole, then A
cannot claim quantum meruit because no money is due till
the whole job is done.
3. When a person enjoys benefit of non-gratuitous act
although there exists no express agreement between the
parties. One of such cases is provided in Section 70.14
Section 70 lays’ down that when services are rendered or
goods are supplied by a person, (i) without any intention
of doing so gratuitously, and (ii) the benefit of the same is
enjoyed by the other party, the latter must compensate the
former or restore the thing so deliv-ered.
Illustrations
(a) A, a trader, leaves certain goods at B’s house by mistake. B
treats the goods as his own. He is bound to pay A for
them. [Illustration (a) to Section 70]
(b) Where A ploughed the field of B with a tractor to the
satisfaction of B in B’s presence, it was held that A was
entitled to payment as the work was ‘not intended to be
gratuitous and the other party has enjoyed the benefit of
the same. (Ram Krishna vs Rangoobed).
4. A party who is guilty of breach of contract may also sue on
a quantum meruit provided both the following conditions
are fulfilled:
(a) The contract must be divisible, and
(b) The other party must have enjoyed the benefit of the
part which has been performed, although he had an
option of declining it.
77
 Illustrations
LEGAL ASPECTS OF BUSINESS
(a) Where a common carrier fails to take a complete
consignment to the agreed destination, he may recover pro-
rata freight. (He will, of course, be liable for breach of the
contract.)
(b) S had agreed to erect upon H’s land two houses and stables
for $ 565. S did part of the work and then abandoned the
contract. H himself completed the buildings using some
materials left on his land by S. In an action by S for the
value of work done and of the materials used by H, it was
held that S could recover the value of the materials (for H
had the option to accept or to reject these) but he’ could
not recover the value of the work done (for H had no
option with regard to the partly erected building, but to
accept that). The court observed, ‘“The mere fact that a
defendant is in possession of what he cannot help keeping,
or even has done work upon it, affords no ground for such
an inference. He is not bound to keep unfinished a
building which in an incomplete state would be a nuisance
on his land.” (Sumpter vs Hedges).
Suit for Specific Performance
Specific performance means the actual carrying out of the
contract as agreed. Under certain circumstances an aggrieved
party may file a suit for specific performance, i. e., for a decree by
the court directing the defendant to actually perform the
promise that he has made. Such a suit may be filed either
instead of or in addition to a suit for damages.
A decree for specific performance is not granted for contracts of
every description. It is only where it is just and equitable so to
do, i.e., where the regal remedy is inadequate or defective, that
the courts issue a decree for specific performance. It is usually
granted in contracts connected with land buildings articles and
unique goods having some special value to the party suing
because of family association. Notice that in all these contracts
monetary compensation is not an adequate relief because the
injured party will not be able to get an exact substitute in the
market.
Specific performance is not granted, as a rule, in the following
cases:
(i) Where monetary compensation is an adequate relief. Thus
the courts refuse specific performance of it contract to lend
or to borrow money or where the contract is for the sale of
goods easily procurable elsewhere.
(ii) Where the court cannot supervise the actual execution of
the con-tract, e.g., a building construction contract.
Moreover, in most cases dam-ages afford an adequate
remedy.
(iii) Where the contract is for personal services, e.g., a contract to
marry or to paint a picture. In such contracts ‘injunction’
(i.e., an order which forbids the defendant to perform a like
personal service for other persons) is granted in place of
specific performance.
Suit for an Injunction
‘Injunction’ is an order of a court restraining a person from
doing particular act. It is a mode of securing the specific
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78
performance” of the negative terms of the contract. To put it
differently, where a party is in breach of negative term of the
contract (i. e., where he is doing something which he promised
not to do), the court may, by issuing an injunction, restrain him
from doing, what he promised not to do. Thus ‘-injunction’ is
a preventive relief. It is particularly appropriate in cases of
anticipatory breach of contract where damages would not be an
adequate relief.
Illustration
(a) A, agreed to sing at B’s theatre for three months from 1st
April and to sing for no one else during that period.
Subsequently she contracted to-sing at C’s theatre and
refused to sing at B’s theatre. On a suit by B, the court
refused to order specific performance of her positive
engagement to sing at the plaintiff’s theatre, but granted an
injunction restraining A from singing elsewhere and
awarded damages to B to compensate him for the loss
caused by A’s refusal. (Lumley vs Wagnerl)
(b) G agreed to take the whole of his supply of electricity from
a certain company. The agreement was held to import a
negative promise that he would take none from elsewhere.
He was, therefore, restrained by an injunction from buying
electricity from any other company. (Metropolitan Electric
Supply Company vs Ginder).
Practical Problems
Attempt the following problems, giving reasons for your
answers:
1. A contracts to pay a sum of money to B on a specified day.
A does not pay the amount on that day. B in consequence
of not receiving the money on that day, is unable to pay his
debts and, is totally ruined. B claims heavy damages.
Advise A.
[Hint. A is liable to pay interest only from the specified day
upto the date of payment. In other words B can; claim only
ordinary damages. B cannot claim heavy damages unless A had
notice of the special circumstances resulting in the special loss at
the time of entering into the contract]
2. A agreed to erect a plant for B by 31st March, 1976. A
further agreed to pay Rs 500 per month as damages in case
of delay beyond the agreed date. A was late by four
months. B sued A for Rs 4,500, the actual loss caused to
him as a result of the delay. What damages will you award,
and why?
[Hint B is entitled to recover Rs 2,000 only, because when a sum
is named in - the contract as the amount to be paid in case of
breach, the court will allow only reasonable compensation so as
to cover the actual loss sustained, within the limits stated in the
contract.]
3. A employs B as manager of his factory for a term of three
years at a monthly salary of Rs 3,000. Without any lapse on
the part of B, A dismisses him after two years of service. B
could not get an alternate job elsewhere and files a suit for
damages for breach of contract against A. Will he succeed?
If yes, assess the amount of damages recoverable by him.
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[Hint. Yes, B will succeed. If it cannot be proved that B has

LEGAL ASPECTS OF BUSINESS

failed in his duty to mitigate the loss subsequent upon the
breach, B. will be entitled to full salary for the whole of the un
expired period of service i.e., one year. Hence the amount of
damages recoverable by B amounts to Rs 36,000.]
4. A mate was engaged for a lump sum to be paid after the
completion of voyage. The mate dies when only of the
voyage was completed. His legal representatives claim
damages on quantum meruit. Decide.
[Hint. The legal representatives of the mate cannot recover
anything as the doctrine of quantum meruit is inapplicable
under the circumstances (Cutter vs. Powell, 6 T.R. 320). The rule
of law on the point is that ‘party in default’ cannot sue upon
quantum meruit, if the contract is ‘indivisible’ and a lump sum
is to be paid for the job as a whole, because no money is due till
the job is done.]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi.

Notes:

© Copy Right: Rai University

11.555 79
LEGAL ASPECTS OF BUSINESS
LESSON 14:
THE SALE OF GOODS ACT, 1930
INTODUCTION TO SALE OF GOODS AND ITS FORMATION
Learning Outcomes
After reading the lesson, you should be able to know:
• Contract of Sale of Goods
• Formation of Sale of Goods
• Difference between Sale and Agreement to Sale
Introduction
Contract of Sale of Goods
We have already studied rules relating to Indian Contract Act,
1872. These rules are applicable to contract of Sales of Goods
Act as for as they are not in consistent with the express provi-
sions of sales of goods Acts. This Act came into force on first
July 1930. The provisions of this Act extends to the whole of
India except the state of J&K. certain minor amendments
where made in this Act in 1963.
Some of the provisions of Indian Contract Act apply to this
Act for example the rules relating to Capacity of parties, free
consent, agreements in Restaurant of trade , wagering agree-
ments and measure of damages. However the definition of
consideration stands modified to the extent that in a contract of
sale of goods consideration must be my way of ‘Price’, only
money consideration.
Just like Indian Contract Act, there should be offer and
acceptance in the case of sales of goods. The parties to the
contract enjoy unfettered discretion to agree to any terms they
like, for example delivery of goods and payment of Price etc.
The sales of goods Act does not seek to fetter this discretion; it
simply lays down certain positive rules of General application
for those cases where the parties have failed to contemplate
expressly for contingencies which may interrupt the smooth
performance of a contract of sale, such as destruction of goods
sold, before it is delivered or in solvency of the buyer. However
the law gives full freedom to the parties to modify any provi-
sions.
Definition of Sale of goods
Section 4 (1) the sales of goods Act defines a contract of sale of
goods as “A contract where by the seller transfers or agrees to
transfer the property in goods to the buyer for a price”.
Essential Characteristics of Sale of Goods
1. Two parties: There should be two parties namely the buyer
and seller. Incase the students of a Hostel take meals in a
mess run by them , there is no contract of sale because the
student are undivided joined owners, who are running the
mess on cooperative basis. An undivided join owners
must be distinguished from a ‘part-owner’ who is a join
owner with divisible share. Example supposes X and Y
jointly owns a typewriter and X sells the type writer to Y
the ownership of type writer goes to Y. Although the
general rule is that a person cannot buy his own goods,
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80
there is one exemption i.e. where a person’s goods are sold
in execution of a decree, he himself may buy them.
2. Transfer of Property: ‘Property’ here means ‘ownership’.
Transfer of property in the goods is another essential of a
contract of sales of goods. A mere transfer of possession
of the goods cannot be termed as sale. To constitute a
contract of sale the seller must either transfer or agree to
transfer the property in the goods to the buyer. Further,
the term ‘property,’ as used in the Sale of Goods Act,
means ‘general property’ in goods as distinguished from
‘special property’
3. Goods: The subject-matter of the contract of sale must be
‘goods’ According to Section 2(7) “goods means every kind
of movable property other than actionable claims and
money; and includes stock and shares, growing crops,
grass, and things attached to or forming part of the land
which are agreed to be severed before sale or under the
contract of sale.” Goodwill, trade marks, copyrights,
patents right, water, gas, electricity,, decree of a court of law,
are all regarded as goods. In the case of land the grass
which forms part of land have to be separated from the
land. Thus where trees sold so that they could be cut out
and separated from the land and then taken away by the
buyer, it was held that there was a contract for sale of
movable property or goods (Kursell vs Timber Operators
& Contractors Ltd.). But contracts for sale of things
‘forming part of the land itself’ are not contracts for sale
of goods. For example, a contract for the sale of coal mine
or building-stone quarry is not a contract of sale of goods.
‘Actionable Claims’ means claims which can be enforced by a
legal action or a suit, example a book debt. A book debt is not
goods because it can only be assigned as per Transfer of
Property Act but cannot be sold. Same is case in the case of bill
of exchange, promissory note etc. The negotiable instrument
like promissory note can be transferred under Negotiable
Instruments Act by mere delivery or endorsement and delivery,
such instruments cannot be sold.
‘Money’ means current money. It is not regarded as goods
because it is the medium of exchange through which goods can
be bought. Old and rare coins, however, many be treated as
goods and sold as such.
It may be mentioned that sale of immovable property is
governed by the Transfer of Property Act, 1882.
4. Price: The consideration for a contract of sale must be
money consideration called the ‘price .’ If goods are sold or
exchanged for other goods, the transaction is barter,
governed by the Transfer of Property Act and not a sale of
goods under this Act. But if goods are sold partly for
goods and partly for money, the contract is one of sale
(Aldridge vs Johnson).
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5. Includes both a ‘sale’ and ‘an agreement to sell.’ The term
‘contract of sale’ is a generic term and includes both a ‘sale’
and an ‘agreement to sell’ [as is clear from the definition
of the term as per Section 4(1) given carlier ].
6. Sale: Where under a contract of sale the property in the
goods is immediately transferred at the time of making the
contract from the seller to the buyer, the contract is called a
‘sale’ [Sec. 4(3)]. It refers to an ‘absolute sale’, e.g. an
outright sale on a counter in a shop. There is immediate
conveyance of the ownership and mostly of the subject
matter of the sale as well (delivery may also be given in
future), It is an executed contract.
An agreement to sell. Where under a contract of sale the transfer
of property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract
is called ‘an agreement to sell’ [Sec. 4(3)]. It is an executory
contract and refers to a conditional sale.
Illustration
(a) On 1 January, A agrees with B that he will sell B his scooter
on 15 January for a sum of Rs. 3,000. It is an agreement to
sell, since A agrees to transfer the ownership of the scooter
to B at a future time.
(b) A agrees to purchase B’s car for Rs 5,000 provided B stands
surety for him with C. It is an agreement to sell for B. It
becomes a sale when the condition is fulfilled by B.
(c) B agrees to buy A’s car for Rs. 30,000 and pay for it, if his
solicitor approves. It is an agreement to sell for A and an
agreement to buy for B.
(d) A buys some furniture for Rs. 2,000 and agrees to pay for
that in two monthly installments, the ownership to pass to
him on the payment of second installment. There is an
agreement to sell for the furniture dealer.
‘An agreement to sell’ becomes a ‘sale’ when the time elapses or
the conditions are fulfilled subject to which the property in the
goods is to be transferred [Sec. 4(4)].
7. No formalities to be observed: A contract of sales of
goods can be made by mere offer and acceptance. Neither
payment nor delivery is necessary at time of making the
contract of sale. It can be made either orally or in writing or
partly orally or partly in writing or may be even implied
from the contact of the parties.
Let us try to understand the difference between sale and
agreement to sale.
‘Sale’ and Agreement to Sale’ Distinguished
1. Transfer of property (ownership) In a ‘sale’ the property in
goods passes to the buyer immediately at the time of
making the contract. In other words, a sale implies
immediate conveyance of property so that the seller ceases
to be the owner of the goods and the buyer becomes the
owner thereof. It creates a just in rem, i.e., gives right to the
buyer to enjoy goods as against the whole world.
In ‘an agreement to sell’ there is no transfer of property to the
buyer at the time of the contract. The conveyance of property
takes place later so that the seller continues to be the owner until
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11.555
the agreement to sell becomes a sale either by the expiry of
LEGAL ASPECTS OF BUSINESS
certain time or the fulfillment of some condition. Thus where
A agrees to buy 50 kg wheat from B and the wheat is yet to be
weighed, the transaction is an agreement to sell because as per
Section 22, in such a case the property does not pass to the
buyer till the goods are weighed and the buyer has notice
thereof. The transaction becomes a sale and the property in the
goods passes to the buyer after the wheat is weighed and the
buyer has notice thereof. An agreement to sell creates a jus in
person, that is, it gives a right to either buyer or seller against the
other for any default in fulfilling his part of the agreement.
It is worth nothing that this is the basic point of distinction
between a ‘sale’ and ‘an agreement to sell.’ All other points of
distinction follow from this basic difference, i.e. whether the
property in the goods has passed or is yet to pass from seller to
buyer.
2. Risk of loss. The general rule is that unless otherwise
agreed, the risk of loss prima facie passes with property
(Sec. 26). Thus in case of sale, if the goods are destroyed
the loss falls on the buyer even though the goods may
never have come into his possession because the property
in the goods has already passed to the buyer. On the other
hand, in case of an agreement to sell where the ownership
in the goods is yet to pass from the seller to the buyer,
such loss has to be borne by the seller even though the
goods are in the possession of the buyer.
3. Consequences of breach. In case of sale, if the buyer
wrongfully neglects or refuses to pay the price of the
goods, the seller can sue for the price, even though the
goods are still in his possession. In case of an agreement
to sell, if the buyer fails to accept and pay for the goods,
the seller can only sue for damages and not for the price,
even though the goods are in the possession of buyer.
4. Right of resale In a sale, the property is with the buyer and
as such the seller ( in possession of goods after sale )
cannot resell the goods. If he does so, the subsequent
buyer having knowledge of the previous sale does not
acquire a title to the goods. The original buyer can sue and
recover the goods from the third person as owner, and can
also sue the seller for the breach of contract as well as for
the tort of conversion. The right to recover the goods
from the third person is, however, lost if the subsequent
buyer had bought them bonafide without notice of the
previous sale (Sec. 30).
In an agreement to sell, the property in the goods remains with
the seller and as such he can dispose of the goods as he likes
and the original buyer can sue him for the breach of contract
only. In this case, the subsequent buyer gets a good title to the
goods, irrespective of his knowledge of previous sale. Further,
goods forming the subject matter of an agreement to sell can
also be attached in execution of a decree of a court of law
against the seller.
5. Insolvency of buyer before he pays for the goods In a
sale, if the buyer is adjudged insolvent before he pays for
the goods, the seller, in the absence of a ‘right of lien’ over
the goods, must deliver the goods to the Official Receiver
or Assignee. The seller is entitled only to a ratable dividend
81
 for the price of the goods. But in an agreement to sell, in [Hint: B shall have to pay for the car already delivered a reason-
LEGAL ASPECTS OF BUSINESS

these circumstances, the seller may refuse to deliver the able price. A cannot ask for its return. As regards the second car,
goods to the Official Receiver or Assignee unless paid for, B cannot insist on its delivery to him since the contract has
as ownership has not passed to the buyers. become void (Sec. 10)].
6. Insolvency of seller if the buyer has already paid the price d) A dealer in radios gives a ‘Murphy’ radio to a customer on
In a sale, if the seller is adjudged insolvent, the buyer is the terms that Rs. 100 should be paid by him immediately
entitled to recover the goods from the Official Receiver or and Rs 200 more in two monthly equal instalments. It was
Assignee, as the property in the goods rests with the buyer. further agreed that if the radio is found defective the
On the other hand, in an agreement to sell, if the buyer has customer may return it within a week but not later. The
already paid the price and the seller is adjudged insolvent, customer makes default in paying the last installment. Can
the buyer can only claim a ratable dividend (as a creditor) the radio dealer take back the radio on his default? [ Hint.
and not the goods because property in them still rests with No. the radio dealer connot take back the radio on default
the seller. by the customer because it is a contract of sale and not of
Let us now understand the difference between Sale And Hire hire purchase]
Purchase e) A sold 100 quintals of groundnut oil to B. Before it could
be delivered to B, the Government of India requisitioned
Hire Purchase
the whole quantity lying with A in public interest. B wants
Although hire purchase resembles sale of goods it is different
to sue A for breach of contract. Advise B.
in many ways. Under hire purchase agreement the goods are
delivered to the hire purchaser for his use at the time of the Notes
agreement but the owner of the goods agrees to transfer the
property in the goods to the hire purchaser only when the hirer
pays a certain fixed number of installments of price. Thus, the
essence of hire-purchase agreement is that there is no agreement
to buy, but there is only a bailment of the goods coupled with
an option to purchase them, which may or may not be exer-
cised.
Distinction between a sale and a hire-purchase agreement
Sale Hire-purchase agreement
1. Ownership is transferred from the seller to 1 Ownership is transferred from the seller to the
the buyer as soon as the contract is entered hire-purchaser only when a certain agreed
into. number of instalments is paid.
2. The position of the buyer is that of the 2. The position of the hire-purchaser is that of
owner. the bailee.
3. The buyer cannot terminate the contract and 3. The hire-purchaser has an option to terminate
as such is bound to pay the price of the the contract at any stage, and cannot be forced
goods. to pay the further instalments.
4 If the buyer makes the payment in 4. The instalments paid by the hire-purchaser are
instalments, the amount payable by the buyer regarded as hire charges and not as payment
to the seller is reduced, for the payment made towards the price of the goods till option to
by the buyer is towards the price of the purchase the goods is exercised.
goods.

Answer the following Questions

a) A agrees to sell a horse to B who tells A that a) He needs
the horse for riding to Ban galore immediately. The horse
is ill at the time of agreement. What are the rights of A
and B?
b) B agrees to buy A’s Furniture at a price to be fixed by D, a
furniture dealer. D refuses to oblige A and B and fixes no
price. On A’s refusal to sell, can B legally compel him to sell
the furniture for any price?
c) A agrees to sell to B his two second –hand cars on the
terms that the price was to be fixed by C. B takes delivery
of one car immediately. G, however, refuses to fix the price,
A asks for the return of the car already delivered whereas B
insists on the delivery of the second car to him, for a
reasonable price of both the cars. Decide.

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82 11.555

LESSON 15:
THE SALE OF GOODS ACT, 1930
SUBJECT MATTER OF CONTRACT OF SALE AND PRICE
Learning Outcomes
After reading the lesson, you should be able to know:
• Subject matter of Contract of Sale
• Kinds of Goods
• Perishing of Goods
• Fixation of Price
• Importance of time
• Document of title to the goods.
Introduction
Subject Matter of Contract of Sale
The subject matter in sales of goods is ‘goods’. I have already
explained what we mean by Goods. Let us know about its
classification.
Goods may be classified into
1. Existing goods;
2. Future goods; and
3. Contingent goods
1. Existing goods: At the time of sales if the goods are
physically in existence and are in possession of the seller
the goods are called ‘Existing Goods’
Existing goods can be classified into ‘specific or
unascertained.’
(a) Specific goods. Goods identified and agreed upon at the
time of the making of the contract of sale are called
‘specific goods’ [Sec. 2(14)]. It may be noted that in actual
practice the term ‘ascertained goods’ is used in the same
sense as ‘specific goods,’ For example, where A agrees to
sell to B a particular radio bearing a distinctive number,
there is a contract of sale of specific or ascertained goods.
(b) Unascertained goods. The goods, which are not separately
identified or ascertained at the time of the making of the
contract, are known as ‘unascertained goods.’ They are
indicated or defined only by description. For example, if A
agrees to sell to B one bag of sugar out of the lot of one
hundred bags lying in his godown, it is a sale of
unascertained goods because it is not known which bag is
to be delivered. As soon as a particular bag is separated
from the lot for delivery, it becomes ascertained or specific
goods.
The distinction between ‘specific’ or ‘ascertained’ and ‘unascer-
tained’ goods is important in connection with the rules
regarding ‘transfer of property’ from the seller to the buyer.
2. Future goods: Future goods are goods to be manufactured
or produced or yet to be acquired by seller. There cannot be
present sale in respect future goods because the property
cannot pass.
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11.555
LEGAL ASPECTS OF BUSINESS
Example
(a) A agrees to sell to B all the milk that his cow may yield
during the coming year. This is a contract for the sale of
future goods.
(b) X agrees to sell to Y all the mangoes, which will be
produced in his garden next year. It is contract of sale of
future goods, amounting to ‘an agreement to sell.’
3. Contingent Goods: Though a type of future goods, these
are the goods the acquisition of which by the seller
depends upon a contingency, which may or may not
happen [Sec. 6 (2)].
Example
A agrees to sell specific goods in a particular ship to B to be
delivered on the arrival of the ship. If the ship arrives but with
no such goods on board, the seller is not liable, for the contract
is to deliver the goods should they arrive.
Do you know what would happen if the goods are perished?
Effect of Pershing of Goods
The first we must know what we mean by perishing of goods.
‘Pershing’ means not only physically destruction of goods but
it also covers:
(a) Damage to goods so that the goods have ceased to exist in
the commercial sense, i.e., their merchantable character as
such has been lost (although they are not physically
destroyed), e.g., where cement is spoiled by water and
becomes almost stone or where sugar becomes sharbat and
thus are unsaleable as cement or sugar;
(b) Loss of goods by theft (Barrow Ltd. Vs Phillips Ltd. );
(c) Where the goods have been lawfully requisitioned by the
government (Re Shipton, Anderson & Co. ).
You must note that it is only the perishing of specific and
ascertained goods that affect the sales. In the case of unascer-
tained goods, their perishing does not affect the contract. Where
A agrees to sell to B ten bales of Egyptian cotton out of 100
bales lying in his godown and the bales in the godown are
completely destroyed by fire, the contract does not become void.
A must supply ten bales of cotton after purchasing them from
the market or pay damages for the breach.
Effect of Pershing of Goods May Fall Under
1. Where specific goods from the subject matter of contract
of sale (both actual sale and agreement to sell, and they,
without the knowledge of seller perish, at or before the
time of contract , the contract is void. This provision is
made either on the ground of mutual mistake as to matter
of fact essential to agreement, or on the ground of
impossibility of performance, both of which render the
contract void ab-initio.
83
 2. Pershing of goods before sell, but after agreement to sell:
LEGAL ASPECTS OF BUSINESS
Where there is agreement to sell specific goods, and
subsequently the goods, without any fault on the part of
the seller or buyer, perish before the risk passes to buyer,
the agreement is thereby avoided, i.e., Sales becomes void
and both parties are excused from performance. This is
based on Supervening Impossibility.
If only part of the goods agreed to be sold perish, the contract
is void is if it is indivisible. In case contract is divisible, perish-
ing of goods rule apply to the extent of perishing goods. The
contract is valid as regards the part available in good condition.
It is to be noted that if fault of either party causes the destruc-
tion of the goods , then the party in default is liable for
non-delivery or to pay for goods as the case may be. Again if
the risk has passed to the buyer, he must pay for the goods,
though undelivered.
3. Effect of Perishing of Future goods: Present sale of
future goods is an agreement to sale. In case of future
goods, if sufficiently identified, are to be treated as specific
goods, the destruction of which makes the contract void.
E.g. A agreed to sell B, 100 tons of potatoes to be grown
in A’s land. A did everything needed but decease attacked
and could produce only 20 tones. The contract was held as
void.
Price is very important in the contract of Sale of Goods. Let me
now take up the meaning and fixation of price.
Price
For a sale of goods, money consideration is known as “price”.
Without money (Price) there are no sales. Unless otherwise
agreed, the price should be pay or promised to be paid, in legal
tender money. Price may be paid by cheque, hundi, Bank
deposit etc. the requisite to make a valid sales of goods contract
is to pay a price in money and not the mode of payment.
Modes of Fixing the Price: Sec 9 says that price may be paid in
one or the other following modes:
1. It may be Expressly Fixed by the Contract Itself
It is the usual mode of fixing price. The parties are free to
fix any price they like and court will not bother as to
adequacy of price. But the sum should be definite. Where
an alternative price is fixed, the agreement is void ab-nitio as
it involves an element of wager. E.g. A offers to B a cow. B
agrees to buy for Rs. 5000/- if cow gives 10 ltr milk and
only Rs. 100/- if it fails to do so.
2. It may be fixed in accordance with an agreed manner
provided by the contract:
It may by agreed that the buyer would pay the market price
prevailing on a particular date or that the price is to be fixed
by a third party ( e.g. valuer ) appointed with consent of
parties.
If no price is fixed, then the contract is void for uncertainty
because in that case law usually allows market price
prevailing on the date of supply of goods as the price
bargained for.
3. It may be determined by the course of dealings between
the parties.
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84
If the buyer has been previously paying to a particular seller
the price prevailing on the date or placing the order, the
course of dealing suggest that in subsequent transactions
also the price as on the date of order will be paid.
4. If the price is not capable of being determined in
accordance with any of the above modes, the buyer is
bound to pay to the seller “A reasonable price”. What is
reasonable price depends of circumstances. Generally, the
market price of the goods prevailing on the date of supply
is taken as reasonable price.
Agreement to Sell at Valuation (Sec. 10 ) says where there is an
agreement to sell goods and the price is to be fixed by the
valuation of a third party and such that parties fails to fix the
price (either because he cannot value of because he does not
want to value ) the contract becomes void, except to as part of
goods delivered and accepted, if any, under the contract, as
regards which the buyer is bound to pay a reasonable price. If,
however any one of the parties , namely, the sellers or the buyer,
prevents the third party from making the valuation, the
innocent party may maintain a suit for damages against the
party at fault. Although in this case also the contract becomes
void, yet the party at fault is bound to compensate the other
party for the actual loss suffered by him because of the Act of
prevention.
Sec:32 says that, unless otherwise agreed, payment of price and
delivery of goods are concurrent condition.
Escalation Clause
Secton-64A, unless otherwise agreed, where, after making of the
contract and fixing the price but before the delivery of the
goods, a new or increased custom or excise duty of sale or
purchase tax is imposed and the seller has to pay it, the seller is
entitled to add the same to the price. Conversely, if the rate of
duty or tax is lowered, the buyer would be entitled to a
reduction in price.
Earnest or Deposit Money
Money deposited by buyer with seller is known as ‘earnest’ or
‘deposit’ money for fulfillment of contract. It is treated as part
payment and only balance to be paid by the buyer.
In case of default by buyer, the seller can forfeit this. In case of
default by seller, the buyer can get a back in addition to dam-
ages.
The time is very important in life. The lost time is never back. It
is important to realize the importance in the contract of sale of
goods.
Importance of Time To Goods
Do you know that as regards the time fixed for the delivery of
goods, time is usually held ‘to be of the essence of the
contract.’? Thus if time is fixed for the delivery of goods and
the seller makes a delay, the contract is voidable at the option of
the buyer. In case of late delivery, therefore, the buyer may
refuse to accept the delivery and may put an end to the contract.
You must understand the importance of time to goods.
Stipulations as to time in a contract of sale fall under the
following two heads:
1. Stipulation relating to time of delivery of goods.
11.555
2. Stipulation relating to time of payment of the price. whereas Q insists on the delivery of the second car to him

LEGAL ASPECTS OF BUSINESS

As regards the time fixed for the payment of the price, the for a reasonable price of both the cars. Decide the case.
general rule is that ‘time is not deemed to be of the essence [Hint. The case is governed by Section 10 which provides that if
of the contract,’ unless a different intention appears from the third party refuses to fix the price, the contract becomes void
the terms of the contract (Sec.11). Thus even if the price is except as to part of goods delivered and accepted as regards
not paid as agreed, the seller cannot avoid the contract on which the buyer must pay a reasonable price. Thus as regards
that account. He has to deliver the goods if the buyer the car already delivered, P cannot ask for its return and must
tenders the price within reasonable time before resale of accept a reasonable price for that. As regards the second car, Q
the goods. The seller may, however, claim compensation cannot insist on its delivery to him since the contract has
for the loss occasioned to him by the buyer’s failure to pay become void.]
on the appointed day. 4. A agrees to sell a horse to B who tells A that he B needs
Documents to Title To Goods the horse for riding to Mumbai immediately. The horse is
Section-2(4) Lays down rules regarding above. Any document ill at the time of agreement. What are the rights of A and
used in ordinary cause of business, as proof of the possession B?
or control of goods, or authorizing or purporting to authorize, [ Hint: The agreement is void (Sec. 8)].
either by endorsement or by delivery, the possessor of docu- 5. B agrees to buy A’s furniture at a price to be fixed by C, a
ment to transfer or receive goods thereby represented is a furniture dealer, C refuses to oblige A and B and fixes no
document of title of goods. It is a proof of ownership of price. On A’s refusal to sell, can B legally compel him to sell
goods and authorizes its holder to receive goods or further the furniture for any price?
transfer such right to another person by proper endorsement of
[Hint: No (Sec. 10)].
delivery.
Documents of title to goods are unconditional under taking on References
the part of issuing authority to deliver goods. Although these • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
documents can be transferred by mere delivery or by endorse- Sultan Chand and Sons, New Delhi.
ment, yet it is regarded as ‘quasi negotiable instrument’ , • http://www.indialawinfo.com/bareacts/soga.html
because the title of transferee ( even if bonafide will not be
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
superior to that of the transferor in the case of transfer of such
House Pvt. Ltd, Delhi.
documents.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Examples of the Documents of Title to Goods Pvt. Ltd, Delhi.
Bill of lading
Dock-warrant
Notes:
Warehouse keeper’s certificate,
Where finger’s certificate
Railway receipt
Delivery order – etc.
Attempt the Following Problems
1. A agrees to sell to B 10 bags of wheat Kalyan (superior)
out of 100 bags lying in his godown for Rs. 6,500. The
wheat is completely destroyed by fire. Can B compel A to
supply the wheat as per agreement?
[Hint. Yes, B can compel A, because the goods forming the
subject-matter of the contract in question are unascertained goods,
the perishing of which does not affect the contract. A must
supply the wheat from elsewhere or pay damages for the breach]
2. A hirer, who obtains possession of a refrigerator from its
owner under a hire-purchase agreement, sells the
refrigerator to a buyer who buys in good faith and without
notices of he right of the owner. Does this buyer get a
good title to the refrigerator? State reasons for your answer.
[ Hint: No, as the hire-purchaser has no title to the refrigerator].
3. P. agrees to sell to Q his two motor cars on the terms that
the price was to be fixed by R. Q takes the delivery of one
car immediately. R refuses to oblige P and Q and fixes no
price. P asks for the return of the car already delivered

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LEGAL ASPECTS OF BUSINESS
LESSON 16:
THE SALE OF GOODS ACT, 1930
CONDITIONS AND WARRANTIES
Learning Outcomes
After reading the lesson, you should be able to know:
• The meaning of conditions and warranties
• The difference between conditions and warranties
• The important conditions and warranties
• The doctrine of caveat emptor
Introduction
In a contract of sale of goods various terms or stipulations
regarding quality of the goods, price mode of payment, delivery
of goods etc. are very important. These stipulations are known
as conditions and warranties. Let us know about it.
Conditions and Warranties
Stipulations regarding quality of the goods, price mode of
payment, delivery of goods etc. are very important are known as
conditions and warranties There is a difference between
conditions and warranties. While some of them may not be
very important but some stipulations may be major terms
which go to the very root of contract and any breach may
frustrate the contract, while others may be minor terms which
are not very vital that their breach may seem to be breach of
contract as such. In law of sales major terms are called “Condi-
tions” and minor terms are called “warranties”
From the terms of contract, it is necessary to distinguish mere
statements commendation or praise or expressions made by the
seller in reference to goods. The commendatory statements are
neither conditions nor warranties. They do not form part of
contract and give no right of action. For Example: Where a
horse dealer, while praising his horse, states that the horse is
very lucky and one whosoever shall purchase it must very soon
become a millionaire, his statement, being mere commendatory
in nature, does not form a part of the contract and its breach (
i.e., if the buyer of the horse does not actually become a
millionaire later) does not give rise to any legal consequences.
Condition Sec. 12 (2) defines as ‘A condition’ is a stipulation
essential to the main purpose of the contract, the breach of
which gives the aggrieved party a right to repudiate the contract
itself. In addition he can claim damages from the guilty party
Warranty Sec. 12(3) defines ‘A warranty is a stipulation collateral
to the main purpose of the contract, the breach of which gives
the aggrieved party a right to sue for damages only, and not to
avoid the contract itself’.
Conditions are the very basis of contract of sale, so any breach
of condition will make contract void, but in the case of
warranties, aggrieved parties can claim only damages.
There is no hard and fast rule as to which stipulation in a
contract is a condition or warranty. Sec 12(4) lays down whether
a stipulation in a contract of sale is a condition or a warranty
depends in each case on the construction of contract. A
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stipulation may be a condition though called a warranty in the
contract. The court is not to be guided by the terminology of
the parties but has to look to the intention of the parities by
referring to the terms of the contract, its construction and the
surrounding circumstances to judge whether a stipulation was a
condition or a warranty. The best test is to see whether a
stipulation is fatal to the aggrieved party, then such stipulation
is a condition.
Example
(a) A man buys a particular horse which is warranted quiet to
ride and drive. If the horse turns out to be vicious, the
buyer’s only remedy is to claim damages. But if instead of
buying a particular horse, a man asks a dealer to supply him
with a quiet horse and the dealer supplies him with a
vicious one, the stipulation is a condition, and the buyer
can return the horse and can also claim damages for breach
of contract ( Hartley vs Hyman).
(b) P goes to R, a horse dealer, and sys, “I want a horse which
can run at a speed of 30 kilometers per hour.” The horse
dealer points out a particular horse and says, “This will suit
you.” P buys the horse. Later on P finds that the horse can
run only at a speed of 20 kilometers per hour. There is a
breach of condition, P can repudiate the contract, return the
horse to R and get back the price.
But if P says to R, “I want a good horse.” R shows him a horse
and says, “This is a good horse and it can run at a speed of 30
kilometers per hour,” and P buys the horse and finds later on
that it can run at a speed of 20 kilometers per hour only, there is
a breach of warranty because the stipulation made by the seller
did not form the very basis of the contract and was only
subsidiary one. The seller gave the assurance about the running
speed of the horse of his own without being asked by the
buyer hence it is only of secondary important.
The above illustrations are a clear proof of the fact that an
exactly similar term may be a condition in one contract and a
warranty in another depending upon the construction of the
contract as a whole.
Distinction between condition and warranty
You may summarize the difference as follows:
1. As to value. A condition is a stipulation which is essential
to the main purpose of the contract, whereas a warranty is
a stipulation which is collateral to the main purpose of the
contract. [Sec. 12(2)(3).
2. As to breach. The breach of a condition gives the aggrieved
party the right to repudiate the contract and also to claim
damages, whereas the breach of warranty gives the
aggrieved party a right to claim damages only.
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3. As to treatment. A breach of condition may be treated as a
breach of warranty. But a breach of warranty can not be
treated as a breach of condition.
When breach of Condition is to be treated as Breach of
Warranty:
Sec-13 deals, where breach of condition is to be treated as breach
of warranty. In this situation the buyer can claim only damages
and cannot rescind contract.
The Cases are as Follows
1. Voluntary waiver by buyer. In a breach of condition by
seller the buyer may instead elect to waive the condition i.e
to treat the breach of condition as a breach of warranty and
accept goods and sue the seller for damages.
Example: A agrees to supply B 10 bags of first quality sugar @
Rs. 625 per bag but supplies only second quality sugar, the price
of which is Rs. 600 per bag. There is a breach of condition and
the buyer can reject the goods. But if the buyer so elects, he may
treat it as a breach of warranty, accept the second quality sugar
and claim damages @ Rs. 25 per bag.
Acceptance of goods by buyer
When the buyer has accepted the goods and subsequently he
comes to know of the breach of the conditions, he cannot reject
them, but can only maintain an action for damages. This case
does not depend on the will of the buyer but the law compul-
sorily treats a breach of condition as a breach of warranty.
In case the buyer has accepted only part of the goods and the
contract indivisible, he will have to treat the breach of condition
as a breach of warranty and accept the remaining part also. But
in case of divisible contracts, he can repudiate as regards
remaining goods, if he has accepted only part thereof.
Express and Implied Conditions and Warranties
Conditions & warranties may be either express or implied.
When they are inserted in the contract they are expressed and
they are implied when the law presumes their existence in the
contract , although they are not been put in express words.
Implied condition and warranties may, however, be negatived
by express agreement, or by course of dealing between the
parties or by the useage of trade. This provision is merely an
application of the general maxim of law “what is expressly
done puts an end to what is tacit or implied’ and ‘custom and
agreement over-rule implied conditions and warranties’.
Implied Conditions
Unless otherwise agreed, the law incooperates following
conditions in to a contract for sale of goods.
1. Condition as to title: Sec.-14(a) In every contract of sale the
first implied condition on the part of the seller is that, in
case of sales he has a right to sell the goods and that, in the
case of agreement to sale, he will have a right to sell to
goods at the time when the property is to pass. Usually the
seller has right to sel the goods if either he is the owner or
he is owner’s agent. This implies that if seller’s title is
defective the buyer is entitled to reject the goods and to
recover his price.
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Example
LEGAL ASPECTS OF BUSINESS
R. purchased a motorcar from D used the same for several
months. D had no title to the car and, therefore, R was
compelled to return the car to the true owner. R sued D to
recover back the price which he had already paid. He was held
entitled to recover the whole of the price paid by him despite
the fact that he had used the car for some months ( Rowland vs
Divall).
It may be noted that the implied condition as to title makes it
obligatory upon the seller that he must not only be the owner
but also must be able to uphold the validity of the contract.
Thus if the goods sold bear labels infringing the trade mark of
another, the seller is guilty of breach of this condition although
he had full ownership of the goods.
2. Condition in a sale by Description
‘Where there is a contract of sale of goods by description,
there is an implied condition that the goods shall
correspond with description’. The goods must correspond
with description whether it is a sale of specific goods or of
unascertained goods. The description may be in term of
the qualities or characteristics of the goods. E.g. long staple
cotton, kalyan wheat, Basmati Rice, Sugar S.30 or may
mention trademark, brand name, type of packing etc.
Example
(b) M agreed to supply to L 3,000 tins of canned fruit, to be
packed in cases each containing 30 tins. M tendered a
substantial portion in cases containing 24 tins, It was held
that the mode of packing constituted a part of the
description and, therefore, L was entitled to reject the
whole consignment ( Re Moore & co. and Landaure & C.)
3. Condition in a sale by sample:
The implied conditions under the contract for sale by
sample are
• The bulk of goods should correspond with sample quality
• Buyer shall have reasonable opportunity to compare the
sample
• That the goods shall be free from any defect, rendering
them unmerchantable, which would not be apparent on
reasonable examination of the sample In other words,
there should not be any latent defect in the goods. If the
defect is patent one, that is, easily discoverable by the
exercise of ordinary care, and the buyer takes delivery after
inspection, there is no breach of implied condition and the
buyer has no remedy.
4. Condition in a sale by sample as well as by description: The
implied condition is that the bulk of goods shall
correspond, both with the sample and with description. If
it corresponds with only sample and not with description,
or vice versa, the buyer is entitled to reject the goods. It
must correspond with both.
Example
(b) N agreed to sell G some oil described as ‘foreign refined
rape oil,’ warranted only equal to sample. The oil supplied,
though corresponded with the sample, was adulterated
with hemp oil. Held that since the oil supplied was not in
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 accordance with the description the buyer was entitled to
LEGAL ASPECTS OF BUSINESS
reject the same ( Nichol vs godts).
5. Condition as to fitness or quality: Usually in a contract of
sale of goods there is no implied condition or warranty as
to quality or fitness for any particular propose of goods
supplied ; the rule being ‘Caveat Emptor’ that is, let the
buyer beware. But an implied condition is deemed to exist
on the part of the seller that the goods supplied shall be
reasonably fit for the purpose for which the buyer wants
them, if the following conditions are satisfied:
(i) The buyer, expressly or impliedly, should make known to
the seller the particular purpose for which the goods are
required; and
(ii) The buyer should rely on the seller’s skill or judgment and
(iii) The goods sold must be of a description which the seller
deals in the ordinary course of his business, whether he be
the manufacturer or not.
Example
A buyer ordered for the Hessian cloth, which is generally used
for packing purposes, without specifying the purpose for which
he wanted the same. The cloth was supplied accordingly. On
receiving the cloth the buyer found that it was not suitable for
packing food products as it had an unusual smell. Held, that the
buyer had no right to reject the cloth as it was suitable for
packing purposes alright. The buyer ought to have disclosed his
particular purpose to the seller in order to make him liable for
the breach of implied condition as to fitness (Rs. Andrew Yule
& Co.)
The purpose need not be told expressly if the goods are fit for
one particular purpose only or if the nature of the goods itself
tells the purpose by implication. In such case the purpose is
deemed to be made known to the seller impliedly.
6. Condition as to merchantability: This condition is applicable
only when the sale is by description. The goods should
correspond with description. Sec-15 Lays down another
implied condition that the goods should be ‘merchantable
quality’ and it should satisfy following conditions:
(a) The seller should be a dealer in goods of that description,
whether he be a manufacturer or not
(b) The buyer must not have any opportunity of examining
the goods or there must be some latent defect in the
goods, which should be apparent on reasonable
examination.
The term ‘merchantable quality’ means that the goods are such
quality and in such condition that a reasonable man, acting
reasonably, would accept them under the circumstances of the
case in performance of his offer to buy those goods, whether he
buys them for his own use or to sell.
7. Condition as to wholesomeness. This condition is
implied only in a contract of sale of eatables and
provisions. In such cases the goods supplied must not
only answer to description and be merchantable but must
also be wholesome, i.e., free from any defect which render
them unfit for human consumption.
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Example
(b) The plaintiff bought a bun at a baker’s and confectioner’s
ship. The bun contained a stone which broke one of the
plaintiff’s teeth. Held, the seller was liable in damages
because he violated the condition of wholesomeness
(Chaproniere vs Mason).
(c) W bought a bottle of beer from H, a dealer in wines. The
beer was contaminated with arsenic. W, on taking the beer,
feel ill. H was held liable to W for the consequent illness
(Wren vs Halt ).
Implied Warranties
Unless otherwise agreed, the law in-corporate following Implied
Warranties
1. Warranty of quite possession: Sec –14 (b), the first implied
warranty on the part of the seller is that “the buyer shall
have and enjoy quite possession of goods.” If the buyer is
in anyway disturbed by a person having a superior right
than that of the seller, the buyer can claim damages from
the seller. Since disturbances of quite possession is likely to
arise only where the seller’s title of goods is defective, this
warranty is regarded as an extension of the implied
condition of the title provided in section-14(a)
Example: A buys a typewriter and spent some money for
repairs. It turns to be a stolen article. A is entitled to get back
what he paid plus repair charges.
2. Warranty of freedom from encumbrances: Sec.-14 (c) Says
that ‘the goods shall be free from any charge or
encumbrance in favour of any third party not declared or
known to the buyer before or at the time when the contract
is made’ if goods are afterwards found to be subject to a
charge and the buyer has to discharge the same , there is a
breach of warranty and the buyer is entitled to damages. If
the buyer knows about the encumbrance on the goods at
the time of entering into the contract, he becomes bound
by the same and he is not entitled to claim compensation
from the seller for discharging same.
Example
A pledges a watch with B. Later gets the watch for limited
purpose and A sales it to C. B tells C about the pledge. C has to
make payment for the pledge amount to B. Here is breach of
warranty and C can get compensation from A.
3. Warranty of disclosing the dangerous nature of goods to
the ignorant buyer: The third implied warranty on the part
of seller is that in case the goods sold are of dangerous
nature he will warn the ignorant buyer of the probable
danger. If there is a breach of warranty the buyer is entitled
to claim damages for injury. The seller is bound to give
some warning of the danger in the goods to the buyer.
Example
C. Purchases a tin of disinfectant powder from A. A knows that
the lid of the tin is defective and if it is opened without special
care it may be dangerous, but tells nothing to C. C opens the tin
in the normal ways whereupon the disinfectant powder flies
into her eyes and causes injury, A is liable in damages to C as he
should have warned C of the probable danger.
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Doctrine of Caveat Emptor: The maxim of caveat emptier
means “Let the buyer beware” according to this it is the duty of
the buyer to be careful while purchasing goods of his require-
ment, and in the absence of any inquiry from the buyer, the
seller is not bound to disclose every defect in goods of which he
may be aware. The buyer must examine the goods thoroughly
and must see that the goods he buys are suitable for the
purpose for which he wants them. If the goods turn out to be
defective the buyer cannot sue the seller because there is no
implied undertaking by the seller that he shall supply goods to
suit the buyer’s purpose. If the buyer depends on his own skill
and makes bad choice he must suffer in the absence of any
misrepresentation or fraud or guarantee by the seller.
Example: A buys a horse from B for riding –but did not
mention this. The horse was found fit only for carriage. A
cannot claim damage.
However caveat emptor is subject to following exceptions:
Exceptions. The doctrine of caveat emptor is subject to the
following exceptions:
1. Where the seller makes a mis-representation and the buyer
relies on it, the doctrine of caveat emptor does not apply.
Such a contract being voidable at the option of the
innocent party, the buyer has a right to rescind the contract.
2. Where the seller makes a false representation amounting to
froud and the buyer relies on it, or where the seller actively
conceals a defect in the goods so that the same could not
be discovered on a reasonable examination, the doctrine of
caveat emptor does not apply. Such a contract is also
voidable at the option of the buyer and the buyer is
entitled to avoid the contract and also claim damages for
fraud.
3. Where the goods are purchased by description and they do
not correspond with the (Sec.15). See implied condition ‘in
a sale by description’ discussed earlier).
4. Where the goods are purchased by description from a seller
who deals in such class of goods and they are not of
‘merchantable quality’, the doctrine of caveat emptor does
not apply. But the doctrine applies, if the buyer has
examined the goods, as regards defects which such
examination ought to have revealed [Sec. 16(2)]. (See
implied condition ‘as to merchantability’ discussed earlier).
5. Where the goods are bought by sample, the doctrine of
caveat emptor does not apply if the bulk does not
correspond with the sample, or if the buyer is not
provided an opportunity to compare the build with the
sample, or if there is any hidden or latent defect in the
goods (Sec. 17). (See implied condition ‘in a sale by sample’
discussed earlier).
6. Where the goods are bought by sample as well as by
description and the bulk of the goods does not
correspond both with the sample and with the description,
the buyer is entitled to reject the goods (Sec. 15). (See
implied condition ‘in a sale by sample as well as by
description’ discussed earlier).
7. Where the buyer makes known to the seller the purpose for
which he requires the goods and relies upon the seller’s skill
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11.555
and judgement but the goods supplied are unfit for the
LEGAL ASPECTS OF BUSINESS
specified purpose, the principle of caveat emptor does not
protect the seller and he is liable in damages [Sec. 16(1)].
(See ‘condition as to fitness or quality’ discussed earlier).
8. Where the trade usage attaches an implied condition or
warranty as to quality or fitness and the seller deviates from
that, the doctrine of caveat emptor does not apply and the
seller is liable in damages [Sec. 16(3)].
Attempt the following problems for better understanding:
Practical Problems
1. Worsted coating of quality equal to sample was sold to
tailors who could not stitch it into coats owing to some
latent defect in its texture. The tailors had examined the
cloth before affecting the purchase. Are they entitled to
damages?
[Hint. In a contract of sale by sample there is an implied
condition that the goods shall be free from any latent or hidden
defect (Sec. 17). As this implied condition is broken in the
instant case, the tailors are entitled to recover damages.
2. A purchases a car from B and uses it for some item. It
turns out that the car sold by B to A was a stolen one and
had to be returned to the rightful owner. A brings action
against B for the return of the price. Will he succeed?
[Hint: Yes (sec. 14(a), Rowland v. Divall].
3. Soda-water was supplied by S to B in bottles. B was
injured by the bursting of one of the bottles. Can B claim
damages from S?
[Hint. B can claim damages from S for the injury as the bottle is
not of merchantable quality and there is a sale of goods by
description. (Refer to Condition as to Merchantability)].
4. A, a farmer, simply exhibits oats in his farm. B buys the
oats in the belief that they are old oats. In fact they are new
oats. B wants. B wants to return the oats and refuses to
pay the price, Decide.
[Hint: B cannot return the oats as the doctrine of caveat emptor
will apply].
5. M was shopping in a self-service super market. He picked
up a bottle of orange squash from a shelf. While he was
examining it, the bottle exploded in his hand and injured
him. Can M claim damages for the injury?
[Hint: M cannot claim damages because a warranty or condition
as to merchantability does not arise unless there is a sale. As
there was no sale (since M may decide not to buy and put back
the bottle in the shelf), there was no implied condition.]
6. A purchased a hot-water bottle from a retail chemist. The
bottle could stand hot water but not boiling water. When
it was filled by A with boiling water, it burst and injured
his wife. A sues for damages. Decide.
[Hint: There is a breach of implied condition as to fitness and
hence A can recover damages (Priest v. Last)].
7. A agrees to supply to B a certain quantity of timber of
half-inch thickness. The timber actually supplied varies in
thickness from one-third inch to five-eighth inch. The
timber is merchantable and commercially fit for the
89
 purpose for which it was ordered. B rejects the timber. Is [Hint: Yes, as the rule of caveat emptor will apply in this case].
LEGAL ASPECTS OF BUSINESS

his action justified? 14. H, a housewife, ordered from C, a coal merchant, ‘a ton of
[Hint. Yes, B is entitled to reject the goods. The facts of the coalite’ and it was duly delivered to her. When part of the
given case are similar to Arcos Ltd. Vs E.A. Ronaasen & Son, consignment was put on fire in an open grate in H’s house,
1933, A.C. 470, in which case Lord Atkin observed: “If the an explosion occurred which caused damage. H claims
contract specifies conditions of weight, measurement and the damages. Is she entitled to sue?
like, those conditions must be complied with. A ton does not [Hint: Yes, as the goods are not of merchantable quality (Sec.
mean about a ton, or a yard about a yard. Still less, when you 16(2)].
descend to minute measurements, does half an inch means 15. In a contract for the purchase of 3,00 tins of canned fruits
about half inch. If the seller wants a margin he must, and in to be packed in cases each containing 30 tins, a substantial
my experience does, stipulate for it.”] part was tendered in cases containing 24 tins instead of 30.
8. A purchases some chocolates from a shop. One of the Can the buyer reject the cases?
chocolates contains a poisonous matter and as a result A’s [Hint: Yes, as the goods do not correspond with the descrip-
wife who has eaten it falls seriously ill. What remedy is tion of the goods ordered
available to A against the shopkeeper?
[ Sec. 15; Moore & Co. v. Landaur & Co.)].
[Hint The chocolates are not of merchantable quality and hence
A can repudiate the contract and recover damages (Sec. 17: References
Drummond v. Van Ingen)]. • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
9. A lady, who knew that her skin was abnormally sensitive, Sultan Chand and Sons, New Delhi.
bought a tweed coat and developed skin trouble by using • http://www.indialawinfo.com/bareacts/soga.html
it. She did not disclose to the seller that her skin was • M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
abnormally sensitive. Is the seller liable for breach of House Pvt. Ltd, Delhi.
implied condition as to fitness or quality? • P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
[Hint. The implied condition as to fitness or quality is with Pvt. Ltd, Delhi.
regard to the suitability of the goods to a normal buyer. If the
buyer is suffering from an abnormality and does not inform the
seller about the same, this implied condition does not apply. Notes:
Hence in the given case there is no breach of implied condition
as to fitness and as such the seller is not liable. (Griffths vs peter
Conway Ltd., 1939,
10. Worsted cotton cloth of quality equal to sample was sold
to tailors who could not stitch it into coats owing to some
defect in its texture. The buyers had examined the cloth
before effecting the purchase. Are they entitled to damages?
[Hint. Yes, as there is a latent defect in cloth (Sec. 17;
Drummond v. Van Ingen)].
11. M. asked for a bottle of Stone’s Ginger Wine at F’s shop
which was licensed for the sale of wines. While M was
drawing the cork, the bottle broke because of defect in the
glass and M was injured. Can M claim damages for the
injury?
[Hint: Yes, as the bottle is not of merchantable quality and
there is a sale of goods by description [Sec. 15 and 16(2); Morelli
v. Fitch and Gibbons)].
12. A sold to B a tin of disinfectant power. He knew that it
would be dangerous to open the tin without special care
but he did not warn B. B without knowledge of the
danger, opened the tin whereupon the power flew into his
eyes and injured him. B filed a suit for damages for the
injury. Will he succeed?
[Hint: Yes (Sec. 16(2)].
13. A contract to sell B a piece of silk. B thinks that it is Indian
silk. A knows that B thinks so, but knows that it is not
Indian silk. A does not correct B’s impression. B afterwards
discovers that it is not Indian silk. Can he repudiate the
contract?

