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2nd Semester Indian contract ACT, 1872 Notes

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 Indian Contract Act, 1872
Q. Explain contract of indemnity with illustration. What are the rights of an indemnity holder when
sued?

In the old English law, Indemnity was defined as a promise to save a person harmless from the
consequences of an act. Such a promise can be express or implied from the circumstances of the case.
This view was illustrated in the case of Adamson vs. Jarvis 1872. In this case, the plaintiff, an auctioneer,
sold certain goods upon the instructions of a person. It turned out that the goods did not belong to the
person and the true owner held the auctioneer liable for the goods. The auctioneer, in turn, sued the
defendant for indemnity for the loss suffered by him by acting on his instructions. It was held that since
the auctioneer acted on the instructions of the defendant, he was entitled to assume that if, what he did
was wrongful, he would be indemnified by the defendant.

This gave a very broad scope to the meaning of Indemnity and it included promise of indemnity due to
loss caused by any cause whatsoever. Thus, any type of insurance except life insurance was a contract of
Indemnity. However, Indian contract Act 1872 makes the scope narrower by defining the contract of
indemnity as follows:

Section 124 - A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself or by the conduct of any other person is a "contract of Indemnity".

Illustration - A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a certain sum of Rs 200. This is a contract of indemnity.

There is a contract between X and Y according to which X has to Sell a tape recorder (which is selected)
to Y after three months. On the next day of their contract Z has come to X and has insisted on selling the
same tape recorder to him (Z). Here Z is promising to compensate X for any loss faced by X, due to
selling the tape recorder to Z. X has agreed. Now the contract which has got formed between X and Z is
called indemnity contract, where Z is indemnifier and X is indemnity holder.

Rights of the indemnity holder

Section 125, defines the rights of an indemnity holder. These are as follows –

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover
from the promisor –

i. Right of recovering Damages - all damages that he is compelled to pay in a suit in respect of any
matter to which the promise of indemnity applies.

For example, if A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a particular transaction. If C does institute legal proceeding against B in that
matter and B pays damages to C, A will be liable to make good all the damages B had to pay in the case.

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ii. Right of recovering Costs -all costs that he is compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor and has acted as it would have
been prudent for him to act in the absence of the contract of indemnity, or if the promisor
authorized him in bringing or defending the suit.
In the case of ADAMSON vs. JARVIS [1827] 4 BING 66, Adamson was entitled to recover the money he
had to pay to the true owner of the cattle as well as any expenses incurred by him to get a legal counsel,
etc.

iii. Right of recovering Sums -all sums which he may have paid under the terms of a compromise in
any such suite, if the compromise was not contrary to the orders of the promisor and was one
which would have been prudent for the promisee to make in the absence of the contract of
indemnity, or if the promisor authorized him to compromise the suit.

As per this section, the rights of the indemnity holder are not absolute or unfettered. He must act within
the authority given to him by the promisor and must not contravene the orders of the promisor. Further,
he must act with normal intelligence, caution, and care with which he would act if there were no
contract of indemnity.

At the same time, if he has followed all the conditions of the contract, he is entitled to the benefits. This
was held in the case of UnitedCommercial Bank vs. Bank of India AIR 1981. In this case, Supreme Court
held that the courts should not grant injunctions restraining the performance of contractual obligations
arising out of a letter of credit or bank guarantee if the terms of the conditions have been fulfilled. It
held that such LoCs or bank guarantees impose on the banker an absolute obligation to pay.

In the case of Mohit Kumar Saha vs. New India Assurance Co AIR 1997, Calcutta HC held that the
indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the surveyor.
Any settlement at lesser value is arbitrary and unfair and violates article 14 of the constitution.

Q. When does the liability of an indemnifier commence? Is contract of insurance covered by contract
of indemnity?

Commencement of liability: In general, as per the definition given in section 124, it looks like an
indemnity holder cannot hold the indemnifier liable until he has suffered an actual loss. This is a great
disadvantage to the indemnity holder in cases where the loss is imminent and he is not in the position to
bear the loss. In the case of GajananMoreshwarvsMoreshwarMadan, AIR 1942, Bombay high court
observed that the contract of indemnity held very little value if the indemnity holder could not enforce
his indemnity until he actually paid the loss. If a suit was filed against him, he had to wait till the
judgment and pay the damages upfront before suing the indemnifier. He may not be able to pay the
judgment and could not sue the indemnifier. Thus, it was held that if his liability has become absolute,
he was entitled to get the indemnifier to pay the amount.

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Osman Jamal & Sons Ltd. v GopalPurshottam

1928 I.L.R. 56 CAL 262

In this case a company acted as a commission agent for another firm and purchased goods on behalf of
the firm. The firm failed to take the goods. The supplier of the goods was entitled to recover from the
firm damages relating to breach of contract. However, before the claim was paid the company went
into liquidation. The court held that the official liquidator was entitled to recover the damages from the
firm though the company had not paid any amount to the supplier.

CONTRACT OF INSURANCE AND CONTRACT OF INDEMNITY

A contract of insurance may be defined as follows” a contract by which a person promises to indemnify
other, for a consideration called premium, against losses that might happen as a result of the perils or
events against which insurance is taken.”

Thus a contract by which the assurer promises to indemnify the insured in case of the happening of the
event against which the insurance was taken. It is a normal contract. All the general provisions apply to
it. Thus the requirement of section 10 of the Indian contract act also applies and is to be fulfilled.

Indemnity means “when a person promises to the save the other from loss caused from the conduct of
promisor himself or by the conduct of any other person”. Though the definition is itself not complete in
the Indian Contract Act. The courts have held that the definition in English law is to be followed. This
was held in the case of GAJANAN MORESHWAR V. MORESHWAR MADAN.

The English law defines the indemnity as” a contract to save another harmless from loss caused as a
result of transactions entered into at the instance of the promisor.” Thus the law covers all type of
indemnifications.

Indemnity is a type of contingent contract. It also depends on happening of events. The contract of
insurance is also a contract that is contingent to the happening of an event. Insurance is a contingent
contract but is not a wager.

The contract of insurance is indeed a contact of indemnity. As the following is noticed in both the
contracts:

1) Both are contingent on happening of an event.

2) Both are special contracts, but the general principal applies to both.

3) A promise to compensate is common.

4) Consideration must be there.

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Q. Define Contract of guarantee and discuss when the surety becomes liable under the contract and
when it is discharged from liability?

Section 126 of Indian Contract Act 1872 defines a contract of guarantee as follows:

"A contract of guarantee is a contract to perform the promise, or to discharge the liabilities of a third
person in case of his default. The person who gives the guarantee is called Surety, the person in respect
of whose default the guarantee is given is called Principal Debtor, and the person to whom the
guarantee is given is called Creditor. A Guarantee may be either oral or written."

For example, when A promises to a shopkeeper C that A will pay for the items being bought by B if B
does not pay, this is a contract of guarantee. In this case, if B fails to pay, C can sue A to recover the
balance. The same was held in the case of Birkmyrvs Darnell 1704, where the court held that when two
persons come to a shop, one person buys, and to give him credit, the other person promises, "If he does
not pay, I will", this type of a collateral undertaking to be liable for the default of another is called a
contract of guarantee.

A contract of guarantee has the following essential elements -

1. Existence of Creditor, Surety, and Principal Debtor - The economic function of a guarantee is to
enable a credit-less person to get a loan or employment or something else. Thus, there must exist a
principal debtor for a recoverable debt for which the surety is liable in case of the default of the
principal debtor.

In the case of Swan vs. Bank of Scotland 1836, it was held that a contract of guarantee is a tripartite
agreement between the creditor, the principal debtor, and the surety.

2. Distinct promise of surety - There must be a distinct promise by the surety to be answerable for
the liability of the Principal Debtor.

3. Liability must be legally enforceable - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example, a surety cannot be made liable for a debt
barred by statute of limitation.

4. Consideration - As with any valid contract, the contract of guarantee also must have a
consideration. The consideration in such contract is nothing but anything done or the promise to do
something for the benefit of the principal debtor. Section 127 clarifies this as follows:

"Anything done or any promise made for the benefit of the principal debtor may be sufficient
consideration to the surety for giving the guarantee."

Illustrations:

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1. A agrees to sell to B certain goods if C guarantees the payment of the price of the goods. C
promises to guarantee the payment in consideration of A's promise to deliver goods to B. This is a
sufficient consideration for C's promise.

2. A sells and delivers goods to B. Later on, C, without any consideration, promises to pay A if B
fails to pay. The agreement is void for lack of consideration.

However, there is no uniformity on the issue of past consideration. In the case of Allahabad Bank vs S
M Engineering Industries 1992 Cal HC, the bank was not allowed to sue the surety in absence of any
advance payment made after the date of guarantee. But in the case of Union Bank of India vs A P
Bhonsle 1991 Mah HC, past debts were also held to be recoverable under the wide language of this
section. In general, if the principal debtor is benefitted as a result of the guarantee, it is sufficient
consideration for the sustenance of the guarantee.

5. It should be without misrepresentation or concealment - Section 142 specifies that a guarantee

obtained by misrepresenting facts that are material to the agreement is invalid, and section 143
specifies that a guarantee obtained by concealing a material fact is invalid as well.

Illustrations -
1. A appoints B for collecting bills. B fails to account for some of the bills. A asks B to get a
guarantor for further employment. C guarantees B's conduct but C is not made aware of B previous mis-
accounting by A. B, afterwards, defaults. C cannot be held liable.

2. A promises to sell Iron to B if C guarantees payment. C guarantees payment however, C is not

made aware of the fact that A and B had contracted that B will pay 5 Rs higher that the market prices. B
defaults. C cannot be held liable.

In the case of London General Omnibus vs Holloway 1912, a person was invited to guarantee an
employee, who was previously dismissed for dishonesty by the same employer. This fact was not told to
the surety. Later on, the employee embezzled funds but the surety was not held liable.

When Surety Becomes Liable

As per section 128, the liability of a surety is co-extensive with that of the principal debtor, unless it is
otherwise provided in the contract.

Illustration - A guarantees the payment of a bill by B to C. The bill becomes due and B fails to pay. A is
liable to C not only for the amount of the bill but also for the interest.

This basically means that although the liability of the surety is co-extensive with that of the principal
debtor, he may place a limit on it in the contract. Co-extensive implies the maximum extent possible. He
is liable for the whole of the amount of the debt or the promises. However, when part of a debt was
recovered by disposing off certain goods, the liability of the surety is also reduced by the same amount.
This was held in the case of Harigopal Agarwal vs State Bank of India AIR 1956.

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The surety can also place conditions on his guarantee. Section 144 says that where a person gives
guarantee upon a contract that the creditor shall not act upon it until another person has joined it as
cosurety, the guarantee is not valid if the co-surety does not join. In the case of National Provincial Bank
of England vsBrakenbury 1906, the defendant signed a guarantee which was supposed to be signed by
three other co-sureties. One of them did not sign and so the defendant was not held liable.

Similarly, a surety may specify in the contract that his liability cannot exceed a certain amount.

However, where the liability is unconditional, the court cannot introduce any conditions. Thus, in the
case of Bank of Bihar Ltd. [Link] Prasad AIR 1969, SC overruled trial court's and high court's order
that the creditor must first exhaust all remedies against the principal debtor before suing the surety.

Discharge of Surety

A surety is said to be discharged from liability when his liability comes to an end. Indian Contract Act
1872 specifies the following conditions in which a surety is discharged of his liability -

1. Section 130- By a notice of revocation - Ordinarily a guarantee cannot be revoked if the liability
has already been accrued. But Section 130 provides for revocation of continuing guarantee. For
example, if A has stood surety for Rs 5, 00,000 home loan of B from a bank, and the money has been
disbursed, A cannot revoke the guarantee, as the liability has accrued. Accordingly, where a guarantee is
a continuing one and extends to a series of transactions, the surety as to future transactions may revoke
it, by giving notice to the creditor. However, the surety shall remain liable for the acts already acted
upon, i.e., prior to the notice of revocation.
2. Section 131 - By death of surety - In case of a continuing guarantee, the death of the surety, in
the absence of any contract to the contrary, discharges him from liability as regards future transactions
(i.e., transactions after his death). In other words, the surety’s survivors or legal representatives would
not be liable unless expressly mentioned in the contract.

3. Section 133 - By variance in terms of contract - A variance made without the consent of the
surety in terms of the contract between the principal debtor and the creditor, discharges the surety as
to the transactions after the variance.

Illustrations -

A becomes a surety to C for B's conduct as manager in C's bank. Afterwards, B and C
contract without A's consent that B's salary shall be raised and that B shall be liable for 1/4th of
the losses on overdrafts. B allows a customer to overdraft and the bank loses money. A is not
liable for the loss.

A guarantees C against the misconduct of B in an office to which B is appointed by C. The conditions of

employment are defined in an act of legislature. In a subsequent act, the nature of the office is
materially altered. B misconducts. A discharged by the change from the future liability of his guarantee
even though B's misconduct is on duty that is not affected by the act.

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4. Section 134 - By discharge of principal debtor - The surety is discharged by any contract
between the creditor and the principal debtor by which the principal debtor is discharged; or by any
action of the creditor the legal consequence of which is the discharge of the principal debtor.

Illustrations

A gives a guarantee to C for goods to be delivered to B. Later on, B contracts with C to

assign his property to C in lieu of the debt. B is discharged of his liability and A is discharged of
his liability.

A contracts with B to build a house for B. B is to supply timber. C guarantees A's performance. B fails
to supply timber. C is discharged of his liability.

If the principal debtor is released by a compromise with the creditor, the surety is discharged but if the
principal debtor is discharged by the operation of insolvency laws, the surety is not discharged. This was
held in the case of Maharashtra SEB vs. Official Liquidator 1982.

5. Section 135 - By composition, extension of time, or promise not to sue - A contract between
the principal debtor and the creditor by which the creditor makes a composition with, or promises to
give time to, or promises to not sue the principal debtor, discharges the surety unless the surety assents
to such a contract.

It should be noted that as per section 136, if a contract is made by the creditor with a third person to
give more time to the principal debtor, the surety is not discharged. However, in the case of
WandoorJupitor Chits vs K P Mathew AIR 1980, it was held that the surety was not discharged when
the period of limitation got extended due to acknowledgement of debt by the principal debtor.

Further, as per section 137, mere forbearance to sue or to not make use of any remedy that is available
to the creditor against the principal debtor, does not automatically discharge the surety.
Illustration -

B owes C a debt guaranteed by A. The debt becomes payable. However, C does not sue B for a year.
This does not discharge A from his surety ship.

It must be noted that forbearing to sue until the expiry of the period of limitation has the legal
consequence of discharge of the principal debtor and thus as per section 134, will cause the surety to be
discharged as well. If section 134 stood alone, this inference was correct. However, section 137 explicitly
says that mere forbearance to sue does not discharge the surety. This contradiction was removed in the
case of Mahanth Singh vs U B Yi by Privy Council. It held that failure to sue the principal debtor until
recovery is banned by period of limitation does not discharge the surety.

6. Section 139 - By impairing surety's remedy - If the creditor does any act that is inconsistent with
the rights of the surety or omits to do an act which his duty to surety requires him to do, and the
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eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is
discharged.

Illustrations -

C contracts with B to build a ship the payment of which is to be made in installments at various stages
of completion. A guarantee's C's performance. B prepays last two installments. A is discharged of his
liability.

A lends money to B with C as surety. A also gets as a security the mortgage to B's
furniture. B defaults and A sells his furniture. However, due to A's carelessness very small
amount is received by sale of the furniture. C is discharged of the liability.

In the case of StateBank of SaurashtravsChitranjanRanganath Raja 1980, the bank failed to properly
take care of the contents of a godown pledged to it against a loan and the contents were lost. The court
held that the surety was not liable for the amount of the goods lost.

Creditor's duty is not only to take care of the security well but also to realize it proper value. Also,
before disposing of the security, the surety must be informed on the account of natural justice so that
he can have the option to take over the security by paying off the debt. In the case ofHiranyapravavs
Orissa State Financial Corp AIR 1995, it was held that if such a notice of disposing off of the security is
not given, the surety cannot be held liable for the shortfall.

However, when the goods are merely hypothecated and are in the custody of the debtor, and if their
loss is not because of the creditor, the surety is not discharged of his liability.

Q. What are the points of similarities as well as dissimilarities between a contract of indemnity and a
contract of guarantee?

