Chapter-1

THE INDIAN CONTRACT ACT,1872

UNIT-1
NATURE OF CONTRACT

INTRODUCTION
• Received its assent on 25th April, 1872
• Came into Force on 1st Sept, 1872
• Applicable to Whole of India
• Not complete and not exhaustive in nature
• Creates “Jus in Personam”
It means Right against a Particular Person
• Act is divided in to two parts.

Section Section
(1 to 75) (124 to 238)
General Contract Special Contract
DEFINITIONS
Contract – Section 2(h)
“An agreement enforceable by law”
Contract = Agreement + Enforceable by law
Agreement – Section 2(e)
“Promise and every set of promise forming
consideration for each other”
Agreement = Offer + Acceptance
Promise Section 2 (b)
“Acceptance of proposal is a promise”

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 Difference Between Agreement and Contract
Basis of distinction An Agreement A Contract
1. What constitute? Agreement = Offer + Acceptance Contract = Agreement + its
enforceability.
2. Creation of legal obligation An agreement may or may not A contract necessarily create a
create a legal obligation. legal obligation.
3. One in other Every agreement need not All contracts are necessarily
necessarily be a contract. agreements.
4. Binding Agreement is not concluded or Contract is oncluded and
a binding contract. binding on the concerned
parties.
“ All Agreements are not contracts though All contracts are Agreements”
Only those agreements where intention of parties is to createlegal relationship are valid contracts

“ Enforceable by Law”
• An Agreement is said to be enforceable by Law if it creates some Legal Obligation
• In Commercial or Business agreements there is a presumption of Legal Relation
• In case of Social or Domestic Arrangements,there is a presumption that parties do not intend to create
Legal Relation.
Essential Elements of a Valid Contract
1. Offer and Acceptance
• Person making the offer – Offeror
• Person to whom offer is made – Offeree

• Agreement is the first essential element of a valid contract

• An Agreement is created by an offer and an acceptance.
2. Intention to create Legal Relationship
• Both parties must intent to create legal relationship

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 • CASE: Balfour v. Balfour
• Facts: A husband agreed to pay to his wife certain amount as maintenance every month while he
was abroad. Husband failed to pay the promised amount. Wife sued him for the recovery of the
amount.
Here, in this case, wife could not recover as it was a social agreement and the parties did not
ntend to create any legal relations.
3. Lawful Consideration
• Consideration means - “Something in Return”
(Quid-Pro-Quo)
• No Consideration – No Contract
• It must not be forbidden by law

4. Lawful Object
• The Object of the Agreement must be Lawful. It should not be any of the following:
1. Immoral – Mr. X dating Mrs. Y
2. Illegal – Selling wine in Gujarat
3. Opposed to Public Policy – Bribe in Public offices
5. Capacity of Parties:
• The Parties must be capable of entering into Contract
• Following persons are not competent to conttract:
1. Minor
2. Person of Unsound mind

3. Persons disqualified by law

1. Alien Enemy: During War
2. Insolvents: Declared by Court
3. Convicts: Who is Imprisoned (In Jail)
6. Free Consent
• Consent means to agree upon the same thing in the same sense
• Consent is not said to be free when it is caused by:

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 1. Coercion-Physical Pressure
2. Undue Influence-Moral Pressure
3. Fraud- Intentional Act
4. Misrepresentation- Unintentional Act
5. Mistake Error in belief
7. Certainty of Terms
• Terms must be clear and definite
• Must not create any confusion
E.g. A has 3 cameras, he says B to give 1 camera
8. Possibility of Performance
• It should be capable of Performance.
• An Agreement to do an Act Impossible in itself cannot be enfored.
E.g. Putting life in dead body
To bring a star from sky
9. Legal Formalities
• An Agreement must fulfil the necessary formalities as to writing. Registration,stamping,etc. If
any required to make it enforceable by Law.
Types of Contract
Classification of contract on basis of

Validity Formation Performance

(1) Valid Contract (1) Express Contract (1) Executed Contract

(2) Void Contract (2) Implied Contract (2) Excutory Contract
(3) Voidable Contract (3) Tacit Contract (3) Bilateral CContract
(4) Illegal Agreement (4) Quasi Contract (4) Unilateral Contract
(5) Unenforceable Contract (5) E-Commerce
Validity
The following contract are classified on basis of validity :

1. Valid Contract:
• It contains all the essential elements of a valid contract
• “A contract which is enforceable by law” .
• It can be enforced by both the parties

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 2. Void Contract:
• Initially the contract is valid then due to happening of some it becomes void.
• As per Section 2(j)” A contract which ceases to be enforceable by Law Becomes void when it
ceases to be enforceable”
3. Voidable Contract :
• When consent is not free the contract is voidable.
• It can be enforced by one party (Aggrieved party)
• Aggrieved party has two options – Valid or Void.
• Section2(i) defines that “ An agreement which is enfolrceable by Law at the option of one or more
parties thereto, but not at the option of the other or others is a Voidable Contract”.
4. Illegal Agreement:
• It is Forbidden by law
• Such an Agreement cannot be enforced
• Illegal agreements are Void-Ab-Initio(Void from very beginning)
5. Unenforceable Contract:
• It is not enforceable due to some technical defect.For Eg. Absence in writing
• Such contracts can be enforced if the technical defect is removed.
Difference Between Void Contract and Voidable Contract
Void Contract Voidable Contract
• Contract becomes Void due • Contract is voidable when consent of parties is
to some event not free
• It is not enforceable by law • It is enforceable at the option of aggrieved party
• Party cannot continue the • Aggrieved Party can treat the Contract as Valid
Contract
• E.g. House burnt by Fire,Horse died • E.g. Coercion, Undue Influence, Fraud, Misrep
Difference Between Void Contract and illegal Agreement
Void Contract illegal Agreement
• Initially Contract is valid • It is void-ab-anitio
then due to some event it
becomes Void
• It is not enforceable by law • It is forbidden by law
• It is not punishable • It is punishable
• It is not necessary all Void • All illegal Agreements are void
Contracts are Illegal
Formation
The following contracts are classified based on performance:

1. Express contract: It is created by words spoken or written.

2. Implied Contract: It is created by the conduct or behaviour of the parties
3. Tacit Contract: It is similar to implied contract but in tacit contract the mechanical process remains the
same

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 For e.g. ATM, Auction
4. Quasi Contract : It is not created by the parties but it is imposed by law. For e.g. Finder of goods Rule “A
person should not enrich himself at the expense of other person”
5. E – commerce Contract : It is created through Internet
Performance

The following contracts are classified based on performance:

1. Executed Contract : Here both the parties have performed their responsibility
2. Executory Contract : Here both the parties are yet to perform their responsibility
3. Bilateral Contract : Here both the parties are yet to perform their responsibility
4. Unilateral Contract : Here only one party has to perform his obligation.
Offer-Sec 2 (a)
“When one person signifies to another his willingness to do or to abstain from doing anything with a view to
obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
Types of Offer :
1. General Offer :
• To public at large anyone can accept it
Case-Carlill Vs. Carbolic Smoke Ball Co.
Facts: In this famous case, Carbolic smoke Ball Co. advertised in several newspapers that a reward of
£100 would be given to any person who contracted influenza after using the smoke balls produced by
the Carbolic Smoke Ball Co. according to printed directions. One lady, Mrs. Carlill, used the smoke balls
as per the directions of company and even then, suffered from influenza. Held, she could recover the
amount as by using the smoke balls she had accepted the offer.
2. Specific Offer :
• To Definite or Particular person or group:
• It can be accepted only by that Specified person.
3. Counter offer (To Bargain) :
• When the offeree makes certain modifications and variations in the original offer, he is said to
have made a counter offer.
• Counter offer amounts to rejection of the original offer.
4. Cross offer (Same offer at Same Time)
• Identical offers are exchanged in Ignorance.
• No Contract will be concluded.
5. Standing / Open / Continuing Offer :
• Allowed to remain Open for Acceptance.
• Eg. Tender for Supply of Goods

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 “ Legal Rules for Offer“
1. Intention to Create Legal Relationship.
2. It must be clear, complete and not vague.
• If terms of offer are vague or confusing ,its acceptance will not create a vaild contract.
3. It must be communicated.
• Offer must be communicated to the person to whom it is made.
• An Acceptance of offer, in ignorance of offer , is not Acceptance and does not give any right to
Acceptor
• CASE: Lalman Shukla Vs. Gauri Dutt.
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He then announced
that anybody who traced his nephew would be entitled to a certain reward. L traced the boy in
ignorance of this announcement. Subsequently when he came to know of the reward, he claimed
it. Held, he was not entitled to the reward, as he did not know the offer.
4. It must be made with a view to obtain the Assent of other Party
5. It can be Express /Iimplied
6. Differentiated from Declaration of Intention & Invitation to an Offer
Invitation to an Offer

• Invitation means inviting Public to make an Offer

• Invitation is not an Offer, it is precedent to an Offer
• Invitation can be easily withdrawn and party cannot claim any damages
• E.g. Advertisement, Sale, Prospectus, Auction, Display of Goods, Price Tags, Catalogues etc
DIFFERENCE BETWEEN OFFER AND INVITATION TO AN OFFER
Basis of Distinction Offer Invitation to Offer
1. Meaning Where a person shows his willingness Where a person invites others to
to enter into a contract, it is called make an offer to him, it is called as
as an offer. an invitation to offer.
2. Purpose An offer is made by a person with the The purpose of making an invitation
purpose of entering into a contract. to offer is to receive the offers or
to negotiate the terms on which the
person making the invitation is
willing to contract.
3. Legal effect An offer, if acted upon (i.e., accepted), An invitation to offer, if acted upon,
results in a contract. only results in making of an offer.
Acceptance -Sec 2 (b)
“When the person to whom the proposal is made signifies his assent thereto, proposal is said to be
accepted. The proposal, when accepted, becomes a promise”.

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 Theory of Anson:

“Acceptance to an Offer is like What a Lighted Matchstick is to a Train of Gunpowder”

Train of Gunpowder + Lighted Match stick = Blast
Offer + Acceptance = Contract
(Intention of Legal relation)
Crux:
• When Acceptance triggers it cannot be recalled.
• Offer can be withdrawn just before it is accepted.
• Offer itself cannot create legal relationship but it is the acceptance which creates a legal relationship.
Legal Rules for Valid Acceptance
1. Absolute and Unqualified (Unconditional)
• It means offer must be Accepted as it is , without any condition
• A conditional Acceptance amounts to counter offer
2. Must be Communicated
• Acceptance is complete when it is communicated to offeror
• Mental Acceptance is not Valid Acceptance
3. Express / Implied
4. Must be within Time prescribed
5. Must be as per Mode prescribed
6. Silence does not amount to Acceptance
• Acceptance cannot be implied from Silence of the offeree
Exception
When offeree has given Previous consent that his Silence will amount to Acceptance.
Communication of Offer , Acceptance and their Revocation

• Communication of Offer – It is complete when it comes to the knowledge of offeree (17th)

• Communication of Acceptance –
1. For Offeror – It is complete when the Offeree posts
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 Acceptance letter (19th)
2. For Offeree – It is complete when the Offeror receives
Acceptance letter (21st)
• If Acceptance letter is lost in transit due to the mistake of postal department, still valid contract will be
concluded ( Such rule does not apply to Offer letter )
Acceptance over telephone on Telex on Fax
• In Instant Communications like Telex , telephone , fax or e-mail, the contract is complete when
Acceptance is received by offeror.
• CASE : Entores Ltd Vs. Miles far East Co.
Facts: In Case of Call drops and disturbances , there will not be a valid contract.
Modes of Revocation of offer/ Lapse of An offer.
1. Notice of Revocation
2. Rejection By Offeree
3. Lapse of Time
4. Acceptance not in prescribed mode
5. Cross offer
6. Counter Offer
7. Change in law
8. Death / Insanity / Insolvency

UNIT-2
CONSIDERATION
CONSIDERATION (Section-2 (d))
“When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or
does or abstains from doing or promises to do or abstain from doing something, such an act or abstinence or
promise is called consideration for the promise”.
• Something in Return.(Quid-Pro-Quo)
• No Consideration – No contract
• It must not be forbidden by Law
Legal Rules Regarding Consideration
1. Must be given at the Desire of Promisor
• An Act Done at the desire of third party is not a Consideration.
2. May move from Promisee or any other person
• It means there can be a Stranger to Consideration.
3. Past, Present or Future
• Past consideration is not vaild under English Law
4. Need not be adequate (Can be Inadequate)
• It need not to be of any Particular value.
• It must be of some value in the Eyes of Law.

