VANIJYA ACADEMY

Published by : Vanijya Academy, Guiding CA Aspirants to Achieve their Dreams for

Over a Decade
Author : CA Tarun Dutt ( B.Com, FCA )

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About the Author

CA Tarun Dutt is a qualified Chartered Accountant with an experience of over 13

years. He is also qualified NCFM certificates. He started his career with Jaypee
Commodities Services Limited in the year 2007. He later followed his passion to help
CA aspirants to qualify CA exams. Over last twelve years he has guided more than a
thousand students and most of them have successfully fulfilled their dreams and are
qualified CAs today doing very well in their careers.

He remains a practicing Chartered Accountant and also works as a visiting faculty in CA

Branches of various cities since then.

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Contents:

1. Nature of contract……………………………………………………………………………………..….4
2. Offer and acceptance…………………………………………………………………………………..10
3. Consideration……………………………………………………………………………………………….19
4. Capacity to contract………………………………………………………………………………….…23
5. Free Consent……………………………………………………………………………………………….27
6. Legality of object…………………………………………………………………………………………37
7. Void Agreement………………………………………………………………………………………….41
8. Contingent Contract……………………………………………………………………………………44
9. Performance of contract…………………………………………………………………………….46
10. Discharge of contract………………………………………………………………………………….52
11. Remedies for Breach of Contract……………………………………………………………..…57
12. Quasi contract…………………………………………………………………………………………….62

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NATURE OF CONTRACT

The Act extends to the whole of India except the State of Jammu and Kashmir; and
came into effect on 1-9-1872.

Definition of Contract: Sec 2(h)

A contract is an agreement made between two or more parties which the law will
enforce. A Contract is an agreement enforceable by law.

Steps of Agreement:

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;

b) When a person to whom the proposal is made, signifies his assent thereto, the
proposal is said to be accepted. A proposal, when a accepted, becomes a
promise; The person making the proposal is called the "promisor", and the
person accepting the proposal is called "promisee". The set of promises is
called agreement.

It implies :

OFFER + ACCEPTANCE= PROMISE

& Set of promises is known as agreement.
Agreement + enforceability by law = Contract

Obligation:

An agreement to become a contract must give rise to legal obligation or duty .The
term obligation is a legal tie which imposes up on a definite person the necessity of
doing or abstains from doing act or acts. It may be social or legal .An agreement giving
rise to social obligations is not a contract.

If A invites B to dinner and B accepts the invitation it is a social agreement.

Consensus ad Idem:

This means that the parties to an agreement must have agreed about the subject
matter of the agreement in the same sense and at the same time. Unless there is
Consensus ad idem there is no contract.

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Example:

A who owns two horses named HANSRAJ & RAJHANS is selling horse HANSRAJ to B .B
thinks he is purchasing Horse RAJHANS .There is no Consensus ad Idem and hence no
contract.

Jus in rem: Right against world at large.

Jus in personam: Right against individual person.

Essential elements of valid contract: Sec 10

1) Offer & acceptance

2) Intention to create legal relationship
3) Lawful consideration
4) Capacity to contract: competency
5) Free & genuine consent
6) Lawful object
7) Agreement not expressly declared void
8) Certainty & possibility of performance
9) Legal formalities

1) Two Parties: One cannot contract with himself. A contract involves at least two
parties- one party making the offer and the other party accepting it. A contract may be
made by natural persons and by other persons having legal existence e.g. companies,
universities etc. It is necessary to remember that identity of the parties be
ascertainable.

Example: To constitute a contract of sale, there must be two parties- seller and buyer.
The seller and buyer must be two different persons, because a person cannot buy his
own goods. In State of Gujarat vs. Ramanlal S & Co. when on dissolution of a
partnership, the assets of the firm were divided among the partners, the sales tax
officer wanted to tax this transaction. It was held that it was not a sale. The partners
being joint owner of those assets cannot be both buyer and seller.

2) Parties must intend to create legal obligations: There must be an intention on the
part of the parties to create legal relationship between them. Social or domestic type
of agreements are not enforceable in court of law and hence they do not result into
contracts. Example: 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 intend to create any
legal relations. (Balfour v. Balfour)

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On the basis of validity:

1) Voidable Contract: An agreement which is enforceable by law at the option of one

or more parties thereto but not at the option of other or others is a voidable contract.
This happens when the essential element of free consent is missing.

2) Void Agreement: An agreement not enforceable by law is called void. A void

agreement does not create legal rights or obligations, it is nullity and destitute of legal
effect altogether. Example: An agreement with minor.

3) Void Contract: A contract which ceases to be enforceable by law becomes void

after it ceases to be enforceable. A contract when originally entered may be valid &
binding on the parties, but may be subsequently becomes void.

Example: Mr. X agrees to write a book with a publisher. After few days, X dies in an
accident. Here the contract becomes void due to the impossibility of performance of
the contract.

Example: A contracts with B (owner of the factory) for the supply of 10 tons of sugar,
but before the supply is effected, the fire caught in the factory and everything was
destroyed. Here the contract becomes void. It may be added by way of clarification
here that when a contract is void, it is not a contract at all but for the purpose of
identifying it, it has to be called a [void] contract.

4) Illegal Agreement: An illegal agreement is that which transgresses some rule of

public policy or which is criminal in nature or to which court regards immoral. So all
illegal agreements are void but all void agreements are not illegal eg. Agreement with
minor is unlawful but not illegal.

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5) Unenforceable Contract: An unenforceable contract is that which can not be

enforced in court of law because of some technical defect like absence of writing on
stamp paper.

On the basis of formation:

1) Express Contract: If the terms of contract are expressly agreed up on (weather by

words written or spoken) at the time of formation of contract, the contact is said to be
express contract.

2) Implied Contract: An implied contract is one which is inferred from the acts or
conducts of the parties or course of dealing between them. It may also result from
continuing course of conduct of parties.
Example: Where a coolie in uniform picks up the luggage of A to be carried out of the
railway station without being asked by A and A allows him to do so, it is an implied
contract and A must pay for the services of the coolie detailed by him.

Tacit Contracts: The word Tacit means silent. Tacit contracts are those that are
inferred through the conduct of parties without any words spoken or written. A classic
example of tacit contract would be when cash is withdrawn by a customer of a bank
from the automatic teller machine [ATM].
Another example of tacit contract is where a contract is assumed to have been
entered when a sale is given effect to at the fall of hammer in an auction sale. It is not
a separate form of contract but falls within the scope of implied contracts falls within
the scope of implied contracts.

3) Quasi Contract: Strictly speaking quasi – contract is not a contract at all. A contract
is intentionally entered in to. A quasi contract is on other hand, created by law. It
resembles as contract in that legal sense ,an obligation is created on a party who is
required to perform it. Eg supplies of necessaries to minor.

4) E-Contracts: When a contract is entered into by two or more parties using

electronics means, such as e-mails is known as e-commerce contracts. In electronic
commerce, different parties/persons create networks which are linked to other
networks through ED1 - Electronic Data Inter change. This helps in doing business
transactions using electronic mode. These are known as EDI contracts or Cyber
contracts or mouse click contracts.

On the basis of performance:

1. Executed Contract: The consideration in a given contract could be an act or

forbearance. When the act is done or executed or the forbearance is brought on
record, then the contract is an executed contract.
Example: When a grocer sells a sugar on cash payment it is an executed contract
because both the parties have done what they were to do under the contract.

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2. Executory Contract: In an executory contract the consideration is reciprocal

promise or obligation. Such consideration is to be performed in future only and
therefore these contracts are described as executory contracts.
Example: Where G agrees to take the tuition of H, a pre-engineering student, from
the next month and H in consideration promises to pay G ` 1,000 per month, the
contract is executory because it is yet to be carried out.

Unilateral or Bilateral are kinds of Executory Contracts and are not separate kinds.

(a) Unilateral Contract: Unilateral contract is a one sided contract in which one party
has performed his duty or obligation and the other party’s obligation is outstanding.
Example: M advertises payment of award of `Rs 5000 to anyone who finds his missing
boy and brings him. As soon as B traces the boy, there comes into existence an
executed contract because B has performed his share of obligation and it remains for
M to pay the amount of reward to B. This type of Executory contract is also called
unilateral contract.

(b) Bilateral Contract: A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties. Example: A promises to sell his plot to B
for Rs. 1 Lakh cash down, but B pays only Rs. 25,000 as earnest money and promises
to pay the balance on next Sunday. On the other hand A gives the possession of plot
to B and promises to execute a sale deed on the receipt of the whole amount. The
contract between the A and B is executory because there remains something to be
done on both sides. Executory contracts are also known as Bilateral contracts.

Difference between Agreement and Contract

Basis of Difference Agreement Contract
Meaning Every promise and every Offer + Acceptance
set of promises, forming Agreement enforceable by
the consideration for each law. Agreement + Legal
other. enforceability

Scope It’s a wider term including It is used in a narrow sense

both legal and social with the specification that
agreement. contract is only legally
enforceable agreement.
Legal Obligation It is not used in a narrow It is used in a narrow sense
sense. with the specification that
It may be legal or social. contract is only legally
enforceable agreement.
Nature All agreement are not All contracts are
contracts. agreements

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Basis of Difference Void Contract Voidable Contract

Meaning A Contract ceases to be An agreement which is
enforceable by law enforceable by law at the
becomes void when it option of one or more of
ceases to be enforceable the parties thereto, but
not at the option of the
other or others, is a
voidable contract
Cause An agreement which is An agreement which is
enforceable by law at the enforceable by law at the
option of one or more of option of one or more of
the parties thereto, but the parties thereto, but
later due to any reason no not at the option of the
longer remain enforceable other or others, is a
are called void contract. voidable contract
Performance of contract A void contract cannot be If the aggrieved party does
performed not, within reasonable
time, exercise his right to
avoid the contract, any
party can sue the other for
claiming the performance
of the contract.
Rights A void contract does not The party whose consent
grant any right to any party was not free has the right
to rescind the contract

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OFFER AND ACCEPTANCE

At the inception of every agreement, there must be a definite offer by one person to
another and its unqualified acceptance by the person to whom the offer is made. An
offer is a proposal by one party to another to enter into a legally binding agreement
with him. A person is said to have made a proposal, when he “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.”[Sec. 2(a)]

For example, A says to B, “Will you purchase my car for Rs.5000?”A, in this case, is
making an offer to B as he signifies to B his willingness to sell his car to B for Rs.
5,000 with a view to obtaining B’s assent to purchase the car.

The person making the offer is known as the offeror or, proposer, or promisor and the
person to whom it is made is called the offeree or proposee. When the offeree accepts
the offer, he is called the acceptor or promisee [Sec.2(c) ]

Offer

On the basis of how On the basis of to

made whom made

Express Implied Specific General

1) Express Offer: An offer may be made by express words, spoken or written. This is
known as an express offer. For example, when A says to B, “will you purchase my
house at Meerut for Rs. 50,000?” or when A advertises in a newspaper offering Rs. 50
to anyone who returns his lost dog. There is an express offer.

2) Implied Offer: An offer may also be implied from the conduct of the parties or the
circumstances of the case. This is known as an implied offer. Thus when a transport
company runs a bus on a particular route, there is an implied offer by the transport
company to carry passengers for a certain fare. The acceptance of the offer is complete
as soon as a passenger boards the bus.

3) Specific Offer: When an offer is made to a definite person. It is called a specific

offer. It can be accepted only by the person to whom it is made.

4) General Offer: When an offer is made to the world at large, it is called a general
offer.
Example, A company advertised in several newspapers that a reward of £100 would be
given to any person who contracted influenza after using the smoke balls of the
company according to its printed directions. One Mrs. Carlill used the smoke balls
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according to the directions of the company but contracted influenza,.. Held, she could
recover the amount as by using the smoke balls she had accepted the offer

[Carlill v. Carbolic Smoke Ball Co.,(1893)]

Legal rules as to offer:

1) Offer must be such as in law is capable of being accepted and giving rise to legal
relationship. A social invitation even if it is accepted does not create legal relations
because it is not so intended. An offer therefore, must be such as would result in a valid
contract when it is accepted.

2) Terms of offer must be definite, unambiguous and certain and not loose and vague.
If the terms of an offer are vague or indefinite, its acceptance cannot create any
contractual relationship.
Example, (a) A says to B, “ I will sell you a car.” A owns three different cars. The offer
is not definite.

3) An offer is different from :

(a) A declaration of intention and an announcement. A declaration by a person that

he intends to do something gives no right of action to another. Such a declaration only
means that an offer will be made or invited in future and not that an offer is made now.
An advertisement for a concert or an auction sale does not amount to an offer to hold
such concert or auction sale.

An auctioneer advertised in a newspaper that a sale of office furniture would be held. A

broker came from a distant place to attend that auction, but all the furniture was
withdrawn. The broker thereupon sued the auctioneer for his loss of time and expenses.
Held, a declaration of intention to do a thing did not create a binding contract with
those who acted upon it, so that the broker could not recover. (Harris v Nickerson)

Example: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2017, it does not
constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid offer
expression of willingness must be made to obtain the assent (acceptance) of the other.
Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute
an offer

(b) An invitation to make an offer or do business. Display of goods by a shopkeeper in

his window, with prices marked on them, is not an offer but merely an invitation to the
public to make an offer to buy the goods at the marked prices. Likewise, quotations,
catalogues, advertisements in a newspaper for sale of an article, or circulars sent to
potential customers do not constitute an offer. They are instead an invitation to the
public to make an offer. A person in case the prices of the goods are marked, cannot
force the seller to sell the goods at those prices. He can, at the most, ask the seller to
sell the goods to him, in which case he would be making an offer to the seller and it is
up to the seller to accept.
Example. Goods are sold in a shop under the self-service system. Customers select
goods in the shop and take them to the cashier for payment of the price. The contract, in

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this case, in made, not when a customer selects the goods, but when the cashier accepts
the offer to buy and receives the price.

Newspaper advertisements are not offers. A recognized exception to this is a general

offer of reward to the public. Thus when A advertises in a newspaper that she would
pay Rs. 100 to anyone who finds and returns her lost dog, the offer is addressed to the
first person who by performing the request with knowledge of the offer of reward do
the act, creates an agreement.

4. Offer must be communicated: An offer, to be complete, must be communicated to

the person to whom it is made. An acceptance of an offer, in ignorance of the offer, is
no acceptance and does not confer any right on the acceptor.

(a) G (Gauri dutt) 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. (Case Law: Lalman Shukla v. Gauri Dutt –Facts )

5) Offer should not contain a term the non-compliance of which may be assumed to
amount to acceptance.

6) Offer is Different from Casual enquiry.

In this case, Privy Council succinctly explained the distinction between an offer and an
invitation to offer. In the given case, the plaintiffs through a telegram asked the
defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.
The defendants replied through telegram that the “lowest price for Bumper Hall Pen is
£ 900”. The plaintiffs sent another telegram stating “we agree to buy Bumper Hall Pen
at £ 900”. However the defendants refused to sell the property at the price. The
plaintiffs sued the defendants contending that they had made an offer to sell the
property at £ 900 and therefore they are bound by the offer. However the Privy Council
did not agree with the plaintiffs on the ground. . Their Lordships held that the mere
statement of the lowest price at which the vendor would sell contained no implied
contract to sell to the person who had enquired about the price. (Harvey Vs Facey)

Tenders: A tender ( in response to an invitation to offer) is an offer and may be either-

1) A definite offer to supply specified goods or services: or

2) A standing offer.

(a) Tender as a definite offer. When tenders are invited for the supply of specified
goods or services, each tender submitted is an offer. The party inviting tenders may
accept any tender he chooses and thus bring about a binding contract.

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(b) Tender as standing offer. Where goods or services are required over a certain
period, a trader may invite tenders as a standing offer which is a continuing offer. The
acceptance of a standing offer has the effect that as and when the goods or services are
required, an order is placed with the person who submitted the tender and each time a
distinct contract is made.

Example: A railway company invited tenders for certain iron articles which it might
require over a year. W’s tender was accepted. He supplied goods to the railway
company for some time under the orders given by the latter. He refused to execute an
order given during the currency of the tender. Held, W could not refuse to supply.

Special terms in a contract:

Where any special terms are to be included in a contract, these must by duly brought to
the notice of the offeree at the time when the proposal is made. If it is not done and if
the contract is subsequently entered into, the offeree will not be bound by them.

Examples:

(a) A hotel put a notice in a bed room, exempting the proprietor from liability for loss
of client’s goods, held , the notice was not effective as it came to the knowledge of the
client only when the contract to take a room had already been entered into.

(b) A transport company accepts goods of G for being carried without any conditions.
Subsequently it issues a circular to the consignors limiting its liability for the goods
damaged or lost in transit; G is not bound by this condition since it is not
communicated to him prior to the date of contract.

Certain conditions are attached to transactions like purchase of a ticket for a journey or
deposit of luggage in a cloak room. wherever on the face of a ticket the words “For
conditions see back” are printed, the person concerned is as a matter of law held to be
bound by the conditions subject to which the ticket is issued whether he takes care to
read them or not. The fact that he did not or could not read does not alter the legal
position.

Example:
(a) P deposited a bag in the cloak room of a railway station. On the face of the ticket,
issued to him, was written “see back”. One of the printed conditions limited the liability
of the company for loss of a package to £ 10. The bag was lost and P claimed £ 24.50
as its value. Held, P was bound by the conditions on the back of the ticket even if he
had not read them.

If conditions are printed on the back of a ticket, but there are no words at all on the face
of it to draw the attention of the person concerned to those conditions, he is not bound
by them.

Cross Offers:

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When two parties make identical offers to each other in ignorance of each other’s
offer. The offers are cross offers. In such a case, the Court will not construe one offer as
the offer and the other as the acceptance and as such there can be no concluded
contract.

Acceptance:
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting
by the offeree to an offer. In other words. It is the manifestation by the offeree of his
willingness to be bound by the terms of the offer.

It is “to an offer what a lighted match is to a train of gunpowder. An offer when

accepted becomes a promise.

The effect of this observation is that what acceptance triggers cannot be recalled or
undone. But there is a choice to the person who had the train to remove it before the
match is applied. It in effect means that the offer can be withdrawn just before it is
accepted. Acceptance converts the offer into a promise and then it is too late to revoke
it. This means as soon as the train of gun powder is lighted it would explode. Train of
Gun powder [offer] in itself is inert, but it is the lighted match [the acceptance] which
causes the gun powder to explode. The significance of this is an offer in itself cannot
create any legal relationship but it is the acceptance by the offeree which creates a legal
relationship. Once an offer is accepted it becomes a promise and cannot be withdrawn
or revoked. An offer remains an offer so long as it is not accepted but becomes a
contract as soon as it is accepted.

Acceptance may be express or implied. It is express when it is communicated by

words, spoken or written. It is implied when it is to be gathered from the surrounding
circumstances or the conduct of the parties.

Examples. (a) At an auction sale. S is the highest bidder. The auctioneer accepts the
offer by striking the hammer on the table. This is an implied acceptance.
Acceptance of an offer requires more than a tacit (implied) formation of intention to
accept.

Acceptance means in general communicated acceptance.

Who can accept?

Acceptance of particular offer. When an offer is made to a particular person. It can be

accepted by him alone. If it is accepted by any other person, there is no valid
acceptance.

Acceptance of general offer. When an offer is made to world at large, any persons to
whom the offer is made can accept it [Carlill v. Carbolic Smoke Ball Co. (1893)]

Legal Rules As To Acceptance:

The acceptance of an offer is the very essence of a contract. To be legally effective, it

must satisfy the following conditions:

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1) It must be absolute and unqualified: An acceptance, in order to be binding, must be

absolute and unqualified. In respect of all terms of the offer, whether material or
immaterial, major or minor, if the parties are not ad idem on all matters concerning the
offer and acceptance, there is no contract.
A made an offer to B to purchase a house with possession form 25th July. The offer was
followed by an acceptance suggesting possession form 1st August. Held, there was no
concluded contract.

2) It must be communicated to the offeror: To conclude a contract between the parties,

the acceptance must be communicated in some perceptible form. A mere resolve or
mental determination on the part of the offeree to accept an offer, when there is no
external manifestation of the intention to do so, is not sufficient.

Example:
A draft agreement relating to the supply of coal was sent to the manager of a railway
company for his acceptance. The manager wrote the word “approved” and put the draft
in the drawer of his table intending to send it to the company’s solicitor for a formal
contract to be drawn up. By some oversight the document remained in the drawer.
Held, there was no contract.( Brogden vs. Metropolitan Railway Co. (1877))

3. It must be according to the mode prescribed or usual and reasonable mode: If the
acceptance is not according to the mode prescribed, or some usual and reasonable mode
(when no mode is prescribed) the offeror may intimate to the offeree within a
reasonable time that the acceptance is not according to the mode prescribed and may
insist that the offer must be accepted in the prescribed mode only. If he does not inform
the offeree, he is deemed to have accepted the acceptance.

Example:
A makes an offer to B and says: “If you accept the offer, reply by wire.” B sends the
reply by post. It will be a valid acceptance unless A informs B that the acceptance is not
according to the made prescribed.

4. It must be given within a reasonable time: If any time limit is specified, the
acceptance must be given within that time. If no time limit is specified, if must be given
within a reasonable time.
5. It cannot precede an offer: If the acceptance precedes an offer, it is not a valid
acceptance and does not result in a contract.
6. It must show an intention on the part of the acceptor to fulfill terms of the promise.
7. It must be given by the party or parties to whom the offer is made.
8. It must be given before the offer lapses or before the offer is withdrawn.
9. It cannot be implied from silence: The acceptance of an offer cannot be implied
from the silence of the offeree or his failure to answer, unless the offeree has by his
previous conduct indicated that his silence means that he accepts.

Example:
A wrote to B“I offer you my car for Rs. 10,000. If I don’t hear from you in seven days.
I shall assume that you accept.” B did not reply at all there is no contract.

Sometimes Silence amount to acceptance: Implied Acceptance: Example: ’A’

subscribed for the weekly magazine for one year. Even after expiry of his subscription,

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the magazine company continued to send him magazine for five years. And also ‘A’
continued to use the magazine but denied to pay the bills sent to him. ’A’ would be
liable to pay as his continued use of the magazine was his acceptance of the offer.

Communication of offer, acceptance and revocation:

When is communication complete (Sec. 4)

Communication of offer: The communication of an offer is complete when if comes to

the knowledge of the person to whom it is made.

Example. A proposes, by a letter, to sell a house to B at a certain price. The letter is

posted on 10th July. It reaches B on 12th July. The communication of the offer is
complete when B receives the letter, i.e. on 12th July.

Communication of acceptance. The communication of an acceptance is complete –

(a) As against the proposer: when it is put into a course of transmission to him, so as to
be out of the power of the acceptor.
(b) As against the acceptor: when it comes to the knowledge of the proposer.

Example. B accepts A’s proposal, in the above case, by a letter sent by post on 13th
instant. The letter reaches A on 15th instant. The communication of the acceptance is
complete, as against A, when the letter is posted, i.e., on 13thas against B, when the
letter is received by A, i.e on 15th.

Communication of revocation. Revocation means “taking back”, “recalling “or

“withdrawal”, it may be a revocation of offer or acceptance. The communication of a
revocation is complete-
1. As against the person who makes it, when it is put into a course of transmission to
the person to whom it is made, so as to be out of the power of the person who makes it.
2. As against the person to whom it is made, when it comes to his knowledge.

Time for revocation of offer and acceptance.

Time for revocation of proposal: A proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer, but not
afterwards.
Time for revocation of acceptance: An acceptance may be revoked at any time before
the communication of the acceptance is complete as against the acceptor, but not
afterwards.

Loss of letter of acceptance in postal transit.

Acceptance is complete as against the offeror as soon as the letter of acceptance is

posted. The contract is complete even if the letter of acceptance goes astray or is lost
through an accident in the post. But in order to bind the offeror, it is important that the
letter of acceptance is correctly addressed, sufficiently stamped and posted. If it is not
correctly addressed and sufficiently stamped, the communication of acceptance is not
complete.

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Contracts over telephone or telex or oral communication.

It has the same effect as an oral agreement entered into between the parties when they
are face to face.

When does an offer come to an end?

An offer may come to an end by revocation or lapse, or rejection.

Sec. 6 deals with various modes of revocation of offer.

1) By communication of notice of revocation by the offeror at any time before its

acceptance is complete as against him

2) By lapse of time if it is not accepted within the prescribed time.

3) By non-fulfillment by the offeree of a condition precedent to acceptance.

Example. S, a seller, agrees to sell certain goods subject to the condition that B, the
buyer, pays the agreed price before a certain date. If B fails to pay the price by that
date, the offer stands revoked.

4) By death or insanity of the offeror provided the offeree comes to know of it before
acceptance. [Sec.6(4)] If he accepts an offer in ignorance of the death or insanity of the
offeror, the acceptance. Is valid.

5) If a counter-offer is made , where an offer is accepted with some modification in the

terms of the offer or with some other condition not forming part of the offer, such
qualified acceptance amounts to a counter- offer.

6) If an offer is not accepted according to the prescribed or usual mode & offeror has
objection to it.

7) If the law is changed. An offer comes to an end if the law is changed so as to make
the contract contemplated by the offer illegal or incapable or performance.