Guarantees and indemnities have numerous similar attributes. By and large likewise, similar obligations
and rights emerge between the parties. This will have impact particularly throughout the time of looking
to authorize the agreement. Contracts of indemnity and contracts of guarantee impart certain central
commonality. In every contract, one party consents to pay in the interest of another. Also each of these
categories of contracts is utilized as a safeguard against misfortunes by people and organizations. One
more point of similarity worth mentioning is that they cannot be used to make unjust enrichments. In a
comparative study between Punjab National Bank Ltd. v. Bikram Cotton Mills and Anr and
GajanMoreshwar vs. MoreshwarMadan, it can be seen, that both guarantee and indemnity are used to
compensate the creditor and indemnity holder respectively and the principal debtor and surety in the
Punjab National Bank case as well as the indemnifier had consented to pay to make good of the debt.
Difference

Contract of Indemnity (Section 124) Contract of Guarantee (Section 126)

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It is a bipartite agreement between It is a tripartite agreement between the Creditor, Principal
the indemnifier and indemnityholder. Debtor, and Surety.

Liability of the indemnifier is Liability of the surety is not contingent upon any loss.
contingent upon the loss.

Liability of the indemnifier is primary Liability of the surety is co-extensive with that of the principal
to the contract. debtor although it remains in suspended animation until the
principal debtor defaults. Thus, it is secondary to the contract
and consequently if the principal debtor is not liable, the surety
will also not be liable.

The undertaking in indemnity is The undertaking in a guarantee is collateral to the original

original. contract between the creditor and the principal debtor.

There is only one contract in a There are three contracts in a contract of guarantee - an original
contract of indemnity - between the contract between Creditor and Principal Debtor, a contract of
indemnifier and the indemnity holder. guarantee between creditor and surety, and an implied contract
of indemnity between the surety and the principal debtor.

The reason for a contract of indemnity The reason for a contract of guarantee is to enable a third person
is to make good on a loss if there is get credit.
any.

Once the indemnifier fulfills his

liability, he does not get any right over Once the guarantor fulfills his liability by paying any debt to the
any third party. He can only sue the creditor, he steps into the shoes of the creditor and gets all the
indemnity-holder in his own name. rights that the creditor had over the principal debtor.

Q. State the rights of surety against the (i) Creditor, (ii) Principle debtor, (iii) Co- Sureties
Rights of the Surety: A contract of guarantee being a contract, all rights that are available to the parties
of a contract are available to a surety as well. The following are the rights specific to a contract of
guarantee that are available to the surety.

Rights against principal debtor

1. Right of Subrogation: As per section 140, where a guaranteed debt has become due or default
of the principal debtor to perform a duty has taken place, the surety, upon payment or performance of
all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

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This means that the surety steps into the shoes of the creditor. Whatever rights the creditor had, are
now available to the surety after paying the debt.

In the case of Lampleigh Iron Ore Co Ltd, Re 1927, the court has laid down that the surety will be
entitled, to every remedy which the creditor has against the principal debtor; to enforce every security
and all means of payment; to stand in place of the creditor to have the securities transferred in his
name, though there was no stipulation for that; and to avail himself of all those securities against the
debtor. This right of surety stands not merely upon contract but also upon natural justice.

In the case of Kadamba Sugar Industries Pvt Ltd [Link] AIR 1993, Kar HC held that surety is
entitled to the benefits of the securities even if he is not aware of their existence.

In the case of MamataGhosevs. United Industrial Bank AIR 1987, Cal HC held that under the right of
subrogation, the surety may get certain rights even before payment. In this case, the principal debtor
was disposing off his personal properties one after another lest the surety, after paying the debt, seize
them. The surety sought for temporary injunction, which was granted.

2. Right to Indemnity: As per section 145, in every contract of guarantee there is an implied
promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the
principal debtor whatever sum he has rightfully paid under the guarantee but no sums which he has
paid wrong fully.

Illustrations -

B is indebted to C and A is surety for the debt. Upon default, C sues A. A defends the suit on
reasonable grounds but is compelled to pay the amount. A is entitled to recover from B the cost as well
as the principal debt.

In the same case above, if A did not have reasonable grounds for defense, A would still be entitled to
recover principal debt from B but not any other costs.

A guarantees to C, to the extent of 2000 Rs, payment of rice to be supplied by C to B. C supplies rice to
a less amount than 2000/- but obtains from A, a payment of 2000/- for the rice. A cannot recover from B
more than the price of the rice actually supplied.

This right enables the surety to recover from the principal debtor any amount that he has paid rightfully.
The concept of rightfully is illustrated in the case of ChekkaraPonnammavs A S Thammayya AIR 1983. In
this case, the principal debtor died after hire-purchasing four motor vehicles. The surety was sued and
he paid over. The surety then sued the legal representatives of the principal debtor. The court required
the surety to show how much amount was realized by selling the vehicles, which he could not show.
Thus, it was held that the payment made by the surety was not proper.

Rights against creditor

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1. Right to securities: As per section 141, a surety is entitled to the benefit of every security which the
creditor has against the principal debtor at the time when the contract of suretyship is entered into
whether the surety knows about the existence of such security or not; and if the creditor loses or
without the consent of the surety parts with such security, the surety is discharged to the extent of the
value of the security.

Illustrations -

C advances to B, his tenant, 2000/- on the guarantee of A. C also has a further security for 2000/- by a
mortgage of B's furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A
is discharged of his liability to the amount of the value of the furniture.

C, a creditor, whose advance to B is secured by a decree, also receives a guarantee from A. C

afterwards takes B's goods in execution under the decree and then without the knowledge of A,
withdraws the execution. A is discharged.

This section recognizes and incorporates the general rule of equity as expounded in the case of
Craythornevs. Swinburne 1807 that the surety is entitled to every remedy which the creditor has
against the principal debtor including enforcement of every security.

The expression "security" in section 141 means all rights which the creditor had against property at the
date of the contract. This was held by the SC in the case of State of MP vs. Kaluram AIR 1967. In this
case, the state had sold a lot of felled trees for a fixed price in four equal installments, the payment of
which was guaranteed by the defendant. The contract further provided that if a default was made in the
payment of an installment, the State would get the right to prevent further removal of timber and the
sell the timber for the realization of the price. The buyer defaulted but the State still did not stop him
from removing further timber. The surety was then sued for the loss but he was not held liable.

It is important to note that the right to securities arises only after the creditor is paid in full. If the surety
has guaranteed only part of the debt, he cannot claim a proportional part of the securities after paying
part of the debt. This was held in the case of Goverdhan Das vs. Bank of Bengal 1891.

2. Right of set off:If the creditor sues the surety, the surety may have the benefit of the set off, if any,
that the principal debtor had against the creditor. He is entitled to use the defenses that the principal
debtor has against the creditor. For example, if the creditor owes the principal debtor something, for
which the principal debtor could have counter claimed, then the surety can also put up that counter
claim.

Rights against co-sureties

1. Effect of releasing a surety: As per section 138, where there are co-sureties, a release by the creditor
of one of them does not discharge the others; neither does it free the surety so released from his
responsibility to the other sureties.

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A creditor can release a co-surety at his will. However, as held in the case of Sri Chand vs.
JagdishPrashad 1966, the released co-surety is still liable to the others for contribution upon default.

2. Right to contribution: As per section 146, where two or more persons are co-sureties for the same
debt jointly or severally, with or without the knowledge of each other, under same or different contract,
in the absence of any contract to the contrary, they are liable to pay an equal share of the debt or any
part of it that is unpaid by the principal debtor.

Illustrations -

A, B, and C are sureties to D for a sum of 3000Rs lent to E. He fails to pay. A, B, and C are liable to pay
1000Rs each.

A, B, and C are sureties to D for a sum of 1000Rs lent to E and there is a contract among A B and C that
A and B will be liable for a quarter and C will be liable for half the amount upon E's default. He fails to
pay. A and B are liable for 250Rs each and C is liable for 500Rs.

As per section 147, co-sureties who are bound in different sums are liable to pay equally as far as the
limits of their respective obligations permit.

Illustrations -

A, B and C as sureties to D, enter into three several bonds, each in different penalty, namely A for
10000Rs, B for 20000 Rs, and C for 30000Rs with E. D makes a default on 30000Rs. All of them are liable
for 10000Rs each.

A, B and C as sureties to D, enter into three several bonds, each in different penalty, namely A for
10000Rs, B for 20000 Rs, and C for 40000Rs with E. D makes a default on 40000Rs. A is liable for 10000Rs
while B and C are liable for 15000Rs each.

A, B and C as sureties to D, enter into three several bonds, each in different penalty, namely A for
Rs10000, B for Rs20000, and C for 40000Rs with E. D makes a default on 70000Rs. A, B and C are liable
for the full amount of their bonds.

Q. Define “Continuing guarantee” with the help of an illustration. How can it be revoked?

Continuing Guarantee

As per section 129, a guarantee which extends to a series of transactions is called a continuing
guarantee.

Illustrations -

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1. A, in consideration that B will employ C for the collection of rents of B's zamindari, promises B to
be responsible to the amount of 5000/- for due collection and payment by C of those rents. This is a
continuing guarantee.
2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to time
to the amount of Rs 100. Afterwards, B supplies C tea for the amount of 200/- and C fails to pay. A's
guarantee is a continuing guarantee and so A is liable for Rs 100.

3. A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of one
month. B delivers 5 sacks to C and C pays for it. Later on B delivers 4 more sacks but C fails to pay. A's
guarantee is not a continuing guarantee and so he is not liable to pay for the 4 sacks.

Thus, it can be seen that a continuing guarantee is given to allow multiple transactions without having to
create a new guarantee for each transaction. In the case of Nottingham Hide Co vs. Bottrill 1873, it was
held that the facts, circumstances, and intention of each case has to be looked into for determining if it
is a case of continuing guarantee or not.

Revocation of Continuing Guarantee

1. As per section 130, a continuing guarantee can be revoked at any time by the surety by notice to the
creditor.

Once the guarantee is revoked, the surety is not liable for any future transaction however he is liable for
all the transactions that happened before the notice was given.

Illustrations -

1. A promises to pay B for all groceries bought by C for a period of 12 months if C fails to pay. In the
next three months, C buys 2000/- worth of groceries. After 3 months, A revokes the guarantee by giving
a notice to B. C further purchases 1000 Rs of groceries. C fails to pay. A is not liable for 1000/- rs of
purchase that was made after the notice but he is liable for 2000/- of purchase made before the notice.

This illustration is based on the old English case of Oxford vs. Davies.

In the case of Lloyd’s vs. Harper 1880, it was held that employment of a servant is one transaction. The
guarantee for a servant is thus not a continuing guarantee and cannot be revoked as long as the servant
is in the same employment. However, in the case of Wingfield vs. De St Cron 1919, it was held that a
person who guaranteed the rent payment for his servant but revoked it after the servant left his
employment was not liable for the rents after revocation.

2. A guarantees to B, to the amount of 10000 Rs, that C shall pay for the bills that B may draw upon
him. B draws upon C and C accepts the bill. Now, A revokes the guarantee. C fails to pay the bill upon its
maturity. A is liable for the amount up to 10000Rs.

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2. As per section 131, the death of the surety acts as a revocation of a continuing guarantee with regards
to future transactions, if there is no contract to the contrary.

It is important to note that there must not be any contract that keeps the guarantee alive even after the
death. In the case of DurgaPriyavsDurgaPada AIR 1928, Cal HC held that in each case the contract of
guarantee between the parties must be looked into to determine whether the contract has been
revoked due to the death of the surety or not. If there is a provision that says death does not cause the
revocation then the contract of guarantee must be held to continue even after the death of the surety.

Q. Define Bailment. What are the essentials of bailment?

Bailment is a kind of activity in which the property of one person temporarily goes into the possession of
another. The ownership of the property remains with the giver, while only the possession goes to
another. Several situations in day to day life such as giving a vehicle for repair, or parking a scooter in a
parking lot, giving a cloth to a tailor for stitching, are examples of bailment. Section 148 of Indian
Contract Act 1872, defines bailment as follows -

Section 148 - A bailment is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering the goods is called
thebailor and the person to whom they are delivered is called the Bailee.

ESSENTIALS OF CONTRACT OF BAILMENT:

1. Contract: - It is a basic essential for bailment. For the delivery of goods contract between the two
parties is necessary. Contract may be oral or written, implied or expressed.

In State of Gujarat vsMenon Mohammad AIR 1967, SC held that bailment can happen even without an
explicit contract. In this case, certain motor vehicles were seized by the State under Sea Customs Act,
which were then damaged. SC held that the govt. was indeed the bailee and the State was responsible
for proper care of the goods.

2. Moveable Property: - It is the main feature of bailment that it is only for the moveable property and
not for the immoveable property.

3. Delivery of Goods: - It is also necessary that goods should be delivered by one person to another.

In Ultzen vs. Nicols 1894, the plaintiff went to a restaurant for dining. When he entered the room, the
waiter took his coat and hung it on a hook behind him. When the plaintiff arose to leave, the coat was
gone. It was held that the waiter voluntarily took the responsibility of keeping the coat while the
customer was dining and was thus a bailee. Therefore, he was liable to return it.

4. Change of Possession:-Bailment contract also brings change in the possessions of the goods. Only
bailment without possession is not sufficient for this contract.
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5. Purpose of Bailment:-The object of bailment may be for the safety of goods or for hire or for the use.

6. Temporary Delivery: - The delivery of the goods may not be for the permanent purpose. It is essential
that delivery must be made for the temporary purpose.

7. Ownership:-right of ownership remains with bailor and it does not change by the delivery of goods to
other person.

8. Change in Shape:-If bailed goods shape changes in the meantime even then it remains a contract of
bailment.

9. Parties of the Contract:-In the contract of bailment there are two parties, the bailor and the bailee.
10. Returnable: - It is very important feature of the bailment. The bailee should return the goods to
the bailor or disposed according the directions of the bailor.

Q. Discuss the rights and duties of Bailee in a bailment.

Rights of the bailee

1. Rights to interplead (Sec. 165). If a person, other than the bailor, claims the goods bailed, bailee
may apply to the court to stop the delivery of the goods to the bailor and to decide the title to the
goods.

2. Rights against third person (Sec. 180). If a third person wrongfully deprives the bailee of the use
or possession of the goods bailed, or causes them any injury, the bailee is entitled to use such remedies
as the owner might have used in a like case if no bailment has been made. Bailee can thus bring a suit
against a third person for such deprivation or injury.

3. Right of particular lien for payment for services (Sec. 170). Where the bailee has (a) in
accordance with the purpose of bailment, (b) rendered any service involving the exercise of labour of
skill, (c) in respect of the goods, he shall have (d) in the absence of a contract to the contrary, right to
retain such goods, until he receives due remuneration for the services he has rendered in respect of
them. Bailee has, however, only a right to retain the article and not to sell it. The service must have
entirely been formed within the time agreed or a reasonable time and the remuneration must have
become due.

This right of particular lien shall be available only against the property in respect of which skill and labour
has been used.

Examples

(i) A delivers a rough diamond to jeweler , to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.

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(ii) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is
finished, to give A three month’s credit for the price. B is not entitled to retain the coat until he is paid.

4. Right of general lien (Sec. 171). Bankers, factors, attorneys of a High Court and policy brokers
will be entitled to retain, as a security for a general balance of amount, any goods bailed to them in the
absence of a contract to the contrary. By agreement other types of bailees excepting the above given
five may also be given five may also be given this right of general lien.

5. Right to indemnity (Sec. 166). Bailee is entitled to be indemnified by the bailor for any loss
arising to him by reasons that the bailor was not entitled to make the bailment or to receive back the
goods or to give a directions respecting them. If the bailor has not title to the goods, and the bailee in
good faith, delivers them back to, or according to the directions of the bailor, the bailee shall not be
responsible to the owner in respect of such delivery. Bailee can also claim all the necessary expenses
incurred by him for the purpose of gratuitous bailment.

6. Right to claim compensation in case of faulty goods (Sec. 150): A bailee is entitled to receive
compensation from the bailor or any loss caused to him due to the failure of the bailor to disclose any
faults in the goods known to him. If the bailment is for hire, the bailor will be liable to compensate even
though he was not aware of the existence of such faults.

7. Right to claim extraordinary expenses (Sec. 158) : A bailee is expected to take reasonable care
of the gods bailed. In case he is required to incur any extraordinary expenses, he can hold the bailor
liable for such expenses.

8. Right of delivery of goods to any one of the several joint bailor of goods. Delivery of goods to
any one of the several joint bailors of goods will amount to delivery of goods to all of them in the
absence of any contract to the contrary.