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 5. Real and not illusory( Imaginary/ Fake)
6. Promisor should not be already bound of it
Eg. Giving money to Police Officer to find lost son
No Consideration -No Contract
An Agreement made without Consuideration is void
Exceptions to above
1. Natural love and affection
• It must be made out of Natural Love and affection
• It must be in writing
• It must be registered under Law
2. Completed Gift
• Gifts do not require any consideration.
3. Agency Contract (Gratuitous means for free)
• No consideration is necessary to create an Agency.
4. Time barred Debt
• It must be in writing
• Signed by Debtor
5. Compensation for Past Voluntary Services
• It is a Promise to Compensate and
• Person who is to be compensated has already done something voluntarily
6. Gratuitous Bailment
• No Consideration is necessary for Gratuitous Bailment
7. Charity
• If Promisee undertakes liability on the Promise, then it is valid.
Doctrine of Privity of Contract
It means a Stranger to Contract cannot Sue.
Exceptions to above:
1. Trust – Beneficiary can enforce the contract.
2. Family Settlement / Marriage Settlement – All members of the Family can sue
3. Agency – Agent can sue principal and vice versa
4. Assignment – Rights and Benefits are assigned, Assignee can enforce the contract
5. Acknowledgement of Liability-Obligation is assigned.
6. In case of Convenant running with Land person who purchases land with Notice may be enforced by
Successor of Seller

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 UNIT-3
OTHER ESSENTIAL ELEMENTS OF A CONTRACT
CAPACITY OF PARTIES
1. Position of Minor
1. Not Completed 18yrs ( Indian Majority Act 1875 )
• CASE-Mohiri Bibi Vs. Dharmodas Ghosh.
Facts: “A, a minor borrowed ‘ 20,000 from B and as a security for the same executed a mortgage
in his favour. He became a major a few months later and filed a suit for the declaration that
the mortgage executed by him during his minority was void and should be cancelled. It was
held that a mortgage by a minor was void and B was not entitled to repayment of money.
Further money lender’s request for repayment of amount advanced to the minor as part of
consideration for the mortgage was also not accepted.
2. Contract is Void – Ab – Initio
• A minor is not competent to contract and any agreement with or by a minor is void from the
very beginning.
3. Can be beneficiary – Partner for benefits
• Minor cannot become a Partner. He can be admitted to the benefits of Partnership.
4. Can plead (Enjoy) Minority – No Estoppel
• Minor can make fraudulent representation of Age.
5. No Ratification (Correction/Change)
• Minor cannot ratity agreement on Attaining majority as it is void-ob-inito.
6. Can be an Agent(Not a principal)
7. Can be an Apprentice (Trainee)
8. Cannot be declared as insolvent
9. Is liable for necessaries to the extent of property
• No Personal Liability of minor, Property is Liable
Two Conditions
1. Contract must be for necessaries
2. Minor must be in need of it.
2. Person of Unsound Mind
• Contract is Void
• A person who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind.
• A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract
when he is of unsound mind.
• Is liable for necessaries to the extent of property
3. Disqualified by Law
• Alien Enemy , Insolvents , Convicts
• Contract is Void

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 • Foreign Sovereign, Representative of Foreign States, Diplomats and Ambassadors
Can enter into Valid Contract. They can file a valid suit against us but we cannot file a valid suit against
them
Free Consent
• Both the parties must understand the same thing in the same sense
( Consensus-ad-idem ) (Section 13)
• A Consent is not free when the following exists : -
1. Coercion (Section 15) : -
• Physical threat or force
• To person or property
• By parties or outsiders
• Punishable under Indian Penal Code (Criminal Offence)
• Contract is Voidable by Aggrieved Party
• Received Benefit - Restore(Return) Back
“Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or
the unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.”
2. Undue Influence(Section 16) : -
• Moral or Mental Pressure
• Contract is Voidable . Three Condition :
• Parties are known to each other
• Position to dominate will of other
• Transaction is unreasonable(Unfair Advantage)

“A contract is said to be induced by ‘undue influence’ where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and he uses that
position to obtain an unfair advantage over the other”.
DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE
Basis of Distinction Coercion Undue Influence
1. Relevant Sec. Sec. 15 Sec. 16
2. Relationship Parties to a contract may or Parties to a contract are
may not be related to each related to each other under
other. some sort of relationship.
3. Consent Consent is obtained by giving Consent is obtained by dominating
a threat of an offence or the will.
committing an offence

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 4. Nature of Pressure It involves physical pressure. It involves moral pressure.
5. Who can exercise It can be exercised even by a It can be exercised only by a
stranger to the contract. party to a contract and not by a
stranger.
6. Restoration of benefit The aggrieved party who is The aggrieved party may or may not
rescinding the contract has to be required to return the benefit
return the benefit received to in whole or in part as per Court’s
the other party under Sec. 64. direction.
7. Nature of liability The party committing the crime It doesn’t involve any criminal
may be punishable under I.P.C liability.
3. Fraud (Section 17) : -
• Intentional Act
• Intention to deceive the other party
• Representation is false
• Person knows it to be false
• Contract is voidable and also claim damages
• Silence is not fraud except
1. Duty of a person to Speak( Based on Trust)
2. Silence is equivalent to speech
Effect of Fraud
• He can Rescind the contract
• He can insist on the performance
• He can sue for Domages
Mere Silence is not Fraud
Caveat Emptor i.e. Let the purchaser beware is the rule applicable to contracts.
Silence is Fraud when:
1. Duty of Person to speak
(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to act
with utmost good faith and make full disclosure of all material facts concerning the agreement,
known to him.
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there is an impliedcondition
that full disclosure of material facts shall be made, otherwise the insurer is entitled toavoid the
contract.
(c) Contracts of marriage: Every material fact must be disclosed by the parties to a contract ofmarriage
(d) Contracts of family settlement: These contracts also require full disclosure of material factswithin
the knowledge of the parties.
(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of shares/
debentures by a joint stock company have to disclose all material facts within their knowledge.
2. Silence itself is equivalent to speech
4. Misrepresentation (Section 18 ) : -
• Unintentional Act
• Misrepresentation Should relate to a material fact
• Representation is false
• Believing it to be true

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 • Contract is Voidable
• Innocent – Not to Cheat
Difference between Fraud and Misrepresentation.
Fraud Misrepresentation
• Intention of Deceive • Without any intention to Deceive
• Without any intention to Perform • With intention to perform
• Knows it to be False • Believes it to be True
• The aggrieved party can claim damages • The aggrieved party cannot claim damages
5. Mistake - Error in belief
1. Mistake of Law

2. Mistake of Fact

Unlawfulness of object and consideration

The object and consideration of an agreement must be lawful, otherwise it is void
1. Prohibited by law
Eg. : - Selling wine in Gujarat
2. Can Defeat the provisions of law
Eg. : - Selling wine in Rajasthan more than 100lt a day
3. A Contract to cause Injury to a person or property
4. A Contract to do Fraud with any person
5. Immoral
6. Opposed to Public Policy

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 Agreements Opposed to Public Policy
1. In Restraint of Marriage : An Agreement that Restricts Right of a person to marry is void
2. In Restraint of Legal Proceedings : An Agreement that Restricts party from enforcing his rights under a
contract is void.
3. Marriage Brokerage Contracts : An Agreement to negotiate marriage for Reward is void.
4. Trading with Enemy: An Agreement with person of enemy country without the Licence of the
Government of India is void.
5. Traffiking in Public Offices : An Agreement to Pay money to a Public Servant is VOID (Bribe)
6. Stifling Prosecution : If a person has committed an offence than he must be punished. Changing
statement in court of law.
7. Maintainance & Champerty :
(a) Maintaining a suit by third party in which they have no interest (Promotion of Litigation in which
one has no int.)
(b) Champerty whereby one party agrees to assist other for recovery of property and to share profit
8. Interference with Course of Justice : Agreement to Influence Legislation is Void
Eg. : - Influence Judge by giving Bribe
9. Agreement in Restraint of Personal Freedom / Liberty : An Agreement which Restricts Personal Liberty
of A person is Void
10. Agreement for creating Monopolies: An Agreement which tends to create monopoly is Void.
11. Agreement in Restraint of Trade : An Agreement to stop a person to do lawful business is to that extent
is Void.
Exceptions- Valid
a. Sale of Goodwill-Buyer of Goodwill can restrict the Seller
b. Partnership Contracts- Firm can restrict the partner
c. Service Agreements-Employer can restrict his Employees during the period of Service
d. Trade Combinations- It is a Business Agreement with a Good intention.
Agreements Expressly Declared Void.
1. Meaning of which is Uncertain- An Agreement the meaning of which is not certain is Void.
2. Unlawful in part

• Where the Legal Part can be Seperated from illegal Part, the Legal Part is valid,
• But where the illegal Part cannot be servered the entire contract is Void.

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 3. Wagering Agreement: (Section 30 )
• An Agreement by way of wager is Void
• There is a Promise to pay money depending upon an uncertain event
• No personal effort
• One wins and other loses
• No control over event
• Collateral transaction-Valid
Wagering Not Wagering
Lottery Horse Race
Gambling Prize Competitions
Betting Crossword Competitions
Shares & Stock without delivery Shares & Stock With Delivery
Difference between Contract of insurance and wagering Agreement
Basis Contracts of Insurance Wagering Agreement
1. Meaning It is a contract to indemnify the loss. It is a promise to pay money or
money’sworth on the happening
or non- happeningof an
uncertain event.
2. Consideration The crux of insurance contractis the There is no consideration
mutual consideration (premium and between the twoparties. There
compensationamount). is just gambling for money.
3. InsurableInterest Insured party has insurableinterest There is no property in case of
in the life or propertysought to be wageringagreement.There is
insured. betting on other’s life and
properties.
4. Contract of Except life insurance, the contract Loser has to pay the fixed
Indemnity of insuranceindemnifies the amount on thehappening of
insured personagainst loss. uncertain event.
5. Enforceability It is valid and enforceable It is void and unenforceable
agreement.
6. Premium Calculation of premium isbased on No such logical calculations are
scientific andactuarial calculation requiredin case of wagering
of risks. agreement.
7. Public Welfare They are beneficial to thesociety. They have been regarded as
against thepublic welfare.

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 UNIT-4 PERFORMANCE OF CONTRACT
1. Obligation of parties to perform
• Parties to a contract must either perform, or offer to perform, their respective promises.
• Actual Performance means the Parties have fulfilled their obligation under the contract
• Attempted Performance / Tender/ offer to Perform means the Promisor offers to Perform but the
Promisee refuses to accept the Performance.
• Legal Representative of Promisor will be bound to Perform in case of Death.
2. Who Can Perform ?
• Promisor himself- when contract involves personal skill or confidence.
• Lawful Agent - When contract does not involve personal skill, Promisor can employ an agent to
perform
• Legal Representative- In case of Death of Promisor
• Third Party - When Promisee accepts Performance from third party he cannot afterwards enforce
it against the promisor
• Joint Promisors.
3. Liability of Joint Promisors : -
• When two or more persons have made a Joint Promise then all such Persons must fulfil the
Promise.
• In case of Death , Legal Representative will be Liable.
• Promisee may demand Performance from any Promisor , then he can call for contribution from
others.
• Release of one Promisor does not discharge others.
• In case of Default Remaining Promisors will bear the loss.
4. Time and Place of Performance
Fixed by parties

If not Fixed, at Reasonable time and place

Question of Fact

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 5. Performance of Reciprocal Promises
1. Simultaneous Performance :
• It will be performed one after the other
2. Order of Performance is Expressly fixed :
• It must be performed in the same order
3. Order of Performance is fixed by Implication :
• It depends on Nature of Transaction
4. Effect of one party Preventing another from performing promise :
• Contract becomes voidable and aggrieved party can claim damages
5. Effect of default of promise to be first performed
• Performance cannot be claimed till the other has been performed.
Other Terms
1. Reciprocal Promise : Promise in exchange of Promise
2. Restitution : Restoring back the benefits received under a void contract (Not to Minor)
3. Succession : Burden and Benefits both devolve on legal heir
4. Assignment : Only Benefits are assigned and not liabilities
5. Appropriation of Payment : When Debtor owes several distinct payments from the Creditor and makes
payment of certain amount than who will decide the direction of payment
1. Debtor Decides
2. Creditor Decides
3. Order of Time (FIFO)
1. Where Debt to be discharged is Indicated: when debtor intimates Expressly or Impliedly
about the Application of Payment, then it must be applied accordingly
2. Where Debt to be discharged is not indicated: when debtor fails to intimate, creditor may
apply it to any lawful debt actually due.
3. Where Neither party Appropriates : where Neither party makes Appropriation payment
shall be applied in order of Time.
Discharge of Contract
1. By Performance :
i. Actual Performance-Both the parties perform
ii. Attempted Performance(Tender)-One party tries to perform but could not perform
2. By Lapse of Time :
Contract is discharged when time fixed has expired
3. By Operation of Law :
i. Death of Promisor
ii. Insolvency of Promisor
4. By Impossibility :
i. At the time of Formation of Contract