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LESSON 17:
THE SALE OF GOODS ACT, 1930
TRANSFER OF PROPERTY
Learning Outcomes
After reading the lesson, you should be able to know:
• The meaning of transfer of property
• The rules relating to transfer of property
• The transfer of property by non owners
Introduction
You must know what we mean by transfer of property.
Transfer of property in a contract of sale is primarily the transfer
of property in goods by the seller to the buyer. The exact time
at which property in goods passes from seller to the buyer is of
great importance. ‘The transfer ‘of property in goods’ means
transfer of ownership of goods. ‘Property in goods’ is different
from possession of goods. Possession simply refers to the
custody of goods. Although the property in goods may pass
from the seller to the buyer, but the goods may be in posses-
sion of the seller as unpaid seller or as a bailee for buyer. In
some cases the property in goods to still be with the seller
although the goods may be in possession of the buyer or his
agent or a carrier for transmission to the buyer.
The Following Require special Notice
1. Risk ‘prima-facia’ passes with property.
As a general rule the risk of the loss of goods is prima-facie in
the person in whom property is. Section 26 provides to the
same effect, thus, “Unless otherwise agreed, the goods remain
at the seller’s risk until the property therein is transferred to the
buyer, but when the property therein is transferred to buyer, the
goods are at the buyer’s risk whether delivery has been made or
not.” Thus, if after the contract the goods are destroyed or
damaged the question who is to bear the loss is to be decided
not on the basis of possession of the goods but on the basis
of ownership of goods. Whosoever is the owner of the goods
at the time of loss must bear the loss.
Example
A buys goods from B and property has passed to him, but the
goods remained in B’s warehouse. Before delivery of goods to
A, there is a fire in B’s warehouse and all the goods are de-
stroyed. A must bear the loss and pay the price of goods to B,
if he has not paid it so far.
The opening words of Section 26, namely, ‘unless otherwise
agreed’ are of great significance. These words imply that ‘risk
passes with property’ is not an absolute or inflexible rule, but a
prima facie one. Risk is no test of property passing. There is
nothing to prevent the parties from contracting that risk shall
pass even before passing of property or vice versa.
1. Action against third parties: If after the contract of sale, the
goods having damaged by a third party, it is only the
person in whom the property vests who can take action
against the wrong doer.
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LEGAL ASPECTS OF BUSINESS
2. Suit for price: Generally speaking the seller can sue for the
price if the property in goods has passed to the buyer.
3. Insolvency of the seller or the buyer: In case of insolvency
of the buyer or seller, whether official receiver or assignee
can take over goods shall depend upon whether the
property in goods was with the party who has become
insolvent. Example: If the seller becomes insolvent before
giving delivery of the goods but the property in goods has
already passed on to the buyer who has paid the price, the
official receiver have no claim on goods.
Do you know that there is a difference in transfer of property in
specific /ascertained goods and unascertained goods. Let us try
to understand the difference.
Rule regarding Transfer of Property in specific or ascertained
goods:
In the case of specific or ascertained goods the property is
transferred to the buyer at such time as parties intend to be
transferred. For ascertaining the intention of parties regard shall
be had on terms of the contract, the conduct of parties and
circumstances of the case. The parties may intend to pass the
property as wanted at the time making the contract, or when
goods are delivered or when the goods are paid.
Only when the intention of parties cannot be judged from the
contract or conduct or circumstances of the case, the rules in
Section-20, 21,22,23, will apply.
1. When goods are in a deliverable state(Sec 20). Where there
is an unconditional (i.e., not subject to any condition
precedent to be fulfilled by the parties) contract for the sale
of specific goods in a deliverable state, the property in the
goods passes to the buyer as soon as the contract is made,
and it is immaterial whether the time of payment of the
price or the time of delivery of the goods, or both are
postponed.
Example
(a) A buys a bicycle for Rs. 300 on a month’s credit and asks
the shopkeeper to send it to his house. The shopkeeper
agrees to do so. The bicycle immediately becomes the
property of A.
(b) P buys a table for Rs 100 on a week’s credit and arranges to
take delivery of the table the next day. A fire broke out in
the furniture mart the same evening and the table is
destroyed. The property in the table has passed to P and
the is bound to pay the price.
The goods are said to be in a ‘deliverable sate’ when they are in
such a state that the buyer would, under the contract, be bound
to take delivery of them [sec.2(3)]. For example, in illustration
(b) above, if the seller has to polish the table to make it
acceptable to the buyer, it is not in a deliverable state until it is
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 so polished, and the buyer does not acquire property at the time
LEGAL ASPECTS OF BUSINESS
of the contract.
2. When goods have to be put into a deliverable state:
(Section. 21) in the case of sale of specific goods, when the
seller is bound to do ‘something’ to do goods for making
them in a deliverable state, the property does not pass until
such thing is done and the buyer has notice thereof.
Something may be like polishing, packing, finishing, etc. It
is important that ‘that something’ to be done must be
completed and the fact that it has been done must be
brought the notice of buyer. The fact that the goods
having put in a deliverable state must come to the
knowledge of the buyer in some way or the other.
Example: A agrees to sell to B the whole of turpentine oil
lying in a cistern. It is further agreed that the oil is to be put
into casks by A and then B is to take them away. Some of
the casks are filled in the presence of B, but before they are
removed or the remainder filled, the whole is destroyed
accidentally bye fire. B must bear the loss of oil which had
been put into the casks because in all these casks the
property has passed to him as nothing further remained to
be done to them by the seller. But the property in the
casks not filled up remained in the seller, at whose risk they
continued (Rugg vs Minett).
3. When the goods have to be measured etc, to ascertain price:
In a contract of specific sale of goods in deliverable state,
but the seller is bound to weigh, measure, test or do
something with reference to the goods for the propose of
ascertaining price, the property does not pass until such act
is done and the buyer has notice thereof.
It may be noted that if the seller has done all what he was
required to do under the contract and nothing remains to be
done by him, the property passes to the buyer even if the buyer
has to do something for his own satisfaction.
Example
A sold to B 289 bales of goat skins, each bale containing five
dozens, and the price was for certain sum per dozen skins. It
was the duty of A to count the goat skins in each bale. Before A
could do the same, the bales were destroyed by fire. Held, that
the property in the goods had not passed to the buyer (i.e.B) as
something still remained to be done by the seller (i.e. , A) for
ascertaining the price, and as such the loss caused by fire had to
be borne by the seller ( i.e., A) (Zagury vs Furnell).
4. When goods are delivered on approval: (Section 24) When
goods are delivered to the buyer on approval or ‘on sale or
return,’ or on other similar terms, the property therein
passes to the buyer:
(i) When he signifies his approval or acceptance to the seller or
does any other act adopting the transaction, e.g., uses the
goods, pledges the goods or resells them;
(ii) If he does not signify his approval or acceptance to the
seller but retains the goods, without giving notice of
rejection, beyond the time fixed for the return of goods, or
if no time has been fixed, beyond a reasonable time.
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Example
(a) A delivered a horse to B on the terms of ‘sale or return,
within 8 days. ‘The horse died on the third day without
any fault on the part of B. Held, A was to bear the loss as
the horse was still his property when it perished (Elphick
vs Barnes).
(b) A delivered a horse to B on trial for 8 days. B continued to
retain the horse even after the expiry of 8 days without
giving notice of rejection A. B had automatically become
the owner of the horse on the expiry of 8 days.
Transfer of Property in Unascertained and future
goods
In section 18 and 23 the rules relating to transfer of property in
unascertained and future goods’ are laid down. These sections
provide that where goods contracted to be sold are not
ascertained or where they are future goods, the property in
goods does not pass to the buyer unless and until the goods
are ascertained or unconditionally appropriated to the contract
so as to bring them in a deliverable state, either by the seller
with the assent of the buyer or by the buyer with the assent of
the seller. Such assent may be expressed or implied, and may be
given either before or after the appropriation is made.
The above rule is fundamental rule and it applies irrespective of
what the parties intended until goods are ascertained or
appropriated there is merely as certained “agreement to sell”.
example: Sale of ten tons of wheat from a granary, has not the
effect of transferring property to buyer (It is an agreement to
sell only) until ten tons are appropriated to the contract by the
seller and the buyer knows it.
The process of ascertainment or appropriation consists in
earmarking or setting apart goods as subject-matter of the
contract. It involves separating, weighing, measuring, counting
or similar acts done in relation to goods with an intention to
identify and determine the specific goods to be delivered under
the contract. The distinction between ‘ascertainment’ and
‘appropriation’ is that whereas ‘ascertainment’ can be a unilateral
act of the seller, that is, he alone may set apart the goods,
‘appropriation’ involves the element of mutual consent of the
seller and the buyer.
Essentials of valid appropriation: As regard a valid or proper
appropriation of goods, the following point should be noted:
(i) The appropriation must be of goods answering the
contract description, both as to quality and quantity.
(ii) The appropriation must be intentional, i.e., it must be
made with intention to appropriate goods to specific
contract, and it must not be due to mere accident or
mistake.
(iii) The appropriation must be made either by the seller with
the assent of the buyer or by the buyer with the assent of
the seller. Assent of the other future party is thus
necessary; whether before of after the appropriation is
made for a valid appropriation.
(iv) The appropriation must be unconditional, i.e. the seller
should not reserve to himself the right of disposal of the
goods until and unless certain conditions are fulfilled.
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Delivery to Carrier: When a seller delivers the goods to a carrier
or other bailee for the purpose of transmission to the buyer
and does not reserve the right of disposal, the property passes
on to the buyer at once. As soon as goods are loaded and
railway receipt obtained and the same is sent to buyer direct the
ownership is passed on delivery of goods to railway company.
If the railway receipt is sent to banker with instructions to
deliver the same on payment, the right of disposal is said to be
reserved and the property will not pass to buyer at the time of
delivery of goods to railway co.
The delivery to the carrier may be:
(i) Absolutely for the buyer. Where the bill of lading or
railway receipt is made out in the name of the buyer and is
sent to him, the presumption is that no right of disposal
has been reserved by the seller in respect of those goods.
The ownership in such a case passes from the seller to the
buyer.
(ii) Absolutely for the seller. Where the bill of lading or railway
receipt is taken in the seller’s or his agent’s name and is sent
to the agent of the seller to be delivered to the buyer on
the fulfillment of certain conditions, the seller is deemed to
have reserved the right of disposal of the goods. In such a
case the ownership does not pass to the buyer until the
necessary conditions are fulfilled and the documents of
title are delivered to the buyer.
Reservation of right of disposal: (Sec. 25) Reservation of the
right of disposal means reserving a right to dispose of the
goods until certain conditions (like payment of the price) are
fulfilled. When the seller reserves such a right the property in
the goods does not pass until those conditions are fulfilled.
The seller may reserve such a right expressly while making a
contract or while making appropriation of unascertained goods.
He may also reserve this right by implication, for example,
when the seller while transporting goods takes the railway
receipt or the bill of lading in his own name or where the seller
has taken the R/R or B/L in the name of the buyer but has
delivered the same to his bank with the instructions that the
document is to be delivered to the buyer only when he makes
payment of the price or accepts the bill of exchange, the right of
disposal is said to be reserved impliedly.
Rule on transfer of title on sale: The rule is ‘the seller can not
transfer to the buyer of goods a better title when he himself
has’. Sector 27 says ‘where goods are sold by a person who is
not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires
no better title to goods than the seller had’. The maxim is
‘nemo det quod non habet,” which means that no one can give
what he has not got.
The general rule aims at protecting the interest of the true
owner and is deemed necessary in the larger interest of society.
If a thief disposes of a stolen property, the buyer acquire no
title though he may have purchased the goods bonabfide for
value, and real owner of the goods is entitled to recover
possession of goods without paying anything to the buyer.
So the buyer cannot get a good title to the goods unless he
purchase the goods from a person who is the owner thereof or
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who sells them under the authority or with the consent of the
LEGAL ASPECTS OF BUSINESS
owner.
Transfer of Title by Non-Owners
The above rule as to the title is however subject to following
exceptions where the buyer gets a better title to the goods than
what the seller himself possesses.
1. An unauthorized sale by a mercantile agent:( Sec. 27 ) A
mercantile agent means an agent having in the customary
course of business as such agent authority either to sell
goods, or to consign goods for the purposes of sale, or to
buy goods, or to raise money on the security of goods
[Sec. 2(9)]. Thus as a rule a mercantile agent having an
authority to sell goods conveys a good title to the buyer.
But by virtue of this provision ( proviso to Sec. 27) a
mercantile agent can convey a good title to the buyer even
though he sells goods without having any authority from
the principal to do so, provided the following conditions
are satisfied:
(a) He should be in possession of the goods or documents
of title to the goods in his capacity as mercantile agent and
with the consent of the owner,
(b) He should sell the goods while acting in the ordinary
course of business,
(c) The buyer should act in good faith without having any
notice, at the time of the contract, that the agent has no
authority to sell. Example: F entrusted his car to a
mercantile agent for sale at a stated price and not below
that. The agent sold it to S, a bonafide purchaser, below
the reserve price and misappropriated the proceeds. S
resold the car to K, the defendant. Held, S obtained a good
title to the car from the mercantile agent and he conveyed a
good title to K and therefore F was not entitled to recover
the car from K (Kolkes vs King).
2. Transfer of title by estoppel (Sec. 27 )
Estoppal means that a person who by his conduct or
words leads another to believe that certain state of affairs
existed, would be estopped ( precluded ) from denying
later that such as state of affairs did not exist. Sometimes
the doctrine of estop or preclude the owner from denying
the seller’s right to sell the goods and thus an innocent
buyer may have a good title dispite the want of authority
of the seller. When the true owner of goods by his
conduct or word or by any act or omission leads the buyer
to believe that the seller is the owner of the goods or has
the authority to sell them, he cannot afar wards deny the
seller’s authority to sell. The buyer in such case gets a better
title when that of the seller. The estopal may arise in any of
the following ways:
1. The owner standing by, when the sale is effected, or
2. Still more, by his assisting the sale, or
3. By permitting goods to go into the possession of
another with all the insignia of possession thereof and
apparent title, or
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LEGAL ASPECTS OF BUSINESS
to induce the buyer to alter his position to his
prejudice.
Example: M, the owner of a wagon allowed one of his
employees K, to have his name painted on it. M did so for the
purpose of inducing the public to believe that the wagon
belonged to K. C purchased the wagon from K in good faith. C
acquires a good title as M is estopped from denying K’s
authority to sell (O, Connor vs Clark).
3. Sale by joint owner: (Sec.28) If one of several joint owners
of goods has the sole possession of them by permission
of the co-owners of goods has the sole possession of
them by permission of the co-owners, the property in the
goods is transferred to any person who buys them from
such joint owner in good faith without notice of the fact
that the seller has no authority to sell. It may be noted that
in the absence of this provision (i.e., Sec. 28) the buyer
would have obtained only the title of the co-owners and
would have become merely a co-owner with the other co-
owners. Hence the provision constitutes an exception to
the rule – “no one can give what the has not got.”
Example: A, B and C are three brothers. They own a cow in
common. B and C entrust the work of looking after the cow to
A and leave the cow in A’s possession. A sells the cow to D. D
purchases bonafide for value. D gets a good title.
4. Sale by person in possession under voidable contract: (Sec.
29) When a person has obtained possession of goods
under voidable contract and sells those goods before the
contract has been rescinded acquires a good title to them
provided he acts in good faith and without notice of the
seller’s defect in title.
Example: A, by misrepresentation induces B to sell and deliver
to him a cow. A sells the cow to C before B has rescinded the
contract. C purchases the cow in good faith and without notice
of the seller’s defective title. C acquires a good title.
It is to be noted that this Section (Sec. 29) does not apply unless
there is a contract. Thus it does not apply to a contract originally
void or where goods have been obtained by theft.
5. Sale by Seller in possession after sale [Sec. 30 (1)] Where a
seller, after having sold the goods, continues to be in
possession of the goods or of the documents of title to
them and again sells or pledges them either himself or
through a mercantile agent, he will convey a good title to
the buyer or the pledge provided the buyer or the pledge
acts in good faith and without notice of the previous sale.
For the application of this exception it is essential that the
possession of the seller must be as seller and not as hirer
or bailee.
6. Sale by buyer in possession after ‘agreement to buy’ [Sec.
30(2)]. Where a buyer has agreed to buy the goods and has
obtained possession of the same or the documents of title
to them with the consent of the seller, resells or pledges
the goods either himself or through a mercantile agent, he
will convey a good title to the buyer or the pledge provided
the person receiving the goods acts in good faith and
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94
without notice of any lien or other right of the original
seller in respect of those goods.
It is to be noted that a person who has got merely ‘an option to
buy,’ as in a hire-purchase agreement, cannot convey a good title
to a sub-buyer, however bonafide, for ‘an option to buy’ is not
‘an agreement to buy’ (Belsize Motor Supply Co. vs Cox). In
order to make this exception applicable it is essential that the
person must have obtained possession of the goods under ‘an
agreement to sell’ (i.e., under ‘and agreement to buy’ from the
buyer’s point of view).
Example
(a) A buys some furniture and agrees to pay for that in two
monthly installments, the ownership to pass to him on
payment of the second installment. Having obtained
possession of the furniture, A, sells the furniture to B
before paying the second installment. B buys the furniture
bonafide. Subsequently A does not pay the second
installment. The furniture dealer cannot take back furniture
from B, who obtains a good title to the same. The dealer
can, of course, sue A for the breach of the contract and
claim damages.
(b) A agreed to buy a car and pay for it, if his solicitor
approved. A obtained possession of the car and sold the
same to B. But the solicitor subsequently disapproved of
the transaction. It was held that B, the bonafide buyer, got
a good title, because A agreed to buy ( Marten vs Whale).
7. Resale by an unpaid seller: [Sec. 54(3)]. Where an unpaid
seller, who has exercised his right of lien or stoppage in
transit, resells the goods (of which ownership has passed
to the buyer), the subsequent buyer acquires a good title
thereto as against the original buyer, even though the resale
may not be justified in the circumstances, i.e., no notice of
the resale has been given to the original buyer.
8. Exceptions under other Acts. Other Acts also contain some
provisions under which a non-owner may pass to the
buyer a better title than he himself has. For example,
(a) Sale by finder of lost goods under certain circumstances
(Sec. 169, The Indian Contract Act).
(b) Sale by Pawnee or pledgee under certain circumstance (Sec.
176, The Indian Contract Act.).
(c) Sale by Official Receiver or Assignee in case of insolvency
of an individual and Liquidators of companies. These
persons are not owners of the properties they deal in, but
convey a better (good) title to the buyers than they
themselves possess.
(d) Under the Negotiable Instruments Act, a holder in due
course gets a better title than what his endorser had. In
other words, a person who takes a negotiable instrument
in good faith and for value becomes the true owner even if
he takes it from a thief of finder.
Solve the following problems for a better understanding:
Practical Problems
Attempt the following problems, giving reasons:
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1. Has the property in the goods passed in the following
cases?
(a) B offers for a specific horse Rs. 20,000 the horse to be
delivered on 5th January, and the price to be paid on the
1st February following.
(b) B orders A, a boat-builder, to make him a boat. While
the boat is being built, B pays to A money from time
to time on account of price.
(c) A, having a quantity of sugar which is more than
twenty quintals, contracts to sell to B ten quintals out
of it. Afterwards A puts ten quintals of sugar in sacks
and gives notice to B that the sugar is ready and
requires him to take it away. B says he will take it as
soon as he can.
[Hint: (a) The property in the horse would pass to B as soon as
the seller accepts the offer. The fact that the time of delivery and
of payment of price is postponed does not prevent the
property from passing at once. (b) No. The property in the boat
would pass to B when the boat is ready and A gives a notice to
B to this effect (Sec. 21). (c) Yes. The property in sugar passes to
B when A gives notice to B (Sec. 21)].
2. A, a jeweler, was entrusted with a diamond by P with the
instructions that A should obtain offers for it, and if any
such offer was approved by P, A should sell it to the offer
or. Acting contrary to P’s instructions A sold the diamond
to S who bought it in good faith. Thereafter, A absconded
with the price money. Can P recover the diamond from S?
[Hint: No. P cannot recover the diamond from S who bought it
in good faith from A who is a mercantile agent (Sec. 27)]
3. A delivers a gold necklace to B on “sale or return” basis. It
is agreed between A and B that property is not to pass to B
till he has paid price of the necklace. Without paying the
price, B sells the necklace to C. Does C get a good title to
the necklace?
[Hint: No. C does not get a good title to the necklace, as B
himself has no title to the necklace till he pays its price (Weiner
v. Smith)].
4. In a mixed contract for storage of paddy and the sale of
the same thereafter, the paddy was delivered by A to B for
storage. B had the option to name a particular day on
which he was to buy the paddy at the current prevailing
rate. Shall B be liable if the goods are destroyed before he
exercises this option?
[Hint: No. (Sec. 19; Chidambaram Chettiar v. Steel Bros.)].
5. Jewellery was sent by A to B ‘on sale or return’. B pledged
the jewellery with C. Discuss the rights and liabilities of
the parties.
[Hint: A can recover the price of jewellery from B. He cannot
recover the jewellery from C [Sec. 24; Kirkham v.
Attenborough)].
6. In a contract of sale of goods, 200 specified bales of
goatskins containing 60 pieces in each bale were sold. It
was necessary for the seller to count them before delivery.
Before counting was completed, the bales were destroyed
by fire. Who should bear the loss, the buyer or the seller?
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11.555
[Hint: The seller (Sec. 22)].
LEGAL ASPECTS OF BUSINESS
7. A sells to B a horse which is to be delivered to B the next
week. B is to pay the price on delivery. A asks his servant
to keep the horse separate from other horses. The horse,
however, dies before it is delivered and paid for. Who shall
bear the loss?
[Hint. It is a contract of sale of specific goods in a deliverable
state and therefore the property in the horse passes to B at once
at the time of contract. Hence B should bear the loss].
8. On 6th May, A entered into a contract for the sale of 100
bags of wheat to B and received Rs 2,500 in part payment
of the price. The goods were not with the seller at that
time but had been dispatched from Hapur on 4th May. A
had received the R/R which he endorsed in favour of B on
6th May. The goods never reached the destination as they
were burnt of 7th May while in transit. Who shall bear the
loss?
[Hint. B has to bear the loss as the property in the goods had
passed to him at once at the time of endorsement of the R/R
in his name, i.e., on 6th May while the loss occurred on 7th May].
9. X sells a car by auction to Y, who is the highest bidder. Y
offers to pay for the car by a cheque and he is allowed to do
so provided he signs a document stating that the property
in the car would not pass to him until the amount of the
cheque has been credited to the seller’s account. The cheque
is subsequently dishonored. X asks Y to return back the
car as he has not become the owner of the car because the
cheque given by him has been dishonored. Is X’s
contention justified?
[Hint: No, X’s contention is not justified. The property in the
car had passed on the fall of hammer, a subsequent agreement
that the property would not pass until the cheque is realized is
of no effect and therefore X having lost his title to the car
cannot recover back the same from Y. X’s only remedy is to sue
Y for the price. Delivery and payment are concurrent condi-
tions. X was, therefore, entitled to refuse delivery of car until
paid and could have exercised his ‘right of lien’ as an unpaid
seller. But once he has given the delivery of car, his ‘right of
lien’ is lost, since lien is lost once possession is lost.]
10. A sells to B the whole content of a certain heap of wheat,
which according to A contains 10 quintals. B gets the
wheat weighed for his own satisfaction. When the wheat is
being weighed, there is a fire and the whole of the wheat is
destroyed. Can A recover the price of wheat from B?
[Hint. Yes, A can recover the price from B. It is a contract of
sale of specific goods in a deliverable state (as nothing remained
to be done by the seller to ascertain the price), and, therefore, the
property passes to the buyer as soon as the contract is made.
When the buer gets something done for his own satisfaction,
the passing of property is not affected by that and Sec. 20
applies to such a case alright].
11. A gives some diamonds to B on sale or return basis. On
the same day B gives those diamonds to C on sale or
return and from him they are lost. Who shall bear the
loss?
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 [Hint: B must bear the loss because by transferring the dia-
LEGAL ASPECTS OF BUSINESS

monds further he has adopted the transaction and the property

in them has, therefore, passed to him.
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas
Publishing House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw
Hill Pvt. Ltd, Delhi.

Notes:

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96 11.555

LESSON 18:
THE SALE OF GOODS ACT, 1930
PERFORMANCE OF CONTRACT OF SALE
Learning Outcomes
After reading the lesson, you should be able to know:
• The meaning of performance of contract of sale
• The rules as to delivery of goods
Introduction
Now you know much about the contract of Sale. Try to answer
what you could mean by Performance of Contract of Sale
The performance of contract of sale implies delivery of goods,
by the seller, and acceptance of the delivery of goods and
payment for them by the buyer, in accordance with in contract.
The parties are free to provide any terms they like in their
contract about the time, place and manner of delivery of
goods, acceptance there of and payment of the price. But if the
parties are silent and do not provide any thing regarding these
matters in the contract then the rules contained in the sale of
Goods Act are applicable.
If the contract contains any special terms as to delivery and
acceptance, these must be complied with. If there are no terms
in the contract to this effect, delivery of the goods and payment
of the price are concurrent conditions, that is , both these must
take place at the same time as in, for instance, a cash sale over a
shop over counter (sec.32).
Delivery of goods (section. 2(2)
Delivery means voluntary transfer of possession of goods
from one person to another [sec. 2(2)]. Delivery of goods sold
may be made by doing anything which the parties agree shall be
treated as delivery or which has the effect of putting the goods
in the possession of the buyer or his agent (sec.33)
Delivery of goods may be actual, symbolic, or constructive.
1. Actual delivery. Where the goods are handed over by the
seller to the buyer or his duly authorized agent, the delivery
is said to be actual. Delivery of goods may also be made by
doing anything which has the effect of putting the goods
in the possession of the buyer [sec 33].
2. Symbolic delivery. Where the goods are ponderous or
bulky and incapable of actual delivery, e.g., haystack in a
meadow, the delivery may be symbolic. Handing over of
the key of a warehouse to the buyer is symbolic delivery of
the goods to the buyer and is as effective as actual delivery,
even though there is no change in the possession of the
goods.
3. Constructive delivery or delivery by attornment .Where a
third person (e.g., a bailee) who is in possession of the
goods of the seller at the time of the sale acknowledges to
the buyer that he holds the goods on his behalf, there
takes place a delivery by attornment or constructive delivery
[sec.36(3)]. This may happen in the following cases:
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LEGAL ASPECTS OF BUSINESS
(a) where the seller in possession of the goods agrees to
hold them on behalf of the buyer.
(b) Where the buyer is in possession of the goods and the
seller agrees to the buyer’s holding the goods as owner.
(c) Where a third person in possession of the goods
acknowledges to the buyer that he holds them on his
behalf.
Example. A sells to B 10 bags of wheat lying in C’s Go down.
A gives an order to C, asking him to transfer the goods to B. C
assents to such order and transfer the goods in his books to B.
this is a delivery by attornment.
Rules as to Delivery of Goods
1. Delivery may be either actual or symbolic or constructive.
(sec. 33) Delivery of goods sold may be made by doing
anything which the parties agree shall be treated as delivery
or which has the effect of putting the goods in the
possession of the buyer or of any person authorized to
hold them on his half. Thus, the delivery of the goods
may be either actual or symbolic or constructive.
2. Delivery and payment are concurrent conditions (sec. 32.)
unless otherwise agreed, delivery of the goods and
payment of the price are con-current conditions, that is ,
the seller should be ready and willing to deliver the goods
to the buyer in exchange for the price and the buyer should
be ready and willing to pay the price in exchange for
possession of the goods simultaneously, just like in a cash
sale over a shop counter.
Illustration A contracts to sell to B 10 bags of sugar for Rs.
9,000. A need not deliver the goods unless B is ready and
willing to pay for the goods on delivery, and B need not pay for
the goods unless A is ready and willing to deliver them on
payment.
3. Buyer to apply for delivery. Apart from any express
contract, the seller of goods is not bound to deliver them
until the buyer applies for delivery (sec.35). where the
goods are subsequently acquired by the seller. He should
intimate this to the buyer and the buyer should then apply
for delivery. Unless otherwise agreed , the buyer has no
cause of action against the seller if he does not apply for
delivey.
4. Effect of part delivery, when property in goods is to pass
on delivery (sec.34). A delivery of part of the goods, in
progress of the delivery of the whole, has the same effect,
for the purpose of passing the property in such goods, as a
delivery of the whole. In other words, when delivery of
part of the goods has been made with the intention of
delivering the rest also, the property in the whole of the
goods is deemed to pass to the buyer as soon as some
portion is delivered.
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 Illustration. A ship arrives with a cargo consigned to X, the
LEGAL ASPECTS OF BUSINESS
buyer of the cargo, upon the condition that the property is to
pass to him on delivery. The captain begins to discharge it. And
delivers over part of the goods to X in progress of the delivery
of the whole. Here, he delivers of the portion of the goods to
X is equivalent to the delivery of the whole of the cargo and he
property in the whole of the goods passes to X, the buyer
(Dixon vs Yates’). But when a part of the goods is delivered
with the intention of severing it from the whole, it is not
regarded as delivery of the whole of the goods and the property
is deemed to pass to the buyer in that portion of the goods
only which has been delivered. If in a contract for the sale of a
stack of hay the buyer is permitted to remove only a part of it,
this does not amount to delivery of the whole as it shows an
intention to separate the part delivered from the rest of hay
(Bunnery vs Poyntz).
Place of Delivery SEC.36(1) The delivey of goods should be
effected as per the terms contained in the contract. The rules are
1. where there is a contract as to the place of
delivery
2. where there is no contract as to the place of At the place at which the goods are at the time of sale.
delivery.
(a) In case of sale At the place at which the goods are at the time of
(b) In case of an agreement to sell agreement to sell.
(i) in respect of existing goods At the place at which the goods are manufactured or seller delivers
(ii) In respect of future goods produced.
1. Time of delivery [sec. 36(2) & (4)]. Where under the
contract of sale the seller is bound to send the goods to
the buyer, but no time for sending them is fixed, the seller
is bound to send them within a reasonable time. Further,
demand of delivery by the buyer or the tender of delivery
by the seller should be made at a reasonable hour. What is
a reasonable hour is a question of fact.
2. Delivery of goods where they are in possession of a third
party (sec. 36(3). Where the goods at the time of sale are in
the possession of a third person, there is no delivery by the
seller to the buyer unless and until such third person
acknowledge to the buyer that he holds the goods on his
behalf. Such a delivery is known as “ constructive delivery”
or “ delivery by attornment” and requires the consent of all
the three parties, the seller, the buyer and the person having
possession of the goods, where the seller hands over the
delivery order to the buyer, there is no delivery unless the
seller’s agent holding the goods has assented thereto.
But where the goods have been sold by the transfer of the
document of title to goods, e.g., railway receipt or bill of lading,
the buyer is deemed to be in possession of the goods repre-
sented by such document, and the assent of the third party is
not required.
3. Cost of delivery. Unless otherwise agreed, all expenses of
and incidental to making of delivery are borne by the seller,
but all expenses of and incidental to obtaining of delivery
are borne by the buyer (sec.36(5)).
4. Delivery of wrong quantity or different quality. [Sec 37] the
delivery of the quanti ty of goods contracted for should
be strictly according to terms of the contract. A defective
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delivery entities the buyer to reject the goods. The three
different contingencies which may arise in case of a
defective delivery, i.e., delivery of a wrong quantity, are:
(1) Delivery of goods less than contracted for . where the seller
delivers to the buyer a quantity of goods less than he
contractecd to sell, the buyer may reject the goods. If he
accepts them, he shall pay for them at the contract rate [sec.
37(1)].
Example. A sells to B 2,000 OF “200 yards reels of sewing
cotton. After taking delivery B finds that the length of the
cotton per reel is less than 200 yards. The average being shortage
of about 6 per cent. B may reject the goods. If he waives the
right of rejection, he is liable to pay the price of the goods at the
contract rate [Back etc. v. synzmanoski, (1924)A.C. 43].
If the goods have been rejected for short delivery. The seller can
make, within the time limit, another delivery in accordance with
the terms of the contract.
(2) Delivery of
At the agreed place. goods in
excess of the
quantity
contracted for.
Where the
to the buyer a
quantity of
goods larger
than he contracted to sell, the buyer may (i) accept the
whole ; or (ii) reject the whole ;or (iii) accept the quantity he
ordered and reject the rest. If the buyer accepts the whole
of the goods so delivered, he must pay for them at the
contract rate [sec. 37(2)
Example . A places an order with B to supply 25 bottles of
orange syrup. B sends 30.A is entitled to reject the whole, or he
may accept 25 and reject the rest. If he accepts all the 30, he must
pay for them at the contract rate.
(3) Delivery of goods contracted for mixed with other goods.
Where the seller delivers to the buyer the goods he
contracted to sell mixed with goods of a different
description, the buyer may accept the goods which are in
accordance with the contract and reject the rest, or may reject
the whole [sec 37(3)].
Example. A contracts with B to buy 100 tons of cane sugar. A
delivers to B 75 tone of cane sugar and 25 tons of beet sugar. A
may either (i) accept 75 tons of cane sugar which is in accordance
with the contract, and reject 25 tons of beet sugar which is of a
different description, or (ii) reject the whole sugar.
The provision of sec.37 are subject to any usage of trade, special
agreement, or course of dealing between the parties [sec.37(4)].
If quantity deliver is deficit or excess which is negligilgible , the
court does not take it into account. The maxim is “ the law does
not take trival deviations into account.”
10. Delivery by installment [sec 38] unless otherwise agreed,
the buyer of goods is not bound to accept delivery thereof
by installments. If the parties so agree then only the
delivery of the goods may be made by installments.
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When the parties agree that to be separately paid for, and either
buyer or seller commits a breach of contract in respect of one or
more installments, there arises a question as to whether such a
breach amounts to a breach of the whole of the contract or a
breach of only a part of it? The answer to this question
depends upon the terms of the contract and the circumstances
of the case, unless otherwise agreed the following two factors
must be borne in mind in deciding the whole matter.
(a) The quantitative proportion which the breach bears to the
contract as a whole, and
(b) The degree of probability of the repetition of the breach
(Maple Flock co.Ltd..vs Universal Furniture products Ltd.)
Generally, failure to deliver or pay for one installment does not
amount to a breach of the whole contract, unless from the
special circumstances of the case (e.g., the factory is closed
because of a labour strike or the buyer become insolvent) it can
be inferred that similar breaches will be repeated.
Illustration A sold to B 1,500 tons of meat of a specified
quality to be shipped 125 tons monthly in equal weekly
installments. After about half the meat was delivered and paid
for, B discovered that it was not of the contract quality and
could have been rejected, and therefore he refused to take
further deliveries. Held, that B was entitled to do so (Robert A.
Munroe & Co,Ltd. Vs Meyer). (if B might have discovered the
defect just after first installment, he would not have been
allowed to repudiate the whole contract but only the damages
for the loss in that particular installment delivery would have
been allowed.
11. Delivery to carrier or wharfinger [section 39] where the seller
is authorized or required to send the goods to the buyer,
delivery of the goods to carrier (whether named by the
buyer, or not) for the purpose of transmission to the
buyer, or delivery of the goods to wharfinger custody, is
prima facie deemed to be a delivery of the goods to the
buyer (section 39(1)]. The seller is further required to
perform the following two duties also.
(a) To make a reasonable contract with the carrier or
wharfinger: unless other wise authorized by the buyer,
the seller shall make a reasonable contract with the
carrier or wharfinger on behalf of the buyer. If the
seller omits to do so, and the goods are lost or
damaged in course of transit or whilst in the custody
of the wharfinger, the buyer may decline to treat the
delivery to the carrier or wharfinger as a delivery to
himself, or any hold the seller irresponsible for
damages (section 39(2)]
(b) To give notice to the buyer to enable him to insure the
goods: unless otherwise agreed, where goods are sent
by the seller to the buyer by a route involving sea
transit, in circumstances in which it is usual to insure,
the seller must inform the buyer to enable him to
insure them during their sea transit, and if the seller
fails to do so, the goods shall be deemed to be at his
risk during such transit [section 39(3)].
12. Liability of buyer for neglecting or refusing to take delivery
of goods. (Sec.44). when the seller is ready and willing to
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11.555
deliver the goods and requests the buyer to take delivery,
LEGAL ASPECTS OF BUSINESS
and the buyer does not within a reasonable time after such
request take delivery of the goods, he becomes liable to the
seller for any loss occasioned by his neglect or refusal to
take delivery, and also for a reasonable charge for the care
and custody of the goods.
Acceptance of Delivery by Buyer
The mere fact that the buyer has taken the delivery of the goods
does not amount to acceptance of them. According to section
42, the buyer is deemed to have accepted the goods in either of
the following circumstances, namely:
1. when he intimates to the seller that he has accepted the
goods. (Sec.41,) to examine and test the goods in order to
be sure as to whether they are in conformity with the
contract regarding quality etc. in the case of a horse sale
conditioned to run at 25 kilometers per hour it is necessary
to use the horse for ascertaining, whether the horse is in
conformity with the contract. But if he is not satisfied, he
must act promptly to inform the seller about rejection.
2. when he does any act in relation to the goods which is
inconsistent with the ownership of the seller, e.g.,
consumers, uses, pledges or resells the goods or puts his
mark on them.
Example
(a) Where the buyer having seen that samples drawn from
bulk were inferior to the samples originally shown to him,
offered the goods for sale by auction at reduced price and
the auction having failed to produce a purchaser, the buyer
purported to reject the goods, it was held that the buyer
could not do so as he had in law ‘accepted’ the goods
(parker vs plamer)
(b) Where the buyer took delivery of wheat and sold a part of
it, and afterwards found that the wheat was not of contract
quality and therefore sought to reject it, it was held that he
had lost the right of rejection as he had accepted the wheat
by a dealing inconsistent with the rights of the seller, in so
far as he had sold out a portion of it ( Hardy & co. vs
fowler).
3. when, after the lapse of a reasonable time, he retains the
goods with out intimating the seller that he has rejected
them. What is reasonable time is a question of fact. If time
for rejection is stipulated, rejection must be within that
period. It may be mentioned that on rejection of goods
because of defective delivery, mere informing the seller is
enough and the buyer is not bound to return the rejected
goods to the seller (sec.43).
Attempt the following problems for a better understanding:
Practical Problems
1. X, a dealer in cattle feed, sold to Y, another such dealer,
15,000 tons of meat and bone-meal of specified quality to
be shipped, 1,250 tons monthly in equal instalments. After
about half the meat was delivered and paid for, it was
found that it was not of the contract quality, and Y refused
to take further delivery. Advise X.
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 [Hint: Y is entitled to refuse to take further delivery as he is not (i.e., the post office) is delivery to the buyer and the buyer
LEGAL ASPECTS OF BUSINESS

bound to take the risk of having put upon him further becomes the owner thereafter who should bear the loss.]
deliveries of goods which do not conform to the contract (Sec. 9. P sold barley to B by sample, delivery to be made at T
38; Robert A. Munro & Co. v. Myer,(1930) 2 K.B. 312)] railway station. B sold the barley to X. The barley was
1. A contracts with B to buy 50 easy-chairs of a certain quality. delivered at T railway station and B, after inspecting a
B delivers 25 chairs of the type agreed upon and 25 chairs sample of it, sent it on to X. X rejected it as not being
of some other type. What are the rights of A? according to sample, whereupon B seeks to reject the
[Hint: A may accept the chairs which are in accordance with the goods. Will B succeed?
contract and reject the rest or may reject the whole (Sec. 37 (3)]. [Hint. B cannot reject the barley, as by reselling those goods to
2. P sold barley to B by sample, delivery to be made at T X and ordering to send them to X, he had in law ‘accepted’ the
railway station. B resold the barley to D. The barley was goods.]
delivered at T station and B, after inspecting a sample of it, References
sent it on to D. D rejected it as not being according to • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
sample, whereupon B claimed to be entitled to reject it. Sultan Chand and Sons, New Delhi.
What are B’s rights?
• http://www.indialawinfo.com/bareacts/soga.html
[Hint: B is not entitled to reject the barley (Secs.17 and 42;
Perkins v. Bell)]. • M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
3. There was a contract for the sale of 4,000 tons of meal, 2
per cent more or less. The seller delivered meal greatly in • P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
excess of the permitted variation. What are the rights of Pvt. Ltd, Delhi.
the buyer?
[Hint: The buyer can reject the whole quantity (Sec. 37 (3); Payne Notes:
& Routh V. Lillico & Sons].
4. A of Agra ordered certain specified goods from B of
Mumbai. B sends the goods, not ordered, along with
them. What should A do?
[Hint: A may either reject the whole or accept the whole or
accept the goods ordered by him and reject the rest (Sec. 37(3)].
5. A contract with B to purchase 30 tons of apple juice. B
crushes the apples, puts the juice in casks and keeps it ready
for delivery. A delays to take the delivery and the juice goes
putrid and has to be thrown away. Is A liable to pay the
price?
{Hint: Yes].
6. A sells to B 100 bags of wheat which are locked up in a
godown. A hands over to B the key of the godown. Does
it constitute delivery of the goods to B?
[Hint. Yes, this is a delivery to B, being a symbolic delivery.]
7. X of Cochin agreed to sell 400 tons of rice to Y of Calcutta
to be shipped in November or December 1995. X puts the
rice on ship on 20 October 1995. Is the buyer bound to
accept the consignment?
[Hint: The buyer is not bound to accept the consignment
because the seller has not complied with the stipulation as to
time of delivery and time of delivery of goods being of the
essence of all mercantile contracts, an essential term of the
contract has been broken.]
8. P of Delhi writes to R of Bombay to send him a book by
parcel post. R accordingly sends the book by parcel post.
The parcel is lost on the way. Can R recover its price from
P?
[Hint. Yes, R can recover the price of the book from P because
as per Section 39 of the sale of Goods Act, delivery to the carrier

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100 11.555
 LEGAL ASPECTS OF BUSINESS
LESSON 19
THE SALE OF GOODS ACT, 1930
REMEDIES IN CASE OF BREACH BY BUYER AND SELLER

Learning Outcomes
After reading the lesson, you should Against the goods Against the buyer personally
be able to know:
• The rights of an unpaid seller
• The rights of an unpaid seller Where the property Where the property
against the goods In the goods has in the goods has not
• The rights of an unpaid seller Passed (Sec.46(1) passed (Sec. 46(2)
against the buyer
personally
• The rights of buyer Lien Stoppage Re-sale Withholding Stoppage in
(Secs. Secs. 50 (Sec. 54) delivery Transit
Introduction 47 to 49 to 52
Today will be discussing about the
remedies in case of breach by seller
and buyer. Let us first start with the Suit for Suit for Repudiation Suit for
study of rights of an unpaid seller. Price damages of contract interest
(Sec.55) (Sec. 56) (Sec. 60) (Sec.61)
Rights of an Unpaid Seller
According to (section 45) the term seller includes ‘any person Rights of an Unpaid Seller
who is in the position of a seller, as, for instance, an agent of An unpaid seller has two-fold rights, viz.,;
the seller to whom the bill of lading had been endorsed, or a
I. Rights of unpaid seller against the goods, and
consignor or agent who has himself paid, or is directly respon-
sible for, the price. II. Rights of unpaid seller against the buyer personally.
The seller of goods is deemed to be an ‘unpaid seller’ (a) when We shall now examine these rights in detail.
the whole of the price has not been paid or tendered; or (b) 1. Rights of Unpaid Seller against the Goods.
where a bill of exchange or other negotiable instrument has An unpaid seller has the following rights against the goods
been received as a conditional payment, i.e., subject to the notwithstanding the fact that the property in the goods has
realization thereof, and the same has been dishonoured. passed to the buyer:
According to above the following are the characteristics of and 1. Right of lien;
‘unpaid seller’. 2. Right of stoppage of goods in transit;
1. He must sell goods on cash terms and not on credit, and 3. Right of resale [Sec. 46 (1)].
he must be unpaid.
1. Right of lien (Sec. 47)
2. He must be unpaid either wholly or partly. Even if only a
portion of the price, however small, remains unpaid, he is ‘Lien’ is the right to retain possession of goods and refuse to
deemed to be an unpaid seller. Where the price is paid deliver them to the buyer until the price due in respect of them
through a bill of exchange or other negotiable instrument, is paid or tendered. An unpaid seller in possession of goods
the same must be dishonoured. sold is entitled to exercise his lien on the goods in the following
cases:
3. He must not refuse to accept payment when tendered. If
the buyer has tendered the price but the seller wrongfully (a) Where the goods have been sold without any stipulation as
refuses to take the same, he ceases to be an unpaid seller. to credit;
(b) Where the goods have been sold on credit, but the term of
credit has expired:
(c) Where the buyer becomes insolvent, even though the
period of credit may not have yet expired.
In the case of buyer’s insolvency the lien exists even though
goods had been sold on credit and the period of credit has not
yet expired. When he goods are sold on credit the presumption
is that the buyer shall keep his credit good. If, therefore, before
payment the buyer becomes insolvent, the seller is entitled to
exercise this right and hold the goods as security for the price.

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11.555 101
 The effect of buyer’s insolvency is that all stipulations as to
LEGAL ASPECTS OF BUSINESS
credit are put to an end and the seller has a right to say, “I will
not deliver the goods until I see that I shall get my price paid”
(Griffiths vs Perry2)
The unpaid seller’s lien is a possessory lien, i.e., the lien can be
exercised as long as the seller remains in possession of the
goods. He may exercise his right of lien notwithstanding that
he is in possession of the goods as agent or bailee for the buyer
[Sec. 47(2)]. Transfer of property in the goods or transfer of
documents of title to the goods does not affect the exercise of
this right, provided the goods remain in the actual possession
of the seller. In fact when property has passed to the buyer then
only retaining of goods is called technically ‘lien.’ Where the
property in goods has not passed to the buyer and the title is
still with the seller then it is, strictly speaking, anomalous to say
that the seller has a lien against his own goods. The seller’s lien
when property has not passed to the buyer is termed as ‘a right
of withholding delivery. Accordingly, Section 46(2) provides:
The term insolvent here does not mean a person who has been
adjudged insolvent under the Insolvency Law. In Sale of
Goods Act “a person is said to be insolvent who has ceased to
pay his debts in the ordinary course of business, or cannot pay
his debts as they become due, whether he has committed an act
of insolvency or not” [Sec. 2(8)].
But if the buyer has transferred the documents of title to a
bonafide purchaser, the seller’s lien is defeated (Sec. 53).
“Where the property in goods has not passed to the buyer, the
unpaid seller has, in addition to his other remedies, a right of
withholding delivery similar to and coextensive with his rights
of lien and stoppage in transit where the property has passed to
the buyer.”
This right of lien can be exercised only for the non-payment of
the price and not for any other charges, i.e., maintenance or
custody charges, which the seller may have to incur for storing
the goods in exercise of his lien for the price. This right of lien
extends to the whole of the goods in his possession even
though part payment for those goods has already been made.
In other words the buyer is not entitled to claim delivery of a
portion of the goods on payment of a proportionate price.
Further, where an unpaid seller has made part delivery of the
goods, he may exercise his right of lien on the remainder,
unless such part delivery has been made under such circum-
stances as to show an agreement to waive the lien (Sec. 48).
Also, the lien can be exercised even though the seller has
obtained a ‘decree’ for the price of the goods [Sec. 49(2)].
When lien is lost? As already observed, lien depends on
physical possession of goods. Once the possession is lost, the
lien is also lost. Section 49 accordingly provides that the unpaid
seller of goods loses his lien thereon in the following cases:
(a) When he delivers the goods to a carrier or other beilee for
the purpose of transmission to the buyer without
reserving the right of disposal of the goods; or
(b) When the buyer or his agent lawfully obtains possession
of the goods; or
(c) When the seller expressly or impliedly waives his right of
lien. An implied waiver takes place when the seller grants
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102
fresh term of credit or allows the buyer to accept a bill of
exchange payable at a future date or assents to a sub-sale
which the buyer may have made.
It may be noted that right of lien, if once lost, will not revive if
the buyer redelivers the goods to the seller for any particular
purpose. Thus, where a refrigerator after being sold was
delivered to the buyer and since it was not functioning properly,
the buyer delivered back the same to the seller for repairs, it was
held that the seller could not exercise his lien over the refrigera-
tor ( Eduljee vs John Bros.).
2. Right of Stoppage of Goods in Transit:
Meaning of Right of Stoppage of Goods in Transit: The right
of stoppage in transit means the right of stopping the goods
while they are in transit, to regain possession and to retian them
till the full price is paid. Lord Cairns LJ in case of Schotsmans v.
Lances and Yorks Rly. Had made the following observation in
this regard:
“The essential feature of stoppage in transit is that the goods
should be in the possession of a middleman or some other
person intervening between the vendor who has parted with
and the purchaser who has not received them.”
Conditions under which Right of Stoppage in Transit can be
Exercised [Section 50]: The unpaid seller can exercise the right
of stoppage in transit only if the following conditions are
fulfilled:
(i) The seller must have parted with the possession of
goods, i.e., the goods must not be in the possession
of seller.
(ii) The goods must be in the course of transit.
(iii) The buyer must have become insolvent.
Note: The buyer is said to be insolvent when he has ceased to
pay his debts in ordinary course of business, or cannot pay his
debts as they become due, whether he has committed an act of
insolvency or not.
Note: The seller’s right of stoppage in transit is based on the
principle that one man’s goods shall nto be applied to the
payment of other man’s debt. [Lord Reading in Booth
Steamship Co Ltd. V. Cargo Fleet Iran Co.]
Duration of Transit [Section 51(1)]: Goods are deemed to be in
course of transit from the time when they are delivered to a
carrier or other bailee for the purpose of transmission to the
buyer, until the buyer or his agent in that behalf takes delivery
of them from such carrier or other bailee.
Note: The carrier must hold the goods in the capacity of an
independent person and not in the capacity of an agent for the
seller or buyer. If the carrier holds the goods as an agent for the
seller, there is no question of exercising the right of stoppage in
transit because the seller can exercise his right of lien. If the
carrier holds the goods as an agent for the buyer, the seller
cannot exercise the right of stoppage in transit because the
delivery to the carrier amounts to delivery to buyer.
Circumstances under which Right of Sopttage is Lost [Sections
51 and 53 (1)]: The right of stoppage in transit is lost when
transit comes to an end. Transit comes to an end in the
following cases:
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(i) If the buyer or his agent in that Basis of distinction
behalf obtains delivery of the goods 1. Possession of goods
before their arrival at the appointed
destination [Section 51(2)].
(ii) If, after the arrival of the goods at the 2. Solvency
appointed destination, the carrier or
other bailee acknowledges to the
buyer or his agent that he holds the
goods on his behalf and continues in
possession of them as bailee for the 3. End. Vs. Commencement on
delivery to carrier
buyer or his agent, even if a further
destination for the goods may have
been indicated by the buyer [Section 4. Purpose
51(3)].
(iii) When goods are delivered to a ship
chartered by the buyer, it is a question Mode of exercising the right
depending on the circumstances of
the particular case, whether goods are
in the possession of the master as a carrier or as agent of
the buyer [Section 51(5)].
(iv) Where the carrier or other bailee wrongfully refuses to
deliver the goods to the buyer or his agent in that behalf
[Section 51(6)].
(v) Where part delivery of the goods has been made to the
buyer or his agent in that behalf, the remainder of the
goods may be stopped in transit and such part delivery has
not been given in such circumstances as to show an
agreement to give up possession of the whole of the
goods [Section 51(7)].
(vi) Where the sub-sale or other disposition by the buyer has
been done with seller’s consent [Section 53(1)].
(vii) Where a document of title to goods ( e.g., bill of lading or
railway receipt ) has been issued or lawfully transferred to
any person as buyer and that person transfers the
document by way of sale to a person who takes the
document in good faith and for consideration. [Provision
to Section 53(1)].
How to Exercise Right of Stoppage in Transit [Section 52(1)]:
The unpaid seller may exercise his right of stoppage in transit in
anyone of the following two ways:
(i) by taking actual possession of the goods, or
(ii) By giving notice of his claim to the carrier or other
bailee who possesses the goods.
Such notice may be given either to the person in actual posses-
sion of the goods or to his principal. In the latter case, the
notice to be effectual shall be given at such time and in such
circumstances that the principal, by the exercise of reasonable
diligence, may communicate it to his servant or agent in time to
prevent a delivery to the buyer.
Duty of Carrier [Section 51(2)]: When notice of stoppage in
transit is given by the seller to the carrier or other bailee in
possession of the goods, he shall redeliver the goods to or
according to the directions of the seller. The expenses of such
redelivery shall be borne by the seller.
Distinction Between Right of Lien and Right of Stoppage in
Transit
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11.555
Right of lien Right of stoppage in transit
LEGAL ASPECTS OF BUSINESS
The goods must be in actual The goods must be in the
possession of the seller. possession of a carrier or other
bailee who is acting as an
independent person.
The right can be exercised even This right can be exercised only
when the buyer is solvent but when the buyer has become
refuses to pay the price. insolvent.
This right comes to an end when
the seller delivers the goods to a This right commences only when
carrier. the seller delivers the goods to a
carrier.
The purpose of right is to retain
possession of the goods. The purpose of this right is to
regain the possession of the
goods.
This right can be exercised by
the seller himself.
This right can be exercised by the
seller through the carrier or the
other bailee.
Right of Stoppage in as an Extension of the Right of Lien:
The right of stoppage in transit is an extension of the right of
lien in the sense that the right of stoppage in transit begins
when the right of lien ends and the purpose of the right of
stoppage in transit is to regain possession of the goods.
Effect of Sub-sale or Pledge by Buyer upon the “Two Rights of
the Unpaid Seller” Discussed Above (Sec. 53)
The unpaid seller’s right of lien or stoppage in transit is not
affected by any sale or other disposition (e.g., pledge) of the
goods which the buyer might have made. For example, P sells
certain goods to R and delivers them to a carrier for transmis-
sion to R. Before the goods reach their destination P comes to
know that R has become insolvent. In the meanwhile R sells
those goods to Q. The sale of goods between R and Q will not
affect the right of P to stop them in transit.
But there are two exceptional cases when these two rights of the
unpaid seller are affected by a sale or other disposition (e.g.,
pledge) of the goods by the buyer. These exceptions are:
(i) When the seller has assented to the sale or other
disposition (e.g., pledge) which the buyer may have made.
(ii) When a document of title to goods (e.g., a bill of lading or
railway receipt) has been issued or transferred to a buyer,
and the buyer transfers the document to a person who
takes the document in good faith and for consideration,
then,
(a) if such last mentioned transfer was by way of sale, the
unpaid seller’s right of lien or stoppage in transit is
defeated, and
(b) if such last mentioned transfer was by way of pledge, the
unpaid seller’s right of lien or stoppage in transit can only
be exercised subject to the rights of the pledgee. But in this
case the unpaid seller may require the pledgee to satisfy his
claim against the buyer first out of any other goods or
securities of the buyer in the hands of the pledgee.
Rights of Unpaid Seller in case of Transfer of Document by
way of Pledge [Proviso to Sections 53(1) and 53(2)]
(i) Where the transfer was by way of pledge or other
disposition for value, the unpaid seller’s right of lien or
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 stoppage in transit can only be exercised subject to rights
LEGAL ASPECTS OF BUSINESS
of the transferee
(ii) Where the transfer is by way of pledge, the unpaid seller
may require the pledgee to have the amount secured by the
pledge satisfied in the first instance, as far as possible, out
of any other goods or securities of the buyer in the hands
of the pledgee and available against the buyer.
3. Right of Resale
The right of resale is a very valuable right given to an unpaid
seller. In the absence of this right, the unpaid seller’s other
rights against the goods, namely, ‘lien’ and ‘stoppage in transit,’
would not have been of much use because these rights only
entitle the unpaid seller to retain the goods until paid by the
buyer. If the buyer continues to remain in default, then should
the seller be expected to retain the goods indefinitely, specially
when the goods are perishable? Obviously, this cannot be the
intention of the law. Section 54, therefore, gives to the unpaid
seller a limited right to resell the goods in the following cases:
(a) Where the goods are of a perishable nature; or
(b) Where such a right is expressly reserved in the contract
in case the buyer should make a default; or
(c) Where the seller has given a notice to the buyer of his
intention to resell and the buyer does not pay or tender
the price within a reasonable time.
If on a resale there is a loss to the seller, he can recover it from
the defaulting buyer. But if there is a surplus on the resale, the
seller can keep it with him because the buyer cannot be allowed
to take advantage of his own wrong. If, however, no notice of
resale [as required in case(c) above] is given to the buyer, the
right of seller to claim loss and retain surplus, if any, is reversed.
In other words, if the unpaid seller fails to give notice of resale
to the buyer, there neither the goods are of perishable nature
nor such a right was expressly reserved, he cannot recover the
loss from the buyer and it under an obligation to hand over the
surplus, if any, to the buyer, arising from the resale. Thus, it will
be seen that giving of notice to the buyer, when so required, is
very necessary to make him liable for the breach of contract. It is
so because such a notice gives an opportunity to the buyer either
to pay the price and have the goods, or, if he cannot pay, to
supervise the sale to see that the same is properly made.
It is important that absence of notice, when so required, affects
the rights of the unpaid seller himself only as discussed above
and it does not affect the title of the subsequent buyer who will
acquire a good title to the goods. Section 54(3) specially declares
–”Where an unpaid seller who has exercised his right of lien or
stoppage in transit resells the goods, the buyer acquires a good
title thereto as against the original buyer, notwithstanding that
no notice of the resale has been given to the original buyer.”
II. Rights of Unpaid Seller against the Buyer Personally
The unpaid seller, in addition to his rights against the
goods as discussed above, has the following three rights of
action against the buyer personally:
1. Suit for price (Sec. 55). Where property in goods has passed
to the buyer; or where the sale price is payable ‘on a day
certain’, although the property in goods has not passed;
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104
and the buyer wrongfully neglects or refuses to pay the
price according to the terms of the contract, the seller is
entitled to sue the buyer for price, irrespective of the
delivery of goods. Where the goods have not been
delivered, the seller would file a suit for price normally
when the goods have been manufactured to some special
order and thus are unsaleable otherwise.
2. Suit for damages for non-acceptance (Sec. 56). Where the
buyer wrongfully neglects or refuses to accept and pay for
the goods, the seller may sue him for damages for non-
acceptance. The seller’s remedy in this case is a suit for
damages rather than an action for the full price of the
goods.
The damages are calculated in accordance with the rules con-
tained in Section 73 of the Indian Contract Act, that is, the
measure of damages is the estimated loss arising directly and
naturally from the buyer’s breach of contract. Where the goods
have a ready market the principle applicable is that the seller may
recover from the buyer damages equal to the difference between
the contract price and the market price on the data of the breach
of the contract. Thus, if the difference between the contract
price and market price is nil, the seller can get only nominal
damages ( Charter vs Sullivan). But where the goods do not
have any ready market, the measure of damages will depend
upon the facts of each case. For example, in Thompson Ltd. Vs
Robinson the damages were assessed on the basis of profits
lost. In that case, T Ltd., who were car dealers, contracted to
supply a motorcar to R.R refused to accept delivery. It was
found as a fact that the supply of cars exceeded the demand at
the time of breach and hence in a sense there was no market
price on the date of breach. Held, T Ltd., were entitled to
damages for the loss of their bargain viz., the profit they would
have made, as they had sold one car less than they otherwise
would have sold. To take another illustration, if the goods have
been manufactured to some special order and they are
unsaleable and have been manufactured to some special order
and they are unsaleable and have no value at all for other buyers,
then the seller may even be allowed the full price of the goods
as damages.
1. Suit for special damages and interest (Sec.61) This Section
entitles the seller to sue the buyer for ‘special damages’ also
for such loss “which the parties knew, when they made the
contract, to be likely to result from the breach of it.” In fact
the Section is only declaratory of the principle regarding
‘special damages’ laid down in Section 73 of the Indian
Contract Act. The Section also recognizes unpaid seller’s
right to get interest at a reasonable rate on the total unpaid
price of the goods sold, from the time it was due until it is
actually paid. (Telu Ram Jain vs Aggarwal & Sons).
We have discussed a lot about the rights of an unpaid seller.
But does the buyer too enjoys some rights. Yes, of course! Let
me throw a light on it.
Rights of Buyer
The rights available to the buyer have been shown below in
Let us discuss these rights one by one.
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(a) Suit for Damages for Non-delivery [Section 57] Where the
seller wrongfully neglects or refuses to deliver the goods to
the buyer, the buyer may sue the seller for damages for
non-delivery.
(b) Suit for Specific Performance [Section 58] In any suit for
breach of contract to deliver specific or ascertained goods,
the court may direct that the contract shall be performed
specifically.
(c) Suit for Breach of Warranty [Section 59] Where there is a
breach of warranty by the seller, or where the buyer elects or
is compelled to treat any breach of a condition on the part
of the seller as a breach of warranty, the buyer is not by
reason only of such breach of warranty entitled to reject the
goods, but he may –
(i) Set up against the seller the breach of warranty in
diminution or extinction of the price; or
(ii) Sue the seller for damages for breach of warranty.
Note: The fact that a buyer has set up a breach of warranty in
diminution or extinction of the price does not prevent him
from suing for the same breach of warranty if he suffered
further damage. [Section 59(2)]
Example: X sold a second hand Radio to Y who spent Rs 100
on the repair of this Radio. This Radio was seized by the police
as it was a stolen one. Y filed a suit against X for recovery of
damages for breach of warranty of quite possession including
the cost of repairs. It was held that Y was entitled to recover the
same. [Mason v. Burmingham]
(d) Right to Treat the Contract as Rescinded or Operative in
Case of Repudiation of Contract by Seller before due Date
[Section 60] Where seller repudiates the contract before the
date of delivery, the buyer may either treat the contract as
subsisting and wait till the date of delivery, or he may treat
the contract as rescinded and sue for damages for the
breach.
(e) Suit for Interest [Section 61(2)] In case of breach of the
contract on the part of the seller, the buyer may sue the
seller for interest from the date on which the payment was
made.
Practical Problem
1. A sells goods to B. B pays to A through a cheque. Before B
could obtain the delivery of goods, his cheque has been
dishonored by the bank. A, therefore, refuses to give
delivery of the goods until paid. Is A’s action justified?
[Hint: Yes, A’s action is justified, because the right of lien is
linked with possession and not with title or passing of
property.]
2. A sells goods to B and transfers him the document of title
to the goods. B pays A through a cheque. In fulfillment
of a contract of sale B transfers that document of title to
C. Before C could obtain the delivery of goods, B,s cheque
has been dishonoured by the bank. Hence A gives
instructions to stop delivery of the goods to C until paid.
Is A’s action justified?
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11.555
[Hint. No. A’s action is not justified. An unpaid seller’s right of
LEGAL ASPECTS OF BUSINESS
lien is defeated against transferee who takes a document of title
in good faith and for consideration (Sec. 53)].
3. A sells and consigns to B goods of the value of Rs. 10,000
on credit. B assigns the railway receipt to C to secure a
specific advance of Rs. 50,00 on the railway receipt. Before
the goods reach the destination B becomes insolvent. A
gives notice to stop the goods in transit but C claims them.
Can A stop the goods in transit?
[Hint. Yes, A can stop the goods in transit but subject to the
pledge of C.C can recover the amount of pledge from the
goods or from A. Hence A can stop the goods in transit only
when he pays Rs. 5,000 to C (Sec.53)].
4. P sells to R a quantity of wheat lying in P’s warehouse. It is
agreed that three months’ credit shall be given to R.R
allows the wheat to remain in P’s warehouse. Before the
expiry of the three months R becomes insolvent and the
Official Assignee demands delivery of the wheat from P
without offering to pay the price. Is P entitled to retain the
goods until paid?
[Hint. Yes, P is entitled to retain the goods as security for the
price until he is paid. In the case of buyer’s insolvency the lien
exists even though goods had been sold on credit and the
period of credit has not yet expired, provided the goods are still
in possession of the seller (Sec. 47).]
5. A sells certain goods to B, the property in the goods is to
pass to B on delivery which is to take place on Ist August
1987, and the payment to be made by property in the
goods has not passed to him. Can A sue B for the price
before the delivery of the goods takes place?
[Hint. Yes, A can sue B for the price. Where the sale price is
payable ‘on a day certain,’ the seller can sue the buyer on his
default, irrespective of passing of property and delivery of
goods (Sec. 55)].
6. A attended an auction sale and made a bid of Rs. 600 for a
typewriter but withdrew the offer before the fall of the
hammer. One of the conditions of the sale, which A had
read was that biddings once made, shall not be withdrawn.
A was sued for Rs. 600, his being the highest bid. Decide.
[Hint. A is liable to pay Rs 600 because as per the conditions of
the auction no bid can be withdrawn. The auctioneer has the
right to make the auction subject to any conditions he likes (The
Coffee Board vs Famous Coffee and Tea Works, ]
7. At an auction sale, A makes the highest bid for a flower
vase. Purporting to accept the bid the auctioneer strikes the
hammer, but strikes the vase and breaks it. Who is to bear
the loss? Would your decision differ if the auctioneer had
struck the table, on which the vase was kept, with the
hammer and the vase fell down and broke into pieces?
[Hint. The loss in both the cases is to be borne by the owner of
the flower vase, because at the time of the completion of the
contract, namely, striking the hammer, the goods forming the
subject matter of the contract have perished, and as such
impossibility of performance at the time of contract renders the
agreements void ab-initio.
105
 References
LEGAL ASPECTS OF BUSINESS

• Kapoor, N.D. (2003), “Elements of Mercantile Law,”

Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi
Notes:

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106 11.555
LEGAL ASPECTS OF BUSINESS
LESSON 21:
THE NEGOTIABLE INSTRUMENT ACT 1881
MEANING AND TYPES OF NEGOTIABLE INTRUMENTS
Learning Outcomes
After reading the lesson, you should be able to know:
• The meaning of Negotiable Instruments
• The important types of Negotiable Instruments
Introduction
We are aware that money is most common medium of
exchange itself has the exchange value and is freely transferable.
It was felt although the use of ready cash is desirable due to
acceptability but may cause risk and inconvenience in dealing. Its
substitute leads to development of Negotiable Instruments.
The Negotiable Instrument Act 1881 came into force on 1st
March 1881. It extends to the whole of India except the State
of Jammu & Kashmir. The term Negotiable Instrument
consists of two parts viz; Negotiable and Instrument. The
word ‘negotiable’ means transferable by delivery and the word ‘
instrument ‘ mean written documents by which a right is
created in favour of some person. It means an instrument
possessing the quality of Negotiability is entitled to be called
negotiable instrument
According to Will “A negotiable instrument is one the property
in which is acquired by anyone who takes it bonafide and for
value not withstanding any defect of title in the person from
whom he took it”
Thus a negotiable instrument must possess two features.
1. The right of ownership contained in the instrument can be
transferred from one person to another by mere delivery, if
it is payable to bearer or by endorsement and delivery if
payable to order and
2. The transferee taking the instrument in good faith and for
consideration gets a good title to the same even though the
title of the transfer is defective.
(a) Meaning of Negotiable Instrument Payable to
order.
A promissory note, bill of exchange or cheque is payable to
order if, either of the following two conditions is fulfilled:
(a) It must be expressed to be so payable
(b) It must be expressed to be payable to a particular
person and it must not contains words which prohibit
transfer or indicate and intention that it shall not be
transferable.
(b) Meaning of Negotiable instrument Payable to
Bearer.
A Promissory note, bill of exchange or cheque is payable to
bearer if either of the following condition is fulfilled
(a) It must be expressed to be so payable
(b) The only and last endorsement must be endorsement in
blank
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108
Essential Characteristics Feature of a Negotiable
Instrument
The essential characteristics of a negotiable instrument have
been shown as under:
1. Payable to order or bearer
2. Freely transferable
3. Presumption as to holder
4. Title of holder in due course
5. Presumption as to consideration
Let us discuss these one by one
1. Payable to order or bearer: - It must be payable either to
order or bearer
2. Freely Transferable:- A instrument payable to order is
negotiable by endorsement and delivery and an instrument
payable to bearer is negotiable by mere delivery
3. Presumption as to Holder:- Every holder of negotiable
instrument is presumed to be holder in due course (Section
118)
4. Title of holder in due course:- A holder in due course ( i.e.
the person who become the possessor of negotiable
instrument before maturity, for valuable consideration and
in good faith ) get the instrument free from all defects in
the title of transferor
5. Presumption as to considerations:- Every negotiable
instrument is presumed to have been made, drawn,
accepted, endorsed , negotiated or transferred for
consideration.
Since the Negotiable Instrument Act deals with only three
Negotiable Instruments; Promissory Note, Bill of exchange
and cheque.
The same are being discussed in some detail. Let us come to the
definition aspect of important negotiable instruments
Definitions
(a) Promissory Note: A promissory note is an instrument
(not being a bank note or a currency – note ) in writing
containing an unconditional undertaking, signed by the
maker to pay a certain sum of money only to or to the
order of, a certain person or to the bearer of the
instrument ( Section 4).
In other words, the requirements of promissory note are as
follows:
(i) It must be in writing: This means that the engagement
cannot be oral. There is no prescribed form of language for
this; even the word ‘promise’ need not be used. What is
necessary is that whatever language is used, it must clearly
show that the maker is unconditionally bound to pay the
sum.
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(ii) The promise to pay must be unconditional: If a condition
is attached to the ‘promise to pay’ then the instrument will
not be construed as a promissory note. Suppose, A signs
an instrument made out as follows, “I promise to pay to B
Rs. 500 on D’s death, provided D leaves me enough to pay
the sum”. The instrument will not be a promissory note.
Similarly, if A signs thus, “I promise to pay to B Rs. 500
deducting any money which B may owe me;” such an
instrument also will not be a promissory note. Let us now
take a converse case. An instrument runs thus: “I
acknowledge myself to be indebted to B of Rs. 500 to be
paid on demand, for value received”. Thus instrument
would be a promissory note.
It may be noted that a promise to pay will not be conditional
under Section 4, where it depends upon an event which is
certain to happen but the time of its occurrence may be
‘uncertain. For example, where a promissory note is in this
form: “I promise to pay to A Rs. 2,000, 15 days after the death
of B”, it is not conditional as it is certain that B will die though
the exact time of his death is uncertain (Section 4).
(iii) The amount promised must be a certain and a definite
sum of money: Certainty is one of the essential
characteristics of a promissory note. Certainty must be as
to the amount and also as to the person by whose order
and to whom payment is to be made. Uncertainty in such
matters has a tendency to restrict credit and to hamper
commerce. Hence the necessity of certainty. For example,
where an instrument contains: “I promise to pay Rs. 350
and all other sums which shall be due”, it is not a valid
promissory note as the sum is not certain within the
meaning of Section 4.
You should also note that payment with interest of at a
specified rate of exchange is certain within the meaning of
Section 4. You should also remember that in the event of
figures and words indicating the sum payable being contradic-
tory; the sum in words must be taken into account.
(iv) The instrument must be signed by the maker: It is
incomplete till it is so signed. Since the signature is
intended to authenticate the instrument it can be on any
part of the instrument.
(v) The person to whom the promise is made must be a
definite person:- The payee must be a certain person.
Where the name of the payee is not mentioned as a party,
the instrument becomes invalid. Remember that a
promissory note cannot be made payable to the maker
himself. Thus, a note, which runs “I promise to pay
myself”, is not a promissory note and hence invalid.
However, it would become valid when it is endorsed by the
maker. This is because it then becomes payable to bearer, if
endorsed in blank, or it becomes payable to the endorsee
or his order, if endorsed specially.
In connection with the promissory note, you should also
remember that: (a) consideration need not be mentioned; (b)
place and date of making it need not the mentioned: (c) an
undated instrument will be treated as having been made on the
date of its delivery; and (d) an antedated or post dated instru-
ment is not invalid.
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N.B. The words “ or to the bearer of the instrument” still
LEGAL ASPECTS OF BUSINESS
appear in Section 4 to the Act. since these have not yet been
deleted there from by the Parliament: Nevertheless, in view of
the provision contained in Sub-section (2) of Section 31 of the
Reserve Bank of India or the Central Government can make or
issue a promissory note payable to the bearer of the instru-
ment.
Let us discuss some of the illustrations.
Illustrations
A signs instruments in the following terms:
(a) “I promise to Pay B or order Rs.500”.
(b) “I acknowledge myself to be indebted to B in
Rs.1,000, to be paid on demand, for value received.”
(c) “Mr B I.O.U Rs.1,000.”
(d) “I promise to pay B Rs. 500 and all other sums which
shall be due to him.”
(e) “I promise to pay B Rs. 500 first deducting there out
any money which he may owe me.”
(f) I promise to pay B Rs. 500 seven days after my
marriage with C.
(g ) I promise to pay B Rs. 500 on D’s death, provided D
leaves me enough to pay that sum.
(h) I promise to pay B Rs. 500 and to deliver to him my
black horse on lst January next.
The instruments respectively marked (a) and (b) are promissory
notes. The instruments respectively marked (c), (d), (e), (f), (g)
and (h) are not promissory notes.
(b) Bill of Exchange: Before going into the definition, you
must know how a bill of exchange ordinarily comes into
existence. It comes into being, when a trader decides to sell
goods on credit. Suppose, A sells goods worth Rs. 800 to
B, and allows him three months’ time to pay the price. A
will them draw a bill on B in the following terms “Three
months after date pay to my order the sum of Rs. 800 for
value received”. After signing the bill, A will present it to B
for acceptance. If B writes across the bill ‘ accepted’, it will
indicate that B undertakes the liability to pay a sum of Rs.
800 within the time stipulated therein. Here A is the
drawer, B is the drawee and after acceptance B will be the
acceptor. A bill of exchange is an instrument in writing
containing an unconditional order signed by the maker,
directing a certain person to pay a certain sum of money
only to, or to the order of certain person to the bearer of
the instrument (Section 4).
You should now try to understand the application of the
points emerging from the said definition:
(i) The bill of exchange must be in writing. This point, we
take it for granted, needs no further annotation.
(ii) There must be money to the payee. It is of the essence of
the bill that its drawer orders the drawee to pay money to
the payee. It must be imperative – mere predatory words
do not suffice. Although terms of politeness may be
admissible, excessive politeness may nonetheless prompt
one to disregard it as an order.
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LEGAL ASPECTS OF BUSINESS

Promissory Note Bill of exchange

(i) It contains a promise to pay. 1.It contains an order to pay.