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Consideration

Consideration is one of the essential elements to support a contract. Subject to certain

exceptions, an agreement made without consideration is nudum pactum (a nude
contract) and is void.

Consideration is a technical term used in the sense of quid pro quo (i.e. something is
return). When a party to an agreement promises to do something, he must get
“something in return”.

Sec. 2 (d) defines consideration as follows : “when at the desire of the promisor, the
promisee or any other person has done or abstained form doing, or does or abstains
form doing, or promises to do or to abstain form doing, something, such act or
abstinence or promise is called a consideration for the promise.”

Consideration. If we analyse this definition, may be:

-An act, i.e., doing of something. In this sense consideration is in an affirmative form.

Example. A promises B to guarantee payment of price of the goods which B sells on

credit to C. here selling of goods by B to C is consideration for A’s promise.

-An abstinence or forbearance i.e., abstaining or refraining from doing something. In

this sense consideration is a negative form.
Example. (a) A promises B not to file a suit against him if he pays him Rs. 500. The
abstinence of A is the consideration for B’s payment.

-A return promise.

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Legal rules as to consideration:

1) It must move at the desire of the promisor.

An act constituting consideration must have been done at the desire or request of the
promisor. If it is done at the instance of a third party or without the desire of the
promisor, it will not be a good consideration.

Example. (a) A saves B’s goods form fire without being asked to do so. A Cannot
demand payment for his services.

D (defendant) promised to pay to P (plaintiff) a certain commission on articles which

would be sold through their agency in a market. Market was constructed by P at the
desire of the C (Collector), and not at the desire of the D. D was not bound to pay as it
was without consideration and hence void (Durga Prasad v. Baldeo)

2) It may move from the promisee or any other person.

Under the English law consideration must move from the promisee. Under the Indian
law consideration may move from the promisee or any other person. i.e., even a
stranger.

Example. An old lady, by a deed of gift, made over certain properly to her daughter D,
under the direction that she should pay her aunt, P (sister of the old lady), a certain sum
of money annually. The same day D entered into an agreement with P to pay her the
agreed amount, later, D refused to pay the amount on the plea that no consideration had
moved from P to D. Held, P was entitled to D, to maintain suit as consideration had
moved from the old lady sister of P to the daughter D.
(Chinnayya vs. Ramayya (1882))

3) It may be an act, abstinence or forbearance or a return promise: This has already

been explained.

4. It may be past, present or future.

5. It need not be adequate. Consideration, as already explained, “something in

return”. This “something in return” need not necessarily be equal in value to
“something given”.

6. It must be real and not illusory. Although consideration need not be adequate. It
must be real, competent and of some value in the eyes of the law.

a) Physical impossibility.
b) Legal impossibility.
c) Uncertain consideration.
d) Illusory consideration.

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7. It must be something which the promisor is not already bound to do. A promise to do
what one is already bound to do, either by general law or under an existing contract, is
not a good consideration for a new promise.

8. It must not be illegal, immoral or opposed to public policy.

Stranger to contract:

It is a general rule of law that only parties to a contract may sue and be sued on that
contract. This rule is known as the doctrine of privity of contract. “Privity of contract”
means relationship subsisting between the parties who have entered into contractual
obligations. It implies a mutuality of will and creates a legal bond or tie between the
parties to a contract.
There are two consequences of the doctrine of privity of contract:

A person who is not a partly to a contract cannot sue upon it even though the contract is
for his benefit and he provided consideration.

A contract cannot confer rights or impose obligations arising under it on any person
other than the parties to it. Thus, if there is a contract between A and B, C cannot
enforce it.

Exceptions:

1. A trust or charge. A person (called beneficiary) in whose favour a trust or other

interest in some specific immovable property has been created can enforce it even
though he is not a party to the contract.
Example. (a) A agrees to transfer certain properties to be held by T in trust for the
benefit of B, B can enforce the agreement, even though he is not a party to the
agreement.

2. Marriage settlement, partition or other family arrangements, when an arrangement

is made in connection with marriage, partition or other family arrangements and a
provision is made for the benefit of a person, he may sue although he is not a party to
the agreement.

Eg: J’s wife deserted him because of his ill treatment. J entered into an agreement with
his father-in-law to treat her properly or else pay her monthly maintenance.
Subsequently she was again ill-treated and also driven out. Held, she was entitled to
enforce the promise made by J to her father.

3) Acknowledgement or estoppel. Where the promisor by his conduct, acknowledges or

otherwise constitutes himself as an agent of a third party, a binding obligation is
thereby incurred by him towards the third party.

Example. A receives some money form T to be paid over to P. A admits of this receipt
to P. P can recover the amount from A who shall be regarded as the agent of P.

4) Assignment of a contract: The assignee of rights and benefits under a contract not
involving personal skill can enforce the contract subject to the equities between the

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original parties. Thus the holder in due course of a negotiable instrument can realize the
amount on it even though there is no contract between him and the person liable to pay.

A Contract without consideration is Void-Exceptions (Sec 25)

1) Love and affection (Sec.25(1)) where an agreement is expressed in writing and

registered under the law for the time being in force for the registration of documents
and is made on account of natural love and affection between parties standing in a near
relation to each other, it is enforceable even if there is no consideration.

Example. (a) F, for natural love and affection, promises to give his son, S, Rs. 1.000, F
puts his promise to S in writing and registers it. This is a contract.

Example. A husband, after referring to quarrels and disagreement between him and his
wife executed a registered document in favour of his wife agreeing to pay her for
maintenance, but no consideration moved form the wife. Held, the agreement was void
for want of consideration, as the essential requirement that the agreement is made on
account of natural love and affection between the parties was missing.

2. Compensation for voluntary services [sec. 25(2)]. A promise to compensate, wholly

or in part, a person who has already voluntarily done something for the promisor, is
enforceable, even though without consideration.

Example.(a) A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is
a contract.

3). Promise to pay a time-barred debt [sec.25 (3)]. A promise by a debtor to pay a time-
barred debt is enforceable provided it is made in writing and is signed by the debtor, or
by his agent generally or specially authorized in that behalf.
4) Completed gift
5) Agency. No consideration is necessary to create an agency.
6) Charitable subscription.
7) Bailment: No consideration is required to effect the contract of bailment (Section
148).

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Capacity to Contract

The parties who enter into a contract must have the capacity to do so. Capacity here
means competence of the parties to enter into a valid contract into between the parties
who are competent to contract. According to Sec. 11, every person is competent to
contract who:

(a) is of the age of majority according to the law to which he is subject,

(b) is of sound mind, are
(c) is not disqualified from contracting by any law to which he is subject. Thus Sec. 11
declares the following persons to be incompetent to contract.

i) Minors
ii) Persons of unsound mind, and
iii) Persons disqualified by any law to which they are subject.

1. Minors

According to Sec. 3 of the Indian Majority Act, 1875, a minor is a person who has not
completed eighteen years of age. In the following two cases, he attains majority after
twenty-one years of age:

Where a guardian of a minor’s person or property has been appointed under the
Guardians and Wards Act, 1890 or
Where the superintendence of a minor’s property is assumed by a Court of Wards.

The rules governing minor’s agreements are based on two fundamental rules:

The first rule is that the law protects minors against their own inexperience and against
the possible improper designs of those more experienced.

The second rule is that, in pursuing the above, the law should not cause unnecessary
hardship to persons who deal with minors.

Minor’s agreements.

1) An agreement with or by a minor is void and inoperative ab-initio. (Mohiri Bibi v.

Dharmodas Ghose), In this case, a minor mortgaged his house in favour of a money-
lender to secure a loan of Rs 20,000 out of which the mortgagee (the money-lender)
paid the minor a sum of Rs. 8,000. subsequently the minor sued for setting aside the
mortgage, stating that he was underage when he executed the mortgage. Held, the
mortgage was void and, therefore, it was cancelled. Further the money-lender’s request

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for the repayment of the amount advanced to the minor as part of the consideration for
the mortgage was also not accepted.
2) He can be a promisee or a beneficiary: Incapacity of a minor to enter into a contract
means incapacity to bind himself by a contract. There is nothing which debars him
form becoming a beneficiary.
Example. M, aged 17, agreed to purchase a second-hand scooter for Rs. 5000 from S.
He paid Rs. 200 as advance and agreed to pay the balance the next day and collect the
scooter. When he came with the money the next day, S told him that he had changed
his mind and offered to return the advance. S cannot avoid the contract, though M may,
if he likes.

(3) His agreement cannot be ratified by him on attaining the age of majority.
Consideration which passed under the earlier contract cannot be implied into the
contract which the minor enters on attaining consideration given during minority is no
consideration. If it is necessary a fresh contract may be entered into by the minor on
attaining majority provided it is supported by fresh consideration.
Example. M, a minor, borrows Rs. 5000 from L and executes a promissory note in
favour of L. After attaining majority, he executes promissory note is void for want of
consideration.

(4) If he has received any benefit under a void agreement, he cannot be asked to
compensate or pay for it.

(5) He can always plead minority. Even if he has, by misrepresenting his age, induced
the other party to contract with him, he cannot be sued either in contract or in tort for
fraud because if he injuried party were allowed to sure for fraud, it would be giving him
an indirect means of enforcing the void agreement.
The Court may, where a loan or some property is obtained by the minor by some
fraudulent representation and the agreement is set aside, direct him on equitable
considerations, to restore the money or property to the other party. Whereas the law
gives protection to the minors, it does not give them liberty “to cheat men”.

(6) There can be no specific performance of the agreements entered into by him as they
are void ab intio..

(7 )He cannot enter into a contract of partnership. But he may be admitted to the
benefits of an already existing partnership with the consent of the other partners.

(8) He cannot be adjusted insolvent. This is because he is incapable of contracting

debts.

(9) He is liable for ‘necessaries’ supplied or necessary services rendered to him or

anyone whom he is legally bound to support.

(10) He can be an agent.

(11)His parents/guardian are/ is not liable for the contract entered into by him.

(12) A minor is liable in tort (a civil wrong)

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(13) Joint contract by minor and adult: In such a case, the adult will be liable on the
contract and not the minor.

(14). Surety for a minor: In a contract of guarantee when an adult stands surety for a
minor then he (adult) is liable to third party as there is direct contract between the
surety and the third party.

(15) Minor as Shareholder: A minor, being incompetent to contract cannot be a

shareholder of the company. If by mistake he becomes a member, the company can
rescind the transaction and remove his name from register. But, a minor may, acting
though his lawful guardian become a shareholder by transfer or transmission of fully
paid shares to him.

Minor’s liability for necessaries. A minor is liable to pay out of his property for
‘necessaries’ supplied to him or to anyone whom he is legally bound to support (Sec.
68). The claim arises not out of contract but out of what are called quasi- contracts.
Again, it is only the property of the minor which is liable for meeting the liability
arising out of such contracts. He is not personally liable. The law has provided this
exception intentionally because if it were not so. It would be impossible for minors
even to live.

Necessaries include—

(a) Necessaries goods. Necessary goods are not restricted to articles which are required
to maintain a bare existence, such as bread and clothes, but include articles which are
reasonably necessary to the minor having regard to his station in life. A watch are a
bicycle may well be considered to be necessaries. An engagement ring may be a
necessary, but not a vanity bag bought for the minor’s financee.
(b) Services rendered. Certain services rendered to a minor have been held to be
necessaries. These include” education, training for a trade, medical advice , legal
advice, house given to a minor on rent for the purpose of living and continuing his
studies.

Persons of unsound mind:

“A person is said to be of sound mind for the purpose of making a contract if, at the
time when he makes it, he is capable of understanding it and of forming a rational
judgment as to its effect upon his interests.

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.

Contracts of persons of unsound mind:

Lunatics. A lunatic is a person who is mentally deranged due to some mental strain or
other personal experience. He suffers from intermittent intervals of sanity and insanity.
He can enter into contracts during the period when he is of sound mind.

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Idiots. An idiot is a person who has completely lost his mental powers. He does not
exhibit understanding of even ordinary matters. Idiocy is permanent whereas lunacy
denotes periodical insanity. An agreement of an idiot, like that of a minor, is void.

Drunken or intoxicated persons. A drunken or intoxicated person suffers from

temporary incapacity to contract, i.e., at the time when he is so drunk or intoxicated that
he is incapable of forming a rational judgment.

3.Other Persons

1) Alien enemies. An alien (the subject of a foreign state) is a person who is not a
subject of the Republic of India. He may be (i) an alien friend, or (ii) an alien enemy.

Contracts with an alien friend, subject to certain restrictions, are valid. Contracts with
an alien enemy may be studied under two heads, namely-

(a) contracts during the war, and

(b) contracts made before the war.

During the continuance of the war, an alien enemy can neither contract with an Indian
subject nor can he sue in an Indian Court, He can do so only after he receives a license
from the Central Government.

Contracts made before the war may either be suspended or dissolved. They will be
dissolved if they are against the public policy or if their performance would benefit the
enemy.

2) Foreign sovereigns. Their diplomatic staff and accredited representatives of foreign

States. They have some special privileges and generally cannot be sued unless they of
their own submit to the jurisdiction of our law Courts.

3) Insolvents. When a debtors is adjudged insolvent, his property vests in the Official,
Receiver or Official Assignee. As such the insolvent is deprived of his power to deal in
that property. It is only the Official Receiver or Official Assignee who can enter into
contracts relating to his property, and sue and be sucd on his behalf.

4) Convicts. A convict when undergoing imprisonment is incapable of entering into a

contract. He can, however, enter into, or sue on, a contract if he is lawfully at large
under a license called “ticket of leave”.

Free Consent

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It is essential to the creation of a contract that the parties are “ad idem”, i.e., they agree
upon the same thing in the same sense at the same time and that their consent is free
and real.

Meaning of “ consent” and “free consent”

Consent: It means acquiescence or act of assenting to an offer. “Two or more persons

are said to consent when they agree upon the same thing in the same sense”
Free consent: Consent is said to be free when it is not caused by-
Coercion as defined in Sec. 15. or
Undue influence as defined in Sec. 16,or
Fraud as defined in Sec. 17,or
Misrepresentation as defined in Sec. 18,or
Mistake, subject to the provisions of Sec 20,21,and 22
When there is no consent there is no contract.

Coercion:

When a person is compelled to enter into a contract by the use of force by the other
party or under a threat, “coercion” is said to be employed. Coercion is the committing,
or threatening to commit, any act forbidden by the Indian Penal Code, 1860 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.

The threat amounting to coercion need not necessarily proceed from a party to the
contract. It may proceed even from a stranger to the contract. Likewise, it may be
directed against any body- not necessarily the other contracting party. The intention of
the person using coercion should, however, be to cause any person to enter into an
agreement.

Coercion includes fear, physical compulsion and menace to goods.

1.Committing or threatening to commit any act forbidden by the Indian Penal Code,
1860

Example. (a) A young girl of 13 years was forced to adopt a boy to her husband who
had just died by the relatives of the husband who prevented the removal of his body for
cremation until she consented. Held, the consent was not free but was induced by
coercion. Consequently the adoption was set aside.

2. Unlawful detaining or threatening to detain any property.

(b) The government gave a threat of attachment against the property of P for the
recovery of the fine due form T, the son of P. P paid the fine. Held, the contract was
induced by coercion

Effect of coercion (Sec19)

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When consent to an agreement is caused by coercion, fraud or misrepresentation, the

agreement is a contract avoidable at the option of the party whose consent was so
caused.

The onus of proving that the consent of a party to a contract was caused by coercion
and that he would not have entered into it had coercion not been employed, lies on the
party who wants to relieve himself of the consequences of coercion.

Threat to commit suicide-Does it amount to coercion?

The question whether a threat to commit suicide amounts to coercion. In case, a person
held out a threat of committing suicide to his wife and son if they did not execute a
release in favour of his brother in respect of certain properties. The wife and son
executed the release deed under the threat. Held, “the threat of suicide amounted to
coercion within Sec. 15 and the release deed was, therefore, avoidable.”
As such, a threat to commit suicide amounts to coercion. (Chikham Ammiraju Vs
Seshama )

Undue influence:

Sometimes a party is compelled to enter into an agreement against his will as a result of
unfair persuasion by the other party. This happens when a special kind of relationship
exists between the parties such that one party is in a position to exercise undue
influence over the other.

“ A contract is said to be induced by ‘undue influence’ where the relations subsisting

between the parties are such that one of the parties is in a position to dominate the will
of the other and uses that position to obtain an unfair advantage over the other.”

A person is deemed to be in a position to dominate the will of another

(1) Where he holds a real or apparent authority over the other, e.g., the relationship
between master and servant, doctor and patient.

(2) Where he stands in a fiduciary relation (relation of trust and confidence) to the
other. It is supposed to exist, for example, between father and son, solicitor and client,
trustee and beneficiary and promoter and company.

(3) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or mental or bodily distress. Example,
between a medical attendant and his patient.

Undue influence is also sometimes called moral coercion.

Example 1: A having advanced money to his son, B, during his minority, upon B’s
coming of age obtains, by misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advance. A employs undue influence.
Example 2: A, a man enfeebled by disease or age, is induced by B’s influence over
him as his medical attendant, to agree to pay B an unreasonable sum for his
professional services. B employs undue influence.

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Example 3: A, being indebted to B, the money-lender of his village, contracts a fresh

loan on terms which appear to be unconscionable. It lies on B to prove that the contract
was not induced by undue influence.
Example 4: A applies to a banker for a loan at a time when there is a stringency in
money market. The banker declines to make the loan except at an unusually high rate of
interest. A accepts the loan on these terms. This is a transaction in the ordinary course
of business, and the contract is not induced by undue influence.

Effect of undue influence (Sec 19)

When consent to an agreement is obtained by undue influence, the agreement is a

contract avoidable the option of the party whose consent was so obtained.

Relationships which raise presumption of undue influence:

The following relationships usually rates a presumption of undue influence, viz., (i)
parent and child, (ii) guardian and ward, (iii) trustee and beneficiary, (iv) religious
adviser and disciple, (v) doctor and patient,(vi) solicitor and client, and (vii) fiancé and
fiancée.

There is, however, no presumption of undue influence in the relationship of (i) landlord
and tenant, (ii) creditor and debtor, and (iii) husband and wife. The wife should not be
pardanashin otherwise the presumption will arise.

Burden of proof:

In an action to avoid a contract on the ground of undue influence, the plaintiff has to
establish that-

1. The other party was in a position to dominate his will. Mere proof of nearness of
relationship is not sufficient for the Court to assume that one relation was in a position
to dominate the will of the other.
2. The other party actually used his influence t obtain the plaintiff consent to the
contract, and
3. The transaction is unconscionable (unreasonable).

Where a person, who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was not
induced by undue influence lies upon the person in a position to dominate the will of
the other.

Rebutting the presumption

1) Full disclosure of facts was made by the influencing party.
2) The price was adequate.
3) That the weaker party was in receipt of independent advice, before making the
promise.

Contracts with pardanashin women:

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A contract with a pardanashin woman is presumed to have been induced by undue

influence. A pardanashin woman is one who observes complete seclusion because of
the custom of the particular community to which she belongs. A woman who goes to
the Court and gives evidence settles rents with tenants and collects rents, communicates
in matters of business with men other than the members of her family. Is not a
pardanashin woman.

Any person who enters into a contract with a pardanashin woman has strictly to prove
that no undue influence was used and that she had free and independent advice,
understood the contents of the contract and exercised her free will.

Difference between coercion and undue influence

Coercion Undue Influence

(a) It involves the physical force or threat. (a) It involves moral or mental pressure
The aggrieved party is compelled to make
the contract against its will.
(b) It involves committing or threatening (b) No such illegal act is committed or a
to commit an act forbidden by Indian. threat is given.
Penal Code or detaining or threatening to
detain property unlawfully.
(c) It is not necessary that there must be (c ) some sort of relationship between the
Some sort of relationship between the parties is absolutely necessary.
parties.
(d) Coercion need not proceed from the (d) Undue influence is always exercised
promisor nor need it be directed against between parties to the contract.
the promisor
(e) The contract is voidable at the option (e)Where the consent is induced by
of the party whose consent has been undue influence, the contract is either
obtained by the coercion or enforce it in a voidable or the court may set it aside
modified form.
(f) In case of coercion where the contract (f)The court has the discretion to direct
is rescinded by the aggrieved party, as per the aggrieved party to return the benefit
Section 64, any benefit received has in whole or in part or not to to be give
restored back to the other party. any such directions.

Misrepresentation and Fraud

A statement of fact which one party makes in the course of negotiations with a view to
inducing the other party to enter into a contract is known as a representation. It must
relate to some fact which is material to the contract. It may be expressed by words
spoken or written or implied from the acts and conduct of the parties.

A representation, when wrongly made, either innocently or intentionally, is a

misrepresentation. Misrepresentation may be –
i) an innocent or unintentional misrepresentation, or
ii) an intentional, deliberate or willful misrepresentation with an intent to deceive or

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defraud the other party.

The former is called “misrepresentation” and the latter “fraud”.

Misrepresentation: Misrepresentation is a false statement which the person making it

honestly believes to be true or which he does not know to be false. It also includes non-
disclosure of a material fact or facts without any intent to deceive the other party.

Example:
(a) A, while selling his mare to B, tells him that the mare is thoroughly sound. A
genuinely believes the mare to be sound although he has no sufficient ground for the
belief. Later on B finds the mare to be unsound. The representation made by A is a
misrepresentation.

Requirements of misrepresentation
A misrepresentation is relevant if it satisfies the following requirements:
1) It must be a representation of a material fact. Mere expression of opinion does not
amount to misrepresentation even if it turns out to be wrong.
2) It must be made before the conclusion of the contract with a view t inducing the
other party to enter into the contract.
3) It must be made with the intention that it should be acted upon by the person to
whom it is addressed.
4) It must actually have been acted upon and must have induced the contract.
5) It must be wrong but he person who made it honestly believed it to be true.
6) It must be made without any intention to deceive the other party.
7) It need not be made directly to the plaintiff. A wrong statement of facts made to a
third person with the intention of communication it to the plaintiff, also amounts to
misrepresentation.

Example:
A told his wife within the hearing of their daughter that the bridegroom proposed for
her was a young man. The bridegroom, however, was over sixty years. The daughter
gave her consent to marry him believing the statement by her father. Held, the consent
was vitiated by misrepresentation and fraud.
Misrepresentation results not only form mis-statement of facts but also from
suppression of material facts.

Consequences of misrepresentation: The aggrieved party, in case of misrepresentation

by the other party, can-

i) avoid or rescind the contract: or

ii) accept the contract but insist that he shall be placed in the position in which he
would have been if the representation made had been true [Sec. 19]

Loss of right of rescission: The aggrieved party loses the right to rescind or avoid the
contract for misrepresentation or fraud-

1) If he, after becoming aware of the misrepresentation or fraud, takes a benefit under
the contract or in some other way affirms it.

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Example: A induced B to buy his lorry on the false representation that it was“ in
excellent condition”. On discovering that lorry was in a very bad shape when B use it,
he wanted to return it to A, A, however, agreed to bear half the cost of repairs to which
B agreed. On a subsequent journey when the lorry completely broke down, B wanted to
rescind the contract. Held, B could not do so as his acceptance of the offer of A to bear
half the cost of repairs impliedly amounted to final acceptance of the sale.

2) Where the subject – matter of the contract has been consumed or destroyed. Further,
if a contract cannot be rescinded in toto (entirely, wholly), it cannot be rescinded at all.

3) If a third party has acquired rights in the subject- matter of the contract in good faith
and for value.

Fraud: Fraud exists when it is shown that-

a false representation has been made
(a) knowingly, or
(b) without belief in its truth, or
(c ) recklessly, not caring whether it is true or false, and the maker intended the other
party to act upon it, or there is a concealment of a material fact or that there is a partial
statement of a fact in such a manner that the withholding of what is not stated makes
that which is stated false.

The intention of the party making fraudulent misrepresentation must be to deceive the
other party to the contract or to induce him to enter into a contract.

Essential elements of fraud

1) There must be a representation or assertion and it must be false. Without a
representation or assertion there can be no fraud except in cases where silence may
itself amount to fraud or where there is an effective concealment of a fact.

Example:
The prospectus of a company did not refer to the existence of a document disclosing
liabilities. This gave the impression that the company was prosperous. If the existence
of the document had been disclosed the impression would have been quite different.
Held, non-disclosure amounted to fraud and anyone who purchased shares on the faith
of this prospectus could avoid the contract.

2) If a representation is true when it is made, but to the knowledge of the party making
it, becomes untrue before the contract is entered into, it must be corrected. If it is not
corrected, the other party can rescind the contract.

3) The representation must relate to a material fact which exists now or existed in the
past.

4) The representation must have been made before the conclusion of the contract with
the intention of inducing the other party to act upon it.

5) The representation or statement must have been made with a knowledge of its falsity
or without belief in its truth or recklessly, not caring whether it is true or false.

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6) The other party must have been induced to act upon the representation or assertion.

Example:
A bought shares in a company on the faith of a prospectus which contained an untrue
statement that one B was a director of the company. A had never heard of B and
therefore, the statement was immaterial from his point of view. A’s claim for damages
in this case was dismissed because the untrue statement had not induced A to buy the
shares.