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 ii. After Formation of Contract :
• Supervening / Subsequent Impossibility
• When performance of promise become impossible or illegal by occurrence of an unexpected
event or a change of circumstances beyond the contemplation of parties, the contract becomes
void e.g. change in law etc.
• In other words, sometimes, the performance of a contract is quite possible when it is made.
But subsequently, some event happens which renders the performance impossible or
unlawful.
• Such impossibility is called the subsequent or supervening. It is also called the post-contractual
impossibility.
5. Mutual Agreement:
Contract is Discharged by Agreement between Parties
i. Novation – Substitution of New Contract
ii. Rescission – Cancellation of the Contract
iii. Alteration – Changing terms of the Contract
iv. Remission – Acceptance of Lesser Performance
v. Waiver – Let go(Sacrifice) the rights
vi. Merger – Contract with Inferior Right is merged with Superior Right

UNIT-5
BREACH OF CONTRACT AND ITS REMEDIES
“ BREACH OF CONTRACT”

ACTUAL BREACH ANTICIPATORY BREACH

• On the Date of Performance • Prior to the Due Date of Performance

or promisor refuses to perform
During the course of performance
• Express or Implied • Express or Implied
• Party can cancel the contract • Party can cancel the contract immediately
or
Wait till the date of performance.
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 Remedies for Breach of Contract
1. Rescission : Party who has suffered can cancel the Contract
2. Suit for Damages : Party can claim compensation for the loss suffered due to Breach.
3. Suit for Specific Performance :
• If damages are not enough
• Party can demand Specific Performance
• Court orders the Other Party to perform
• It is a positive act
• It cannot be demanded from a Minor
4. Suit for Injuction :
• It is a Negative Act
• Court restricts the party from doing what he promised Not to Do.
Damages
1. Ordinary Damage :
• Naturally arose in the usual course of Things
• It is difference between Market Price and Contract Price
• It is a matter of right
2. Special Damage :
• It arises in special circumstance
• It is already contracted between the Parties
• It is not a matter of right
3. Nominal Damage :
• Minimum Amount is claimed
• There is no Actual Loss
4. Vindictive Damage : Awarded by way of Punishment
1. Breach of promise to marry
2. `Wrongful dishonor of cheque by banker
5. Liquidated Damage :
• Parties fix certain amount which is payable in case of Breach
• Amount is already estimated
Penalty Liquidated Damages
• Amount is greater than loss • Amount is equal to loss
• Disproportionate to loss • Genuine Pre- Estimate of loss
• Intention is to punish the other party • Intention is only to recover the Loss

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 UNIT-6
CONTINGENT AND QUASI CONTRACTS

CONTINGENT CONTRACT
• Contract depending upon happening or non - happening of future uncertain event
• Contingent Contract is Valid
• Contingent Contract to do impossible event is Void

DEFINITION OF CONTINGENT CONTRACT (SECTION 31)

“A contract to do or not to do something, if some event, collateral to such contract, does or does not
happen”.
Essentials of Contingent Contract
a. The performance of a contingent contract would depend upon the happening or non-happeningof
some event or condition.
b. The event referred to as collateral to the contract. The event is not part of the contract. The event
should be neither performance promised nor a consideration for a promise.
c. The contingent event should not be a mere ‘will’ of the promisor.
d. The event must be uncertain.
RULES RELATING TO ENFORCEMENT
1. Contracts contingent upon the Such contracts cannot be enforced by law unless and
happening of an uncertain until that event has happened. If the event becomes
future event impossible, such contracts become void.
2. Contracts contingent upon the Such contracts can be enforced when the happening
— non-happening of a certain of that event becomes impossible and not before.
future event.
3. Contracts contingent upon the future If the uncertain event is the future conduct of a living
conduct of a living person. person, such event shall be considered impossible if
that such person does anything by which it becomes
impossible to perform the contract within any
definite time.

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 4. Contracts contingent upon the Such contracts become void if before the expiry ‘of
happening of an uncertain specified fixed time—
event within a fixed time. (a) such event does not happen, or
(b) such event becomes impossible.
5. Contracts contingent upon the Such contracts can be enforced by law if before the
non- happening of an uncertain expiry of fixed time—
specified event within a fixed time (a) such event does not happen,or
(b) it becomes certain that such event will not
happen.
6. Agreements contingent upon Such agreements are void whether the impossibility
impossible events of the event is known or not to the parties to the
agreement at the time when it is made.
Difference Between Wagering and Contingent Contract
Wagering Contingent
• Money or Money’s Worth is • Entire Contract is Dependent
Dependent
• Uncertain Future Event is • Uncertain Future Event is Collateral Factor
Primary Factor
• Void • Valid
• No real Interest • Parties have real Interest
• There Must be Reciprocal Promise • May or May not be Reciprocal Promise
Quasi Contract
• No offer, No Acceptance , No consent
• No real Contract between parties
• It is an obligation Imposed by law
• Rule – “A person should not enrich himself at the expense of other”
• It is Resembling a contract so it is known as Quasi contract
Kinds of Quasi Contract/ Cases deemed as Quasi contract
1. Necessaries supplied to Minor/ Incapable Person : Is Entitled to be Reimbursed from the property
2. Payment by An Interested Person: Is Entitled to be Reimbursed from Others.
3. Person enjoying benefit of Non-Gratuitous Act: Is Bound to Compensate the other.
4. Finder of Goods: Same Responsibility of Bailee.
Duties Rights
(i) to take proper care of the property as (i) Right to Lawful charges
man of ordinary prudence would take
(ii) no right to appropriate the goods and (ii) Right to Reward, if any
(iii) to restore the goods if the owner (iii) Right to possession againt the whole world
is found. except the true owner
5. Money paid by mistake or under Coercion : Must Repay or Return it.


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 Chapter-2
THE SALE OF GOODS ACT, 1930

 Introduction:
• Sale of Goods Act came into force on 1st July,1930.
• This Act came into force to determine the Rights and liabilities of buyer as well as seller in case of
sale of the goods.
• This act provides sale as a bargain between the buyer and a seller.
• This act gives the right to a person in nature of Right in Rem.
 Basic Terms in Sale of Goods Act:
• Contract of Sale: According to Section 4(1), “A contract of sale of goods is a contract whereby the
seller transfers or agrees to transfer the property in goods to buyer for a price.”
• Buyer: According to Section 2(1), “Buyer means a person who buys or agrees to buy the goods.”
• Seller: According to Section 2(13), “Seller means a person who sells or agrees to sell goods.”
• Goods: According to Section 2(7), “Goods means every kind of movable property other than
actionable claim and money; and includes stock and shares, growing crops, grass, and things
attached to or forming part of land which are agreed to be severed before sale or under Contract
of Sale.”

Types of Goods:
On the basis of Existence:
• Existing goods: According to Section 6, Existing goods are such goods as are in existence at the time of
Contract of Sale i.e. owned or possessed or acquired by the seller at the time of Contract of Sale.

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 • Future Goods: According to Section 2(6), Future Goods means goods to be manufactured or produced
or acquired by the seller after making the contract of sale.
• Contingent Goods: According to Section 6(2), Goods the acquisition of which by the seller depends
upon an uncertain event are called Contingent goods
On the basis of Identification:
• Specific Goods: According to Section 2(14), Specific goods means those goods identified and agreed
upon at the time when contract of sale is made.
• Unascertained Goods: Goods which are not specifically identified or ascertained at the time of making
contract. They are indicated or defined only by description or sample.
• Ascertained Goods: Ascertained Goods are those which are identified in accordance with the agreement
after the contract of sale. These type of goods are not defined in the Act but similar to Specific Goods
when from large quantity the goods are selected or identified then such identified goods are called
Ascertained goods.
• Transfer of Property: Transfer of Property means transfer of ownership in such a way that buyer can
enjoy the goods against whole world including seller.
Transfer of Property gives a buyer 2 rights: 1) He can utilize goods in whatever manner he decides 2) He can
transfer the ownership to others.
Property of goods can be of 2 types : 1) General Property which is known as actual ownership of goods. 2)
Special Property is known as beneficial ownership of goods. E.g If Mr.A the actual owner of certain jewelry
pledges the same with Mr.B then Mr.A has the general Property and Mr.B has the special property.
• Price : According to Section 2(10), Price means money consideration for sale of goods.
As per the provisions of the Act if the consideration is fully in terms of Money then it is allowed, if it is
partly in terms of money partly in kind then also it is allowed but if it is fully in terms of kind then it will
be considered as Barter not sale.
 Manner of Determination of Price:
Price may :
1. Either be fixed by the contract.
2. Agreed to be fixed in manner provided by the contract.
3. Determined by the course of dealing between the parties.
If nothing is decided then buyer should pay Reasonable Price.
 Determination of Price by Third Party:
• Where there is an agreement to sell goods on the terms that Price is to be fixed by the valuation
of third party and such third party cannot or does not make such valuation then such contract will
become void.
• Where a third party is prevented from making valuation by fault of seller or buyer then party not
in fault may maintain a suit for damages against the party in default.
• Essential Elements of Contract of Sale:
The following elements must co-exist so as to constitute a contract of sale of goods under the Sale of
Goods Act, 1930:
• There must be at least two parties, the seller and the buyer and the two must be different persons.
A person cannot be both the seller and the buyer and sell his goods to himself.

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 • The subject matter of the contract must necessarily be goods covering only movable property. It
may be either existing goods, owned or possessed by the seller or future goods.
• A price in money (not in kind) should be paid or promised. But there is nothing to prevent the
consideration from being partly in money and partly in kind.
• A transfer of property in goods from seller to the buyer must take place. The contract of sale is
made by an offer to buy or sell goods for a price by one party and the acceptance of such offer by
other.
• A contract of sale may be absolute or conditional.
• All other essential elements of a valid contract must be present in the contract of sale, e.g. free
consent of parties, competency of parties, legality of object and consideration etc.
 Difference between Sale and Other type of Contracts:
Sale and Agreement to sell:
• Sale: Where under a contract of sale the property in goods is transferred from seller to buyer the
contract is called sale.
• Agreement to Sell: Where under a contract of sale the transfer of property in the goods is to take
place at a future date or subject to some condition thereafter to be fulfilled , the contract is called
agreement to sell.
Basis of difference Sale Agreement to sell
Transfer of property The property in the goods passes Property in the goods passes to the
to the buyer immediately. buyer on future date or on fulfilment
of some condition.
Nature of contract It is an executed contract. i.e. It is an executory contract. i.e.
contract for which consideration contract for which consideration is
has been paid. to be paid at a future date.
Remedies for breach The seller can sue the buyer for the The aggrieved party can sue for
price of the goods because of the damages only and not for the price,
passing of the property therein unless the price was payable at a
to the buyer. stated date.
Liability of parties A subsequent loss or destruction Such loss or destruction is the
of the goods is the liability of the liability of the seller.
buyer.
Burden of risk Risk of loss is that of buyer since Risk of loss is that of seller.
risk follows ownership.
Nature of rights Creates Jus in rem Creates Jus in personam
Right of resale The seller cannot resell the goods. The seller may sell the goods since
ownership is with the seller.
In case of insolvenc of seller The official assignee will not be The official assignee will acquire
able to take over the goods but will control over the goods but the price
recover the price from the buyer. will not be recoverable.

In case of insolvenc The official assignee will have The official assignee will not have
of buyer control over the goods. any control over the goods.

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Sale and Bailment:
• Bailment: A ‘bailment’ is the delivery of goods for some specific purpose under a contract on the
condition that the same goods are to be returned when the purpose is accomplished.
Basis of difference Sale Bailment
Transfer of property The property in goods is transferred There is only transfer of possession
from the seller to the buyer. So it is of goods from the bailor to the
transfer of general property. bailee for any of the reasons like
safe custody, carriage etc. So, it is
transfer of special property.
Return of goods The return of goods in contract of The bailee must return the goods
sale is not possible. to the bailor on the
accomplishment of the purpose for
which the bailment was made.
Consideration The consideration is the price The consideration may be
in terms of money. gratuitous or non-gratuitous.
Sale and Hire Purchase:
Basis of difference Sale Hire- Purchase
Time of passing property Property in the goods is transferred The property in goods passes to the
to the buyer immediately at the hirer upon payment of the last
time of contract. instalment.
Position of the party The position of the buyer is that The position of the hirer is that of
of the owner of the goods. abailee till he pays the last instalment.
Termination of contract The buyer cannot terminate the The hirer may, if he so likes, terminate
contract and is bound to pay the the contract by returning the goods
price of the goods. to its owner without any liability to
pay the remaininginstalments.
Burden of Risk of The seller takes the risk of any The owner takes no such risk, for if
insolvency of the buyer loss resulting from the insolvency the hirer fails to pay an instalment,
of the buyer. the owner has right to take back
the goods.
Transfer of title The buyer can pass a good title to a The hirer cannot pass any title even
bona fide purchaser from him. to a bona fide purchaser.
Resale The buyer in sale can resell the goods. The hire purchaser cannot resell
unless he has paid all the
installments.

 Destruction of Subject Matter:

Destruction of subject matter in Sale: In contract of Sale if the goods at the time when contract was
made were perished or damaged in a way it can no longer be capable of being used then in such a case
Sale is void ab initio.