(ii) The liability of the maker of a note is 2.The liability of the drawer of a bill is secondary
primary and absolute (Section 32) and conditional. He would be liable if the drawee,
after accepting the bill fails to pay the money due
upon it provided notice of dishonour is given to the
drawer within the prescribed time (Section 30)
(iii) It is presented for payment without 3.If a bill is payable some time after sight, it is
any previous acceptance by the required to be accepted either by the drawee
maker. himself or by some one else on his behalf, before it
can be presented for payment.
4.The maker or drawer of an accepted bill stands in
immediate relationship with the acceptor and the
(iv) The maker of promissory note stands payee (Explanation to Section 44).
in immediate relationship with the
payee (Explanation to Section 44) and
is primarily liable to the payee or the 5.In the case of bill, the drawer and payee or the
holder. drawee and the payee may be the same person.
(v) It cannot be made payable to the
maker himself, that is the maker and
6.In the case of a bill of exchange there are three
the payee cannot be the same person.
parties, viz, drawer, drawee and payee, and any two
(vi) In the case of a promissory note there of these three capacities can be filled by one and
are only two parties, viz, the maker the same person.
(debtor) and the payee (creditor).
7.The bills can be drawn in sets.
(vii) A promissory note cannot be drawn 8.A bill of change too cannot be drawn
in sets. conditionally, but it can be accepted conditionally
(viii) A promissory note can never be with the consent of the holder.
conditional.

(iii) This order must be unconditional, as the bill is payable at
all events. Thus it is absolutely necessary for the drawer’s
order to the drawee to be unconditional. The order must
not make the payment of the bill dependent on a
contingent event. A conditional bill of exchange is invalid.
Where a bill contains an order to pay the amount specified
therein out of a particular fund it will be conditional and
therefore invalid. The reason for this invalidity is that it is
uncertain whether the funds will be in existence or prove
sufficient on the bill becoming payable. However, an unquali-
fied order to pay together with an indication of a particular fund
out of which the drawee is to reimburse himself, is not
conditional. Hence such as indication does not vitiate the
instrument.
(iv) The drawee must sign the instrument. The instrument
without the proper signature will be inchoate and hence
ineffective. It is permissible to add the signature at any time
after the issue of the bill. But if it is not so added, the
instrument remains ineffectual.
(v) The drawer, the drawee (acceptor) and the payee – the
necessary parties to a bill – are to be specified in the
instrument with reasonable certainty. You should
remember that all these three parties may not necessarily be
three different persons. Once can play the role of two. But
there must be two distinct persons in any case.
(vi) The sum must be certain [what we have discussed on this
point in relation to promissory note vide requirement (iii)
on page 2 will equally hold goods here].
(vii) The medium of payment must be money and money only.
The distinctive order to pay anything in kind will vitiate the
bill.
(c) Distinction between a promissory note and a bill of
exchange: The distinctive features of these two types of
negotiable instruments are tabulated below:
You should carefully note that neither a promissory note nor a
bill of exchange can be made payable to bearer on demand.
(d) Definition of Cheque: A “cheque” is a bill of exchange
drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the
electronic form.
For the purposes of this section, the expressions –
(a) “a cheque in the electronic form” means a cheque which
contains the exact mirror image of a paper cheque, and is
generated, written and signed in a secure system ensuring
the minimum safety standards with the use of digital
signature ( with or without biometrics signature ) and
asymmetric crypto system;
(b) “a truncated cheque” means a cheque which is truncated
during the course of a clearing cycle, either by the clearing

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110 11.555
 house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for
transmission, substituting the further physical movement
of the cheque in writing.
For the purposes of this section, the expression “clearing house
recognized as such by the Reserve Bank of India. (Section 6,
Negotiable Instruments Act) That is to say, it is a bill drawn on
a banker which is payable on demand.
A cheque being specie of bill of exchange, it must, under the
Section 5, be signed by the drawer and must contain an
unconditional order on a specified banker to pay a certain sum
of money to or the order of the specified person or to the
bearer of the instrument. A cheque, however, is a peculiar type
of negotiable instrument in the sense that it does not require
acceptance; also it is not meant to be payable to bearer on
demand. A cheque is an exception to the general rule that a bill
of exchange cannot be drawn “payable to bearer on demand”
Section 31, (The Reserve Bank of India Act).
A cheque may be drawn up in three forms, viz., (i) bearer
cheque (i.e., one which is either expressed to be so payable or on
which the last or only endorsement is an endorsement in
blank); (ii) order cheque i.e., one which is expressed to be so
payable words against its transfer or indicating an intention that
it shall not be transferable (Section 18); and (iii) crossed cheque
is a cheque which can be only collected through a banker.
Difference between Cheque and Bill of Exchange
(1) In the case of a cheque the drawee – i.e., the person on
whom the bill is drawn – must always be banker whereas
in the case of a bill of exchange the drawee may be any
person.
2) No days of grace are allowed in the case of a cheque, and a
cheque is as a rule, payable on demand, whereas three days’
grace is allowed in the case of a bill.
3) In the case of a dishonour of a cheque, notice of
dishonour is not necessary whereas notice of dishonour is
usually required in the case of a bill.
4) A cheque can be drawn to bearer and made payable on
demand, whereas a bill cannot be bearer if it is made
payable on demand.
5) In the case of a cheque, it is not necessary to present it for
acceptance. It needs only is advisable to present them for
acceptance even when it is not essential to do so.
6) Cheque do not require to be stamped in India, whereas bill
must be stamped according to the law. In England and
several other countries, cheques also are required to be
stamped.
7) A cheque may be crossed, whereas a bill cannot be crossed.
Generally, it must be remembered that cheques are negotiable
instruments and the most of the rules in relation to bills of
exchange also apply to cheques.
(f) Bank Draft: A bank draft is, by definition, an order drawn
by an office of a bank upon another office of the same
bank. In other words, it is, in a sense, an order drawn by
one person upon himself, whereas in the case of bills, they
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11.555
are drawn by one person upon another person (Section
LEGAL ASPECTS OF BUSINESS
85A).
Section 131A of the Act makes all rules as regards crossed
cheques, laid down in Sections 123 to 131, applicable to drafts
definition by Section 85A, Thus a banker who collects a draft on
behalf of a customer will not be protected by Section 131.
A draft is drawn either against cash deposited at the time of its
purchase or against debit to the buyer’s current account with the
banker. The buyer of the draft generally furnishes particulars of
the person to whom the amount thereof should be paid. The
banker charges for his services a small commission. The draft
like a cheque, can be made payable to drawer on demand
without any legal objection thereto, since the Reserve Bank of
India. Act, under Section 31, specially allows such a draft be
issued.
Moreover, where a draft purports to have been endorsed by or
on behalf of the payee the paying bank is discharged from
liability by its payment in due course even though the endorse-
ment of the payee has been forged. This affords great
protection to the paying banker in so far as it is always possible
for the paying banker to identify the signature of the payee.
(g) Marked cheque: A cheque need not be presented for
acceptance. Therefore the drawee of the cheque i.e., the
banker, is under liability, to the person in whose favour the
cheque is drawn. The banker, however, will be liable to his
customer ( drawer), if he wrongly refuses to honour the
cheque. In such a case, action can be taken by the customer
against the banker for the loss of his reputation. In certain
cases, however , a cheque is marked or certified by the
banker on whom it is drawn as “good for payment’. Such a
certification of marking is strictly not equivalent to an
acceptance but is very similar to it and protects the person
to whom the cheque is issued against the cheque being
refused for payment subsequently by Banking in India, as a
rule, do not mark or certify cheque in this manner. Bankers
in India, are not liable even if a bank has marked a cheque
as “good for payment” (Bank of Baroda vs. Punjab
National Bank Ltd. ).
(h) Crossed cheque
(a) The usage of crossing cheques: Cheques are usually
crossed as a measure of safety. Crossing is made by
drawing two parallel transverse lines across the face of
the cheque with or without the addition of certain
words. The usage of crossing distinguishes cheques
from other bills of exchange. The object of general
crossing is to direct the drawee banker to pay the
amount of the cheque only to a banker, to prevent the
payment of the cheque being made to wrong person
(Section 123);
(b) Special crossing: Where a cheque bears across its face an
entry of the name of a banker either with or without
the words “not negotiable”, the cheque is considered
to have been crossed specially to that banker. In the
case of special crossing the addition of two parallel
transverse lines is not essential though generally the
name of the bank to which the cheque is crossed
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 specially is written between two parallel transverse lines
LEGAL ASPECTS OF BUSINESS
(Section 124).
(c) Crossing after issue: (f) If cheque has not been crossed,
the holder thereof may cross it either generally, or
specially. (ii) If it is crossed generally, the holder may
cross it, specially. (iii) If it is crossed, either generally or
specially the holder may add the words “not
negotiable”. (iv) If a cheque is crossed specially, the
banker to whom it is crossed, may again cross it
specially to another banker, his agent, for collection.
This is the only case where the Act allows a second
special crossing by a banker and for the purpose of
collection [Akro Kervi Mines vs. Economic Bank
(1904) 2 K.B. 465 (Section 125)]. It may be noted that
the crossing of a cheque is an instance of an alteration
which is authorized by the Act.
(d) Payment of cheque, crossed generally or specially
(Section 126 & 127): If a cheque is crossed generally, the
banker on whom it is drawn shall not pay it otherwise
than to a banker. Again, where a cheque is crossed
specially, the banker on whom it is drawn shall not pay
it otherwise than to the banker to whom it is crossed
or his agent for collection.
Where a cheque is crossed specially to more than one banker
except when it is crossed to an agent for the purpose of
collection, the banker on whom it is drawn shall refuse payment
thereof. This is because, in such a case, the instruction by the
drawer would not be clear (Section 127).
(e) Payment in due course of crossed cheque: Where the
banker on whom a crossed cheque is drawn, pays it in
due course, it is to be presumed that he has made
payment to the true owner of cheque, though in fact,
the amount of the cheque may not reach the true
owner. In other words, banker making payment in due
course is protected, whether the money is or is not, in
fact, received by the true owner of the cheque (Section
128).
(f) Payment out of due course: Any banker paying a
crossed cheque otherwise than in accordance with the
provisions of Section 126 shall be liable to the true
owner of the cheque for any loss he may have
sustained. Thus, if the money does not reach the true
owner, he can claim payment over again from the
banker (Section 129).
(g) Cheque marked “not negotiable”: A person taking a
cheque crossed generally or specially bearing in either
case the words’ not negotiable’ shall not have or shall
not be able to give a better title to the cheque than the
title the person from whom he took had.
In consequence if the title of the transferor is defective, the title
of the transferee would be vitiated by the defect. But, in the case
of a bill negotiated in the ordinary way, the title of the holder in
due course would not be affected by the defect in the title of the
transferor (Section 130).
For example, X, by means of fraud, obtained from Y a cheque
crossed ‘not negotiable’ and got it cashed at a bank other than
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112
the drawee bank. Y sued the bank for conversion. Is the bank
liable for conversion? The effect of Section 130 of the Act.
broadly, is that if the holder has a good title, he can still transfer
it with a good title; but if the transferor has a defective title, the
transferee is affected by such defects, and he cannot claim the
right of a holder in due course by providing that he purchased
the instrument in good faith and for value. As X in the case in
question had obtained the cheque by fraud, he had no title to it
and could not give to the bank any title to the cheque or the
money and the bank would be liable for the amount of the
cheque for conversion. A similar decision was taken in Great
Western Railway Co. vs. London and Country Banking Co.
(1901) A.C. 414 the facts whereof are exactly the same as the
example cited above.
The addition of the words” not negotiable” in a crossed cheque
has a special significance. The use of the words does not render
the cheque non-negotiable but only affects one of the main
features of negotiability. The general rule about the negotiability
is that the holder in due course of a bill or promissory note or
cheque takes the instrument free from any defect which might
be existing in the title of the transferor. If the holder takes the
instrument in good faith , before maturity and for valuable
consideration, his claim is not defeated or affected by the
defective title of the transferor. In case of any dispute, it is the
transferor with the defective title who is liable. But the addition
on the words “not negotiable” to the crossing of a cheque,
makes the position different. When such a crossing is placed on
a cheque, the holder in due course does not get any better title
than what the transferor had: If the transferor had defective
title, the title of the holder in due course also becomes defective.
Therefore, he will have to refund the amount of the bill to the
true owner. In other words, the principle of the ‘nemo dat
quod non habet’ – (that is, nobody can pass on a title better
than what he himself has ) will be applicable to a cheque with a
“not negotiable” crossing.
Thus, cheques with “not negotiable” crossing are negotiable so
long as their title is good. Once the title of the transferor or
endorser become defective the title of the transferee is also
affected by such defect and the transferee cannot claim the right
of a holder in due course.
As per the latest instructions issued by the Reserve Bank of
India (9-9-1992) it would be safer for the drawer to cross a
cheque “not negotiable” with the words “account payee” added
to it. The courts of law have held that “an account payee”
crossing is a direction to the collecting banker as to how the
proceeds are to be applied after receipt. The banker can disregard
the direction only at his own risk and responsibility. In other
words, an ‘account payee, cheque can be collected only for the
account of the payee named in the cheque and not for anyone
else. A banker collecting an ‘account payee’ cheque for a person
other than the payee named in the cheque may be held liable for
conversion.
In other words, if the bank collects an account payee cheque for
a person other than the payee it does so at its own risk. It is
imperative on the part of collecting bank, therefore to take
utmost care to enquire into the title of its customer and satisfy
11.555
itself that there is no defect in the title of the customer
presenting such cheque for collection.
(h) Cheque marked “Account Payee”: It is a form of
restrictive crossing, represented by the words “Account
Payee” entered on the face of the cheque. Such a
crossing acts as a warning to the collecting bankers that
the proceeds are to be credited only to the account of
the payee. If the collecting banker allows the proceeds
of the cheque so crossed to be credited to pay any other
account, he may be held guilty of a negligence in the
event of an action for wrongful conversion of funds
being brought against him. These words are not an
addition to the crossing but are mere direction to the
receiving or collecting bankers. These do not affect the
paying banker who is under no duty to ascertain that
the cheque in fact has been collected for the account of
the person named as the payee.
In the case of a cheque bearing “Account Payee” crossing which
is not specially crossed to another banker, the paying banker
needs only to see that the cheques bears no other endorsement
but that of the payee, and that it is otherwise in order. But
where the cheque is also crossed specially, the paying banker
must make payment only to the bank named in the crossing. If
has been held that crossing cheque with the words “Account
Payee” and mentioning a bank is not a restrictive endorsement
so as to invalidate further negotiations of the cheque by the
endorsee.
(i) Protection in respect of uncrossed cheque: When a cheque
payable to order purports to be endorsed by or on behalf
of the payee and the banker on whom it is drawn pays the
cheque in due course, he is authorized to debit the account
of his customer with the amount so paid, even though the
endorsement of the payee subsequently terns out to be a
forgery, or though the endorsement may have been made
by payee, agent without his authority . In other words, the
banker is exonerated for the failure to direct either the
genuineness of the validity of the endorsement on the
cheque purporting to be that of the payee of his
authorized agent.
For example, a cheque is drawn payable to B on order and it is
stolen, Thereafter, the thief or someone else forges B’s endorse-
ment and presents the cheque to the bank for encashment. On
paying the cheque, the banker would be able to debit the
drawer’s account with the amount of the cheque. Likewise, if
the cheque in the above case, was not stolen but instead
presented for payment by B’s agent on endorsing the same “Per
Pro” for B and the cheque is cashed the banker could debit the
account of the drawer. He would not be held guilty of the
ground that he has cashed the cheque endorsed by the agent of
B who has misappropriated the amount thereof.
Such a protection is also available in respect of drafts drawn by
one branch of a bank of another payable to order (Section
85A).
(j) Protection in respect of crossed cheques: When a banker
pays a cheque (drawn by his customer), if crossed generally
then to any banker, and if crossed specially then to banker,
to whom it is crossed or his agent for collection (also being
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11.555
a banker), he can debit the drawer’s account so paid, even
LEGAL ASPECTS OF BUSINESS
though the amount of the cheque does not reach true
owner.
The protection in either of the two cases aforementioned can be
availed of, if the payment has been made in due course i.e.,
according to the apparent tenor of the instrument, in good
faith and without negligence, to any person in possession
thereof in the circumstances which do not excite any suspicion
that he is not entitled to receive payment of the cheque.
Let us know in detail about the other important classification
of instruments.
Classification of Instruments
(a) Bearer and Order instruments: An instrument may be
made payable: (1) to bearer; (2) to a specified person or to
his order.
An instrument is payable to bearer which is expressed to be so
payable on which is expressed thus “Pay to R or bearer”. It is
also payable to bearer when the only or last endorsement on it
is an endorsement in blank.
An instrument is payable to order (i) when it is payable to the
order of a specified person or (2) when it is payable to a
specified person or his order or, (3) when it is payable to a
specified person without the addition of the words “or his
order” and does not contain words prohibiting transfer or
indicating an intention that it should not be transferable. When
an instrument, either originally or by endorsement, is made
payable to the order of a specified person and not to him or his
order, it is payable to him or his order, at his option.
When an instrument is not payable to bearer, the payee must be
indicated with reasonable certainty.
Significance of bearer instruments” The expression “bearer
instrument” signifies an instrument, be it a promissory note,
bill of exchange or a cheque, which is expressed to be so payable
or on which the last endorsement is in blank (Explanation 2 to
Section 13 of the Negotiable Instrument Act ).
Under Section 46, where an instrument is made payable to
bearer it is transferable merely by delivery, i.e., without any
further endorsement thereon. This character of the instrument,
however, can be altered subsequently. For Section 49 provides
that a holder of negotiable instrument endorsed in blank (i.e.,
bearer ) may, without signing his own name, by writing above
the endorser’s signatures, direct that the payment of the
instrument be made to another person. An endorsee thus, can
convert an endorsement in blank into an endorsement in full.
In such a case, the holder of the instrument would not be able
to negotiable the instrument by mere delivery. He will be
required to endorse the instrument before delivering it.
In the case of a cheques, however the law is a little different
from the one stated above. According to the provisions of
Section 85(2) where a cheque is originally expressed to be
payable to bearer, the drawee is discharged by payment in due
course to the bearer thereof, despite any endorsement whether
in blank or full appearing thereon notwithstanding that any
such instrument purported to restrict or exclude further
negotiation. In other words, the original character of the cheque
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 is not altered so far as the paying bank is concerned, provided
LEGAL ASPECTS OF BUSINESS
the payment is made in due course. Hence the proposition that
“once a bearer instrument always a bearer instrument.”
(b) Inland and Foreign Instrument (Sections 11 & 12): A
promissory note, bill of exchange or cheque drawn or
made in India and made payable in or drawn upon any
person resident in India shall be deemed to be an inland
instrument. Any such instrument, not so drawn, made or
payable shall be deemed to be a foreign instrument.
Thus, the foreign bills are: (a) bills drawn outside India and
made payable in or drawn upon any person resident in any
country outside India; (b) bills drawn outside India and made
payable in India, or drawn upon any person resident in India;
(c) bills drawn in India upon persons resident outside India
and made payable outside India.
In the absence of a contract to the country, the liability of the
maker or drawer of a foreign promissory note or bill of
exchange is regulated in all essential matters by the law of the
place where he made the instrument, and the respective liability
of the acceptor and endorser by the law of the place where the
instrument is made payable (Section 134). For example, a bill of
exchange is drawn by A in California where the rate of interest is
25% and accepted by B payable in Washington where the rate of
interest is 6%. The bill is endorsed in the State and is
dishonoured. An action on the bill is brought against B in the
States. He is liable too pay interest at the rate of 6% only. But if
A is charged as drawer, he is liable to pay interest at 25.
The distinction between inland and foreign bills is of impor-
tance in connection with Sections 104 and 134 of the Act.
Inland bills need not be protested for dishonour; protest in
this case is optional. But foreign bills must be protested when
law of the place of making or drawing them requires such
protest. The question by what law are the contracts on nego-
tiable instruments governed is also important.
Foreign bills must be protested for dishonour if the law of the
place where these are drawn prescribes for such a protest. In the
case of inland bills, protest is optional (Section 104).
c) Ambiguous and inchoate bills An ambiguous bill means
an instrument which can be constructed either as a
promissory note or as bill of exchange (Section 17). E.g., a
bill drawn by a person on himself in favour of a third
person or where the drawee is a fictitious person. The law
on the point is that the holder of such a bill is at liberty to
treat the instrument as bill or a promissory note. The
nature of the instrument will be as determined by the
holder.
An incomplete instrument called an inchoate instrument.
Section 20 of the Negotiable Instruments Act provides that
when one person signs and delivers to another a paper stamped
in accordance with the law relating to negotiable instruments
then in force in India and either wholly blank or having written
thereon an incomplete negotiable instrument, he thereby give
prima facie authority to the holder thereof to maker or com-
plete, as the case may be, upon it a negotiable instrument for an
amount specified therein and not exceeding the amount covered
by the stamp. The person so signing shall be liable upon such
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114
instrument in the capacity in which he signed the same, to any
holder in due course for such amount. Provided that no person
other than a holder in due course shall recover from the person
delivering the instrument anything in excess of the amount
intended to be paid by them there under. The principle of this
rule (namely that a person who gives another possession to his
signature on a blank stamped paper, Prima facie authorizes the
latter as his agent to fil it up and give to the world the instru-
ment as accepted by him ) is one of estoppel. By such signature
he binds himself as drawer, maker, acceptor or endorser. His
signature on the blank paper purports to be an authority to the
holder to fill up the blank, and complete the paper as a nego-
tiable instrument.
Till this filling in and completion, the instrument is not a valid
negotiable instrument, and no action is maintainable on it.
Further, as a condition of liability, the signer as a maker, drawer,
endorser or acceptor must deliver the instrument to another. In
the absence of delivery, the signer is not liable. Furthermore, the
paper so signed and delivered must be stamped in accordance
with the law prevalent at the time of signing and on delivering
otherwise the signer is not estopped from showing that the
instrument was filled without his authority.
Sight And Time Bills Etc.: (Sections 21 To 25)
(i) Instruuments payable on demand: Bills and notes are
payable either on demand or at a fixed future time.
Cheques are always payable on demand. A promissory note
or bill of exchange in which no time for payment is
mentioned is payable on demand. A bill or promissory
note is also payable on demand when it is expressed to be
payable on demand, or “at sight” or “presentment”. It
should be noted that the expression “on demand” does
not imply that any actual demand is to be made; it is only a
technical expression meaning “immediately payable”. Such
a bill or note may be presented for payment at any time at
the option of holder, but it must be presented within a
reasonable time after its issue in order to tender the drawer
liable, and within a reasonable time after its endorsement
to render the endorser liable.
(ii) Time Bills: The expression “after sight” means, a
promissory note after presentment for sight, and in a bill
of exchange, after acceptance, noting for non-acceptance or
protest for non – acceptance. It is useful to make a bill or
not payable at so many months or days after sight.
The term ‘after sight’ is differently used in a note and a bill. In
the former case, it denotes that payment is not to be demanded
till it has been exhibited to the maker, for a note is incapable of
being accepted; while in the latter case, it denotes that sight
must appears in legal way , i.e., after acceptance, if the bill has
been accepted or a after noting for non-acceptance or protest for
non-acceptance soon).
(iii) Maturity. Where bill or note is payable at fixed period after
sight, the question of maturity becomes important. The
maturity of a note or bill is the date on which it falls due.
A note or bill, not payable on demand, at sight or on
presentment; is at maturity on the third day after the day
on which it is expressed to be payable. Three days are
11.555
 allowed as days of grace. No days of grace are allowed in
the case of a note or bill payable on demand, at sight on
presentment.
(iv) Calculation of maturity: Where a bill is payable at a fixed
period after sight, the time is to be calculated from the date
of acceptances if the bill is accepted and from the date of
noting or protest if the bill is noted or protested for non-
acceptance (For the explanation of noting and protesting,
read Section 99 and 100 of the Negotiable Instruments
Act).
In the case of note, the expression “after sight” means after
exhibition thereof to maker for the purpose of founding a
claim for payment. In the case of a bill payable after a stipulated
number of months after sight which has been accepted for
honour, the date of its maturity is calculated from the date of
acceptance for honour. (For the explanation of the phrase
‘acceptance for honour’, read Section 108 of the Negotiable
Instruments Act. ).
In calculating the date at which a note or bill made payable a
certain number of days after date or after sight or after a certain
event is at maturity on the days or the date, or the day of
presentment for acceptance or sight or the day of protest for
non-acceptance, or the day on which the event happens shall be
excluded (Section 24). When a note or bill is made payable, a
stated number of months after date, the period stated termi-
nates on the day of the month, which corresponds, with the
day on which the instrument is dated. When it is made payable
after a stated number of months after sight the period termi-
nates on the day on the month which corresponds with the day
on which it is presented for acceptance or sight or noted for
non-acceptance or protested for non-acceptance. When it is
payable a stated number of months after a certain event, the
period terminations on the day of the months which corre-
sponds with the day on which the event happens (Section 23).
If the months in which the period would terminate have no
corresponding day, the period terminates on the last day of
such month (Section 23). Three days of grace are allowed to
these instruments after the day on which they are expressed to
be payable (Section 22).
When the last day of grace falls on a day, which is public holiday,
the instrument is due and payable on the preceding business
day (Section 15).
Illustrations
(a) A negotiable instrument dated 29th January, 1878, is
made payable at one month after date. The instrument
is at maturity on the third day after the 28th February,
1878.
(b) A negotiable instrument, dated 30th August, 1878, is
made payable three months after date. The instrument
is at maturity on the 3rd December, 1878.
(a) A promissory note or bill of exchange, dated 31st
August, 1878, is made payable three months after date. The
instrument is at maturity on the 3rd December, 1878.
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11.555
Solve the following problems for a better
LEGAL ASPECTS OF BUSINESS
understanding
1. A bill of exchange is drawn stating “Pay to the X or his
order a sum of ten thousand rupees”. In the margin the
amount stated is Rs. 1,000. Is it a valid bill? If so, how
much amount it will represent?
[Hints : Yes, it will represent Rs. 10,000. Section 18 of the Act
says that if the amount in words and figures is different in a
negotiable instrument, the amount stated in words shall be
taken as final. ]
2. Classify the following instruments as payable to bear or to
order.
(a) “ to X” (b) “to bearer” (c) to X or order (d) “to X bearer” (e)
“ to the order of X”
[Hints: (a) order, (b) bearer, (c) order, (d) bearer, (e) order]
3. A firm carries on business in Bombay and Calcutta. The
Bombay house draws a bill on Calcutta house. Can the
holder treat this bill as a promissory note?
[Hint: Yes, it is an ambiguous instrument and holder may treat it
as a bill or note at his option. The facts of this case are similar to
those of Miller v. Thompson [1841] 3 M & G, 576]
4. A bill was payable three months after the date it was
accepted. The acceptance bore no date, and the drawee
attained the majority the day before the bill matured. Will
the drawee be liable on the bill?
[Hint: No. In this case it is presumed that the drawee accepted
the bill on a date when he was minor. A minor being incompe-
tent to contract will not incur any liability under the bill. The
facts of this case are similar to those of Roberts v. Bethel [1852]
12 CB 778.
5. Are the following instruments promissory notes?
(a) Mr. X, I owe you Rs. 10,000 the note is signed by Y.
(b) XYZ signs a note reading I have received Rs. 1,000, which I
borrowed, form you. And I have to be accountable to you
for the same with interest.”
(c) XYZ signs a note reading “ I am liable to A in a sum of
Rs. 10,000 which is to be paid by installments for rent.”
6. Mr. X promises by way of promissory note to pay Mr. Y,
his partner, a sum of Rs. 10,000 in the event of latter’s
retirement from the partnership firm. Decide giving
reasons for your answer whether the promissory note in
the above case in a laid promissory note.
[Hint. The promise of X is conditional, nad hence it cannot be
constituted as a valid promissory note. Further retirement of Y
from the partnership firm is not a certain event]
1. A company issued a cheque to its bankers. A receipt
was appended to the cheque and it ordered the banker
to make the payment ‘provided the receipt form at foot
hereof is duly signed, stamped and dated.” Is the
cheque valid?
115
 [Hint: No, because its payment is conditional upon signing of
LEGAL ASPECTS OF BUSINESS

the receipt. Facts of this case are similar to those of Bevin v.

London & south western Bank Ltd.[1990] 1 KB 270]
7. An instrument on which the word hundi was written was
in the following form “ sixty days after date we promise to
pay a or order the sum of Rs. 1,000 only for the value
received” across the document was written “accepted” and
it was signed by the maker x y. is this instrument a
promissory note or a bill of exchange?
[Hint: it is promissory note. An instrument does not become a
bill of exchange for the reason of appearance of word hundi on
its face.]
8. X draws a bill of exchange on Y and negotiates it to Z. Y
is a fictitious person. Can Z treat it as a promissory note
made by X?
[Hint: Yes. Where in a bill, the drawee is a fictitious person, it is
an ambiguous instrument and the holder has an option to treat
it as a bill or note].
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal (2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Aggarwal, Rohini (2003), “Student’s Guide to Mercantile
and Commercial Laws,” Taxmann’s, New Delhi
Notes:

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116 11.555

LESSON 22:
THE NEGOTIABLE INSTRUMENT ACT 1881
PARTIES TO A NEGOTIABLE INTRUMENTS
Learning Outcomes
After reading the lesson, you should be able to know:
• The Parties to a negotiable instrument
• The liability of various parties to negotiable
instrument
Introduction
The important parties to Negotiable Instruments can be listed
as follows:
• Parties to a promissory note: Maker, payee, indorser,
indorsee
• Parties to a bill of exchange: Drawer, Drawee or
Acceptor, drawee in case of need, acceptor for honour,
, indorser, indorsee.
• Parties to a cheque: Drawer, drawee ( always a banker),
payee, indorser, indorsee
Let us learn about them
Drawer, Drawee, Acceptor, Maker, Payee, etc.,:
(i) The party who draws a bill of exchange or a cheque or any
other instrument is called drawer.
(ii) The party on whom such bill of exchange of cheque is
drawn is called the drawee. In other words the person who
is thereby directed to pay is called the drawee.
(iii) The drawee of a bill of exchange who has signified his
assent to the order of the drawer is called the acceptor. The
acceptor becomes liable to the holder after he has signified
his assent but not before.
Now a question would naturally arise as to who can be accep-
tors? Under Section 33 of the Act, no person except the drawee
of a bill of exchange, or all or some of several drawees or a
person named there in as drawee in case of need, can bind
himself by an acceptance. Under Section 34, where they are
several drawees of a bill of exchange who are not partners, each
of them can accept it for himself; but none of them can accept it
for another without his authority.
If follows from the aforesaid provisions that the following
person can be acceptors:
(a) Drawee, i.e., the person directed to pay.
(b) All or some of the several drawees when the bill is
addressed to more drawees than one.
(c) A drawee in case of need.
(d) An acceptor for honour.
(e) Agent of any of the persons mentioned above.
(f) When no drawee has been named in a bill but a person
accepts it, then he may be stopped from denying his
liability as an acceptor.
Acceptance is ordinarily made by the drawee by the signing of
his names across the face of the bill and by delivery. Acceptance,
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LEGAL ASPECTS OF BUSINESS
therefore, means the signification of assent to the order of the
drawer by delivery or notification thereof. Under Section 27 of
the Act, every person capable of legally entering into a contract,
may make, draw, accept endorse, deliver and negotiate a
promissory note, bill of exchange or cheque, himself or
through a duly authorized agent. The agent may sign in two
ways, viz., (a) he may sign the principal’s name, for it is
immaterial what hand actually signs the name of the principal,
when in fact there exists an authority for the agent to put it
these; (b) he may sign by procreation stating on the face of the
instrument that he signs as agent. It is thus essenial that the
agent, while putting his signature to the instrument, must have
either express or implied authority to enter, for his principal
who must be sui juris, into the particular contract. The authority
of an agent to make, draw, accept or endorse notes and bills
depends on the general law of agency and is a question of fact.
From a perusal of Section 27 and 28 it is, however, evident that
a general authority to transact business and to discharge debits
does not confer upon an agent the power to endorse bills of
exchange so as to bind his principal; nor can an agent escape
personal liability unless he indicates that he signs as an agent
and does not intend to incur personal liability.
What do you think constitutes a valid acceptance:
The essentials of a valid acceptance are as follows:
(a) Acceptance must be written: The drawee may use any
appropriate word to convey his assent. It may be sufficient
acceptance even if just a bare signature is put without
additional words. But it should be remembered that an
oral acceptance is not valid in law. .
(b) Acceptance must be signed: A mere signature would be
sufficient for the purpose. Alternatively, the words
‘accepted’ may be written across the face of the will with a
signature underneath; if it is not so signed, it would not
be an acceptance.
(c) Acceptance must be on the bill: That the acceptance should
be on the face of the bill is not necessary; an acceptance
written on the back of a bill has been held to be sufficient
in law. What is essential is that it must be written on the
bill; else it creates no liability as acceptor on the part of the
person who signs it. Now what will happen if acceptance is
signed upon a copy of the bill and the copy is not one of
the part of it or if acceptance is made on a paper attached
to the bill; in either of the cases, acceptance would not be
sufficient.
(d) Acceptance must be completed by delivery: It would not
complete and the drawee would not be bound until the
drawee has either actually delivered the accepted bill to the
holder or tendered notice of such acceptance to the holder
of the bill or some person on his behalf.
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 Where a bill is drawn in sets, the acceptance should be put on
LEGAL ASPECTS OF BUSINESS
one part only. Where the drawee signs his acceptance on two or
more parts, he may become liable on each of them separately.
Acceptance may be either general or qualified. By a general
acceptance, the acceptor assents without qualification to the
order of the drawer . The acceptance of bill is said to be
qualified, when the drawee does not accept it according to the
apparent tenor of the bill but attaches some conditions or
qualification which have the effect of either reducing his
(acceptor’s) liability or acceptance of the liability subject to certain
conditions. The holder of a bill is entitled to require an absolute
and unconditional acceptance as well as to treat it as
dishonoured, if it is not so accepted. However he may agree to
qualified acceptance, but he does so at his own peril, since
thereby he discharges all parties prior to himself, unless he has
obtained their consent.
According to the Explanation to Section 86 of the Act, an
acceptance to be treated as qualified.
(1) Where it is conditional, declaring the payment to be
dependent on the happening of an event therein stated,
accepted payable when in funds” “accepted payable on
giving up bills of lading for cover per S.S. Amazon
“accepted payable when a cargo consigned to me is sold”
(2) When it undertakes the payment of part only of the sum
ordered to be paid, e.g., a bill drawn for Rs. 5,000 but
“accepted for Rs. 4,000 only”.
(3) When, no place of payment being specified on the order, it
undertakes to pay only at a specified place and not
elsewhere or to pay at a place different from that specified
in the bill and not elsewhere.
(4) Where it undertakes the payment at a time other than that
at which under the order it would be legally due e.g., a bill
drawn “payable three months after date” is accepted as
“accepted, payable six months after date.”
The aforementioned list of examples is only illustrative of the
different respects in which the bill may be qualified, for it is
possible to qualify the acceptance of a bill in other ways as well.
(5) Drawee in case of need: When in the bill or any
endorsement thereon the name of any person is entered, in
addition to the drawee, to be restored to in case of need,
such a person is called a drawee in case of need. In case of
need means in the event of the bill being dishnoured by
the drawee by non-acceptance or non-payment. The holder
of the bill is at liberty to choose whether be will resort to
the drawee in case of need or not.
(6) Payee: The party to whom or to whose order the amount
of a bill of exchange, cheque or promissory note is payable
is the payee.
(7) Delivery means transfer of possession from one person to
another.
(8) Issue of negotiable instrument means its first delivery,
complete in form, to a person who takes it as a holder.
A holder may become the possessor or payee of an instrument
even without consideration whereas a holder in due course is
one who acquires possession for consideration.
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118
You must be able to distinguish between a holder and a holder
in due course:
(i) A holder may become the possessor or payee of an
instrument even without consideration whereas a holder in
due course is one who acquires possession for
consideration.
(ii) A holder in due course as against a holder must become
the possessor payee of the instrument before the amount
thereon become payable.
(iii) A holder in due course as against a holder, must have
become the payee of the instrument in good faith i.e.,
without having sufficient cause to believe that any defect
existed in the transferor’s little
Privileges of a “Holder in Due Course”:
(i) A person signing and delivering to another a stamped but
otherwise inchoate instrument is debarred from asserting,
as against a holder in due course, that the instrument has
not been filled in accordance with the authority given by
him, the stamp being sufficient to cover the amount
(Section 20).
(ii) In case a bill of exchange is drawn payable to the drawer’s
order in a fictitious name and is endorsed by the same
hand as the drawer’s signature, it is not permissible for
acceptor to allege as against the holder in due course that
such name is fictitious (Section 42).
(iii) In case a bill or note is negotiated to a holder in due course,
the other parties to the bill or note cannot avoid liability on
the ground that the delivery of the instrument was
conditional or for a special purpose only (Section 42 and 47
).
(iv) The person liable in a negotiable instrument cannot set up
against the holder in due course the defence that the
instrument had been lost or obtained from the former by
means of an offence or fraud or for an unlawful
consideration (Section 58).
(v) No maker of a promissory note, and no drawer of a bill or
cheque and no acceptor of a bill for the honour of the
drawer shall, in a suit thereon by a holder in due course be
permitted to deny the validity of the instrument as
originally made or drawn (Section 120).
(vi) No maker of a promissory note and no acceptor of a bill
payable to order shall, in a suit thereon by a holder in due
course, be permitted to deny the payee’s capacity, at the rate
of the note or bill, to endorse the same (Section 121). In
short, a holder in due course gets a good title to the bill.
You must understand the liability of various parties to
negotiable instrument
Liabilities of Parties
(a) Liability of legal representatives (Section 29): A ‘legal
representative’ of a deceased person, who signs his own
name on an instrument, is personally liable for the entire
amount; but he may expressly limit his liability to the
extent of the assets received by him as legal representative.
The term “legal representative” includes heirs, executors
and administrators.
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(b) Liability of drawer (Section 30): The drawer of a bill of
exchange or cheque is bound, in the case of dishonour by
the drawer or acceptor thereof to compensate the however.
Provided due notice of dishonour has been given to, or
received by him provided in Section 93 to 98 of the Act.
The drawer’s liability is conditional, i.e., it arises only in the
event of a dishonour by the drawee or acceptor. Once there has
been dishonour and the notice of dishonour has been served
on the drawer, he is bound to compensate the holder whatever
be the state of the account between himself and the drawee or
acceptor (Seth Ka – Haridas vs. Bhan 3. Bom 182). The holder
will have to be compensated, for the principal sum together
with interest calculated according to the rules mentioned in
Section 79 & 80 and form the expenses properly incurred by
him in presenting noting and protesting the instrument. On
dishonour of a bill of exchange by non-acceptance followed by
a notice of dishonour to the drawer, the drawer becomes liable
immediately for the full amount of the bill. The drawer cannot
ask the holder to wait till the date of maturity to see whether it
will be dishonoured by non-payment [Whitehead vs. Walker
[1842] 9 M and W 506, If however, the holder chooses to wait
till its maturity before he sues the drawer he ones not acquire a
fresh cause of action by reason of its non-payment of the due
date.
The only pre-condition of the liability of the drawer is that
notice of dishonour should have been received by him, unless
the case is one covered by Section 98 of the Act and notice of
dishonour is dispensed with.
The drawer of a bill or cheque is a “prior party” to the instru-
ment and as such as liable for every holder in due course, under
Section 36 of the Act, till the instrument is discharged. Until
acceptance, he is liable in the instrument as a principal debtor
and thereafter as a surety (Section 37).
(c) Liability of drawee of cheque (Section 31) The drawee of
the cheque is always a banker. It is the duty of the banker
to pay the cheque, provided he has in his hands sufficient
found of the drawer and the founds are properly applicable
to such payment. Trust money is not properly applicable to
the payment of a cheque drawn in breach of trust. If the
banker refuses payment without sufficient case being
shown, he must compensate the drawer for any loss caused
by such improper refusal. The bank is required to
compensate, not the holder, but the drawer. The amount
of compensation, that the drawee would have to pay to the
drawer is to be measured by the loss or damage say loss of
credit, suffered by the drawer). The principle is: “The lesser
the value of the cheque dishonoured, the greater the
damage to the credit of the drawer”. If there is any
agreement between the drawer and the banker that the
former shall not draw more than one cheque every week,
the banker is not bound to pay the second cheque. The
banker must pay the cheque, only when he is duly required
to do so. If any trustee opens an account the banker is
entitled to refuse to pay cheques drawn for purposes other
than those of the trust.
In addition to such a general right, a banker will be justified or
bound to dishonour a cheque in the following cases, viz.;
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11.555
(i) If a cheque is undated
LEGAL ASPECTS OF BUSINESS
(ii) If it is stale, that is if it has not been presented within
reasonable period , which may vary three months to a year
after its issue dependent on the circumstances of the case
(iii) If the instrument is inchoate or not free from reasonable
doubt If the cheque is post-dated and represented for
payment before its ostensible date
(iv) If the customer’s funds in the banker’s hands are not
‘properly applicable’ to the payment of cheque drawn by
the former. Thus, should the funds in the banker’s hand’s
be subject to a lien or should the banker be entitled to a
set-off in respect of them, the funds cannot be said to be
“properly applicable” to the payment of the customer’s
cheque, and the banker would be justified in refusing
payment.
(v) If the customer has credit with one branch of a bank and
he draws a cheque upon another branch of the same bank
in which either he has account or his account is overdrawn
(vi) If the bankers receive notice of customer’s insolvency or
lunacy .
(vii) If the customer countermands the payment of cheque the
banker’s duty and authority to pay on a cheque ceases
[Mowji Shamji vs. The National bank of India 22 Bom.
499].
(viii)If a garnishee or other legal order from the Court attaching
or otherwise dealing with the money in the hand of the
banker, is served on the banker [Rogers vs. Whitely ( 1889),
22 Q.B.D. 236, affirmed 1892 A.C. 118].
(ix) If the authority of the banker to honour a cheque of his
customer is undermined by the notice of the latter’s death.
However, any payment made prior to the receipt of the
notice of death is valid [Tata vs. Hbert 9 Ves, 111; in re
Beaumant. 1 Ch. 889].
(e) Liability of endorser (Section 35): The endorser of an
instrument by endorshing and delivering the instrument,
before maturity, undertakes in effect the responsibility that
on the due presentment it shall be accepted, (if a bill), and
paid and that if it is dishonoured by the drawee, acceptor
or maker, he will indemnify the holder or subsequent
endorser who is compelled to pay, provided due notice of
dishonour is received by him. But he may insert, in the
endorsement, stipulations excluding, or making his liability
conditional ; In this respect, his position is better than that
a drawer or an acceptor, neither of whom can exclude his
liability. An acceptor, however can make his acceptance
conditional.
(f) Liability of parties to holder in due course (Section 36 ) :
Every prior party ( ie. , maker or drawer, acceptor and all
intervening endorsers to an instrument is liable to a holder
in due course until the instrument is satisfied. Thus the
maker and endorsers of a note are jointly and severally
liable for the payment and may be sued jointly.
(g) Liability of maker, drawer and acceptor as principals
(Section 37 & 38): The maker of a promissory note is liable
as the principal debtor. If the payee endorses it to A, the
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 maker will be liable to A as the principal debtor and the
LEGAL ASPECTS OF BUSINESS
payee will be liable as a surety. Similarly, the drawer of a
cheque, the drawer of a bill until acceptance and the
acceptor are respectively liable as sureties. As between the
parties so liable as sure – ties, each prior party is also liable
as a principal debtor in respect of each subsequent party.
For instance, A draws a bill payable to his own order on B
who accepts it. Afterwards A endorses the bill to C, C to D
to E. As between E ( holder and B, B is the principal
debtor and A, C and D are his sureties. As between E and
C, C is the principal debtor and D his surety.
(h) Nature of suretyship (Section 39): The holder of an
accepted bill may waive his claim against the acceptor, but at
the same time , he may expressly reserve his right to change
the other parties. Under Section 134 of the Contract Act,
the release of the principal debtor has the effect of
discharging the surety, but in the case of a bill it is not so.
But if the holder does not reserve his right expressly
against the other parties , they too will be discharged if he
released the acceptor.
(i) Discharge of endorser’s liability (Section 40): Any party
liable on the instrument may be discharged by the
intentional cancellation of his signature by the holder.
Suppose that A is the holder of bill of exchange of which
B is the payee and it contains the following endorsement in
blank:
First Endorsement, “B” Second Endorsement, “C”
Third Endorsement, “D” Fourth Endorsement, “E”
A, the holder, may intentionally strike out the endorsement by
D and C; in that case the liability of D and C upon the bill will
come to an end. But if the endorsements of D and C are struck
out without the consent of E, A will not be entitled to recover
anything firm E the reason being that as between D and E, D is
the principal debtor and E is surety. If D is released by the
holder under section 39 of the act, E, Being surety, will be
discharged. The rule may be stated thus: when the holder
without the consent of the endorser impairers the endorser’s
remedy against a prior party, the endorser is discharged from
liability to the holder.
(i) Liability of acceptor of a bill drawn in a fictitious name:
the acceptor is not relieved from liability by proving that
the drawer is fictitious. Suppose X uses a fictitious name in
drawing a bill upon Z and that the bill is made payable to
the order of the drawer X then endorses the bill in the
same fictitious name to Y, who presents the Bill to Z, for
acceptance. If Z accepts the bill, in spite of the fact that the
name of the drawer is fictitious; he cannot escape liability
to pay by showing that the name of the drawer is fictitious;
rather he will not be allowed to lead evidence that the name
is fictitious.
(ii) Liability on an instrument made drawn etc. without
consideration: an instrument made, drawn, accepted,
endorse, or transferred without consideration creates no
obligation of payment between the parties to the
instrument. For example, if the maker delivers a
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120
promissory note to the payee as a gift, the payee cannot
endorse it against the maker.
Similarly, if the consideration fails, there is no obligation on the
parties to pay. For example, X makes note in favor of Y in
anticipation of Y’s supplying a bale of cotton. Y fails to deliver
the cotton cannot claim payment from X.
Again, a bill that is drawn or accepted without consideration
does not impose any liability either on the drawer or on the
acceptor to pay the holder. Similarly, if an instrument is
endorsed without consideration, nothing can be claimed from
the endorser.
But if any party to an instrument made, accepted, endorsed or
transferred without any consideration, or for a consideration
which fails, has transferred the instrument to a holder for a
consideration such holder and every subsequent holder deriving
title from him, may recover the amount due on such instru-
ment from the transfer for consideration or from any party
prior thereto. For example, X and Z are respectively the drawer,
the payee and the acceptor of a bill of exchange drawn without
consideration; y transfers the bill to P for consideration. P can
claim payment from Y and also from Z and X.
(a) Is also entitled to receive amount when the person through
whom he claims was a holder or the lost instrument in due
course.
Under section 45A, the loser of the instrument has the right to
apply to the drawer for a duplicate of the lost bill. If the drawer
does not grant the application the loser many compel him to
provide him with a duplicate.
Liabilities on an accommodation note or bill (Provision to
Section 59): In the case of accommodation bills or notes, a
defect in the title of the transferor does not affect the title of the
holder acquiring after maturity. An accommodation may be
explained as follows: X draws a bill payable to himself on Y,
who accepts the bill without consideration just to accommodate
X, that is, to enable X to raise money by negotiating the bill in
the market. Though Y accepts the bill, X is primarily liable on
the bill, and he cannot demand the amount from Y, for in an
accommodation bill, the acceptor is only surety for the party
accommodated. However, if the accommodation bill, in the
above illustration, is transferred by X to Z for good consider-
ation after maturity and Z becomes the holder in good faith, Z
will be able to realize the amount of the bill from Y, the
acceptor though Z’s transferor X could not, at the date of
transfer, recover anything from Y.
Do you know what are the rights and obligations of a person
who had obtained an instrument by unlawful means of for
unlawful consideration?
Let us discuss it.
a) Rights and obligations of a person who had obtained an
instrument by unlawful means: If an instrument is
obtained from any maker, acceptor or holder by means, of
an offence or fraud, the possessor is not, ordinarily, entitled
to received the amount under it from such maker, acceptor,
X does not acquire any title to the instrument, and the
proceeds of the bill, if collected, could be recovered from X
by acceptor. If X transfers it to Y who is a gratuitous
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 transferee, Y too would not acquire any title to the bill. realize the amount of the bill from Q. But if R were bona fide

LEGAL ASPECTS OF BUSINESS

Similarly if X obtains a bill from the acceptor by fraud, he endorsee before maturity, he could relies the amount from Q.
cannot receive the amount of it, but if he endorses it to Y
References
who receives the bill for value without notice of the fraud,
he could collect the amount of the bill from X but from • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
no other party. Sultan Chand and Sons, New Delhi.
(b) Right and obligations of a person who has obtained an • http://www.indialawinfo.com/bareacts/soga.html
instrument for unlawful consideration: When an • M.C. Kucchal (2002), “ Business Law”, Vikas Publishing
instrument has been obtained from any maker, acceptor or House Pvt. Ltd, Delhi.
holder for an unlawful consideration no possessor is, • P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
ordinarily entitled to receive the amount due thereon from Pvt. Ltd, Delhi.
such maker, acceptor or holder or form any party prior to • Aggarwal, Rohini (2003), “Student’s Guide to Mercantile
such holder. The consideration may be unlawful either and Commercial Laws,” Taxmann’s, New Delhi
because it is immoral and contrary to public policy or
because it is specially interdicted or prohibited by the
stature if the possessor endorses it to say, P, even P would Notes:
not be entitled to claim payment, unless he is holder in due
course. P would be regarded as a holder in the course, if it
is endorsed to him for valuable consideration without any
notice having been received by him as to the consideration
being unlawful.
Effect of forgery: When a signature on a negotiable instrument
has forged, it becomes a nullity: the property in the instrument
remains vested in the person who is the holder at the time
when the forged signature was put on it. The holder of a
forged instrument can neither enforce payment thereon nor give
a valid discharge therefore. In the event of the holder being able
to obtain payment in spite of forgery, he cannot retain the
money. The true owner many sue in tort the person who had
received. This principle is universal in character, by reasons
whereof even a holder in due course is not exempt from. It
forgery is not capable of being ratified. But what would be the
effect of a forged endorsement? The answer to this question is
wholly dependent upon whether the instrument had been
endorsed in full or in blank. In the former case, the person
claiming under the forged endorsement even if he is purchaser
for value and in good faith, cannot acquire the rights of a
purchaser for value and in good faith cannot acquire the rights
of a holder in due course. He acquires no title to the bill or not
(Mercantile Bank vs. D’ Silva, 30 Bom L.R. 1225).
Instrument acquired after dishonour (Section 59) It has already
been pointed out that the holder in due course is not affected
by the defect in the title of his transferor; but it is not so in the
case of a holder whole acquires the instrument after dishonour,
or after maturity.
The holder of instrument, who has acquired it after dishonour,
has as against the other parties, only the rights thereon of his
transferor. For example, receive the amount of it from the other
parties because the endorsee too could not do so.
Instrument acquired after maturity (Section 59): The holder of
an overdue instrument too is affected by the defect in title of
his transferor. For example, Q. accepts a bill drawn by P and
deposits with P certain goods as collateral security for the
payment of bill. The bill, not having been paid at maturity, P
sells the goods and retains the proceeds, but in breach of faith
endorses the bill to R.R. having only the right of P, cannot