7) The other party must have relied upon the representation and must have been
deceived.

8) The other party, acting on the representation or assertion, must have subsequently
suffered some loss.

Consequences of fraud.(Sec 19)

A contract induced by fraud in avoidable at the option of the party defrauded. Until it
is avoided, it is valid. The party defrauded has, however, the following remedies:
1) He can rescind the contract.
2) He can insist on the performance of the contract on the condition that he shall be put
in the position in which he would have been if the representation made had been true.

3) He can sue for damages.

Silence as to facts

The general rule is that a person before entering into a contract need not disclose to the
other party the material facts which he knows, but he must refrain from making active
concealment (like concealing a crack on the surface of a table by filling it and
repolishing it). This means mere silence is not fraud.

Example. Mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud.

Statutory exceptions.
1) Where the circumstances of the case are such that, regard being had to them , it is the
duty of the person keeping silence to speak.
Example. F sells by auction to D, his daughter, who has just come of age, a horse which
F knows to be unsound, Here, the relation between the parties would make it F’s duty
to tell that the horse is unsound. If F does not do so, it will amount to fraud.
Other exceptions.

2) If a representation becomes false due to change of circumstances at the time when

the contract is entered into, although it was true at the time when it was made, it is the
duty of the person who made the representation to communicate the change of
circumstances.

3) If a seller fails to inform the buyer as to a latent defect (i.e., a defect known to the
seller and not apparent on an ordinary inspection), his silence amounts to fraud.

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In all these cases silence amounts to fraud

1) Contracts of Insurance
2) Contracts of marriage: Every material fact must be disclosed by the parties to a
contract of marriage
3) Contracts of family settlement
4) Share Allotment contracts

Distinction between fraud and misrepresentation

1) Intention. In misrepresentation, there is a mis-statement or concealment of a
material fact or facts essential to the contract without any intention to deceive the other
party. In fraud, the intention is to deceive the other party. Misrepresentation is innocent,
fraud is deliberate or willful.
2) Belief. In case of misrepresentation, the person making the suggestion believes it to
be true, while in case of fraud he does not believe it to be true.
3) Rescission and damages. In misrepresentation, the aggrieved party can rescind the
contract or sue for restitution. There can be no suit for damages. In fraud, the remedy
available to the aggrieved party is not limited to rescission alone. He can also claim
damages.
4) Discovery of truth. In case of misrepresentation, the aggrieved party cannot avoid
the contract if it had the means to discover the truth with ordinary diligence. But in case
of fraud, where there is active concealment, the contract is avoidable even though the
aggrieved party had the means of discovering the truth with ordinary diligence.

Mistake: Mistake may be defined as an erroneous belief about something. It may be a

mistake of law or a mistake of fact.

Mistake of law: Mistake of law may be-

(1) mistake of law of the country, or
(2) mistake of law of a foreign country.

1. A party cannot be allowed to get any relief on the ground that it had done a
particular act in ignorance of law. A mistake of law is, therefore, no excuse and the
contract cannot be avoided. But if a person enters into a contract by making a mistake
of law through the inducement of another, whether innocent or otherwise, the contract
may be avoided. Mistake of law of a foreign country. Such a mistake is treated as
mistake of fact and the agreement in such a case is void.

Mistake of fact:
(1) a bilateral mistake, or
(2) a unilateral mistake.

1. Bilateral mistake: Where both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, there is a bilateral mistake. In such a case, the
agreement is void. The following two conditions have to be fulfilled for the application
of Sec. 20:

a) The mistake must be mutual.

b) The mistake must relate to a matter of fact essential to the agreement.

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The various cases which fall under bilateral mistake are as follows:
A) Mistake as to the subject-matter:
(a) Mistake as to the existence of the subject matter.
Example:
(i) A agreed to sell a cargo of corn supposed at the time of the contract to be in transit
from Salonica to the United Kingdom. Unknown to the parties, the corn had become
fermented and had already been sold by the master of the ship at Tunis. Held, the
agreement was void and the buyer was not liable for the price.

(ii) Mistake as to the identity of the subject-matter. It usually arises where one party
intends to deal in one thing and the other intends to deal in another.-

(iii) Mistake as to the quality of the subject-matter. If the subject-matter is something

essentially different from what the parties thought it to be, the agreement is void.

(iv) Mistake as to the quantity of the subject-matter.

(v) Mistake as to the title to the subject-matter.

(vi) Mistake as to the price of the subject-matter.

B) Mistake as to the possibility of performing the contract. Consent is nullified if both

the parties believe that an agreement is capable of being performed when in fact this is
not the case. The agreement, in such a case, is void on the ground of impossibility.
1) Physical impossibility.
2) Legal impossibility.

2. Unilateral mistake: When in a contract only one of the parties is mistaken regarding
the subject-matter or in expressing or understanding the terms or the legal effect of the
agreement, the mistake is a unilateral mistake. According to Sec. 22, a contract is not
avoidable merely because it was caused by one of the parties to it being under a mistake
as to a matter of fact. A unilateral mistake is not allowed as a defense in avoiding a
contract unless the mistake is brought about by the other party’s fraud or
misrepresentation.

Exceptions: A unilateral mistake is generally not allowed as a defense in avoiding a

contract. But in certain cases, the consent is given by a party under an error or mistake
which is fundamental as goes to the root of the agreement. In such cases the agreement
is void.

1. Mistake as to the identity of the person contracted with: It is a fundamental rule of

law that if one of the parties represents himself to be some person other than him really
is, there is a mistake as to the identity of the person contracted with. If, for example, A
intends to contract with B but finds he has contracted with C, there is no contract if the
identity of B was a material clement of the contract and C knows it.
2. Mistake as to the nature of contract: If a person enters into a contract in the mistaken
belief that he is signing a document of a different class and character altogether, there is
a mistake as to the nature of contract and the contract is void.

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Example: M, an old man of poor sight, indorsed a bill of exchange thinking that it was
a guarantee. Held, there was no contract on the ground that the mind of the signer did
not accompany the signature.

LEGALITY OF OBJECT

A contract must not only be based upon mutual assent of competent parties but must
also have a lawful object. It the object of an agreement is the performance of an
unlawful act, the agreement is unenforceable. Sec. 23 declares that the ‘object’ or the
‘consideration’ of an agreement is not lawful in certain cases. The word ‘object’ means
purpose or design. In some cases, consideration for an agreement may be lawful but the
purpose for which the agreement is entered into may be unlawful. In such cases the
agreement is void. As such both the object and the consideration of an agreement must
be lawful, otherwise the agreement is void.

When consideration or object is unlawful (Sec.23)

The consideration or object of an agreement is unlawful-

1) If it is forbidden by law: If the object or the consideration of an agreement is the
doing of an act forbidden by law. The agreement is void.
Example. (a) A promises to obtain for B an employment in the public service and B
promises to pay Rs. 1000 to A. The agreement is void, as the consideration for it is
unlawful.
2) If it is of such a nature that, if permitted, it would defeat the provisions of any law:
Example: A was licensed under an Excise Act to run a liquor shop. The Act forbade the
sale, transfer or sub-lease of the license or the creation of a partnership to run the shop.
A took B into partnership. Held, the agreement was void.
3) If it is fraudulent.
4) If it involves or implies injury to the person or property of another.
5) If the Court regards it as immoral.
6) Where the Court regards it as opposed to public policy.

Unlawful And Illegal Agreements:

An unlawful agreement is one which, like a void agreement is not enforceable by law.
It is void ab initio and is destitute of legal effects altogether. It affects only the
immediate parties and has no further consequences. An illegal agreement, on the other
hand, is not only void as between immediate parties but has this further effect that the
collateral transactions to it also become tainted with illegality.
Example: L lends Rs. 5000 to B to help him to purchase some prohibited goods from T,
an alien enemy. If B enters into an agreement with T, the agreement will be illegal and
the agreement between B and L shall also become illegal, being collateral to the main
transaction which is illegal L cannot, therefore, recover the amount. He can recover the
amount if he did not know of the purpose of the loan.

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Every illegal agreement is unlawful, but every unlawful agreement is not necessarily
illegal.

Reciprocal promises (Sec, 57). Where persons reciprocally promise, firstly, to do

certain things which are legal, and secondly, under specified circumstances, to do
certain other things which are illegal, the first set of promises is a contract, but the
second is a void agreement.
Example: A and B agree that A shall sell B a house for Rs. 10,000 but that if B uses it
as a gambling house, he shall pay A Rs. 50,000 for it. The first set of reciprocal
promises, namely to sell the house and pay Rs. 10,000 for it, is a contract. The second
set is for an unlawful object, namely that B may use the house as a gambling house, and
is a void agreement.

Agreements opposed to public policy:

An agreement is said to be opposed to public policy when it is harmful to the public
welfare.
Some of the agreements which are, or which have been held to be opposed to public
policy and are unlawful are as follows.
1) Agreements of trading with enemy.
2) Agreement to commit a crime.
3) Agreements which interfere with justice.
a) Interference with the course of justice.
b) Stifling prosecution. It is in public interest that if a person has committed a
crime, he must be prosecuted and punished. Thus where “A” promises to drop a
prosecution which he has instituted against B for robbery, and B promises to restore the
stolen property. The agreement is unlawful. But a compromise in case of
compoundable offences is valid.
c) Maintenance and champerty: ‘Maintenance’ is an agreement to give assistance,
financial or otherwise, to another to enable him to bring or defend legal proceedings
when the person giving assistance has got no legal interest of his own in the subject-
matter. ’Champerty’ is an agreement whereby one party is to assist another to bring an
action for recovering money or property, and is to share in the proceeds of the action.
4) Agreements in restraint of legal proceedings
5) Agreements restricting enforcement of rights.
6) Agreements curtailing period of limitation.
7) Trafficking in public offices and titles: Agreements for the sale or transfer of public
offices and title or for the procurement of a public recognition like Padma Vibhushan or
Param Veer Chakra for monetary consideration are unlawful, being opposed to public
policy.
8) Agreements tending to create interest opposed to duty: If a person enters into an
agreement whereby he is bound to do something which is against his public or
professional duty, the agreement is void on the ground of public policy.
9) Agreements in restraint of parental rights: A father, and in his absence the mother, is
the legal guardian of his/her minor child. This right of guardianship cannot be bartered
away by any agreement. A father is entitled by law to the custody of his legitimate
child. He cannot enter into an agreement which is inconsistent with his duties arising
out of such custody. If he enters into any such agreement. It shall be void on the ground
of public policy.
10) Agreements restricting personal liberty:

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Example: A debtor agreed with his money lender that he would not, without the
lender’s written consent, leave his job, or borrow money, or dispose of his property or
change his residence. Held, the agreement was void.

11) Agreements in restraint of marriage: Every agreement in restraint of the marriage

of any person, other than a minor, is void. This is because the law regards marriage and
married status as the right of every individual.
12) Marriage brokerage or brocage agreements.
13) Agreements interfering with marital duties: Any agreement which interferes with
the performance of marital duties is void, being opposed to public policy.
14) Agreements to defraud creditors or revenue authorities. An agreement the object of
which is to defraud the creditors or the revenue authorities is not enforceable, being
opposed to public policy.
15) Agreements in restraint of trade: An agreement which interferes with the liberty of
a person to engage himself in any lawful trade, profession or vocation is called an
agreement in restraint of trade. Public policy requires that every man should be at
liberty to work for himself and should not be at liberty to deprive himself of the fruit of
his labour, skill or talent by any contract that he enters into.

Exceptions. The following are the exceptions to the rule that “an agreement in restraint
of trade is void.”
(1) Sale of goodwill: A seller of goodwill of a business may be restrained from carrying
on:
(i) a similar business,
(ii) within specified local limits,
(iii) so long as the buyer or any person deriving title to the goodwill from him carries
on a like business provided that such limits appear to the Court reasonable regard being
had to the nature of the business.
(2) Partners agreements:

(a) Incoming Partner: A partner shall not carry on any business other than that of the
firm while he is a partner.
(b) Outgoing Partner: An outgoing partner may agree with his partners not to carry on a
business similar to that of the firm within a specified period or within specified local
limits.
(c )Dissolution: Partners may, upon or in anticipation of the dissolution of the firm,
make an agreement that some or all of them will not carry on a business similar to that
of the firm within a specified period or within specified local limits of the Indian
Partnership Act. 1932.
(d) Where the goodwill of a firm is sold after dissolution, a partner may carry on a
business competing with that of the buyer and he may advertise such business. But,
subject t agreement between him and the buyer, he may not
(i) use the firm name,
(ii) represent himself as carrying on the business of the firm, or
(iii) solicit custom of persons who were dealing with the firm before its dissolution.

(3) Trade combinations: Traders and manufacturers in the same line of business
normally form associations to regulate business or to fix prices. The regulations as to
the opening and closing of business in a market, licensing of traders, supervision and

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control of dealers and the mode of dealing are not unlawful even if they are in restraint
of trade.

(4) Service contracts: Sometimes an employee, by the terms of his service agreement,
is prevented from accepting-

i) any other engagement during his employment, and/or

ii) a similar engagement after the termination of his services.

As regards the first restraint. It is valid and is not in restraint of trade if it is to operate
while the employee is contractually bound to serve his employer. The doctors, for
example, are usually debarred from private practice during the term of their
employment.

As regards the second restraint, it is void if its object is merely to restrain competition
by an employee not to engage in a similar business, or not to accept a similar
engagement, after the termination of his services, is void.

VOID AGREEMENTS

An agreement, though if might possess all the essential elements of a valid contract,
must not have been expressly declared as void by any law in the country. The Contract
Act specifically declares certain agreements to be void. A void agreement is one which

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is not enforceable by law. Such an agreement does not give to any legal consequences
and is void ab inito.

VOID AGREEMENTS
The following agreements have been expressly declared to be void by the Contract Act:

Agreements by incompetent parties (Sec. 11).

Agreements made under a mutual mistake of fact (Sec. 20).
Agreements the consideration or object of which is unlawful (Sec.23).
Agreements the consideration or object of which is unlawful in part (Sec.24).
Agreements made without consideration (Sec.25).
Agreements in restraint of marriage (Sec.26).
Agreements in restraint of trade (Sec.27).
Agreements in restraint of legal proceedings (Sec.28).
Agreements the meaning of which is uncertain (Sec.29).
Agreements by way of wager (Sec.30).
Agreements contingent on impossible events (Sec. 36).
Agreements to do impossible acts (Sec.56).
Agreements the meaning of which is uncertain (Sec.29)
Agreements the meaning of which is not certain, or capable of being made certain, are
void (Sec. 29).The uncertainty may be as to (i) existence of, (ii) quantity of, (iii) quality
of, (iv) price of, or (v) title to, the subject matter.

Wagering agreements or wager (Sec. 30): A wager is an agreement between two parties
by which one promises to pay money or money’s worth on the happening of some
uncertain event in consideration of the other party’s promise to pay if the event does
not happen. Thus if A and B enter into an agreement that A shall pay B Rs. 100 if it
rains on Monday, and that B shall pay A the same amount if it does not rain, it is a
wagering agreement.

“The essence of gambling and wagering is that one party is to win and the other to lose
upon a future event, which at the time of the contract is of an uncertain nature, that is to
say, if the event turns out one way A will lose but if it turns way he will win”.

Essentials of a wagering agreement.

1) Promise to pay money or money’s worth.

2) Uncertain event.
3) Each party must stand to win or lose.
4) No control over the event.
5) No other interest in the event. Thus an agreement is not a wager if the party to whom
money is promised on the occurrence of an event has an interest in its non-occurrence.
That is why a contract of insurance is not a wagering agreement.

Contracts of insurance and wagering agreements.

Contracts of insurance bear a certain superficial resemblance to wagering agreements,
but they are really transactions of a different character. The principal differences
between the two are as follows:

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i) In insurance, the assured has an insurable interest in the subject-matter, in a wagering

agreement, there is no such interest.
ii) In insurance, both the parties are interested in the protection of the subject-matter
whereas in a wagering agreement it is only one of the parties who is interested in its
protection.
iii) A contract of insurance, except life insurance, is a contract of indemnity. In a
wagering agreement, the amount is fixed.
iv) Contracts of insurance are beneficial to the public whereas wagering agreements do
not serve any useful purpose.
v) A contract of insurance is based on scientific and actuarial calculation of risks. A
wagering agreement is just a gamble.

Effect of wagering agreement: Wagering agreements have been expressly declared to

be void in India. In the state of Maharashtra and Gujarat they have been declared to be
illegal

-
Transactions similar to Wager Transactions resembling with wagering
(Gambling) transaction but are not void
(i) Lottery transactions: A lottery is a (i) Chit fund: Chit fund does not come within
game of chance and not of skill or the scope of wager (Section 30). In case of a chit
knowledge. Where the prime motive of fund, a certain number of persons decide to
participant is gambling, the transaction contribute a fixed sum for a specified period and
amounts to a wager. Even if the lottery is at the end of a month, the amount so contributed
sanctioned by the Government of India it is paid to the lucky winner of the lucky draw.
is a wagering transaction. The only effect (ii) Commercial transactions or share market
of such sanction is that the person transactions: In these transactions in which
responsible for running the lottery will delivery of goods or shares is intended to be
not be punished under the Indian Penal given or taken, do not amount to wagers.
Code. Lotteries are illegal and even
collateral transactions to it are tainted (iii) Games of skill and Athletic Competition:
with illegality Crossword puzzles, picture competitions and
athletic competitions where prizes are awarded
(ii) Crossword Puzzles and on the basis of skill and intelligence are the
Competitions: Crossword puzzles in games of skill and hence such competition are
which prizes depend upon the valid. According to the Prize Competition Act,
correspondence of the competitor’s 1955 prize competition in games of skill are not
solution with a previously prepared wagers provided the prize money does not
solution kept with the editor of a exceed `Rs 1,000.
newspaper is a lottery and therefore, a (iv) A contract of insurance: A contract of
wagering transaction. Case Law: State of insurance is a type of contingent contract and is
Bombay vs. R.M.D. Chamarbangwala. valid under law and these contracts are different
Crossword puzzles, picture competitions from wagering agreements.
and athletic competitions where prizes
are awarded on the basis of skill and
intelligence are the games of skill and
hence such competitions are valid.
According to the Prize Competition Act,
1955 prize competitions in games of skill
are not wagers provided the prize money

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does not exceed ` 1,000.

(iii) Speculative transactions: an
agreement or a share market transaction
where the parties intend to settle the
difference between the contract price and
the market price of certain goods or
shares on a specified day is a gambling
and hence void.
(iv) Horse Race Transactions: A horse
race competition where prize payable to
the bet winner is less than `Rs 500, is a
wager. However, Sec 30 is not applicable
in an agreement to contribute toward
plate, prize or sum of money of the value
of `Rs 5,00,000 or above to be awarded
to the winner of a horse race.

Restitution: When a contract becomes void, the party who has received any benefit
under it must restore it to the other party or must compensate the other party by the
value of the benefit. This restoration of the benefit is called ‘restitution’. The principle
of restitution is that a person who has been unjustly enriched at the expense of another
is required to make restitution to that other. In essence, restitution is not based on loss
to the plaintiff but on benefit which is enjoyed by the defendant at the cost of the
plaintiff which is unjust for the defendant to retain.

CONTINGENT CONTRACTS

A contract may be-

(a) an absolute contract, or

(b) a contingent contract.

An ‘absolute contract’ is one in which the promisor binds himself to performance in

any event without any conditions.

‘Contingent’ means that which is dependent on something else.

A contingent contract is a contract to do or not to do something. If some event,

collateral to such contract, does or does not happen. Where, for example, goods are sent

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on approval, the contract is a contingent contract depending on the act of the buyer to
accept or reject the goods.

There are three essential characteristics of a contingent contract:

(a) Its performance depends upon the happening or non-happening in future of some
event. It is this dependence on a future event which distinguishes a contingent contract
from other contracts.

(b) The event must be uncertain, if the event is bound to happen, and the contract has
got to be performed in any case it is not a contingent contract.

(C) The event must be collateral, ie., incidental to the contract.

Example:
There was a contract for the sale of American parachute cloth by A to B. The goods
were to be delivered when they arrived. A failed to give delivery and B sued for
damages for breach. A pleaded that the contract was conditional one and as the goods
had not arrive he had no obligation to give delivery. Held, the contract was an absolute
one and the obligation of A was not contingent upon the arrival of the goods.

Example. Contracts of insurance, indemnity and guarantee are the commonest

instances of a contingent contract.

Rules Regarding Contingent Contracts:

(1) Contingent contracts dependent on the happening of an uncertain future event

cannot be enforced until the event has happened. If the event becomes impossible, such
contracts become void.

(2) Where a contingent contract is to be performed if a particular event does not

happen, its performance can be enforced when the happening of that event becomes
impossible.

(3) If a contract is contingent upon how a person will act at an unspecified time, the
event shall be considered to become impossible when such person does anything which
renders it impossible that he should so act within any definite time, or otherwise than
under further contingencies (Sec.34).

Example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage

of B to C must now be considered impossible, although it is possible that D may die
and that C may afterwards marry B.

(4) Contingent contracts to do or not to do anything, if a specified uncertain event

happens within a fixed time, become void if the event does not happen or its happening
becomes impossible before the expiry of that time.

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(5) Contingent contracts to do or not to do anything, if a specified uncertain event does

not happen within a fixed time, may be enforced if the event does not happen or its
happening becomes impossible before the expiry of that time (Sec.35).

(6) Contingent agreements to do or not do anything, if an impossible event happens, are

void, whether or not the fact is known to the parties (sec. 36).

Difference between a wagering agreement and a contingent contract:

(1) A wagering agreement consists of reciprocal promises whereas a contingent

contract may not contain reciprocal promises.
(2) A wagering agreement is essentially of a contingent nature whereas a contingent
contract may not be of a wagering nature.
(3) A wagering agreement is void whereas a contingent contract is valid.
(4) In a wagering agreement, the parties have no other interest in the subject-matter of
the agreement except the winning or losing of the amount of the wager.
(5) In a wagering agreement the future event is the sole determining factor while in a
contingent contract the future event is only collateral.

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Performance of Contract

Performance of a contract takes place when the parties to the contract fulfill their
obligations arising under the contract within the time and in the manner prescribed,
Sec. 37, lays down that the parties to a contract must either perform or offer to perform,
their respective promises, unless such performance is dispensed with or excused.

Offer to Perform (Sec.38)

Sometimes it so happens that the promisor offers to perform his obligation under the
contract at the proper time and place but the promisee does not accept the performance.
This is known as “attempted performance” or “tender” Sec. 38. Where a promisor ha
made an offer of performance, to the promisee, and the offer has not been accepted, the
promisor is not responsible for non-performance, nor does he thereby lose his rights
under the contract. Thus, a tender of performance is equivalent to actual performance. It
excuses the promisor from further performance and entitles him to sue the promisee for
the breach of contract.

Requisites of a valid tender (Attempted Performance)

1) It must be unconditional. It becomes conditional when it is not in accordance with

the terms of the contract.
2) It must be of the whole quantity contracted for or of the whole obligation. A tender
of an installment when the contract stipulates payment in full is not a valid tender.
3) It must be by a person who is in a position, and is willing, to perform the promise.
4) It must be made at the proper time and place. A tender of goods after the business
hours or of goods or money before the due date is not a valid tender.
5) It must be made to the proper person.
6) It may be made to one of the several joint promises.

In case of tender of goods, it must give a reasonable opportunity to the promisee for
inspection of the goods. A tender of goods at such time when the other party cannot
inspect the goods is not a valid tender.
In case of tender of money, the debtor must make a valid tender in the legal tender
money. If the creditor refuses to accept it, the debtor is not discharged from making the
payment. Tender in this case, does not discharge the debt. But when the creditor files a
suit against the debtor, the debtor can set up the defense of tender. If he deposits the
money in the Court and proves his pleas, the creditor gets the amount originally
tendered to him but without any interest, whereas the debtor gets judgment for his cost
of defense.

Effect of refusal of a party to perform promise wholly (Sec. 39)

When a party to a contract refuses to perform, or disables himself from performing, his
promise in its entirety, the promisee may put an end to the contract. But if the promisee
has signified, by words or conduct, his acquiescence in the continuance of the contract,
he cannot repudiate it.

(a) A servant is employed for one year on a salary of Rs. 6000 per month, the whole
salary to be paid at the end of the year. The servant wrongfully leaves the service after

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three months. He is not entitled to the salary for the period he has been employed
because, by leaving the service, he has disabled himself from performing his promise in
its entirety.

Contracts Which Need Not be Performed:

A contract need not be performed-

1.When its performance becomes impossible (sec.56).

2. When the parties to it agree to substitute a new contract for it or to rescind or alter it
(sec. 62).
3. When the promisee dispenses with or remits, wholly or in part, the performance of
the promise made to him or extends the time for such performance or accepts any
satisfaction for it (sec.63).
4) When the person at whose option it is voidable, rescinds it (sec.64).
5) When the promisee neglects or refuses to afford the promisor reasonable facilities
for the performance of his promise (sec.67).
Example. ‘A’ contracts with ‘B’ to repair B’s house. B neglects or refuses to point out
to A the places in which his house requires repairs A is excused for the non-
performance of the contract, if it is caused by such neglect or refusal.
6) When it becomes illegal.

