Special

Contracts
CONTRACT OF INDEMNITY
The term Indemnity literally means “Security against loss”. In a contract of
indemnity one party – i.e. the indemnifier promise to compensate the other party
i.e. the indemnified against the loss suffered by the other.

The English law definition of a contract of indemnity is – “it is a promise to save

a person harmless from the consequences of an act”. Thus it includes within its
ambit losses caused not merely by human agency but also those caused by
accident or fire or other natural calamities.

A Contract of indemnity is a direct engagement between two parties whereby one

promises to save another from harm. According to section 124 of the Indian
Contract Act a contract of indemnity means,” a contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person.”

The definition provided by the Indian Contract Act confines itself to the losses
occasioned due to the act of the promisor or due to the act of any other person.

This gave a very broad scope to the meaning of indemnity and it

included promise of indemnity due to loss caused by any cause whatsoever. Thus
any type of insurance except life insurance was a contract of indemnity however
Section 124 of Indian Contract Act 1872 makes the life insurance was a contract
of indemnity. However the Contract Act -1872 makes the scope narrower by
defining the contract of indemnity.

DEFINITION: - As provisions made in section 124 of the Indian Contract Act-

1872 says that, “whenever one party promises to save the other from loss caused
to him by the conduct of the promisor himself or by the conduct of other by the
conduct of the any other person is called a Contract of Indemnity.”

Illustration
A contracts to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of 200 rupees. This is a contract
of indemnity.
New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others,
A Contract of indemnity is a direct engagement between two parties thereby one
promises to save the other harm. It does not deal with those classes of cases where
the indemnity arises from loss caused by events or accidents which do not or may
not depend on the conduct of indemnifier or any other person.
Under a contract of indemnity, liability of the promisor arises from loss caused to
the promisee by the conduct of the promisor himself or by the conduct of other
person. [Punjab National Bank v Vikram Cotton Mills].

Every contract of insurance, other than life insurance, is a contract of indemnity.

The definition is restricted to cases where loss has been caused by some human
agency. [Gajanan Moreshwar v Moreshwar Madan]

Nature of Contract of Indemnity –

A contract of indemnity may be express or implied depending upon the

circumstances of the case, though Section 124 of the Indian Contract Act does not
seem to cover the case of implied indemnity.

A broker in possession of a government promissory note endorsed it to a bank with

forged endorsement. The bank acting in good faith applied for and got a renewed
promissory note from the Public Debt Office. Meanwhile the true owner sued the
Secretary of State for conversion who in turn sued the bank on an implied
indemnity. It was held that – it is general principle of law when an act is done by
one person at the request of another which act is not in itself manifestly tortious to
the knowledge of the person doing it, and such act turns to be injurious to the rights
of a third person, the person doing it is entitled to an indemnity from him who
requested that it should be done. [Secretary of State v Bank of India].

ESSENTIAL ELEMENTS:The following are the essentials of the Contract of

Indemnity:-

1. There must be a loss.

2. The loss must be caused either by he promisor or by any other person.

3. Indemnifier is liable only for the loss.

Thus it is clear that this contract is contingent in nature and is enforceable only
when the loss occurs.

Right of the indemnity holder – (Section 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is
entitled to the following rights –

1. Right to recover damages – he is entitled to recover all damages which he

might have been compelled to pay in any suit in respect of any matter covered by
the contract.

2. Right to recover costs – He is entitled to recover all costs incidental to the

institution and defending of the suit.

3. Right to recover sums paid under compromise – he is entitled to recover all

amounts which he had paid under the terms of the compromise of such suit.
However, the compensation must not be against the directions of the indemnifier.
It must be prudent and authorized by the indemnifier.

4. Right to sue for specific performance – he is entitled to sue for specific

performance if he has incurred absolute liability and the contract covers such
liability. The promisee in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor-

(1) Right of recover Damages: - All the damages that he is compelled to pay in a
suit in respect of any mater to which the promise of indemnity applies.

(2) Right of recover all Costs: - All the costs that he is compelled to pay in such
suit if in bringing or defending it he did not contravene the orders of the promisor
and has acted as it would have been prudent for him to act in the absence of the
contract of indemnity or if the promisor authorised him in bringing or defending
the suit.

(3) Right of recovery all sums :- All the sums which he may have paid under the
terms of a compromise in any such suite if the compromise was not contrary to the
orders of the promisor and was one which would have been prudent for the
promisee to make in the absence of the contract of indemnity.

In case of Mohit Kumar saha v. New India Assurance Co. It was held that the
indemnifier must pay the full amount of the value of the vehicle lost to theft as
given by the Surveyor. Any settlement at the lesser value is arbitrary and unfair
and violates art.14 of the constitution. all sums which he may have paid under the
terms of any compromise of any such suit, if the compromise was not

It is important to note here that the right to indemnity cannot be claimed of

dishonesty, lack of good faith and contravention of the promisor’s request.
However, the right cannot be negatived in case of oversight. [Yeung v HSBC]

Right of Indemnifier –

Section 125 of the Act only lays down the rights of the indemnified and is quite
silent of the rights of indemnifier as if the indemnifier has no rights but only
liability towards the indemnified.

In the logical state of things if we read Section 141 which deals with the rights of
surety, we can easily conclude that the indemnifier’s right would also be same as
that of surety.

Where one person has agreed to indemnify the other, he will, on making good the
indemnity, be entitled to succeed to all the ways and means by which the person
indemnified might have protected himself against or reimbursed himself for the
loss. [Simpson v Thomson]

Principle of Subrogation is applicable because it is an essential part of law of

indemnity and is based on equity and the Contract Act contains no provision in
contravention with [Maharaja Shri Jarvat Singhji v Secretary of State for India]

CONTRACT OF GUARANTEE

A “contract of guarantee ” is a contract to perform the promise, or discharge the

liability, of a third person in case of his default.

PARTIES TO CONTRACT OF GUARANTEE

There are three parties to a contract of Guarantee-Principle debtor, Creditor and

Surety.

Meaning of Principal Debtor [Section 126]

The person in respect of whose default the guarantee is given is called the
'Principal debtor'. Y is the principal debtor in the aforesaid example.

Meaning of Creditor [Section 126]

The person to whom the guarantee is given, is called the 'creditor'. Z is the creditor
in the aforesaid example.

Meaning of Surety [Section 126]

The person who gives the guarantee is called the 'Surety'. X is the surety in the
aforesaid example.

A guarantee may be either oral or written.

Consideration for guarantee [Section 127] : What constitutes consideration in a

case of guarantee is an important question and is laid down in Section 127 of the
Act. As per Section 127 of the Act, “anything done, or any promise made, for the
benefit of the principal debtor, may be a sufficient consideration to the surety for
giving the guarantee.”

Illustrations

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises to
guarantee the payment in consideration of as promise to deliver the goods. This is
a sufficient consideration for Cs promise.

(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B

for the debt for a year, and promises that, if he does so, C will pay for them in
default of payment by B. A agrees to forbear as requested. This is a sufficient
consideration for Cs promise.

(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to

pay for them in default of B. The agreement is void.

Example 1 : When A requests B to lend `10,000 to C and guarantees that C will

repay the amount within the agreed time and that on C falling to do so, he will
himself pay to B, there is a contract of guarantee. Here, B is the creditor, C the
principal debtor and A the surety.

Guarantee is a promise to pay a debt owed by a third person in case the latter does
not pay. Any guarantee given may be oral or written. From the above definition, it
is clear that in a contract of guarantee there are, in effect three contracts

(i) A principal contract between the principal debtor and the creditor
(ii) A secondary contract between the creditor ad the surety.
 (iii) A implied contract between the surety and the principal debtor whereby
principal debtor is under an obligation to indemnify the surety; if the
surety is made to pay or perform. The right of surety is not affected by
the fact that the creditor has refused to sue the principal debtor or that
he has not demanded the sum due from him.

ESSENTIAL FEATURES OF A CONTRACT OF GUARANTEE

1. All the essentials of a valid contract.

(i) The principal debtor need not be competent to contract. In case the principal
debtor is not competent to contract, the surety would be regarded as the principal
debtor and would be personally liable to pay.
(ii) Surety need not be benefited. According to Section 127, "Anything done, or
any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee."
(iii) A guarantee need not be in writing. According to Section 126, a guarantee
may be either oral or written.
2. Guarantee not to be obtained by misrepresentation [section 142]
Any guarantee which has been obtained by means of misrepresentation made by
the creditor, or with his knowledge and assent, concerning a material part of the
transaction, is invalid.

3. Guarantee not to be obtained by concealment [section 143]

Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.

4. Tripartite agreement
A contract of guarantee is a tripartite agreement between the principal debtor,
creditor and surety. There are three contracts as under:
(i) Contract between creditor and the principal debtor out of which the
guaranteed debt arises.
(ii) Contract between surety and the principal debtor by which the principal
debtor undertakes to indemnity the surety if surety is required to pay.
(iii) Contract between surety and the creditor by which the surety guarantees
to pay the principal debtor's debt if the principal debtor fails to pay.

5. There must be consent of all the three parties.

Example:- X sells and delivers goods to Y. X afterwards requests Z to pay in
default of Y. Z agrees to do so. Here, Z cannot become surety without the consent
of Y.

6. Existence of a liability
There must be an existing liability or a promise whose performance is guaranteed.
Such liability or promise must be enforceable by law. Hence, guarantee can be
given only for liability or promise which is enforceable by law. But there is an
exception to this rule. The exception is a guarantee given for minor's debt. Though
minor's debt is not enforceable by law, yet the guarantee given for minor's debt is
valid.

Nature of surety’s liability [Section 128]

The liability of the surety is co-extensive with that of the principal debtor unless it
is otherwise provided by the contract.

(i) The term “co-extensive with that of principal debtor” means that the surety
is liable for what the principal debtor is liable.
(ii) The liability of a surety arises only on default by the principal debtor. But
as soon as the principal debtor defaults, the liability of the surety co-extensive with
the liability of the principal debtor, in the sense that the surety will be liable for
all those sums for which the principal debtor is liable.
(iii) Where a debtor cannot be held liable on account of any defect in the
document, the liability of the surety also ceases.
(iv) Surety’s liability continues even if the principal debtor has not been sued or
is omitted from being sued. In other words, a creditor may choose to proceed
against a surety first, unless there is an agreement to the contrary.
v) Surety’s liability may be conditional. The surety may impose certain conditions
in the contract of guarantee. Until those conditions are met, the surety shall not
be liable.

Example : A guarantees to B the payment of a bill of exchange by C, the acceptor.

The bill is dishonoured by C. A is liable not only for the amount of the bill but also
for any interest and charges which may have become due on it.

Important cases on Sureties liability

In Bank of Bihar Ltd. v. Damodar Prasad, The Supreme Court held that the
liability of the surety is immediate and cannot be defended until the creditor has
exhausted all his remedies against the principal debtor.
In Maharashtra Electricity Board Bombay v. Official Liquidator and Another,
under a letter of guarantee the bank undertook to pay any amount not exceeding
Rs.50000/- to the Electricity Board. It was held that the Bank is bound to pay the
amount due under the letter of guarantee given by it to the Board.
In Kellappan Nambiar v. Kanhi Raman In this case that if the principal debtor
happens to be a minor and the agreement made by him is void, the surety too
cannot be made liable in respect of the same because the liability of the surety is
co-extensive with that of principal debtor. It has been held that the guarantee of
the loan or an overdraft to an infant is void because the loan to the infant itself is
void.
In State Bank of India v. V.N. Anantha Krishnam that in view of the provision
of section 128 of Act the Presiding officer was not correct in giving directions to
the Bank to proceed against the property because cash credit facility and the
liability of surety was co-extensive with that of principal debtor. In Industrial
Financial Corporation of India v. Kannur Spining & Weaving Mills Ltd. It
was held that the liability of surety does not cease merely because of discharge of
the principal debtor from liability.
In a case of Harigobind Aggarwal v. State Bank Of India It was held that the
principal debtor liability is reduced e.g. after the creditor has recovered a part of
the sum due from him out of his property the liability of the surety is also reduced
accordingly.

KINDS OF GUARANTEE
Guarantee may be classified under the following two categories:
I. Specific guarantee
II. Continuing guarantee

I. SPECIFIC GUARANTEE
A guarantee which extends to a single debt or specific transaction is called a
specific guarantee. The liability of the surety comes to an end when the guaranteed
debt is duly discharged or the promise is duly performed.

Example:- X guarantees payment to Y of the price of the five bags of flour to be

delivered by Y to Z and to be paid for in a month. Y delivers five bags to Z, Z
pays for them. This is a contract of specific guarantee because X intended to
guarantee only for the payment of price of the first five bags of flour to be delivered
at one time. [Kay v. Groves)
Continuing Guarantee
Meaning of Continuing Guarantee [Section 129]:
A Guarantee which extends to a series of transactions is called a 'continuing
guarantee'. A surety's liability continues until the revocation of the guarantee.

Example 1: On A’s recommendation, C employed B for the collection of rent from

his tenants.
A promised to make good any default made by B This is a contract of continuing
guarantee.

Example 2:- A guarantees payment to B, a tea-dealer to the extent of Rs 100, for

any tea he may supply to C from time to time. B supplies C with tea to the above
value of Rs 100, and C pays B for it. Afterwards, B supplies C with tea to the value
of Rs 200. C fails to pay. The guarantee given by A was a continuing guarantee,
and he is accordingly liable to B to the extent of Rs 100.

NOTE: A continuing guarantee may be given for a part of the entire debt or for the
entire debt subject to a limit.

REVOCATION OF CONTINUING GUARANTEE

1. By notice of revocation [section 130]

A continuing guarantee may at any time be revoked by the surety as to the future
transactions by notice to the creditor. However, the surety remains liable for the
past transactions which have already
taken place.

Example1: X gives guarantee to the extent of Rs 60,000 for the loans given from
time to time by Y to Z. Y gave a loan of Rs 20,000 to Z. Afterwards, X gives notice
of revocation. X is discharged from all liability to Y for any loan granted after the
revocation of guarantee but he is liable to Y for Rs. 20,000 on default of Z.
Example 2 : A guarantees to B, to the extent of 100,000 rupees, that C shall pay
all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A
gives notice of revocation. C dishonours the bill at maturity. A is liable upon his
guarantee
Lloyd’s v/s Harper It was held that employment of a servant is one transaction.
The guarantee for a servant is thus not a continuing guarantee and cannot be
revoked as long as the servant is the same employment. Wingfield v/s De St Cron
it was held that a person who guaranteed the rent payment for his servant but
revoked it after the servant left his employment was not liable for the rents after
revocation.
2. By death of surety [section 131]
In the absence of any contract to the contrary, the death of surety operates as a
revocation of a continuing guarantee as to the future transactions taking place after
the death of surety. However, the surety's estate remains liable for the past
transactions which have already taken place before the death of surety.
In the case of Durga Priya v/s Durga Pada It was held by the court that in each
case the contract of guarantee between the parties must be looked into to determine
whether the contract has been revoked due to the death of the surety or not. It there
is a provision that says that death does not cause the revocation then the contract
of guarantee must be held to continue even after the death of the surety.
3. By modes of discharging the surety
A continuing guarantee is also revoked in the same manner in which the surety is
discharged such as:
(i) Novation [Section 62]
(ii) Variance in terms of contract [Section 133]
(iii) Release or discharge of principal debtor [Section 134]
(iv) When the creditors enter into an arrangement with the principal debtor
[Section 135]
(v) Creditor's act or omission impairing surety's eventual remedy [Section
139]
(vi) Loss of security [Section 141]
Rights of a Surety

Rights of a surety may be classified as under :

I Rights against the creditor,
II Rights against the principal debtor,
III Rights against co-sureties
I. Rights against the principal debtor
(a) Right to Subrogation [Section 140]
On payment of the guaranteed debt or performance of the guaranteed duty; the
surety acquires all the rights which the creditor had against the principal debtor.
Thus, the surety steps into the shoes of creditor.
(b) Right to Indemnity [Section 145]
In every contract of guarantee there is an implied promise by the principal debtor
to indemnify the surety; and the surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee, but not those
sums which he had paid wrongfully.

Example I:- B is indebted to C, and A is surety for the debt. C demands payment
from A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so, but he is compelled to pay the amount of the
debt with costs. He can recover from B the amount paid by him for costs, as well
as the principal debt.

Example II:- C lends B a sum of money, and A, at the request of B, accepts a bill
of exchange drawn by B upon A to secure the amount. C, the holder of the bill,
demands payment of it from A, and on A's refusal to pay sues him upon the bill.
A, not having reasonable grounds for so doing, defends the suit, and has to pay the
amount of the bill and costs. He can recover from B the amount of the bill, but not
the sum paid for costs, as there was no real .ground for defending the action.

Example III:- A guarantees to C, to the extent of Rs 2,000, payment for rice to be

supplied by C to B. C supplies to B rice of less amount than Rs 2,000 but obtains
from A payment of the sum of Rs 2,000 in respect of the rice supplied. A cannot
recover from B more than the price of the rice actually supplied.

II. RIGHTS OF AGAINST CREDITOR

(a) Right to Securities [Section 141]

A surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of suretyship is entered into,
whether the surety knows of the existence of such security or not; and if the
creditor loses, or, without the consent of the surety, parts, with such security, the
surety is discharged to the extent of the value of the security.
Example I:- C advances to 8 his tenant, Rs 2,000 on the guarantee of A. C has also
a further security for Rs 2,000 by a mortgage of Bs furniture. C cancels the
mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged
from liability to the amount of the value of the furniture.

Example II:- C, a creditor, whose advances to 8 is secured by a decree, receives

also a guarantee for that advance from A. C, afterwards, takes 8's goods in
execution under the decree, and then, without the knowledge of A, withdraws the
execution. A is discharged.

Example III A, as surety for 8, makes a bond jointly with 8 to C, to secure a loan
from C
to 8. Afterwards, C obtains from 8 a further security for the same debt.
Subsequently, C gives up the further security. A is not discharged.

(b) Right to Claim Set Off

The surety has the right to claim set off or counterclaim, if any, which the principal
debtor had against the creditors in case the creditors sues him for payment of
liability of principal debtor.
III. Rights against co-suriteis
Meaning of Co-sureties:- When the same debt or duty is guaranteed by two
or more persons, such persons are called as 'co-sureties'
(a) Co-sureties liable to contribute equally (Section 146) : Equality of burden
is the basis of Co-suretyship. This is contained in section 146 which states that
“when two or more persons are co-sureties for the same debt, or duty, either jointly,
or severally and whether under the same or different contracts and whether with
or without the knowledge of each other, the co-sureties in the absence of any
contract to the contrary, are liable, as between themselves, to pay each an equal
share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”.
Example 1 : A, B and C are sureties to D for the sum of 3,00,000 rupees lent to
E. E makes default in payment. A, B and C are liable, as between themselves, to
pay 1,00,000 rupees each.
Example 2 : A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E,
and there is a contract between A, B and C that A is to be responsible to the extent
of one-quarter, B to the extent of one-quarter, and C to the extent of one-
half. E makes default in payment. As between the sureties, A is liable to pay
25,000 rupees, B 25,000 rupees, and C 50,000 rupees.
(b) Liability of co-sureties bound in different sums (Section 147) : The
principal of equal contribution is, however, subject to the maximum limit fixed
by a surety to his liability. Co-sureties who are bound in different sums are
liable to pay equally as far as the limits of their respective obligations permit.
Example 1 : A, B and C, as sureties for D, enter into three several bonds, each
in a different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of
2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly
accounting to E. D makes default to the extent of 3,00,000 rupees. A, B and C
are each liable to pay 1,00,000 rupees.
Example 2 : A, B and C, as sureties for D, enter into three several bonds, each in
a different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of
2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting
to E. D makes default to the extent of 4,00,000 rupees; A is liable to pay 1,00,000
rupees, and B and C 1,50,000 rupees each.
Example 3 : A, B and C, as sureties for D, enter into three several bonds, each in
a different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of
2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting
to E. D makes default to the extent of 7,00,000 rupees. A, B and C have to pay
each the full penalty of his bond.
.
Right to Claim Contribution:- If a co-surety pays more than his proportionate share
of liability, he has a right to claim contribution from the other co-surety or co-
sureties.
Right to Share the Security:- If a co-surety obtains any security of principal debtor,
the other co-surety (or co-sureties) has (or have) a right to share such security.
Effect of Release of One Co-surety [Section 138]
Where there are co-sureties, a release by the creditor of one of them does not
discharge the others; neither does it free the surety so released from his
responsibility to the other sureties. However, under English law the release of one
co-surety shall release all the other co-sureties since the liability of co- sureties
under English law is only joint and not joint and several.
DISCHARGE OF SURETY

A surety is said to be discharged when his Liability as surety comes to an end.

 BY REVOCATION OF CONTRACT OF GUARANTEE

 BY NOTICE [SECTION 130]

A specific guarantee may be revoked by a surety by notice to the creditor if the
liability of the surety has not yet accrued. A continuing.guarantee may at any time
be revoked by the surety as to future transactions by notice to the creditor.
However, the surety remains liable for the past transactions which have already
taken place.
 BY THE DEATH OF SURETY [SECTION 131]
In the absence of any contract to the contrary, the death of a surety operates as a
revocation of a continuing guarantee as to future transactions taking place after the
death of surety. However, the deceased surety's estate remains liable for the past
transactions which have already taken place before the death of the surety but will
not be liable for the transactions taking place after the death of surety even if the
creditor has no notice of surety's death

 BY NOVATION [SECTION 62]

A contract of guarantee is said to be discharged by novation when a fresh contract
is entered into either between the same parties or between other parties, the
consideration being the mutual discharge of the old contract. The original contract
of guarantee comes to an end and the surety under original contract is discharged.

 BY CONDUCT OF CREDITOR

By Variance In Terms Of Contract [Section 133]

Any variance, made without the surety's consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.

Example:- C contracts to lend A Rs 5,000 on the first March. A guarantees

repayment. C pays Rs 5,000 to A on the first January. A is discharged from his
liability as the contract has been varied in as much as C might sue A for the money
before the first of March.
But variation which is not substantial or material or which is beneficial to the
surety will not discharge him of his liability. In M.S. Anirudhan v. Thomeo's
Bank, the surety guaranteed overdraft provided by the bank to the prinCipal-
debtor only upto Rs 25,000. Subsequently since the bank was willing to provide
overdraft only upto Rs 20,000, the principal debtor reduced the amount in the
guarantee form to Rs 2,000. On default by the principal debtor the court held the
surety liable as the alteration was beneficial to him and it was not of a substantial
nature.

 BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR [SECTION

134]

The surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by any act or omissions of the
creditor, the legal consequence of which is the discharge of the principal debtor. .

Example I A contracts with B for a fixed price to build a house for A within a
stipulated time, B supplying the necessary timber. C guarantees A's performance
of the contract. B omits to supply the. timber. C is discharged from his suretyship.

Example II A contracts with B to grow a crop of wheat on A's land and to deliver
it to B at a fixed rate, and C guarantees A's performance of this contract. B diverts
a stream of water which is necessary for irrigation of A's land, and thereby prevents
him from raising the wheat. C is no longer liable for his guarantee.
 BY ARRANGEMENT [SECTION 135]
A contract between the creditor and principal debtor, by which the creditor makes
a composition with, or promises to give time to, or not to sue the principal debtor,
discharges the surety, unless the surety assents to such contract.
CASES WHERE SURETY IS DISCHARGED
(i) Where a contract to give time to the principal debtor is made by the creditor
with a third person, and not with the principal debtor, the surety is not discharged.
Example:- C, the holder of an overdue bill of exchange drawn by A as surety for
B, and accepted by a, contracts with M to give more time to A. A is not discharged.

(ii) Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him, does not, in the absence of any provision in
the guarantee to the contrary, discharge the surety.

Example:- B owes to C a debt guaranteed by A. The debt becomes payable. C does

not sue B for a year after the debt has become payable. A is not discharged from
his suretyship.

(iii) Where there are co-sureties, the release by the creditor of one of them does
not discharge the other nor does it free the surety so released from his
responsibility to the other sureties. [Section 138]

(d) By Creditor's Act or Omission Impairing Snrety's Eventual Remedy

[Section139]
If a creditor does any act which is inconsistent with the rights of the surety, or
omits to do an act which is his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged.

Example I:- B contracts to build a ship for C for a given sum, to be paid by
installments as the work reaches certain stage. A becomes surety to C for B's due
performance of the contract. C, without the knowledge' of A, pre•pays to B the last
two instalments. A is discharged by this prepayment.

Example II:- C lends money to B on the security of a joint and several promissory
note, made in Cs favour by B, and by A as surety for B, together with a bill of sale
of Bs furniture, which gives power to C to sell the furniture, and apply the proceeds
in discharge of the note. Subsequently, C sells the furniture, but, owing to his
misconduct and willful negligence, only a small price is realized. A is discharged
from liability on the note.
(e) Loss of Security [Section 141]
If the creditor loses, or without the consent of the surety, parts with security given
to him, the surety is discharged from liability to the extent of the value of security.

Example:- A gave a loan to B on the guarantee of C as well as on the mortgage of

Bs furniture. Afterwards, A cancels the mortgage. B becomes insolvent and A
sues C on this guarantee. C is discharged from liability to the value of furniture.

 BY INVALIDATION OF CONTRACT
(a) Guarantee Obtained by Misrepresentation [Section 142]
Any guarantee which has been obtained by means of misrepresentation made by a
creditor or with his knowledge and assent, concerning a material part of the
transaction, is invalid.

(b) Guarantee Obtained by Concealment [Section 143]

Any guarantee which a creditor has obtained by means of keeping silence to
material circumstances is invalid
Example:- X employs Y as a clerk to collect money for him. Y fails to account for
some of his receipts and X, in consequence calls upon Z to furnish security for his
duly accounting. Z gives guarantee for Ys duly account. X does not inform Z about
Ys previous conduct. Y, afterwards, makes default. 'z is not liable because the
guarantee was obtained by concealment of facts.
(c) Failure of Co-surety to Join a Surety [Section 144]
Where a person gives a guarantee upon a contract that a creditor shall not act upon
it until another person has joined in it as co-surety

DIFFERENCE BETWEEN INDEMNITY & GUARANTEE

INDEMNITY GUARANTEE
In indemnity there are two, one who There are three parties, Principal
is indemnified and the other debtor, surety and the Creditor.
indemnifier. There are three contracts between
It consists of only one contract under surety, principal debtor and creditor.
which indemnifier promises to pay in
the event of certain loss. The object of contract of guarantee
The contract of indemnity is made to is the security of the creditor.
protect the promise against some In guarantee the liability of surety is
likely loss. only a secondary, when principal debtor
The liability of the indemnifier in a default.
contract of indemnity is a primary one. The liability arises only on the non-
The liability arises only on the performance of an existing promise or
happening of a contingency. non-payment of an existing debt.
The indemnifier need not act at the The surety acts at the request of the
request of indemnity-holder. principal debtor.
The indemnifier cannot sue a third A surety, on discharging the debt of
party in his own name because of principal debtor, can sue 'the principal
absence of privity of contract between debtor in his own
him and a third party. He can sue the
third party in his own name if there in an
assignment in his favour
BAILMENT

Sections -148 to 171

148. “Bailment”, “bailor” and “bailee” defined.

149. Delivery to bailee how made.
150. Bailor's duty to disclose faults in goods bailed.
151. Care to be taken by bailee.
152. Bailee when not liable for loss, etc., of thing bailed.
153. Termination of bailment by bailee’s act inconsistent with conditions.
154. Liability of bailee making unauthorized use of goods bailed.
155. Effect of mixture, with bailor’s consent, of his goods with bailee’s.
156. Effect of mixture, without bailor’s consent, when the good can be separated.
157. Effect of mixture, without bailor’s consent, when the goods cannot be separated.
158. Repayment, by bailor, of necessary expenses.
159. Restoration of goods lent gratuitously.
160. Return of goods bailed, on expiration of time or accomplishment of purpose.
161. Bailee’s responsibility when goods are not duly returned.
162. Termination of gratuitous bailment by death.
163. Bailor entitled to increase or profit from goods bailed.
164. Bailor’s responsibility to bailee.
165. Bailment by several joint owners.
166. Bailee not responsible on re-delivery to bailor without title.
167. Right of third person claiming goods bailed.
168. Right of finder of goods.
May sue for specific reward offered.
169. When finder of thing commonly on sale may sell it.
170. Bailee’s particular lien.
171. General lien of bankers, factors, wharfingers, attorneys and policy-brokers.

BAILMENT
Chapter IX (Section 148 – 181) of the Indian Contract Act, 1872 deals with the
general rules relating to bailment. The Chapter is not exhaustive on the topic of
bailment – there are various other Acts which deal with other types of bailment
like the Carriers Act, 1865, the Railways Act, 1890, the Carriage of Goods by
Sea Act, 1925.

Bailment and Pledge are examples of specific contracts. Indian Contract Act 1872
First of all not a comprehensive Act, dealing with all types of specific contracts.
There are various other Acts which deal with specific contracts.
Bailment and Pledge are two special contracts that are often confused. Every
pledge is a bailment but every bailment is not pledge. Bailment means a delivery
of goods from one person to another for a special purpose. Whereas Pledge means
delivery of goods as security for the payment of debt or performance of a promise.
Therefore, Bailment & Pledge are two different contracts. Pledge is a special kind
of bailment.

A bailment is a special contract defined under section 148 of the Indian Contract
Act, 1872. It is derived from a French word i.e. “bailer” which means “to deliver”.
The etymological meaning of bailment is “handing over”or “change of possession
of goods”. By bailment, we mean delivery of goods from one person to another
for a special purpose on the contract that they shall reimburse the goods on the
fulfilment of the purpose or dispose of them as per the direction of the bailor. The
person who delivers the goods is known as bailor. And the person to whom the
goods are given is known as Bailee. And the property bailed is known as Bailed
Property.

Definition - Contract of Bailment (Sec. 148)

A ‘bailment’ is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.

The person delivering the goods is called the "bailor". The person to whom they
are delivered is called the "bailee".

For example, you deliver some gold to a jeweller B to make bangles for your
sister. In this case you are bailor and B is bailee and by delivering gold to B, a
relationship of bailment is created between you and the jeweller.

Example: A man drops off his clothes for dry cleaning. He is the bailor and the
purpose of bailment is to have the particular set of clothes cleaned. The dry cleaner
is the bailee – he is the temporary custodian of the clothes and is responsible for
keeping them safe and to return them to the bailor once they have been cleaned.

Section 148 states that if a person already in possession of the goods of another
person contracts to holds the goods as a bailee, he becomes the bailee even though
the goods may not have been delivered to him by way of bailment in the first place.
For example, a seller of goods becomes a bailee if the goods
continue to be in his possession after sale is complete. Here the original possession
of goods was with the seller as the owner of the said goods and after the sale, his
possession is converted into a contract of bailment.

Example: A has a motorcycle, he sells to B who leaves the motorcycle in the

possession of A while he is out of town. Here, A becomes the bailee even though
he was the owner originally.

Halsbury defines Bailment as ‘delivery of personal chattels in trust on a contract,

express or implied, that the trust shall be duly executed and chattels redelivered in
either their original or altered form, as soon as the time of use, or condition on
which they had been bailed has elapsed or been performed respectively’.

Justice Blackstone defines Bailment as ‘a delivery of goods in trust, upon

contract, either expressed or implied, that the trust shall be faithfully executed on
the part of the bailee’.

Bailment can also be described as ‘the delivery of goods to another person for a
particular use’.

Only ‘goods’ can be bailed and thus, only movable goods can be the subject matter
of bailment. Current money or legal tender cannot be bailed. Deposition of money
in a bank is not bailment as money is not ‘goods’ and the same money is not
returned to the client. But the coins and notes that are no longer legal tender and
are more or less just objects of curiosity, then they can be bailed.

Mere custody of goods is not the same as delivery of possession. A guest who uses
the goods of the host during a party is not a bailee. Similarly, it was held in
Reaves vs. Capper that a servant in custody of certain goods by the nature of his
job is not a bailee. Similarly, a servant holding his master’s umbrella is not a bailee
but is a custodian.

Similarly, hiring and storing goods in a bank locker by itself is not bailment
thought there is delivery of goods to the bank premises. The goods are in no way
entrusted to the bank. A bank cannot be presumed to know what goods are stored
in any given locker at all the times. If a bank is given actual and exclusive
possession of the property inside a locker by the person who hired the locker, only
then can bailment under Section 148 can be presumed.

In Atul Mehra vs. Bank of Maharashtra [AIR 2003 P&H 11], it was held that
mere hiring of a bank’s locker and storing things in it would not constitute a
bailment. But the position changes completely if the locker in the safe deposit vault
of the bank can be operated even without the key of the customer.

Example: A hired a locker in a bank and kept some of his valuables in it. He was
given one key to open the locker. But the bank manager of the particular branch
had fraudulently filed the levers of the locks of the lockers. Thus, the lockers could
be opened even without the key of the customers. A’s valuables went missing. A’s
control over the valuables in that locker had gone because the locker could be
operated even without A’s key. The bank was liable for the loss of A’s belongings
from the locker as it became a bailee. This example is similar to the case of
National Bank of Lahore vs. Sohan Lal [AIR 1962 Punj. 534]
Thus, it is clear that the nature of possession is very important to determine
whether a delivery is for bailment or not. If the owner continues to have control
over the goods, there can be no bailment.

To create a bailment, the bailee must intend to possess and in some way
physically possess or control the bailed goods or property. In a situation where a
person keeps the goods in possession of another person but in fact, continues to
have control over such goods, there is no delivery for the purpose of bailment.

The delivery of possession does not mean that the bailee now represents the bailor
with respected to the bailed goods. The bailee only has certain power over the
property of the bailor with his permission. The bailee has no power to make
contracts on behalf of the bailor or make the bailor liable for his own acts with the
goods bailed.

Example: If a person delivers his damaged car to a garage for repair under his
insurance policy, the insurance company becomes a bailee and the garage a sub-
bailee. If the car is stolen from the garage or destroyed by fire in the garage, both
– the insurance company and the garage will be liable to the owner of the car, the
bailor.

Modes of Delivery (Sec.149)

1- Actual delivery

Transfer of physical possession of goods from one person to another.Here, the

bailor hands over the physical possession of the goods to the bailee.
Example: A’s watch is broken. When he leaves his watch at the showroom for
repair, he has given actual delivery of possession of goods to the showroom.

2- Symbolic delivery

Physical possession of goods is not actually transferred. A person does some act
resulting in transfer of possession to any other person.

Examples: Delivery of keys of a car to a friend, Delivery of a railway receipt.

3- Constructive delivery

If –A person is already in possession of goods of owner. Such person contracts to

hold the goods as a bailee for a third person. Then –Such person becomes the
bailee, and the third person becomes the bailor.