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11.555 121
LEGAL ASPECTS OF BUSINESS
LESSON 23:
THE NEGOTIABLE INSTRUMENT ACT 1881
NEGOTIATION, ENDORSEMENT, ASSIGN ABILITY
Learning Outcomes
After reading the lesson, you should be able to know:
• The meaning of negotiation, endorsement and assign
ability
• The rules of negotiation, endorsement and assign
ability
• The provisions relating to dishonored cheque
• The meaning of noting and protesting
• The presentment of negotiable instrument
• The international law related to negotiable instruments
Introduction
Today, we will discuss about the meaning of negotiation,
endorsement and assign ability and the important rules related
to it.
Negotiation
When a negotiable instrument is transferred to many person
with a view to constituting that person the holder thereof, the
instrument is deemed to have been negotiated (Section 14). A
negotiable instrument may be transferred in either of the two
ways viz., (1) by negotiation under the Negotiable Instruments
Act (Section 14, 48, 47, 46); and (ii) by assignment of the
instrument as an ordinary chosen in action under the Transfer
of Property Act (Chapter VII, Section 130). Transfer by
negotiation, however, is the only mode of transfer recognized
by the Act.
Duration of negotiation (Section 60): An instrument may be
negotiated until payment thereof by the maker, drawee or
acceptor at or after maturity, but not after such payment. But the
maker, drawee or acceptor cannot negotiate the instrument after
maturity, even if it remains unpaid. An instrument may be
satisfied even without payment, and such satisfaction is
equivalent to payment.
Under the Act, negotiable instruments may be negotiated either
by delivery when these are payable to bearer or by endorsement
and delivery when these are payable to order.
(i) Importance of delivery (Section 46): Delivery is an incident
of the utmost importance in the case of an instrument. It
is essential to the issue of an “instrument’ for “issue”
means the delivery of the instrument, complete in form, to
a person who takes is as a holder. It is equally essential to
the negotiation of an instrument, for a bearer instrument,
must be transferred by delivery and in the case of any other
instrument, endorsement is incomplete without delivery.
In fact, a negotiable instrument is nothing but a contract,
which is incomplete and revocable until the delivery of the
instrument is made. For the payee cannot claim payment;
Section 46 of the Act provides as follows:
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“The making, acceptance or endorsement of promissory note,
bill of exchange or cheque is completed by delivery, actual or
constructive”
(ii) How to deliver: As between parties standing in immediate
relations, delivery to be effectual, must be made by the
party making, accepting or endorsing the instrument, or by
a person authorized by him in this behalf. Thus a
promissory note must be handed over to the payee by the
maker himself or by some one authorized by the maker.
Similarly, a bill of exchange must be delivered to the
transferee by the maker, acceptor or endorser, as a case may
be.
(iii) Conditional and unconditional delivery; An instrument
may be delivered conditionally or only for a special
purpose, and not for the purpose of transferring
absolutely the property in the instrument. A bill delivered
conditionally is called an ‘escrow’. Although a conditional
delivery is valid, the condition attaches exclusively to the
delivery and not to the making or drawing of an
instrument. A bill must be drawn and a note made
unconditionally When an instrument is delivered
conditional or for special purpose, the property in the
instrument does not pass on to the transferee until the
condition is fulfilled and the transferee holds such
instrument in law as trustee or agent of the transferor.
If, however, he transfers an instrument delivered conditionally
to X for value to Y without notice of the condition, Y can claim
payment even if the condition is not complied with. The reason
is obvious – Y is bonafide transferee for value without notice
of the condition and, as such, he should not suffer for
suppression of fact by X.
(iv) Negotiation by delivery (Section 47): An instrument
payable to bearer is negotiable by delivery thereof. But
when such instrument is delivered on condition that it is
not to take effect except in certain event, it is not negotiable
(except in the hands of a holder for value without notice
of the condition ) unless such event happens.
The distinction between ‘delivery’ and ‘negotiation’ should be
noticed. An instrument is said to be negotiated, when it is
transferred from one person to another in such a manner as to
constitute the transferee the holder thereof.
(v) Negotiation by endorsement: In order to negotiate, that is
to transfer title to an instrument payable to order, it is at
first to be endorsed and then delivered by the holder
thereof.
(vi) Different types of endorsements (a) Blank ( or general):
No endorsee is specified in an endorsement in blank it
contains only the bare signature of the endorser. A bill so
endorsed becomes payable to bearer.
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Specimen
Kishan Lal
(b) Special ( or in full) : In such an endorsement, in addition
to the signature of the endorser the person to whom or to
whose order the instrument is payable is specified.
Specimen
Pay to Hari Ram.
Kishan Lal
(c) Restrictive: Such an endorsement has the effect of
restricting further negotiation and transfer.
Specimen (1) Pay to A only ]
M.Lal P.Kumar
(d) Conditional : Such an endorsement combines an order to
pay with condition.
Specimen: Pay to A on safe receipt of goods.
V. Chopra
(e) Sanse Recourse: By adding these words after the
endorsement, the endorser declines to accept and liability
on the instrument of any subsequent party.
(f) Sans Frais: These words when added at the end of the
endorsement, indicate that no expenses should be incurred
on account of the bill.
(g) Facultative: When it is desired to waive certain right, the
appropriate words are added to indicate the fact, e.g.,
“notice of dishonour dispensed with”.
Every endorser of a negotiable instrument is liable, under
Section 35, to every subsequent party to it provided due notice
of dishonour is given to or received by him e.g., if a bill is
drawn by A upon B and is payable to C or order, and C
endorses the bill to D, who in turn endorses it to E, then, in
case B, dishonours the bill, the holder, i.e., E has the right of
action against all the parties i.e., D.C. and A. Similarly, D has
right against C and A. To this rule that every prior party of a bill
is liable to every subsequent party, there are a few exceptions
which are enumerated below:
(1) Any endorser can exclude personal liability by endorsing
“sans recourse” i.e. without recourse.
(2) If the holder of a negotiable instrument, without the
consent of the endorser destroys the instrument or in any
way prejudices the holder (Section 40 ).
(3) The rule is not applicable also in the case of “circuitry of
action” e.g., a bill is drawn by A upon B payable to C or
order, who endorses it to D who endorses it to E, who
endorses it to F, who endorses it to G and who again.
Endorses it back to D. In that case, it will be observed
that a circle is complete between the first and second
holdings of D; and the parties in between ( i.e., E,F and G)
are absolved from liability to D because D is, as against
them, both a subsequent party and a prior party. If,
however, D’s first endorsement was “sans recourse”, the
intermediate parties, i.e., E,F and G would not be absolved
from liability to him.
(vii) Conversion of endorsement in blank into endorsement in
full (Section 49): The holder of a negotiable instrument
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11.555
endorsed in blank may, without signing his own name by
LEGAL ASPECTS OF BUSINESS
writing above the endorsers, signature a direction to pay to
any other person as endorsee, covert the endorsement in
blank into an endorsement in full; and the holder does not
thereby insure the responsibility of an endorser .
(viii)Effect of endorsement (Section 50): (a) The endorsement
of an instrument, followed by delivery, transfers to the
endorsee the property in the instrument with right of
further negotiation. That is, the endorsee may endorse it to
some other person.
(b) The endorsement may also contain express terms
making it restrictive. The effect of restrictive
endorsement is (1) to prohibit or exclude the right of
further negotiation, or (2) to constitute the endorsee an
agent to endorse the instrument; or (3) to entitle the
endorsee to receive the contents of the instrument for
the endorser or for some other specified person.
(c) A restrictive endorsement gives the endorsee: (1) the
right to receive payment of the instrument; (2) the
same rights of action against any other party to the
instrument as the endorser had; (3) power, only in
accordance with the express terms of his authority, to
transfer the instruments and his right thereon to
another.
(ix) Who may negotiate (Section 51): The following persons
may negotiate an instrument: .
(1) sole maker, (2) drawer, (3) payee, (4) endorsee.
A maker or drawer only when the instrument is drawn to his
own order. When the endorsee is the holder under a restrictive
endorsement, he must exercise his power of negotiability is
excluded by the respective endorsement, the endorsee, as
holder, cannot negotiate.
The explanation to Section 51 provides that though a maker or
a drawer may endorse or negotiate an instrument, he cannot do,
so unless the instrument fall into his possession in a lawful
manner or unless he is the holder thereof. Further, insofar as t
he payee or an endorsee is concerned, he must before he can
negotiate the instrument, be a holder thereof. Consequently, a
person who steals or endorses or finds a lost instrument,
cannot endorse or negotiate, as he is not a holder within the
meanings of the Act.
(x) Exclusion of liability of endorser (Section 52): The
endorser of an instrument may, by express words in the
endorsement, exclude his own liability on the instrument.
Suppose that the endorser signs his name, adding the
words “without recourse”, the incurs no liability. The
holder cannot claim compensation from him in case of
dishonoured by the drawee, acceptor or maker. But for the
words “without recourse”, he would have been liable.
The endorser, instead of excluding his liability altogether, may
restrict his liability by endorsement. Thus, he may either (1)
make his liability depend upon the happening of a specified
uncertain event, (2) make the right of the endorsee to receive the
amount mentioned in the instrument depend upon a specified
uncertain event.
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 But when such endorser afterwards becomes the holder, all
LEGAL ASPECTS OF BUSINESS
intermediate endorsers are liable to him. For example A the
payee and holder of an instrument endorses it to B with the
words “without recourse” and B endorses it to C who in his
turn endorses it to A, B and C are liable to A as intermediate
endorsers.
(xi) Holder deriving title from holder in due course (Section
53): A holder of an instrument deriving title from a holder
in due course has rights thereon of the holder in due
course. Therefore, a holder deriving title from a holder in
due course can claim the amount of a bill drawn and
accepted without consideration. It has been held that title
which has been cleansed of defects by passing through the
hands of a holder in due course remains immune from
those defects inspite of the fact that a subsequent holder
may have noticed that the defects once existed provided he
was not a party to them.
For example, X obtains Y’s acceptance to a bill by fraud. X
endorses it to Z who takes it as a holder in due course. Z
endorses the bill to F who knows of the fraud. Since F derives
the title from Z who is a holder in due course and F is not party
to fraud, F gets a good title to the bill.
(xii) Effect of endorsement in full after a blank one (Section 54
and 55): An instrument endorsed in blank is payable to the
bearer, although originally it was payable to order. If an
instrument after having been endorsed in blank is
endorsed in full, the endorsee in full does not incur the
liability of an endorser, so the amount of it cannot be
claimed from him. In other words if an endorsement in
blank is followed by an endorsement in full, the
instrument still remains payable to bearer and negotiable
by delivery as against all parties prior to the endorse in full,
though the endorser in full is only liable to a holder who
made title directly through his endorsement and the
persons deriving title through such holder.For example, X
is the payee holder of a bill of exchange X endorsee it in
blasnk and delivers it to Y who endorses it in full to Z or
order Z, without endorsement, transfers the bill to F. In
view of Section 55, F as the bearer of the instrument can
receive payment or sue the drawer, acceptor or X but not Y
or Z who is a subsequent but not a prior party. But there is
an exception to this rule. The person to whom it has been
endorsed in full, or any one who derives title through him,
can claim the amount from the endorser in full.
(xiii)Effect of endorsement for part of sum due (Section 56):
An endorsement purposing to transfer only a part of the
amount of instrument is invalid, and the endorsee,
therefore cannot negotiate it. But when the amount due
has been paid in part, a note to that effect may be endorsed
on instrument and the instrument may then be negotiated
from the balance.
There is an important difference between negotiation and
assignment. Let us first try to understand the difference
between it.
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Negotiability VS. Assignability
(i) The essential distinction between transfer by negotiation
and transfer by assignment is that in the latter case, the
assignee does not acquire the right of a holder in due
course but has only the right, title and interest of his
assignor; on the other hand in the former case he acquires
all the rights of a holder in due course i.e., rights from
equities (Mohammad Khunerali vs. Ranga Rao, 24 M. 654).
(ii) In the case of negotiable instrument, notice of transfer is
not necessary while in the case of an assignment of chose
in action, notice of assignment must be served by the
assignee on his debtor.
(iii) Again, in the case of transfer of negotiable instrument,
consideration is presumed but in the case of transfer by
assignment, consideration must be proved as in the case in
any other contract.
(iv) Negotiation requires either delivery only in the case of
“bearer” instrument or endorsement and delivery only in
the case of “order instrument”. But of in the case an
assignment, Section 130 of the Transfer of Property Act
requires a document— be reduced into writing and signed
by the transferor.
(v) Endorsements do not require payment of stamp duty
whereas negotiation requires payment of stamp duty.
Negotiation Back – An instrument is said to have been
negotiated back to him and he is said to have taken up or taken
back the negotiable instrument when a person who has been a
party to the negotiable instrument takes it again. For example,
suppose that that the endorsements on a negotiable instrument
are as under.
Pabxya
Here A is person who is a prior party to the instrument. He
negotiated it to B, B to X, X to Y and Y again to this very A.
On account of this last endorsement, A should have right to
claim money from X, Y and B. The rule is that every prior party
is liable to every subsequent party. Thus, conversely, every
subsequent party may sue every prior party. As a result of the
prior party (i.e. a) having taken back the instrument subsequent,
he (i.e., a) becomes a subsequent’ party. Therefore A, by reason
of the last endorsement mentioned above, come to have the
rights to claim money Y, X or B.A is permitted by law to use Y,
X or B then Y, X or B in his turn can sue A because of A’s prior
endorsement. This will lead to a circuitry of action. To prevent
this, Section 52 of the Negotiable Instruments Act enacts an
exception to the general rule to provide that the holder in due
course of a negotiable instrument may sue all prior parties
thereto. Thus A, in the above case cannot sue Y, X or B. But A
can sue P since the latter is prior to A’s original endorsement. If
however A, in original endorsement, had signed “sans recourse
“ there could be no circuitry of action and A could sue Y, X or
B.
(b) Capacity to incur liability under instrument Section 26:
Every person competent to contract has capacity to
incur liability by making ‘drawing’ accepting, endorsing
, delivering and negotiating an instrument.
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A party having such capacity may himself put his signature or
authorize some other person to do so. A minor cannot make
himself liable as drawer, acceptor or endorser, but where the
instrument is drawn or endorsed by him, the holder can receive
payment from any other party thereto. Authority to sign
(Section 27 & 28): Every person, capable of incurring liability,
may bind himself or be bound by a duly authorized agent
acting in the name.
A general authority to transact business given to an agent does
not empower him to accept or endorse bill of exchange so as to
bind the principal. An agent may have authority to draw bills of
exchange, but endorse them. An authority to draw does not,
necessarily, imply an authority to endorse. An agent who signs
his name on an instrument without indicating that he signs as
agent, is personally liable, but this rule does not apply where any
one induces him to sign upon the belief that principal only
would be held liable.
The mere signature of an agent in his own name, with the
word agent” added, does not exempt him from personal
liability.
You also need to understand the following in regard to the
dishonoured cheque.
Dishonoured cheque to be treated as an offence: From 1st April
1989, a person issuing a Cheque will be committing an offence
if the cheque is dishonoured for insufficiency of funds. The
offence will be punishable with imprisonment for a term up to
two years [as prescribed by the Negotiable Instruments.
(Amendment and Miscellaneous and Provisions Act, 2002] or
with a fine twice the amount of the cheque or both. The cheque
in question should be issued in discharge of a liability and
therefore a cheque given as gift will not fall in this category. The
cheque should be presented within six months or its specific
validity period whichever is earlier. The payee or holder in due
course should give notice demanding payment within 15 days
of the receipt of the notice and only if he fails to do so,
prosecution can take place. The complaint can be made only by
the payee/holder in due course, within one month.
A banker who in good faith but without negligence receives
payment for a customer of a cheque crossed generally or
specially to himself, does not, in the event of the title of the
customer to the cheque providing to be defective, incur any
liability to the true owner of the cheque for having received
payment therefore (Section 131). It is special protection given to
the collecting banker which is available to him only if he acts in
good faith but without negligence. Given below are a few
illustrations of circumstances in which a banker has been
deemed to have complied with these conditions:
Discharge from Liability on Notes, Bills and Cheque
Distinction between discharge of a party and discharge of
instrument: An instrument is said to be discharged only when
the party who is ultimately liable thereon is discharged from
liability. Therefore, discharge of a party to an instrument does
not discharge the instrument itself. Consequently, the holder in
due course may proceed against the other parties liable for the
instrument. For example, the endorser of a bill may be
discharged from his liability, but even then acceptor may be
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11.555
proceeded against. On the other hand, when a bill has been
LEGAL ASPECTS OF BUSINESS
discharged by payment, all rights there under are extinguished,
even a holder in due course cannot claim any amount under the
bill.
(b) Different modes of discharge from liability: Parties to
negotiable instrument are discharged from liabilities
when the right of action on the instrument is
extinguished. The right of action on a negotiable
instrument is extinguished by the following method:
(i) By payment in due course: The maker, acceptor or endorser
respectively of a negotiable ins trument is discharged from
liability thereon to all parties thereto if the instrument is
payable to bearer, or has been endorsed in blank and such
maker, acceptor or endorser makes payment in due course
of the amount due thereon i.e., when the payment has
been made to the holder of the instrument at or after
maturity in good faith and without notice of any defect in
the title to the instrument (Section 82).
(ii) By cancellations of acceptor’s endorser’s name: The maker,
acceptor and endorser respectively of a negotiable
instrument is discharged from liability thereon to a holder
there of who has cancelled such acceptor’s or endorser’s
name with the intent to discharge him and to all parties
claiming under such holder. In other words, if the holder (
Payee) of a bill cancels the signature of acceptor ( drawee )
with an intention to discharge him both maker (drawer)
and the acceptor of such negotiable instrument are
discharged from the liability to the holder and to all parties
claiming under such a holder [Clause (a) Section 82.}
(iii) By release: The maker, acceptor or endorser respectively of a
negotiable instrument is discharged from liability thereon
to a holder thereof who has renounced his right in respect
of the instrument. The waiver of the right may be express
or implied [Clause (b) of Section 82.]
(iv) By default of the holder: If the holder of a bill of
exchange allows the drawee more than forty-eight hours,
exclusive of public holiday, to decide whether he will accept
the bill, all prior parties not consenting to such an
allowance are discharged from liability to such holder. It is
because if the drawee fails to signify his acceptance within
forty-eight hours, the holder must treat the instrument as
dishonoured and he must at once give notice to the drawer
and to all prior, parties, and must not allow time unless
they give their consent that more time should be allowed
(Section 83).
(v) Dissenting parties discharged by qualified or a limited
acceptance: If the holder of a bill who is entitled to an
absolute and unqualified acceptance elects to take a qualified
acceptance, he does so at his own peril and discharges all
parties prior to himself unless he obtains their consent to
such an acceptance. Thus, the previous parties are
discharged in the following cases namely (i) when
acceptance is qualified, (ii) when acceptance is for a part of
the sum, (iii) when acceptance substitutes a different place
or time of payment, (iv) when acceptance is not signed by
the drawees not being partners.
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 They are discharged, if such acceptance is acquiesced in by the
LEGAL ASPECTS OF BUSINESS
holder without obtaining their previous consent. They are
discharged as against the holder and those claiming under him.
But, if they subsequently approve of such acceptance by the
holder , they will not be discharged.
An acceptance is qualified in the following cases, namely: (a)
where it is conditional, declaring the payment to be dependent
on the happening of an event stated therein, (b) when it
undertakes the payment of part only of the sum ordered to be
paid,(c) where no place of payment being specified on the order,
it undertakes the payment at a specified place, and not otherwise
or elsewhere or where a place of payment being specified in the
order it undertakes the payment at some other place and
otherwise or elsewhere, (d) where it undertakes the payment at a
time other than that at which under the order it would be legally
due
(vi) By material alteration of the instrument without assent of
all parties liable: Any material alteration of a negotiable
instrument renders the same void as against any one who
is party there to at the time of making such alteration and
does not consent there to, unless it was made in order to
carry out the common intention of the original parties and
any such alteration, if made by an endorsee, discharges his
endorser from all liability to him in respect of the
consideration there of (section87). The alteration must be
so material that it alters the character of the instrument to a
great extent, alteration of the date, alteration of the
amount payable, or alteration of the time and the
alteration on the place of payment of the instrument are
regarded as material alterations of the instrument, in
hongkong and Shangai Bank vs. Lee shi (1928)A.C 181, it
has been held that an accidental alteration will not, however
render the instrument void. It is necessary to show that the
alteration has been improperly and intentionally.
(vii) By payment, alteration not being apparent: if, however a
person pays an altered note, bill or cheque, provided the
alteration is not apparent and payment is made in due
course by person or a banker who is liable to pay the
amount he is protected (section 89. For example, if A
draws a cheque for Rs. 8 in favour of B who fraudulently
converts eight into eighty, and the alteration is not
apparent, the banker, paying Rs. 80 to B will not be liable
to make good to the drawer the amount paid in excess.
(viii) By acceptor becoming holder of a bill at or after maturity
in his own right:
If a bill of exchange which has been negotiated is at or after
maturity held by the acceptor in his own right all rights to action
thereon are extinguished (section90)
(ix) By default in presenting the cheque within a reasonable
time: In the case of a cheque if it is not presented for
payment within a reasonable time of its issue and the
drawer or person on whose account, it is drawn had the
right at the time when presentment ought to have been
made as between himself and the banker, to have the
cheque paid and suffers actual damage through the delay he
is discharged to the extent of such damage, that is to say,
to the extent to which such drawer or person is creditor of
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126
the banker to a larger amount that he would have been if
such cheque had been paid(section84) for example, if X
draws 10 cheques of Rs. 100 each, but when the cheque
ought to be presented, has only Rs. 600 at the bank and
subsequently the bank fails before the cheques are
presented, X will be released from liability to the extent of
Rs. 600 but will remain liable for the balance. If he had the
full amount of Rs. 1,000 at the bank, he will be discharged
in full.
Note – In the above case liability of the drawer will be trans-
ferred to the banker. For determining what is reasonable time
for presentation, the following matters would be considered: (i)
nature of instrument: (ii) usage of the trade and bankers and
(iii) facts of the case.
(x) By operation of Law: it should be noted that a negotiable
instrument is also discharged by operation of law, which
may occur in any of the following circumstances. (a) By
lapse of time i.e. when the claim under the instrument
become barred by the limitation act on the expiry of the
period prescribed for the recovery of the amount due on
the instrument; (b) By merger, i.e. when the debt, under
the instrument is merged in the judgment debt obtained
against the acceptor maker or endorse; under the law of
insolvency, i.e. when the acceptor, maker, or endorser, who
has been adjudicated an insolvent, is discharged by an order
of the court made in the insolvency proceedings.
(xi) By payment by the drawee of a cheque payable to order or
to bearer: where a cheque payable to order purports to be
endorsed by or on behalf of the payee, the drawee who
always is a banker is discharged by payment in due course.
A cheque is said to have been paid in due course, when it
has been paid in good faith, after taking proper care to
ascertain the genuineness of the endorsement. Payment in
due course discharge the bank from liability even if the
payment is made to a wrong person. Even if the
endorsement of the payee is forged the banker is
discharged from the payment in good faith and with
negligence. But if the drawer’s signature is forged, the
banker can, under no circumstance, claim discharge on
payment, for the banker is presumed to know the signature
of his customer (i.e. the drawer)
The bank is discharged by payment in due course to the bearer
not with standing any endorsement thereon, whether in full or
in part and whether or not such endorsement purports to
restrict or exclude further negotiation. The endorsee under an
endorsement in full cannot recover the amount from the banker
who has paid it to the bearer (section 85)
The rule of the discharge applicable to a cheque payable to order
also applies, to a draft drawn by one of the bank upon another
payable to order or demand (section 85 A)
4.10 Notice of Dishonour
(a) Dishonour by non - acceptance (section 91): A bill may be
dishonored either by non acceptance or by non – payment.
A dishonour by non - acceptance may take place in any one
of the following circumstances: (i) when the drawee either
does not accept the bill within forty – eight hours of
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 presentment or refuse to accept it; (ii) when one of several
drawees, not being partners, makes default in acceptance;
(iii) when the drawee gives a qualified acceptance; (iv) when
presented for acceptance is excused and the bill remains
unaccepted; and (v) when the drawee is incompetent to
contract.
Note that presentment is not necessary where the drawee after
diligent, search cannot be discovered, or where the drawee is
incompetent to contract or here the drawee is a fictitious person.
When a bill has been dishonoured by non- acceptance, it gives
the holder an immediate right to have recourse against the
drawer or the endorser. Since a dishonour by non -acceptance
constitutes a material ground entitling the holder to take action
against the drawer, he need not wait till the maturity of the bill
for it to be dishonored on presentment for payment (Ram
Ravij Jambekar vs. prulhaddas 20 Bom. 133).
(b) Dishonour by non-payment (section 92) : An
instrument is dishonored by non-payment when the
party primarily liable e.g., the acceptor of a bill, the
maker of a not or the drawee of a cheque, make default
in payment. An instrument is also dishonored for
non-payment when presentment for payment excused
and the instrument, when overdue, remains unpaid,
under section 76 of the Act.
(c) Distinction between dishounour by non-acceptance
and by non-payment. If a bill is dishonored by non-
acceptance, there is no right of action against the
drawee as he is not a party to the bill. The holder of
the bill can proceed only against the drawer or endorser,
if any, on Dishonour by non-payment the drawee can
be sued.
(d) Notice of Dishonour (sections 93 and 94) : (i) by
whom notice to be given: when an instrument is
dishonored either by non-acceptance or by non-
payment, the holder thereof or some party thereto
who remains liable thereon must give notice of
dishounour.
(ii) To whom notice is to be given : Notice must be given to
such parties whom the holder proposes to charge with
liability severally or jointly, e.g., the drawer and the
endorsers. Notices may be given either to the party himself
or to his agent, or to his legal representative on his death,
or to the official assignee on his insolvency. It is not
necessary to give notice to the maker of a note or the
drawee or acceptor of a bill or cheque.
(iii) Effect of non-service of notice : if a notice is not sent to
any prior party who is entitled to such notice within a
reasonable time, he is discharged form liability. It is a
condition precedent to the continuation of the liability of
the drawer under section 30 and of the endorsee under
section 35 of the Act that they should be notified of the
dishonour.
(v) Mode of service of notice. The notice, if written, may be
given by post at the place of business or at the residence of
party for whom it is intended, and even if it is miscarried
the notice is not rendered invalid by such miscarriage.
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When the holder of the instrument and the party to
LEGAL ASPECTS OF BUSINESS
whom notice of dishonour must be posted by the next
post if the parties carry on business or live in the same
place, it is sufficient if the notice is so dispatched that it
reaches its destination on the day next after the day of
dishonour.
(e) Transmission of notice of dishonour by party
receiving it (section 95) : any party receiving notice of
dishounour should communicate the same within a
reasonable time to any prior party whom he intends to
hold liable in respect of the instrument, but if the
prior party receives otherwise ,no such communication
is necessary.
To illustrate the necessity of transmission of notices, let us
consider the following case.
A drawn a bill in favour of B on X.
B endorses it to C;
C endorses it to D;
D endorses it to E;
E endorses it to F.
Suppose X refuses to accept the bill and F, the holder, gives
notice of dishonour only to E and A, but E does not transmit
the notice to D, C and B, in that case F shall have the right of
action against E or A, E also has right of action against D, C
and B,E must transmit the notice to them as well.
(f) When notice of dishonour is unnecessary (section 98):
in a suit against the drawer or endorser on an
instrument being dishonored, notice of dishonour is a
material part of the cause of action. However, in the
following cases the notice of dishonour is not
necessary. (i) when the necessity of the notice has been
dispended with by an express waiver by the party
entitled to it. For example, when the drawer of a bill
informs the holder that the bill will be dishonored on
presentment, the notice of dishonour is said to have
been dispensed with [ Bertt vs. Levett (18]1) 13
East 213].
(ii) when the drawer has countermanded payment, he, having
put an impediment in the way of the holder obtaining
payment is not entitled to the notice of dishonour.
(iii) When the party charged would not suffer damage for want
of a notice. In such a case neither presentment nor notice
of dishonour is necessary is necessary, provided it is shown
that at the time of drawing the instrument there were no
funds belonging to the drawer in the hands of the drawee
[ subrao vs. sitaram 2 Bom L. R. 891]
(iv) When the party entitled to notice after due search, cannot
be found. (v) where there has been accidental omission to
give notice, provided the omission has been caused by an
unavoidable circumstances, e.g., death or dangerous malady
of the holder or his agent, or other inevitable accident, or
overwhelming catastrophe not attributable to the default,
misconduct or negligence of the party tendering notice. (vi)
when one of the drawers is acceptor. Form this, it is also
possible to deduce a further rule that notice of dishonour
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 is not necessary for charging the drawer where the drawer
LEGAL ASPECTS OF BUSINESS
and drawee of a bill are partners does not give rise to the
presumption that they are partners in respect of the
drawing of the bill, or that the bill was drawn by one of
them on behalf of both. [jambu Ramaswamy vs.
Sundraraja chetti 29 mad 239]. Such a case does not fall
under purview of the rule mentioned above, so as to
dispense with notice, (vii) in the case of promissory note
which is not negotiable, (viii) when the party entitled to
notice, knowing the facts, promises unconditionally to pay
the amount due on the instrument.
4.11 Noting and Protesting
(a) Noting- noting is a convenient mode of authenticating the
fact that a bill or note has been dishonored. When a note
or a bill has been dishonored by non- acceptance or non-
payment, the holder causes such dishounour to be noted
by a Notary public. Noting is a minute recorded by a
notary public on the dishonored instrument. When an
instrument, say a bill of exchange, is to be noted for
dishonour, it is taken to Notary public who presents it
once again for acceptance or payment, as the case may be;
and if the drawee or acceptor still refuses to accept or pay
the bill, it is noted, i.e., a minute is prepared containing the
date of dishonour, reason for such dishonour, etc.; which
is attached to the instrument; and the facts are’ noted on
the instrument.
(b) Protest - When an instrument is dishonored, the holder
may cause the fact not on by to be noted, but also to be
certified by a Notary Public that the bill has been
dishonolired. Such a certificate is referred to as a protest.
If the creed it or an acceptor of a bill is shaken by insolvency or
otherwise before the date of maturity of the bill, the holder
may cause such a fact also to ‘be noted and certified,
Such a certificate is called a protest for better security. The
contents of a protest are given in Section, 101 of the Act.
Neither noting nor protesting is compulsory in the case of
inland bi is. But under Section
104 every foreign bill of exchange must be protested for
dishonour when such a pretest
is required by the law of the country where the bill was drawn.
The advantage of both noting and protesting is that this
constitutes prim facie good evidence in the Court of the fact that
instrument has been dishonoured; It is necessary to note that
under Section 119, the Court is bound to recognise a protest.
But it may of may not recognise noting.
To make good this lacuna, Section 104 A has been introduced.
It c1ai-ifies the position that any bill or document which has
been noted can be protested any time thereafter for taking legal
action against the parties. Thus, where a document has been
noted within the time required by law, legal proceeding cannot
be vitiated on account of protest not having been made.
(c) Notary Public: A Notary public is appointed by the Central
State Government . His functions are to attest deeds,
contracts and other instruments that are to be used abroad
and to give a certificate of due execution of such
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128
documents. He enjoys the confidence of the business
world, and any certificate given by him is presumed to be
true by a court of law. The profession of notaries is
regulated by the Notaries Act, 1952.
(d) Notice of Protest: When a promissory note or a bill of
exchange is required by law to be protested, notice of such
protest in lieu of notice of dishonour must be given in the
same manner as notice of dishonour (Section 102).
4.12 Acceptance and Payment for Honour and
reference in Case of Need
Acceptance for honour – If a bill has been dishonoured by
non-acceptance and has been duly noted or protested for such
dishonour, any person, before it is overdue, who is not a partly
already liable under the bill may, with the consent of the holder
of the bill, by writing on the bill, accept the bill for the honour
of any of the parties liable on it. The object of such an
acceptance for honour is to protect the credit of the party liable
on the bill, and to prevent legal proceeding being taken against
him.
Conditions for valid acceptance for honour: These are: (i) that
the bill has been noted or protested for non-acceptance or better
security: (ii) that such an acceptance has been made with the
consent of the holder, (iii) that the acceptor for honour is not
already liable on the bill, (iv) that the acceptance is for the
honour of any party already liable on the bill; and (v) that the
acceptance is by writing on the bill.
Rights and Liabilities of such acceptor: Section 111 of the Act
states that an acceptor for honour binds h himself all parties
subsequent to the party for whose honour he accepts to pay the
amount of the bill if the drawee does not. But an acceptor for
honour is not liable to the holder of the bill unless it is
presented or (in case the address given by such acceptor on the
bill is a place other then the place where the bill is made payable)
forwarded for presentment not later than the ‘day next after the
day of its maturity. Moreover, an acceptor for honour cannot be
charged unless the bill has been presented at its maturity to the
drawee for payment and has been dishonoured by him and
noted or protested for such dishonour (Section 112),
Section 111 further provides that the party for whose honour
the acceptor accepts to pay and
all prior parties become liable in their respective capacities to
compensate the acceptor for honour for all loss or damage
sustained by him, in consequence of sad acceptance:
Payment for honour: It is a payment which is made by any
person for the honour of any party liable on the bill after it has
been protested for non-payment. The condition essential for
such payment are, (i) that the bill must have been noted or,
protested for non-payment (ii) that the person paying or his
agent declares before Notary Public the pal}:y for whose honour
he pays; (iii) that such declaration has been recorded by such
Notary Public; (iv) that the payment must be made for the
honour of an y party liable to pay the bill and ( v) that the
payment may be made by any person whether he is already
liable on the bill or not.
The effects of such a payment are : All parties subseq1,Jent to
the party for whose honour it is paid are is charged. ( 2) The
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payer for honour acquires for the rights of a holder whom he
pays and becomes entitled to all the remedies of the holder on
the instrument, (3) The payer can recover all sums paid by him
together with the interest and expenses properly incurred in
making such payment (Section 114).
According to Section 115 where a “drawee in case of need” is
motioned in a bill or nay endorsement thereon, it is obligatory
for the holder to present the instrument to him i.e. , the drawee
in case of need, and it will not be considered to have been
dishonoured, unless it has been dishonoured by such drawee.
The failure to present the bill to the drawee in case of need
absolves the drawer from liability (Bahadur Chand v. Gulab Rai
AIR Lah 557). Again according to the Bombay High Court if a
bill of exchange has been duly accepted by dishonoured when
presented to drawee in the first instance for payment, it cannot
be validly presented for payment to the drawee in case of need
if it was not first presented to him for acceptance [Dore vs.
Kanchiwalla & co. 40 Bom LR 473].
4.13 Presentment Of Instruments
(a) Presentment of bills for acceptance (Section 61) - A bill of
exchange is not necessarily required to be presented for
acceptance, before its being presented for payment. For
example, a bill payable on demand, payable certain number
of days after date, payable on a certain day, etc., need not be
presented for acceptance. Although it is a matter of
common practice to obtain acceptance of the bill by the
drawee at the earliest opportunity after it is drawn, such an
acceptance is not absolutely essential to the bill being a
negotiable instrument. For example, a person to whom a
bill has been negotiated before acceptance may sue thereon
as a holder in due course. [National Park Bank of New
York vs. Berggren & (1914) 110 L.T.
907].
It should, however, be noted that in two cases presented for
acceptance would be necessary, namely:
(i) Where a bill is payable after sight – presentment for
acceptance is with a view to fixing the maturity of the
instrument:
(ii) Where a bill expressly stipulates that it shall be presented
for acceptance.
But when a bill is not payable after sight, presentment is
unnecessary to render any prior party liable. It is, however,
prudent for the holder of such bill to present it for acceptance,
for if it is accepted, he obtains the security of the acceptor’s
signature and if it is not accepted he is relieved of the necessary
presentment for payment.
How, when and by whom bill is to be presented: A bill payable
after sight is to be presented to the drawee by a person entitled
to demand acceptance, and it is generally the holder of the bill
who is entitled to demand acceptance. The bill must be
presented by the holder within a reasonable time after it is
drawn, and in business hours on a business day either at the
residence or at the place of business of the drawee. But if the
bill itself indicates a place of presentment, it must be presented
at the place. If the drawee cannot, after reasonable search, be
found, the bill is to be regarded as dishonoured for non –
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11.555
acceptance. When authorized by agreement of usage, a present-
LEGAL ASPECTS OF BUSINESS
ment through the post office by a registered letter is sufficient.
Drawee’s time for deliberation: Under Section 63, the drawee is
entitled to a respite of forty eight hours ( exclusive of public
holidays ) top consider whether he should accept a bill pre-
sented to him for acceptance.
When presentment is excused: Presentment for acceptance is
excused if the drawee is a fictitious person (Section 91) or if he
cannot, after reasonable search, be found (Section 61). Against
even if presentment is made irregularly, such an irregularity is
excused if the bill has been dishonoured by non-acceptance on
some other ground.
(b) Presentment of promissory note for sight (Section 64):
When and why a note is to be presented for sight? Like a
bill of exchange payable after sight, a promissory note
payable at a certain period after sight must be presented to
the maker for sight. The presentment is to be made by a
person entitled to demand payment who is usually the
holder. Against, the note must be presented within a
reasonable time after it is made and in business hours on a
business day. In default of such presentment, the maker is
not liable to pay anything to the holder. The necessity for
presentment, in the case of such a note, viz., a note payable
at a certain period after sight, is obvious; without such
presentment the maturity of the note cannot be fixed.
(c) Presentment of instrument for payment: Presentment of a
bill of exchange means it exhibition to drawee or acceptor
by holder with a request for payment in Accordance With
Its Apparent Tenor (section 64). Presentment may be made
through post by means of a registered letter if such a
mode of presentment is authorized by agreement or usage.
If registered letter if such a mode of presentment is
authorized by agreement or usage. If the bill is paid, the
holder would have to hand it over to the payer. In default
of the bill is paid, the holder would have to hand it over to
the payer. In default of presentment, the drawer and the
endorser would be discharged form their liability to the
holder.
(i) By whom and to whom presentment is to be made:
Presentment is to be made either by the holder or by
somebody on behalf of the holder. Promissory notes are
to be presented to the maker; bills of exchange are to be
presented to the acceptor; and cheque are to be presented to
the drawee.
(ii) Time of presentment for payment: (a) Presentment should
be made during the usual business hours (Section 65( (b)
If the bill is made payable a specified period after date or
sight, it must be presented for payment at its maturity
(Section 66) (C). If the bill is payable on demand, it must
be presented for payment within a reasonable time after its
receipt by the holder (Section 74).
(iii) Place of presentment for payment: (a) If the bill is drawn
or accepted payable at a specified place and not elsewhere, it
must be presented for payment at such a place in order to
charge any party to the bill (Section 68) (b). If, however the
bill is accepted payable at a special place (the word “and not
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 elsewhere” being omitted) then to charge the drawer ( but
LEGAL ASPECTS OF BUSINESS
not he acceptor), presentment should be made at the place
specified (Section 69) (C) If no place of payment is
specified then the bill should be presented for payment at
the place of business ( if any ) or the residence of the
drawee or acceptor or (if he has no fixed place of business
or residence) to him in person wherever he can be found
(Section 70 and 71).
(iv) Presentment of promissory note payable by installment
(Section 67)
A promissory note payable by instalments must be presented
for payment on the third day after the date fixed for payment of
each instalment.
(v) Presentment of cheque to drawer (Section 72): It is the
duty of the holder of cheque to present it at the bank
upon which it is drawn. If payment is refused by the bank,
the holder may sue the drawer. If the holder sues the
drawer without first presenting the cheque at the bank, the
suit will be dismissed.
If the holder does not present the cheque at the bank in time,
the position of the bank may become unsound and it may not
be possible for the banker to honour the cheque; in this case,
the drawer is not liable if the bank refuses payment on present-
ment. The rule is that the cheque must be presented before the
relation between the drawer and his banker has been altered to
the prejudice of the drawer.
(vi) Distinction between drawer of bills and drawer of cheque:
If a bill is not presented in time, the drawer is absolutely
discharged; but the drawer of a cheque, in case of delay in
presentment, is discharged only if he has suffered some
loss or injury and that too, to the extent of such loss only.
Therefore, if the bank remains solvent, the drawer will
remain bound after presentment and refusal, although
solvent, the drawer will remain bound after presentment
and refusal, although months ( short of the period of
limitation ) have elapsed since the drawing.
(vii) Presentment of cheque to charge any other person (Section
73) : It may be recalled that in order to charge the drawer,
the cheque must be presented before the relation between
the drawer and his banker has been altered to the prejudice
of the drawer, but in order to charge any person other than
the drawer the cheque must be presented within a
reasonable time. For example, A drawes a cheque in favour
of B, who endorses it to C. C must present it at the bank
within a reasonable time, otherwise B will be discharged
from liability.
(viii)Presentment of instrument to agents, etc. (Section 75):
Presentment for acceptance or payment may be made not
only to the drawer maker or acceptor acceptance or payment
may be made not only to the drawer maker or acceptor but
also to his duly authorized agent or where he is dead to his
legal representative, or where he has been declared an
insolvent, to his assignee.
When presentment is unnecessary (Section 76): (a) No present-
ment for payment is necessary in any of the following cases; (1)
if the maker, of acceptor intentionally prevents the presentment
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130
of the instrument; (2) if the instrument being payable at his
place of business, he ( i.e., maker, drawer or acceptor ) closes
such place on a business, day during the usual business hours;
(3) if the instrument being payable at some other specified
place, neither he nor any person authorized to pay it attends at
such place during the usual business hours: (4) if the instru-
ment not being payable at any specified place, he (i.e., maker, etc.
) cannot after due search be found.
(b) Not presentment for payment is necessary as against any
party sought to be charged with payment, if he has
engaged to pay notwithstanding non-presentment.
(c) No presentment for payment is necessary as against any
party if, after maturity and with the knowledge that
instrument has not been presented:
(d) He makes a part-payment on account of the amount due
on the instrument; or (2) he promises to pay the amount
due thereon in whole or in part; or (3) he otherwise waives
his right to take advantage of any default in presentment
for payment.
When we say that no presentment for payment is necessary, we
mean thereby the instrument is taken as dishonoured at the due
date for presentment even though it has not been presented.
The result is that the holder any sue the party liable without
presentment and the plea that the instrument was not
presented for payment is no defence to the claim of the holder.
4.14 Payment and Interest
(a) To whom payment should be made (Section 78): Payment
of the amount due on promissory note, bill of exchange
or cheque must, in order to discharge that maker or
acceptor, be made to the holder. If payment is made to any
person other than the holder, the holder can claim payment
over again from the maker or acceptor.
(b) Payment of interest when rate is specified (Section 49):
Where interest at a specified rate is expressly made payable
on a promissory note or a bill of exchange, interest shall be
calculated at the rate specified, on the amount of the
principal money due thereon; (i) from the date of the
instrument until tender or realization of such amount (ii)
from the date of the instrument until such a date after the
institution of a suit to recover the principal amount as the
Court directs.
(c) Payment of interest when no rate is specified (Section 80):
When no rate interest is specified in the instrument ,
interest on the amount due shall be calculated at the rate of
18% per annum from the date at which the instrument
ought to have been paid until tender or realization of the
amount, or until such date as the Court directs.
4.15 International Law Regarding Negotiable
Instrument
In the absence of a contract the contrary (i.e., unless the parties
otherwise agree ), the liability of the maker or drawer a foreign
promissory note, bill of exchange or cheque is governed in all
essential matters by the law of the place where he made
instrument. The respective liability of the acceptor and endorser,
in such cases, will be governed by the law of the place where the
11.555
instrument is made payable (Section 1‘34). For example, if a bill The objective of these provisions are: (i) that the original parties

LEGAL ASPECTS OF BUSINESS

of change was drawn by A in California where the rate of to the instrument may not deny the validity of the instrument;
interest was 25% it was accepted by B, payable in Washington, (ii) that the maker of a promissory note or an acceptor of a bill
where the rate of interest was 6% and the bill was endorsed in may not deny the right of the payee to receive the payment
Indian and was dishonoured. On an action on the bill being therefore; and (iii) that an endorser of a negotiable instrument
brought against B in India. B would be liable to pay interest may not disown the signature or capacity to contract of any
@6% only; but if A was charged as drawer, A would be liable prior party to the instrument.
to pay interest @25%. Hundis : Bills of exchange drawn up in the vernacular are
When the foreign instrument made is payable in a place generally known as Hundis. The negotiable instruments Act
different from that at which it is made or endorsed, the law of ordinarily is not applicable to Hundis but, the parties to the
the place where the instrument is made payable would deter- Hundis may agree to be the Negotiable instrument Act.
mine what constitutes dishonour and what notice of
dishonour is sufficient (Section 135).
Notes
If the instrument is made, drawn, accepted or endorsed abroad,
but it is in accordance with the law of India, any subsequent
acceptance or endorsement thereon India will not be regarded as
invalid, because the agreement as evidenced by such an instru-
ment is invalid according to the law of such foreign country
(Section 136).
Special Rules of Evidence
(a) Presumption as to negotiable instrument (Section 118):
For deciding cases in respect of rights of parties on the
basis of a bill of exchange, the Court is entitled to make
certain presumptions. These are briefly stated as follow:
(a) That the negotiable instrument was made or drawn for
consideration and every party who made itself bound
in respect thereof did so for consideration;
(b) That the negotiable instrument was drawn on the date
shown on the face of it;
(c) That the bill of exchange was accepted before its
maturity, i.e., before it became overdue;
(d) That the negotiable instrument was transferred before
its maturity;
(e) That the endorsements appearing upon a negotiable
instrument were made in the order in which they
appear.
(f) That an instrument which has been lost was properly
stamped;
(g) That the holder of a negotiable instrument is the
holder in due course, except when the instrument has
been obtained from its lawful owner or its lawful
custodian. Likewise, if it has been obtained from a
maker or and acceptor by means of an offence or fraud,
it is for the holder to prove that he is the holder in due
course.
(b) Certain rules of estoppel applicable to instruments: When
one person causes another person to believe a thing to be
true and to act upon such belief he is not allowed in a suit
between him and such person, to deny the truth of that
thing. That is, he is not allowed to give evidence in support
of his denial. This rule is called the rule of estoppel, by
which evidence is excluded. There are certain rules of
estoppel applicable to negotiable instruments. These are
contained in Section 120 of the Act.

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11.555 131
LEGAL ASPECTS OF BUSINESS
LESSON 24:
THE NEGOTIABLE INSTRUMENT ACT 1881
TUTORIAL
These questions are intended to enable the student to test his
knowledge before proceeding to answer the test paper. The
answer to these questions are not required to be written out or
submitted for evaluation. (The Answers are given at the end).
1. X signs a negotiable instrument in the following terms.
(a) “I promise to pay X or order Rs. 400”.
(b) “I acknowledge myself to be indebted to X in the
sums of Rs. 400 to be paid on demand for value
received”.
(c) “Mr. X, I.O.U. Rs. 800”.
(d) “I promise to pay X Rs. 400 and all other sums which
shall be due to him”.
(e) “I promise to pay X Rs. 400 first deducting thereout
any money which he may owe me”.
(f) “I promise to pay X Rs. 400 seven days after my
marriage with Z”
(g) “I promise to pay, X Rs. 400 on P’s death provided P
leaves me enough to pay that sum.
(h) “I promise to pay Rs. 400 and deliver to him may black
horse on Ist July next.” Which of the aforesaid
instruments are not promissory notes?
2. State whether the following bills are “inland” bills.
(a) Bills drawn outside India and made payable in or
drawn upon any person resident in any country
outside India.
(b) A bill drawn in Calcutta on a merchant in Bombay but
endorsed in Paris.
(c) Bills drawn outside India made payable in India, or
drawn upon any person resident therein.
(d) Bills drawn in India and made payable outside India,
or drawn upon a person resident outside India, but
not made payable In India.
(e) A bill is drawn in Madras upon a merchant in Brussels
and accepted payable in Bombay.
3. When a note is drawn in this from ; “I promise to pay Rs.
500 to B only”, Can it be called a negotiable instrument?
4. A bill is made payable to “Saroj Sehgal”. Saroj Sehgal
endorses it in blank and negotiates it. Is the bill payable to
bearer?
5. A bill is drawn by an agent acting with the scope of his
authority upon his principal. Can the holder thereof treat it
at his option as a note or bill.?
6. A draws a bill on B and negotiates it away. B is fictitious
drawee. Can the holder of the bill teat it as note made by
A?
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132
7. A bill is drawn “Pay to X or order the sum of one
thousand rupees. In the margin the amount stated is Rs.
100. What is the amount of the bill for?
8. When is a negotiable instrument, dated 30th August ( in a
year ) and made payable three months after date, deemed to
be at maturity?
9. A bill of exchange is addressed to Swapan Ganguli, Anil
Benerjee writes an acceptance on it. Can Anil Banerjee bind
himself by such acceptance?
10. Where there are several drawees of a bill, who are not
partners, can any one of such drawees accept it for another
without that other’s authority?
11. A who is the holder of a bill transfers it to B without
consideration. B transfers it to C without consideration. C
transfers it to D for value. D transfers it without
consideration to E. (a) Can E recover the amount of the
bill from A? (b) Has E any right against D? Say Yes or No.
12. A owes to B Rs. 500. B draws a bill on A for Rs. 1,000. A
to accommodate B and at his request, accept it. B sues A on
the bill. Can he recover Rs. 1,000?
13. A agrees to supply a quantity of paper to B. B accept a bill
for Rs, 1,000 drawn by A, being the price of the paper. The
paper. The paper is delivered to B but it turns out to be of
a quality different from the stipulated one, and worth Rs.
500 only. B retains the paper. A sues B on the bill. Is B
bound to pay Rs. 1,000 to A?
14. X accepts a bill for Rs. 1,500. This is the agreed price of two
bales of cotton to be supplied by Y to X, Y delivers only
one bale to X, Y sues X on the bill. Can Y recover Rs.
1,500 from X?
15. X owes to Y Rs. 2,000 and makes a promissory note for
the amount payable to Y. X dies and the note is
subsequently found amongst his papers. Can Y sue on the
note even if it was later on delivered to him?
16. A, the holder of a negotiable instrument payable to bearer,
which is in the hands of A’s banker who is at the time the
banker to transfer the instrument to B’s credit in the
banker’s account with B. The banker does so and according
now possesses the instrument as B’s agent. Can the
instrument be deemed to have been negotiated?.
17. A is the holder of a bill payable to “A or order”. A by
simple delivery transfers the bill without endorsing it to B.
Can ‘B’ deemed to be a holder in due course?
18. A is holder of a bill endorsed by B in bank. A writes over
B’s signature the words “Pay to C or order”. (a) is the
writing of A operates as an endorsement in full from B to
C ? (b) Is A liable an endorser?
19 B signs the following endorsement on different negotiable
instruments payable to bearer. Do these endorsements
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 exclude the right of further negotiation by C? Say yes or

LEGAL ASPECTS OF BUSINESS

no:
(a) “Pay the contents to C only”.
(b) “Pay C for my use”
(c) “Pay C or order for the account of B”.
(d) “The within must be credited to C”.
(e) “Pay C”
(f) “Pay C value in account with the State Bank”.
(g) “Pay the contents to C, being part of the consideration
in a certain deed of assignment executed by the
endorser and other”
19. A bill is drawn payable to A or order. A endorses it to B
but the endorsement doe4s not contain the words “or
order” or any equivalent words. Can B negotiate the
instrument?

Notes:

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11.555 133
LEGAL ASPECTS OF BUSINESS
LESSON 25:
INDIAN PARTNERSHIP ACT, 1932
PARTNERSHIP ,FORMATION ,TEST AND REGISTRATION OF PAR TNERSHIP
Learning Objectives
At the end of this chapter, you will able to know:
• The Meaning and nature of partnership
• The true test of partnership
• The types of partnership
• The formation of partnership
• The registration of partnership
Introduction
Have you ever heard of partnership?
Try to answer what do you mean by partnership in general.
Yes, partnership is an association between two or more
persons. Let us now discuss about the legal aspects of partner-
ship.
The Rules and regulations relating to partnership are governed
by the Indian Partnership Act 1932. This act contains 74
sections and it came into force on Ist December 1932 except
Section 69 (relating to the effect of non – registration of the
firms ) which came into force on Ist October 1933. It extends to
whole of India except to the state of Jammu and Kashmir
Definition
Section 4 Indian Partnership Act 1932 defines ‘Partnership’ in
the following terms: -
“Partnership is the relation between persons who have agreed
to share the profit of business carried on by all or any of them
acting for all.”
Breaking the above definition, following essential elements of
partnership are revealed:-
1. There must be an agreement.
2. Between two or more persons
3. Who agree to carry on business
4. With the object of sharing profit
5. The business must be carried by all or any of them
acting for all or Mutual Agency.
All the above elements must coexist in order to constitute
partnership. A brief explanation of these elements is as follows:
1. An agreement :- The relationship of partnership arises
from an agreement between the persons concerned not
from status. Agreement as made between the persons
must be valid and enforceable by law. This agreement may
be oral or written. To avoid future complications and
dispute amongst the persons constituting partnership,
agreement in writing must be preferred.
Example
A & B enters into a contract to carry on business of manufactur-
ing of tin plates; a partnership is exacted between A&B.
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134
2. Two or more persons:- There must be at least two persons
to form a partnership. It is obvious that a single person
cannot constitute partnership. Only persons competent to
contract can enter into partnerships.
As to the maximum number of partners, there is no limitation
in the partnership Act 1932 but is no limitation in the partner-
ship Act 1932 but the Joint Stock companies Act 1956 provides
that in a firm carrying banking business, the number of
partners should not be more than 10 whereas in other type of
business, the limit is 20 partners. It is also mentioned that in
case, the number of partners in the above business are more
than the prescribed limit, the partnership will be treated as
illegal.
3. Carrying on of business There can be partnership if there
is some business is carried under it. Sec 2(b) of the Act
reads as under “business” includes every trade, occupation
or profession. If the purpose is to carry on charitable work,
it will not be partnership. Carrying on of the business
means continuity of business activities is required to
consider it as partnership business. A and B agrees to open
a shop of fancy items and agree to carrying on of the
business for sharing of profit. It is a partnership.
Sec. 8, however, provides that there can be a ‘particular partner-
ship’ between partners whereby they engage in a particular
adventure or undertaking, which, if successful, would result in
profit. Thus there can be a partnership for production of a film,
construction of a building etc. although there is single adven-
ture but the same requires a series of transaction a and
continuing relationship.
4. Sharing of profit:- The essential element of partnership is
to carry on business with the object of sharing profit
amongst the partners. The partners may however, agree to
share profits in any ratio they like.
Ex. A, B, and C entered into a contract to carry on business of
manufacturing of toys. ABC decided the ratio as 40:30:30.
Besides sharing of profit, in case, there is loss in the partner-
ship, it is not essential that the partners should agree to share
the losses. Sec 13(b) however, provides that the partners are
entitled to share equally in profits earned and shall contribute
equally to the loss sustained by the firm, unless otherwise,
agreed. It means that the partners may make a contract contrary
to this provision. There may be an agreement vide when only
one artner may bear the whole loss.
5. Mutual Agency ‘Business must be carried by all or any of
them acting for all” It means all the partners should be able
to represent each other and should be represented by each
other with respect to the business of partnership. Thus the
fundament of a partnership is that partners carrying on the
business of the firm are agents as well as principals of each
other. A partner can bind the firm by has act provided: -
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• He act within the scope of his authority
• His acts are done in the name of he firm
• They are done for the purpose of the business of the firm
Example. ABC inters into an agreement to form partnership
for carrying on business of rice. D, an outsider makes a deal
with B. B has acted as agent of the firm. D can file a suit against
ABC in case of default.
The rules laid in Cox v/s Hickman (1860) are an authority in
this behalf. The facts of the case are as follows:-
S and S was iron merchant in partnership. They became
financially embarrassed and made a compromise with their
creditors. The creditors were empowered to carry on business as
trustee, to proportionately divide the income amongst the
creditors and return the business after discharge of debt. Cox
was of the trustee who never acted. The other trustee purchased
coal from Hickman and failed to pay the price. Hickman sued all
the trustees including Cox. The court observed that the
creditors working as trustee, although dividing the profit of the
business in a ratable proportion were not partners because they
were not empowered to represent each other. It was holding
that Cox was not liable to pay Hickman for Coke. ]
Do you know how you would identify the partnership? What is
the true test to identify the partnership?
Let me now know first your views on it.
Yes, It is the mutual agency, which makes a true partnership. Let
us now elaborate further over it.
Test of Partnership
The all elements as discussed above must co-exist in order to
constitute partnership Sec 6 of Indian Partnership Act provides
that “in determining whether a group of persons is or is not a
firm or whether a person is or in not a partner in a firm, regard
shall be had to the real relation between the parties, as shown by
all relevant facts taken together “Thus all incidents of relations
of the partnership are to be examined as shown in written
agreement, verbal agreement or conduct. We can explain be
position by the following examples.
Example
(i) A&B jointly buy a mine and lease it out. They make a
partnership agreement that they will divide the lease rent in
a ratio of 50:50 between themselves. In this case A&B are
having understanding that they are partners but in the eyes
of low it is not partnership.
How many types of partnership are there?
Type of Partnership
Sec 4 of the Act provides that persons who have entered into a
partnership with one another are called individually “partners”
and collectively a firm and the name under which their business
is carried is called the firm name”
The formation of the partnership of type of partnership
means, there is an agreement between parties to form the firm
that too as per provision of Partnership Act. The Partnership
can be classified as under:-
1. Partnership at will:- Sec 7 Where no provision is made by a
contract between the partners for duration of their
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11.555
partnership or for the determination of their partnership,
LEGAL ASPECTS OF BUSINESS
the partnership is, “partnership at will”. It means the
partnership is made without specifying any period and is at
the sweet will of the partners. Any partner may dissolve
such a partnerships by giving a notice to that effect to all
the other partners.
2. Particular Partnership:- When a partnership is to formed
for a particular period or for a particular venture, in a such a
case the partnership is automatically dissolved at expiry of
fixed term or on the completion of the venture e.g. A&B
have formed a partnership for manufacture of a particular
film, the partnership is automatically dissolved on
completion of the venture provided they don’t enter into a
contract to continue this partnership for future.
We have discussed the distinction of partnership vide which the
important elements for the formation ware discussed in detail.
However to make it more clear, we give below the important
points for execution of partnership.
1. It is executed by a agreement between the partners
2. It has no separate entity apart from its members. It is
simply a collection of members
3. Maximum number of person allowed 10 in banking firm
and 20 in non banking firm
4. Carrying on business is necessary for existence of
partnership
5. The liability of partnership is unlimited an the partners are
jointly/personally liable.
6. Every partner is agent of the other partner as well as the
firm
7. Every partner has a right to take part in the management
of the affairs of the firm
Now, we will discuss how the partnership comes into forma-
tion. What legal formalities are there in the formation of
partnership?
Formation of Partnership
A partnership is formed by an agreement between the partners.
The rights and obligations of the partners towards each other
and towards the firm can be determined by an oral or written
agreement. To avoid future dispute it is always advisable to have
partnership expressed in writing.
Partnership Deed
A partnership agreement put to writing and is termed as
partnership deed. Before starting of the business the partners
are drafting the deed in proper manner so that the business may
run smoothly by and if there is any dispute the same may be
settled according to the terms of partnership deed. What
should be the exact contents, it depends on the circumstances
but generally the partnership deed must contain the following
clauses
1. Name and address of the firm and nature of business to
be carried on.
2. Name and address of the partners
3. Date of commencement and duration of partnership
4. The capital and any other contribution made by partners
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 5. The ratio to share profit and losses amongst the partners.
LEGAL ASPECTS OF BUSINESS
6. Rules as to interest on loans and capital, their salary,
commission, etc.
7. Method and arrangement of keeping accounts
8. Division of task and obligation of partners
9. Rules to be followed in case of admission, expulsion /
retirement or death of a partner.
10. Whether a partner is allowed to carry competing business.
11. The circumstances under which the partnership will stand
dissolved.
12. In case of dispute which course of action shall be followed
e.g. Court, arbitrations etc.
Registration of Partnership
Registration of firm means the recording of the firm name
along with the prescribed particulars, in the Register of the
firms, kept. in the office of the Registrar of Firms. The
registration provides a reliable evidence and conclusive proof of
the existence of a partnership firm.
Section 56- Power to exempt from application of this Chapter
The 3[State Government of any State], may, by notification in
the Official Gazette, direct that the provisions of this Chapter
shall not apply to 4[that State] or to any part thereof specified in
the notification.
Section 57- Appointment of Registrars
(1) The State Government may appoint Registrars of Firms
for the purposes of this Act, and may define the areas
within which they shall exercise their powers and perform
their duties.
(2) Every Registrar shall be deemed to be a public servant
within the meaning of section 21 of the Indian Penal Code
(45 of 1860).
Section-58- Application for registration
(1) The registration of a firm may be effected at any time by
sending by post or delivering to the Registrar of the area in
which any place of business of the firm is situated or
proposed to be situated, a statement in the prescribed
form and accompanied by the prescribed fee, stating-
(a) The firm name,
(b) The place or principal place of business of the firm,
(c) The names of any other places where the firm carries
on business,
(d) The date when each partner joined the firm,
(e) The names in full and permanent addresses of the
partners, and
(f) The duration of the firm.
The statement shall be signed by all the partners, or by their
agents specially authorized in this behalf.
(2) Each person signing the statement shall also verify it in the
manner prescribed.
(3) A firm name shall not contain any of the following words,
namely-
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“Crown”, “Emperor”, “Empress”, “Empire”, “Imperial”,
“King”, “Queen”, “Royal”, or words expressing or implying
thesanction,approvalorpatronageo5f [Government],
, except 6,
[when the State Government] signified 7[its] consent to the use
of such words as part of the firm name by order in writing
Section 59- Registration
When the Registrar is satisfied that the provisions of section 58
have been duly complied with, he shall record an entry of the
statement in a register called the Register of Firms, and shall file
the statement..
Section 60- Recording of alterations in firm name
and principal place of business
(1) When an alteration is made in the firm name or in the
location of the principal place of business of a registered
firm, a statement may be sent to the Registrar accompanied
by the prescribed fee, specifying the alteration and signed
and verified in the manner required under section 58.
(2) When the Registrar is satisfied that the provisions of sub-
section (1) have been duly complied with, he shall amend
the entry relating to the firm in the Register of Firms is
accordance with the statement, and shall file it along with
the statement relating to the firm filed under section 59.
Section 61- Noting of closing and opening of
branches
When a registered firm discontinued business at any place or
begins to carry on business at any place, such place not being its
principal place of business, any partner or agent of the firm may
send intimation thereof to the Registrar, who shall make a note
of such intimation in the entry relating to the firm in the
Register of Firms, and shall file the intimation along with the
statement relating to the firm filed under section 59.
Section 62- Noting of changes in names and
addresses of partners
When any partner in a registered firm alters his name or
permanent address, any partner or agent of the firm may send
an intimation of the alteration to the Registrar, who shall deal
with it in the manner provided in section 61.
Section 63- Recording of changes in and dissolution of a firm
(1) When a change occurs in the constitution of a registered
firm any incoming, continuing or outgoing partner, and
when a registered firm is dissolved any person who was a
partner immediately before the dissolution, or the agent of
any such partner or person specially authorized in this
behalf, may give notice to the Registrar of such change or
dissolution, specifying the date thereof; and the Registrar
shall make a record of the notice in the entry relating to the
firm in the Register of Firms, and shall file the notice along
with the statement relating to the firm filed under section
59.
(2) Recording of withdrawal of a minor-When a minor who
has been admitted to the benefits of partnership in a firm
attains majority and elects to become or not to become a
partner, and the firm is then a registered firm, he, or his
agent specially authorised in this behalf, may give notice to
the Registrar that he has or has not become a partner, and
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 the Registrar shall deal with the notice in the manner
provided in sub-section (1).
Section 64- Rectification of mistakes
(1) The Registrar shall have power at all times to rectify any
mistake in order to bring the entry in the Register of
Firms relating to any firm into conformity with the
documents relating to that firm filed under this
Chapter.
(2) On application made by all the parties who have signed
any document relating to a firm filed under this
Chapter, the Registrar may rectify any mistake in such
document or in the record or note thereof made in the
Register of Firms.
Section 65- Amendment of Register by order of
Court
A court deciding any matter relating to a registered firm may
direct that the Registrar shall make any amendment in the entry
in the Register of Firms relating to such firm which is conse-
quential upon its decision; and the Registrar shall amend the
entry accordingly.
Section 66- Inspection of Register and filed
Documents
(1) The Register of Firms shall be open to inspection by
any person on payment of such fee as may be
prescribed.
(2) All statements, notices and intimations filed under this
Chapter shall be open to inspection, subject to such
conditions and on payment of such fee as may be
prescribed.
Section 67- Grant of Copies
The Registrar shall on application furnish to any person, an
payment of such fee as may be prescribed, a copy, certified under
his hand, of any entry or portion thereof in the Register of
Firms.
Section 68- Rules of Evidence
(1) Any statement, intimation or notice recorded or noted
in the Register of Firms shall, as against any person by
whom or on whose behalf such statement, intimation
or notice was signed, be conclusive proof of any fact
therein stated.
(2) A certified copy of an entry relating to a firm in the
Register of Firms may be produced in proof of the
fact of the registration of such firm, and of the
contents of any statement, intimation or notice
recorded or noted therein.
What is the effect of non-registration? Is it mandatory?
No, it is not mandatory. But there would be some serious
effects if the firm is not registered as covered under Section 69.
Section 69- Effect of non-registration
(1) No suit to enforce a right arising from a contract or
conferred by this Act shall be instituted in any court by
or on behalf of any person suing as a partner in a firm
against the firm or any person alleged to be or to have
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11.555
been a partner in the firm unless the firm is registered and
LEGAL ASPECTS OF BUSINESS
the person suing is or has been shown in the register of
firms as a partner in the firm.
(2) No suit to enforce a right a rising from a contract shall
be instituted in any court by or on behalf of a firm
against any third party unless the firm is registered and
the persons suing are or have been shown in the
register of firms as partners in the firm.
(3) The provisions of sub-sections (1) and (2) shall apply
also to a claim of set-off or other proceeding to
enforce a right arising from a contract, but shall not
affect-
(a) The enforcement of any right to sue for the
dissolution of a firm or for accounts of a
dissolved firm, or any right or power to
realise the property of a dissolved firm, or
(b) The powers of an official assignee, receiver or
court under the Presidency-towns Insolvency
Act, 1909 (3 of 1909) or the Provincial
Insolvency Act, 1920 (5 of 1920) to realise
the property of an insolvent partner.
(4) This section shall not apply-
(a) To firms or to partners in firms which have
no place of business in 10[the territories to
which this Act extends], or whose places of
business in 11[the said territories], are
situated in areas to which, by notification
under 12[section 56], this Chapter does not
apply, or
(b) To any suit or claim of set-off not exceeding
one hundred rupees in value which, in the
Presidency-towns, is not of a kind specified
in section 19 of the Presidency Small Cause
Courts Act, 1882 (5 of 1882), or, outside the
Presidency-towns, is not of a kind specified
in Schedule II to the Provincial Small Cause
Courts Act, 1887 (9 of 1887), or to any
proceeding in execution or other proceeding
incidental to or arising from any such suit or
claim.
Section 70- Penalty for furnishing false particulars
Section 70 lays down that if any person who signs any
statement, amending statement, notice or intimation under
this Chapter containing any particular which he knows to
be false or does not believe to be true, or containing
particulars which he knows to be incomplete or does not
believe to be complete, shall be punishable with
imprisonment which may extend to three months, or with
fine, or with both.
Section 71- Power to make rules
Section 71 states that The State Government may by
notification in the Official Gazette make rules describing
the fees which shall accompany documents sent to the
Registrar of Firms, or which shall be payable for the
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 inspection of documents in the custody of the Registrar of
LEGAL ASPECTS OF BUSINESS
Firms or for copies from the Register of Firms:
It is also provided that such fees shall not exceed the
maximum fees specified in Schedule I.
The State Government may make rules-
(a) Prescribing the form of statement submitted under
section 58, and of the verification thereof;
(b) Requiring statements, intimations and notices under
sections 60, 61, 62 and 63 to be in prescribed form, and
prescribing the form thereof;
(c) Prescribing the form of the Register of Firms, and the
mode in which entries relating to firms are to be made
therein, and the mode in which such entries are to be
amended or notes made therein;
(d) Regulating the procedure of the Registrar when
disputes arise;
(e) Regulating the filing of documents received by the
Registrar;
(f) Prescribing conditions for the inspection of original
documents;
(g) Regulating the grant of copies;
(h) Regulating the elimination of registers and documents;
(i) Providing for the maintenance and form of an index
to the Register of Firms; and
(j) Generally, to carry out the purposes of this Chapter.
(3) All rules made under this section shall be subject to the
condition of previous publication. Every rule made by
the State Government under this section shall be laid, as
soon as it is made, before the State Legislature.
Attempt the following problems for a better understanding:
1. X, a publisher, agrees to publish at his own expense, a
book written by Y and to pay Y half the net profits. Is
there a partnership between X and Y?
[Hint. No partnership, mere profit-sharing is not conclusive test
of partnership.]
2. Two trading firms, each having twelve partners join hands
and make a partnership form having twenty-four partners.
Is it a valid entity?
[Hint. No, it’s an illegal association as per section 11 of the
companies Act, as the number of members exceeds 20]
3. A and B separately tender for a contract to cut and remove
bamboos form a certain jungle. They mutually agree that
each one of them shall be entitled to a certain share of
bamboos, no matter whosoever is granted the contract. Is
it a partnership agreement?
[Hint. No]
4. A agreed with B, a goldsmith, to buy and deliver gold to B,
where B will make ornaments out of it and sell them, and
they shall share the resulting profit and losses. Is it a
partnership agreement?
[Hint. Yes.]
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138
5. A advanced some money to B and C, two merchants. The
merchants agreed to carryon the business subject to the
control of A in several respects. A was to receive a
commission of 20% on all the profits. Is it a partnership
agreement between A, Band C?
[Hint: A is not a partner. The object of the agreement is to give
maximum security to A for the returns on his money - Mallow
March & Co. v. The Court of Wards [1872] LR 2 CP 419.]
6. A, a contractor, undertook a contract of loading and
unloading railway wagons. He appointed H-to manage the
work. It was agreed that B would receive 75%of the profits
as his remuneration and would bear all the losses, if any. Is
it a partnership agreement?
[B. Com. (H), 1999]
[Hint- No, B is an agent of A, not his partner - Munshi Abdul
Latif v. Gopeshwar Chattoraj AIR 1933 Calcutta 204.] )
6. A, B and C are partners of an unregistered firm. D owes
this firm Rs. 1,000 on a con-tract. The firm filed a suit
against D. The suit is dismissed for non-registration of the
firm. The firm is registered later on. Can the firm now
successfully bring the suit against D? [B. Com. (H), 1986]
[Hint - Yes, after registration, the firm can file a fresh suit. The
provision is - ‘before a suit is filed in the court, registration
must have been effected’.]
7. A and B purchased a taxi to ply it in partnership. They plied
the taxi for a year. When A, without the consent of B,
disposed of the taxi, B brought an action to recover his
share in sale proceeds. A resisted B’s claim on the ground
that the firn1 was not registered.
Will B succeed in his claim?
[B. Com. (H), 1982]
[Hint - B will succeed in his claim because partner of an
unregistered firm can sue for his share on dissolution of the
firm.]
8. An unregistered firm filed a suit against a debtor to recover
Rs. 500. The court dismissed firm’s application on the
ground of non-registration. Can the firm get its
registration now and file a fresh suit against the debtor to
recover the amount? [B. Com. (H.), 2000]
[Hint: Yes, the partners can get the firm registered and then file
a fresh suit against the debtor.]
9. A, B and C were partners in a firm. A died. Z, who did
know about the death of A, made a deal with the firm.
The firm committed a default in meeting out the deal. Z
sued upon A’s estate, B and C for compensation of his
damages. Is A’s estate liable for the damages?
[Hint - No, A’s estate is not liable for the dealings of the firm
after A’ death.]
10. A, a holding out partner in the firm of X & Y is
adjudicated as insolvent. The firm caused heavy losses to Z
by breaching a contract. Z sued X, Y and A for the
damages. Is A liable to share such damages?
[Hint - No, A partner by holding out who is an insolvent,
cannot be held liable for the claims on the firm.]
11.555
References