By whom must contracts be performed?

1) Promisor himself: If there is something in the contract to show that it was the
intention of the parties that the promise should be performed by the promisor himself,
such promise must be performed by the promisor. This means contracts which involve
the exercise of personal skill, volition, or diligence of the promisor or which are
founded on personal confidence between the parties must be performed by the promisor
himself.
2) Agent: Where personal consideration is not the foundation of a contract, the promisor
or his representative may employ a competent person to perform it.
3) Legal representatives: A contract which involves the use of personal skill or is
founded on personal considerations comes to an end on the death of the promisor. As
regards any other contract, the legal representatives of the deceased promisor are bound
to perform it unless a contrary intention appears from the contract. But their liability
under a contract is limited to the value of the property they inherit from deceased.
4) Third persons: Sometime contract may get performed through third person if
promisee agrees to it is a valid contract.
5) Joint promisors: The rule regarding joint promise are studied on next pages.

Devolution of joint liabilities: Devolution means passing over from one person to
another.When two or more persons have made a joint promise, they are known as joint
promisors. Unless a contrary intention appears from the contract, all joint promisors
must jointly fulfill the promise. If any of them dies, his legal representatives must,
jointly with the surviving promisors, fulfill the promise. If all of them die, the legal
representatives of all of them must fulfill the promise jointly, three rules as regards
performance of joint promises.

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Rules regarding performance of joint promise:

1. Any one of the joint promisors may be compelled to perform

2. A joint promisor compelled to perform may claim contribution. Sharing of loss
arising from default.
3. Release of a joint promisor (sec. 44). A release by the promisee of any of the joint
promisors does not discharge the other joint promisors from liability. The released
joint promisor also continues to be liable to the other joint promisors.

Devolution of joint rights (sec.45): When a person (say A) has made a promise to
several persons (say, B, C and D), these persons are known as joint promisees. Unless a
contrary intention appears from the contract, the right to claim performance rests with
all of the joint promises (B, C and D). when one of the joint promises (say B) dies, the
right to claim performance rests with his (B’s) legal representatives jointly with the
surviving joint promises (C and D). when all the joint promises (B, C and D) die, the
right to claim performance rests with their legal representatives jointly.

Who can demand performance ?

1) It is only the promisee who can demand performance of the promise under a
contract. It makes no difference whether the promise is for the benefit of the promisee
or for the benefit of any other person.

Example. A promises B to pay C a sum of Rs. 500. A does not pay the amount to C. C
cannot take any action against A. It is only B who can enforce this promise against A.

2) In certain cases, a third party can also enforce a promise under a contract even
though he is not a party to the contract. These cases have already been discussed in the
Chapter on “Consideration”.

3) Death of promise: In case of death of joint promisee his legal representatives can
demand performance.

Reciprocal Promises: Promises which form the consideration or part of the

consideration for each other are called “reciprocal promises” [Sec. 2(f)]. Where, for
example, A promises to do or not to do something in consideration of B’s promise to do
or not to do something, the promises are reciprocal.

These promises have been classified.

1) Mutual and independent.

Example. In a contract of sale, B agrees to pay the price of goods on 10th instant. S
promises to supply the goods on 20th instant. The promises are mutual and independent.

2) Conditional and dependent. Where the performance of the promise by one party
depends on the prior performance of the promise by the other party, the promises are
conditional and dependent.

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Example. A promises to remove certain debris lying in front of B’s house provided B
supplies him with the cart. The promises, in this case, are conditional and dependent.

3) Mutual and concurrent. Where the promises of both the parties are to be performed
simultaneously, they are said to be mutual and concurrent. The example of such
promises may be sale of goods for cash.

Rules regarding performance of reciprocal promises:

These are contained in Sec 51 and 57 and are reproduced below.

1. Simultaneous performance of reciprocal promises (Sec.51). When a contract consists

of reciprocal promises to be simultaneously performed, the promisor need not perform
his promise unless the promisee is ready and willing to perform his reciprocal promise.
2. Order of performance of reciprocal promises (Sec.52). Where the order in which
reciprocal promises are to be performed is expressly fixed by the contract, they must be
performed in that order; and where the order is not expressly fixed by the contract, they
must be performed in that order which the nature of the transaction requires.

Effect of one party preventing another from performing promise (Sec.53). When a
contract contains reciprocal promises, it may happen that one party to the contract
prevents the other from performing his promise. In such a case, the contract becomes
voidable at the option of the party so prevented. Further, the party so prevented is
entitled to compensation from the other party for any loss which he may sustain in
consequence of the non-performance of the contract.

Effect of default as to promise to be performed first (Sec. 54). Where the nature of
reciprocal promises is such that one of them cannot be performed till the other party has
performed his promise then if the other party fails to perform it, he cannot claim the
performance of the reciprocal promise from the first party.

Time as the essence of the contract: When we say that “time is the essence of the
contract” we mean that the performance of the promise by a party to the contract is
essential within the specified period, in order to entitle him to enforce performance
from the other party. In other words, the expression “time is of the essence of the
contract” means that a breach of the condition as to the time for performance will
entitle the innocent party to consider the breach as a repudiation of the contract.

Whether time is of the essence of the contract is a mixed question of law and fact.

a) When time is of the essence.- In a contract, in which time is of the essence of the
contract, if there is a failure on the part of the promisor to perform his obligation within
the fixed time, the contract (or so much of it as remains unperformed) becomes
voidable at the option of the promisee (Sec.55,para1). If, in such a case, the promisee
accepts performance of the promise after the fixed time, he cannot claim compensation
for any loss occasioned by the non-performance of the promise at the agreed time. But
if at the time of accepting the delayed performance he gives notice to the promisor of
his intention to claim compensation, he can do so.

b) When time is not of the essence. -In a contract, in which time is not of the essence
of the contract, failure on the part of the promisor to perform his obligation within the

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fixed time does not make the contract voidable, but the promisee is entitled to
compensation for any loss occasioned to him by such failure.

Assignment of Contracts: To ‘assign’ means to ‘transfer’. Assignment of a contract

means transfer of contractual rights and liabilities under the contract to a third party
with or without the concurrence of the order party to the contract it may take place by-

(a) Act of the parties: Assignment of contractual obligations. This is subject to the
following rule: Contractual obligations involving personal skill or ability cannot be
assigned. A promisor cannot assign his liabilities or obligations under a contract, i.e., a
promisee cannot be compelled by the promisor or a third party to accept any person
other than the promisor as the person liable to him on the promise. The rule is based on
sense and convenience. The promisee in a contract is entitled to know to whom he is to
look for the satisfaction of his rights under the contract. For example. If D owes L Rs.
5000 and is owed the same sum by D1, D cannot ask L to recover the amount from D1
unless, L accepts the performance from D1.

Limitations to the rule:

1. It is open to a party to have the contract performed through the agency of a

competent person provided the contract does not expressly or implied contemplate
performance only by the promisor.
2 .The promisor may transfer his liability with the consent of the promisee and of the
transferee. In such a case novation takes place.

(b) Operation of Law: Assignment by operation of law takes place by intervention of

law. This takes place in the following two cases.
(i) Death. Upon the death of a party to a contract his rights and liabilities under in the
contract (except in the case of contracts requiring personal skill or services) devolve
upon to the heirs and legal representatives.

(ii) Insolvency.

Distinction between Succession and Assignment

Succession Assignment
When the benefits of a contract are Benefit of a contract can only be assigned
succeeded to by process of law, then both but not the liabilities thereunder. This is
burden and benefits attaching to the because when liability is assigned, a third
contract, may sometimes devolve on the party gets involved therein. Thus a debtor
legal heir. Suppose, a son succeeds to the cannot relieve himself of his liability to
estate of his father after his death, he will creditor by assigning to someone else his
be liable to pay the debts and liabilities of obligation to repay the debt.
his father owed during his life-time. But if
the debts owed by his father exceed the
value of the estate inherited by the son
then he would not be called upon to pay
the excess. In other words, the liability of
the son will be limited to the extent of the
property inherited by him.

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Discharge of Contract

Discharge of contract means termination of the contractual relationship between the

parties. A contract is said to be discharged when it ceases to operate, i.e., when the
rights and obligations created by it come to an end.

A contract may be discharged-

1) By performance.
2) By agreement or consent.
3) By impossibility.
4) By lapse of time.
5) By operation of law.
6) By breach of contract.

Discharge by Performance: Performance means the doing of that which is required by a

contract. Discharge by performance takes place when the parties to the contract fulfill
their obligations arising under the contract within the time and in the manner
prescribed. In such a case, the parties are discharged and the contract comes to an end.
But if only one party performs the promise, he alone is discharged. Such a party gets a
right of action against the other party who is guilty of breach.

Performance of a contract is the most usual mode of its discharge. It maybe:

1. Actual performance, or
2. Attempted performance.

Actual performance. When both the parties perform their promises, the contract is
discharged.
Attempted performance or tender. Tender is not actual performance but is only an offer
to perform the obligation under the contract. Where the promisor offers to perform his
obligation, but the promisee refuses to accept the performance, tender is equivalent to
actual performance, except in case of tender of money.

2.Discharge by Agreement or Consent: As it is the agreement of the parties which binds

them, so by their further agreement of consent the contract may be terminated.
The various cases of discharge of a contract by mutual agreement are dealt with in
Secs. 62 and 63 and are discussed below.

a.)Novation [Sec. 62]. Novation takes place when

(i) a new contract is substituted for an existing one between the same parties., or (ii) a
contract between two parties is rescinded in consideration of a new contract being
entered into on the same terms between one of the parties and a third party. A common
instance is where a creditor at the request of the debtor agrees to take another person as
his debtor in place of the original debtor. The consideration for the new contract is the
discharge of the old contract.
Example. (a) A owes money to B under a contract. It is agreed between A, B and C that
B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an
end, and a new debt from C to B has been contracted.-
Novation should take place before expiry of the time of the performance of the original
contract. It is does not, there would be a breach of the contract. If a new contract is
subsequently substituted for the existing contract, it would only be to adjust the

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remedial rights arising out of the breach of the old contract. If for any reason the new
contract cannot be enforced, the parties can fall back upon the old contract.
b.) Rescission (Sec. 62). Rescission of a contract takes place when all or some of the
terms of the contract are cancelled. It may occur-
i) by mutual consent of the parties, or
ii) where one party fails in the performance of his obligation. In such a case, the other
party may rescind the contract without prejudice to his right to claim compensation for
the breach of contract.
Example. (a). A promises to supply certain goods to B six months after date. By that
time, the goods go out of fashion. A and B may rescind the contract.

c.) Alteration (Sec. 62). Alteration of a contract may take place when one or more of
the terms of the contract is / are altered by the mutual consent of the parties to the
contract. In such a case, the old contract is discharged.

d.) Remission (Sec. 63). Remission means acceptance of a lesser fulfillment of the
promise made, e.g., acceptance of a lesser sum than what was contracted for, in
discharge of the whole of the debt. It is not necessary that there must be some
consideration for the remission of the part of the debt.

e.) Waiver. Waiver takes place when the parties to a contract agree that they shall no
longer be bound by the contract. This amounts to a mutual abandonment of rights by
the parties to the contract. Consideration is not necessary for waiver.

f.) Merger. Merger takes place when an inferior right accruing to a party under a
contract merges into a superior right accruing to the same party under the same or some
other contract.

3.Discharge by Impossibility of Performance

If an agreement contains an undertaking to perform an impossibility , it is void ab
initio.
According to Sec. 56, impossibility of performance may fall into either of the following
categories.
1) Impossibility existing at the time of agreement.

a) Known to the parties. This is known as absolute impossibility. In case of absolute

impossibility, the agreement is void ab initio.
b) Unknown to the parties. Where at the time of making the contract both the parties
are ignorant of the impossibility, as in the case of destruction of subject-matter to the
ignorance of both the parties, the contract is void on the ground of mutual mistake. If ,
however, the promisor alone knows of the impossibility of performance at the time of
making the contract, he shall have to compensate the promisee for any loss which such
promisee sustains through the non-performance of the promise.

2) Impossibility arising subsequent to the formation of contact. Impossibility which

arises subsequent to the formation of a contract which could be performed at the time
when the contract was entered into is called post-contractual or supervening
impossibility, the contract becomes void when the act becomes impossible or unlawful.
Impossibility of performance of a contract, as a general rule, is no excuse for the non-

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performance of a contract, ; but where this impossibility is caused by the circumstances

beyond the control of the parties, the parties are discharged from further performance of
the obligation under the contact.

Discharge by supervening impossibility:

1) Destruction of subject-matter of contract. When the subject-matter of a contract,

subsequent to its formation, is destroyed without any fault of the parties to the contract,
the contract is discharge.
Example. C let a music hall to T for a series of concerts for certain days. The hall was
accidentally burnt down before the date of the first concert. Held, the contract was void.
2) Non-existence or non-occurrence of a particular state of things. Sometimes, a
contract is entered into between two parties on the basis of a continued existence or
occurrence of a particular state of things. If there is any change in the state of things
which ought to have occurred does not occur, the contract is discharged.
3) Death or incapacity for personal service. Where the performance of a contract
depends on the personal skill or qualification of a party, the contract is discharged on
the illness or incapacity or death of that party. The man’s life is an implied condition of
the contract.
4) Change of law or stepping in of a person with statutory authority. When, subsequent
to the formation of a contract, change of law takes place, or the Government takes some
power under some Ordinance or Special Act, as for example, the Defense of India Act,
so that the performance of the contract becomes impossible, the contract is discharged.
5) Outbreak of war. A contract entered into with an alien enemy during war is unlawful
and therefore impossible of performance. Contracts entered into before the outbreak of
war are suspended during the war and may be revived after the war is over.

Impossibility of performance- not an excuse: “Impossibility of performance is, as a

rule, not an excuse for non-performance.” Ordinarily when a person undertakes to do
something, he must do it unless its performance becomes absolutely impossible due to
any of the circumstances already discussed.

A contract is not discharged on the ground of supervening impossibility :

1) Difficulty of performance. A contract is not discharged by the mere fact that it has
become more difficult of performance due to some uncontemplated events or delays.
Example. A sold a certain quantity of Finland timber to B to be supplied between July
and September, Before any timber was supplied, war broke out in the month of August
and transport was disorganized so that A could not bring any timber from Finland.
Held, the difficulty in getting the timber from Finland did not discharge A from
performance.
2) Commercial impossibility. A contract is not discharged merely because expectation
of higher profits is not realized, or the necessary raw material is available at a higher
price because of the outbreak of war, or there is a sudden depreciation of currency.
3) Impossibility due to failure of a third person. Where a contract could not be
performed because of the default by a third person on whose work the premisor relied,
it is not discharge.
4) Strikes, lock-outs and civil disturbances. Events such as these do not discharge a
contract unless the parties have specifically agreed in this regard at the time of
formation of the contract.

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5) Failure of one of the objects. When a contract is entered into for several objects, the
failure of one of them does not discharge the contract.

4.Discharge by Lapse of Time: The Limitation Act, 1963 lays down that a contract
should be performed within a specified period, called period of limitation. If it is not
performed, and if no action is taken by the promisee within the period of limitation, he
is deprived of his remedy at law. In other words, we may say that the contract is
terminated. For example, the price of goods sold without any stipulation as to credit
should be paid within three years of the delivery of the goods. Where goods are sold on
credit to be paid for after the expiry of a fixed period of credit, the price should be paid
within three years of the expiry of period of credit. If the price is not paid and creditor
does not file a suit against the buyer for the recovery of price within three years, the
debt becomes time barred and hence irrecoverable.

5.Discharge by Operation of Law: A contract may be discharged independently of the

wishes of the parties, i.e., by operation of law. This includes discharge-
1) By death - Involving personal skill or ability
2) By Merger
3) By insolvency
4) By unauthorized alteration of the terms of a written agreement. Where a party to a
contract makes any material alteration in the contract without the consent of the other
party, the other party can avoid the contract
5) By rights and liabilities becoming vested in the same person. This is to avoid
circuitry of action

6.Discharge by Breach of Contract

Breach of contract means a breaking of the obligation which a contract imposes. It
occurs when a party to the contract without lawful excuse does not fulfill his
contractual obligation or by his own act makes it impossible that he should perform his
obligation under it.
Breach of contract may be-
1.Actual breach of contract, or
2.Anticipatory or constructive breach of contract.

Actual breach of contract

It may take place?
1) At the time when the performance is due. Actual breach of contract occurs, when at
the time when the performance is due, one party fails or refuses to perform his
obligation under the contract.
2) During the performance of the contract. Actual breach of contract also occurs when
during the performance of the contract, one party fails or refuses to perform his
obligation under the contract. This refuse to perform may be by-
Express repudiation.
Implied repudiation

Anticipatory breach of contract

It occurs when a party to an executory contract declares his intention of not performing
the contract before the performance is due. He may do so.
(a) By expressly renouncing his obligation under the contract.
(b) By doing some act so that the performance of his promise becomes impossible.

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The rights of the promisee in case of anticipatory breach are as follows:

1) He can treat the contract as discharged so that he is absolved of the performance of

his part of the promise.
2) He can immediately take a legal action for breach of contract or wait till the time the
act was to be done.

Anticipatory breach does not necessarily discharge the contract, unless the promisee so
chooses.

If the promisee refuses to accept the repudiation of the contract by the promisor and
treats the contract as alive, the consequences are as follows.

The promisor may perform his promise when the time for its performance comes and
the promisee will be bound to accept the performance.

If, while the contract is alive, an event happens which discharges the contract legally,
the promisor may take advantage of such discharge. In such a case, the promisee loses
his right to sue for damage.

Measure of damages in anticipatory breach of contract: If the contract is ended by the

promisee at once, he can sue the promisor for damages. The amount of damages will be
measured by the difference between the price prevailing on the date of breach and the
contract price. If the contract is kept alive till the date of performance of the contract,
the measure of damages will be the difference between the price prevailing on the date
of the performance and the contract price.

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REMEDIES FOR BREACH OF CONTRACT

Where there is a right, there is a remedy: A contract gives rise to correlative rights and
obligations. A right accruing to a party under a contract would be of no value if there
were no remedy to enforce that right in a Law Court in the event of its infringement or
breach of contract. A remedy is the means given by law for the enforcement of a right.

When a contract is broken, the injured party has one or more of the following remedies
:
1) Rescission of the contract.
2) Suit for damages.
3) Suit upon quantum meruit.
4) Suit for specific performance of the contract.
5) Suit for injunction.

1. Rescission: When a contract is broken by one party, the other party may sue to treat
the contract as rescinded and refuse further performance. In such a case he is absolved
of all his obligations under the contract.
Example. A promises B to supply 10 bags of cement on a certain day. B agrees to pay
the price after the receipt of the goods. A does not supply the goods. B is discharged
from liability to pay the price.
A. The Court may grant rescission-
(a) where the contract is voidable by the plaintiff ; or
(b) where the contract is unlawful for causes not apparent on it’s face and the
defendant is more to blame than the plaintiff.
B. The Court may, however, refuse to rescind the contract-
(a) where the plaintiff has expressly or impliedly ratified the contract; or
(b) where, owing to the change of circumstances, the parties cannot be restored to their
original positions; or
(c ) where third parties have, during the subsistence of the contract acquired rights in
good faith and for value ; or
(d) where only a part of the contract is sought to be rescinded and such part is
severable from the rest of the contract.

2. Damages: Damages are a monetary compensation allowed to the injured party by

the Court for the loss or injury suffered by him by the breach of a contract. The object
of awarding damages for the breach of a contract is to put the injured party in the same
position, so far as money can do it, as if he had there been performance and not breach.
This is called the doctrine of restitution (restitution in integrum). The fundamental basis
of awarding damages is compensation for the pecuniary loss which naturally flows
from the breach.

a. Damages arising naturally – ordinary damages: When a contract has been broken,
the injured party can recover from the other party such damages as naturally and
directly arose in the usual course of things from the breach. This means that the
damages must be the proximate consequence of the breach of contract. These damages
are known as ordinary damages.

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Example. A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. 475 per
quintal, the price to be paid at the time of delivery. The price of Wheat rises to Rs.500
per quintal and A refuses to sell the Wheat. B can claim damages at the rate of Rs.25
per quintal.

b. Damages in contemplation of the parties- special damages: Damages other than

those arising from the breach of a contract may be recovered if such damages may
reasonably be supposed to have been in the contemplation of both the parties as the
probable result of the breach of the contract. Such damages, known as special damages,
cannot be claimed as a matter of right. These can be claimed only if the special
circumstances which would result in a special loss in case of breach of a contract, are
brought to the notice of the other party.

Example:

(i) S sent some specimens of his goods for exhibition at an agricultural show. After the
show he entrusted some of his samples to an agent of a railway company for carriage to
another show ground at New Castle. On the consignment note he wrote “Must be at
New Castle Monday certain”. Owing to a default on the part of the railway company
the samples arrived late for the show. Held, S could claim damages for the loss of profit
at the show.

(ii) G, a tailor, delivered a sewing machine and some cloth to a railway company to be
delivered at a place where a festival was to be held, G expected to earn some
exceptional profit at festival but he did not bring this fact to the notice of the railway
authorities. The goods were delivered after the conclusion of the festival. Held, he
could not recover the loss of profit.

c. Vindictive or exemplary damages: Damages for the breach of a contract are given by
way of compensation for loss suffered, and not by way of punishment for wrong
inflicted. Hence, ‘vindictive’ or ‘exemplary’ damages have no place in the law of
contract because they are punitive (involving punishment) by nature.

d. Nominal damages: Where the injured party has not in fact suffered any loss by
reason of the breach of a contract, the damages recoverable by him are nominal i.e.,
very small, for example, a rupee.

e. Damages for loss of reputation: Damages for loss of reputation in case of breach of a
contract are generally not recoverable. An exception to this rule exists in the case of a
banker who wrongfully refuses to honour a customer’s cheque. If the customer happens
to be a tradesman, he can recover damages in respect of any loss to his trade reputation
by the breach. And the rule of law is: the smaller the amount of the cheque
dishonoured, the larger the amount of damages awarded. But if the customer is not a
tradesman, he can recover only nominal damages.

f. Damages for inconvenience and discomfort: Damages can be recovered for physical
inconvenience and discomfort. The general rule in this connection is that the measure
of damages is not affected by the motive or the manner of the breach.
Example. H, with his wife and children, took a ticket for a midnight train, to be
transported to a particular place where he lived. They were, however, transported to a

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wrong place and they had to walk several miles home on a drizzling wet night. Held, H
could recover the sum of £ 8 to compensate him for the inconvenience, but nothing for
the medical expenses of his wife who caught cold as this consequence was too remote.

g. Mitigation of damages: It is the duty of the injured party to take all reasonable steps
to mitigate the loss caused by the breach. He cannot claim to be compensated by the
party in default for loss which he ought reasonably to have avoided is he cannot claim
compensation for loss which is really due not to the breach but due to his own neglect
to mitigate the loss after the breach.

h. Cost of decree: The aggrieved party is entitled, in addition to damages, to get the cost
of getting the decree for damages. The cost of suit for damages is in the discretion of
the Court.

i.Damages agreed upon in advance in case of breach

` i) Liquidated damages and penalty
ii)Some times parties to a contract stipulate at the time of its formation that on
the breach of the contract by either of them, a certain specified sum will be
payable as damages. Such a sum may amount to either liquidated damages
or penalty.

Liquidated damages represent a sum, fixed or ascertained by the parties in the contract,
which is a fair and genuine pre-estimate of the probable loss that might ensue as a result
of the breach. If it takes place.
Penalty is a sum named in the contract at the time of its formation, which is
disproportionate to the damage likely to accrue as a result of the breach. It is fixed up
with a view to securing the performance of the contract.
Indian Law: Indian law makes no distinction between ‘penalty ‘and liquidated
damages’. The Courts in India award only a reasonable compensation not exceeding the
sum so mentioned in the contract. Section 74 of the Contract Act lays down if the
parties have fixed what the damages will be, the courts will never allow more. But the
court may allow less. A decree is to be passed only for reasonable compensation not
exceeding the sum named by the parties. Thus, Section 74 entitles a person
complaining of breach of contract to get reasonable compensation and does not entitle
him to realise anything by way of penalty.
Exception: Where any person gives any bond to the Central or State government for the
performance of any public duty or act in which the public are interested, on breach of
the condition of any such instrument, he shall be liable to pay the whole sum mentioned
therein.
j. Damages for deterioration caused by delay: In the case of deterioration caused to
goods by delay, damages can be recovered from carrier even without notice. The word
‘deterioration’ not only implies physical damages to the goods but it may also mean
loss of special opportunity for sale.

k. Pre-fixed damages: Sometimes, parties to a contract stipulate at the time of its

formation that on a breach of contract by any of them, a certain amount will be payable
as damage. It may amount to either liquidated damages (i.e., a reasonable estimate of
the likely loss in case of breach) or a penalty (i.e., an amount arbitrarily fixed as the
damages payable). Section 74 provides that if a sum is named in a contract as the
amount to be paid in case of a breach, the aggrieved party is entitled to receive from the

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party at fault a reasonable compensation not exceeding the amount so named (Section
74).