Constructive delivery is an action that the law treats as the equivalent of actual
delivery. It can be difficult to deliver intangible

In constructive delivery, the physical possession of the goods may not be handed
over. The possession of the goods may remain with the bailor with the consent or
authorization of the bailee. In constructive delivery, an action on part of the bailor
merely puts the bailee in position of power with respect to the bailed goods. The
bailor gives the bailee the means of access to taking custody of it, without its
actual delivery.

Example: A has rare coins in a locked safe-deposit box. Delivery of a safe deposit
box is not possible. When he hands over the keys of the box to B, it is taken as
constructive delivery for purpose of bailment.

Section 149 specifically deals with constructive delivery of goods. It states that
anything done which has the effect of putting the goods in the possession of the
intended bailee or any other person authorized to hold them on his behalf is to be
treated as constructive delivery of the goods.

Constructive delivery is a legal fiction – thus, a legal delivery is presumed even

where the delivery of the actual goods has not taken place. Even the delivery of a
railway receipt is taken as the equivalent of delivery of the goods.

In Bank of Chittor vs. Narsimbulu [AIR 1966 AP 163], a person pledged cinema
projector with the bank but the bank allowed him to keep the projector so as to
keep the cinema hall functional. It was held that there was constructive delivery
because action on part of the bailor had changed the legal character of
the possession of the projector. Even though the actual and physical possession
was with the person, the legal possession was with the bank, the bailee.

Essentials of a Valid Contract of Bailment (Sec.148)

Contract-There must be a contract. The contract may be expressed or implied.This
contract between the parties for the delivery of goods.The goods shall be delivered
for a special purpose only.

Goods-Bailment can be made of goods only.Bailment can only be done for

movable goods and not for immovable goods or money,

Delivery-There must be delivery of goods by one person to another person.

Purpose of delivery

The goods must be delivered for some purpose.

The purpose may be expressed or implied.

There shall be a transfer of possession of goods, The delivery of goods must be

conditional. The condition shall be that the goods shall be –returned (either in
original form or in any altered from); or disposed of according to the directions of
the bailor, when the purpose is accomplished.

Ownership is not transferred to Bailee, therefore Bailor remains the owner,

Bailee is duty bound to deliver the same goods back and not any other goods.

Return or disposal of goods

Exception: The money deposited in the bank shall not account to bailment as the
money returned by the bank would not be the same identical notes. And it is one
of the essentials of the bailment that same goods are to be delivered back.

(1) Delivery of possession of goods: Delivery of goods from one person to another
person for some purpose is an essential element of bailment. According to Section
149 of the Indian Contract Act, 1872 the delivery to the bailee may be made by
doing anything which has the effect of putting the goods in the possession of the
intended bailee or of any person authorised to hold them on his behalf. It is
necessary that the goods should be delivered to the bailee. It is
the essence of the contract of bailment. It follows that bailment can be of movable
goods only. It is further necessary that the possession of the goods should be
voluntarily transferred and is in accordance with the contract. For example, A, a
thief enters a house and by showing the revolver, orders the owner of the house
to surrender all ornaments in the house to him. The owner of the house surrenders
the ornaments. In this case although, the possession of goods has been transferred,
but it does not create bailment because the delivery of goods is not voluntary.

Delivery of possession may be actual or constructive. Actual delivery means actual

physical transfer of goods from one person to another. For example, when a
person gives his scooter for repair to workshop, it is actual delivery. When physical
possession of goods is not actually given but some such act is done which has the
effect of putting the goods in the possession of bailee, or putting the goods in the
possession of any other person authorised by the bailee to hold them on his behalf,
it amounts to constructive delivery. Sometimes the other person may already be in
possession of the goods of the bailor, and subsequently a contract of bailment is
entered into, whereby the other person promises to keep the goods as bailee. This
also amounts to constructive delivery of the goods. A railway receipt is a document
of title to goods, a transfer of the railway receipt affects a constructive delivery of
the goods.

(2) Agreement: For creating a bailment the first essential requirement is the
existence of an agreement between the bailor and the bailee. As you have read just
now bailor is the person who bails the goods and bailee is the person to whom the
goods are bailed. The agreement between the bailor and bailee, may be either
express or implied.

Delivery of possession upon a contract: There can be no bailment without a

contract. All conditions for valid contract are to be satisfied, such as competent
parties, free consent lawful object etc. It is necessary that the goods are delivered
to the bailee and returned to the bailor when the purpose is accomplished upon a
contract. This means there should a contract between the two parties for such
transaction of delivery and subsequent return. If there is no contract, there is no
bailment. The contract giving rise to bailment can be express or implied.

Property deposited in a court under orders is not property delivered under a

contract. Such delivery or transfer does not constitute bailment.
Exception to the delivery upon contract: A finder of goods is treated as a bailee
even if there is no contract of Bailment or delivery of goods under a contract. A
finder of the goods is a person who finds the goods belonging to some other person
and keeps them under his protection till the actual owner of the goods is found. An
involuntary contract of bailment arises and the finder automatically becomes
bailee even in absence of bailment by the bailor – the owner of the lost goods.
Since the person is in the position of the bailee, he has all the rights and duties of
a bailee.

Under English Law: There can be bailment without a contract. If a person

deposits or delivers the goods under stressful circumstance like fire flood, riots or
if the person who is depositing the goods is incapable of appreciating the value of
the action, it is still regarded as bailment despite the absence of a contract. Delivery
of goods to another under a mistake of identity of the person is also treated as
bailment without a contract as long as the bailor took reasonable care to ascertain
the identity.

Present Position in India: The Law Commission of India in its 13th report
suggested that bailment without contract should also be included in the Indian
Contract Act, 1872 but no concrete steps have been taken as yet. Presently, the
Indian Courts have taken the position that bailment can exist without a contract.
In some of these cases, even the government has been held liable as a bailor despite
the absence of a contract.

The case of Lasalgoan Merchants Bank vs. Prabhudas Hathibhai is one the
first where the Courts started imposing the obligations of a bailee even without a
contract. In State of Gujarat vs. Memom Mahomed, the Supreme Court of India
accepted this view and stated that “…Bailment is dealt with by the Contract Act
only in cases where it arises from a contract, but it is not correct to say that there
cannot be bailment without an enforceable contract.”

(3) Purpose: In a bailment, the goods are delivered for some purpose. The
purpose for which the goods are delivered is usually in the contemplation of both
the bailor and the bailee.

(4) Return or dispose of goods according to the direction: In bailment the

goods are delivered for specific purpose. After the purpose is accomplished the
goods may be returned to the bailor in the same or altered direction, condition or
maybe disposed of as directed by bailor. If the person to whom the goods are
delivered is not bound to restore them to the person delivering them or to deal with
them according to the mandate their relationship will not be that of bailor and
bailee.

Delivery for a purpose and Return of Goods: There has to be a purpose for the
bailment of goods and it is mandatory that once such purpose is accomplishes, the
goods have to be returned to the bailor or be disposed of per his instructions.
Bailment cannot arise if the goods are not to be specially accounted for after
completion of such task or purpose. This is a feature of bailment that distinguishes
it from other relations like agency, etc.

The third essential of bailment is twofold –

a) The delivery of goods must be for some specific task or performance. Delivery
of goods in bailment is not permanent. There has to be a purpose for the bailment
of goods and it is mandatory that once such purpose is accomplishing, the goods
have to be returned to the bailor or be disposed of per his instructions. A tailor is
given a cloth for stitching a shirt, a watch repair shop is given a watch to mend it.

b) That the goods must be returned to the bailor or be taken care of as per the
instructions of the bailor. If a person is not bound to return the goods to another,
then the relationship between them is not of bailment. If there is an agreement to
return the equivalent and not the same goods, it is not bailment. An agent who
collects money on behalf of his principal is not a bailee because he is not liable to
return the same money and coins.

Example: A tailor who receives a cloth for stitching is the bailee in this case. The
tailor is supposed to return the finished garment to the customer, the bailor, once
the garment has been stitched.

Return of goods in specie is also essential. The same goods that were bailed must
be returned to the bailor in the same condition after the accomplishment of purpose
as they were handed over to the bailee in the beginning. Any accruals to the goods
must also be handed over. If an animal gives birth during the period of bailment,
the bailee must return the animal with the offspring at the conclusion of the
bailment.

The bailor can give other directions as to the disposal or return of the bailed goods.
In case of such agreement or instructions, the bailee must immediately dispose the
goods after completion of purpose as per the directions.
If the goods are not returned or dealt as per the directions of the bailor there is no
bailment. For example, depositing money into bank by a customer does not give
rise to a contract of bailment because the bank is not bound to return the same
notes and coins to the customer. This same point was also made in the case of
Ichcha Dhanji v. Natha [1888 13 Bom 338]

In Secy of State v. Sheo Singh Rai [1880 ILR 2 All 756], a man delivered nine
government promissory notes to the Treasury Officer at Meerut for cancellation
and consolidation into a single note of Rupees 48,000 only. The notes were
misappropriated by the servants of the Treasury Officer. The man sued the State
to hold it responsible as a bailee. But the action failed as there can be no bailment
without delivery of goods and a promise to the return the same. The government
was in no way bound to return the same notes or dispose the surrendered notes in
accordance with the instructions of the man.

Return of the goods: It is important that the goods which form the subject matter
of the bailment should be returned to the bailor or disposed of according to the
directions of the bailor, after the accomplishment of purpose or after the: expiry of
period of bailment. Where goods are transferred by the owner to another, in
misdirection of price, it is a safe. Similarly, where the goods are not to be delivered
back in specie but their price is paid, it is not a bailment. Again, where money is
deposited by a customer with a bank in a current, savings or fixed deposit account,
and, therefore, there is no obligation to return the identical money but an
equivalent of it, it is no bailment. But what is thus created is a relationship of
creditor and debtor. But if valuables or even coins or notes in a box deposited for
safe custody there is a contract of bailment, for these are too stunned as they are,
and not their monetary value.

EXAMPLES/ CASE LAWS/ ILLUSTRATIONS:

Other common examples of a contract of bailment are where a watch is given for
repairs, or diamonds are given for being set in a gold ring. In both these cases, the
same watch or the same diamonds should be returned after the purpose for which
they were given, has been fulfilled. A pledge of a jewel on the security of which
money is borrowed, gold jewels delivered to a bank for safe custody, goods
delivered to a railway company for being carried and delivered to the consignee,
are all examples of bailment.

L.M. Co-Operative Bank v. Prabhudas Hathibhai, the Bombay High Court

has taken the contrary view. In this case some packages of tobacco belonging to
A had been pleadged to the plaintiff bank but they were still lying in A's godown.
The bodown was locked and its keys were handed over to the plaintiff bank. Owing
to the non-payment of some income-tax dues by A, the said goods were attached
by the Collector though they were allowed to remain in the same godown. The key
of the godown was handed over to the police there were heavy rains, roof of the
godown leaked and the goods inside were damaged. Even though the goods were
not in the possession of the Government under a contract, the state was still held
liable as a bailee.

Coggs v Bernard (1703) is a landmark case both for English property law
and contract law, decided by Sir John Holt, Chief Justice of the King's Bench. It
sets out the duties owed by a bailee – someone in possession of property owned
by another. William Bernard undertook to carry several barrels of brandy
belonging to John Coggs from Brooks Market, Holborn to Water Street, just south
of the Strand (about half a mile). Bernard's undertaking was gratuitous; he was not
offered compensation for his work. As the brandy was being unloaded at the Water
Street cellar, a barrel was staved and 150 gallons were lost. Coggs brought an
action on the case against Bernard, alleging he had undertaken to carry the barrels
but had spilled them through his negligence.

Which held that a general bailee was strictly liable for any damage or loss to the
goods in his possession (e.g., even if the goods were stolen from him by force).
Under the ruling in Coggs v Bernard, a general bailee was only liable if he had
been negligent. Despite his reappraisal of the standard of liability for general
bailees, Holt CJ refused to reconsider the long-standing common law rule that held
common carriers strictly liable for any loss or damage to bailed property in their
possession.

B. Dutta, Senior Advocate v. Management of State, (2010) 1 CPC 319. To hold

that laws of bailment apply when a customer pays to park his car in a parking lot
and it is then stolen or damaged. It was noted that the price paid for food consumed
in the hotel would include consideration for a contract of bailment from the
consumer (bailor) to the hotel (bailee). Applying this to the facts of this case, the
State Commission observed that though the Appellant- hotel had averred that
Respondent No. 2 had not had dinner at the hotel that night, it was improbable for
him to have stayed inside the hotel from 11 p.m. to 1 a.m. without consuming any
food or snacks or paying any kind of bill. Hence, the State Commission proceeded
on the assumption that Respondent No. 2 had paid consideration for the contract.
In light of this, the State Commission allowed the complaint and directed the
Appellant-hotel to pay Respondent No. 1 a sum of £2,80,000 (the value of the car)
with interest at 12% per annum and L 50,000 as litigation costs. In addition to this,
it directed payment of £1,00,000 to Respondent No. 2 for inconvenience and
harassment faced by him. The State Commission also held that Respondent No. 3
(insurer of the hotel) would not be liable to indemnify the loss caused to the
Appellant hotel, as the theft of the car had not been notified to it within due time.

Hyman & Wife V/S Nye & Sons (1881) 6 QBD 685. The plaintiff hired from the
defendant for a specific journey of a carriage, a pair of horses and a driver. During
the journey a bolt in the under-part of the carriage broke, the splinter bar became
displaced, the carriage was upset and the plaintiff injured. Holding the defendant
liable, justice Lindley said: “A person who lets out carriages is not responsible for
all defects discoverable or not; he is not an insurer against all the defects which
care and skill guard against. His duty is to supply a carriage as fit for the purpose
for which it is hired as care and skill can render it”.

Reed V/S Dean (1949) 1 KB 188.The plaintiff hired a motor launch from the
defendant for a holiday on the river Thames. The launch caught fire, and the
plaintiffs were unable to extinguish it, the fire-fighting equipment being out of
order. They were injured and suffered loss. The court held that there was an
implied undertaking that the launch was as fit for the purpose for which it was
hired as reasonable care and skill could make it. The defendant was accordingly
held liable.

Lyell V/S Ganga Das, ILRC (1875) 1 AII 60 Goods consigned without disclosing
that they were combustible. Where a bailor delivers goods to another for carriage
or for some other purpose, and if the goods are of dangerous nature, the fact should
be disclosed to the bailee.

In the case of Atul Mehra v Bank of Maharashtra to determine whether the

hiring of the lockers by the plaintiffs constitutes actual delivery of possession to
the defendants. This case was filed by Atul Mehra in appeal at the High Court of
Punjab and Haryana. It is one of the landmark cases in India because it lays down
the principle that hiring lockers at banks does not constitute a contract of bailment.
It was previously talked about in some cases, and this court has upheld the
principle that merely hiring a bank locker does not constitute delivery of
possession which is a necessary ingredient for the contract of bailment. It was
also said by the learned Judge that in order to constitute a
contract of bailment, the bailee must be made aware of the contents of the locker
so that it can gauge the nature and extent of the security and possible liability.

Bailment may be classified on two bases,

i.e., Reward and Benefit.
On the Basis of Reward

Bailment can be classified as gratuitous and non-gratuitous bailment on the basis

of whether the parties are getting or not getting some value out of the contract of
bailment.

1) Gratuitous Bailment- A Bailment made without any Consideration for the

benefit of the bailor or for the benefit of the bailee is called Gratuitous
Bailment. In simple words A bailment with no consideration is Gratuitous
bailment.
When there is no consideration involved in the contract of bailment it is called
gratuitous bailment. For example, when you lend your cycle to your friend so that
he can have 3 ride or when you borrow his books to read, it is a case of gratuitous
bailment because no exchange of money or any other consideration is involved.
Neither you nor your friend would be entitled to any remuneration here.

No hire charges are paid by bailee; andNo custody charges are paid by bailor.

2) Non-Gratuitous Bailment: Non-Gratuitous is a bailment for reward. It is

for the benefit of both the bailor and bailee.A contract of bailment which
involves some consideration passing between bailor and bailee, is called a
non-gratuitous bailment. For example, if your friend hired a cycle from a
cycle shop or you borrowed a book from a bookshop on hire, this would be
a case of non-gratuitous bailment.
Hire charges are paid by bailee; or Custody charges are paid by bailor.

On the Basis of Benefit

On the basis of the benefits accruing to the parties, the contract of bailment may
be divided into the following types:
i) Bailment for the exclusive benefit of the bailor: In this case the bailor
delivers his goods to a bailee for a safe custody without any benefit/ reward.
It is called " the bailment for the benefit of the bailor".
This is the case where a contract of bailment is executed only for the benefit
of the bailor, and the bailee does not derive any benefit from it. For
example, if you are going out of station and leave your valuable goods with
your neighbour for safety, it is you as bailor, who alone is being benefited
by this contract.
ii) Bailment for the exclusive benefit of the bailee: In this case Bailor delivers
his goods to a bailee without any benefit for his use, it is called "the
bailment for the exclusive benefit of the bailee".
This is the case where the contract of bailment is executed only for the
benefit of the bailee and the bailor does not derive any benefit from the
contract. For example, if you lend your books to a friend, without charge,
so that he can study for his exams, it is your friend as the bailee, who alone
is going to be benefited by this contract.
iii) Bailment for the mutual benefit of bailor and bailee: In this case goods are
delivered for consideration, both the bailor and bailee get benefit and hence
it is called the bailment for the benefit of the bailor and bailee.
In this case both the bailor and the bailee derive some benefit from the
contract of bailment. For example, if you give your shirt to be stitched by
the tailor, both of you are going to be benefited by this contract, while you
get a stitched shirt; the tailor gets the stitching charges.

Bailor’s Duties
Duties of a Bailor (Sec. 150, 158, 159 and 164)

A bailor has the following duties

1) Duty to disclose defects:

Section 150 of the Indian Contract Act, 1872 bound the bailor with certain
duties to disclose the latent facts specifically pertaining to defect in goods.
Bailor’s duties of disclosure are:

Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the
goods that he is aware of to the Bailee that can interfere with the use of
 goods or can expose him to extraordinary risks. And failure to do the same will
make bailor liable for damages.

Non-Gratuitous Bailment (Bailment for Reward): This duty particularly deals

with the goods given on hire. As per this provision, when the goods are bailed
for hire, then in such a situation even if the bailor is aware of the defect in the
goods or not will be held liable for the injury that has been caused due to the
existence of such defect.

In Hyman v Nye & Sons, the plaintiff took a carriage on hire from the defendant
but the carriage was not fit for the journey and subsequently, the plaintiff
suffered injuries. The court held that even though the defendant was aware of
such defect or not he shall be liable.

Disclose faults in goods [Sec. 150]: Bailor is bound to disclose to Bailee, faults in
the goods bailed, of which he has knowledge. He should also disclose such
information which – (a) materially interferes with the use of goods, or (b) expose
the Bailee to extraordinary risk.

The bailor is bound to disclose to the bailee faults in the goods bailed, of which
the bailor is aware, and which materially interfere with the use of them, or expose
the bailee to extraordinary risk; and if he does not make such disclosure, he is
responsible for damage arising to the bailee directly from such faults.

Examples-A lends a horse, which he knows to be vicious, to B. He does not

disclose the fact that the horse is vicious. The horse runs away. B is thrown and
injured. A is responsible to B for damage sustained.

Liability for defects in goods

In case of Gratuitous bailment In case of Non – Gratuitous Bailment
Bailor is liable only for those losses which Bailor is liable for damages whether or not he
arise due to non – disclosed risks was aware of the existence of faults

Example: A owning a motorcycle, allows B, his friend, to take it for a joy ride. A
knows that its brakes were not proper but does not disclose it to B. B meets with
an accident. A is liable to compensate B for damages. But when A had lent the
motorcycle on hire, he is liable to B even if he did not know of the failure of his
brakes.

The law of bailment imposes a duty on bailor to disclose the defects of the goods
bailed. Bailor is under an obligation to inform those defects in the goods
which would interfere with the use of the goods for which the goods heir bailed
car would expose the bailee to some risk. Bailment of goods may he gratuitous (in
which neither bailor nor the bailee gets any reward) or non-gratuitous bailment for
reward). In case of gratuitous bailment, the law imposes a duty on t b e bailor to
reveal all the defects known to him, which would interfere with the use of goods
bailed. If the bailor does not disclose the defects and the bailee in consequence
suffers some loss, the bailor would be liable to compensate the bailee for the losses
so suffered.

For example, A the owner of a scooter allows B, his friend, to take his scooter for
a joy ride. A knows that the brakes of the scooter were not working well. A does
not discloses this fact to B. Consequently, B meets with an accident. A is liable to
compensate B for damages. In case of Non-gratuitous bailment, i.e., bailment for
reward, the bailor has a duty to keep the goods in a fit condition. The goods should
be fit to be used, for the purpose, they are meant. In such a case the bailor is
responsible for all defects in the goods whether he knows the defects or not is
immaterial, and if the bailee suffers any loss, the bailee has to bear it.
For example, A hires a tractor from B, for ploughing his field. The shaft of the
tractor is broken but B is not aware of the defect. While A was ploughing his field
because of the defect, the tractor overturns and A is injured. B is liable for A's
losses. In case of gratuitous bailment the bailor is responsible only for those defects
which he is aware of and did not disclose to the bailee. Duty to reveal is all the
more important, where the goods bailed are of dangerous nature, otherwise the
bailor would be liable for the resulting consequences.

For example, A delivers to B, certain chemicals, to be carried to Bombay. These

chemicals have a tendency to burst, if not kept below a certain temperature. A does
not tell B to take this precaution. While carrying the chemicals, the chemicals burst
and injure B. A is liable for all the damages.

To pay damages for Non-Disclosure (Section 150) Second part of Section 150 of
the said Act says that, if bailor does not make disclosure to the bailee faults in the
goods bailed, he is responsible for damage arising to the bailee directly from such
faults.
Example:
(a) A lends a horse, which he knows to be vicious, to B. He does not disclose the
fact that the horse is vicious. The horse runs away. B is thrown and injured. A is
responsible to B for damage sustained.

(b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and
A is injured. B is responsible to A for the injury.

2) Duty to bear expenses:

Section 158 of the Indian Contract Act says that, where, by the conditions of the
bailment, the goods are to be kept or to be carried, or to have work done upon them
by the bailee for the bailor, and the bailee is to receive no remuneration, the bailors
shall repay to the bailee the necessary expenses incurred by him for the purpose of
the bailment.

The general rule in those bailments where the bailee is not to receive any
remuneration is that the bailor should bear the usual expenses in keeping the goods
or in carrying the goods or to have work done upon them by the bailee for the
bailor. The bailor must repay to the bailee all the necessary expenses which the
bailee has already incurred for the purpose of bailment. For example- if A, a farmer
gives some gold to his friend B. who is a goldsmith, to make a gold ring. B is not
to receive any remuneration for the job. But A has a duty to repay to B any
expenses incurred by him in making the ring. In cases of non-gratuitous bailments
( where the bailee is to receive remuneration). bailor has a duty to bear
extraordinary expenses, borne by the bailee. For the purposes of bailment.
However, the bailor is not to bear ordinary or usual expenses. For example, if a
horse is lent for a journey, the expenses for feeding the horse would be payable by
the bailee. But, if the horse becomes sick and expenses have to be incurred, or ~f
the horse is stolen and expenses are incurred for recovery. the bailor should pay
those expenses.
Bear expenses [Sec.158]

Expenses of Bailment

In case of Gratuitous bailment In case of Non – Gratuitous Bailment

Bailor is liable to repay only extra –
Bailor shall repay to Bailee, all ordinary expenses, and not the ordinary
necessary expenses incurred by him for expenses.
the purpose of Bailment
Example: M lends his car to N and it runs out of petrol. N can recover the amount
paid for refuelling (ordinary expenses). If in case, the car suffers a breakdown, N
can recover such charges as are paid by him in bringing it back to condition (extra
ordinary expenses). He M hired the car to N, he shall be liable only for the repair
charges, being extra ordinary expenses.

3) Duty to indemnify the bailee:

To indemnify the loss (Section159) Indemnity means promise to make good the
loss. According to Section 159 of the Indian Contract Act 1872 bailor has a duty
to indemnify the loss suffered by the bailee under the contract.

The lender of a thing for use may at any time require its return, if the loan was
gratuitous, even through he lent it for a specified time or purpose. But if, on the
faith of such loan made for a specified time or purpose, the borrower has acted in
such a manner that the return of the thing lent before the time agreed upon would
cause him losses exceeding the benefit actually derived by him from the loan, the
lender must, if he compels the return. Indemnify the borrower for the amount in
which the loss so occasioned exceeds the benefits so derived.

It is the duty of the bailor to indemnify the bailee, for any loss which the bailee
may suffer because of the bailor's title being defective. The reason for this is that
the bailor was not entitled to make the bailment or to receive back the goods
bailed or to give directions regarding the goods bailed. For example, A asks his
friend B to give him cycle for one hour. B instead of his own cycle gives C's cycle
to A. While A was riding, the true owner of the cycle catches A and surrenders
him to police custody. A is entitled to recover iron B all costs, which A had to pay
in getting out of this situation.

4) Duty to bear risks: It is the duty of bailor to bear the risk of loss, deterioration
and destruction, of the things bailed, provided that bailee has taken reasonable care
to protect the goods from loss etc.

5) Duty to receive back the goods: It is the duty of the bailor that when the bailee,
in accordance with the terms of bailment, returns the goods to him that: bailor
should receive them. If the bailor, without any reasonable reasons refuses to take
the goods back, when they are offered at a proper time and at a proper place, the
bailee can claim compensation from the bailor for all necessary and incidental
expenses, which the bailee undertakes to keep and protect the goods.
6) To pay damages for defect in bailor's title (Section 164)-The bailor is
responsible to the bailee for any loss which the bailee may sustain the reason that
the bailor was not entitled to make the bailment, or to receive back the goods, or
to give directions, respecting them.

Indemnify the bailee for defective title

The bailor shall indemnify the bailee for any loss caused to bailee due to
defective title of bailor.

Indemnify the bailee for premature termination

If – the bailment is gratuitous; and for a specific period.

Then –

(a) the bailor may compel the bailee to return the goods before expiry of the
period of bailment; but

(b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

7) To put bailee into possession (Section 149)-The delivery to be bailee may be

made by doing anything which has the effect of putting the goods in the possession
of the intended bailee or of any person authorised to hold them on his behalf.
Kaliaperumal V. Visalakshmi (1938) AIR 1938 Mad 32, In this case Madras high
court held that delivery is an essential element of bailment.

8) Receive back the goods- It is the duty of the bailor to receive back the goods,
when returned by bailee.If the bailor wrongfully refuses to receive back the goods,
he shall be liable to pay ordinary expenses of custody of goods incurred by the
bailee.

Bailee’s Duties
Bailee has to fulfil several obligations as per Indian Contract Act, 1872.

A bailee has the following duties:

1) Duty to take reasonable care of the goods bailed: Section 151 of the Indian
Contract Act lays down the degree of care, which a bailee should take, in respect
of goods bailed to him. The bailee is bound to take as much care "if the goods
bailed to him as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quality and value as the
goods bailed. The standard of care is same whether the bailment is gratuitous or
for reward. So a bailee is liable when the goods suffer loss due to the negligence
on the part of bailee. However, under Section 152 of the Act, the standard of care
of ordinary prudent man can be increased by entering into a contract, between the
bailor and the bailee. In that situation the bailee, in order to save himself from any
liability, would be bound to take as much care, as provided by the terms of
contract. In the absence of any such contract, if the bailee has taken care as an
ordinary prudent man of the goods bailed, he is not responsible for the loss,
destruction or deterioration of the goods bailed. To take an example, if a diamond
ring is kept by its owner A for safe custody with another person B and B is not to
receive any reward for it. The bailee should keep it locked in an iron safe, or some
other safe place but not keep it in his room, simply because the bailment is
gratuitous. Similarly, if a cow is delivered for safe custody it is sufficient if it is
kept in the backyard properly enclosed and even if it is for reward, no one would
expect it to be kept in the drawing room. If the goods get stolen, lost or otherwise
destroyed, even after the bailee has taken reasonably good care, the bailee would
not be liable for this loss. The bailor, would have to bear this lass.

Duty to take reasonable care: It is the duty of the Bailee to take care of goods as
his own goods. He shall ensure all safety measures that are necessary to protect
the goods. The standard of care should be such as taken care by a prudent man.
The goods shall be taken care of equally whether they are gratuitous or non-
gratuitous. The Bailee shall be held liable for payment of compensation if he fails
to take due care. But if the Bailee has taken due care and instead of that the goods
are damaged then in such a situation Bailee will not be liable to pay compensation.
The Bailee is not liable for the loss of goods due to destruction by fire. (Section
151-152)

2) Not to make any Unauthorized use of goods: The bailee is under a duty to
use the bailed goods in accordance with the terms of bailment. If bailee does any
act with regard to the goods bailed, which is not in accordance with the terms of
bailment, the contract is voidable at the option of the bailor. Besides it, the bailee
is liable to compensate the bailor for any damage caused to the goods. By an
inconsistent use of the goods bailed. If he makes unauthorised use of goods, bailee
would not be saved from his liability even if he has taken reasonable care of the
ordinary prudent man. For example, A lends his car, B to be taken to Delhi from
Hyderabad. The car was to be driven by B himself. B
takes along with him a friend C, who has been driving his car for the last 10 years.
B instead of going to Delhi goes to Calcutta. The contract becomes voidable at the
option of the bailor. On way to Calcutta, B allows C to drive the car. Inspite of the
fact that C, in accordance with the directions of B, drives the car at a very slow
speed, an accident takes place and the car is damaged. A is entitled to be
compensated for the loss.

Bailee is duty bound to use the goods for a specific purpose only and not otherwise.
If he uses the goods for any other purpose than what is agreed for then the bailor
has the right to terminate such bailment or is entitled with compensation for
damage caused due to unauthorized use. (Section 153-154)

3) Duty not to mix bailor's goods with his own goods: Next duty of the bailee
is to keep the goods of the bailor separate from his own. Sections- 155 to 157 of
the Act lays down this duty in the following ways:

i) If the bailee, with the consent of the bailor, mixes the goods of the bailor with
his own goods, the bailor and the bailee shall have an interest, in proportion to
their respective shares, in the mixture thus produced (Section 1-76].

ii) If the bailee, without the consent of the bailor, mixes the goods of the bailor
with his goods, and the goods can be a separated or divided, the property in the
goods remains in the parties respectively; but the bailee is bound to bear the
expense of separation or division, and any damages arising from the mixture
(Section 156). For example, A bails 100 bales of cotton marked with a particular
mark to B. B, without A's consent, mixes these 100 bales with other bales of his
own, bearing a different mark, A is entitled to have his 100 bales returned, and B
is bound to bear all expenses incurred in the separation of the bales, and any other
incidental damage.

iii) If the bailee, without the consent of the bailor, mixes the goods of the bailor
with his own goods, in such a manner that it is impossible to separate the goods
bailed from the other goods and deliver them back, the bailor is entitled to be
compensated by the bailee for the loss of the goods (Section 157). A bails a barrel
of cape flour worth Rs. 50 to B. B without A's consent mixes the flour with country
flour of his own, worth Rs. 20 a barrel. B must compensate A for the loss of his
flour. Where a bailee mixed his own goods with those of the bailor and when
ordered to return the goods of the bailor he offered to return the
goods without sorting them out. It was held that the bailor was entitled to refuse to
take delivery in Toto and claim compensation for loss or damage.

It is the duty of the Bailee not to mix bailor’s goods with his own. But if he wants
to do the same then he shall seek consent from the bailor for mixing of goods. If
the bailor agrees for the mixing of the goods then the interest in the mixed goods
shall be shared in proportion. In case, Bailee without the consent of bailor mixes
the goods with his own then two situations arise: goods can be separated and
goods can’t be separated. In the former case the Bailee has to bear the cost of
separation and in the latter case since there is the loss of the goods, therefore,
bailor shall be entitled with damages of such loss. (Section 155-157)

4) Duty not to set up adverse title: The bailee is duty bound not to do any act
which is inconsistent which the title of the bailor. He should not set up his own
title or the title of a third party on the goods bailed to him.

5) Duty to return the goods: It is the duty of the bailee to return or to deliver the
goods according to the directions of bailor, without demand, on the expiry of the
time fixed or when the purpose is accomplished. If he does not return or deliver as
directed by the bailor, or tender the goods at the proper time, he becomes liable to
the bailor for any loss, destruction or deterioration of the goods from that time.
He is liable even without his negligence. For example, a book-binder kept books
beyond the time allowed to him for binding, and they were lost in an accidental
fire, the binder is liable. If however, the bailment is gratuitous, then the bailee will
have to return the goods loaned, at any time on demand by the bailor, even though
the goods were lent for a specified time or purpose. But if on the faith of such loan
made for a specified time or purpose, the borrower has acted in such a manner
that the return of the thing lent before the time agreed upon would cause him loss
exceeding the benefit actually derived by him from the loan the lender must, if he
compels the return, indemnify the borrower for the amount in which the loss so
occasioned exceeds the benefit so derived.

Duty to return the goods on the fulfilment of purpose: Bailee is duty bound to
return the goods once the purpose is achieved or on the expiry of the time period
for which the goods were bailed. But if the Bailee makes default in returning the
goods on proper time then he will be responsible with the loss, destruction or
deterioration of the goods if any. (Section 160-161)
In the case of Bank of India v. Grains & Gunny Agencies the court held that if the
goods are lost or destroyed due to the negligence of servant of Bailee, then in
such case as well Bailee shall be liable.

6) Duty to return accretions to the goods: In the absence of any contract to the
contrary, the baileemust deliver to the bailor, or according to his directions, any
increase or profit which have accrued from the goods bailed. For example, A
leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound
to deliver the calf as well as the cow to A.

Duty to deliver to the bailor increase or profit if any on the goods bailed:The
Bailee has a duty to return the goods along with increase or profit subject to
contract to the contrary. Accretion that has accrued from the bailed goods is the
part of the bailed goods and therefore bailor has the right over such accretions if
any. And such accretions shall be handed over to the bailor along with the goods
bailed. For instance, A leaves a cow in the custody of B and cow gives birth to the
calf. Then B is duty bound to hand over the bailed goods along with accretion to
the bailor. (Section 163).

Bailor’s Rights
As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But
Rights of a Bailor is same as Duties of the Bailee i.e. Rights of Bailor = Duties of
Bailee.

A bailor has the following rights.

1) Enforcement of bailee's duties: You have just now read the duties of the
bailee. Duties of the bailee are the rights of the bailor. Since Right of the bailor is
same as the right of the Bailee, therefore on the fulfilment of all duties of Bailee
the bailor’s right is accomplished.

For example, when the bailee returns the goods bailed, he should also return all-
natural accretions to the goads. This is a duty of the bailee and it is the right of the
bailor to receive all-natural accretions in the goods baited, when the goods are
returned to him.