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 Destruction of subject matter in case of Agreement to sell : In an Agreement to sell if the goods after
agreement was entered but before passing of property to buyer were perished or damaged in a way it
can no longer be capable of being used then in such a case Agreement becomes void.
 Rules as to delivery of goods:
• Delivery : Delivery means voluntary transfer of possession by one person to another.
(1) Delivery of goods is necessary for the transfer of property in goods.
(2) Goods are said to be in a deliverable state when they are in such a condition where buyer , would
under a contract, be bound to take the delivery of goods.
(3) Modes of Delivery:
Actual Delivery : Here goods are actually delivered to buyer.
Symbolic Delivery: Goods are delivered by using some symbol like keys or Document of title to Goods.
Constructive Delivery: Where the goods are delivered just by acknowledgment. Where without change
of possession just the right of buyer as an owner is acknowledged and person having possession
continues to have possession on behalf of owner.
(4) Usually a buyer is required to make the request for delivery of goods then the seller is bound to
deliver the goods.
(5) Usually place of delivery is mentioned within the contract but if it is not mentioned then it will be
delivered at a place where the contract was made.
(6) Usually time of delivery of goods is also mentioned within the contract but if it is not mentioned
then it will be delivered at reasonable time means Business hours.
(7) Usually the seller will bear the expense of delivery of goods.
(8) Sometimes buyer may request for delivery of goods in installments & accordingly it will be given
to him.
(9) Sometimes the goods are delivered through transport company then seller’s responsibility will
come to an end as soon as he delivers the goods to transport company provided a notice is given
to a buyer.
(10) If notice is given to buyer and seller has also delivered the goods to transport company and
afterwards if there is any loss then buyer will bear the loss but if no notice is given then seller will
bear the loss.
(11) If seller has delivered wrong quantity then remedy available to buyer.
Excess Quantity delivered: Buyer may accept total, Buyer may reject total or he may accept the bulk
ordered and reject the excess.
Short Quantity delivered: Buyer may accept total or he may reject total quantity delivered.
Different Goods delivered from contract: Buyer may accept total or he may reject total quantity
delivered.
• Passing of Property:
• When there is an unconditional contract for sale of specific or ascertained goods in a deliverable
state, the property in goods passes to the buyer when the contract is made.
• Ascertainment of goods and their unconditional appropriation to the contract are the two pre-
conditions for transfer of property in goods from seller to buyer.
• Therefore in case of unascertained goods also property will pass to buyer when goods are
ascertained and unconditionally appropriated.
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 • Appropriation of goods: Appropriation of goods involves selection of goods with the intention of
using them in performance of contract and with the mutual consent of buyer as well as seller.
The essential elements:
The goods must confirm with the description and quantity stated in the contract.
The goods must be in a deliverable state.
The goods must be unconditionally appropriated with the consent of buyer and seller.
The consent may be given either before or after appropriation.
• Sale or Return:
When goods are sent to buyer on sale or return basis then property passes to buyer when:
• Buyer signifies his approval or acceptance to the seller,
• When he does any other act adopting the transaction ,
• When he does not approve the transaction but retain the goods beyond a reasonable time.
• Reservation of Right of Disposal:
• In certain situation the seller can reserve the right of disposal until certain conditions are fulfilled.
• If the seller reserves such right of disposal with him then although the goods are delivered to
carrier or other bailee for the purpose of transmitting the same to the buyer, the property in
goods will not be passed to the buyer till the condition intended by seller is fulfilled by the buyer.
• Document of Title to goods and Document showing Title to goods:
• Document of title to goods: Document of Title to goods are the documents where the person
having such a document gets the goods that means the person having the possession of the
document will be entitled for goods and therefore these documents can also be transferred by
endorsement to others and transferee will also be entitled to get the goods.
• Document showing title to goods: Document showing Title to goods are the document which
shows that the person named in such document is the owner of such goods. That means it is just
a document showing title of the ownership of a person named in such document. Therefore this
document cannot be transferred by endorsement to others.
• Passing of Risk:
• The general rule is that “Unless otherwise agreed the goods remain at seller’s risk until the
property therein is transferred to the buyer, but when the property therein is transferred to the
buyer, the goods are at the buyer’s risk whether delivery has been made or not.”
• Risk passes with the property. The owner of goods must bear the loss or damage of goods but
there are two exceptions:
• The delivery has been delayed by default of either of the party then the risk will be with the Party
in default.
• When the buyer or seller are working as the bailee of goods for the other party.
 Rule as to Ownership:
• The concept dealing with passing of ownership is known as “Nemo dat quad non Habet” that
means the person who is not the owner cannot pass the valid ownership. If he is selling the goods
then he will not pass a good title. He will pass the same title as he has.
• There are Certain Exceptions to this rule:

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 (1) Mercantile Agent: If the agent is having possession with the permission of owner and sells it to
the buyer acquiring the goods in good faith for consideration then he will pass a good title.
(2) Co-owner: If one of the co-owner is having possession of goods with the consent of other co-
owners and he sells the whole goods then the buyer acquiring the goods in good faith for
consideration then he will pass a good title.
(3) Unpaid Seller: If the buyer has not paid price and seller by exercising Right of Lien or Right of
stoppage in transit has the possession of goods then he can sell the goods and person buying will
get good title.
(4) Estoppel: If the Owner is estopped from denying seller’s authority to sell then the seller selling
the goods will get a good title. E.g. If Mr.A introduced Mr.B as his agent in front of Mr.X though he
was not then afterwards if Mr.B sells some goods to Mr.X then Mr.A will be estopped from denying
Mr.B’s authority to sell and buyer will get a good title.
(5) Person having possession of goods under Voidable Contract: If person having possession of goods
under a voidable contract sells the goods before recession by aggrieved party then the buyer
purchasing will get a good title.
(6) Seller in possession of goods after transfer of property: If the seller after transfer of property has
the possession of goods and he sells it to a buyer acquiring in good faith and consideration then
such buyer will get a good title.
(7) Buyer in possession of goods before transfer of property to him: If the buyer has the possession
of goods with the consent of seller before transfer of property in his favor and he sells the goods
to third party who acquires in good faith without consideration then buyer will get good title.
(8) Operation of law: In case of Pledge the pledgee can sell the goods, In case of insolvent official
receiver can sell the goods.
 Rights of Unpaid Seller:
• Meaning: A seller will be treated as an unpaid seller if in case of cash sales he has not received the
cash or in case cheque or negotiable instrument has been received as conditional payment and
condition has not been fulfilled by the reason of dishonor or otherwise.
• Rights of Unpaid Seller: Unpaid seller have two types of Rights: 1)Right against goods 2) Right
against buyer
• Rights against goods: Following are the rights of unpaid seller against goods:
• Right of Lien: The right of lien means to keep the possession of goods belonging to buyer until and
unless the dues are clear. This right is a Right to Retain the Possession of goods.
Conditions of exercising Right of Lien:
• Seller must be unpaid.
• Goods must be in the possession of seller.
• Right of stoppage in transit: The right of stoppage in transit means to stop the goods in transit
when they are handed over for transport. This right is a right to Re gain the possession already
handed over to courier.
Conditions of exercising Right of Stoppage in Transit:
• Seller must be unpaid
• Seller must have parted with the goods
• Goods must be in Transit

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 • Buyer must be insolvent
• Right of Resale: If the seller has the possession of goods by using Right of Lien or Stoppage in
Transit then he can sell such goods.
Conditions for Resale:
• If the goods are perishable: He can sell the goods without giving notice to the buyer and in such a
case he will not be liable to share the profits with buyer and he will be entitled to claim the loss
from buyer.
• If the goods are Non Perishable: In this situation unpaid seller should give notice to buyer before
selling the goods
If the goods are sold without giving notice:
In this case Seller will not be entitled to claim loss from buyer but if there is any profit he will be
liable to share the profits with buyer.
If goods are sold after giving notice:
In this case seller will be entitled to claim loss from buyer and if there is any profit he is not
required to share it with buyer.
 Difference between Right of Lien and Stoppage in Transit:
• Right of Lien is about retaining the possession whereas Right of Stoppage in Transit is about
regaining possession which is already given to transport company.
• Right of lien can be exercised even when buyer is not insolvent whereas right of stoppage in
transit can be exercised only when the buyer is insolvent.
• In Right of lien the possession must be there with the seller but in case of Right of Stoppage in
Transit the seller must have parted with possession.
• Right of Stoppage in Transit begins when Right of Lien ends.
 Effect of Sub-sale or Pledge by the Buyer:
• The right of Lien or Stoppage in Transit is not defeated by Sub sale or pledge made by the buyer
except when seller has given consent for such Sub Sale or Pledge.
• The Right of Stoppage in Transit will be defeated when the Buyer has transferred document of
title or pledges toa sub-buyer who acquires in good faith by paying consideration.
 How Stoppage in Transit is effected:
• There are two modes of stoppage in transit:
1. By taking actual possession of goods.
2. By giving notice to the carrier not to deliver goods.
• Where the notice of stoppage in transit is given by seller to carrier or bailee in possession of
goods, he shall redeliver the goods to or according to directions of seller. The expenses shall be
borne by seller.
 When does transit comes to an end:
• When buyer or other bailee obtains delivery.
• Buyer obtains delivery before arrival of goods at the destination.
• Where buyer is communicated by carrier or other bailee that they are holding the goods.
• Where goods are delivered to carrier hired by the buyer.

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 • Where goods are delivered to a ship chartered by buyer.
 Rights of Unpaid Seller against buyer:
• Suit for Price: Where price is payable on a certain day irrespective of delivery of goods then seller
may sue the buyer for price of goods. Where the goods are delivered and buyer wrongfully
refuses to accept and pay for goods then also the seller may sue for price.
• Suit for damages for Non-Acceptance: Where the seller has delivered the goods as per the
requirements of buyer but buyer wrongfully rejects the goods then seller may sue for damages
for non-acceptance.
• Suit for Interest: Where the interest is decided by terms of contract then that interest will be
provided to seller or if nothing was decided then buyer will be required to pay interest which
seller indicated at that time and if no interest is determined then court will award interest at the
reasonable rate.
 Rights of Buyer against Seller:
• Suit for non-delivery: In case the seller promised to deliver the goods on certain day irrespective
of payment and seller has not delivered the goods then buyer can sue for non-delivery.
• Suit for breach of conditions and warranties: When there is breach of condition or warranty then
buyer can exercise the option of repudiation of contract or claiming damages.
• Suit for Specific performance: When buyer has ordered some goods which are unique or for which
no replacement is available then on failure of seller to deliver the goods buyer can demand a
specific performance and require the seller to deliver the same goods which were promised by
seller.
• Suit for interest: Buyer can also claim interest for the amount to be recovered from seller till the
time it is actually paid.
 Doctrine Of Caveat Emptor( Principle of Let the buyer beware):
• According to such doctrine buyer should be careful in selection of goods if later on goods are
found defective or unfit for buyer’s purpose then he cannot blame the seller.
• Here, for the wrong selection of goods made by buyer, he himself will be held responsible for.
• Following are the situations where the buyer will not be responsible for wrong selection rather
the seller will be responsible.:
• When buyer has expressly relied upon expertise of seller for selection of goods.
• When buyer has purchased goods as per a brand name or trade name.
• When goods are not of merchantable quality.
• When buyer has purchased goods under sample or brand name.
• When seller has sold the goods by way of fraud.
 Conditions and Warranties:
• Conditions: Conditions are the stipulations which are essential to the main purpose of contract.
Breach of which gives a buyer right to Repudiate contract or claim damages or both.
• Warranties: Warranties are the stipulations which are collateral to the main purpose of contract.
Breach of which gives a buyer right to claim damages but not a right to repudiate the contract.
• Conditions and Warranties can be expressly decided by seller and buyer at the time of contract
and it will be known as Express Conditions or Warranties.

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 • Conditions and Warranties if not decided can be implied by law and it will be known as Implied
Conditions or Warranties.
Implied Conditions:
• Condition as to title: In case of sale of goods there is an implied condition that seller has the
ownership of goods or has a right to sale the goods i.e. he can pass the good title.
• Condition as to sample or description: When the goods are sold as per sample or description
there is an implied condition that actual goods must co-relate with sample or description.
• Condition as to Quality or Fitness: Goods must be of the quality which is suitable for buyer’s
purpose. This condition will be applied only if Buyer has informed the purpose for which he is
purchasing the goods to seller.
• Condition as to Merchantability: Goods must be of merchantable quality. Merchantable quality
has not been defined by the act but it can be said that merchantable quality means a person of
ordinary prudence should consider the goods as merchantable. This Condition is not applicable
when buyer has checked the goods.
• Condition as to Wholesomeness: In case of eatables or provisionary items there is an implied
condition that actual goods consumed will not affect human health.
Implied Warranties :
• Warranty as to Quiet Possession: It is a warranty that buyer can enjoy the possession of goods
against whole world including seller.
• Warranty as to Quality or fitness by usage or trade: Goods must be of merchantable quality.
• Warranty as to free from encumbrances: In case of sale of goods, there is implied warranty that
goods are free from defect of title.
• Warranty to disclose dangerous nature of goods: If the goods contain anything of dangerous
nature then there is an implied warranty that such dangerous nature must be disclosed.
 Situations where Conditions will be considered as warrenties:
Mandatory situations:
• Where the performance of condition is excused by law.
• Where the contract is non-severable and buyer has appropriated some of the goods out of that
lot.
Voluntary situations:
• Where buyer has elected to treat breach of condition as breach of warranty.
• Where buyer has waived the performance of Condition.
 Auction Sale:
• In case of auction sale an auctioneer sales goods on behalf of owner in public.
• The relationship between auctioneer and owner will be that of Principle & Agent.
• Different goods may be put for display & for each type of goods a separate bid will be made.
• A bid will come to an end with the fall of hammer.
• An owner can keep a reserve price below which no one can bid.
• Moreover an owner can keep his own reservation of bidding.
• If owner has reserved the right of bidding then he must reserve the right expressly and he should
either bid himself or appoint any one person as an agent to bid on his behalf.