3. Specific Performance: In certain cases of breach of a contract, damages are not an

adequate remedy. The Court may, in such cases, direct the party in breach to carry out
his promise according to the terms of the contract. This is a direction by the Court for
specific performance of the contract at the suit of the party not in breach.

Specific performance will be granted:

i. When the act agreed to be done is such that compensation in money for its non-
performance is not an adequate relief.
ii. When there exists no standard for ascertaining the actual damage caused by the non-
performance of the act agreed to be done.
iii. When it is probable that the compensation in money cannot be got for the non-
performance of the act agreed to be done.

Specific performance will not be granted where-

Damages are an adequate remedy.
The contract is not certain, or is inequitable to either party.
The contract is in its nature revocable.
The contract is made by trustees in breach of their trust.
The contract is of a personal nature, e.g., a contract to marry.
The contract is made by a company in excess of its powers as laid down in its
Memorandum of Association.

5.Injunction: Where a party is in breach of a negative term of a contract, the Court

may, by issuing an order, restrain him from doing what he promised not to do such an
order of the Court is known as an injunction.

Rectification Or Cancellation

When through fraud or a mutual mistake of the parties, a contract or other instrument
does not express their real intention, either party may institute a suit to have the
instrument rectified. In such a case, if the Court finds that there has been a fraud or
mistake, it may ascertain the real intention of the parties, and may, in its discretion,
rectify the instrument so as to express that intention. But this must not prejudice the
rights acquired by third persons in good faith and for value. If rectification is not
possible, the Court orders for the cancellation of the contract.

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Quasi-Contracts

Under certain circumstances, a person may receive a benefit to which the law regards
another person as better entitled, or for which the law considers he should pay to the
other person, even though there is no contract between the parties. Such relationships
are termed quasi-contracts, because, although there is no contract or agreement between
the parties, they are put in the same position as if there were a contract between them.
These relationships are termed quasi-contracts or constructive contracts.

A quasi-contract rests on the ground of equity that a person shall not be allowed to
enrich himself unjustly at the expense of another.

Kinds Of Quasi- Contracts:

1. Supply of necessaries (Sec.68): If a person, incapable of entering into a contract, or

anyone whom he is legally bound to support, is supplied by another with necessaries
suited to his condition in life, the person who has furnished such supplies is entitled to
be reimbursed from the property of such incapable person.

2. Payment by an interested person (Sec. 69): A person who is interested in the

payment of money which another is bound by law to pay, and who therefore pays it, is
entitled to be reimbursed by the other.

Example: B holds land in Bengal, on a lease granted by A, the zamindar. The revenue
payable by A to the Government being in arrear, his land is advertised for sale by the
Government. Under the revenue law the consequences of such sale will be annulment
of B’s lease. B to prevent the sale and the consequent annulment of his own lease, pays
to the Government the sum due from A. A is bound to make good to B the amount so
paid.

The essential requirements of Sec. 69.

i. The payment made should be bona fide for the protection of one’s interest.
ii. The payment should not be a voluntary one.
Example. A canal company owned a canal and was under a statutory duty to keep the
bridge on the plaintiffs, the highway authority, called upon the canal company to repair
it. When the canal company failed to do so, the plaintiffs themselves repaired the bridge
and brought an action to recover the money paid. Held, the plaintiffs could not recover
as they acted as mere volunteers.
iii. The payment must be such as the other party was bound by law to pay.

3. Obligation to pay for non-gratuitous acts(Sec.70)

When a person lawfully does anything for another person or delivers anything to him,
not intending to do so gratuitously, and such other person enjoys the benefit there of ,
the latter is bound to make compensation to the former in respect of, or to restore, the
things so done or delivered.

Before any right of action under Sec.70 arises, three conditions must be satisfied:
The thing must have been done lawfully.

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The person doing the act should not have intended to do it gratuitously.
The person for whom the act is done must have enjoyed the benefit of the act.

4.Responsibility of finder of goods(Sec.71)

A person, who finds goods belonging to another and takes them into his custody, is
subject to the same responsibility as a bailee. He is bound to take as much care of the
goods as a man of ordinary prudence would, under similar circumstances, take of his
own goods of the same bulk, quality and value. He must also take all necessary
measures to trace its owner. If he does not, he will be guilty of wrongful conversion of
the property. Till the owner is found out, the property in goods will vest in the finder
and he can retain the goods as his own against the whole world (except the owner, of
course).

The finder can sell the goods in the following cases.

a) When the thing found is in danger of perishing.

b) When the owner cannot, with reasonable diligence, be found out.
c)When the owner is found out, but he refuses to pay the lawful charges of the finder,
and
d) When the lawful charges of the finder, in respect of the thing found, amount to two-
thirds of the value of the thing found.

5.Mistake

A person to whom money has been paid, or anything delivered, by mistake must repay
or return it to the person who paid it by mistake.

Quantum meruit: “Quantum meruit” literally means “as much as earned” or “as much
as is merited”. When a person has done some work under a contract, and the other party
repudiates the contract, or some event happens which makes the further performance of
the contract impossible, then the party who has performed the work can claim
remuneration for the work he has already done. Likewise, where one person has
expressly or impliedly requested another to render him a service without specifying any
remuneration, but the circumstances of the request imply that the service is to be paid
for, there is implied a promise to pay quantum meruit, the right to claim quantum
meruit does not arise out of contract as the right to damages does; it is a claim on the
quasi-contractual obligation which the law implies in the circumstances.

The claim for quantum meruit arises only when the original contract is discharged, if
the original contract exists., the party not in default cannot have quantum meruit
remedy ; he has to take resort to remedy in damages. Further the claim for quantum
meruit can be brought only by the party who is not in default.

The claim for quantum meruit arises in the following cases.

a) When an agreement is discovered to be void. When an agreement is discovered to be

void, or when a contract becomes void, any person who has received any advantage

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under such agreement or contract is bound to restore it, or to make compensation for it,
to the person from whom he received it.

b) When something is done without any intention to do so gratuitously when a thing is

lawfully done or goods are supplied by a person without any intention to do so
gratuitously to another person and such other person enjoys the benefit thereof, he is
bound to make compensation to the former in respect of, or to restore, the thing so done
or delivered.

c) When there is an express or implied contract to render services but there is no

agreement as to remuneration. In such a case, reasonable remuneration is payable.
What is reasonable remuneration is determined by Court, and this reasonable
remuneration is quantum meruit.

d) When the completion of the contract has been prevented by the act of the other party
to the contract.

When a contract is divisible. When a contract is divisible and the party not in default
has enjoyed the benefit of the part performance, the party in default may sue on
quantum meruit. But if the contract is not divisible, i.e., where it requires complete
performance as a condition of payment, the party in default cannot claim remuneration
on the ground of quantum meruit.

When an indivisible contract is completely performed but badly. When an indivisible

contract for a lump sum is completely performed, but badly, the person who has
performed the contract can claim the lump sum; but the other party can make a
deduction for bad work.

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Question Bank

This is a collection of Questions that have appeared in past CA examinations. The

intention is to help you practice your understanding of the subject and let you practice
for better retention. Ideally, you should attempt all the questions in writing and take
feedback from an expert teacher on the areas where you should improve. In case you
need any help, you may write to the author at [email protected] for guidance.

1. Father promised to pay his son a sum of Rs, one lakh if the son passed C.A.
examination in the first attempt. The son passed the examination in the first attempt,
but father failed to pay the amount as promised. Son files a suit for recovery of the
amount. State along with reasons whether son can recover the amount under the
Indian Contract Act,1872.

2. Shambhu Dayal started ‘self service’ system in his shop. Smt. Parkash entered in
the shop, took a basket and after taking articles of her choice into the basket reached
the cashier for payments. The cashier refuses to accept the price. Can Shambhu dayal
be compelled to sell the said articles to Smt. Parkesh? Decide.

3.“Good Girl” soap co. advertised that it would give a reward of Rs.1, 000 who
developed skin disease after using. ‘Good Girl” soap of the company for a certain
period according to the printed directions. Miss Rakhi used “Good Girl” soap and
developed skin disease in spite of using this soap according to the printed instructions.
She claimed reward of Rs.1000.The Company refused the reward on the ground that
offer was not made to her and that in any case she had not communicated her
acceptance of the offer.
Decide whether Miss Rakhi can claim the reward or not. Refer the relevant case law, if
any.

4. Ram swami proposed to sell his house to Ramanathan. Ramanathan sent his
acceptance by post next day, Ramanathan sends a telegram withdrawing his
acceptance. Examine the validity of the acceptance in the light of provisions of
contract Act in the following:-
i. The telegram of revocation of acceptance was received by Ramswami before
the letter of acceptance.
ii. The telegram of revocation and letter of acceptance both reached together.

5. X transferred his house to his daughter M by way of gift. The gift deed, executed by
X, contained a direction that M small pay a sum of Rs.5, 000 per month to N (the sister
of the executants) . Consequently M executed an instrument in favour of N agreeing
to pay the said sum. Afterwards, M refused to pay the sum to N saying that she is not
liable to N because no consideration had moved from her. Decide with reasons under
the provisions of the Indian Contract Act, 1872 whether M is liable to pay the said sum
to N.

6. Mr. Singh, on old man, by a registered deed of gift. The gift deed, executed by X,
contained a direction that m shall pay a sum of Rs.5, 000 per month to N (the sister of
the executants). Consequently m executed an instruction in favour of N agreeing to
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pay the said sum. Afterwards, M refused to pay the sum to N saying that she is not
liable to N because no consideration had moved from her. Decide with reasons under
the provision of the Indian Contract Act, 1872 whether M is liable to pay the said sum
to N.

7. X a minor was studying in M.com in a college. On 1st July, 2005 he took a loan of Rs.
10,000 from b for payment of his college fees and to purchase books and agreed to
repay by 31st December, 2005. X possesses assets worth Rs.2 lakhs. On due date X fails
to pay back the loan to B.B now wants to recover the loan from X out of his (X’s)
assets. Referring to the provisions of the Indian Contract act, 1872 decide whether B
would succeed.

8. W is the wife of H, who is lunatic, purchases a diamond set of Rs .10 lacs from
Beauty Jeweler on credit Referring to the provisions of the India contract Act,1872,
decide whether the Beauty Jeweler is entitled to claim the above amount from the
property of H .

9. ‘A’ applies to a banker for a loan at a time when there is stringency in the money
market. The banker declines to make the loan except at an unusually high rate of
interest. A accepts the loan on these terms. Whether the contract is induced by undue
influence? Decide.

10. Sohan induced suraj to buy his motorcycle saying that it was in a very good
condition. After taking motorcycles, Suraj complained that there were many defects in
the motorcycle. Sohan proposed to get it repaired and promised to pay 40 % cost of
repairs. After a few days, the motorcycle did not work at all. Now Suraj wants to
rescind the contract. Decide giving reasons.

11. Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Ramen
another industrialist. To supper his legal campaign Mr. Seth enlists the services of Mr.
X a legal expert stating that an amount of Rs. 5 lakhs would be paid. If Mr. X does not
take up the brief of Mr. Raman. Mr. X agrees, but at the end of the litigation, Mr. Seth
refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth
under the provisions of the Indian Contract Act, 1872.

12. Miss X, a film actress agreed to work exclusively for a period of two years, for a
film production company. However, during the said period she enters into a contract
to work for another film producer. Discuss the rights of the aggrieved film production
company under the Indian Contract Act, 1872.

13. ‘X’ agreed to become an assistant for 5 years to ‘y’ who was a Doctor practicing at
Ludhiana. It was also agreed that during the term of agreement ‘X ’will not practice on
his own account in Ludhiana. At the end year, X’ left the assistantship of; Y and began
to practice on his own account. Referring to the provisions of the Indian contact Act,
1872, decide whether ‘X’ could be restrained from doing so?

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14. X agreed to become an assistant for 5 years to y who was a doctor practicing at
Chennai. It was also agreed that during the term of agreement X will not practice on
his own account in Chennai. At the end of one year, X left the assistantship of Y and
began to practice on his own account. Referring to the provisions of the Indian
Contact Act, 1872, decide whether X could be restrained from doing so?

15. Answer any four of the following:

Point out with reasons whether the following agreements are valid or void:
i. Kamala promises Ramesh to tend Rs. 50000 in lieu of consideration that
ramesh gets kamala’s dissolved and him self marries with her
ii. Sohan agrees with Mohan to sell his Black house. Unknown both the
parties, the house was dead at the time of agreement.\
iii. Ram sells the goodwill of his shop to Shyam for Rs.400000 and promise
not to curry on such business forever and anywhere in India.
iv. In an agreement between Parkash Girish, there is a condition that they will
not institute legal proceeding against each other without consent.
v. Ramamurthy, who is a citizen of India, enters into an agreement with an
alien friend.

16. Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land
revenue payable by X to the Government being in arrear, his land is advertised for sale
by Government. Under the Revenue law, the consequence of such sale will be
termination of Y’s lease. Y, in order to prevent the sale and the consequent
termination of his lease, pays the government, sum due from X. Referring to the
provisions of the Indian Contact Act,1872 decide whether X is liable to make good to y,
the amount so paid?

17. Z rents out his house situated at Mumbai to W for a Rs.10, 000 per month. A sum
of Rs.5 lac, the house tax payable by Z to the Municipal Corporation being in appears,
his house is advertised for sale by corporation. W pays the corporation, the sum due
from z to avoid legal consequences. Referring to the provisions of the Indian Contact
Act, 1872 decide whether W is entitled to get the reimbursement of the said amount
from Z.

18. X,Y and Z jointly borrowed Rs.50,000 from A. The whole amount was Paid to A by
Y. Decide in the light of the Indian Contact Act, 1872 whether:
i. Y recover the contribution from X and Z,
ii. Legal representatives of X are liable in case of death of X,
iii. Y can recover the contribution from the assets, in case Z becomes insolvent.

19. A,B and C are partners in a firm. They jointly promise to pay Rs.1, 50,000 to P.C
become insolvent and his private assets are sufficient to pay only 1/5 of his share of
debits. A is compelled to pay the whole amount to P. Examining the provisions of the
Indian contact Act,1872,decide the intent to which A can recover the amount from B.

20. Explain the law relating to liability of joint promisors in a contact. ‘D’, ‘E’ and ‘F’
who are partners in a firm, jointly promised to pay Rs.1,50,000/- to ‘A’ Later on ‘F’

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become insolvent and his private assets are sufficient to pay only 1/5th of his share of
debt. ‘A’ recovers the whole amount from ‘D’ through a legal action. Decide, under
the provisions of the Indian Contact Act,1872 the extent to which ‘D’ can recover the
amount from ‘E’.

21. Akhilesh entered into an agreement with shekhar to deliver him (Shekhar) 5,000
bags to be manufactured in his factory. The bags could not be manufactured become
strike by the workers and Akhliesh failed to supply the said bags to Shekhar .Decide
whether Akhliseh can be exempted from liability under the provisions of the Indian
Contact Act,1872.

22. M Ltd. contracts with Shanti Traders to make and deliver certain machinery to
them by 30.6.2004 for Rs.11.50 lakhs. Due to labor strike, M Ltd. could not
manufacture and deliver the machinery to Shanti traders. Later, Shanti Traders
procured the machinery from another manufacture of their contract with Ltd. and
were compelled to pay compensation for break of contract. Advise Shanti Traders the
amount of compensation which it can claim from M Ltd, referring to the legal
provision of the Indian Contract Act.

23. Mr.Ramaswamy of Chennai placed an order with Mr. Shah of Ahmadabad for
supply of Urid Dal on 10.11.2017 at a contracted price of Rs.40 per kg. The order was
for the supply of within a month’s time viz before 09.12.2017. On 04.12.2017 Mr. Shah
wrote a letter to Mr. Ramashwamy stating that the price of urid Dal was sky rocketing
to Rs.50 per. kg. and he would not be able to supply as per original contact. The price
of Urid Dal rose to Rs. 53 on 09.12.17. Advise Mr.Ramaswamy citing the legal position.

24. Dubious Textile enters into a contact with Retail garment show Room for supply of
1,000 pieces of Cotton shirts at Rs.300 per shirt to be supplied on or before 31 st
December, 2004. however on 1st November, 2004 Dubious Textile informs the retail
garment show Room that is not willing to supply the goods as the price of cotton
shirts in the meantime has gone up to Rs.350 per shirts. Examine the rights of the
retail garments Show Room in this regard.

25. A contracted with B to supply him (B)500 tons-steel @Rs.5, 000 per ton, to be
delivered are a specified time. Thereafter, A contracts with C for purchase of 500 tons
of iron-steel @ Rs.4,800 per ton and at the same time told he did so for the purpose of
performing his contact entered into with B.C failed to perform his contact on due
date. Consequently, A could not procure any iron-steel and B rescinded the contact.
What would be the amount of damages which A could claim from C in the
circumstances? Explain with reference to the provisions of the Indian Contact, 1872.

SALES OF GOODS ACT 1930

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NATURE AND FORMATION OF CONTRACT OF SALE

Introduction

The contract of sale relating to sale of movable goods is govern by

the provisions of the sales of gods act 1930 passed in year 1930 .The act comes in to force
on 1 July 1930 & it extends to whole of India except Jammu and Kashmir.

This act does not deal with IMMOVABLE PROPERTY.

Definition: A contract of sale of goods is a contract whereby seller transfer or agrees to

transfer the property in the goods to the buyer for a price.

Sale and agreement to sell:

Sale: In this case ownership is immediately transferred to buyer from seller.
Agreement to sell: In this case ownership of goods is not immediately transferred to buyer
from seller but transfer at some future date. subject to some conditions to be fulfilled.

BASIS SALE AGREEMENT TO SELL

1) ownership The ownership is transferred immediately The ownership is transferred
not immediately
2) execution It is an executed contract It is an executory contract
The buyer is responsible for the destruction of goods The seller is responsible for
3)Destruction of even if the goods are in the possession of seller the destruction of goods even
Goods if the goods are in the
possession of buyer.
If seller refuses to deliver the goods the buyer can If seller refuses to deliver the
4) Seller’s default file a case to recover the goods. goods the buyer can not
recover the goods but can file
a case to recover the damages.
If buyer refuses to pay the price the seller may If buyer fails to pay the price
5) Buyer’s recover it by filing a suit on in the court of law. the seller cannot file a suit to
default recover the price however he
can file a case to recover the
damages.

6) Type of goods A sale can be only with existing goods Agreement to sell can be in
relation to existing as well as
future goods.
7) A sale is a contract plus conveyance and creates jus Agreement to sale is a

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Jus in in rem it gives right against word at large. contract pure and simple and
personam/Rem creates jus in personam it
gives right to buyer against
seller to sue for damages
.
Buyer’s In a sale if buyer becomes insolvent before he pays
Insolvency for goods the seller in the absence of lien over the If buyer becomes insolvent
goods must return them to official receiver or and has not yet paid the price
assignee he can only claim retable dividend. the seller is not bound to part
with the goods until buyer
Seller’s In sale if seller becomes insolvent the buyer being the pays the price.
Insolvency owner is entitled to recover the goods from official
receiver or assignee If buyer has paid the price
finds that seller has become
insolvent he can claim only
retable dividend and not
goods because the property in
goods has not yet passed to
buyer.

ESSENTIAL ELEMENTS OF A VALID CONTRACT OF SALE

1) All requirement of valid contract must be fulfilled (Sec 10 of Indian contract Act)
2) There must be at least two parties to the contract of sale the buyer and seller.
3) There must be some goods as subject matter: The term goods has been defined in

Sec 2 (7) Goods means every kind of movable property other than actionable claim
and money and includes
(a) Stock and share
(b) Growing crops and grass and
( c) Things attached to or forming part of land agreed to be seveared.

Trade mark, copyright, patent, goodwill, electricity, water and gas all are goods.
Actionable claim and money are not goods.

4) The property in goods must be transferred to the buyer: The property in goods must
be transferred means ownership must be transferred .The term property means general
property as distinguished from special property.

5) There must be some price for the goods: The price is defined in sec 2 (10) of sales of
goods act. “Price means money consideration for sale”. The price is the consideration for
contract of sale. It must in terms of money. If the goods are exchanged for goods that is not
sale but barter exchange.

CLASSIFICATION OF GOODS:
The goods which form the subject matter of contract of sale may be either existing goods or
future goods

A. EXISTING GOODS:
1) Specific goods: These are the goods which are identified and agreed up on at the time
contract is made.
2 )Unascertained Goods: These are the goods which are not identified and agreed up on at the
time of contract of sale they are defined only by description and may form part of lot.

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3) Ascertained Goods: Though commonly used as similar in meaning to specific goods which
become ascertained subsequent to formation of contract of sale.

B. Future Goods:
These are the goods which a seller does not posses at the time of the contract but which will
be manufactured or produced or acquired by him after the making of the contract of sale .A
contract of present sale of future goods though express as an actual sale purports to operate
as an agreement to sale the goods and not a sale .This is because the ownership of a thing
can not be transferred before that thing comes in to existence.

C. Contingent Goods:
Though a type of future goods these goods are the goods the acquisition of which by the
seller depends up on the contingency which may or may not happen.

EFFECT OF DESTRUCTION OF GOODS

1) Goods perishing before making of contract: A contract for the sale of

specific goods is void if at the time when the contract was made the goods have without the
knowledge of seller perished .The same would be the case when goods become so damaged
as no longer to answer their description in the contract This rule is based on the grounds of
mutual mistake or impossibility of performance.

2) Goods perishing after agreement to sell but before the sale is effected
An agreement to sell specific goods become void if subsequently the goods without any
fault on the part of seller or buyer perish or become so damaged as no longer to answer to
their description in the agreement before the risk passes to the buyer. This rule is based on
the ground of impossibility of performance

DOCUMENT OF TITLE TO GOODS

A document of title to goods is one which enables its possessor to deal with the goods
described in it as if he were the owner. It is used in the ordinary course of business as proof
of the possession or control of goods .It authorizes its possessor to transfer or receive goods
represented by it. It symbolizes goods and confers a right on the purchaser to receive the
goods or to further transfer such right to another person .This may be done by mere
delivery or by proper endorsement & delivery.

Examples of document of title to goods:

1) Bill of lading: It is a document which acknowledges receipt of goods on board a ship &
is signed by the captain of the ship.
2) Dock warrant: It is document issued by dock owner.
3) Warehouse keepers or wharfinger certificate.
4) Railway receipt
5) Delivery Order.

THE PRICE {Sec 9 & 10}

The price in a contract of sale means the money consideration for sale of goods.
Sec 2 (10)

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It forms an essential part of the contract .It must be expressed in money. It is the
consideration for the transfer or the agreement to transfer the property in goods from the
seller to the buyer. It is not essential that the price should be fixed at the time of sale .It
must however be payable though it may not have been fixed.

Ascertainment of price
The price in a contact of sale may be:
a) Fixed by the contract itself or
b) Left to fixed in an agreed manner or
c) Determined by the course of dealing between the parties
In the absence of this the buyer must pay to the seller a reasonable price what is reasonable
price is a question of facts depended on the circumstance of each particular case it is not
necessary the market price.

Agreement to sell at valuation

The parties may agree to sell and buy the goods on the terms that price is to be fixed
by the valuation of a third party.
a) If such third party can not or does not make such valuation, the agreement becomes void.
b) But if the goods have been delivered to buyer ,he shall pay a reasonable price.
c) If the party is prevented from making the valuation by the fault of seller or buyer, the
party not in fault may maintain a suit for damages against the party in fault.

Basis of Difference Sale Hire Purchase System

Time of passing property Property in the goods is The property in goods passes to the
transferred to the buyer hirer upon payment of the last
immediately at the time of installment
contract.

Position of the party The position of the buyer is that The position of the hirer is that of a
of the owner of the goods. bailee till he pays the last installment
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 to
price of the goods. its owner without any liability to pay
the remaining installments.
Burden of Risk of insolvency of The seller takes the risk of any The owner takes no such risk, for if the
the buyer loss resulting from the insolvency hirer fails to pay an installment, the
of the buyer. owner has right to take back the goods.

Transfer of title The buyer can pass a good title to The hirer cannot pass any title even to
a bona fide purchaser from him. a bona fide purchaser
.
Resale The buyer in sale can resell the The hire purchaser cannot resell unless
goods he has paid all the installments.

The difference between bailment and sale

Basis of difference Sale Bailment
Transfer of The property in goods is transferred from the There is only transfer of possession of
property seller to the buyer. goods from the bailor to the bailee for
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any of the reasons like safe custody,

carriage etc.
Return of goods The return of goods in contract of sale is not The bailee must return the goods to the
possible. bailor on the accomplishment of the
. purpose for which the bailment was
made
Consideration The consideration is the price in terms of The consideration may be gratuitous
money. or non-gratuitous.

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CONDITIONS AND WRRANTIES

A stipulation in a contract of sale with reference to goods which are the subject thereof
may be a condition or warranty {Sec 12(1)}.

CONDITION {Sec 12(2)}: A Condition is a stipulation which is essential for the main
purpose of contract .It goes to the root of contract. Its Non fulfillment upsets the very
basis of the contract. If there is a breach of condition, the aggrieved party can treat the
contract as repudiated.

