Chapter Indian Contract Act,1872

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Indian Contract Act, 1872

Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his Acceptance by post.
Next day, Ramanathan sends a telegram withdrawing his Acceptance. Examine the Validity of the
Acceptance According to the Indian Contract Act, 1872 in the light of the following:
a. The telegram of revocation of Acceptance was received by Ramaswami before the letter of
Acceptance.
b. The telegram of revocation And letter of Acceptance both reached together.
Provision: [Section 4 of Indian Contract Act, 1872]
1. The problem is related with the communication and time of Acceptance and its revocation. As per
Section 4 of the Indian Contract Act, 1872, the communication of An Acceptance is complete as
against the Acceptor when it comes to the knowledge of the proposer.
2. The communication of an acceptance is complete, as against the proposer, when it is put in a
course of transmission to him so as to be out of the power of the acceptor;
3. The communication of a revocation is complete, as against the person who makes it, when it is put
into a course of transmission to the person to whom it is made, so as to be out of the power of the
person who makes it; & as against the person to whom it is made, when it comes to his knowledge.
Facts of Case:
In given case Ramaswami wants to sell his house to Ramanathan and Ramananthan also sent his
acceptance by post. But afterwards the next day Ramananthan changed his mind and sends a
telegram for withdrawing his acceptance.
Answer:
a. Yes, the revocation of acceptance by Ramanathan (the acceptor) is valid.
b. If Ramaswami opens the telegram first (and this would be normally so in case of a rational person)
and reads it, the acceptance stands revoked. If he opens the letter first and reads it, revocation of
acceptance is not possible as the contract has already been concluded.

“An anticipatory breach of contract is a breach of contract occurring before the time fixed
for performance has arrived”. Discuss stating also the effect of anticipatory breach on contracts.
Provision: [Section 4 of Indian Contract Act, 1872]
1. An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise and
signifies his unwillingness even before the time for performance has arrived, it is called
Anticipatory Breach.
2. Section 39 of the Indian Contract Act, 1872 deals with anticipatory breach of contract and provides
that, "When a party to a contract has refused to perform or disable himself from
performing, his promise in its entirety, the promisee may put an end to the contract, unless he has
signified, but words or conduct, his acquiescence in its continuance."

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3. Effect of anticipatory breach: The promisee is excused from performance or from further
performance. Further he gets an option:
a) To either treat the contract as “rescinded and sue the other party for damages from breach of
contract immediately without waiting until the due date of performance; or
b) He may elect not to rescind but to treat the contract as still operative, and wait for the time of
performance and then hold the other party responsible for the consequences of non-
performance.
c) In this case, he will keep the contract alive for the benefit of the other party as well as his own,
and the guilty party, if he so decides on re-consideration, may still perform his part of the
contract and can take advantage of any supervening impossibility, which may have the effect of
discharging the contract.

Mr. Balwant, an old man, by a registered deed of gift, granted certain landed property to
Ms. Reema, his daughter. By the terms of the deed, it was stipulated that an annuity of Rs 20, 000
should be paid every year to Mr. Sawant, who was the brother of Mr. Balwant. On the same day
Ms. Reema made a promise to Mr. Sawant and executed in his favour an agreement to give effect
to the stipulation. Ms. Reema failed to pay the stipulated sum. In an action against her by Mr.
Sawant, she contended that since Mr. Sawant had not furnished any consideration, he has no
right of action. Examining the provisions of the Indian Contract Act, 1872, decide, whether the
contention of Ms. Reema is valid?
Provision: [Section 2(d) of Indian Contract Act, 1872]
1. The definition of consideration as given in section 2(d) makes that proposition clear.
According to the definition, when at the desire of the promisor, the promisee or any other person
does something such an act is consideration.
2. Consideration can be offered by the promisee or a third-party only at the request or desire of the
promisor. If an action is initiated at the desire of the third-party, it is not a consideration
3. If you look at the definition of consideration according to section 2 (d) of the Indian Contract Act.
1872, it explicitly states the phrase ‘promisee or any other person…’ This essentially means that in
India, consideration may move from the promise to any other person. However, it is important to
note that there can be a stranger to consideration but not a stranger to the contract.
Facts of Case:
1. In the given problem, Mr. Balwant has entered into a contract with Ms. Reema, but Mr. Sawant has
not given any consideration to Ms. Reema but the consideration did flow from Mr. Balwant to Ms.
Reema and such consideration from third party is sufficient to the enforce the promise of Ms.
Reema, the daughter, to pay an annuity to Mr. Sawant.
2. Further, the deed of gift and the promise made by Ms. Reema to Mr. Sawant to pay the annuity
were executed simultaneously, therefore they should be regarded as one transaction, and there
was sufficient consideration for it.
Answer:
Thus, a stranger to the contract cannot enforce the contract but a stranger to the consideration may
enforce it. Hence, the contention of Ms. Reema is not valid.

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A coolie in uniform picks up the luggage of R to be carried out of the railway station without being
asked by R And R Allows him to do so. Examine whether the coolie is entitled to receive money
from R under the Indian Contact Act, 1872?
Provision: [Indian Contract Act, 1872]
Implied contracts come into existence by implication. Most often the implication is by law and or
by action. Section 9 of the Indian Contract Act, 1872 contemplates such implied contracts when it lays
down that in so far as such proposal or acceptance is made otherwise than in words, the promise is
said to be implied.
Going by the definition we can say that a contract in which the terms of the agreement are not
expressed in written or oral form is an implied contract.
Facts of Case:
In given case a coolie without being asked picks up the luggage of R to be carried out of the railway
station and R allows him to do so.
Answer:
In the present case, it is an implied contract and R must pay for the services of the coolie.

Point out with reason whether the following agreements are valid or void:
a. Kamala promises Ramesh to lend Rs 500,000 in lieu of consideration that Ramesh gets Kamala’s
marriage dissolved and he himself marries her
b. Sohan Agrees with Mohan to sell his black horse. Unknown to both the parties, the horse was
dead at the time of Agreement.
c. Ram sells the goodwill of his shop to Shyam for Rs 4, 00,000 and promises not to carry on such
business forever And Anywhere in India.
d. In An Agreement between Prakash and Girish, there is A Condition that they will not institute
legal proceedings against each other without consent.
e. Ramamurthy, who is A Citizen of India, enters into An Agreement with An Alien friend.
Provision: [Indian Contract Act, 1872]
1. Valid Contract: A valid contract is enforceable by law and if a contract is not valid it may lead to
obstruction of businesses and unlawful and insincere dealings.
2. Void Agreement: An agreement not enforceable by law is said to be void.
3. Voidable contract: 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 others, is a voidable contract.
4. Void Contract: A contract, which ceases to be enforceable by law, becomes void when it ceases to
be enforceable.
5. Illegal Contract: An agreement that leads to one or all the parties breaking a law or not conforming
to the norms of the society is deemed illegal by the court. A contract opposed to public policy is
also illegal.
Answer:
a. Void Agreement: As per Section 23 of the Indian Contract Act, 1872, an agreement is void if the
object or consideration is against the public policy.

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b. Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contracts caused by
mistake of fact are void. There is mistake of fact as to the existence of subject matter.
c. Void Agreement: As per Section 27 of the Indian Contract Act, 1872 an agreement in restraint of
trade is void. However, a buyer can put such a condition on the seller of good will, not to carry on
same business. However, the conditions must be reasonable regarding the duration and the place
of the business.
d. Void Agreement: An agreement in restraint of legal proceedings is void as per Section 28 of the
Indian Contract Act, 1872.
e. Valid Agreement: An agreement with alien friend is valid, but an agreement with alien enemy is
void.

Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay Rs 6, 00, 000 to
Kartik. Over a period, Vijay became insolvent, but his assets are sufficient to pay one-fourth of his
debts. Sanjay is compelled to pay the whole. Decide whether Sanjay is required to pay whole
amount himself to Kartik in discharging joint promise under the Indian Contract Act, 1872.
Provision: [Section 43 Indian Contract Act, 1872]
1. When two or more persons make a joint promise, the promisee may, in the absence of express
agreement to the contrary, compel any 1[one or more] of such joint promisors to perform the
whole of the promise.
2. 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
3. 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.
Facts of Case:
1. Ajay, Vijay, and Sanjay were partners of a software business. They jointly promises to pay 6, 00,000
to Kartik.
2. Afterwards Vijay became insolvent and can only pay one-fourth of his debts and due to which
Sanjay is compelled to pay the whole amount to Kartik.
Answer:
Therefore, by considering the above provisions and facts of the case here Sanjay paid the whole
amount 6, 00,000 to Kartik. He will receive 50,000 from Vijay ( 1/4th of 2,00,000) and 2,75,000 from
Ajay ( 2,00,000 of his part of debt and 75,000 of the debt of 1,50,000 from Vijay’s part which shall be
paid by Sanjay & Ajay due to insolvency of Vijay.)

X, Y and Z are partners in a firm. They jointly promised to pay Rs 3, 00,000 to D. Y become insolvent
and his private assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole
amount to D. Examining the provisions of the Indian Contract Act, 1872, decide the extent to which
X can recover the amount from Z.
Provision: [Section 43 Indian Contract Act, 1872]

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1. When two or more persons make a joint promise, the promisee may, in the absence of express
agreement to the contrary, compel any 1[one or more] of such joint promisors to perform the
whole of the promise.
2. 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
3. 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.
Facts of Case:
In the instant case, X, Y and Z jointly promised to pay Rs 3, 00,000. Y become insolvent and his
private assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole
amount
Answer:
Therefore, by considering the above provisions and facts of the case here X paid the whole amount 3,
00,000 to D. He will receive 20,000 from Y ( 1/5th of 1,00,000) and 1,40,000 from Z ( 1,00,000 of his
part of debt and 40,000 of the debt of 80,000 from Vijay’s part which shall be paid by Sanjay & Ajay
due to insolvency of Vijay.)

M Ltd., contract with Shanti Traders to make and deliver certain machinery to them by 30.6.2017
for Rs 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver the machinery to
Shanti Traders. Later, Shanti Traders procured the machinery from another manufacturer for Rs
12.75 lakhs. Due to this Shanti Traders was also prevented from performing a contract, which it
had made with Zenith Traders at the time of their contract with M Ltd. and were compelled to pay
compensation for breach of contract. Advise Shanti Traders the amount of compensation, which it
can claim from M Ltd., referring to the legal provisions of the Indian Contract Act, 1872.
Provision: [Section 73 Indian Contract Act, 1872]
1. When a contract has been broken, the party who suffers by such breach is entitled to receive, from
the party who has broken the contract, compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of it.
2. Such compensation is not to be given for any remote and indirect loss or damage sustained
because of the breach.
3. When an obligation resembling those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and had
broken his contract.
4. It is further provided in the explanation to the section that in estimating the loss or damage from a
breach of contract, the means which existed of remedying the inconvenience caused by the non -
performance of the contract must be taken into account.
Facts of Case:

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1. In given case M ltd contracted to make & deliver certain machinery for Rs. 11.50 lakhs to Shanti
Traders but due to labour strike, M ltd could not manufacture the machinery.
2. Later Shanti Traders procured the machinery from another manufacture for Rs. 12.75 lakhs
3. Due to failure to provide machinery by M ltd, Shanti Traders were unable to perform contract,
which it had made with Zenith Traders and were compelled to pay compensation for breach of
contract.
Answer:
1. Applying the above principle of law to the given case, M Ltd. is obliged to compensate for the loss
of Rs. 1.25 lakh (i.e. Rs 12.75 minus Rs 11.50 = Rs 1.25 lakh) which had naturally arisen due to
default in performing the contract by the specified date.
2. Regarding the amount of compensation which Shanti Traders were compelled to make to
Zenith Traders, it depends upon the fact whether M Ltd., knew about the contract of Shanti
Traders for supply of the contracted machinery to Zenith Traders on the specified date. If
so, M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay to
Zenith Traders for breach of contract. Otherwise M Ltd is not liable.

X agreed to become an assistant for 2 years to 'Y' who was practicing Chartered Accountant at
Jodhpur. It was also agreed that during the term of agreement 'X' will not practice as a Chartered
Accountant on his own account within 20 kms of the office of 'Y' at Jodhpur. At the end of one year,
'X' left the assistantship of 'Y' and started practice on his own account within the said area of 20
kms. Referring to the provisions of the Indian Contract Act, 1872, decide whether 'X' could be
restrained from doing so?
Provision: [Section 27 Indian Contract Act, 1872]
1. Section 27 of the Indian Contract Act, 1872 deals with agreements in restraint of trade. According
to the said section, every agreement by which any person is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
2. However, in the case of the service agreements restraint of trade is valid. In an agreement of
service by which a person binds himself during the term of agreement not to take service with
anyone else directly or indirectly to promote any business in direct competition with that of his
employer is not in restraint of trade, so it is a valid contract.
Facts of Case:
1. An agreement made between X & Y in which X will work as assistant to Y who is Chartered
Accountant at Jodhpur for 2 years and agreed not to work / practice as a chartered accountant on
his own account within 20 kms of the office of Y at jodhpur.
2. At the end of one year X left the assistantship and started practice on his own account within the
said area of 20 kms
Answer:
Therefore, referring to above provisions and facts in the instant case, agreement entered by ‘X’ with
‘Y’ is reasonable, and do not amount to restraint of trade and hence enforceable.

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Therefore, ‘X’ can be restrained by an injunction from practicing on his own account in within the said
area of 20 Kms for another one year.

PM Ltd., contracts with Gupta Traders to make and deliver certain machinery to them by 30 June
2017 for Rs 21.50 Lakhs. Due to labour strike, PM Ltd. could not manufacture and deliver the
machinery to Gupta Traders. Later Gupta Traders procured the machinery from another
manufacturer for Rs 22.75 lakhs. Gupta Traders was also prevented from performing a contract,
which it had made with Zenith Traders at the time of their contract with PM Ltd. and were
compelled to pay compensation for breach of contract. Calculate the amount of compensation,
which Gupta Traders can claim from PM Ltd., referring to the legal provisions of the Indian Contract
Act, 1872.
Provision: [Section 73 Indian Contract Act, 1872]
1. When a contract has been broken, the party who suffers by such breach is entitled to receive, from
the party who has broken the contract, compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of it.
2. Such compensation is not to be given for any remote and indirect loss or damage sustained
because of the breach.
3. When an obligation resembling those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and had
broken his contract.
4. It is further provided in the explanation to the section that in estimating the loss or damage from a
breach of contract, the means which existed of remedying the inconvenience caused by the non -
performance of the contract must be taken into account.
Facts of Case:
1. In given case PM ltd contracted to make & deliver certain machinery for Rs. 21.50 lakhs to Gupta
Traders but due to labour strike, PM ltd could not manufacture the machinery.
2. Later Gupta Traders procured the machinery from another manufacture for Rs. 22.75 lakhs
3. Due to failure to provide machinery by PM ltd, Gupta Traders were unable to perform contract,
which it had made with Zenith Traders and were compelled to pay compensation for breach of
contract.
Answer:
Applying the above principle of law to the given case, PM Ltd. is obliged to compensate for the loss of
Rs 1.25 lakhs (i.e. Rs 22.75 lakhs – Rs 21.50 lakhs) which had naturally arisen due to default in
performing the contract by the specified date.
Regarding the amount of compensation which Gupta Traders were compelled to make to Zenith
Traders, it depends upon the fact whether PM Ltd. knew about the contract of Gupta Traders for
supply of the contracted machinery to Zenith Traders on the specified date. If so, PM Ltd. is also
Obliged to reimburse the compensation, which Gupta Traders had to pay to Zenith Traders for breach
of contract. Otherwise PM Ltd. is not liable for that.

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A student was induced by his teacher to sell his brand new car to the latter at less than the
purchase price to secure more marks in the examination. Accordingly, the car was sold. However,
the father of the student persuaded him to sue his teacher. State on what ground the student can
sue the teacher?
Provision: [Indian Contract Act, 1872]
1. A contract is said to be induced by ‘undue influence’ where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses
that position to obtain an unfair advantage over the other.
2. In particular and without prejudice to the generality of the foregoing principle, 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, or where he stands in a fiduciary
relation to the other; or
b. Where he makes a contract with a person whose mental capacity is temporarily or permanently
affected because of age, illness, or mental or bodily distress.
Answer:
Yes, the student can sue his teacher on the ground of undue influence under the provisions of Indian
Contract Act, 1872. A contract brought because of coercion, undue influence, fraud or
misrepresentation would be voidable at the option of the person whose consent was caused.

Though a minor is not competent to contract, nothing in the Contract Act prevents him
from making the other party bound to the minor”. Discuss.
Provision: [Indian Contract Act, 1872]
Though a minor is not competent to contract, nothing in the Contract Act prevents him from making
the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not
void and can be sued upon by him. A minor cannot become a partner in a partnership firm. However,
he may, with the consent of all partners, be admitted to the benefits of partnership.
For example: A promissory note duly executed in favour of a minor is not void and can be sued upon
by him, because he though incompetent to contract, may yet accept a benefit.

A received certain goods from B promising to pay Rs 1, 00,000. Later on, A expressed his inability to
make payment. C, who is known to A, pays Rs 60,000 to B on behalf of A. However, A was not
aware of the payment. Now B is intending to sue A for Rs 1, 00,000. Discuss whether the contention
of B is right?
Provision: [Indian Contract Act, 1872]
As per Section 41 of the Indian Contract Act, 1872, when a promisee accepts performance of the
promise from a third person, he cannot afterwards enforce it against the promisor. That is,
performance by a stranger, accepted by the promise e, produces the result of discharging the
promisor, although the latter has neither authorized nor ratified the act of the third party
Facts of Case:
In given case A received certain goods from B promising to pay Rs. 1,00,000. Afterwards A is unable to
make the payment ton B. C who is known to A make payment of Rs. 60,000 to B on A’s behalf. A was
not aware of the transaction between B & C.
Answer:
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As C made the payment of Rs. 60,000 to B on behalf of A, now B can sue A only for the balance
amount i.e. Rs. 40,000.

Decide with reasons whether the following Agreements Are Valid or void under the provisions of
the Indian Contract Act, 1872:
a. Vijay Agrees with Saini to sell his black horse for Rs 3,00,000. Unknown to both the Parties, the
horse was dead at the time of the Agreement.
b. Sarvesh sells the goodwill of his shop to Vikas for Rs 10, 00,000 and promises not to carry on
such business forever and Anywhere in India.
c. Mr. X Agrees to write A book with A publisher. After few days, X dies in An Accident.
Provision: [Indian Contract Act, 1872]
1. 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.
2. Section 27 of the Indian Contract Act, 1872 deals with agreements in restraint of trade. According
to the said section, every agreement by which any person is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void. However, in the case of the service
agreements restraint of trade is valid.
3. As per section 2(j) of the Contract Act, “A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable”.
Answer:
1. In this case, there is mistake of fact as to the existence of the subject - matter, i.e., with respect to
the selling of horse which was dead at the time of the agreement. It is unknown to both the
parties. Therefore, it is a void agreement.
2. Since in the given case, restraint to carry on business was forever and anywhere in India, so the
agreement in question is void.
3. In the present case, Mr. X Agrees to write A book with A publisher. After few days, X dies in An
Accident. Here the contract becomes void due to the impossibility of performance of the contract.

Ishaan, aged 16 years, was studying in an engineering college. On 1st March, 2016 he took a loan
of Rs 2 lakhs from Vishal for the payment of his college fee and agreed to pay by 30th May, 2017.
Ishaan possesses assets worth Rs 15 lakhs. On due date Ishaan fails to pay back the loan to Vishal.
Vishal now wants to recover the loan from Ishaan out of his assets. Decide whether Vishal would
succeed referring to the provisions of the Indian Contract Act, 1872
Provision: [Indian Contract Act, 1872]
1. According to Section 11 of the Indian Contract Act, 1872, 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.
2. A person who has completed the age of 18 years is a major and otherwise he will be treated as
minor. Thus, Ishaan who is a minor is incompetent to contract and any agreement with him is void
[Mohori Bibi Vs Dharmo Das Ghose 1903].

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3. Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor for
the supply of the things which are the necessaries of life to him. It says that though minor is not
personally liable to pay the price of necessaries supplied to him or money lent for the purpose, the
supplier or lender will be entitled to claim the money/price of goods or services which are
necessaries suited to his condition of life provided that the minor has a property.
4. The liability of minor is only to the extent of the minor’s property.
Facts of Case:
1. Ishaan aged 16 years was studying in an engineering college took loan from Vishal of Rs. 2 lakhs for
payment of his college fee and agreed to pay the same by 30th may, 2017.
2. Ishaan possesses assets value of which is worth Rs. 15 lakhs.
3. On due date ishaan fails to pay the sum to Vishal. Now Vishal wants to recover the amount of loan
from Ishaan out of his assets.
Answer:
Thus, according to the above provision, Vishal will be entitled to recover the amount of loan given to
Ishaan for payment of the college fees from the property of the minor.

X’ entered into a contract with ‘Y’ to supply him 1,000 water bottles @ Rs 5.00 per water bottle, to
be delivered at a specified time. Thereafter, ‘X’ contracts with ‘Z’ for the purchase of 1,000 water
bottles @ Rs 4.50 per water bottle, and at the same time told ‘Z’ that he did so for the purpose of
performing his contract entered into with ‘Y’. ‘Z’ failed to perform his contract in due course and
market price of each water bottle on that day was Rs 5.25 per water bottle. Consequently, ‘X’ could
not procure any water bottle and ‘Y’ rescinded the contract. Calculate the amount of damages
which ‘X’ could claim from ‘Z’ in the circumstances? What would be your answer if ‘Z’ had not
informed about the ‘Y’s contract? Explain with reference to the provisions of the Indian Contract
Act, 1872
Provision: [Indian Contract Act, 1872]
1. When a contract has been broken, the party who suffers by such breach is entitled to receive, from
the party who has broken the contract, compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of it.
2. Such compensation is not to be given for any remote and indirect loss or damage sustained
because of the breach.
3. When an obligation resembling those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and had
broken his contract.
4. It is further provided in the explanation to the section that in estimating the loss or damage from a
breach of contract, the means which existed of remedying the inconvenience caused by the non -
performance of the contract must be taken into account.
Facts of Case:

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The problem asked in this question is based on the provisions of Section 73 of the Indian Contract Act,
1872. In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water bottles from him for
performing his contract with ‘Y’. Thus, ‘Z’ had the knowledge of the special circumstances.
Answer:
1. Therefore, ‘X’ is entitled to claim from ‘Z’ Rs 500/- At the rate of 0.50 paise i.e. 1000 Water bottles
x 0.50 paise (difference between the procuring price of water bottles And contracted selling
price to ‘Y’) being the Amount of profit ‘X’ would have made by the performance of his contract
with ‘Y’.
2. If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the Amount of damages would have been
the difference between the contract price And the market price on the day of default. In other
words, the Amount of damages would be Rs 750/- (i.e. 1000 Water bottles x 0.75 paise).

Liquidated damage is a genuine pre-estimate of compensation of damages for certain anticipated

breach of contract whereas Penalty on the other hand is an extravagant amount stipulated and is
clearly unconscionable and has no comparison to the loss suffered by the parties”. Explain.
Provision: [Indian Contract Act, 1872]
1. Liquidated damage is a genuine pre-estimate of compensation of damages for certain
anticipated breach of contract. This estimate is agreed to between parties to avoid at a later date
detailed calculations and the necessity to convince outside parties.
2. Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and
has no comparison to the loss suffered by the parties.
3. In terms of Section 74 of the Act “where a contract has been broken, if a sum is named in
the contract as the amount to be paid in case of such breach, or if the contract contains
any other stipulation by way of penalty, the party complaining of the breach is entitled, whether
or not actual damages or loss is proved to have been caused thereby, to receive from the
other party who has broken the contract, a reasonable compensation not exceeding the amount
so named, or as the case may be the penalty stipulated for.
4. Explanation to Section 74:
A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
In terms of Section 74, courts are empowered to reduce the sum payable on breach whether it is
‘penalty’ or “liquidated damages” provided the sum appears to be unreasonably high.
5. Sri ChunniLal vs. Mehta & Sons Ltd (Supreme Court): Supreme Court laid down the ratio that the
aggrieved party should not be allowed to claim a sum greater than what is specific in the written
agreement. But even then the court has powers to reduce the amount if it considers it reasonable
to reduce.

Explain the meaning of ‘Contingent Contracts’ and state the rules relating to such contracts
Provision: [Indian Contract Act, 1872]
1. Essential characteristics of a contingent contract: A contract may be absolute or contingent. A
contract is said to be absolute when the promisor undertakes to perform the contract in all events.

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2. A contingent contract, on the other hand “is a contract to do or not to do something, if some
event, collateral to such contract does or does not happening (Section 31). It is a contract in which
the performance becomes due only upon the happening of some event which may or may not
happen. For example, A contracts to pay B Rs10, 000 if he is elected President of a particular
association. This is a contingent contract.
3. The essential characteristics of a contingent contract may be listed as follows:
a) There must be a contract to do or not to do something,
b) The performance of the contract must depend upon the happening or non-happening of some
event.
c) The happening of the event is uncertain.
d) The even on which the performance is made to depend upon is an event collateral to the
contract. i.e. it does not form part of the reciprocal promises which constitute the contract. The
even should neither be a performance promised, nor the consideration for the promise.
e) The contingent even should not be the mere will of the promisor. However, where the event is
within the promisor’s will, but not merely his will, it may be a contingent contract.
4. The rules regarding the contingent contract are as follows”
a) Contingent contract dependent on the happening of an uncertain future cannot be enforced
until the even has happened. If the even becomes impossible, such contracts become void.
(Sec.32).
b) Where a contingent contract is to be performed if a particular event does not happening
performance can be enforced only when happening of that even becomes impossible (Sec. 33).
c) If a contract is contingent upon, how a person will act at an unspecified time the even 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.
(Section 34,35).
d) The contingent contracts to do or not to do anything if an impossible event happens, are void
whether or not the fact is known to the parties (Section 36).

Explain the-term ‘Quasi Contracts’ and state their characteristics.

Provision: [Indian Contract Act, 1872]
1. Under certain special circumstances obligation 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’.
2. 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. These contracts are based on the
doctrine that a person shall not be allowed to enrich himself unjustly at the expense of another.
3. The salient features of a quasi-contract are :
a) It does not arise from any agreement of the parties concerned but is imposed by law.
b) Duty and not promise is the basis of such contract.
c) The right under it is always a right to money and generally though not always to a liquidated
sum of money.
d) Such a right is available against specific person(s) and not against the whole world.

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e) A suit for its breach may be filed in the same way as in case of a complete contract

Distinction between Void and Illegal Agreements.

Provision: [Indian Contract Act, 1872]
1. Void and Illegal Agreements: According to Section 2(g) of the Indian Contract Act, an agreement
not enforceable by law is void. The Act has specified various factors due to which an agreement
may be considered as void agreement.
2. One of these factors is unlawfulness of object and consideration of the contract i.e. illegality of the
contract which makes it void.
3. Despite the similarity between an illegal and a void agreement that in either case the agreement is
void and cannot be enforced by law, the two differ from each other in the following respects:
a) Scope: An illegal agreement is always void while a void agreement may not be illegal being void
due to some other factors e.g. an agreement the terms of which are uncertain is void but not
illegal.
b) Effect on collateral transaction: If an agreement is merely void and not illegal, the collateral
transactions to the agreement may be enforced for execution but collateral transaction to an
illegal agreement also becomes illegal and hence cannot be enforced.
c) Punishment: Unlike illegal agreements, there is no punishment to the parties to a void
agreement.
d) Void ab-initio: Illegal agreements are void from the very beginning but sometimes-valid
contracts may subsequently become void.