Duties/Responsibilities of a Bailee

1. Duty to take reasonable care: In English law the duties of a gratuitous and non-gratuitous bailee are
different. However, in Indian law, Section 151 treats all kinds of bailees the same with respect to the
duty. It says that in all cases of bailment, the bailee is bound to take as much care of the goods bailed to
him as a man of ordinary prudence would, under similar circumstances take, of his own goods of the
same bulk, quality, and value as the goods bailed. The bailee must treat the goods as his own in terms of
care. However, this does not mean that if the bailor is generally careless about his own goods, he can be
careless about the bailed goods as well. He must take care of the goods as any person of ordinary
prudence would of his things.

In Blount vs War Office 1953, a house belonging to the plaintiff was requisitioned by the War Office. He
was allowed to keep his certain articles in a room of the house, which he locked. The troops who
occupied the house were not well controlled and broke into the room causing damage and theft of the
articles. It was held that War office did not take care of the house as an owner would and held the War
Office liable for the loss.
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Bailee, when not liable for loss etc. for thing bailed -

As per section 152, in absence of a special contract, the bailee is not responsible for loss, destruction, or
deterioration of the thing bailed, if he has taken the amount of care as described in section 151. This
means that if the bailee has taken as much care of the goods as any owner of ordinary prudence would
take of his goods, then the bailee will not be liable for the loss, destruction, or deterioration of the
goods. No fixed rule regarding how much care is sufficient can be laid down and the nature, quality, and
bulk of goods will be taken into consideration to find out if proper care was taken or not. InGopal Singh
vs Punjab National Bank, AIR 1976, Delhi HC held that on the account of partition of the country, when
a bank had to flee along with mass exodus from Pakistan to India, the bank was not liable for the goods
bailed to it in Pakistan.

If the bailee has taken sufficient care in the security of the goods, then he will not be liable if they are
stolen. However, negligence in security, for example leaving a bicycle unlocked on the street, would
cause the bailee to be liable. In Join & Son vsComeron 1922, the plaintiff stayed in a hotel and kept his
belonging in his room, which were stolen. The hotel was held liable because they did not take care of its
security as an owner would.

If loss is caused due to the servant of the bailee, the bailee would be liable if the servant's act is within
the scope of his employment.
The extent of this responsibility can be changed by a contract between the bailor and the bailee.
However, it is still debatable whether the responsibility can be reduce or it can be increased by a
contract. Section 152 opens with, "In absence of special contract", which is interpreted by Punjab and
Haryana HC, as the bailee can escape his responsibility by way of a contract with the bailor. However, in
another case Gujarat HC held that the bank was liable for loss of bales of cotton kept in its custody
irrespective of the clause that absolved the bank of all liability. This seems to be fair because no one can
get a license to be negligent and a minimum standard of care is expected from everybody.

2. Duty not to make unauthorized use (Section 154):Section 154 says that if the bailee makes any use of
the goods bailed which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods from or during such use of them.

Illustration - A lends horse to B for his own riding only. B allows C, a member of his family, to ride the
horse. C rides with care but the horse is injured. B is liable to compensate A for the injury to the horse.

A hires a horse in Calcutta from B expressly to march to Benares. A rides with care but marches to
Cuttack instead. The horse accidentally falls and is injured. A is liable to make compensation to B.

Thus, we can see that bailee is supposed to use the goods only as per the purpose of the bailment. If the
bailee makes any unauthorized use of the goods, he will be held absolutely liable for any damages.

3. Duty not to mix (Section 155-157):Thebailee should maintain the separate identity of the
bailor's goods. He should not mix his goods with bailor's good without bailor's consent. If he does so,
and if the goods are separable, he is responsible for separating them and if they are not separable, he
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will be liable to compensate the bailor for his loss. For example, A bails 100 bales of cotton with a
particular mark to B. B, without A's consent, mixes them with his own. A is entitled to have his 100 bales
returned and B is bound to bear all expenses for separation. But if A bails a barrel of Cape flour worth Rs
45 to B and B mixes it with country flour worth Rs 25, B is liable to A for the loss of his flour.

4. Duty to return (Section 160): It is the duty of the bailee to return or deliver according to the
bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed
has expired or the purpose for which they were bailed has been accomplished.

If the bailee keeps the goods after the expiry of the time for which they were bailed or after the purpose
for which they were bailed has been accomplished, it will be at bailee's risk and he will be responsible
for any loss or damage to the goods arising howsoever.

In Shaw & Co vsSymmons& Sons 1971, the plaintiff gave certain books to the defendant to be bound.
The defendant bound them but did not return them within reasonable time. Subsequently, the books
were burnt in an accidental fire. The defendants were held liable for the loss of books.

5. Duty to return increase (Section 163):As per Section 163, in absence of any contract to the
contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase of profit
which may have accrued from the goods bailed.

Illustration - A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to
deliver the calf as well as the cow to B.
6. Duty not to set up jus tertii (Section 166):As per Section 166 if the bailor has no title and the
bailee, in good faith returns the goods back to the bailor or as per the directions of the bailor, he is not
responsible to the owner in respect of such delivery. Thus, once the bailee takes the goods from the
bailor, he agrees that the goods belong to the bailor and he must return them only to the bailor. He
cannot deny redelivery to the bailor on the ground that the bailor is not the owner.

If there is true owner of the goods, he can apply to the court to stop the delivery of the goods from the
bailee to the bailor. This right is given to the true owner in section 167.

Q. What is pledge? What is lien? Explain different types of lien.

Pledge is a special kind of bailment in which a person transfers the possession of his property to another
for securing the loan taken from the other. It only differs from bailment in the matter of purpose. When
the purpose of the bailment is to secure a loan or a promise, it is called a pledge. Section 172 of Indian
Contract Act 1872 defines Pledge as follows -

Section 172 - The bailment of goods as a security for the payment of a debt or performance of a promise
is called Pledge. The bailor in this case is called a Pawnor and the bailee is called Pawnee.

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J Shelat in Lallan Prasad vsRahmat Ali AIR 1967 observed that Pawn or pledge is a bailment of personal
property as a security for some debt or engagement.

LIEN: The right to retain the lawful possession of the property of another until the owner fulfills a legal
duty to the person holding the property, such as the payment of lawful charges for work done on the
property. A mortgage is a common lien.

In its widest meaning this term includes every case in which real or personal property is charged with the
payment of any debt or duty; every such charge being denominated a lien on the property. In a more
limited sense it is defined to be a right of detaining the property of another until some claim be satisfied.

The right of lien generally arises by operation of law, but in some cases it is created by express contract.

There are two kinds of lien; particular and general. When a person claims a right to retain property, in
respect of money or labor expended on such particular property, this is a particular lien.

Liens may arise in three ways:

1. by express contract;

2. from implied contract, as from general or particular usage of trade;

3. By legal relation between the parties, which may be created in three ways: 1. When the law casts an
obligation on a party to do a particular act and in return for which, to secure him payment, it gives
him such lien; common carriers and inn keepers are among this number; 2. When goods are delivered
to a tradesman or any other, to expend his labor upon, he is entitled to detain those goods until he is
remunerated for the labor which he so expends; 3. When goods have been saved from the perils of
the sea, the salvor may detain them until his claim for salvage is satisfied; but in no other case has the
finder of goods a lien.

Lien is of two kinds - Particular and General.

Particular Lien:This means that the lien holder has a right to keep possession of only that particular
property for which the charges are owed. For example, A gives a horse and a bicycle to B. A agrees to
pay B charges for training the horse and no charges for keeping the bicycle. Now, if A fails to pay charges
for the horse, B is entitled to keep possession only of the horse and not of the bicycle. He must return
the bicycle.

Section 170 gives this right to the bailee. It says that where the bailee has, in accordance with the
purpose of the bailment, rendered any service involving the exercise of labor or skill in respect of the
goods bailed, he has, in absense of a contract to the contrary, a right to retain such goods until he
receives due remuneration for the services he has rendered in respect of them.

Illustrations - A delivers a rough diamond to B to be cut and polished, which is accordingly done. B is
entitled to keep the diamond until charges for his services are paid.

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A gives cloth to B, a tailor, to make into a cloth. B promises to deliver the coat as soon as it is done and
also to give 3 months credit for the price. B is not entitled to keep the coat until he is paid.

Conditions for Particular Lien -

Exercise of labor or skill- This right is subject to the condition that the bailee has exercised labor or
skill in respect of the goods. Further, it has been frequently pointed out that the labor or skill must be
such as improves the goods. This, in Hutton vs Car Maintenance Co 1915, it was held that a job master
has no lien for feeding and keeping the horse in his stable but a horse trainer does get a lien upon the
horse.

Labor or skill exercised must be for the purpose of the bailment - Any services rendered that are
beyond the purpose of the bailment do not give a right of lien. For example, A bails his car to B to repair
Engine. But B repairs tires instead. B will not get the right of lien.

Labor or skill exercised must be in respect of the goods - As mentioned before, the bailee gets a right of
lien only upon the goods upon which the service was performed.

General Lien - As opposed to Particular Lien, General Lien gives a right to the bailee to keep the
possession of any goods for any amount due in respect of any goods. Section 171 says that, bankers,
factors, wharfingers, attorneys of a High Court, and policy brokers may, in the absence of a contract to
the contrary, retain as a security for a general balance of account, any goods bailed to them; but no
other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is
an express contract to that effect.

Thus, this right is only available to bankers, factors, wharfingers, attorneys of high court, and policy
brokers. However, this right can be given to the bailee by making an express contract between the bailor
and the bailee.

Q. Can a finder of goods sell the same? If yes then in what capacity?

POSITION OF FINDER OF GOODS

According to section 71, a person who find goods belonging to another and takes them into his custody,
is subject to the same responsibility as a bailee. Since the position of the finder of the goods is that of a
bailee he is supposed to take the same amount of care with regard to the goods as is expected of a
bailee under section 151. He is also subject to all the duties of a bailee, including a duty to return the
goods after the true owner is found. If he refuses to return, he could be made liable for conversion.
RIGHTS OF FINDER OF GOODS

Section 168 and 169 confer certain rights on the finder of goods.

[Link] OF LIEN: According to section 168, a finder of goods has no right to sue the owner for
trouble and expenses voluntarily incurred by him to preserve the goods and to find the owner.

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 He has, however, the right of particular lien in respect of those goods. He may retain the goods
against the owner until he receives compensation for trouble and expense voluntarily incurred
by him to preserve the goods and to find the owner

[Link] OF CLAIMING THE REWARD, IF ANNOUNCED BY THE OWNER :It has been noted above that
the finder has the right to retain the goods until he Is paid compensation for trouble and
expense voluntarily incurred by him to preserve the goods and find the owner. In addition to
that, where the owner has offered a specific reward for the return of goods lost the finder may
sue for such reward and also may retain the goods until he receives it.

If the goods have already been found voluntarily, and then the owner of the goods promises to
compensate the finder for his past voluntary services, the contract is binding and the owner is bound to
pay the promised amount.

• RIGHT TO SELL THE GOODS FOUND (SEC.169)

The finder of the goods has also been given the right to sell the goods found by him under certain
circumstances mentioned in section 169. Such a right is available to the finder of the lost goods
when the following conditions are satisfied:

1. If the owner of the goods cannot be found; or if he refuses to pay the lawful charges of the
finder, and

2. When the good is in danger of perishing its value; or when the lawful charges of the founder in
respect of the thing found amount to two-third of its value.

Q. What is meant by ‘Agent’ ‘Sub-Agent’ and ‘Principal’ under Indian Contract Act? Discuss the extent
of Agent’s authority. Is Consideration required for creation of an agency?

The person acting on behalf of the other is called an agent, and the person from whom the agent derives
authority to act is called the principal. The law of agency is based on the Latin maxim “qui facit per
alium, facit per se,” which means, “He who acts through another is deemed in law to do it himself“.
Agent and principal are defined under Section 182 of the Indian Contract Act, 1872. According to the
section “an agent is a person employed to do any act for another or to represent another in dealings
with third persons. The person for whom such act is done, or who is so represented, is called the
principal”. The competent agent is legally capable of acting for the principal vis-à-vis the third party.

According to section 184 any person can become an agent i.e. there is no need to have a contractual
capacity to become an agent. Therefore, a minor can also act as an agent. But the minor will not be
responsible to his principal. Different types of commercial agents have been identified under Indian law
like brokers, auctioneers, delcredere agents, persons entrusted with money for obtaining sales and
insurance agents.

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Section 191 of the Indian Contract Act, 1872 defines sub-agent. According to this section “a sub-agent is
a person employed by, and acting under the control of, the original agent in the business of the agency.”
The appointment of an agent may be done properly or improperly, which determines the relationship
between the principal and the sub-agent.

Section 188 of Indian Contract Act 1872: "Extent of agent's authority": An agent having an authority to
do an act has authority to do every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on a business has authority to do every lawful thing necessary for
the purpose, or usually done in the course, of conducting such business.

Illustrations
(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal
process necessary for the purpose of recovering the debt, and may give a valid discharge for the same.
(b) A constitutes B as his agent to carry on his business of a ship-builder. B may purchase timber and
other materials, and hire workmen, for the purpose of carrying on the business.

In Fergusion Vs. Uma Chand Bold (1905) Cal HC said that ‘A’ executes a power of attorney in favour of
‘B’ in running a silk factory, but the power of attorney did not authorized ‘B’ to borrow and if ‘B’
borrowed, it was stated to be an act in excess of his authority.

Section 189 of Indian Contract Act 1872: "Agent's authority in an emergency": An agent has authority,
in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be
done by a person of ordinary prudence, in his own case, under similar circumstances.

Illustrations
(a) an agent for sale may have goods repaired if it be necessary.

(b) A consigns provisions to B at Calcutta, with directions to send them immediately to C, at Cuttack. B
may sell the provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling.

According to Section 185Consideration is not necessary to create an agency. Generally an agent gets
commission for his services. If the agent promises to perform ant act for his principal without charging
any commission the agreement is valid even without consideration.

EXAMPLE: Alley promises to sell Beam’s house on his behalf. An agreement between Alley and Beam is
valid even without consideration

Q. Write a note on revocation of agency?

Agency can be terminated by following ways:

By Agreement

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On the basis that agency relationship is created by agreement between the principal and the agent, such
a relationship can also be brought to an end by mutual agreement between the parties, either in writing
or orally.

Termination by agreement may also occur if the agency relationship is terminated pursuant to the
provisions of the agreement itself. The following situations may arise in this context:

If the agreement provides for the appointment of the agent for a specified period of time, the agency
will come to an end automatically when that period of time expires.

If the agreement provides for the agency to terminate upon the occurrence of a specified event, the
agency will come to an end upon the happening of the specified event.

By the Act of Parties: An agency may be terminated by the acts of the either principal or the agent as
illustrated below:-

Performance by the agent: If an agent is appointed to accomplish a particular task or for a specific
purpose, when the task is accomplished by the agent or the specific purpose is attained, the agency will
terminate.

Revocation by the principal

The authority of an agent may be revoked at any time by the principal. However unilateral revocation
otherwise than in accordance with the provisions of the agency agreement may render the principal
liable to the agent for the breach of agency agreement.

Any word or conduct of the principal inconsistent with the continued exercise of the authority by the
agent may operate as revocation of the agency.

Revocation’s of the agent’s power by the principal may not automatically discharge the principal from
liability to a third party who is entitled to rely on the apparent authority of the agent on grounds of
representation by the principal of previous course of dealing with the agent’s before notice of
revocation is given to the third party .Therefore notice of revocation of an agent’s power should be
given to the third party as soon as possible.

Renunciation by agent

An agent is entitled to renounce his power by refusing to act or by notifying the principal that he will not
act for the principal.

Unilateral termination of the agency by the agent before he has fulfilled the obligations to the principal
under the agency agreement will render the agent liable to the principal for the breach of the agency
agreement such as payment of damages for the loss suffered by the principal.

By Notice

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If the agency agreement provides that the agency may be terminated upon either party serving on the
other written notice of a specified duration.

However, if the agency agreement does not contain any termination provision, the general rule is that
reasonable notice has to be given to the other party to terminate the agency.

By Operation of Law:-

An agency may terminate by the operation of law upon the occurrence of particular events:-

Where the party concerned is an individual:

• By death

• By insanity

• By bankruptcy

Where the party concerned is a limited company

• Winding up

• Receivership

Frustration of the contract of agency.

Q. What is ratification? What is the effect of ratification? How can a ratification be made?

Agency by Ratification

Subsequent adoption of an activity is called ratification. Soon after ratification, the person who has done
the activity becomes agent and that person who has given ratification becomes principal.

Ratification is of two types. Namely; •

Express Ratification and

• Implied Ratification.

The ratification where there is wording and expression is called express ratification. For example: With
A`s direction, B has purchased goods for the sake of A from C. Thereafter, A has given his Support to B`s
activity, it is called ratification and now A is principal and b is agent.