For example, it is the duty of the Bailee to give the accretions and it is the right of
bailor to demand the same.
2) Right to claim damages: It is an inherent right of the bailor to claim damages
for any loss that might have been caused to the goods bailed, due to the bailee's
negligence (Section 151). If the Bailee fails to take care of the goods, the bailor
has the right to claim damages for such loss. (Section 151)

3) Right to avoid the contract: If the bailee does any act, in respect of the goods
bailed, which is inconsistent with the terms of bailment, the bailor has a right to
avoid the contract. For example, A lends his car to B for Bs personal use. B starts
using the car as a taxi. A can avoid the contract (Section 153).

If the Bailee does not comply with the terms of the contract and acts in a negligent
manner in such case the bailor has the right to rescind the contract. (Section 153)

The bailor has a right to terminate the contract of bailment if the bailee does any
act with the goods bailed to him. which is inconsistent with the terms of the
contract. For example- bailor gives his tonga to bailee for his personal use, but he
uses it for carrying passengers.

4) Right to claim compensation: If any damage is caused to the goods bailed

because of the unauthorised use of the goods. The bailor has a right to claim
compensation from the bailee. In the same way the bailor has (right to claim:
compensation, if, some loss is caused to the goods bailed, due to unauthorised
mixing by bailee, of bailee's own goods with the goods of the bailor (Sections
154. 155 and 156). If the Bailee uses the goods for an unauthorized purpose or
mixes the goods which cause loss of goods in such case bailor has the right to
claim compensation.

Compensation for goods-If the bailee has mixed the goods of the bailor with
someone other goods not belonging to bailor without the consent of the bailor and
bailors goods cannot be separated from the other goods, the bailor has a right to
get reasonable compensation from bailee for his goods. Compensation for
unauthorised use- If the bailee make’s any use of the goods bailed, which is not in
accordance to the conditions of the bailment, the bailor has a right to get
Compensation from the bailee for any damage arising to the goods from or during
such unauthorized use of the goods. Compensation for delay in time-
According to the Contract Act, the bailee is responsible to return, deliver or to
tender the goods to the bailor at a proper time. If he fails to do the bailor has a
right to get compensation from bailee for any loss, destruction or deterioration of
the goods due to such delay in time.
5) Right to get back the goods-The bailor has a right to get back the goods bailed
by him as soon as the purpose of bailment is accomplished. If the bailee fails to do
so, is entitled to get reasonable compensation from the bailee

6) Right to denial return of goods: It is a right of the bailor to compel the bailee,
to return the goods hailed, when the time of bailment has expired or when that
purpose for which the goods were bailed has been accomplished. You have just
now read that in the case of a gratuitous bailment, even if the goods have been
bailed for a fixed time or for a fixed purpose, the bailor has a right to compel the
bailee to return them, before the agreed time. It is the duty of the Bailee to return
the goods and the bailor has the right to demand the same.

7)Right to share profit-The bailor has a right to share with bailee any profit
earned from the goods bailed if it is so provided by the contract.

8) Expenses of separation-If the bailee has mixed the goods of bailor with
someone other goods not belonging to bailor without the consent of the bailor, the
bailor has a right to get from bailee the expenses which he has to bear for the
separation of his goods from others.

Bailee’s Rights
The duties of bailor are the rights of bailee and bailee can enforce his rights against
the bailor by suing him in case of a default. The rights of bailee are as follows.

1) Right to claim damages: If the bailor has bailed the goods, without disclosing
the defects in goods, and the bailee has suffered some loss, the bailee has a right
to sue the bailor for damages. A hires a carriage of B. The carriage is unsafe,
though B is not aware of it, and A is injured. B is responsible to A for the injury
(Section 150).

2) Right to claim reimbursement: In case of non-gratuitous bailment the bailee

has a right to recover from the bailor, all necessary expenses, which the bailee had
incurred for achieving the purpose of bailment. In case of a gratuitous bailment,
bailee has a right to recover from the bailor, all extraordinary expenses, borne by
the bailee or the purposes of bailment (Section 158).
3) Right to recover losses: It is a right of bailee to recover from the bailor, all
losses suffered by him by reason of the fact that the bailor was not entitled to make
the bailment of the goods or to receive back the goods, or to give directions
regarding them (Section 164). In the contract of Bailment, the Bailee incurs
expenses to ensure the safety of goods. The Bailee has the right to recover such
expenses from the bailor. (Section 158)

4) Right to deliver goods to any one of the joint bailors: If the goods are owned
and bailed by more than one person, the bailee has a right, in the absence of a
contrary contract, to deliver back the goods to any one of the joint owner, or may
deliver the goods back according to the directions of one of the joint owner,
without the consent of all. (Section 165).

5) Right to deliver the goods to bailor even if his title is defective: If the title of
bailor is defective and the bailee, in good faith returns the goods to the bailor or
according to the directions of bailor, the bailee is not liable to the true owner in
respect of such delivery (Section 166).

6) Right to remuneration: When the goods are bailed to the Bailee he is entitled
to receive certain remuneration for services that he has rendered. But in case of
gratuitous bailment, the Bailee is not awarded any remuneration.

7) Rightto recover compensation:At times a situation arises wherein bailor did

not have the capacity to contract for bailment. Such a contract causing loss to the
Bailee, therefore the Bailee has the right to recover such compensation from the
bailor. (Section 168)

8) Right to lien: When the bailee, in accordance with the purpose of agreement
has rendered any service involving the exercise of labour or skill, to the goods
bailed, and his lawful payments are not made by the bailor, the bailee has a right
to retain unless there is a contract to the contrary, the goods bailed, until he
received his remuneration for the services rendered by him. This right to retain
goods is known as bailee's lien (Section 170). The bailee has a right of lien in
respect of charges due to him for work of labour done in respect of goods bailed.
As you have already read, the right of lien is a right to detain goods belonging to
another, by a person in possession, until the sum claimed or other demand of the
person in possession is satisfied.

Bailee has the right over Lien. By this, we mean that if the bailor fails to make
payment of remuneration or does not pay the amount due, the Bailee has the right
to keep the goods bailed in his possession till the time debtor dues are
cleared. Lien is of two types: particular lien and general lien. (Section 170-171) In
the case of Surya Investment Co. v. S.T.C, the court held that expenses incurred
by Bailee during preservation of goods under lien shall be borne by bailor.

The Indian Contract Act has dealt with the following kinds of lien:

(i) lien of a finder of goods (Section 168);

(ii) Particular lien of bailee (Section 170);
(iii) General lien of bankers, factors, wharfingers, attorneys and policy
brokers (Section 171);
(iv) lien of Pawnees (Sections 173; 174); and
(v) lien of agents (Section 221), and the of a Pawnees is dealt separately in
this unit. The item, lien on agents is discuss in the separate unit,
"Contract of Agency". Possession of goods is necessary to claim it must
be rightful, not for a particular purpose and lastly it should be continuo.
For example, A, a trader took on lease, B's warehouse for 5 years. It was
also between A and B that A can at any time deposit or take out his goods
from the warehouse. After six months A stopped paying the lease rent.
B detained A's goods am11 claimed lien. B cannot claim lien because it
was agreed that A can take out his goods whenever he wanted. A lien
may be either a particular lien or a general lien.
(vi) Unpaid seller’s lien- sec 47, sale of goods act, 1930
(vii) Partner’s lien – sec 52, Indian partnership act, 1932.
Particular Lien: A lien which can be exercised only on goods in respect of which
some payment is due is called particular lien. Where the bailee has, in accordance
with the purpose of the bailment, rendered any service involving the exercises of
labour or skill in respect of the goods bailed, he has, in the absence of a contract
to the contrary, a right to retain such goods until he received due remuneration for
the services he has rendered in respect of them (Section 170).

For example, A delivers a rough diamond to B, a jeweller, to be cut and polished,

which is accordingly done. B is entitled to retain the stone till he is paid for the
service he has rendered. Again, A gives cloth to B, a tailor, to make into a coat. B
promises A to deliver the coat as soon as it is finished, and to give a three months'
credit for the price. B is not entitled to retain the coat. As a general rule a bailee is
entitled only to particular lien, which means the right to retain only that particular
property in respect of which the charge is due. The
right is available subject to certain important conditions. The foremost among
them is that the bailee must have rendered some service involving the exercise of
labour or skill or expenses incurred in respect of the goods bailed. Further, a
bailee's right of lien arises only where "Labour and skill" have been used so as to
confer an additional value on the article. So, a person who takes an animal for
feeding has no lien, but a veterinary surgeon who has treated the animals has right
of lien. Further conditions are that the contract has been fully in accordance with
the contract, and goods, as you already know, are still in possession of the bailee
and there exists no contract for payment of price in future.

General Lien: The right of general lien, as provided for in Section 171, means the
right to hold the goods bailed as security for a general balance of account. Whereas
right of particular lien entitles a bailee to detain only that particular property in
respect of which charges are due. Right of general lien entitles the bailee to detain
any, goods bailed to him for any amount due to him whether in respect of these
goods or any other goods. The right of general lien is privilege and is specially
conferred by Section 171 on certain kinds of bailees only. They are bankers,
factors, wharfingers, attorneys of a high court, and policy brokers.

9) Right to suit against a wrongdoer: After the goods have been bailed and any
third party deprives the Bailee of use of such goods, then the Bailee or bailor can
bring an action against the third party. (Section 180)

Right of Bailor and Bailee Against Wrongdoer

If a third person wrongfully deprives the bailee of the use or possession of the
goods bailed, or does them any injury, the bailee is entitled to use such remedies
as the owner might have used in the like case if no bailment had been made; and
either the bailor or the bailee may bring a suit against a third person for such
deprivation or injury. Section 180 of the Act enables a bailee to sue any person
who has wrongfully deprived him of the use or possession of the goods bailed or
has done them an injury. It says: If a third person wrongfully deprives the bailee
of the use of possession of the goods bailed, or does them any injury, the bailee is
entitled to use such remedies as the owner might have used is the like case if no
bailment had been made; and either the bailor or the bailee may bring a suit against
a third person for such deprivation or injury. Section 181 provides for
apportionment of the relief obtained by the bailee and reads: Whatever is
obtained by way of relief or compensation in any such suit shall, as between the
bailor and the bailee, be dealt with according to their respective interests. For
example, A, forcefully takes possession of a colour T.V. from B's repair shop. Now
either the owner of the T.V. or B may sue A. If B files the suit, he shall hand over
the amount received, after deducting his repair charges, to the owner of the T.V.

Duties of a Finder of Goods

Under Section 71 of the Contract Act, a finder of goods has same duties with
regards the goods found, as that of a bailee. Hence, 1) The finder should take
reasonable care of the goods found. 2) He should not put the goods for his personal
use. 3) He should not mix the goods found with his own goods. 4) It is the duty of
the finder of goods to find the real owner of the goods and then to entrust the goods
to him.

According to section 71 of the Indian Contract Act, 1872 by the finder of lost
goods we mean a person who comes across the goods that are unclaimed or whose
actual owner is not known. Such a person has to take care of these lost goods as
Bailee unless a true owner is found. He has the same responsibility, rights and
duties of that of a Bailee as per section 151 of the Indian Contract Act, 1872. He
is duty bound to return the goods to the actual owner. He has to take all measures
to find actual owners. He cannot refuse the delivery of goods else he will be liable
for non- delivery of goods.

Rights of Finder of Lost Goods

The right of Lien: According to section 168 of the Indian Contract Act, 1872
finder of the lost goods can exercise his right of particular lien if the actual owner
refuses to make the payment of the expenses incurred to preserve those goods or
to find the actual owner. But finder of the lost goods cannot sue him for the same.

The right of Claiming the Award, if announced by the owner: According to

section 168 of the Indian Contract Act, 1872 finder of lost goods cannot sue the
actual owner for expenses incurred by him. But he can sue him for the award that
is announced by the owner and he refuses to pay the same. For instance, X
finds Z’s wallet and gives it to him. Z promises X to give him Rs. 100 for the same.
This is a contract of bailment and Z is bound to pay the reward.

Right to sell the goods found: According to section 169 of the Indian Contract
Act, 1872 finder of the lost goods also have the right to sell the goods on certain
circumstances i.e. either he could not find the actual owner after taking all due
diligence or the goods or of such nature that their value might perish.

Right of lien: The bailee has the right to retain the goods delivered to him until
the charges due to him are paid by the bailor.

Distinction between Bailee’s Particular and General Lien

Basis of distinction Bailee’s particular lien Bailee’s general lien

1. Natural of right Particular lien gives right General lien gives right to
to retain only such goods retain any goods
in respect of which belonging to another
charges due remain person for any amount
unpaid. due from him.

2. Condition for Particular lien can be General lien may be

exercising lien exercised only when exercised even though no
some labour or skill has labour or skill has been
been expended on the expended on the goods.
goods, resulting in an
increase in value of
goods.

3. Right to whom? Every bailee is entitled to General lien can be

particular lien. exercised by only such
persons as are specified
u/s 171. e.g., bankers,
factors, wharfingers,
Attomeys of High Court,
policy brokers. Any other
bailee may exercise
general lien if there is an
agreement to this effect.
Termination of Bailment
A contract of bailment comes to an end under the following cases:

1) On the expiry of fixed 'period: If the goods are bailed-for a fixed time, the
bailment is terminated at the end of that period. Expiry of time- When
the goods are bailed for a fixed time, the contract of bailment is terminated at the
expiry of the time fixed.

2) On the fulfilment of the object: If the goods are bailed for some specific
purpose or purposes, the bailment is terminated on fulfilling the object.
Accomplishment of purpose-When the purpose for which goods were bailed” has
been accomplished, the contract of bailment is terminated and goods are returned
to the bailor.

3) Inconsistent use of bailed goods: If the bailee uses the goods in

contravention of the terms of bailment, the bailor may terminate the bailment even
before the term of bailment. Bailee’s inconsistent act-A contract of bailment ‘is
voidable (terminated) at the option of the bailee does any act with regard to the
goods bailed’ with the conditions of the bailment.

4) Destruction of the subject matter: A bailment is terminated if the subject

matter of the bailment is destroyed or because of some change in the nature of
goods bailed if the goods become incapable of being used for bailment.

5) Termination of gratuitous bailment: As you have already read, a gratuitous

bailment can be terminated by the bailor at any time even though the bailment was
for a fixed period or purpose. But in such a case, the loss to be suffered by the
bailee from such premature termination should not exceed the benefit he had
derived from the bailment. If the loss exceeds the benefit, the bailor shall
indemnify the bailee.

6) Death: A gratuitous bailment is terminated by the death of either the bailor or

the bailee. Sec. 162.
Termination of Bailment (Sec.153, 159 and 162)

Situation Explanation Example

1. Expiry of When bailment is for specific Z lends a moped to Y for
specified Period period, it terminates on the a period of 3 months April
expiry of the specified period –
June. The Bailment
terminates by the end of
June.
2. Where bailment is for a G hires tables and chairs,
Accomplishment specified purpose, it terminates utensils, etc. from H for
of specified when such purpose is organizing his son’s
purpose accomplished. engagement. G shall
return
them once the
engagement
functions are over
3. Bailee’s act When bailee does some act J gives his car to K
inconsistent with which is inconsistent with the keeping it
conditions terms and conditions of in K’s garage. K gives it
bailment, the Bailor may to his son for racing. J can
terminate the bailment. terminate the
bailment.
4. Destruction of When goods bailed are K hires a cycle from L.
subject matter destroyed, Bailment comes to an When
end. the cycle is damaged
beyond repair in an
accident, bailment ends.
5. Gratuitous • Gratuitous Bailment can • Also, a Gratuitous
Bailment be terminated at any time Bailment ends by the
death of either Bailor or
Bailee. (Sec162)

Note: Where premature termination of bailment by the Bailor, causes loss to the
Bailee exceeding the benefits derived by him, the Bailor shall indemnify the
Bailee.

Pledge and Bailment- Pawn and bailment have many similarities. In both the
cases only the movable goods are delivered with the condition that the goods shall
be delivered back after the purpose of contract is over or after the expiry of
stipulated time. Both pawn and bailment contracts are created by agreement
between the parties, However, pawn differs from bailment in the sense that pawn
is bailment of goods for a specific purpose i.e., repayment of a debt or performance
of a duty. Whereas, the bailment is for a purpose of ally kind. Secondly, the pawnee
cannot use the goods pawned, but in bailment the bailee use the goods bailed if the
terms of bailment so Bailment and Pledge - Specific Contracts provide. Thirdly,
pawnee has a right to sell the goods, pledged with him after giving notice to
pawnor, in case of default by the pawnor to repay the debt, whereas bailee may
either retain the goods or sue bailor for his dues

Sl. Bailment Pledge

No

Sections 148 to 171 of the Indian Sections 172 to 181 of the Indian
Contract Act 1872 deals with Contract Act deals with Pledge.
1
bailment

Meaning: The term bailment is Meaning: Pledge is a special kind of

derived from the French word bailment. If the goods are bailed as a
‘Bailor’, which means ‘to deliver. security for payment of a debt or
2 It means possession voluntarily performance of a promise, it is called
from one person to another. Pledge.

Definition: Delivery of goods by Definition: The Bailment of goods as

Bailor to Bailee for a definite security for payment of a debt or
purpose on condition of their performance of a promise is called
3 return or disposal, when purpose pledge. (Section.178, I.C.A)
is accepted. (Section.148, I.C.A)

Example: Sam delivers a cloth to Example: If a Farmer delivers to bank

John, a tailor making a shirt. The 50 bags of wheat as security for
contract between Sam and John is obtaining a loan, it is called pledge.
4 bailment
5 It is made for any purpose. It is made for specific purpose.

Bailment may be for purpose Pledge is bailment of goods for a

other than by way of providing specific purpose, i.e. to provide a
security for a loan or fulfillment security for a loan or fulfillment of an
of an obligation. It may be for obligation.
purpose like repairs, safe custody,
etc.

6 The Bailee can use the goods. Pledgee cannot use the goods. Pledgee
Bailee can use the goods bailed as has no right of using goods pledged.
per terms of contract.

The Bailee has no right to sell The Pledgee / Pawnee has a right to
the goods bailed sell the goods pledged if the pledger
7
could not redeem them within the
stipulated period.

Bailee can exercise lien on goods Pledgee can exercise lien even for
only for labour and service non payment of interest.
8

9 Sale of Goods-There is no right of Sale of Goods-Pawnee, i.e. Pledgee

sale to the has a right of sale of goods pledged on
Bailee. Bailee may either – (a) default of Pawnor. He can do so by
retain goods, or (b) sue the Bailor giving a notice to the pawnor.
for non – payment of his dues.

Distinction between Bailment and Agency:

No. Bailment Agency

1 Meaning: Meaning :

The term bailment is derived When a person appoints another to

from the French word ‘Bailor’, act on his behalf with a third party, it
which means ‘to deliver’. is called ‘Agency’.

Definition : Definition:
2
Voluntarily Change of ‘Agency’ is the legal relationship
possession from one person to between an agent and Principal; to
another is called contract of bring the principal into legal
bailment. relationship with the third party.

Example: Example :
3
‘X’ delivers a cloth to ‘Y’, a ‘X’ appoints ‘Y’ to purchase some
Tailor for making a shirt. The property on his behalf. Here ‘X’ is
contract between ‘X’ and ‘Y’ is Principal and ‘Y’ is Agent.
bailment. ‘X’ is a Bailor and ‘Y’
is a Bailee.

In bailment, the Bailee does not The agent represents his principal,
4 represent the Bailor. He does and derives certain power from his
not derive any authority from principal.
the Bailor.

In Bailment, A Bailee cannot In Agency, an agent can sell the

5 sell the property under bailment property.

6 A Bailee cannot transfer the An agent can transfer the ownership

ownership of the property. of the property.
7 A Bailee must have possession An agent may or may not have
of the property possession of the property.

Distinction between Bailment and Contract of sale:

No Bailment Sale

1 Meaning : Meaning :

Bailment means change of Sale literally means “transfer of

possession voluntarily from one absolute interest in property (it may
person to another be movable or immovable) from one
person to another in lawful
consideration of price paid.

2 Object : Object :

The object of Bailment is The object of sale is permanent

temporary possession of the goods transfer to the purchaser.
in the hands of the Bailee

3 In Bailment the ownership does In contract of sale, the Purchaser

not change. The Bailor is the becomes owner. The seller does not
owner of the goods before, during possess any connection with the
and after the period of Bailment. property sold.
5 In Bailment, the Bailor pays some In contract of sale, the transferee
nominal charges to the Bailee for shall have to pay the full market
the services rendered by him. value of the property to buy
Sometimes, he is not required to property.
pay any charges.

6 The Bailee cannot appropriate the The purchaser can appropriate the
property bailed to him. property purchased by him.

5 In bailment, on certain occasions, In contract of sale,The seller of the

the Bailee can exercise his right of property has no such right of lien.
lien over the goods bailed. However, an unpaid seller of goods
can exercise lien or stoppage in
transit

Summary:

If the owner maintains control over the goods, there is no bailment, when a
person keeps his goods in the premises of another person but himself continues to
have the control over them; this is not sufficient delivery for being considered to
be bailment.

Kaliaporumalpillai v visalakshmi, a lady took her old jewels to a goldsmith for

being melted and being converted into new jewels. Every evening she used to
receive the half made jewels, put the same into a box and lock the same. She
allowed the locked box to remain in the premises of the goldsmith but kept the key
in her possession. One night the jewels were stolen. It was held that there was no
bailment as she had not handed over the possession of the jewels to the goldsmith,
and therefore the goldsmith could not be made liable for the loss.

There can be bailment without a contract: a bailment cannot arise without a

contract, does not appear to be convincing. The law itself recognizes the finder of
goods as bailee. In some cases, it has been held that bailment can be there even
without a contract.
Hiring of locker – not bailment

Atul Mehra v bank of Maharashtra, in this case it was held that mere hiring of
locker of bank would not constitute bailment as provided under sec 148. The
exclusive possession of the property was sine qua non for bailment, which should
be given by the hirer of the locker to the bank. It was not possible for the bank to
know the quantity, quality and the value of the goods that was allegedly kept in
the locker. So hiring of locker, the court thus ruled was transaction wholly distinct
in nature form a transaction of bailment.

Restoration of goods lent gratuitously – sec 159.

Return when bailment by several joint owners- the bailee may deliver them back
to or according to the directions of, one joint owner without the consent of all, in
the absence of any agreement to the contrary.

Return of goods to the bailor, when he has no title to them, sec 164- bailor’s
lack of title may cause some loss to the bailee, e.g., in an action by the third party
to recover those goods, he may be involved in the litigation. The bailor is
responsible to the bailee was not entitled to make the bailment, or to receive back
the goods, or to give directions respecting them. The bailee has not right to refuse
to return the goods to the bailor by pleading jus tertii, i.e., the title of a third person
being better than that of the bailor. The third person, who claims better title than
that of the bailor, may take their delivery form the bailee only through a court of
law.
PLEDGE
Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under
section 172 of the Indian Contract Act, 1892. By pledge, we mean bailment of
goods as a security for the repayment of debt or loan advanced or performance of
an obligation or promise. The person who pledges the goods as security is known
as Pledger or Pawnor and the person in whose favour the goods are pledged is
known as Pledgee or Pawnee.

Pawn or Pledge is a special kind of bailment where a movable thing is bailed as

security for the repayment of a debt or for the performance of a promise.

For example, if you borrow rupees one hundred from B and keep your cycle with
him as security for repayment, it is a contract of pledge. The person taking the loan
is called the pledger or pawnor and the person with whom goods are pledged is
called the pawnee. Ownership of the pledged goods does not pass to the pledgee.
The general property remains with the pledger but a "special property" in it passes
to the pledgee. The special property is a right to the possession of the articles along
with the power of sale on default. 'delivery of the goods pawned is a necessary
element in the making of a pawn. The property pledged should be delivered to the
pawnee. Thus, where the producer of a film borrowed a sum of money from a
financier-distributor and agreed to deliver the final prints of the film when ready,
the agreement was held not to amount to a pledge, there being no actual transfer
of possession. Delivery of possession may be actual or constructive. Delivery of
the key of the godown where the goods are stored is an example of constructive
delivery. Where the goods are in the possession of a third person, who, on the
directions of the pledger, consents to hold them on the pledgee's behalf, that is
enough delivery. A railway receipt is a document of title of the goods and a pledge
of the receipt operates as a pledge of the goods.

Meaning of ‘Pledge’, ‘Pawnor’, ‘Pawnee’ (Sec.172)

‘Pledge’: The bailment of goods as security for payment of a debt or
performance of promise is called ‘pledge’.

‘Pawnor’: The bailor in case of a pledge is called as ‘pawnor’.

‘Pawnee’: The bailee in case of pledge is called as ‘pawnee’.

A borrowed Rs.100 from B and gave his cycle as a security for the repayment of
the amount, in the condition that if A pays back to B he will get his cycle back. it
is called the contract of Pledge.

In case of Lallan Prasad v. Rahmat Ali, Supreme Court of India defined

Pledgeas: “Pawn or pledge is a bailment of personal property as a security for
some debt or engagement. A pawner is one who being liable to an engagement
gives to the person to whom he is liable a thing to be held as security for payment
of his debt or the fulfilment of his liability”.

Difference between Bailment and Pledge

Basis Bailment Pledge

Transfer of goods from one

Transfer of goods from one person to
person to another for a
Meaning another as security for repayment of
specific purpose is known as
debt is known as the pledge.
the bailment.

It is defined under section

It is defined under section 172 of
Defined In 148 of the Indian Contract
the Indian Contract Act, 1872.
Act, 1872.

The person who delivers the The person who delivers the pledged
bailed goods is known as goods is known as Pledger or Pawnor
Parties Bailor and the person and the person receiving such goods
receiving such goods is is known as Pledgee or Pawnee.
known as Bailee.

The consideration may or

Consideration Consideration is always there.
may not be present.

Bailee has no right to sell Pledgee or Pawnee has the right to

Right to Sell
the goods bailed. sell the goods.

Bailee can use the goods

Pledgee or Pawnee cannot use the
Use of Goods only for a specific purpose
goods pledged.
only and not otherwise.

The purpose of bailed goods The purpose of pledged goods is to

Purpose is for safekeeping or repairs act as security for repayment of debt
etc. or performance of the promise.
Illustrations / Examples:
1: Mr A gives his watch for repair to Mr B., In this case, Mr A is bailor, Mr B is
Bailee and the goods bailed is watch.

2: Harry bailed his bike to David for riding for himself to go to college. David used
it for racing purpose. Now David will be liable for unauthorized use of the bike
bailed.

3: Mr X gave his cat to Mr Y for looking after over some days. Cat in that while
gave birth to kittens. Now Mr Y is liable to return the cat along the accretions.

4: Mr A bailed his carriage for Mr B for hire for a few days. But there was a default
in the carriage of which Mr A was not aware. And subsequently, Mr B suffered
injuries because of the same. Now Mr A is liable to pay damages to Mr B.

5: Y mixes his sweets with that of Z without Z’s consent. Since the sweets can be
separated so the cost to separate the sweets will be borne by Y.

6: Mark took a loan from the bank against a security of gold. In this case, Mark is
a pledger, the bank is a pledgee and gold is the pledged goods.

7: Z pledged his goods with A. But now Z refuses to make the payment of the
same. A now can either sell his goods or can initiate a suit proceeding against Z.

PLEDGE AND HYPOTHECATION

Both pledge and hypothecation are created by an agreement between the parties.
In both, movable property is delivered as a security for repayment of loan or for
the performance of a promise. The difference in hypothecation and pledge is that,
that in hypothecation the debtor continues to enjoy the possession of goods. The
debtor has a right to deal in the goods but only subject to the terms of contract. He
has to send to the creditor, details of property hypothecated. The creditor, in
hypothecation, has a right to inspect the goods, at his convenience, whereas, in
case of pledge, the pawnor loses the possession of the property as well as his rights
to deal in the property pledged. A hypothecation has been regarded as a form of
pledge, but where there is no delivery of the possession. Thus, the hypothecator
still remains in the possession of the goods with all his interest and rights to
enjoyment of it intact. It is pertinent to note that in case of hypothecation, unlike
pledge where the pledgee is in possession, the owner of the things as an agent of
the hypothecatee. Thus, delivery of possession is the
 primary point of distinction between pledge and hypothecation. However, alike
pledge the hypothecatee under pledge to have the right to sue and even to sell the
thing for recovering the loan amount. In hypothecation the position of the true
owner becomes that of a bailee of goods acting for the bailor who in this case is
hypothecatee. In simpler words the distinctiveness can be made clear by saying
that while pledge involves transfer of possession, hypothecation involves transfer
of rights or interest, those too limited.

The Differences Pledge and Hypothecation

Basis Pledge Hypothecation

As such it is not defined in the

It is defined under Section
Indian Contract Act, 1872 but has
Defined 172 of the Indian Contract
been recognized by the usage since
Act, 1872.
very long.

Property is transferred from

Transfer of Property is not transferred; it stays
one person to another as
Property with the owner.
security.

Since the property stays with the

Once the property is pledged,
Dealing in owner, therefore he can deal in the
the owner loses the right to
Property property subject to certain
deal in that property.
condition.

The right of lien can be The right of lien cannot be

Right of
exercised since the property exercised since the property is not
Lien
is with the Pawnee. with the creditor.

Pledge and Lien- While a pledge creates special property in the thing pledged,
lien is merely a personal right which the party is entitled to exercise in case where
payment is due. The difference between the two arises on the basis of the rights
the party have. While a pledge permits the pledgee to retain, sue and even sell the
property of good pledged, under lien only the right of retainment is provided. To
some extent lien can be regarded as an inverse of hypothecation as where the
former involves transfer of possession, the later requires transfer of rights.
Pledge and Mortgage- pledge involves transfer of possession of a thing in
return for certain sum or as a security for fulfilling an obligation. A pledge gives
pledgee special rights to the pledgee that in case of default he has remedies
available with him. However, under a mortgage, other than these special rights,
the juristic rights or the legal rights are also transferred. That is to say that the right
of enjoyment is not transferred in the case of pledge, but in case of mortgage, the
mortgagee has the right of enjoyment. Also, another point of distinction here is
that a contract of mortgage does not require actual delivery of the goods or the
things. Further, while only moveable goods are pledged under a contract of pledge,
mortgage can be of both, moveable as well as immoveable property.

WHO MAY PLEDGE:

Any of the following persons may make a valid pledge:

i) The owner, or his authorised agent, or

ii) One of the several co-owners, who is in the sole possession of goods,
with the consent of other owners, or
iii) A mercantile agent, who is in possession of the goods with the consent
of real owner, or (sec 178)
iv) A person in possession under a voidable contract, before the contract
is rescinded, or (sec 178 A)
v) A seller, who is in possession of goods after sale (sec 30(1))or a buyer
who has obtained possession of the goods before sale,sec-30 (2) or
vi) A person who has a limited interest in the property. In such a case the
pawn is valid only to the extent of such interest.(Sec 179)
Note: If a servant has the custody of the goods, or a tenant gets the possession
of a furnished house, the servant cannot pledge the goods, nor can a tenant pledge
the furnishing materials in his possession.

A person obtaining the goods fraudulently does not have any right to pledge them.
In Purshottam Das v Union of India, the goods were pledged on the basis of a
forged railway receipt and it is not a valid pledge.

The ‘document of title’ has the same meaning as the Sale of Goods Act 1930,
acc to sec 2(4) of that act, includes a bill of lading, dock warrant,
warehousekeeper’s certificate, wharfinger’s certificate, railway receipt, warrant or
order for the delivery of goods and any other document used in the ordinary
course of business as proof of the possession or control of goods, or authorizing or
purporting to authorize, either by endorsement or by delivery, the possessor of the
document to transfer or receive goods thereby represented.

If the person entrusts some valuables to his neighbour for safe custody for some
time, and he happens to be a mercantile agent, a pledge made by him will not be
covered by this provision. So the mercantile agent has not got the possession as
such agent but in a different capacity, a pledge made by him not be a valid one.

Essentials of a Valid Contract of Pledge (Sec.172)

Since Pledge is a special kind of bailment, therefore all the essentials of bailment
are also the essentials of the pledge. Apart from that, the other essentials of the
pledge are:

There shall be a bailment for security against payment or performance of the

promise.

Note: in order to constitute a valid pledge, the foremost requirements must be

satisfied.

i- There should be bailment of goods, i.e, and the delivery of goods from
one person to another.
ii- The purpose of such bailment is to make the goods bailed serve as
security for the payment of a debt, or performance of a promise.

Contract-There must be a contract. The contract may be expressed or implied.

Moveable Property: The pledge is concerned with the movable property. All types
of goods and valuable documents are included in it.

Goods:Pledge can be made of goods only.The subject matter of pledge is goods,

Goods pledged for shall be in existence.

Delivery:There must be delivery of goods by one person to another person.

There shall be the delivery of goods from pledger to pledgee Purpose of delivery-
The goods must be delivered for some purpose.
The purpose must be to deliver the goods as security for

(a) Payment of a debt; or

(b) Performance of a promise.

Transfer of Possession: In case of pledge only possession, of goods transferred

by the pawnor to the Pawnee. Example: Mr. Nelson ledges car with Mr. Mcculan
and gets 1,00,000. He gives the possession of car to Mr. Mcculan.

Ownership Right: In the case of a pledge, the ownership of the goods remains with
the pawnor. It is not transferred to Pawnee. Example: Mr. Wali pledges the plot
with Mr. Raffel and gets 10 lac. The ownership of the plot remains with Mr.
Wali.There is no transfer of ownership in case of the pledge: Exception: In
exception circumstances pledgee has the right to sell the movable goods or
properties that are been pledged.

Return of goods-The delivery of goods must be conditional

The condition shall be that the goods shall be –

– returned (either in original form or in altered form); or

– Disposed of according to the directions of the pawnor when the purpose is

accomplished.

A case of Mere Custody: Those people who have only mere custody of the goods
cannot pledge them. Example: A custodian cannot pledge his master’s bang low.
It will be an invalid pledge.

Limited Interest: Pledge property cannot be used for unlimited interest. When a
person pledges goods in which he has only limited interest, the pledge is valid to
the extent of that interest only. Example: Mr. Nelson gives a car to Mr. Andre for
repair, but does not pay 20,000 repair charges. Mr. Andre pledges the car with Mr.
Smith and borrows fifty thousand. This pledge is valid only up to ten thousand

Revenue authority v Sudarsanam pictures,

It has been held that an agreement wherein, the producer of a film agrees to deliver
final prints of the film under production, when the same are ready, to a financier-
distributor in return for the finance provided by the latter, is not pledge because
there is no delivery of the goods.
Morvi Mercantile Bank v Union of India, AIR 1965, S.C. 1954.

The delivery of a railway receipt was considered to be enough to constitute

delivery of the goods represented by that railway receipt for the purpose of pledge.
It was held with the majority that according to the prevailing Indian law, railway
receipt is a document of title, and therefore delivery of the railway receipt means
delivery of the goods represented by the railway receipt.

Bank of India V. Vinod Steel Ltd AIR 1977 MP 188:

In this case, Court held that when certain movables have been pledged by
a company to a Bank, they cannot be attached and sold for satisfaction of claims
of other creditors of the company without first satisfying the claim of the bank.