Explain the type of contracts in the following agreements under the Indian Contract Act, 1872:
(i) A coolie in uniform picks up the luggage of A to be carried out of the railway station without
being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the
supply is effected, the fire caught in the factory and everything was destroyed.
Answer: [Indian Contract Act, 1872]
(i) It is an implied contract and A must pay for the services of the coolie.
Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Indian Contract Act, 1872 contemplates such
implied contracts when it lays down that in so far as such proposal or acceptance is made
otherwise than in words, the promise is said to be implied.
(ii) Obligation of finder of lost goods to return them to the true owner cannot be said to arise out of a
contract even in its remotest sense, as there is neither offer and acceptance nor consent. These are
said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract. It is created
by law under certain circumstances. The law creates and enforces legal rights and obligations when
no real contract exists. Such obligations are known as quasi-contracts. In other words, it is a
contract in which there is no intention on part of either party to make a contract but law imposes a
contract upon the parties.
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(iii) The above contract is a void contract.
Void Contract: Section 2 (j) of the Act states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a void contract is one
which cannot be enforced by a court of law.

“Only a person who is party to a contract can sue on it”. Explain this statement and describe its
exceptions, if any.
Provision: [Indian Contract Act, 1872]
1. Though under the Indian Contract Act, 1872, the consideration for an agreement may proceed
from a third party, the third party cannot sue on contract. Only a person who is party to a contract
can sue on it.
2. Thus, the concept of stranger to consideration is valid and is different from stranger to a contract.
3. The previously mentioned rule, that stranger to a contract cannot sue is known as a “doctrine of
privity of contract”, is however, subject to certain exceptions. In other words, even a stranger to a
contract may enforce a claim in the following cases:
a) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a
party to the contract between the settler and the trustee.
b) In the case of a family settlement, if the terms of the settlement are reduced into writing, the
members of family who originally had not been parties to the settlement may enforce the
agreement.
c) In the case of certain marriage contracts, a female member can enforce a provision for
marriage expenses made on the partition of the Hindu Undivided Family.
d) In the case of assignment of a contract, when the benefit under a contract has been assigned,
the assignee can enforce the contract.
e) Acknowledgement or estoppel – where the promisor by his conduct acknowledges himself as
an agent of the third party, it would result into a binding obligation towards third party.
f) In the case of covenant running with the land, the person who purchases land with notice that
the owner of land is bound by certain duties affecting land, the covenant affecting the land may
be enforced by the successor of the seller.
g) Contracts entered into through an agent: The principal can enforce the contracts entered by his
agent where the agent has acted within the scope of his authority and in the name of the
principal.
Answer:
Therefore even though stranger to a contract cannot sue but in some cases it can do the same which
are known to be the exception to the Doctrine of privity of contract as mentioned above.

Explain the circumstances in which the person is deemed to be in a position to dominate the will of
the other person under the Indian Contract Act, 1872.
Provision: [Indian Contract Act, 1872]
A person is deemed to be in such position in the following circumstances:
1. Real and apparent authority: Where a person holds a real authority over the other as in the case
of master and servant, doctor and patient and etc.

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2. Fiduciary relationship: where relation of trust and confidence exists between the parties to a
contract. Such type of relationship exists between father and son, solicitor and client, husband
and wife, creditor and debtor, etc.
3. Mental distress: An undue influence can be used against a person to get his consent on a contract
where the mental capacity of the person is temporarily or permanently affected by the reason of
mental or bodily distress, illness or of old age.
4. Unconscionable bargains: Where one of the parties to a contract is in a position to dominate the
will of the other and the contract is apparently unconscionable i.e., unfair, it is presumed by law
that consent must have been obtained by undue influence. Unconscionable bargains are witnessed
mostly in money-lending transactions and in gifts.
Answer:
Above are circumstances in which person is deemed to be in position to dominate will of the other
person under the Indian Contract Act, 1872.

What is a wagering agreement? Describe the transactions which resembles with wagering
transactions but are not void.
Provision: [Section 30 of Indian Contract Act, 1872]
1. An agreement by way of a wager is void. It is an agreement involving payment of a sum of money
upon the determination of an uncertain event. The essence of a wager is that each side should
stand to win or lose, depending on the way an uncertain event takes place in reference to which
the chance is taken and in the occurrence of which neither of the parties has legitimate interest.
For example, A agrees to pay ` 50,000 to B if it rains, and B promises to pay a like amount to A if it
does not rain, the agreement will be by way of wager. But if one of the parties has control over the
event, agreement is not a wager.
2. Transactions resembling with wagering transaction but are not void
a) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case of a chit
fund, a certain number of persons decide to contribute a fixed sum for a specified period and at
the end of a month, the amount so contributed is paid to the lucky winner of the lucky draw.
b) Commercial transactions or share market transactions: In these transactions in which delivery
of goods or shares is intended to be given or taken, do not amount to wagers.
c) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and athletic
competitions where prizes are awarded on the basis of skill and intelligence are the games of
skill and hence such competition are valid. According to the Prize Competition Act, 1955 prize
competition in games of skill are not wagers provided the prize money does not exceed ` 1,000.
d) A contract of insurance: A contract of insurance is a type of contingent contract and is valid
under law and these contracts are different from wagering agreements

“The basic rule is that the promisor must perform exactly what he has promised to perform.”
Explain stating the obligation of parties to contracts.
Provision: [Section 37 of Indian Contract Act, 1872]
1. 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 the Contract Act or
of any other law.
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2. Promises bind the representatives of the promisor in case of death of such promisor before
performance, unless a contrary intention appears from the contract.
Example 1: A promises to deliver goods to B on a certain day on payment of ` 1,00,000. A dies
before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay `
1,00,000 to A’s representatives.
Example 2
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 representatives or by B because it involves use of
personal skill.
3. Analysis of Section 37
a) A contract being an agreement enforceable by law, creates a legal obligation, which subsists
until discharged. Performance of the promise or promises remaining to be performed is the
principal and most usual mode of discharge.
b) The basic rule is that the promisor must perform exactly what he has promised to perform.
The obligation to perform is absolute. Thus, it may be noted that it is necessary for a party who
wants to enforce the promise made to him, to perform his promise for himself or offer to
perform his promise.
c) Only after that he can ask the other party to carry out his promise. This is the principle which is
enshrined in Section 37. Thus, it is the primary duty of each party to a contract to either perform
or offer to perform his promise.
d) He is absolved from such a responsibility only when under a provision of law or an act of the
other party to the contract, the performance can be dispensed with or excused.
Answer:
Thus, from above it can be drawn that performance may be actual or offer to perform.

What do you mean by Quantum Meruit and state the cases where the claim for Quantum Meruit
arises?
Provision: [Indian Contract Act, 1872]
1. Where one person has rendered service to another in circumstances which indicate an
understanding between them that it is to be paid for although no particular remuneration has
been fixed, the law will infer a promise to pay. Quantum Meruit i.e. as much as the party doing
the service has deserved.
2. It covers a case where the party injured by the breach had at time of breach done part but not all
of the work which he is bound to do under the contract and seeks to be compensated for the
value of the work done.
3. For the application of this doctrine, two conditions must be fulfill ed:
a) It is only available if the original contract has been discharged.
b) The claim must be brought by a party not in default.
4. The object of allowing a claim on quantum meruit is to recompensate the party or person for value
of work which he has done. Damages are compensatory in nature while quantum meruit is

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restitutory. It is but reasonable compensation awarded on implication of a contract to
remunerate.
5. The claim for quantum meruit arises in the following cases:
a) when an agreement is discovered to be void or when a contract becomes void.
b) When something is done without any intention to do so gratuitously.
c) Where there is an express or implied contract to render services but there is no agreement as to
remuneration.
d) When one party abandons or refuses to perform the contract.
e) Where a contract is divisible and the party not in default has enjoyed the benefit of part
performance.
f) When an indivisible contract for a lump sum is completely performed but badly the person who
has performed the contract can claim the lump sum, but the other party can make a deduction
for bad work.

What Explain the meaning of ‘Contingent Contracts’ and state the rules relating to such contracts.
Provision: [Indian Contract Act, 1872]
1. A contract may be absolute or contingent. A contract is said to be absolute when the promisor
undertakes to perform the contract in all events. A contingent contract, on the other hand "is a
contract to do or not to do something, if some event, collateral to such contract does or does not
happening (Section 31).
2. It is a contract in which the performance becomes due only upon the happening of some event
which may or may not happen.
For example, A contracts to pay B ` 10,000 if he is elected President of a particular association. This
is a contingent contract.
3. The essential characteristics of a contingent contract may be listed as follows:
a) There must be a contract to do or not to do something,
b) The performance of the contract must depend upon the happening or non- happening of some
event.
c) The happening of the event is uncertain.
d) The event on which the performance is made to depend upon is an event collateral to the
contract i.e. it does not form part of the reciprocal promises which constitute the contract. The
event should neither be a performance promised, nor the consideration for the promise.
e) The contingent event should not be the mere will of the promisor. However, where the event is
within the promisor’s will, but not merely his will, it may be a contingent contract.

4. The rules regarding the contingent contract are as follows:

a) Contingent contract dependent on the happening of an uncertain future cannot be enforced
until the event has happened. If the event becomes impossible, such contracts become void.
(Section 32).
b) Where a contingent contract is to be performed if a particular event does not happening
performance can be enforced only when happening of that event becomes impossible (Section
33).

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c) 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.
(Section 34 and 35).
d) The contingent contracts to do or not to do anything if an impossible event happens, are void
whether the fact is known to the parties (Section 36).

Explain the concept of ‘misrepresentation’ in matters of contract. Sohan induced Suraj to buy his
motorcycle saying that it was in a very good condition. After taking the motorcycle, Suraj
complained that there were many defects in the motorcycle. Sohan proposed to get it repaired and
promised to pay 40% cost of repairs After a few days, the motorcycle did not work at all. Now Suraj
wants to rescind the contract. Decide giving reasons whether Suraj can rescind the contract?
Provision: [Section 18 & 19 Indian Contract Act, 1872]
1. According to Section 18 of the Indian Contract Act, 1872, misrepresentation is:
a) When a person positively asserts that a fact is true when his information does not warrant it to
be so, though he believes it to be true.
b) When there is any breach of duty by a person, which brings an advantage to the person
committing it by misleading another to his prejudice.
c) When a party causes, however, innocently, the other party to the agreement to make a mistake
as to the substance of the thing, which is the subject of the agreement.
2. The aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the
contract. The aggrieved party loses the right to rescind the contract if he, after becoming aware of
the misrepresentation, takes a benefit under the contract or in some way affirms it.
Answer:
Accordingly, in the given case Suraj could not rescind the contract, as his acceptance to the offer of
Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the sale.

X, a minor was studying in M.Com. in a college. On 1st July, 2019 he took a loan of` 1,00,000
from B for payment of his college fees and to purchase books and agreed to repay by 31st
December, 2019. X possesses assets worth ` 9 lakhs. On due date, X fails to pay back the loan to
B. B now wants to recover the loan from X out of his (X’s) assets. Referring to the provisions of
Indian Contract Act, 1872 decide whether B would succeed.
Provision: [Indian Contract Act, 1872]
1. According to Section 11 of the Indian Contract Act, 1872, 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.
2. A person who has completed the age of 18 years is a major and otherwise he will be treated as
minor. Thus, Ishaan who is a minor is incompetent to contract and any agreement with him is void
[Mohori Bibi Vs Dharmo Das Ghose 1903].
3. Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor for
the supply of the things which are the necessaries of life to him. It says that though minor is not
personally liable to pay the price of necessaries supplied to him or money lent for the purpose, the
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supplier or lender will be entitled to claim the money/price of goods or services which are
necessaries suited to his condition of life provided that the minor has a property.
4. The liability of minor is only to the extent of the minor’s property.
Facts of case:
In given question X, a minor was studying in M.Com. in a college. he took a loan of` 1,00,000
from B for payment of his college fees and to purchase books and agreed to repay by 31st December,
2019. X possesses assets worth ` 9 lakhs. On due date, X fails to pay back the loan to B. B now wants
to recover the loan from X out of his (X’s) assets.
Answer:
Yes, B can proceed against the assets of X. According to section 68 of Indian Contract Act, 1872, 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. Since
the loan given to X is for the necessaries suited to the conditions in life of the minor, his assets can
be sued to reimburse B.

P sells by auction to Q a horse which P knows to be unsound. The horse appears to be sound but
P knows about the unsoundness of the horse. Is this contract valid in the following circumstances:
a) If P says nothing about the unsoundness of the horse to Q.
b) If P says nothing about it to Q who is P’s daughter who has just come of age.
c) If Q says to P “If you do not deny it, I shall assume that the horse is sound.” P says nothing.
Provision: [Indian Contract Act, 1872]
According to section 17 of the Indian Contract Act, 1872, mere silence as to facts likely to affect
the willingness of a person to enter into a contract is not fraud, unless 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 unless his silence is, in itself, equivalent to speech.
Answer:
Hence, in the instant case,
a) This contract is valid since as per section 17 mere silence as to the facts likely to affect the
willingness of a person to enter into a contract is not fraud. Here, it is not the duty of the seller
to disclose defects.
b) This contract is not valid since as per section 17 it becomes P’s duty to tell Q about the
unsoundness of the horse because a fiduciary relationship exists between P and his daughter Q.
Here, P’s silence is equivalent to speech and hence amounts to fraud.
c) This contract is not valid since as per section 17, P’s silence is equivalent to speech and hence
amounts to fraud.

P Comment on the following statements:

a) Acceptance must be absolute and unqualified.
b) Acceptance must be in the prescribed mode.
Answer: [Indian Contract Act, 1872]
a) Acceptance must be absolute and unqualified: As per section 7 of the Indian Contract Act,
1872 acceptance is valid only when it is absolute and unqualified and is also expressed in some
usual and reasonable manner unless the proposal prescribes the manner in which it must be
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accepted. If the proposal prescribes the manner in which it must be accepted, then it must be
accepted accordingly.
Example: ‘A’ enquires from ‘B’, “Will you purchase my car for ` 2 lakhs?” If ‘B’ replies “I shall
purchase your car for ` 2 lakhs, if you buy my motorcycle for ` 50000/-, here ‘B’ cannot be
considered to have accepted the proposal. If on the other hand ‘B’ agrees to purchase the car
from ‘A’ as per his proposal subject to availability of valid Registration Certificate / book for
the car, then the acceptance is in place though the offer contained no mention of R.C. book. This
is because expecting a valid title for the car is not a condition. Therefore, the acceptance in this
case is unconditional.
b) Acceptance must be in the prescribed mode:Where the mode of acceptance is prescribed in
the proposal, it must be accepted in that manner. But if the proposer does not insist on the
proposal being accepted in the manner prescribed after it has been accepted otherwise, i.e., not
in the prescribed manner, the proposer is presumed to have consented to the acceptance.
Example: If the offeror prescribes acceptance through messenger and offeree sends acceptance by
email, 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.

Explain the concept of ‘misrepresentation’ in matters of contract. & Sohan induced Suraj to buy his
motorcycle saying that it was in a very good condition. After taking the motorcycle, Suraj
complained that there were many defects in the motorcycle. Sohan proposed to get it repaired
and promised to pay 40% cost of repairs. After a few days, the motorcycle did not work at all.
Now Suraj wants to rescind the contract. Decide giving reasons.
Provision: [Section 18 of Indian Contract Act, 1872]
According to Section 18 of the Indian Contract Act, 1872, 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;
b) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him; by misleading another to his prejudice or to the
prejudice of any one claiming under him;
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.
Facts of case:
In given case sohan induced suraj to buy his motorcycle by saying that it is in very good condition but
afterwards suraj complained that there were many defects in motorcycle.
Sohan promised to pay 40 % cost of repairs. After some days the motorcycle did not work well and
now suraj wants to rescind the contract.
Answer:
In the instant case, the aggrieved party, in case of misrepresentation by the other party, can avoid
or rescind the contract. The aggrieved party loses the right to rescind the contract if he, after
becoming aware of the misrepresentation, takes a benefit under the contract or in some way affirms
it. Accordingly, in the given case, Suraj could not rescind the contract, as his acceptance to the offer
of Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the sale.

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No consideration, no contract” Comment.
Or
State the exceptions to the rule "An agreement without consideration is void".
Provision: [Indian Contract Act, 1872]
1. Every agreement, to be enforceable by law must be supported by valid consideration. An
agreement made without any consideration is void. A gratuitous promise may form a subject of a
moral obligation and may be binding in honour but it does not cause a legal responsibility.
2. No consideration, no contract is a general rule. However, Section 25 of the Indian Contract Act,
1872 provides some exceptions to this rule, where an agreement without consideration will be
valid and binding. These exceptions are as follows:
a) Agreement made on account of natural love and affection : Section 25 (1) provides that if an
agreement is (i) in writing (ii) registered under the law and made on account of natural love and
affection (iv) between the parties standing in a near relation to each other, it will be
enforceable at law even if there is no consideration. Thus, where A, for natural love and
affection, promises to give his son, B, ` 10,000 in writing and registers it. This is a valid contract.
b) Compensation for services voluntarily rendered: Section 25(2) provides that something which
the promisor was legally compelled to do; (iii) and the promisor was in existence at the time
when the act was done whether he was competent to contract or not (iv) the promisor must
agree now to compensate the promise. Thus when A finds B's purse and gives it to him and
B promises to give A ` 50, this is a valid contract.
c) Promise to pay time-barred debts [Section 25 (3)]: Where there is an agreement, made in
writing and signed by the debtor or by his agent, to pay wholly or in part a time barred debt,
the agreement is valid and binding even though there is no consideration. If A owes B ` 1,000
but the debt is lapsed due to time-bar and A further makes a written promise to pay ` 500 on
account of this debt, it constitutes a valid contract.
d) Contract of agency (Section 185): No consideration is necessary to create an agency.
e) Completed gift (Explanation 1 to Section 25): A completed gift needs no consideration. Thus, if
a person transfers some property by a duly written and registered deed as a gift he cannot
claim back the properly subsequently on the ground of lack of consideration.

Explain the meaning of ‘Contingent Contracts’ and state the rules relating to such contracts.
Provision: [Indian Contract Act, 1872]
1. A contract may be absolute or contingent. A contract is said to be absolute when the promisor
undertakes to perform the contract in all events. A contingent contract, on the other hand "is a
contract to do or not to do something, if some event, collateral to such contract does or does
not happened (Section 31). It is a contract in which the performance becomes due only upon the
happening of some event which may or may not happen. For example, A contracts to pay B
`10,000 if he is elected President of a particular association. This is a contingent contract.
2. The essential characteristics of a contingent contract may be listed as follows:
a) There must be a contract to do or not to do something,
b) The performance of the contract must depend upon the happening or non- happening of some
event.

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c) The happening of the event is uncertain.
d) The event on which the performance is made to depend upon is an event collateral to the
contract i.e. it does not form part of the reciproc al promises which constitute the contract.
The event should neither be a performance promised, nor the consideration for the promise.
e) The contingent event should not be the mere will of the promisor. However, where the event
is within the promisor’s will, but not merely his will, it may be a contingent contract.
3. The rules regarding the contingent contract are as follows:
a) Contingent contract dependent on the happening of an uncertain future cannot be enforced
until the event has happened. If the event becomes impossible, such contracts become void.
(Section 32).
b) Where a contingent contract is to be performed if a particular event does not happening
performance can be enforced only when happening of that event becomes impossible (Section
33).
c) 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. (Section 34, 35).
d) The contingent contracts to do or not to do anything if an impossible event happens, are void
whether or not the fact is known to the parties (Section 36).

Define an offer. Explain the essentials of a valid offer. How an offer is different from an invitation to
offer?
Provision: [Indian Contract Act, 1872]
1. The word Proposal and offer are used interchangeably and it is defined under Section 2(a) of the
Indian Contract Act, 1872 as when one person signifies to another his willingness to do or to
abstain from doing anything with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
2. The following are important essentials of an offer: -
a) Must be capable of creating legal relation.
b) Must be certain, definite and not vague.
c) Must be communicated.
d) Must be made with a view to obtaining the assent of the other party
e) May be conditional
f) Offer should not contain a term the non-compliance of which would amount to acceptance
g) May be general or specific
h) May be expressed or implied
i) A statement of price is not an offer
3. Offer and an Invitation to an offer:
a) In terms of Section 2(a) of the Act, an offer is the final expression of willingness by the offer or
to be bound by the offer should the other party chooses to accept it.
b) On the other hand, offers made with the intention to negotiate or offers to receive offers are
known as invitation to offer. Thus, where a party without expressing his final willingness
proposes certain terms on which he is willing to negotiate he does not make an offer, but only
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invites the other party to make an offer on those terms. Hence, the only thing that is
required is the willingness of the offeree to abide by the terms of offer.

A sends an offer to B to sell his second-car for ` 1,40,000 with a condition that if B does not reply
within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition? What shall be
the position if B communicates his acceptance after one week?
Provision: [Indian Contract Act, 1872]
Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is
expressly stated in the offer itself.
The acceptance must be made within the time limit prescribed by the offer. The acceptance of an
offer after the time prescribed by the offer or has elapsed will not avail to turn the offer into a
contract.
Answer:
Unless the offeree has by his previous conduct indicated that his silence amount to acceptance, it
cannot be taken as valid acceptance. So in the given problem, if B remains silent, it does not amount
to acceptance.

X, Y and Z jointly borrowed ` 50,000 from A. The whole amount was repaid to A by Y. Decide in the
light of the Indian Contract Act, 1872 whether:
(i) Y can recover the contribution from X and Z,
(ii) Legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case Z becomes insolvent.
Provision: [Indian Contract Act, 1872]
1. Section 42 of the Indian Contract Act, 1872 requires that when two or more persons have made a
joint promise, then, unless a contrary intention appears from the contract, all such persons jointly
must fulfill the promise.
2. In the event of the death of any of them, his representative jointly with the survivors and in case of
the death of all promisors, the representatives of all jointly must fulfill the promise.
3. Section 43 allows the promisee to seek performance from any of the joint promisors. The liability
of the joint promisors has thus been made not only joint but "joint and several".
4. Section 43 provides that in the absence of express agreement to the contrary, the promisee may
compel any one or more of the joint promisors to perform the whole of the promise.
5. Section 43 deals with the contribution among joint promisors. The promisors, may compel
every joint promisor to contribute equally to the performance of the promise (unless a contrary
intention appears from the contract). If any one of the joint promisors makes default in such
contribution the remaining joint promisors must bear the loss arising from such default in equal
shares.
Answer:
As per the provisions of above sections,
(i) Y can recover the contribution from X and Z because X,Y and Z are joint promisors.

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(ii) Legal representative of X are liable to pay the contribution to Y. However, a legal representative is
liable only to the extent of property of the deceased received by him.
(iii) Y also can recover the contribution from Z's assets.

Explain the meaning of ‘Quasi-Contracts’. State the circumstances which are identified as quasi
contracts by the Indian Contract Act, 1872.
Provision: [Indian Contract Act, 1872]
1. Even in the absence of a contract, certain social relationships give rise to certain specific
obligations to be performed by certain persons. These are known as “quasi-contracts” as they
create some obligations as in the case of regular contracts.
2. Quasi-contracts are based on the principles of equity, justice and good conscience.
3. The salient features of quasi-contracts are:
a) such a right is always a right to money and generally, though not always, to a liquidated sum of
money;
b) does not arise from any agreement between the parties concerned but the obligation is
imposed by law and;
c) The rights available are not against all the world but against a particular person or persons only,
so in this respect it resembles to a contractual right.
4. Circumstances Identified as Quasi-Contracts:
a) Claim for necessaries supplied to persons incapable of contracting: Any person supplying
necessaries of life to persons who are incapable of contracting is entitled to claim the price from
the other person’s property. Similarly, where money is paid to such persons for purchase of
necessaries, reimbursement can be claimed.
b) Payment by an interested person: A person who has paid a sum of money, which another
person is obliged to pay, is entitled to be reimbursed by that other person if the payment has
been made by him to protect his own interest.
c) Obligation of person enjoying benefits of non-gratuitous act: Where a person lawfully does
anything for another person, or delivers anything to him not intending to do so gratuitously
and such other person enjoys the benefit thereof, the latter is bound to pay compensation to
the former in respect of, or to restore, the thing so done or delivered.
d) Responsibility of finder of goods: A person who finds goods belonging to another person and
takes them into his custody is subject to same responsibility as if he were a Bailee.
e) Liability for money paid or thing delivered by mistake or by coercion : A person to whom
money has been paid or anything delivered by mistake or under coercion, must repay or return
it.
5. In all the above cases contractual liability arises without any agreement between the parties.

What is the law relating to determination of compensation, on breach of contract, contained in

section 73 of the Indian Contract Act, 1872?
Provision: [Indian Contract Act, 1872]
1. Section 73 of the Indian Contract Act, 1872 provides that when a contract has been broken, the
party who suffers by such breach is entitled to receive from the party who has broken the contract,

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compensation for any loss or damage caused to him thereby which naturally arose in the usual
course of things from such breach or which the parties knew when they made the contract, to be
likely to result from the breach of it.
2. Such compensation is not given for any remote and indirect loss or damage sustained because of
the breach.
3. The explanation to the section further provides that in estimating the loss or damage from a
breach of contract, the means, which existed of remedying the inconvenience caused by the non-
performance of the contract, must be taken into account.

X found a wallet in a restaurant. He enquired of all the customers present there but the true owner
could not be found. He handed over the same to the manager of the restaurant to keep until the
true owner is found. After a week, he went back to the restaurant to enquire about the wallet. The
manager refused to return it back to X, saying that it did not belong to him. In the light of the Indian
Contract Act, 1872, can X recover it from the Manager?
Provision: [Indian Contract Act, 1872]
1. Finder may claim compensation for the trouble and expenses incurred by him to preserve the
goods and to find out the true owner.
2. If the owner refuses to pay compensation then may retain the goods until he receives it. However,
he cannot make a suit for this.
3. If any reward has been announced by the owner he has a right to claim such reward. He can even
sue for the reward.
4. Normally he cannot sale the goods but when real owner is not found out with reasonable
diligence, or if owner refuses to pay lawful charges then he can sale in the market if it normally
sold in the market.
5. He can sale goods when the article is in danger of being perished or losing the greater part of its
value. He can sale goods when the lawful charges of the finder amounts to two-thirds or more of
the value of the article found.
Answer:
In the light of the above provisions, the manager must return the wallet to X, since X is entitled to
retain the wallet found against everybody except the true owner.

Define consideration. What are the legal rules regarding consideration under the Indian Contract
Act, 1872?
Provision: [Indian Contract Act, 1872]
Consideration [Section 2(d) of the Indian Contract Act, 1872]: When at the desire of the promisor,
the promisee or any other person has done or abstained from doing, or does or abstains from doing
or promises to do or abstain from doing something, such an act or abstinence or promise is called
consideration for the promise.
Legal Rules Regarding Consideration

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a) Consideration must move at the desire of the promisor: Consideration must be offered by the
promisee or the third party at the desire or request of the promisor. This implies “return” element
of consideration.
b) Consideration may move from promisee or any other person: In India, consideration may proceed
from the promisee or any other person who is not a party to the contract. In other words, there
can be a stranger to a consideration but not stranger to a contract.
c) Executed and executory consideration: A consideration which consists in the performance of an
act is said to be executed. When it consists in a promise, it is said to be executory. The promise by
one party may be the consideration for an act by some other party, and vice versa.
d) Consideration may be past, present or future: It is a general principle that consideration is given
and accepted in exchange for the promise. The consideration, if past, may be the motive but
cannot be the real consideration of a subsequent promise. But in the event of the services being
rendered in the past at the request or the desire of the promisor, the subsequent promise is
regarded as an admission that the past consideration was not gratuitous.
e) Consideration need not be adequate: Consideration need not to be of any particular value. It need
not be approximately of equal value with the promise for which it is exchanged but it must be
something which the law would regard as having some value.
f) Performance of what one is legally bound to perform: The performance of an act by a person
who is legally bound to perform the same cannot be consideration for a contract. Hence, a
promise to pay money to a witness is void, for it is without consideration. Hence such a contract is
void for want of consideration.
However, where a person promises to do more that he is legally bound to do, such a promise
provided it is not opposed to public policy, is a good consideration. It should not be vague or
uncertain.
g) Consideration must be real and not illusory: Consideration must be real and must not be
illusory. It must be something to which the law attaches some value. If it is legally or physically
impossible it is not considered valid consideration.
h) Consideration must not be unlawful, immoral, or opposed to public policy. Only presence of
consideration is not sufficient it must be lawful. Anything, which is immoral or opposed to public
policy, also cannot be valued as valid consideration.