The ratification where there is no expression is called implied ratification. Here the mode of behavior of
the party indicates that support is given to activity concern. For example: Mr. Q has P`s money with him.

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Without P`s direction Q has lent that amount to R. Thereafter, R pays interest directly to P and P has
taken the amount of interest. It indicates that P has given his support to Q`s activity.

Essentials of Valid Ratification:

1. The person, who is going to give ratification, must be in existence at the time of activity. Let us
consider pre-incorporation contracts made by promoters. Company comes into existence on the
date of incorporation. Therefore company is not in existence at the time of pre-incorporation
contracts. If company gives ratification to pre incorporation contracts, it is not valid ratification.
Hence to pre-incorporation contracts, promoters are personally liable.

2. The person who is going to give ratification should have capacity to contract, at the time of
activity as well as at the time of ratification. In ArmuganVsDorai Singh the minor obtains loan
from money lender and executes a deed. Before repayment of debt, he becomes a major and
executes another bond. Court decides that the second bond also is not valid because the person
who has given ratification has no capacity to contract at the time of activity i.e. at the time of
getting loan.

3. Ratification should be given within reasonable period after the activity the concept of
reasonable period depends upon nature of the situation.

4. Ratification must be absolute. To entire activity ratification is to be given. Partial ratification

carries no validity.

5. The fact of ratification must be communicated to all parties in connection with the activity.

6. Ratification attains validity only when it is given with full knowledge of facts relating to the
activity.

7. The activity which is going to be ratified must be a lawful activity. For example: for the sake of A,
B has murdered C. If A gives his support to B`s activity, it is not valid ratification.

8. The person who is going to give ratification should have right to do such activities. For example:
If company gives ratification to an Ultra-vires activity it is not valid.

9. Ratification relates back to date of activity. Though ratification takes place after the date of
activity, it will be assumed that ratification is given on the date of activity.

10. Ratification should not lead to breach of contract. In other words ratification should not be
harmful to third party. For example: There is a rental agreement between A and B according to
which three months’ notice is needed at the time of vacation of house. On one day C, A`s son,
has asked B to vacate the house on that day itself. A has given his support to C`s activity. It is not
valid ratification because it leads to breach of rental agreement and at the same time it is
harmful to B.

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Effects of Ratification

The effect of ratification is to put the principal, agent, and the third party into the position that they
would have been if the agent’s acts had been authorized from the beginning. Ratification, in fact, relates
back to the time of the unauthorized act, and not to the date when the principal ratified the said act.
The doctrine of relating back is based on the assumption that the unauthorized act is not a nullity; if it
were, ratification itself would be ineffective either because a nullity cannot be ratified or, the principal
himself could not have validly done the act in question, when it took place.
Ratification: The express or implied affirmation of a previously unauthorized contract made by a
purported agent.

(1) The purported agent must have acted on behalf of the principal who subsequently ratified the
action;

(2) The principal must know all material facts involved in the transaction;

(3) The agent's act must be affirmed in its entirety by the principal;

(4) The principal must have the legal capacity to affirm the transaction both

(a) at the time the agent acts, and

(b) at the time the principal ratifies;

(5) The principal must affirm before the third party withdraws from the transaction;

And (all of this stuff must exist!)

(6) The principal must observe the same formalities when he or she ratifies the act as would have
been required to authorize it initially

Q. Discuss the ways in which relationship of an agency arises or created?

An agency may be created in any of the following ways:

1. Express agency: An express agency may be created orally by words of mouth or in writing (Sec.
187). The most common form of written agency, you might have often heard of, is power of attorney,
under seal, popularly called P.O. A. Under such authority, an agent is authorized to bind his principal by
any contract under seal, i.e., a written and stamped document.

2. Implied agency: An agency is said to be implied when it is to be inferred from the circumstances
of the case. An implied agency does not arise out of a contract, but is implied from the acts of the

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parties, or the ordinary course of dealing, usage or custom of the trade, etc. The agent is deemed to be
acting on behalf of the principal.

Example:

A owns a shop in Meerut and he himself lives in Delhi. A visits his shop occasionally. The shop is
managed by B who is in the habit of ordering goods from C in the name of A for the purpose of the shop,
and of paying for them out of A's funds and with A's knowledge. B has an implied authority from A to
order goods in the name of A for the purpose of the shop.

The implied agency includes agency by estoppel, agency by holding out and agency by necessity.

(i) Agency by estoppel: Where a person, by his conduct or words spoken or written, willfully leads
another to believe that a certain person is acting as his agent, he is estopped later on from denying the
truth of the fact that such a person is dealing as his agent.

Example:
A tells B in the presence and within the hearing of C that he (A) is C's agent. C does not object to this
statement and keeps quiet. Later on B enters into a transaction with A bona fide believing that A is C's
agent. C is bound by this transaction and will be estopped from denying that A was his agent, even
though A was not in reality his agent.

It will be noticed from the above example that C by his conduct has willfully led B to believe that A is C's
agent. Now C will be estopped from denying the truth of the statement that A is C's agent. Hence C is
liable although in reality, A is not C's agent.

(ii) Agency by holding out: It is a corollary of the first rule. In the case of agency by estoppel, the role of
the principal is passive while is the case of agency by holding out, the role of the principal is rather active
and somewhat affirmative or positive.

Example:

A allows his servant habitually to buy goods on credit from local dealer and pays for them.

One day he terminated the services of his servant without any notice to the dealer. The servant
purchased goods worth Rs. 100 on credit, as usual, after his termination. A is liable for the purchase
made by his servant.

(iii) Agency by necessity: Necessity in certain cases forces a person to act as an agent of the other, even
without his consent (i.e., consent of the other person). In such a case, the law implies agency by
necessity. The law confers authority upon a person to act as an agent of the other in times of necessity
or emergency to save his property, etc. where it is impossible to get the formal consent of the principal.
In that case, the law implies the consent of the principal.

Example:

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A sent 10 tons of fish by a truck to Agra. On the Way, the truck met with an accident. The fish were in
danger of perishing so the truck driver sold the fish. The truck driver has become A's agent by necessity.

Ratification Relates back to date of Contract:

Ratification relates back to the date of the original transaction or ratification is tantamount to prior
authority. In simple words, ratification would mean as if the agent had authority to enter into
transaction at the time of making the contract (Sec. 196). In other words the transaction would be valid
not from the date of ratification but from the date the transaction was made.

Example: The managing director of a company, without its authority accepted an offer by L. L withdrew
his offer later on. But the company ratified the acceptance. Held, L was bound by the ratification as it
related back to the time of acceptance and, therefore revocation by L was not valid [Bottom Partners v.
Lambert]

Q. Discuss Rights, Duties and Responsibilities of an Agent.

Section 182 of the contract act defines, “An agent is a person employed to do any act for another or to
represent another in dealings with third persons. The person for whom such act is done, or who is
represented, is called the principal”.
The function of an agent is essentially to bring about contractual relations between the principal and
third parties. An agent has certain rights, duties and liabilities towards the principal and third parties
depending upon the nature of business. These rights, duties and liabilities can be generated as:-

Rights of an Agent

i) Right to Receive Remuneration – The agent is entitled to receive an agreed remuneration or

reasonable remuneration unless otherwise agreed upon. An agent has a right to claim his
remuneration on completion of his work, even if the contract never materializes on account of
breach. But, if an agent is found guilty of misconduct or fraud, etc. he has no right over
remuneration. In addition, he is entitled or liable to compensate the principal for any such loss.

ii) Right of Retainer: An agent has the right to retain any sum, received by him on behalf of his principal
from the third parties, which may fall due as part of his remuneration, or advances or expenses
incurred in the general conduct of business.

iii) Right of Lien: An agent has the right to retain any movable or immovable property, papers or goods
of the principal received by him, until the amount of commission due to him is received. This kind of
alien is a ‘Particular lien’ which will end as soon as the possession is cost. However, by a special
contract such a lien can be extended to a ‘General Lien’.

iv) Right to be Indemnified Against Consequences of Lawful Acts: An agent has also the right to be
indemnified against the consequences of all lawful acts done by him in exercise of authority

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 conferred upon him. This right of the agent is obvious for the simple reason that an agent is a
representative of his principal.

v) Right to be Indemnified Against Consequences of Acts Done in Good Faith: An agent has the right
to be indemnified against all acts done by him in utmost good faith ,where one person employs
another to do an act and the agent does the act in good faith, the employer or principal is liable to
indemnify the agent.

Eg.: A employs B to sell the goods in A’s possession B sells the goods unaware of the fact that C is the
actual owner of the goods. C sues B for the recovery of the value of goods. In this case B has a right to be
indemnified by A and to rum burse the expenses incurred by B is the liability of A.

vi) Right to Compensation: The agent has a right to be compensated for injuries sustained by him due
to the principals neglect or want of skill. However, the principal is not liable for any compensation
for the injuries caused by the own neglect of the agent.

vii) Right of Stopping of Goods in Transit: An agent has a right to stop the goods in transit if:-

a) He has bought goods either with his own money or by incurring a personal liability for the price on
behalf of the principal,

b) The principal has become insolvent of/and

c) When an agent, e.g. delCredere agent is personally liable to his principal to his principal for the price
of the goods sold, he can exercise the unpaid seller’s right and stop the goods in transit on the
insolvency of the buyer.
viii) Agent’s Right To do All Lawful Things: A person who is appointed as an agent has the right to do
all lawful things which fall under the usual course of business.

ix) Right in Emergency: An agent has a right to do all such acts which could protect his principal
from loss in case of emergency as would have been done in his own case, in a similar situation.

x) Right to Appoint Sub-Agent & Substitute Agent: An original agent has a right appointed would
be responsible to the original agent, except in case of fraud, etc. Where an agent has an express or
implied authority he may name another person as substitute agent to act for his principal.

xi) Right to Renounce His Agency: An agent is in full right to renounce his agency by giving a
reasonable notice to his principal.

xii) Right to Receive Compensation for Remature Revocation: If there is an express or implied
conduct on the part of the agency that the agency would continue for a specified period and if there is
previous revocation without any reasonable cause, the agent would have a right to compensation in
such a case.

Duties and Responsibilities of an Agent

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i) Duty of Follow Principal’s Directions of Customs: The first and the foremost duty of an agent is
to act within the scope of authority conferred upon him and act according to the directions given by his
principal. In the absence of any such instructions the agent should work according to the customs
prevailing in the agency. If he acts otherwise he is liable to make good the loss caused by him.

ii) Duty to Carry Out Work With Reasonable Skill & Diligence: The agent must conduct the
business with reasonable skill and diligence unless otherwise specified i.e. if the principal has notice of
want of skill. In general the agent is expected to work in the manner as he would do in his own name.

iii) Duty to Render Accounts:It is the duty of the agent to maintain proper accounts of his
principal’s property and render it to him on demanded, or periodically if so agreed upon.

iv) Duty to Communicate: It is the duty of the agent to communicate to the principal with full
diligence any difficulty that may arise from time to time. He should obtain proper instructions from the
principals, before taking any steps in facing the difficulty. But, if due to certain reasons he is unable to
communicate the difficulty, he has full authority to take all reasonable steps to prevent loss.

v) Duty Not to deal on his own Account: It is the duty of the agent not to buy from or sell goods to
the principal in his own account, which he is actually asked to sell or buy on his principal’s behalf,
without obtaining prior consent of his principal, all material facts being disclosed.

vi) Duty not to make any profit out of his Agency Except his Remuneration: An agent stands in a
fiduciary relation to his principal and therefore he must not make any secret profits from the agency. He
is authorized only to a fixed remuneration or commission as the case may be. If the principal gets the
notice of any such secret profit he can either recover the amount of profit from the agent, refuse to pay
his remuneration, terminate the agency without prior notice, file a suit against his agent or can even
repudiate the contract entered by his agent with the third party.

vii) Duty on Termination of Agency by Principal’s death or Insanity: When an agency is terminated
due to the death or insanity of his principal, it is the duty of the agent to take all steps to protect and
preserve all the interests entrusted to him.
viii) Duty not to delegate His Authority: It is the duty of an agent not to do his work i.e. to perform
the work which he has expressly or impliedly undertaken to perform personally except of specifically
agreed upon.

ix) Duty not to use the Information Obtained in the course of the Agency Against his Principal: It
is the duty of the agent not to use the information obtained in the course of business against his
principal. If he does so, he must compensate the loss incurred by his principal.

x) Duty to Pay Sums Received for the Principal: It is the duty of the agent to pay all such sums to
his principal which he may have received for him. He has the right to deduct any amount which may be
outstanding in this account like remuneration, etc.

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xi) Duty not to set up an Advance Adverse Title: When an agent receives goods from his principal
or other sources, on behalf of the principal, it is the duty of the agent not to set up on adverse title i.e.
his own title or title of third parties to it. If he does so, he can be held liable.

xii) Duty in Naming an Agent for his Principal: Selecting an agent for his principal, an agent is bound
to put in same amount of discretion, as he would do in his own case, under similar circumstances.

Liabilities of an Agent

i) Liabilities in Respect of Damages and Misconduct: In case of breach of contract by an agent, he

is liable to pay damages. If he is found guilty of misconduct, the principal can hold back his
remuneration for that part of business which he has mis-conducted.

ii) Personal Liability of an Agent where Fixed by Trade Custom or Usage: If the trade custom or
usage in business specifies the personal liability of an agent, then hill be held personally liable for his
misconducts, until unless specified.

iii) When an Agent Expressly Agrees to be Liable: When the contract expressly specifies that the
agent shall be held personally liable in case of breach of contract, then he can be held liable personally.

iv) Liability for his wrongful Acts: An agent is held liable personally when he acts beyond his
authority or commits fraud or misrepresentation.

v) Liability for the Acts of Sub-agents: When an agent appoints a sub-agent, without having the
authority to do so, hill be liable for all acts of the sub agent, both to the principal and the third party.

Q. Who is a ‘del credere agent’? Distinguish between sub agent and substituted agent. (2013) A del
credere is an agent who guarantees the solvency of third parties with whom the agent contracts on
behalf of the principal. As a token for the guaranty given, the agent receives an additional commission
for sales. The promise of such an agent is almost universally held not to be within the statute of frauds.
Such an agent assumes the position of a surety who is liable to his principal if the vendee make default.
Such agents are commonly referred to in English law. They are also known as delcredere factor.

DIFFERENCE BETWEEN SUB AGENT AND SUBSTITUTED AGENT

Sub-agent
1. A sub-agent is appointed by the agent and as such he is under the control of the agent.

2. A sub-agent acts under the agent.

3. There is no privy of contract between the subagent and the principal.

4. A sub-agent cannot ask for his remuneration from the principal.

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5. The principal cannot hold the sub-agent liable, except in case of fraud.

6. An agent is liable for the agent acts of the sub-agent.

Substituted Agent

1. A substituted agent is only named by the agent but is under the control of the principal.

2. A substituted agent acts independently for his principal.

3. There is contractual relationship between the substituted agent and the principal.

4. A substituted agent can ask for his remuneration from the principal.

5. The principal can hold the substituted agent liable.

6. An agent is not liable for the acts of the substituted agent.

INDIAN PARTNERSHIP ACT 1932

Q. Define partnership. Discuss true test of partnership. What are the rights of partner?
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Definition Of Partnership:

Section 4 of the Indian Partnership Act ,1932 defines ‘Partnership’ as: ‘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 ’

Essentials Of Partnership : According to Section 4, the following essentials are necessary to constitute a
‘Partnership’.

1. There should be an agreement between the persons who wants to be partners.

2. The purpose of creating partnership should be carrying on of business

3. The motive for the creation partnership should be earning and sharing profits.

4. The business of the firm should be carried on by all of them or any of them acting for all, i.e., in
mutual agency

When all the above elements are present in certain relationship that is known as ‘partnership’. Persons
who have entered into partnership with one another are called individually ‘partners’ andcollectively ‘a
firm’ and the name under which their business is carried on is called the ‘ firm name’.

Elements Of ‘Partnership’:

1. There must be an agreement entered into by all the persons concerned.

2. The agreement must be to share the profits of business; and

3. The business must be carried on by all or any of the persons concerned, acting for all.

Illustrations:
a) A and B buy 100 bales of cotton, which they agree to sell for their joint account. A andB are partners
in respect of such cotton.

b) A and B buy 100 bales of cotton, agreeing to share it between them. A and B are not partners.

c) A agrees with B, a goldsmith , to buy and furnish gold to B , to be worked on by him and sold , and
that they shall share in the resulting profit or loss. A and B are partners.