LEGAL ASPECTS OF BUSINESS

• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Aggarwal, Rohini (2003), “Student’s Guide to Mercantile
and Commercial Laws,” Taxmann’s, New Delhi

Notes

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11.555 139
LEGAL ASPECTS OF BUSINESS
LESSON 26:
INDIAN PARTNERSHIP ACT, 1932
TYPES OF PARTNERS AND THEIR RIGHTS AND OBLIGATIONS
Learning Objectives
At the end of this chapter, you will able to know:
• The types of partners
• The rights of partners
• The obligations of partners
• The minor’s status in the partnership
Introduction
We are now well versed what we mean by partnership. Its nature
and formation and registration formalities.
Today we will discuss about the kinds of partners and their
rights and obligations as provided under the Act.
Kinds of Partners in a partnership terms
The partners of partnership firm may be classified in following
categories: -
1. Actual/Active partner
2. Dormant or sleeping partner
3. Nominal partner
4. Partner in profit only
5. Sub Partner
6. Partner by estoppels or partner by holding out.
1. Actual/Active Partner Partners actively engaged in the
conduct on business are known as “active partners”. They
are full fledged partners in the real sense. If such partner
wants to retire from the firm he must give public notice of
his retirement from the firm in order to get himself
absolved from the responsibly of the firm.
2. Dormant of Sleeping Partner: Some times, there are
persons who merely become partners in a firm by
contributing capital or even without capital and donot take
active pact in the conduct of the partnership business. Such
partners are liable to third parties as actual partner
Such partners can retire from the firm without giving notice but
they have assess to the books of the accounts of the firm and
can have a copy of the same.
Example:- A&B start a partnership firm wherein A is active
partners and B is dormant partner. This is valid partnership
3. Nominal Partner:- These are the partners who have no real
interest in the firm . They donot invest or participate in the
business of the firm but give their name as partner of the
firm.
Example:- A is a renowned businessman. His son B starts the
business in which A has given consent to become partner of
the firm which is to be run by his son with the sole purpose to
help his son. A is only a nominal partner.
4. Partner in profits only:- Some times the partnership firm
is formed to carryon business wherein a partner becomes
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partner of the firm only for profits. In case the firm suffers
loss, he shall not be liable for the loss. These type of
partners have no say in the management of the firm.
However, the liability of such partner towards third party is
similar to active partner .
5. Sub Partner:- When a partner agrees to share his profit in a
partnerships firm with an outsider such a outsider in called
sub partner. The outsider cannot interfere business of the
firm nor he is liable to third party as an active partner.
6. Partner by estoppel or holding all :- Section 28 – “Anyone
who by words spoken or written or by conduct represent
himself or knowingly permit himself to be represented
himself to be a partner in a firm, is liable as a partner in
that firm to anyone who has on the faith of any such
representation gives credits to the firm, whether the person
representing himself or represented to be a partner does or
does not know that the representation has reached the
person so giving credit”
Thus if the behavior of such person cause misunderstanding
to third parties that he is partner of a particular firm. Later on
such a person is estopped from denying the fact that he is a
partner in that particular firm, shall be called partner by estop-
pels.
Example:- ABC are partners in a partnership firm named XYZ.
A tells in the market that D is partners of the firm. D does not
c cant contradict his statement: XYZ gets a loan from Y and
later on become insolvent. In the instant case D is partner in the
firm and is estopped from the fact that he is partner of XYZ.
Holding out means a partner retires from the firm and does not
give notice of retirement. If transactions are taking place treating
the retired partner as active partner of the firm, he shall be
estopped from denying the fact.
Let us now talk about the rights and liabilities of partners
Rights and liabilities/ obligations of partners
We would be discussing the rights and liabilities/ obligations
of the partners in term of Indian Partnership Act 1932 as
amended up to date.
Section 9-12 deals with the mutual relation pf partners.
Section 9- General duties of partners
Partners are bound to carry on the business of the firm to the
greatest common advantage, to be just and faithful to each
other, and to render true accounts and full information of all
things affecting the firm to any partner or his legal representa-
tive.
Section 10- Duty to indemnify for loss caused by
fraud
Every partner shall indemnify the firm for any loss caused to it
by his fraud in the conduct of the business of the firm.
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Section 11- Determination of rights and duties of
partners by contract between the partners
(1) Subject to the provisions of this Act, the mutual
rights, and duties of the partners of a firm may be
determined by contract between the partners, and such
contract may be expressed or may be implied by a
course of dealing.
Such contract may be varied by consent of all the partners, and
such consent may be expressed or may be implied by a course
of dealing.
(2) Agreements in restraints of trade-Notwithstanding
anything contained in section 27 of the Indian
Contract Act, 1872 (9 of 1872), such contracts may
provide that a partner shall not carry on any business
other than that of the firm while he is a partner.
Section 12- The conduct of the business
Subject to contract between the partners, -
(a) Every partner has a right to take part in the conduct of
the business;
(b) Every partner is bound to attend diligently to his
duties in the conduct of the business;
(c) Any difference arising as to ordinary matters connected
with the business may be decided by a majority of the
partners, and every partner shall have the right to
express his opinion, before the matter is decided, but
no change may be made in the nature of the business
without the consent of all the partners; and
(d) Every partner has a right to have access to and to
inspect and copy any of the books of the firm.
Section 13- Mutual rights and liabilities
Subject to contract between the partners-
(a) Partner is not entitled to receive remuneration for
taking part in the conduct of the business;
(b) The partners are entitled to share equally in the profits
earned, and shall contribute equally to the losses
sustained by the firm;
(c) Where a partner is entitled to interest on the capital
subscribed by him such interest shall be payable only
out of profits;
(d) Partner making, for the purposes of the business, any
payment or advance beyond the amount of capital he
has agreed to subscribe, is entitled to interest thereon
at the rate of six per cent per annum;
(e) The firm shall indemnify a partner in respect of
payments made and liabilities incurred by him-
(i) In the ordinary and proper conduct of the
business, and
(ii) In doing such act, in an emergency, for the purpose
of protecting the firm from loss, as would be done
by a person of ordinary prudence, in his own case,
under similar circumstances; and
© Copy Right: Rai University
11.555
(f) A partner shall indemnify the firm for any loss caused
LEGAL ASPECTS OF BUSINESS
to it by his wilful neglect in the conduct of the
business of the firm.
Section 14- The property of the firm
The property of the firm includes all property and rights and
interests in property originally brought into the stock of the
firm, or acquired, by purchase or otherwise, by or for the firm,
or for the purposes and in the course of business of the firm,
and includes also the goodwill of the business subject to
contract between the partners,.
Unless the contrary intention appears, property and rights and
interests in property acquired with money belonging to the firm
are deemed to have been acquired for the firm.
Section 15- Application of the property of the firm
Section 15 states that the property of the firm shall be held and
used by the partners exclusively for the purposes of the
business subject to contract between the partners
Section 16.-Personal profits earned by partners
As is subject to contract between the partners-
(a) If a partner derives any profit for himself from any 0
transaction of the firm, or from the use of the
property or business connection of the firm or the
firm name, he shall account for that profit and pay it to
the firm;
(b) If a partner carries on any business of the same nature
as and competing with that of the firm, he shall
account for and pay to the firm all profits made by him
in that business.
Section 17- Rights and duties of partners
Subject to contract between the partners-
(a) After a change in the firm-where a change occurs in the
constitution of a firm, the mutual rights and duties of
the partners in the reconstituted firm remain the same
as they were immediately before the change, as far as
may be;
(b) After the expiry of the term of the firm, and - where a
firm constituted for a fixed term continues to carry on
business after the expiry of that term, the mutual
rights and duties of the partners remain the same as
they were before the expiry, so far as they may be
consistent with the incidents of partnership at will; and
(c) Where additional undertakings are carried out-where a
firm constituted to carry out one or more adventures
or undertakings, the mental rights and duties of the
partners in respect of the other adventures or
undertakings are the same as those in respect of the
original adventures or undertakings.
Section 25- Liability of a partner for acts of the firm
Every partner is liable, jointly with all the other partners and
also severally, for all acts of the firm done while he is a partner.
Section 26- Liability of the firm for wrongful acts of
a partner
Where, by the wrongful act or omission of a partner acting in
the ordinary course of the business of a firm, or with the
141
 authority of his partners, loss or injury is caused to any third
LEGAL ASPECTS OF BUSINESS
party, or any penalty is incurred, the firm is liable therefor to the
same extent as the partner.
Section 27- Liability of firm for misapplication by
partners
Where
(a) A partner acting within his apparent authority receives
money or property from a third party and misapplies
it, or
(b) A firm in the course of its business receives money or
property from a third party, and the money or property
is misapplied by any of the partners while it is in the
custody of the firm, the firm is liable to make good
the loss.
Section 28- Holding out
(1) Anyone who by words spoken or written or by
conduct represents himself or knowingly permits
himself to be represented, to be a partner in a firm, is
liable as a partner in that firm to any one who has on
the faith of any such representation given credit to the
firm, whether the person representing himself or
represented to be a partner does or does not know that
the representation has reached the person so giving
credit.
(2) Where after a partner’s death the business is continued
in the old firm name, the continued use of that name
or of the deceased partner’s name as a part thereof
shall not of itself make his legal representative or his
estate liable for any act of the firm done after his death.
Section 29- Rights of transferee or a partner’s
interest
(1) A transfer by a partner of his interest in the firm, either
absolute or by mortgage, or by the creation by him of a
charge on such interest, does not entitle the transferee,
during the continuance of the firm, to interfere in the
conduct of the business, or to require accounts, or to
inspect the books of the firm, but entitles the
transferee only to receive the share of profits of the
transferring partner, and the transferee shall accept the
account of profits agreed to by the partners.
(2) If the firm is dissolved or if the transferring partner
ceases to be a partner, the transferee is entitled as
against the remaining partners to receive the share of
the assets of the firm to which the transferring partner
is entitled, and, for the purpose of ascertaining that
share, to an account as from the date of the
dissolution.
This was all about the rights and obligations of partners.
Do you think that minor can be a partner in the partnership
firm?
Minor’s status in partnership firm
Partnership is based on mutual contract and only those who are
competent to contract can become partners of a firm. As per
Indian Contract Act, any agreement with a minor is void ab-
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142
intio but he can derive benefit under it. Under section 30 of the
Partnership Act, a minor can be admitted to the partnership for
his benefit. Section 30 lays down certain condition which are
discussed as under:-
Section 30- Minors Admitted to the Benefits of
Partnership
(1) A person who is a minor according to the law to which
he is subject may not be a partner in a firm, but, with
the consent of all the partners for the time being, he
may be admitted to the benefits of partnership.
(2) Such minor has a right to such share of the property
and of the profits of the firm as may be agreed upon,
and he may have access to and inspect and copy any of
the accounts of the firm.
(3) Such minor’s share is liable for the acts of the firm, but
the minor is not personally liable for any such act.
(4) Such minor may not sue the partners for an account or
payment of his share of the property or profits of the
firm, save when severing his connection with the firm,
and in such case the amount of his share shall be
determined by a valuation made as far as possible in
accordance with the rules contained in section 48:
It is provided that all the partners acting together or any partner
entitled to dissolve the firm upon notice to other partners may
elect in such suit to dissolve the firm, and thereupon the court
shall proceed with the suit as one for dissolution and for
settling accounts between the partners, and the amount of the
share of the minor shall be determined along with the shares
of the partners.
(5) At any time within six months of his attaining
majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership,
whichever date is later, such person may give public
notice that he has elected to become or that he has
elected not to become a partner in the firm, and such
notice shall determine his position as regards the firm:
It is provided that, if he fails to give such notice, he shall
become a partner in the firm on the expiry of the said six
months.
(6) Where any person has been admitted as a minor to the
benefits of partnership in a firm, the burden of
proving the fact that such person had no knowledge of
such admission until a particular date after the expiry
of six months of his attaining majority shall lie on the
persons asserting that fact.
(7) Where such person becomes a partner-
(a) His rights and liabilities as a minor continue up to
the date on which he becomes a partner, but he also
becomes personally liable to third parties for all acts
of the firm done since he was admitted to the
benefits of partnership, and
(b) His share in the property and profits of the firm
shall be the share to which he was entitled as a
minor.
(8) Where such person elects not to become a partner,-
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 (a) His rights and liabilities shall continue to be those [Hint - Yes, he will succeed. He can sue at his option either the

LEGAL ASPECTS OF BUSINESS

of a minor under this section up to the date on old partners, i.e., X, Y, and Z on the ground of estoppel, or the
which he gives public notice, new partners, i.e., X, Y. and A.]
(b) His share shall not be liable for any acts of the firm References
done after the date of the notice, and
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
(c) He shall be entitled to sue the partners for his share Sultan Chand and Sons, New Delhi.
of the property and profits in accordance with sub- • http://www.indialawinfo.com/bareacts/soga.html
section (4).
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
It is provided that nothing in sub-sections (7) and (8) shall House Pvt. Ltd, Delhi.
affect the provisions of section 28.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Attempt the Following Problems for a Better Pvt. Ltd, Delhi.
Understanding
• Aggarwal, Rohini (2003), “Student’s Guide to Mercantile
1. A , B and C are partners in a firm. A manages to get a and Commercial Laws,”
contract from Indian Railways after paying a bribe of Rs. 10
• Taxmann’s, New Delhi
lac. The contract is worth Rs. 1 crore. He charges this
amount to the firm, but B and C object to it. Advise.
[Hint: A cannot charge Rs. 10 lac to the firm, because a partner Notes
has a right to be reimbursed for the payments made by him in
the ordinary and proper conduct of the business This is not the
manner in which business should ordinarily be conducted. See
Section 13 (e).]
2. A gives continuing guarantee to B for due fulfillment of
business obligations by firm ‘X& Y’ in its dealings with B.
A partner in the firm retires and another partner admitted.
What effect the change has on A’s guarantee?
[Hint: Guarantee is revoked.]
3. A and B are partners in a firm. ‘C’, the minor son of B is
admitted to the benefits of the partnership. Soon after the
admission of ‘C’, B dies. And the business of the firm is
carried on. During this period, A speculates and loses
heavily. The creditors of the firm demand the losses from
A and C. Is C liable to creditors?
[Hint. when B died, partnership came to an end. C being a
minor cannot be sole part- x with A. Thus C is not liable for
any losses incurred after B’s death.]
4. X, Y and Z are partners in a firm. X, without the authority
of Y and Z buys certain shares in his name out of
partnership money. Will ‘shares’ constitute partnership
property?
[Hint. Yes, though shares stand in the name of X, they have
been acquired using firm’s money.]
5. A, Band C are partners. C is a sleeping partner who is not
known to the creditors. C retires without giving public
notice of his retirement. Is C liable for subsequent debts
incurred by A and B? [B. Com (Pass), 1995, B. Com (H),
1976, 1981, 1994]
[Hint - No, C is not liable. He being a sleeping partner is not
supposed to be known to the outsiders dealing with the firm.]
6. X, Y and Z are partners in a firm. Z retires and A is
admitted as a new partner. No public notice of this change
is given but the firm continues its business in the old
name. Mr. P, a customer deals with the firm after this
change and the firm become indebted to P. P sues X, Y and
A for his dues. What will be the implication? Will he
succeed?
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11.555 143
LEGAL ASPECTS OF BUSINESS
LESSON 27:
INDIAN PARTNERSHIP ACT, 1932
DISSOLUTION OF PARTNERSHIP
Learning Objectives
At the end of this chapter, you will able to know:
• The modes of dissolution of partnership
• The consequences of dissolution of partnership
• The settlement of accounts on dissolution of
partnership
Introduction
Today, we will be discussing dissolution of partnership
business.
But before going ahead you need to understand that there is a
difference between the dissolution of partnership and dissolu-
tion of firm.
Section 39 of the Act provides that there is a difference between
the dissolution of partnership and the dissolution of the firm.
Partnership is a relation between the partners and the partner-
ship firm is an entity which exists because of partnership
relations. Thus, whenever a partner leaves the firm, partnership
is dissolved but the firm continues until the partnership firm is
dissolved. After starting the business, partners may feel like
closing the business, may be because the business is not
lucrative or it is not going the way they predicted or for any
other reason. When a partner close down the firm, dissolution
of the partnership firm takes place. Thus , when partners close
down the business, dissolution of the partnership firm takes
place. The dissolution of partnership between all the partners
of the firms occurs is called dissolution of the firm.
Let us now concentrate on the modes of dissolution of the
firm.
Modes of Dissolution of the Firm
Section 40- Dissolution by Agreement
A firm may be dissolved with the consent of all the partners or
in accordance with a contract between the partners.
Section 41- Compulsory dissolution
A firm is dissolved-
(a) By the adjudication of all the partners or of all the
partners but one as insolvent, or
(b) By the happening of any event which makes it
unlawful for the business of the firm to be carried on
or for the partners to carry it on in partnership:
It is further provided that, where more than one separate
adventure or undertaking is carried on by the firm the illegality
of one or more shall not of itself cause the dissolution of the
firm in respect of its lawful adventures and undertakings.
Section 42- Dissolution on the Happening of Certain
Contingencies
Subject to contract between the partners a firm is dissolved-
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144
(a) If constituted for a fixed term, by the expiry of that
term;
(b) If constituted to carry out one or more adventures or
undertakings, by the completion thereof;
(c) By the death of a partner; and
(d) By the adjudication of a partner as an insolvent.
Section 43- Dissolution by notice of partnership at
will
(1) Where the partnership is at will, any partner giving
notice in writing to all the other partners of his
intention to dissolve the firm may dissolve the firm.
(2) The firm is dissolved as from the date mentioned in
the notice as the date of dissolution or, if no date is so
mentioned, as from the date of the communication of
the notice.
Section 44- Dissolution by the court
At the suit of a partner, the court may dissolve a firm on any of
the following grounds, namely-
(a) That a partner has become of unsound mind, in which
case the suit may be brought as well by the next friend
of the partner who has become of unsound mind as
by any other partner;
(b) That a partner, other than the partner suing, has
become in any way permanently incapable of
performing his duties as partner;
(c) That a partner, other than the partner suing, is guilty
of conduct which is likely to affect prejudicially the
carrying on of the business, regard being had to the
nature of the business;
(d) That a partner, other than the partner suing, willfully or
persistently commits breach of agreements relating to
the management of the affairs of the firm or the
conduct of its business, or otherwise so conducts
himself in matters relating to the business that it is not
reasonably practicable for the other partners to carry on
the business in partnership with him;
(e) That a partner, other than the partner suing, has in any
way transferred the whole of his interest in the firm to
a third party, or has allowed his share to be charged
under the provisions of rule 49 of Order XXI of the
First Schedule to the Code of Civil Procedure, 1908 (5
of 1908) or has allowed it to be sold in the recovery of
arrears of land revenue or of any dues recoverable as
arrears of land revenue due by the partner;
(f) That the business of the firm cannot be carried on save
at a loss; or
(g) On any other ground which renders it just and
equitable that the firm should be dissolved.
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What are the consequences of dissolution ?
Consequences of Dissolution
Since dissolution initiates the process of winding up the affairs
of the firm some rights are inferred and some obligation are
imposed upon the partners to do the needful in this regard .
Such consequences are covered under the Indian Partnership Act
1932 vide Vide Sec 45 to Sec 55
Section 45- Liability for acts of Partners done after
Dissolution
(10 Notwithstanding the dissolution of a firm, the
partners continue to be liable as such to third parties
for any act done by any of them, which would have
been an act of the firm if done before the dissolution,
until public notice is given of the dissolution:
It is further provided that the estate of a partner who dies, or
who is adjudicated an insolvent, or of a partner who, not
having been known to the person dealing with the firm to be a
partner, retires from the firm, is not liable under this section for
acts done after the date on which he ceases to be a partner.
Notices under sub-section (1) may be given by any partner.
Section 46- Rights of Partners to have Business
Wound up after Dissolution
On the dissolution of a firm every partner or his representative
is entitled, as against all the other partners or their representa-
tives, to have the property of the firm applied in payment of
the debts and liabilities of the firm, and to have the surplus
distributed among the partners or their representatives accord-
ing to their rights.
Section 47- Continuing authority of Partners for
Purposes of Winding up
After the dissolution of a firm the authority of each partner to
bind the firm, and the other mutual rights and obligations of
the partners continue notwithstanding the dissolution, so far as
may be necessary to wind up the affair of the firm and to
complete transactions begun but unfinished at the time of the
dissolution, but not otherwise:
It is provided that the firm is in no case bound by the acts of a
partner who has been adjudicated insolvent; but this proviso
does not affect the liability of any person who has after the
adjudication represented himself or knowingly permitted
himself to be represented as a partner of the insolvent.
Settlement of accounts is very important in the partnership
business. Section 48 deals with it.
Section 48- Mode of Settlement of accounts
between Partners
In settling the accounts of a firm after dissolution, the follow-
ing rules shall, subject to agreement by the partners, be
observed-
(a) Losses, including deficiencies of capital, shall be paid
first out of profits, next out of capital, and, lastly,
if necessary, by the partners individually in the
proportions in which they were entitled to share
profits;
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(b) The assets of the firm, including any sums contributed
LEGAL ASPECTS OF BUSINESS
by the partners to make up deficiencies of capital, shall
be applied in the following manner and order-
(i) In paying the debts of the firm to third parties;
(ii) In paying to each partner ratably what is due to him
from the firm for advances as distinguished from
capital;
(iii) In paying to each partner ratably what is due to
him on account of capital; and
(iv) The residue, if any, shall be divided among the
partners in the proportions in which they were
entitled to share profits.
Section 49- Payment of firm debts and of separate
debts
Where there are joint debts due from the firm, and also separate
debts due from any partner, the property of the firm shall be
applied in the first instance in payment of the debts of the
firm, and, if there is any surplus, then the share of each partner
shall be applied in payment of his separate debts or paid to
him. The separate property of any partner shall be applied first
in the payment of his separate debts, and the surplus (if any) in
the payment of the debts of the firm.
Section 50- Personal profits Earned after Dissolution
Subject to contract between the partners, the provisions of
clause (a) of section 16 shall apply to transactions by any
surviving partner or by the representatives of a deceased
partner, undertaken after the firm is dissolved on account of the
death of a partner and before its affairs have been completely
wound up:
It is provided that where any partner or his representative has
bought the goodwill of the firm, nothing in this section shall
affect his right to use the firm name.
Section 51- Return of Premium on Premature
Dissolution
Where a partner has paid a premium on entering into partner-
ship of a fixed term, and the firm is dissolved before the
expiration of that term otherwise than by the death of a
partner, he shall be entitled to repayment of the premium or of
such part thereof as may be reasonable, regard being had to the
terms upon which he became a partner and to the length of
time during which he was a partner, unless-
(a) The dissolution is mainly due to his own misconduct,
or
(b) The dissolution is in pursuance of an agreement
containing no provision for the return of the premium
or any part of it.
Section 52- Rights where Partnership Contract is
Rescinded for Fraud or Misrepresentation
Where a contract creating partnership is rescinded on the ground
of the fraud or misrepresentation of any of the parties thereto
the party entitled to rescind is, without prejudice to any other
right, entitled-
(a) To a lien on, or a right of retention of, the surplus or
the assets of the firm remaining after the debts of the
145
 firm have been paid, for any sum paid by him for the
LEGAL ASPECTS OF BUSINESS
purchase of a share in the firm and for any capital
contributed to him;
(b) To rank as a creditor of the firm in respect of any
payment made by him towards the debts of the firm;
and
(c) To be indemnified by the partner or partners guilty of
the fraud or misrepresentation against all the debts of
the firm.
Section 53- Right to Restrain from use of Firm name
or firm Property
After a firm is dissolved, every partner or his representative may,
in the absence of a contract between the partners to the contrary,
restrain any other partner or his representative from carrying on
a similar business in the firm name or from using any of the
property of the firm for his own benefit, until the affairs of the
firm have been completely wound up:
It is provided that where any partner or his representative has
bought the goodwill of the firm, nothing in this section shall
affect his right to use the firm name.
Section 54- Agreements in Restraint of Trade
Partners may, upon or in anticipation of the dissolution of the
firm, make an agreement that some or all of them will not carry
on a business similar to that of the firm within a specified
period or within specified local limits; and notwithstanding
anything contained in section 27 of the Indian Contract Act,
1872 (9 of 1872), such agreement shall be valid if the restric-
tions imposed are reasonable.
Section 55- Sale of Goodwill after Dissolution
In settling the accounts of a firm after dissolution, the goodwill
shall, subject to contract between the partners, be included in
the assets, and it may be sold either separately or along with
other property of the firm.
Rights of buyer and seller of goodwill-Where the goodwill of a
firm is sold after dissolution, a partner may carry on a business
competing with that of the buyer and he may advertise such
business, but, subject to agreement between him and the buyer,
he may not-
(a) Use the firm name,
(b Represent himself as carrying on the business of the
firm, or
(c) Solicit the custom of persons who were dealing with
the firm before its dissolution.
Agreement in restraint of trade -Any partner may, upon the sale
of the goodwill of a firm, make an agreement with the buyer
that such partner will not carry on any business similar to that
of the firm within a specified period or within specified local
limits and, notwithstanding anything contained in section 27 of
the Indian Contract Act, 1872 (9 of 1872), such agreement shall
be valid if the restrictions imposed are reasonable.
Attempt the following Problems for a Better
Understanding:
1. A and B partners under an agreement, which provided that
the partnership could be terminated by mutual
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146
arrangement only. A alone wants to terminate the
partnership. Can he do so?
[Hint. No, however, under Section 44, the court may, at the suit
of A, dissolve the firm on certain grounds.]
2. X and Y started business in partnership. After a couple of
years they found that the firm is incurring continues losses.
Can it be a ground for dissolution of a firm?
[Hint- Yes, the dissolution can be applied for on the ground
that business cannot be carried on except losses. See section
44(f)]
3. X, Y and Z are partners in a firm. X and Y always behave
arrogantly with each other and do not also co-operate in
business matters. Z applies to court for dissolution of the
firm. Will he succeed?
[Hint- Yes, on ‘Just and Equitable grounds’.]
4. X and Y form a partnership firm. After 5 years, Delhi
police for trading in narcotics detains Y. He is later
convicted for the same. Will the court dissolve the firm on
the application of X before the expiry of the term? Advice.
[Hint – Yes. It is possible on the ground ‘Conduct prejudicial
to partnership business’. See Section 44]
5. X and Y were carrying on a printing business as partners.
They decided to dissolve the firm, and it was provided in
the dissolution deed that even after the sale of goodwill of
the firm to one of them, nothing should prevent the other
partner from carrying on the similar business in the
neighborhood. X purchased the goodwill of the firm, and
Y opened another printing house nearby and started
soliciting the customers of the old firm. X objects. Advice.
[Hint- Y is legally justified in opening a printing house in the
neighborhood, but after the sale of goodwill, Y has no right to
solicit the customers of the firm. X can take an injunction order
from the court to stop Y from soliciting the firm’s customers.]
6. A, B and C were partners in a firm sharing profits in the
ratio of 4:3:2. After 15 years they agree to dissolve the firm.
After paying outside liabilities and the capital of partners,
there is a surplus of Rs. 40,000. What will be the share of
A, B and C?
[Hint. They will share the surplus in the ratio of 4:3:2.]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Aggarwal, Rohini (2003), “Student’s Guide to Mercantile
and Commercial Laws,” Taxmann’s, New Delhi
11.555
LEGAL ASPECTS OF BUSINESS
LESSON 29:
THE COMPANIES ACT, 1956
DEFINITION AND NATURE OF A COMPANY
Learning Objectives
At the end of this chapter, you will be able to
• Identify the meaning and nature of a company
• Identify the important characteristics of a company
Introduction
Today, we will begin with the Companies Act that was passed in
1956.
In the lecture of today we will discuss the meaning and nature
of a company.
Do you know what do we mean by company?
In simple words, a company can be defined as a group of
persons associated together for the purpose of carrying on a
business, with a view to earn profits. The word ‘Company’ is an
amalgamation of the Latin word ‘Com’ meaning “with or
together” and ‘Pains’ meaning “bread”. Thus, a company is
nothing but a group of persons who have come together or
who have contributed money for some common person and
who have incorporated themselves into a distinct legal entity in
the form of a company for that purpose.
Section 3(1)(i) of the Act provides that, “a company means a
company formed and registered under this Act or an existing
company.”
Section 3(1)(ii) lays down that, “ An existing company means a
company formed and registered under any of the previous
companies laws specified below.”
(a) any Act or Acts relating to companies in force before
the Indian Companies Act, 1866 (10 of 1886), and
repealed by that Act;
(b) The Indian Companies Act, 1866 (10 of 1866);
(c) The Indian Companies Act, 1882 (6 of 1882);
(d) The Indian Companies Act, 1913 (7 of 1913);
(e) The Registration of Transferred Companies Ordinance,
1942 (54 of 1942); and 40[
(f) An law corresponding to any of the Acts or the
Ordinance aforesaid and in force-
(1) In the merged territories or in a Part B State (other than
the State of Jammu and Kashmir), or any part thereof,
before the extension thereto of the Indian Companies
Act, 1913 (7 of 1913); or
(2) In the State of Jammu and Kashmir, or any part
thereof before the commencement of the Jammu and
Kashmir (Extension of Laws) Act, 1956 41[ in so far
as banking, insurance and financial corporations are
concerned, and before the commencement of the
Central Laws (Extension to Jammu & Kashmir)
There is very good definition by Lord Justice Lindey, “A
company is an association of many persons who contribute
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148
money or money’s worth to a common stock and employ it in
some trade or business and who share the profit and loss
arising there from. The common stock so contributed is
denoted in money and is the capital of the company. The
persons who contribute it or to whom it belongs are members.
The proportion of capital to which each member is entitled is
his share. The shares are always transferable although the right
to transfer is more or less restricted.”
The Supreme Court of India has held in the case of State
Trading Corporation of India v/s CTO that a company cannot
have the status of a citizen under the Constitution of India.
Let us learn about its important characteristics.
Characteristics of a Company
A company as an entity has several distinct features, which
together make it a unique organization. The following are the
defining characteristics of a company: -
Separate Legal Entity
On incorporation under law, a company becomes a separate
legal entity as compared to its members. The company is
different and distinct from its members in law. It has its own
name and its own seal, its assets and liabilities are separate and
distinct from those of its members. It is capable of owning
property, incurring debt, borrowing money, having a bank
account, employing people, entering into contracts and suing
and being sued separately.
The importance of the separate entity of the company was
however firmly established in the following case.
Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots
business to a newly formed company for £ 30,000. His wife,
one daughter and four sons took up one share of £ 1 each. S
took 23,000 shares of £1 each and £ 10,000 debentures in the
company. The debentures gave S a charge over the assets of the
company as the consideration for the transfer of the business.
Subsequently when the company was wound up, its assets were
found to the worth £ 6,000 and its liabilities amounted to £
17,000 of which £ 10,000 were due to S (secured by debentures)
and £ 7,000 due to unsecured creditors, the unsecured creditors
claimed that S and the company were one and the same person
and that the company was a mere agent for S and was hence
they should be paid in priority to S. Held, the company was, in
the eyes of the law, a separate person independent from S and
was not his agent. S, though virtually the holder of all the
shares in the company, was also a secured creditor and was
entitled to repayment in priority to the unsecured creditors.
Limited Liability
The liability of the members of the company is limited to
contribution to the assets of the company up to the face value
of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him when called upon to
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pay and nothing more, even if liabilities of the company far
exceeds its assets. On the other hand, partners of a partnership
firm have unlimited liability i.e. if the assets of the firm are not
adequate to pay the liabilities of the firm, the creditors can force
the partners to make good the deficit from their personal assets.
This cannot be done in case of a company once the members
have paid all their dues towards the shares held by them in the
company.
For example, if the face value of the share in a company is Rs.
10 and a member has already paid Rs. 5 per share, he can be
called upon to pay not more than Rs. 5 per share during the
lifetime of the company.
Perpetual Succession
A company does not die or cease to exist unless it is specifically
wound up or the task for which it was formed has been
completed. Membership of a company may keep on changing
from time to time but that does not affect life of the company.
Death or insolvency of member does not affect the existence of
the company.
There is a very good saying. Even where during war all the
members of a private company, while in general meeting was
killed by a bomb, the company survived; not even a hydrogen
bomb could have destroyed it. [ Meat Supplies( Guildford) Ltd;
Re( 1966) 3 All E.R.320]
Separate Property
A company is a distinct legal entity. The company’s property is
its own. A member cannot claim to be owner of the company’s
property during the existence of the company.
Transferability of Shares
Shares in a company are freely transferable, subject to certain
conditions, such that no shareholder is permanently or
necessarily wedded to a company. When a member transfers his
shares to another person, the transferee steps into the shoes of
the transferor and acquires all the rights of the transferor in
respect of those shares.
Common Seal
A company is a artificial person and does not have a physical
presence. Therefore, it acts through its Board of Directors for
carrying out its activities and entering into various agreements.
Such contracts must be under the seal of the company. The
common seal is the official signature of the company. The name
of the company must be engraved on the common seal. Any
document not bearing the seal of the company may not be
accepted as authentic and may not have any legal force.
Capacity to sue and Being Sued
A company can sue or be sued in its own name as distinct from
its members.
Separate Management
A company is administered and managed by its managerial
personnel i.e. the Board of Directors. The shareholders are
simply the holders of the shares in the company and need not
be necessarily the managers of the company.
One Share-One Vote:
The principle of voting in a company is one share-one vote. I.e.
if a person has 10 shares, he has 10 votes in the company. This
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is in direct contrast to the voting principle of a co-operative
LEGAL ASPECTS OF BUSINESS
society where the “One Member - One Vote” principle applies
i.e. irrespective of the number of shares held; one member has
only one vote.
You have learnt about partnership. Now you also know about
company.
Let us try to differentiate between company and partnership.
Distinction between Company and Partnership
1. A Partnership firm is sum total of persons who have come
together to share the profits of the business carried on by
them or any of them. It does not have a separate legal
entity. A Company is association of persons who have
come together for a specific purpose. The company has a
separate legal entity as soon as it is incorporated under law.
2. Liability of the partners is unlimited. However, the liability
of shareholders of a limited company is limited to the
extent of unpaid share or to the tune of the unpaid
amount guaranteed by the shareholder.
3. Property of the firm belongs to the partners and they are
collectively entitled to it. In case of a company, the property
belongs to the company and not to its members.
4. A partner cannot transfer his shares in the partnership firm
without the consent of all other partners. In case of a
company, shares may be transferred without the
permission of the other members, in absence of provision
to contrary in articles of association of the company.
5. In case of partnership, the number of members must not
exceed 20 in case of banking business and 10 in other
businesses. A Public company may have as many members
as it desires subject to a minimum of 7 members. A
Private company cannot have more than 50 members.
6. There must be at least 2 members in order to form a
partnership firm. The minimum number of members
necessary for a public limited company is seven and two for
a private limited company.
7. In case of a partnership, 100 % consensus is required for
any decision. In case of a company, decision of the
majority prevails.
8. On the death of any partner, the partnership is dissolved
unless there is provision to the contrary. On the death of
the shareholder the company’ existence does not get
terminated.
I must tell you about the meaning of illegal association.
Illegal Association
Under the Companies Act, 1956, not more than 10 persons can
come together for carrying on any banking business and not
more than 20 persons can come together for carrying on any
other of business, unless the association is registered under the
Companies Act or any other Indian law. Any association, which
does not comply with the above norms, is an illegal association.
Therefore, a partnership of more 10 or 20 members, as the case
may be, is an illegal association unless the registered under the
Companies Act or any other Indian law.
However, you cannot apply this provision in the following cases
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 1. A Joint Hindu Family business comprising of family
LEGAL ASPECTS OF BUSINESS

members only. But where two or more Joint Hindu

families come together for business through partnership,
the total number of members cannot exceed 10 or 20 as
the case may be, but in computing the number of persons,
minor members of such family will be excluded.
2. Any association of charitable, religious, scientific trust or
organisation which is not formed with a profit motive
3. Foreign companies.
When the number of members exceeds the prescribed maxi-
mum, members must register it under Companies Act or any
other Indian law.
Consequences of non-Registration
Law does not recognize an illegal association. An illegal
association cannot enter into any contract, cannot sue any
members or any outsider, and cannot be sued by any members
or outsiders for any of its debts. The members of the illegal
association are personally for the obligations of the illegal
association. A member may be liable to a fine of Rs. 1000. Any
member of an illegal association cannot sue another member in
respect of any matter connected with the association.
Minimum Number of Members
A public company must have at least 7 members whereas a
private company may have only 2 members. If the number of
members falls below the statutory minimum and the company
carries on its business beyond a period of six months after the
number has so fallen, the reduction of number of members
below the legal minimum is a ground for the winding up of
the company.
Practical Problems
1. A husband and wife who were the only two members of a
private company died in an accident. Does the company
also come to an end?
2. There are five members in a company. They are all holding
fully paid shares in a company. What is their liability?
3. What would be the effect if 22 members were carrying on a
business without registration?
4. How would you differentiate between a company and
partnership?
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/
osca20.html

Notes:

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150 11.555

LESSON 30:
THE COMPANIES ACT, 1956
TYPES OF COMPANIES
Learning Objectives
At the end of this chapter, you will be able to
• Identify the different types of company
Introduction
Today we will learn about the important types of company.
There are various basis to classify companies.
On the basis of the number of the members,
companies can be divided in two:
• A Private Company
• A Public Company
Public Company means a company which not a private
company.
Private Company means a company which by its articles of
association: -
a. Restricts the right of members to transfer its shares
b. Limits the number of its members to fifty. In
determining this number of 50, employee-members
and ex-employee members are not to be considered.
c. Prohibits an invitation to the public to subscribe to any
shares in or the debentures of the company.
If a private company contravenes any of the aforesaid three
provisions, it ceases to be private company and loses all the
exemptions and privileges, which a private company is entitled.
Following are some of the privileges and exemptions of a
private limited company:-
1. Minimum number is members is 2 (7 in case of public
companies)
2. Prohibition of allotment of the shares or debentures in
certain cases unless statement in lieu of prospectus has
been delivered to the Registrar of Companies does not
apply.
3. Restriction contained in Section 81 related to the rights
issues of share capital does not apply. A special resolution
to issue shares to non-members is not required in case of a
private company.
4. Restriction contained in Section 149 on commencement of
business by a company does not apply. A private company
does not need a separate certificate of commencement of
business.
5. Provisions of Section 165 relating to statutory meeting and
submission of statutory report do not apply.
6. One (if 7 or less members are present) or two members (if
more than 7 members are present) present in person at a
meeting of the company can demand a poll.
7. In case of a private company which not a subsidiary of a
public limited company or in the case of a private company
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11.555
LEGAL ASPECTS OF BUSINESS
of which the entire paid up share capital is held by the one
or more body corporate incorporated outside India, no
person other than the member of the company concerned
shall be entitled to inspect or obtain the copies of profit
and loss account of that company.
8. Minimum number of directors is only two. (3 in case of a
public company)
The Company Law Board on being satisfied that the infringe-
ment of the aforesaid 3 conditions was accidental or due to
inadvertence or that on other grounds, it just an equitable to
grant relief, may grant relief to the company from the conse-
quences of such infringement. The infringement of the
aforesaid 3 conditions does not automatically convert a private
company into a public company. It continues to remain a
private company; it merely ceases to be entitled to the privileges
and exemptions available to a private company.
Companies Deemed to be Public limited Company
A private company will be treated as a deemed public limited
company in any of the following circumstances :-
1. Where at least 25% of the paid up share capital of a private
company is held by one or more bodies corporate, the
private company shall automatically become the public
company on and from the date on which the aforesaid
percentage is so held.
2. Where the annual average turnover of the private company
during the period of three consecutive financial years is not
less than Rs 25 crores, the private company shall be,
irrespective of its paid up share capital, become a deemed
public company.
3. Where not less than 25% of the paid up capital of a public
company limited is held by the private company, then the
private company shall become a public company on and
from the date on which the aforesaid percentage is so held.
4. Where a private company accepts deposits after the
invitation is made by advertisement or renews deposits
from the public (other than from its members or directors
or their relatives), such companies shall become public
company on and from date such acceptance or renewal is
first made.
On the basis of the liability of the members, a company can be
classified in
• Limited Companies
• Unlimited Companies
Limited Companies
Companies may be limited or unlimited companies. Company
may be limited by shares or limited by guarantee.
a. Company limited by shares In this case, the liability of
members is limited to the amount of uncalled share
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 capital. No member of company limited by the shares can
LEGAL ASPECTS OF BUSINESS
be called upon to pay more than the face value of shares or
so much of it as is remaining unpaid. Members have no
liability in case of fully paid up shares.
b. Company limited by the guarantee A company limited by
guarantee is a registered company having the liability of its
members limited by its memorandum of association to
such amount as the members may respectively thereby
undertake to pay if necessary on liquidation of the
company. The liability of the members to pay the
guaranteed amount arises only when the company has
gone into liquidation and not when it is a going concern. A
guarantee company may be a company with share capital or
without share capital.
Unlimited Company: The liability of members of an unlimited
company is unlimited. Therefore their liability is similar to that
of the liability of the partners of a partnership firm. It may or
may not have a share capital.
Under the Companies Act, 1956, the name of a public limited
company must end with the word ‘Limited’ and the name of a
private limited company must end with the word ‘Private
Limited’. However, under Section 25, the Central Government
may allow companies to remove the word “Limited / Private
Limited” from the name if the following conditions are
satisfied :-
1. The company is formed for promoting commerce, science,
art, religion, charity or other socially useful objects
2. The company does not intend to pay dividend to its
members but apply its profits and other income in
promotion of its objects.
On the basis of the control, we can classify company as Holding
and Subsidiary companies
Holding and Subsidiary companies (Sec 4)
A company shall be deemed to be subsidiary of another
company if: -
1. That other company controls the composition of its board
of directors; or
2. That other company holds more than half in face value of
its equity share capital
3. Where the first mentioned company is subsidiary company
of any company, which that other’s subsidiary. eg Company
B is subsidiary of the Company A and Company C is
subsidiary of Company B, therefore Company C is
subsidiary of Company A.
The control of the composition of the Board of Directors of
the company means that the holding company has the power at
its discretion to appoint or remove all or majority of directors
of the subsidiary company without consent or concurrence of
any other person.
On the basis of the ownership, a company can be classified as
• Government Companies
• Non Government Companies
• Foreign Companies
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152
Government Companies
It means any company in which not less than 51% of the paid
up share capital is held by the Central Government or any State
Government or partly by the Central Government and partly by
the one or more State Governments and includes a company
which is a subsidiary of a government company. Government
Companies are also governed by the provisions of the Compa-
nies Act. However, the Central Government may direct that
certain provisions of the Companies Act shall not apply or shall
apply only with such exceptions, modifications and adaptions
as may be specified to such government companies.
Non Government Companies
It is controlled and operated by a private capital
Foreign Companies
By this, we mean a company incorporated in a country outside
India under the law of that other country and has established
the place of business in India.
There is another important type of company which is called as
One Man Company
One man company is a company in which one man holds
practically the whole of the share capital of the company, and in
order to meet the statutory requirement of minimum number
of members, some dummy members who are mostly his
friends or relations, hold just 1or 2 shares each. It is like any
other company is a legal entity distinct from its members. The
dummy members are usually nominees of the principal
shareholder who is the virtual owner of the business and who
carries it on with limited liability.
Now attempt the following problems.
Practical Problems
Attempt the following problems, giving reasons :
1. A, a trader, carried on business under the name of A& Co.
Ltd. Without being registered as a company with limited
liability. Discuss the consequences of the act of A.
2. An association of 12 members starts a banking business
without being registered. 4 members retire and thereafter a
suit is instituted by one of the continuing members for
the partitions of assets of the business. Is the suit valid?
[Hint. No]
3. 35 percent of the paid up capita of a private company is
held by a public company. Does the private company
become a public company? Give reasons for your answer.
[Hint. Yes(Badri Prasad v.Nagarmal)]
4. X & Co. and Y & co. are 2 firms roistered under the Indian
partnership act, 1932, each consisting of 12 partners. The
firms desire to carry on business jointly as partners under
the name XY & co. Does XY & co. require registration and,
if so, under what provisions of the companies act?
[Hint. Yes]
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5. A joint Hindu family consisting of a father and 5 major

LEGAL ASPECTS OF BUSINESS

sons and another family consisting of a father. 5 major
sons and 1minor son carried on banking business. As
owners thereof. Does the organization require registration
under the companies act, 1956?
[Hint. Yes ]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html

Notes:

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11.555 153
LEGAL ASPECTS OF BUSINESS
LESSON 31:
THE COMPANIES ACT, 1956
PROMOTION AND FORMATION OF A COMPANY
Learning Objectives
At the end of this chapter, you will be able to
• Identify the process of forming a company
• Identify the process of registration of a company
Introduction
We have learnt about the meaning, nature and types of
company. Today we will learn about how the company is
formed.
Before a company is formed, certain preliminary steps are to be
taken, e.g; whether it should be a private company or a public
company; what should be its capital;etc.
The process of forming a company can be divided into four
distinct stages:
a) Promotion
b) Registration or incorporation
c) Capital Subscription
d) Commencement of Business.
As regards a private company, it needs to go through the first
two stages only. As soon it receives the certificate of incorpora-
tion, it can commence business. This is so because it cannot
invite the public to subscribe to its shares and must arrange to
raise the capital privately. But Public Company has to go
through all of the four stages.
We shall now discuss each of these four stages.
Promotion
This is the first stage in the formation of a company. It refers to
the entire process by which a company is brought into existence.
It starts with the conceptualization of the birth a company and
determination of the purpose for which it is to be formed.
Do you know what we mean by promoters?
Promoters
The persons who conceive the company and invest the initial
funds are known as the promoters of the company. The
promoters enter into preliminary contracts with vendors and
make arrangements for the preparation, advertisement and the
circulation of prospectus and placement of capital. However, a
person who merely acts in his professional capacity on behalf of
the promoter (e.g. lawyer, CA, etc) for drawing up the agree-
ment or other documents or prepares the figures on behalf of
the promoter and
whom the promoter pays is not a promoter.
Pre-Incorporation or Preliminary Contracts
The promoters of a company usually enter into contract to
acquire some property or right for the company, which is yet to
be incorporated. Such contracts are called Pre-Incorporation or
Preliminary Contracts.
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154
Position of promoters as regards Pre-Incorporation or
Preliminary Contracts
• Company not bound by pre-incorporation contract
English & colonial produce co. ltd Re (1906) 2 ch. 435. A
solicitor prepared the memorandum and Articles of association
of a company and paid the necessary registration fees and other
incidental expenses to obtain of the company. He did this on
the instruction of certain persons who later became directors of
the company. Held, the company was not liable of his work.
• Company can not enforce pre-incorporation contract
Natal land & colonization co. Ltd. V. Pauline colliery & Develop-
ment syndicate ltd., (1904) A.C. 120. The N company agreed
with an agent of the P syndicate Ltd before its formation to
grant a mining lease to the syndicate. The syndicate was
registered and discovered a seam of coal. The company refused
to grant the lease. Held, there was no binding contract between
the company and the syndicate.
• Promoters are personally liable
Kelner v. Baxter, (1866) L.R. 2 C.P. 174.A hotel company was
about to be formed and persons responsible for the new
company signed an agreement on 27th January, 1866, for the
purchase of stock on behalf of the proposed company,
payment to be made on 28th January, 1866. The company was
incorporated on 20th February 1866. the goods were consumed
in the business and the company went into liquidation before
the debt was paid. The persons signing the agreement were
sued on the contract. Held. The persons signing were promot-
ers and personally liable on their signatures.
The promoters have certain basic duties towards the company
formed :-
1. He must not make any secret profit out of the promotion
of the company. Secret profit is made by entering into a
transaction on his own behalf and then sell to concerned
property to the company at a profit without making
disclosure of the profit to the company or its members.
The promoter can make profits in his dealings with the
company provided he discloses these profits to the
company and its members. What is not permitted is
making secret profits i.e. making profits without disclosing
them to the company and its members.
2. He must make full disclosure to the company of all
relevant facts including to any profit made by him in
transaction with the company.
In case of default on the part of the promoter in fulfilling the
above duties, the company may: -
1. Rescind or cancel the contract made and if he has made
profit on any related transaction, that profit also may be
recovered
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2. Retain the property paying no more for it then what the
promoter has paid for it depriving him of the secret profit.
3. If these are not appropriate (e.g. cases where the property
has altered in such a manner that it is not possible to cancel
the contract or where the promoter has already received his
secret profit), the company can sue him to for breach of
trust. Damages up to the difference between the market
value of the property and the contract price can be
recovered from him.
A promoter may be rewarded by the company for efforts
undertaken by him in forming the company in several ways.
The more common ones are :-
1. The company may to pay some remuneration for the
services rendered.
2. The promoter may make profits on transactions entered by
him with the company after making full disclosure to the
company and its members.
3. The promoter may sell his property for fully paid shares in
the company after making full disclosures.
4. The promoter may be given an option to buy further
shares in the company.
5. The promoter may be given commission on shares sold.
6. The articles of the Company may provide for fixed sum to
be paid by the company to him. However, such provision
has no legal effect and the promoter cannot sue to enforce
it but if the company makes such payment, it cannot
recover it back.
If the promoter fails to disclose the profit made by him in
course of promotion or knowingly makes a false statement in
the prospectus whereby the person relying on that statement
makes a loss, he will be liable to make good the loss suffered by
that other person. The promoter is liable for untrue statements
made in the prospectus. A person who subscribes for any
shares or debenture in the company on the faith of the untrue
statement contained in the prospectus can sue the promoter for
the loss or damages sustained by him as the result of such
untrue statement.
Let us learn about the incorporation of the company.
Incorporation by Registration
The promoters must make a decision regarding the type of
company i.e. a public company or a private company or an
unlimited company, etc and accordingly prepare the documents
for incorporation of the company. In this connection the
Memorandum and Articles of Association (MA & AA) are
crucial documents to be prepared.
Mode of forming incorporated company (Sec. 12)
Any 7 or more persons (2 or more in case of a private company)
associated for any lawful purpose may form an incorporated
company, with or without limited liability.
They shall subscribe their names to a Memorandum of
Association and also comply other formalities in respect of
registration. A company so formed may be :
a) A company limited by shares, or
b) A company limited by guarantee, or
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11.555
c) Unlimited company
LEGAL ASPECTS OF BUSINESS
Registration of the Company
Once the documents have been prepared, vetted, stamped and
signed, they must be filed with the Registrar of Companies for
incorporating the Company. The following documents must be
filed in this connection: -
1. The Memorandum of Association duly signed by
subscribers and the Articles of Association, if any signed
by subscribers to the Memorandum of Association
3. An agreement, if any, which the company proposes to enter
into with any individual for appointment as its managing
director or whole-time director or manager.
5. A statutory declaration in Form 1 by an advocate, attorney
or pleader entitled to appear before the High Court or a
company secretary or Chartered Accountant in whole - time
practice in India who is engaged in the formation of the
company or by a person who is named as a director or
manager or secretary of the company that the requirements
of the Companies Act have been complied with in respect
of the registration of the company and matters precedent
and incidental thereto.
4. In addition to the above, in case of a public company, the
following documents must also be filed: -
1.
2. Written consent of directors in Form 29 to agree to act
as directors and their written consent to act as directors
and take up qualification shares.
3.
4. The complete address of the registered office of the
company in Form 18.
5.
6. Details of the directors, managing director and
manager of the company in Form 32.
Certificate of Incorporation
Once all the above documents have been filed and they are
found to be in order, the Registrar of Companies will issue
Certificate of Incorporation of the Company. This document is
the birth certificate of the company and is proof of the
existence of the company. Once, this certificate is issued, the
company cannot cease its existence unless it is dissolved by
order of the Court.
Conclusiveness of Certificate of Incorporation
The certificate of incorporation given by registrar in respect of a
company is conclusive evidence that all the requirements of the
Companies Act have been complied in respect of registration.
This is known as Rule In Peel’s Case.
Note the following Case
Jubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6th
January, the necessary documents were delivered to the registrar
for registration. Two days after, the registrar issued the certificate
of incorporation but dated it 6th January instead of 8th, i.e.. the
day on which the certificate was issued. On 6th January some
shares were allotted to L, i.e.. before the certificate of incorpora-
tion was issued. The question arose whether the allotment was
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 void. Held, the certificate of incorporation is conclusive evidence
LEGAL ASPECTS OF BUSINESS
of all that it contains, in law the company was formed on 6th
January and, therefore, the allotment of shares was valid.
Commencement of Business
A private company or a company having no share capital can
commence its business immediately after it has been incorpo-
rated. However, other companies can commence their activities
only after they have obtained Certificate of Commencement of
Business. For this purpose, the following additional formalities
have to be complied with: -
1. If a company has share capital and has issued a prospectus,
then: -
a.
b. Shares up to the amount of minimum subscription
must be allotted.
c.
d. Every director has paid to the company on each of the
shares, which he has taken the same amount as the
public has paid on such shares.
e.
f. No money is or may become payable to the applicants
of shares or debentures for failure to apply for or to
obtain permission to deal in those shares or
debentures in any recognized stock exchange.
g.
h. A statutory declaration in Form 19 signed by one
director or the employee - company secretary or a
Company secretary in whole time practice that the
above provisions have been complied with must be
filed.
2. If a company has share capital but has not issued a
prospectus, then: -
a.
b. It must file a statement in lieu of prospectus with the
Registrar of Companies
c.
d. Every director has paid to the company on each of the
shares, which he has taken the same amount as the
other members have paid on such shares
e.
f. A statutory declaration in Form 20 signed by one
director or the employee - company secretary or a
Company secretary in whole time practice that the
above provisions have been complied with must be
filed.
Once the above provisions have been complied with, the
Registrar of Companies grants “Certificate of Commencement
of Business” after which the company can commence its
activities.
Now attempt the following problems
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156
Practical Problems
Attempt the following problems, giving reasons:
1. The promoters of a company, before its incorporation,
enter into an agreement with P to buy A Plot of land on
behalf of the company, after incorporation the company
refuses to buy the said plot of land. Has P any remedy
either against the promoters or against the company?
[Hint. P has no remedy against the company. The promoters are
personally liable on the contract],
2. 6 of the 7 signatures to the memorandum of association
of a company were forged. The memorandum was duly
presented, registered and a certificated of incorporation was
issued. Can the existence of the of the company be
subsequently attacked on the ground that the registration
was void. Decide.
[Hint. No (see.35 Rule in peel’s case)]
3. The memorandum of association of a company was
presented to the registrar of companies for registration and
the registrar issued the certificate of incorporation. The
company after complying with all the prescribed legal
formalities started a business. The company contends that
the nature of business cannot be one into as the certificate
of incorporation is conclusive. Discuss.
[Hint. The company’s contention is untenable and the nature
of the business can be gone into.]
4. The memorandum of association of a company was
signed by 2 adult members and by a guardian of the other
5 minor members. The guardian signing separately for each
minor member. The registrar registered the company and
issued under his hand a certificate of incorporation, the
plaintiff contended that
(a) Conditions of registration were not duly complied
with, and
(b) There were no 7 subscribes to the memorandum.
Will the court uphold his contention?
[Hint. No (peel’s case)]
5. The express newspapers (Pvt.) Ltd., leading publishers of
newspapers and weeklies, sold its undertaking to a new
company. Andhra Prabha (Pvt). Ltd; consequent upon the
Government adopting certain recommendations of the
wage board for improvement in the terms of service and
salaries of the working journalists. Shall the registration of
the company be declared void on the plea that new
company was formed for the purpose of evading the new
obligations imposed by the wage board?
Hint. No (T.V. Krishna v. Andhra Prabha [Pvt.] Ltd; (1902) 2
Ch 809)]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html
11.555