Reeves v. Copper (1933)

In this case, the captain of the ship pledged his chronometer with his
employer, the ownership. The captain was allowed to keep the chronometer and to
use it for the purpose of a voyage later on the captain pledged it again with another
person. It was held that the first place was valid as it was a case of constructive
delivery.

Rights of Pawnor
As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to
Redeem. By this, we mean that on the repayment of the debt or the performance
of the promise, the Pawnor can redeem the goods or property pledged from the
Pawnee before the Pawnee makes the actual sale. The right of redemption is
extinguished once the actual sale is done by the Pawnee as per his right under
section 176 of the Indian Contract Act, 1872.

Rights of Pawnor If a time is stipulated for the payment of the debt, or performance
of the promise, for which the pledge is made, and the pawnor makes default in
payment of the debt or performance of the promise at the stipulated time, he may
redeem the goods pledged at any subsequent time before their actual sale; but he
must, in that case, pay in addition, any expenses which have arisen from his
default. Besides this, all the duties of a pawnee are the rights of a pawnor and so
he has the right to get pawnee’s duties duly enforced.
1) It is the duty of pawnor to comply with the terms of pledge and repay the debt
on the stipulated date or to perform the promise at the stipulated time. '

2) It is the duty of pawnor to compensate the pawnee for any extraordinary

expenses incurred by him for preserving the goods pawned

Rights of a Pawnee (Sec.173 and 176)

The rights of the Pawnee as per Indian Contract Act, 1872 are:

Right to retain the goods: If the Pawnor fails to make the payment of a debt or
does not perform as per the promise made, the Pawnee has the right to retain the
goods pledged as security. Moreover, Pawnee can also retain goods for non-
payment of interest on debt or non-payment of expenses incurred. But Pawnee
cannot retain goods for any other debt or promise other than that agreed for in the
contract. (Section 173-174)

Right of Retainer [Sec.173]: The pawnee has right to rctain the pledged goods till
his payments are made (Sections 173 and 174). He can retain the goods for the
following payments; Pawnee may retain the goods pledged for –

(a) Payment of the debt or the performance of promise,

(b) Any interest due on the debt; and

(c) All necessary expenses incurred by him with respect to possession or for
preservation of goods pledged.

This right of the pawnee to retain the pledged goods till he is paid, is known as
pawnee's right of particular lien, In the absence of a contrary contract, the pawnee
cannot retain the goods pledged for any debt or promise other than the debt or
promise for which the goods are pledged. However, in the absence of any thing
to the contrary, such a contract shall be presumed when subsequent advances are
made without any further security. If fresh security is provided for the fresh
advance, this presumption will not apply.

Retainer for subsequent advances [Sec.174]

(a) Where the Pawnee lends money to the Pawnor subsequently, after the date of
pledge, it shall be presumed that the he has a right of retainer over the goods
already pledged in respect of the subsequent lending also.
(b) This presumption can be made invalid only by an expenses provision to that
effect.

Right to recover extraordinary expenses: The expenses incurred by Pawnee on

the preservation of goods pledged can be recovered from Pawnor (Section 175).

Reimbursement of Expenses [Sec.175]: Where the Pawnee incurs extraordinary

expenses to preserve the goods pledged with him; he is entitled to receive such
amount from the Pawnor. The pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the preservation of the goods pledged.
This right does not entitle the pawnee to retain the goods for recovery of such
expenses, however, he can sue the pawnor to pay such amount.

The right of suit to procure debt and sale of pledged goods: On the failure to
make repayment to Pawnee of the debt, the Pawnee has two rights: either to initiate
suit proceedings against him or sell the goods. In the former case, the Pawnee
retains the goods with himself as collateral security and initiate the court
proceedings. He need to provide reasonable notice of such proceedings to the
Pawnor. And in the latter case, the Pawnee can sell the goods after giving due
notice of sale to the Pawnor. If the amount received from the sale of goods is less
than the amount due then the rest amount can be recovered from Pawnor. And if
the Pawnee gets more amount than the due amount then such surplus is to be
given back to Pawnor. (Section 176)

Right to Sale (Sec. 176): Upon a default being made by the pawnor in the payment
of the debt or performance of the the pawnee gets two distinct rights. Firstly, the
pawnee may bring a suit against the pawnor for the recovery of the due amount or
for the performance of the promised duty and in addition to it he may retain the
goods as a collateral security. Secondly, he may sell the goods pledged but only
after giving reasonable notice of the intended sale, to the pawnor. If the proceeds
of such sale are less than the amount due in respect of the debt or promise, the
pawnor is still liable to pay the balance, if the proceeds of the sale are greater than
the amount so due, the pawnee shall pay over the surplus, to the pawnor. A further
the pawnee cannot sell the goods to himself. Ifthe does so the sale is void and the
pawnor can take back the goods after paying the amount due.
As you already know pledge is an extension of bailment, therefore the pawnor and
pawnee have almost the same rights and duties as those of the bailor and bailee.

Rights in case of default by Pawnor [Sec.176]

(a) Suit/ Right to sue: Pawnee may institute a suit against Pawnor when there is
a default in payment of debt or performance of promise at the stipulated time.

(b) Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as
collateral security, or (b) sell the goods pledged by giving a reasonable notice to
the Pawnor.

Remedies of filing suit and sale of goods are disjunctive- in case the pawnor
commits default in the payment of debt within the stipulated time, 2 avenues are
available to the pawnee:

- either to file a suit against the pawnor, by retaining the pledged goods as
collateral security

- to resort to sale of goods after giving reasonable notice to the pawnor.

K.M.Hidaathulla v Bank of India, It has been held that the 2 remedies available
to the pawnee are disjunctive in nature. It means that if three years period is
prescribed by the limitation act for filing the suit, this does not imply that the time
available for sale to the pawnee will be the same and such time shall be
automatically extended.

(c) Surplus / Deficit on Sale: When there is a surplus on sale, Pawnee shall pay
the excess to the Pawnor. In case of deficit, Pawnor shall be liable for the balance
amount.

(d) Notice before suit: Where the Pawnee does not give a reasonable notice to the
Pawnor. The section does not contemplate any notice before the institution of the
suit. A suit for the debt due can be brought through notice is not given. The pawnee
can also being a suit to sell the goods pledged. However, a suit to recover the debt
by sale of pledged articles must be preceded by notice.

Right against true owner of goods [Sec.178A]

When the pawnor has acquired, possession of pledged goods, under a voidable
contract, but the contract has not been rescinded, at the time of pledge, the pawnee
acquires a good title to the goods, even against the true owner, provided
that pawnee had no notice of the pawnor's defect in title and he acts in good faith.

(a) Where the Pawnor has acquired possession of pledged goods, under a voidable
contract u/s 19 or 19A but contract has not been rescinded at the time of pledge,
the Pawnee acquires a good title to the goods, against the true owner.

(b) The title of Pawnee is good only where – (a) he had no notice of the Pawnor’s
defect in title and (b) he acts in good faith.

Reasonable notice u/s 176 means that a notice of intended sale of the security by
the Creditor within a certain date, so as to afford an opportunity to the Debtor to
pay the amount within the time mentioned in the notice.

Requisities of a valid Notice- This notice must be clear and specific in its
language and must indicate the pawnee’s intention to dispose of the security. It
can’t be implied. It must be reasonable and not vague under this section. Merely
an intimation that arrangements would be made for sale, not notice for sale. The
debt for which the pledged goods are being sold must be mentioned.

Effect of sale without notice: Notice of sale is essential and a clause in the
agreement excluding the requirement of Notice is inconsistent with the Act & is
void and unenforceable.

Sale without notice is void, and a vendee without notice of the pledgee , takes only
the limited rights or interest of the pawnee, in other words, he steps inot the shoes
of the pawnee.

Duties of a Pawnor(Sec.175)
Pay the debt: The pawnor is liable to pay the debt or perform his promise as the
case may be.

Pay deficit on sale: If the pawnee sells the goods due to default by the pawnor,
the pawnor must pay the deficit.

Pay extra – ordinary expenses: The pawnor is liable to pay to the pawnee any
extraordinary expenses incurred by the pawnee for preservation of goods.

Disclose faults in goods: The pawnor is liable to disclose all the faults which

(a) Are material for use of the goods; or

(b) May put the pawnee to extraordinary risks.

Indemnify the pawnee: If loss is caused to the pawnee due to defect in pawnor’s
title to the goods, the pawnor must indemnify the pawnee.

Duties of a Pawnee
Not to use the goods: The pawnee has no right to use the goods However,
he may use the goods, if he has been so authorised by the pawnor. Duty not to
make unauthorised use of goods pledged.

Return the goods: The pawnee must return the goods if the pawnor pays the debt
or performs his promise. Duty to return the goods when the debt has been repaid
or the promise has been performed

Take reasonable care: The pawnee must take such care of goods pledged as a
man of ordinary prudence would take care of his own goods. Duty to take
reasonable care of the pledged goods.

Not to mix goods: The pawnee must not mix his own goods with the goods
pledged. Duty not to mix his own goods with the goods pledged.

Return increase in goods: The pawnee must return to the pawnor any accretion
to the goods pledged with him. Duty to deliver increase (if any), to the goods
pledged.

Duty not to do any act which is inconsistent with the terms of pledge.

In Central Bank of India v. Abdul Mujeeb Khan, the bank took over the
possession of the hypothecated truck but thereafter neither sold it according to the
agreed terms nor took care of it, leaving it in open place, the bank was liable for
the extraordinary depreciation in the value of the vehicle.

Important Note:

Requirement of Notice:-Before making the sale, the pledger is required to give

to the pawner, a reasonable notice of his intention to sell. The requirement of
‘reasonable notice’ is a statutory obligation and, therefore, cannot be excluded by
a contract to the contrary. In a case of Prabhat Bank v. Babu Ram, before the
Allahabad High Court: One of the terms of an agreement of loan enabled the
lending banker to sell the securities without any notice to the pawner. The pawner
defaulted in the payment. The bank sent a reminder, but the pawner asked for more
time. The bank thereupon disposed of the securities.
The sale was held to be bad in law. The court said, “What is contemplated by
section 176, is not merely a notice but a reasonable notice, meaning thereby a
notice of intended sale of the security by the creditor within the certain date so as
to afford an opportunity to the debtor to pay an amount within the time mentioned
in the notice.” The court refused to agree with the bank’s contention that the sale
notice should be inferred from the pawner’s request for time. “A notice of the
character contemplated by section 176 cannot be implied. Such notice has to be
clear and specific in language…”.

If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater that the amount so due, the pawnee shall pay over the surplus to the pawnor.

When the pawnee sells the pledged goods, he does not do so as full owner, but by
virtue of an implied authority from the pawnee to do so. The sale must be for the
benefit of both the parties. After sale, it is the pawnee’s ordinary right ‘to recover
the balance of the loan unsatisfied on the sale of the pledge’. And if there is any
surplus amount from such sale, it must be accounted for and refunded to the
pawner. The words ‘such sale’ in the second paragraph indicate that no liability
can be fastened on the pawnor for loss, if the pawnee does not exercise his right of
sale according to section 176. Before a sale, the goods are the property of the
pawnor in pawnee’s custody. If there arises dispute regarding the quality of the
goods, the pawnee cannot proceed in the matter without referring to the pawnor.
In such a situation, pawnee is the agent of the pawnor.

Loss of Security due to Pledgee’s Negligence: Where goods are lost due to the
negligence of the pledgee, the liability of the pledger is reduced to the extent of
the value of such goods which are lost. In a case of Gurbax Rai v. Punjab National
Bank, before the Supreme Court: Certain goods in the godown of a firm were
under the pledge of a bank. The go down was insured against fire. A part of them
was damaged by fire. The bank received insurance money to the extent of the fire.
Sale by Hypothecatee: A hypothecatee is not in actual possession of the goods.
He grants the right of use to the borrower. He naturally has a right to take
possession of the goods if the borrower makes default. He can then sell them in
his capacity as a pledgee. Intervention of the court is not necessary.
Pawner’s Right to Redeem:-

Section 177 of the Act provides for the most valuable right of the pawner:
Defaulting pawnor’s right to redeem-

If a time is stipulated for the payment of the debt, or performance of the promise,
for which the pledged is made, and the pawnor makes default in payment of the
debtor performance of the promise at the stipulated time, he may redeem the goods
pledged at any subsequent time before the actual sale of them; but he must, in that
case, pay, in addition, any expenses which have arisen from his default.

This provision is supplementary to the earlier section. Even after the time for
payment of the debt or the performance of the promise has expired, the pawnor is
entitled to redeem the goods pledged until they are actually sold; but he must then
also pay any expenses which arise from his default. It has been pointed out by the
Supreme Court in a case of Jaswantrai Manilal Akhaney v. State of Bombay, that:
“The special interest of the pledgee comes to an end as soon as the debt for which
the goods were pledged is discharged. It is open to the pledger to redeem the
pledge by full payment of the amount for which the pledge had been made at any
time if there is no period fixed for redemption, or at any time after the fixed date
and the right continues until the thing pledged is lawfully sold.”

Redemption means the enforcement of the right to have the title to corpus of the
pledged property restored to the pledger free and clear of the pledge. A suit for
redemption has to be filed for exercising this specific remedy and not just for a
declaration of the right of redemption.

Heritable Right: Certain gold ornaments were pledged with a bank as a security
for a gold loan. The pawnor died. His wife sought to redeem the pledge by repaying
the loan. She produced a ‘will’ of her husband to show her right. The court said
that she was entitled to redeem. The bank could not ask her for submitting a
probate of the will or a succession certificate. Her son and daughter raised no
objection.
Premature Redemption:Where the pawner redeems before expiry of the
specified period, he would remain bound by the terms of the loan, if any, which
require that a premium would be leviable on premature payment.
Statutory Right:Where the property of an employer was pledged with a bank as
security for repayment of a loan, the court said that it could be attached and sold
for recovery of employee’s Provident Fund dues.(Section 11(2) of the Provident
fund Act, 1952 operates against mortgage and pledge executed by employer to
give priority to employees Provident Fund claims.)
Pledged goods if lost or damaged
In central bank of India v grins and gunny agencies
Due to the negligence of the pledgee bank, the pledged goods were lost. The bank
was requested by the pawnor to sell away the goods and realize the balance, but
the bank failed to do so. Moreover, now the bank was not a in a position to
redeliver the goods on the satisfaction of its claim. It was held that the bank was
liable for the loss of the goods an therefore, he was not entitled to succeed in his
claim against the pawnor.
Legal heir’s right to redeem- in case of death of a pawnor, the pledge made by
him, can be redeemed by his legal heirs on meeting the liabilities concerning the
plede.

Conclusion

Pledge is a kind of bailment where a thing is delivered as security for the

repayment of a debt or performance of any promise. Delivery of the possession to
the pawnee may be actual delivery or constructive delivery. Ownership of the
pledged article does not pass to the pledgee. The pawnee has the right to retain
goods till the payment, of the debt, any interest on the debt, and any other
necessary expenses incurred for preservation of the goods. Where pawnee incur
any other extraordinary expenses on goods for preservation, he is entitled of the
same from pawnor. In case of the default of the pawnor, in the debt or performance,
the pawnee has the right to sell the goods pledged.

The pawnor has also the right to redeem the goods before the actual sale, but after
the payment of the debt or performance of promise and any other expenses which
have arisen from his default.

Contracts of Agency
When one party delegates some authority to another party whereby the latter
performs his actions in a more or less independent fashion, on behalf of the first
party, the relationship between them is called an agency. Agency can be
express or implied. Chapter X of the Indian Contract Act, 1872 deals with the
laws relating to Agency. It is important to know the law relating to agency because
nearly all business transactions worldwide are carried out through agency. All
corporations, big or small, carry their work out through agency.
Therefore, laws relating to the agency are an important area of Business Law.
Relationships relating to principal and agent involve three main parties: The
Principal, the Agent, and a Third Party.

An agent does not act on his own behalf but acts on behalf of his principal. He
either represents his principal in transactions with third parties or performs an act
for the principal. The question as to whether a particular person is an agent can be
verified by finding out if his acts bind the principal or not.

Who is a Principal?

According to Section 182, The person for whom such act is done, or who is so
represented, is called the “principal”. Therefore, the person who has delegated his
authority will be the principal.

Illustrations:

A, a businessman, delegates B to buy some goods on his behalf. Here, A is the

principal and B is the agent, and the person from whom the goods are bought is
the ‘Third Person’.

Joe appoints Mary to deal with his bank transactions. In this case, Joe is the
Principal, Mary is the Agent and the Bank is the Third Party.

Lavanya lives in Mumbai, but owns a shop in Delhi. She appoints a person Susan
to take care of the dealings of the shop. In this case, Lavanya has delegated her
authority to Susan, and she becomes a Principal while Susan becomes an agent.

Who can appoint an Agent?

According to Section 183, any person who has attained the age of majority and has
a sound mind can appoint an agent. In other words, any person capable of
contracting can legally appoint an agent. Minors and persons of unsound mind
cannot appoint an agent.
Who may be an Agent?

In the same fashion, according to Section 184, the person who has attained the age
of majority and has a sound mind can become an agent. A sound mind and a mature
age is a necessity because an agent has to be answerable to the Principal.

Principal is liable for the acts of agent

The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.

The contracts entered into by the agent on behalf of the principal have the same
legal consequences as if these contracts were made by the principal himself.

Who may employ an agent? Any person may employ an agent if –

He is of the age of majority; and He is of sound mind.

Who can be an agent?

Any person may become an agent. Even a minor or a person of unsound mind
can become an agent.

Liability of agent

Generally, an agent is liable to the principal. An agent is not liable to the

principal if he is a minor or is of unsound mind.

Requirement of consideration

No consideration is necessary for creating an agency.(Section 185)

General Rule of Agency

No essential of consideration

Delegation of Authority

Contractual capacity

Agent can appoint sub agent with permission of Principal

If the agent has removed, subagent is automatically terminated

 Essentials of Agency
1- The principal should be competent to contract -Any person who is of the age
of majority and is of sound mind may employ an agent. (Section 183) Since in an
agency, the agent creates a contractual relationship between his principal and the
third persons, it is necessary that the principle and third person should be
competent to contract.
Mahendra Pratap Singh v Padam Kumar Devi, AIR 1993, ALL 143
When a client gives a power of attorney to his counsel, while he is in good
state of health and mental understanding, but subsequently the client
becomes old, feeble, weak, unable to comprehend under a mental
incapacity, the power of attorney becomes worthless after the change in the
state of health and metal infirmity of the client.
Madanlal Dhariwal v Bherulal AIR 1965 272.
If the principal is a minor or of unsound mind, he is incapable of being
bound through the acts of his agent. Although a minor himself cannot
appoint an agent, there is nothing in sec 183, which prohibits the guardian
of a minor form appointing an agent for him.
2- The agent may not be competent to contract-Between the principal and
the third persons, any person may become an agent. But no person who is a minor
and of unsound mind can become an agent, so as to be responsible to his principal.
(Section- 184)
The capacity of an agent has 2 angles.
- The capacity of the agent to act on behalf of the principal, so as to bind
his principal and the third.
- His capacity to bind himself by a bind himself by a contract between
himself and his principal.
He (minor) is capable of creating a valid contract between his principal and third
party, in this context, the agent is only a connecting link between the 2 parties.

3- Consideration (sec -185) No consideration is necessary to create an

agency. The principal agrees to be bound by the acts done by the agent on
his behalf and that serves as a sufficient detriment to the principal. Here the
principal’s duty to indemnify the agent is also there. The law does not
require any consideration as such for the validity of a contract of agency.
It is not essential that a contract of agency be entered in to. It is sufficient if a
person acts on behalf of another and is accepted by the latter.
 An agency can be created either in writing or orally. An oral appointment is a valid
appointment even though the contract of agency by which agent is
authorized has to be in writing.

Modes of Creation of Agency (Model/ Methods of Creating Agency)

Modes mean the way and methods. There are various ways or modes by which the
relationship of principal and agent may arise.

1- By actual authority being conferred on the agent to act on behalf of the

principal. Such authority may be either express or implied.
2- By agent’s authority to act on behalf of the principal in a situation of
‘emergency’
3- By the conduct of the principal, which creates an agency on the basis of
the law of estoppel.
4- By ratification of the agent’s act by the principal, even though the same
has been done without the principal’s prior authority.
5- By presumption of agency in husband- wife relationship.

1- Express authority – According to Section 187, an authority is said to be express

when it is given by words spoken or written. A contract of agency can be made
orally or in writing. Example of a written contract of agency is the Power of
Attorney that gives a right to an agency to act on behalf of his principal in
accordance with the terms and conditions therein.
A power of attorney can be general or giving many powers to the agent or some
special powers, giving authority to the agent for transacting a single act.

Direct appointment is the standard form of creating an agency is by direct

appointment. When a person, in writing or speech appoints another person as his
agent, an agency is created between the two. Normally the authority given by
principal to his agent is an express authority in such case; the agent may be
appointed either by the words spoken or written or conduct of activities. For e.g.
power of attorney.

2- Implied authority - According to Section 187, an authority is said to be

implied when it is to be inferred from the circumstances of the case. In carrying
out the work of the Principal, the agent can take any legal action. That is, the agent
can do any lawful thing necessary to carry out the work of the Principal.
Implied agency arises when there is any conduct, the situation of parties or is
necessary for the case. Implication (implied) is when an agent is not directly
appointed but his appointment can be inferred from the circumstances, an agency
by implication is created. Implied agreements are unexpressed agreement.
Implied agreements/agency arises from the conduct, situation or relationship of
the parties. It may be inferred from circumstances of the case, Implies agency may
come from different cases.

Implied authority is of four main types

Incidental authority- doing something that is incidental to the due performance

of express authority

Usual authority- doing that which is usually done by persons occupying the same
position

Customary authority- doing something according to the pre-established customs

of a place where the agent acts

Circumstantial authority- doing something according to the circumstances of the

case

Illustration

Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by a person
named John. John takes care of the deals regarding the shop and buys goods from
a person named Ram, with Ali’s knowledge. In this case, John has implied
authority from Ali to buy these goods.

Soham employed Abhay, who is a shipbuilder to build ships for him. In doing so,
Abhay may legally buy all the material necessary to build the ships.

Case

Chairman L.I.C v. Rajiv Kumar Bhaskar

In this case, as per the salary saving scheme of L.I.C, the employer was supposed
to deduct the premium from the employee’s salary and deposit it with
L.I.C. Upon the death of the employee, it was found by his heirs that the employer
has defaulted in doing so, causing the policy to lapse. A clause in the acceptance
letter was referred to, in which the employer had said that he would act as the
agent of the employee and not as that of L.I.C. It was held that the
 employer was acting as the agent of the company, thereby making the company
(L.I.C) responsible as a Principal due to the fault of the Agent (the employer).

3- Necessity– In a situation of necessity, one person can act on behalf of another to

save the person from any loss or damage, without expressly being appointed as
an agent. This creates an agency out of necessity.(Sections 188 and 189):
In certain circumstances, a person who has been entrusted with another’s property
may have to incur unauthorized expenses to protect or preserve it. This is called
an agency of necessity.

For example, a sent a horse by railway. On its arrival at the destination, there was
no one to receive it. The railway company, is bound to take reasonable steps to
keep the horse alive, was an agent of the necessity of A.

For example:- ‘A’ a common interest carrier carries dairy product of ‘B’ from
Kathmanduto Narayan ghat because of landslide, the carrier sold all dairy product
on the way(transit) otherwise there was chance of damage of all goods. In such
case ‘B’ cannot sue against ‘A’ because of no authority. Here ‘A’ is treated as an
agent of ‘B’ by necessity.

In certain urgent circumstance the law confers an authority on a person to act as

an agent for the benefit of another such agency is called an agency of necessity. In
such cases, the agent must act in good faith and have to protect and preserve the
interest of the principal.

A wife deserted by her husband and thus forced to live separate from him can
pledge her husband’s credit to buy all necessaries of life according to the position
of the husband even against his wishes

4- Estoppel (Section 237)– An agency can also be created by estoppel. In a situation

where one person behaves in such a manner in front of a third person, as to make
someone believe he is an authorized agent on behalf of someone, an agency by
estoppel is created. Principal allows third party to believe agent has
power/authority to act on its behalf. Agent has apparent (also called “ostensible”)
authority. The principal is estopped (prevented) from denying that agent had not
authority. A court will uphold a contract where there is apparent authority if 4
matters are present.
Estoppel arises when you are precluded from denying the truth of anything which
you have represented as a fact, although it is not a fact. Thus, where P allows third
parties to believe that A is acting as his authorized agent, he will be
estopped from denying the agency if such third-parties relying on it make a
contract with an even when A had no authority at all.

If a person represents by words or conducts that another person is his agent and
third party reasonably believes on such representation and enters into an
agreement, the person who represents so is bound by the act of other this is known
as the agency by estoppel. In this case of agency by estoppel, the third party must
act in good faith and must rely on a representation of the agent’s authority to act
as an agent.

5- Holding out -This may arise from the relation of employer and employee. A
manager is an agent of the company. The agency that is held due to any kind of
business relationship is known as agency by holding out.

6- Ratification– When an act of a person, who acted as another person’s agent

(on his behalf) without his knowledge is later ratified by that person, this creates
an agency by ratification between the two.
As per Section 196 of the Indian Contract Act, agency by ratification is said to
arise when a person, on whose behalf the acts are done without his knowledge or
authority, expressly or impliedly accept such acts.

Illustration

Steve bought apples on behalf of Mark, without his permission or knowledge.

Mark later sold those apples to another person. This act of mark impliedly ratifies
the purchase made by Steve.

Agency of Ratification (Later Acceptance)Even if the agent enters into a contract

without the authority of the principal, the principal may subsequently ratify i.e.
adopt the benefits and liabilities of a contact made on the principal’s behalf. It may
occur in two ways:-

firstly, when a person acts one behalf of another without authority of the
principal and principal adopt the transaction.

Secondly, when a person is an agent of another but he exceeds his authority and
acts on behalf of principal and principal adopts the transaction.

In either cases if act is done on behalf of another (principal) and later principal
adopts or rectifies the transaction there is an agency relationship between the
parties. (If one person does something without the permissions or authority of
another person and another person makes good response for that work then it is
known as Agency of Ratification. In this case person is known as ‘Agent’ and
another person is ‘Principal’. Though another person (principal) gives positive
response to person (agent) the date when person ‘agent’ starts the work for another
person (principal) should be called the agency)

Ratification is not allowed in the following cases

When the person’s knowledge of the facts of the case is defective. That is, he only
half knows things that he is ratifying to.

An act done on behalf of another person which would have the effect of injuring
or harming the person or violating any of his rights if the act was done with his
authority.

Valid Ratification (Sections 169-200):

Where a person not having any authority act as agent, or act beyond its authority,
then the principal is not bound by the contract with the agent in respect of such
authority. But the principal can ratify the agent’s transaction and accept liability.
In this way, an agency by ratification arises.

This is ex post facto agency— agency arising after the event. By this ratification,
the contract is binding on principal as if the agent had been authorized before.
Ratification will have an effect on the original contract and so the agency will
have effect from the original contract and not on ratification.

A principal may subsequently ratify an act done by a person who acted on his
behalf without his permission or knowledge. If the act is ratified, a relationship of
the agency will come into existence and it will be as if he had previously authorized
the person to act his agent. Ratification may be express (by speech or writing) or
implied (by act or conduct).

Following are the conditions for ratification to be effective/Requisites for

Valid Ratification:

 There was an actual and definite necessity for acting on behalf of the
principal. (sec -196)
 The principal should be in existence, and competent to contract when the
act is done.
 Ratification may be express or implied (sec- 197)
  Ratification should be with full knowledge of the facts. (sec -198)
 Ratification should be of the whole transaction. (sec- 199)
 Ratified acts should not be injurious to third person. (sec- 200)
 Ratification should be made within a reasonable time.
 The agent was not in a position to communicate with the principal.
 The act was done for the purpose of protecting the interest of his
principal.
 The agent has exercised such reasonable care as a man of ordinary
prudence would have exercised in his own case.
 The act was done bonafide.
The agent must expressly contract as agent for a principal who is in existence and
competent to contract.i.e., The principal must be named. Ratification must be done
by the person to whom act is done.

The principal must be competent to contract not only at the time the agent acts but
also when he ratifies the agent’s act. Ratification must be by a person competent
to have authorized the transactions.

The principal at the time of ratification has full knowledge of the material facts
and must ratify the whole contract, within a reasonable time. Ratification must be
done by a person (principal) with full knowledge of material facts or with intent to
take the risk of any irregularity.

Ratification cannot be made so as to subject a third-party to damages, or terminate

any right or interest of a third person.

Only lawful acts can be ratified, Void or illegal contract cannot be ratified by the
principal

Essentials of Ratification

1- Full knowledge
2- Whole transaction
3- No damage to 3rd parties
4- Act on behalf of another person
5- Existence of Principal
6- Within reasonable time
7- Lawful acts
8- Acts within Principal’s power
9- Communication
10- Agency by operation of law
Types of Agents
Agents are classified in various ways according to the point of view adopted. From
the viewpoint of the authority they have, they can be classified as special agents,
general agents and universal agents. They are classified as mercantile or
commercial agents and non-mercantile or non-commercial agents. There are
different various types of kind agents are as follows.

Sub-Agent-An agent appointed by an agent. Sub-agency denotes delegation of

power by an agent to a person appointed by him as sub-agent. Incidentally the
agent himself is delegate of his principal. The principal is that ‘a delegate cannot
delegate’. According to this, a person to whom powers have been delegate cannot
delegate them to another. Section 190 of the Act. Contains this principle.
Generally, an agent cannot lawfully employ another to perform acts, which he has
expressly. But, if by the ordinary custom of trade, a sub-agent may be employed,
the agent may to do so.

A sub-agent, according to section 191, is a person whom the original agent

employs in the business of the agency and who under the control of the original
agent. Thus, the relation of the sub-agent to the original agent is, as between
themselves, that of the agent and the principal.

(i.) In case of proper appointment: The agent is responsible to the principal for the
acts of the sub-agent. Thus, a commission agent for the sale of goods who makes
a proper employment of a sub-agent for selling his principal’s goods is liable to
the principal for the fraudulent disposition of the goods by sub-agent within the
course of his employment.

(ii.) In the case of appointment without authority: In term of Section 193, the
principal is not bound by the acts of the sub-agent, nor is the sub-agent liable to
the principal. The agent is the principal of the sub-agent both to the principal and
the third party.

Substituted Agent: Substituted agents are different from sub-agents. Section 194
provides that substituted agents are not sub-agents but are in fact agents of the
principal. Suppose an agent has an implied authority to name another person to act
for the principal in the business of the agency, and he has named another person
accordingly. In the circumstances, such a named person is not a sub-
agent he is an agent of the principal for such part of the business of the agency as
has been entrusted to him.

For Example: A directs B who is a solicitor to sell his estate by auction and to
employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the
sale. In such a situation, C is not sub-agent, but is A’s agent for the sale.

Special Agents: Agent appointed to do a singular specific act. A special agent is

also known as a specific or particular agent. Such agent appointed to perform a
particular work or to represents his principal in particular transaction only. As soon
as the said period lapses, the agency stands terminated. Specific agents have a
limited authority and as soon as the entrusted to him is performed, his authority
also comes to an end. A special agent cannot bind his principal in any act other
than for which he is specially appointed. If he does anything outside his authority,
his principal cannot be bound by it. The third parties that deal with a special agent
must ascertain the extent of the authority he has. A Special Agent is one who is
employed to do some particular act or represent his Principal in some particular
transactions.

For example: An agent employed to sell a Bike. If the special agent does anything
outside his authority, the principal is not bound by it and third parties are not
entitled to assume that the agent has unlimited powers.

General agents: Agent appointed to do all acts relating to a specific job. This type
of agents has a general authority to do everything in the course of his agency and
he has to perform all the acts in the interest of his principal. Thus, a general agent
is one that has authority to do all acts connected with the business of his principal.
A manager of a branch shop of a firm or a commission agent is instances of general
agents. General agents have an implied authority to bind his principal by doing
various acts necessary for carrying on the business of his principal. Sufficiently
wide powers are vested in him to affect the business deals, enter into trade
bargains, to make purchases and also payments of the purchases, to receive money
on behalf of his principal.

A General Agent is one was employed to do all acts connected with particular
business or employment. For example, A manager of a firm. He can bind the
principal by doing anything which Falls within the ordinary scope of that business.
Whether he is actually authorised for any particular act or not, is immaterial
provided that third party acts bona fide.
Universal Agent: A universal agent has a universal or an unlimited power to act
on behalf of his principal. A universal agent is one whose authority is unlimited
and who any act on behalf of his principal can do provide such act is legal and is
agreeable to the law of land. A universal agent is practically substituted for his
principal for all those transactions wherein his principal cannot participate. A
Universal agent is one who is authorised to do all the acts which the Principal can
lawfully do and can delegate.

For Example: When a person leaves his country for a long time, he may appoint
his son, wife or friend as his universal agent to act on his behalf in his absence.

Co-Agent- Agents together appointed to do an act jointly. When a principal

appoints two or more persons agents jointly or severally, such agents are known
as co-agents. Their authority is joint when nothing is mentioned about the exercise
of their authority. It implies that all co-agents concur in the exercise of their
authority unless their authority is fixed. But when their authority is several, any
one of the co-agents can act without the concurrence of other.

Factor- An agent who is remunerated by a commission (one who looks like the
apparent owner of the things concerned). A factor is a mercantile agent to home
goods is entrusted for sale. He enjoys wide discretionary powers in relation to the
sale of goods. A Factor is an agent who is entrusted with the possession and
contract of the goods to be said by him for his Principal. He has possession of the
goods, authority to sell them in his own name and a general discretion as to this
sale. He may sale on the usual term of credit may receive the price and give a
good discharge to the buyer.

Broker- An agent whose job is to create a contractual relationship between two

parties. He is one who is employed to make contracts for the purchase and sale of
goods. He is not entrusted with the possession of goods. He simply act as a
connecting link and bring it to parties together to bargain and if the circumstances
materialise he becomes entitled to his commission called brokerage. He makes a
contract in the name of his Principal. Thus, a broker is an agent primarily
employed to negotiable a contract between two parties where he is a broker for
sale he has no position of the goods to be sold.

Auctioneer- An agent who acts a seller for the Principal in an auction. An

auctioneer is a mercantile agent who is appointed to sell goods on behalf of the
principal i.e., seller and for this function, an auctioneer get a reward in the form of
a commission. An auctioneer conducts auction on behalf of a seller, as he is
primarily the agent of the seller. However, after the sale, he also becomes of the
purchaser who gives the highest bid. An auctioneer has no authority to sell the
goods of his principal by private contract or contracts. An auctioneer is an agent
to sell property at a public auction. He is primary an agent for the seller, but upon
the property being knocked down he becomes also the agent of the buyer. He is
mercantile agent within the meaning of Section 2(9) of the Sale of goods Act.