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 Chapter-3
THE INDIAN PARTNERSHIP ACT, 1932

 Definitions:
• Partnership: “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.”
• Partners: Persons who have entered into partnership with one another are called individually
“Partners”
• Partnership firm: Persons who have entered into partnership with one another are called
collectively “Firm”
• Firm Name: The name under which business of partners is carried on is called the “Firm Name”
 Essential Elements of Partnership:
• Association of persons: Partnership is an association of 2 or more persons. But, Persons recognized
by law can enter into an agreement of partnership. A firm since it is not a legal person in the eyes
of law it cannot be a partner.
• Agreement: Partnership must be the result of an agreement between two or more persons.
Agreement may be oral or written, express or implied. The nature of partnership is voluntary and
contractual.
• Agreement to share profits: The sharing of profits is an essential feature of partnership. There can
be no partnership where only one of the partners is entitled to the whole of the profits of the
business. But an agreement to share losses is not an essential element.
• Business: First, there must exist a business. For the purpose, the term ‘business’ includes every
trade, occupation and profession. Secondly, the motive of the business is the “acquisition of
gains” which leads to the formation of partnership.
• Business carried on by all or any of them acting for all: The business must be carried on by all the
partners or by anyone or more of the partners acting for all. This is the cardinal principle of the
partnership Law. In other words, there should be a binding contract of mutual agency between
the partners. Mutual Agency provides that every partner is principal as well as agent of other
partners.
 True Test of Partnership:
• Three elements will decide the existence of partnership: Agreement, Profit Sharing and Mutual
Agency.
• Agreement: Partnership is created by agreement and not by status. The members of a Hindu
Undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife
carrying on business as such are not partners in such business.
• Profit Sharing: Sharing of profits is an essential element but not a conclusive evidence of
Partnership it is only prima facie evidence as there are many other incidents where persons
sharing profits are not partners.
• Mutual Agency: Mutual Agency is the conclusive evidence of existence of partnership. If the
elements of mutual agency relationship exist between the parties constituting a group formed
with a view to earn profits by running a business, a partnership may be deemed to exist.
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 Situations where there is a profit sharing but no partnership:
• Co-ownership
• a lender of money to persons engaged or about to engage in any business,
• a servant or agent as remuneration,
• a widow or child of a deceased partner, as annuity, or
• a previous owner or part owner of the business, as consideration for the sale of the goodwill or
share thereof, does not of itself make the receiver a partner with the persons carrying on the
business.
 Kinds of Partnership:
On the basis of Business:
• Particular Partnership: A partnership formed for a particular adventure or a particular project is known
as a particular partnership. In case of particular partnership the partnership is dissolved on completion
of purpose.
• General Partnership: A partnership not limited to a particular adventure or project but for general
business is known as General Partnership.
On the basis of Duration:
• Partnership at will: The partnership where no duration is fixed or no manner is provided for
determination of partnership then it is known as Partnership at will. Partnership at will can be dissolved
at any time by a partner by giving notice.
• Partnership for fixed duration: In case where the duration is fixed for the partnership then it will be
known as Partnership for fixed duration. In case of Partnership for fixed period the partnership ends on
completion of duration but if Partners continue the business after such duration then it will be converted
into Partnership at will.
 Types of Partners:
• Active/Ostensible/Actual Partner: An active partner is the one who becomes partner by agreement
with other partner and actively participates in the conduct of business. Active partner shares
profit and bears losses. Active partner is liable towards third party.
• Sleeping/Dormant Partner: A dormant partner is the one who becomes partner by agreement
but do not participate in the conduct of business. He shares the profit and bears the losses.
Dormant partner is also liable towards third party.
• Nominal Partner: A nominal Partner is the one who allows his name to be used in the firm. He
does not participate in day to day functioning of business. He do not share profit or is not liable for
loss but he is also liable towards third party for the acts of firms.
• Incoming Partner: A partner who is joining the already existing firm is known as an Incoming
Partner. Incoming Partner is not liable for any act of the firm before his joining as partner.
• Outgoing Partner: A partner who is leaving the firm and remaining partners continue the business
is known as an outgoing partner. In case of an outgoing partner an active partner remains liable till
the public notice is given and dormant partner remains liable till the retirement.
• Partner by estoppel/holding out: If the presumption is created in mind of third party that a particular
person is a Partner of a partnership firm then that will be a case of Partner by estoppel/holding
out and in this case person will be liable for the act of firm towards the third party in whose mind
the presumption is created and firm is also liable for that partner’s act.
• Partner for profits only: Partner for profits only is a person who is entitled to share profits only but
not liable for losses. He is also liable towards third party for the acts of firm.

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 • Sub Partner: When one of the partners under existing firm transfers his interest to the outsider
with the consent of other partners then such transferee will be considered as sub partner. Sub
partner will be entitled to share the profit but will not be liable for loss. Sub partner will not be
liable towards third party.
 Partnership Deed:
• The document in writing containing the various terms and conditions as to the relationship of the
partners to each other is called the ‘partnership deed’.
• Name of the partnership firm.
• Names of all the partners.
• Nature and place of the business of the firm.
• Date of commencement of partnership.
• Duration of the partnership firm.
• Capital contribution of each partner.
• Profit Sharing ratio of the partners.
• Admission and Retirement of a partner.
• Rates of interest on Capital, Drawings and loans.
• Provisions for settlement of accounts in the case of dissolution of the firm.
• Provisions for Salaries or commissions, payable to the partners, if any.
• Provisions for expulsion of a partner in case of gross breach of duty or fraud. A partnership firm
may add or delete any provision according to the needs of the firm.
 General duties of Partners: Partners are bound to carry on the business of the firm to the greatest
common advantage, to be just and faithful to each other, and to render true accounts and full information
of all things affecting the firm to any partner or his legal representative.
• Every partner has a duty to indemnify the firm for any loss caused to it by his fraud or willful
neglect in the conduct of the business of the firm.
• Other rights and duties of partners will be decided by contract between the partners, and such
contract may be express or may be implied by course of dealing
• Agreement may also restrain partner from carrying on any business while he is a partner and no
provision of Indian Contract Act restricting Restrain of Trade will apply to these agreements.
 Conduct of the Business:
• Subject to contract between the partners:
(a) every partner has a right to take part in the conduct of the business;
(b) every partner is bound to attend diligently to his duties in the conduct of the business;
(c) any difference arising as to ordinary matters connected with the business may be decided by
majority of the partners, and every partner shall have the right to express his opinion before the
matter is decided, but no change may be made in the nature of the business without the consent
of all partners; and
(d) every partner has a right to have access to and to inspect and copy any of the books of the firm.
(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised
agents shall have a right of access to and to inspect and copy any of the books of the firm.
 Mutual Rights and Liabilities:
• Subject to contract between the partners-
(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business;
(b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the
losses sustained by the firm;

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 (c) where a partner is entitled to interest on the capital subscribed by him such interest shall be
payable only out of profits;
(d) 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 percent per
annum;
(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him-
a. in the ordinary and proper conduct of the business, and
b. 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;
(f) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of
business of the firm.
 Partnership Property:
• Subject to contract between the partners, the property of the firm includes all property and rights
and interest in property originally brought into the stock of the firm, or acquired, by purchase or
otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and
also includes the goodwill of the business.
• Section 14 specifically lays down that the goodwill of a business is subject to a contract between
the partners, to be regarded as ‘property’
• When a partnership firm is dissolved every partner has a right, in the absence of any agreement to
the contrary, to have the goodwill of business sold for the benefit of all the partners.
• Goodwill is a part of the property of the firm. It can be sold separately or along with the other
properties of the firm.
• Where the property is exclusively belonging to a person, it does not become a property of the
partnership merely because it is used for the business of the partnership, such property will
become property of the partnership if there is an agreement.
• 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.
 Personal profit earned by partners:
• 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;
• 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.
 Rights and duties of partners after change in the firm:
• after a change in the firm: Where a change occurs in the constitution of a firm, the mutual rights
and duties of the partners in the reconstituted firm remain the same as they were immediately
before the change, as far as may be;
• after the expiry of the term of the firm: Where a firm constituted for a fixed term continues to
carry on business after the expiry of that term, the mutual rights and duties of the partners
remain the same as they were before the expiry, so far as they may be consistent with the incidents
of partnership at will; and
• Where additional undertakings are carried out: Where a firm constituted to carry out one or more
adventures or undertakings carries out other adventures or undertakings carries out other
adventures or undertakings are the same as those in respect of original adventures or undertakings.

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 Relation of Partners to Third Parties:
• Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the
business of the firm.
• Implied authority of partner as agent of the Firm:
• The authority of a partner to bind the firm conferred by this section is called his “ implied
authority”.
If partnership is of a general commercial nature,
(a) he may pledge or sell the partnership property;
(b) he may buy goods on account of the partnership;
(c) he may borrow money, contract debts and pay debts on account of the partnership;
(d) he may draw, make, sign, endorse, transfer, negotiate and procure to be discounted, Promissory
notes, bills of exchange, cheques and other negotiable papers in the name and on account of the
partnership.
• Mode of doing an act to bind the firm:
(a) The act done must relate to the usual business of the firm, that is, the act done by the partner
must be within the scope of his authority and related to the normal business of the firm.
(b) The act is such as is done for normal conduct of business of the firm.
(c) The act to be done in the name of the firm or in any other manner expressing or implying an
intention to bind the firm.
• Acts not covered in Implied Authority:
• In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does
not empower him to-
(a) Submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.
o Extension or Restriction of Partner’s implied authority:
• The implied authority of a partner may be extended or restricted by contract between the partners.
Under the following conditions, the restrictions imposed on the implied authority of a partner by
agreement shall be effective against a third party:
• The third party knows about the restrictions, and
• The third party does not know that he is dealing with a partner in a firm.
o Partner’s authority in Emergency:
• According to section 21, a partner has authority, in an emergency, to do all such acts for the
purpose of protecting the firm from loss.

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 Effect of Admission by a partner:
• According to Section 23, an admission or representation made by a partner concerning the affairs
of the firm is evidence against the firm, if it is made in the ordinary course of business.
 Effect of notice to Acting partner:
• According to section 24, notice to a partner who habitually acts in the business of the firm of any
matter relating to the affairs of the firm operates as notice to the firm.
 Liability to Third Parties:
• Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm
done while he is a partner.
 Liability of firm for wrongful acts of partner:
• The firm is liable to the same extent as the partner for any loss or injury caused to a third party by
the wrongful acts of a partner, if they are done by the partner while acting:
o in the ordinary course of the business of the firm
o with the authority of the partners.
 Liability of firm or Misapplication by partners:
• a partner acting within his apparent authority receives money or property from a third party and
misapplies it, or
• a firm in the course of its business receives money or property from a third party, and the money
or property is misapplied by any of the partners while it is in the custody of the firm, the firm is
liable to make good the loss.
 Rights of Transferee of a Partner’s Interest:
• The rights of such a transferee are as follows:
• During the continuance of partnership, such transferee is not entitled:
 to interfere with the conduct of the business,
 to require accounts, or
 to inspect books of the firm.
• He is only entitled to receive the share of the profits of the transferring partner and he is bound
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.
 Minors admitted to the benefits of Partnership:
· A minor cannot be admitted as a partner but he can be admitted to the benefit of partnership with the
consent of all other partners.
Rights of Minor admitted to the benefits of Partnership:
• A minor partner has a right to his agreed share of the profits and of the firm.
• He can have access to, inspect and copy the accounts of the firm.
• He can sue the partners for accounts or for payment of his share but only when severing his
connection with the firm, and not otherwise.
• On attaining majority he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was entitled
as a minor. If he does not, then his share is not liable for any acts of the firm after the date of the
public notice served to that effect.