WARRANTY {Sec 12 (3)}: A warranty is a stipulation which is collateral to the main

purpose of contract. It is not of such a vital importance as the condition is. If there is a
breach of warranty the aggrieved party can only claim damages and it has no right to
treat the contract as rescinded.

DISTINCTION BETWEEN CONDITION & WARAANTY:

1) Difference as to value: A condition is a stipulation which is essential to main
purpose of contract .A warranty is a stipulation which is collateral to the main
purpose.
2) Difference as to breach: If there is a breach of condition the aggrieved party
can repudiate the contract, in case of breach of warranty the aggrieved party can
claim damages only.
3) Difference as to treatment: A breach of condition can be treated as breach of
warranty while breach of warranty can not be treated as breach of condition.

WHEN CONDITION IS TO BE TREATED AS WARRANTY (Sec 13)

1) Voluntary waiver of condition: Where the contract of sale is subject to any
condition to be fulfilled by any seller the buyer may:
(a) Waive the condition or,
(b) Elect to treat the breach of condition as breach of warranty.
If the buyer once decided to waive the condition he can not afterwards insist on its
non fulfillment
2) Acceptance of goods by the buyer: Where a contract of sale is not severable *
the buyer has accepted the goods thereof the breach of any condition to be
fulfilled by the seller can only be treated as breach of warranty.

EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES

In a contract of sale of goods conditions and warranties may be express and implied
.Express conditions and warranties are those which are expressly provided in the
contract .Implied conditions and warranties are those which the law implies in to
the contract unless the parties stipulate to the contrary.
IMPLIED CONDITIONS:
1) Condition as to title: In a contract of sale unless the circumstance of contract
are such as to show a different intention, there is an implied condition on the part of
the seller that –
(a) In case of sale, he has right to sell the goods and,
(b) In case of agreement to sell he will have a right to sell the goods at the time
when the property is to pass.

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2) Sale by description: Where there is a contract for the sale of goods by

description there is an implied condition, there is an implied condition that the
goods shall correspond with the description.
Sale of goods by description may include the following situations:
1) Where the buyer has not seen the goods and relies only on their description
given by the seller.
Example: W bought a reaping machine which he had never seen and which V the
seller described to have cut only 5 to 6 acres .W found the machine extremely old
.Held W could return the machine as it did not correspond the description.

2) Where the buyer has seen the goods but he relies on not on what he has seen but
what was stated to him & the deviation of the goods from the description is not
apparent.
Example: In an auction sale a set of napkins and table cloth, these were described as
’dated from seventh century” the buyer bought the set after seeing it .Subsequently
he found the set to be eighteenth century set. Held he could reject the set.

3) Packing of goods may sometimes be part of the description.

4) Sale by description as well as by sample.

If sale is by sample as well as by description it is not sufficient that the bulk of the
goods correspond with the sample, it should correspond with the sample as well as
with description.

3) Condition implied by quality or fitness:

Normally in contract of sale there is no implied condition as to quality or fitness of
the goods for particular purpose .The buyer must examine the goods thoroughly
before he buys them in order to satisfy himself that the goods will be suitable for
the purpose for which he is buying them .The following points will be however be
noted in this regard:
1) Where the buyer, expressly or by implication makes known to the seller the
particular purpose for which he needs the goods and depends up on the skill and
judgment of the seller whose business is to supply goods of that description, there is
an implied condition that the goods shall reasonably fit for that purpose.

2) If the buyer purchasing the article for a particular use is suffering from
abnormality and it is not made known to seller at the time of sale, implied condition
of fitness does not apply.
3) If the buyer purchase an article under its patent or trade name implied condition
that article are fit for particular purpose shall not apply. Unless buyer relies on
sellers skill and judgment and makes known to the seller that he so relies on the
seller.

4) If the goods can be used for number of purpose the buyer must tell the seller that
particular purpose for which he requires the goods .If he does not he cannot hold the
seller liable if the goods do not suit the particular purpose for which he buys the
goods.

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4) Condition as to merchantability: Where the goods are brought by description

from the seller who deals in goods of that description there is implied condition that
goods are of merchantable quality ,This means goods be such as are commercially
saleable under the description by which they are known in market at its full value.
Means: A watch that will not keep time, pen that can not write, tobacco that can
not smoke can not be regarded as merchantable quality.

5) Condition implied by custom: An implied condition as to quality or fitness for

particular purpose may be annexed by usage of trade.

6) Sale by sample: In case of sale by sample there is implied condition-

a) That bulk shall correspond with sample in quality.
b) That buyer shall have reasonable opportunity of comparing the bulk with sample.
c) That goods shall be free from all defects rendering them unmerchantable. The
defect should not however be apparent on reasonable examination of the sample
.This implied condition applies only to latent defects ie the defects that are not
apparent on reasonable examination. The seller is not responsible for the patent
defects ie which are apparent on reasonable examination.

7) Condition as to wholesomeness: In case of eatables and provisions in addition to

implied condition as to merchantability there is another implied condition that
goods shall be wholesome.

IMPLIED WARRANTIES
The implied warranties in a contract of sales are follows:

1) Warranty of quiet possession: In a contract of sale unless there is contrary

intention there is implied warranty that the buyer shall have the quiet possession of
the goods. if the possession is in any way disturbed because of sellers defective title
to sell ,he can claim damages from seller.

2) Warranty of free from encumbrances: The goods are not subject to any charges
or right in favour of any other person .If his possession is in any way disturbed by
reason of charge in favour of any person he shall have a right to claim damages for
breach of this warranty.

3) Warranty as to quality or fitness by usage of trade: An implied warranty as to

quality or fitness for a particular purpose may be annexed by usage of trade.

4) Warranty to disclose the dangerous nature of goods: Where a person sells

goods knowing that they are inherently dangerous or they are likely to be dangerous
to the buyer and buyer is ignorant of the danger he must warn the buyer of probable
danger otherwise he will be liable for damages.

CAVEAT EMPTOR
This means “LET THE BUYER BEWARE” ie in a contract of sale of goods the
seller is under no duty to reveal unflattering truths about goods, he must examine

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them thoroughly if goods turn out defective or do not suit his purpose or if he
depends up on his own judgment & skill judgment & makes a bad selection ,he can
not blame any body exempting himself.

EXCEPTIONS:
1) Fitness for buyer’s purpose: Where buyer by implication or expressly makes
known to the seller the purpose for which goods are required & relies on the skill of
the seller whose business is to sell the goods of that type the seller must supply the
goods that suits for buyer purpose.

2) Merchantable quality: Where the goods are brought by description from a seller
there is an implied condition that goods shall be of merchantable quality.

3) Usage of trade: An implied warranty of condition or warranty may be annexed

by usage of trade.

4) Consent by fraud: Where the consent of the buyer .In a contract of sale is
obtained by fraud or where conceals a defect which could not be discovered on a
reasonable examination ie Latent defect

5) Brand name or patent name

TRANSFER OF PROPERTY
There are 3 stages in performance of a contract of sale of goods by a seller viz

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1) The transfer of property in the goods

2) The transfer of possession of goods (it implies delivery) &
3) The passing of the risk

Transfer of property in goods to the buyer is the main object of a contract of sale.
The term property in goods must be distinguished from possession of goods.
property in goods means the ownership of goods whereas possession of goods
refers to the custody or control of goods.

It is important the precise moment of time at which the property passes to the buyer
for the following reasons:
1) RISK FOLLOWS OWNERSHIP: Unless otherwise agreed ,risk follows
ownership weather delivery has been made or not & weather price has been paid or
not .This the risk of loss as a rule lies on the owner .unless otherwise agreed ,the
goods remain at the sellers 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 buyers
risk whether delivery has been made or not .but if delivery has been delayed
through the fault of either the buyer or the seller .The goods are at the risk of the
party at fault. thus risk and property go together.
2) ACTION AGAINST THIRD PARTY: When the goods are in anyway damaged
or destroyed by the action of third party, it is only the owner of the goods who can
take action against them.

3) INSOVENCY OF THE SELLER OR THE BUYER: In the event of insolvency

of either the seller or the buyer ,the question weather the official receiver or
assignee can take over the goods or not depends on weather the property in the
goods has passed from the seller to the buyer.

4) SUIT FOR PRICE: The seller can sue for the price, unless otherwise agreed,
only if the goods have become the property of the buyer.

PASSING OF PROPERTY
The primary rules for ascertaining when the property in goods passes to the buyer
are as follows:
1) GOODS MUST BE ASCERTAINED: Where there is the contract for sale of
unascertained goods no property in the goods transferred to the buyer unless & until
the goods are ascertained.
2) INTENTION OF THE PARTIES: Where there is contract for sale of specific or
ascertained goods, the property in them passes to the buyer at the time when the
parties intend it to pass.
Example: S offered to sell to B a certain machine for Rs 5000 B refused to buy it
unless certain work was done on it to put it in to proper running conditions S replied
that B could done it himself and when the cost of repair known, B might pay Rs
5000 less the cost of repair s. to this B agreed .While the machine was with
repairman the machine was destroyed without the fault of repairman. Held the
property in machine had not passed from S to B.

WHERE INTENTION CAN NOT BE ASCERTAINED

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Where the intention of the parties as to the time when the property in the goods is to pass to
the buyer cannot be ascertained from the contract, the rules contained in sec 20-24 applies
.These rules are as follows :

SPECIFIC GOODS: The rules relating to transfer of property in specific goods are as
follows:
1) Passing of property at the time of contract where there is an unconditional
contract for the sale of specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made the fact the time of payment of the price or
the time of delivery of goods or both is postponed does not prevent the property in goods
passing at once.
Deliverable state means such a state that the buyer would under the contract be bound to take
delivery of the goods.

2) Passing of property delayed beyond the date of the contract

a) Goods not in deliverable state where there is a contract for the sale of
specific goods in a goods not in a deliverable state it implies the seller has to do something to
the goods to put them in to a deliverable state, the property does not pass until such thing is
done and the buyer has notice of it.

b) When the price of goods is to be ascertained by weighing, etc.

Where there is contract for the sale of specific goods in a deliverable state, but the seller is
bound to weight, measure, test or do some other act or things with reference to the goods for
the purpose of ascertain price, the property does not pass until such act or thing is done and
buyer has notice thereof .

UNASCERTAINED GOODS
Where there is the contract of sale of unascertained goods, the property in the goods does not
pass to the buyer until the goods are ascertained .Unstill goods are ascertained there is merely
an agreement to sell, Sec 23 further provides that where is a contract for the sale of
unascertained or future goods by descriptions and goods of that description and in a deliverable
state are unconditionally appropriated to the contract, the property in goods there upon passes
to the buyer.

The ascertainment of goods and there unconditional appropriation to the contract are the two
pre conditions for the transfer of property from the seller to buyer in case unascertained goods.

ASCERTAINMENT: Ascertainment is the process by which the goods

answering the description and identified and set apart.

The appropriation must be unconditional. It is unconditional when the seller does

not reserve to himself the right of disposal of the goods , the appropriation may be done either
by the seller with the ascent of the buyer or by the buyer with the ascent of the seller.

GOODS SENT ON APPROVAL OR ON SALE OR RETURN BASIS

When goods are delivered to the buyer on approval or on sale or return or
other similar term, the property there in passes to the buyer:
1) When he signifies his approval or acceptance to the seller
2) When he does any other act adopting the transaction

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If the seller delivers the goods to the buyer on sale or return on the terms that the goods were to
remain his property until settled or paid for, the property would not pass to the buyer until these
terms are complied with.

RESERVATION OF RIGHT OF DISPOSAL

The property in goods, whether there specific or subsequently appropriated to the contract, does
not pass to the buyer if the seller reserves the right of disposal of the goods until certain
conditions are fulfilled. If for example it is the term of the contract that the buyer is to pay for
the goods before delivery the seller reserves the right of disposal. In such a case the property in
the goods does not pass to the buyer until the conditions imposted by the seller are fulfilled, it
makes no difference even if the good have been delivered to the buyer to carrier or other bailee
for the purpose of transmission to the buyer.
Apart from express reservation of the right of disposal, the seller is deemed to reserve the right
of disposal ----
1) Where goods are shipped are delivered to a railway for carriage, and by the bill of lading or
railway receipt they are deliverable to the order of the seller his agent.
2) Where the seller sends a bill of exchange for the price of the goods to the buyer for his
acceptance, together with the bill of lading or railway receipt. The property in the goods does
not pass to the buyer until he accepts the bill of exchange. The buyer must return the bill of
lading or railway receipt If he does not honor the bill of exchange; & if he wrongfully returns
the bill of lading or railway receipt, the property in goods does not pass to him.

DELIVERY TO CARRIER

ABSOLUTELY FOR THE BUYER ABSOLUTELY FOR THE SELLER

If the seller does not reserve the right of If the seller reserve the right of disposal of
disposal of goods the delivery is absolutely for goods the delivery is absolutely for the seller.
the buyer.

SALE BY NON OWNERS

NEMO DAT QUI NON HABAT ” NO ONE CAN GIVE THAT HE HAS NOT GOT”

EXCEPTIONS:

1) Sale by the person not the owner or title by estoppel: Where the owner by his conduct, or by
an act or omission leads the buyer to believe that the seller has the authority to sale and induces
the buyer to buy the goods, he shall estopped from denying the fact of want of authority of the
seller. The buyer in such a case gets a better title than that of the seller.

2) Sale by a mercantile agent.

3) Sale by one of several joint owners.
4) Sale by seller in possession after sale:

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5) Sale by buyer in possession after having bought or agreed to buy goods:

6) Sale by unpaid seller.

7) Sale by a finder of lost goods under certain circumstances.
8) Sale by a pawnee or pledgee under certain circumstances.
9) Sale by an official receiver or official assignee or liquidator of company.

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PERFORMANCE OF CONTRACT
Performance of contract in a sale means as regards seller, delivery of goods to the buyer and as
regards buyer acceptance of goods and payment of price.

DELIVERY OF GOODS:
Delivery means voluntary transfer of possession of goods from one person to another Sec 2(2).
Delivery of goods may be made by doing anything which the parties agree shall be treated as
delivery or which has the effect of putting the goods in possession of buyer or his agent.
Delivery of goods may be actual, symbolic,constructive.

1) ACTUAL DELIVERY: Where the goods are handed over physically by the seller or his
duly authorized agent the delivery is actual delivery.

2) SYMBOLIC DELIVERY: Where the goods are ponderous or bulky and incapable of actual
delivery eg. haystack in a meadow the delivery may be symbolic like handing over the keys of
warehouse to buyer is symbolic delivery it is as effective as actual delivery even though no
change in the actual possession of the goods.

3) CONSTRUCTIVE DELIVERY OR DELIVERY BY ATTORNMENT: Where a third

person (bailee) who is in the possession of goods of the seller at the time acknowledge the
buyer that he holds goods on his behalf ,there takes place a delivery by attornment or
constructive delivery
This may happen in the following cases:
(a) Where the seller in possession of goods agree to hold them on behalf of buyer,
(b) Where the buyer is in the possession of goods and seller agree to buyer’s holding as owner
(c) Where the third person is in the possession of goods acknowledges to the buyer that he hold
goods on there behalf.

RULES AS TO DELIVERY OF GOODS:

1) Mode of delivery: The delivery may be actual, symbolic, constructive.

2) Delivery and payment concurrent condition: Delivery and payment of price must be in
according to the terms of contract. unless otherwise agreed delivery and payment of price is
concurrent condition that is to say the seller shall be ready and willing to give possession of the
goods and buyer hall be ready and willing to pay the price in exchange of goods.

3) Effect of part delivery: A delivery of part of goods in progress of delivery of whole has the
same effect for the purpose of passing the property in such goods as delivery of the whole but
the delivery of goods with the intention of severing it from whole does not operate as delivery
of whole.

4) Buyer to apply for delivery: Apart from express contract the seller of goods is not bound to
deliver them until the buyer applies for the delivery. Where the goods are subsequently
acquired by the seller he should intimate this to buyer and the buyer should then apply for
delivery.

5) Place of delivery: Where the place at which the goods are to be delivered is specified in the
contract the goods must be delivered at that place during the business hours on working days.
Where there is no specific agreement as to place the goods sold are to be delivered at the place
at which they are at the time of sale.

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6) Time of delivery: Where in a contract of sale seller is bound to deliver the goods to buyer but
no time is fixed the seller must deliver them within reasonable time.

7) Goods in possession of third party: When at the time of sale of goods are with third party,
there is no delivery by the seller to the buyer until such third party acknowledges to the buyer
that he holds them on his behalf.
8) Cost of delivery: Unless otherwise agreed all expenses of and incidental to making of
delivery are borne by seller and all expenses of and incidental to obtaining of delivery are borne
by buyer.

9) Delivery of wrong Quantity: The delivery of quantity of goods contracted for

should be strictly according to the terms of the contract .A defective delivery entitle the buyer
to reject the goods.
a) DELIVERY OF GOODS LESS THAN CONTRACTED FOR: Where the seller delivery to
the buyer a quantity of goods less than he contracted for the buyer is entitled to reject the
goods.
If he accepts them he is to pay for them.

B) DELIVERY OF GOODS IN EXCESS OF QUANTITY CONTRACTED FOR: Where

seller delivers the buyer the quantity larger than contracted for , the buyer may
a) accept the whole;or
b) reject the whole
c)Accept the quantity he ordered ard reject the rest.

C) DELIVERY OF GOODS CONTRACTED FOR MIXED WITH OTHER GOODS:

Where the seller delivers to the buyer the goods he contracted for mixed with the other goods
Of different description, the buyer may accept the goods which are in accordance with and
reject the rest, or may reject the whole.

10) INSTALLMENT DELIVERIES: Unless otherwise agreed the seller is not entitled to
deliver the goods by installments and if he does so the buyer is not entitled to accept the goods.

11) Delivery to a carrier or wharfinger: Where in pursuance of contract of sale goods are
delivered to a carrier for the purpose of transmission to the carrier or to a wharfinger for safe
custody delivery of goods to them is prima facie deemed to be the delivery to the buyer.In such
a case the seller must enter in to a reasonable agreement with the carrier or wharfinger on
behalf of buyer for the safe transmission and custody .If the seller omits to do so and if goods
are destroyed ,the buyer may decline to treat the delivery to buyer as delivery to himself or he
may hold the seller liable in damages .unless otherwise agreed , where goods are sent by route
involving sea transit the seller must inform the buyer in time to get the goods insured otherwise
the goods will be at sellers risk.

ACCEPTANCE OF DELIVERY: Receipt of goods by the buyer does not

necessarily results in acceptance of goods by him under and in performance of the
contract of sale .Acceptance is something more then mere receipt of goods or taking
possession of goods by the buyer .It means final ascent by the buyer that he has
received the goods under and In performance of contract If he wrongfully refuses to
accept the goods under the contract he would be liable in damages.

The buyer is deemed to have accepted the goods –

1) When he intimates to the seller that he has accept the goods.

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2) When the goods have been delivered to him and he does any act in relation to them
which is inconsistent with the ownership of the seller as for instance he;
(A) Re sells the goods
(b) Uses the goods in a way that is proper for the owner only.
(c) Make some alteration in the goods.

BUYER’S LIABILITY FOR REJECTING, NEGLECTING AND REFUSING

DELVERY.
Buyer’s liability in case of rejection of goods: Unless otherwise agreed where goods are
delivered to the buyer and he rejects them he is not bound to return them to the seller>it
is sufficient for him to intimate to the seller that he has rejected the goods. If seller
refuses to take them away, the buyer becomes the bailee of the goods and he may
charge for keeping them.

BUYER’S LIABILITY FOR NEGLECTING AND REFUSING DELVERY.

When the seller is ready and willing to deliver goods and request the buyer the delivery
and the buyer does not ,within a reasonable time after such request take delivery of the
goods he is liable to the seller for-
a) any loss occasioned by his neglect
b) a reasonable charge for the care and custody of the goods.

RIGHTS OF BUYER:
1) Right to have delivery as per contract.
2) Right to reject the goods
3) Right to repudiate contract.
4) Right to notice of insurance.
5) Right to examine goods .The buyer has right to examine goods before accepting the
goods if he has not already examined the goods .The seller is bound to afford him a
reasonable opportunity of examining the goods.
6) Right against the seller for breach of contract:
a) Suit for price
b) Suit for damages
c) Suit for specific performance.
d) Repudiation of contract before the due date. ”rule of anticipatory breach’’
e) Suit for interest.

DUTIES OF BUYER:
1) Duty to accept goods and pay for them in exchange of possession.
2) Duty to apply for delivery.
3) Duty to demand delivery at reasonable hour.
4) Duty to pay damages in case of non-acceptance.

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RIGHTS OF AN UNPAID SELLER

A seller is deemed to be an unpaid seller when:
1) A whole of the price has not been paid or tendered
2) a bill of exchange or other negotiable instrument has been received as a condition of
payment and the condition on which it has been received has not been fulfilled by
reason of Dishonour of the instrument or otherwise.

The conditions to be fulfilled before a seller is known as unpaid are:

a) He must be unpaid and price must be due.
b) He must have immediate right of action against the buyer for price
c) A bill of exchange or other negotiable instrument has been received as a condition of
payment and the same must be dishonored.

WHERE THE PROPERTY IN THE GOODS HAVE PASSED

1) Right of unpaid seller against the goods:

1) Right of lien: A lien is a right to retain the possession of goods until the payment of
price. It is available to the seller of the goods who is in the possession of goods where:
a) The goods have been sold without stipulation as to credit
b) Goods have been sold on credit but the credit term has expired.
c) The buyer has become insolvent.

Termination of lien: However, the unpaid seller loses his right of lien under the
following circumstances:
(i) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods.
(ii) Where the buyer or his agent lawfully obtains possession of the goods.
(iii) Where seller has waived the right of lien.
(iv) By Estoppel: i.e., where the seller so conducts himself that he leads third parties to
believe that the lien does not exist.

Exception: The unpaid seller of the goods, having a lien thereon, does not lose his lien
by reason only that he has obtained a decree for the price of the goods.
Example: A, sold a car to B for `Rs 1,00,000 and delivered the same to the railways for
the purpose of transmission to the buyer. The railway receipt was taken in the name of
B and sent to B. Now A cannot exercise the right of lien

2 ) RIGHT OF STOPPAGE IN TRANSIT :The right of stoppage in transit is a right of

stopping the goods in transit after the unpaid seller has parted with the possession of
goods .It is available to unpaid seller :
a) When the buyer become insolvent and
b) When the goods are in transit.

DISTINCTION BETWEEN RIGHT OF LIEN AND RIGHT OF STOPPAGE IN

TRANSIT
LIEN STOPPAGE IN TRANSIT

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1) Buyer is able to pay but does not pay 1) Buyer become insolvent and unable to
pay
2) Seller can exercise the right of lien 2) Seller has parted with the possession of
when seller is in the possession of goods goods and goods are in the possession of
middlemen
3) Right of lien comes to an end when 3) Right of stoppage in transit starts when
seller has parted with the possession. seller has parted with the possession.

4) Right of lien is to retain possession. 4) Right of stoppage in transit is to regain

possession.

Duration of transit (Section 51):

(1) Goods are deemed to be in the course of transit from the time when they are delivered to a carrier or other
bailee for the purpose of transmission to the buyer, until the buyer or his agent in that behalf takes delivery of
them from such carrier or other bailee.
(2) If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed
destination, the transit is at an end.
(3) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the
buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the
buyer or his agent, the transit is at an end.
(4) If the goods are rejected by the buyer and the carrier or other bailee continues in possession of them, the
transit is not deemed to be at an end, even if the seller has refused to receive them back.
(5) When goods are delivered to a ship chartered by the buyer, it is a question depending on the circumstances
of the particular case, whether they are in the possession of the master as a carrier or as agent of the buyer.
(6) Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that
behalf, the transit is deemed to be at an end.
(7) Where part delivery of the goods has been made to the buyer or his agent in that behalf, the remainder of the
goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an
agreement to give up possession of the whole of the goods.

How stoppage in transit is effected (Section 52)

(1) The unpaid seller may exercise his right of stoppage in transit either by taking actual possession of the
goods, or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such
notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the
notice, to be effectual, shall be given at such time and in such circumstances, that the principal, by the exercise of
reasonable diligence, may communicate it to his servant or agent in time to prevent a delivery to the buyer.
(2) When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the
goods, he shall re-deliver the goods to, or according to the directions of, the seller. The expenses of such re-
delivery shall be borne by the seller.

3) RIGHT OF RE-SALE: The unpaid seller can re-sale the goods if:
a) Where the goods are of perishable nature; or
b) Where he gives notice to the buyer of his intention to re sell the goods and buyer
does not within the reasonable time pay or tender the price.

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If on resale there is loss to seller he can claim it from the buyer as damages for the
breach of contract. If he received benefit on the re sale the seller is not bound to return
it to buyer as the buyer can not be allowed to take advantage of his own wrong.
But if notice is not given to by buyer the seller is not entitled to:
(a) recover any loss on re sale on goods;
(b) to retain any surplus arising on the re sale.