Commission Agent- An appointed to buy and sell goods (make the best purchase)
for his Principal. Commission Agent is a mercantile Agent who buys or sells goods
for his Principal on the best possible terms in his own name and who receives
Commission for his labours. He may have possession of course or not.

Del Credere- An agent who acts as a salesperson, broker and guarantor for the
Principal. He guarantees the credit extended to the buyer. He is one who in
consideration of an extra commission guarantee his Principal that the third person
with whom he enters into contracts on behalf of the principal shall perform their
financial obligations that is, if the buyer does not pay, he will pay. Thus, he
occupies the position of a surety it as well as an Agent. He is not answerable to his
principle for the failure of the third person to perform the contract. A del credere
agent constituted an exception to this rule.

Besides the above-mentioned agents, there are other types of agents also such as
brokers, bankers, clearing agents, forwarding agents, underwriter, estate agents,
etc. They also play an important role and perform various functions for and on
behalf of their principals.

Bank and Bankers is the agent of the customers because the relationship between
banker and customer is generally creditor and debtors. The bankers collect cheque,
draft or bills or buys and sales securities on behalf and get commissions from the
customer as considerations for services.

Non-Mercantile Agent: The agent who is unrelated with business activities. It

includes estate agent, house agent, election agent, promoter, insurance agents,
solicitors, clearing and forwarding agent etc. These include attorneys.

Agency between Husband and Wife

Generally, there exists no agency between a husband and wife, except in cases
where it has expressly or impliedly been sanctioned that either of them would do
certain acts or transactions as the agent of the other. That is, a relationship of
agency can come into existence between the two through contract, appointment,
or ratification.

A married woman cohabiting with her husband is presumed to have the power to
pledge the credit of her husband for necessaries. It means for the domestic use or
which may be of use of her husband, herself or children. If such goods or services
are necessary to the conditions of life of that family, the husband becomes bound
to pay for them. This results in an agency of necessity where the wife can use her
husband’s credit for what is necessary for her to live. But in cases where they are
separated because of the wife’s own whims or faults, for no just reason, the
husband is not liable for the wife’s necessaries. If they are living separately, there
is presumed to be no such authority in wife to pledge the credit of her husband.

Wife as Agent

Where a husband and wife are living together, we presume that the wife has her
husband’s authority to pledge his credit for the purchase of necessaries of life
suitable to their standard of living. But the husband will not be liable if he shows
that:

(i) he had expressly warned the tradesman not to supply goods on credit to his
wife; or

(ii) he had expressly forbidden the wife to use his credit; or

(iii) he already sufficiently supplies his wife with the articles in question; or

(iv) he supplies his wife with a sufficient allowance.

Similarly, where any person is held out by another as his agent, the third-party can
hold that person liable for the acts of the ostensible agent, or the agent by holding
out. Partners are each other’s agents for making contracts in the ordinary course
of the partnership business.

Sub-Agent

Who is a sub-agent?
An agent may sometimes delegate the duty that has been delegated to him by the
Principal to somebody else. Ordinarily, an agent cannot delegate the duty he is
supposed to perform himself to another person (Delegatus Non Potest Delegare),
except in particular circumstances where he must, out of necessity, do so. Section
191 of the Indian Contract Act, 1872 defines a sub-agent to be a person employed
by and acting under the control of the original agent in the business of the agency.

Delegatus non potest delegare

An agent cannot in ordinary circumstances delegate the duty that was delegated to
him. The principle is based upon the idea that when a Principal appoints an agent,
he does so by placing his confidence and trust in the agent and might not have
similar trust in the work of another person.

Difference between sub-agent and substituted agent

The difference between sub-agent and the substituted agent is very fundamental.
When a person, in the capacity of an agent, is asked to name someone for a certain
task, the person who is named does not become a sub-agent to the Principal, but a
substituted agent.

Illustration

Sarah asks her solicitor to appoint an auctioneer to sell her antique merchandise.
Her solicitor appoints Naaz as an auctioneer. In this case, Naaz is not a sub- agent
but is, in fact, a substituted agent for this sale.
Difference between Sub-Agent and Substituted-Agent

No Sub-Agent Substituted-Agent

1 Definition : Definition :

According to Section 191 of A Substituted agent is a person

the Indian Contract Act, 1872 - A who is named by the Agent for
“sub-agent” is a person employed performing such part of the business
by, and acting undue the control of, of the agency as is entrusted to him.
the original agent in the business of
the agency.

Substituted Agent works under the

2 Sub-Agent works under the control
control of the Principle and he is an
of the Agent. He is the agent of the
agent of the agent.
Principle.

3 Sub-Agent is responsible to the Substituted Agent is responsible to

Agent. the principal

4 The Agent is responsible for the The agent is not responsible for the
acts of the sub-agent. acts of the substituted-agent

5 There is no Privity of contract There is privity of Contract between

between the Principle and sub- the Principal and substituted-agent.
agent.
No Sub-Agent Co-agent /Substituted Agent

1 Who is sub-agent? Sub Agent Who is co-agent/ Substituted Agent?

is a person employed by the Substituted agent is a person, who is
original agent. named by the agent with the express
or implied authority of the principal.

2 Section 191 of the Indian Section 194 of the Indian Contract Act
Contract Act, 1872 - Deals deals with the Appointment of a Co-
with Sub Agent Agent or Substituted agent.

3 Sub-Agent Works under the Substituted Agent works under the

Control of the Agent and control of the Principal and is an agent
Hence, He is the agent of The of the Agent
Principal.

4
There is no privity of contract There is privity of contract between
between the principal and sub- the principal and substituted agent.
agent.

5
Sub-Agent is responsible to Substituted Agent is responsible to
the Agent. the Principal.

6
The Agent is Responsible for The Agent is not responsible for the
the acts of the sub-agent. acts of the substituted-agent.

Distinction between Agent and Servant

Agent: Servant:
He has the authority to create He ordinarily has no such authority
commercial relationship between the
principal and the third party

An agent may work for several He ordinarily work for only one master
principals at a time at a time. A servant usually provides
services for only one master.

He usually get commission, i.e., An He usually get salary or wages, i.e., A

agent generally received commission servant generally receives salary as
for the acts done from his principal remuneration from his master

Agent is a person who represents but servant is person employed by

another in matter to relating contracts someone to do in a house for a payment.

An agent is bound by lawful Whereas servant acts under direct

instructions of principal but is not under control and supervision of his owner.
a direct control and supervision. He has no discretionary power.
He has a discretionary power
An agent is employed with an authority but servant does not ordinarily do this
to bring the principal into legal kind of acts.
relations with third parties. He
represents his principal in dealings
with third party
Mistakes made by an agent with but mistakes made by servant may
authority are attributed to his principal. make his master liable only when it is
The agent isn’t responsible personally committed at the time of employment
for the act done
Agent is a representative of the A servant may act as an agent office
principal with a high status. master with low standard.

Termination of Agency ( Sec 201- 210)

There are various modes/rules in which the agency can be terminated.
An agency can be terminated or is terminated in the following different ways
and with different rules.

1- When the agent’s authority is revoked by the Principal(Revocation by the

principal)(sec 201)
2- Revocation may be express or implied (sec -207)
3- Revocation possible before the authority has been exercised (sec 203)
4- Revocation when authority has been partly exercised (sec 204)
5- Principal to compensate, if there is premature revocation without
justification (sec 205)
6- Principal should give reasonable notice of revocation (sec 206)
7- When the agent renounces the business of the agency
8- When the business of the agency is completed (Mutual Agreement).By
performance- If agency is made for certain purpose on the completion of
achievements of purpose the agency is terminated.
9- When either of the parties dies or becomes mentally disabled. The death of
the principal or agent terminates the contract of agency.(sec 209)
10- When the Principal is adjudicated an insolvent. Insanity of principal
or (unsound mind), If the principal become insane the contract can be
terminated. (Insolvency of principal) After the insolvency or bankruptcy of
principal if agent acts on behalf of principal, he himself will be liable for
that not the principal. So, after the insolvency the contract of agency
terminates. Not only principal it also applies in case of agent as well.
11- By the act of the parties/ Destruction of the subject matter:- If the
subject matter for which agency was created destroyed then it terminates
the contract of agency.
12- Rescinding (Cancel) the authority by the principal
13- By expiry of time fixed: (sec -208)- If time is fixed for the agency,
whether or not purposes are fulfilled, and the agency is terminated after
expiry of time fixed. If agency is made for some specific purpose and for a
fixed time period the agency terminates when purposes are achieved or time
is lapse.
14- By dissolution of company: - If the company dissolves the agent will
have no more authority provided by the company or principal, and then
contract of agency terminates.
15- By operation of law /By the happening of any event rendering the
agency unlawful: - If subsequent to the contract, law change in such way
which invalidated the transaction, then the agency also terminates.
Subsequent to the contract, if principal and agent became alien enemy the
contract of agency also terminated.
 16- On termination of sub-agent’s authority.(sec -210)
17- The death of one of the joint agents will terminate the agency only as
far as he is concerned, while it will continue to be valid as regards the other
surviving agents in the absence of contrary intention.
18- On the principal becoming an alien enemy.

There are certain rules regarding the revocation of an agent’s authority. It can be
revoked any time before the authority has been exercised. If according to the terms
of the contract between the two, the agency has to continue up-to a certain time,
any prior revocation by the Principal shall be compensated for, to the agent. The
termination does not take effect before it has been communicated to the agent.
Termination of the authority of an agent terminates the authority of all the sub-
agents under him.

The parties by an agreement can create a contract of agency. Similarly, by an

agreement they can terminate it.

Exceptions

Irrevocable Agency: When an agency cannot be put an end to, it is said to be

irrevocable agency. An agency is irrevocable where the agent himself has an
interest in the property which forms the subject-matter of the agency.(sec- 202)

Time when Termination takes Effect: The termination of the authority of an agent
does not, so far as regards the agent, take effect before it becomes known to him.
As regards third persons, it terminates when it comes to their notice.

Termination of an Agency
 By Action of Parties e.g. Performance;

Completion;

Mutual Agreement;

Revocation by principal;

Renunciation by agent;

On giving reasonable notice

By Operation of Law e.g. Death, incapacity, bankruptcy;

Expiry of agency agreement;

Frustration;

Change in Law (illegality).

*Liability of Agent to Third Parties

Agent is not personally liable for a contract, (the principal is), provided he acted
within his authority.

NOTE: – may be liable to Third Party if Third Party was unaware of agency but
agent would be entitled to be indemnified by principal.

If Agent acts > authority = personally liable.

According to Black Law’s Dictionary “A fiduciary relationship created by express

or implied contract or by law in which one party may act on behalf of another party
and bind the other party by words or actions”

The principal is only responsible up to the extent to which the agent is assigned
rights to do act beyond this boundary the principal isn’t responsible but the agent
is self-responsible. While making contract there may be or may not be
consideration. Agency is process of delegating the authority by a principal to the
agent to act and represent from his behalf.
The act done and representation made by an agent aren’t the act of the agent but
are regarded as the act of principal. Therefore, rights and duties created by agent
are the right and duties of the principal. However, some acts relating to personal
skill cannot be done through agency.

Following act can be done through Agency:-

 To do at for himself.
 To run commercial transaction by agent.
 To do transaction with third person.
 To establish legal relation with principal and third person.
We may note that the contract relating to agency is legally recognized in following
criteria:-

 Whatever a person can lawfully do he may also does the same

through an agent.
 He who acts through another is considered to have acted
personally.
All Contracts are agreements but all agreements are not contracts.

Agent’s duties to Principal

An agent owes a number of duties to his principal who varies in degree according
to the nature of agency and circumstances of a case.

An agent has following duties towards his Principal:

 Duty to act according to directions or custom of trade – Sec. 211

He has to conduct the business of the Principal according to the directions
of the Principal. Duty to follow customs, Where the principal has not given
any instructions it is the duty of agent to follow the customs prevailing in
the same kind of business at the place where the agent conducts his business.
 To act under the terms of the contract:- An agent is obliged to perform each
and every term mentioned in the contract towards his principal.
 Duty to act with reasonable care and skill/Duty to carry out the work with
reasonable care, skill and diligence:- Sec. 212 An agent is bound to conduct
the business he is supposed to conduct with as much skill as a person on his
position ordinarily holds. Agent is always bound to act with
 reasonable care, skill and diligence as he possesses and to make
compensation to his principal in respect of direct consequences of his
neglect or want of skill or misconduct.
 Duty to render account – Sec. 213 An agent is supposed to show the
relevant accounts to the Principal as and when the Principal demands. Duty
to keep and render separate and correct accounts, An agent must keep the
money and property of the principal separate. He must keep true, correct
and proper accounts of his all transactions on behalf of his principal and to
be prepared all times to produce them to his principal.
 Duty not to deal on his own account (sec 215 & 216) Accounting must
maintain separate accounts for the principal’s funds & for the agent’s funds,
no intermingling is permitted
o Repudiation of contract by principal when agent deals on his own
account -sec -215
o Principal’s right to claim benefit when agent acting on his own
account – sec 216.
 Duty to communicate with Principal and to obtain Principal’s instructions
– Sec. 214,An agent has the duty to communicate any difficulty whatsoever
he may come across while doing the Principal’s business. He is supposed to
perform due diligence in this regard. Duty to communication in cases of
difficulty, it will be also the agent’s duty to communicate the principal and
obtain his instructions while carrying the business agency.
 Duty to follow instructions/ directions:-(Section 211) The first and
foremast duty of an agent is to act strictly within the scope to the authority
conferred upon him and to carry out the instructions of the principal. It is
duty of an agent in cases of difficulty, to use all reasonable diligence in
communicating with his principal and seeking to obtain his instruction
 Duties to disclose all material circumstances and to obtain the Principal’s
consent in dealings – Sections 215 & 216
If any material fact has been concealed or the business is not carried out in
the manner that the Principal directed, the Principal can repudiate the
contract between them. An agent must not use confidential information
entrusted to him by his principal for his own benefit or against the principal
 Duty to pay sum received for Principal – Sections 217 & 218, If the agent
carries out the business in the manner he wanted to perform it, rather than
on the directions of the Principal, the Principal may claim
 from the agent any benefit he may have achieved through doing so. An agent
is duty bond to pay sums received to the principal on his account.
 Duty not to make secret profit from agency:-An agent’s duty is to be loyal
to his principal. It an agent makes secret profit from its agency, the principal
can demand all the profits from the agent. The agent must not make secret
profit from the extract agency. He must disclose any extra profit that he may
make.
 Duty to protect and preserve the interest entrusted to him – Section 219An
agent must not allow his interest conflict with his duty. For example, he
must not compete with his principal. Loyalty: actions must be strictly for
the benefit of the principal, not in the interest of the agent or a third party

 Duty to act with good faith:- An agent must act in good faith while
representing the principal. Agent should not have any intention to cause
harm to the principal. Obedience: must follow lawful & clearly stated
instructions of the principal
 Duty not to delegate his authority (Sec. 190), An agent must not delegate
his authority to delegate authority agent must have the permission of
principal. As much as possible agent himself performs on behalf of
principal. An agent must not delegate his authority to as sub-agent. This rule
is based on the principle ‘Delegatus non protest delegare’. Delegate cannot
further delegate (Section 190). But there are exceptions for this principle.
 Not disclose confidential information- Though the agent may have
authority from his principal to deal on his accounts, agents are not allowed
to disclose or leak the confidential information of the principal. It is the duty
of agent to maintain privacy and secrecy of such confidential information
of the principal.
 An agent should not set up an adverse title to the goods which he receives
from the principal as an agent. Don’t exceed authority which is given by
the principal.

Illustration

Hala directs her agent Saima to buy a certain house for her. Saima does not buy
the house, and tells Hala that it cannot be bought due to certain reasons, but ends
up buying the house herself. In this case, Hala has the right to claim the house from
Saima at the price which Saima bought it for herself.
If any material fact has been concealed or the business is not carried out in the
manner that the Principal directed, the Principal can repudiate the contract between
them.

Illustration

Hala directs her agent Saima to buy a certain house for her. Saima does not buy
the house, and tells Hala that it cannot be bought due to certain reasons, but ends
up buying the house herself. In this case, Hala has the right to claim the house from
Saima at the price which Saima bought it for herself.

Principal’s duties to Agent

The Principal has duties towards the Agent:

 The Principal is bound to indemnify the agent against any lawful acts done
by him in the exercise of his authority as an agent.
 The Principal is bound to indemnify the agent against any act done by him
in good faith, even if it ended up violating the rights of third parties.
 The Principal is not liable to the agent if the act that is delegated is criminal
in nature. The agent will also in no circumstances be indemnified against
criminal acts.
 The Principal must make compensation to his agent if he causes any injury
to him because of his own competence or lack of skill. Compensation: must
pay the agent for services rendered, & do so in a timely manner
 Liability of Principal for Agent’s Fraud or Misrepresentation. According to
Section 238, The Principal is liable for any fraud or misrepresentation made
by his agent during the course of his business, as if the fraud or
misrepresentation was done by the Principal himself.
 Reimbursement & indemnification: must reimburse agent that disburses
money at principal’s request. Must compensate (indemnify) agent for any
costs incurred as a result of principal’s failure to perform the contract
 Cooperation: must cooperate with & assist an agent in performing his duties
Provide safe working conditions. Agent’s Rights & Remedies: has a
corresponding right for every duty of the principal.
 Liability of Principal to Third Parties For The Acts Of Agent (Sec. 226 to
228) Principal is liable for the acts of agent, The principal is liable for all
 the acts of an agent which are lawful and within the scope of agent’s
authority. The contracts entered into by the agent on behalf of the principal
have the same legal consequences as if these contracts were made by the
principal himself. When agent exceeds his authority: Whether the
acts done within the authority are separable from the acts done beyond
authority. If yes – The principal is not bound for excess acts done by the
agent. If no – The principal is not bound by the transaction and the principal
can repudiate the whole transaction.

Rights of Principal

 Right to repudiate the Transaction

 To claim any resulted benefit from Agency
 Right to Recover Damages
 To Resist Agent’s claim for Indemnity
 Normal contract & tort remedies, Principal’s Rights & Remedies; has
contract remedies for breach of fiduciary duties & tort remedies for Main
actions available:
 Constructive trust: imposed by courts when agent withholds monies that
belong to principal, allows principal to get what he deserves
 Avoidance: principal may avoid any contract entered into with agent if agent
breaches agency duties
 Indemnification: principal can be sued by a third party for an agent’s
negligent conduct, & in certain situations the principal can turn around &
sue agent for an equal amount of damages

Rights of Agent

There are number of rights which an agent has against his principal and third
parties. These areas follows-

Right to get remuneration, (sec – 219) If it is provided in the contract of agent

has right to receive reasonably remuneration for his work for principal. An agent,
when he has wholly carried out the business of the agency has the right to be
remunerated of any expenses suffered by him while conducting the business. The
agent has a right to retain any sums received on account of the principal in the
business of the agency, all moneys due to himself in respect of
his remuneration and advances made or expenses properly incurred by him in
conducting such business.

Right of Lien-(sec – 221)-If agent is not paid lawful charges remunerations or

expenses by his principal and of goods of principal are under his control he can
retain the goods until the lawful charges is paid by principal. This right last till the
lawful charges are fully satisfied. Right of Lien on Principal’s property means the
agent has the right to hold (keep with himself) any movable or immovable property
of the Principal until his due remuneration is paid to him by the Principal. In the
absence of any contract to the contrary, an agent is entitled to retain goods, papers
and other property.

Right to get indemnity- (sec – 222- 224) If principal removes the agent without
concrete reason agent has right to claim compensation from his principal.
Therefore, agent has also right to continue business performance until nothing is
wrong done by agent. The agent has the right to be indemnified against all the
lawful acts done by him during the course of conducting the Principal’s business.
Indemnified by principal in respect of the contract and all losses/liabilities
provided the agent acted within his authority.

o Indemnity for civil wrong- (sec 223)

o No indemnity in case of criminal offences (sec 224)
Right of retainer–(sec – 217 &218) An agent has the right to retain any
remuneration or expenses incurred by him while conducting the Principal’s
business.

Right to Compensation– (sec 225) The Agent has the right to be compensated for
any injury or loss suffered by him due to the lack of skill and competency of the
Principal.

Right of stoppage in transit-Where he has bought goods for his principal by

incurring a personal liability, he has a right of stoppage in transit against the
principal, in respect of the money which he has paid or is liable to pay.Where he
is personally liable to the principal for the price of the goods sold, he stands in the
position of an unpaid seller towards the buyer and can stop the goods in transit on
the insolvency of the buyer.

Delegation

General rule: The general rule is that an agent cannot lawfully employ another act,
which he has expressly or impliedly undertaken to perform personally.
Exceptions

 There is a custom or usage of trade to that effect.

 Where power of the agent to delegate can be inferred from the conduct of
the both the principle and the agent.
 When the principal is aware of the intention of the agent to appoint sub
agent by the does not object to it.
 When principle permits appointment of a sub-agent.
 If the nature of the agency is such that the sub-agent is necessary
 Extent of Agents authority
 Lawful Acts
 Emergency Authority
 Ostensible Authority
Liability of principal
Sec 226- for contracts relationship between the principal and the 3rd
persons becomes bound towards a third person as if he entered into the
contract himself.
- Principal’s liability when agent exceeds authority- principal
is not liable.
- Position when the authorized and unauthorized acts are
separable sec- 227
- Principal’s liability for notice to the agent – sec 299
- Principal’s liability for agent’s fraud, misrepresentation and
torts (sec -238)- do not fall within their authority – it do not
affect their principals.
Personal Liability of an Agent
General Rule – No personal liability [Sec.230], In the absence of contract to
contrary, an Agent cannot – (a) personally enforce contracts entered into by him,
on behalf of his Principal, (b) be held personally liable for them. This is
because the Agent merely acts on behalf of his Principal. Thus, he enjoys
immunity from being personally sued.

Exceptions, i.e. Agent personally as well as Joint & Severally Liable

The Agent is personally liable in the following cases –
Foreign Principal [Sec.230] : Where the contract is made by an Agent for the
sale or purchase of goods for a merchant resident abroad.

Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name
of his Principal.

Right of undisclosed principal to require performance – sec 231

Right of third person against undisclosed principal – sec 232

Liability of pretended agent – sec 235

Principal cannot be sued [Sec.230]: Where the Principal, though disclosed,

cannot be sued, e.g. Principal becoming of unsound mind, subsequent to
appointment of agent.

Acting for a Principal not in existence: Where the Agent acts for a Principal who
is not in existence at the time of making contracts, he shall be personally held liable
e.g. contracts entered into by Promoters before incorporation of a Company are
made in their personal capacity and hence personally liable.

Agency coupled with interest [Sec.202] : Where the Agent has an interest in the
subject matter of agency.

Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or

misrepresentation in matters that are outside the scope of his authority, he is
personally liable, and do not affect his Principal.

Agent exceeds authority & act not ratified: Where an Agent acts either without
any authority or exceeds his authority, he shall be held personally liable when the
principal does not ratify his acts.

Agent receives or pays money: Where an Agent receives or pays money by

mistake or fraud to a third party, he shall be personally liable to such third party.
Also ha can personally sue the third party if the fraud or mistake is accountable to
such third party.

Express Agreement for personal liability: Where an Agent expressly agrees to

be personally bound.

Execution of Contract in his own name: Where an Agent executes a contract in

his own name, without disclosing that he is acting as Agent for a Principal, he
shall be personally liable, e.g. An Agent signs a Negotiable Instrument without
making it clear that he is signing it as an Agent only, he shall be held personally
liable on the same. He would be personally liable as Maker of P/N, even though
he may be described as Agent.

Trade custom or usage: Where trade usage or custom makes an Agent personally
liable.

Agent with special interest: An Agent with special interest or with a beneficial
interest, e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya
v. Narayana]

Action against Agent or Principal [Sec 233] : Where the Agent is personally
liable, a person dealing with him may hold – (a) either him or (b) his Principal or
(c) both of them liable. The liability of Principal and Agent is “joint and several”.

Exclusive liability [Sec. 234]

Where a person has made a contract with an Agent and –Induces such Agent to act
upon it in the belief that only his principal would be held liable,

Induces the principal to act upon it in the belief that only his Agent would be
held liable.

Such Third person cannot later on, shift the liability on to –

The Agent, or The principal, respectively.

Liability for contracts:

Disclosed / Partially disclosed principals: liable to a third party for contract

made by the agent

Undisclosed principals: agent, not the principal, is liable as a party on the contract.
However, if principal has a duty to perform & fails to do so, agent is entitled to
indemnification by principal if third party seeks restitution from agent

Liability for Agent’s Torts: Principal may be liable for agent’s torts if they
result from the following:
Principal’s own tortious conduct

Principal’s authorization of tortious act

Agent’s unauthorized but tortious misrepresentation (if representations were

made within scope of the agency)

Doctrine of Respondeat Superior: principal-employer is liable for any harm caused

to a third party by an agent-employee in the scope of employment. This doctrine
imposes vicarious liability on the employer.

Scope of employment: is employee doing what is normally expected of him, is

employee “on the job” from a time & location standpoint, does the employee’s act
benefit the employer

Liability for employee’s negligence: act causing the injury must have occurred
within the scope of employment, employee going to & from work or to & from
meals is usually considered outside the scope of employment

Notice of dangerous conditions: employer has assumed knowledge of any

dangerous conditions discovered by an employee & pertinent to employment
situation

Liability for employee’s intentional torts: if torts committed within scope of

employment

Liability for Independent Contractor’s Torts: General rule is that the employer is
not liable.

Test: how much control the employer exerts over the contractor. Exceptionally
hazardous activities (blasting) that are contracted are an exception in that there is
no shield for the employer

Liability for Agent’s Crimes: General rule is that a principal or employer is not
liable for agent’s or employee’s crime even if agent acted within scope of authority
or employment.

Parties agreed that the agent will act on behalf & instead of the principal in
negotiating & transacting bus with 3rd persons. 3 types

Special: hired for an ltd purpose (CPA, attorney)

General: employer/employee relations (wider affairs corporate lawyer)

Universal: hired to do everything

Fiduciary: fundamental to agency, means that trust & confidence are involved

Employer-Employee Relations: An employee is someone whose physical conduct

is not entirely controlled, or subject to control, by the employer. Employees who
deal with third parties are typically deemed to be agents.

Employer-Independent contractor Relations: an independent contractor is not

controlled by another or subject to another’s control with regard to physical
conduct. He may or may not be an agent. Main determinant here is how much
control is exercised over the contractor.

Conclusion

Contracts establishing a relationship of the agency are very common in business

law. These can be express or implied. An agency is created when a person
delegates his authority to another person, that is, appoints them to do some specific
job or a number of them in specified areas of work. Establishment of a Principal-
Agent relationship confers rights and duties upon both the parties. There are
various examples of such a relationship: Insurance agency, advertising agency,
travel agency, factors, brokers, del credere agents, etc.

Sale of Goods Act, 1930

The Indian Sale of Goods Act, 1930 is a Mercantile Law, which came into
existence on 1 July 1930, during the British Raj, borrowing heavily from the
Sale of Goods Act 1893. Till 1930 the transactions relating to sale and purchase of
goods were regulated by the Indian contract act, 1872, (sec 76-123) and were
repealed and made separate act called Indian Sale of Goods Act, 1930. The act
was amended on 23 September 1963, and was renamed to the Sale of Goods
Act, 1930. It is still in force in India. The Sale of Goods Act, 1930 herein referred
to as the Act, is the law that governs the sale of goods in all parts of India.

Originally, the transactions related to sale and purchase of goods was regulated by
Chapter VII (Sections 76 to 123) of Indian Contract Act, 1872 – which was
broadly based on English common law. A need was felt to overhaul the law due to
rapid growth of mercantile transactions and various progressive English judgments
being passed to meet the needs of the community. Thus, the provisions of Chapter
VII were repealed, suitably amended keeping in mind the English Sales of Goods,
1893 and recent judicial decisions of the time. A separate act, the Sale of Goods
Act came into force on 1st July 1930. It does not affect rights, interests, obligations
and titles acquired before the commencement of the Act. The Act deals with sale
but not with mortgage or pledge of the goods.

The contacts for sale of goods are subject to the general principles of the law
relating to contracts i.e. the Indian Contact Act. A contract for sale of goods has,
however, certain peculiar features such as, transfer of ownership of the goods,
delivery of goods rights and duties of the buyer and seller, remedies for breach of
contract, conditions and warranties implied under a contract for sale of goods,
etc.

Law pertaining to sale of goods- identical application to domestic as well as

international transaction.

Normally, the price of goods is paid when delivery is made. But there are several
variations, mostly because parties are known to each other and repose trust admits
themselves.

The Act defines various terms which are contained in the act itself.

Buyer and Seller

As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to buy
goods. Since a sale constitutes a contract between two parties, a buyer is one of the
parties to the contract.

The Act defines seller in sec 2(13). A seller is someone who sells or has agreed to
sell goods. For a sales contract to come into existence, both the buyers and seller
must be defined by the Act. These two terms represent the two parties of a sales
contract.

A faint difference between the definition of buyer and seller established by the Act
and the colloquial meaning of buyer and seller is that as per the act, even the person
who agrees to buy or sell is qualified as a buyer or a seller. The actual transfer of
goods doesn’t have to take place for the identification of the two parties of a sales
contract.

Goods
One of the most crucial terms to define is the goods that are to be included in the
contract for sale. The Act defines the term “Goods” in its sec 2(7) as all types of
movable property. The sec 2(7) of the Act goes as follows:
“Every kind of movable property other than actionable claims and money; and
includes stock and shares, growing crops, grass, and things attached to or forming
part of the land which are agreed to be severed before sale or under the contract of
sale will be considered goods”

As you can see, shares and stocks are also defined as goods by the Act. The term
actionable claims mean those claims which are eligible to be enforced or initiated by
a suit or legal action. This means that those claim where an action such as recovery
by auction, suit, refunds etc. could be initiated to recover or realize the claim. We say
that goods are in a deliverable state when their condition is such that the buyer
would, under the contract, be bound to take delivery of these goods.

Contract
A Contract of Sale is:

 an offer to buy for a price, or

 An offer to sell good for a price, and
 the acceptance of such offer.

A Contract may provide for:

 the immediate delivery of the goods, or
 immediate payment of the price, or
 the immediate delivery of the goods and payment both, or
 for the delivery or payment by instalments, or
 That the delivery or payment or both shall be postponed.
 per the Section 5 sub-clause (2) - Subject to the provisions of any law for the
time being in force, a contract of sale may be made-
 in writing or
 by word of mouth, or
 partly in writing and partly by word of mouth or
 may be implied from the conduct of the parties

FORMATION OF CONTRACT OF SALE

CONTRACT OF SALE OF GOODS

A contract of goods is a contract whereby the seller transfers or agrees to transfer

the property to goods to the buyer for a price. There may be a contract of sale
between one part-owner and another [Sec. 4(1)]. A contract of sale may be
absolute or conditional [Sec 4(2)].

The term ‘contract of sale’ is a generic term and includes both a sale and an
agreement to sell.

Sale and agreement to sell: when under a contract of sale, the property in the goods
is transferred from the seller to the buyer, the contract is called a ‘sale’, but where
the transfer of the property in the goods is to take place at a future time or subject
to some conditions thereafter to be fulfilled, the contract is called an ‘agreement
to sell’ [Sec. 4(3)]. An agreement to sell becomes a sale when time elapses or the
conditions, subject to which the property in the goods is to be transferred, are
fulfilled [Sec. 4(4)].

Definition of Sale

Section 4 of the Sales of Goods Act, 1930 defines a sale of goods as a “contract of
sale whereby the seller transfers or agrees to transfer the property in goods to the
buyer for price”. The term ‘contract of sale’ includes both a sale and an agreement
to sell.
A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer by the other party. The contract may be oral or in writing.
A contract of sale may be absolute or conditional.

Formalities of a contract of sale: Section 5 of the Act specifically provides for the
following three steps or formalities in a contract of sale:

1) Offer and Acceptance: A contract of sale is made by an offer to buy or sell the
goods for a price and acceptance of such offer.

2) Delivery and Payment: It is not necessary that the payment for the goods to
the seller and delivery of goods to the buyer must be simultaneous. They can be
made at different times or in instalments – as per the contract.

3) Express or Implied: The contract can be in writing, oral or implied. It can also
be partly oral and partly written.

Essential features

The five essential features of a contract of sale are as discussed below:

1) Two parties (It is a contract between 2 parties, one known as the seller and
the other the buyer)

.2) Subject matter to be goods

3) Transfer of ownership of goods (The seller should transfer or agree to transfer

the property (ownership) in the goods to the buyer) Passing of property in the
goods.

4) Consideration is price (The transfer of property (ownership) in the goods from

the seller to the buyer is for consideration known as, ‘price’)

5) Essential elements of a valid contract- Agreement between the competent

parties

1) Two parties: there must be 2 distinct parties i.e. a buyer and a seller, to affect
a contract of sale and they must be competent to contract. ‘Buyer’ means a person
who buys or agrees to buy goods [Sec. 2(1)]. ‘Seller’ means a person who sells or
agrees to sell goods [Sec. (13)].

A sale has to be bilateral because the goods have to pass from one person to
another. The seller and the buyer must be different persons. A part owner can
sell to another part owner. A partner may, therefore, sell to his firm or a firm may
sell to a partner. But if joint owners distribute property among themselves as per
mutual agreement, it is not ‘sale’. A person cannot be the seller of his own goods
as well as the buyers of them.

However, when a bankrupt person’s goods are sold under an execution of decree,
the person may buy back his own goods from his trustee.

2) Subject matter to be goods: Goods: there must be some goods the property in
which is or is to be transferred from the seller to the buyer. The goods which form
the subject-matter of the contract of sale must be movable. Transfer of immovable
property is not regulated by the Sale of Goods Act.

The term ‘goods’ is defined in Section 2(7). It states that ‘goods’ “means every
kind of movable property other than actionable claims and money; and includes
stock and shares, growing crops, grass and things attached to or forming part of
the land which are agreed to be severed before sale or under the contract of sale”.

Money cannot be sold because money means legal tender and not the old coins
which can be sold and purchased as goods. Actionable claims are things that a
person cannot make use of, but which can be claimed by him by means of legal
action such as a debt.

Sale of immovable property is not covered under this Act. As per Section 3 of the
Transfer of Property Act, 1882, ‘immovable property’ does not include standing
timber, growing crops or grass. They are considered movable property and thus
goods. Standing timber is taken as movable property while trees are immovable
property.

Things like goodwill, copyright, trademark, patents, water, gas, electricity are all
goods. In the case of Commissioner of Sales Tax vs. Madhya Pradesh Electricity
Board [AIR 1970 SC 732], the Supreme Court observed – “…electricity…can be
transmitted, transferred, delivered, stored, possessed, etc., in the same way as any
other movable property…If there can be sale and purchase of electric energy like
any other movable object, we see no difficulty in holding that electric energy was
intended to be covered by the definition of “goods”.