LESSON 32:
THE COMPANIES ACT, 1956
MEMORANDUM AND AR TICLES OF ASSOCIATION
Learning Objectives
At the end of this chapter, you will be able to know about:
• The memorandum of association
• The articles of association
• The doctrine of ultra virus
Introduction
Memorandum and Articles of Association are the two impor-
tant documents of the company.
Let us learn about them.
Memorandum of Association of a
Company
It is the constitution or charter of the company and contains
the powers of the company. No company can be registered
under the Companies Act, 1956 without the memorandum of
association. Under Section 2(28) of the Companies Act, 1956
the memorandum means the memorandum of association of
the company as originally framed or as altered from time to
time in pursuance with any of the previous companies law or
the Companies Act, 1956.
The memorandum of association should be in any of the one
form specified in the tables B,C,D and E of Schedule 1 to the
Companies Act, 1956. Form in Table B is applicable in case of
companies limited by the shares, form in Table C is applicable
to the companies limited by guarantee and not having share
capital, form in Table D is applicable to company limited by
guarantee and having a share capital whereas form in table E is
applicable to unlimited companies.
Contents of Memorandum:
The memorandum of association of every company must
contain the following clauses
Name Clause
The name of the company is mentioned in the name clause. A
public limited company must end with the word ‘Limited’ and
a private limited company must end with the words ‘Private
Limited’. The company cannot have a name which in the
opinion of the Central Government is undesirable. A name
which is identical with or the nearly resembles the name of
another company in existence will not be allowed. A company
cannot use a name which is prohibited under the Names and
Emblems (Prevntion of Misuse Act, 1950 or use a name
suggestive of connection to government or State patronage.
Domicile clause
The state in which the registered office of company is to be
situated is mentioned in this clause. If it is not possible to state
the exact location of the registered office, the company must
state it provide the exact address either on the day on which
commences to carry on its business or within 30 days from the
date of incorporation of the company, whichever is earlier.
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11.555
LEGAL ASPECTS OF BUSINESS
Notice in form no 18 must be given to the Registrar of
Comapnies within 30 days of the date of incorporation of the
company. Similarly, any change in the registered office must also
be intimated in form no 18 to the Registrar of Companies
within 30 days. The registered office of the company is the
official address of the company where the statutory books and
records must be normally be kept. Every company must affix or
paint its name and address of its registered office on the
outside of the every office or place at which its activities are
carried on in. The name must be written in one of the local
languages and in English.
Objects Clause
This clause is the most important clause of the company. It
specifies the activities which a company can carry on and which
activities it cannot carry on. The company cannot carry on any
activity, which is not authorised by its MA. This clause must
specify: -
i. Main objects of the company to be pursued by the
company on its incorporation
ii. Objects incidental or ancillary to the attainment of the
main objects
iii. Other objects of the company not included in (i) and
(ii) above.
In case of the companies other than trading corporations
whose objects are not confined to one state, the states to whose
territories the objects of the company extend must be specified.
Doctrine of the ultra-vires Any transaction which is outside the
scope of the powers specified in the objects clause of the MA
and are not reasonable incidentally or necessary to the attain-
ment of objects is ultra-vires the company and therefore void.
No rights and liabilities on the part of the company arise out of
such transactions and it is a nullity even if every member agrees
to it.
Consequences of an Ultra vires transaction :-
1. The company cannot sue any person for enforcement of
any of its rights.
2. No person can sue the company for enforcement of its
rights.
3. The directors of the company may be held personally liable
to outsiders for an ultra vires.
Note the following case
Ashbury Rly. Carriage & Iron Co. Ltd. V. Riche. (1875) l. R. 7
H.L 653. A company was incorporated with the following
objects.
(a) To make, sell, or lend on hire, railway carriages and
wagons.
(b) To carry on the business of mechanical engineers and
general contractors.
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 (c) To purchase, lease, work, and sell mines, minerals, land
LEGAL ASPECTS OF BUSINESS
and buildings.
The company entered into a contract with Riche for the
financing of the construction of a railway line in Belgium. The
question raised was whether that contract was covered within
the meaning of general contractors. The house of lords held
that the contract was ultra virus the company and void so that
not even the subsequent assent of the whole body of share-
holders could ratify it.
However, the doctrine of ultra-vires does not apply in the
following cases :-
1. If an act is ultra-vires of powers the directors but intra-
vires of company, the company is liable.
2. If an act is ultra-vires the articles of the company but it
is intra-vires of the memorandum, the articles can be
altered to rectify the error.
3. If an act is within the powers of the company but is
irregualarly done, consent of the shareholders will
validate it.
4. Where there is ultra-vires borrowing by the company or
it obtains deliver of the property under an ultra-vires
contract, then the third party has no claim against the
company on the basis of the loan but he has right to
follow his money or property if it exist as it is and
obtain an injunction from the Court restraining the
company from parting with it provided that he
intervenes before is money spent on or the identity of
the property is lost.
5. The lender of the money to a company under the
ultra-vires contract has a right to make director
personally liable.
Liability clause A declaration that the liability of the members is
limited in case of the company limited by the shares or
guarantee must be given. The MA of a company limited by
guarantee must also state that each member undertakes to
contribute to the assets of the company such amount not
exceeding specified amounts as may be required in the event of
the liquidation of the company. A declaration that the liability
of the members is unlimited in case of the unlimted compa-
nies must be given. The effect of this clause is that in a
company limited by shares, no member can be called upon to
pay more than the uncalled amount on his shares. If his shares
are already fully paid up, he has no liabilty towards the company.
The following are exceptions to the rule of limited liability of
members :-
1. If a member agrees in writing to be bound by the
alteration of MA / AA requiring him to take more shares
or increasing his liability, he shall be liable upto the amount
agreed to by him.
2. If every member agrees in writing to re-register the
company as an unlimited company and the company is re-
registered as such, such members will have unlimited
liability.
3. If to the knowledge of a member, the number of
shareholders has fallen below the legal minimum, (seven in
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158
the case of a public limited company and two in case of a
private limited company ) and the company has carried on
business for more than 6 months, while the number is so
reduced, the members for the time being constituting the
company would be personally liable for the debts of the
company contracted during that time.
Capital clause The amount of share capital with which the
company is to be registered divided into shares must be
specified giving details of the number of shares and types of
shares. A company cannot issue share capital greater than the
maximum amount of share capital mentioned in this clause
without altering the memorandum.
A company limited by shares can alter the capital clause of its
Memorandum in any of the following ways provided that such
alteration is authorized by the articles of association of the
company: -
1. Increase in share capital by such amount as it thinks
expedient by issuing new shares.
2. Consolidate and divide all or any of its share capital
into shares of larger amount than its existing shares.
eg, if the company has 100 shares of Rs.10 each (
aggregating to Rs. 1000/-) it may consolidate those
shares into 10 shares of Rs100 each.
3. Convert all or any of its fully paid shares into stock and
re-convert stock into fully paid shares of any
denomination.
4. Subdivide shares or any of shares into smaller
amounts fixed by the Memorandum so that in
subdivision the proportion between the amount paid
and the amount if any unpaid on each reduced shares
shall be same as it was in case of from which the
reduced share is derived.
5. Cancel shares which have been not been taken or agreed
to be taken by any person and diminish the amount of
share capital by the amount of the shares so cancelled.
The alteration of the capital of the company in any of the
manner specified above can be done by passing a resolution at
the general meeting of the company and does not require any
confirmation by the court.
Reduction of the share capital can be effected only in the
manners specified in Section 100-104 of the Act or by way of
buy back under Section 77A and 77B of the Act. Notice of
alteration to share capital is required to be filed with the registrar
of the company in Form no 5 within 30 days of the alteration
of the capital clause of the MA. The Registrar shall record the
notice and make necessary alteration in Memorandum and
Articles of Association of the company. Any default in giving
notice to the registrar renders company and its officers in default
liable to punishment with fine which may extend to the Rs50
for each day of default.
Association clause A declaration by the persons for subscribing
to the Memorandum that they desire to form into a company
and agree to take the shares place against their respective name
must be given by the promoters.
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Articles of Association
The Articles of Association (AA) contain the rules and regula-
tions of the internal management of the company. The AA is
nothing but a contract between the company and its members
and also between the members themselves that they shall abide
by the rules and regulations of internal management of the
company specified in the AA. It specifies the rights and duties
of the members and directors.
The provisions of the AA must not be in conflict with the
provisions of the MA. In case such a conflict arises, the MA will
prevail.
Normally, every company has its own AA. However, if a
company does not have its own AA, the model AA specified in
Schedule I - Table A will apply. A company may adopt any of
the model forms of AA, with or without modifications. The
articles of association should be in any of the one form
specified in the tables B,C,D and E of Schedule 1 to the
Companies Act, 1956. Form in Table B is applicable in case of
companies limited by the shares , form in Table C is applicable
to the companies limited by guarantee and not having share
capital, form in Table D is applicable to company limited by
guarantee and having a share capital whereas form in table E is
applicable to unlimited companies. However, a private company
must have its own AA.
The important items covered by the AA include :-
1. Powers, duties, rights and liabilities of Directors
2. Powers, duties, rights and liabilities of members
3. Rules for Meetings of the Company
4. Dividends
5. Borrowing powers of the company
6. Calls on shares
7. Transfer & transmission of shares
8. Forfeiture of shares
9. Voting powers of members, etc
Alteration of articles of association : A company can alter any of
the provisions of its AA, subject to provisions of the Compa-
nies Act and subject to the conditions contained in the
Memorandum of association of the company. A company, by
special resolution at a general meeting of members, alter its
articles provided that such alteration does not have the effect of
converting a public limited company into a private company
unless it has been approved by the Central Government.
The articles must be printed, divided into paragraphs and
numbered consequently and must be signed by each subscriber
to the Memorandum of Association who shall add his address,
description and occupation in presence of at least one witness
who must attest the signature and likewise add his address,
description and occupation. The articles of association of the
company when registered bind the company and the members
thereof to the same extent as if it was signed by the company
and by each member.
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11.555
Practical Problems
LEGAL ASPECTS OF BUSINESS
Attempt the following problems, giving reasons
1. 1. X Ltd. A cotton textile company enters into a
contract with A Ltd. an adjacent cotton textile mil, to
supply electricity form their power generation plant.
After supplies have been made fro 3 months it is
discovered that this activity is beyond the scope of the
objective clause of the memorandum of association of
X Ltd. Shareholders of X Ltd. Ratify the contract in
their general body meeting can A Ltd, which refuses to
make payment on the ground that the contract is
wholly null and void be legally compelled to make
payment?
Hint. No, as the transaction in ultra virus X Ltd]
2. A company altered the objects clause of its
memorandum of association according to the
procedure laid down by law by passing a special
resolution. A copy of the resolution was filed with the
registrar 4 months after the passing of the resolution.
Can the registrar register the alteration?
[Hint. No. Sec. 18]
3. A company carrying on business in jute is empowered
by the objects clause of its memorandum of
association to do any other business connected with
jute. By a resolution passed unanimously the company
resolved to alter the objects clause to include the power
to carry on additional business in rubber. Is this
alteration valid?
[Hint. No].
4. A company put up telephone wires in a certain area.
There was no power in the memorandum to put up
wires there. The defendants cut them down. Can the
company sue for the damage done to the wire?
[Hint. Yes (National Telephone Co v. St. Peter Port
Constables)]
5. The memorandum of association of a company
formed to improve and encourage the breeding of
poultry contained a provision that no remuneration
should be paid to the members of the governing body
of the company. But the company owing to its increase
in the business passed a special resolution providing
for equitable remuneration to such members for
services rendered. Is this alteration of the
memorandum valid?
[Hint. Yes (Scientific Poultry Breeders Assn. Ltd., Re)]
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html
159
 LESSON 33:
LEGAL ASPECTS OF BUSINESS
THE COMPANIES ACT, 1956
THE MANAGEMENT OF A COMPANY
DIRECTORS AND MANAGING DIRECTORS
Learning Objectives
At the end of this chapter, you will be able to know about:
• The meaning of directors and managing director
• The position of directors and managing director
• The appointment and removal of directors and
managing director
Introduction
A company in the eyes of the law is an artificial person. It has
no physical existence. As such it cannot act by itself and acts
instead through human agency. The persons through whom it
acts and by whom the business of the company is conducted
are known as directors. The directors of a company are collec-
tively known as the “ board of directors” or the “board”
First of all, you must know what do we mean by director?
Section 2(13) defines a director as any person occupying the
position of a director, by whatever name he is called.
It is the directors who exercise the powers of a company on the
behalf of the company. Only individuals can be appointed as
the directors of the company. No body corporate, association or
firm shall be appointed as director of a company. The directors
are the brain of a company. They occupy a pivotal position in
the structure of the company. They are in fact the mainsprings
of the company. Speaking about the importance of directors.
Nevile J; observed in Bath v. Standard Land Co… [1910] 2CH.
408 that “ the Board of directors are the brain and the only
brain of the company which is the body, and the company can
and does act only through them.” It is only “ when the brain
functions that the corporation is said to function.”
Number of Directors
Every public company (other than a deemed public company)
must have at least three directors. Every other company must
have at least two directors. Subject to this minimum number of
directors, the articles of a company may fix the minimum and
maximum number of directors for its board of directors.
Right of company to increase or reduce the number of directors
A company, at a general meeting may, by ordinary resolution,
increase or reduce the number of its directors within the limits
fixed in that behalf by its articles.
Increase in number of directors to require Government
sanction (Sec. 259)
In the case of a public company, or a private company which is a
subsidiary of a public company, any increase in the number of
its directors, beyond the maximum number of directors
permitted by the Articles of the Company as first registered,
shall not have any effect unless approved by the Central
Government and shall become void if, and in so far as, it is
disapproved by that Government.
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160
However, where such permissible maximum is 12 or less, no
approval of the Central Government is required provided the
increase does not increase the number of directors beyond 12.
Let us now learn about the appointment of directors.
Appointment of Directors
1. First Directors
The articles of a company usually name the first directors by
their respective names or prescribe the method of appointing
them. In case the promoters of a company do not appoint the
first directors, subscribers of the memorandum who are
individuals, shall be deemed to be the directors of the company,
until the directors are duly appointed.
If the first directors are not appointed in the above manner, the
subscribers of the memorandum who are individuals become
directors of the company. They shall hold office until directors
are duly appointed in the first annual general meeting.
2. Appointment of Directors by the Company
(Secs 255 to 257, 263 and 264). Shareholders in general meeting
must appoint directors. In the case of a public company or a
private company, which is a subsidiary of a public company, at
least 2/3rds of the total number of directors shall be liable to
retire by rotation. Such directors are called rotational directors
and shall be appointed by the shareholders in general meeting.
Ascertainment of Directors retiring by Rotation and
Filling of Vacancies (Sec. 256)
• At the annual general meeting of a public company or
a private company which is a subsidiary of a public
company, 1 /3rd (or the number nearest to 1/3rd ) of the
rotational directors shall retire form office.
• The directors to retire by rotation at every annual
general meeting shall be those who have been longest
in the office since their last appointment.
• At the annual general meeting at which a director retires
by rotation, the company may fill up the vacancy (thus
created) by appointing the retiring director or some
other person.
• If the place of the retiring director is not filled up, the
meeting may resolve not to fill the vacancy. If there is
no such resolution, the meeting shall stand adjourned
till the same day in the next week. If at the adjourned
meeting also, the place of retiring director is not filled
up, nor is there a resolution not to fill the vacancy, the
retiring director shall be deemed to have been re-
appointed at the adjourned meeting.
3. Appointment of Directors by Directors
(Secs. 260, 262 and 313). The directors of a company may
appoint directors-
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 • As Additional Directors (Sec. 260) Any additional
directors appointed by the directors shall hold office
only up to the date of the next annual general meeting
of the company. The number of directors and
additional directors must not exceed the maximum
strength fixed for the Board by the Articles [Patrakola
Tea Co; Re, A.I.R.(1967) Cal. 406]
If the annual general meeting of a company is not held or
cannot be held, the additional director shall vacate his office on
the day on which the annual general meeting should have been
held.
If an additional director has been appointed as managing
director also, the moment he ceases to be an additional director,
he will cease to be the managing director.
• In a casual vacancy (Sec. 262) In the case of a public
company, or a private company which is a subsidiary of
a public company, if the office of any director
appointed by the company in general meeting is
vacated before his term of office expires in the normal
course, the resulting casual vacancy may be filled by the
board of directors subject to any regulations in the
Articles of the Company. By ‘ casual vacancy’ is meant
any vacancy, which occurs by reason of death,
resignation, disqualification, or failure of an elected
director to accept the office for any reason other than
retirement, by rotation. A vacancy caused by the
retirement of a director by rotation is not a casual
vacancy. Such a vacancy has to be filled by the annual
general meeting.
• As alternate director (Sec.313) An alternate director can
be appointed by the board if it is so authorized by (i)
the articles of the company, or (ii) a resolution passed
by the company in the general meeting.
He shall act for a director called the original director during his
absence for a period of at least 3 months form the state in
which board meetings are ordinarily held.
4. Appointment of directors by third parties.
The Articles under certain circumstances give power to the
debenture holders or other creditors, e.g., a banking company or
financial corporation, who have advanced loans to the company
to appoint their nominees to the board. The number of
directors so appointed shall not exceed 1/3 of the total number
of directors, and they are not liable to retire by rotation.
5. Appointment by Proportional Representation
[Sec. 265]
The Articles of a company may provide for the appointment of
not less than 2/3rds of the total number of directors of a public
company or of a private company which is a subsidiary of a
public company according to the principle of proportional
representation. The proportional representation may be by a
single transferable vote or by a system of cumulative voting or
otherwise. The appointment shall be made once in 3 years and
interim casual vacancies shall be filled in the manner as provided
in the articles.
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11.555
6.Appointment of directors by the central
LEGAL ASPECTS OF BUSINESS
government (Sec. 408)
Sec 408 empowers the central government to appoint such
number of directors on the Board as the Tribunal may, by order
in writing, specify as necessary to effectively safeguard the
interests of the company or its shareholders or the public
interest. The appointment will be for a period not exceeding 3
years on any one occasion. The purpose of the appointment is
to prevent the affairs of the company from being conducted
either in the manner.
• Which is oppressive to any members of the company
or
• Which is prejudicial to the interests of the company or
to public interest.
The Tribunal may pass the above order on a reference made to it
by the central government or on the application.
(i) of not less than 100 members of the company or
(ii) of members of the company holding not less than 1/
10th of the total voting power there in .
Any director appointed by the central government shall not be
required to hold any qualification shares nor shall his period of
office be liable to termination by retirement of directors by
rotation .Any such director may be removed by the central
government from his office and another person may be
appointed in his place.
Consent of candidate for directorship to be filled
with Registrar
A person shall not act as director of a company unless he has,
by himself or by his agent authorized in writing, signed and
filed with the Registrar, consent in writing to act as such director
within 30 days of his appointment. This provision shall not
apply to a private company unless it is a subsidiary of a public
company.
As already discussed, directors hold very important position in
the Company.
Let us now discuss their position
Position of Directors
It is very difficult to pinpoint the exact legal position of the
directors of a company. They have been described by various
names, sometimes as agents, sometimes as trustees, and
sometimes as managing partners of the company. But “such
expressions are not used as exhaustive of the powers and
responsibilities of such persons but only as indicating useful
points of view from which they may, for the moment and for
the particular purpose, be considered.”
We may now consider the position of the director’s form all
these points of view.
Directors as Agents. A company as an artificial person acts
through directors who are elected representatives of the
shareholders. They are, in the eyes of the law, agents of the
company for which they act, and the general principle of
the law of principal and agent regulate in most respects the
relationship between the company and its directors.
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 Directors as Employees. Although the directors of a
LEGAL ASPECTS OF BUSINESS
company are its agents they are not employees or servants
of the company for being entitled to privileges and
benefits, which are granted under the Companies Act to the
employees. But there is nothing to prevent a director form
being a servant of the company under a special contract of
service, which he may enter into with the company.
The Companies Act itself indicates many situations where
a director may be in the employment of a company.
Directors as officers For certain matters under the
Companies Act, the directors are treated as officers of the
company [Sec 2 (30)]. As such they are liable to certain
penalties if the provisions of the Companies Act are not
strictly complied with.
Directors as trustees Directors are treated as trustees
• Of the company’s money and property; and
• Of the powers entrusted to them.
Directors are trustees of the company’s money and
property in the sense that they must account for all the
company’s money and property over which they exercise
control. They have also to refund to the company any of
its money or property, which they have improperly paid
away or transferred.
Directors are, however, not trustees in the real sense of the
word because they are not vested with the ownership of
the company’s property. It is only as regards some of their
obligations to the company and certain powers that they
are regarded as trustees of the company.
Directors are trustees of the power entrusted to them in
the sense that they must exercise their powers honestly and
in the interest of the company and the shareholders and
not in their own interest.
Alexander v. Automatic Telephone Co; (1900) 2 CH. 56
The directors of a company paid up nothing on their own
shares. They however made all the other shareholders pay
3s. 6d. on each share. They did not tell the other
shareholders of the difference. Held, this was a breach of
trust, and the directors were bound to pay to the company
3s. 6d. on each of their shares.
Piercy v. S. Mills & Co. Ltd…(1920) Ch 77
The directors of a company had the power to issue the
unissued shares of the company. The company was in no
need of further capital but the directors made a fresh issue
to themselves and their supporters with a view to
maintaining control of the company Held, the allotment
was invalid and void.
Trustees for the company Directors are trustees for the
company and not for third persons who have made
contracts with the company (City Equitable Fire Ins. Co.
Ltd., Re (1925) Ch. 407] or for the individual shareholders.
The leading case on the point is :
Percival v. Wright, (1902 )2 Ch. 421 The directors of a
company bought shares from a shareholder, while they
were negotiating for the sale of the company to another at
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162
a very high price and they did not disclose this fact to the
shareholder. The shareholder sued to have the sale set
aside. Held, the sale was binding, as the directors were
under no obligation to disclose the negotiations to the
shareholder.
Quasi- trustees. Directors are really only quasi trustees because
• They are not vested with ownership of the company’s
property.
• Their functions are not the same as those of trustees.
• Their duties of care are not as onerous as those of
trustees.
To sum up we can say: “Directors have sometimes been called
as trustees or commercial trustees, and sometimes they have
been called managing partners; it does not matter much what
you call them so long as you understand what their real
position is, which is that they are really commercial men
managing a trading concern for the benefit of themselves and
of all the shareholders in it. They stand in a fiduciary position
towards the company in respect of their powers and capital
under their control.”
The remaining directors in the case of any such company, and
the directors generally in the case of a private company which is
not a subsidiary of a public company, must also be appointed
by the company in general meeting, unless otherwise provided
in any regulations in the articles of the company.
There are some important restrictions on the appointment of
director. Let us learn about them.
Restrictions on Appointment or Advertisement of
Director (Sec. 266)
A person shall not be capable of being appointed director of a
company by the articles, unless before the registration of the
articles, the publication of the prospectus, or the filing of the
statement in lieu of prospectus, as the case may be , he has, by
himself or by his agent authorized in writing
(a) Signed and filed with the Registrar a consent in writing to
act as such director; and
(b) Either
i. Signed the memorandum for shares not being less in
number or value than that of his qualification shares,
if any, or
ii. Taken his qualification shares, if any, from the
company and paid or agreed to pay for them; or
iii. Signed and filed with the Registrar and undertaking in
writing to take from the company his qualification
shares, if any, and pay for them; or
iv. Made and filed with the Registrar an affidavit to the
effect that shares, not being less in number or value
than that of his qualification shares, if any, are
registered in his name.
Qualification shares are the minimum number of shares a
person must own, as provided in the articles of the company, in
order to qualify to become a director of the company. A director
must acquire qualification shares within 2 months of his
appointment. The articles cannot require a director to acquire
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qualification shares within a shorter period. The face value of
the qualification shares cannot exceed five thousand rupees, or
if the face value of one share is more than five thousand
rupees, then the qualification share will be one qualification
share.
Every director, not being a technical director of a director
appointed, by the Central or a State Government, shall within
two months after his appointment file with the company a
declaration specifying the qualification shares held by him. If,
after the expiry of the said period of two months, any person
acts as a director of the company when he does not hold the
qualification shares, he shall be punishable with the fine which
may extend to fifty rupees for every day between such expiry and
the last day on which he acted as a director.
The above provisions do not apply to-
a. A company not having a share capital;
b. A private company;
c. A company which was a private company before
becoming a public company; or
d. A prospectus issued by or on behalf of a company
after the expiry of one year from the date on which the
company was entitled to commence business.
Disqualifications of directors (Sec. 274)
A person shall not be capable of being appointed director of a
company, if,
a. He has been found to be of unsound mind by a Court
of competent jurisdiction and the finding is in force
b. He is an undischarged insolvent
c. He has applied to be adjudicated as an insolvent and
his application is pending
d. He has been convicted by a Court of any offence
involving moral turpitude and sentenced in respect
thereof to imprisonment for not less than six months,
and a period of five years has not elapsed from the
date of expiry of the sentence
e. He has not paid any call in respect of shares of the
company held by him, whether alone or jointly with
others, and six months have elapsed from the last day
fixed for the payment of the call
f. An order disqualifying him for appointment as director
has been passed by a court and is in force unless the
leave of the court has been obtained for his
appointment in pursuance of that section.
The Central Government may, by notification in the Official
Gazette, remove :-
i. The disqualification incurred by any person in virtue of
clause (d) either generally or in relation to any company or
companies specified in the notification; or
ii. The disqualification incurred by any person in virtue of
clause (e)
A private company which is not a subsidiary of a public
company may, by its articles, provide that a person shall be
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11.555
disqualified for appointment as a director on any grounds in
LEGAL ASPECTS OF BUSINESS
addition to those specified above.
No Person to be a Director of More than Twenty
Companies
Do you know that no person could, hold office at the same
time as director in more than twenty companies?
Where a person already holding the office of director in twenty
companies is appointed, as a director of any other company, the
appointment: -
a. Shall not take effect unless such person has, within
fifteen days thereof, effectively vacated his office as
director in any of the companies in which he was
already a director; and
b. Shall become void immediately on the expiry of the
fifteen days if he has not, before such expiry effectively
vacated his office as director in any of the other
companies aforesaid.
Where a person already holding the office of director in
nineteen companies or less is appointed, as a director of other
companies, making the total number of his directorships more
than twenty, he shall choose the directorships which he wishes
to continue to hold or to accept so however that the total
number of the directorships, old and new, held by him shall
not exceed twenty.
None of the new appointments of director shall take effect
until such choice, is made; and all the new appointments shall
become void if the choice is not made within fifteen days of the
day on which the last of them was made.
In calculating the number of companies of which a person may
be a director, the following companies shall be excluded: -
a. A private company which is neither a subsidiary nor a
holding company of a public company
b. An unlimited company
c. An association not carrying on business for profit or
which prohibits the payment of dividend
d. A company in which such person is only an alternate
director, that is to say, a director who is only qualified
to act as such during the absence or incapacity of some
other director.
Any person who holds office, or acts, as a director of more than
twenty companies in contravention of the foregoing provisions
shall be punishable with fine which may extend to five thou-
sand rupees in respect of each of those companies after the first
twenty.
Vacation of office by directors
The office of a director shall become vacant if: -
a. He fails to obtain within the time specified ( 2 months)
or at any time thereafter ceases to hold, the share
qualification, if any, required of him by the articles of
the company
b. He is found to be of unsound mind by a Court of
competent jurisdiction
c. He applies to be adjudicated an insolvent
d. He is adjudged an insolvent
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 e. He is convicted by a Court of any offence involving
LEGAL ASPECTS OF BUSINESS
moral turpitude and is sentenced in respect thereof to
imprisonment for not less than six months
f. He fails to pay any call in respect of shares of the
company held by him, whether alone or jointly with
others, with in six months from the last date fixed for
the payment of the call unless the Central Government
has, by notification in the Official Gazette removed
such disqualification.
g. He absents himself from three consecutive meetings
of the Board of directors, or from all meetings of the
Board, for a continuous period of three months,
whichever is longer, without obtaining leave of absence
from the Board
h. He, whether by himself or by any person for his
benefit or on his account or any firm in which he is a
partner or any private company of which he is a
director, accepts a loan, or any guarantee or security for
a loan, from the company in contravention of section
295 ( without due authorization of the Central
Government )
i. He acts in contravention of section 299 ( failure to
disclose interest in any transaction with the company )
j. He becomes disqualified by an order of Court under
section 203
k. He is removed by the members by- resolution at a
general meeting
l. Having been appointed a director by virtue of his
holding any office or other employment in the
company, he ceases to hold such office or other
employment in the company.
The disqualification referred to in clauses (d). (e) and (j) shall
not take effect,-
a. For thirty days from the date of the adjudication
sentence or order
b. where any appeal or petition is preferred within the
thirty days aforesaid against the adjudication, sentence
or conviction resulting in the sentence, or order until
the expiry of seven days from the date on which such
appeal or petition is disposed of
c. where within the seven days aforesaid, any further
appeal or petition is preferred in respect of the
adjudication, sentence, conviction, or order, and the
appeal or petition, if allowed, would result in the
removal of the disqualification, until such further
appeal or petition is disposed of.
If a person functions as a director, knowing that his office has
vacated on account of the above provisions, shall be liable to a
fine upto Rs. 500/- per day of default.
A private company which is not a subsidiary of a public
company may, by its articles, provide, that the office of director
shall be vacated on any grounds in addition to those specified in
above.
If the director fails to function in a proper way, he could be
removed.
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164
Now we will discuss how it is made possible?
Removal of Directors
A company may, by ordinary resolution, remove a director (not
being a director appointed by the Central Government in
pursuance of section 408) before the expiry of his period of
office. This provision shall not apply where the company has
availed itself of the option given to it of proportional represen-
tation on the Board of Directors to appoint not less than
two-thirds of the total number of directors according to the
principle of proportional representation.
Special notice shall be required of any resolution to remove a
director, or to appoint somebody instead of a director so
removed at the meeting at which he is removed.
On receipt of notice of a resolution to remove a director under
this section, the company shall forthwith send a copy thereof to
the director concerned, and the director (whether or not he is a
member of the company) shall be entitled to be heard on the
resolution at the meeting.
Where notice is given of a resolution to remove a director and
the director concerned makes representations in writing to the
company (not exceeding a reasonable length) and requests their
notification to members of the company, the company shall,
unless the representations are received by it too late for it to do
so :-
a. In any notice of the resolution given to members of
the company state the fact of the representations
having been made; and
b. Send a copy of the representations to every member of
the company to whom notice of the meeting is sent
If a copy of the representations is not sent as aforesaid because
they were received too late or because of the company’s default,
the director may (without prejudice to his right to be heard
orally) require that the representations shall be read out at the
meeting.
However, copies of the representations need not be sent out
and the representations need not be read out at the meeting if,
on the application either of the company or of any other
person who claims to be aggrieved, the Company Law Board is
satisfied that the rights conferred by this provision are being
abused to secure needless publicity for defamatory matter and
the Company Law Board may order the company’s costs on the
application to be paid in whole or in part by the director.
A vacancy created by the removal of a director if he had been
appointed by the company in general meeting or by the board
in on a casual vacancy, be filled by the appointment of another
director in his stead by the meeting at which he is removed,
provided special notice of the intended appointment has been
given.
A director so appointed shall hold office until the date up to
which his predecessor would have held office if he had not been
removed as aforesaid.
If the vacancy is not filled, it may be filled as a causal vacancy in
accordance with the provisions.
The above provisions of removal of a director shall not affect :-
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 a. Any compensation or damages payable to him in
respect of the termination of his appointment as
director or of any appointment terminating with that
as director
b. Any other power to remove a director which may exist
apart from this provision.
We will also discuss in brief about the managing director as he
holds very important position in the company.
Managing Director
Managing Director means a person who, by virtue of an
agreement with the company or of a resolution passed by the
company in a general meeting or by its Board of directors or by
virtue of its memorandum or articles of association, is
entrusted with substantial powers of management which could
not otherwise be exercisable by him and includes a director
occupying the position of a managing director, by whatever
name called. The power merely to do administrative acts of a
routine nature, when so authorised by the Board such as the
power to affix the common seal of the company on any
document or to draw and endorse any cheque on the account of
the company in any bank or to draw and endorse any negotiable
instrument or to sign any share certificate or to direct registra-
tion of share transfers will not be deemed to be included within
substantial powers of management. The managing director
must exercise his powers subject to the superintendence, control
and direction of the Board.
Certain Persons not to be Appointed Managing
Directors
No company can, appoint or employ, or continue the appoint-
ment or employment of, any person as its managing or whole
time director who-
a. Is an undischarged insolvent, or has at any time been
adjudged an insolvent
b. Suspends, or has at any time suspended, payment to
his creditors or makes, or has at any time made, a
composition with them
c. Is, or has at any time been, convicted by a Court in
India of an offence involving moral turpitude.
Every public company or a private company which is a subsid-
iary of a public company, having a paid up share capital of Rs. 5
crores or more must have a managing director or wholetime
director or manager.
Appointment of managing director or wholetime director or
manager of a public company or a private company which is a
subsidiary of a public company requires the approval of the
Central Government unless the appointment is in accordance
with the conditions specified in Schedule XIII of the Compa-
nies Act, 1956 and a returm in Form 25 C is filed within 30 days
of appointment.
Application for approval must be made to the Central Govern-
ment if Form 25 A within 90 days of appointment. The
Central Government shall grant its approval if it is satisfied that
a. The managing director or wholetime director or
manager is in its opinion, a fit and proper person
b. Such appointment is not against public interest
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11.555
c. The terms and conditions of the appointment are fair
LEGAL ASPECTS OF BUSINESS
and reasonable.
The Central Government may grant approval for a period less
that the period for which approval is sought.
In case the approval of the Central Government is refused, the
appointed person shall vacate his office on the date of commu-
nication of the decision of the Central Government to the
company and if he omits to do so, he shall be liable to a fine of
Rs. 500/- for each day of default.
The Central Government, on information received by it or suo
moto, is of the opinion that such appointment made without
approval of the Central Government contravenes the condi-
tions given in Schedule XIII, it may refer the matter to the
Company Law Board for decision.
On receipt of the order of the Company Law Board against the
company,:-
a. The company shall be liable to fine of upto Rs. 5000/-
b. Every officer of the company in default shall be liable
to a fine of Rs. 10000/-
c. The appointment shall be deemed to have come to an
end and the appointed person shall in addition to
being liable to pay a fine of Rs. 10000/-, refund to the
company the entire amount of remuneration received
by him from such appointment.
Number of Companies of which one Person may be
Appointed Managing director
No public company or private company which is a subsidiary of
a public company can, appoint or employ any person as
managing director, of he is either the managing director or the
manager of any other company, except as provided below.
A public company or a private company which is the subsidiary
of a public company may appoint or employ a person as its
managing director, if he is the managing director or manager of
one, and of not more than one, other company provided that
such appointment or employment is made or approved by a
unanimous resolution passed at a meeting of the Board and of
which meeting, and of the resolution to be moved thereat,
specific notice has been given to all the directors then in India.
In addition to the above provision, the Central Government
may, by order, permit any person to be appointed as a manag-
ing direct of more than two companies if the Central
Government is satisfied that it is necessary that the companies
should, for their proper working, function as a single unit and
have a common managing director.
Managing Director not to be Appointed for more
than five Years at a Time
No company can, appoint or employ any individual as its
managing director for a term exceeding five years at a time.
However, a person may be re-appointed, re-employed, or his
term of office extended by further periods not exceeding five
years on each occasion. Such re-appointment, re-employment or
extension cannot be sanctioned earlier than two years from the
date on which it is to come into force.
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 This provision does not apply to a private company unless it is
LEGAL ASPECTS OF BUSINESS

a subsidiary of a public company.

Practical Problems
Attempt the following problems, giving reasons
1. A contract between N.W. Ltd. And B. one of its directors is
referred to a general meeting for its approval. At the
meeting, B voted for the resolution and all others against
it. But as B held majority of shares and was entitled to
majority of votes. The resolution was passed. Is the
contract binding on the company?
[Hint. No (sec. 300)].
2. A public limited company has 15 directors, 4 of whom are
not subject to retire by rotation, is it a validly constituted
Board?
[Hint. Yes (sec. 255)].
3. A private company having 2 directors has just become a
public company by virtue of sec. 43 A is it obligatory for
the company to appoint a third director?
[Hint. No (Sec. 252)].
4. The Board of directors of X Ltd. Met only 3 times in the
previous year. A fourth meeting was adjourned twice for
lack of quorum. Does this constitute a violation of sec.
285 of the companies Act,1956?
[Hint. No (Sec. 288)].
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html

Notes:

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166 11.555

LESSON 34:
THE COMPANIES ACT, 1956
MEETINGS AND PROCEEDINGS
Learning Objectives
After reading the lesson, you will be able to know about the:
• The kinds of meeting of a company
• The requisites of a valid meeting of a company
• The kinds of resolutions
• The other important terms related to meeting, viz;
adjournment, postponement, dissolution and
minutes of meeting
Introduction
A company is an association of several persons. Decisions are
made according to the view of the majority. Various matters
have to be discussed and decided upon. These discussions take
place at the various meetings, which take place between mem-
bers and between the directors. Needless to say, the importance
of meetings cannot be under-emphasized in case of companies.
The Companies Act 1956 contains several provisions regarding
meetings. These provisions have to be understood and
followed.
For a meeting, there must be at least 2 persons attending the
meeting. One member cannot constitute a company meeting
even if he holds proxies for other members.
Kinds of Company Meetings
Broadly, meetings in a company are of the following types :-
I Meetings of Members
These are meetings where the members / shareholders of the
company meet and discuss various matters. Member’s meetings
are of the following types :-
Statutory Meeting (Sec 165)
A public company limited by shares or a guarantee company
having share capital is required to hold a statutory meeting. Such
a statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not
less than one month or within a period not more than six
months from the date on which it is entitled to commence
business i.e. it obtains certificate of commencement of
business. In a statutory meeting, the following matters only can
be discussed: -
a. Floatation of shares / debentures by the company
b. Modification to contracts mentioned in the prospectus
The purpose of the meeting is to enable members to know all-
important matters pertaining to the formation of the company
and its initial life history. The matters discussed include which
shares have been taken up, what money has been received, what
contracts have been entered into, what sums have been spent on
preliminary expenses, etc. The members of the company
present at the meeting may discuss any other matter relating to
the formation of the Company or arising out of the statutory
report also, even if no prior notice has been given for such other
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LEGAL ASPECTS OF BUSINESS
discussions but no resolution can be passed of which notice
have not been given in accordance with the provisions of the
Act.
A notice of at least 21 days before the meeting must be given to
members unless consent is accorded to a shorter notice by
members, holding not less than 95% of voting rights in the
company.
A statutory meeting may be adjourned from time to time by
the members present at the meeting.
The Board of Directors must prepare and send to every
member a report called the “Statutory Report” at least 21 days
before the day on which the meeting is to be held. But if all the
members entitled to attend and vote at the meeting agree, the
report could be forwarded later also. The report should be
certified as correct by at least two directors, one of whom must
be the managing director, where there is one, and must also be
certified as correct by the auditors of the company with respect
to the shares allotted by the company, the cash received in
respect of such shares and the receipts and payments of the
company. A certified copy of the report must be sent to the
Registrar for registration immediately after copies have been sent
to the members of the company.
A list of members showing their names, addresses and
occupations together with the number shares held by each
member must be kept in readiness and produced at the
commencement of the meeting and kept open for inspection
during the meeting.
If default is made in complying with the above provisions,
every director or other officer of the company who is in default
shall be punishable with fine upto Rs. 500. The Registrar or a
contributory may file a petition for the winding up of the
company if default is made in delivering the statutory report to
the Registrar or in holding the statutory meeting on or after 14
days after the last date on which the statutory meeting ought to
have been held.
Contents of Statutory Report Must provide the
following Particulars
(a) The total number of shares allotted, distinguishing those
fully or partly paid-up, otherwise than in cash, the extent to
which partly paid shares are paid-up, and in both cases the
consideration for which they were allotted.(b) The total
amount of cash received by the company in respect of all
shares allotted, distinguishing as aforesaid.(c) An abstract
of the receipts and payments upto a date within 7 days of
the date of the report and the balance of cash and bank
accounts in hand, and an account of preliminary
expenses.(d) Any commission or discount paid or to be
paid on the issue or sale of shares or debentures must be
separately shown in the aforesaid abstract.(e) The names,
addresses and occupations of directors, auditors, manager
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 and secretary, if any, of the company and the changes which
LEGAL ASPECTS OF BUSINESS
have taken place in the names, addresses and occupations
of the above since the date of incorporation.(f) Particulars
of any contracts to be submitted to the meeting for
approval and modifications done or proposed.(g) If the
company has entered into any underwriting contracts, the
extent, if any, to which they have not been carried out and
the reasons for the failure.(h) The arrears, if any, due on
calls from every director and from the manager.(i) The
particulars of any commission or brokerage paid or to be
paid, in connection with the issue or sale of shares or
debentures to any director or to the manager.
The auditors have to certify that all information regarding calls
and allotment of shares are correct.
B. Annual General Meeting (Secs. 166 and 167)
It must be held by every type of company, public or private,
limited by shares or by guarantee, with or without share capital
or unlimited company, once a year. Every company must in each
year hold an annual general meeting. Not more than 15 months
must elapse between two annual general meetings. However, a
company may hold its first annual general meeting within 18
months from the date of its incorporation. In such a case, it
need not hold any annual general meeting in the year of its
incorporation as well as in the following year only.
Note the following case:
Sree Meenakshi Mills Co. Ltd. V. Assistant Registrar of
Companies. A.I.R. (1938) Mad 640. The annual general
meeting of a company called in December 1934 was adjourned
and held in march 1935, the next meeting was held in January,
1936, no other meeting being held in 1935. the company
contended that it did hold a meeting in the year 1935. but it was
held by the court that the meeting of march 1935 was the
adjourned meeting of 1934.
In the case there is any difficulty in holding any annual general
meeting (except the first annual meeting), the Registrar may, for
any special reasons shown, grant an extension of time for
holding the meeting by a period not exceeding 3 months
provided the application for the purpose is made before the due
date of the annual general meeting. However, generally delay in
the completion of the audit of the annual accounts of the
company is not treated as “special reason” for granting exten-
sion of time for holding its annual general meeting. Generally,
in such circumstances, an AGM is convened and held at the
proper time . all matters other than the accounts are discussed.
All other resolutions are passed and the meeting is adjourned
to a later date for discussing the final accounts of the company.
However, the adjourned meeting must be held before the last
day of holding the AGM.
A notice of at least 21 days before the meeting must be given to
members unless members, holding not less than 95% of
voting rights in the company, accord consent to a shorter notice.
The notice must state that the meeting is an annual general
meeting. The time, date and place of the meeting must be
mentioned in the notice. The notice of the meeting must be
accompanied by a copy of the annual accounts of the company,
director’s report on the position of the company for the year
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168
and auditor’s report on the accounts. Companies having share
capital should also state in the notice that a member is entitled
to attend and vote at the meeting and is also entitled to appoint
proxies in his absence. A proxy need not be a member of that
company. A proxy form should be enclosed with the notice.
The proxy forms are required to be submitted to the company
at least 48 hours before the meeting.
The AGM must be held on a working day during business
hours at the registered office of the company or at some other
place within the city, town or village in which the registered
office of the company is situated. The Central Government
may, however, exempt any class of companies from the above
provisions. If any day is declared by the Central government to
be a public holiday after the issue of the notice convening such
meeting, such a day will be treated as a working day.
A company may, by appropriate provisions in its articles, fix the
time for its annual general meeting and may also by a resolution
passed in one annual general meeting fix the time for its
subsequent annual general meetings.
Companies licensed under Section 25 are exempt from the
above provisions provided that the time, date and place of each
annual general meeting are decided upon beforehand by the
Board of Directors having regard to the directions, if any, given
in this regard by the company in general meeting.
In case of default in holding an annual general meeting, the
following are the consequences: -
1. Any member of the company may apply to the Company
Law Board. The Company Law Board may call, or direct the
calling of the meeting, and give such ancillary or
consequential directions as it may consider expedient in
relation to the calling, holding and conducting of the
meeting. The Company Law Board may direct that one
member present in person or by proxy shall be deemed to
constitute the meeting. A meeting held in pursuance of
this order will be deemed to be an annual general meeting
of the company. An application by a member of the
company for this purpose must be made to the concerned
Regional Bench of the Company Law Board by way of
petition in Form No. 1 in Annexure II to the CLB
Regulations with a fee of rupees fifty accompanied by (i)
affidavit verifying the petition, (ii) bank draft for payment
of application fee.
2. Fine which may extend to Rs. 5,000 on the company and
every officer of the company who is in default may be
levied and for continuing default, a further fine of Rs. 250
per day during which the default continues may be levied.
Business to be Transacted at Annual General
Meeting
At every AGM, the following matters must be discussed and
decided. Since such matters are discussed at every AGM, they are
known as ordinary business. All other matters and business to
be discussed at the AGM are specila business.
The following matters constitute ordinary business at an AGM
a. Consideration of annual accounts, director’s report and
the auditor’s report
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 b. Declaration of dividend
c. Appointment of directors in the place of those retiring
d. Appointment of and the fixing of the remuneration
of the statutory auditors.
In case any other business ( special business ) has to be
discussed and decided upon, an explanatory statement of the
special business must also accompany the notice calling the
meeting. The notice must should also give the nature and
extent of the interest of the directors or manager in the special
business, as also the extent of the shareholding interest in the
company of every such person. In case approval of any
document has to be done by the members at the meeting, the
notice must also state that the document would be available for
inspection at the Registered Office of the company during the
specified dates and timings.
C. Extraordinary General Meeting( Sec. 169)
Every general meeting (i.e. meeting of members of the
company) other than the statutory meeting and the annual
general meeting or any adjournment thereof, is an extraordinary
general meeting. Such meeting is usually called by the Board of
Directors for some urgent business which cannot wait to be
decided till the next AGM. Every business transacted at such a
meeting is special business. An explanatory statement of the
special business must also accompany the notice calling the
meeting. The notice must should also give the nature and
extent of the interest of the directors or manager in the special
business, as also the extent of the shareholding interest in the
company of every such person. In case approval of any
document has to be done by the members at the meeting, the
notice mus also state that the document would be available for
inspection at the Registered Office of the company during the
specified dates and timings.
The Articles of Association of a Company may contain
provisions for convening an extraordinary general meeting. It
may provide that “the board may, whenever it thinks fit, call an
extraordinary general meeting” or it may provide that “if at any
time there are not within India, directors capable of acting who
are sufficient in number to form a quorum, any director or any
two members of the company may call an extraordinary general
meeting”.
Extraordinary General Meeting on Requisition :
The members of a company have the right to require the calling
of an extraordinary general meeting by the directors. The board
of directors of a company must call an extraordinary general
meeting if required to do so by the following number of
members :-
a. Members of the company holding at the date of
making the demand for an EGM not less than one-
tenth of such of the voting rights in regard to the
matter to be discussed at the meeting ; or
b. if the company has no share capital, the members
representing not less than one-tenth of the total
voting rights at that date in regard to the said matter.
The requisition must state the objects of the meetings and
must be signed by the requisitioning members. The requisition
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must be deposited at the company’s registered office. When the
LEGAL ASPECTS OF BUSINESS
requisition is deposited at the registered office of the company,
the directors should within 21 days, move to call a meeting and
the meeting should be actually be held within 45 days from the
date of the lodgement of the requisition. If the directors fail to
call and hold the meeting as aforesaid, the requisitionists or any
of them meeting the requirements at (a) or (b) above, as the
case may be, may themselves proceed to call meeting within 3
months from the date of the requisition, and claim the
necessary expenses from the company. The company can make
good this sum from the directors in default. At such an EGM,
any business which is not covered by the agenda mentioned in
the notice of the meeting cannot be voted upon.
Power of Company Law Board to Order Calling of
Extraordinary General Meeting :
If for any reason, it is impracticable to call a meeting of a
company, other than an annual general meeting, or to hold or
conduct the meeting of the company, the Company Law Board
may, either i) on its own motion, or ii) on the application of
any director of the company, or of any member of the com-
pany, who would be entitled to vote at the meeting, order a
meeting to be called and conducted as the Company Law Board
thinks fit, and may also give such other ancillary and consequen-
tial directions as it thinks fit expedient. A meeting so called and
conducted shall be deemed to be a meeting of the company
duly called and conducted.
Procedure for Application under Section 186 :
An application by a director or a member of a company for this
purpose is required to be made to the Regional Bench of the
Company Law Board before whom the petition is to be made
in Form No 1 specified in Annexure II to the CLB Regulations
with a fee of Rs200. The petition must e accompanied with the
following documents -
a. Evidence in proof of status of the applicant.
b. Affidavit verifying the petition.
c. Bank draft evidencing payment of application fee.
d. Memorandum of appearance with copy of the Board’s
resolution or executed vakalat nama, as the case may be.
D. Class Meeting
Class meetings are meetings which are held by holders of a
particular class of shares, e.g., preference shareholders. Such
meetings are normally called when it is proposed to vary the
rights of that particular class of shares. At such meetings, these
members dicuss the pros and cons of the proposal and vote
accordingly. (See provisions on variations of shareholder’s
rights). Class meetings are held to pass resolution which will
bind only the members of the class concerned, and only
members of that class can attend and vote.
Unless the articles of the company or a contract binding on the
persons concerned otherwise provides, all provisions pertaining
to calling of a general meeting and its conduct apply to class
meetings in like manner as they apply with respect to general
meetings of the company.
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 II. Meetings of the Board of Directors
LEGAL ASPECTS OF BUSINESS
- Meeting of the Board of Directors
- Meeting of a Committee of the Board
III. Other Meetings
A. Meeting of debenture holders
A company issuing debentures may provide for the holding of
meetings of the debentureholders. At such meetings, generally
nmmatters pertaining to the variation in terms of security or to
alteration of their rights are discussed. All matters connected
with the holding, conduct and proceedings of the meetings of
the debentureholders are normally specified in the Debenture
Trust Deed. The decisions at the meeting made by the pre-
scribed majority are valid and lawful and binding upon the
minority.
B. Meeting of Creditors
Sometimes, a company, either as a running concern or in the
event of winding up, has to make certain arrangements with its
creditors. Meetings of creditors may be called for this purpose.
Eg U/s 393, a company may enter into arrangements with
creditors with the sanction of the Court for reconstruction or
any arrangement with its creditors. The court, on application,
may order the holding of a creditors’ s meeting. If the scheme
of arrangement is agreed to by majority in number of holding
debts to value of the three-fourth of the total value of the
debts, the court may sanction the scheme. A certified copy of
the court’s order is then filed with the Registrar and it is binding
on all the creditors and the company only after it is filed with
Registrar.
Similarly, in case of winding up of a company, a meeting of
creditors and of contributories is held to ascertain the total
amount due by the company and also to appoint a liquidator to
wind up the affairs of the company.
Requisites of a Valid Meetings
It is necessary for you to understand that the following
conditions must be satisfied for a meeting to be called a valid
meeting: -
1. It must be properly convened. The persons calling the
meeting must be authorized to do so.
2. Proper and adequate notice must have been given to all
those entitled to attend.
3. The meeting must be legally constituted. There must
be a chairperson. The rules of quorum must be
maintained and the provisions of the Companies Act,
1956 and the articles must be complied with.
4. The business at the meeting must be validly transacted.
The meeting must be conducted in accordance with the
regulations governing the meetings.
Notice of General Meeting
You must know that a meeting cannot be held unless a proper
notice has been given to all persons entitled to attend the
meeting at the proper time, containing the necessary informa-
tion. A notice convening a general meeting must be given at
least 21 clear days prior to the date of meeting. However, an
annual general meeting may be called and held with a shorter
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notice, if it is consented to by all the members entitled to vote
at the meeting. In respect of any other meeting, it may be called
and held with a shorter notice, if at least members holding 95
percent of the total voting power of the Company consent to a
shorter notice.
Notice of every meeting of company must be sent to all
members entitled to attend and vote at the meeting. Notice of
the AGM must be given to the statutory auditor of the
company.
Accidental omission to give notice to, or the non-receipt of
notice by, any member or any other person on whom it should
be given will not invalidate the proceedings of the meeting. The
notice may be given to any member either personally or by
sending it by post to him at his registered address, or if there is
none in India, to any address within India supplied by him for
the purpose. Where notice is sent by post, properly addressing,
pre-paying and posting the notice affect service. A notice may be
given to joint holders by giving it to the joint holder first
named in the register of members. A notice of meeting may
also be given by advertising the same in a newspaper circulating
in the neighborhood of the registered office of the company
and it shall be deemed to be served on every member who has
to registered address in India for the giving of notices to him.
A notice calling a meeting must state the place, day and hour of
the meeting and must contain the agenda of the meeting. If the
meeting is a statutory or annual general meeting, notice must
describe it as such. Where any items of special business are to be
transacted at the meeting, an explanatory statement setting out
all materials facts concerning each item of the special business
including the concern or interest, if any, therein of every director
and manager, is any, must be annexed to the notice. If it is
intended to propose any resolution as a special resolution, such
intention should be specified.
A notice convening an AGM must be accompanied by the
annual accounts of the company, the director’s report and the
auditor’s report. The copies of these documents could,
however, be sent less than 21 days before of the date of the
meeting if agreed to by all members entitled to vote at the
meeting.
You must have heard about proxy. Let us learn what we mean
by it in respect of a company.
Proxy
In case of a company having a share capital and in the case of
any other company, if the articles so authorize, any member of
a company entitled to attend and vote at a meeting of the
company shall be entitled to appoint another person (whether a
member or not) as his proxy to attend and vote instead of
himself. Every notice calling a meeting of the company must
contain a statement that a member entitled to attend and vote is
entitled to appoint one proxy in the case of a private company
and one or more proxies in the case of a public company and
that the proxy need not be member of the company.
A member may appoint another person to attend and vote at a
meeting on his behalf. Such other person is known as “Proxy”.
A member may appoint one or more proxies to vote in respect
of the different shares held by him, or he may appoint one or
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more proxies in the alternative, so that if the first named proxy
fails to vote, the second one may do so, and so on.
The member appointing a proxy must deposit with the
company a proxy form at the time of the meeting or prior to it
giving details of the proxy appointed. However, any provision
in the articles which requires a period longer than forty eight
hours before the meeting for depositing with the company any
proxy form appointing a proxy, shall have the effect as if a
period of 48 hours had been specified in such provision.
A company cannot issue an invitation at its expense asking any
member to appoint a particular person as proxy. If the com-
pany does so, every officer in default shall be liable to fine up to
Rs1,000. But if a proxy form is sent at the request of a mem-
ber, the officer shall not be liable. Every member entitled to
vote at a meeting of the company, during the period beginning
24 hours before the date fixed for the meeting and ending with
the conclusion of the meeting may inspect proxy forms at any
time during business hours by giving 3 days notice to the
company of his intention to do so.
The proxy- form must be in writing and be signed by the
member or his authorised attorney duly authorised in writing
or if the appointer is a company, the proxy form must be under
its seal or be signed by an officer or an attorney duly authorised
by it.
The proxy can be revoked by the member at any time, and is
automatically revoked by the death or insolvency of the
member. The member may revoke the proxy by voting himself
before the proxy has voted, but once the proxy has exercised the
vote, the member cannot retract his vote. Where two proxy
forms by the same shareholder are lodged in respect of the
same votes, the last proxy form will be treated as the correct
proxy form.
A proxy is not entitled to vote except on a poll. Therefore, a
proxy cannot vote on show of hands.
Another requirement is in respect of a Quorum
Quorum
Quorum refers to the minimum number of members who
must be present at a meeting in order to constitute a valid
meeting. A meeting without the minimum quorum is invalid
and decisions taken at such a meeting are not binding. The
articles of a company may provide for a quorum without which
a meeting will be construed to be invalid. Unless the articles of a
company provide for larger quorum, 5 members personally
present (not by proxy) in the case of a public company and 2
members personally present (not by proxy) in the case of a
private company shall be the quorum for a general meeting of a
company.
It has been held by Courts that unless the articles otherwise
provide, a quorum need to be present only when the meeting
commenced, and it was immaterial that there was no quorum at
the time when the vote was taken. Further, unless the articles
otherwise provide, if within half an hour from the time
appointed for holding a meeting of the company, a quorum is
not present in the person, the meeting: -
a. If called upon the requisition of members, shall stand
dissolved;
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b. In any other case, it shall stand adjourned to the same
LEGAL ASPECTS OF BUSINESS
day in the next week, at the same time and place, or to
such other day and time as the Board of Directors may
determine.
If at the adjourned meeting also, the quorum is not present
within half an hour from the time appointed for holding the
meeting, the members present shall a quorum.
In case the Company Law Board calls or directs the calling of a
meeting of the company, when default is made in holding an
annual general meeting, the government may give directions
regarding the quorum including a direction that even one
member of the company present in person, or by proxy shall be
deemed to constitute a meeting. Similarly the Company Law
Board may, direct a meeting of the company (other than an
annual general meeting) to be called and held where for any
reason it is impracticable to call a meeting and direct that even
one member present in person or by proxy shall be deemed to
constitute a meeting.
No meeting can be valid unless it has a chairperson to preside in
the meeting.
Chairman
The chairman is the head of the meeting. Generally, the
chairman of the Board of Directors is the Chairman of the
meeting. Unless the articles otherwise provide, the members
present in person at the meeting elect one of themselves to be
the chairman thereof on a show of the hands. If there is no
Chairman or he is not present within 15 minutes after the
appointed time of the meeting or is unwilling to act as
chairman of the meeting, the directors present may elect one
among themselves to be the chairman of the meeting. If,
however no director is willing to act as chairman or if no
director is present within 15 minutes after the appointed time
of the meeting, the members present should choose one
among themselves to be chairman of the meeting. If, after the
election of a chairman on a show of hands, poll is demanded
and taken and a different person is elected as chairman, then
that person will be the chairman for the rest of the meeting.
Duties of the Chairman
Without a chairman, a meeting is incomplete. The chairman is
the regulator of the meeting. His duties include the following :-
1. He must ensure that the meeting is properly convened
and constituted i.e. that proper notice has been given,
that the required quorum is present, etc.
2. He must ensure that the provisions of the act and the
articles in regard to the meeting and its procedures are
observed.
3. He must ensure that business is taken in the order set
out in agenda and no business, which is not
mentioned in the agenda, is taken up unless agreed to
by the members.
4. He must impartially regulate the proceedings of the
meeting and maintain discipline at the meeting.
5. He may exercise his powers of adjournment of the
meeting, should he in good faith feel that such a step is
necessary. The chairman has the power to adjourn the
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 meeting in case of indiscipline at the meeting. A chairman
LEGAL ASPECTS OF BUSINESS
however does not have the power to stop or adjourn the
meeting at his own will and pleasure. If he adjourns the
meeting prematurely, the members present may decide to
continue the meeting and elect another chairman and
proceed with the business for which it was convened.
6. He must exercise his power to order a poll correctly and
must order it to be taken when demanded properly.
7. He must exercise his casting vote bonafide in the
interest of the company.
Motion
Motion means a proposal to be discussed at a meeting by the
members. A resolution may be passed accepting the motion,
with or without modifications or a motion may be entirely
rejected. A motion, on being passed, as a resolution becomes a
decision. A motion must be in writing and signed by the mover
and put to the vote of the meeting by the chairman. Only those
motions, which are mentioned in the agenda to the meeting,
can be discussed at the meeting. However, motions incidental or
ancillary to the matter under discussion may be moved and
passed. Generally, a motion is proposed by one member and
seconded by another member.
The motions proposed in a general meeting of a company are
decided on the votes of the members of the company.
The Voting may be:
• Voting by a show of hands
• Voting by poll
Voting by a show of hands (Secs . 177 and 178). At any general
meeting, motions put to vote are in the first instance decided by
a show of hands, unless a poll is demanded (sec. 177) in taking
a vote by show of hands. The duty of the chairman is to count
the hands raised and to declare the result accordingly, without
regard to the number of votes that a member raising the hand
possesses. Proxies cannot be used on a show of hands [Earnest
v. Loma Gold Mines. (1906) 2 Ch. 572.]
Voting and Demand for Poll (Sec. 179)
Generally, initially matters are decided at a general meeting by a
show of hands. If the majority of the hands raise their hands
in favor of a particular resolution, then unless a poll is de-
manded, it is taken as passed. Voting by a show of hands
operates on the principle of “One Member-One Vote”.
However, since the fundamental voting principle in a company
is “One Share-One Vote”, if a poll is demanded, voting takes
place by a poll. Before or on declaration of the result of the
voting on any resolution on a show of hands, the chairman
may order suo motu (of his own motion) that a poll be taken.
However, when a demand for poll is made, he must order the
poll be taken. The chairman may order a poll when a resolution
proposed by the Board is lost on the show of hands or if he is
of the opinion that the decision taken on the show of hands is
likely to be reversed by poll. When a poll is taken, The decision
arrived by poll is final and the decision on the show of hands
has no effect.
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A poll is allowed only if the prescribed number of members
demand a poll. A poll must be ordered by the chairman if it is
demanded:-
a. In the case of a public company having a share capital,
by any member or members present in person or by
proxy and holding shares in the company-
i. Which confer a power to vote on the resolution not
being less than one-tenth of the total voting power in
respect of the resolution, or
ii. on which an aggregate sum of not less than fifty
thousand rupees has been paid up.
b. In the case of a private company having a share capital, by
one member having the right to vote on the resolution and
present in person or by proxy if not more than seven such
members are personally present, and by two such members
present in person or by proxy, if more than seven such
members are personally present.
c. In the case of any other, by any member or members
present in person or by proxy and having not less than
one-tenth of the total voting power in respect of the
resolution.
Now we are going to discuss about resolutions.
Resolutions
Resolutions mean decisions taken at a meeting. A motion, with
or without amendments is put to vote at a meeting. Once the
motion is passed, it becomes a resolution. A valid resolution
can be passed at a properly convened meeting with the required
quorum. There are broadly three types of resolutions: -
1. Ordinary Resolution [Sec. 189(1)]
An ordinary resolution is one which can be passed by a simple
majority. I.e. if the votes (including the casting vote, if any, of
the chairman), at a general meeting cast by members entitled to
vote in its favour are more than votes cast against it. Voting may
be by way of a show of hands or by a poll provided 21 days
notice has been given for the meeting.
2. Special Resolution [Sec. 189(2)]
A special resolution is one in regard to which is passed by a 75
% majority only i.e. the number of votes cast in favour of the
resolution is at least three times the number of votes cast
against it, either by a show of hands or on a poll in person or
by proxy. The intention to propose a resolution as a special
resolution must be specifically mentioned in the notice of the
general meeting. Special resolutions are needed to decide on
important matters of the company. Examples where special
resolutions are required are :-
a. To alter the domicile clause of the memorandum from
one State to another or to alter the objects clause of the
memorandum.
b. To alter / change the name of the company with the
approval of the central government
c. To alter the articles of association
d. To change the name of the company by omitting
“Limited” or “Private Limited”. The Central
Government may allow a company with charitable
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 objects to do so by special resolution under section 25 of
the Companies Act, 1956.
3. Resolution Requiring Special Notice [Sec. 190]
There are certain matters specified in the Companies Act, 1956
which may be discussed at a general meeting only if a special
notice is given regarding the proposal to discuss these matters at
a meeting. A special notice enables the members to be prepared
on the matter to be discussed and gives them time to indicate
their views on the resolution. In case special notice of resolu-
tion is required by the Companies Act, 1956 or by the articles of
a company, the intention to propose such a resolution must be
notified to the company at least 14 days before the meeting. The
company must within 7 days before the meeting give the notice
of the proposed resolution to its members. Notice of the
resolution is required to be given in the same way in which
notice of a meeting is given, or if that is not practicable, the
company may give notice by advertisement in a newspaper
having an appropriate circulation or in any other manner
allowed by the articles, not less 7 days before the meeting.
The following matters requiring Special Notice before they are
discussed before tha meeting :-
a. To appoint at an annual general meeting appointing an
auditor a person other than a retiring auditor.
b. To resolve at an annual general meeting that a retiring
auditor shall not be reappointed.
c. To remove a director before the expiry of his period of
office.
d. To appoint another director in place of removed
director.
e. Where the articles of a company provide for the giving
of a special notice for a resolution, in respect of any
specified matter or matters.
Please note that a resolution requiring special notice may be
passed either as an ordinary resolution (Simple majority) or as a
special resolution (75 % majority).
Circulation of Member’s Resolution
Generally, the Board of Directors prepare the agenda of the
meeting to be sent to all members of the meeting. A member,
by himself has very little say in deciding the agenda. However,
there are provisions in the Companies Act which enable
members to introduce motions at a meeting and give prior
notice of their intention to do so to all other members of the
company. If members having one twentieth of the total voting
rights of all members having the right to vote on a resolution
or if 100 members having the right to vote and holding paid-
up capital of Rs1,00,000 or more, require the company to do so,
the company must :-
1. Give to the members entitled to receive notice of the
next annual general meeting, notice of any resolution
which may be properly moved and is intended to be
moved at that meeting; and
2. Circulate to members entitled to have notice of any
general meeting sent to them, any statement of not
more than 1,000 words with respect to the matter
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referred to in any proposed resolution, or any business
LEGAL ASPECTS OF BUSINESS
to be dealt with at that meeting.
The expenses for this purpose must be borne by the
requisitionists and must be tendered to the company. The
requisition, signed by all the requisitionists, must be deposited
at the registered office of the company at least 6 weeks before
the meeting in the case of resolution and not less than 2 weeks
before the meeting in case of any other requisition together
with a reasonable sum to meet the expenses. However, where a
copy of the requisition requiring notice of resolution has been
deposited at the registered office of the company and an annual
general meeting is called for a date six weeks or less after the
requisition is deposited, the copy though not deposited within
the prescribed time is deemed to have been properly deposited.
The company is required to serve the notice of resolution and/
or the statement to the members as far as possible in the
manner and so far as practicable at the same time as the notice
of the meeting ; otherwise as soon as practicable thereafter.
However, a company need not circulate a statement if the
Court, on the application either of the company or any other
aggrieved person, is satisfied that the rights so conferred are
being abused to secure needless publicity or for defamatory
purposes. Secondly a banking company need not circulate such
statement, if in the opinion of its Board of directors, the
circulation will injure the interest of the company.
It is required to register the resolutions and agreements.
Registration of Resolutions and Agreements
A copy of each of the following resolutions along with the
explanatory statement in case of a special business and agree-
ments must, within 30 days after the passing or making thereof,
be printed or typewritten and duly certified under the signature
of an officer of the company and filed with the Registrar of
Companies who shall record the same :-
1. All special resolutions
2. All resolutions which have been unanimously agreed
to by all the members but which, if not so agreed,
would not have been effective unless passed as special
resolutions
3. All resolutions of the board of directors of a company
or agreement executed by a company, relating to the
appointment, re-appointment or renewal of the
appointment, or variation of the terms of
appointment, of a managing director
4. All resolutions or agreements which have been agreed
to by all members of any class of members but which,
if not so agreed, would not have been effective unless
passed by a particular majority or in a particular manner
and all resolutions or agreements which effectively bind
all members of any class of shareholders though not
agreed to by all of those members
5. All resolutions passed by a company conferring power
upon its directors to sell or dispose of the whole or
any part of the company’s undertaking; or to borrow
money beyond the limit of the paid-up share capital
and free reserves of the company; or to contribute to
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 charities beyond Rs50000 or 5 per cent of the average
LEGAL ASPECTS OF BUSINESS
net profits
6. All resolutions approving the appointment of sole
selling agents of the company
7. All copies of the terms and conditions of
appointment of a sole selling agent or sole buying or
purchasing agent
8. Resolutions for voluntary winding up of a company
We will know discuss some important terms related to
meetings of company in brief.
Adjournment
Adjournment means suspending the proceedings of a meeting
for the time being so that the meeting may be continued at a
later date and time fixed in that meeting itself at the time of
such adjournment or to decided later on. Only the business not
finished at the original meeting can be transacted at the ad-
journed meeting.
The majority of members at a meeting may move an adjourn-
ment motion at a meeting. If the chairman adjourns the
meeting, ignoring the views of the majority, the remaining
members can continue the meeting. The chairman cannot
adjourn the meeting at his own discretion without there being a
good cause for such an adjournment. Where the chairman,
acting bona fide within his powers, adjourns the meeting as per
the view of the majority, the minority members cannot to
continue with such meeting and, if they do the proceedings
there will be null and void.
An adjourned meeting is merely the continuation of the
original meeting and therefore, a fresh notice is not necessary, if
the time, date and place for holding the adjourned meeting are
decided and declared at the time of adjourning it. If a meeting
is adjourned without stipulation as to when it will be contin-
ued, fresh notice of the adjourned meeting must be given.
Postponement
Postponement of a meeting means deferring the holding of
the meeting itself at a later date. Postponement is done by the
Board of Directors or by the person convening the meeting. In
case of adjournment, it is the decision of the majority of the
members present at the meeting itself.
Dissolution
Dissolution of a meeting means termination of a meeting. The
meeting no longer exists once it has been dissolved. If within
half an hour after the time appointed for holding a general
meeting; the quorum is not present, the meeting shall stand
dissolved if it was called on requisition by members.
Minutes of Proceedings of Meetings
Every company must keep minutes of the proceedings of
general meetings and of the meetings of board of directors and
its committees. The minutes are a record of the discussions
made at the meeting and the final decisions taken thereat.
Every company must keep minutes containing details of all
proceedings at the meetings. The pages of the minute books
must be consecutively numbered and the minutes must be
recorded therein within 30 days of the meeting. They have to be
written directly on the numbered pages. Pasting or attaching of
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papers is not allowed. Each page of every such minutes books
must be initialed or signed and last page of the record of
proceedings of each meeting in such books must be dated and
signed by :-
a. In the case of the meeting of the Board of directors or
committee thereof, by the chairman of that meeting or
that of the succeeding meeting, and
b. In the case of a general meeting, by the chairman of
the same meeting within the aforesaid 30 days or in the
event of the death or inability of that chairman within
the period, by a director duly authorised by the Board
of directors for the purpose.
The Company Law Board, however, may not object if minutes
are maintained in loose-leaf form provided all other procedural
requirements are complied with and all possible safeguards
against manipulation or interpolation of the minutes are
ensured. The loose leaves must be bound at reasonable
intervals. Entering the minutes in a bound minute book by a
chemical process, which does not amount to attachment to any
book by pasting or otherwise is permissible provided on the
mechanical impression of the minutes, the original signatures
of the Chairman are given on each page. All appointments of
officers made at any of the meetings must be included in the
minutes of the meeting. In the case of a meeting of the Board
of directors or its Committee, the minutes must also state the
names of directors present at the meeting and the names of
directors, if any, dissenting from, or not concurring with a
resolution passed at the meeting.
The chairman may exclude from the minutes any matters which
are defamatory, irrelevant or immaterial or which are detrimental
to the interests of the company. The discretion of the Chair-
man with regard to the inclusion or exclusion of any matter is
absolute and unfettered.
Where minutes of the proceedings of any meeting have been
kept properly, they are, unless the contrary is proved, presumed
to be correct, and are valid evidence that the meeting was duly
called and held, and all proceedings thereat have actually taken
place, and in particular, all appointments of directors or
liquidators made at the meeting shall be deemed to be valid.
The minute books of the proceedings of general meetings
must be kept the registered office of the company. Any member
has a right to inspect, free of cost during business hours at the
registered office of the company, the minutes books containing
the proceedings of the general meetings of the company.
Further, any member shall be entitled to be furnished, within 7
days after he has made a request to the company, with a copy of
any minutes on payment of Rupee One for every hundred
words or fraction thereof. If any inspection is refused or copy
not furnished within the time specified, every officer in default
shall be punishable with fine up to Rs. 500 for each offence. The
Company Law Board may also by order compel an immediate
inspection or furnishing of a copy forthwith. But the minutes
books of the board meetings are not open for inspection of
members.
Practical Problems
Attempt the following problems, giving reasons
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1. At a meeting of a company, only 15 shareholders were