WHERE THE PROPERTY IN THE GOODS HAVE NOT PASSED

1) WITHOLDING DELIVERY
When the properties in goods have not passed to the buyer an unpaid seller has in
addition to his other remedies a right of withholding delivery similar to and co
extensive with his right of lien.
2) RIGHT OF STOPPAGE IN TRANSIT

3) RE SALE

RIGHT OF UNPAID SELLER AGAINST THE BUYER PERSONALLY

1) SUIT FOR PRICE

a) When the property in goods passed: When under contract of sale the property in
goods have passed to the buyer and buyer wrongfully neglects or refuses to pay for the
goods the seller may sue him for the price.
b) When the property in goods has not passed: When under a contract of sale the
price is payable on certain day irrespective of delivery and the buyer wrongfully refuses
to pay the price the seller may sue him for the price. It makes no difference whether the
property in goods have not passed to the buyer.

2) SUIT FOR DAMAGES FOR NON-ACCEPTANCE: When under contract of sale

the property in goods have passed or not passed to the buyer and buyer wrongfully
neglects or refuses the seller may claim damages.

3) REPUDIATION OF CONTRACT BEFORE DUE DATE

“RULE OF ANTICIPATORY BREACH OF CONTRACT”

4) SUIT FOR INTEREST: Where there is a specific agreement between the buyer
and seller and the buyer as to interest on the price of goods from the date on which
payment becomes due the seller may recover interest from buyer. If however there is no
specific agreement to this effect the seller may charge interest on the price when it
becomes due from such day as he may notify to buyer.

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AUCTION SALE

A sale by auction is a public sale where different intended buyers try to outbid each
other .The goods are ultimately sold to the highest bidder .The auctioneer who sells the
goods by auction is an agent of the seller ie the owner of the goods is governed by the
general principles of the law relating to the agency.

PROCEDURE OF AUCTION SALE:

The usual procedure of auction sale is: The proposed auction is advertised and printed
catalogue of goods together with the terms of sale is circulated. On the appointed date
& time the intended buyers assemble at a place & auctioneer puts the different lots to
auction and invites bids from the highest bidders. Every bid is an offer. The auction
goes in to the favour of the highest bidder. The highest bid is accepted by the
auctioneer in a customary manner ie by
(a) Fall of hammer
(b) Using the words one ,two or three
(c) Going, Going or gone

The auctioneer thus knocks down the lot to highest bidder .The highest bid constitute
the offer .The fall of hammer or other customary manner constitutes acceptance of offer
by auctioneer. At this contract gets completed. Until acceptance by the auctioneer the
bidder may at any time retract his bid.

RULES OF AUCTION SALE:

1) Goods put up for sale in lots: Where goods are put up for sale in lots each lot is
prima facie be deemed to be subject to a separate contract of sale.

2) Completion of sale: The sale is completed when the auctioneer announces its
completion by the fall of hammer or in some other customary manner like “one, two ,
three or Going going Gone .Until such announcement any bidder may retract his bid
The security money may not be forfeited.

3) Right of seller to bid: A right to sale may be reserved expressly by or on behalf of

seller any one on behalf may bid on behalf of seller. Secret employment of even one
Puffer is fraud.

4) Reserve price: The sale may be notified to be subject to a reserve price or upset
price .This is the price below which bidder cannot bid.

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5) Knock Out Agreement Or not to bid against each other: Where a group of people
agree among themselves that they will not bid against each other, this agreement is
valid and is known as Knock out agreement.

Question Bank:
Q1. P is having two bikes. He agrees to sell both of the bikes to S at a price to be fixed
by the Q. He gives delivery of one bike immediately. Q refuses to fix the price. As such
P ask S to return the bike already delivered while S claims for the delivery of the
second bike too. As regards the Second bike, the contract can contract be avoided?

Q2. : A agrees to sell B 50 bags of wheat stored in the A’s godown. Due to water
logging, all the goods stored in the godown were destroyed. At the time of agreement,
neither parties were aware of the fact. Is the agreement void?

Q3. What is Sale and contract for work and labour.

Q4. Explain Goods under sales of goods Act.

Q5. A purchased a tractor from B who had no title to it. After 2 months, the true owner
spotted the tractor and demanded it from A. Is A bound to hand over the tractor to its
true owner.

Q6. : A at Kolkata sells to B twelve bags of “waste silk” on its way from Murshidabad
to Kolkatta, but it not “waste silk” but some other quality of silk which is better than
“waste silk”,Is B entitled to reject the goods?

Q7. : ‘A’ bought a set of false teeth from ‘B’, a dentist. But the set was not t for ‘A’s
mouth. ‘A’ rejected the set of teeth and claimed the refund of price. Can A do so?

Q8. ‘A’ sold carpets to the Company which were required to be laid. The carpet was
delivered to the company’s premises but was stolen before it could be laid. Is the carpet
in deliverable state. Who will bear this loss?

Q9. ‘A’ delivered some jewellery to ‘B’ on sale or return basis. ‘B’ pledged the
jewellery with ‘C’. and ‘C’ lost it. In this case, can ‘A’ sue against ‘C’. Can he recover
the price of the jewellery from ‘B’?

Q10. A entered into a contract to sell cartons in possession of a wharfinger to B and

agreed with B that the price will be paid to A from the sale proceeds recovered from his
customers. Now B sold goods to C and C duly paid to B. But anyhow B failed to make
the payment to A. A wanted to exercise his right of lien and ordered the wharfinger not
to make delivery to C. Is lien valid.

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PARTNERSHIP ACT 1932

NATURE OF PARTNERSHIP

Partnership Act 1932 extends to the whole of India except the State of Jammu and
Kashmir. It shall come into force on the 1st day of October, 1932.

DEFINITION OF PARTNERSHIP:
Partnership is the relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all .Persons that have entered in to
partnership with one another are called individually partners and collectively
firm.(Sec4)

CHARACTERSTICS OF PARTNERSHIP:

1) Association of two or more persons: There should be at least two competent

persons to form a partnership .As regard maximum number of partners in a firm sec464
of companies act provides that a number of persons carrying business for gain should
not exceed 50 Companies (miscellaneous) Rule 2014.If the number of partners exceed
the above mentioned limit such an association would be an Illegal association.
2) Contract: The Partnership relation is one of contractual nature; it arises from
contract and not from status.
3) Business: A Partnership can be formed only for the purpose of carrying on business.
Business includes every trade, occupation, & profession.
4) Sharing of profits: The object of Partnership is sharing of profits, profits mean Net
profit after deduction all expenses. It must be distributed among partners in an agreed
ratio. But it is not necessary that who share profits is a Partner as a minor can share
profits with the consent of all partners but he will not be a partner.
5) Mutual Agency: The business of partnership may be carried on by all or any of
them acting for all. A partner is both an agent as well as a principal. In the sense the
partner can bind all other partners by his conduct he would be an agent, while he would
got bind by the act of all other partners means he would be a principal.

LAW OF PARTNERSHIP –IS AN EXTENTION OF LAW OF AGENCY.

A Partner assumes two fold characters:
1) HE IS AN AGENT: partner can bind all other partners by his conduct he would be
an agent.
2) HE IS A PRICIPAL: he would get bind by the act of all other partners’ means he
would be a principal.

FORMATION OF PARTNERSHIP
A partnership is based on contract .The partnership can be made orally or in writing or
it may be implied from course of dealing between partners however all the essential
elements of valid contracts must be present in it. As no consideration is required to
create agency , no consideration is required to create partnership.

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PARTNERSHIP DEED: The partnership can be made orally or in writing or it may be

implied from course of dealing between partners however it is in the interest of partners
that they should be in writing .The document which contains these provisions relation
to partnership is called partnership agreement./partnership deed.

WHO MAY BE PARTNERS?

Every person who is competent to contract can be a partner

WHO CAN NOT BECOME PARTNERS?

1) MINOR: A person who is a minor according to the law to which he is subject may
not be a partner in a firm, but, with the consent of all the partners for the time being, he
may be admitted to the benefits of partnership.
2) ALIEN ENEMY: Alien enemy can not enter in to partnership with an Indian
subject.
3) PERSONS OF UNSOUND MIND

NOTE
Company / CORPORATION: A company can be a partner in a firm but all of its
shareholders will not be partners as the company is having separate legal entity.

PARTNERS, FIRM, FIRM NAME- Section4

Persons who have entered in to partnership with one another are individually called
partners and collectively firm and the name under which they carry on business is
called firm name.
The firm name shall not contain any words expressing or implying the sanction
approval or patronage of the government. The law safeguards the name of firm and
restrains others from adopting the same name but only when it is used with fraudulent
intention means the firm can use the similar name if no fraudulent intention is there like
one firm carrying business of shoes with name XYZ and one firm uses the name XYZ
doing business of food.

DO THE SAME PARTNERS IN TWO DIFFERENT FIRMS CONSTITUTE

ONE FIRM?
It will depend on the intention of partners whether they intend to:
a) Constitute two separate partnerships & therefore two different firms or
b) Extend merely a partnership originally constituted to carry on one business to
carrying on of other business.

TEST OF PARTNERSHIP

REAL RELATION IS THE BASIS:

To determine the partnership one must look in to test whether there is agreement to
share profits and business carried on by all or any of them acting for all, if it is so there
is partnership else not.
The real relation between partners .The real relation between the partners is the proof of
partnership & it is determined from all the facts i.e. written or verbal agreement,
surrounding circumstance & conduct of the parties at the time when contract was made.

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SHARING OF PROFITS BUT NO PARTNERSHIP:

1) Joint owners sharing gross returns: Joint owners of property sharing profits &
gross returns do not make them partners.
2) Sharing of profits: Sharing of profits is prima facie a strong evidence of partnership
but the fact that there is sharing of profit between some persons does not make them
partners. There are few cases where there is sharing of profit but no partnership.
a) Where a person has lent money to persons engaged or about to engage in business &
receive rate of interest varying with profit.
b) Where servant or agent is engaged in business& receive his remuneration as % of
profits.
c) Where widow or child of deceased receive a portion of profit.
d) Where a person has sold his business along with his goodwill & receives a portion of
profit in consideration of sale.

REAL TEST IS MUTUAL AGENCY:

To conclude one may say that true test of partnership is not sharing of profits but it is
mutual agency. The business of partnership may be carried on by all or any of them
acting for all. A partner is both an agent as well as a principal. In the sense the partner
can bind all other partners by his conduct he would be an agent, while he would got
bind by the act of all other partners means he would be a principal.

PARTNERSHIP AND OTHER ASSOCIATIONS

Partnership & Co ownership:

Co-ownership is a legal concept where two or more co-owners share the legal
ownership of a property

1) Status: Partnership is result of an agreement but Co-ownership is not necessarily

result of agreement,
2) Transfer of interest: A partner cannot transfer his interest to stranger without
consent of others but co-owner can transfer,
3) Agent: A partner is agent of other but co-owner is not,
4) Lien for expenses: A partner has lien on the thing owned by firm for expenses but
co-owner doesn't,
5) Profit:/Business: A partnership exist for gain but co-owner doesn't necessarily exist
for gain,
6) Partition of property: A partner cannot seek division of partnership in specie but
co-owner has that right.
7) Number of members: In partnership the o of members is can not exceed the
statutory limit while in co ownership there is no such limit.

PARTNERSHIP AND JOINT HINDU FAMILY

1) Mode of creation: Partnership is essentially as a result of agreement but HUF is a

result of status.

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2) Interest in business: In partnership the partner does not acquire the interest by birth
but get through agreement but in HUF the interest by birth.
3) Admission of new members: In partnership the new member get admission by
consent of all the members but in HUF the admission by birth.
a) Female member: female can be a full fledged member of partnership but in HUF
female become member by birth.
b) Minor member: with the consent of all the partners for the time being, he may be
admitted to the benefits of partnership but in HUF minor become member by birth.
c) Membership fluctuating: There should be at least two competent persons to form a
partnership .As regard maximum number of partners in a firm sec464 of companies act
provides that a number of persons carrying business for gain should not exceed 50 ,
Companies (miscelleaneous) Rules2014.If the number of partners exceed the above
mentioned limit such an association would be an Illegal association but in HUF there is
no such Limit.
4 Authority of Members: In partnership each partner has implied authority to bind the
firm by his conduct but in HUF only Karta (Usually the eldest family Member) has
implied authority to contract on behalf of HUF.
5 Liability of members: In partnership the liability of partners is unlimited the share of
each partner in partnership with his private property is responsible. In HUF the karta is
personally responsible for the debts of family business the other members are liable
only to the extent of there share in the family business.
6) Rights of member to demand accounts: In partnership every member has right to
demand accounts & have access to and inspect copy of books and ask for profits and
losses but the members of HUF cannot ask the karta for accounts of his past dealing.
7) Registration: In case of partnership registration is not compulsory but as un
registered firm suffers from many disabilities so Indirectly law has made the
registration of partnership compulsory but there is no such requirement in HUF.

Basis of Difference Partnership Joint Stock Company

Legal Status A firm is not legal entity i.e., it has A company is a separate legal entity
no legal personality distinct from the distinct from its members (Salomon v.
personalities of its constituent Salomon).
members

In a firm, every partner is an agent of In a company, a member is not an agent

the other partners, as well as of the of the other members or of the
firm. company, his actions do not bind either
Agency
Distribution of The profits of the firm must be There is no such compulsion to
Profits distributed among the partners distribute its profits among its members.
according to the terms of the Some portion of the profits, but
partnership deed. generally not the entire profit, become
distributable among the shareholders
only when dividends are declared.
Extent of liability In a partnership, the liability of the In a company limited by shares, the
partners is unlimited. This means liability of a shareholder is limited to
that each partner is liable for debts of the amount, if any, unpaid on his shares,
a firm incurred in the course of the but in the case of a guarantee company,
business of the firm and these debts the liability is limited to the amount for

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can be recovered from his private which he has agreed to be liable.

property, if the joint estate is However, there may be companies
insufficient to meet them wholly. where the liability of members is
unlimited
Property The firm’s property is that which is The firm’s property is that which is the
the “joint estate” of all the partners “joint estate” of all the partners as
as distinguished from the ‘separate’ distinguished from the ‘separate’ estate
estate of any of them and it does not of any of them and it does not belong to
belong to a body distinct in law from a body distinct in law from its members
its members
Transfer of share The firm’s property is that which is In a company a shareholder may
the “joint estate” of all the partners transfer his shares, subject to the
as distinguished from the ‘separate’ provisions contained in its Articles. In
estate of any of them and it does not the case of public limited companies
belong to a body distinct in law from whose shares are quoted on the stock
its members exchange, the transfer is usually
unrestricted
Management In the absence of an express Members of a company are not entitled
agreement to the contrary, all the to take part in the management unless
partners are entitled to participate in they are appointed as directors, in which
the management case they may participate. Members,
however, enjoy the right of attending
general meeting and voting where they
can decide certain questions such as
election of directors, appointment of
auditors, etc.
Registration Registration is not compulsory in the A company cannot come into existence
case of partnership. unless it is registered under the
Companies Act, 2013.

Winding Up A partnership firm can be dissolved any time if all the partners agree.
at any time if all the partners agree A company, being a legal person is
either wind up by the National
Company Law Tribunal or its name is
struck of by the Registrar of
Companies.
Number of According to section 464 of the A private company may have as many
membership Companies Act, 2013, the number of as 200 members but not less than two
partners in any association shall not and a public company may have any
exceed 100. number of members but not less than
However, the Rule given under the seven. A private Company can also be
Companies (Miscellaneous) Rules, formed by one person known as one
2014 restrict the present limit to 50. person Company.
Duration of existence Unless there is a contract to the A company enjoys a perpetual
contrary, death, retirement or succession
insolvency of a partner results in the
dissolution of the firm.

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Basis of difference Partnership Club

Definition A club is an association of persons
Partnership Club Definition It is an formed with the object not of earning
association of persons formed for profit, but of promoting some beneficial
earning profits from a business purposes such as improvement of health
carried on by all or any one of them or providing recreation for the
acting for all. members, etc.
Relationship Persons forming a partnership are Persons forming a club are called
called partners and a partner is an members. A member of a club is not the
agent for other partners. agent of other members

Interest in property Partner has interest in the property of A member of a club has no interest in
the firm. the property of the club

Dissolution A change in the partners of the firm A change in the membership of a club
affect its existence does not affect its existence

Basis of difference Partnership Association

Meaning Partnership means and involves Association evolve out of social cause where
setting up relation of agency there is no necessarily motive to earn and
between two or more persons who share profits. The intention is not to enter in
have entered into a business for a business for gains
gains, with the intention to share
the profits of such a business.
Examples Partnership to run a business and Members of charitable society or religious
earn profit thereon association or an improvement scheme or
building corporation or a mutual insurance
society or a trade protection association

DURATION OF PARTNERSHIP/TYPES OF PARTNERSHIP

(1) PARTNERSHIP FOR FIXED TERM:

In this case partnership is entered for fixed period of time as soon as fixed term is
expired partnership comes to an end. However the partners may continue to carry on
the business after the expiry of business .In such case the rights & liabilities of partners
remain same as they were before and partnership will be converted in to partnership at
will.

(2) PARTNERSHIP AT WILL: Where no provision is made by contract between the

partners for the duration of their partnership, or for the determination of their
partnership, the partnership is "partnership-at-will". Where the partnership is at will, the

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firm may be dissolved by any partner giving notice in writing to all the other partners of
his intention to dissolve the firm. The firm is dissolved as from the date mentioned in
the notice as the date of dissolution or, if no date is so mentioned, as from the date of
the communication of the notice. Notice once given can not be withdrawn unless all
partners agree to it.

(3) PARTICULAR PARTNERSHIP:A person may become a partner with another

person in particular adventures or undertakings. It comes to an end as soon as that
adventure is complete. However the partners may continue to carry on the business
after the expiry of business .In such case the rights & liabilities of partners remain same
as they were before and partnership will be converted in to partnership at will.

REGISTRATION OF FIRMS

In case of partnership registration is not compulsory but as un registered firm suffers

from many disabilities so Indirectly law has made the registration of partnership
compulsory
APPLICATION FOR REGISTRATION. the registration of a firm effected 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 and a true copy of the deed of partnership stating (a)
the firm-name,
(aa) the nature of business of the firm;
(b) the place or principal place of business of the firm,
(c) the names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the partners, and
(f) the duration of the firm.
The statement shall be signed by all the partners, or by their agents specially authorised
in this behalf.

When the Registrar is satisfied that the provisions of section 58 have been duly
complied with, he shall record an entry of the statement in a register called the Register
of Firms, and shall file the statement. On the date such entry is recorded and such
statement is filed, the firm shall be deemed to be registered. Registration is effective
from the date when registrar files the document & records it with him and not from the
date when the documents has been delivered to registrar for registration.

EFFECT OF NON-REGISTRATION: SEC-69

1) No suit to enforce a right arising from a contract or conferred by this Act shall be
instituted in any Court by or on a behalf of any persons suing as a partner in a firm
against the firm or any person alleged to be or to have been a partner in the firm unless
the firm is registered and the person suing is or has been shown in the Register of Firms
as a partner in the firm
(2) No suit to enforce a right arising from a contract shall be instituted in any court by
or on behalf of a firm against any third party unless the firm is registered and the
persons suing are or have been shown in the Register of Firms as partners in the firm.

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(3) No suit to enforce any right for the dissolution of a firm or for accounts of a
dissolved firm or any right or power to realize the property of a dissolved firm shall be
instituted in any Court by or on behalf of any person suing as a partner in a firm against
the firm or any person alleged to be or have been a partner in the firm, unless the firm is
registered and the person suing is or has been shown in the Register of Firms as a
partner in the firm.
(4) Claim to set off: An unregistered firm or any partner thereof cannot claim a set off
in a proceeding instituted against the firm by a third party to enforce a right arising
from a contract until registration of firm is affected .This right to set off however is not
affected if the claim of set off does not exceed Rs 100 in value.
This section I.e. Sec 69 does not affect the:
(a) To firms or partners in firm which have no place of business in India.
(b) To any suit or claim of set-off not exceeding one hundred rupees in value.
c) The powers of the official receiver or assignee to realize the property of an insolvent
partner of an unregistered firm.
(d) The rights of third party to proceed against the unregistered firm

RELATIONS OF PARTNERS
RIGHTS OF PARTNERS
1) Right to take part in the business of firm: The partnership agreement usually
provide the mode of conduct of business, subject to any such agreement every partner
have right to take pat in the business of firm.
2) Right to be consulted: Every partner has inherent right to be consulted in all matters
affecting the business of partnership and express his views before any decision is taken
by partners.
3) Right to access to accounts: Every partner has right to have access to books of
accounts and inspect and copy any books of the firm .A minor partner may have access
to & inspect any books accounts of firm but not books.
4) Right to share in profits: In the absence of any agreement the partners are entitled
to share equally in profits earned and are liable to contribute equally to the losses
sustained by the firm.
5) Right to interest on capital: The partnership agreement may contain a clause as to
right of partners to claim interest on capital at certain rate. Such interest, subject to
contract between the partners is payable only out of profits if any earned by the firm.
6) Right to interest on advances: Where partner makes for the purpose of business of
firm any advances beyond the amount of capital he is entitled to interest on advance at
the rate of 6 % per annum .Such rate of interest is payable out of profits of firm but also
out of assets of firm.
7) Right to be indemnified: A partner has authority in an emergency to do all such
acts for the purpose of protecting the firm from loss as would be done by the person of
ordinary prudence in his own case acting under similar circumstance. Such act of the
partner bind the firm if as a consequence of any such act the partner incurs any liability
or makes any payment he has a right to be indemnified.

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8) Right to use partnership property: The partnership property should be used for
the purpose of business of the firm.
9) Right of partner as agent of firm: Every partner is the agent of the firm for the
purpose of carrying the business of firm.
10) No new partner to be introduced: Every partner has the right to prevent the
introduction of new partner unless he has consented permitting such introduction.
11 )No liability before joining: A person who is introduced as a partner in the firm is
not liable for the acts done before he becomes a partner.

12) A partner has right to retire:

a) With the consent of all other partners,
b) In accordance with express agreement with partners,
c) Where partnership is at will by giving notice to all other partners of his intention to
retire.
13) Right not to be expelled: A partner has right not to be expelled from the firm by
any majority of partners save in the exercise of good faith and powers conferred by the
contract between the partners.

14) Right of outgoing partners to share in subsequent profits: SEC 37

Where a partner has died or ceased to be a partner by retirement or expulsion, or any
other case the surviving partners may carry on the business with the property of the
firm without any final settlement of accounts between partners and firm .In such case
legal representative of deceased partner or the outgoing partner in the absence of
contrary,is entitled to:
a) Such share of profit as is proportionate to his share in the property of the firm,
OR
b) Interest @ 6%PA on the amount of his share in the property in the firm.

DUTIES OF PARTNER
1) To carry on the business to greatest common advantage: Partners are bound to
carry on the business of the firm to 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, his heir or legal representative.
2) TO observe faith: Partnership is fiduciary relationship every partner must be just &
faithful in carrying out his duties Good faith require that he should not make private
advantage.
3) DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD. Every partner shall
indemnify the firm for any loss caused to it by his fraud in the conduct of the business
of the firm.
4) To attend diligently: It s the duty of partner to attend diligently in conduct of
business.

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5) Not to claim remuneration: A partner Is not entitled to claim remuneration in any

form for taking part in the conduct of business of firm however it is usual to allow
some remuneration to working partners provided there is specific agreement to that
effect.
6) To share losses: It is the duty of every partner to share losses .In the absence of
contract to contrary the partner are bound to contribute equally to losses
sustained by the firm.
7) To hold & use property of firm only for the benefit & exclusively for the benefit
of firm.
8) To account for personal profits: If partner derives any benefit without the consent
of other partners from partnership transaction he must account it and pay it back
to the firm. This is because the relationship of partner to firm is fiduciary.
9) To act within authority: Every partner is bound to act with in his actual & implied
authority.
10) To be liable jointly & severally: Every partner is liable jointly & severally for all
acts of firm while he is a partner.
11) Not to assign his rights: A partner cannot assign his rights & interest in the firm to
an outsider as to make him a partner of firm.

EFFECT OF ADMISSIONS BY A PARTNER (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.
Partners, as agents of each other can make binding admissions but only in
relation to partnership transaction and in the ordinary course of business. An
admission or representation by a partner will not however, bind the firm if his
authority on the point is limited and the other party knows of the restriction.

PROPERTY OF FIRM
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 for the purposes and in the course
of the business of the firm, and includes also the goodwill of the business. Unless the
contrary intention appears, property and rights and interest in property acquired with
money belonging to the firm are deemed to have been acquired for the firm. This list is
not exhaustive.

GOODWILL
The term goodwill is not defined in the act .It is properly speaking a legal term. It is the
value of reputation & connection which the firm over a period of time earned due to its
integrity, efficient services to customers quality of its products Industry etc. Its
reputation enables the firm to earn more than normal profits earn by the business as a
whole. Goodwill is an intangible asset.
EXCEPTION TO THE GENERAL RULE THAT AGREEMENT IN RESTRAINT OF
TRADE IS VOID UNDER PARTNERSHIP ACT.