In the case of H. Anraj vs. Government of Tamil Nadu [AIR 1986 SC 63], it was
held that lottery tickets are goods and not actionable claims. Thus, sale of
lottery tickets is sale of goods. Sugarcane supplied to a sugar factory is goods
within the meaning of Section 2(7) of the Act as held in the case of UP Cooperative
Cane Unions Federation vs. West UP Sugar Mills Assn. [AIR 2004 SC 3697]

3) Transfer of ownership of Goods: There must be transfer of ownership or an

agreement to transfer the ownership of goods from the seller to the buyer – not the
transfer of mere possession or limited interest as in the case of pledge, lease or hire
purchase agreement). If goods remain in possession of seller after sale transaction
is over, the ‘possession’ is with seller, but ‘ownership’ is with buyer. The Act uses
the term ‘general property’ implying that sale involves total ownership and not a
specific right limited by conditions.

Delivery of goods refers to a voluntary transfer of possession of goods from one

person to another. Delivery may be constructive or actual depending upon the
circumstances of each case. A contract may provide for the immediate delivery of
the goods or immediate payment of the price or both. Alternatively, the delivery
or payment may be made by instalments or be postponed.

4) Consideration is Price: Price is an essential ingredient for all transactions of

sale and in the absence of the price or the consideration, the transfer is not regarded
as a sale. The transfer by way of sale must be in exchange for a price. It has been
held that price normally means money considerations for a sale of goods sec 2
(10). The price can be paid fully in cash or it can be partly paid and partly promised
to be paid in future. The price can be fixed by the agreement between the parties
before the conveyance of the property. When goods are exchanged for goods, it is
a contract of barter or exchange-(Commissioner of Income Tax v Motar and
General Store ltd. AIR, 1968.S.C.200). When there is no consideration for the
contract and the transfer is gratuitous, the transaction will be by way of gift.
The consideration in a contract of sale has to be price i.e., money. If goods are
offered as the consideration for goods, it will not amount to sale. It will be barter.
If there is no consideration, it will be called gift. But where the goods are sold for
definite sum and the price is paid partly in kind and partly in cash, the transaction
is a sale.

Consideration is an essential for a valid contract as per the Indian Contract Act,
1872. It is the duty of a buyer who has received and appropriated the goods to pay
a reasonable price. According to Section 2(10) ‘price’ means the money
consideration for the sale of goods. If the price is not fixed, the contract is void
ab initio.

Section 9 lays down how the price may be fixed in a contract of sale:

a) It can be fixed by the contract itself; or

b) It can be fixed in a manner provided by the contract, such as appointment of a

valuer; or

c) It can be determined by the course of dealings between the parties; or

d) If the price is not capable of being fixed in any of the ways mentioned ways,
the buyer is bound to pay reasonable price. What is a reasonable price is a question
of fact dependent on the circumstances of each particular case. It is not necessary
that reasonable price should be equal to the market price.

Section 10 makes it clear that if the third party appointed under the agreement to
fix the price cannot or does not make such valuation, then the agreement to sell
goods will become void. If the third party is prevented in his valuation due to the
buyer or the seller, the party not at fault can file a suit for damages against the
party in fault.

5) Essential elements of a valid contract: All essential elements of a valid

contract must be present in the contract of sale. viz., competent parties, free
consent, legal object and so on. The transfer of possession and ownership under
the Act has to be voluntary and not be tainted with fraud or duress.

Time: Any stipulation with respect to time is not deemed to be of essence to a

contract of sale unless a different intention appears from the terms of the contract.

Unless all these ingredients of sale are duly proved, mere entry or endorsement
made by the registering authority under sec 31 of the motor vehicles act showing
transfer of ownership of the vehicle. Thus, to constitute a transaction of sale of
goods the essential ingredients of sale under the sale of goods act have to be
proved.

Contract under statutory compulsion- sometimes a contract may not be entered

into by the normal process of negotiation, but under a statutory compulsion. When
the goods are supplied under a statutory compulsion. When the goods are supplied
under a statutory compulsion whether that results in sale or not, is the question
which has arisen in a number of cases.
Coffee Board Karnataka v Commissioner of Commercial Taxes, it has been
held that the compulsory delivery of coffee by the coffee growers to the coffee
board constitutes a sale and not compulsory acquisition, and the state can impose
purchase tax on the same.

Performance – they may provide that the delivery of the goods will be made
either immediately or by instalments or on some future date. Similarly, regarding
the payment of price too the contract may require either immediate payment, or
payment by instalments or the payment on some future date.

Compliance of the provisions of the sale of goods act

The transfer of title in any goods, e.g., a car depends on fulfilment of the provisions
of the sale of goods act, rather than the provisions of the Motar vehicles act, 1939.

Transfer of general property: There must be a transfer of general property as

distinguishes from special property in goods from the seller to the buyer. For
e.g. if A owns certain goods he has general property in the goods. If he pledges
them with B, B has special property in the goods.

Valuation by a third party-: It has noted that one of the modes of determinations
of the price may be by the valuation being made by a third party. Sec 10(1)
provides that if a third party who is supposed to make valuation cannot or does
not make such valuation, the agreement is thereby avoided.

The effect of perishing of goods may be discussed under the following heads:

Sections 7 and 8 deal with the effect of perishing of goods on the rights and
obligations of the parties to a contract of sale. Under these Sections, the word
‘perishing’ means not only physical destruction of the goods but it also covers:

(a) Damage to goods so that the goods have ceased to exist in the commercial
sense, i.e., their merchantable character as such has been lost by water and
becomes almost stone or where sugar becomes sharbat and thus are unsaleable as
cement or sugar;

(b) Loss of goods by theft (Barrow Ltd. vs. Phillips Ltd.);

(c) Where the goods have been lawfully requisitioned by the government (Re
Shipton, Anderson & Co.).
It may also be mentioned that it is only the perishing of specific and ascertained
goods that affects a contract of sale. Where, therefore, unascertained goods form
the subject-matter of a contract of sale, their perishing does not affect the contract
and the seller is bound to supply the goods from wherever he likes, otherwise be
liable for breach of contract. Thus, where A agrees to sell to B ten bales of Egyptian
cotton out of 100 bales lying in his godown and the bales in the godown are
completely destroyed by fire, the contract does not become void. A must supply
ten bales of cotton after purchasing them from the market or pay damages for the
breach.

EFFECT OF DESTRUCTION OF GOODS:

Perishing of goods at or before making of the contract (Sec. 7):

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 the seller, perished. The same would be the case where the goods
become so damaged as no longer to answer to their description in the contract.

This may again be divided into the following sub-heads:

(i) In case of perishing of the whole of the goods:

Where specific goods form the subject- matter of a contract of sale (both actual
sale and agreement to sell), and they, without the knowledge of the seller, perish,
at or before the time of the contract, the contract is void. This provision is based
either on the ground of mutual mistake as to a matter of fact essential to the
agreement, or on the ground of impossibility of performance, both of which render
an agreement void ab-initio.

Illustrations :
(a) A sold to B a specific cargo of goods supposed to be on its way from England
to Bombay. It turned out, that before the day of the bargain, the ship conveying the
cargo had been cast away and the goods were lost. Neither party was aware of the
fact. The agreement was held to be void (Hastie vs Conturier).

(b) A agrees to sell to B a certain horse. It turns out that the horse was dead at the
time of bargain, though neither party was aware of the fact. The agreement is
void.

(ii) In case of perishing of only ‘a part’ of the goods. Where in a contract for the
sale of specific goods, only part of the goods are destroyed or damaged, the effect
of perishing will depend upon whether the contract is entire or divisible.
If it is entire (i.e., indivisible) and only part of the goods had perished, the contract
is void. If the contract is divisible, it will not be void and the part available in good
condition must be accepted by the buyer.

Illustration :
1. There was a contract for the sale of a parcel containing 700 bags of Chinese
groundnuts of different qualities. Unknown to the seller, 109 bags had been stolen
at the time of the contract. The seller delivered the remaining 591 bags, and on the
buyer’s refusal to take them, brought an auction for the price. It was held that the
contract, being indivisible, had become void by reason of the loss of the goods
and the buyer was not bound to take delivery of 591 bags or pay for the goods
(Barrow Ltd. vs. Philips Ltd.) (Note that, had there been all bags of the same
weight and quality for certain price per bag, the contract would have been
divisible and the buyer could not have avoided the contract as to those goods
which had actually perished).

2. Perishing of goods before sale but after agreement to sell Sec. 8:

Goods perishing after the agreement to sell but before the sale is effected --
An agreement to sell specific goods becomes void if subsequently the goods,
without any fault on the part of the seller or the buyer, perish or become so
damaged as no longer to answer to their description in the agreement before the
risk passes to the buyer, ‘Fault’ means wrongful act or default [Sec 2(5)]

1Where there is an agreement, to sell specific goods and subsequently the goods,
without, any fault on the part of the seller or buyer, perish before the risk passed
to the buyer, the agreement is there by avoided. This Provision is based or the
ground of Supervening impossibility of performance which makes a contract void.

If only part of the goods agreed to be sold perish, the contract becomes void if it
is indivisible. But if it is divisible then the parties are absolved from their
obligations only to the extent of the perishing of the goods (i.e., the contract
remains valid as regards the part available in good condition).

It must further be noted that if fault of either party causes the destruction of the
goods, then the party in default is liable for non-delivery or to pay for the goods,
as the case may be (Sec. 26). Again, if the risk has passed to the buyer, he must
pay for the goods, though undelivered [unless otherwise agreed risk prima facie
passes with the property (Sec. 26).]

Illustrations :
(a) A buyer took a horse on a trial for 8 days on condition that if found suitable for
his purpose, the bargain would become absolute. The horse died on the
3rd day without any fault of either party. Held, the contact, which was in the form
of an agreement to sell, becomes void and the seller should bear the loss (Elphick
vs. Barnes).
(b) A, had contracted to erect machinery on M’s premises, the price was to be paid
on completion. During the course of the work, there was a fire which completely
destroyed the premises and the machinery. It was held that both parties were
excused from further performance and A was not entitled to any payment as the
price was payable on the completion of entire work (Appleby vs. Myers.).

Effect of Perishing of Future Goods:

As observed earlier, a present sale of future goods always operates as an agreement
to sell [Sec. 6(3)]. As such there arises a question as to whether Section 8 applies
to a contract of sale of future goods (amounting to an agreement to sell”) as well?
The answer is found in the leading case of Howell vs. Coopland, where it has been
held that future goods, if sufficiently identified, are to be treated as specific goods,
the destruction of which makes the contract void. The facts of the case are as
follows:

Illustration :
C agreed to sell to H 200 tons of potatoes to be grown on C’s land. C sowed
sufficient land to grow the required quantity of potatoes, but without any fault on
his part, a disease attacked the crop and he could deliver only about ten tons. The
contract was held to have become void.

Classification of goods

‘Goods’ have been defined under sec 2(7) of the Sale of Goods Act, 1930, to
include every kind of movable

e property, including stocks, shares, crops, grass, severable objects, etc. It is

supplemented by the definitions of movable and immovable property under sec
3(36) and sec 3(26) of the General Clauses Act, 1897.

This primarily investigates the dilemma regarding the scope of definition of

“goods” for the purposes of Sale of Goods Act, 1930 (hereinafter referred to as the
‘Act’). I have differentiated the position of law in England and India. However,
due to the vastness of the definition I have limited the scope of my concept to three
of the major commodities which have been subject of controversies, namely:

(1) Electricity,
(2) Lottery tickets, and

(3) Software programs.

Definition of “goods”

‘Goods’ is defined as per Section 2 (7) of the ‘Act’ as. “Every kind of movable
property other than actionable claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale.”

Definition of “Movable Property”

As per section 3(36) of the General Clauses Act 1897, “movable property” is
defined as “property of every description except immovable property.” Section
3(26) of the same Act reads as, “Immovable property shall include land, benefits
to arise out of land, and things attached to the earth, or permanently fastened to
anything attached to the earth.”

Hence, a conjoint reading of the two sections gives us a clear definition that
anything that is attached to the land maybe termed as “movable property”,
provided that there is an element of severability involved. The element of
severability is important while deciding on the nature of the property, and this
element can be established by ascertaining the nature of the property, intention of
the parties and the terms of the contract between them. For instance, timber falls
under the ambit of “goods” as per S.2(7) because timber trees are severed from the
land for the purpose of sale and hence they become a commercial commodity- M/s
Mukesh Kumar Aggarwal & Co. V. State of M.P.

Perumal v Ramaswami, AIR 1969 Mad.346.- if an oil engine is attached to the

earth and it is used as long as it can, and it can be detached and shifted to some
other place when it is not used, such an engine is not immovable property.

In the case of Tata Consultancy Services v. State of Andhra Pradesh it was held
that property as per Sale of Goods Act means general property over the goods and
not merely a specific property. The usage of the word ‘includes’ further expands
the definition, as it includes in the definition not only goods of the prescribed
nature but it also imports those things that are specifically provided by the
interpretation clause.

Difference between the English law and the Indian law

In English law as per Sec. 61(1) of the Sale of Goods Act 1979, “goods” include
personal chattels which can be further divided into “choses in possession” and
“choses in action”. As per the English law only the former is
included in the definition of “goods” whereas the latter which include commodities
like shares, debentures, bills of exchange, and other negotiable instruments are
excluded from the definition as they all are actionable claims. On the other
hand in India, the definition as elucidated in Sec.2(7) is much wider in scope than
the English definition as it includes stocks and shares as within the scope of
“goods”.

The following discussion primarily focuses on the point that whether certain
types of commodities can be included within the definition of “goods” or not.

 Electricity (water, gas) as “goods”: Inclusion of intangible energy

within the definition of goods

Electricity does not come under the definition of “goods” as per English law.
There have been judicial decisions in England where electricity has been referred
to as ‘thing’ and an ‘article’ and also as ‘tangible personal property’, but there
has been no judicial decision which includes electricity within the definition of
‘goods’ for the purpose of Sale of Goods Act. Moreover, the legal possession of
electrical energy is a challenging proposition as “it is capable of being kept or
stored only by changing the physical or chemical state of other property which is
itself the subject of possession.”

In India however, the situation is quite different. In the Calcutta High Court case
of Associated Power Co. v. R.T. Roy it was held that electricity comes under the
ambit of ‘goods’ under the article 366 (12) of the Constitution as well as S. 2 (7)
of the ‘Act’. This proposition was affirmed in a Madras High Court case where the
learned judge held that electricity was under the definition of ‘goods’ since it is
capable of delivery, and it does not matter whether it is a tangible or intangible
form of energy. The Law Commission of India in its 8th report proposed that
electricity and water should be included in the definition of ‘goods’ under S. 2(7)
of the ‘Act’. Meanwhile, the Supreme Court while discussing about the definition
of ‘goods’ as mentioned in the Madhya Pradesh Sales Tax Act (2 of 1959), found
that the definition included all kinds of movable property. The court further held
that:

“The term “movable property” when considered with reference to “goods” as

defined for the purposes of sales tax cannot be taken in a narrow sense and merely
because electric energy is not tangible or cannot be moved or touched like, for
instance, a piece of wood or a book it cannot cease to be movable property when
it has all the attributes of such property……It can be transmitted, transferred,
delivered, stored, possessed etc., in the same way as any other movable property.”
However, Pollock & Mulla, in their commentaries, have expressed their concerns
over the applicability of the ‘Act’ for electricity because, there is no contractual
obligation on part of the public authority to supply ‘electricity’, rather it is a
statutory obligation on part of the authority providing these ‘goods’. The supply
of such commodities would not amount to a ‘sale’ for the purposes of the ‘Act’.
As a result, any breach or failure on part of the public body to supply electricity
would be dependent upon the terms of the statute governing the public body.

Thus, on one hand it can be said that ‘electricity’ comes under the definition of
‘goods’ however the applicability of the ‘Act’ in case of sale of electricity is a
dubious proposition.

Electronic T.V. Signals are goods – Jabalpur Cable Network Pvt Ltd v ESPN
Software India Pvt. Ltd, electronic T.V. Signals are in the form of energy just like
electricity and are Goods.

Exclusion of Lottery tickets from the definition of “goods”

As per Black’s Law Dictionary, ‘lottery’ is defined as ‘a chance for a prize for a
price’. For the purposes of the ‘Act’ lottery tickets are clearly a movable property,
however it has been a matter of debate that whether they are an actionable claim
as defined under S.3 of Transfer of Property Act, 1882.

In the Supreme Court case of H. Anraj v. Government of TamilNadu. it was held

that a lottery ticket primarily involved two rights: (1) the right to participate in
the draw and (2) the right to win the prize, depending on chance. In that case it
was held that the former right was a “transfer of a beneficial interest in movable
goods” and hence was a sale within the meaning of Art 366 (29-A)(d) of the
Constitution whereas the latter right was a chose in action and thus not “goods”
for the purpose of levy of sales tax.

However, the ruling of this decision was challenged in a later Supreme Court
verdict of Sunrise Associates v. Government of NCT of Delhi. It was held that
sale of a lottery ticket amount to a sale of an actionable claim. The conclusion of
the Court was based on the reasoning that there was no difference between right
to win and right to participate in a lottery draw, as no purchaser pays the
consideration for a right to participate in the draw, instead he pays it for the right
to win.

Thus, the classification by H. Anraj case of the right to participate as right in

praesenti and the right to win as a right in futuro, was incorrect as both these rights
are in futuro. As a result the earlier judgment was overruled to that extent and
“lottery tickets” were excluded from the definition of “goods”.
Incomplete film- in State of T.N. V Thiru Murugan Bros, sale of an incomplete
film has been held to be goods and the transaction is liable to sales tax. It is
immaterial that in such a case no copyright is acquired.

Fixed deposit receipt is goods, in State Bank of India v Smt.Neela Ashok Naik,
it has been held that fixed deposit receipt is goods. It may be pledged as collateral
security. If the bank loan is not repaid, the bank may retain it as a collateral security
and file suit for recovery of loan.

Conundrum surrounding Software programs

In the case of TCS v. State of Andhra Pradesh the Supreme Court held that a
software program on a CD or a floppy drive would be a “good” for the purposes
of levy of sales tax. A software program is a collection of instructions or
commands that are given to a computer to perform a given task. The main area of
debate is that “Do software programs – being intellectual creations of human mind
– be treated as “goods” for the purposes of the ‘Act’ or not?”

One of the landmark cases in this regard was the case of St Albans City and
District Council v. International Computers Ltd where Sir Iain Glidewell
observed that a hardware device has no use of its own unless it is supplemented
with a software and it was only because of necessity that software was contained
in a physical medium like a disk or a floppy furthermore, in case the disk is sold
and there is a defect with the program, then there would be a prima facie liability
against the disk manufacturer as well. Thus, he held that the tangible disk and the
software program both will be included within the definition of “goods”.

In the TCS case a special mention was given to ‘canned software’, where it was
held by the learned judge that once a software is uploaded on a medium like a CD
or a floppy drive, it ceases to be a work of intellectual creation. This is primarily
because each of these mediums becomes a marketable commodity in itself.[
“Marketability” of a commodity was the determining factor whether it is a “good”
or not. It has also been held that “operational software” which was uploaded on a
hard-disk does not lose its character as a tangible good.

It has also been a matter of debate as to inclusion of computer software within the
definition of “goods” as defined in section 2[41] of the Uniform Commercial
Code, 1952. It is argued that since “custom designed” computer software is a
product of a labour intensive process and it must be considered as a service rather
than a good. However, sale of most of the software programs resemble sales of
any other consumer product available for consumption, and it is usually sold
through separate pre-existing packages. On the other hand
contracts for providing data processing services have been held to be contracts for
services rather than contracts for “goods”.

With the help of the above discussion it is clear that despite of being an intangible
commodity, “computer software” can be included in the definition of “goods” for
the purposes of the ‘Act’.

Exclusion of ‘Money’ from the definition

Money and actionable claim are specifically excluded from the definition of
“goods” under S.2(7) of the ‘Act’, because it is the medium of exchange used
at the time of sale of goods. Hence, money is not regarded as a “chattel but as
something ‘sui generis’”. However, a coin which was intended to be sold as an
item of curiosity will be said to be a “good”, as it was passed on as a commodity
and not as a currency.

Through these judgements have tried to identify some of the major controversies
surrounding certain commodities and their inclusion in the definition of “goods”
as per S.2(7) of the ‘Act’. The discussion helped to prove that “electricity” (even
being an intangible good) comes under the ambit of goods, while on the same hand
lottery tickets (being movable goods per se) are excluded because they are
“actionable claims”. This helps us to show that being a movable property in itself
is not a conclusive proof of being a “good”. Also, the debate on software programs
elucidated the importance on “marketability” aspect of “goods”.

Hence, it evident that due to rapid developments in science and technology, the
definition of goods cannot be compartmentalized into straight jacket distinctions
and the scope of this section will expand over time.

Old and rare coins, however, are goods and they can be sold or purchased as such.
But money constitutes consideration for sale of goods rather than itself being
goods and recognised currency in circulation.

Goods may be classified into:

1. Existing goods;
2. Future goods; and
3. Contingent goods
1. Existing goods: At the time of sales if the goods are physically in existence
and are in possession of the seller the goods are called ‘Existing Goods’. The goods
that are referred to in the contract of sale are termed as existing goods if they are
present (in existence) at the time of the contract. In sec 6 of the Act, the existing
goods are those goods which are in the legal possession or are owned by the seller at
the time of the formulation of the contract of sale. The existing goods are further of
the following types:

a) Specific goods: Goods identified and agreed upon at the time of the making of
the contract of sale are called ‘specific goods’ [Sec. 2(14)]. It may be noted that in
actual practice the term ‘ascertained goods’ is used in the same sense as ‘specific
goods,’ These are those goods that are “identified and agreed upon” when the
contract of sale is formed.

For example, you want to sell your mobile phone online. You put an advertisement
with its picture and information. A buyer agrees to the sale and a contract is formed.
The mobile, in this case, is specific good.

For example, where A agrees to sell to B a particular radio bearing a distinctive

number, there is a contract of sale of specific or ascertained goods.
B) Ascertained Goods: This is a type not defined by the law but by the judicial
interpretation. This term is used for specific goods which have been selected from a
larger set of goods.

For example, you have 500 apples. Out of these 500 apples, you decide to sell 200
apples. To sell these 200 apples, you will need to separate them from the 500 (larger
set). Thus, you specify 200 apples from a larger group of unspecified apples. These
200 apples are now the ascertained goods.
(c) Unascertained goods. The goods, which are not separately identified or
ascertained at the time of the making of the contract, are known as ‘unascertained
goods.’ They are indicated or defined only by description. These are the goods that
have not been specifically identified but have rather been left to be selected from a
larger group

For example, if A agrees to sell to B one bag of sugar out of the lot of one
hundred bags lying in his godown; it is a sale of unascertained goods because it is
not known which bag is to be delivered. As soon as a particular bag is separated from
the lot for delivery, it becomes ascertained or specific goods.

For example, from your 500 apples, you decide to sell 200 apples but you don’t
specify which ones you want to sell. A seller will have the liberty to choose any
200 apples from the lot. These are thus the unascertained goods.

The distinction between ‘specific’ or ‘ascertained’ and ‘unascertained’ goods is

important in connection with the rules regarding ‘transfer of property’ from the seller
to the buyer.

2. Future goods: Future goods are goods to be manufactured or produced or yet

to be acquired by seller. There cannot be present sale in respect future goods
because the property cannot pass. In sec 2(6) of the Act, future goods have been
defined as the goods that will either be manufactured or produced or acquired by the
seller at the time the contract of sale is made. The contract for the sale of future
goods will never have the actual sale in it, it will always be an agreement to sell.

For example, -you have an apple orchard with apples in it. You agree to sell 1000
apples to a buyer after the apples ripe. This is a sale that has to occur in the future
but the goods have been identified already and the agreement made. Such goods are
known as future goods.

Example- A agrees to sell to B all the milk that his cow may yield during the
coming year. This is a contract for the sale of future goods.
X agrees to sell to Y all the mangoes, which will be produced in his garden next
year. It is contract of sale of future goods, amounting to ‘an agreement to sell.’
3. Contingent Goods: Though a type of future goods, these are the goods the
acquisition of which by the seller depends upon a contingency, which may or may
not happen [Sec. 6 (2)]. Contingent goods are actually a subtype of future goods in
the sense that in contingent goods the actual sale is to be done in the future. These
goods are part of a sale contract that has some contingency clause in it. For
example, if you sell your apples from your orchard when the trees are yet to
produce apples, the apples are a contingent good. This sale is dependent on the
condition that the trees are able to produce apples, which may not happen.

Example
A agrees to sell specific goods in a particular ship to B to be delivered on the arrival
of the ship. If the ship arrives but with no such goods on board, the seller is not
liable, for the contract is to deliver the goods should they arrive.

Delivery- The delivery of goods signifies the voluntary transfer of possession from
one person to another. The objective or the end result of any such process which
results in the goods coming into the possession of the buyer is a delivery process.
The delivery could occur even when the goods are transferred to a person other than
the buyer but who is authorized to hold the goods on behalf of the buyer.

There are various forms of delivery as follows:

 Actual Delivery: If the goods are physically given into the possession of the
buyer, the delivery is an actual delivery.
 Constructive delivery: The transfer of goods can be done even when the
transfer is affected without a change in the possession or custody of the goods.
For example, a case of the delivery by attornment or acknowledgment will be
a constructive delivery. If you pick up a parcel on behalf of your friend and
agree to hold on to it for him, it is a constructive delivery.
 Symbolic delivery: This kind of delivery involves the delivery of a thing in
token of a transfer of some other thing. For example, the key of the godowns
with the goods in it, when handed over to the buyer will constitute a symbolic
delivery.

The Document of Title to Goods-From the Sec 2(4) of the act, we can say that
this “includes the bill of lading, dock-warrant, warehouse keeper’s certificate,
railway receipt, multimodal transport document, warrant or order for the delivery of
goods and any other document used in the ordinary course of business as proof of
the possession or control of goods or authorizing or purporting to authorize, either
by endorsement or by delivery, the possessor of the document to transfer or receive
goods thereby represented.”

Mercantile Agent [Section 2(9)]-Mercantile agent is someone who has authority

in the customary course of business, either to sell or consign goods under the
contract on behalf of the one or both of the parties. Examples include auctioneers,
brokers, factors etc.

Property [Section 2(11)]-In the Act, property means ‘ownership’ or the general
property i.e. all ownership right of the goods. A sale constitutes the transfer of
ownership of goods by the seller to the buyer or an agreement of the same.

Insolvent [Section 2(8)]-The Act defines an insolvent person as someone who

ceases to pay his debts in the ordinary course of business or cannot pay his debts as
they become due, whether he has committed an act of insolvency or not.

Price [Section 2(10)]-In the Act, the price is defined as the money consideration
for a sale of goods.

Quality of Goods-In Sec 2(12) of the Act, the quality of goods is referred to as
their state or condition.

SALE & AGREEMENT TO SELL

A contract of sale is a generic term and includes both an actual sale and an
agreement to sell. Section 4 provides that if the property in goods is transferred
from the seller to the buyer under a contract, the contract is called a sale. Where
the transfer of the property in the goods will take place at a future time or is subject
to some condition which has to be fulfilled, the contract is called an agreement to
sell. Such an agreement to sell becomes a sale when the prescribed time lapses or
the conditions are fulfilled.

Basis of
Sale Agreement to Sell
Distinction

Contract It is an executed contract. It is an executory contract.

The property passes when it becomes sale

The property in the goods
on the expiry of prescribed time or the
Transfer of sold passes to the buyer at
fulfilment of certain conditions. It takes
property the time of contract. It passes
place at a future time or subject to
immediately.
fulfilment of conditions.
 It creates a right in rem – a
Conveyance right to enjoy the goods It creates a right in personam – right
of property against the whole world against the seller.
including the seller.

The transfer of risk takes

place immediately. It is
related to ownership and
There is no transfer of risk of loss of
when ownership is
goods as ownership is not transferred. The
Transfer of transferred, the risk also
loss will be borne by the seller even
risk passes to the person. If there
though the goods are in possession of the
is loss of goods, it will fall
buyer.
on the buyer even though the
goods maybe in the
possession of the seller.

Since the property has

Right of The seller can only sue for damages,
passed to the buyer, the
seller in case unless the price was payable at a
seller can sue the buyer for
of breach particular date.
price of the goods.

He can sue the seller for

Right of
damages. He can also sue the
buyer in case He can sue the seller for damages only.
third party who bought those
of breach
goods for the goods.

Insolvency of
He can claim the goods from
seller in He cannot claim the goods but only a
the Official assignee or
possession of rateable dividend for the money paid.
Receiver.
goods

Insolvency of The seller has to deliver the

The seller can refuse to deliver the
buyer before goods to the Official
goods to the Official Assignee or
paying the assignee except where he
price has a lien over the property. Receiver.

The question of paying sales tax arises only in case of a completed sale and not
where there is only agreement to sell.

SALE & HIRE PURCHASE AGREEMENT

A Hire purchase agreement is an agreement for hire of goods where the person
who hires the goods has an option to purchase the goods at the end. The possession
of the goods is delivered to such a hirer and he has to pay via instalments. The
property in the goods passes to the hirer on the payment of the last instalments.
The Hire purchase agreements are treated as bailment and the parties have the same
rights as a bailor and bailee. The hirer has a right to terminate the agreement at any
time before the property passes.

The test whether an agreement is sale or hire purchase was given in the case of
Lee vs. Butler [1893 2 QB 318] – If a person taking the goods has no option to
terminate the agreement, is a contract of sale irrespective of where the price is paid
in instalments.

Basis of
Contract of Sale Hire Purchase Agreement
distinction

A contract of sale is governed by

They are governed by Hire Purchase
Law the Sale of Goods Act, 1930.-
Act, 1972- sec 2(c )
sec 4(1)

It is an agreement to hire and an

Nature of It may be written, oral or
agreement to sell. It has to be in
contract implied.
writing.

Possession may or may not

Possession Possession passes immediately
transfer immediately.

It transferred only when the option to

Transfer of The ownership of goods is
purchase is exercised and the last
ownership transferred immediately. payment is made.

The hirer is a bailee, and not the owner

The buyer becomes the full until he pays all the instalments of the
Buyer
owner of the goods price in full or exercises the option to
purchase.

The buyer can transfer a good

Transfer to The hirer cannot transfer a good title to
title to third parties because
third a third party as ownership has not been
ownership of goods has been
parties transferred.
transferred.

The hire vendor has a right to repossess

Right to The seller can sue for price but
the goods if the hirer defaults in the
repossess he cannot repossess the goods.
payments.

In a sale, there is no option to the

Right to The hirer can terminate the agreement
buyer to return the goods bought.
terminate before the ownership is transferred.

In case of sale of taxable goods, Even if taxable goods are hired, sales
Sales Tax
sales tax is levied. tax is not levied.

SALE OF GOODS & WORK AND LABOUR

A contract of sale of goods is one in which some goods are sold or are to be sold
for a price. It requires the delivery of goods. But there are transactions where there
is a contract of exercise of skill and labour, and the delivery of goods is subsidiary.
These are the contracts for work or labour or the contracts for service. It is the
intention of the parties that creates the difference – whether only delivery of goods
is intended or exercise of skill and labour with regard to the goods has to be
delivered.
Example: A commissions B to paint his portrait and supplies him with the material
to paint. It is a contract for work and labour and not a contract of sale because the
substance of the contract is the artist’s skill and not the delivery of the material.

In a similar case of Robinson vs. Graves [1935 1 KB 579], A, a painter was orally
commissioned by B to paint portrait of a lady. Later, B repudiated the contract
before its completion. It was held that the contract was of work and labour because
the substance of the contract was the skill and experience of the artist in producing
the picture.

Example: A bought a portrait painted by B, a famous artist. It is a contract of sale

and not a contract for work and labour because the substance of the work is the
delivery of the portrait.

In Lee vs. Griffin [1861 30 LJ QB 252], a dentist was engaged by a lady to make
false teeth ‘to be fitted into her mouth’. The lady died before the completion of
work and a question arose as to the nature of the contract. It was held that the
contract was one of sale.

Where gold is given to a goldsmith for preparing ornament, it is a contract of work

and labour. When a photographer takes a photograph, develops the negative and
does other photographic work and then supplies the prints to his client, the contract
is one of skill and labour and not that of sale of goods as held in the case of Asstt.
Sales Tax Officer vs. B C Kame [AIR 1977 SC 1642]

Sale and Barter: A sale is always for a price but in case of barter, the transfer of
ownership of goods is in return for other goods – there is not price paid.

Sale by pawnee of goods, where the bank, in the course of banking business, has
sold the goods pledged with it, it would be covered within the meaning of the term
‘SALE’ of goods under sec 2(13) of the sale of goods act, 1930. In State Bank of
Travancore V Commercial Tax Officer, The bank sold, in public auction,
goods/ornaments/bullion pledged with the bank, in realisation of security, in
exercise of its rights as a pledgee. It is held to be sale within the meaning of sec
2(13) of the act.

Conditions and Warranties

Whenever we buy any goods like electronic gadgets etc, we are concerned about
the warranty periods. We ask the seller about the warranty to make sure
that even if the product is found to be faulty after purchase we can easily get the
product replaced or repaired. The terms “Condition” and “Warranty” are set out in
the contract of sale in order to determine remedies the parties can claim in case of
the breach by either of the parties. Here in this article, we will see the manner how
these terms are defined, their differences and their legality in the light of Sale of
Goods Act, 1930.

Certain provisions need to be fulfilled as demanded in the contract of sale or any

other contract. The condition is a fundamental precondition on the basis of which
the whole contract is based upon, on the other hand, warranty is the written
guarantee wherein the seller commits to repair or replace the product in case of
any fault in the product. Section 11 to 17 of the Sale of Goods Act enlightens the
provisions relating to Conditions and Warranties.

Section 12 of the Act draws a demarcation between a condition and a warranty.

The determination of condition or warranty depends upon the interpretation of the
stipulation. The interpretation should be based on its function rather than the form
of the word used.

The Sale of Goods Act 1930 (hereinafter the Act) contains various provisions
regarding the sale of goods. One such provision is of conditions and warranties. In
Section 12 of the Act the meaning of conditions and warranties are given as under-

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

(2) A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose of the contract, the
breach of which gives rise to a claim for damages but not to a right to reject the
goods and treat the contract as repudiated.

(4) Whether a stipulation in a contract of sale is a condition or a warranty depends

in each case on the construction of the contract. A stipulation may be a condition,
though called a warranty in the contract.

But our concern here is with 'Implied Conditions and Warranties'. If a stipulation
forms the very basis of the contract, or, as stated in S.12(2) is
essential to the main purpose of the contract, it is called a condition. On the other
hand, if the stipulation is not essential to the main purpose of the contract, it is
called warranty S. 12(3).