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Liabilities of Minor:
Before attaining majority:
• The liability of the minor is confined only to the extent of his share in the profits and the property of
the firm.
• Minor has no personal liability for the debts of the firm incurred during his minority.
• Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests in
the Official Receiver / Assignee.
After attaining majority:
• Within 6 months of his attaining majority or on his obtaining knowledge that he had been admitted to
the benefits of partnership, whichever date is later, the minor partner has to decide whether he shall
remain a partner or leave the firm.
• Where he has elected not to become partner he may give public notice that he has elected not to
become partner and such notice shall determine his position as regards the firm. If he fails to give such
notice he shall become a partner in the firm on the expiry of the said six months.
When he becomes partner: If the minor becomes a partner on his own willingness or by his failure to give the
public notice within specified time, his rights and liabilities as given in Section 30(7) are as follows:
• He becomes personally liable to third parties for all acts of the firm done since he was admitted to the
benefits of partnership.
• His share in the property and the profits of the firm remains the same to which he was entitled as a
minor.
When he elects not to become a partner:
• His rights and liabilities continue to be those of a minor up to the date of giving public notice.
• His share shall not be liable for any acts of the firm done after the date of the notice.
• He shall be entitled to sue the partners for his share of the property and profits. It may be noted that
such minor shall give notice to the Registrar that he has or has not become a partner.
 Legal Consequence of Partner coming in and going out:
Introduction of a Partner: A person can be admitted to the partnership only with the consent of all the
existing partners. An Incoming partner will not be liable for acts of firm before he became a partner.
Retirement of Partner:
• A partner may retire from firm with consent of all other partners or in accordance with agreement
or in case of partnership at will, by giving notice in writing to other partners of his intension to
retire.
• If Retiring partner makes an agreement with remaining partners and third party then he is
discharged from liabilities incurred before his retirement.
• In other cases An active partner remains liable till the public notice is given and Dormant partner
remains liable till the retirement.
Expulsion of a Partner:
• A partner may be expelled from a firm only if following conditions are satisfied.
o The power of expulsion must be provided under the contract of Partners.
o The power is exercised by a majority of the partners; and
o Power is exercised in good faith.
• If any of these conditions are not satisfied then expulsion is not in bona fide interest and void.
• Partner is expelled in good faith if

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 o Expulsion is in the interest of partnership.
o The partner expelled is served with a notice.
o He is given an opportunity of being heard.
Insolvency of a Partner: Where a partner in a firm is adjudicated as an insolvent he ceases to be a partner on the
day he is adjudicated as insolvent.
• When the firm is not dissolved on insolvency of a partner, the estate of such partner will not be liable
for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which
the order of adjudication is made.
 Right of Outgoing Partner to carry on Competing business: An outgoing Partner may carry on the
business competing with that of the firm and he may advertise such business , but he may not
o Use firm name,
o Represent himself as carrying on business of firm; or
o Solicit the existing client of firm
 Right of Outgoing Partner to share subsequent Profits:
• Where any partner of the firm has died or otherwise ceased to be partner and the surviving
partners carry on the business of firm without final settlement of accounts then outgoing partner
is entitled at his option to have Share of profit or 6% p.a. Interest on amount till the accounts are
finally settled.
 Revocation of Continuing Guarantee by change in firm:
• A continuing guarantee given to a firm or to third party in respect of the transaction of a firm is, in
the absence of an agreement to the contrary, revoked as to future transactions from the date of
any change in the constitution of the firm.
 Registration of firms:
• The registration of a firm may be effected at any time by sending by post or delivering to the
Registrar of the area in which any place of business of the firm is situated or proposed to be
situated, a statement in the prescribed form and accompanied by the prescribed fee, stating-
• The firm’s name
• The place or principal place of business of the firm
• The names of any other places where the firm carries on business,
• the date when each partner joined the firm,
• the names in full and permanent addresses of the partners, and
• the duration of the firm.
The statement shall be signed by all the partners, or by their agents specially authorised in this behalf.
o Each person signing the statement shall also verify it in the manner prescribed.
o A firm name shall not contain any of the following words, namely:-
Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words expressing or implying
the sanction, approval or patronage of Government except when the State Government signifies its consent to
the use of such words as part of the firm-name by order in writing.
• When the Registrar is satisfied that the provisions of section 58 (above mentioned provisions)
have been duly complied with, he shall record an entry of the statement in a register called the
Register of Firms, and shall file the statement. The Firm when registered shall use the bracket
and word (Registered) immediately after its name.

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 Consequences of Non-Registration:
• Registration of partnership is not compulsory but still it is advisable as there are many disabilities
of unregistered firm.
Disabilities of Unregistered firm:
• No suit in a civil court by firm or other co-partners against third party: The firm or any other person
on its behalf cannot bring an action against third party for breach of contract entered into by the
firm.
• No relief to partners for set-off of more than Rs.100: Neither the firm nor Partners of an
unregistered firm cannot claim set off of more than Rs.100 in any suit.
• Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an
unregistered firm cannot bring action against any other partner for any matter except for dissolution
of the firm.
• Third party can sue the firm: In case of an unregistered firm, an action can be brought against the
firm by a third party.
 Conditions of Filing a suit against third party by a firm:
• A firm must be registered.
• Name of Partners filing suit must be registered with the Registrar.
 Dissolution of firm:
• Dissolution of partnership between all the partners is called dissolution of firm.
 Difference between Dissolution of Partnership and Dissolution of firm: Point 3.3 page 3.49
 Modes of dissolution of a firm:
Dissolution without order of court(Voluntary dissolution):
• Dissolution by agreement: A firm may be dissolved with the consent of all the partners.
• Compulsory dissolution: A firm is compulsorily dissolved by adjudication of all the partners or all
except one as an insolvent or business of firm becomes illegal.
• Dissolution on happening of contingency: If there is no provision in agreement for continuation
of partnership, the firm can be dissolved on expiry of term, Firm was constituted or a particular
adventure or project and the adventure or project is completed, By death of partner, By adjudication
of partner as an insolvent.
• Dissolution by notice of partnership at will: In case of partnership at will the firm may be dissolved
by any partner by giving notice in writing to other partners of his intention to dissolve the firm.
Dissolution by order of court:
• Insanity/Unsound mind: Where a partner other than dormant partner has become unsound mind
then court may dissolve the firm.
• Permanent Incapacity: When a partner other than suing, has become in any way permanently
incapable of performing his duties as partner, then court may dissolve the firm.
• Misconduct: Where there is a misconduct by a partner prejudicially effecting the business of firm,
the court may dissolve the firm considering the nature of firm.
• Persistent breach of agreement: Where a partner other than the partner suing, willfully or
persistently commits breach of agreements relating to the management of the affairs of the firm
or the conduct of its business. The court may dissolve the firm at the instance of any of the
partners. Embezzlement, Keeping erroneous accounts, holding more cash than allowed, Refusal
to show accounts despite repeated requests can be considered as breach of contract.

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 • Transfer of Interest: Where a partner other than the partner suing, has transferred the whole of
his interest in the firm to a third party.
• Continuous/Perpetual losses: Where the business of firm cannot be carried on except a loss in
future also, the court may order the dissolution.
• Just and Equitable grounds: Where there is a deadlock in the management or where partners are
not in talking terms between them or there is loss of substratum or gambling by a partner on a
stock exchange the court may dissolve the firm on just and equitable grounds.
 Consequences of dissolution:
• Liability for acts of Partners after dissolution: Even after dissolution the partners are liable for the
acts of ordinary business towards third party till the Public Notice for dissolution is given. Notice
of dissolution can be given by any partner.
• Continuing authority of partners for purposes of winding up: After dissolution the authority of
partner will continue for the transactions as are necessary to wind up the affairs of firm and to
complete the transactions begun but unfinished at the time of dissolution but not otherwise.
 Mode of settlement of partnership accounts:
• Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and,
lastly, if necessary, by the partners individually in the proportions in which they were entitled to
share profits;
• The assets of the firm, including any sums contributed by the partners to make up deficiencies of
capital, must be applied in the following manner and order:
• in paying the debts of the firm to third parties;
• in paying to each partner’s loan
• in paying to each partner’s capital
• residue, if any, shall be divided among the partners in the proportions in which they were entitled
to share profits.
 Payment of firm debts and of separate debts: Where there are joint debts due from the firm and also
separate debts due from any partner:
• the property of the firm shall be applied in the first instance in payment of the debts of the firm,
and if there is any surplus, then the share of each partner shall be applied to the payment of his
separate debts or paid to him;
• the separate property of any partner shall be applied first in the payment of his separate debts
and surplus, if any, in the payment of debts of the firm.



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 THE LIMITED LIABILITY PARTNERSHIP ACT, 2008

Chapter-4
THE LIMITED LIABILITY PARTNERSHIP ACT, 2008

Introduction
• Bill got Assent on 7th January, 2009
• Came into force on 31st March, 2009
• Applicable to whole of India
• Administrative Authority are ministry of Corporate Affairs (MCA) and the Registrar of companies (ROC)
• The Indian Partnership Act,1932 is not Applicable to LLP’s
Nature of LLP

Need For LLP

• A need was felt for a new corporate form that could provide the benefits of limited liability of a
company and the flexibility of a traditional partnership to its members in organizing their internal
structure based on a mutual agreement.
• Hence.a concept of LLP was introduced which combines the elements of both ‘a corporate structure’(i.e.
limited liability) as well as ‘a partnership firm structure’(i.e. flexibility).
• LLP is an alternative corporate business form that gives the benefits of Limited Liability of a Company
and Flexibility of Partnership.
• LLP is a Partnership Formed and registerd under this Act
Characteristics of Limited Liability
1. Body Corporate: A Limited Liability Partnership is a body corporate formed and incorporated under this
Act.
2. Separate Legal Entity: It is a legal entity separate from that of its partners.
3. Perpetual Succession : It has perpetual succession. Any change in the partners of a Limited Liability
Partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

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 4. Limited Liability: The liability of the partners will be limited to their agreed contribution in the LLP.
5. Minimum and Maximum number of Partners: Every LLP must have least 2 partners and must also have
at least 2 individuals as designated partners, of whom at least one shall be resident in India. There is no
maximum limit on the partners in LLP.
6. Business for Profit Only: The LLP can be formed only for carrying on a lawful business with a view to
earn profit. Thus, LLP cannot be formed for charitable or non-economic purpose.
7. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed by an agreement
between the partners. In the absence of any such agreement, the mutual rights and duties shall be
governed by the provisions of The LLP Act, 2008.
Advantages of LLP
• Separate Legal Entity
• Perpetual Existence
• No Limit on Maximum No. of Partners
• Limited Liability Protection to Partners
• Personal Assets not exposed (Except in fraud)
• Easy to Form
• Easy to Wind Up
• Foreigh National can become a Partner
Parrtner (Section 5)
1. Persons whose name is mentioned in incorporation documents
2. Individual or Body Corporate
3. Capacity
o not of unsound mind
o not declared as insolvent
o not a minor
4. Liability
o personal liability for own wrongful act
o no personal liability for wrongful act of other partner
5. Minimum No Of Partners (Section 6 )
o Every LLP must have atleast 2 partners
o If at any time the number of partners of a LLP is reduced below 2 and the LLP carries on business
for more than 6 months while the number is so reduced, the person, who is the only partner of the
LLP during the time that it so carries on business after those 6 months and has the knowledge of
the fact that it is carrying on business with him alone, shall be personally liable for the obligations
of the LLP incurred during that period.
Designated Partner (Section 7)
o Minimum 2 Designated Partner – Atleast 1 shall be Resident of India
o Individual can be a Designated Partner
o Body corporate –Nominee appointed who is an Individual can be a DP
o Liable for Legal Compliances
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 Foreign LLP
o LLP formed, incorporated or registered outside India
which has established a place of business within India
o It can become Partner in an Indian LLP

Incorporation or Registration of LLP

• To decide about Partners and to appoint minimum two individuals as Designated Partners.
• Designated Partner must have a DPIN.
• Reservation of Name
• To have a Registered Office to which all communications and notices may be addressed and where they
shall be received.
• To execute a LLP Agreement between the partners
• To complete and file Incorporation Document along with the Compliance Statement in the prescribed
form along with the prescribed fees with the Registrar electronically;
• To file LLP Agreement with the Registrar within 30 days of incorporation of LLP.
• Registrar is satisfied will Register LLP and issue Certificate to LLP within 14 days.
Effect of Registration
• LLP in its name shall be capable of
1. Sue and can be sued
2. Acquire, hold, develop or dispose off property
3. Have its common seal
4. Do and suffer such other acts as body corporate
Name
• Every LLP shall have Limited Liability Partnership or LLP as its suffix.
• Name should not be
1. Undesirable
2. Identical with any other Partnership Firm,LLP or Body Corporate.

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 • Registrar is satisfied then it will reserve the name for a period of 3 months
• CG can direct LLP to change its name, LLP shall comply it within 3 months or time prescribed by CG
Cessation Of Partnership Interest
A person may cease to be a Partner

On his death or discalution of LLP

Unsound Mind
Insolvent

LLP to file notice with Registrar

Within 30 days
Duties
• Liable for the Acts which he did while being a Partner.
Rights
• Right to Receive Capital Contribution
• Right to share in the Accumulated Profits on the date when he ceases to be Partner.
Registration of Change in Partners
Change in Name or Address of Partner

Partner

Inform within 15 days

LLP

Notice within 30 Days

Registrar

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 Person Ceases to be a Partner.
Person Ceases to be a Partner.