Mr. Sonumal a wealthy individual provided a loan of ` 80,000 to Mr. Datumal on 26.02.2019. The
borrower Mr. Datumal asked for a further loan of ` 1,50,000. Mr. Sonumal agreed but
provided the loan in parts at different dates. He provided` 1,00,000 on 28.02.2019 and remaining `
50,000 on 03.03.2019.
On 10.03.2019 Mr. Datumal while paying off part ` 75,000 to Mr. Sonumal insisted that the lender
should adjusted ` 50,000 towards the loan taken on·03.03.2019 and balance as against the loan on
26.02.2019.
Mr. Sonumal objected to this arrangement and asked the borrower to adjust in the order of date
of borrowal of funds.
Now you decide:
(i) Whether the contention of Mr. Datumal correct or otherwise as per the provisions of the Indian
Contract Act, 1872?

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(ii) What would be the answer in case the borrower does not insist on such order of adjustment of
repayment?
(iii) What would the mode of adjustment/appropriation of such part payment in case neither Mr.
Sonumal nor Mr. Datumal insist any order of adjustment on their part?
Provision: [Indian Contract Act, 1872]
1. In case where a debtor owes several debts to the same creditor and makes payment which is not
sufficient to discharge all the debts, the payment shall be appropriated (i.e. adjusted against the
debts) as per the provisions of Section 59 to 61 of the Indian Contract Act, 1872.
2. As per the provisions of 59 of the Act, 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.
3. As per the provisions of 60 of the Act, 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, where its
recovery is or is not barred by the law in force for the time being as to the limitation of suits.
4. As per the provisions of 61 of the Act, 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.
5. If the debts are of equal standing, the payments shall be applied in discharge of each
proportionately.
Answer:
(i) Therefore, the contention of Mr. Datumal is correct and he can specify the manner of
appropriation of repayment of debt.
(ii) Hence in case where Mr. Datumal fails to specify the manner of appropriation of debt on part
repayment, Mr. Sonumal the creditor, can appropriate the payment as per his choice.
(iii) Hence in case where neither Mr. Datumal nor Mr. Sonumal specifies the manner of appropriation
of debt on part repayment, the appropriation can be made in proportion of debts.

Explain the term 'Coercion" and what are the effects of coercion under Indian Contract Act, 1872.
Provision: [Indian Contract Act, 1872]
1. Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal
Code or the unlawful detaining, or threatening to detain any property, to the prejudice of any
person whatever, with the intention of causing any person to enter into an agreement.”
2. Effects of coercion under section 19 of Indian Contract Act, 1872:
a) Contract induced by coercion is voidable at the option of the party whose consent was so
obtained.
b) As to the consequences of the rescission of voidable contract, the party rescinding a void
contract should, if he has received any benefit, thereunder from the other party to the

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contract, restore such benefit so far as may be applicable, to the person from whom it was
received.
c) A person to whom money has been paid or anything delivered under coercion must repay or
return it.

Mr. Ramesh promised to pay ` 50,000 to his wife Mrs. Lali so that she can spend the sum on her
30th birthday. Mrs. Lali insisted her husband to make a written agreement if he really loved her.
Mr. Ramesh made a written agreement and the agreement was registered under the law. Mr.
Ramesh failed to pay the specified amount to his wife Mrs. Lali. Mrs. Lali wants to file a suit against
Mr. Ramesh and recover the promised amount. Referring to the applicable provisions of the
Contract Act, 1872, advise whether Mrs. Lali will succeed.
Provision: [Indian Contract Act, 1872]
1. Intention to create legal relations is part of elements in contract. Intention to create legal relations
is defined as an intention to enter a legally binding agreement or contract. Intention to create legal
relations is one of the necessary elements in formation of a contract.
2. In addition, with no intention to create legal relations, it will make any contract to become a mere
promise. Mere promises simply like a simple promise arise when there is no intention to create
legal relation
3. There must be an intention on the part of the parties to create legal relationship between them.
Social or domestic type of agreements are not enforceable in court of law and hence they do not
result into contracts.
4. Domestic and social agreements of intention to create legal relations can be broken down into
three groups, which are firstly commercial, or business relations, secondly social friend’s relations
and thirdly family or domestic relations.
Facts of case:
In above case Mr. Ramesh promised his wife to pay Rs.50,000. So Mrs.Lali can spend this on her
birthday. Mrs. Lali insisted her husband to make a written agreement if he really loved her. Mr.
Ramesh did same and written agreement was registered under law but he fails to pay specified
amount and Mrs. Lali wants to file a suit against Mr. Ramesh.
Answer:
Here, in the given circumstance wife will not be able to recover the amount as it was a social
agreement and the parties did not intend to create any legal relations.

A shop-keeper displayed a pair of dress in the show-room and a price tag of` 2,000 was
attached to the dress. Ms. Lovely looked to the tag and rushed to the cash counter. Then she asked
the shop-keeper to receive the payment and pack up the dress. The shop-keeper refused to hand-
over the dress to Ms. Lovely in consideration of the price stated in the price tag attached to the Ms.
Lovely seeks your advice whether she can sue the shop-keeper for the above cause under the Indian
Contract Act, 1872.
Provision: [Indian Contract Act, 1872]
1. The offer should be distinguished from an invitation to offer. An offer is definite and capable of
converting an intention in to a contract.
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2. Whereas an invitation to an offer is only a circulation of an offer, it is an attempt to induce offers
and precedes a definite offer.
3. Where a party, without expressing his final willingness, proposes certain terms on which he is
willing to negotiate, he does not make an offer, but invites only the other party to make an offer
on those terms. This is the basic distinction between offer and invitation to offer.
Facts of case:
In above case Ms. Lovely looked at a price tag of 2000 for a pair of dress after a shop. She rushed to
shop-keeper for purchase the same but the shop-keeper refused to hand over the dress to Ms. Lovely
Answer:
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in no
sense an offer for sale, the acceptance of which constitutes a contract.
In this case, Ms. Lovely by selecting the dress and approaching the shopkeeper for payment simply
made an offer to buy the dress selected by her. If the shopkeeper does not accept the price, the
interested buyer cannot compel him to sell.

Explain the modes of revocation of an offer as per the Indian Contract Act, 1872.
Provision: [Indian Contract Act, 1872]
Modes of revocation of Offer can be explained as follow:
1. By notice of revocation
2. By lapse of time: The time for acceptance can lapse if the acceptance is not given within the
specified time and where no time is specified, then within a reasonable time.
3. By non-fulfillment of condition precedent: Where the acceptor fails to fulfill a condition precedent
to acceptance the proposal gets revoked.
4. By death or insanity: Death or insanity of the proposer would result in automatic revocation of the
proposal but only if the fact of death or insanity comes to the knowledge of the acceptor.
5. By counter offer
6. By the non- acceptance of the offer according to the prescribed or usual mode
7. By subsequent illegality

Distinguish between wagering agreement and contract of insurance.

Provision: [Indian Contract Act, 1872]
Basis Wagering Agreement Contracts of Insurance

1. Meaning It is a promise to pay money or It is a contract to indemnify the loss.

money’s worth on the happening
or non happening of an uncertain
event.

2. Consideration There is no consideration between the The crux of insurance contract is the
two parties. There is just gambling for mutual consideration (premium an
money. compensation amount).

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3. Insurable There is no property in case of Insured party has insurable interest in
wagering agreement. the life or property sought to be
Interest There is betting on other’s insured.
life and properties.

4. Contract Loser has to pay the fixed amount on Except life insurance, the contract of
the happening of uncertain event. insurance indemnifies the insured
of Indemnity person against loss

5. Enforceability It is void and unenforceable It is valid and enforceable

agreement.

6. Premium No such logical calculations are Calculation of premium is based on

required in case of wagering scientific and actuarial calculation of
agreement. risks.

7. Public Welfare They have been regarded as against They are beneficial to the society.
the public welfare.

Define Fraud. Whether "mere silence will amount to fraud" as per the Indian Contract Act, 1872?
Provision: [Indian Contract Act, 1872]
Definition of Fraud under 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 an intent to deceive
another party thereto or his agent, or to induce him to enter into the contract:
a) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
b) the active concealment of a fact by one having knowledge or belief of the fact;
c) a promise made without any intention of performing it;
d) any other act fitted to deceive;
e) any such act or omission as the law specially declares to be fraudulent.
Mere silence will amount to fraud: This statement is incorrect as per the Indian Contract Act, 1872.
A party to the contract is under no obligation to disclose the whole truth to the other party. ‘Caveat
Emptor’ i.e. let the purchaser beware is the rule applicable to contracts. There is no duty to speak in
such cases and silence does not amount to fraud. Similarly, there is no duty to disclose facts which are
within the knowledge of both the parties.

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Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September 2018 for
` 25 Lakhs. The Property papers mentioned a condition, amongst other details, that whosoever
purchases the land is free to use 9 acres as per his choice but the remaining 1 acre has to be
allowed to be used by Mr. Chotelal, son of the seller for carrying out farming or other activity of
his choice. On 12th October, 2018, Mr. Sohanlal died leaving behind his son and life. On 15th
October, 2018 purchaser started construction of an auditorium on the whole 10 acres of land and
denied any land to the son.
Now Mr. Chotelal wants to file a case against the purchaser and get a suitable redressed.
Discuss the above in light of provisions of Indian Contract Act, 1872 and decide upon Mr.
Chotelal's plan of action?
Provision: [Indian Contract Act, 1872]
1. Problem as asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in section 2(d) and on the principle ‘privity of consideration’. Consideration is one of
the essential elements to make a contract valid and it can flow from the promisee or any other
person.
2. In view of the clear language used in definition of ‘consideration’ in Section 2(d), it is not
necessary that consideration should be furnished by the promisee only.
3. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it
moves from the promisee or any other person.
4. The leading authority in the decision of the Chinnaya Vs. Ramayya, held that the consideration can
legitimately move from a third party and it is an accepted principle of law in India.
Facts of case:
1. In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlal, but Mr. Chotelal
has not given any consideration to Mr. Mohanlal but the consideration did flow from Mr.
Sohanlal to Mr. Mohanlal on the behalf of Mr. Chotelal and such consideration from third party is
sufficient to enforce the promise of Mr. Mohanlal to allow Mr. Chotelal to use 1 acre of land.
2. Further the deed of sale and the promise made by Mr. Mohanlal to Mr. Chotelal to allow the use
of 1 acre of land were executed simultaneously and therefore they should be regarded as one
transaction and there was sufficient consideration for it.
3. Moreover, it is provided in the law that “in case covenant running with the land, where a person
purchases land with notice that the owner of the land is bound by certain duties affecting land, the
covenant affecting the land may be enforced by the successor of the seller.”
Answer:
In such a case, third party to a contract can file the suit although it has not moved the consideration.
Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for execution of contract.

"Mere silence is not fraud" but there are some circumstances where the "silence is fraud".
Explain the circumstances as per the provision of Indian Contract Act, 1872?
Provision: [Indian Contract Act, 1872]
1. Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances of the case are such that, regard being had to them, it is the
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duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to
speech.
2. It is a rule of law that mere silence does not amount to fraud. A contracting party is not duty
bound to disclose the whole truth to the other party or to give him the whole information in his
possession affecting the subject matter of the contract.
3. The rule is contained in explanation to Section 17 of the Indian Contract Act which clearly states
the position that mere silence as to facts likely to affect the willingness of a person to enter into
a contract is not fraud.
4. Under the following circumstances silence is treated as fraud they are as follow:
a) Duty of person to speak: Where the circumstances of the case are such that it is the duty of
the person observing silence to speak. Following contracts come within this category:
i. Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to
act with utmost good faith and make full disclosure of all material facts concerning the
agreement, known to him.
ii. Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied
condition that full disclosure of material facts shall be made, otherwise the insurer is entitled
to avoid the contract.
iii. Contracts of marriage: Every material fact must be disclosed by the parties to a contract of
marriage.
iv. Contracts of family settlement: These contracts also require full disclosure of material
facts within the knowledge of the parties.
v. Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of
shares/debentures by a joint stock company have to disclose all material facts within their
knowledge.
b) Where the silence itself is equivalent to speech: For example, A says to B “If you do not deny
it, I shall assume that the horse is sound.” A says nothing. His silence amounts to speech.

Discuss the essentials of Undue Influence as per the Indian Contract Act, 1872.
Provision: [Section 16 of Indian Contract Act, 1872]
The essentials of Undue Influence as per the Indian Contract Act, 1872 are the following:
1. Relation between the parties: A person can be influenced by the other when a near relation
between the two exists.
2. Position to dominate the will: Relation between the parties exist in such a manner that one of
them is in a position to dominate the will of the other. A person is deemed to be in such
position in the following circumstances:
a) Real and apparent authority: Where a person holds a real authority over the other as in the
case of master and servant, doctor and patient and etc.
b) Fiduciary relationship: Where relation of trust and confidence exists between the parties to a
contract. Such type of relationship exists between father and son, solicitor and client,
husband and wife, creditor and debtor, etc.
c) Mental distress: An undue influence can be used against a person to get his consent on a
contract where the mental capacity of the person is temporarily or permanently affected by
the reason of mental or bodily distress, illness or of old age.
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d) Unconscionable bargains: Where one of the parties to a contract is in a position to dominate
the will of the other and the contract is apparently unconscionable i.e., unfair, it is presumed by
law that consent must have been obtained by undue influence. Unconscionable bargains are
witnessed mostly in money lending transactions and in gifts.
3. The object must be to take undue advantage: Where the person is in a position to influence the
will of the other in getting consent, must have the object to take advantage of the other.
4. Burden of proof: The burden of proving the absence of the use of the dominant position to obtain
the unfair advantage will lie on the party who is in a position to dominate the will of the other.

1.33
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The Sale of Goods Act, 1930

What are the consequences of “destruction of goods” under the Sale of Goods Act, 1930, where the
goods have been destroyed after the agreement to sell but before the sale is affected
Provision: [The Sale of Goods Act, 1930]
1. In accordance with the provisions of the Sale of Goods Act, 1930 as contained in Section 7, a
contract for the sale of specific goods is void if at the time when the contract was made; the goods
without the knowledge of the seller, perished or become so damaged as no longer to answer to
their description in the contract, then the contract is void ab initio.
2. This section is based on the rule that where both the parties to a contract are under a mistake as to
a matter of fact essential to a contract, the contract is void.
3. In a similar way Section 8 provides that an agreement to sell specific goods becomes void if
subsequently the goods, without any fault on the part of the seller or buyer, perish or become so
damaged as no longer to answer to their description in agreement before the risk passes to the
buyer. This rule is also based on the ground of impossibility of performance as stated above.
4. It may, however, be noted that section 7 & 8 apply only to specific goods and not to
unascertained goods. If the agreement is to sell a certain quantity of unascertained goods, the
perishing of even the whole quantity of such goods in the possession of the seller will not relieve
him of his obligation to deliver the goods.

What do you understand by Caveat Emptor under the Sale of Goods Act 1930? What are the
exceptions to this rule?
Provision: [The Sale of Goods Act, 1930]
1. Caveat emptor’ means “let the buyer beware”, i.e. in sale of goods the seller is under no duty to
reveal unflattering truths about the goods sold. Therefore, when a person buys some goods,
he must examine them thoroughly.
2. If the goods turn out to be defective or do not suit his purpose, or if he depends upon his skill and
judgment and makes a bad selection, he cannot blame any body excepting himself.
3. The rule is enunciated in the opening words of section 16 of the Sale of Goods Act, 1930 which
runs thus: “Subject to the provisions of this Act and of any other law for the time being in force,
there is no implied warranty or condition as to the quality or fitness for any particular purpose of
goods supplied under a contract of sale”
4. The rule of caveat emptor does not apply in the following cases:
a) Fitness for buyer’s purpose: Where the buyer, expressly or by implication, makes know to the
seller the particular purpose for which he requires the goods and relies on the seller’s skill or
judgment and the goods are of a description which it is in the course of the seller’s business to
supply, the seller must supply the goods which shall be fit for the buyer’s purpose.
(Section16(1).
b) Sale under a patent or trade name: In the case of a contract for the sale of a specified article
under its patent or other trade name, there is no implied condition that the goods shall be
reasonably fit for any particular purpose (Section 16(1).
c) Merchantable quality: Where goods are bought by description from a seller who deals in goods
of that description (whether he is in the manufacturer or producer or not), there is an implied

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condition that the goods shall be of merchantable quality. But if the buyer has examined the
goods, there is no implied condition as regards defects which such examination ought to have
revealed. (Section 16(2).
d) Usage of trade: An implied warranty or condition as to qualify or fitness for a particular purpose
may be annexed by the usage of trade. (Section 16(3).
e) Consent by fraud: Where the consent of the buyer, in a contract of sale, is obtained by the
seller by fraud or where the seller knowingly conceals a defect which could not be discovered
on a reasonable examination, the doctrine of caveat emptor does not apply.

What are the implied conditions in a contract of ‘Sale by sample’ under the Sale of Goods Act,
1930? State also the implied warranties operatives under the said Act
Provision: [The Sale of Goods Act, 1930]
1. The following are implied conditions in a contract of sale by sample in accordance with Section 17
of the Sale of Goods Act, 1930
a) that the bulk shall correspond with the sample in quality
b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
c) that the goods shall be free from any defect, rendering them merchantable, which would not be
apparent on a reasonable examination of the sample [Section 17(2)].
2. Implied Warrants under The Sale of Goods Act,1930 are as follows:
a) Warranty of quiet possession [Section 14(b)]: In a contract of sale, unless there is a contrary
intention, there is an implied warranty that the buyer shall have and enjoy quiet possession of
the goods. If the buyer is in any way distributed in the enjoyment of the goods in consequence
of the seller’s defective title to sell, he can claim damages from the seller.
b) Warranty of freedom from encumbrances [Section 14(c)]: The buyer is entitled to a further
warranty that the goods are not subject to any charge or encumbrance in favour of a third
party. If his possession is in any way disturbed by reason of the existence of any charge or
encumbrances on the goods in favour of any third party, he shall have a right to claim damages
for breach of this warranty.
c) Warranty as to quality or fitness by usage of trade [Section 16(3)]. An implied warranty as to
quality or fitness for a particular purpose may be annexed by the usage of trade.
d) Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing that the
goods are inherently dangerous or they are likely to be dangerous to the buyer and that the
buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise he
will be liable in damages.

Distinguish between a ‘Condition’ and a ‘Warranty’ in a contract of sale. When shall a ‘breach of
condition’ be treated as ‘breach of warranty’ under the provisions of the Sale of Goods Act, 1930?
Explain.
Provision: [The Sale of Goods Act, 1930]
1. Difference between Condition and Warranty
a) A condition is a stipulation essential to the main purpose of the contract whereas a warranty is a
stipulation collateral to the main purpose of the contract.
b) Breach of condition gives rise to a right to treat the contract as repudiated whereas in case of
breach of warranty, the aggrieved party can claim damage only.
c) Breach of condition may be treated as breach of warranty whereas a breach of warranty cannot
be treated as breach of condition.
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2. According to Section 13 of the Sale of Goods Act, 1930 a breach of condition may be treated as
breach of warranty in following circumstances:
a) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may
waive the condition.
b) Where the buyer elects to treat the breach of condition as breach of a warranty.
c) Where the contract of sale is non-severable and the buyer has accepted the whole goods or any
part thereof.
d) Where the fulfilment of any condition or warranty is excused by law due to impossibility or
otherwise.

Nemo Dat Quod Non Habet”–“None can give or transfer goods what he does not himself own.”
Explain the rule and state the cases in which the rule does not apply under the provisions of the
Sale of Goods Act, 1930.
Provision: [The Sale of Goods Act, 1930]
The term means, “None can give or transfer goods what he does not himself own”. Exceptions to the
rule and the cases in which the Rule does not apply under the provisions of the Sale of Goods Act,
1930 are enumerated below:
1. Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods or document of title
to goods would pass a good title to the buyer in the following circumstances, namely
a) if he was in possession of the goods or documents with the consent of the owner
b) if the sale was made by him when acting in the ordinary course of business as a mercantile
agent and
c) if the buyer had acted in good faith and has at the time of the contract of sale, no notice of the
fact that the seller had no authority to sell. (Proviso to Section 27).
2. Sale by one of the joint owners: If one of the several joint owners of goods has the sole possession
of them with the permission of the others the property in the goods may be transferred to any
person who buys them from such a joint owner in good faith and does not at the time of the
contract of sale have notice that the seller has no authority to sell. (Section 28)
3. Sale by a person in possession under voidable contract: A buyer would acquire a good title to the
goods sold to him by seller who had obtained possession of the goods under a contract voidable on
the ground of coercion, fraud, misrepresentation or undue influence provided that the contract
had not been rescinded until the time of the sale (Section 29).
4. Sale by one who has already sold the goods but continues in possession thereof: If a person has
sold goods but continues to be in possession of them or of the documents of title to them, he may
sell them to a third person, and if such person obtains the delivery thereof in good faith without
notice of the previous sale, he would have good title to them, although the property in the goods
had passed to the first buyer earlier. A pledge or other deposition of the goods or documents of
title by the seller in possession are equally valid. [Section 30(1)]
5. Sale by buyer obtaining possession before the property in the goods has vested in him: Where a
buyer with the consent of seller obtains possession of the goods before the property in them has
passed to him, he may sell, pledge or otherwise dispose of the goods to a third person, and if such
person obtains delivery of the goods in good faith and without notice of the lien or other right of
the original seller in respect of the goods in good faith and without notice of the lien or other right
of the original seller in respect of the goods, he would get a good title to them. [Section 30(2)].

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 Chapter The Sale of Goods Act, 1930 2.4

6. Sale by an unpaid seller: Where on unpaid seller who had exercised his right of lien or stoppage in
transit resells the goods, the buyer acquires a good title to the goods as against the original buyer
[Section 54(3)].
7. Sale under the provisions of other Acts:
a) Sale by an official Receiver or liquidator of the company will give the purchaser a valid title.
b) Purchase of goods from a finder of goods will get a valid title under circumstances.
c) Sale by a pawnee under default of pawnor will give valid title to the purchaser.

Ram consults Shyam, a motorcar dealer for a car suitable for touring purposes to promote the sale
of his product. Shyam suggests ‘Maruti’ and Ram accordingly buys it from Shyam. The car turns out
to be unfit for touring purposes. What remedy Ram is having now under the Sale of Goods Act,
1930?
Provision: [The Sale of Goods Act, 1930]
1. A stipulation in a contract of sale with reference to goods, which are the subject thereof, may be a
condition or a warranty.
2. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives
rise to a right to treat the contract as repudiated.
3. A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives
rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated.
4. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract. A stipulation may be a condition, though called a warranty in the
contract.
Facts of Case:
In the instant case, the term that the ‘car should be suitable for touring purposes’ is a condition of the
contract. It is so vital that its non-fulfilment defeats the very purpose for which Ram
purchases the car.
Answer:
Ram is therefore entitled to reject the car and have refund of the price.

Referring to the provisions of the Sale of Goods Act, 1930, state the circumstances under which
when goods are delivered to the buyer “on approval” or “on sale or return” or other similar
terms, the property therein passes to the buyer.
Ms. Preeti owned a motor car, which she handed over to Mr. Joshi on sale or return basis. After a
week, Mr. Joshi pledged the motor car to Mr. Ganesh. Ms. Preeti now claims back the motor car
from Mr. Ganesh. Will she succeed? Referring to the provisions of the Sale of Goods Act, 1930
decide and examine what recourse is available to Ms. Preeti.
Provision: [The Sale of Goods Act, 1930]
As per the provisions of section 24 of the Sale of Goods Act, 1930, when goods are delivered to the
buyer on approval or “on sale or return" or other similar terms, the property therein passes to the
buyer-
a) when the buyer signifies his approval or acceptance to the seller or does any other act adopting
the transaction
b) if he does not signify his approval or acceptance to the seller but retains the goods without giving
notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of
such time, and, if no time has been fixed, on the expiration of a reasonable time or
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 Chapter The Sale of Goods Act, 1930
2.5
c) He does something to the good, which is equivalent to accepting the goods, e.g. he pledges or sells
the goods.
Facts of Case:
Since, Mr. Joshi, who had taken delivery of the Motor car on Sale or Return basis and pledged the
motor car to Mr. Ganesh, has attracted the third condition that he has done something to the good
which is equivalent to accepting the goods e.g. he pledges or sells the goods. Therefore, the property
therein (Motor car) passes to Mr. Joshi.
Answer:
Now in this situation, Ms. Preeti cannot claim back her Motor Car from Mr. Ganesh, but she can claim
the price of the motor car from Mr. Joshi only.

Explain the provisions of law relating to unpaid seller’s ‘right of lien’ and distinguish it from the
“right of stoppage the goods in transit”.
Provision: [The Sale of Goods Act, 1930]
The legal provisions regarding the right of lien of an unpaid seller has been stated from Sections 47 to
49 of the Sale of Goods Act, 1930 which may be enumerated as follows:
1. According to Section 47, the unpaid seller of the goods who is in possession of them is entitled to
retain possession of them until payment or tender of the price in the following cases namely:
a) where the goods have been sold without any stipulation as to credit.
b) where the goods have been sold on credit, but the term of credit has expired; or
c) where the buyer becomes insolvent.
2. The seller may exercise his right of lien not withstanding that he is in possession of the goods as
agent or bailee for the buyer.
3. Section 48 states that 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
circumstances as to show an agreement to waive the lien.
4. According to Section 49 the unpaid seller loses his lien on goods:
a) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the
buyer without reserving the right of disposal of the goods.
b) when the buyer or his agent lawfully obtains possession of the goods
c) by waiver thereof.
5. The unpaid seller of the goods, having a lien thereon, does not lose his lien by reason only that he
has obtained a decree to the price of the goods.
6. Right of lien and Right to stoppage the goods in transit- Distinction:
a) The essence of a right of lien is to retain possession whereas the right of stoppage in transit is
right to regain possession.
b) Seller should be in possession of goods under lien while in stoppage in transit
i. Seller should have parted with the possession
ii. possession should be with a carrier and
iii. Buyer has not acquired the possession.
c) Right of lien can be exercised even when the buyer is not insolvent, but it is not the case with
right of stoppage in transit.
d) Right of stoppage in transit begins when the right of lien ends. Thus, the end of the right of lien
is the starting point of the right of stoppage the goods in transit.

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 Chapter The Sale of Goods Act, 1930 2.6

There is no implied warranty or condition as to quality or fitness for any particular purpose of goods
supplied under a contract of sale.” Discuss the significance and State exceptions, if any.
Provision: [The Sale of Goods Act, 1930]
The statement given in the question is the fundamental principle of law of sale of goods, sometime
expressed by the maxim ‘Caveat Emptor’ meaning thereby ‘Let the buyer be aware’.
In other words, it is no part of the seller’s duty in a contract of sale of goods to give the buyer an
article suitable for a particular purpose, or of particular quality, unless the quality or fitness is made
an express terms of the contract.
The person who buys goods must keep his eyes open, his mind active and should be cautious while
buying the goods. If he makes a bad choice, he must suffer the consequences of lack of skill and
judgement in the absence of any misrepresentation or guarantee by the seller.
There are, however, certain exceptions to the rule which are stated as under:
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular purpose for
which the goods are required, so as to show that he relies on the seller’s skill or judgment and the
goods are of a description which is in the course of seller’s business to supply, it is the duty of the
seller to supply such goods as are reasonably fit for that purpose.
2. Goods purchased under patent or brand name: In case where the goods are purchased under its
patent name or brand name, there is no implied condition that the goods shall be fit for any
particular purpose.
3. Goods sold by description: Where the goods are sold by description there is an implied condition
that the goods shall correspond with the description. If it is not so then seller is responsible.
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller who
deals in goods of that description there is an implied condition that the goods shall be of
merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer has
examined the goods this rule shall apply if the defects were such which ought to have not been
revealed by ordinary examination.
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does not apply
if the bulk does not correspond with the sample.
6. Goods by sample as well as description: Where the goods are bought by sample as well as
description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with
both the sample and description or either of the condition.
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular purpose may
be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor is
not applicable.
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by making
some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals
some defect in the goods so that the same could not be discovered by the buyer on a reasonable
examination, then the rule of Caveat Emptor will not apply. In such a case, the buyer has a right to
avoid the contract and claim damages.