Parties may expressly provide any conditions or warranties in their contract. For
e.g. for a sale of red saree, to be worn by a woman at a function on a particular
day, it is express condition that it should be red saree for a particular day and
should reach on time. But is there any other condition? Yes, there can be other
conditions also that are not exclusively said by parties but are impliedly
understood. In the said illustration, the implied condition can be of a perfect saree,
not to be torn, matching with selected piece etc. Let's have a deep look into this
provision.

Conditions
In the context of the Sale of Goods Act, 1930, a condition is a foundation of the
entire contract and integral part for performing the contract. The breach of the
conditions gives the right to the aggrieved party to treat the contract as repudiated.
In other words, if the seller fails to fulfil a condition, the buyer has the option to
repudiate the contract or refuse to accept the goods. If the buyer has already paid,
he can recover the prices and also claim the damages for the breach of the contract.

Sec 12(2)-‘A condition is a stipulation essential to the main purpose of the

contract, the breach of which gives rise to a right to treat the contract as
repudiated’.

A condition is referred to as, an essential element attached to the subject matter of

an agreement which is mentioned by the buyer to the seller and is either expressed
or implied while entering into the contract. The buyer can refuse to accept the
goods delivered by the seller, in case of non-compliance with the condition
mentioned by the seller in the contract. The condition may be express or implied.
If while entering into a contract, the buyer mentions (in words or writing) that the
goods are to be delivered to him before a given date, the date is taken as a condition
to the contract since the buyer expressed it. Whereas, if a buyer contracts to buy a
red-coloured saree for her ‘wedding’ which is to be held on a date mentioned to
the seller, then the time is the implied condition for the contract. Even if the buyer
doesn’t mention the date of delivery (but has mentioned the date of the wedding
or occasion), it is implied on the part of the seller that the garment is to be delivered
before the mentioned date of the wedding. In this case, the seller is bound to deliver
the garment before the date of the wedding as the delivery of the garment after the
said date of the wedding is of no use to the buyer and the buyer can refuse to
accept the same since the condition to the contract is not fulfilled.

For example, Sohan wants to purchase a horse from Ravi, which can run at a speed
of 50 km per hour. Ravi shows a horse and says that this horse is well suited for
you. Sohan buys the horse. Later on, he finds that the horse can run only at a speed
of 30 km/hour. This is the breach of condition as the requirement of the buyer is
not fulfilled. The conditions can be further classified as follows.

Kinds of conditions

Expressed Condition

The dictionary meaning of the term is defined as a statement in a legal agreement

that says something must be done or exist in the contract. The conditions which
are imperative to the functioning of the contract and are inserted into the contract
at the will of both the parties are said to be expressed conditions.

Implied Condition

There are several implied conditions which are assumed by the parties in different
kinds of contracts of sale. Say for example the assumption during sale by
description or sale by sample. Implied conditions are described in Section 14 to 17
of the Sale of Goods Act, 1930. Unless otherwise agreed, these implied
conditions are assumed by the parties as if it is incorporated in the contract
itself. Let’s study these conditions briefly:

Warranty
Sec 12(3)-‘A warranty is a stipulation collateral to the main purpose of the
contract, the breach of which gives rise to a claim for damages but not to a right
to reject the goods and treat the contract as repudiated’.

A warranty is referred to as extra information given with respect to the desired

good or its condition. The warranty is of secondary importance to the contract for
its fulfilment. Non-compliance of the seller to the warranty of the contract does
not render the contract repudiated and hence, the buyer cannot refuse to buy the
good but can only claim compensation from the buyer.

Warranty is the additional stipulation and a written guarantee that is collateral to

the main purpose of the contract. The effect of a breach of a warranty is that the
aggrieved party cannot repudiate the whole contract however, can claim for the
damages. Unlike in the case of breach of condition, in the breach of warranty, the
buyer cannot treat the goods as repudiated.

Kinds of Warranty

Expressed Warranty

The warranties which are generally agreed by both the parties and are inserted in
the contract, it is said to be expressed warranties.

Implied Warranty

Implied warranties are those warranties which the parties assumed to have been
incorporated in the contract of sale despite the fact that the parties have not
specifically included them in the contract. Subject to the contract, the following
are the implied warranties in the contract of sale:
  Warranty as to undisturbed possession

Section 14(2) of the given Act provides that there is an implied warranty that the
buyer shall enjoy the uninterrupted possession of goods. As a matter of fact, if the
buyer having got possession of the goods, is later disturbed at any point, he can
sue the seller for the breach of warranty.

For eg: ‘X’ purchased a second-hand bike from ‘Y’. Unknown to the fact that the
bike was a stolen one, he used the bike. Later, he was compelled to return the
same. X is entitled to sue Y for the breach of warranty.

 Warranty as to freedom from Encumbrances

In Section 14(3), there is an implied warranty that the goods shall be free from any
charge or encumbrances that are in favour of any third party not known to the
buyer. But if it is proved that the buyer is known to the fact at the time of entering
into the contract, he will not be entitled to any claim.

For eg: A pledges his goods with C for a loan of Rs. 20000 and promises him to
give the possession. Later on, A sells those goods to B. B is entitled to claim the
damages if he suffers any.

 Implied warranty to disclose Dangerous nature of the goods sold

If the goods sold are inherently dangerous or likely to be dangerous and the buyer
is not aware of the fact, it is the duty of the seller to warn the buyer for the
probable danger. If there would be a breach of this warranty, the seller will be
liable.

For eg: A purchases a horse from B if the horse is violent and then It is the duty of
the seller to inform A about the probable danger. While riding the horse, A was
inflicted with serious injuries. A is entitled to claim damages from B.
CONDITION WARRANTY

A condition is of secondary
A condition is of primary importance.
importance.

In case of a breach of warranty, the

Breach of condition leads to termination
injured party is liable to be
of the contract.
compensated.

The injured party can refuse to accept the The Injured party can only claim
goods as well as claim damages in case of damages in case of breach of
breach of condition. warranty.

The injured party can refuse to accept The Injured party cannot refuse to
goods not fulfilling the condition of the accept the goods not fulfilling the
contract. warranty.

A condition can be treated as a warranty A warranty cannot be treated as a

on the wish of the buyer. condition.

Defined in Section 12(2) of the Sale of Defined in Section 12(3) of the Sale of
Goods Act, 1930. Goods Act, 1930.

BASIS FOR
CONDITION WARRANTY
COMPARISON

It is a stipulation which It is additional stipulation

Meaning forms the very basis of the complementary to the main
contract. purpose of the contract.

Section 12(2) of the Sale of Section 12(3) of the Sale of

Provision Goods Act, 1930 defines Goods Act, 1930 defines
Condition. Condition.

Purpose Condition is basic for the

It is a written guarantee for
formulation of the
 contract. assuring the party.

Result of Breach The whole contract may Only damages can be claimed in
of Contract be treated as repudiated. case of a breach.

Remedies
Repudiation, as well as
available to the Only damages can be claimed.
damages, can be claimed.
aggrieved party

Important note on the differences Between Condition and Warranty

1. A condition is an obligation which requires being fulfilled before another

proposition takes place. A warranty is a surety given by the seller
regarding the state of the product.
2. The condition is vital to the theme of the contract while Warranty is
ancillary.
3. Breach of any condition may result in the termination of the contract while
the breach of warranty may not lead to the cancellation of the contract.
4. Violating a condition means violating a warranty too, but this is not the case
with warranty.
5. In the case of breach of condition, the innocent party has the right to rescind
the contract as well as a claim for damages. On the other hand, in breach of
warranty, the aggrieved party can only sue the other party for damages.

Implied Conditions and Warranties under the Sale of Goods Act

Meaning- Apart from what may be provided by the parties in the contract, certain
conditions and warranties as provided under S.14 to 17 are impliedly there in every
contract of sale of goods. Thus, the stipulation that are implied in a contract of
sale of goods corresponding to their nature of being a condition or warranty as
according to the nature of contract is called as Implied Conditions and Warranties.
They are binding in every contract unless they are inconsistent with any express
condition and warranty agreed by the parties.
Section 14-17 of the Sale of Goods Act, 1930 deal with the implied conditions and
warranties attached to the subject matter for the sale of a good which may or may
not be mentioned in the contract.

Implied Conditions:
There are seven implied conditions in a contract of sale of goods.

Condition as to Title [Section 14(a)]

Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to
title as ‘in the case of a sale, he has a right to sell the goods and that, in the case of
an agreement to sell, he will have a right to sell the goods at the time when the
property is to pass’.

In every contract of sale, the basic yet essential implied conditions on the part of
the seller are that-

1. Firstly, he has the title to sell the goods.

2. Secondly, in case of an agreement to sell, he will have the right to sell
the goods at the time of performing the contract.

Consequently, if the seller has no title to sell the given goods, the buyer may refuse
or reject those goods. He is also entitled to recover the full price paid by him.

In every contract of sale, unless the circumstances are such as to show a different
intention, there is an implied condition on the part of the seller that in case of sale,
he has a right to sell the goods and in the case of agreement to sell, he will have
the right to sell goods at the time when property in them is to pass.

This means that the seller has the right to sell a good only if he is the true owner
and holds the title of the goods or is an agent of the title holder. When a good is
sold the implied condition for the good is its title, i.e. the ownership of the good.
If the seller does not own the title of the said good himself and sells it to the buyer,
it is a breach of condition. In such a situation the buyer can return the
goods to the seller and claim his money back or refuse to accept the good before
delivery or whenever he learns about the false title of the seller.

CASE LAW: Rowland v Divall, 192210 – The plaintiff had purchased a car from
the defendant and was compelled to return it to the true owner after having used it
for a while. The plaintiff then sued the defendant for the purchase money, since
the defendant didn’t receive the consideration as per the condition of the title of
ownership.

If the goods bears labels infringing the trademark of a third party, the seller has no
rights to sell them. In Niblett v Confectioners' Material, the claimant purchased
1,000 tins of condensed milk from the defendant. The tins were labelled 'Nissly'.
Nestle told the claimant that if they attempted to sell these on, they would apply
for an injunction to prevent the sale as the label was very similar to Nestle's labels
for their condensed milk. The claimants agreed not to sell them and brought an
action against the sellers. It was held that,the sellers did not have the right to sell
the goods and therefore the buyers were entitled to repudiate the contract.

In Butterworth v Kingsway Motors , R was in possession of a car under a hire-

purchase contract with a finance company. Before exercising the option to
purchase, R sold the car to X, who then sold it to Y. Y sold the car to KM, and KM
sold it to B. The finance company recovered the car from B. It was held that at
the time KM purported to sell, they were not the owners of the car. B was entitled
to recover the whole of the purchase price paid to KM, because there was a total
failure of consideration. Thus, it was observed that Where a seller having no title
to the goods at the time of the sale, subsequently acquires a title, that title feeds
the, that title feeds the defective titles of both the original buyer and the subsequent
buyer.

Sale by Description (Section 15)

Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends to
buy goods by description, the goods must correspond with the description given
by the buyer at the time of formation of the contract, failure in which the buyer
can refuse to accept the goods.
In the contract of sale, there is an implied condition that the goods should be in
conformity with the description. The buyer has the option to either accept or reject
the goods which do not conform with the description of the good. Say for example:
Where Ram buys a new car which he thinks to be new from “B” and the car is not
new. Ram’ can reject the car.

When the goods are sold by description there is an implied condition that the goods
supplied shall correspond with the description. Lord Blackburn inBowes v
Shandstated: If you contract to sell peas, you cannot oblige to take beans.

In Shepherd v Kane, A ship was contracted to be sold as "copper fastened vessel"

to be taken with all faults, without any allowance for any defects whatsoever. The
ship turned to be partially copper fastened. The court held that that the buyer was
entitled to reject the goods.

When a descriptive word or phrase is used in a contract of sale to describe the

product it creates an implied condition that the goods will correspond to the
description. For example, a sale of Seedless Grapes signifies that the fruit will have
no seeds. If it turns that the fruit is with seeds the buyer can reject the goods.

Some situations-Where the buyer has not seen the goods and relies on the
description given by seller: In Varley v. Whipp, there was a contract for the sale
of a second hand reaping machine which the buyer had not seen. The seller
described it as a new machine a year before and having cut only 50 to 60 acres.
After delivery, the buyer found that the machine was not in accordance with the
description given by seller. It was held that the buyer was entitled to reject the
machine.

Where the buyer had seen the goods but relies not on what he had seen but on what
was stated to him by the seller: In Nicholson &Venn v Smith Marriot, Table
napkins sold at an auction which were said to be authentic property of Charles I,
but that turned out to be false. Claimant was entitled to damages for
breach of contract, but Hallet J held the claimant could've avoided the contract on
the ground of mistake.

Packing of goods may sometimes be part of the description: In Moore &Co v.

Landauver&Co, M sold to L 300 TINS OF Australian Apple packed in cases
containing 30 tins. M tendered a substantial portion in case containing 24 tins. It
was held that l could reject all the tins as the goods were not packed according to
the description given in the contract as the method in which the fruit was packed
was an essential part of the description.

Sale by Sample (Section 17)

When the goods are to be supplied on the basis of a sample provided to the seller
by the buyer while the formation of a contract the following conditions are
implied:

 Bulk supplied should correspond with the sample in quality,That the

actual products would correspond with the sample with respect to the
quality, size, colour etc.
 Buyer shall have a reasonable opportunity to compare the goods with the
sample
 The good shall be free from any apparent defect on reasonable
examination by the buyer.

For example, A company sold certain shoes made of a special kind of sole by
sample sale for the French Army. Later when the bulk was delivered it was found
that they were not made from the same sole. The buyer was entitled to the refund
of the price and damages.

According to S. 17 (1) - A contract of sale is a contract for sale by sample where

there is a term in the contract, express or implied, to that effect. The purpose of a
sample is to present to the eyes the real meaning and intention of the parties with
regard to the subject matter of the contract which owing to the imperfection of
language, it may be difficult or impossible to express in words. According to S. 17
(2)- In the case of a contract for sale by sample there is an implied condition-
(a) that the bulk shall correspond with the sample in quality;(b) that the buyer shall
have a reasonable opportunity of comparing the bulk with the sample;(c) that the
goods shall be free from any defect, rendering them unmerchantable, which would
not be apparent on reasonable examination of the sample.

In Godley v Perry, a retailer purchased from a wholesaler a number of toy

catapults in a sale by sample. The retailer sold one of those catapults to a boy and
when the boy tried to play with it, it broke into pieces because of manufacturing
defect. The retailer was held bound to pay compensation to the boy and in his turn
he sued the wholesaler for indemnity. It was found that the retailer had done
reasonable examination on his part, thus wholesaler had to indemnify him

Sale by sample as well as Description (Section 15)

When the sale of goods is by a sample as well as a description the bulk of the goods
should correspond with both, i.e. description and sample provided to the seller in
the contract and not only sample or description.

In a sale by sample as well as description, the goods supplied must be in

accordance with both the sample as well as the description. In Nichol v. Godis
(1854), there was a sale of foreign refined rape-oil. The delivered oil was the same
as the sample but it was having a mixture of other oil too. It was held in this case
that the seller was liable to refund the amount paid.

S. 15- When the goods are sold by sample as well as description, it is not sufficient
that the bulk of goods correspond with the sample if the goods do not correspond
with the description.

In Wallis v Pratt, there was a contract for sale of seeds referred to as 'Common
English Sainfoin'. However, the seeds supplied to the buyer were of a different
quality. The defect also existed in the sample. The discrepancy in quality was
discovered only after the seeds were sown. The buyer could recover damages as
there was a breach of condition.
Before heading towards the further implied conditions let us know about the
Doctrine of Caveat Emptor meaning 'Buyer beware'. This doctrine of caveat
emptor is based on the fundamental principle that once a buyer is satisfied with the
product's suitability, then he has no subsequent right to reject such product. This
doctrine is enshrined through Section 16 of the Act, thus it becomes important to
study it.

Sometimes the goods purchased by the buyer may not suit the particular purpose
for which the buyer wants them. The question in such case arise is, whether the
buyer can reject the goods or he is supposed to take the risk of goods turning out
not suitable for the required purpose.

The section provides that as a general rule, there is no implied warranty or

condition as to the quality or fitness for any particular purpose of goods supplied
under a contract of sale. It is incorporation of the rule contained in maxim caveat
emptor which means buyer beware. According to this rule, the buyer himself
should be careful while purchasing the goods and he should himself ascertain that
the goods suit his purpose; but if the goods are subsequently found to be unsuitable
for the purpose of the buyer, he cannot blame seller for the same.

For e.g. A purchases a horse from B. A needs the horse for riding but he doesn't
mention this to B. The horse is not suitable for riding but only for carriage. A can
neither reject the horse nor can he claim any compensation.

In Re Andrew Yule & Co., the buyer ordered for hessian cloth without specifying
purpose for which he wanted the same. It was in fact needed for packing. Because
of its unusual smell, it was unsuitable for the same. It was held that the buyer had
no right to reject the cloth and claim damages.

Section 16 of the act incorporates certain exceptions to the rule of caveat emptor
which are the next two implied conditions of a contract of sale also.
Condition as to Quality or Fitness (Section 16)

The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods,

which means ‘Buyer Beware’. The maxim means that the buyer must take care of
the quality and fitness of the goods he intends to buy and cannot blame the seller
for his wrong choice. However, section 16 of the Sale of Goods Act 1930 provides
a few conditions which are considered as an implied condition in terms of quality
and fitness of the good:

 When the buyer specifies the purpose for the purchase of the good to the
seller, he relied on the sound judgment and expertise of the seller for the
purchase there is an implied condition that the goods shall comply with
the description of the purpose of purchase.
 When the goods are bought on a description from a person who sells
goods of that description (even if he doesn’t manufacture the good), there
is an implied condition that the goods shall correspond with the
description. However, in case of an easily observable defect that is
missed by the buyer while examining the good is not considered as an
implied condition.

S. 16(1) {First exception to caveat emptor}- Where the buyer, expressly or by

implication, makes known to the seller the particular purpose for which the goods
are required, so as to show that the buyer relies on the seller's skill or judgment,
and the goods are of a description which it is in the course of the seller's business
to supply (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably fit for such purpose.

In Priest v Last, B went to S, a chemist and demanded a hot water bottle from
him, S gave a bottle to him telling that it was meant for hot water, but not boiling
water. after few days while using the bottle B's wife got injured as the bottle burst
out, it was found that the bottle was not fit to be used as hot water bottle. The court
held that the buyer's purpose was clear when he demanded a bottle for hot water
bottle, thus the implied condition as to fitness is not met in this case.
In Frost v Aylesbury Dairy Co, The claimant bought milk from the defendant
and the account book supplied to him contained statements on the precautions
taken to keep the milk free from germs. The claimant's wife died of typhoid fever
contracted from milk supplied by the defendants. It was held that the claimant
should be awarded.

Proviso to Section 16 (1)- No implied condition when the sale under patent or trade
name: In Chanter v Hopkins, the buyer's order to the seller said: 'Send me your
patent hopper and apparatus to fit up my brewing copper with your smoke
consuming furnace'. The seller supplied the buyer the furnace and apparatus asked
for but the same was not suitable for the purpose of buyer's brewery. It was held
that the seller had supplied what was ordered and he was entitled to recover its
price from the buyer.

Implied condition of merchantable quality- Sec. 16(2) {Second exception to

caveat emptor}-S. 16 (2) contains another implied condition which is by way of
exception to the rule of caveat emptor. It has been noted before in S.15 that when
the goods are bought by description, there is an implied condition that the goods
supplied shall answer the description.

Goods must be of merchantable quality. In other words, the goods are of such
quality that would be accepted by a reasonable person. For eg: A purchased sugar
sack from B which was damaged by ants. The condition of merchantability is
broken here and it is unfit for use. It must be noted from this section that the buyer
has the right to examine the goods before accepting it. But a mere opportunity
without an actual examination would not suffice to deprive the buyer of his rights.
If however, the examination does not reveal the defect but within a reasonable
time period the goods are found to be defective, He may repudiate the contract
even if he approves the goods.

The implied conditions especially in case of eatables must be wholesome and

sound and reasonably fit for the purpose for which they are purchased. For eg:
Amit purchases milk that contains typhoid germs and because of its consumption
he dies. His wife can claim damages.

Goods supplied shall be of merchantable quality where -the goods are bought by
description;-from a seller who deals in the goods of that description (whether he
is the manufacturer or producer or not), there is an implied condition that the goods
shall be of merchantable quality.

In Grant v Australian Knitting Mills, Dr Grant purchased two pairs of woollen

underwear and two singlets from John Martin & Co. There was nothing to say the
underwear should be washed before wearing and Dr Grant did not do so. He
suffered a skin irritation within nine hours of first wearing them. It was held that
because of such a defect the underwears were not of merchantable quality.

In Shivallingappa v. Balakrishna & Son, the buyer ordered for the best quality of
'toor dal'. The dal was loaded in rain and by the time it reached the destination, it
became damages by moisture. It was held that since the damaged toor dal could
not be sold as that of best quality as it was no longer of merchantable quality. The
buyer was entitled to claim damages.

Proviso to Sec. 16(2) “Condition negative when the goods examined by the buyer:
Thus the proviso divides defect into two kinds-

# Patent “Patent defects are those which can be found on examination by an

ordinary prudence with the exercise of due care and attention. #
Latent “In latent defects, the implied condition of merchantability continues in
spite of the examination of the goods by the buyer.

Liability of all natural consequences: In Jackson v Watson, the plaintiff

purchased a tin of salmon from defendant. The contents of the tin being poisonous,
his wife died. It was held the defendant were liable to pay damages.

Hence, the basic concept of caveat emptor is contained in the section 16 of the Act.

Conditions implied by trade usage - S. 16(3)-Sub-Section (3) of section 16 gives

statutory force to conditions implied by the usage of a particular trade. It says: "An
implied warranty or condition as to the quality or fitness for the particular purpose
may be annexed by the usage of trade." In case of Peter Darlington Partners Ltd
v Gosho Co Ltd, where a contract for the sale of canary seed was held subject to
the custom of the trade that for impurities in the seed, the buyer would get a rebate
on the price, but would not reject the goods.
Implied Warranty

Enjoy Possession of the Goods [Section 14(b)] In a contract of sale unless the
circumstances of the case show different intention, there is an implied
warranty that the buyer shall have and enjoy possession of goods

Section 14(b) of the Act mentions ‘an implied warranty that the buyer shall have
and enjoy quiet possession of the goods’ which means a buyer is entitled to the
quiet possession of the goods purchased as an implied warranty which means the
buyer after receiving the title of ownership from the true owner should not be
disturbed either by the seller or any other person claiming superior title of the
goods. In such a case, the buyer is entitled to claim compensation and damages
from the seller as a breach of implied warranty.

Goods are free from any charge or encumbrance in favour of any third party
[Section 14(c)]

Any charge or encumbrance pending in favour of the third party which was not
declared to the buyer while entering into a contract shall be considered as a breach
of warranty, and the buyer is be entitled to compensation and claim damages from
the seller for the same.

Implied warranty against encumbrances- There is an implied warranty that the

goods sold shall be free from any charge or encumbrances in favour of any third
party. If there is a charge or encumbrance on the goods sold and the buyer has to
discharge the same, he is entitled to get compensation for the same from the seller.
If the charge or encumbrance of the goods is known to the buyer at the time of the
contract of sale, he becomes bound by the same sand does not have any right to
claim compensation for discharging the same.

The provision of Implied conditions and warranties are provided in the Sale of
Goods Act in order to protect the buyers in case of any fraud by the seller.
However, it is seller’s duty in the first place to look for the obvious defects and
enquire about the quality of the product before entering into a contract of sale of
goods since a seller cannot be held guilty for a customer’s wrong choice.In order
to ensure purchase of an appropriate good by the seller, it is suggested that
the buyer conveys the purpose and gives a reasonable description of the goods so
desired.

Exclusion of implied terms and conditions- S. 62-Exclusion of implied terms and

conditions.-Where any right, duty or liability would arise under a contract of sale
by implication of law, it may be negatived or varied by express agreement or by
the course of dealing between the parties, or by usage, if the usage is such as to
bind both parties to the contract.

“As regards conditions and warranties , section 16(4) lays down that an express
warranty or condition does not negative a warranty or condition implied by this
Act unless inconsistent therewith. That means that when the parties expressly
agree to such stipulation and the same are inconsistent with the implied conditions
and warranties, the express conditions and warranties will prevail and the implied
ones in S. 14 to 17 will be negative.

When does Condition sink to the level of Warranty?

Section 13 of the Act specifies the cases wherein a breach of Condition sink to the
level of breach of Warranty. In the first two following points, it depends upon the
will of the buyer, but the last one is compulsory and acts as estoppel against him:

1. When the buyer waives the condition, the condition is considered a

warranty.
2. A condition would sink to the level of warranty where the buyer on his
own will treat the breach of condition as a breach of warranty.
3. Wherein the contract is indivisible and the buyer has accepted the whole
or part of goods, the condition is treated as a warranty. Consequently, the
contract cannot be repudiated. However, the damages can be claimed.

At the time of selling or purchasing goods, both the buyer and seller put forth some
preconditions with regards to the mode of payment, delivery, quality, quantity and
other things necessary. These stipulations are either considered as condition or
warranty differing from case to case. These concepts are necessary
to be understood as it protects the rights of parties in case of breach of the contract.

Legal Principles regarding Transfer of Goods

There are four principles regarding the transfer of goods under the umbrella of The
Sale of Goods Act, 1930, which the article will be talking about and they’re as
follows:

Transfer of property in sale of Specific or Ascertained Goods

Section 19 to section 22 of The Sale of Goods Act, 1930 are a few sections which
govern the transfer of goods in a case where the goods are specific and ascertained
in nature:

Property when intended to pass (Section 19)

Section 19 of The Sale of Goods Act, 1930, is divided into further subsections and
they’re as follows:

1. Where a contract for sale of ascertained or specific goods exists, a

specified time is fixed as per the convenience and consensus of both the
parties at which the property is intended to be transferred from the seller
to the buyer.
2. One has to pay attention to the circumstances and conduct of both the
parties to the contract in order to understand the true intention of the
contracting parties. Also, the terms of the contract should be given equal
importance in the existing case.
3. Except if an alternate intention shows up, the principles laid under the
Section 20 to 24 of the Act will help in finding out the intention of the
contracting parties in respect with the time at which the goods are about
to get transferred from the seller to the buyer.
Specific goods in a Deliverable state (Section 20)

Section 20 of The Sale of Goods Act, 1930 relates to specific goods in a deliverable
state, and it states:

In a contract for the sale of specific goods, which is unconditional in nature, the
goods are transferred from the seller to the buyer at the time of formation of the
contract. However, the only precondition required for the transfer of property is
the fact that the goods must be existing in a deliverable state. The delay in the
payment or delivery of goods or both is not something which holds importance.

Example: A goes to a big electronic shop in order to buy a television set. He selects
a big plasma Television set and asks the shopkeeper to deliver the television at his
house which is at the other end of the town. The shopkeeper agrees to it. With this,
“A” will become the owner of the television, and the Television set will become
his property.

Specific goods to be put into a deliverable state (Section 21)

Section 21 of The Sale of Goods Act, 1930: certain goods to be put in a deliverable
state:

Where there is an existence of a contract for the sale of specific goods, the property
concerned in the transaction will only be passed to the buyer, if the seller performs
the necessary acts and omissions in order to put the goods in a deliverable state.
Also, it is mandatory for the seller to notify the buyer regarding the alterations.

Example: A goes to a mall to buy a smart television from an electronics store. He

selects a big fancy smart TV from the electronic section and asks for its home
delivery. The manager agrees to deliver it to A’s home. However, at the time where
he selects the smart TV, it doesn’t have an operating system installed. The
manager promises to install the operating system and on the next day, he informs
“A” that his smart TV is now installed with the operating system and is ready for
its delivery. Further, he asked for his permission to make the delivery.
In order to summarize the example, the goods will only be transferred to “A” if the
manager has installed the operating system making the smart TV ready for its use.

Specific goods are in a deliverable state but the seller has to do something to
ascertain the price (Section 22)

Section 22 of The Sale of Goods Act, 1930: Specific goods are in a deliverable
state but the seller has to do something to ascertain the price:

Where there is a contract for the sale of specific goods in a deliverable state, the
seller is undoubtedly bound to weigh, measure, test or do the necessary
demonstration or anything which is required in reference with the sale of those
particular goods. He’ll be doing this to ascertain the appropriate value of the goods.
The property in the goods will not pass until such demonstration or particulars are
done and the buyer has acknowledged it thereof.

Example: Rishabh sells a wooden bed to Deepak and agrees to assemble it in

Deepak’s bedroom as it was a part of the agreement. Rishabh delivers the wooden
bed and makes a call to him informing Deepak that he will assemble the wooden
bed the next day. That night the wooden bed gets stolen from Deepak’s premises.
In this case, Deepak will not be liable for the loss since the wooden bed was not
passed to him. According to the terms of the contract, the wooden bed would be
in a deliverable state only after it is assembled.

Transfer of property in sale of Unascertained Goods

Section 23 of The Sale of Goods Act, 1930 govern the transfer of goods in a case
where the goods are unascertained in nature:

Sale of unascertained goods and appropriation (Section 23)

Section 23 of The Sale of Goods Act, 1930, is divided into further subsections and
they’re as follows:

Section 23(1) Sale of unascertained goods by description:

In a contract, for the sale of unascertained goods by description, if goods of a
specific description are appropriated either by the seller with the consent of buyer
or by the buyer with the consent of the seller, then the goods are passed to the
buyer. The consent can be expressed or implied and can be given before or after
the appropriation is made.

Section 23(2) Delivery to the carrier:

The seller has unconditionally appropriated the property if he delivers the property
to the buyer/ carrier/ bailee for the reason of transmission to the buyer, however,
he doesn’t reserve the disposal rights to the property, then it can be said that he
has appropriated the contract.

Goods sent on “sale or return”

When goods are disposed on the basis of “sale or return” by the seller, the
ownership of the goods aren’t transferred to the buyer unless the buyer gives assent
to the goods. However, if these goods are held by its buyer without giving an
approval then they’re taken as goods whose ownership is yet to be transferred. In
that case, they’re treated as goods which belong to the seller and not the buyer.

Goods sent on approval or “on sale or return” (Section 24)

Section 24: In a case where the goods are delivered to the buyer either on approval
or on “sale or return” or on other comparable terms then:

(a) The goods therein will only pass to the buyer if the buyer either portrays his
consent or acknowledges to the seller or does any act by which the transaction
would be adopted.

(b) The goods therein will only pass to the buyer if the buyer doesn’t express his
consent or acknowledgement to the seller that he intends to reject the goods,
however, holds the goods without giving a notice to the buyer then on the
expiration of time frame for the return of the goods or if time hasn’t been fixed,
then on the completion of a reasonable time, the property will be passed to the
buyer.

Example: “A” the seller of a precious necklace gives it to “B” the buyer on “Sale
or return” basis. B after observing the necklace finds it very beautiful and put forth
his consent on buying the necklace. In this case, the goods will be transferred to
the buyer. However, if the buyer doesn’t wish to give the acknowledgement for
the product then the goods shall be duly returned back to B.

In case of right to disposal

The intention behind reserving the right of disposal of the goods is to make sure
that the value of the product is paid before the property is transferred to the buyer.
However, under the prepared value system, the ownership follows the possession.
That is to say, the seller transfers the possession of the goods but retains the
ownership until the buyer pays the appropriate amount.

Reservation of Right to Disposal (Section 25)

Section 25 of Sale of Goods Act, 1930 deals with the conditional appropriation of
goods and is bifurcated into the following subsections:

Section 25(1): As per the terms and conditions of the contract the seller of goods
reserves the right of disposal of the goods in a situation where the sale of specific
goods is concerned. Despite the delivery of the goods, the goods will not get
transferred from the seller to the buyer unless the subsequent terms of the contract
aren’t appropriated or fulfilled.

For example, A sends certain goods by rickshaw to B and instructs the rickshaw
driver not to deliver the goods until B pays him the price which was set between
them as per the agreement. The rickshaw reaches the destination in time. However,
the buyer “B” refuses to pay the amount as he had no money with him at the
moment. Here the rickshaw driver can refuse to deliver the goods and the seller
can rightly exercise his right to disposal.
Section 25(3): A few perspectives pertaining to the transfer of property during a
sale of goods or property are encapsulated in Sales of Goods Act, 1930. The
liabilities of the buyer and seller are determined in consonance with the provisions
enshrined from section 18 to 25 of The Sale of Goods Act. The concept of
possession of goods differs from passing of the goods as the latter in essence means
transfer of ownership from the seller to the buyer while the former is confined to
the custody of goods.

Cases pertaining to Transfer of Property

Badri Prasad Vs. State of Madhya Pradesh

In the case of Badri Prasad Vs. State of Madhya Pradesh, the appellant entered into
a contract in respect of certain forests in Madhya Pradesh. He was entitled to chop
teak trees with girth over 12-inch. After the passing of the Abolition of Proprietary
Rights (Estates, Mahals. Alienated Lands) Act, the appellant was prohibited from
cutting trees in the exercise of his rights under the contract.

He filed a suit claiming specific performance of the contract on the grounds:

(1) The forest and trees did not vest in the State under the Act;

(2) Even if they vested, the standing timber, having been sold to the appellant,
did not vest in the State;

(3) In any event, a new contract was completed on 5 February 1955, and the
appellant was entitled to its specific performance.

The court held: The forest and trees vested in the State under the Act. The plaintiff
was entitled to cut teak trees of more than 12-inch girth. However, it had to be
ascertained which trees would be falling in that Description. Till this was
ascertained, they will not be ascertained goods as per Section 9 of the Sale of
Goods Act.
MultanuakChempalal Vs. C.P Shah & Co.

In the case of MultanuakChempalal Vs. C.P Shah & Co., Section 26 of the Sale of
Goods Act 1930 was discussed and it was held that the risk passes only after the
property in the agreement has been passed. Thus, the parties can enter into a
contract which provides for the passing of risk before the passing of property.

HooglyChinsurah Municipality vs Spence Ltd

In the case, the Hoogly Chinsurah Municipality contracted with Spence Ltd to buy
a tractor on the condition that if the municipality is not satisfied then it will reject
the tractor. The municipality took possession of the tractor, used it for a month and
a half and then rejected it. The suit was filed upon the unwillingness of Spence Ltd
to accept it. The Court while dismissing the appeal held that, the municipality had
not only used the tractor but also extinguished a reasonable time. Hence the
property in the tractor had passed to the municipality and they could not reject it
now.

The Sale of Goods Act, 1930 tells us about a few views regarding the transfer of
property during a contract pertaining to the sale of goods. Section 18 to 25 of the
Sale of Goods Act, 1930 provides the contracting parties several principles,
through which rights and liabilities of the buyer and seller are determined. Passing
of the goods from the seller to the buyer portrays the transfer of ownership from
one party to another, which is without an exception a different concept from that
of the possession of goods as possession only involves custody of goods.

Transfer of Title
Nemo Dat Quod Non Habet- Sec. 27

The general rule relating to the transfer of title on sale is that “the seller cannot
transfer to the buyer of goods a better title than he himself has.” If the title of the
seller is defective, the buyer’s title will also be subject to the same defect.