TRUE TEST OF PARTNERSHIP

According to Sec.4of the Indian Partnership act, 1932 “Partnership is the relationship between persons
who have agreed to share the profits of a business carried on by all or any of them acting for all.”
Generally a partnership consists of three essential elements:

(a) There must be agreement between partners.

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(b) The agreement must be to share the profits of the business.
(c) The business must be carried on by all or any of them acting for all.

In order to determine the existence of partnership between a group of persons, agreement between
persons must be taken into consideration. If the agreement is to share the profits of a business, and the
business is carried on by all or any of them acting for all, there is partnership otherwise not.

But if there is no agreement or the agreement is such as it does not specifically speak of partnership, the
real relation between the parties should be taken as base in determining the existence of partnership
(sec.6).
The existence of a partnership cannot be determined on the basis of expressed intentions. In
Raghunathan vs. Hormusjee[51 Bom 342], it was held that mere use of the word ‘partner’ does give rise
to a partnership where there is none. The existence of a partnership is determined by the actual or real
relationship between the so called partners of the firm as inferred from all relevant facts. It depends
upon the intention of the parties as shown by their agreement or conduct which gives rise to an implied
agreement or both. Mere common interest does not make a person a partner. In the same manner,
sharing finances does not mean two people are partners.

The real relation between the parties is to be determined from all the relevant facts, i.e., the written or
verbal agreement, surrounding circumstances at the time when the contract was entered into, conduct
of the parties and other relevant facts, e.g., books of accounts, correspondence, evidence of employees,
etc. These facts are to be considered collectively not individually. In effect it is the substance of the
facts, not the form that has to be looked into in determining the real relation between the parties. There
may be cases where the parties expressly state in a document that they are not partners but they may
turn out to be partners in the eyes of law, when all the facts are taken into account. Again, a statement
by the parties in a document that they are partners may not necessarily constitute them partners in law.

MERE SHARING OF PROFIT IS NOT PARTNERSHIP

The sharing of profit is an essential element to constitute a partnership. But, it is only a prima
facieevidence and not conclusive evidence. The receipt of a share of the profits of a business by a
person or a payment contingent upon the earnings of profits or varying with the profits earned by
business, would not by itself make him a partner with the persons carrying on the business. Sec. 6
enumerates cases where there is sharing of profits but the partnership relation does not exist. These
cases are:

(a) Joint owners of property sharing profits or gross returns arising from the property do not become
partners.

(b) Where a lender lent money to persons engaged or about to engaged in business, and receives a
rate of interest varying with the profit.

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(c) Where a servant or agent engaged in a business and receives his remuneration as a share of profit.

(d) Where the widow or child of a deceased partner receives a portion of the profits.
(e) Where a person has sold his business along with its goodwill and receives a portion of the profits in
consideration of the sale.

Although the sharing of profits of a business is a strong test of partnership, yet the existence of relation
of partnership must depend upon the real intention and conduct of the parties.

In Cox vs. Hickman [1860 8 HL Cas 268], it was decided that of all the essentials of a partnership, sharing
profits is an important criterion but is not conclusive. The true test of determining the existence of
partnership is mutual agency. If one partner can bind the other partners and the firm by his actions and
is also, in turn, bound by the actions of the other partners, only then it can be said that a partnership
exists.

Example: A is an assistant in a firm of brokers and he receives a share in the profits over and above his
salary. At times, A also signs some letters and documents on behalf of the firm. Nevertheless, A is only
an agent of the firm and does not become a partner merely because he received a share in profits. This
illustration is similar to the case of McLaren Morrison vs. Verschoyle[1901 6 CWN 429].

Example: A is a doctor who sold his medical practice and its goodwill to B. They enter into an agreement
under which A will help B by introducing him to his patients. In turn, A will get a share of profits. Here, A
and B are not partners. This illustration is similar to the case of Pratt vs. Strick[1932 7 Tax Cas. 459]

Rights of Partners:

1. Right to take part in the conduct of the business [section 12(a)|. subject to contract between
the partners, every partner has a right to take part in the conduct of the business of the firm. this right
cannot be taken away except by a contract. unequal capital contribution or no capital contribution is no
bar to his right. it is sometimes provided by express agreement that this or that partner will not take
active part in the conduct of the business and also for payment for salary to managing or active partner.

2. Right to be consulted [section 12(c)|. subject to contract between the partners, any difference
arising as to ordinary matters may be decided by a majority of the partners, and every partner shall have
the right to express his opinion before the matter is decided by the majority of the partners. this power,
though not in itself of a judicial kind, is subject to the rule of natural justice. every partner must have an
opportunity of being heard, and the decision must be made in good faith with a view to collective
interest of the firm. further, no change may be made in the nature or place of the business without the
consent of all the partners. thus in the cases of fundamental matters, the consent of all the partners
becomes necessary.

3. Right to have access to firm's books [section 12(d)]. Subject to contract between the partners,
every partner has a right to have access to and to inspect and copy any of the books of the firm. the
term 'books', used is section 12 (d), is more comprehensive than the term 'accounts' used in section 30

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(2) of the act. As such, no exception can be made to any books of the firm, even though a particular
book may contain business secrets. This right can be exercised by the partner personally or by an agent,
who is not objectionable. However, the extracts of the books should not be used by a partner for
purposes hostile or injurious to the firm after he has ceased to be a partner.

4. Right to share the profits [section 13(b)|. subject to contract between the partners, the
partners are entitled to share equally in the profits earned, and shall contribute equally to the losses
sustained by the firm. since this provision is subject to the contract between the partners, it is open to
the partners to divide the profits and losses of the firm in a different ratio. the contract may provide that
a particular partner will bear all the losses of the business. the contract to the contrary may even
provide that one of the partners is to have a fixed salary.

5. Right to interest (section 13(c) and section 13(d)|.Unless otherwise agreed, the partners are
not entitled to any interest on their capital. Section 13(c) provides that where a partner is entitled to
interest on the capital subscribed by him such interest shall be payable out of profits. Section 13(d)
provides that subject to contract between the partners, a partner making for the purposes of the
business, any payment or advance, beyond the amount of capital he has agreed to subscribe, is entitled
to interest thereon at the rate of six per cent per annum from the firm. A partner has the right of
interest on advances whether there are profits or not. But a partner is not entitled to interest after the
date of dissolution. The contract may provide a different rate of interest. Subject to contract between
the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the
business [section 13 (a)].

6. Right to indemnity (section 13(e) |.Subject to contract between the [Link] firm shall
indemnify a partner in respect of payments made and liabilities incurred by him—

(i) in the ordinary and proper conduct of the business, and (ii) in doing such act, in an emergency, for the
purposes of protecting the firm from loss, as would be done by a person of ordinary prudence, in his
own case, under similar circumstances.

7. Right to use the property of the firm for the purposes of the business of the firm (section 15|.
subject to contract between the partners, the property of the firm shall be held and used by the
partners exclusively for the purposes of the business. if a partner uses the property of the firm for his
own purposes, he will be liable to account to the firm for the profits, if any, that he may make. a
contract of partnership is uberrimaefideii.e., a contract of absolute good faith.

8. Rights of an outgoing partner. The rights of an outgoing partner have been explained in a
subsequent chapter. These rights are:

(a) Right to carry on competing business [section 36(1)]; and

(b) Right in certain cases to share subsequent profits [section 37].

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Instead verses. Salt, (1825) 3 bing 101, a partner without the authority of the other partner, submitted a
dispute to arbitration. The award passed on such submission was held not binding on the other partner
as the submission to arbitration ordinarily does not come within the scope of a partner's authority so as
to bind the other partners. Similar was the decision in venkatachellamchettyverses. ratnanathan, the
partner was not allowed to claim indemnity in the circumstances of the case.

Inthomas verses atherton, (1878) 10 ch d 185, the managing partner of a colliery worked beyond the
boundaries of the colliery without making proper inquiries. The adjoining owner gave a notice to the
managing partner to that effect. Even after receiving the notice from the adjoining owner that he was
committing a trespass, he recklessly continued such workings without consulting his co-partners, even
though he had a bonafidebelief that the adjoining owner had no title to the disputed areas. The
adjoining owner brought an action before the arbitration for tress pass and awarded damages of £
6,000. The co-partners refused to contribute. The managing partner filed a suit against them. The court
of appeal held that the managing partner alone was liable for damages.

Inmahadeo verses patelverses. ganoochangoopatel, air 1925 bom 324, a partner was not allowed to
recover from his co-partner a part of the losses suffered by the firm because they were due to his own
failure to utilize the boats of the firm for plying purposes.

Insidhunarayanaiyangarverses. ramaswami, ilr 32 mad 203, it was held that the right to indemnity is
not lost by the dissolution of the firm and it is immaterial whether there is or has been no settlement of
accounts.

Duties of Partners:

1. Absolute duties

Section 9 and 10 reproduced above, have imposed certain duties which cannot be varied by agreement
between the partners. These duties are discussed below:—

1. Duty to carry on the business to the greatest common advantage and to be just and faithful to
each other. Section 9 provides that partners are bound to carry on the business of the firm to the
greatest common advantage and be just and faithful to each other. Duty to carry on the business to the
greatest common advantage and the duty to be just and faithful to each other are two sides of the same
coin, which is the duty of good faith. All the endeavors of a partner must be to secure the maximum
profits to the firm. He should not try to make a personal profit for himself at the cost of his co-partners.
Duty to carry on the business to the greatest common advantage must be read along with the provisions
of section 16. If a partner makes any personal profit, he has to account for it to the firm, as making
personal profit would be acting not to the greatest common advantage.

2. Duty to render true accounts and full information affecting the firm. According to section 9 a
partner is bound to render true accounts and full information of all things affecting the firm to his co-
partners or their legal representatives. In other words the partners must make a full and frank disclosure
of facts affecting the affairs of the firm to each other. The duty to render accounts is not confined to
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submitting statements of accounts, but it includes the duty to handover to the firm the balance of the
moneys of the firm which have come in the hands of a partner. He must also be ready to explain to his
other partners the true accounts and produce vouchers relating to everything coming into his hands.

If a partner is in possession of more information about the things affecting the firm, he should disclose it
to his co-partners. A leading case on this point is law verses law, (1905) 1 ch. 140. In this case a partner
sold his share in the assets of the firm to his co-partner. Subsequently, he (the vendor) discovered that
material information had been concealed from him. Although he was entitled to set aside the sale, he
agreed to modify the original bargain. It should be noted that after electing to modify the original
bargain, he is bound by that election, and neither he nor his representative after his death can repudiate
the sale.

3. Duty to indemnify for fraud. Section 10 provides that "every partner shall indemnify the firm
for any loss caused to it by his fraud in the conduct of the business." the section makes the liability, to
indemnify' for fraud absolute and not subject to contract, i.e. partners are not allowed to contract
themselves out of liability for fraud. though partners may agree amongst themselves that the extent of a
partners liability to his co-partners is to be limited or that he is not liable to compensate them for loss
occasioned by his wrongful act, omission, neglect, want of skill, misconduct or negligence, but it is not
open to them to contract themselves, or any one of them, out of liability for loss occasioned to the firm
by fraud.

The purpose of section 11 is to induce partners to deal honestly with the customers of the firm. If for
example, a partner in the ordinary course of the business of firm, commits a fraud upon a customer of
the firm, for which the firm (including the innocent partners) is held liable, the firm is entitled to recover
indemnity from partner guilty of the fraud. In campbell verses campbell(1834) 12 sh (city of seas) 573,
scot, the managing partner of a distillery purchased certain quantity of illicit whisky on behalf of the
firm. The plaintiff partner, who did not take part in the conduct of the business of the firm, had no
knowledge of the purchases. The firm had to pay penalties for purchase of illicit whisky. They were held
liable jointly and severally to indemnify the plaintiff against the amount so paid and interest on it.

2. Duties subject to contract to the contrary

The following duties of the partners as laid down in the act are applicable in the absence of a contract to
the contrary:

1. Duty of due diligence. section 12 (b) provides that subject to contract between the partners,
"every partner is bound to attend diligently to his duties in the conduct of the business." diligent
functioning means working with careful effort and absence of carefulness is negligence. But section 13
provides liability only where there is willful negligence.

2. Duty to indemnify for wilful neglect. Section 13 (f) provides that subject to contract between
the partners, "a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the
conduct of the business of the firm". Unlike the duty to indemnify for fraud under section 10, a partner
can contract himself out from this duty. To attract clause (f) the loss caused to the firm must be by
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partner's wilful neglect. Mere neglect on the part of partner, i.e. a mere inadvertence or accident, is not
sufficient to attract application of this clause and the loss caused has to be due to wilful neglect, i.e. a
deliberate, intentional and purposeful commission or omission of a certain act. In case such wilful
neglect amounts to fraud provisions of section 10 are attracted.

3. Duty to work without remuneration. According to section 13 (a), subject to contract between
the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the
business.

4. Duty to contribute to losses. Section 13(b) providers that subject to contract between the
partners, the partners are bound to contribute equally to the losses sustained by the firm.

5. Duty to apply the property of the firm for purposes of the business of the firm. section 15
provides that "subject to contract between the partners, the property of the firm shall be held and used
by the partners exclusively for the purposes of the business." thus it is a duty of the partners that the
property of the firm shall be held and used by them exclusively for the purposes of the business of the
firm. If a partner uses the property of the firm for his personal purposes he will be accountable to the
firm as per section 16, for any private advantage obtained by him. However, the failure of the partner to
submit an account of use of partnership property for personal use will not make him liable for criminal
breach of trust under section 409 of the Indian penal code. In yeljiraghavjiverses. state of
maharashtra, air 1965,
SC 1433, a partner who was assigned the work of realizing the dues of the partnership, failed to deposit
in bank some collections, the supreme court held that he was not liable for criminal breach of trust
under section 409, IPC as he was authorized by other partners to spend the money for the business of
the firm.

6. Duty to account for personal profits. Section 16 provides that subject to contract between the
partners,—

(a) If a partner derives any profit for himself from any transaction of the firm, or from the use of the
property or business connection of the firm or the firm name, he shall account for that profit and pay it
to the firm;

(b) if a partner carries on any business of the same nature as and competing with that of the firm,
he shall account for and pay to the firm all profits made by him in that business.

Thus the section lays down the following two of the most important duties. They are: (a)

Duty to account for secret profits, and

Q. What is Partnership deed? What is partnership at will? Is registration compulsory for a partnership
firm? Discuss the effect of non-registration of a firm
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The document in which the respective rights and obligations of the members of a partnership are set
forth is called a ‘partnership deed’. It should be drafted with care and be signed by all the partners. It
must be stamped in accordance with the Indian Stamp Act.

The Deed should cover the following points:

(i) The name of the firm and the names and addresses of partners who compose it.

(ii) Nature of business and the town and place where it will be carried on.

(iii) Date of commencement of partnership.

(iv) The duration of partnership.

(v) The amount of capital to be contributed by each partner and the methods of raising finance in
future if so required.

(vi) The ratio of sharing profits and losses.

(vii) Interest on partners’ capital, partners’ loan, and interest, if any, to be charged on drawings.

(viii) Salaries, commissions etc., if any, payable to partners.

(ix) The method of preparing accounts and arrangement for audit and safe custody of cash etc.

(x) Division of task and responsibility, i.e., the duties, powers and obligations of all the partners.

(xi)Rules to be followed in case of retirement, death and admission of a partner.

(xii) Expulsion of partners in case of gross breach of duty or fraud.

(xiii) Can a partner carry on a competing business or any other business whether competing or not.
Section 11 (2) clearly provides that the Deed may provide that a partner shall not carry on any
business other than that of the firm while he is partner, notwithstanding anything contained in
Section 27 of the Indian Contract Act where agreements in restraint of trade are void.

(xiv) The circumstances under which the partnership will stand dissolved.

(xv) Arbitration in case of dispute among the partners.

The terms laid down in the Deed may be varied by consent of all the partners, and such consent may be
expressed or may be implied by a course of dealing [Sec. 11(1)].

Partnership–at–will: Defined under section 7 of Indian Partnership Act, 1932

Partnership-at-will is a partnership which is formed to carry on business without specifying any period of
time. The life of such a partnership continues as long as the partners are willing to continue it as such.
The partnership can be terminated, if any partner notifies his desire to quit.
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Section 7 provides that where there is a provision in the contract for the duration of partnership, the
partnership is not at will. Similarly, if there is a provision in the contract for the determination of
partnership, it is not partnership at will. Thus section 7 recognizes two exceptions to the partnership at
will.

The duration of partnership can be expressly provided in the contract or it may be implied from the
conduct of the parties. The same principle applies to a case determination.

Inudumanverses. aslum, (1991) the partnership deed provided that the partnership was to continue till
there were two partners. TheSupreme Court held that this was a provision as to duration and therefore,
the firm was not "at will". Therefore, a suit for dissolution on the basis of notice was not maintainable.