Describe the consequences of “destruction of goods” under the Sale of Goods Act, 1930, where the
goods have been destroyed after the agreement to sell but before the sale is affected.
Provision: [The Sale of Goods Act, 1930]
1. In accordance with the provisions of the Sale of Goods Act, 1930 as contained in Section 7, a
contract for the sale of specific goods is void if at the time when the contract was made; the goods
without the knowledge of the seller, perished or become so damaged as no longer to answer to
their description in the contract, then the contract is void ab initio.
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 Chapter The Sale of Goods Act, 1930
2.7
2. This section is based on the rule that where both the parties to a contract are under a mistake as to
a matter of fact essential to a contract, the contract is void.
3. In a similar way Section 8 provides that an agreement to sell specific goods becomes void
if subsequently the goods, without any fault on the part of the seller or buyer, perish or become so
damaged as no longer to answer to their description in agreement before the risk passes to the
buyer. This rule is also based on the ground of impossibility of performance as stated above.
4. It may, however, be noted that section 7 and 8 apply only to specific goods and not to
unascertained goods. If the agreement is to sell a certain quantity of unascertained goods, the
perishing of even the whole quantity of such goods in the possession of the seller will not relieve
him of his obligation to deliver the goods.

Describe the term "unpaid seller" under the Sale of Goods Act, 1930? When can an unpaid seller
exercise the right of stoppage of goods in transit?
Provision: [The Sale of Goods Act, 1930]
1. According to Section 45 of the Sale of Goods Act, 1930 the seller of goods is deemed to be an
‘Unpaid Seller’ when-
a) The whole of the price has not been paid or tendered.
b) A bill of exchange or other negotiable instrument has been received as conditional payment,
and it has been dishonoured.
2. Right of stoppage of goods in transit: When the unpaid seller has parted with the goods to a carrier
and the buyer has become insolvent, he can exercise this right by asking the carrier to return the
goods back, or not to deliver the goods to the buyer.
3. However, the right of stoppage in transit is exercised only when the following conditions
are fulfilled:
a) The seller must be unpaid.
b) The seller must have parted with the possession of goods.
c) The goods must be in the course of transit.
d) The buyer must have become insolvent.
e) The right is subject to provisions of the Act.

Explain the “condition as to Merchantability” and “condition as to wholesomeness” under the Sale
of Goods Act, 1930.
Provision: [The Sale of Goods Act, 1930]
1. Condition as to Merchantability [Section 16(2) of the Sale of Goods Act, 1930]: Where goods are
bought by description from a seller who deals in goods of that description (whether he is the
manufacturer or producer or not), there is an implied condition that the goods shall be of
merchantable quality.
2. Provided that, if the buyer has examined the goods, there shall be no implied condition as regards
defects which such examination ought to have revealed .
3. The expression “merchantable quality”, though not defined, nevertheless connotes goods of such a
quality and in such a condition a man of ordinary prudence would accept them as goods of that
description. It does not imply any legal right or legal title to sell.

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Example: If a person orders motor horns from a manufacturer of horns, and the horns supplied are
scratched and damaged owing to bad packing, he is entitled to reject them as
unmerchantable.
4. Condition as to wholesomeness: In the case of eatables and provisions, in addition to the implied
condition as to merchantability, there is another implied condition that the goods shall be
wholesome.
Example: A supplied F with milk. The milk contained typhoid germs. F’s wife consumed the milk
and was infected and died. Held, there was a breach of condition as to fitness and A was liable to
pay damages.

J the owner of a Fiat car wants to sell his car. For this purpose he hand over the car to P, a
mercantile agent for sale at a price not less than Rs 50, 000. The agent sells the car for Rs 40, 000 to
A, who buys the car in good faith and without notice of any fraud. P misappropriated the money
also. J sues A to recover the Car. Decide given reasons whether J would succeed.
Provision: [The Sale of Goods Act, 1930]
1. The problem in this case is based on the provisions of the Sale of Goods Act, 1930
contained in the proviso to Section 27. The proviso provides that a mercantile agent is one who in
the customary course of his business, has, as such agent, authority either to sell goods, or to
consign goods, for the purpose of sale, or to buy goods, or to raise money on the security of goods
[Section 2(9)].
2. The buyer of goods from a mercantile agent, who has no authority from the principal to sell,
gets a good title to the goods if the following conditions are satisfied:
a) The agent should be in possession of the goods or documents of title to the goods with the
consent of the owner.
b) The agent should sell the goods while acting in the ordinary course of business of a mercantile
agent.
c) The buyer should act in good faith.
d) The buyer should not have at the time of the contract of sale notice that the agent has no
authority to sell.
Facts of Case:
In the given case J was the owner of Fiat Car, which he wants to sell for this he appointed P and
mercantile agent putting one condition that price should not be less then Rs.50, 000. However, p sells
the car for Rs. 40, 000 to A who buys the car in good faith without having any knowledge of fraud. P
misappropriated the money received from sell of that car.
Answer:
In the instant case, P, the agent, was in the possession of the car with J’s consent for the
purpose of sale. A, the buyer, therefore obtained a good title to the car. Hence, J in this case, cannot
recover the car from A.

Mr. Samuel agreed to purchase 100 bales of cotton from Mr. Varun, out of his large stock and sent
his men to take delivery of the goods. They could pack only 60 bales. Later on, there was an
accidental fire and the entire stock was destroyed including 60 bales that were already packed.
Referring to the provisions of the Sale of Goods Act, 1930 explain as to who will bear the loss and to
what extent?
Provision: [The Sale of Goods Act, 1930]

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 Chapter The Sale of Goods Act, 1930
2.9
1. Section 26 of the Sale of Goods Act, 1930 provides that 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 the buyer, the goods are at buyer’s risk whether delivery has been made
or not.
2. Further Section 18 read with Section 23 of the Act provides that in a contract for the sale of
unascertained goods, no property in the goods is transferred to the buyer, unless and until the
goods are ascertained and where there is contract for the sale of unascertained or future
goods by description, and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with
the assent of the seller, the property in the goods thereupon passes to the buyer.
3. Such assent may be express or implied. Applying the aforesaid law to the facts of the case in hand,
it is clear that Mr. Samuel has the right to select the good out of the bulk and he has sent his men
for same purpose.
Facts of Case:
1. Mr. Samuel agreed to purchase 100 bales from Mr. Varun and sent his men to take delivery of the
same. Mr. Varun were able to pack only 60 bales.
2. Later on, there was accidental fire in Varun’s place, due to which all the stock including those 60
bales to be delivered to Mr. Samuel was destroyed.
Answer:
Hence the problem can be answered based on the following two assumptions and the answer will
vary accordingly.
a) Where the bales have been selected with the consent of the buyer’s representatives: In this case,
the property in the 60 bales has been transferred to the buyer and goods have been appropriated
to the contract. Thus, loss arising due to fire in case of 60 bales would be borne by Mr. Samuel. As
regards 40 bales, the loss would be borne by Mr. Varun, since the goods have not been identified
and appropriated.
b) Where the bales have not been selected with the consent of buyer’s representatives. In this case
the property in the goods has not been transferred at all and hence the loss of 100 bales would be
borne by Mr. Varun completely.

What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials regarding
appropriation of unascertained goods
Provision: [The Sale of Goods Act, 1930]
1. Appropriation of goods: Appropriation of goods involves selection of goods with the
intention of using them in performance of the contract and with the mutual consent of the seller
and the buyer.
2. The essentials regarding appropriation of unascertained goods are:
a) There is a contract for the sale of unascertained or future goods.
b) The goods should conform to the description and quality stated in the contract.
c) The goods must be in a deliverable state.
d) The goods must be unconditionally (as distinguished from an intention to appropriate)
appropriated to the contract either by delivery to the buyer or his agent or the carrier.
e) The appropriation must be made by
i. the seller with the assent of the buyer; or

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ii. the buyer with the assent of the seller.

f) The assent may be express or implied.
g) The assent may be given either before or after appropriation.

Mr. D sold some goods to Mr. E for Rs 5,00,000 on 15 days credit. Mr. D delivered the goods. On
due date Mr. E refused to pay for it. State the position and rights of Mr. D as per the Sale of Goods
Act, 1930
Answer: [The Sale of Goods Act, 1930]
Position of Mr. D: Mr. D sold some goods to Mr. E for Rs 5,00,000 on 15 days credit. Mr. D
delivered the goods. On due date Mr. E refused to pay for it. So, Mr. D is an unpaid seller as according
to section 45(1) of the Sale of Goods Act,1930 the seller of goods is deemed to be an ‘Unpaid Seller’
when the whole of the price has not been paid or tendered and the seller had an immediate right of
action for the price.
Rights of Mr. D: As the goods have parted away from Mr. D, therefore, Mr. D cannot exercise the right
against the goods, he can only exercise his rights against the buyer i.e. Mr. E which are as under:
a) Suit for price (Section 55) In the mentioned contract of sale, the price is payable after 15 days and
Mr. E refuses to pay such price, Mr. D may sue Mr. E for the price.
b) Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for damages for non-
acceptance if Mr. E wrongfully neglects or refuses to accept and pay for the goods. As regards
measure of damages, Section 73 of the Indian Contract Act, 1872 applies.
c) Suit for interest [Section 61]: If there is no specific agreement between the Mr. D and Mr. E as to
interest on the price of the goods from the date on which payment becomes due, Mr. D may
charge interest on the price when it becomes due from such day as he may notify to Mr. E.

What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930?
Provision: [The Sale of Goods Act, 1930]
1. As per the provisions of Section 46 of the Sale of Goods Act, 1930, notwithstanding that the
property in the goods may have passed to the buyer, the unpaid seller of goods, as such, has by
implication of law-
a) a lien on the goods for the price while he is in possession of them;
b) in case of the insolvency of the buyer, a right of stopping the goods in transit after he has
parted with the possession of them;
c) a right of re-sale as limited by this Act. [Sub-section (1)]
2. 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 co-extensive with his rights of lien
and stoppage in transit where the property has passed to the buyer. [Sub-section (2)]
3. These rights can be exercised by the unpaid seller in the following circumstances:
a) Right of lien (Section 47): According to sub-section (1), the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or tender of the
price in the following cases, namely:-
i. where the goods have been sold without any stipulation as to credit;
ii. where the goods have been sold on credit, but the term of credit has expired;
iii. where the buyer becomes insolvent.
b) Right of stoppage in transit (Section 50): When the buyer of goods becomes insolvent, the
unpaid seller who has parted with the possession of the goods has the right of stopping them

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 Chapter The Sale of Goods Act, 1930
2.11
in transit, that is to say, he may resume possession of the goods as long as they are in the
course of transit, and may retain them until paid or tendered price of the goods.
c) Right to re-sell the goods (Section 54): The unpaid seller can exercise the right to re-sell the
goods under the following conditions:
i. Where the goods are of a perishable nature
ii. Where he gives notice to the buyer of his intention to re-sell the goods
iii. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the
goods
iv. A re-sale by the seller where a right of re-sale is expressly reserved in a contract of sale
v. Where the property in goods has not passed to the buyer

State briefly the essential element of a contract of sale under the Sale of Goods Act, 1930.
Provision: [The Sale of Goods Act, 1930]
The following elements must co-exist so as to constitute a contract of sale of goods under the Sale
of Goods Act, 1930.
1. There must be at least two parties
2. The subject matter of the contract must necessarily be goods
3. A price in money (not in kind) should be paid or promised.
4. A transfer of property in goods from seller to the buyer must take place.
5. A contract of sale must be absolute or conditional [section 4(2)].
6. All other essential elements of a valid contract must be present in the contract of sale
Answer:
Above given are the essential elements that must be present in contract of sale.

What are the rights of buyer against the seller, if the seller commits a breach of contract under the
Sale of Goods Act, 1930?
Provision: [The Sale of Goods Act, 1930]
If the seller commits a breach of contract, the buyer gets the following rights against the seller:
1. 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.
2. Suit for specific performance (Section 58): Where the seller commits of breach of the contract
of sale, the buyer can appeal to the court for specific performance. The court can order for specific
performance only when the goods are ascertained or specific.
3. Suit for breach of warranty (section 59): Where there is breach of warranty on the part of the
seller, or where the buyer elects to treat breach of condition as breach of warranty, the buyer is
not entitled to reject the goods only on the basis of such breach of warranty. But he may –
a) set up against the seller the breach of warranty in diminution or extinction of the price; or
b) sue the seller for damages for breach of warranty.
4. Repudiation of contract before due date (Section 60): Where either party to a contract of sale
repudiates the contract before the date of delivery, the other 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.
5. Suit for interest: Nothing in this Act shall affect the right of the seller or the buyer to recover
interest or special damages, in any case where by law interest or special damages may be
recoverable, or to recover the money paid where the consideration for the payment of it has
failed.

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 Chapter The Sale of Goods Act, 1930 2.12

In the absence of a contract to the contrary, the court may award interest at such rate as it thinks
fit on the amount of the price to the buyer in a suit by him for the refund of the price in a case of a
breach of the contract on the part of the seller from the date on which the payment was made.

Mr. Amit was shopping in a self-service Super market. He picked up a bottle of cold drink from a
shelf. While he was examining the bottle, it exploded in his hand and injured him. He files a suit for
damages against the owner of the market on the ground of breach of condition. Decide under the
Sale of Goods Act, 1930, whether Mr. Amit would succeed in his claim?
Provision: [The Sale of Goods Act, 1930]
Essentials of Sale: The problem as given in the question is based on Section 16(2) of the Sale of
Goods Act, 1930, which states that where goods are bought by description from a seller who deals in
goods of that description (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be of merchantable quality. Though the term ‘merchantable quality’ is
not defined in the Act, it means that in the present case, the bottle must be properly sealed. In other
words, if the goods are purchased for self-use, they should be reasonably fit for the purpose for which
it is being used.
Answer:
In the instant case, on an examination of the bottle of cold drink, it exploded and injured the buyer.
Applying the provision of Section 16(2), Mr. Amit would succeed in claim for damages from the owner
of the shop.

For the purpose of making uniform for the employees, Mr. Yadav bought dark blue coloured cloth
from Vivek, but did not disclose to the seller the purpose of said purchase. When uniforms were
prepared and used by the employees, the cloth was found unfit. However, there was evidence that
the cloth was fit for caps, boots and carriage lining. Advise Mr. Yadav whether he is entitled to
have any remedy under the sale of Goods Act, 1930?
Provision: [The Sale of Goods Act, 1930]
As per the provision of Section 16(1) of the Sale of Goods Act, 1930, an implied condition in a
contract of sale that an article is fit for a particular purpose only arises when the purpose for which
the goods are supplied is known to the seller, the buyer relied on the seller’s skills or judgement and
seller deals in the goods in his usual course of business. In this case, the cloth supplied is capable of
being applied to a variety of purposes, the buyer should have told the seller the specific purpose for
which he required the goods. But he did not do so.
Answer:
Therefore, the implied condition as to the fitness for the purpose does not apply. Hence, the buyer
will not succeed in getting any remedy from the seller under the Sale of Goods Act, 1930.

What are the rules related to Acceptance of Delivery of Goods?

Provision: [The Sale of Goods Act, 1930]
1. Acceptance is deemed to take place when the buyer-
a) intimates to the seller that he had accepted the goods; or
b) does any act to the goods, which is inconsistent with the ownership of the seller; or
c) Retains the goods after the lapse of a reasonable time, without intimating to the seller that he
has rejected them (Section 42).
2. Ordinarily, a seller cannot compel the buyer to return the rejected goods; but the seller is entitled
to a notice of the rejection.

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 Chapter The Sale of Goods Act, 1930
2.13
3. Where the seller is ready and willing to deliver the goods and requests the buyer to take
delivery, and the buyer does not take delivery within a reasonable time, he is liable to the
seller for any loss occasioned by the neglect or refusal to take delivery, and also reasonable charge
for the care and custody of the goods.

Classify the following transactions according to the types of goods they are:
a) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales and these bales
were selected and set aside.
b) A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his shop.
c) T agrees to sell to S all the oranges which will be produced in his garden this year.
Answer: [The Sale of Goods Act, 1930]
a) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales and these bales
were selected and set aside. On selection the goods becomes ascertained. In this case, the contract
is for the sale of ascertained goods, as the cotton bales to be sold are identified and agreed after
the formation of the contract.
b) If A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his shop,
it is a sale of unascertained goods because it is not known which packet is to be delivered.
c) T agrees to sell to S all the oranges, which will be produced in his garden this year. It is contract of
sale of future goods, amounting to 'an agreement to sell

Suraj sold his car to Sohan for ` 75,000. After inspection and satisfaction, Sohan paid` 25,000 and
took possession of the car and promised to pay the remaining amount within a month. Later on
Sohan refuses to give the remaining amount on the ground that the car was not in a good
condition. Advise Suraj as to what remedy is available to him against Sohan.
Provision: [The Sale of Goods Act, 1930]
As per the section 55 of the Sale of Goods Act, 1930 an unpaid seller has a right to institute a suit
for price against the buyer personally. The said Section lays down that
a) Where under a contract of sale the property in the goods has passed to buyer and the buyer
wrongfully neglects or refuses to pay for the goods, the seller may sue him for the price of the
goods [Section 55(1)].
b) Where under a contract of sale the price is payable on a certain day irrespective of delivery and the
buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price. It
makes no difference even if the property in the goods has not passed and the goods have not
been appropriated to the contract [Section 55(2)].
Facts of Case:
In given case Suraj sold his car to Sohan for 75,000. Sohan paid 25,000 and took possession of the car
and promised to pay the remaining amount within month but later on Sohan refuses to give
remaining amount on thr ground that car is notin good condition.
Answer:
This problem is based on above provisions. Hence, Suraj will succeed against Sohan for recovery of
the remaining amount. Apart from this Suraj is also entitled to:-
a) Interest on the remaining amount
b) Interest during the pendency of the suit.

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 Chapter The Sale of Goods Act, 1930 2.14

J the owner of a car wants to sell his car. For this purpose, he hand over the car to P, a mercantile
agent for sale at a price not less than ` 50,000. The agent sells the car for` 40, 000 to A, who buys
the car in good faith and without notice of any fraud. P misappropriated the money also. J sues A to
recover the Car. Decide given reasons whether J would succeed.
Provision: [The Sale of Goods Act, 1930]
1. The problem in this case is based on the provisions of the Sale of Goods Act, 1930 contained in the
proviso to Section 27. The proviso provides that a mercantile agent is one who in the customary
course of his business, has, as such agent, authority either to sell goods, or to consign goods, for
the purpose of sale, or to buy goods, or to raise money on the security of goods [Section 2(9)].
2. The buyer of goods form a mercantile agent, who has no authority from the principal to sell, gets
a good title to the goods if the following conditions are satisfied:
a) The agent should be in possession of the goods or documents of title to the goods with the
consent of the owner.
b) The agent should sell the goods while acting in the ordinary course of business of a mercantile
agent.
c) The buyer should act in good faith.
d) The buyer should not have at the time of the contract of sale notice that the agent has no
authority to sell.
Facts of Case:
In given case J handover his car to P a mercantile agent for sell at a price not less than 50,000. But
agent sells the same for 40,000 to A who buys the same in good faith . P also misappropriated the
money. J sues A to recover the car.
Answer:
In the instant case, P, the agent, was in the possession of the car with J’s consent for the purpose of
sale. A, the buyer, therefore obtained a good title to the car. Hence, J in this case, cannot recover the
car from A.

Mr. G sold some goods to Mr. H for certain price by issue of an invoice, but payment in respect of
the same was not received on that day. The goods were packed and lying in the godown of Mr. G.
The goods were inspected by H's agent and were found to be in order. Later on, the dues of the
goods were settled in cash. Just after receiving cash, Mr. G asked Mr. H that goods should be
taken away from his godown to enable him to store other goods purchased by him. After one day,
since Mr. H did not take delivery of the goods, Mr. G kept the goods out of the godown in an open
space. Due to rain, some goods were damaged.
Referring to the provisions of the Sale of Goods Act, 1930, analyse the above situation and decide
who will be held responsible for the above damage. Will your answer be different, if the dues were
not settled in cash and are still pending?
Provision: [The Sale of Goods Act, 1930]
1. According to section 44 of the Sales of Goods Act, 1932, when the seller is ready and willing to
deliver the goods and requests the buyer to take delivery, and the buyer does not within a
reasonable time after such request take delivery of the goods, he is 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.
2. The property in the goods or beneficial right in the goods passes to the buyer at appoint of time
depending upon ascertainment, appropriation and delivery of goods.

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 Chapter The Sale of Goods Act, 1930
2.15
3. Risk of loss of goods prima facie follows the passing of property in goods. Goods remain at the
seller's risk unless the property there in is transferred to the buyer, but after transfer of property
therein to the buyer the goods are at the buyer's risk whether delivery has been made or not.
Facts of case:
In given question Mr. G sold some goods to Mr. H but payment of the same was not received that
day. Goods were packed & lying in godown of Mr. G. agent of Mr. H inspected the goods and later on
payment was made in cash. Just after receiving cash. Mr. G asked Mr. H to take away goods so he can
store his other goods at such place but Mr. H did not take delivery. Mr. G kept the goods out of the
godown in an open place and due to rain some of the goods were damaged.
Answer:
1. In the given case, since Mr. G has already intimated Mr. H, that he wanted to store some other
goods and thus Mr. H should take the delivery of goods kept in the godown of Mr. G, the loss of
goods damaged should be borne by Mr. H.
2. If the price of the goods would not have settled in cash and some amount would have been
pending then Mr. G will be treated as an unpaid seller and he can enforce the following rights
against the goods as well as against the buyer personally:
a) Where under a contract of sale the property in the goods has passed to the buyer and the buyer
wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the
seller may sue him for the price of the goods. [Section 55(1) of the Sales of Goods Act, 1930]
b) Where under a contract of sale the price is payable on a day certain irrespective of delivery and
the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price
although the property in the goods has not passed and the goods have not been appropriated
to the contract. [Section 55(2) of the Sales of Goods Act, 1930].

Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D delivered the goods. On due
date Mr. E refused to pay for it. State the position and rights of Mr. D as per the Sale of Goods
Act, 1930.
Provision: [The Sale of Goods Act, 1930]
1. Position of Mr. D: Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D
delivered the goods. On due date Mr. E refused to pay for it. So, Mr. D is an unpaid seller as
according to section 45(1) of the Sale of Goods Act,1930 the seller of goods is deemed to be an
‘Unpaid Seller’ when the whole of the price has not been paid or tendered and the seller had an
immediate right of action for the price.
2. Rights of Mr. D: As the goods have parted away from Mr. D, therefore, Mr. D cannot exercise the
right against the goods, he can only exercise his rights against the buyer i.e. Mr. E which are as
under:
a) Suit for price (Section 55): In the mentioned contract of sale, the price is payable after 15 days
and Mr. E refuses to pay such price, Mr. D may sue Mr. E for the price.

b) Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for damages for non-
acceptance if Mr. E wrongfully neglects or refuses to accept and pay for the goods. As regards
measure of damages, Section 73 of the Indian Contract Act, 1872 applies.

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 Chapter The Sale of Goods Act, 1930 2.16

c) Suit for interest [Section 61]: If there is no specific agreement between the Mr. D and Mr. E as
to interest on the price of the goods from the date on which payment becomes due, Mr. D may
charge interest on the price when it becomes due from such day as he may notify to Mr. E.

“A non-owner can convey better title to the bonafide purchaser of goods for value.” Discuss the
cases when a person other than the owner can transfer title in goods as per the provisions of the
Sales of Goods Act, 1930
Provision: [The Sale of Goods Act, 1930]
In the following cases, a non-owner can convey better title to the bona fide purchaser of goods for
value:
1. Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document of title
to goods would pass a good title to the buyer in the following circumstances; namely;
a) If he was in possession of the goods or documents with the consent of the owner;
b) If the sale was made by him when acting in the ordinary course of business as a
mercantile agent; and
c) If the buyer had acted in good faith and has at the time of the contract of sale, no notice of the
fact that the seller had no authority to sell (Proviso to Section 27 of the Sale of Goods Act,
1930).
2. Sale by one of the joint owners (Section 28): If one of several joint 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 of such joint owner in good faith and has not at the time of the
contract of sale notice that the seller has no authority to sell.
3. Sale by a person in possession under voidable contract: A buyer would acquire a good title to the
goods sold to him by a seller who had obtained possession of the goods under a contract voidable
on the ground of coercion, fraud, misrepresentation or undue influence provided that the
contract had not been rescinded until the time of the sale (Section 29).
4. Sale by one who has already sold the goods but continues in possession thereof: If a person has
sold goods but continues to be in possession of them or of the documents of title to them, he may
sell them to a third person, and if such person obtains the delivery thereof in good faith and
without notice of the previous sale, he would have good title to them, although the property in the
goods had passed to the first buyer earlier. [Section 30(1)]
5. Sale by buyer obtaining possession before the property in the goods has vested in him: Where a
buyer with the consent of the seller obtains possession of the goods before the property in them
has passed to him, he may sell, pledge or otherwise dispose of the goods to a third person, and if
such person obtains delivery of the goods in good faith and without notice of the lien or other
right of the original seller in respect of the goods, he would get a good title to them [Section
30(2)].
6. Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s
authority to sell, the transferee will get a good title as against the true owner. But before a
good title by estoppel can be made, it must be shown that the true owner had actively suffered
or held out the other person in question as the true owner or as a person authorized to sell the
goods.
7. Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage
in transit resells the goods, the buyer acquires a good title to the goods as against the original
buyer [Section 54 (3)].
8. Sale under the provisions of other Acts:
a) Sale by an Official Receiver or Liquidator of the Company will give the purchaser a valid title.

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 Chapter The Sale of Goods Act, 1930
2.17
b) Purchase of goods from a finder of goods will get a valid title under circumstances [Section 169
of the Indian Contract Act, 1872]
c) A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian Contract Act, 1872]

M/s Woodworth & Associates, a firm dealing with the wholesale and retail buying and selling of
various kinds of wooden logs, customized as per the requirement of the customers. They dealt
with Rose wood, Mango wood, Teak wood, Burma wood etc.
Mr. Das, a customer came to the shop and asked for wooden logs measuring 4 inches broad and 8
feet long as required by the carpenter. Mr. Das specifically mentioned that he required the
wood which would be best suited for the purpose of making wooden doors and window
frames. The Shop owner agreed and arranged the wooden pieces cut into as per the buyers
requirements.
The carpenter visited Mr. Das's house next day, and he found that the seller has supplied Mango
Tree wood which would most unsuitable for the purpose. The carpenter asked Mr. Das
to return the wooden logs as it would not meet his requirements.
The Shop owner refused to return the wooden logs on the plea that logs were cut to specific
requirements of Mr. Das and hence could not be resold.
(i) Explain the duty of the buyer as well as the seller according to the doctrine of
“Caveat Emptor”.
(ii) Whether Mr. Das would be able to get the money back or the right kind of wood as required
serving his purpose?
Provision: [The Sale of Goods Act, 1930]
1. Duty of the buyer according to the doctrine of “Caveat Emptor”: In case of sale of goods, the
doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their goods in the
open market, it is for the buyers to make a proper selection or choice of the goods. If the goods
turn out to be defective he cannothold the seller liable. The seller is in no way responsible for the
bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he is
selling.
2. Duty of the seller according to the doctrine of “Caveat Emptor”: The following exceptions to the
Caveat Emptor are the duties of the seller:
a) Fitness as to quality or use
b) Goods purchased under patent or brand name
c) Goods sold by description
d) Goods of Merchantable Quality
e) Sale by sample
f) Goods by sample as well as description
g) Trade usage
h) Seller actively conceals a defect or is guilty of fraud
Answer:
As Mr. Das has specifically mentioned that he required the wood which would be best suited for
the purpose of making wooden doors and window frames but the seller supplied Mango tree
wood which is most unsuitable for the purpose. Mr. Das is entitled to get the money back or the
right kind of wood as required serving his purpose. It is the duty of the seller to supply such goods as
are reasonably fit for the purpose mentioned by buyer. [Section 16(1) of the Sale of Goods Act, 1930]

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 Chapter The Indian Partnership Act, 1932
3.1

The Indian Partnership Act,

1932
Ram & Co., a firm consists of three partners A, B and C having one third share each in the firm.
According to A and B, the activities of C are not in the interest of the partnership and thus want to
expel C from the firm. Advise A and B whether they can do so quoting the relevant provisions of
the Indian Partnership Act, 1932. (Nov’18 RTP)
Provision:
1. It is not possible for the majority of partners to expel a partner from the firm without satisfying the
conditions as laid down in Section 33 of the Indian Partnership Act, 1932.
2. The essential conditions before expulsion can be done are:
a) the power of expulsion must have existed in a contract between the partners;
b) the power has been exercised by a majority of the partners; and
c) It has been exercised in good faith. The test of good faith includes:
i) that the expulsion must be in the interest of the partnership;
ii) that the partner to be expelled is served with a notice; and
iii) that the partner has been given an opportunity of being heard.
Facts of case:
Ram & Co. consists of three partners A,B & C having one third share each in firm. As per A & B C is not
able to contribute anything to partnership i.e. his activities are not in the interest of that partnership.
Thus they want to remove/expel C from Ram & Co.
Answer:
Thus, in the given case A and B the majority partners can expel the partner only if the above
conditions are satisfied and procedure as stated above has been followed.