Beleives that LLP may not file notice

Partner himself will give notice

Registrar

Confirmation within 15 days from LLP

No confirmation - It will be registered.

Liability of LLP

LLP is Liable LLP is Not Liable

For Wrongful Act of Partner Patner had No Authority and

Within Authority Third Party knows that

partner had No Authority
LIABILITY OF PARTNERS
- No Personal Liability of Partner
- Unlimited Liability in Case of Fraud

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 Act done by LLP/ Partner

Intention to Defraud

Liability of LLP and such Partner

Shall be unlimited
Holding out
Any Person

Either Expressly/ Implieldly

Represents himself / is Represented to be a partner in LLP

Is liable to Any Person

Who an faith of Such representation

Given Credit to LLP

Whistle Blowing
Any Partner/ Employee

Provides useful information during investigation

Court / Tribunal may Waive or Reduce Penalty

No Discrimination to Partner
(Cannot be discharged , demoted, threatened etc.)
Financial Disclosures
• To Maintain Proper Books of Accounts at Registered office
• To File Statement of Account and Solvency with the Registrar within a period of 6 months from the end
of each financial year.
• To file Annual Return with the Registrar within 60 Days of end of Financial year.

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 Effect of Conversion
Registrar is Satisfied.

Firm,Pvt Co. , Unlisted Public Co.

Complied with Provisions of the Act

Issue COI to LLP

Inform within 15 Days

To the Concerned Registrar of Firm or Co.

LLP Comes in to Existence

Property shall vest in LLP
Firm/Co. shall be deemed to be dissolved.
Winding Up of LLP
The winding up of a LLP may be either voluntary or by the Tribunal.
A LLP may be wound up by the Tribunal:
• if the LLP decides
• if, for a period of more than six months, the number of partners of the LLP is reduced below two
• if the LLP is unable to pay its debts
• if the LLP has acted against the interests of the sovereignty and integrity of India
• if the LLP has made a default in filing with the Registrar the Statement of Account and Solvency or
annual return for any five consecutive financial years
• if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up
Difference Between Partnership Firm and LLP
Basis of Distinction Partnership Firm LLP
1. Regulating Law It is governed by ‘The Indian It is governed by ‘The Limited Liability
Partnership Act, 1932’ Partnership Act, 2008’
2. Body Corporate It is not a Body Corporate. It is a Body Corporate.

3. Separate Legal Entity It has no separate legal entity. It has separate legal entity.
4. Perpetual Succession It does not have perpetual It has perpetual succession.
succession. The death, The death, insolvency or unsoundness
insolvency or unsoundness of of its members does not affect its
its members may affect existence. Members may come
its existence. and go but LLP goes forever.
5. Liability of Partners Liability of Partner is unlimited. Liability of Partner is limited, to the
extent their contribution towards LLP.
6. Registration Registration is optional. Registration is compulsory.
7. Creation It is created by agreement. It is created by Law.
8. Designated Partners It need not have Designated It must have at least 2 individuals as
Partners. Designated Partners.

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 9. Name of Entity It can have any name as per Its Name to contain ‘Limited Liability
choice. Partnership’ or ‘LLP’ as suffix.
10. Admission of Minor Minor can be admitted tothe Minor can not be admittedto the
benefits of Partnership as per benefits of LLP.
its Agreement.
11. Can Foreign National Foreign National can not become Foreign National can become a Partner
become partner? a partner in a Partnership Firm in a LLP.
in India.
12. Annual Filing with No Return is required to be filed 1. Annual Statement of Accounts
Registrar with Registrar of Firms 2. Statement of Solvency
3. Annual Return required to be filed
with Registrar of LLP every year.
Difference Between Limited Liability Company and LLP
Basis of Distinction Limited Liability Company LLP
1. Regulating Law It is governed by ‘The It is governed by ‘The Limited Liability
Companies Act, 2013’ Partnership Act, 2008’
2. Motive It can be formed for Profit or It can be formed only for Profit motive.
Service motive.
3. Number of Membersi Private Company: Minimum 2 Minimum 2 but their is no limit on
members & maximum maximum numberof partners.
200 members. Public Company:
Minimum 7 members but their is
no limit on maximum number
of partners.
4. Name of Entity Name of Public Co to contain Its Name to contain ‘Limited Liability
‘Limited’ and Name of Private Partnership’ or ‘LLP’ as suffix.
Co to contain ‘Private Limited’.
5. Filing of Annual Annual Statement of Solvency is Annual Statement of Solvency is
Statement of Solvency not required to be filed with the required to be filed with the
Registrar of Companies every year. Registrar of LLP every year.

6. Minimum No. of Public Co to have at least 3 directors LLP must have at least 2 Designated
Directors/ Designated Private Co to have at least Partners.
Partners 2 directors.
Schedules

   
I II III IV
Mutual Rights and Conversation of a Conversation of Conversation of Private
Firm in to LLP
Duties of Partner Private Company Company in to LLP
in to LLP


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 Chapter-5
THE COMPANIES ACT, 2013

 Applicability of Companies Act,2013:

• Companies incorporated under this Act or under any previous company law.
• Insurance companies (except where the provisions of the said Act are inconsistent with the
provisions of the Insurance Act, 1938 or the IRDA Act, 1999)
• Banking companies (except where the provisions of the said Act are inconsistent with the provisions
of the Banking Regulation Act, 1949)
• Companies engaged in the generation or supply of electricity (except where the provisions of the
above Act are inconsistent with the provisions of the Electricity Act, 2003)
• Any other company governed by any special Act for the time being in force.
• Such body corporate which are incorporated by any Act for time being in force, and as the Central
Government may by notification specify in this behalf.
 Meaning and characteristics of Company:
• Definition: Section 2(20), “Company means a company incorporated under this Act or under any
previous company law”.
Characteristics of Company:
• Separate legal entity: Company is a separate legal person that means it is legally recognized in the
eyes of law. Company can have profit or loss in its own name, asset or liability in its own name. It
is a separate person from its members.
Connected Case Law: Macaura v. Northern Assurance Co. Limited: Members do not have insurable
interest in asset of company
• Perpetual Succession: Life of company does not depend upon life of its members. Members may
die or change but the company goes on .Death, unsoundness or insolvency of members do not
affect the life of company.
• Limited Liability: The liability of members in company can be by three ways:
Limited by share: The liability of members is limited up to unpaid value of shares.
Limited by guarantee: The liability of members is limited up to guarantee amount that too at the time
of wind up.
• Artificial person: Company comes into existence by process of registration and wind up of company
also requires certain compliances.
 Corporate Veil and Lifting of Corporate Veil:
• Meaning of Corporate Veil: The term corporate veil refers to the concept that members of company
are shielded from liability connected with company’s actions. If company incurs any debts or
contravenes any laws, the corporate veil concept implies that members shall not be liable for
those errors.

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 • Connected case law: Salomon Vs. Salomon and Co Ltd.: Once registered company becomes a
separate legal person from members. For that purpose it is immaterial whether any member has
a large or small shareholding.
• Corporate veil is a safeguard for members that they are not liable for company’s action but if this
veil is used for fraud/dishonest purpose then this safeguard will be cancelled. This concept is
known as Lifting of Corporate Veil.
Lifting of Corporate veil:
• Determining enemy character of company: During war the corporate veil is lifted to check whether
the company is alien enemy or not. If persons having control of company are residents of enemy
country or wherever they are they are acting on behalf of enemy then company will also be
regarded as having enemy character.
Connected case law: Daimler Co. ltd vs Continental tyre & Rubber associates.
• To protect Revenue/Tax: If the corporate veil is used just to evade tax liability then corporate veil
is lifted to make the person liable for taxes.
Connected case law: Dinshaw Manekjee Petit
• To avoid a legal obligation: Where the sole purpose for the formation of company was to use it as
device to reduce the amount to be paid by way of bonus to workmen, Supreme court allowed the
lifting of corporate veil to look at the real transaction.
Connected case law: Workmen of Associated Rubber Industry ltd vs Associated Rubber Industry
Ltd
• Formation of subsidiaries to act as an agent: If the subsidiary companies are created just to work
as an agent then for act of subsidiary company, holding company will be liable.
Connected case law: Merchandise Transport Limited vs. British Transport Commission
• Company formed for fraud/improper conduct or to defeat law: Where the device of incorporation
is adopted for some illegal or improper purpose.
(Gilford Motor Co. vs. Horne)
 Classes of Companies under the Act:
On the basis of liability:
• Company Limited by Shares: When the liability of the members of a company is limited by its
memorandum of association to the amount (if any) unpaid on the shares held by them, it is known
as a company limited by shares.
• Company Limited by Guarantee: Company having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake by the memorandum
to contribute to the assets of the company in the event of its being wound up.
Similarity between Company limited by shares and company limited by guarantee : Company limited by
shares as well as Guarantee both are “Separate legal person” and Both have the liability of its members
“Limited”.
Difference between Company limited by shares and company limited by guarantee: In case of Guarantee
company the members may be called upon to discharge the liability only on commencement of winding up
and only subject to certain conditions; but in case of company limited by shares the liability will be limited
up to the unpaid value of shares that can be called at any time.
• Unlimited Company: unlimited company as a company not having any limit on the liability of its
members. In such a company, the liability of a member ceases when he ceases to be a member.

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 The liability of each member extends to the whole amount of the company’s debts and liabilities but he
will be entitled to claim contribution from other members. In case the company has share capital, the
articles of association must state the amount of share capital and the amount of each share.
On the basis of members:
• One Person Company:
o One person company is a company which has only one person as a member.
o The member of One Person Company must be a Natural Person who is Indian Citizen and Resident
of India.
o The Memorandum of OPC should contain the name of person as a nominee who shall act as a
member in case of death or incapacity of the sole member.
o The nominee must also be Indian Citizen and Indian Resident and shall also give his consent in
writing to act as Nominee.
o Nominee can also withdraw his consent at any time by giving notice to company and company
shall communicate to registrar.
o No person shall be eligible to incorporate more than one OPC or become nominee in more than
one such company.
o No minor shall become member or nominee of the OPC or can hold share with beneficial interest.
o Such Company cannot be incorporated or converted into a company under section 8 of the Act.
o Such Company cannot carry out Non-Banking Financial Investment activities including investment
in securities of anybody corporate.
o OPC cannot convert voluntarily into any kind of company unless two years have expired from the
date of incorporation, except where the paid up share capital is increased beyond fifty lakh
rupees or its average annual turnover during the relevant period exceeds two crore rupees.
• Private Company: “Private company” means a company having a minimum paid-up share capital as may
be prescribed, and which by its articles,—
o restricts the right to transfer its shares;
o except in case of One Person Company, limits the number of its members to two
hundred:(Excluding Employees and Ex-Employees and treating joint holder as a single member)
o prohibits any invitation to the public to subscribe for any securities of the company;
o No minimum paid-up capital requirement.
o Minimum number of members – 2 (except if private company is an OPC, where it will be 1).
o Maximum number of members – 200, excluding present employee-cum-members and erstwhile
employee-cum-members.
• Small Company: Small company given under the section 2(85) of the Companies Act, 2013 which means
a company, other than a public company—
• paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than ten crore rupees; and
• turnover of which as per profit and loss account for the immediately preceding financial year does not
exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one
hundred crore rupees:
• Exceptions: This clause shall not apply to:

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 o a holding company or a subsidiary company;
o a company registered under section 8; or
o a company or body corporate governed by any special Act.
• Public Company:
Meaning:
• Company which is not private company is considered as Public Company.
• A subsidiary of Public company is also a public company.
Other Criteria:
• It should have minimum paid up capital as may be prescribed
• It should have minimum 7 members and there is no maximum limit.
• It should have minimum 3 directors
On the basis of Control:
• Holding and Subsidiary Company:
• If one company is holding
Either more than:
o 50% directors(Management control)
e.g. If B ltd is having 6 directors and out of that more than 50% i.e. 4 or more directors can be appointed
or removed by the direction of A ltd than A ltd will be considered as holding company and B ltd will be
considered as subsidiary.
o 50% voting power(Ownership control)
e.g if B ltd is having Rs.10 lacs as Paid up capital and A ltd. is holding more than 50% of paid up capital
than A ltd will be considered as holding company and B ltd will be considered as subsidiary company.
o Indirect holding
e.g If A ltd is holding company of B ltd and B ltd is holding company of C ltd than A ltd will by default
become holding company of C ltd
In other company
Then it is said to be the holding company of another company
And another company will be known as Subsidiary.
• Associate Company: If one company is holding significant influence (Control of 20% or more but less
than 50%) in other company then that company will be known as associate of other and includes a joint
venture.
On the basis of access to capital:
• Listed Company: It is a company which has any of its securities listed on any recognised stock exchange.
• Unlisted Company: Unlisted company means a company other than listed companies.
Other Companies:
• Government Company: Government Company means any company in which not less than 51% of the
paid-up share capital is held by-
o the Central Government, or
o by any State Government or Governments, or