LEGAL ASPECTS OF BUSINESS

present. 9 voted for a special resolution and 2 against and 4
did not vote at all. No poll was demanded and the
chairman declared the resolution to be carried. Is this a
valid resolution?
[Hint. Yes (Sec. 189)]
2. S, a shareholder. After appointing P as his proxy at a
meeting of the company. He himself attended the meeting
and voted on a particular resolution. P, thereafter, claimed
to exercise his vote. Examine his claim.
[Hint. His claim is invalid (Cousins v. International Brick
Co. Ltd.)].
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html

Notes:

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11.555 175
LEGAL ASPECTS OF BUSINESS
LESSON 35:
THE COMPANIES ACT, 1956
THE WINDING UP OF A COMPANY
MODES OF WINDING UP OF A COMPANY
Learning Objectives
After reading the lesson, you will be able to know about the:
• The meaning of winding up of a company
• The modes of winding up of a company
• The petition for winding up of a company
• The commencement of winding up of a company
• ·The powers of a tribunal/ liquidator in the winding
up of a company
Introduction
A company comes into existence by a legal process and when for
any reason, it is desired to end its existence; it must go through
the legal process of winding up of its affairs. Winding up or
liquidation is the process by which the management of a
company’s affairs is taken out of its director’s hands, its assets
are realized by a liquidator, and its debts are paid out of the
proceeds of realization. If any balance remains in the hands of
the liquidator, it is divided among the members of the
company in accordance with their rights under the articles.
However, you must understand that winding up and dissolu-
tion of the company are not one and the same thing. A
company is said to be dissolved when it ceases to exist as a
corporate body. Winding up precedes dissolution. It is the
process by which the dissolution of the company is brought
about. Let us learn about the modes of winding up.
Modes of Winding Up
(1) The winding up of a company may be either-
(a) By the Court; or
(b) Voluntary; or
(c) Subject to the supervision of the Court.
(2) The provisions of this Act with respect to winding up
apply, unless the contrary appears, to the winding up of a
company in any of those modes.
Winding up By The Court
Section 433 lays down that the Court in the following case may
wind up a company:
1. If the company has passed a special resolution of it’s being
wound up by the Court. It may be mentioned here that
without such act cannot be done by the directors
themselves. It can be done only if a resolution to this effect
has passed at a general meeting of the company. The
members can however ratify the act of directors already
done.
2. If the company makes default in delivering the statutory
report to the Registrar or in holding the Statutory Meeting.
A petition under this ground can be made either by the
Registrar with the previous approval of the Central
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176
Government or by a contributory or after 14 days after the
last day on which the statutory meeting should have been
held.
3. It does not commence business within one year from its
incorporation or it suspends business for a whole year.
4. The number of its members falls before the minimum
required i.e. 2 in case of a private company and 7 in case of
a public company.
5. It is unable to pay its debts.
6. If the Court of opinion that it is just and equitable that
the company should be wound up.
Let us now understand when the Company would be deemed
to be unable to pay its debts and what do we mean by just and
equitable cause?.
A Company shall be Deemed to be unable to Pay its
Debts (Section 434)
(a) If a creditor, by assignment or otherwise, to whom the
company is indebted in a sum exceeding five hundred
rupees then due, has served on the company, by causing it
to be delivered at its registered office, by registered post or
otherwise, a demand under his hand requiring the
company to pay the sum so due and the company has for
three weeks thereafter neglected to pay the sum, or to
secure or compound for it to the reasonable satisfaction of
the creditor;
(b) If execution or other process issued on a decree or order of
any Court in favour of a creditor of the company is
returned unsatisfied in whole or in part; or
(c) If it is proved to the satisfaction of the Court that the
company is unable to pay its debts, and, in determining
whether a company is unable to pay its debts, the Court
shall take into account the
contingent and prospective liabilities of the company.
(2) The demand referred to in clause (a) of sub-section (1)
shall be deemed to have been duly given under the hand of
the creditor if it is signed by any agent or legal adviser duly
authorized on his behalf, or in the case of a firm, if it is
signed by any such agent or legal adviser or by any member
of the firm.
What is ‘just and Equitable’ Clause ?
It depends upon the facts of each case. The tribunal may order
winding up under the just and equitable clause in the following
cases.
(1) When the substratum of a company is gone. The
substratum of a company can be said to have
disappeared only when the object for which it was
incorporated has substantially failed, or when it is
impossible to carry on the business of the company
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 except at a loss, or the existing and possible assets are
insufficient to meet the existing liabilities.
The substratum of a company disappears :
(i) When the very basis for the survival of the company is
gone
Pirie v. Stewart, (1904) 6 F 847 A shipping company lost it’s
only ship, the remaining asset being a paltry sum of $ 363. A
majority in number and value of shareholders petitioned for its
compulsory winding up but a minority shareholder opposed
this and desired to carry on the business as chatterer. Held it was
just and equitable that the company should be wound up.
(ii) When the main object of the company has
substantially failed or become impracticable. Where a
company’s main object fails, its substratum is gone
and it may be wound up even though it is carrying on
its business in pursuit of a subsidiary objects.
German Date Coffee Co., Re. (1882) 20 Ch. D. 169.
In this case, the objects clause of the German Date Coffee
Co. stated that it was for making a partial substitute for
coffee from dates and for the acquisition of inventions
incidental there to and also other inventions for similar
purposes. The German patent was never granted but the
company did acquire and work a Swedish patent and carried
on business at Hamburg where a substitute coffee was
made from dates, but not under the protection of a patent.
Held, on a petition by 2 shareholders, that the main object
could not be achieved and. Therefore, it was just and
equitable that the company should be wound up.
(iii) When the company is carrying on its business at a loss
and there is no reasonable hope that the object of
trading at a profit can be attained. However, where the
majority shareholders are against it, the tribunal will
not order a company to be wound up merely because it
is making a loss.
(iv) When the existing and probable assets of the
company are insufficient to meet its existing liabilities.
Where a company is totally unable to pay off creditors
and there is ever- increasing burden of interest and
deteriorating state of management and control of
business owing to sharp differences between
shareholders. The tribunal will order winding up.
(2) When the management is carried on in such a way that the
minority is disregarded or oppressed Oppression of
minority shareholders will be a just and equitable ground
where those who control the company abuse their power
to such an extent as to seriously prejudice the interest of
minority shareholders.
(3) Where there s a deadlock in the management of the
company. When shareholding is more or less equal and
there is a case of complete deadlock in the company on
account of lack of probity in the management of the
company and there is no hope or possibility of smooth
and efficient continuance of the company as a commercial
concern, there may arise a case fro winding up ion the just
and equitable ground.
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Yenidje Tobacco co. Ltd. Re (1916) 2 Ch. 426. A and B were
LEGAL ASPECTS OF BUSINESS
the only shareholders and directors of a company with
equal right of management and voting power. After a time
they become bitterly hostile to each other and disagreed
about the appointment of important servant s of the
company. All communications between them were made
through the secretary as they were not on speaking terms
with each other. The company made large profits in spite
of the disagreement. Held there was a complete deadlock in
the management and the company was ordered to be
wound up.
(4) Where public interest is likely to be prejudiced. Having
regard to the provisions of Secs. 397 and 398 (dealing with
prevention of oppression and mismanagement) where the
concept of prejudice to public interest is introduced, it
would appear that the court winding up a company will
have to take into consideration not only the interest of
shareholders and creditors but also public interest in the
shape of need of the community, interest of the
employees, etc.
(5) When the company was formed to carry out fraudulent or
illegal business or when the business of the company
become illegal.
(6) When the company is a mere bubble and does not carry on
any business or does not have any property
[London & County Coal Co; Re (1867) L.R. 3 Eq. 355].
(7) If the company has acted against the interests of the
sovereignty and integrity of India, the security of the state,
friendly relations with foreign states. Public order, decency
or morality.
(8) If the tribunal is of the opinion that the company should
be wound up under the circumstances specified in Sec. 424
The last two clauses in Sec. 333(1) have been added by the
Companies [Amendment] Act.
Petition for Winding up
Section 439 lays down that an application to the Court for the
winding up of a company shall be by petition presented,
subject to the provisions of this section,-
1. The Company
2. Any creditor of the Company
3. Any contributory / shareholder. Contributory means every
person liable to contribute to the assets of a company in
the event of its being wound up and includes holders of
its fully paid shares. While every member of a company
becomes a contributory, not every contributory is a
member. Besides members, any person who ceased to be a
member 1 year prior to the commencement of winding up
is also a contributory.
4. The Registrar may petition for winding up in the following
circumstances: -
(i) If default is made in delivering statutory report or
holding the statutory report.
(ii) If the company does not commence its business
within one year from its incorporation or suspends its
business for a whole year.
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 (iii) If it appears to him either from the financial position
LEGAL ASPECTS OF BUSINESS
of the company as disclosed in the balance sheet of the
company or from the report of a special auditor or an
inspector that the company is unable to pay its debts.
(iv) Where the Registrar is authorized by the Central
Government to petition for winding up the company.
(v) Where the number of members of the company fall
below the statutory minimum.
(vi) Where it is just and equitable that the company be
wound up.
5. Any person authorized by the Central Government. Under
section 243, if any report of an inspector appointed to
investigate the affairs of the company discloses: -
(i) That the business of the company is being conducted
to defraud its creditors or members or for a fraudulent
or unlawful purpose
(ii) That the persons concerned in the formation or
management have been guilty of fraud, misfeasance,
and it appears to the Central Government from such
report so to do, then the Central Government may
authorize any person including the Registrar to petition
for winding up the company on the ground that it is
just and equitable to do so.
6. The Official Liquidator attached to a Court where a
company is already being voluntarily wound up and such
voluntary winding up cannot be continued with due regard
to the interests of the creditors or contributors or both.
Please note that
• A secured creditor, the holder of any debentures
(including debenture stock), whether or not any trustee
or trustees have been appointed in respect of such and
other like debentures, and the trustee for the holders
of debentures, shall be deemed to be creditors within
the meaning of clause (b) of sub-section (1).
• A contributory shall be entitled to present a petition
for winding up a company, notwithstanding that he
may be the holder of fully paid-up shares, or that the
company may have no assets at all, or may have no
surplus assets left for distribution among the
shareholders after the satisfaction of its liabilities.
However, a contributory shall not be entitled to present a
petition for winding up a company unless-
(a) Either the number of members is reduced, in the case of a
public company, below seven, and, in the case of a private
company, below two; or
(b) The shares in respect of which he is a contributory, or
some of them, either were originally allotted to him or
have been held by him, and registered in his name, for a
least six months during the eighteen months immediately
before the commencement of the winding up, or have
devolved on him through the death of a former holder.
Except, in the case where he is authorized in pursuance of
clause (f) of sub-section (1), the Registrar shall be entitled to
present a petition for winding up a company only on the
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178
grounds specified in 12[clause (b), (c), (d), (e) and (f)] of section
433:
It is also provided that the Registrar shall not present a petition
on the ground specified in clause (e) aforesaid, unless it appears
to him either from the financial condition of the company as
disclosed in its balance sheet or from the report of 13[a special
auditor appointed under section 233A or an inspector] ap-
pointed under section 235 or 237, that the company is unable to
pay its debts. A registrar shall obtain the previous sanction of
the Central Government for the presentation of the petition on
any of the grounds aforesaid.
The Central Government shall not accord its sanction in
pursuance of the foregoing proviso, unless the company has
first been afforded an opportunity of making its representa-
tions, if any.
Please note that a petition for winding up a company on the
ground specified in clause (b) of section 433 shall not be
presented-
(a) Except by the Registrar or by a contributory; or
(b) Before the expiration of fourteen days after the last day
on which the statutory meeting referred to in clause (b)
aforesaid ought to have been held.
Before a petition for winding up a company presented by a
contingent or prospective creditor is admitted, the leave of the
Court shall be obtained for the admission of the petition and
such leave shall not be granted-
(a) Unless, in the opinion of the Court, there is a prima facie
case for winding up the company; and
(b) Until such security for costs has been given as the Court
thinks reasonable.
Commencement of Winding up
Section 441 lays down that where, before the presentation of a
petition for the winding up of a company by the Court, a
resolution has been passed by the company for voluntary
winding up, the winding up of the company shall be deemed
to have commenced at the time of the passing of the resolu-
tion, and unless the Court, on proof of fraud or mistake,
thinks fit to direct otherwise, all proceedings taken in the
voluntary winding up shall be deemed to have been validity
taken.
In any other case, the winding up of a company by the Court
shall be deemed to commence at the time of the presentation
of the petition for the winding up.
Statement of affairs to be made to Official
Liquidator.
It is very important document to be prepared by the company.
Section 454 requires that where the Court has made a winding
up order or appointed the Official Liquidator as provisional
liquidator, unless the Court in its discretion otherwise orders,
there shall be made out and submitted to the Official Liquida-
tor a statement as to the affairs of the company in the
prescribed form, verified by an affidavit, and containing the
following particulars, namely
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(a) The assets of the company, stating separately the cash
balance in hand and at the bank, if any, and the negotiable
securities, if any, held by the company;
(b) Its debts and liabilities;
(c) The names, residences and occupations of its creditors,
stating separately the amount of secured and unsecured
debts; and in the case of secured debts, particulars of the
securities given, whether by the company or an officer
thereof, their value and the dates on which they were given;
(d) The debts due to the company and the names, residences
and occupations of the persons from whom they are due
and the amount likely to be realised on account thereof;
(e) Such further or other information as may be prescribed, or
as the Official Liquidator may require.
The statement shall be submitted and verified by one or more
of the persons who are at the relevant date the directors and by
the person who is at that date the manager, secretary or other
chief officer of the company, or by such of the persons
hereinafter in this sub-section mentioned, as the Official
Liquidator, subject to the direction of the Court, may require to
submit and verify the statement, that is to say, persons-
(a) Who are or have been officers of the company;
(b) Who have taken part in the formation of the company at
any time within one year before the relevant date;
(c) Who are in the employment of the company, or have been
in the employment of the company within the said year,
and are, in the opinion of the Official Liquidator, capable
of giving the information required;
(d) Who are or have been within the said year officers of, or in
the employment of, a company which is, or within the said
year was, an officer of the company to which the statement
relates.
The statement shall be submitted within twenty-one days from
the relevant date, or within such extended time not exceeding
three months from that date as the Official Liquidator or the
Court may, for special reasons, appoint.
Any person making, or concurring in making, the statement
and affidavit required by this section shall be allowed, and shall
be paid by the Official Liquidator or provisional liquidator, as
the case may be, out of the assets of the company, such costs
and expenses incurred in and about the preparation and making
of the statement and affidavit as the Official Liquidator may
consider reasonable, subject to an appeal to the Court.
If any person, without reasonable excuse, makes default in
complying with any of the requirements of this section, he shall
be punishable with imprisonment for a term which may extend
to two years, or with fine which may extend to one hundred
rupees for every day during which the default continues, or with
both.
Any person stating himself in writing to be a creditor or
contributory of the company shall be entitled, by himself or by
his agent, at all reasonable times, on payment of the prescribed
fee, to inspect the statement submitted in pursuance of this
section, and to a copy thereof or extract there from. Any person
untruthfully so stating himself to be a creditor or contributory
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11.555
shall be guilty of an offence under section 18223 of the Indian
LEGAL ASPECTS OF BUSINESS
Penal Code (45 of 1860); and shall, on the application of the
Official Liquidator, be punishable accordingly.
In this section, the expression “the relevant date” means, in a
case where a provisional liquidator is appointed, the date of his
appointment, and in a case where no such appointment is
made, the date of the winding up order.
We shall now discuss about the important powers of the
Tribunal.
Powers of Tribunal
Power of Court to stay or restrain proceedings
against company.
It is provided under Section 442 that at any after the presenta-
tion of a winding up petition and before a winding up order
has been made, the company, or any creditor or contributory,
may-
(a) Where any suit or proceeding against the company is
pending in the Supreme Court or in any High Court, apply
to the Court in which the suit or proceeding is pending for
a stay of proceedings therein; and
(b) Where any suit or proceeding is pending against the
company in any other Court, apply to the Court having
jurisdiction to wind up the company, to restrain further
proceedings in the suit or proceeding;
and the Court to which application is so made may stay or
restrain the proceedings accordingly, on such terms as it thinks
fit.
Powers of Court on Hearing Petition (Section 443)
On hearing a winding up petition, the court may -
(a) Dismiss it, with or without cost; or
(b) Adjourn the hearing conditionally or unconditionally; or
(c) Make any interim order that it thinks fit; or
(d) Make an order for winding up the company with or
without costs, or any other order that it thins fit:
It is provided that the Court shall not refuse to make a winding
up order on the ground only that the assets of the company
have been mortgaged to an amount equal to or in excess of
those assets, or that the company has no assets.
Where the petition is presented on the ground that it is just and
equitable that the company should be wound up, the Court
may refuse to make an order of winding up, if it is of opinion
that some other remedy is available to the petitioners and that
they are acting unreasonably in seeking to have the company
would up instead of pursuing that other remedy.
Where the petition is presented on the ground of default in
delivering the statutory report to the Registrar, or in holding the
statutory meeting, the Court may-
(a) Instead of making a winding up order, direct that the
statutory report shall be delivered or that a meeting shall be
held; and
(b) Order the cost to be paid by any persons who, in the
opinion of the Court, are responsible for the default.
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 Copy of Winding up order to be filed with Registrar
LEGAL ASPECTS OF BUSINESS
( Section 445)
On the making of a winding up order, it shall be the duty of
the petitioner in the winding up proceedings and of the
company to file with the Registrar a certified copy of the order,
within thirty days from the date of the making of the order.
In computing the period of thirty days from the date of the
making of a winding up order, the time requisite for obtaining
a certified copy of the order shall be excluded.
Suits Stayed on winding up Order (Section 446)
When a winding up order has been made or the Official
Liquidator has been appointed as provisional liquidator, no suit
or other legal proceeding shall be commenced, or if pending at
the date of the winding up order, shall be proceeded with,
against the company, except by leave of the Court and subject to
such terms as the Court
may impose.
Effect of Winding up Order (Section 447)
An order for winding up a company shall operate in favour of
all the creditors and of all the contributories of the company as
if it had been made on the joint petition of a creditor and of a
contributory.
Appointment of Official Liquidator (Section 448)
For the purposes of this Act, so far as it relates to the winding
up of companies by the Court, -
(a) There shall be attached to each High Court, an Official
Liquidator appointed by the Central Government, who
shall be a whole-time officer, unless the Central
Government considers that there will not be sufficient
work for a whole-time officer in which case a part-time
officer may be appointed; and (b) the Official Receiver
attached to a District Court for insolvency purposes, or if
there is no such Official Receiver, then, such person as the
Central Government may, by notification in the Official
Gazette appoint for the purpose, shall be the Official
Liquidator attached to the District Court.
The Central Government may appoint one or more Deputy or
Assistant Official Liquidators to assist the Official Liquidator in
the discharge of his functions.
Official Liquidator to be liquidator
Section 449 provides that on a winding up order being made in
respect of a company, the Official Liquidator shall, by virtue of
his office, become the liquidator of the company.
Appointment and powers of Provisional Liquidator
(Section 450)
At any time after the presentation of a winding up petition and
before the making of a winding up order, the Court may
appoint the Official Liquidator to be liquidator provisionally.
Before appointing a provisional liquidator, the Court shall give
notice to the company and give a reasonable opportunity to it
to make its representations, if any, unless, for special reasons to
be recorded in writing, the Court thinks fit to dispense with
such notice. Where a provisional liquidator is appointed by the
Court, the Court may limit and restrict his powers by the order
appointing him or by a subsequent order; but otherwise he
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180
shall have the same powers as a liquidator. The Official
Liquidator shall cease to hold office as provisional liquidator,
and shall become the liquidator, or the company, on a winding
up order being made.
General provisions as to liquidators are laid down
under Section 421
The liquidator shall conduct the proceedings in winding up the
company and perform such duties in reference thereto as the
Court may impose.
Where the Official Liquidator becomes or acts as liquidator,
there shall be paid to the Central Government out of the assets
of the company such fees as may be prescribed.
The acts of a liquidator shall be valid, notwithstanding any
defect that may afterwards be discovered in his appointment or
qualification:
It is provided that nothing in this sub-section shall be deemed
to give validity to acts done by a liquidator after his appoint-
ment has been shown to be invalid.
Powers of liquidator
Section 457 provides that the liquidator in a winding up by the
Court shall have power, with the sanction of the Court,
(powers exercisable without the sanction of the tribunal)
(a) to institute or defend any suit, prosecution, or other legal
proceeding, civil or criminal, in the name and on behalf of
the company;
(b) To carry on the business of the company so far as may be
necessary for the beneficial winding up of the company;
(c) To sell the immovable and movable property and
actionable claims of the company by public auction or
private contract, with power to transfer the whole thereof
to any person or body corporate, or to sell the same in
parcels;
(d) To raise the money on the security of the assets of the
company any money requisite;
(e) To do all such other things as may be necessary for winding
up the affairs of the company and distributing its assets.
The liquidator in a winding up by the Court shall have power
under Section 457 (powers exercisable without the sanction of
the tribunal)
(i) To do all acts and to execute, in the name and on behalf of
the company, all deeds, receipts, and other documents, and
for that purpose to use, when necessary, the company’s
seal;
ii) To inspect records and returns of the company on the files
of the Registrar without payment of any fee;]
(ii) To prove, rank and claim in the insolvency of any
contributory, for any balance against his estate, and to
receive dividends in the insolvency, in respect of that
balance, as a separate debt due from the insolvent, and
ratably with the other separate creditors;
(iii) To draw, accept, make and endorse any bill of exchange,
hundi or promissory note in the name and on behalf of
the company, with the same effect with respect to the
liability of the company as if the bill, hundi, or note had
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 been drawn, accepted, made or endorsed by or on behalf
of the company in the course of its business;
(iv) To take out, in his official name, letters of administration
to any deceased contributory, and to do in his official name
any other act necessary for obtaining payment of any
money due from a contributory or his estate which cannot
be conveniently done in the name of the company, and in
all such cases, the money due shall, for the purpose of
enabling the liquidator to take out the letters of
administration or recover the money, be deemed to be due
to the liquidator himself:
(v) To appoint an agent to do any business which the
liquidator is unable to do himself.
Winding up of a company leads to dissolution of the com-
pany. When the Court is of opinion that the liquidator cannot
proceed with the winding up for want of funds or assets or for
any other reason whatsoever, and that it is just and reasonable
in the circumstances of the case that an order for the dissolution
of the company be made, the Court may make an order that the
company be dissolved from the date of the order, and the
company is accordingly dissolved. A copy of this order has to
be forwarded by the liquidator to the Registrar within 30 days
and the Registrar is required to record it in his books.
Do the Court may also declare the Dissolution of a
Company void in Certain cases?
Yes, the Court may at any time within two years of the date of
the dissolution, make an order, on the application of the
liquidator or of any other person interested and upon such
terms as it thinks fit, declaring the dissolution to have been
void. The person who obtains the order avoiding the dissolu-
tion must file a certified copy thereof with the Registrar within
30 days or such further time as the Court may allow. In case of
default, he will be punishable with fine to the extent of Rs. 500
for every day during which the default continues.
We will now discuss about other modes of winding up.
Voluntary Winding Up (Section 484 to 520)
In case of voluntary winding up, the entire process is done
without Court Supervision. When the winding up is complete,
the relevant documents are filed before the Court for obtaining
the order of dissolution. The members may do a voluntary
winding up as the creditors may do it.
The circumstances in which a company may be wound up
voluntarily are: -
1. When the period fixed for the duration of the company in
its articles has expired
2. When an event on the happening of which the company is
to be dissolved as per its articles happens
3. The company resolves by a special resolution at a general
meeting to be voluntarily wound up.
A voluntary winding up commences from the date of the
passing of the resolution for voluntary winding up. This is so
even when after passing a resolution for voluntary winding up,
the Court presents a petition for winding up. The effect of the
voluntary winding up is that the company ceases to carry on its
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business except so for as may be required for the beneficial
LEGAL ASPECTS OF BUSINESS
winding up thereof.
Types of Voluntary Winding Up
A voluntary winding up may be:
• Member’s Voluntary Winding Up
• Creditor’s Voluntary Winding Up
Let me tell you about it in detail
Member’s Voluntary Winding Up
In case of a company which is solvent and able to pay its
liabilities in full and which desires to be wound up voluntarily,
the majority of its directors at a Meeting of the Board must
make a declaration of solvency verified by an affidavit staling
that in their opinion the company will be able to pay its debts in
full within such period not exceeding 3 years from the com-
mencement of the winding up as may be specified in the
declaration. Such a declaration must be made within 5 weeks
immediately preceding the date of the passing of the resolution
for winding up the company and be delivered to the Registrar
for registration before that date. The declaration must embody a
statement of the company’s assets and liabilities as at the
practicable date before the making of the declaration. Any
director making a false declaration shall be criminally liable to
imprisonment as well as with fine extending up to Rs. 50,000.
The company must appoint liquidators for the purpose of
winding up and fix their remuneration at a general meeting. On
the appointment of the liquidators, the Board of directors,
managing director and manager of the company cease to have
any management power. The liquidator may transfer or sell the
assets of the company and pay off its liabilities. If the winding
up proceedings continue for more than one year, the liquidator
must call a general meeting at the end of each year the liquida-
tion continues. At the last meeting, the accounts of the
liquidator must be approved by the members. Such accounts
must be filed by him with the registrar of Companies and the
Official Liquidator attached to the Court having jurisdiction
over the company.
The Registrar on receiving such accounts must register them.
The Official Liquidator on receipt of the accounts and other
relevant details must make a report to the Court if he is of the
opinion that the affairs of the company have not been con-
ducted in a manner prejudicial to the interest of its members or
to public interest.
The company shall be deemed to be dissolved from the date of
submission of such report. If the Official Liquidator makes a
report that the affairs of the company have been conducted in a
manner prejudicial to the interest of its members or to public
interest, the Court may direct the Official Liquidator to make
further investigation of the affairs of the Company. On receipt
of the investigation report, the Court may make an order of
dissolution or may make such order as it deems fit and proper
ion the given circumstances.
Creditors’ Voluntary Winding Up
Where the company is not solvent or where the declaration of
solvency of the company is not made and delivered to the
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 Registrar in a voluntary winding up, it amounts to creditor’s 2. The Court obtains jurisdiction over suits and legal
LEGAL ASPECTS OF BUSINESS

voluntary winding up. proceedings as in case of compulsory winding up by the

In this case all the provisions of a member’s voluntary winding Court.
up apply except that instead of the members, it is the creditors 3. The supervision order also confers the power on the Court
who appoint the liquidator, approve the accounts and regulate to make calls or to enforce calls made by the liquidators and
the winding up proceedings. The creditors may appoint a to exercise all other powers which it would have in case of
Committee of Inspection consisting of not more than 5 compulsory winding up by the court.
creditors in order to regulate and supervise the winding up 4. The supervision order when passed, acts as a stay of
proceedings. actions and other proceedings against the company
You will find that Court has some specific powers in case of 5. When an order has been made for winding up subject to
Voluntary Winding Up. supervision of Court and an order is afterwards made for
Powers of the Court in case of Voluntary Winding winding up by the Court up, the Court has power to
Up appoint any person as either provisional or permanent
liquidators, in addition to, and subject to the control of the
1. It may appoint the Official Liquidator or any other person
Official Liquidator. The Company cannot be dissolved
as liquidator where the appointed liquidator is not acting.
except by order of dissolution by the Court
2. It may remove the liquidator and appoint the Official
Liquidator or any other person as liquidator on justifiable References
cause being shown. • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
3. It may determine the remuneration of the liquidator when Sultan Chand and Sons, New Delhi.
the Official Liquidator is appointed as a liquidator • http://www.vakilno1.com
4. It may amend, vary, confirm or set aside the arrangement • http://www.saarclawnet.com/saarclawnet/osca20.html
entered into between a company and its creditors on an
appeal made by any creditor or contributory within 3 weeks
of the completion of the arrangement Notes:
5. On an application of the Liquidator or contributory or
creditor, it may determine any question arising in the
winding up of a company and it may exercise, as respects
the enforcing of calls, the staying of suits or other legal
proceedings or any other matter, all or any of the powers
which the Court might exercise if the company were being
wound up by the Court.
6. It may set aside any attachment, distress or execution
started against the assets of the company after the
commencement of the winding up on such terms as it
thinks fit on an application made by the liquidator, creditor
or contributory if the Court thinks fit.
7. It may order a public examination of any person connected
with the promotion or formation of the company or any
officer connected with the company.
Winding up subject to the supervision of court
When a company has by special or ordinary resolution resolved
wind up voluntarily, the Court may make an order that the
voluntary winding up shall continue, but subject to such
supervision the Court and with such liberty for creditors,
contributories or others to apply to the Court and generally on
such terms and conditions, as the Court thinks just.
The application for a creditor, contributory or the voluntary
liquidator may make such intervention of the Court, when
there are irregularities or frauds in the voluntary winding up.
The effect of such an order is: -
1. The liquidator may exercise his powers for liquidation
subject to terms and conditions imposed by the Court.

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LESSON 36:
THE COMPANIES ACT, 1956
THE WINDING UP OF A COMPANY
CONSEQUENCES OF A WINDING UP OF A COMPANY
Learning Objectives
After reading the lesson, you will be able to know about the:
• The consequences of winding up of a company
• The proof and ranking up of claims
• The preferential payments in regard to winding up of a
company
• The meaning of defunct company
Introduction
By now, you are all aware of Winding Up. Today, we will discuss
its consequences and how the claims are settled.
Consequences of Winding Up
1. Consequences as to Shareholders/ Members
In a company limited by shares, a shareholder is liable to pay the
full amount up to the face value of the shares held by him. His
liability continues even after the company goes into liquidation,
but he is then described as a contributory. A contributory may
be present or past. The liability of present and past contributo-
ries has already been discussed in this chapter. In a company
limited by guarantee, the members are liable to contribute up to
the amount guaranteed by them.
2. Consequences as to Creditors
(1) Where the company is solvent (Sec. 528) Where a
company is being wound up, all debts payable on a
contingency and all claims against the company, present
or future, certain or contingent, ascertained or
sounding only in damages, shall be admissible to
proof against the company. A just estimate of the
value of such debts or claims shall be made. Where a
solvent company is wound up. Where a solvent
company is wound up, all claims of creditors, when
proved, are fully met.
(2) Where the company is insolvent (Sec.529) Where a
company is insolvent and is wound up, the same rules
shall prevail as in the case of insolvency with regard to:
(a) Debts provable;
(b) The valuation of annuities and future and contingent
liabilities, and
(c) The respective rights of secured and unsecured
creditors
The security of every secured creditor shall, however, be deemed
to be subject to a pari passu charge in favors of the workmen to
the extent of the workmen’s portion; therein. Where a secured
creditor instead of relinquishing his security and proving his
debt, opts to realize his security -
(a) The liquidator shall be entitled to represent the
workmen and enforce the workmen’s charge.
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11.555
LEGAL ASPECTS OF BUSINESS
(b) Any amount realized by the liquidator by way of
enforcement of the workmen’s charge shall be applied
rate ably for the discharge of workmen’s dues; and
(c) The debt due to the secured creditor or the amount of
the workmen’s portion in his security, shall rank pari
passu with the workmen’s dues for the purposes of
sec. 529-A (which deals with overriding preferential
payments.)
All persons who in any such case would be entitled to prove foe
and receive dividends out for the assets of the company may
come in under the winding up, and make such claims against
the company as they are entitled to make.
Secured and Unsecured creditors The creditors may be secured
or unsecured. A secured. A secured creditor has 3 alternatives
before him.
(i) He may rely on his security and ignore the liquidation.
(ii) He may value his security and prove for the deficit.
(iii) He may surrender his security and prove for the whole
debt.
If a secured creditor instead of relinquishing his security and
proving his debt proceeds to realize his security, he shall be
liable to pay his portion of the expenses incurred by the
liquidator (including a provisional liquidator, if any) for
preservation of the security before its realization by the secured
creditor.
(a) All revenues, taxes, cases and rates due to the central
government or a state government or to a local authority at
the relevant date. The amount should have become due
and payable within the 12 months preceding the relevant
date.
‘Relevant date’ means
(i) In the case of a compulsory winding up of a company, the
date on which a provisional liquidator is appointed, or if
he is not appointed, the date of the winding up order. In
case the company had commenced to be wound up
winding up order, in case the company had commenced to
be wound up voluntarily before that date, ‘relevant dare
means date of commencement of voluntary winding up.
(ii) In the case of a voluntarily winding up of a company, the
date of the passing of the resolution for the winding up
of the company.
(b) All wages or salary of any employee, in respect of services
rendered to the company and due for a period not
exceeding 4 months within the 12 months before winding
up, the amount shall not, in case of any one claimant,
exceed such sum as may be notified by the central
government in the official Gazette.
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 (c) All accrued holiday remuneration becoming payable to any
LEGAL ASPECTS OF BUSINESS
employee on account of winding up.
(d) All amounts due in respect of contributors payable during
the 12 months before the winding up order under the
employees’ state insurance act. 1948. This,however does
not apply when the company is being wound up
voluntarily for the purpose of reconstruction or
amalgamation with another company.
(e) All amounts due in respect of any compensation or
liability under the workmen’s compensation act. 1923, in
respect of death or disablement of any employee of the
company.
(f) All sums due to any employee form a provident fund, a
pension fund, a gratuity fund or any other fund for the
welfare of the employees maintained by the company.
(g) The expenses of any investigation held in pursuance of
sec. 235 or 237 in as far as they are payable by the company.
Advances made by a third person to pay wages or salary to any
employee, or in the case of his death to any other person in his
right on account of holiday remuneration, shall, in a winding
up, have the same priority as the persons to whom these
payments are made out of money advanced have priority.
Primrose (Builders) Ltd; Re. (1950) Ch. 561 A bank allowed
overdrafts to a company for the purpose of paying the wages
of the company on the understanding that an amount equal to
the loan would shortly be paid in order to reduce the overdraft.
Held, the bank was entitled to preferential payment in respect
of the overdrafts
3. Consequences as to servants and officers.
A winding up order shall be deemed to be a notice of discharge
to the officers and employees of the company, except when the
business of the company is continued. Such a discharge shall
relieve them of all obligations under their contract of service. A
voluntary winding up shall also operate as a notice of discharge
to the company’s servants.
4. Consequences as to Proceedings Against the
Company
When a winding up order has been made or the official
liquidator, has been appointed as provisional liqudator, no suit
or other legal proceeding against the company shall be com-
menced except by leave of the tribunal. Similarly if a suit is
pending against the company at the date of the winding up
order, it shall not be proceeded with against the company,
except by leave of the tribunal. In a voluntary winding up also,
the tribunal may restrain proceedings against the company if it
thinks fit.
5. Consequences as to Costs
If assets are insufficient to satisfy liabilities, the tribunal may
order for payment of the costs, charges and expenses of the
winding up out of the assets of the company. The payment
shall be made in such order of priority inter se as the tribunal
thinks just. Similarly all costs, charges and expenses property
incurred in a voluntary winding up, including the remuneration
of the liquidator, shall be paid out of the assets of the
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184
company in priority to all other claims. The payment shall,
however, be subject of the rights of secured creditors.
Now, we will learn about the proof and ranking of claims.
Proof and Ranking of Claims
Debts of all Descriptions to be Admitted to Proof
Section 528 requires that in every winding up (subject, in the
case of insolvent companies, to the application in accordance
with the provisions of this Act of the law of insolvency), all
debts payable on a contingency, and all claims against the
company, present or future, certain or contingent, ascertained or
sounding only in damages, shall be admissible to proof against
the company, a just estimate being made, so far as possible, of
the value of such debts or claims as may be subject to any
contingency, or may sound only in damages, or for some other
reason may not bear a certain value.
Application of insolvency rules in winding up of insolvent
companies.
Section 529 lays down that in the winding up of an insolvent
company, the same rules shall prevail and be observed with
regard to-
(a) Debts provable;
(b) The valuation of annuities and future and contingent
liabilities; and
(c) The respective rights of secured and unsecured creditors; as
are in force for the time being under the law of insolvency
with respect to the estates of persons adjudged insolvent:
The security of every secured creditor shall be deemed to be
subject to a pari passu charge in favour of the workmen to the
extent of the workmen’s portion therein, and, where a secured
creditor, instead of relinquishing his security and proving his
debt, opts to realise his security,-
(a) The liquidator shall be entitled to represent the workmen
and enforce such charge;
(b) Any amount realised by the liquidator by way of
enforcement of such charge shall be applied rateably for the
discharge of workmen’s dues; and
(c) So much of the debt due to such secured creditor as could
not be realised by him by virtue of the foregoing
provisions of this proviso or the amount of the
workmen’s portion in his security, whichever is less, shall
rank pari passu with the workmen’s dues for the purposes
of section 529A.
(2) All persons who in any such case would be entitled to
prove for and receive dividends out of the assets of the
company, may come in under the winding up, and make
such claims against the company as they respectively are
entitled to make by virtue of this section:
If a secured creditor instead of relinquishing his security and
proving for his debt proceeds to realize his security, he shall be
liable to pay 53[his portion of] the expenses incurred by the
liquidator (including a provisional liquidator, if any) for the
preservation of the security before its realization by the secured
creditor.]
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For the purposes of this provision, the portion of expenses
incurred by the liquidator for the preservation of a security
which the secured creditor shall be liable to pay shall be the
whole of the expenses less an amount which bears to such
expenses the same proportion as the workmen’s portion in
relation to the security bears to the value of the security.
For the purposes of this section, section 529A and section 530,-
(a) “Workmen”55, in relation to a company, means the
employees of the company, being workmen within the
meaning of the Industrial Disputes Act, 1947 (14 of 1947);
(b) “Workmen’s dues”, in relation to a company, means the
aggregate of the following sums due from the company to
its workmen, namely:-
(i) All wages or salary including wages payable for time or
piece work and salary earned wholly or in part by way of
commission of any workman, in respect of services
rendered to the company and any compensation payable to
any workman under any of the provisions of the
Industrial disputes Act, 1947 (14 of 1947);
(ii) All accrued holiday remuneration becoming payable to any
workman, or in the case of his death to any other person
in his right, on the termination of his employment before,
or by the effect, of, the
winding up order or resolution;
(iii) Unless the company is being would up voluntarily merely
for the purposes of reconstruction or of amalgamation
with another company, or unless the company has, at the
commencement of the winding up, under such a contract
with insurers as is mentioned in section 14 of the
Workman’s Compensation Act, 1923 (8 of 1923), rights
capable of being transferred to an vested in the workman,
all amounts due in respect of any compensation or liability
for compensation under the said Act in respect of the
death or disablement of any workman of the company;
(iv) All sums due to any workman from a provident fund, a
pension fund, a gratuity fund or any other fund for the
welfare of the workmen, maintained by the company;
(c) “Workmen’s Portion”, in relation to the security of any
secured creditor of a company, means the amount which
bears to the value of the security the same proportion as
the amount of the workmen’s dues bears to the aggregate
of-
(i) The amount of workmen’s dues; and
(ii) The amounts of the debts due to the secured creditors.
Preferential Payments (Section 530)
In a winding up, there shall be paid in priority to all other
debts-
(a) All revenues, taxes, cesses and rates due from the company
to the Central or a State Government or to a local authority
at the relevant date as defined in clause (c) of sub-section
(8), and having become due and payable within the twelve
months next before that date;
(b) All wages or salary (including wages payable for time or
piece work and salary earned wholly or in part by way of
commission) of any employee, in respect of services
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11.555
rendered to the company and due for a period not
LEGAL ASPECTS OF BUSINESS
exceeding four months within the twelve months next
before the relevant date subject to the limit specified in
sub-section (2);
(c) All accrued holiday remuneration becoming payable to any
employee, or in the case of his death to any other person in
his right, on the termination of his employment before, or
by the effect of, the winding up order or resolution;
(d) Unless the company is being would up voluntarily merely
for the purposes of reconstruction or of amalgamation
with another company all amounts due in respect of
contributions payable during the twelve months next
before the relevant date, by the company as the employer
of any persons, under the Employees’ State Insurance Act,
1948 (34 of 1948), or any other law for the time being in
force;
(e) Unless the company is being wound up voluntarily merely
for the purposes of reconstruction or of amalgamation
with another company, or unless the company has, at the
commencement of the winding up, under such a contract
with insurers as is mentioned in section 1459 of the
Workmen’s Compensation Act, 1923 (8 of 1923), rights
capable of being transferred to and vested in the workman,
all amounts due in respect of any compensation or liability
for compensation under the said Act in respect of the
death or disablement of any employee of the company;
(f) All sums to any employee from a provident fund, pension
fund, a gratuity fund or any other fund for the welfare of
the employees, maintained by the company; and
(g) The expenses of any investigation held in pursuance of
section 235 or 237, in so far as they are payable by the
company.
(2) The sum to which priority is to be given under clause (b)
of sub-section (1), shall not, in the case of any one
claimant, exceed such sum as may be notified61 by the
Central Government in the Official Gazette.
(3) Where any compensation under the Workmen’s
Compensation Act, 1923 (8 of 1923) is a weekly payment,
the amount due in respect thereof shall, for the purposes
of clause (e) of sub-section (1), be taken to be the amount
of the lump sum for which the weekly payment could, if
redeemable, be redeemed if the employer made an
application for that
purpose under the said Act.
(4) Where any payment has been made to any employee of a
company,-
(i) On account of wages or salary; or
(ii) To him, or in the case of his death, to any other person in
his right, on account of accrued holiday remuneration, out
of money advanced by some person for that purpose, the
person by whom the money was advanced shall, in a
winding up, have a right of priority in respect of the
money so advanced and paid, up to the amount by which
the sum in respect of which the employee or other person
in his right, would have been entitled to priority in the
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 winding up has been diminished by reason of the payment
LEGAL ASPECTS OF BUSINESS
having been made.
(5) The foregoing debts shall-
(a) Rank equally among themselves and be paid in full, unless
the assets are insufficient to meet them, in which case they
shall abate in equal proportions; and
(b) So far as the assets of the company available for payment
of general creditors are insufficient to meet them, have
priority over the claims of holders of debentures under
any floating charged created by the company, and be paid
accordingly out of any property comprised in or subject to
that charge.
(6) Subject to the retention of such sums as may be necessary
for the costs and expenses of the winding up, the
foregoing debts shall be discharged forthwith so far as the
assets are sufficient to meet them, and in the case of the
debts to which priority is given by clause (d) of sub-section
(1), formal proof thereof small not be required except in
so far as may be otherwise prescribed.
(7) In the event of a landlord or other person distraining or
having distrained on any goods or effects of the company
within three months next before the date of a winding up
order, the debts to which priority is given by this section
shall be a first charge on the goods or effects so distrained
on, or the proceeds of the sale thereof
(8) For the purposes of this section-
(a) Any remuneration in respect of a period of holiday or of
absence from work through sickness or other goods cause
shall be deemed to be wages in respect of services rendered
to the company during that period;
(b) The expression “accrued holiday remuneration” includes, in
relation to any person, all sums which, by virtue either or
his contract of employment or of any enactment (including
any order made or direction given under any enactment),
are payable on account of the remuneration which would,
in the ordinary course, have become payable to him in
respect of a period of holiday, had his employment with
the company continued until he became entitled to be
allowed the holiday;
You must understand that
• The expression “employee” does not include a
workman; and
• The expression “the relevant date” means-
(i) In the case of a company ordered to be wound up
compulsorily, the date of the appointment (or first
appointment) of a provisional liquidator, or if no such
appointment was made, the date of the
winding up order, unless in either case the company had
commenced to be wound up voluntarily before that date;
and
(ii) In any case where sub-clause (i) does not apply, the date of
the passing of the resolution for the voluntary winding up
of the company.
This section shall not apply in the case of a winding the dated
referred to in sub-section (5) of section 230 of the Indian
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186
Companies Act, 1913 (7 of 1913) occurred before the com-
mencement of this Act, and in such a case, the provisions
relating to preferential payments which would have applied if
this Act had not been passed, shall be deemed to remain in full
force.
There is another important term which you could find in regard
to winding up of company.
Defunct company
A company is a said to be ‘defunct ’ when it is not carrying on
business or when it is not in operation. Sec. 560 deals with
defunct companies. If a company has ceased to carry on
business, the registrar may strike it off the register as a defunct
company in accordance with Sec. 560.
Practical Problems
Attempt the following problems, giving reasons
1. S, a builder, wrote to a hotel company offering to take 300
shares in the company, if a contract for the renovation of
the hotel was given to him. His offer was accepted. 300
shares were allotted to him and the directors passed a
resolution that S should have the contract. S paid his
deposit on shares and attended 2 meetings of the
shareholders. No such contract was made and the company
went into liquidation. Is S liable as contributory.
[Hint. No ( Aldborough Hotel Co., Re. Simpson’s Case)]
2. A creditor of a company applied for winding up of the
company for its inability to pay his claim after proper
demand had been made by him and on the lapse of the 3
weeks from the dare of such demand. It was proved to the
satisfaction of the tribunal during inquiry, that the
company was commercially solvent, will the tribunal order
for the winding up of the company?
[Hint. The tribunal may order for the winding up of the
company Secs. 433 (e) and 434].
3. An application was made by a father as guardian of his
minor daughter for shares and the company registered the
shares in the name of the daughter describing her as
minor. The company went into liquidation and the father
of the minor was placed on the list of contributories. The
father resists this. Decide.
[Hint. The father cannot be placed on the list of
contributories ( Palaniappa Mudaliar v. Official Liquidator,
Pasupathi Bank Ltd)].
4. Ever since its incorporation in 1969 and for 30 years
thereafter, a company never met either in a shareholders’ or
in a directors’ meeting, did not file for more than 10 years
any summaries or list of shareholders, treated the
company’s properties as though they were properties as
though they were properties belonging to the individual
members, and sales, transfers and various dealing with
these properties took place for all over those 30 years as will
the registrar be justified in striking off the name of the
company from the register?
[Hint. Yes. ( Rai Sahib V.N. Mandal’s Estates Ltd. Re.)].
5. A company, in ignorance of the fact that it had been struck
off the register, borrowed money on the security of a
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 charge on it property. On an application by the company,

LEGAL ASPECTS OF BUSINESS

the tribunal restored it to the register. Is the charge valid?
[Hint. Yes (Boxco Ltd., Re.)]
References:
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html

Notes:

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11.555 187
LEGAL ASPECTS OF BUSINESS

LESSON 37:
TUTORIAL
THE COMPANIES ACT, 1956

You are the company secretary of XYZ Ltd., a listed company,

which is making a takeover bid to acquire control of ABC Ltd.,
another listed
Company. XYZ Ltd. presently has no stake in ABC Ltd. Advise
your
Board of directors in respect of the following queries:
(i) Govinda, your director, desires to be appointed on the
Board of ABC Ltd. during the offer period.
(ii) Your company after acquiring control of ABC Ltd. desires
to dispose of some assets of ABC Ltd., not in the
ordinary course of business and its intention to dispose of
such assets is not stated in the offer document.