Inkarmuthuthiagarajanchettiarverses. emmuthappachettiar, the partnership deed provided that in

case of death or retirement of a partner his legal heirs would be admitted on the same terms; that the
death would not dissolve the firm and the same would be carried on by the remaining partners along
with legal heirs; that retirement would require six months' notice; that on retirement etc. there would
be no valuation of assets and the outgoing partner would get only the amount standing to the credit
side of his account at the time. TheSupreme Court held that the partners never intended that the
partnership be dissolved at the sweet will of any of the partners, rather their intention was that the
business should continue as long as possible, notwithstanding death or retirement of the partner.

Section 32(l)(c) of the act provides that a partner may retire where the partnership is at will, by giving
notice in writing to all other partners of his intention to retire. Section 43(1) provides that where the
partnership is at will, the firm may be dissolved by any partner by giving notice in writing to all other
partners of the intention to dissolve the firm. Section 43(2) provides that the firm is dissolved as from
the date mentioned in the notice as the date of dissolution or, if no date is mentioned, as from the date
of communication of the notice.

Innarayanlalbansilalpittiverses. tarabaimotilal, (1970), the partnership business, was agreed to be for

two years; whether this was extended for another three years or whether there was an agreement
under which one partner was to pay out the other, over this question the trial court dismissed the suit,
the high court reserved it and the supreme court restored the order of the trial court. It was held that
there was no agreement to extend the partnership for the next three years.

Ingobardhanchakrabortyverses. abanimohan, a firm formed for obtaining a license for running a

cinema hall has been held to be partnership at will.

REGISTRATION OF A FIRM: In India, there is no need to register a partnership deed. This is the short
answer, as specified under part VII of the Indian Partnership Act, 1932

It is optional for the firm to get itself registered or not. However, Section 69 puts down certain
disabilities to a non-registered firm which normally forces the partners the partners to get the firm
registered. The effects of non-registration are as follows:

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(a) No suit by a partner against other partners or firm – a partner of an unregistered firm cannot
sue the firm or any partner of the firm to enforce a right arising from the contract or conferred by the
Partnership Act. He can do so only if the firm is registered and the person suing is shown as a partner in
the register of firms.

(b) No suit against any third party – an unregistered firm cannot sue a third party to enforce a right
arising from a contract. The firm can only do so if the firm is registered and the person suing is shown as
a partner in the register of firms.

(c) No right to counter claim or to claim setoff – an unregistered firm or any partner thereof
cannot claim setoff in the proceedings instituted against a firm by a third party to enforce a right arising
from a contract. Setoff means a claim by the firm which would reduce the amount of money payable to
the claimant.

(d) Arbitration proceedings – in Jagdish Chandra Gupta Vs. Kajaria Traders (India) Limited it was
held that arbitration proceedings were barred if the firm was unregistered.

In halidrambhujiwala verses anantkumardeepakkumar, it was held that the handicap caused by section
69 can be overcome by getting the firm registered before the suit is filed. It cannot be rectified by
subsequent registration. A fresh suit will have to be filed after registration provided that is still within
the period of limitation.

In hind trading and mgs. co. verses didi modes (p) ltd., it was held that if the reconstitution of the firm is
notified to the registrar, the firm continues to enjoy the status of a registered firm. Section 69(2) is also
not applicable in case of rights arising independently of contract, i.e., they remain enforceable.

In virendra dresses verses varinder garments, an action was instituted by an unregistered to restrain the
defendant firm committing an infringement of the firm's trade mark. It was held that the suit was
maintainable.

In padamsinghjain verses chandra brothers, it was held the rights conferred on a landlord by a tenancy
legislation are statutory rights and where the landlord is a partnership firm it can bring a suit for the
eviction of a tenant on a statutory ground whether the firm is registered or not.

In sharadvasantkotak verses ramnilalmohanlalchawla, (1948), section 69 (2-a), as amended in the

state of Maharashtra, requires two conditions before a partner can sue for dissolution of a firm and for
accounts:1. the firm must be registered.
2. The person suing is or has been shown in the register of Firms as partner in the firm.

Non registration of the firm however, does not affect the following rights:

(i) The right of a third party to sue the unregistered firm or its partners.

(ii) The right of a partner to sue for dissolution of a firm or for accounts of a dissolved firm or any
right to realized the property of the dissolved firm.
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(iii) The Power of an official assignee or court receiver to realize the property of an insolvent partner.
(iv) The right of a firm or partners of a firm having no place of business in India.

(v) The right of an unregistered firm to enforce a right arising otherwise then out of a contract.

(vi) One partner can bring a suit for damages for misconduct against the other partner.

(vii) The right to claim Setoff in a suit for an amount not exceeding Rs.100/- in value.

Q. What is the position of Minor as against a firm as per the Indian Partnership Act? Discuss. If after
attaining majority, the minor beneficiary fails to inform the firm about his intentions, what would be
the consequences?

MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP

The position of a minor in a partnership is dealt with in s.30 of the Indian partnership act, 1932 which is
reproduced below:—

"30 minors admitted to the benefits of partnership.—(1) a person who is a minor according to the law to
which he is subject may not be a partner in a firm, but with the consent of all the partners for the time
being, he may be admitted to benefits of partnership.

(2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed
upon, and he may have access to and inspect and copy any of the accounts of the firm.

(3) Such minor's share is liable for the act of the firm, but the minor is not personally liable for any such
act.

(4) such minor may not sue the partners for an account or payment of his shares of the property or
profits of the firm, save when severing his connection with the firm, and in such case the amount of
his share shall be determined by a valuation made as far as possible in accordance with the rules
contained in section 48:

provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to
other partners may elect in such suit to dissolve the firm, and thereupon the court shall proceed with
the suit as one for dissolution and for settling accounts between the partners, and the amount of the
share of the minor shall be determined along with the shares of the partner.

(5) at any time within six months of his attaining majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, such persons 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 regard the firm:

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Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the
said six months.

(6) Where any person has been admitted as a minor to the benefits of partnerships in affirm, the burden
of proving the fact, that such person had no knowledge of such admission until a particular date after
the expiry of the six months of his attaining majority shall lie on the persons asserting that fact.

(7) Where such person becomes a partner:—

(a) his right and liabilities as a minor continue up to the date on which he become a partner, but he also
becomes personally liable to third parties for all acts of the firm done since he was admitted to the
benefits of partnership, and

(b) His share in the property and profits of the firm shall be share to which he was entitled as a minor.

(8) Where such person elects not to become a partner:-

(a) His rights and liabilities shall continue to be those of a minor under this section up to the date on
which he gives public notice,

(b) His share shall not be liable for any acts of the firm done after the date of the notice, and

(c) He shall be entitled to sue the partners for his share of the property and profits in accordance with
sub-section (4).

Nature of Minor's Agreement

An agreement enforceable by law i.e. a contract is an essential element for the existence of partnership.
Section 11 of the Indian contract act. 1872, provides that a person must be competent to contract for
entering into a contract. After mohoribibeeverses. dharmodasghose, pc (1903) 30 ia 114: ilr 30 cal 539
it is settled law in India that a minor is incompetent to contract within the meaning of the Indian
contract act, 1872. Section 30 of the Indian partnership act does not render a minor competent to
contract. Therefore, a minor cannot enter into an agreement of partnership as an agreement with a
minor is absolutely void. A guardian of a minor also cannot enter into an agreement of partnership on
behalf of his ward to make a minor full-fledged partner.

Admission of minor to benefits of existing firm

Sub-section (1) lays down that a minor cannot become a partner though, with the consent of all the
partners for the time being. He may be admitted to the benefits of partnership in an existing firm. There
must be either an express agreement between the partners to admit the minor to the benefits of
partnership or there must be some positive conduct on their part from which it can be inferred that they
agreed to so admit the partner. Allotment of a share or distribution of a part of the profits of the firm to
a minor or something of an analogous character is indicative of admission of a minor to the benefits of
partnership. In shri ram sardarmaldidwani verses. gourishanker, air 1961 bom. 136, it was held that

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there must be a partnership of at least two partners before a minor can be admitted to the benefits of
partnership.
Thus there are two pre-requisites of admission of a minor to the benefits of the partnership firm. They
are: (1) there should be an existing firm and (2) all the partners must have consented the admission of a
minor.

In official assignee, madras verses. palaniappachetty, (1918) ILR 41 madras 824, a Hindu father started
a business during the minority of his undivided son. The business was continued after the son became a
major. The son helped his father in the business during his minority. He was taking active part after
attaining majority. It was held that the mere fact that the minor rendered help in the joint family
business is not enough to show that he was admitted to the benefits of partnership. Therefore, the son
was held not liable for debts incurred by the firm during his minority. To make him personally liable in
debts incurred during minority it would be necessary to prove that there was a partnership and he was
admitted into it. However, he was held liable in the debts incurred after attaining majority as he was
taking active part in the joint family business.

Admission of a minor to the benefits of the partnership business implies some definite act such as the
allotment of a share to him or the distribution of a part of the profits to him or something of an
analogous character. It is something more than a mere incident, of birth in a particular family.

In lachminarayan verses. beni ram, there was a partnership firm of two partners. One of them died. It
was held that the minor son of the deceased partner cannot enter into a contract with surviving partners
to firm partnership.

In cItverses. dwarkadaskhetan& co, it was held that a minor cannot become a full-fledged partner in an
existing firm.

In dhararnvirverses. jagannath, air 1968 punj 84, it was held that a minor is not a partner even if he is
so described in the agreement. Partnership agreement, to which a minor is party contrary to s.30 of the
partnership act, would be involved. Even for the purpose of taking accounts, effect cannot be given to
such an invalid document qua the major partners as that will require re-writing of the contract and
compelling the major partners to do something contrary to express terms thereof.

In cIt verses. Shah mohandassadhuram, AIR 1966 SC 15, it was held that a partnership deed that
attempts to make a minor a full-fledged partner is invalid to that. Extent. it was further held in this case
that as long as a partnership deed does not make minor a full partner it cannot be regarded as invalid on
the ground that a guardian has purported to contract on behalf of a minor. Earlier in cit verses
shahjethajiphulchand, it was held that a guardian can agree on behalf of a minor for constituting a firm
into which a minor would be admitted to the benefits of partnership (and not as full-fledged partner).

A summary view of the rights and liabilities of a minor admitted to the benefits of partnerships is as
under:—

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(1) Right to share profits. A minor is entitled to the agreed share of the property and of the profits
of the firm [s.30 (3)].

(2) right to access books of accounts. He has right of access to books of accounts. He can inspect
and copy them. However, he cannot have access to any other book, if maintained by the firm, since the
same may contain a secret of the firm and the minor's knowledge of the same may be detrimental to
the interest of the firm [section 30(2)].
(3) Right to sue for accounts or share after severing connection with the firm. A minor does not
have the right to sue the partners for an account or payment of his share of property or profits till he
remains in the firm. On severing connections with the firm, the minor becomes entitled to sue the other
partners for accounts, payment of his share of profits and property [section 30(4)].

(4) Liability of a minor. The minor's share of the profits and in the property of the firm is liable for
the acts of the firm. he is not personally liable for any such acts [section 30(3)].therefore, if the assets of
the firm are not sufficient to meet the liabilities of the firm, then, surplus private estate of other
partners (and not that of the minor) will be used to meet the 'firm's debts. Rights and liabilities of such
minor on attaining majority

a minor admitted to the benefits of partnership, according to sub-section (5) has a right to elect to
become or not to become a partner in the firm 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 is later,
by giving a public notice to that effect, and such a notice will determine his position as regards the firm.
Proviso to this sub-section provides that if he fails to give such notice within the required period he will
be deemed to have elected to become a partner in the firm.

In shiva Gouda rayjipatel verses chanderkantneelkanthsadatge, it was held that "it is implicit in term of
sub-section (5) of section 30 of the partnership act that the partnership is in existence. A minor after
attaining majority cannot elect to become a partner of a firm which ceased to exist." thus, the minor
cannot exercise the option where, before the expiry of vital six months, the firm is dissolved. In such a
case the minor would remain what he was, that is, a partner with share committed to liability, but no
personal liability. Section 45 applies only to partners of the firm. In this case a firm consisting of two
partners. A minor was admitted to the benefits of the partnership firm. The appellant supplied certain
goods to the firm on credit. Before satisfying the claim of the appellant the firm was dissolved.
Subsequently the minor attained majority and did not exercise the option to become a partner. The
appellant could not recover the dues from the partners. The minor was held not personally liable/

Sub-section 6 provides that where any person has been admitted as a minor to the benefits of
partnership in a firm, the burden of proving the fact that such person had no knowledge of such
admission until a particular date, after the expiry of six months of his attaining majority shall lie on the
person asserting the fact.

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Sub-section (7) deals with the rights and liabilities of such minor where he becomes a partner either by
his own election or by his failure to give notice within the stipulated period of six months or of his
obtaining knowledge, whichever is later. It provides as follows:—

(a) The rights and liabilities of such a person vis-a-visother partners will continue as that of a minor
up to the date on which he becomes a partner. But 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 profits of the firm remains the same as that to which he was
entitled as a minor.

Sub-section 8 deals with the rights and liabilities of a minor where he elects not to become a partner by
giving a notice to that effect. The sub-section provides as follows:—
(a) His rights and liabilities shall continue to be those of a minor under this section (section 30) up to the
date on which he gives public notice.

(b) His share shall not be liable for any acts of the firm done after the date of the notice.

Q. Define Particular Partnership.

When a partnership is formed for the object of conducting a particular business, it is called particular
partnership. (Sec. 17) The particular undertaking cannot be extended to any other enterprise and this
would last only so long as the business id not completed. But if the partnership firm goes to carry on
other business then in the absence of an agreement to the contrary, the rights and duties of the
member in the new undertaking will continue to be the same as in the earliest enterprises.

Q. Mention any six acts not falling within the implied authority of partner. Discuss the legal provisions
relating to expulsion of a partner

Implied authority of a partner

A partner's authority may be express or implied. An authority is said to be express when it is given by
words, spoken or written. It is implied where there is no express agreement between the partners, in
which case, the law impliedly gives certain powers to a partner and also negatives certain other powers
as regards partners. The word "implied" suggests that authority of a partner which is apparent from his
position in a partnership firm in relation to the business of the firm. Section 19 deals with the subject of
implied authority of a partner. It is reproduced below:—

"19. implied authority of a partner as agent of the firm.—(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.

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Thus a partner, in the case of a trading firm, in the exercise of his implied authority, can bind the firm by
any of the following acts:

(1) He may draw, make, sign, endorse, accept, transfer, negotiate and procure to de discounted,
promissory notes, bills of exchange, cheques and other negotiable paper in the name and on account
of the partnership firm. A partner of a non-trading firm does not ordinarily possess the power to bind
his copartners by drawing or accepting bills of exchange. Therefore, a partner of a non-trading firm
cannot in the exercise of implied authority bind his copartners by giving a post-dated cheque.

(2) He may borrow money for the purposes of the business of the firm,

(3) He may pledge or sell moveable property of the firm,

(4) He may buy goods on account of the firm which are necessary for or usually required for the
purposes of the business of the firm,

(5) He may receive payment of debts on account of the firm and give valid discharge by issuing a receipt
for the same,
(6) He may pay debts on account of the partnership firm,

(7) He may employ servants for the partnership.

(8) He may sue on behalf of the firm and for this purpose may engage a lawyer. Similarly he can defend a
suit brought against the firm and may engage a lawyer for this purpose.

In an ordinary partnership, a partner may bind the firm by any of the acts mentioned in (4) to (7) above.

All the partners of a firm can ratify an act of a partner, which has been done in excess of his implied
authority or without any authority, provided the act is such that it can be legally done by the authority of
all the partners previously given.

Statutory restrictions on implied authority

Sub-section (2) of section 19 provides certain acts which do not, in the absence of any usage or custom
of trade to the contrary, fall within the implied authority of a partner. Thus a partner is not authorised
to do these acts without consulting the other partners. The sub-section says that "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 claim by the firm.

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(d) Withdraw a suit or proceeding filed on behalf of the firm. (e)

Admit any liability in a suit or proceeding against the firm,

(f) Acquire immovable property on behalf of the firm.

Grounds for Expulsion of partners

Ideally the grounds for expelling a partner from the partnership will be set forth in detail in the
partnership agreement. The agreement may provide that a partner may be expelled upon vote of the
other partners for any reason or no reason. Or, it may specify certain reasons for expulsion, such as:

• breaching the partnership agreement or otherwise failing to carry out the partner’s obligations
under the agreement

• being charged with, or convicted of, a crime

• professional misconduct, or

• Filing for bankruptcy.