What is Partnership Deed? What are the particulars that partnership deed contain? (Nov’18 RTP)
Provision:
1. Partnership is the result of an agreement. No particular formalities are required for an agreement
of partnership. It may be in writing or formed verbally. But it is desirable to have the partnership
agreement in writing to avoid future disputes.
2. The document in writing containing the various terms and conditions as to the relationship of
the partners to each other is called the ‘partnership deed’.
3. It should be drafted with care and be stamped according to the provisions of the Stamp Act,
1899. Where the partnership comprises immovable property, the instrument of partner’s hip must
be in writing, stamped and registered under the Registration Act.
4. Partnership deed may contain the following information:
a) Name of the partnership firm.
b) Names of all the partners.
c) Nature and place of the business of the firm.
d) Date of commencement of partnership.
e) Duration of the partnership firm.
f) Capital contribution of each partner.

© CA Darshan D. Khare
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 Chapter The Indian Partnership Act, 1932 3.2

g) Profit Sharing ratio of the partners.

h) Admission and Retirement of a partner.
i) Rates of interest on Capital, Drawings and loans.
j) Provisions for settlement of accounts in the case of dissolution of the firm.
k) Provisions for Salaries or commissions, payable to the partners, if any.
l) Provisions for expulsion of a partner in case of gross breach of duty or fraud.

State the modes by which a partner may transfer his interest in the firm in favour of another
person under the Indian Partnership Act, 1932. What are the rights of such a transferee?
Provision:
1. Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is transferable
like any other property, but as the partnership relationship is based on mutual confidence,
the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights
and privileges as the original partner.
2. The rights of such a transferee are as follows:
a) During the continuance of partnership, such transferee is not entitled
i) to interfere with the conduct of the business,
ii) to require accounts, or
iii) to inspect books of the firm.
b) He is only entitled to receive the share of the profits of the transferring partner and he is bound
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.
c) On the dissolution of the firm or on the retirement of the transferring partner, the transferee
will be entitled, against the remaining partners:
i) to receive the share of the assets of the firm to which the transferring partner was entitled,
and
ii) For ascertaining the share, he is entitled to an account as from the date of the dissolution.
3. By virtue of Section 31, no person can be introduced as a partner in a firm without the consent of
all the partners. A partner cannot by transferring his own interest, make anybody else a partner
in his place, unless the other partners agree to accept that person as a partner.
4. At the same time, a partner is not debarred from transferring his interest. A partner’s
interest in the partnership can be regarded as an existing interest and tangible property, which can
be assigned.

State the grounds on which a firm may be dissolved by the Court under the Indian Partnership Act,
1932?.
Provision:
Court may, at the suit of the partner, dissolve a firm on any of the following ground:
1. Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound mind,
the court may dissolve the firm on a suit of the other partners or by the next friend of the insane
partner. Temporary sickness is no ground for dissolution of firm.
2. Permanent incapacity: When a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner, then the court may dissolve the firm.
Such permanent incapacity may result from physical disability or illness etc.
3. Misconduct: Where a partner, other than the partner suing, is guilty of conduct, which is likely to,
affect prejudicially carrying on of business, court may order for dissolution of the firm, by giving

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 Chapter The Indian Partnership Act, 1932
3.3
regard to the nature of business. It is not necessary that misconduct must relate to conduct of the
business. Important point is the adverse effect of misconduct on the business. In each case, nature
of business will decide whether an act is misconduct or not.
4. Persistent breach of agreement: Where a partner other than the partner suing, wilfully 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 conduct himself in matters relating to the business that
it is not reasonably practicable for other partners to carry on the business in partnership with him,
then the court may dissolve the firm at the instance of any of the partners. Following comes in to
category of breach of contract:
a) Embezzlement,
b) Keeping erroneous accounts
c) Holding more cash than allowed
d) Refusal to show accounts despite repeated request etc.
5. Transfer of interest: Where a partner other than the partner suing, has transferred the whole of
his interest in the firm to a third party or has allowed his share to be charged or sold by the court,
in the recovery of arrears of land revenue, the court may dissolve the firm at the instance of any
other partner.
6. Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at a loss
in future also, the court may order for its dissolution.
7. Just and equitable grounds: Where the court considers any other ground to be just and equitable
for the dissolution of the firm, it may dissolve a firm. The following are the cases for the just and
equitable grounds-
a) Deadlock in the management.
b) Where the partners are not in talking terms between them.
c) Loss of substratum.
d) Gambling by a partner on a stock exchange.

Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a
minor in the partnership firm.
Or
Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits of
partnership."
Provision:
1. A minor is incompetent to do the contract and such contract is void-ab-initio. Therefore, a minor
cannot be admitted in the business of the partnership firm because the partnership is
formed on a contract.
2. Though a minor cannot be a partner in a firm, he can nevertheless be admitted to the
benefits of partnership under section 30 of the Indian Partnership Act, 1932. He may be validly
have a share in the profit of the firm but this can be done with the consent of all the partners of
the firm.
3. Rights of the minor in the firm:
a) A minor has a right to his agreed share of the profits and of the firm.
b) He can have access to, inspect and copy the accounts of the firm.
c) He can sue the partners for accounts or for payments of his share but only, when severing his
connection with the firm, and not otherwise. The amount of share shall be determined by a
valuation made in accordance with the rules upon a dissolution.

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 Chapter The Indian Partnership Act, 1932 3.4

d) On attaining majority, he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after the
date of the public notice served to that effect.

A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In 2016, A dies. In
2017, B and C sue X in the name and on behalf of A & Co., without fresh registration. Decide
whether the suit is maintainable. Whether your answer would be same if in 2017 B and C had taken
a new partner D and then filed a suit against X without fresh registration?
Provision: [Section 69 of Indian Partnership Act, 1932]
1. As regards the question whether in the case of a registered firm (whose business was carried on
after its dissolution by death of one of the partners), a suit can be filed by the remaining
partners in respect of any subsequent dealings or transactions without notifying to the Registrar of
Firms, the changes in the constitution of the firm, it was decided that the remaining partners
should sue in respect of such subsequent dealings or transactions even though the firm was not
registered again after such dissolution and no notice of the partner was given to the
Registrar.
2. The test applied in these cases was whether the plaintiff satisfied the only two requirements of
Section 69 (2) of the Act namely,
a) the suit must be instituted by or on behalf of the firm which had been registered
b) the person suing had been shown as partner in the register of firms.
Answer:
1. In view of this position of law, the suit is in the case by B and C against X in the name and on behalf
of A & Co. is maintainable.
2. Now, in 2017, B and C had taken a new partner, D, and then filed a suit against X without fresh
registration. Where a new partner is introduced, the fact is to be notified to Registrar who shall
make a record of the notice in the entry relating to the firm in the Register of firms.
3. Therefore, the firm cannot sue as D’s (new partner’s) name has not been entered in the register of
firms. It was pointed out that in the second requirement, the phrase “person suing” means persons
in the sense of individuals whose names appear in the register as partners and who must be all
partners in the firm at the date of the suit.

A, B and C are partners in a firm called ABC Firm. A, with the intention of deceiving D, a supplier
of office stationery, buys certain stationery on behalf of the ABC Firm. The stationery is of
use in the ordinary course of the firm’s business. A does not give the stationery to the firm, instead
brings it to his own use. The supplier D, who is unaware of the private use of stationery by A, claims
the price from the firm. The firm refuses to pay for the price, on the ground that the stationery was
never received by it (firm). Referring to the provisions of the Indian Partnership Act, 1932 decide:
i) Whether the Firm’s contention shall be tenable?
ii) What would be your answer if a part of the stationery so purchased by A was delivered to the
firm by him, and the rest of the stationery was used by him for private use, about which neither
the firm nor the supplier D was aware?
Provision:

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 Chapter The Indian Partnership Act, 1932
3.5
1. The problem in the question is based on the ‘Implied Authority’ of a partner provided in Section 19
of the Indian Partnership Act, 1932.
2. The section provides that subject to the provisions of Section 22 of the Act, the act of a partner,
which is done to carry on, in the usual way, business of the kind carried on by the firm, binds
the firm. The authority of a partner to bind the firm conferred by this section is called his
‘Implied Authority’ [Sub-Section(1) of section 19].
3. Furthermore, every partner is in contemplation of law the general and accredited agent of the
partnership and may consequently bind all the other partners by his acts in all matters which are
within the scope and object of the partnership. Hence, if the partnership is of a general commercial
nature, he may buy goods on account of the partnership.
Answer:
Considering the above provisions and explanation, the questions as asked in the problem may be
answered as under:
i) The firm’s contention is not tenable, for the reason that the partner, in the usual course of the
business on behalf of the firm has an implied authority to bind the firm. The firm is, therefore,
liable for the price of the goods.
ii) In the second case also, the answer would be the same as above, i.e. the implied authority of the
partner binds the firm.
iii) In both the cases, however, the firm ABC can take action against A, the partner but it has to pay
the price of stationery to the supplier D.

What are the consequences of Non-Registration of a Partnership Firm? Discuss

Or
“Indian Partnership Act does not make the registration of firms compulsory nor does it impose any
penalty for non-registration." Explain. Discuss the various disabilities or disadvantages that a non-
registered partnership firm can face in brief?
Provision:
Although registration of firms is not compulsory, yet the consequences or disabilities of non-
registration have a persuasive pressure for their registration.
These disabilities briefly are as follows:
1. No suit in a civil court by firm or other co-partners against third party: The firm or any other
person on its behalf cannot bring an action against the third party for breach of contract entered
into by the firm, unless the firm is registered and the persons suing are or have been shown in the
register of firms as partners in the firm.
2. No relief to partners for set-off of claim: If an action is brought against the firm by a third party,
then neither the firm nor the partner can claim any set-off, if the suit be valued for more than `100
or pursue other proceedings to enforce the rights arising from any contract.
3. Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an
unregistered firm (or any other person on his behalf) is precluded from bringing legal action
against the firm or any person alleged to be or to have been a partner in the firm. But, such a
person may sue for dissolution of the firm or for accounts and realization of his share in the firm’s
property where the firm is dissolved.
4. Third party can sue the firm: In case of an unregistered firm, an action can be brought against the
firm by a third party.

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 Chapter The Indian Partnership Act, 1932 3.6

X, Y and Z are partners in a Partnership Firm. They were carrying their business successfully for the
past several years. Spouses of X and Y fought in ladies club on their personal issue and X's wife was
hurt badly. X got angry on the incident and he convinced Z to expel Y from their
partnership firm. Y was expelled from partnership without any notice from X and Z. Considering
the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from the
firm. What are the criteria for test of good faith in such circumstances?
Provision:
1. A partner may not be expelled from a firm by a majority of partners except in exercise,in good
faith, of powers conferred by contract between the partners. It is, thus, essential that:
a) the power of expulsion must have existed in a contract between the partners;
b) the power has been exercised by a majority of the partners; and
c) it has been exercised in good faith.
2. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of
the business of the firm.
3. The test of good faith as required under Section 33(1) includes three things:
a) The expulsion must be in the interest of the partnership.
b) The partner to be expelled is served with a notice.
c) He is given an opportunity of being heard.
4. If a partner is otherwise expelled, the expulsion is null and void.
Facts of case:
X, Y & Z were partners in a partnership firm carrying there business successfully. Due to some
personal issue spouses of X & Y fought in a club in which X’s wife was hurt badly. X got angry on this
incident and convinced Z to expel Y from partnership. Further Y was expelled from partnership firm
without any notice.
Answer:
Thus, according to the test of good faith as required under Section 33(1), expulsion of Partner Y is not
valid.

What is the conclusive evidence of partnership? State the circumstances when partnership is not
considered between two or more parties.
Provision:
1. Existence of Mutual Agency which is the cardinal principle of partnership law is very much
helpful in reaching a conclusion with respect to determination of existence of partnership.
2. Each partner carrying on the business is the principal as well as an agent of other partners.
Therefore, the act of one partner done on behalf of firm, binds all the partners.
3. If the element of mutual agency relationship exists between the parties constituting a group
formed with a view to earn profits by running a business, a partnership may be deemed to exist.
4. Circumstances when partnership is not considered between two or more parties: Various judicial
pronouncements have laid to the following factors leading to no partnership between the parties:
a) Parties have not retained any record of terms and conditions of partnership.
b) Partnership business has maintained no accounts of its own, which would be open to inspection
by both parties
c) No account of the partnership was opened with any bank
d) No written intimation was conveyed to the Deputy Director of Procurement with respect to the
newly created partnership

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 Chapter The Indian Partnership Act, 1932
3.7
What is the true test of partnership?
Provision: [Section 6 of Indian Partnership Act,1932]
1. In determining whether a group of persons is or is not a firm, or whether a person is or 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.
2. For determining the existence of partnership, it must be proved.
a) There was an agreement between all the persons concerned
b) The agreement was to share the profits of a business and
c) The business was carried on by all or any of them acting for all.
3. Agreement:
Partnership is created by agreement and by status (Section 5). The relation of partnership arises
from contract and not from status; and in particular, the members of a Hindu Undivided family
carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on
business as such are not partners in such business.
4. Sharing of Profit:
a) Sharing of profit is an essential element to constitute a partnership. But, it is only a prima facie
evidence and not conclusive evidence, in that regard. The sharing of profits or of gross returns
accruing from property by persons holding joint or common interest in the property would not
by itself make such persons partners.
b) Although the right to participate in profits is a strong test of partnership, and there may be
cases where, upon a simple participation in profits, there is a partnership, yet whether the
relation does or does not exist must depend upon the whole contract between the
parties.
c) Where there is an express agreement between partners to share the profit of a business and
the business is being carried on by all or any of them acting for all, there will be no difficulty in
the light of provisions of Section 4, in determining the existence or otherwise of
partnership.
d) But the task becomes difficult when either there is no specific agreement or the
agreement is such as does not specifically speak of partnership. In such a case for testing the
existence or otherwise of partnership relation, Section 6 has to be referred.
e) According to Section 6, regard must be had to the real relation between the parties as shown by
all relevant facts taken together. The rule is easily stated and is clear but its application is
difficult. Cumulative effect of all relevant facts such as written or verbal agreement, real
intention and conduct of the parties, other surrounding circumstances etc., are to be
considered while deciding the relationship between the parties and ascertaining the
existence of partnership.
5. Agency: Existence of Mutual Agency which is the cardinal principle of partnership law, is very much
helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal
as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all
the partners. If the elements of mutual agency relationship exist between the parties constituting a
group formed with a view to earn profits by running a business, a partnership may be deemed to
exist.
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 Chapter The Indian Partnership Act, 1932 3.8

What do you mean by “implied authority” of the partners in a firm?

Provision: [Section 19 of Indian Partnership Act,1932]
1. Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual
way, business of the kind carried on by the firm, binds the firm.
2. The authority of a partner to bind the firm conferred by this section is called his “implied
authority”.
3. In the absence of any usage or custom of trade to the contrary, the implied authority of a partner
does not empower him to-
a) Submit a dispute relating to the business of the firm to arbitration
b) open a banking account on behalf of the firm in his own name
c) compromise or relinquish any claim or portion of a claim by the firm
d) withdraw a suit or proceedings filed on behalf of the firm
e) admit any liability in a suit or proceedings against the firm;
f) acquire immovable property on behalf of the firm
g) transfer immovable property belonging to the firm; and
h) enter into partnership on behalf of
4. Mode Of Doing Act To Bind Firm (Section 22):
In order to bind a firm, an act or instrument done or executed by a partner or other person on
behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or
implying an intention to bind the firm.

When does dissolution of a partnership firm take place under the provisions of the Indian
Partnership Act, 1932? Explain
Provision: [Indian Partnership Act,1932]
1. The Dissolution of Firm means the discontinuation of the jural relation existing between all the
partners of the Firm.
2. But when only one of the partners retires or becomes in capacitated from acting as a partner due
to death, insolvency or insanity, the partnership, i.e., the relationship between such a partner and
other is dissolved, but the rest may decide to continue. In such cases, there is in practice, no
dissolution of the firm.
3. The particular partner goes out, but the remaining partners carry on the business of the Firm. In
the case of dissolution of the firm, on the other hand, the whole firm is dissolved. The partnership
terminates as between each and every partner of the firm.
a) as a result of any agreement between all the partners (i.e., dissolution by agreement)
b) by the adjudication of all the partners, or of all the partners but one, as insolvent (i.e.,
compulsory dissolution)
c) by the business of the Firm becoming unlawful (i.e., compulsory dissolution)
d) subject to agreement between the parties, on the happening of certain contingencies, such as:
(i) effluence of time;
(ii) completion of the venture for which it was entered into;
(iii) death of a partner

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 Chapter The Indian Partnership Act, 1932
3.9
e) insolvency of a partner.
f) by a partner giving notice of his intention to dissolve the firm, in case of partnership at will and
the firm being dissolved as from the date mentioned in the notice, or if no date is mentioned, as
from the date of the communication of the notice; and by intervention of court in case of:
i) a partner becoming the unsound mind
ii) permanent incapacity of a partner to perform his duties as such
iii) Misconduct of a partner affecting the business
iv) willful or persistent branches of agreement by a partner
v) transfer or sale of the whole interest of a partner
vi) improbability of the business being carried on save at a loss
vii) The court being satisfied on other equitable grounds that thefirm should be dissolved

Three brothers, X (age 19 years), Y (age 18 years), Z (age 17 years), decide to form a partnership
with a provision that Z will share the profit only. Can they do so?
Provision: [Indian Partnership Act,1932]
1. As per the provisions of the Indian Partnership Act, 1932, a partnership can be formed if all the
partners are competent to contract.
2. A minor cannot become a partner in the partnership firm. But, after the formation of partnership,
the minor can be admitted into partnership, but with the consent of all the partners, for benefits
only.
3. A minor is incompetent to do the contract and such contract is void-ab-initio. Therefore, a minor
cannot be admitted in the business of the partnership firm because the partnership is
formed on a contract.
4. Though a minor cannot be a partner in a firm, he can nevertheless be admitted to the
benefits of partnership under section 30 of the Indian Partnership Act, 1932. He may be validly
have a share in the profit of the firm but this can be done with the consent of all the partners of
the firm
Facts of case:
Three brothers, X (age 19 years), Y (age 18 years), Z (age 17 years), decide to form a partnership with
a provision that Z will share the profit only.
Answer:
Here, Z is not competent to contract because he is a minor. Hence, a partnership cannot be formed
with a minor as a partner but after the formation of partnership, a minor can be admitted to the
benefit of the firm with the consent of all other partners.

X, Y and Z agreed to share the profits of a business carried on by all or any of them acting for all.
The management and control were entrusted in X with power to restrict the rights of Y and Z. Is
there a valid partnership?
Provision: [Indian Partnership Act,1932]
1. As per the provisions of the Indian Partnership Act, 1932, partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all.
2. Each partner carrying on business is the principal as well as agent of other partners. He is an agent
in so far as he can bind other partners by his acts and he is the principal to the extent that he is
bound by the act of other partners.
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 Chapter The Indian Partnership Act, 1932 3.10

Facts of case:
X, Y and Z agreed to share the profits of a business carried on by all or any of them acting for all. The
management and control were entrusted in X with power to restrict the rights of Y and Z.
Answer:
Here, the partnership between X, Y and Z is valid because all the essential elements of partnership
exist under the partnership agreement.

Can X and Y be regarded as partners in the following cases?

a) X and Y who jointly own a house, let it out on rent of Rs. 10,000 p.a. and share the rental income
equally.
b) X and Y who jointly own a house, converted the house into a hotel after investing Rs. 1,00,000
each. X manages the hotel and meets all expenses and retains half of gross earnings and hands
over the other half to Y.
c) X and Y who jointly own a house, converted the house into a hotel after investing Rs. 1,00,000
each. It was agreed that X would manage the hotel on his own and on behalf of Y and the net
earnings would be divided equally.
d) X, a publisher agrees to publish at his own expense, a book written by Y and to pay Y half of the
net profits.
e) X admits Y as a partner. Y does not bring any capital. He is not liable for any loss and is to receive
Rs. 1,000 p.m. as salary in lieu of profits and have all the powers of a partner.
Answer:
a) As per the provisions of the Indian Partnership Act, 1932, partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all. Here, X and Y are merely co-owners who are sharing the gross returns arising from a joint
property.
b) As per the provisions of the Indian Partnership Act, 1932, partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all. Here, X manages the hotel on his own and also bears all expenses on his own. X and Y are
merely co-owners who are sharing the gross returns arising from a joint property
c) As per the provisions of the Indian Partnership Act, 1932, partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all. Here, X and Y are in partnership as both have agreed that X would manage the hotel on his
own and on behalf of Y and the net earnings would be divided equally. All the essential elements of
partnership exist between X and Y.
d) As per the provisions of the Indian Partnership Act, 1932, partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all. Here, X and Y are not partners because sharing of profit, which is prima facial evidence,
exists but mutual agency among X and Y, which is conclusive evidence, does not exist.
e) As per the provisions of the Indian Partnership Act, 1932, partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all. Here, X and Y are partners as X has admitted Y as a partner and also Y has all powers of a
partner. Bringing capital or bearing losses are not essential elements of a partnership. X and Y have
mutual agency between them

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 Chapter The Indian Partnership Act, 1932
3.11
X, Y and Z are partners in an unregistered firm. Is the suit maintainable in the following cases?
a) X filed a suit against the firm for the recovery of his share of profit.
b) X filed a suit against Y who had stolen the property of the firm.
c) The firm filed a suit against W, a customer for the recovery of the amount due from W.
d) The firm filed a suit against W, a customer for the recovery of the amount due from W and
immediately after filling the suit, the firm got itself registered.
e) The firm filed a suit to restrain the third party from misusing the Patent right of firm.
f) W filed a suit against the firm for the recovery of Rs. 10,000 dues from the firm. W also owed Rs.
6,000 to the firm. The firm claimed a set off of Rs. 6,000.
g) X filed a suit for the dissolution of the firm.
h) X filed a suit for the accounts of a dissolved firm.
i) X filed a suit for claiming share of the assets of a dissolved firm.
Answer:
a) As per the provisions of the Indian Partnership Act, 1932, an aggrieved partner of an unregistered
firm cannot bring legal action against other persons or the firm. Here, X cannot file a suit against
the firm for the recovery of his share of profit because the firm is unregistered.
b) As per the provisions of the Indian Partnership Act, 1932, if a partnership firm is unregistered,
there will be no suit in a civil court by firm or other co-partners against third party or other co-
partners. But, in this case, X had filed a suit against Y for stealing the property of the firm. X’s suit is
valid as it is a criminal suit not the civil suit.
c) As per the provisions of the Indian Partnership Act, 1932, if a partnership firm is unregistered,
there will be no suit in a civil court by firm or other co-partners against third party. Here, the firm
cannot recover its amount due from W, a customer of the firm, as the firm, being unregistered,
cannot file a suit against third party (W).
d) As per the provisions of the Indian Partnership Act, 1932, if a partnership firm is unregistered,
there will be no suit in a civil court by firm or other co-partners against third party. Here, the firm
file a suit against W for the recovery of amount due from W. The firm filed the suit at the time
when it was unregistered. Now, the firm cannot ratify this act by registering itself.
e) As per the provisions of the Indian Partnership Act, 1932, if a partnership firm is unregistered,
there will be no suit in a civil court by firm or other co-partners against third party. But, here, the
firm is restricting the third party from misusing its patent right, which is a criminal offence.
f) As per the provisions of the Indian Partnership Act, 1932, third party can sue the firm even if the
firm is unregistered and if the suit is filed against the firm and the claim value is more than
Hundred Rupees, then firm cannot set-off. Here, W filed a suit against the firm for the recovery of
Rs. 10,000 dues from the firm. W also owed Rs. 6,000 to the firm. W is entitled for the recovery of
Rs. 10,000 from the firm. But the firm cannot set-off the claim of Rs. 6,000 because it is more than
Rs. 100.
g) As per the provisions of the Indian Partnership Act, 1932, partners can sue the firm for the
dissolution, even if the firm is unregistered. X’s suit for the dissolution of the firm is valid.
h) As per the provisions of the Indian Partnership Act, 1932, partners can sue a dissolved firm for the
settlements of accounts, even if the firm is unregistered. Here, X’s suit is valid because he has sued
a dissolved firm for the accounts.
i) As per the provisions of the Indian Partnership Act, 1932, partners have the right to sue a dissolved
firm for the realisation of the assets, even if the firm is unregistered. Here, X’s claim is valid as the
shares are assets of the dissolved firm and X can claim it even if the firm is unregistered.

X and Y are in partnership. X was appointed to buy goods for the firm. Is X accountable to firm for
profit he makes in the following cases?
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 Chapter The Indian Partnership Act, 1932 3.12

a) X without the knowledge of Y, supplied his own goods to the firm at market price and made a
huge gain.
b) X without the knowledge of Y, obtains for his own sole benefit a lease of the building in which
the partnership business is carried on.
c) X without the knowledge of Y, received commission from Z, a supplier of goods to the firm.
d) It is found out that X is engaged with Z in the supplying goods to the customers of firm.
Answer:
a) As per the provisions of the Indian Partnership Act, 1932, the partners must not make ‘secret
profits.’ Here, X, without the knowledge of Y, supplied his own goods to the firm and made huge
gain. The gains made by X shall be claimed by the firm
b) As per the provisions of the Indian Partnership Act, 1932, the profits gain by any partner from the
use of the firm’s property, the profits shall be claimed by the firm. Here, X obtains the sole benefit
by leasing the building belonging to the firm. The benefits so obtained by X, shall be claimed by the
firm.
c) As per the provisions of the Indian Partnership Act, 1932, any profit gained by the partner from a
transaction of the firm, shall be claimed by the firm. Here, X, without the knowledge of Y, receives
commission from Z, a supplier of firm. The commission received shall be claimed by the firm.
d) As per the provisions of the Indian Partnership Act, 1932, partner shall not compete with the firm
without the consent of the other partners. Any profits made by such unauthorised competition can
be claimed by the firm. Here, X is engaged with Z in supplying goods to the customers of the firm.
Profits gained by X shall be claimed by the firm.