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 o partly by the Central Government and partly by one or more State Governments, and
the section includes a company which is a subsidiary company of such a Government company.
• Foreign Company: It means any company or body corporate incorporated outside India which—
o has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
o conducts any business activity in India in any other manner
• Company with Charitable Objects:(Section-8)
o Meaning: When an AOP wants to be registered as a limited company and it
a. Has in its objects the promotion of Commerce, Arts , Sports, Education, Research, Social welfare,
Religion, Charity, Protection of Environment or any such other object.
b. Intends to apply its profit or other income on promoting its objectives
c. Intends to prohibit the payment of any dividend to its members.
The Central Government may permit such registration as a limited company under this
section.(Section.8)without addition of words “Limited” and “Private Limited”.
o A firm can be a member of such company.
o The MOA and AOA of this company cannot be altered without government’s prior approval.
o Central Government can also revoke the license so granted after giving an opportunity of being
heard to the company.
o Government can also pass order of winding up of such company.
o Government can also pass order for amalgamation of such company.
o Can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
o Requirement of minimum number of directors, independent directors etc. does not apply.
o Need not constitute Nomination and Remuneration Committee and Shareholders Relationship
Committee.
• Dormant Company:
o Where a company is formed and registered under this Act for a future project or to hold an asset
or intellectual property and has no significant accounting transaction, such a company or an inactive
company may make an application to the Registrar in such manner as may be prescribed for
obtaining the status of a dormant company.
o “Inactive company” means a company which has not been carrying on any business or operation,
or has not made any significant accounting transaction during the last two financial years, or has
not filed financial statements and annual returns during the last two financial years.
o “Significant accounting transaction” means any transaction other than—
1. payment of fees by a company to the Registrar;
2. payments made by it to fulfill the requirements of this Act or any other law;
3. allotment of shares to fulfill the requirements of this Act; and payments for maintenance of
its office and records.
• Nidhi Company: “Nidhi” or “Mutual Benefit Society” means a company which the Central Government
may, by notification in the Official Gazette, declare to be a Nidhi or Mutual Benefit Society, as the case
may be.

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• Public Financial Institutions (PFI):
By virtue of Section 2(72) of the Companies Act, 2013, the following institutions are to be regarded as public
financial institutions:
o the Life Insurance Corporation of India, established under the Life Insurance Corporation Act, 1956;
o the Infrastructure Development Finance Company Limited,
o specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
o institutions notified by the Central Government under section 4A(2) of the Companies Act, 1956 so
repealed under section 465 of this Act;
o such other institution as may be notified by the Central Government in consultation with the Reserve
Bank of India:
Conditions for an institution to be notified as PFI: No institution shall be so notified unless—
o it has been established or constituted by or under any Central or State Act other than this Act or the
previous Companies Law; or
o not less than fifty-one per cent of the paid-up share capital is held or controlled by the Central
Government or by any State Government or Governments or partly by the Central Government and
partly by one or more State Governments.
 Process of Company Incorporation:
• There are two steps of Company Formation: 1) Promotion 2) Incorporation
• Promotion:
“Promotion” is the process of conceiving an idea and developing it into a concrete proposition or
project to be accomplished by the incorporation and floatation of a company. The person who takes
the necessary steps to accomplish these objectives is known as promoter.
• Promoters:
o Section 2 (69) of the Companies Act, 2013 defines the term ‘promoter’ as under:-
o “Promoter” means a person –
(a) who has been named as such in a prospectus or is identified by the company in the annual
return; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director ; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act otherwise.
• Process of Incorporation:
o Filing of the documents and information with the registrar: For the registration of the company
following documents and information are required to be filed with the registrar within whose
jurisdiction the registered office of the company is proposed to be situated-
(1) The memorandum and articles of the company duly signed by all the subscribers to the
memorandum.
(2) a declaration by person who is engaged in the formation of the company (an advocate, a chartered
accountant, cost accountant or company secretary in practice), and by a person named in the
articles (director, manager or secretary of the company), that all the requirements of this Act and
the rules made thereunder in respect of registration and matters precedent or incidental thereto
have been complied with.
CA Foundation | Paper-2 Business Laws -56-
 • An affidavit from each of the subscribers to the memorandum and from persons named as the
first directors, if any, in the articles stating that-
• he is not convicted of any offence in connection with the promotion, formation or management
of any company, or he has not been found guilty of any fraud or misfeasance or of any breach of
duty to any company under this Act or any previous company law during the last five years,
• and that all the documents filed with the Registrar for registration of the company contain
information that is correct and complete and true to the best of his knowledge and belief;
(3) the address for correspondence till its registered office is established; 
(4) the particulars (names, including surnames or family names, residential address, nationality) of
every subscriber to the memorandum along with proof of identity, and in the case of a subscriber
being a body corporate, such particulars as may be prescribed
(5) the particulars (names, including surnames or family names, the Director Identification Number,
residential address, nationality) of the persons mentioned in the articles as the directors to the
Memorandum and such other particulars including proof of identity as may be prescribed; and
(6) the particulars of the interests of the persons mentioned in the articles as the first directors of the
company in other firms or bodies corporate along with their consent to act as directors of the
company in such form and manner as may be prescribed.
(7) Issue of certificate of incorporation on registration: The Registrar on the basis of documents and
information filed, shall register all the documents and information in the register and issue a
certificate of incorporation in the prescribed form to the effect that the proposed company is
incorporated under this Act. 
(8) Allotment of Corporate Identity Number (CIN): On and from the date mentioned in the certificate
of incorporation, the Registrar shall allot to the company a corporate identity number, which shall
be a distinct identity for the company and which shall also be included in the certificate.
• Alternative Incorporation Process (SPICE): Incorporation process can also be done through
electronic mode and the name for the process is SPICE(Simplified Proforma for Incorporating
Company Electronically)
• Consequences where company was registered by providing false information.
Furnishing of false or incorrect information or suppression of material fact at the time of incorporation
(i.e. at the time of Incorporation): If any person furnishes any false or incorrect particulars of any
information or suppresses any material information, of which he is aware in any of the documents led
with the Registrar in relation to the registration of a company, he shall be liable for action for fraud
under section 447.
Company already incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact (i.e. post Incorporation): Where, at any time after the incorporation of a
company, it is proved that the company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact or information in any of the documents
or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters,
the persons named as the first directors of the company and the persons making declaration under this
section shall each be liable for action for fraud under section 447.
Order of the Tribunal:
• Where a company has been got incorporated by furnishing false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or
declaration led or made for incorporating such company or by any fraudulent action, the Tribunal
may, on an application made to it, on being satisfied that the situation so warrants,—
CA Foundation | Paper-2 Business Laws -57-
 o pass such orders, as it may think t, for regulation of the management of the company including
changes, if any, in its memorandum and articles, in public interest or in the interest of the company
and its members and creditors; or
o direct that liability of the members shall be unlimited; or
o direct removal of the name of the company from the register of companies; or
o pass an order for the winding up of the company; or
o pass such other orders as it may deem fit:
o Provided that before making any order,—
o the company shall be given a reasonable opportunity of being heard in the matter; and
o Tribunal shall take into consideration the transactions entered into by the company, including the
obligations, if any, contracted or payment of any liability.
The Memorandum of Association
• The Memorandum of Association is a document which sets out the constitution of a company and is
therefore the foundation on which the structure of the company is built. It defines the scope of the
company’s activities.
• Memorandum of Association is the charter of a company. It is a document, which amongst other things,
defines the area within which the company can operate.
1. Name Clause
2. Situation Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Association/ Subscription Clause:
7. In case of OPC it should also state the name of a person who will be nominee in case of inability
of the only member.
Articles of Association:
• The memorandum contains the fundamental conditions, upon which the company is allowed to
incorporate. On the other hand, the articles contain the rules and regulations and bye-laws for the
internal management of the company.
• Entrenchment Provisions: The articles may contain provisions for entrenchment (to protect something)
to the effect that specified provisions of the articles may be altered only if conditions or procedures as
that are more restrictive than those applicable in the case of a special resolution, are met or complied
with.
• Manner of inclusion of the entrenchment provision: The provisions for entrenchment shall only be
made either on formation of a company, or by an amendment in the articles agreed to by all the
members of the company in the case of a private company and by a special resolution in the case of a
public company.
Difference between Memorandum and Articles of Association:
• Objectives: Memorandum of Association defines and delimits the objectives of the company whereas
the Articles of association lays down the rules and regulations for the internal management of the
company. Articles determine how the objectives of the company are to be achieved.

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 • Relationship: Memorandum defines the relationship of the company with the outside world and Articles
define the relationship between the company and its members.
• Alteration: Memorandum of association can be altered only under certain circumstances and in the
manner provided for in the Act. In most cases permission of the Regional Director, or the Tribunal is
required. The articles can be altered simply by passing a special resolution.
• Ultra Vires: Acts done by the company beyond the scope of the memorandum are ultra-vires and void.
These cannot be ratified even by the unanimous consent of all the shareholders. The acts ultra-vires
the articles can be ratified by a special resolution of the shareholders, provided they are not beyond
the provisions of the memorandum.
 Concept of Share and Share Capital:
• Meaning: A share represents such proportion of the interest of the shareholders as the amount paid up
thereon bears to the total capital payable to the company. It is a measure of the interest in the company’s
assets to which a person holding a share is entitled.
• Equity share capital —
• Meaning: ‘Equity share capital’’, with reference to any company limited by shares, means all share
capital which is not preference share capital;
Types:
(1) with voting rights; or
(2) with differential rights as to dividend, voting or otherwise in accordance with prescribed rules;
• Preference Share capital:
• Meaning: ‘Preference share capital’’, with reference to any company limited by shares, means that
part of the issued share capital of the company which carries or would carry a preferential right with
respect to—
— payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may
either be free of or subject to income-tax; and
— repayment, in the case of a winding up or repayment of capital, of the amount of the share capital
paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the
payment of any fixed premium or premium on any fixed scale, specified in the memorandum or
articles of the company;
 Doctrine of Ultra Vires:
Meaning: The meaning of the term ultra vires is simply “beyond (their) powers”.
• It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can
be departed from only to the extent permitted by the Act - thus far and no further [Ashbury Railway
Company Ltd. vs. Riche]. In consequence, any act done or a contract made by the company which
travels beyond the powers not only of the directors but also of the company is wholly void and
inoperative in law and is therefore not binding on the company.
• The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it.
The whole position regarding the doctrine of ultra vires can be summed up as:
• When an act is performed, which though legal in itself, is not authorized by the object clause of the
memorandum, or by the statute, it is said to be ultravires the company, and hence null and void.
• An act which is ultravires, the company cannot be ratified even by the unanimous consent of all the
shareholders. 
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 • An act which is ultravires the directors, but intravires the company can be ratified by the members of
the company through a resolution passed at a general meeting.
• If an act is ultravires the Articles, it can be ratified by altering the Articles by a Special Resolution at a
general meeting.
 Doctrine of Constructive Notice and Indoor Management:
Doctrine of Constructive Notice:
• This doctrine is in favour of a company i.e., it creates a presumption in favour of a company.
• Effect Of this doctrine:
 Once registered MOA and AOA becomes the public documents. Therefore, any person dealing with
company is presumed to have read the Memorandum and Articles correctly.
 The doctrine prevents any person dealing with a company alleging that he did not read the provisions
contained in MOA and AOA.
 Case Law: (Kotla Venakataswarny v/s C Rammurthi)
 The Articles of a company required that all the documents and deeds of the company shall be signed by
MD, the secretary and a working director of a company.
 A mortgage deed was signed by secretary and a working director only.
 It was held that the mortgage deed was invalid even though the plaintiff had acted in good faith and
money was utilised for benefit of the company.
Doctrine of Indoor Management
• This Doctrine operates in favour of the outsiders.
• Meaning:
 As per this doctrine, outsiders dealing with the company are not required to enquire into the internal
management of the company.
 Outsiders dealing with the company are entitled to assume that as far as internal proceedings of the
company are concerned, everything has been done regularly.
• Effect: If a contract is entered into on behalf of company by any director or officer of company, It is
enforceable against the company if provisions contained in the MOA and AOA are fulfilled , even
though while entering into a contract some irregularity had arisen of which the outsider was unaware.
Case law : (Royal British Bank v/s Turquand)
• The articles of a company stated that the directors could borrow money on behalf of a company, if they
are authorized by a resolution passed by the shareholders in GM.
• The directors borrowed money from T without being authorized by shareholders.
• T lent money assuming that shareholders had authorized the directors.
• It was held that borrowing of money without any authorization was internal irregularity and since T had
no Knowledge of such irregularity he was not bound .
Conclusion: The benefit can be availed:
• If the person has knowledge of the MOA and AOA
• He has no knowledge of internal irregularity.
Exceptions:
• Knowledge of Irregularity
• Suspicion about Irregularity
• Forgery
• No knowledge of MOA/AOA

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