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(1) AGREEMENT IN RESTRAINT OF TRADE: A partner may make an

agreement with his partners that on ceasing to be a partner he will not carry on any
business similar to that of the firm within a specified period or within specified local
limits
(2) RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING
BUSINESS.
An outgoing partner may carry on a business competing with that of the firm and he
may advertise such business, but subject, to contract to the contrary, he may not
(a) use the firm-name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before he ceased to be
a partner.
(3) Agreement in case of dissolution : A partner may up on or in anticipation of
dissolution agree not to carry on a business competing with that of the firm and
advertise such business within a specified period or within specified local limits.
(4) Restriction on the seller of goodwill of firm:The purchaser of firm can restrict the
seller of goodwill to do the business with same name in same area up to definate time
but all the restrictions must be reasonable according to court.
(5) RIGHT TO RESTRAIN FROM USE OF FIRM-NAME OR FIRM-
PROPERTY. After a firm is dissolved, every partner or his representative may, in the
absence of a contract between the partners to the contrary, restrain any other partner or
his representative from carrying on a similar business in the firm-name or from using
any of the property of the firm for his own benefit, until the affairs of the firm have
been completely wound up : Provided that where any partner or his representative has
brought the goodwill of the firm, nothing in this section shall affect his right to use the
firm-name.

RELATIONS OF PARTNERS TO THIRD PARTY

IMPLIED AUTHORITY OF PARTENR:

The act of a partner which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm. The authority of a partner to bind the firm
conferred by this section is called his "implied authority” but it is subject to following
conditions:
a) The act done by partner must relate to normal or usual business of the firm.
b) The act must be such as is done within the scope of business of the firm in usual
way.
c) The act must be done in the name of firm or in any other manner expressing or
implying an intention to bind the firm.

ACT WITHIN THE IMPLIED AUTHORITY OF PARTNER

1) Purchasing goods on behalf of firm in which firm regularly deals in.
2) Selling the goods of the firm.

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3) Receiving debts of firm due to firm and issuing receipts and make payment on behalf
of firm.
4) Engaging servants for partnership business.
5) Borrowing money on the credit of the firm for the firm.
6) Drawing, accepting, endorsing bills & other negotiable instruments in the name of
firm.
7) Pledging the goods of firm for the purpose of borrowing money.
9) Employing solicitor to defend an action against the firm for goods supplied.

NO IMLIED AUTHORITY
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 proceeding filed on behalf of the firm,
(e) Admit any liability in a suit or proceeding against the firm,
(f) Acquire immovable property on behalf of the firm,
(g) Transfer immovable property belonging to the firm, or
(h) Enter into partnership on behalf of the firm.

PARTNER'S AUTHORITY IN AN EMERGENCY. A partner has authority, in an

emergency; to do all such acts for the purpose of protecting the firm from loss as would
be done by a person of ordinary prudence, in his own case, acting under similar
circumstances, and such acts bind the firm.

TYPES OF PARTNERS
1) Actual or ostensible or active partner:
A person who becomes a partner by an agreement and is actively engaged in the
conduct of business of partnership is known as actual partner.
2) Sleeping or dormant or sleeping partner:
A sleeping partner is one who does not take part actively in the conduct of the business
of the firm .He like other partner invest capital in the firm ,share profits .

3) Nominal partner:
A partner who lends his name to the partnership firm without having any real interest
in it is called nominal partner .He does not invest in the business of the firm nor does he
share in the profits & not take part in the business of firm but he along with other
partners is liable to outsiders for all the debts of the firm.
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4) Partner in profits only:

Sometimes partners agree that a partner shall get share of profits only and shall not be
liable to contribute towards losses such a partner is known as partner in profits only
.But viz a viz third party he liable for debts of firm.
5) Sub partner:
When a partner agrees to share his profit derived from partnership with third party that
third person is known as sub partner. He has no rights against the firm & not liable firm
the acts of the firm.
6) Partner by estoppel or holding out:
a) By Estoppel: Anyone who by words spoken or written or by conduct represent
himself, or knowingly permits himself to be represented, to be a partner in a firm, is
liable as a partner in that firm to anyone who has on the faith of any such representation
given credit to the firm
Some times a person who is not a partner in a firm may under certain circumstance be
liable for debts as he is a partner in a firm such a partner is called partner by estoppel.

b) By Holding out: It may be noted where a retiring partner does not give a public
notice of his retirement and allowed to firm to continue using his name as a partner in
letterheads, bills,etc he will be personally liable on the grounds of holding out to third
partners who give credit to the firm on the faith that he is still a partner.

MINOR PARTNER
(1) A person who is a minor according to the law to which he is subject may not be a
partner in a firm, but, with the consent of all the partners for the time being, he may be
admitted to the benefits of partnership.
(3) Such minor's share is liable for the acts of the firm but the minor is not personally
liable for any such act.
The position of minor may be studied under following two heads:
1) Position before attaining majority
Rights:
(1) Such minor has a right to such share of the property and of the profits of the firm as
may be agreed upon.
(2) He may have access to and inspect and copy any of the accounts of the firm but not
books.
(3) Such minor may sue the partners for an account or payment of his share of the
property or profits of the firm but he can do so only if he wants to severing his
connection with the firm.
LIABILITES:
1) The liability of minor is confined only to the extent of his share in the profits in the
firm over & above this he is not personally liable nor his private estate is liable.
2) He can not be declared insolvent but if firm is declared insolvent his share in the
partnership vests in official receiver or assignee.

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2) Position on attaining majority

At any time within six months of his attaining majority, or of his obtaining knowledge
that he had been admitted to the benefits of partnership, whichever date is later, such
person may give public notice that he has elected to become or that he has elected not
to become a partner in the firm.
Provided that, if he fails to give such notice, he shall become a partner in the firm on
the expiry of the said six months.
Where any person has been admitted as a minor to the benefits of partnership in a firm,
the burden of proving the fact that such person had no knowledge of such admission
until a particular date after the expiry of six months of his attaining majority shall lie on
the person asserting that fact
Where such person becomes a partner –
(a) his rights and liabilities as a minor continue upto the date on which he becomes a
partner, but he also becomes personally liable to third parties for all acts of the firm
done since he was admitted to the benefits of partnership, and
(b) His share in the property and profits of the firm shall be the share to which he was
entitled as a minor.
Where such person elects not be to become a partner, -
(a) His rights and liabilities shall continue to be those of a minor under the section up to
the date on which he gives public notice;
(b) His share shall not be liable for any acts for the firm done after the date of the
notice; and
(c) He shall be entitled to sue the partners for his share of the property and profits.

RECONSTITUTION OF FIRM
INTRODUCTION OF A PARTNER
A person may be entered as partner in a firm according to the agreement between the
partners .No person shall be introduced as a partner into a firm without the consent of
all the existing partners.
A person who is introduced as a partner into a firm does not thereby become liable for
any act of the firm done before he became a partner. This is because old partners were
not the agents of incoming partners when such act was done But by mutual agreement
new partner may become liable for the past dealings of the firms. This does not
however give the creditors of the firm to proceed against the new partner for past debt.
RETIREMENT OF A PARTNER
A partner may retire –
(a) With the consent of all the other partners,
(b) In accordance with an express agreement by the partners, or
(c) Where the partnership is at will, by giving notice in writing to all the other partners
of his intention to retire.
Liability of a retired partner

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Notwithstanding the retirement of a partner from a firm, he and the partners continue to
be liable as partners to third parties for any act done by any of them which would have
been an act of the firm if done before the retirement, until public notice is given of the
retirement.
A retired partner remains liable for all his acts done before his retirement but as per
agreement between partners a retiring partner may be discharged from any liability to
any third party for acts of the firm done before his retirement by an agreement made by
him with such third party and the partners of the reconstituted firm, and such agreement
may be implied by a course of dealing between such third party and the reconstituted
firm after he had knowledge of the retirement.
RIGHTS OF RETIRED PARTNER
1) To carry on the competing business: A retired partner may carry on the competing
business with that of the firm and he may advertise business but subject to contract to
contrary ,he may not:
(a) Use the firm-name,
(b) Represent himself as carrying on the business of the firm, or
(c) Solicit the custom of persons who were dealing with the firm before he ceased to be
a partner.
2) To share subsequent profits: (Sec 37)
Where a partner has died or ceased to be a partner by retirement or expulsion, or any
other case the surviving partners may carry on the business with the property of the
firm without any final settlement of accounts between partners and firm .In such case
legal representative of deceased partner or the outgoing partner in the absence of
contrary, is entitled to:
a) Such share of profit as is proportionate to his share in the property of the firm,
OR
b) Interest @ 6% pa on the amount of his share in the property in the firm.

EXPULSION OF A PARTNER
A partner may be expelled from a partnership subject to following conditions:
1) A power to expulsion should be conferred by the contract between the partners.
2) The power should be conferred by majority of partners.
3) Power should be exercised in good faith.
Bare majority not enough. The test of good faith is;
1) The expulsion must be in the interest of partnership
2) The partner to be expelled is served with due notice
3) That he is given opportunity of being heard.

REGULAR EXPULSION: The expulsion subject to all the conditions mentioned

above is called regular expulsion.

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IRREGULAR EXPULSION: Where expulsion of partner takes place without the

satisfaction of all the condition above is called irregular expulsion, in that case the
expelled partner may claim either:
1) Re instatement as partner.
2) Sue for refund of his share capital & profits in the firm.
An irregular expulsion is ineffectual & inoperative .The expelled partner in such case
does not cease to be a partner.

INSOLVENCY OF A PARTNER
On insolvency of partner the firm is automatically dissolved but the partners may agree
differently that firm will not dissolve by insolvency of partner In such case on
insolvency of partner the firm will not get dissolved automatically.

(1) Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on

the date on which the order of adjudication is made, whether or not the firm is thereby
dissolved.
(2) Where under a contract between the partners the firm is not dissolved by the
adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not
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.

LIABILITY OF ESTATE OF DECEASED PARTNER

On death of partner the firm is automatically dissolved but the partners may agree
differently that firm will not dissolve by death of partner In such case on death of
partner the firm will not get dissolved automatically.
Where under a contract between the partners the firm is not dissolved by the death of a
partner, the estate of a deceased partner is not liable for any act of the firm done after
his death.

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM

(SECTION 38) A continuing guarantee given to a firm or to third party in respect of the
transaction of a firm is, in the absence of an agreement to the contrary, revoked as to
future transactions from the date of any change in the constitution of the firm.
Mere changes in the constitution of the firm operates to revoke the guarantee as to all
future transactions. Such change may occur by the death, or retirement of a partner, or
by introduction of a new partner.

DISSOLUTION OF FIRM
DISSOLUTION OF A FIRM
The dissolution of a partnership between all the partners of a firm is called the
"dissolution of the firm”. it means complete breakdown or extinction of relationship
between all the partners of firm. If this severance of partnership relations is between a

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few but not all the partners (& business is carried on) this amounts to dissolution of
partnership & not of the firm.
DISSOLUTION OF PARTNERSHIP
It involves only the change of relationships between partners. If there is partnership
between A B C and C retires partnership between A B C comes to end & partnership
between A & B comes in to being.
The new firm between A & B is called reconstituted firm. This retirement of C does not
dissolve the firm. It merely severs the partnership relation between the retiring partner
& reconstituted firm. it leaves the partnership among continuing partner unaffected and
the firm continues with change constitution .
Dissolution of a firm may be voluntary or without order of the court or it may take
place of by the order of court.

Basis Dissolution of Firm Dissolution of Partnership

Continuation of It involves discontinuation of business It does not affect continuation of
business in partnership. business. It involves only
reconstitution of the firm.
Winding up It involves winding up of the firm and It involves only reconstitution and
requires realization of assets and requires only revaluation of assets
settlement of liabilities and liabilities of the firm
Order of court A firm may be dissolved by the order of Dissolution of partnership is not
the court ordered by the court.
Scope It necessarily involves dissolution of It may or may not involve dissolution
partnership of firm.
Final closure of book It involves final closure of books of the It does not involve final closure of
firm the books.

DISSOLUTION OF FIRM

Dissolution of firm Dissolution by court

Without order of the court

1) By agreement
2) Compulsory dissolution
3) On the happening of certain contingencies
4) By notice

Dissolution of firm without order of the court

It may take place in one of the following ways:
1) Dissolution by agreement:
a) With the consent of all the partners
b) In accordance between them
The contract of dissolution may be express or implied.
2) Compulsory dissolution:
A firm is compulsorily dissolved –
a) By adjudication of all the partners or all the partners but one as insolvent the reason
for this is simple a partner on being adjudicated insolvent ceases to be a partner on the

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date on which order of adjudication is made. If therefore all or all the partners but one
as adjudicated insolvent the firm can no longer exist.
b) By the happening of of any event which makes it unlawful for the firm to be carried.

3) Dissolution on the happening of certain contingencies:

Subject to contract between the partners a firm is dissolved
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the
completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.

4) DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL (Section43)

(1) Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.
(2) The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the communication of the
notice.

Dissolution by the order of court

At the suit of a partner, the Court may dissolve a firm on any of the following grounds,
namely:-
(a)INSANITY: That a partner has become of unsound mind, in which case the suit
may be brought as well by the next friend of the partner who has become of unsound
mind as by any other partner;
(b) PERMANENT INCAPACITY: That a partner, other than the partner suing, has
become in any way permanently incapable of performing his duties as partner;
(c) MISCONDUCT: That a partner, other than the partner suing, is guilty of conduct
which is likely to affect prejudicially the carrying on of the business regard being had
to the nature of the business;
(d) PERSISTANT BREACH OF AGREEMENT: That a partner, other than the
partner suing, willfully or persistently commits breach of agreements relating to the
management of the affairs of the firm of the conduct of its business; or otherwise so
conducts himself in matters relating to the business that it is not reasonably practicable
for the other partners to carry on the business in partnership with him;
(e) TRANSFER OF INTREST :That a partner, other than the partner suing, has in
any way transferred the whole of his interest in the firm to a third party, or has allowed
it to be sold in the recovery of arrears of land revenue or of any dues recoverable as
arrears of land revenue due by the partner;
(f) BUSINESS WORKING AT LOSS: That the business of the firm cannot be carried
on save at a loss; or
(g) ANY OTHER GROUND: On any other ground which renders it just and
equitable that the firm should be dissolved.

RIGHTS AND LIABILITES ON DISSOLUTION

1) RIGHT OF PARTNERS TO HAVE BUSINESS WOUND UP AFTER
DISSOLUTION. On the dissolution of a firm every partner or his representative is
entitled, as against all the other partners or their representatives, to have the property of
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the firm applied in payment of the debts and liabilities of the firm, and to have the
surplus distributed among the partners or which representatives according to their
rights.
2) PAYMENT OF FIRM'S DEBTS AND OF SEPARATE DEBTS. Where there are
joint debts due from the firm, and also separate debts due from any partner, the
property of the firm shall be applied in the first instance in payment of the debts of the
firm, and, if there is any surplus, then the share of each partner shall be applied in
payment of his separate debts or paid to him. The separate property of any partner shall
he applied first in the payment of his separate debts, and the surplus (if any) in payment
of the debts of the firm.
3) PERSONAL PROFITS EARNED AFTER DISSOLUTION Where any partner
or his representative has bought the good will of the firm, he has right to use the firm-
name.
4) RETURN OF PREMIUM ON PREMATURE DISSOLUTION. Where a partner
has paid a premium on entering into partnership for a fixed term, and the firm is
dissolved before the expiration of that term otherwise than by the death of a partner, he
shall be entitled to repayment of the premium or of such part thereof as may be
reasonable, regard being had to the terms upon which he became a partner, and to the
length of time during which he was a partner, unless –
(a) The dissolution is mainly due to his own misconduct, or
(b) The dissolution is in pursuance of an agreement containing no provision for the
return of the premium or any part of it.
5) RIGHTS WHERE PARTNERSHIP CONTRACT IS RESCINDED FOR
FRAUD OR MISREPRESENTATION. Where a contract creating partnership is
rescinded on the ground of fraud or misrepresentation of any of the parties thereto, the
party entitled to rescind is, entitle –
(a) To a lien on, or right of retention of, the surplus of the assets of the firm remaining
after the debts of the firm have been paid, for any sum paid by him for the purchase of a
share in the firm and for any capital contributed by him;
(b) To subrogated as a creditor of the firm in respect of any payment made by him
towards the debts of the firm; and
(c) To be indemnified by the partner or partners guilty of fraud or misrepresentation
against all the debts of the firm.
6) RIGHT TO RESTRAIN FROM USE OF FIRM-NAME OR FIRM-
PROPERTY. After a firm is dissolved, every partner or his representative may, in the
absence of a contract between the partners to the contrary, restrain any other partner or
his representative from carrying on a similar business in the firm-name or from using
any of the property of the firm for his own benefit, until the affairs of the firm have
been completely wound up : Provided that where any partner or his representative has
brought the goodwill of the firm, nothing in this section shall affect his right to use the
firm-name.

LIABILITES OF A PARTNER ON DISSOLUTION

1) LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION

In order to absolve partners of the liability for any act done after dissolution of the firm
a public notice must be given of the dissolution .If this is not done the partner continue
to be liable as such to third parties for any act done by any of them after the dissolution

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.Further in such a case the act of a partner done after the dissolution is deemed to be an
act done before dissolution.

The following however are not liable for acts done after the dissolution of the firm and
no notice of dissolution need be given:
a) The estate of deceased partner
b) The insolvent partner
c) The sleeping or dormant partner who retires.

2) Continuing authority of partners for the purpose of winding up

After the dissolution of a firm the authority of each partner to bind the firm, and the
other mutual rights and obligations of the partners, continue notwithstanding the
dissolution, so far as may be necessary to wind up the affairs of the firm and to
complete transactions begun but unfinished at the time of the dissolution, but not
otherwise .

SETTELMENT OF ACCOUNTS
The mode of settlement of accounts between partners after dissolution of a firm is
determined by the partnership agreement.
1) Sale of goodwill: In settling the accounts after dissolution the goodwill shall be
included in the assets and it may be sold either separately or along with other property
of firm.
2) Sharing of deficiency: If the assets of the firm are insufficient to discharge the debts
and liabilities of the firm the partners shall bear the deficiency in the proportion in
which they were entitled to share profits. Thus losses including deficiency of capital
shall be paid –
1) First out of profits
2) Next out of capital
3) Lastly if necessary by partners individually in the proportions in which they were
entitled to share profits.
3) Application of assets: The assets of the firm including any sums contributed by the
partners to make up the deficiencies of capital shall be applied in the following manner
& order:
a) In paying the debts of the firm to the third parties.
b) In paying each partner ratably what is due to him from the firm form advances
distinguished from capital.
c) In paying to each partner ratably what is due to him on account of capital.
d) The residue if any shall be divided among the partners in the proportions in which
they are entitled to share profits.

RULE IN GARNER Vs MURRAY

If any partner become insolvent then the remaining solvent partners will bear his
deficiency in their capital sharing ratio.

PUBLIC NOTICE (Section72)

A public notice under this Act is given
1) On the retirement or expulsion of a partner from a registered firm
2) On the dissolution of a registered firm.

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3) On the election to become or not to become a partner in a registered firm by a person

attaining majority who was admitted as a minor to the benefits of partnership.

HOW PUBLIC NOTICE IS GIVEN

1) By notice to the Registrar of Firms under section 63 regarding reconstitution of the
firm.
2) By publication in the Official Gazette.
3) By Publication in at least one vernacular newspaper circulating in the district where
the firm to which it relates, has its place or principal place of business.

COSEQUENCES IF PUBLIC NOTICE IS NOT GIVEN:

1) On election of minor partner to became or not to became a partner: At any time
within six months of his attaining majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, such person may
give public notice that he has elected to become or that he has elected not to become a
partner in the firm, and such notice shall determine his position as regards the firm:
Provided that, if he fails to give such notice, he shall become a partner in the firm on
the expiry of the said six months.
2) On retirement of partner: If a retiring partner does not give public notice on
retirement from the firm he and all other partners shall continue to be liable as partner
to third parties for any act done by any of them which would have been an act of firm
as done before retirement.
3) On expulsion of a partner: In case of expulsion of partner from the firm a public
notice is not given the expelled partner and the other partner shall continue to be liable
to third parties dealing with the firm as in case of retired partner.
4) Dissolution of firm: If on the dissolution of a registered firm a public notice is not
given all partners shall continue to be liable as partner to third parties for any act done
by any of them which would have been an act of firm as done before dissolution.

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Question Bank:
Q1. X and Y buy certain bales of cotton which they agree to sell on their joint account
and to share the profits equally. In these circumstances, are X and Y partners in respect
of such cotton business?

Q2. : X and Y are partners in a partnership firm. X introduced A, a manager, as his

partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets
to the firm on credit. After expiry of credit period, Z did not get amount of T.V sets
sold to the partnership firm. Z filed a suit against X and A for the recovery of price. Is
A liable for the debts of firm , explain the provisions in this regard.?

Q3.: A partnership firm consisting of P, Q, R and S. S retires from the firm without
giving public notice and his name continues to be used on letterheads. Is S liable as a
partner to creditors who have lent on the faith of his being a partner.?

Q4. A, B, C & D established partnership business for refining sugar. A, who was
himself a wholesale grocer, was entrusted with the work of selection and purchase of
sugar. As a wholesale grocer, A was well aware of the variations in the sugar market
and had the suitable sense of propriety as regards purchases of sugar. He had already in
stock sugar purchased at a low price which he sold to the firm when it was in need of
some, without informing the partners that the sugar sold had belonged to him. Is A
liable to the firm for this profit.?

Q5. A, B, C and D started a business in partnership for importing salt from foreign
ports and selling it at Chittagong. A struck certain transactions in salt on his own
account, which were found to be of the same nature as the business carried on by the
partnership. Is A liable to account to the firm for profits of the business so made by
him. ?

Q6. X, a partner in a firm of solicitors, borrows money and executes a promissory note
in the name of firm without authority.Is firm liable on this promisory note?

Q7. A, a partner, borrows from B `Rs 1,000 in the name of the firm but in excess of his
authority, and utilizes the same in paying off the debts of the firm. Is firm liable on the
debt.?

Q8. P, Q, and R are partners in a business for purchase and sale of second hand goods.
R purchases a second hand car on behalf of the firm from S. In the course of dealings
with S, he comes to know that the car is a stolen one and it actually belongs to X. P and
Q are ignorant about it. Is whole firm liable or only S is liable to the real owner?

Q9. A, a partner who actively participates in the management of the business of the
firm, bought for his firm, certain goods, while he knew of a particular defect in the
goods. Is whole firm liable or only partner having knowledge of defect is liable.?

Q10. Certain persons were found to have been partners in a firm when the acts
constituting an infringement of a trademark by the firm took place, Now they are not
partners.Can they all be sued though they are not partners now.?

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Q11. One of the two partners in coal mine acted as a manager was guilty of personal
negligence in omitting to have the shaft of the mine properly fenced. As a result
thereof, an injury was caused to a workman.Will other partner be liable.?

Q12. : A, B, and C are partners of a place for car parking. P stands his car in the
parking place but A sold out the car to a stranger.will only A be liable or all partners be
liable to true owner.?

Q13. A,B,C are partners in a firm M/S ABC they took a building on rent, later on A
took retirement while B and C still are partners. Though the building was on rent for a
period of 5 years and still there are two years to go. The owner of the building now
saying. Mere retirement of a partner, who was the tenant of the premises in which the
partnership business was carried out, would not result in assignment of the tenancy
rights in favour of the remaining partners even though the retiring partner ceases to
have any right, title or interest in the business as such. Is the statement given by
building owner correct.?

Q14. A, B and C are partners in a Partnership firm. They were carrying their business
successfully for the past several years. Spouses of A and B fought in ladies club on
their personal issue and A’s wife was hurt badly. A got angry on the incident and he
convinced C to expel B from their partnership firm. B was expelled from partnership
without any notice from A and C. Considering the provisions of Indian Partnership Act,
1932 state whether they can expel a partner from the firm?

Q15. X was a partner in a firm. The firm ordered goods in X’s lifetime; but the delivery
of the goods was made after X’s death.Would the estate of X liable.?

Q16. A, B and C are partners in a manufacture of machinery. A is entitled to three-

eighths of the partnership property and profits. A becomes bankrupt whereas B and C
continue the business without paying out A’s share of the partnership assets or settling
accounts with his estate.How much amount A is entitled from profit after insolvency.?

Q17. A, B and C are partners. C retires after selling his share in the partnership firm. A
and B fail to pay the value of the share to C as agreed to. Is C is entitled to recover
anything.?

Q18. A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In
2016, A dies. In 2017, B and C sue X in the name and on behalf of A & Co., without
fresh registration.Is suit maintainable.?

Q19. A firm is carrying on the business of trading a particular chemical and a law is
passed which bans on the trading of such a particular chemical. The business of the
firm becomes unlawful.Can the firm still be run.?

Q20. If one of the partners keeps erroneous accounts and omits to enter receipts or if
there is continued quarrels between the partners or there is such a state of things that
destroys the mutual confidence of partners, what is the best mode for dissolution of the
firm.?

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Q21. X and Y who carried on business in partnership for several years, executed on
December 1, a deed dissolving the partnership from the date, but failed to give a public
notice of the dissolution. On December 20, X borrowed in the firm’s name a certain
sum of money from R, who was ignorant of the dissolution. In such a case, is Y also
would be liable for the amount.?

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