X paid Y and Z a premium of Rs. 20 lacs on entering into partnership for 10 years and the firm is
dissolved at the end of 8 years. State whether X is entitled to repayment of proportionate premium
in each of the following alternative cases:
a) If the dissolution is by the death of Y.
b) If the dissolution is due to X’s own misconduct.
c) If the dissolution is in pursuance to an agreement which contains no provision for the return of
the premium.
d) If the dissolution is due to Y’s misconduct.
e) If the dissolution is due to the insolvency of Y.
Answer:
a) As per the provisions of the Indian Partnership Act, 1932, if the partnership is dissolved before a
fixed time period, then the partner paying the premium is entitled to the return of the premium for
the left-out period. But, in case of death of one of the partners, the partner shall not be entitled for
the premium. Here, the firm is dissolved due to the death of Y, so X shall not get the premium of
the left-out period.
b) As per the provisions of the Indian Partnership Act, 1932, if the partnership is dissolved before a
fixed time period, then the partner paying the premium is entitled to the return of the premium for
the left-out period. But, in case, the firm is dissolved due to the misconduct of the partner paying
the premium, then such partner shall not be entitled to get the premium. Here, the firm is
dissolved due to X’s own misconduct. So, X shall not be entitled for the return of the premium.
c) As per the provisions of the Indian Partnership Act, 1932, if the partnership is dissolved before a
fixed time period, then the partner paying the premium is entitled to the return of the premium for
the left-out period. But, in case, there is an agreement that contains no provision regarding the
return of the premium, then such partner shall not be entitled to get the premium. Here, the
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3.13
agreement contains no provision regarding the return of the premium after dissolution. So, X shall
not be entitled for the return of the premium.
d) As per the provisions of the Indian Partnership Act, 1932, if the partnership is dissolved before a
fixed time period, then the partner paying the premium is entitled to the return of the premium for
the left-out period. Here, X shall be entitled for the return of the premium as the dissolution of
firm has happened due to Y’s misconduct. X shall get the premium for the rest of 2 years i.e. 2×2 =
4 Lacs.
e) As per the provisions of the Indian Partnership Act, 1932, if the partnership is dissolved before a
fixed time period, then the partner paying the premium is entitled to the return of the premium for
the left-out period. Here, X shall be entitled for the return of the premium as the firm is dissolved
due to the insolvency of Y. X shall get the premium for the rest of 2 years i.e. 2×2 = 4 Lacs.

A, B, C, D and E are partners in a firm. They decided to dissolve the firm from 1st January but failed
to give a public notice of its dissolution and continued the business of the firm even that date. C, a
dormant partner retired on 4th Jan, D died on 5th January and E was declared insolvent on 10th
January. On 11th January, A borrowed in the firm’s name Rs. 20 lacs from R who was ignorant of
the dissolution. Discuss the liability of partners for Rs. 20 lacs.
Provision: [Indian Partnership Act, 1932]
1. As per the provisions of the Indian Partnership Act, 1932, a public notice of the dissolution of the
firm is not required if:
a) the partner is adjudicated as insolvent, or
b) a dormant partner retires from the firm, or
c) the partner dies.
2. The remaining active partners shall be liable for the acts done after dissolution except the partners
mentioned in the above cases.
Facts of case:
A, B, C, D and E are partners in a firm. They decided to dissolve the firm from 1st January but failed to
give a public notice of its dissolution and continued the business of the firm even that date. C, a
dormant partner retired on 4th Jan, D died on 5th January and E was declared insolvent on 10th
January. On 11th January, A borrowed in the firm’s name Rs. 20 lacs from R who was ignorant of the
dissolution.
Answer:
Here, A and B are liable for Rs. 20 Lacs but C, being a dormant partner, D and E are not liable for Rs.
20 lacs because C retires form the firm and dormant partner’s retirement does not make him liable
for the acts done after dissolution. D dies and E was adjudicated as insolvent. So, D and E shall also
not be liable for any dealings or transactions subsequent to dissolution.

State with reason whether the following agreements are valid or void:
a) An agreement among the partners that no partner shall not carry on any business other than
that of the firm while he is a partner.
b) An agreement with an outgoing partner that he will not carry on any business similar to that of
the firm in the same locality for the next 3 years.
c) An agreement among the partners upon the dissolution of the firm that some or all of them will
not carry on a business similar to that of the firm in the same locality for the next 3 years.
d) An agreement by a partner with the buyer of goodwill of the firm that he will not carry on any
business similar to that of the firm in the same locality for the next 3 years.
Answer:

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a) As per the provisions of the Indian Partnership Act, 1932, the contract between the partners may
be express or implied by consistent course of act. The contract between the partners may provide
that a partner shall not carry on any business other than that of the firm while he is a partner.
Here, the above agreement between the partners is valid.

b) As per the provisions of the Indian Partnership Act, 1932, every outgoing partner has the right to
carry on competitive business under certain conditions. Here, the agreement with the outgoing
partner, that he will not carry on any business similar to that of the firm in the same locality for the
next 3 years, is valid.
c) As per the provisions of the Indian Partnership Act, 1932, the contract between the partners may
be express or implied by consistent course of act. The contract between the partners may provide
that the partners shall not carry on any business other than that of the firm after dissolution under
certain conditions. Here, the above agreement between the partners is valid.
d) As per the provisions of the Indian Partnership Act, 1932, if goodwill of the firm is sold after
dissolution, then existing partners cannot continue the business unless:
i. Agreement of sale of goodwill provides for something else, or
ii. Goodwill has been purchased by any of the existing partner.
Here, the agreement by a partner with the buyer of goodwill of the firm, that he will not carry on
any business similar to that of the firm in the same locality for the next 3 years, is valid.

Explain the following kinds of partnership under the Indian Partnership Act, 1932:
(i) Partnership at will
(ii) Particular partnership
Answer: [Indian Partnership Act, 1932]
(i) Partnership at will: According to Section 7 of the Indian Partnership Act, 1932, partnership at will
is a partnership when:
a) no fixed period has been agreed upon for the duration of the partnership; and
b) there is no provision made as to the determination of the partnership.
These two conditions must be satisfied before a partnership can be regarded as a partnership at
will. But, where there is an agreement between the partners either for the duration of the
partnership or for the determination of the partnership, the partnership is not partnership at will.
Where a partnership entered into for a fixed term is continued after the expiry of such term, it is
to be treated as having become a partnership at will.
A partnership at will may be dissolved by any partner by giving notice in writing to all the other
partners of his intention to dissolve the same.

(ii) Particular partnership: A partnership may be organized for the prosecution of a single adventure
as well as for the conduct of a continuous business. Where a person becomes a partner with
another person in any particular adventure or undertaking the partnership is called ‘particular
partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any agreement,
dissolved by the completion of the adventure or undertaking.

“Partner indeed virtually embraces the character of both a principal and an agent”. Describe the
said statement keeping in view of the provisions of the Indian Partnership Act, 1932.
Provision: [Indian Partnership Act, 1932]
1. Subject to the provisions of section 18 of the Indian Partnership Act, 1932, a partner is the agent
of the firm for the purposes of the business of the firm.

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2. A partnership is the relationship between the partners who have agreed to share the profits of
the business carried on by all or any of them acting for all (Section 4). This definition suggests that
any of the partners can be the agent of the others.
3. Section 18 clarifies this position by providing that, subject to the provisions of the Act, a partner is
the agent of the firm for the purpose of the business of the firm. The partner indeed virtually
embraces the character of both a principal and an agent.
4. So far as he acts for himself and in his own interest in the common concern of the partnership, he
may properly be deemed as a principal and so far as he acts for his partners, he may properly be
deemed as an agent.
5. The principal distinction between him and a mere agent is that he has a community of interest with
other partners in the whole property and business and liabilities of partnership, whereas an agent
as such has no interest in either.
6. The rule that a partner is the agent of the firm for the purpose of the business of the firm cannot
be applied to all transactions and dealings between the partners themselves. It is applicable only to
the act done by partners for the purpose of the business of the firm.

A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled to 20 percent
of the partnership property and profits. A retires from the firm and dies after 15 days. B and C
continue business of the firm without settling accounts. What are the rights of A’s legal
representatives against the firm under the Indian Partnership Act, 1932?
Provision: [Section 37 of Indian Partnership Act, 1932]
Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or otherwise ceases
to be a partner and there is no final settlement of account between the legal representatives of the
deceased partner or the firms with the property of the firm, then, in the absence of a contract to the
contrary, the legal representatives of the deceased partner or the retired partner are entitled to claim
either.
a) Such shares of the profits earned after the death or retirement of the partner which is
attributable to the use of his share in the property of the firm; or
b) Interest at the rate of 6 per cent annum on the amount of his share in the property.
Facts of case:
A, B and C are partners in firm. As per the partnership deed, A is entitled to 20 % of partnership
property and profits. A retires from firm and dies after 15 days. B and C without settling the accounts
continue the partnership business.
Answer:
Based on the previously mentioned provisions of Section 37 of the Indian Partnership Act, 1932, in the
given problem, A shall be entitled, at his option to:
a) The 20% shares of profits (as per the partnership deed); or
b) Interest at the rate of 6 per cent per annum on the amount of A’s share in the property.

P, X, Y and Z are partners in a registered firm A & Co. X died and P retired. Y and Z filed a suit
against W in the name and on behalf of firm without notifying to the Registrar of firms about the
changes in the constitution of the firm. Is the suit maintainable?
Provision: [Indian Partnership Act, 1932]
1. As regards the question whether in the case of a registered firm (whose business was carried
on after its dissolution by death of one of the partners), a suit can be filed by the remaining

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partners in respect of any subsequent dealings or transactions without notifying to the

Registrar of Firms, the changes in the constitution of the firm, it was decided that the remaining
partners should sue in respect of such subsequent dealings or transactions even though the firm
was not registered again after such dissolution and no notice of the partner was given to the
Registrar.

(i) The test applied in these cases was whether the plaintiff satisfied the only two requirements of
Section 69 (2) of the Act namely,
(ii) The suit must be instituted by or on behalf of the firm, which had been registered.

Ram, Mohan and Gopal were partners in a firm. During the course of partnership, the firm ordered
Sunrise Ltd. to supply a machine to the firm. Before the machine was delivered, Ram expired. The
machine, however, was later delivered to the firm. Thereafter, the remaining partners became
insolvent and the firm failed to pay the price of machine to Sunrise Ltd.
Explain with reasons:
a) Whether Ram’s private estate is liable for the price of the machine purchased
By the firm?
b) Against whom can the creditor obtain a decree for the recovery of the price?
Provision: [Indian Partnership Act, 1932]
The problem in question is based on the provisions of the Indian Partnership Act, 1932 contained in
Section 35. The Section provides that where under a contract between the partners the firm is not
dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of
the firm done after his death. Therefore, considering the above provisions, the problem may be
answered as follows:
(i) Ram’s estate in this case will not be liable for the price of the Machinery purchased.
(ii) The creditors in this case can have only a personal decree against the surviving partners and
decree against the partnership assets in the hands of those partners. However, since the
surviving partners are already insolvent, no suit for recovery of the debt would lie against
them. A suit for goods sold and delivered would not lie against the representative of the
deceased partner. This is because there was not debt due in respect of the goods in Ram’s
life time.

What is the procedure of registration of a partnership firm under the Indian Partnership Act,
1932?
Provision: [Indian Partnership Act, 1932]
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’s 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.
2. The statement shall be signed by all the partners, or by their agents specially authorised in this
behalf.
3. Each person signing the statement shall also verify it in the manner prescribed.

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4. A firm name shall not contain any of the following words, namely:-
‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words expressing or
implying the sanction, approval or patronage of Government except when the State Government
signifies its consent to the use of such words as part of the firm-name by order in writing.

State the modes by which a partner may transfer his interest in the firm in favour of another
person under the Indian Partnership Act, 1932. What are the rights of such a transferee?
Provision: [Indian Partnership Act, 1932]
1. Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is transferable
like any other property, but as the partnership relationship is based on mutual confidence, the
assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and
privileges as the original partner.
2. The rights of such a transferee are as follows:
a) During the continuance of partnership, such transferee is not entitled
i) to interfere with the conduct of the business,
ii) to require accounts, or
iii) to inspect books of the firm.
b) He is only entitled to receive the share of the profits of the transferring partner and he is bound
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.
c) On the dissolution of the firm or on the retirement of the transferring partner, the transferee
will be entitled, against the remaining partners:
i) to receive the share of the assets of the firm to which the transferring partner was entitled,
and
ii) for the purpose of ascertaining the share,
d) He is entitled to an account as from the date of the dissolution.
3. By virtue of Section 31, no person can be introduced as a partner in a firm without the consent of
all the partners.
4. A partner cannot by transferring his own interest, make anybody else a partner in his place, unless
the other partners agree to accept that person as a partner. At the same time, a partner is not
debarred from transferring his interest.
5. A partner’s interest in the partnership can be regarded as an existing interest and tangible
property, which can be assigned.

State the legal consequences of the following as per the provisions of the Indian Partnership Act,
1932:
Retirement of a partner
Insolvency of a partner
Provision: [Indian Partnership Act, 1932]
RETIREMENT OF A PARTNER (SECTION 32):
1. A partner may retire:
a) with the consent of all the other partners;
b) in accordance with an express agreement by the partners; or
c) where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.

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 Chapter The Indian Partnership Act, 1932 3.18

2. A retiring partner may be discharged from any liability to any third party for acts of the firm
done before his retirement by an agreement made by him with such third party and the partners
of the reconstituted firm, and such agreement may be implied by a course of dealing between the
third party and the reconstituted firm after he had knowledge of the retirement.
3. Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable
as partners to third parties for any act done by any of them which would have been an act of
the firm if done before the retirement, until public notice is given of the retirement:
4. Provided that a retired partner is not liable to any third party who deals with the firm without
knowing that he was a partner.
5. Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.
Insolvency of a partner (Section 34)
1. The insolvent partner cannot be continued as a partner.
2. He will be ceased to be a partner from the very date on which the order of adjudication is made.
3. The estate of the insolvent partner is not liable for the acts of the firm done after the date of
order of adjudication.
4. The firm is also not liable for any act of the insolvent partner after the date of the order of
adjudication,
5. Ordinarily but not invariably, the insolvency of a partner results in dissolution of a firm; but the
partners are competent to agree among themselves that the adjudication of a partner as an
insolvent will not give rise to dissolution of the firm

X and Y are partners in a partnership firm. X introduced A, a manager, as his partner to Z. A

remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit.
After expiry of credit period, Z did not get amount of T.V sets sold to the partnership firm. Z filed a
suit against X and A for the recovery of price. Advice Z whether he can recover the amount from X
and A under the Indian Partnership Act, 1932.
Provision: [Section 28 of Indian Partnership Act, 1932]
1. Partnership by holding out is also known as partnership by estoppel. Where a man holds himself
out as a partner, or allows others to do it, he is then stopped from denying the character he has
assumed and upon the faith of which creditors may be presumed to have acted.
2. It is only the person to whom the representation has been made and who has acted thereon that
has right to enforce liability arising out of ‘holding out’.
3. You must also note that for the purpose of fixing liability on a person who has, by representation,
led another to act, it is not necessary to show that he was actuated by a fraudulent intention.
4. The rule given in Section 28 is also applicable to a former partner who has retired from the firm
without giving proper public notice of his retirement. In such cases, a person who, even
subsequent to the retirement, give credit to the firm on the belief that he was a partner, will be
entitled to hold him liable.
Facts of case:
In the given case X & Y are partners in a partnership firm. X introduced A, a manager as a partner to Z
who is a trader. A remained silent on this. Z believing on same supplied 100 t.v sets to A on credit. Z
did not get the amount after the expiry of the time period from the firm and he filled a suit against X
and A for recovery of price.
Answer:
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 Chapter The Indian Partnership Act, 1932
3.19
In the given case, along with X, the Manager (A) is also liable for the price because he becomes a
partner by holding out (Section 28, Indian Partnership Act, 1932).

"Dissolution of a firm is different from dissolution of Partnership". Discuss.

Provision: [Indian Partnership Act, 1932]
S.NO. BASIS OF DIFFERENCE DISSOLUTION OF FIRM DISSOLUTION OF PARTNERSHIP

1. Continuation of It involves discontinuation of It does not affect continuation of

business business in partnership. business. It involves only
reconstitution of the firm.

2. Winding up It involves winding up of the firm It involves only reconstitution and

and requires realization of assets requires only revaluation of assets
and settlement of liabilities. and liabilities of the firm.

3. Order of court A firm may be dissolved by the Dissolution of partnership is not

order of the court. ordered by the court.

4. Scope It necessarily involves It may or may not involve

dissolution of partnership. dissolution of firm.

5. Final closure of books It involves final closure of books of It does not involve final closure of
the firm. the books.

Answer:
Therefore, considering the above points we can conclude that Dissolution of a firm if very much
different from dissolution of partnership.

Master X was introduced to the benefits of partnership of M/s ABC & Co. with the consent of all
partners. After attaining majority, more than six months elapsed and he failed to give a public
notice as to whether he elected to become or not to become a partner in the firm. Later on, Mr. L,
a supplier of material to M/s ABC & Co., filed a suit against M/s ABC & Co. for recovery of the debt
due.
In the light of the Indian Partnership Act, 1932, explain:
(i) To what extent X will be liable if he failed to give public notice after attaining majority?
(ii) Can Mr. L recover his debt from X?
Provision: [Indian Partnership Act, 1932]
1. As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, 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.
2. However, if he fails to give such notice, he shall become a partner in the firm on the expiry of the
said six months.
3. If the minor becomes a partner by his failure to give the public notice within specified time, his
rights and liabilities as given in Section 30(7) are as follows:

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 Chapter The Indian Partnership Act, 1932 3.20

a) He becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.
b) His share in the property and the profits of the firm remains the same to which he was entitled
as a minor
Answer:
(i) In the instant case, since, X has failed to give a public notice, he shall become a partner in the M/s
ABC & Co. and becomes personally liable to Mr. L, a third party.
(ii) In the light of the provisions of Section 30(7) read with Section 30(5) of the Indian Partnership Act,
1932, since X has failed to give public notice that he has not elected to not to become a partner
within six months, he will be deemed to be a partner after the period of the above six months
and therefore, Mr. L can recover his debt from him also in the same way as he can recover from
any other partner.

When the continuing guarantee can be revoked under the Indian Partnership Act, 1932?
Answer: [Section 38 of Indian Partnership Act, 1932]
According to section 38, a continuing guarantee given to a firm or to third party in respect of the
transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future
transactions from the date of any change in the constitution of the firm. Such change may occur by
the death, or retirement of a partner, or by introduction of a new partner.

What do you mean by Goodwill as per the provisions of Indian Partnership Act,1932?
Provision: [Indian Partnership Act, 1932]
1. The term “Goodwill” has not been defined under the Indian Partnership Act, 1932. Section 14 of
the Act lays down that goodwill of a business is to be regarded as a property of the firm.
2. Goodwill may be defined as the value of the reputation of a business house in respect of profits
expected in future over and above the normal level of profits earned by undertaking belonging to
the same class of business.

With reference to the provisions of Indian partnership Act, 1932 explain the various effects of
insolvency of a partner.
Provision: [Section 34 of Indian Partnership Act, 1932]
Effects of insolvency of a partner are as follow:
1. The insolvent partner cannot be continued as a partner.
2. He will be ceased to be a partner from the very date on which the order of adjudication is made.
3. The estate of the insolvent partner is not liable for the acts of the firm done after the date of order
of adjudication.
4. The firm is also not liable for any act of the insolvent partner after the date of the order of
adjudication,
5. Ordinarily, the insolvency of a partner results in dissolution of a firm; but the partners are
competent to agree among themselves that the adjudication of a partner as an insolvent will not
give rise to dissolution of the firm.

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Mr. A. Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in
the business of trading of branded furniture. The name of the partners was clearly written along
with the firm name in front of the head office of the firm as well as on letter-head of the firm. On
1st October, 2018, Mr. C passed away. His name was neither removed from the list of partners as
stated in front of the head office nor from the letter-heads of the firm. As per the terms of
partnership, the firm continued its operations with Mr. A and Mr. B as partners. The accounts of
the firm were settled and the amount due to the legal heirs of Mr. C was also determined on
10th October, 2018. But the same was not paid to the legal heirs of Mr. C. On 16th October, 2018,
Mr. X, a supplier supplied furniture worth ` 20,00,000 to M/s ABC & Co. M/s ABC & Co. could not
repay the amount due to heavy losses. Mr. X wants to recover the amount not only from M/s ABC
& Co., but also from the legal heirs of Mr. C.
Analyses the above situation in terms of the provisions of the Indian Partnership Act, 1932 and
decide whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X.
Provision: [Indian Partnership Act, 1932]
1. Generally, the effect of the death of a partner is the dissolution of the partnership, but the rule in
regard to the dissolution of the partnership, by death of partner, is subject to a contract between
the parties and the partners are competent to agree that the death of one will not have the effect
of dissolving the partnership as regards the surviving partners unless the firm consists of only
two partners.
2. In order that the estate of the deceased partner may be absolved from liability for the future
obligations of the firm, it is not necessary to give any notice either to the public or the persons
having dealings with the firm.
Answer:
In the light of the provisions of the Act and the facts of the question, Mr. X (creditor) can have only a
personal decree against the surviving partners (Mr. A and Mr. B) and a decree against the partnership
assets in the hands of those partners. A suit for goods sold and delivered would not lie against the
representatives of the deceased partner. Hence, the legal heirs of Mr. C cannot be held liable for the
dues towards Mr. X.

What is the conclusive evidence of partnership? State the circumstances when partnership is not
considered between two or more parties.
Provision: [Indian Partnership Act, 1932]
1. Existence of Mutual Agency which is the cardinal principle of partnership law is very much helpful
in reaching a conclusion with respect to determination of existence of partnership.
2. Each partner carrying on the business is the principal as well as an agent of other partners. So, the
act of one partner done on behalf of firm, binds all the partners.
3. If the element of mutual agency relationship exists between the parties constituting a group
formed with a view to earn profits by running a business, a partnership may be deemed to exist.
4. Circumstances when partnership is not considered between two or more parties:
Various judicial pronouncements have laid to the following factors leading to no partnership
between the parties:
a) Parties have not retained any record of terms and conditions of partnership.
b) Partnership business has maintained no accounts of its own, which would be open to
inspection by both parties
c) No account of the partnership was opened with any bank

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 Chapter The Indian Partnership Act, 1932 3.22

d) No written intimation was conveyed to the Deputy Director of Procurement with respect to the
newly created partnership.

Whether a group of persons is or is not a firm, or whether a person is or not a partner in a firm."
Explain the mode of determining existence of partnership as per the Indian Partnership Act, 1932?
Provision: [Section 6 of Indian Partnership Act, 1932]
1. In determining whether a group of persons is or is not a firm, or whether a person is or 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.
2. For determining the existence of partnership, it must be proved.
a) There was an agreement between all the persons concerned
b) The agreement was to share the profits of a business and
c) the business was carried on by all or any of them acting for all.

3. Agreement: Partnership is created by agreement and not by status (Section 5). The relation of
partnership arises from contract and not from status; and in particular, the members of a
Hindu Undivided family carrying on a family business as such are not partners in such business.
4. Sharing of Profit: Sharing of profit is an essential element to constitute a partnership. But, it is
only a prima facie evidence and not conclusive evidence, in that regard. The sharing of profits
or of gross returns accruing from property by persons holding joint or common interest in the
property would not by itself make such persons partners. Although the right to participate in
profits is a strong test of partnership, and there may be cases where, upon a simple participation
in profits, there is a partnership, yet whether the relation does or does not exist must depend
upon the whole contract between the parties.
5. Agency: Existence of Mutual Agency which is the cardinal principle of partnership law, is very
much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the
principal as well as an agent of other partners. So, the act of one partner done on behalf of
firm, binds all the partners. If the elements of mutual agency relationship exist between the
parties constituting a group formed with a view to earn profits by running a business, a partnership
may be deemed to exist.

M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged in the
business of carpet manufacturing and exporting to foreign countries. On 25th August, 2016,
they inducted Mr. G, an expert in the field of carpet manufacturing as their partner. On 10th
January 2018, Mr. G was blamed for unauthorized activities and thus expelled from the partnership
by united approval of rest of the partners.
(i) Examine whether action by the partners was justified or not?
(ii) What should have the factors to be kept in mind prior expelling a partner from the firm by
other partners according to the provisions of the Indian Partnership Act, 1932?
Provision: [Section 33 of Indian Partnership Act, 1932]
1. A partner may not be expelled from a firm by a majority of partners except in exercise,in good
faith, of powers conferred by contract between the partners. It is, thus, essential that:
a) the power of expulsion must have existed in a contract between the partners;
b) the power has been exercised by a majority of the partners; and
c) it has been exercised in good faith.
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2. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of
the business of the firm.
3. The test of good faith as required under Section 33(1) includes three things:
a) The expulsion must be in the interest of the partnership.
b) The partner to be expelled is served with a notice.
c) He is given an opportunity of being heard.
4. If a partner is otherwise expelled, the expulsion is null and void.
Facts of case:
In given question M/s XYZ & Associates is a partnership firm in which X, Y & Z are senior partners.
They are engaged in the business of carpet manufacturing and exporting it to foreign countries. They
appointed Mr. G an expert in the field of carpet business as their partner. Afterwards Mr. G was
blamed for conducting unauthorized activities and was expelled from partnership.
Answer:
Action by the partners of M/s XYZ & Associates, a partnership firm to expel Mr. G from the
partnership was justified as he was expelled by united approval of the partners exercised in good
faith to protect the interest of the partnership against the unauthorized activities charged against Mr.
G. A proper notice and opportunity of being heard has to be given to Mr. G.

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 Chapter Limited Liability Partnership, 2008 4.1

Limited Liability Partnership,

2008
Explain the Meaning of LLP. State its Characteristics? of LLP.
Provision: [The LLP Act,2008]
Meaning of LLP
1. A LLP is a new form of legal business entity with limited liability.
2. It is an alternative corporate business vehicle that not only gives the benefits of limited liability at
low compliance cost but allows its partners the exibility of organising their internal structure as a
traditional partnership.
3. The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its
assets, the liability of the partners will be limited.
4. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’
LLP is called a hybrid between a company and a partnership.
Essentials of LLP
1. LLP is a body corporate: LLP is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners.
2. Perpetual Succession: LLP can continue its existence irrespective of changes in partners. Death,
insanity, retirement or insolvency of partners has no impact on the existence of LLP. It is capable
of entering into contracts and holding property in its own name.
3. Separate Legal Entity: LLP is a separate legal entity, is liable to the full extent of its assets but
liability of the partners is limited to their agreed contribution in the LLP.
4. Mutual Agency: Further, no partner is liable on account of the independent or un-authorized
actions of other partners. All partners will be the agents of the LLP alone. No one partner can bind
the other partner by his acts.
5. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed by an
agreement between the partners. The LLP Act, 2008 provides exibility to partner to devise the
agreement as per their choice. In the absence of any such agreement, the mutual rights and
duties shall be governed by the provisions of the LLP Act, 2008.
6. Artificial Legal Person: A LLP is an artificial legal person because it is created by a legal process
and is clothed with all rights of an individual. It can do everything which any natural person can
do, except of course that, it cannot be sent to jail, cannot take an oath, cannot marry or get
divorce nor can it practice a learned profession like CA or Medicine.
7. Common Seal: A LLP being an artificial person can act through its partners and designated
partners. LLP may have a common seal, if it decides to have one. Thus, it is not mandatory for a
LLP to have a common seal.
8. Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the agent of the

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 4.2
Chapter Limited Liability Partnership, 2008

LLP, but not of other partners (Section. 26). The liability of the partners will be limited to their
agreed contribution in the LLP
9. Management of Business: The partners in the LLP are entitled to manage the business of LLP. But
only the designated partners are responsible for legal compliances.
10. Minimum and Maximum number of Partners: Every LLP shall have least two partners and shall
also have at least 2 individuals as designated partners, of whom at least one shall be resident in
India. There is no maximum limit on the partners in LLP.

State the essentials required for incorporation of the LLP.