Notes:

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188 11.555

LESSON 38:
CONSUMER PROTECTION ACT
Learning Objectives
At the end of this chapter, you will be able to know about:
• The object of the Consumer Protection Act
• Salient features of the Act
• The procedure and authorities for filing a complaint
under the Act
Introduction
The earlier principle of “Caveat Emptor” or “let the buyer
beware” which was prevalent has given way to the principle of
“Consumer is King”. The origins of this principle lie in the fact
that in today’s mass production economy where there is little
contact between the producer and consumer, often sellers make
exaggerated claims and advertisements, which they do not
intend to fulfill. This leaves the consumer in a difficult position
with very few avenues for redressal. The onset on intense
competition also made producers aware of the benefits of
customer satisfaction and hence by and large, the principle of “
consumer is king” is now accepted. The need to recognize and
enforce the rights of consumers is being understood and
several laws have been made for this purpose. In India, we have
the Indian Contract Act, the Sale of Goods Act, the Dangerous
Drugs Act, the Agricultural Produce (Grading and Marketing)
Act, the Indian Standards Institution (Certification Marks) Act,
the Prevention of Food Adulteration Act, the Standards of
Weights and Measures Act, the Trade and Merchandise Marks
Act, etc which to some extent protect consumer interests.
However, these laws required the consumer to initiate action by
way of a civil suit, which involved lengthy legal process proving,
to be too expensive and time consuming for lay consumers.
Therefore, the need for a more simpler and quicker access to
redressal to consumer grievances was felt and accordingly, it lead
to the legislation of the Consumer Protection Act, 1986.
Object of the Consumer Protection Act, 1986
The main objective of the act is to provide for the better
protection of consumers. Unlike existing laws, which are
punitive or preventive in nature, the provisions of this Act are
compensatory in nature. The act is intended to provide simple,
speedy and inexpensive redressal to the consumers’ grievances,
and reliefs of a specific nature and award of compensation
wherever appropriate to the consumer. The act has been
amended in 1993 both to extend its coverage and scope and to
enhance the powers of the redressal machinery.
The basic rights of consumers as per the Consumer Protection
Act (CPA) are
1. The right to be protected against marketing of goods and
services which are hazardous to life and property
2. The right to be informed about the quality, quantity,
potency, purity, standard and price of goods, or services so
as to protect the consumer against unfair trade practices
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LEGAL ASPECTS OF BUSINESS
3. The right to be assured, wherever possible, access to variety
of goods and services at competitive prices
4. The right to be heard and be assured that consumers’
interests will receive due consideration at appropriate
forums
5. The right to seek redressal against unfair trade practices or
restrictive trade practices or unscrupulsous exploitation of
consumers
6. The right to consumer education
Extend and Coverage of the Act:-
The salient features of the Act are summed up as under:-
- The Act applies to all goods and services unless
specifically exempted by the Central Government.
- It covers all the sectors whether private, public or
cooperative.
- The provisions of the Act are compensatory in nature.
It enshrines the following rights of consumers:-
- Right to be protected against the marketing of goods and
services which are hazardous to life and property.
-Right to be informed about the quality, quantity, potency,
purity, standard and price of goods or services so as to
protect the consumer against unfair trade practices;
-Right to be assured , wherever possible , access to a variety
of goods and services at competitive prices;
-Right to be heard and to be assured that consumers’
interests will receive due consideration at appropriate
forums;
-Right to seek redressal against unfair trade practices
unscrupulous exploitation of consumers; and
-Right to consumer education
-The Act envisages establishment of Consumer Protection
Councils at the Central and State levels, whose main objects
will be to promote and protect the rights of the consumers
The CPA extends to the whole of India except the State of
Jammu and Kashmir and applies to all goods and services
unless otherwise notified by the Central Government.
Definitions of Important Terms
Before studying the provisions of the CPA, it is necessary to
understand the terms used in the Act. Let us understand some
of the more important definations.
Complainant Means
1. A consumer; or
2. Any voluntary consumer association registered under the
Companies Act,1956 or under any other law for the time
being in force; or
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 3. The Central Government or any State Government, who
LEGAL ASPECTS OF BUSINESS
or which makes a complaint; or
4. One or more consumers where there are numerous
consumers having the same interest
Complaint means any allegation in writing made by a complain-
ant that :-
1. An unfair trade practice or a restricted trade practice has
been adopted by any trader
2. The goods bought by him or agreed to be bought by him
suffer from one more defects
3. The services hired or availed of or agreed to be hired or
availed of by him suffer from deficiency in any respect
4. The trader has charged for the goods mentioned in the
complaint a price excess of the price fixed by or under any
law for the time being in force or displayed on the goods
or any package containing such goods.
5. Goods which will be hazardous to life and safety when
used, are being offered for sale to the public in
contravention of the provisions of any law for the time
being in force, requiring traders to display information in
regard to the contents, manner and effect of use of such
goods ;with a view to obtaining any relief provided by law
under the CPA.
Goods means goods as defined in the Sale of Goods Act, 1930.
Under that act, goods means every kind of movable property
other than actionable claims and money and includes stocks and
shares, growing crops, grass and things attached to or forming
part of the land which are agreed to be severed before sale or
under the contract of sale.
Service is defined to mean service of any description which is
made available to potential users and includes the provision of
facilities in connection with banking, financing, insurance,
transport, processing, supply of electrical or other energy, board
or lodging or both, housing construction, entertainment,
amusement or the purverying of news or other information
but does not include the rendereing of any service free of charge
or under a contract of personal service.
Consumer dispute means dispute where the person against
whom a complaint has been made, denies or disputes the
allegation contained in the complaint.
Restrictive Trade Practice means any trade practice which requires
a consumer to buy, hire, or avail of any good or as the case may
be, services as a condition precedent for buying, hiring or
availing of any other goods or services.
Unfair Trade Practice means unfair trade practice as defined
under the Monopolies and Restrictive Trade Practices Act. The
MRPT act has defined certain practices to be unfair trade
practices. The detailed definition is given in the Consumer
Protection Act, 1986 as amended by the Consumer Protection
(Amendment) Act. 1993. It means a trade practice which, for the
purpose of promoting the sale, use or supply of any goods or
for the provision of any service, adopts any unfair method or
unfair or deceptive practice including any of the following
practices, namely: -
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(a) False or misleading representation,
(b) Bargain price
(c) Offering of gifts, prize, contest etc.
(d) Non compliance of product safety standard.
(e) Hoarding or destruction of goods.
The Act may be consulted before filing a complaint for unfair
trade practice.
Defect means any fault, imperfection or shortcoming in the
quality, quantity, potency, purity or standard which is required to
be maintained by or under any law for the time being in force or
under any contract, express or implied, or as is claimed by the
trade in any manner whatsoever in relation to any goods.
Deficiency means any fault, imperfection or shortcoming or
inadequacy in the quality, nature and manner of performance
which is required to be maintained by or under any law for the
time being in force or has been undertaken to be performed by
a person in pursuance of a contract or otherwise in relation to
any service.
Who is a Consumer?
All of us are consumers of goods and services. For the purpose
of the Consumer Protection Act,the word “Consumer” has
been defined separately for “goods” and “services”.
For the purpose of “goods”, a consumer means a person
belonging to the following categories:
(i) One who buys or agrees to buy any goods for a
consideration which has been paid or promised or partly
paid and partly promised or under any system of deferred
payment;
(ii) It includes any user of such goods other than the person
who actualy buys goods and such use is made with the
approval of the purchaser.
Note :- A person is not a consumer if he purchases goods for
commercial or resale purposes However, the word “commer-
cial” does not include use by consumer of goods bought and
used by him exclusively for the purpose of earning his liveli-
hood, by means of self employment.
- For the purpose of “services”, a “consumer” means a person
belonging to the following categories:
(i) One who hires or avails of any service or services for a
consideration which has been paid or promised or partly
paid and partly promised or under any system of deferred
payment;
i.It includes any beneficiary of such service other than the one
who actually hires or avails of the service for consideration and
such services are availed with the approval of such person.
Who Can file a Complaint
The following can file a complaint under the Act:-
- A consumer
- Any voluntary consumer organization registered under
the Societies Registration Act,1860 or under the Companies
Act,1956 or under any other law for the time being in force.
- The Central Government
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 - The State Government or Union Territory
Administrations.
- One or more consumers on behalf of numerous
consumers who are having the same interest
(Class action complaints)
Structure
-To provide simple, speedy and inexpensive redressal of
consumer grievances, the Act envisages a three- tier quasi-
judicial machinery at the National, State and District levels.
• National Consumer Disputes Redressal Commission -
known as “National Commission”.
• Consumer Disputes Redressal Commissions known as
“State Commission.
• Consumer Disputes Redressal Forums- known as “District
Forum.
-The provisions of this Act are in addition to and not in
derogation of the provisions of any other law for the time
being in force
What Constitutes a Complaint?
Under the Act, a complaint means any allegation in writing
made by a complainant in regard to one or more of the
following:-
- Any unfair trade practice as defined in the Act or restrictive
trade practices like tie-up sales adopted by any trader.
- One or more defects in goods. The goods hazardous to
life and safety, when used,are being offered for sale to
public in contravention of provisions of any law for the
time being in force.
- Deficiencies in services.
- A trader charging excess of price.
(i) Fixed by or under any law for the time being in force; or
(ii) Displayed on goods; or
(iii) Displayed on any packet containing such good;
Where to file a complaint
Consumer Protection Councils
The interests of consumers are enforced through various
authorities set up under the CPA. The CPA provides for the
setting up of the Central Consumer Protection Council, the
State Consumer Protection Council and the District Forum
Central Consumer Protection Council
The Central Government has set up the Central Consumer
Protection Council which consists of the following members :-
(a) The Minister in charge of Consumer Affairs in the Central
Government who is its Chairman, and
(b) Other official and non-official members representing varied
interests
The Central council consists of 150 members and its term is 3
years. The Council meets as and when necessary but at least one
meeting is held in a year.
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State Consumer Protection Council
LEGAL ASPECTS OF BUSINESS
The State Council consists of :-
(a) The Minister in charge of Consumer Affairs in the State
Government who is its Chairman, and
(b) Other official and non-official members representing varied
interests
The State Council meets as and when necessary but not less
than two meetings must be held every year.
Redressal Machinery under the Act
The CPA provides for a 3 tier approach in resolving consumer
disputes. The District Forum has jurisdiction to entertain
complaints where the value of goods / services complained
against and the compensation claimed is less than Rs. 5 lakhs,
the State Commission for claims exceeding Rs. 5 lakhs but not
exceeding Rs. 20 lakhs and the National Commission for claims
exceeding Rs. 20 lakhs.
District Forum
Under the CPA, the State Government has to set up a district
Forum in each district of the State. The overnment may
establish more than one District Forum in a district if it deems
fit. Each District Forum consists of :-
(a) A person who is, or who has been, or is qualified to be, a
District Judge who shall be its President
(b) Two other members who shall be persons of ability,
integrity and standing and have adequate knowledge or
experience of or have shown capacity in dealing with
problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one
of whom shall be a woman.
Appointments to the State Commission shall be made by the
State Goverrnment on the recommendation of a Selection
Committee consisting of the President of the State Committee,
the Secretary - Law Department of the State and the secretary in
charge of Consumer Affairs
Every member of the District Forum holds office for 5 years or
upto the age of 65 years, whichever is earlier and is not eligilbe
for re-appointment. A member may resign by giving notice in
writing to the State Government whereupon the vacancy will be
filled up by the State Government.
The District Forum can entertain complaints where the value of
goods or services and the compensation, if any, claimed is less
than rupees five lakhs. However, in addition to jurisdiction over
consumer goods services valued upto Rs. 5 lakhs, the District
Forum also may pass orders against traders indulging in unfair
trade practices, sale of defective goods or render deficient
services provided the turnover of goods or value of services
does not exceed rupees five lakhs.
A complaint shall be instituted in the District Forum within the
local limits of whose jurisdiction -
(a) The opposite party or the defendant actually and
voluntarily resides or carries on business or has a branch
office or personally works for gain at the time of
institution of the complaint; or
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 (b) Any one of the opposite parties (where there are more than
LEGAL ASPECTS OF BUSINESS
one) actually and voluntarily resides or carries on business
or has a branch office or personally works for gain, at the
time of institution of the complaint provided that the
other opposite party/parties acquiescence in such
institution or the permission of the Forum is obtained in
respect of such opposite parties; or
(c) The cause of action arises, wholly or in part.
State Commission
The Act provides for the establishment of the State Consumer
Disputes Redressal Commission by the State Government in
the State by notification. Each State Commission shall consist
of:-
(a) A person who is or has been a judge of a High Court
appointed by State Government (in consultation with the
Chief Justice of the High Court ) who shall be its
President;
(b) Two other members who shall be persons of ability,
integrity, and standing and have adequate knowledge or
experience of, or have shown capacity in dealing with,
problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one
of whom must be a woman.
Every appointment made under this hall be made by the State
Government on the recommendation of a Selection Committee
consisting of the President of the State Commission, Secretary -
Law Department of the State and Secretary in charge of
Consumer Affairs in the State.
Every member of the District Forum holds office for 5 years or
upto the age of 65 years, whichever is earlier and is not eligilbe
for re-appointment. A member may resign by giving notice in
writing to the State Government whereupon the vacancy will be
filled up by the State Government.
The State Commission can entertain complaints where the value
of goods or services and the compensation, if any claimed
exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;
The State Commission also has the jurisdiction to entertain
appeal against the orders of any District Forum within the State
The State Commission also has the power to call for the records
and appropriate orders in any consumer dispute which is
pending before or has been decided by any District Forum
within the State if it appears that such District Forum has
exercised any power not vested in it by law or has failed to
exercise a power rightfully vested in it by law or has acted illegally
or with material irregularity.
National Commission
The Central Government provides for the establishment of the
National Consumer Disputes Redressal Commission The
National Commission shall consist of :-
(a) A person who is or has been a judge of the Supreme
Court, to be appoint by the Central Government (in
consultation with the Chief Justice of India ) who be its
President;
(b) Four other members who shall be persons of ability,
integrity and standing and have adequate knolwiedge or
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experience of, or have shown capacity in dealing with,
problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one
of whom shall be a woman
Appointments shall be by the Central Government on the
recommendation of a Selection Committee consisting of a
Judge of the Supreme Court to be nominated by the Chief
Justice of India, the Secretary in the Department of Legal
Affairs and the Secretary in charge of Consumer Affairs in the
Government of India.
Every member of the National Commission shall hold office
for a term of five years or upto seventy years of age, whichever
is earlier and shall not be eligible for reappointment.
The National Commission shall have jurisdiction :-
(a) To entertain complaints where the value of the goods or
services and the compensation, if any, claimed exceeds
rupees twenty lakhs:
(b) To entertain appeals against the orders of any State
Commission; and
(c) To call for the records and pass appropriate orders in any
consumer dispute which is pending before, or has been
decided by any State Commission where it appears to the
National Commission that such Commission has exercised
a jurisdiction not vested in it by law, or has failed to exercise
a jurisdiction so vested, or has acted in the exercise of its
jurisdiction illegally or with material irregularity.
Complaints may be filed with the District Forum by :-
1. The consumer to whom such goods are sold or delivered
or agreed to be sold or delivered or such service provided
or agreed to be provided
2. Any recognised consumer association, whether the
consumer to whom goods sold or delivered or agreed to
be sold or delivered or service provided or agreed to be
provided, is a member of such association or not
3. One or more consumers, where there are numerous
consumers having the same interest with the permission
of the District Forum, on behalf of or for the benefit of,
all consumers so interested
4. The Central or the State Government.
On receipt of a complaint, a copy of the complaint is to be
referred to the opposite party, directing him to give his version
of the case within 30 days. This period may be extended by
another 15 days. If the opposite party admits the allegations
contained in the complaint, the complaint will be decided on
the basis of materials on the record. Where the opposite party
denies or disputes the allegations or omits or fails to take any
action to represent his case within the time provided, the
dispute will be settled in the following manner :-
I. In case of dispute relating to any goods : Where the
complaint alleges a defect in the goods which cannot be
determined without proper analysis or test of the goods, a
sample of the goods shall be obtained from the
complainant, sealed and authenticated in the manner
prescribed for referring to the appropriate laboratory for the
purpose of any analysis or test whichever may be necessary,
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 so as to find out whether such goods suffer from any other
defect. The appropriate laboratory’ would be required to
report its finding to the referring authority, i.e. the District
Forum or the State Commission within a period of forty-
five days from the receipt of the reference or within such
extended period as may be granted by these agencies.
How to File a Complaint
Procedures for filing complaints and seeking redressal are
simple.
• There is no fee for filing a complaint before the
District Forum, the State Commission or the National
Commission. ( A stamp paper is also not required)
There should be 3 to 5 copies of the complaint on
plain paper.
• The complainant or his authorized agent can present
the complaint in person.
• The complaint can be sent by post to the appropriate
Forum / Commission.
• A complaint should contain the following
information
(a) The name, description and the address of the complainant.
(b) The name , description and address of the opposite party
or parties, as the case may be, as far as they can be
ascertained;
(c) The facts relating to complaint and when and where it
arose;
(d) Documents, if any, in support of the allegations contained
in the complaint.
(e) The relief which the complainant is seeking.
• The complaint should be signed by the complainant
or his authorized agent.
• The complaint is to be filed within two years from the
date on which cause of action has arisen.
Relief Available to the Consumers
Depending on the nature of relief sought by the consumer and
facts, the Redressal Forums may give orders for one or more of
the following reliefs:-
(a) Removal of defects from the goods,
(b) Replacement of the goods;
(c) Refund of the price paid;
(d) Award of compensation for the loss or injury suffered;
(e) Removal of defects or deficiencies in the services;
(f) discontinuance of unfair trade practices or restrictive trade
practices or direction not to repeat them;
(g) Withdrawal of the hazardous goods from being offered to
sale; or
(h) Award for adequate costs to parties.
Procedure for Filing the Appeal
Procedure for filing the appeal :-
- Appeal against the decision of a District Forum can be
filed before the State Commission within a period of thirty
days. Appeal against the decision of a State Commission
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can be filed before the National Commission within thirty
LEGAL ASPECTS OF BUSINESS
days. Appeal against the orders of the National
Commission can be filed before the Supreme Court within
a period of thirty days.
• There is no fee for filing appeal before the State
Commission or the National Commission.
• Procedure for filing the appeal is the same as that of
complaint, except the application should be
accompanied by the orders of the District/State
Commission as the case may be and grounds for filing
the appeal should be specified.
Speedy Disposal
The thrust of the Act is to provide simple, speedy and inexpen-
sive redressal to consumers’ grievances. To ensure speedy
disposal of consumers’ grievances, the following provisions
have been incorporated in the Act and the rules farmed
thereunder:-
• It is obligatory on the complainant or appellant or their
authorized agents and the opposite parties to appear
before the Forum/Commission on the date of
hearing or any other date to which hearing could be
adjourned.
• The National Commission, State Commission and
District Forums are required to decide complaints, as
far as possible, within a period of three months from
the date of notice received by the opposite party where
complaint does not require analysis or testing of the
commodities and within five months if it requires
analysis or testing of commodities.
• The National Commission and State Commissions are
required to decide the appeal as far as possible, within
90 days from the first date of hearing.
Read the following questions for a better understanding of the
Act:
Q1. I have instituted a complaint before the Consumer Court
against a Medical Practitioner. My complaint has been
challenge on the ground that a Medical Practitioner cannot
be sued under the Consumer Act. What does law provide?
A. Yes, a medical practitioner can be sued under the Consumer
Protection Act 1986 for his or her professional negligence
resulting in damage to patient. Section 2 (d) in defining a
consumer in Clause (ii) uses the expression ‘hires and avails
of”. The word “hire” means employ of wages or fees”.
Secondly the words “any service” in s. 2 (d) (ii) in Consumer
Protection Act. A eloquent to bring the delinquent medical
practitioners within the ambit of Consumer Protection Act.
Thirdly, s. 2 (o), Consumer Protection Act which defines service
exempts only two types of services, one “service free of charge”
and another “contract of personal service” postulates a
relationship of master and servant. A medical man whose
service is requisitioned for a patient answers the clause “ contract
of service” but never “a contract of personal service”. So, a
negligent medical professional can be proceeded under the
Consumer Protection Act 1986.
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 Q2. I had purchased seeds from a party. The seeds did not
LEGAL ASPECTS OF BUSINESS
germinate. The other party took the plea that I was not a
consumer. Whether purchase of seeds for the purpose of
agriculture is purchase for commercial purpose?
A. Purchase made for agriculture is not for commercial purpose.
Therefore, the complainant is a consumer and entitled to seek
redressal of his grievance in a Consumer Court against the party
which supplied defective seed to him.
Q3. I had got a confirmed ticket on Sahara Airways. The flight
was later cancelled on account of technical snag. Is it a
deficiency in service?
A. Cancellation of flight on account of technical snag is not
deficiency in service as it is due to unavoidable circumstances.
However, you ought to be allowed refund of the fare but no
compensation can be granted on account of any loss suffered by
you (if any) because of the said cancellation.
Q4. I was allotted a Maruti Car. There was a delay in delivery of
the car. Subsequently, the dealer called upon me to make
further payment as the price of the car had gone up. Am I
liable to bear the price increase on account of delay caused
by the dealer?
A. You are not liable to pay any price increase in the above
mentioned circumstances since the increase in price is totally on
account of the delay on the part of the dealer for which a
consumer cannot be made to suffer.
Q5. Does rejection of application for grant of loan by a Bank
constitute deficiency in service for which I can approach the
Consumer Court?
A. The Bank has a wide discretion in the matter of granting
loans and advances and continuing disbursement of loans
sanctioned .The Consumer Courts cannot sit in judgement over
the discretion exercised by the Bank and as such you will not
succeed in any such action, if taken by you.
Q6. The transformer, which was supplying electricity to me, got
burned and was replaced by the department after about
two months. However, However I was billed with
consumption charges. Am I liable to pay any such charges
when there was no consumption of electricity by me?
A. When the electricity was not supplied and the electricity bills
produced by you showed that there was no consumption of
electricity by you and admittedly the reason for that was burning
of the transformer, you are not liable to pay any minimum
charges.
Q7. I had applied for electricity connection. However, power
supply was not provided to me. Can I seek redressal of my
grievance in Consumer Court?
A. Your grievances is that you application for electricity connec-
tion was not granted. Electricity may be a service but the hiring
of the service is not complete till the Electricity Board sanctions
service. Hence, you can’t approach a Consumer Court for
redressal of your said grievance. Your remedy is to file a civil suit
in the Court of law against the Electricity Board.
Q8. Can Consumer Forums adjudicate disputes involving scale
of pay?
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A. No, Consumer Forums do adjudicate dispute-involving scale
of pay.
Q9. I had applied for subscription in Rajlakshmi scheme of
UTI. The essence of the scheme was that the sum of
money deposited with the UTI would grow 21 times in 28
years. However subsequently, the UTI extended the
maturity date by two years. Can I approach a Consumer
Court?
A. Unilateral alteration of terms of payment by the UTI in their
above scheme is “Deficiency in Service” for which you can seek
relief in a consumer court.
Q10. My car met with an accident. The insurance claim was
rejected on the ground that my driver was not holding
valid driving license. Should I approach a Consumer Court
for seeking the Insurance claim?
A. The Consumer Court will not be able to grant you any relief
since the driver employed by you did not have a driving license.
You were bound under law to check the ability of the person
employed by you and the failure in holding a license for driving
well debar you from claiming the Insurance Claims.
Q11. I had purchased a fridge, which suffered from several
defects, and those defects could not be removed or repaired
by the Company. Can I seek redressal of my grievance?
A. You can certainly seek redressal before the Consumer Forum.
In a similar case as yours, the Forum appointed a Local
Commissioner who corroborated the version of the complain-
ant. It was held by the Forum that the fridge was found to be
defective within the period of warranty. The opposite party was
directed to replace the unit with a new one.
Q12. I filed a complaint before the State Commission regarding
payment of policy amount in death claim, which was
allowed to me by the State Commission. I wish to file
another complaint claiming the Double Accident Benefit.
Can I do so?
A. It is well-settled principal of law that one can not educate the
same cause of action before a court of law or before another
adjudicating Forum after it had already been adjudicating upon
earlier. This is the basis for the relevant provisions under the
Code of Civil Procedure, 1908 (CPC) which embody a sound
principal of law to obviate multiplicity of litigation. Even
though Consumer Forums are not governed by the CPC yet the
sound principles of law and procedure embody in that CPC are
followed by the Forums. Consequently, second complaint filed
on the same cause of action would not be maintainable.
Q13. I had applied for allotment for a plot and paid Rs.100 as
registration fees. At the time of draw my name was not
included. I lodged a complaint before the Consumer
Forum, wherein the Housing Board argued that I was not
a “Consumer” since no allotment had taken place. What is
the correct position in law?
A. Where the complainant had paid for the cost of application
form as well as the registration fee, he is the potential user and
the nature of transaction is covered by the expression “service
of any description”. As such the complaint is maintainable. The
Housing Board is deemed to have undertaken to include your
name in the draw of lots for allotment of a plot. However,
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your application has not been considered because your name
was not included in the draw. The only inference that can be
drawn is that the person who prepared the list was negligent in
discharge of his duty. You can proceed on this ground.
Q14. My grievance is that I had registered with the M.I.G.
scheme of the Haryana Housing Board and the board had
escalated the price of the flats three times within a period
of two years. Does my case lie within the jurisdiction of
Consumer Forums?
A. It has been laid down that under Consumer Protection Act
the pricing policy of flats cannot be adjudicated upon by
Consumer Forums. The question of pricing of the flat by
Housing Board is not a Consumer dispute. If any amount has
been illegally charged from you by Housing Board , you can
recover the same through a civil court.
Q15. A Complainant filed a case against our company who’s
grievance related to transactions dating back to years 1994-
95 while the complaint was filed in the year 1999. Is the
complaint within time?
A. Session 24 A of the Consumer Protection Act, 1986
provides a limitation period of two years within which the
complaint is required to be filed . In the light of the above, the
complaint is time barred and hence not maintainable.
Q16. My grievance is that I am not getting regular supply of
water. What can I do against the concerned Government
Authority before a Consumer Forum?
A. The Government supplying water is performing a statutory
functions which can not termed to be rendering of service.
Hence the Consumer Forums have no jurisdictions to entertain
such a complaint.
Q17. My grievance is that a Hospital where I was treated
declined to give me the medical records pertaining to my
treatment and operation for Ulcer. Can it be termed a
deficiency is service on the part of the hospital?
A. There is no negligence on the part of the hospital by reason
of such failure to supply the said papers unless there was a legal
duty cast on the hospital to furnish such documents to the
patients, which has to be seen from their Rules and Regula-
tions.
Q18. A registered letter sent to me was not delivered. What is
the liability of an employee of the Post Office in this
matter?
A. Section 6 of the Indian Post Office Act 1878 provides that
the Government shall not incur any liability by reasons of the
loss, mis-delivery or delay or damage to any postal article in
course of transmission by post except in so far as such liability
is made in express terms to be undertaken by the Government
and no Officer the Post Office shall incur any liability by reason
of such loss, mis-delivery , delay or damage unless he had
caused the same fraudulently or by his willful act or default. In
view of the said Section 6, your complaint is not maintainable
unless there is allegation an of fraud or willful act of negligence
of any postal employee.
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11.555
Q19. A Superfast Train in which I was travelling was delayed for
LEGAL ASPECTS OF BUSINESS
long hours without any reason. Can this be a ground for
filing a complaint against the Railways?
A. Additional charges are taken by the Railways from the
passengers travelling by a Superfast Train. If the trains are
delayed for long hours and the delay has not been properly
explained it amounts to deficiency in service and therefore the
Railway is bound to refund the excess charges.
Q20. I am a shareholder of HLL. Despite having made all the
payments, the share certificates were delivered very late. I
have claimed the loss in terms of the escalation in the
market price of the share. Is my claim valid?
A. Share market is a speculative market and there is bound to be
fluctuation in value of shares of the company depending on
market condition. Merely because the value of the share went
up you are not entitled to get compensation at the increased
rate, as damages are remote damages.
Q21. I had paid the telephone bill but inspite of that the
telephone department disconnect my telephone without
any notice. Can the department disconnect the telephone
without notice to the subscriber?
A. Disconnection cannot be effected without notice to the
subscriber. The Department is bound by law to give such a
notice. You can seek compensation for the same alongwith
restoration of the connection.
Q22. I had bought a scooter in last May, after some months it is
creating problem to me. When I complained to Service
center they serviced it and say the problem was removed.
But last week it is creating the same problem again. When I
complained them they return me the Scooter next day and
they say again that the problem was removed. But today it
is creating the same problem to me. Can I go to file a case
in consumer forum.
A. You can definitely file a case before the Consumer Forum
but the ideal remedy at this stage would be to complain to the
company i.e. Bajaj Scooters Ltd. against the service center and
wait for their response. In case nothing is done even after this,
then it will be prudent to file a case in the Consumer Forum.
Q23. We have been buying Parag milk packet 500 ml from a
retailer. The packet though gives only 400ml. What action
can we take against the company.
A. There is clear case of cheating and you can file a criminal
complaint under Section 421 of the Indian Penal Court. Besides
filing a Criminal complaint, you can also approach a Consumer
Court for this purpose. You must collect adequate evidence
before doing the same, i.e.; retain a sealed packet of Parag Milk
which indicates the quantity of 500ml but actually weighs
400ml.
Q24. I had deposited a booking amount with Pal-Peugeot,
letter the same was cancelled but no refund has come so
far, for the last two years. The matter was referred to Delhi
Consumer forum who referred to than (Maharashtra)
consumer forum. Documents were sent to them but of no
avail, again it was sent by us to Delhi as the deposit was
made to Premnath Motors Delhi but Delhi Consumer
forum has again written to follow than.
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 A. You should file an appeal before the State Commission with Consumer Forum at Delhi by making both the Company
LEGAL ASPECTS OF BUSINESS

against the order of the Consumer Forum. Since the cause of
action arose at Delhi, i.e.; the Distributor was located at Delhi
and money also seems to have been paid at Delhi the Delhi
Consumer Forum had the jurisdiction in case the distributors
(who work at Delhi) have been made parties to the said
petition. You should file an appeal against both the manufac-
turers as well as the distributors, i.e.; Prem Nath Motors against
the order.
Q25. I purchased on 1.1.2000 from a shop in Panjim, Goa a
bottle of Scotch Whiskey. I find that it is not original in
that it tastes too sweat. It appears to be spurious. I have
written letters to the MD, Goa Tourism but there is no
reply. What remedy is available to me to the relief.
A. You can certainly file a complaint before the Consumer
Forum against supply of Spurious Whisky supplied to you as
well as also lodge a Criminal Complaint in this regard. How-
ever, the difficulty (which is a major one) is that since the bottle
of Whisky has been open, it will be virtually impossible to
prove that the contents of the Whisky are the same as they were
when the bottle was sealed. Since, the legal system is totally
based on evidence / proof, it would not be a worthwhile
exercise to institute any legal proceedings in the facts and
circumstances of the present case.
Q26. I understand that under the Consumer Protection Act, a
complain has to be made within 2 years from the date on
which the cause of action arose. What happens in a case
where the 2 year period has elapsed because the I spent the
time writing(and replying to) to the manufacturer in the
hope that he would replace the good? What argument can I
give to the Forum in response to the plea of 2 years which
I know will be taken by the manufacturer?
A. It is correct that the Consumer Protection Act, provides for a
limitation period of two years for filing a complaint and the
said period starts from the date when the cause of action arose.
The same is provided under Section 24-A of the Consumer
Protection Act, 1986. However, the Consumer Forum has the
power to entertain a complaint even after the said period in case
it is convinced that the complaint could not be filed within the
said period on account of certain sufficient cause. Thus you
would have to give a good explanation in order to have the
delay condoned from the Consumer Forum. In case the only
ground pleaded by you is that you were corresponding with the
Manufacturer and hoping to get the goods replaced, the same
would not be construed as sufficient reasons for condoning the
delay.
Q27. Can I claim for replacement. If they do not replace the
vehicle can I move to consumer forum. Who should I
make a party i.e. the dealer, or the LML company or both
of them. The dealer is in Karol Bagh the company office in
Greater Kailash and factory’s regd. office in Kanpur in
which Jurisdiction/Zone should I file the complaint. Or
any other detail which you feel Justified to provide me.
A. You should again inform the Company about all the facts
and steps taken by them for removing the defect in writing and
further pursue the matter with the Company and try to get the
defect rectified. In case your efforts fail you can file the complaint
and the Dealer as parties to the complaint. Replacement is
allowed by Forum if the defect is such that it is not possible to
rectify the same. Give the Delhi address of the company and file
the complaint at Delhi.
Q28. I injured my knee in a game of football on 31st December
1997. It was diagnosed as ACL TEAR. For that I was
operated upon in the knee on 2nd March 1998. After the
operation my knee developed stiffness, which is unusual in
such cases even after undergoing physiotherapy for two
months I was unable to bend or straighten my knee. So
after two months of operation my knee was manipulated
under anesthesia to relieve stiffness. A plaster was put on
the knee for one month. I was told to start walking . I
used to walk with a limp. For about 8 months I continued
to walk with a limp but then my condition deteriorated &
in March-99 I had to start using crutches to move around.
To find out the cause of this pain I underwent
investigative arthoscopy in June-99 which revealed the
following 1. ACL Laxity 2. meniscus tear 3. patellofemoral
osteoarthritis . I was advised by the doctor to do
physiotherapy, and take painkillers for the pain, I am still
doing physiotherapy, but neither the pain has reduced nor
am I able to walk without crutches, this whole experience
has affected my life badly. Can I sue the doctors for
negligence / inefficiency. My both operations were carried
out in military hospitals, and they were done free of cost
since I am serving in army. So I can not go to Consumer
protection court. Please advise?.
A. You can file a writ petition in the High Court of judicature
against the hospital, making doctors responsible for your
condition a party. You can also seek damages alongwith the
appropriate action against the doctors and the management in
the writ petition .
References
• http://www.vakilno1.com/consumerprotect_qns.htm
• http://fcamin.nic.in/cpa.htm
• http://www.indiainfoline.com/lega/cptc/ch01.html
Notes:

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LESSON 39:
FEMA AND TRADE AND COPYRIGHTS ACT
Learning Objectives
After reading the lesson, you will be able to know about the:
• The brief outline of Fema
• The brief outline of Trade and Copyrights Act
Introduction
Today, we will discuss the two Acts as outlined above in brief
just to give you an idea as to the purpose of these Acts and the
brief introduction of these Acts.
Let us first talk about FEMA
FEMA (Foreign Exchange Management
Act)
The Foreign Exchange Management Act (FEMA) is a law to
replace the draconian Foreign Exchange Regulation Act, 1973.
Any offense under FERA was a criminal offense liable to
imprisonment, whereas FEMA seeks to make offenses relating
to foreign exchange civil offenses. Unlike other laws where
everything is permitted unless specifically prohibited, under
FERA nothing was permitted unless specifically permitted.
Hence the tenor and tone of the Act was very drastic. It
provided for imprisonment of even a very minor offense.
Under FERA, a person was presumed guilty unless he proved
himself innocent whereas under other laws, a person is
presumed innocent unless he is proven guilty.
With liberalization, a need was felt to remove the drastic
measures of FERA and replace them by a set of liberal foreign
exchange management regulations. Therefore FEMA was
enacted to replace FERA.
FEMA extends to the whole of India. It applies to all branches,
offices and agencies outside India owned or controlled by a
person resident in India and also to any contravention there
under committed outside India by any person to whom this
Act applies.
FEMA contains definitions of certain terms, which have been
used throughout the Act. The meaning of these terms may
differ under other laws or under common language. But for the
purposes of FEMA, the terms will signify the meaning as
defined there under. Let us take up some of the more impor-
tant ones.
“Authorized person” means an authorized dealer, money
changer, off-shore banking unit or any other person for the
time being authorized to deal in foreign exchange or foreign
securities;
“Capital Account Transaction” means a transaction which alters
the assets or liabilities, including contingent liabilities, outside
India of persons resident in India or assets or liabilities in India
of persons resident outside India, and includes transactions by
way of giving guarantees or surety for any debt, obligation or
other liability of (1) a person resident outside India or (2) of a
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11.555
LEGAL ASPECTS OF BUSINESS
person resident in India and owed to a person resident outside
India.
“Currency” includes all currency notes, postal notes, postal
orders, money orders, cheques, drafts, travelers cheques, letters
of credit, bills of exchange and promissory notes, credit cards or
such other similar instruments, as may be notified by the
Reserve Bank;
“Currency Notes” means and includes cash in the form of coins
and bank notes;
“Current Account Transaction” means a transaction other than a
capital account transaction and includes :-
i. Payments due in connection with foreign trade, other
current business, services, and short-term banking and
credit facilities in the ordinary course of business,
ii. Payments due as interest on loans and as net income
from investments,
iii. remittances for living expenses of parents, spouse and
children residing abroad,
iv. expenses in connection with foreign travel, education
and medical care of parents, spouse and children;
“Export”, with its grammatical variations and cognate expres-
sions, means :-
i. The taking out of India to a place outside India any
goods,
ii. Provision of services from India to any person outside
India;
“Foreign currency” means any currency other than Indian
currency;
“Foreign Exchange” means foreign currency and includes :-
i. Deposits, credits and balances payable in any foreign
currency,
ii. Drafts, travelers cheques, letters of credit or bills of
exchange, expressed or drawn in Indian currency but
payable in any foreign currency,
iii. Drafts, travelers cheques, letters of credit or bills of
exchange drawn by banks, institutions or persons
outside India, but payable in Indian currency;
“Foreign Security “ means any security, in the form of shares,
stocks, bonds, debentures or any other instrument denomi-
nated or expressed in foreign currency and includes securities
expressed in foreign currency, but where redemption or any
form of return such as interest or dividends is payable in Indian
currency;
“Import”, with its grammatical variations and cognate expres-
sions, means bringing into India any goods or services;
“Indian currency” means currency which is expressed or drawn
in Indian .rupees but does not include special bank notes and
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 special one rupee notes issued under section 28A of the Reserve
LEGAL ASPECTS OF BUSINESS
Bank of India Act, 1934 by the Ministry of Finance.
“Person” includes an individual, a Hindu undivided family, a
company, a firm, an association of persons or a body of
individuals, whether incorporated or not, every artificial juridical
person and any agency, office or branch owned or controlled by
such person;
“Person Resident in India” Means
i. a person residing in India for more than one hundred and
eighty-two days during the course of the preceding
Financial year but does not include :-
(a) a person who has gone out of India or who stays
outside India,
i. For or on taking up employment outside India, or
ii. For carrying on outside India a business or vocation
outside India, or
iii. For any other purpose, in such circumstances as would
indicate his intention to stay outside India for an
uncertain period;
a. A person who has come to or stays in India, otherwise
than
i. For or on taking up employment in India, or
ii. For carrying on in India a business or vocation in
India, or
iii. For any other purpose, in such circumstances as would
indicate his intention to stay in India for an uncertain
period;
i. Any person or body corporate registered or incorporated in
India,
ii. An office, branch or agency in India owned or controlled by
a person resident outside India,
iii. An office, branch or agency outside India owned or
controlled by a person resident in India.
“Repatriate to India” means bringing into India the realized
foreign exchange and
i. The selling of such foreign exchange to an authorized
person in India in exchange for rupees, or
ii. The holding of realized amount in an account with an
authorized person in India to the extent notified by
the Reserve Bank, and includes use of the realized
amount for discharge of a debt or liability
denominated in foreign exchange and the expression
“repatriation” shall be construed accordingly:
“Security” means shares, stocks, bonds and debentures,
Government securities, savings certificates, deposit receipts in
respect of deposits of securities and units of the Unit Trust of
India or of any mutual fund and includes certificates of title to
securities, but does not include bills of exchange or promissory
notes other than Government promissory notes or any other
instruments which may be notified by the Reserve Bank as
security for the purposes of this Act;
“Service” means service of any description which is made
available to potential users and includes the provision of
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198
facilities in connection with banking, financing, insurance,
medical assistance, legal assistance, chit fund, real estate,
transport, processing, supply of electrical or other energy,
boarding or lodging or both, entertainment, amusement or the
purveying of news or other information, but does not include
the rendering of any service free of charge or under a contract of
personal service;
“Transfer” includes sale, purchase, exchange, mortgage, pledge,
gift, loan or any other form of transfer of right, title, posses-
sion or lien.
What this Act actually regulates?
Regulation and Management of Foreign Exchange
Except with the general or special permission of the Reserve
Bank, no person can :-
a. Deal in or transfer any foreign exchange or foreign
security to any person not being an authorized person;
b. Make any payment to or for the credit of any person
resident outside India in any manner;
c. Receive otherwise through an authorized person, any
payment by order or on behalf of any person resident
outside India in any manner;
d. Where any person in, or resident in India receives any
payment by order or on behalf of any person resident
outside India through any other person (including an
authorized person) without a corresponding inward
remittance from any place outside India, then, such
person shall be deemed to have received such payment
otherwise than through an authorized
e. Enter into any financial transaction in India as
consideration for or in association with acquisition or
creation or transfer of a right to acquire, any asset
outside India by any person
Financial transaction means making any payment to, or for the
credit of any person, or receiving any payment for, by order or
on behalf of any person, or drawing, issuing or negotiating any
bill of exchange or promissory note, or transferring any security
or acknowledging any debt.
No person resident in India can acquire, hold, own, possess or
transfer any foreign exchange, foreign security or any immovable
property situated outside India except with the general or special
permission of the Reserve Bank.
Any person may sell or draw foreign exchange to or from an
authorized person if such sale or drawal is a current account
transaction. However, the Central Government may, in public
interest and in consultation with the Reserve Bank, impose
such reasonable restrictions for current account transactions as
may be prescribed.
Any person may sell or draw foreign exchange to or from an
authorized person for a capital account transaction. The Reserve
Bank may, in consultation with the Central Government, specify
a. Any class or classes of capital account transactions
which are permissible;
b. The limit up to which foreign exchange shall be admis
sible for such transactions:
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However, the Reserve Bank cannot impose any restriction on
the drawal of foreign exchange for payments due on account of
amortization of loans or for depreciation of direct investments
in the ordinary course of business.
The Reserve Bank can, by regulations, prohibit, restrict or
regulate the following :-
a. Transfer or issue of any foreign security by a person
resident in India;
b. Transfer or issue of any security by a person resident
outside India;
c. Transfer or issue of any security or foreign security by
any branch, office or agency in India of a person
resident outside India;
d. Any borrowing or lending in foreign exchange in
whatever form or by whatever name called;
e. Any borrowing or tending in rupees in whatever form
or by whatever name called between a person resident
in India and a person resident outside India;
f. Deposits between persons resident in India and
persons resident outside India;
g. Export, import or holding of currency or currency
notes;
h. Transfer of immovable property outside India, other
than a lease not exceeding five years, by a person
resident in India;
i. Acquisition or transfer of immovable property in
India, other than a lease not exceeding five years, by a
person resident outside India;
j. Giving of a guarantee or surety in respect of any debt,
obligation or other liability incurred (i) by a person
resident in India and owed to a person resident
outside India or (ii) by a person resident outside India.
A person resident in India may hold, own, transfer or invest in
foreign currency, foreign security or any immovable property
situated outside India if such currency, security or property was
acquired, held or owned by such person when he was resident
outside India or inherited from a person who was resident
outside India.
A person resident outside India may hold, own, transfer or
invest in Indian currency, security or any immovable property
situated in India if such currency, security or property was
acquired, held or owned by such person when he was resident
in India or inherited from a person who was resident in India.
The Reserve Bank may, by regulation, prohibit, restrict, or
regulate establishment in India of a branch, office or other place
of business by a person resident outside India, for carrying on
any activity relating to such branch, office or other place of
business.
Every exporter of goods must :-
a. Furnish to the Reserve Bank or to such other authority
a declaration in such form and in such manner as may
be specified, containing true and correct material
particulars, including the amount representing the full
export value or, if the full export value of the goods is
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11.555
not ascertainable at the time of export, the value which
LEGAL ASPECTS OF BUSINESS
the exporter, having regard to the prevailing market
conditions, expects to receive on the sale of the goods
in a market outside India;
b. Furnish to the Reserve Bank such other information as
may be required by the Reserve Bank for the purpose
of ensuring the realization of the export proceeds by
such exporter.
The Reserve Bank may, for the purpose of ensuring that the
full export value of the goods or such reduced value of the
goods as the Reserve Bank determines, having regard to the
prevailing market-conditions, is received without any delay,
direct any exporter to comply with such requirements as it
deems fit.
Every exporter of services shall furnish to the Reserve Bank or
to such other authorities a declaration in such form and in such
manner as may be specified, containing the true and correct
material particulars in relation to payment for such services.
Where any amount of foreign exchange is due or has accrued to
any person resident in India, such person shall take all reason-
able steps to realize and repatriate to India such foreign
exchange within such period and in such manner as may be
specified by the Reserve Bank.
What if the Contravention of The Act takes place? What are the
penalties for it ?
If any person contravenes any provision of this Act, or
contravenes any rule, regulation, notification, direction or order
issued in exercise of the powers under this Act, or contravenes
any condition subject to which an authorization is issued by the
Reserve Bank, he shall, upon adjudication, be liable to a penalty
up to thrice the sum involved in such contravention where such
amount is quantifiable, or up to two lakh rupees where the
amount is not quantifiable, and where such contravention is a
continuing one, further penalty which may extend to five
thousand rupees for every day after the first day during which
the contravention continues.Any Adjudicating Authority
adjudging any contravention may, if he thinks fit in addition to
any penalty which he may impose for such contravention direct
that any currency, security or any other money or property in
respect of which the contravention has taken place shall be
confiscated to the Central Government and further direct that
the foreign exchange holdings, if any, of the persons commit-
ting the contraventions or any part thereof, shall be brought
back into India or shall be retained outside India in accordance
with the directions made in this behalf.
“Property” in respect of which contravention has taken place,
shall include deposits in a bank, where the said property is
converted into such deposits, Indian currency, where the said
property is converted into that currency; and any other property
which has resulted out of the conversion of that property.
If any person fails to make full payment of the penalty
imposed on him within a period of ninety days from the date
on which the notice for payment of such penalty is served on
him, he shall be liable to civil imprisonment.
No order for the arrest and detention in civil prison of a
defaulter shall be made unless the Adjudicating Authority has
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 issued and served a notice upon the defaulter calling upon him
LEGAL ASPECTS OF BUSINESS
to appear before him on the date specified in the notice and to
show cause why he should not be committed to the civil
prison, and unless the Adjudicating Authority, for reasons in
writing, is satisfied :-
a. That the defaulter, with the object or effect of
obstructing the recovery of penalty, has after the issue
of notice by the Adjudicating Authority, dishonestly
transferred, concealed or removed any part of his
property ; or
b. That the defaulter has, or has had since the issuing of
notice by the Adjudicating Authority, the means to pay
the arrears or some substantial part thereof and refuses
or neglects or has reused or neglected to pay the same.
A warrant for the arrest of the defaulter may be issued by the
Adjudicating Authority if the Adjudicating Authority is
satisfied, by affidavit or otherwise, that with the object or effect
of delaying the execution of the certificate the defaulter is likely
to abscond or leave the local limits of the jurisdiction of the
Adjudicating Authority.
Where appearance is not made pursuant to a notice issued and
served, the Adjudicating Authority may issue a warrant for the
arrest of the defaulter.
A warrant of arrest issued by the Adjudicating Authority may
also be executed by any other Adjudicating Authority within
whose jurisdiction the defaulter may for the time being be
found.
Every person arrested in pursuance of a warrant of arrest shall
be brought before the Adjudicating Authority issuing the
warrant as soon as practicable and in any event within twenty-
four hours of his arrest (exclusive of the time required for the
journey). However, if the defaulter pays the amount entered in
the warrant of arrest as due and the costs of the arrest to the
officer arresting him, such officer shall at once release him.
When a defaulter appears before the Adjudicating Authority
pursuant to a notice to show cause or is brought before the
Adjudicating Authority, the Adjudicating Authority shall give
the defaulter an opportunity showing cause why he should not
be committed to the civil prison.
Pending the conclusion of the inquiry, the Adjudicating
Authority may, in his discretion, order the defaulter to be
detained in the custody of such officer as the Adjudicating
Authority may think fit or release him on his furnishing the
security to the satisfaction of the Adjudicating Authority for his
appearance as and when required.
Upon the conclusion of the inquiry, the Adjudicating Authority
may make an order for the detention of the defaulter in the civil
prison and shall in that event cause him to be arrested if he is
not already under arrest. However in order to give a defaulter an
opportunity of satisfying the arrears, the Adjudicating Author-
ity may, before making the order of detention, leave the
defaulter in the custody of the officer arresting him or of any
other officer for a specified period not exceeding fifteen days, or
release him on his furnishing security to the satisfaction of the
Adjudicating Authority for his appearance at the expiration of
the specified period if the arrears are not satisfied.
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200
When the Adjudicating Authority does not make an order of
detention, he shall, if the defaulter is under arrest, direct his
release.
Every person detained in the civil prison in execution of the
certificate may be so detained ;-
a. Where the certificate is for a demand of an amount
exceeding rupees one crore, up to three years, and
b. In any other case, up to six months
However he shall be released from such detention on the
amount mentioned in the warrant for his detention being paid
to the officer-in-charge of the civil prison.
A defaulter released from detention shall not, merely by reason
of is/release, be discharged from his liability for the arrears, but
he shall not be liable to be arrested under the certificate in
execution of which he was detained in the civil prison.
A detention order may be executed at any place in India in the
manner provided for the execution of warrant of arrest under
the Code of Criminal Procedure, 1973.
Any such contravention may, on an application made by the
person committing such contravention, be compounded (i.e.
fine paid in lieu of imprisonment) within one hundred and
eighty days from the date of receipt of application by the
Director of Enforcement or such other officers of the Director-
ate of Enforcement and officers of the Reserve Bank as may be
authorized in this behalf by the Central Government in such
manner as may be prescribed.
Where a contravention has been compounded, no proceeding
or further proceeding, as the case may be, shall be initiated or
continued, as the case may be, against the person committing
such contravention, in respect of the contravention so com-
pounded.
What are the adjudication authorities and where the appeal can
be filed?
Adjudication and Appeal
For the purpose of adjudication, the Central Government may,
by an order published in the Official Gazette, appoint as many
officers of the Central Government as it may think fit, as the
Adjudicating Authorities for holding an inquiry in the manner
prescribed after giving the person alleged to have committed
contravention, against whom a complaint has been made a
reasonable opportunity of being heard for the purpose of
imposing any penalty.However where the Adjudicating
Authority is of opinion that the said person is likely to abscond
or is likely to evade in any manner, the payment of penalty, if
levied, it may direct the said person to furnish a bond or
guarantee for such amount and subject to such conditions as it
may deem fit.
No Adjudicating Authority shall hold an enquiry except upon a
complaint in writing made by any officer authorized by a general
or special order by the Central Government.
The said person may appear either in person or take the
assistance of a legal practitioner or a chartered accountant of his
choice for presenting his case before the Adjudicating Authority.
Every Adjudicating Authority shall have the same powers of a
civil court and :-
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 a. All proceedings before it shall be deemed to be judicial
proceedings within the meaning of sections 193 and
228 of the Indian Penal Code;
b. Shall be deemed to be a civil court for the purposes of
sections 345 and 346 of the Code of Criminal
Procedure, 1973.
c.
Every Adjudicating Authority shall deal with the complaint as
expeditiously as possible and endeavor shall be made to
dispose off the complaint finally within one year from the date
of receipt of the complaint. However, where the complaint
cannot be disposed off within the said period, the Adjudicating
Authority shall record periodically the reasons in writing for not
disposing off the complaint within the said period.
The Central Government shall, by notification, appoint one or
more Special Directors (Appeals) to hear appeals against the
orders of the Adjudicating Authorities under this section and
shall also specify in the said notification the matter and places in
relation to which the Special Director (Appeals) may exercise
jurisdiction.
Any person aggrieved by an order made by the Adjudicating
Authority, being an Assistant Director of Enforcement or a
Deputy Director of Enforcement, may prefer an appeal to the
Special Director (Appeals).
Every appeal must be filed within forty-five days from the date
on which the copy of the order made by the Adjudicating
Authority is received by the aggrieved person and it shall be in
such form verified in such manner and be accompanied by such
fee as may be prescribed. However, the Special Director (Ap-
peals) may entertain an appeal after the expiry of the said period
of forty-five days if he is satisfied that there was sufficient cause
for not filing it within that period.
On receipt of an appeal, the Special Director (Appeals) may after
giving the parties to the appeal an opportunity of being heard,
pass such order thereon as he thinks fit confirming, modifying
or setting aside the order appealed against.
The Special Director (Appeals) shall send a copy of every order
made by him to the parties to appeal and to the concerned
Adjudicating Authority.
Every Special Director (Appeals) shall have the same powers of
a civil court and :-
d. All proceedings before it shall be deemed to be judicial
proceedings within the meaning of sections 193 and
228 of the Indian Penal Code;
e. Shall be deemed to be a civil court for the purposes of
sections 345 and 346 of the Code of Criminal
Procedure, 1973.
The Central Government shall, by notification, establish an
Appellate Tribunal to be known as the Appellate Tribunal for
Foreign Exchange to hear appeals against the orders of the
Adjudicating Authorities and the Special Director (Appeals)
under this Act.
The Central Government or any person aggrieved by an order
made by the Adjudicating Authority or Special Director
(Appeals), may prefer an appeal to the Appellate Tribunal.
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However, any person appealing against the order of the
LEGAL ASPECTS OF BUSINESS
Adjudicating Authority or the Special Director (Appeals) levying
any penalty, shall while filing the appeal, deposit the amount of
such penalty with such authority as may be notified by the
Central Government. Where in any particular case, the Appellate
Tribunal is of the opinion that the deposit of such penalty
would cause undue hardship to such person, the Appellate
Tribunal may dispense with such deposit subject to such
conditions as it may deem fit to impose so as to safeguard the
realization of penalty.
An appeal to the Appellate Tribunal must be filed within a
period of forty-five days from the date on which a copy of the
order made by the Adjudicating Authority or the Special
Director (Appeals) is received by the aggrieved person or by the
Central Government and it shall be in such form, verified in
such manner and be accompanied by such fee as may be
prescribed. The Appellate Tribunal may entertain an appeal after
the expiry of the said period of forty-five days if it is satisfied
that there was sufficient cause for not filing it within that
period.
On receipt of an appeal, the Appellate Tribunal may, after giving
the parties to the appeal an opportunity of being heard, pass
such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against.
The Appellate Tribunal shall send a copy of every order made
by it to the parties to the appeal and to the concerned Adjudicat-
ing Authority or the Special Director (Appeals), as the case may
be.
The appeal filed before the Appellate Tribunal shall be so dealt
with by it as expeditiously as possible and endeavour shall be
made by it to dispose the appeal finally within one hundred and
eighty days from the date of receipt of the appeal. Where any
appeal could not be disposed oft’ within the said period of one
hundred and eighty days, the Appellate Tribunal shall record its
reasons in writing for not disposing off the appeal within the
said period.
The Appellate Tribunal may, for the purpose of examining the
legality, propriety or correctness of any order made by the
Adjudicating Authority in relation to any proceeding, on its
own motion or otherwise, call for the records of such proceed-
ings and make such order in the case as it thinks fit.
Let us talk about some other miscellaneous provisions in brief.
Miscellaneous
Where any document
a. Is produced or furnished by any person or has been
seized from the custody or control of any person, in
either case, under this Act or under any other
law; or
b. Has been received from any place outside India (duly
authenticated by such authority or person and in such
manner as may be prescribed) in the course of
investigation of any contravention under this Act
alleged to have been committed by any person,
and such document is tendered in any proceeding under this
Act in evidence against him, or against him and any other
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 person who is proceeded against jointly with him, the court or
LEGAL ASPECTS OF BUSINESS
the Adjudicating Authority, as the case may be shall :-
a. Presume, unless the contrary is proved, that the
signature and every other part of such document
which purports to be in the handwriting of any
particular person or which the court may reasonably
assume to have been signed by, or to be in the
handwriting of, any particular person, is in that
person’s handwriting, and in the case of a document
executed or attested, that it was executed or attested by
the person by whom it purports to have been so
executed or attested.
b. Admit the document in evidence notwithstanding that
it is not duly stamped if such document is otherwise
admissible in evidence.
c. Unless the contrary is proved, the truth of the contents
of such document.
For the purposes of this Act, the Central Government may,
from time to time, give to the Reserve Bank such general or
special directions as it thinks fit, and the Reserve Bank shall, in
the discharge of its functions under this Act, comply with any
such directions.
Where a person committing a contravention of any of the
provisions of this Act or of any rule, direction or order made
there under is a company, every person who, at the time the
contravention was committed, was in charge of, and was
responsible to the company for the conduct of the business of
the company as well as the company, shall be deemed to be
guilty of the contravention and shall be liable to be proceeded
against and punished accordingly.
However any such person will not be liable to punishment if he
proves that the contravention took place without his knowledge
or that he exercised due diligence to prevent such contravention.
Where a contravention of any of the provisions of this Act or
of any rule, direction or order made thereunder has been
committed by a company and it is proved that the contraven-
tion has taken place with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, man-
ager, secretary or other officer shall also be deemed to be guilty
of the contravention and shall be liable to be proceeded against
and punished accordingly.
The same provisions also apply to a firm or other association
of individuals.
Notwithstanding anything contained in any other law for the
time being in force, no court shall take cognizance of an offence
under FERA and no adjudicating officer shall take notice of any
contravention under section 51 of the repealed FERA after the
expiry of a period of two years from the date of the com-
mencement of this Act.
If any difficulty arises in giving effect to the provisions of this
Act, the Central Government by order do anything not
inconsistent with the provisions of this Act for the purpose of
removing the difficulty.The Central Government may by
notification make rules to carry out the provisions of this
Act.The Reserve Bank may by notification make regulations to
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carry out the provisions of this Act and the rules made
thereunder.
This was all about the FEMA.
Let us now talk of the Trade, Patents and Copyrights Act as
prevalent In India.
Trade, Patents and Copy Rights Act
These Acts are covered under the Intellectual Property Rights.
Do you know what is Intellectual Property Rights
(IPR)?
IPR is a general term covering patents, copyright, trademark,
industrial designs, geographical indications, protection of layout
design of integrated circuits and protection of undisclosed
information (trade secrets).
Legislations covering IPRs in India are the Following
Patents: The Patents Act,1970 and was amended in 1999 and
2002. The amended Act after the amendments made in 2002
came in to force on May 20, 2003.
Design: A new Design Act 2000 has been enacted superseding
the earlier Designs Act 1911.
Trade Mark: A new Trademarks Act, 1999 has been enacted
superseding the earlier Trade and Merchandise Marks Act, 1958.
The Act came in force from September 15, 2003
Copyright: The Copyright Act, 1957 as amended in 1983, 1984
and 1992, 1994,1999 and the Copyright Rules, 1958.
Layout Design of Integrated Circuits: The Semiconductor
Integrated Circuit Layout Design Act 2000. (Enforcement
pending)
Protection of Undisclosed Information: No exclusive legisla-
tion exists but the matter would be generally covered under the
Contract Act, 1872.
Geographical Indications: The Geographical Indication of
Goods (Registration and Protection) Act 1999.
Administration of IPRs in the Country
Patents, designs, trademarks and geographical indications are
administered by the Controller General of Patents, Designs and
Trade Marks which is under the control of the Department of
Industrial Policy and Promotion, Ministry of Commerce and
Industry. Copyright is under the charge of the Ministry of
Human Resource Development. The Act on Lay out Design of
Integrated Circuits. Will be implemented by the Ministry of
Communication and Information Technology.
Let us now concentrate on the outline of Trade and Copyrights
Act.
Copyrights
India’s copyright law, laid down in the Indian Copyright Act,
1957 as amended by Copyright (Amendment) Act, 1999, fully
reflects the Berne Convention on Copyrights, to which India is
a party. Additionally, India is party to the Geneva Convention
for the Protection of rights of Producers of Phonograms and
to the Universal Copyright Convention. India is also an active
member of the World Intellectual Property Organization
(WIPO), Geneva and UNESCO.
The copyright law has been amended periodically to keep pace
with changing requirements. The recent amendment to the
copyright law, which came into force in May 1995, has ushered
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in comprehensive changes and brought the copyright law in line diagnostic, therapeutic and surgical methods of the treatment

LEGAL ASPECTS OF BUSINESS

with the developments in satellite broadcasting, computer of human and animals and plants and animal other than
software and digital technology. The amended law has made micro-organisms and essentially biological processes for the
provisions for the first time, to protect performer’s rights as production of plants and animals.
envisaged in the Rome Convention The TRIPS Agreement provides for a minimum term of
Several measures have been adopted to strengthen and stream- protection of 20 years counted from the date of filing.
line the enforcement of copyrights. These include the setting up India had already implemented its obligations under Articles
of a Copyright Enforcement Advisory Council, training 70.8 and 70.9 of TRIP Agreement.
programs for enforcement officers and setting up special policy
A comprehensive review of the Patents Act, 1970 was also
cells to deal with cases relating to infringement of copyrights.
made and a bill to amend the Patents Act, 1970 was introduced
Trade Marks in Parliament on 20 December, 1999 and notified on 25-6-2002
Trademarks have been defined as any sign, or any combination to make the patent law TRIPS compatible.
of signs capable of distinguishing the goods or services of one
References
undertaking from those of other undertakings. Such distin-
guishing marks constitute protect able subject matter under the • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
provisions of the TRIPS Agreement. The Agreement provides Sultan Chand and Sons, New Delhi.
that initial registration and each renewal of registration shall be • http://www.vakilno1.com
for a term of not less than 7 years and the registration shall be • http://www.saarclawnet.com/saarclawnet/osca20.html
renewable indefinitely. Compulsory licensing of trademarks is
• http://dipp.nic.in/ipr.htm
not permitted.
Keeping in view the changes in trade and commercial practices,
globalization of trade, need for simplification and harmoniza- Notes:
tion of trade marks registration systems etc., a comprehensive
review of the Trade and Merchandise Marks Act, 1958 was made
and a Bill to repeal and replace the 1958 Act has since been
passed by Parliament and notified in the Gazette on 30.12.1999.
This Act not only makes Trade Marks Law, TRIPS compatibility
but also harmonizes it with international systems and practices.
Work is underway to bring the law into force.
Geographical Indications
The Agreement contains a general obligation that parties shall
provide the legal means for interested parties to prevent the use
of any means in the designation or presentation of a good that
indicates or suggests that the good in question originates in a
geographical area other than the true place of origin in a manner
which misleads the public as to the geographical origin of the
goo. There is no obligation under the Agreement to protect
geographical indications which are not protected in their country
or origin or which have fall en into disuse in that country.
A new law for the protection of geographical indications, viz.
the Geographical Indications of Goods (Registration and the
Protection) Act, 1999 has also been passed by the Parliament
and notified on 30.12.1999 and the rules made thee under
notified on 8-3-2002.
Patents
The basic obligation in the area of patents is that, invention in
all branches of technology whether products or processes shall
be patent able if they meet the three tests of being new
involving an inventive step and being capable of industrial
application. In addition to the general security exemption which
applied to the entire TRIPS Agreement, specific exclusions are
permissible from the scope of patent ability of inventions, the
prevention of whose commercial exploitation is necessary to
protect public order or morality, human, animal, plant life or
health or to avoid serious prejudice to the environment.
Further, members may also exclude from patent ability of

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LEGAL ASPECTS OF BUSINESS

LESSON 40:

Group Discussion on the Intellectual Property Rights.

Notes:

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