The agreement should also specify how the decision to expel is to be made—for example, whether a
majority vote is sufficient or a unanimous vote (not counting the partner to be expelled) will be
required. Unfortunately, not all partnership agreements address expulsion; and some partners don't
even have a written agreement. In some states, if partners don't have a written agreement that provides
for expulsion, the only way to expel a partner is to dissolve the partnership and start a new partnership.
The partners may expel a fellow partner by unanimous vote if:
• the partner transfers substantially all of his or her partnership interest (other than as security for
a loan)

• it is unlawful to carry on the business with that partner

• a corporate partner ceases being a corporation in good standing

• a partnership that is a partner has been dissolved and its business is being wound up, or

• The partner’s interest in the partnership becomes subject to a charging order.

In addition, in most states, the partnership itself, or any individual partner, may go to court and obtain a
court order expelling a partner if:

• the partner engaged in wrongful conduct that adversely and materially affected the partnership
business

• the partner materially and willfully breached the partnership agreement, or

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 • The partner’s conduct makes it not reasonably practicable to carry on the partnership business
with that partner.

THE SALE OF GOODS ACT, 1930

Q. Distinguish between sale and agreement to sale.

Basis for Comparison Sale Agreement to sell

Meaning When in a contract of sale, the exchange When in a contract of sale the
of goods for money consideration takes parties to contract agree to
place immediately, it is known as Sale. exchange the goods for a price at a
future specified date is known as an
Agreement to Sell.
Nature Absolute Conditional
Type of Contract Executed Contract Executory Contract
Transfer of risk Yes No
Title In sale, the title of goods transfers to the In an agreement to sell, the title of
buyer with the transfer of goods. goods remains with the seller as
there is no transfer of goods.
Right to sell Buyer Seller

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Consequences of Responsibility of buyer Responsibility of seller
subsequent loss or
damage to the goods
Tax VAT is charged at the time of sale. No tax is levied.
Suit for breach of The buyer can claim damages from the Here the buyer has the right to
contract by the seller seller and proprietary remedy from the claim damages only.
party to whom the goods are sold.
Right of unpaid seller Right to sue for the price. Right to sue for damages.
Example Suppose Miss. Rina enters into contract of Suppose Miss. Poonam agrees with
sale of horse in the hand of Mr. Guru Mr. Mirza to sell him her house
against Rs. 30,000. Mr. Guru pays Rs. against Rs. 30 lac after the
30,000 to Miss. Rina and she delivers her construction next year.
horse to Mr. Guru. It is a sale.

Q. Define unpaid seller and discuss his rights.

The seller of goods is deemed to be unpaid (Sec. 45-1)

I. When whole of the price has not been paid of tendered.

II. When the bill of exchange or negotiable instrument has been received as a condition of
payment and the condition on which it was received has not been fulfilled by the reason ondishonor of
the instrument or otherwise.

Features of the unpaid seller

I. He must sell goods on the cash basis and must be unpaid

.II. If he sells on credit basis, he is not an unpaid seller during the period of credit.

III. The term of credit has expired and the price has not been paid to him.
IV. He must be unpaid wholly or partially. If a part of price remains unpaid, he is unpaid.

V. When the price is paid in the form of negotiable instruments and it has been dishonored. VI. If buyer

offers payment and seller refuses to accept, the seller is not an unpaid seller Example:

I. Party A sells a car on cash basis to party B and the price has not been received yet.

II. A sells good to B on 5 months credit period and B turns insolvent after 2 months.

III. A sells TV set to B on the same day cheque basis, the cheque is dishonored due to insufficient
funds. A is an unpaid seller.

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1. Rights of Unpaid Seller against the Goods.

An unpaid seller has the following rights against the goods notwithstanding the fact that the property in
the goods has passed to the buyer:

1. Right of lien;

2. Right of stoppage of goods in transit;

3. Right of resale [Sec. 46 (1)].

1. Right of lien (Sec. 47)

‘Lien’ is the right to retain possession of goods and refuse to deliver them to the buyer until the price
due in respect of them is paid or tendered. An unpaid seller in possession of goods sold is entitled to
exercise his lien on the goods in the following cases:

(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:

(c) Where the buyer becomes insolvent, even though the period of credit may not have yet expired.

In the case of buyer’s insolvency the lien exists even though goods had been sold on credit and the
period of credit has not yet expired. When his goods are sold on credit the presumption is that the buyer
shall keep his credit good. If, therefore, before payment the buyer becomes insolvent, the seller is
entitled to exercise this right and hold the goods as security for the price.

The effect of buyer’s insolvency is that all stipulations as to credit are put to an end and the seller has a
right to say, “I will not deliver the goods until I see thatI shall get my price paid” (Griffithsvs Perry)

The unpaid seller’s lien is a possessory lien, i.e., the lien can be exercised as long as the seller remains in
possession of the goods. He may exercise his right of lien notwithstanding that he is in possession of the
goods as agent or bailee for the buyer [Sec. 47(2)]. Transfer of property in the goods or transfer of
documents of title to the goods does not affect the exercise of this right, provided the goods remain in
the actual possession of the seller. In fact when property has passed to the buyer then only retaining of
goods is called technically ‘lien.’ Where the property in goods has not passed to the buyer and the title is
still with the seller then it is, strictly speaking, anomalous to say that the seller has a lien against his own
goods. The seller’s lien when property has not passed to the buyer is termed as ‘a right of withholding
delivery. Accordingly, Section 46(2) provides:

The term insolvent here does not mean a person who has been adjudged insolvent under the Insolvency
Law. In Sale of Goods Act “a person is said to be insolvent who has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due, whether he has committed an
act of insolvency or not” [Sec. 2(8)].

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But if the buyer has transferred the documents of title to a bonafide purchaser, the seller’s lien is
defeated (Sec. 53).

This right of lien can be exercised only for the non-payment of the price and not for any other charges,
i.e., maintenance or custody charges, which the seller may have to incur for storing the goods in exercise
of his lien for the price. This right of lien extends to the whole of the goods in his possession even
though part payment for those goods has already been made. In other words the buyer is not entitled to
claim delivery of a portion of the goods on payment of a proportionate price. Further, where an unpaid
seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless
such part delivery has been made under such circumstances as to show an agreement to waive the lien
(Sec. 48).Also, the lien can be exercised even though the seller has obtained a ‘decree’ for the price of
the goods [Sec. 49(2)].

When lien is lost? As already observed, lien depends on physical possession of goods. Once the
possession is lost, the lien is also lost. Section 49 accordingly provides that the unpaid seller of goods
loses his lien thereon in the following cases:

(a) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer
without reserving the right of disposal of the goods; or

(b) When the buyer or his agent lawfully obtains possession of the goods; or

(c) When the seller expressly or impliedly waives his right of lien. An implied waiver takes place when
the seller grants fresh term of credit or allows the buyer to accept a bill of exchange payable at a
future date or assents to a sub-sale which the buyer may have made.

It may be noted that right of lien, if once lost, will not revive if the buyer redelivers the goods to the
seller for any particular purpose. Thus, where a refrigerator after being sold was delivered to the buyer
and since it was not functioning properly, the buyer delivered back the same to the seller for repairs, it
was held that the seller could not exercise his lien over the refrigerator (Eduljeevs John Bros.).

2. Right of Stoppage of Goods in Transit:

The right of stoppage in transit means the right of stopping the goods while they are in transit, to regain
possession and to retainit till the full price is paid. Lord Cairns LJ in case of Schotsmans v. Lances and
Yorks Rly. Had made the following observation in this regard:

“The essential feature of stoppage in transit is that the goods should be in the possession of a
middleman or some other person intervening between the vendor who has parted with and the
purchaser who has not received them.”
Conditions under which Right of Stoppage in Transit can be Exercised[Section 50]: The unpaid seller
can exercise the right of stoppage in transit only if the following conditions are fulfilled:

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(i) The seller must have parted with the possession of goods, i.e., the goods must not be in the
possession of seller.

(ii) The goods must be in the course of transit.

(iii) The buyer must have become insolvent.

Note: The seller’s right of stoppage in transit is based on the principle that one man’s goods shall not be
applied to the payment of other man’s debt. [Lord Reading in Booth Steamship Co Ltd. V. Cargo Fleet
Iran Co.]

Duration of Transit [Section 51(1)]: Goods are deemed to be in course of transit from the time when
they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the
buyer or his agent in that behalf takes delivery of them from such carrier or other bailee.

Note: The carrier must hold the goods in the capacity of an independent person and not in the capacity
of an agent for the seller or buyer. If the carrier holds the goods as an agent for the seller, there is no
question of exercising the right of stoppage in transit because the seller can exercise his right of lien. If
the carrier holds the goods as an agent for the buyer, the seller cannot exercise the right of stoppage in
transit because the delivery to the carrier amounts to delivery to buyer.

3. Right of Resale

The right of resale is a very valuable right given to an unpaid seller. In the absence of this right, the
unpaid seller’s other rights against the goods, namely, ‘lien’ and ‘stoppage in transit,’ would not have
been of much use because these rights only entitle the unpaid seller to retain the goods until paid by the
buyer. If the buyer continues to remain in default, then should the seller be expected to retain the goods
indefinitely, especially when the goods are perishable? Obviously, this cannot be the intention of the
law. Section 54, therefore, gives to the unpaid seller a limited right to resell the goods in the following
cases:

(a) Where the goods are of a perishable nature; or

(b) Where such a right is expressly reserved in the contract in case the buyer should make a default;

II. Rights of Unpaid Seller against the Buyer Personally

The unpaid seller, in addition to his rights against the goods as discussed above, has the following three
rights of action against the buyer personally:

1. Suit for price (Sec. 55). Where property in goods has passed to the buyer; or where the sale
price is payable ‘on a day certain’, although the property in goods has not passed; and the buyer
wrongfully neglects or refuses to pay the price according to the terms of the contract, the seller is
entitled to sue the buyer for price, irrespective of the delivery of goods. Where the goods have not been

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delivered, the seller would file a suit for price normally when the goods have been manufactured to
some special order and thus are unsaleable otherwise.
2. Suit for damages for non-acceptance (Sec. 56). Where the buyer wrongfully neglects or refuses
to accept and pay for the goods, the seller may sue him for damages for non-acceptance. The seller’s
remedy in this case is a suit for damages rather than an action for the full price of the goods.

The damages are calculated in accordance with the rules contained in Section 73 of the Indian Contract
Act, that is, the measure of damages is the estimated loss arising directly and naturally from the buyer’s
breach of contract. Where the goods have a ready market the principle applicable is that the seller may
recover from the buyer damages equal to the difference between the contract price and the market
price on the data of the breach of the contract. Thus, if the difference between the contract price and
market price is nil, the seller can get only nominal damages (Charter vs Sullivan). But where the goods
do not have any ready market, the measure of damages will depend upon the facts of each case.

For example, in Thompson Ltd. Vs Robinson the damages were assessed on the basis of profits lost. In
that case, T Ltd., who were car dealers, contracted to supply a motorcar to R.R refused to accept
delivery. It was found as a fact that the supply of cars exceeded the demand at the time of breach and
hence in a sense there was no market price on the date of breach. Held, T Ltd., were entitled to damages
for the loss of their bargain viz., the profit they would have made, as they had sold one car less than they
otherwise would have sold.

1. Suit for special damages and interest (Sec.61) This Section entitles the seller to sue the buyer for
‘special damages’ also for such loss “which the parties knew, when they made the contract, to be likely
to result from the breach of it.” In fact the Section is only declaratory of the principle regarding ‘special
damages’ laid down in Section 73 of the Indian Contract Act. The Section also recognizes unpaid seller’s
right to get interest at a reasonable rate on the total unpaid price of the goods sold, from the time it was
due until it is actually paid. (Telu Ram Jain vs Aggarwal & Sons).

(a) Suit for Damages for Non-delivery [Section 57]where the seller wrongfully neglects or refuses
to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery.

(b) Suit for Specific Performance [Section 58]in any suit for breach of contract to deliver specific or
ascertained goods, the court may direct that the contract shall be performed specifically.

(c) Suit for Breach of Warranty [Section 59] Where there is a breach of warranty by the seller, or
where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a
breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the
goods, but he may – (i) Set up against the seller the breach of warranty in diminution or extinction of
the price; or (ii) Sue the seller for damages for breach of warranty.

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Note: The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does
not prevent him from suing for the same breach of warranty if he suffered further damage. [Section
59(2)]

Example: X sold a second hand Radio to Y who spent Rs 100 on the repair of this Radio. This Radio was
seized by the police as it was a stolen one. Y filed a suit against X for recovery of damages for breach of
warranty of quite possession including the cost of repairs. It was held that Y was entitled to recover the
same. [Mason v. Burmingham]

(d) Right to Treat the Contract as Rescinded or Operative in Case of Repudiation of Contract by
Seller before due Date [Section 60] Where seller repudiates the contract before the date of delivery, the
buyer may either treat the contract as subsisting and wait till the date of delivery, or he may treat the
contract as rescinded and sue for damages for the breach.

(e) Suit for Interest [Section 61(2)] In case of breach of the contract on the part of the seller, the
buyer may sue the seller for interest from the date on which the payment was made.

Q. Explain Caveat Emptor. Stating exceptions if any.

The phrase Caveat Emptormeans “let the buyer beware.” The doctrine of caveat emptor is enshrined in
Section 16 of the Sale of Goods Act, [Link] doctrine of caveat emptor is based on the fundamental
principle that once a buyer is satisfied with the product’s suitability, then he has no subsequent right
to reject such product. The objective of introducing this provision was to ensure that the buyer
purchases the product at his own risk after being assured of the quality of the product. He is required to
use his own skill and judgment except in cases of fraud where the doctrine of caveat emptor does not
apply.

Statement of Caveat Emptor

Section 16 of the Sale of Goods Act 1930 incorporates the principle of caveat emptor which reads as-

“Subject to the provisions of this act or any other law for the time being in force there is no implied
condition or warranty as to quality or fitness for any particular purpose of goods supplied.”

Scope of Caveat Emptor

In Ward v. Hobbes (1878) 4 AC 13, the House of Lords held that a vendor cannot be expected to use
artifice or disguise to conceal the defects in the product sold, since that would amount to fraud on the
vendee; yet the doctrine of caveat emptor does not impose duty on vendor to disclose each and every
defect in the product. The caveat emptor imposes such obligation on vendee to use care and skill while
purchasing such product.

In Wallis v. Russel (1902) 2 IR 585, the Court of Appeal explained the scope of caveat emptor-
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“Caveat emptor does not mean in law that the buyer must “take a chance,” it means he must “take
care.” It applies to the purchase of specific things, e.g. a horse, or a picture, upon which the buyer can,
and usually does, exercise his own judgment; it applies also whenever the buyer voluntarily chooses what
he buys; it applies also whereby usage or otherwise it is a term of the contract, that the buyer shall not
rely on the skill or judgment of the seller.”

Exceptions to the Rule of Caveat Emptor

[Link] 16(1) – Fitness for buyer’s purpose: Sub section (1) of Section 16 of the said Act prescribes
the circumstances in which the seller is obliged to supply goods to the buyer as per the purpose
for which he intends to make a purchase. It states that when the seller either expressly or by
necessary implication is aware of the purpose for which buyer makes purchase thereby relying
on seller’s skill and judgment and the goods to be purchased are of a description which the
seller in his ordinary course of business supply, then there is as implied condition that the goods
shall be reasonably in accordance with the purpose

Requirements of the Section 16(1) are as follows:-

• The buyer should make the seller aware of the particular purpose for which he is making
purchase;

• The buyer should make purchase on the basis of seller’s skill or judgment;

• The goods must be of a description which it is in the course of the seller’s business to supply.

In the case of Shital Kumar Saini v. Satvir Singh, the petitioner purchased a compressor with one year
warranty. The defect appeared within three months. The petitioner asked for a replacement. The seller
replaced it but without providing any further warranty. The State Commission allowed it to be rejected
stating that there was an implied warranty guaranteed under Section 16 of the Sale of Goods Act, 1930
that the goods should be reasonably fit for the purpose for which they are sold.

Sale under Trade Name[Proviso to S. 16 (1)] Sometimes a buyer purchases goods not on the basis of
skill and judgment of the seller but by relying on the trade name of the product. In such case, it would be
unfair to burden the seller with the responsibility for quality.

Merchantable quality [Section 16(2)]The second important exception to the doctrine of caveat emptor
is incorporated in Section 16(2) of the Act. The Section provides that the dealer who sells the goods has
a duty to deliver the goods of merchantable quality.