Provision: [The LLP Act,2008]
Under the LLP Act, 2008, the following elements are very essential to form a LLP in India:
1. To complete and submit incorporation document in the form prescribed with the Registrar
electronically
2. To have at least two partners for incorporation of LLP [Individual or body corporate]
3. To have registered office in India to which all communications will be made and received
4. To appoint minimum two individuals as designated partners who will be responsible for number
of duties including doing of all acts, matters and things as are required to be done by the LLP.
Atleast one of them should be resident in India
5. A person or nominee of body corporate intending to be appointed as designated partner of LLP
should hold a Designated Partner Identification Number (DPIN) allotted by MCA
6. To execute a partnership agreement between the partners inter se or between the LLP and its
partners. In the absence of any agreement the provisions as set out in First Schedule of LLP Act,
2008 will be applied
7. LLP Name. The LLP cannot have the same name with any other LLP, Partnership Firm or Company
8. To create a LLP proper formation documents must be led with the registrar along with the
necessary filing fees.
9. Steps to Incorporate LLP
a) Name Resevation
 The first step to incorporate Limited Liability Partnership is reservation of name of LLP.
 Applicant has to file e-Form 1, for ascertaining availability and reservation of the name of a LLP
business.
b) Incorporate LLP
 After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability
Partnership
 e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated
partners’ details and consent of the partners/designated partners to act as partners/
designated partners
c) LLP Agreement
 Execution of LLP Agreement is mandatory as per Section 23 of the Act.
 LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
incorporation of LLP

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 Chapter Limited Liability Partnership, 2008 4.3

Explain the process of Registration of LLP

Provision: [The LLP Act,2008]
1. Deciding Partners and Designated partners
2. Obtain Designated Partners Identification Number (DPIN) & Digital Signature Certificates (DSC)
3. Apply for reservation of Name by checking the availability of Name (up to 6 Names)
4. Drafting of LLP Agreement*
5. Electronic Filing of some Documents along with requisite fees
6. Issuing Certificate of Incorporation along with LLPIN (LLP Identification Number)

State the Contents of LLP Agreement ?

Provision: [The LLP Act,2008]
Following are the contents of LLP Agreement
1. Name of LLP
2. Name & address of Partners & Designated Partners
3. Form of contribution & interest on contribution
4. Profit sharing ratio
5. Remuneration of Partners
6. Rights & Duties of Partners
7. Proposed Business
8. Rules for governing LLP.

Differentiate between a LLP and a partnership firm?

Provision: [The LLP Act,2008]
Difference between LLP and Partnership Firm
Basis for Comparison Limited Liability Partnership Partnership Firm
Regulating Act The Limited Liability The Indian Partnership Act, 1932.
Partnership Act, 2008.
Body corporate It is a body corporate. It is not a body corporate.
Separate legal It is a legal entity separate It is a group of persons with no
entity from its members. separate legal entity.
Creation It is created by a legal process It is created by an agreement between
called registration under the the partners.
LLP Act, 2008.

Registration Registration is mandatory. LLP can Registration is voluntary. Only the

sue and be sued in its registered partnership firm can sue
own name. the third parties.

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 4.4
Chapter Limited Liability Partnership, 2008

Perpetual succession The death, insanity, retirement or The death, insanity retirement or
insolvency of the partner(s) does insolvency of the partner(s) may affect
not affect its existence of LLP. its existence. It has no perpetual
Members may join or leave but its succession.
existence continues forever.

Name Name of the LLP to contain the No guidelines. The partners can have
word limited liability any name as per their choice.
partners (LLP) as suffix.

Liability Liability of each partner Liability of each partner is

limited to the extent to agreed unlimited. It can be extended up to the
contribution except in personal assets of the partners.

case of willful fraud.

Mutual agency Each partner can bind the LLP by his Each partner can bind the firm as well as
own acts but not the other other partners by his own acts.
partners.

Designated partners At least two designated partners There is no provision for such partners
and at least one of them shall be under the Indian partnership Act, 1932.
resident in

India.

Differentiate between a LLP and Limited Liability Company?

Provision: [The LLP Act,2008]

Basis for Comparison Limited Liability Partnership Limited Liability Company

Regulating Act The LLP Act, 2008. The Companies Act, 2013.

Members/Partners The persons who contribute to LLP The persons who invest the money in
are known as partners of the LLP. the shares are known as members of
the company.

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 Chapter Limited Liability Partnership, 2008 4.5

Internal governance The internal governance structure of The internal governance structure of a
structure a LLP is governed by agreement company is regulated by statute (i.e.,
between the partners. Companies Act, 2013).

Name Name of the LLP to contain the word Name of the public company to contain
“Limited Liability partnership” or the word “limited” and Private company
“LLP” as suffix. to contain the word “Private limited” as
suffix.
Number of members / Minimum – 2 members Maximum – Private company: Minimum – 2
partners No such limit on the members in the members Maximum – 200 members
Act. The members of the LLP can be Public company:
individuals/or body corporate
through the nominees. Minimum – 7 members Maximum – No
such limit Members can be
organizations, trusts, another business
form or

individuals.

Liability of members / Liability of a partners is limited to the Liability of a member is limited to the
Partners extent of agreed contribution except amount unpaid on the shares held by
in case of
them.
willful fraud.

Management The business of the company The affairs of the company are managed
managed by the partners including by board of directors elected by the
the designated partners authorized shareholders.
in the

agreement.

Minimum number of Minimum 2 designated partners. Private Co. – 2 directors Public Co. – 3
directors/designated directors

partners

What is the procedure for changing the name of Limited Liability Partnership (LLP) under the LLP
Act, 2008?
Provision: [Section 17 of the LLP Act,2008]
Change of name of LLP (Section 17 of LLP Act, 2008):

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 4.6
Chapter Limited Liability Partnership, 2008

1. Notwithstanding anything contained in sections 15 and 16, where the Central Government is
satisfied that a LLP has been registered (whether through inadvertence or otherwise and whether
originally or by a change of name) under a name which —
a) is a name referred to in sub-section (2) of section 15; or
b) is identical with or too nearly resembles the name of any other LLP or body corporate or other
name as to be likely to be mistaken for it,
2. The Central Government may direct such LLP to change its name, and the LLP shall comply with the
said direction within 3 months after the date of the direction or such longer period as the Central
Government may allow.
3. Punishment for not complying with above provisions will be as follow :
a) Any LLP which fails to comply with a direction given under sub-section (1) shall be punishable
with fine which shall not be less than ` 10,000 but which may extend to ` 5 Lakhs.
b) The designated partner of such LLP shall be punishable with fine which shall not be less than `
10,000 but which may extend to ` 1 Lakh.

Explain the circumstances in which LLP may be wound up by Tribunal under the LLP Act, 2008.
Provision: [Section 64 of the LLP Act,2008]
A LLP may be wound up by the Tribunal:
1. if the LLP decides that LLP be wound up by the Tribunal ;
2. if, for a period of more than six months, the number of partners of the LLP is reduced below two;
3. if the LLP is unable to pay its debts;
4. if the LLP has acted against the interests of the sovereignty and integrity of India, the security of
the State or public order;
5. if the LLP has made a default in filing with the Registrar the Statement of Account and Solvency or
annual return for any five consecutive financial years; or
6. if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

Who are the individuals which shall not be capable of becoming a partner of a Limited Liability
Partnership?
Provision:[Section 5 of the LLP Act,2008]
1. Any individual or body corporate may be a partner in a LLP. However, an individual shall not be
capable of becoming a partner of a LLP, 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; or
c) he has applied to be adjudicated as an insolvent and his application is pending

What are the effects of registration of LLP?

Provision:[Section 14 of the LLP Act,2008]
1. On registration, a LLP shall, by its name, be capable of—
a) suing and being sued;

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 Chapter Limited Liability Partnership, 2008 4.7

b) acquiring, owning, holding and developing or disposing of property, whether movable or

immovable, tangible or intangible;
c) having a common seal, if it decides to have one; and
d) doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

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 Chapter The Companies Act,2013
4.1

The Companies Act, 2013

What is meant by a Guarantee Company? State the similarities and dissimilarities between a
Guarantee Company and a Company having Share Capital.
Provision:
1. Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as the
company having the liability of its members limited by the memorandum to such amount as
the members may respectively undertake by the memorandum to contribute to the assets of the
company in the event of its being wound up.
2. Thus, the liability of the member of a guarantee company is limited up to a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond that
stipulated sum.
3. Similarities and dis-similarities between the Guarantee Company and the Company having
share capital:
a) The common features between a ‘guarantee company’ and ‘share company’ are legal
personality and limited liability. In the latter case, the member’s liability is limited by the
amount remaining unpaid on the share, which each member holds. Both of them have to
state in their memorandum that the members’ liability is limited.
b) However, the point of distinction between these two types of companies is that in the former
case the members may be called upon to discharge their liability only after commencement of
the winding up and only subject to certain conditions; but in the latter case, they may be called
upon to do so at any time, either during the company’s life-time or during its winding up.
Answer:
Above are given some similarities between a Guarantee company and Company having share capital.

Can a non-profit organization be registered as a company under the Companies Act, 2013? If so,
what procedure does it have to adopt?
Answer:
1. Yes, a non-profit organization be registered as a company under the Companies Act, 2013 by
following the provisions of section 8 of the Companies Act, 2013.
2. Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to
promote the charitable objects of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment etc.
3. Such company intends to apply its profit in
a) promoting its objects and
b) prohibiting the payment of any dividend to its members.
4. The Central Government has the power to issue license for registering a section 8 company.
a) Section 8 allows the Central Government to register such person or association of persons as a
company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its
name, by issuing licence on such conditions as it deems fit.

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 Chapter The Companies Act,2013 4.2

b) The registrar shall on application register such person or association of persons as a company
under this section.
c) On registration the company shall enjoy same privileges and obligations as of a limited
company.

Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are the
consequences of ultravires acts of the company?
Provision:
1. The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra
vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes
that the powers are in their nature limited. To an ordinary citizen, the law permits whatever does
the law not expressly forbid.
2. It is a fundamental rule of Company Law that the objects of a company as stated in its
memorandum can be departed from only to the extent permitted by the Act - thus far and no
further [Ashbury Railway Company Ltd. vs. Riche].
3. In consequence, any act done or a contract made by the company which travels beyond the
powers not only of the directors but also of the company is wholly void and inoperative in law and
is therefore not binding on the company.
4. On this account, a company can be restrained from employing its fund for purposes other than
those sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade
different from the one it is authorised to carry on.
5. The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public
inspection.
6. Therefore, when one deals with a company one is deemed to know about the powers of the
company. If in spite of this you enter into a transaction which is ultra vires the company, you
cannot enforce it against the company.
For example, if you have supplied goods or performed service on such a contract or lent money,
you cannot obtain payment or recover the money lent. But if the money advanced to the company
has not been expended, the lender may stop the company from parting with it by means of an
injunction; this is because the company does not become the owner of the money, which is ultra
vires the company. As the lender remains the owner, he can take back the property in specie.
7. If the ultra vires loan has been utilised in meeting lawful debt of the company then the lender
steps into the shoes of the debtor paid off and consequently he would be entitled to recover his
loan to that extent from the company.
8. An act, which is ultra vires the company being void, cannot be ratified by the shareholders of the
company. Sometimes, act which is ultra vires can be regularized by ratifying it subsequently.
For instance, if the act is ultra vires the power of the directors, the shareholders can ratify it; if it is
ultra vires the articles of the company, the company can alter the articles; if the act is within the
power of the company but is done irregularly, shareholder can validate it.

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 Chapter The Companies Act,2013
4.3
Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies
registered under the Companies Act, 2013. Explain the circumstances in which an outsider
dealing with the company cannot claim any relief on the ground of ‘Indoor Management’.
Or
Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies
registered under the Companies Act, 1956. Explain the circumstances in which an outsider dealing
with the company cannot claim any relief on the ground of ‘Indoor Management’.
Provision:
1. According to the “doctrine of indoor management” the outsiders, dealing with the company
though are supposed to have satisfied themselves regarding the competence of the company to
enter into the proposed contracts are also entitled to assume that as far as the internal compliance
to procedures and regulations by the company is concerned, everything has been done properly.
2. They are bound to examine the registered documents of the company and ensure that the
proposed dealing is not inconsistent therewith, but they are not bound to do more.
3. They are fully entitled to presume regularity and compliance by the company with the
internal procedures as required by the Memorandum and the Articles. This doctrine is a
limitation of the doctrine of “constructive notice” and popularly known as the rule laid down in the
celebrated case of Royal British Bank v. Turquand. Thus, the doctrine of indoor management aims
to protect outsiders against the company.
4. The above mentioned doctrine of Indoor Management or Turquand Rule has limitations of its own.
That is to say, it is inapplicable to the following cases, namely:
a) Actual or constructive knowledge of irregularity: The rule does not protect any person when
the person dealing with the company has notice, whether actual or constructive, of the
irregularity. In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend
the issue of debentures to themselves because they should have known that the extent to
which they were lending money to the company required the assent of the general meeting
which they had not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as he
participated in the meeting, which made the allotment. His appointment as a director also fell
through because none of the directors appointed him was validly in office.
b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently. Where
the person dealing with the company is put upon an inquiry, for example, where the transaction
is unusual or not in the ordinary course of business, it is the duty of the outsider to make the
necessary enquiry.
The protection of the “Turquand Rule” is also not available where the circumstances
surrounding the contract are suspicious and therefore invite inquiry. Suspicion should arise, for
example, from the fact that an officer is purporting to act in the manner, which is apparently
outside the scope of his authority. Where, for example, as in the case of Anand Bihari Lal vs
Dinshaw & Co. the plaintiff accepted a transfer of a company’s property from its accountant, the
transfer was held void. The plaintiff could not have supposed, in absence of a power of attorney
that the accountant had authority to effect transfer of the company’s property.
Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person holding
directorship in two companies agreed to apply the money of one company in payment of the
debt to other, the court said that it was something so unusual “that the plaintiff were put upon

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 Chapter The Companies Act,2013 4.4

inquiry to ascertain whether the persons making the contract had any authority in fact to make
it.” Any other rule would “place limited companies without any sufficient reasons for so doing,
at the mercy of any servant or agent who should purport to contract on their behalf.”
c) Forgery: The doctrine of indoor management applies only to irregularities which might
otherwise affect a transaction but it cannot apply to forgery which must be regarded as nullity.
Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found in
the Ruben v Great Fingall Consolidated. In this case the plaintiff was the transferee of a share
certificate issued under the seal of the defendant’s company. The company’s secretary, who
had affixed the seal of the company and forged the signature of the two directors, issued the
certificate. The plaintiff contended that whether the signature were genuine or forged
was apart of the internal management, and therefore, the company should be estopped from
denying genuineness of the document. However, it was held, that the rule has never been
extended to cover such a complete forgery.

ABC Pvt. Ltd., is a Private Company having five members only. All the members of the company
were going by car to Mumbai in relation to some business. An accident took place and all of them
died. Answer with reasons, under the Companies Act, 2013 whether existence of the company
has also come to the end?
Provision:
1. The most distinguishing feature of a company is its being a separate entity from the shareholders
and promoters who form it. This lends stability and perpetuity to the company form of
business organization.
2. In short, a company is brought into existence by a process of law and can be terminated or wound
up or brought to an end only by a process of law. Its life is not impacted by the death, insolvency or
retirement of any or all shareholder(s) or director(s).
3. The provision for transferability or transmission of the shares helps to preserve the perpetual
existence of a company by allowing the constitution and identity of shareholders to change.
Facts of case:
In the present case, ABC Pvt. Ltd. does not cease to exist even by the death of all its shareholders. The
legal process will be for the successors of the deceased shareholders to get the shares registered in
their names by way of the process which is called “transmission of shares”. The company will cease to
exist only when it is wound up by a due process of law.
Answer:
Therefore, even with the death of all members (i.e. 5), ABC (Pvt.) Ltd. does not cease to exist.

Define OPC (One Person Company) and state the rules regarding its membership. Can it be
converted into a non-profit company under Section 8 or a private company?
Provision: [Section 2(62) of Companies Act,2013]
1. One Person Company (OPC) [Section 2(62) of the Companies Act, 2013]: The Act defines one
person company (OPC) as a company which has only one person as a member.
2. Rules regarding its membership:
a) Only one person as member.
b) The memorandum of OPC shall indicate the name of the other person, who shall, in the event of
the subscriber’s death or his incapacity to contract, become the member of the company.

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 Chapter The Companies Act,2013
4.5
c) The other person whose name is given in the memorandum shall give his prior written consent
in prescribed form and the same shall be filed with Registrar of companies at the time of
incorporation.
d) Such other person may be given the right to withdraw his consent.
e) The member of OPC may at any time change the name of such other person by giving notice to
the company and the company shall intimate the same to the Registrar.
f) Any such change in the name of the person shall not be deemed to be an alteration of the
memorandum.
g) Only a natural person who is an Indian citizen and resident in India (person who has stayed in
India for a period of not less than 182 days during the immediately preceding one calendar
year)-
i.shall be eligible to incorporate a OPC
ii.shall be a nominee for the sole member of a OPC.
h) No person shall be eligible to incorporate more than one OPC or become nominee in more than
one such company.
i) No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.
3. OPC cannot be incorporated or converted into a company under section 8 of the Act. Though it
may be converted to private or public companies in certain cases.
4. OPC cannot convert voluntarily into any kind of company unless two years have expired from the
date of incorporation, except where the paid up share capital is increased beyond fifty lakh
rupees or its average annual turnover during the relevant period exceeds two crore rupees
Answer:
Above are rules regarding one person company. As per provisions given it is one of the main condition
for OPC that it cannot be get converted into a Section 8 i.e. non-profit organization.

Examine the following whether they are correct or incorrect along with reasons:
a. A company being an artificial person cannot own property and cannot sue or be sued.
b. A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.
Answer:
a. Incorrect:
A company is an artificial person as it is created by a process other than natural birth. It is legal or
judicial as it is created by law. It is a person since it is clothed with all the rights of an individual.
Further, the company being a separate legal entity can own property, have banking account, raise
loans, incur liabilities and enter into contracts. Even members can contract with company, acquire
right against it or incur liability to it. It can sue and be sued in its own name. It can do everything
which any natural person can do except be sent to jail, take an oath, marry or practice a learned
profession. Hence, it is a legal person in its own sense.
b. Correct:
Section 3 of the Companies Act, 2013 deals with the basic requirement with respect to the
constitution of the company. In the case of a public company, any 7 or more persons can form a
company for any lawful purpose by subscribing their names to memorandum and complying with
the requirements of this Act in respect of registration. In exactly the same way, 2 or more persons
can form a private company.
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 Chapter The Companies Act,2013 4.6

Explain the concept of "Dormant Company" as envisaged in the Companies Act, 2013.
Provision: [Section 455 of Companies Act, 2013]
1. Where a company is formed and registered under this Act for a future project or to hold an asset
or intellectual property and has no significant accounting transaction, such a company or an
inactive company may make an application to the Registrar in such manner as may be
prescribed for obtaining the status of dormant company.
2. “Inactive company” means a company which has not been carrying on any business or operation,
or has not made any significant accounting transaction during the last two financial years, or has
not filed financial statements and annual returns during the last two financial years.
3. “Significant accounting transaction” means any transaction other than
a) payment of fees by a company to the Registrar
b) payments made by it to fulfil the requirements of this Act or any other law
c) allotment of shares to fulfil the requirements of this Act and
d) payments for maintenance of its office and records.

When a company is registered, it is clothed with a legal personality. Explain.

Provision: [The Companies Act, 2013]
1. When a company is registered, it is clothed with a legal personality. It comes to have almost the
same rights and powers as a human being. Its existence is distinct and separate from that of its
members.
2. A company can own property, have bank account, raise loans, incur liabilities and enter into
contracts.
a) It is at law, a person different altogether from the subscribers to the memorandum of
association. Its personality is distinct and separate from the personality of those who compose
it.
b) Even members can contract with company, acquire right against it or incur liability to it. For the
debts of the company, only its creditors can sue it and not its members.
3. A company is capable of owning, enjoying and disposing of property in its own name. Although the
shareholders contribute the capital and assets, the company becomes the owner of its capital and
assets.
4. The shareholders are not the private or joint owners of the company’s property.

The Articles of Association of XYZ Ltd. provides that Board of Directors have authority to issue
bonds provided the shareholders authorize such issue by a necessary resolution in the general
meeting of the company. The company was in dire need of funds and therefore, it issued the bonds
to Mr. X without passing any such resolution in general meeting. Can Mr. X recover the money
from the company. Decide referring the relevant provisions of the Companies Act, 2013.
Provision: [Companies Act, 2013]
1. According to the “doctrine of indoor management” the outsiders, dealing with the company
though are supposed to have satisfied themselves regarding the competence of the company to
enter into the proposed contracts are also entitled to assume that as far as the internal compliance
to procedures and regulations by the company is concerned, everything has been done properly.

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 Chapter The Companies Act,2013
4.7
2. They are bound to examine the registered documents of the company and ensure that the
proposed dealing is not inconsistent therewith, but they are not bound to do more.
3. They are fully entitled to presume regularity and compliance by the company with the
internal procedures as required by the Memorandum and the Articles. This doctrine is a
limitation of the doctrine of “constructive notice” and popularly known as the rule laid down in the
celebrated case of Royal British Bank v. Turquand. Thus, the doctrine of indoor management aims
to protect outsiders against the company
4. As per the case of the Royal British Bank vs. Turquand [1856] 6E & B 327, the directors of R.B.B.
Ltd. gave a bond to T. The articles empowered the directors to issue such bonds under the
authority of a proper resolution. In fact, no such resolution was passed. Notwithstanding that, it
was held that T could sue on the bonds on the ground that he was entitled to assume that the
resolution had been duly passed. This is the doctrine of indoor management, popularly
known as Turquand Rule.
Facts of case:
In given case articles of association of XYZ Ltd. Provides that BOD have authority to issue bonds
provided it need to be authorised by resolution passed in general meeting by shareholders of
company.
Company issued bonds to Mr. X without passing any resolution in general meeting of shareholders.
Answer:
Since, the given question is based on the above facts, accordingly here in this case Mr. X can recover
the money from the company considering that all required formalities for the passing of the
resolution have been duly complied.

Krishna, an assessee, was a wealthy man earning huge income by way of dividend and interest. He
formed three Private Companies and agreed with each to hold a bloc of investment as an agent for
them. The dividend and interest income received by the companies was handed back to Krishna as
a pretended loan. This way, Krishna divided his income into three parts in a bid to reduce his tax
liability. Decide, for what purpose the three companies were established? Whether the legal
personality of all the three companies may be disregarded.
Provision: [Companies Act, 2013]
1. The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person
distinct and separate from its members, and therefore, has an independent separate legal
existence from its members who have constituted the company. But under certain circumstances
the separate entity of the company may be ignored by the courts.
2. When that happens, the courts ignore the corporate entity of the company and look behind the
corporate façade and hold the persons in control of the management of its affairs liable for the
acts of the company.
3. Where a company is incorporated and formed by certain persons only for the purpose of evading
taxes, the courts have discretion to disregard the corporate entity and tax the income in the hands
of the appropriate assessee.
4. This is based on the concept called Lifting of Corporate Veil in which by lifting the veil court sees
the persons who are actually liable for the misconduct done by such persons who acts behinds the
veil of company.
Facts of case:

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The problem asked in the question is based upon the aforesaid facts. The three companies were
formed by the assessee purely and simply as a means of avoiding tax and the companies were nothing
more than the façade of the assessee himself. Therefore, the whole idea of Mr. Krishna was simply
to split his income into three parts with a view to evade tax. No other business was done by the
company.
Answer:
The legal personality of the three private companies may be disregarded because the companies were
formed only to avoid tax liability. It carried no other business, but was created simply as a legal entity
to ostensibly receive the dividend and interest and to hand them over to the assessee as pretended
loans.

Krishna, Examine with reasons whether the following statement is correct or incorrect:
a. A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.
b. Affixing of Common seal on company’s documents is compulsory.
Provision: [Companies Act, 2013]
a. Correct:
Section 3 of the Companies Act, 2013 deals with the basic requirement with respect to the
constitution of the company. In the case of a public company, any 7 or more persons can form a
company for any lawful purpose by subscribing their names to memorandum and complying with
the requirements of this Act in respect of registration. In exactly the same way, 2 or more persons
can form a private company.
b. Incorrect:
The common seal is a seal used by a corporation as the symbol of its incorporation. The Companies
(Amendment) Act, 2015 has made the common seal optional by omitting the words “and a
common seal” from Section 9 so as to provide an alternative mode of authorization for companies
who opt not to have a common seal. This amendment provides that the documents which need to
be authenticated by a common seal will be required to be so done, only if the company opts to
have a common seal. In case a company does not have a common seal, the authorization shall be
made by two directors or by a director and the Company Secretary, wherever the company has
appointed a Company Secretary.

The paid-up share capital of SAB Pvt. Ltd. is Rs. 1 crore, consisting of 8 lacs Equity Shares of Rs. 10
each, fully paid-up and 2 lacs Cumulative Preference Shares of Rs. 10 each, fully paid-up. JVN Pvt.
Ltd. and SARA Pvt. Ltd. are holding 3 lacs Equity Shares and 50,000 Equity Shares respectively in SAB
Pvt. Ltd. JVN Pvt. Ltd. and SARA Pvt. Ltd. are the subsidiaries of PQR Pvt. Ltd. With reference to the
provisions of the Companies Act, 2013, examine whether SAB Pvt. Ltd. is a subsidiary of PQR Pvt.
Ltd.? Would your answer be different if PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of SAB
Pvt. Ltd.?
Provision: [Section 2(87) of Companies Act, 2013]
1. Holding and Subsidiary Companies are relative terms. A company is a holding company of another
only if the other is its subsidiary.
2. Section 2 (87) of the Companies Act 2013 lays down the circumstances under which a company
becomes a subsidiary company of another company which becomes its holding company. These
circumstances are as under:

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a) When the holding company controls the composition of Board of Directors of the subsidiary
company or companies, or
b) When the holding company exercises or controls more than one half of the total voting power
either on its own or together with one or more of its subsidiary companies, or
3. Where a company is the holding company of the company which fulfils any of the above
conditions, e.g., if A Ltd. is the holding company of B Ltd., but C Ltd. is the holding company of A
Ltd., then B Ltd. will automatically become a subsidiary of C Ltd.
Facts of case:
The paid-up share capital of SAB Private Limited is Rs. 1 crore, consisting of 8 lacs Equity Shares of Rs.
10 each, fully paid-up and 2 lacs Cumulative Preference Shares of Rs. 10 each, fully paid-up. JVN
Private Limited and SARA Private Limited are holding 3 lacs Equity Shares and 50,000 Equity Shares
respectively in SAB Private Limited. JVN Private Limited and SARA Private Limited are the subsidiaries
of PQR Private Limited
Answer:
In the first case, the SAB Pvt. Ltd. will not be the subsidiary of the PQR Pvt. Ltd. as JVN Pvt. Ltd. and
SARA Pvt. Ltd. are the subsidiaries of PQR Pvt. Ltd. but they do not hold more than one-half of the
share capital of SAB Pvt. Ltd. Hence, SAB Pvt. Ltd. is the holding company of JVN Pvt. Ltd. and SARA
Pvt. Ltd. but not a subsidiary of PQR Pvt. Ltd.
If, PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of SAB Pvt. Ltd., so, it implies that the PQR Pvt.
Ltd. controls the composition of the Board of Directors of SAB Pvt. Ltd. and hence be the holding
company of the SAB Pvt. Ltd.