Meaning of Merchantable Quality: Merchantable quality means that if the goods are purchased for
resale they must be capable of passing in the market under the name or description by which they are
sold.

Merchantable quality depends on two factors:-

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 • Marketability- Merchantability does not merely mean that the goods shall be marketable, but
that they shall be marketable at their full value. “Merchantability does not mean that the things
are saleable in the market because it looks all right; it is not merchantable in that event if it has
defects unfitting it for its only proper use but not apparent on ordinary examination.”

• Reasonable fitness for general purposes-“Merchantable quality” means, in the second place,
that if the goods are purchased for self-use, they must be reasonably fit for the purpose for
which they are generally used. Example: The plaintiff bought a hot-water bottle which is
ordinarily used for application of heat to the human the bottle burst scalding the plaintiff’s wife.
The seller was held liable.

Examination by buyer [Proviso to S.16 (2)]The proviso to section 16(2) declares that “if the buyer has
examined the goods, there shall be no implied condition as regards defects which such examination
ought to have revealed. The requirement of the proviso is satisfied when the seller gives the buyer full
opportunity to examine the goods and whether the buyer made any use of the opportunity or not
should make no difference.
Conditions implied by trade usage [Sec. 16(3)]Sub-Section (3) of section 16 gives statutory force to
conditions implied by the usage of a particular trade.

In another case of Peter Darlington Partners Ltd v Gosho Co Ltd, where a contract for the sale of canary
seed was held subject to the custom of the trade that for impurities in the seed, the buyer would get a
rebate on the price, but would not reject the goods.

However, an unreasonable custom will not, however, affect the parties’ contract.

Express Terms [Section 16(4)]It is open to the parties to include any express conditions or warranties in
their contract. But an express warranty or condition does not negative a warranty or condition implied
by the Act unless the express terms are inconsistent with the implied conditions. Thus, where sleepers
supplied to a railway company were required to be approved by its experts, it was held that it did not
exclude the implied condition of merchant ableness.

Q. Explain ‘NemoDat Quad Non Habet’. Stating exceptions if any.

Nemodat quod non habet, literally meaning “no one gives what he doesn’t have” is a legal rule,
sometimes called the nemodat rule, which states that the purchase of a possession from someone who
has no ownership right to it also denies the purchaser any ownership title.

Section 27: Sale by person not the owner. -

Section 27, as a general rule, tries to protect the interest of the true owner when it provides that where
the goods are sold by a person who is not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires no better title to the goods than the
seller has.
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If the title of the seller is defective, the buyer’s title will also be subject to the same defect. The rule does
not imply that buyer’s title will always be a bad one. What it means is that the buyer cannot acquire a
superior title to that of the seller. If a thief disposes of stolen goods, the buyer of such goods has the
same title as the seller had. Similarly, where a person taking goods on hire- purchase basis sells them
before he had paid all the instalments, the owner can recover the goods from the transferee, on default
of payment, in the same way as he could have recovered them from the person to whom they had been
given on the hire purchaser basis.

The rule can be demonstrated by the case of Greenwood v Bennett. In this case the original owner of a
Jaguar car (Bennett) entrusted it to a man named Searle for repairs to be carried out. Searle then used
the car for his own purposes, crashed it and caused extensive damage. Searle then sold the car to
Harper, who owned a garage, for £75. Harper did not realised that Searle was not the owner of the car.
Harper then spent £226 repairing the car and sold it on to a finance company. It was held by the court
that the car belonged to Bennett as Searle did not have title and could therefore not transfer that title to
Harper. For the same reason, Harper could not transfer title to the finance company. Bennett was
therefore able to recover the car but had to compensate Harper for the work done to it.

However, although the nemodat rule in its essential form may be clear, it is not always fair, as it is an
innocent party buyer who will suffer, and nor is it necessarily in keeping with the needs of modern
commerce and trade. Where goods are in question the buyer may be in a very difficult position. The
owner, in voluntarily parting with the possession of the goods, takes upon himself the risk that
something might happen to the goods. The owner is in a position to check for himself the
creditworthiness of the person to whom he gives possession of the goods and there is an argument that
if the owner’s trust is in fact ill-founded then he ought not to put the consequences of his own mistaken
judgment on to the shoulders of the innocent purchaser. There is no way that the buyer can effectively
investigate the title to chattels and if the goods are to move freely in the distribution chain then it is
important that buyers are confident in their purchases. Furthermore, goods may be perishable and there
is a need for them to be dealt with quickly and efficiently.

Because of the apparent harshness of the nemodat rule, several exceptions to it were developed at
common law and also have been added by statute. All of the exceptions will apply only in favour of a
person who acquires the goods in good faith and without notice of the rights of the original owner. The
common law exceptions are around agency arrangements, estoppel and (previously) market overt.

In India in the case of Life Insurance Corporation vs United Bank Of India Ltd. And Anr court held that
Under the Indian Law, an actionable claim is no doubt transferable but it is transferable only by the
person who has a title to the property in respect of which the claim lies. The position is the same in
English law. Nemodat quod non habet, no one gives what he does not possess. If the nominee has no
title to the policy money he can neither surrender the policy nor can he transfer by assignment any right,
title or interest in the moneys payable under the policy. In the contemplation of the statute, the right of
a nominee is a mere right to collect the proceeds of the policy and the right has been given only to

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obviate the inconvenience of obtaining representation to the estate of the deceased policy-holder or a
succession certificate.

EXCEPTIONS

1. Transfer of Title by Estoppel (Sec 27)

Estoppel means that a person who by his conduct or words leads another to believe that certain state of
affairs existed, would be estopped (precluded) from denying later that such as state of affairs did not
exist. Sometimes the doctrine of estop or preclude the owner from denying the seller’s right to sell the
goods and thus an innocent buyer may have a good title despite the want of authority of the seller.
When the true owner of goods by his conduct or word or by any act or omission leads the buyer to
believe that the seller is the owner of the goods or has the authority to sell them, he cannot afterwards
deny the seller’s authority to sell.

The closing words of the rule contained in Sec 27 are as under:

Unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell the
goods.

The buyer in such case gets a better title when that of the seller. The estoppel may arise in any of the
following ways:
1. The owner standing by, when the sale is effected, or
2. Still more, by his assisting the sale, or
3. By permitting goods to go into the possession of another with all the insignia of possession thereof
and apparent title, or
4. If he has otherwise acted or made representations so as to induce the buyer to alter his position to his
prejudice.

Estoppel arises from;

a. act or omission – but it should be a legal obligation
b. Negligence – not mere negligence but it should be in regard to the person.

Estoppel by act or omission: A firm of merchants pledged certain railway receipts with a bank against a
loan. Subsequently they took back the receipts for clearing the goods and storing them in the bank’s
warehouse. But they fraudulently re-pledged the receipts with another bank for another loan. The
second bank contented that the first bank should not have returned the receipts without impressing up
on then them their stamp of pledge. Their omission to do so enabled the merchants to re-pledge the
receipts and therefore the first bank should be stopped from denying the validity of the second pledge.
But the Privy Council ruled otherwise. The court held that the duty to impress the stamp of pledge was
not a legal duty. It was a duty of commercial origin and its omission did not create a legal estoppel.

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Estoppel by negligence: Mere carelessness may not create an estoppels, negligence in order to give rise
to a defence under this section must be more than mere carelessness on the part of a person in the
conduct of his own affairs, and must amount to a disregard of his obligations towards the person who is
setting up the defence. In Conventary Shepherd & Co v. Great Eastern [Link] the defendant carelessly
issued two delivery orders relating to the same consignment of goods, thus enabling the person to
whom they were issued to obtain an advance from the plaintiff and the defendants were held to be
estopped as against him from denying the fact that the goods mentioned in the order were held on
behalf of the assignor someone who puts documents of this nature into circulation owes a duty to those
into whose hands they may come.

In Shaw and Another v Metropolitan Police Commissioner the claimant, wishing to sell his car,
permitted a dealer who promised to sell the car to hold possession. The owner furthermore gave the
dealer a transfer notification form signed in blank. The claimant had clearly made a representation to
the dealer that he should sell the car and therefore would have been estopped from claiming return of
the car under section 21 or 25 of the Sale of Goods Act 1979(This is English Case) had the contract
between the owner and the dealer not stated that title was only to pass at such time as the car was sold,
thus rendering the contract a contract to sell the car as opposed to a contract of sale

2. Sale by a Mercantile Agent (Section 27)

If a mercantile agent has an authority to sell the goods and he does so, no difficulty arises because
according to the general rule, an agent having the authority to sell them can convey a good title. The
difficulty arises when the mercantile agent disposes of the goods without having authority to do so.

Second Para of the section 27 explicitly express about this. Provision is—

Provided that, where a mercantile agent is, with the consent of the owner, in possession of the goods or
of a document of title to the goods, any sale made by him, when acting in the ordinary course of
business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the
goods to make the same, provided that the buyer act is good faith and has not at the time of the
contract of sale notice that the seller has no authority to sell.
For the application of this proviso, the following condition are to be satisfied,-

1. That the seller is a mercantile agent as defined in Sec. 2(9) of the Act. Section 2(9) states that

“Mercantileagent” means a mercantile agent having in the customary course of business as such agent
authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise
money on the security of goods;

2. The said mercantile agent got the possession of the goods or documents of title to the goods
with the consent of the owner, and in his capacity as a mercantile agent;

3. While selling the goods he must have been acting in the ordinary course of his business of a
Mercantile agent;

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 4. The buyer of the goods must have acted in good faith without having any notice that such a
mercantile agent did not have an authority to sell.

In Folks v king, the plaintiff delivered his car to a mercantile agent to sell it for not less than 575 pounds.
But the mercantile agent sold it to the defendant for pound 140 and misappropriated the amount. In an
action by the plaintiff it was held that the defendant (buyer) had a good title to the goods.

3. Sale by joint owner (Section 28)

If one of several joint owners of goods has the sole possession of them by permission of the co-owners
of goods, the property in the goods is transferred to any person who buys them from such joint owner in
good faith without notice of the fact that the seller has no authority to sell. It may be noted that in the
absence of this provision (i.e., Sec. 28) the buyer would have obtained only the title of the co-owners
and would have become merely a co-owner with the other co-owners. Hence the provision constitutes
an exception to the rule –“no one can give what he has not got.”

4. Sale by a person in possession under a voidable Contract- (Section 29)

According to section 19 and 19- A of the Contract Act, if the consent of a party to the contract has been
obtained by coercion, fraud, misrepresentation or undue influence, the contract is voidable at the
option of the party whose consent has been so obtained. Section 29 provides that if a person has
obtained the possession of some goods under a contract which is voidable under section 19 or 19 – A of
the contract Act and he sells those goods before the contract has been avoided by the party entitled to
do so, the buyer of such goods acquire a good title to them. It is, however, necessary that such buyer
must have purchased the goods in good faith and without the notice of the seller’s defect of title.

This section does not apply to a contract which is void and not voidable, or where the seller has no title
at all, for example, he has obtained the goods by theft.

5. Sale by the seller in Possession (Section 30) (1)

If a seller has sold the goods and the property in the goods has passed to the buyer, the seller cannot
deal with such goods. If he is still in possession of the goods and deals with them, the buyer can sue him
for the tort of conversion, Sec 30 (1), however, provides that if seller having sold the goods is still in
possession of the goods or of the documents of title to them, the delivery or transfer of the goods or of
the documents of title under any sale, pledge or other disposition thereof by the seller or by a
Mercantile agent on his behalf will convey a good title to the buyer provided the buyer has been acting
in good faith and he has no notice of the previous sale.

6. Sale by the buyer in Possession – sec 30(2)

This section says that if a buyer has obtained the possession of the goods or the documents of title to
them with the consent of the seller, any sale, pledge or other disposition thereof to any person will
convey good title and without any notice as regards any lien or other right of the original seller in
respect of those goods.
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7. Resale by an unpaid seller – Sec 54(3)

According to this section, if an unpaid seller has exercised the right of lien or stoppage in transit and the
buyer does not pay him he may resell the goods after a notice to the buyer. If such a notion is not given,
the seller is neither entitled to claim from the buyer any loss if the goods bring lower than the contract
price nor can he retain the benefit if the goods are sold at a higher price.

8. Sale by finder of goods- (sec 169, Indian Contract Act)

According to sec 71, Indian Contract Act, the finder of goods is subject to the same responsibility as the
bailee. He is to take due care of goods while they are in his possession and also to return them when
their owner has been found. According to Sec 169 of ICA, however, if the owner cannot with a
reasonable diligence be found or if he refuses upon demand, to pay the lawful charges of the finder, the
finder may sell the goods,-

• When the things is in danger of perishing or of losing the greater part of its value, or

• When the lawful charges of the finder, in respect of the thing found, amount to 2/3 of its value.

9. Sale by Pawnee- sec 176 of Indian contract act

According to this section, if the Pawnor makes a default in the payment of the debt, the Pawnee may
either sue him for the debt or may sell the goods pledged on giving the Pawnor reasonable notice of the
sale.

Q. Explain Conditions and Warranty

At the time of selling of goods, the seller makes certain statements or representations with a view to
induce the buyer to purchase the goods. These statements may form a part of contract of sale and the
buyers rely upon them. These representations are called ‘stipulation’. When these stipulations are
become most important for the formation of a contract of sale is known as ‘condition’. Again if these are
lesser important for the formation of a contract of sale is, known as ‘warranty’.

According to Section 12 (2) of the Sale of Goods Act, 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.
There are mainly three essentials of a condition, such as

I) Condition is essential to the main purpose of the contract.

II) The cause of non-fulfillment of condition is irreparable damage to the aggrieved party.

III) As a result of breach of a condition the aggrieved party will get the right to rescind the contract
and recover the damages for breach of condition.

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According to Section 12 (3), a warranty has 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 repudiated.

Like condition, the warranty is to fulfill three essentials, such as- I)

Warranty is collateral to the main purpose of the contract.

II) The breach of warranty does not breach the main purpose of the contract and it causes damages to
the aggrieved party.

III) The aggrieved party can only claim damages for breach of warranty.

Example:

P went to Q ask to show a horse which could run at a speed of 35 m.p.h. Q pointed out at a particular
horse and said that it will suit his purpose. P bought and discovered that the horse run at a speed of 20
m. p. h. Now, P may reject the horse as the representation made by Q which is the condition of sale is
not fulfilled.

Differences between a condition and a warranty:-

i) Essential of Contract: - Under Section 12 (2) of the Sale of Goods Act 1930, a condition is
defined as a stipulation which is essential to the main purpose of the contract.

On the other hand, warranty is defined under Section 12 (3) as a stipulations that is collateral to the
main purpose of the contract.

ii) Effect on breach: The breach of condition give rise to a right to treat the contract as repudiated.
But the breach of warranty gives rise to the claim for damages but not to a right to reject the goods and
treat the contract as repudiated.

iii) Option of treatment: In case of condition, a breach of condition can be treated as a breach of
warranty as an option on the part of the aggrieved party. But, in case of breach of warranty no such
option is essential to the aggrieved party. So the breach of warranty cannot be treated as breach of
condition.

Q. Define Auction Sale.

Auction sale is a manner of sales, where property is auctioned usually to the highest bidder by public
competition. The auctioneer is an agent of the seller. The auctioneers can auction his own property. In
fact there is no need to express that he is selling, so contract is formed between auctioneer and the
buyer in case of sale by auction. Some liabilities are incurred by this contract. Of course, all of these

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liabilities are not for the seller. Under Section 64 certain rules are provided regarding auction sale. These
are mentioned below-

i) Auction sale is in lots and every lot is prima facie deemed to be the subject of a separate
contract of sale.

ii) When the auctioneer announces its completion by the fall of the hammer or by other customary
manner, then the sale by auction will be complete. iii) It may be reserved as a right to bid expressly by or
on behalf of the seller. iv) The seller or other may bid at the auction on behalf of him if the right to bid is
so reserved.

v) It will be not lawful, if sale is not notified to be subject to a right to bid on behalf of the seller for
two cases. Firstly, for the seller to bid himself or to employ any person to bid at such sale or secondly,
for the auctioneer knowingly to take the bid from the seller or any other such person.

vi) It should be notified as a sale by auction subject to a reserved or upset price. A reserved price
can be fixed by the seller to protect him against “knockout’ agreement. vii) In case of making use of
pretended bidding to raise the price by the seller, the sale will be avoidable.

If the auctioneer sells goods then he must take impliedly the following obligations.

i) Auctioneer warrants his authority to sell.

ii)Auctioneer warrants that he does not know of any defect in his principal’s title. iii)

Auctioneer gives the possession of the goods against the price paid into his hands.

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