The K Ltd. was in the process of incorporation. The Promoters of the company signed an agreement
for the purchase of certain furniture for the company and payment was to be made to the suppliers
of furniture by the company after incorporation. The company was incorporated and the furniture
was received and used by it. Shortly after incorporation, the company went into liquidation and the
debt could not be paid by the company for the purchase of above furniture. As a result, supplier
sued the promoters of the company for the recovery of money. Examine whether promoters can be
held liable for the payment under the following situations:
a) When the company has already adopted the contract after incorporation?
b) When the company makes a fresh contract with the suppliers in substitution of pre incorporation
contract
Provision: [Companies Act, 2013]
1. Pre-incorporation contracts are those contracts which are entered into, by the promoters on
behalf of a prospective company, before it has come into existence e.g. with the proprietor of
business to sell it to the prospective company.
2. Under section 9 of the Companies Act, 2013 a company comes into existence from the date of its
incorporation, it follows that any act purporting to be performed by it prior to that date is of no
effect so far as the company is concerned.
3. The right to enter into contracts, sue or get sued arises only on the incorporation of the company
as stated in section 9. Before its incorporation a company does not exist.
4. Being nonexistent, it can neither act in its own behalf nor expressly or implicitly appoint agents to
act on its behalf.
5. Further, under the principle of constructive notice, every person entering into a contract with a
company is presumed to have knowledge of its documents such as the Memorandum, Articles and

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resolutions passed by members as these are public documents available for scrutiny at the
registered office of a company.
6. Hence, a person who enters into a pre incorporation contract with the promoters does so at his
own peril.
Fact of case:
K Ltd. was in the process of incorporation. The Promoters of the company signed an agreement for
the purchase of certain furniture for the company and payment was to be made to the suppliers of
furniture by the company after incorporation. The company was incorporated and the furniture was
received and used by it. Shortly after incorporation, the company went into liquidation and the debt
could not be paid by the company for the purchase of above furniture. As a result, supplier sued the
promoters of the company for the recovery of money.
Answer:
a) If there was already a contract between the suppliers and promoters even after incorporation, the
promoters shall be personally liable for the failure of payment to the suppliers. Company will not
be held liable.
b) If the company makes a fresh contract with the suppliers in substitution of pre- incorporation
contract, the liability of the promoters will come to an end and the company shall be liable to pay
to the suppliers.

The X Limited was registered as a public company. There are 215 members in the company as noted
below:
a) Directors and their relatives – 190
b) Employees – 10
c) Ex-employees (shares were allotted when they were employees) – 5
d) 5 couples holding shares jointly in the name of husband and wife (5×1) – 5
e) Others – 5
The Board of Directors of the company propose to convert it into a private company. Also advise
whether reduction in the number of members is necessary.
Provision: [Companies Act, 2013]
private company” means company having a minimum paid-up share capital, which by its articles—
1. restricts the right to transfer its shares;
2. except in case of One Person Company, limits the number of its members to two hundred.
3. Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member:
4. Provided further that—
a. persons who are in the employment of the company; and
b. persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased, shall not be included in the number of members; and
5. prohibits any invitation to the public to subscribe for any securities of the company.
Fact of case:
1. X Limited was registered as a public company. There are 215 members in the company as noted
below:
a) Directors and their relatives – 190
b) Employees – 10
c) Ex-employees (shares were allotted when they were employees) – 5

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4.11
d) 5 couples holding shares jointly in the name of husband and wife (5×1) – 5
e) Others – 5
2. The Board of Directors of the company propose to convert it into a private company.
Answer:
Here, the Board of Directors of the company can convert it into a private company because there are
maximum 200 members in the firm.
a) Directors and their relatives – 190
b) 5 couples holding shares jointly in the name of husband and wife (5×1) – 5
c) Others – 5
Total Members = 190 + 5 + 5 = 200 members
So, company do not need any reduction of members as the maximum limit of 200 is not breached by
the company as the employees and ex-employees are excluded from the counting of 200 members.

A company was incorporated on 6th October. The certificate of incorporation of the company was
issued by the Registrar on 15th October. The company on 10th October entered into a contract
which created its contractual liability. The company entered into prior to issuing of certificate of
incorporation. Decide, under the provisions of The Companies Act, 2013, whether the companies
can be exempted from the said contractual liability.
Provision: [Companies Act, 2013]
1. Right from the date of Incorporation as mentioned in the certificate of incorporation the company
will have the status of body corporate and that:
a) All the subscribers and other persons whose names are mentioned in memorandum will
become members and directors as the case may be,
b) Also, company will have following:
i. Common Seal,
ii. Perpetual Succession,
iii. Sale or purchase of movable or immovable property or Tangible and intangible Assets in the
name of the company,
iv. Also will have right to sue and be sued as company.
Fact of case:
A company was incorporated on 6th October. The certificate of incorporation of the company was
issued by the Registrar on 15th October. The company on 10th October entered into a contract which
created its contractual liability. The company entered into prior to issuing of certificate of
incorporation
Answer:
Here, the date of incorporation of the company is 6th October since the date specified in the
certificate of incorporation shall be taken as the date of incorporation of the company even though
the certificate of incorporation was issued at a later date. Hence, the company is bound by the
contracts entered into after date of incorporation.

A, on the instruction of promoters of a company, prepared Memorandum of Association and

Articles of Association, paid the registration fees and got the company incorporated. A claim his
costs and charges from the company. The company refuses to pay. Will A succeed?
Provision: [Companies Act, 2013]
1. Pre-incorporation contracts are those contracts which are entered into, by the promoters on
behalf of a prospective company, before it has come into existence e.g. with the proprietor of
business to sell it to the prospective company.
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2. As per the provisions of the Companies Act, 2013, all the expenses incurred while incorporating a
company, after incorporation, the company shall not be liable for those expenses. Promoters are
held personally liable for such expenses.
Fact of case:
A, on the instruction of promoters of a company, prepared Memorandum of Association and Articles
of Association, paid the registration fees and got the company incorporated. A claim his costs and
charges from the company. The company refuses to pay.
Answer:
Here, A cannot recover the amount from the company as at the time of incorporation, the company
was not in existence. Company will be liable for the expenses incurred after its incorporation. The
expenses incurred before the incorporation are all borne by the promoters. So, A cannot claim his
costs from the company but can claim from the promoters.

The Memorandum and Articles of Association of a company were delivered to the Registrar of
Companies for registration on January 6. On 8th January, the Registrar issued the certificate of
incorporation but dates it January 6th. On that very day (January 6th) the company made allotment
of its shares. The allotment was challenged that it was made before the actual issue of the
certificate of incorporation. How would you decide and why?
Provision: [Companies Act, 2013]
As per the provisions of the Companies Act, 2013, from the date of incorporation (mentioned in the
certificate of incorporation), such a registered company shall be capable of exercising all the functions
of an incorporated company under this Act and having power to enter into contracts related to
property or other matters.
Fact of case:
The Memorandum and Articles of Association of a company were delivered to the Registrar of
Companies for registration on January 6. On 8th January, the Registrar issued the certificate of
incorporation but dates it January 6th. On that very day (January 6th) the company made allotment of
its shares. The allotment was challenged that it was made before the actual issue of the certificate of
incorporation.
Answer:
Here, the date of incorporation of the company is 6th October since the date specified in the
certificate of incorporation shall be taken as the date of incorporation of the company even though
the certificate of incorporation was issued at a later date. So, the allotment of shares made by the
company is valid.

A company was formed on the basis of a certificate of incorporation obtained by threatening the
Registrar of Companies. Is the company legally formed?
Provision: [Companies Act, 2013]
Certificate of Incorporation is a Conclusive evidence nothing can invalidate the Certificate of
Incorporation. Even illegal object or Forged Subscribers will only invalidate the object & memorandum
but that will not affect the valid incorporation of company.
Answer:
Here, the certificate of incorporation was obtained by threatening the Registrar of Companies. Since,
no one can challenge the certificate of incorporation because it is a conclusive evidence, one cannot
say that the company is illegally formed. The certificate of incorporation means that all the legal
formalities while incorporating the company are duly complied.

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Four of the seven signatures to the Memorandum of Association of a company are forged. The
memorandum is duly presented, registered and a certificate of incorporation is issued. Can the
existence of the company be subsequently questioned on the ground that registration is void.
Decide
Provision: [Companies Act, 2013]
1. Certificate of Incorporation is a Conclusive evidence nothing can invalidate the Certificate of
Incorporation. Even illegal object or Forged Subscribers will only invalidate the object &
memorandum but that will not affect the valid incorporation of company.
2. The Companies Act, 2013 states that subject to the provisions of the Act, the Memorandum and
Articles shall, when registered, bind the company and the members thereof, to the same extent as
if they respectively had been signed by the company and by each member, and contained
covenants on its and his part to observe all the provisions of the Memorandum and of the Articles.
Fact of case:
Four of the seven signatures to the Memorandum of Association of a company are forged. The
memorandum is duly presented, registered and a certificate of incorporation is issued
Answer:
The company’s existence cannot be challenged now on the ground that registration was void since,
the certificate of incorporation, once issued, is the conclusive evidence of the fact that the company
has been duly registered. Once the certificate is issued, no one can question the validity of that
certificate.

The principal business of XYZ Company Ltd. was the acquisition of vacant plots of land and to erect
the houses. In the course of transacting the business, the chairman of the Company acquired the
knowledge of arranging finance for the development land. The XYZ Company introduced a financier
to another company ABC Ltd. and received an agreed fee of Rs. 2 lakhs for arranging the finance.
The Memorandum of Association of the company authorises the company to carry on any other
trade or business which can, in the opinion of the board of directors, be advantageously carried on
by the company in connection with the company’s general business. Referring to the provisions of
the Companies Act, 1956 examine the validity of the contract carried out by XYZ Company Ltd. with
ABC Ltd.
Provision: [Companies Act, 2013]
1. As per the provisions of the Companies Act, 2013, the meaning of the term ‘ultra vires’ is simply
“beyond powers”. The acts done by the company beyond its object clause of the Memorandum of
Association are void.
2. The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it.
3. In the leading case law of Ashbury Railway Carriage and Iron Company Limited V. Riche, the main
business of the company was to make, sell or lend on hire, railway carriages or wagon and to carry
on the business of mechanical engineers and general contractors.
4. The directors of the company entered into a contract with Riche for financing the construction of a
railway line in Belgium and the company further ratified this act of the directors by passing a
special resolution.
5. Riche, however, repudiated the contract as being ultra vires and the company brought an action
for damages for breach of contract. Its contention was that the contract was well within the
meaning of the word ‘general contractors’ and hence within its powers.
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6. The court decided that the term ‘general contractors’ was associated with mechanical engineers,
i.e. it had to be read in connection with the company’s main business. If the term ‘general
contractors’ was not so interpreted, it would authorize the making of contracts of any kind and
every description
Fact of case:
The principal business of XYZ Company Ltd. was the acquisition of vacant plots of land and to erect
the houses. In the course of transacting the business, the chairman of the Company acquired the
knowledge of arranging finance for the development land. The XYZ Company introduced a financier to
another company ABC Ltd. and received an agreed fee of Rs. 2 lakhs for arranging the finance. The
Memorandum of Association of the company authorizes the company to carry on any other trade or
business, which can, in the opinion of the board of directors, be advantageously carried on, by the
company in connection with the company’s general business.
Answer:
Here, arranging finance or financier is an ultra vires act since, it falls outside the object clause of
memorandum. An object contained in the object clause is not valid if it authorises the company to
carry on any other trade or business which can be advantageously carried on by the company.
a) The company has no power to arrange finance or financier.
b) The Board cannot take the defence that the memorandum authorises the company to carry on any
business which can be advantageously carried on in connection with company’s present business
because it is a specified purpose for alternation of object clause.

A company registered under section 8 of the Companies Act, 2013, earned huge profit during the
financial year ended on 31st March, 2018 due to some favorable policies declared by the
Government of India and implemented by the company. Considering the development, some
members of the company wanted the company to distribute dividends to the members of the
company. They approached you to advise them about the maximum amount of dividend that can
be declared by the company as per the provisions of the Companies Act, 2013. Examine the relevant
provisions of the Companies Act, 2013 and advise the members accordingly.
Provision: [Companies Act, 2013]
1. Under the Companies Act,2013 Section 8 companies are prohibited to distribute dividends to its
shareholders. It can pay interest but cannot pay dividend.
2. A company is registered with the object of promotion of commerce, science, art, sports, education
, research, social welfare, or any other related object. They can use their profit for this given
purposes.
Fact of case:
In given case company was registered under section 8 company , it earned huge profit during this
financial year. Considering the development some of the members of company demanded dividend
from company.
Answer:
The company in question is a section 8 company and hence it cannot declare dividend. Thus, the
contention of members is incorrect.

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4.15
There are cases where company law disregards the principle of corporate personality or the
principle that the company is a legal entity distinct from its shareholders or members. Elucidate.
Or
Some of the creditors of Pharmaceutical Appliances Ltd. have complained that the company was
formed by the promoters only to defraud the creditors and circumvent the compliance of legal
provisions of the Companies Act, 2013. In this context, they seek your advice as to the meaning of
corporate veil and when the promoters can be made personally liable for the debts of the company.
Provision: [Companies Act, 2013]
Meaning of Lifting the Corporate Veil:
1. The company has a separate legal entity from its members. This principle is called the ‘Veil of
Incorporation’.
2. All the directors and the members take the decision behind the veil. And it is considered as
decision of the company.
3. This advantage of acting behind the veil is available to the members and directors or any other
person belonging from the inner management of the company, only if he is acting for the benefit of
the company & its members in legitimate manner.
4. Therefore, where there is fraudulent intention to misuse the veil for benefits of their own or
conducting illegal act, such person will not get benefit of acting behind veil. In such case the veil
will be removed and person responsible for the fraud shall be penalized and will be held personally
liable.
5. The circumstances or the cases in which the Courts have disregarded the corporate personality
of the company are:
a) Protection of revenue: (To prevent evasion of taxation) The Courts may ignore the corporate
entity of a company where it is used for tax evasion. (Juggilal v. Commissioner of Income Tax,
B.F. Guzdar v. Commissioner of Income Tax Bombay).
b) Prevention of fraud or improper conduct: The legal personality of a company may also be
disregarded in the interest of justice where the machinery of incorporation has been used for
some fraudulent purpose like defrauding creditors or defeating or circumventing law. Professor
Gower has rightly observed in this regard that the veil of a corporate body will be lifted where
the ‘corporate personality is being blatantly used as a cloak for fraud or improper conduct’. Thus
where a company was incorporated as a device to conceal the identity of the perpetrator of the
fraud, the Court disregarded the corporate personality (Jones v. Lipman) (Gilford Motor Co. v.
Home).
c) Determination of character of a company whether it is enemy: A company may assume an
enemy character when persons in de facto control of its affairs are residents in an enemy
country. In such a case, the Court may examine the character of persons in real control of the
company and declare the company to be an enemy company. (Daimler Co. Ltd. v. Continental
Tyre & Rubber Co. Ltd).
d) Where the company is a sham: The Courts also lift the veil or disregard the corporate
personality of a company where a company is a mere cloak or sham (hoax). (Gilford Motor Co.
Ltd. v. Home).
e) Company avoiding legal obligation: Where the use of an incorporated company is being made
to avoid legal obligations, the Court may disregard the legal personality of the company and
proceed on the assumption as if no company existed.

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f) Company acting as agent or trustee of the shareholders: Where a company is acting as agent
for its shareholders, the shareholders will be liable for the acts of the company (F.G. Films Ltd.,
In re.)
g) Avoidance of welfare legislation: Where the courts find that there is avoidance of welfare
legislation, it will be free to lift the corporate veil. (Workmen of Associated Rubber
Industry Ltd. v. Associated Rubber Industry Ltd.).
h) Protecting public policy: The Courts invariably lift the corporate veil or a disregard the
corporate personality of a company to protect the public policy and prevent transactions
contrary to public policy. (Connors v. Connors Ltd.).
i) In quasi-criminal cases: The courts pierce the corporate veil in quasi-criminal cases in order to
look behind the legal person and punish the real persons who have violated the law.
Answer:
Therefore, Promotor can be made liable when they do any misconduct behind the veil of company.

Examine the following whether they are correct or incorrect along with reasons:
a) A company being an artificial person cannot own property and cannot sue or be sued.
b) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.
Answer: [Companies Act, 2013]
a) Incorrect:
A company is an artificial person as it is created by a process other than natural birth. It is legal or
judicial as it is created by law. It is a person since it is clothed with all the rights of an individual
Further, the company being a separate legal entity can own property, have banking account, raise
loans, incur liabilities and enter into contracts. Even members can contract with company, acquire
right against it or incur liability to it. It can sue and be sued in its own name. It can do everything
which any natural person can do except be sent to jail, take an oath, marry or practice a learned
profession. Hence, it is a legal person in its own sense.
b) Correct:
Section 3 of the Companies Act, 2013 deals with the basic requirement with respect to the
constitution of the company. In the case of a public company, any 7 or more persons can form a
company for any lawful purpose by subscribing their names to memorandum and complying with
the requirements of this Act in respect of registration. In exactly the same way, 2 or more persons
can form a private company.

Mr. Anil formed a One Person Company (OPC) on 16th April, 2018 for manufacturing electric cars.
The turnover of the OPC for the financial year ended 31st March, 2019 was about ` 2.25 Crores. His
friend Sunil wanted to invest in his OPC, so they decided to convert it voluntarily into a private
limited company. Can Anil do so?
Provision: [Companies Act, 2013]
1. As per Rule 3 of the Companies (Incorporation) Rules, 2014, no One Person Company (OPC) can
convert voluntarily into any kind of company unless two years have expired from the date of its
incorporation, except where the paid up share capital is increased beyond fifty lakh rupees or its
average annual turnover during the relevant period exceeds two crore rupees.

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2. Besides, Section 18 of the Companies Act, 2013 provides that a company of any class registered
under this Act may convert itself as a company of other class under this Act by alteration of
memorandum and articles of the company in accordance with the provisions of Chapter II of the
Act.
Answer:
In the instant case, Mr. Anil formed an OPC on 16th April, 2018 and its turnover for the financial year
ended 31st March, 2019 was Rs. 2.25 Crores. Even though two years have not expired from the date
of its incorporation, since its average annual turnover during the period starting from 16th April,
2018 to 31st March, 2019 has exceeded Rs. 2 Crores, Mr. Anil can convert the OPC into a private
limited company along with Sunil.

A, an assessee, had large income in the form of dividend and interest. In order to reduce his tax
liability, he formed four private limited company and transferred his investments to them in
exchange of their shares. The income earned by the companies was taken back by him as
pretended loan. Can A be regarded as separate from the private limited company he formed?
Provision: [Companies Act, 2013]
1. The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a person distinct
and separate from its members, and therefore, has an independent separate legal existence from
its members who have constituted the company.
2. But under certain circumstances the separate entity of the company may be ignored by the courts.
When that happens, the courts ignore the corporate entity of the company and look behind the
corporate façade and hold the persons in control of the management of its affairs liable for the
acts of the company.
3. Where a company is incorporated and formed by certain persons only for the purpose of evading
taxes, the courts have discretion to disregard the corporate entity and tax the income in the hands
of the appropriate assesse.
4. In Dinshaw Maneckjee Petit case it was held that the company was not a genuine company at all
but merely the assessee himself disguised that the legal entity of a limited company. The assessee
earned huge income by way of dividends and interest. So, he opened some companies and
purchased their shares in exchange of his income by way of dividend and interest. This income
was transferred back to assessee by way of loan. The court decided that the private companies
were a sham and the corporate veil was lifted to decide the real owner of the income.
Fact of case:
In the instant case, the four private limited companies were formed by A, the assesse, purely and
simply as a means of avoiding tax and the companies were nothing more than the façade of the
assesse himself. Therefore, the whole idea of Mr. A was simply to split his income into four parts with
a view to evade tax. No other business was done by the company.
Answer:
Hence, A cannot be regarded as separate from the private limited companies he formed.

The Memorandum of Association is a charter of a company". Discuss. Also explain in brief the
contents of Memorandum of Association.
Provision: [Companies Act, 2013]

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 Chapter The Companies Act,2013 4.18

1. The Memorandum of Association of company is in fact its charter; it defines its constitution and
the scope of the powers of the company with which it has been established under the Act. It is the
very foundation on which the whole edifice of the company is built.
2. Object of registering a memorandum of association:
a) It contains the object for which the company is formed and therefore identifies the possible
scope of its operations beyond which its actions cannot go.
b) It enables shareholders, creditors and all those who deal with company to know what its
powers are and what activities it can engage in.
c) A memorandum is a public document under Section 399 of the Companies Act, 2013.
Consequently, every person entering into a contract with the company is presumed to have the
knowledge of the conditions contained therein.
d) The shareholders must know the purposes for which his money can be used by the company
and what risks he is taking in making the investment.
3. A company cannot depart from the provisions contained in the memorandum however imperative
may be the necessity for the departure. It cannot enter into a contract or engage in any trade or
business, which is beyond the power confessed on it by the memorandum. If it does so, it would be
ultra vires the company and void.
4. Contents of the memorandum: The memorandum of a company shall state—
a) the name of the company (Name Clause) with the last word “Limited” in the case of a public
limited company, or the last words “Private Limited” in the case of a private limited company.
This clause is not applicable on the companies formed under section 8 of the Act.
b) the State in which the registered office of the company (Registered Office clause) is to be
situated;
c) the objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof (Object clause);
d) the liability of members of the company (Liability clause), whether limited or unlimited
e) The amount of authorized capital (Capital Clause) divided into share of fixed amounts and the
number of shares with the subscribers to the memorandum have agreed to take, indicated
opposite their names, which shall not be less than one share. A company not having share
capital need not have this clause.
f) The desire of the subscribers to be formed into a company. The Memorandum shall conclude
with the association clause. Every subscriber to the Memorandum shall take at least one share,
and shall write against his name, the number of shares taken by him.

Mr. X had purchased some goods from M/s ABC Limited on credit. A credit period of one month
was allowed to Mr. X. Before the due date Mr. X went to the company and wanted to repay the
amount due from him. He found only Mr. Z there, who was the factory supervisor of the
company. Mr. Z told Mr. X that the accountant and the cashier were on leave, he is in-charge of
receiving money and he may pay the amount to him. Mr. Z issued a money receipt under his
signature. After two months M/s ABC Limited issued a notice to Mr. X for non-payment of the dues
within the stipulated period. Mr. X informed the company that he had already cleared the dues and
he is no more responsible for the same. He also contended that Mr. Z is an employee of the
company to whom he had made the payment and being an outsider, he trusted the words of
Mr. Z as duty distribution is a job of the internal management of the company. Analyse the
situation and decide whether Mr. X is free from his liability.
Provision: [Companies Act, 2013]

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 Chapter The Companies Act,2013
4.19
1. According to the “doctrine of indoor management” the outsiders, dealing with the company
though are supposed to have satisfied themselves regarding the competence of the company to
enter into the proposed contracts are also entitled to assume that as far as the internal compliance
to procedures and regulations by the company is concerned, everything has been done properly.
2. They are bound to examine the registered documents of the company and ensure that the
proposed dealing is not inconsistent therewith, but they are not bound to do more.
3. They are fully entitled to presume regularity and compliance by the company with the
internal procedures as required by the Memorandum and the Articles. This doctrine is a
limitation of the doctrine of “constructive notice” and popularly known as the rule laid down in the
celebrated case of Royal British Bank v. Turquand. Thus, the doctrine of indoor management aims
to protect outsiders against the company.
Fact of case:
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same
to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive
money on behalf of the company.
Answer:
Hence, Mr. X will be free from liability for payment of goods purchased from M/s ABC Limited, as he
has paid amount due to an employee of the company.

State the limitations of the doctrine of indoor management under the Companies Act, 2013.
Provision: [Companies Act, 2013]
The doctrine of Indoor Management has limitations of its own. That is to say, it is inapplicable to the
following cases, namely:
a) Actual or constructive knowledge of irregularity: The rule does not protect any person when the
person dealing with the company has notice, whether actual or constructive, of the irregularity. In
Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend the issue of
debentures to themselves because they should have known that the extent to which they
were lending money to the company required the assent of the general meeting which they had
not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as he
participated in the meeting, which made the allotment. His appointment as a director also fell
through because none of the directors appointed him was validly in office.
b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently. Where
the person dealing with the company is put upon an inquiry, for example, where the transaction is
unusual or not in the ordinary course of business, it is the duty of the outsider to make the
necessary enquiry.
The protection of the “Turquand Rule” is also not available where the circumstances surrounding
the contract are suspicious and therefore invite inquiry. Suspicion should arise, for example, from
the fact that an officer is purporting to act in the manner, which is apparently outside the scope of
his authority. Where, for example, as in the case of Anand Bihari Lal vs Dinshaw & Co. the plaintiff
accepted a transfer of a company’s property from its accountant, the transfer was held void. The
plaintiff could not have supposed, in absence of a power of attorney that the accountant had
authority to effect transfer of the company’s property.

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 Chapter The Companies Act,2013 4.20

c) Forgery: The doctrine of indoor management applies only to irregularities which might otherwise
affect a transaction but it cannot apply to forgery which must be regarded as nullity. Forgery may
in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found in the Ruben v
Great Fingall Consolidated. In this case the plaintiff was the transferee of a share certificate
issued under the seal of the defendant’s company. The company’s secretary, who had affixed the
seal of the company and forged the signature of the two directors, issued the certificate. The
plaintiff contended that whether the signature were genuine or forged was apart of the
internal management, and therefore, the company should be estopped from denying genuineness
of the document. However, it was held, that the rule has never been extended to cover such a
complete forgery.

Sound Syndicate Ltd., a public company, its articles of association empowers the managing agents
to borrow both short and long term loans on behalf of the company, Mr. Liddle, the director of the
company, approached Easy Finance Ltd., a non-banking finance company for a loan of `
25,00,000 in name of the company.
The Lender agreed and provided the above said loan. Later on, Sound Syndicate Ltd. refused to
repay the money borrowed on the pretext that no resolution authorizing such loan have been
actually passed by the company and the lender should have enquired about the same prior
providing such loan hence company not liable to pay such loan.
Analyse the above situation in terms of the provisions of Doctrine of Indoor Management under the
Companies Act, 2013 and examine whether the contention of Sound Syndicate Ltd. is correct or
not?
Provision: [Companies Act, 2013]
1. According to the “doctrine of indoor management” the outsiders, dealing with the company
though are supposed to have satisfied themselves regarding the competence of the company to
enter into the proposed contracts are also entitled to assume that as far as the internal compliance
to procedures and regulations by the company is concerned, everything has been done properly.
2. They are bound to examine the registered documents of the company and ensure that the
proposed dealing is not inconsistent therewith, but they are not bound to do more.
3. They are fully entitled to presume regularity and compliance by the company with the
internal procedures as required by the Memorandum and the Articles. This doctrine is a
limitation of the doctrine of “constructive notice” and popularly known as the rule laid down in the
celebrated case of Royal British Bank v. Turquand. Thus, the doctrine of indoor management aims
to protect outsiders against the company.
4. What happens internal to a company is not a matter of public knowledge. An outsider can only
presume the intentions of a company, but do not know the information he/she is not privy to.
5. If not for the doctrine, the company could escape creditors by denying the authority of officials
to act on its behalf.
Facts of case:
In given question, Sound Syndicate Ltd., a public company borrows Rs.25,00,000 from Easy Finance
Ltd., a non-banking finance company. Later on they refused to pay back the loan amount by giving
reason that no such resolution has been passed for such borrowing and Easy Finance Ltd. Should have
enquired about the same before providing such loan.
Answer:
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 Chapter The Companies Act,2013
4.21
In the given question, Easy Finance Ltd. being external to the company, need not enquire whether the
necessary resolution was passed properly. Even if the company claim that no resolution
authorizing the loan was passed, the company is bound to pay the loan to Easy Finance Ltd.

What do you mean by "Companies with charitable purpose" (section 8) under the Companies Act,
2013? Mention the conditions of the issue and revocation of the licence of such company by
the government.
Provision: [Companies Act, 2013]
1. Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to
a) promote the charitable objects of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment etc.
b) Such company intends to apply its profit in promoting its objects and
c) prohibiting the payment of any dividend to its members.
2. Power of Central government to issue the license–
a) Section 8 allows the Central Government to register such person or association of persons as a
company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its
name, by issuing licence on such conditions as it deems fit.
b) The registrar shall on application register such person or association of persons as a company
under this section.
c) On registration the company shall enjoy same privileges and obligations as of a limited
company.
3. The Central Government may by order revoke the licence of the company where the company
contravenes any of the requirements or the conditions of this sections subject to which a licence
is issued or where the affairs of the company are conducted fraudulently, or violative of the
objects of the company or prejudicial to public interest, and on revocation the Registrar shall put
‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such
revocation, the Central Government must give it a written notice of its intention to revoke the
licence and opportunity to be heard in the matter.
4. Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CII etc.

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CA Darshan D. Khare