Section 27 lays down to the same effect and provides that “where goods are sold
by a person who is not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires no better title to the
goods than the seller had…”

This rule is expressed by the maxim “nemo dat quod non habet”, which means that
no one can give what he has not got, i.e., a seller cannot convey a better title than
that of his own. When the seller himself is the owner of the goods which he sells
or he is somebody’s agent to dispose of the goods, he conveys a good title in the
goods to the buyer. Difficulty arises when the seller is neither himself the owner
nor has he any such authority from the owner to sell the goods.

E.g., a person finds goods lying on the road and sells them, or a thief sells the
goods after he has stolen them, or a person purchases the goods on credit or hire-
purchase basis and disposes them off, or a person continuing in possession of the
goods which he has already sold resells the goods. The question which in such
cases arises is: Should the rights of the owner of the goods be protected and he
be entitled to recover back the possession of the goods from one to whom they
have been sold, or, should the buyer, who might have bought them in good faith
and for value be protected and allowed to retain the goods defeating the rights and
the title of the real owner?

In regard to this question, the general rule contained in section 27 is as follows:

Subject to the provisions of this Act and of any other law for the time being in
force, where goods are sold by a person who is not the owner thereof and who does
not sell them under the authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had…

Section 27, as a general rule, tries to protect the interest of the true owner when it
provides that where the goods are sold by a person who is not the owner thereof
and who does not sell them under the authority or with the consent of the owner,
the buyer acquires no better title to the goods than the seller had.

This rule is a manifestation of the maxim “nemo dat quod non habet”, which has
been already explained above. If the title of the seller is defective, the buyer’s title
will also be subject to the same defect. This rule does not imply that buyer’s title
will always be a bad one. What it means is that the buyer cannot acquire a superior
title to that of the seller. If a thief disposes of stolen goods, the buyer of such goods
has the same title as the seller had. Similarly, where a person taking goods on hire-
purchase basis sells them before he had paid all the instalments, the owner can
recover the goods from the transferee, on
default of payment, in the same way as he could have recovered them from the
person to whom they had been given on the hire-purchase basis.

Exceptions to the rule the above stated general rule contained in section 27, as
stated in the opening words of the section itself, is “subject to the provisions of
this Act and of any other law for the time beingin force.” Various exceptions to
this rule have been mentioned in this Act and the Indian Contract Act and in those
exceptional situations, the seller of the goods may not be having a good title to the
goods, yet the buyer of the goods gets a good title to them. The exceptions are as
follows:

 Sale under the implied authority of the owner, or transfer of title by

estoppel (S. 27) 2.
 Sale by a mercantile agent (proviso to S. 27)
 Sale by one of joint owners (S. 28)
 Sale by a person in possession under a voidable contract (S. 29)
 Sale by the seller in possession of goods, the property in which has
passed to the buyer (S. 30(1))
 Sale by the buyer in possession of the goods before the property in them
has passed to him (S. 30(2))
 Re-sale of the goods by an unpaid seller after he has exercised the right of
lien or stoppage in transit (S. 54(3))
 Sale by finder of goods (S. 169, Indian Contract Act)
 Sale by a pawnee when the pawner makes a default in payment (S. 176,
Indian Contract Act)

Section 27 deals with the sale by a person who is not the owner. Imagine a sale
contract where the seller –

 Is not the owner of the goods

 Does not have consent from the owner to sell the goods
 Has not been given authority by the owner to sell the goods on his behalf
In such cases, the buyer acquires no better title to these goods than the seller had,
provided the conduct of the owner precludes the seller’s authority to sell.

Let us see an example. Peter steals a mobile phone from his office and sells it to
John, who buys it in good faith. However, John will get no title to the phone and
will have to return it to the owner when he demands, i.e. there is no transfer of
title.Now, this seems to be a really straight-forward rule. However, enforcing this
rule can mean that innocent buyers might suffer losses in most cases. Therefore, to
protect the interest of the buyers, certain exceptions are provided.

Exceptions to Section 27

In the following scenarios a non-owner of goods can transfer a better title to the
buyer:

1] Sale by a Mercantile agent (Proviso to Section 27)

Consider a mercantile agent, who is in possession of the goods or a document to the
title of the goods, with the consent of the owner. Such an agent can sell the goods
when acting in the ordinary course of business of a mercantile agent. The sale shall
be valid provided the buyer acts in good faith and has no reason to believe that the
seller doesn’t have any right to sell the goods. The transfer of title is valid in such a
case.

2] Sale by one of the Joint Owners (Section 28)

Many times goods are purchased in joint ownership. In many cases, the goods are
kept in the possession of one of these joint owners by the permission of the co-
owners. If this person (who has the sole possession of the goods) sells the goods, the
property in the goods is transferred to the buyer. This is provided the buyer acts in
good faith and has no reason to believe that the seller does not have a right to sell
the goods.

Example: Peter, John, and Oliver are three friends to buy a 42-inch television set to
watch the upcoming cricket World Cup. They unanimously decide to keep the
television set at Oliver’s house. Once the World Cup is over, the TV is still at his
house. One day, Oliver’s office colleague Julia visits his house and he sells the TV
to her. She buys it in good faith and has no knowledge about the fact that it was
purchased jointly. In this case, she gets a good title to the TV.

3] Sale by a Person in Possession of Goods under a Voidable Contract (Section

29)
Consider a person who acquires possession of certain goods under a contract voidable
on grounds of coercion, misrepresentation, fraud or undue influence. If this person
sells the goods before the contract is terminated by the original owner of the goods,
then the buyer acquires a good title to the goods.
Example: Peter fraudulently obtains a gold diamond ring from Olivia. Olivia can void
the contract whenever she wants. Before she realizes the fraud, Peter sells the ring to
Julia – an innocent buyer. In this case, Olivia cannot recover the ring from Julia since
she didn’t void the contract before the sale was made.

4] Sale by a Person who has already sold the Goods but Continues to have
Possession [Section 30 (1)]
Consider a person who has sold goods but continues to be in possession of them or
of the documents of title to them. This person might sell the goods to another buyer.

If this buyer acts in good faith and is unaware of the earlier sale, then he will have a
good title to the goods even though the property in the goods was passed to the first
buyer. A pledge or other disposition of the goods or documents of title by the seller
in possession are valid too.

5] Sale by Buyer obtaining possession before the Property in the Goods has
Vested in him [Section 30 (2)]
Consider a buyer who obtains possession of the goods before the property in them is
passed to him, with the permission of the seller. He may sell, pledge or dispose of
the goods to another person.

If the second buyer obtains delivery of the goods in good faith and without notice of
the lien or any other right of the original seller, he gets a good title to them.

This rule does not hold true for a hire-purchase agreement which allows a person the
possession of the goods and an option to buy unless the sale is agreed upon.

Example: Peter takes a car from John under the conditions that he will pay Rs. 5,000
every month as rent of the vehicle and that he can choose to purchase it for Rs.
100,000 to be paid in 24 equal installments. Peter pays Rs. 5,000 for three months
and then sells the car to Oliver. In this case, John can recover his car from Oliver
since Peter had neither purchased the car nor agreed to purchase it. He only had an
option to buy the car.

6] Estoppel
If an owner of goods is stopped by the conduct from denying the seller’s authority
to sell, the buyer gets a good title. However, to get a good title by estoppel, it
needs to be proved that the original owner had actively suffered or held out the
seller in question as a person authorized to sell the goods.

Let us see an example. Peter, John, and Oliver are having a conversation. Peter tells
John that he owns the BMW car parked nearby which actually belongs to Oliver.
However, Oliver remains silent. Subsequently, Peter sells the car to John.In this
case, John will get a good title to the car even though the seller is Peter who has no
title to it. This is because, Oliver, by his conduct, did not deny Peter’s authority to
sell the car.

7] Sale by an Unpaid Seller [Section 54 (3)]

If an unpaid seller exercises his right of lien or stoppage in transit and sells the
goods to another buyer, then the second buyer gets a good title to the goods as
against the original buyer. So in such a case transfer of title will occur.

8] Sale under the Provisions of other Acts

 Sale by an Official Receiver or Liquidator of the Company will give the

purchaser a valid title.
 Purchase of goods from a finder of goods will get a valid title under
circumstances [Section 169 of the Indian Contract Act, 1872]
 A sale by a pawnee can convey a good title to the buyer [Section 176 of
the Indian Contract Act, 1872]

Performance of the Contract

According to the Sales of Goods Act 1930, the performance of the contract of sale
comes under chapter IV from Section 31 to Section 44 it is described how the
goods are being displaced and how their possession are being transferred from one
person to another voluntarily. There are basically two parties for the agreement,
one is the seller and the other one is the buyer. The seller sells the goods and the
buyer buys the goods. There are some criteria on the basis of selling and buying
which takes place, which we are going to discuss in this article.
Who is a seller

The definition of the seller is given in Section 2(13) of the Sale of Goods Act,
1930. The seller can be defined as a person who agrees to sell goods.

Rights of the Seller (Section 31)

 He can reserve the rights of the goods until and unless payment of
goods is done.
 He can assume that the buyer has accepted the goods or not.
 He will only deliver the goods when the buyer would apply for the
delivery.
 He can make the goods delivered in instalments when so agreed by the
buyer.
 He can have the possession of the goods until the buyer hasn’t paid for
the goods.
 He can stop the delivery of goods and resume possession of the goods
unless and until the payment is done for the goods.
 He can resell the goods under certain conditions.
 He can bring the goods back if it is not delivered to the buyer.
 He can sue the buyer if the buyer fails to make the payment on a
certain day, in terms of the contract.

Duties of seller

 He should make an arrangement for the transfer of property to the

buyer.
 He should check whether the goods are delivered properly or not.
 He should give a proper title to the goods which he has to pass to the
buyer.
 He should deliver the goods according to the terms of the agreement.
 He should ensure that the goods supplied should be agreed to the
implied condition and warranties.
 He should keep the goods in a deliverable state and deliver the goods
when the buyer asks for it.
  He should deliver the goods within a specific time fixed in the
contract.
 He should bear all the expenses for which the good should be
delivered.
 He should deliver the goods as said by the buyer in the contract in an
agreed quantity.
 To deliver the goods in instalments only when the buyer wants.
 He should make arrangements for the goods while they are in the
custody of the carrier.

Who is a buyer?

The definition of the buyer is given in Section 2(1) of the Sale of Goods Act,
1930. The buyer can be defined as a person who buys goods from the seller.

Rights of the Buyer (Section 31)

 He should get the delivery of the goods as per contract.

 He can reject the goods if the quality and quantity are not as specified
in the contract.
 To deny the contract when goods are delivered in instalments without
any agreement to the effects.
 The seller should inform him when the goods are to be sent by sea
route, so that the buyer may arrange for their insurance.
 He can examine the goods for checking whether they are in the
agreement with the contract.
 If he has already paid he can sue the seller for recovery of the price if
the seller fails to deliver the goods.
 He can also sue the seller for damages or the seller’s wrongful neglect
or the seller refuses to deliver the goods to the buyer.
 He can sue the seller for damages for breach of a warranty or for
breach of a condition.
 He can sue the seller for the damages of breach of contract.
Duties of the Buyer

 He should accept the delivery of goods when the seller is prepared to

make the delivery as per the contract.
 To have possession on it he should pay the price for the goods as per
the contract.
 He should apply for the delivery of the goods.
 He can ask to deliver the goods at a particular time.
 He should accept delivery of the goods in instalments and pay for it
according to the contract.
 He should bear the risk of failure of delivery of goods if the delivery
point is a distant place.
 He should pay the price on the transfer of possession of the goods as
given in the term of the contract.
 He has to pay for not accepting the goods.

Delivery
There are many rules and definitions governing the law on sales in sections 31 to 40
of the Sale of Goods Act, 1930. In this article, we will be looking at various
definitions and duties of buyers, sellers, and third parties (wherever applicable).

Definition of Delivery

According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means voluntary
transfer of possession of goods from one person to another. Hence, if a person takes
possession of goods by unfair means, then there is no delivery of goods. Having
understood delivery, let’s look at the law on sales

Section 33 of the Sale of Goods Act, 1930 defines delivery as a voluntary transfer
of possession from one person to another. It is also the process of transporting
goods from a source location to a predefined destination. Cargos (physical goods)
are primarily delivered via roads and railroads on land, shipping lanes on the sea
and airline networks in the air.
The basic elements of delivery are:

 There must be two parties.

 One party out of those two parties should have the possession of the
goods.
 One party should transfer possession to the other.
 This should be done voluntarily.

Mode of delivery

 When the seller transfers the possession of the goods to the buyer or to a
person who is authorised on behalf of the buyer it’s called physical or
actual delivery.
 If the actual delivery is not done and only the control of the goods is
transferred, then it is called symbolic delivery. In this case, neither
physical nor symbolic delivery is made.
 In constructive delivery, the individual possessing the products
recognizes that he holds the merchandise for the benefit of, and at the
disposal of the purchaser. Constructive delivery is also called attornment.

Constructive delivery may be affected in the following three ways.

 Where the seller, after having sold the goods, agrees to hold them as
bailee for the buyer
 Where the buyer, who is already in possession of the goods as bailee of
the seller, holds them as his own, after the sale, and
 Where a third party, for example, a carrier/transporter, who holds the
goods, as bailee for the seller, agrees and acknowledges holding them for
the buyer.

Rules regarding delivery

 The delivery and payment of price are concurrent conditions unless the
two parties agree.
  If the intention of the seller is to deliver the goods in parts then the
delivery is called a valid delivery. But if goods are delivered in parts and
the seller is not intending to contract fully then there is a breach of
contract.
 If a part-delivery of the goods is made in progress of the delivery of the
whole, then it has the same effect for the purpose of passing the property
in such goods as the delivery of the whole. However, a part- delivery
with the intention of severing it from the whole does not operate as the
delivery of the remainder (Section 34).
 According to Section 35 of Sale of Goods Act 1930 unless there is a
contract to the contrary then the buyer must apply for delivery. But if it
is mentioned in the contract that the seller has to deliver the goods then
the seller has to deliver without the permission of the buyer.
 If no place is decided for the delivery of the goods that, they are to be
delivered at a place at which the seller and the buyer are in the time of
sale.
 There should be an appropriate time for the delivery.
 The expenses of delivery are to be carried out by the seller unless there
is a contract to the contrary.

If the seller delivers the wrong quantity of goods to the buyer then the
following cases may take place:

 If the quantity of goods is less as per the contract then the buyer can reject
the goods.
 If the quantity of goods is more than that of contract than the buyer can
keep the number of goods as per the contract and reject the rest or he may
also reject the total.
 If the goods ordered are mixed with the goods of different descriptions(
i.e. goods with a different title or different quality), the buyer may reject
the goods or accept the goods.
 If there is no contract for the instalment delivery, the seller cannot force
the buyer to accept the instalment delivery.
 The buyer has the right to check and examine the goods.
 If the buyer once accepted the goods then he cannot reject the goods.
  If the buyer refuses to take the delivery then he would be responsible
for it.

According to Section 36(3) of the Sale of Goods Act 1930, if at the time of delivery
the goods are in possession of a third party then there will be no delivery unless
and until the third party tells the buyer that the goods are being held on his behalf.
This section would not create any impact on the transfer of title of the goods.

Law on Sales in depth.

1] The Duty of the Buyer and Seller (Section 31)

It is the duty of the seller to deliver the goods and the buyer to pay for them and
accept them, as per the terms of the contract and the law on sales.

2] Concurrency of Payment and Delivery (Section 32)

The delivery of goods and payment of the price are concurrent conditions as per the
law on sales unless the parties agree otherwise. So, the seller has to be willing to
give possession of the goods to the buyer in exchange for the price. On the other
hand, the buyer has to be ready to pay the price in exchange for possession of the
goods.

Rules Pertaining to the Delivery of Goods in depth

a. Delivery (Section 33)

The delivery of goods can be made either by putting the goods in the possession of
the buyer or any person authorized by him to hold them on his behalf or by doing
anything else that the parties agree to.

b. Effect of part-delivery (Section 34)

If a part-delivery of the goods is made in progress of the delivery of the whole, then
it has the same effect for the purpose of passing the property in such goods as the
delivery of the whole. However, a part-delivery with an intention of severing it from
the whole does not operate as a delivery of the remainder.
c. Buyer to apply for delivery (Section 35)
A seller is not bound to deliver the goods until the buyer applies for delivery unless
the parties have agreed to other terms in the contract.

d. Place of delivery [Section 36 (1)]

When a sale contract is made, the parties might agree to certain terms for delivery,
express or implied. Depending on the agreement, the buyer might take possession of
the goods from the seller or the seller might send them to the buyer.

If no such terms are specified in the contract, then as per law on sales

 The goods sold are delivered at the place at which they are at the time of the
sale
 The goods to be sold are delivered at the place at which they are at the time of
the agreement to sell. However, if the goods are not in existence at such time,
then they are delivered to the place where they are manufactured or produced.

e. Time of Delivery [Section 36 (2)]

Consider a contract of sale where the seller agrees to send the goods to the buyer, but
not time of delivery is specified. In such cases, the seller is expected to deliver the
goods within a reasonable time.

f. Goods in possession of a third party [Section 36 (3)]

If at the time of sale, the goods are in possession of a third party. Then there is no
delivery unless the third party acknowledges to the buyer that the goods are being
held on his behalf. It is important to note that nothing in this section shall affect the
operation of the issue or transfer of any document of title to the goods.

g. Time for tender of delivery [Section 36 (4)]

It is important that the demand or tender of delivery is made at a reasonable hour. If
not, then it is rendered ineffectual. The reasonable hour will depend on the case.
h. Expenses for delivery [Section 36 (5)]
The seller will bear all expenses pertaining to putting the goods in a deliverable state
unless the parties agree to some other terms in the contract.

i. Delivery of wrong quantity (Section 37)

 Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to

the contracted quantity, then the buyer may reject the delivery. If he accepts
it, then he shall pay for them at the contracted rate.
 Sub-section 2 – If the seller delivers a larger quantity of goods as compared to
the contracted quantity, then the buyer may accept the quantity included in the
contract and reject the rest. The buyer can also reject the entire delivery. If he
wants to accept the increased quantity, then he needs to pay at the contract
rate.
 Sub-section 3 – If the seller delivers a mix of goods where some part of the
goods are mentioned in the contract and some are not, then the buyer may
accept the goods which are in accordance with the contract and reject the rest.
He may also reject the entire delivery.
 Sub-section 4 – The provisions of this section are subject to any usage of trade,
special agreement or course of dealing between the parties.

j. Installment deliveries (Section 38)

The buyer does not have to accept delivery in installments unless he has agreed to
do so in the contract. If such an agreement exists, then the parties are required to
determine the rights and liabilities and payments themselves.

k. Delivery to carrier [Section 36 (1)]

The delivery of goods to the carrier for transmission to the buyer is prima facie
deemed to be ‘delivery to the buyer’ unless contrary terms exist in the contract.

l. Deterioration during transit (Section 40)

If the goods are to be delivered at a distant place, then the liability of deterioration
incidental to the course of the transit lies with the buyer even though the seller agrees
to deliver at his own risk.
m. Buyers right to examine the goods (Section 41)
If the buyer did not get a chance to examine the goods, then he is entitled to a
reasonable opportunity of examining them. The buyer has the right to ascertain that
the goods delivered to him are in conformity with the contract. The seller is bound
to honour the buyer’s request for a reasonable opportunity of examining the goods
unless the contrary is specified in the contract.

Acceptance of Delivery of Goods (Section 42)

A buyer is deemed to have accepted the delivery of goods when:

 He informs the seller that he has accepted the goods; or

 Does something to the goods which is inconsistent with the ownership of the
seller; or
 Retains the goods beyond a reasonable time, without informing the seller
that he has rejected them.

Return of Rejected Goods (Section 43)

If a buyer, within his right, refuses to accept the delivery of goods, then he is not
bound to return the rejected goods to the seller. He needs to inform the seller of his
refusal though. This is true unless the parties agree to other terms in the contract.

Refusing Delivery of Goods (Section 44)

If the seller is willing to deliver the goods and requests the buyer to take delivery,
but the buyer fails to do so within a reasonable time after receiving the request, then
he is liable to the seller for any loss occasioned by his refusal to take delivery. He
is also liable to pay a reasonable charge for the care and custody of goods.

Who is an Unpaid seller?

As defined by Section 45 of Sale of Goods Act, 1930, a person has sold some
goods and has not got the whole price and if the transaction is done through
negotiable instruments like cheque, bill of exchange and a promissory note, then
the person can be said as an unpaid seller.
Sec-45. “Unpaid seller” defined—
(1) The seller of goods is deemed to be an “unpaid seller” within the meaning of
this Act—

(a) when the whole of the price has not been paid or tendered;

(b) when a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has not been
fulfilled by reason of the dishonour of the instrument or otherwise.

(2) In this Chapter, the term “seller” includes any person who is in the position of
a seller, as, for instance, an agent of the seller to whom the bill of lading has been
endorsed, or a consignor or agent who has himself paid, or is directly responsible
for, the price.

Illustration- If A is a seller and he delivers the goods to B and transfers the

possession, and if B hasn’t paid the sum then A becomes an unpaid seller.

Rights of an unpaid seller

Section 46 of the Sale of Goods Act 1930, discusses the rights of an unpaid
seller. This can be of two types:

 Against the goods – jus in rem ( right against property)

 Against the buyer – jus in personam (right against the person)

Right against the goods

 Right to a lien which means the seller has the right on the possession
over the goods.
 Right to stoppage in transit which means the seller can call up the
carrier transporter and tell not to deliver the goods.
 Right to resale means the seller can again sell the goods as he has the
possession of the goods.
And the rights like the right to lien, the right to stoppage in transit and the right to
resale are also applicable for the agreement which is made for sale.

Rights against the buyer

 The seller has the right to sue the buyer for the price if the seller has
already sold the goods and the buyer hasn’t paid the sum.
 The seller has the right to sue for the damages, for e.g. if the seller has
sent the carrier for the delivery and the buyer isn’t available to receive
the delivery and the goods returned back by the carrier to the seller then
he can sue the buyer for damages like the packing of goods,
transportation charges and so many.
 If the buyer hasn’t paid the price of the goods to the seller after the
delivery within a stipulated time period as given in the contract, then the
seller can sue for the interest on the buyer.

Rights of Unpaid Seller against Goods in detail.

An unpaid seller has certain rights against the goods and the buyer. In this article, we
will refer to the sections of the Sale of Goods Act, 1930 and look at the rights of an
unpaid seller against goods namely rights of lien, rights of stoppage in transit etc.

Rights of Lien

Seller’s Lien (Section 47)

According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an unpaid
seller, who is in possession of the goods can retain their possession until payment.
This is possible in the following cases:

1. He sells the goods without any stipulation for credit

2. The goods are sold on credit but the credit term has expired.
3. The buyer becomes insolvent.
Subsection (2) specifies that the unpaid seller can exercise his right of lien
notwithstanding that he is in possession of the goods acting as an agent or bailee for
the buyer.

Part-delivery (Section 48)

Further, Section 48 states that if an unpaid seller makes part-delivery of the goods,
then he may exercise his right of lien on the remainder. This is valid unless there is
an agreement between the buyer and the seller for waiving the lien under part-
delivery.

Termination of Lien (Section 49)

According to subsection (1) of Section 49 of the Sale of Goods Act, 1930, an unpaid
seller loses his lien:

 If he delivers the goods to a carrier or other bailee for transmission to the

buyer without reserving the right of disposal of the goods.
 When the buyer or his agent obtain possession of the goods lawfully.
 By waiver.
Further, subsection (2) states that an unpaid seller, who has a lien, does not lose his
lien by reason only that he has obtained a decree for the price of the goods.

When is lien lost?

As already discovered, lien relies upon physical ownership of products. As soon

as the possession is misplaced, the lien is also misplaced. The unpaid dealer of
goods loses his lien thereon inside the following instances:

1. When he provides the products to a carrier or other bailee for the motive
of transmission to the customer without reserving the rights of possession
of the products.
2. When the buyer lawfully obtains ownership of the goods.
3. When the seller expressly or impliedly waives his rights of lien. An
implied waiver takes place while the seller offers a fresh time period of
credit or allows the customer to just accept an invoice of trade payable
 at a particular date to a sub-sale which the purchaser may additionally
have made.

Accordingly, when a refrigerator after being bought, will be delivered to the

purchaser and if it no longer functions well, the buyer takes it again to the seller
for repairs, here we can say that the seller could not exercise his lien over the
fridge.

Rights of Stoppage of Goods in Transit

The right of stoppage in transit method is the right of stopping the transit of the
goods even if they may be with a carrier for the cause of transmission to the buyer;
resuming the ownership of the customer and retaining possession until they made
the payment of the good.

Hence, this right is an extension of the right of lien because it entitles the seller to
regain ownership even if the seller has parted with the possession of the products.

When can this right be exercised? (Section 50)

An unpaid seller can exercise this right in the simplest way when:

 The purchaser becomes insolvent

The buyer is said to be bankrupt when he has denied paying his debts inside the
normal route of business, or if he cannot pay his money then it will be due.
[Section 2(8)]

 The property has exceeded the buyer

If assets have not surpassed the buyer then this right is called the “right of
withholding shipping”.[Section 46(2)]
  The products are within the route of transit

This means that goods should be neither with the seller nor with the buyer nor with
their agent. The product has to be within the custody of a carrier as an intermediary.
At that time, the carrier needs not to be either a seller’s agent or customer’s agent.
Because, if he is the seller’s agent then the products are still in the arms of seller
in the eye of regulation and consequently there may be no transit, and if he is the
customer’s agent, the consumer gets transport in the attention of law and hence
query of stoppage does now not rise up.

Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means
that an unpaid seller has the right to stop the goods while they are in transit, regain
possession, and retain them till he receives the full price.

If an unpaid seller has parted with the possession of the goods and the buyer becomes
insolvent, then the seller can ask the carrier to return the goods back. This is subject
to the provisions of the Act.

Duration of Transit (Section 51)

Goods are in the course of transit from the time the seller delivers them to a carrier
or a bailee for transmission to the buyer until the buyer or his agent takes delivery
of the said goods.

Some scenarios of the transit ending:

 The buyer or his agent obtain delivery before the goods reach the destination.
In such cases, the transit ends once the delivery is obtained.
 Once the goods reach the destination and the carrier of bailee informs the
buyer or his agent that he holds the goods, then the transit ends.
 If the buyer refuses the goods and even the seller refuses to take them back the
transit is not at an end.
 In some cases, goods are delivered to a ship chartered by the buyer. Depending
on the case, it is determined that if the master is functioning as an agent or
carrier of the goods.
 If the carrier or other bailee wrongfully refuses to deliver the goods to the
buyer or his agent, the transit ends.
 If a part-delivery of the goods has been made and the unpaid seller stops the
remaining goods in transit, then the transit ends for those goods. This is
provided that there is no agreement to give up the possession of all the goods.
How Stoppage is Affected (Section 52)
There are two ways of stopping the transit of goods:

1. The seller takes actual possession of the goods

2. If the goods are in the possession of a carrier or other bailee, then the seller
gives a notice of stoppage to him. On receiving the notice, the carrier or bailee
must re-deliver the goods to the seller. The seller bears the expenses of the re-
delivery.
Effect of Stoppage
Even if the unpaid seller exercises his right of stoppage in transit, the contract
stays valid. The buyer can ask for delivery of the goods after making the payment.

Right of Lien vs. Rights of Stoppage in Transit

Rights of Stoppage
Right of Lien
in Transit

Essence Retain possession Regain possession

The carrier or other

Who has the
bailee. The buyer
possession of the The seller.
should not have
goods?
received the goods.
 The right can be
Not a mandatory exercised only when
Buyer insolvent
requirement the buyer becomes
insolvent.

In simple words, the right of stoppage in transit begins when the right of
lien ends.

The principal points of difference among these rights of an unpaid seller are as
follows:

1. The seller’s lien attaches when the purchaser is in default, whether or not
he is solvent or bankrupt. The right of stoppage in transit arises best
while the customer is bankrupt.
2. Lien is to be held only when the goods are in actual possession of the
seller at the same time as the right of stoppage is available, when the
seller has half part with his own and the products are within the custody
of an independent service.
3. The right of lien comes as soon as the seller has possession over the
products to the carrier for the motive of transmission to the purchaser.

On the other hand, the right of stoppage in transit starts after the seller has
introduced the goods to a carrier for the purposes of transmission to the buyer and
maintains until the customer has acquired the ownership. The right of lien includes
preserving the possession of the goods when the right of stoppage includes
regaining ownership of the goods.

Pledge by the Buyer (Section 53)

Unless the seller agrees, the right of lien or stoppage is unaffected by the buyer selling
or pledging the goods. The principle is simple: the second buyer cannot be in a better
position that the seller (first buyer). However, if the buyer transfers the
document of title or pledges the goods to a sub-buyer in good faith and
for consideration, then the right of stoppage is defeated.

There are two exceptions to make note of:

a. The seller agrees to resale, mortgage or other disposition of the goods

If the seller agrees to the buyer selling, pledging or disposing of the goods in any
other way, then he loses his right to lien.

b. Transfer of the document of title of goods by the buyer

When the seller transfers the document of title of goods to the buyer and the buyer
further transfers it to another buyer who purchases the goods in good faith and for a
price, then:

 If the last mentioned transfer is by way of sale, the original seller’s right of
lien and stoppage is defeated.
 If the last mentioned transfer is by way of a pledge, the original seller’s right
of lien or stoppage can be executed subject to the rights of the pledgee.

Right of Resale (Section 54)

The right of resale is an important right for an unpaid seller. If he does not have this
right, then the right of lien and stoppage won’t make sense. An unpaid seller can
exercise his right of resale under the following conditions:

 Goods are perishable in nature: In such cases, the seller does not have to
inform the buyer of his intention of resale.
 Seller gives a notice to the buyer of his intention of resale: The buyer needs
to pay the price of the goods and ask for delivery within the time mentioned
in the notice. If he fails to do so, then the seller can resell the goods. He can
also recover the difference between the contract price and resale price if the
latter is lower. However, if the resale price is higher, then the seller keeps the
profits.
 Unpaid seller resells the goods post exercising his right of lien or stoppage:
The subsequent buyer acquires a good title to the goods even if the seller has
not given a notice of resale to the original buyer.
 Resale where the right of resale is reserved in the contract of sale: If the
contract of sale specifies that the seller can resell the goods if the buyer
 defaults, then the seller reserves his right of sale. He can claim damages
from the original buyer even if he does not give a notice of resale to him.
 Property in the goods has not passed to the buyer: The unpaid seller can
exercise his right of withholding delivery of goods. This is similar to the right
of lien and is called quasi-lien.

Suits for breach of contract

Sections 55 and 56 focus on seller’s remedies against the buyer and entitles the
seller to either sue for price of the goods or ask for damages for non- performance
of the contract. Sections 57, 58 and 59 lay down the remedies available to the
buyer against the seller in the event the latter breaches the contract. The buyer
can seek damages for non-delivery of goods, damages for breach of warranty or
specific performance of the contract. Sections 60 and 61 give rise to those special
situations wherein a remedy for breach is available to both the buyer and seller.”

It relates to suits for the Breach of a Contract. It shall be divided roughly, into 3
parts

 Seller’s Remedies against Buyer – Sections 55 and 56

 Buyer’s remedies against Seller – Sections 57, 58 and 59
 Remedies available to both buyer and seller – Sections 60 and 61

In every contract of sale, a seller is under an obligation to deliver the goods sold
and buyer is under an obligation to pay the requisite amount set or quid pro quo
i.e something in return, under the contract of sale, by them. This is known as
reciprocal promise as per Section 2(f) of the Indian Contract Act. In other words,
any set of promises made which forms the consideration or part of the
consideration for each other are called reciprocal promises and every contract of
sale of goods consists of reciprocal promises.

In certain cases, when a buyer refuses or fails to pay the requisite amount to the
seller, the seller becomes an unpaid seller and can exercise certain rights against
the buyer. These rights are considered as seller’s remedies in case there is a breach
of contract by the buyer. These remedies can be against:
 1. Buyer
2. Goods

According to Section 45(1) of Sale of Goods Act, 1930, the seller is considered
as an unpaid seller when:

a- When the whole price has not been paid and the seller has an immediate right
of action for the price.

b- When Bills of Exchange or other negotiable instrument has been received as

conditional payment, and the pre-requisite condition has not been fulfilled by
reason of the dishonour of the instrument or otherwise. For instance, X sold some
goods to Y for $50 and received a cheque. On presentment, the cheque was
dishonoured by the bank. X is an unpaid seller.

Seller also includes a person who is in a position of a seller i.e agent, consignor
who had himself paid or is responsible for the price.

Rights against buyer

1- Suit for the price

When any goods are passed on to the buyer and the buyer has wrongfully neglected
or refused to pay as per the terms and conditions of the contract, the seller may sue
him as per the Section 55(1) because once the property has been passed the buyer
is bound to pay the price.

But in the case due date of payment has been passed and goods had not been
delivered yet, the seller can sue the buyer for the wrongful neglect or refusal on
his part according to clause 2 of Section 55.

In case the price is due in foreign currency the damages must be calculated at the
rate of exchange prevailing at the time when the price was due not on the
judgement date.
2- Suit for damages

In case there is a wrongful refusal on the part of buyer for acceptance of goods and
payment of money, the seller can sue him for damages of non-acceptance as per
Section 56. For calculating the quantum of damages Section 73 and 74 of the
Indian Contract Act applies.

In case the goods have a ready market, the seller has to resell the goods and buyer
have to pay the losses if incurred. If the seller does not resell the goods the
difference between contract and market price at the day of breach is taken as a
measure for damages. If the difference between them is nil seller gets nominal
value.

There is a duty of mitigation on the part of the seller, which means that injured has
to make reasonable efforts to minimise the loss from that breach. For instance, if
the seller can resale the goods, the difference in price in contract and resale price
is given to the seller but if the seller deliberately refuses to resale the goods and
its market value reduces then the buyer will not be liable for the exaggerated loss.

The nature of the duty of mitigation has been explained by the supreme court in
case of M. Lachia Shetty V Coffee Board, where, a dealer who bid at an auction
of coffee had been accepted, refused to carry out the contract, consequently, coffee
was reauctioned at next best bidding price and dealer who refused the bid have to
give the difference in the amount of loss to the board.

3- Suit for interest

As stated under Section 61, where there is a specific agreement between buyer and
seller with regards to interest on the price of goods from the date on which payment
becomes due, the seller may recover interest from a buyer. But if there were no
such agreement the seller may charge interest from the day he notifies the buyer.
If there is no contract to the contrary, the court of law may award interest to the
seller at such rate as it thinks fit on the amount of the price from the date on which
amount is payable.

4- Repudiation of the contract before the due date

According to Section 60, the rule of anticipatory breach contract applies, wherein,
if buyer repudiates the contract before the date of delivery the seller can consider
the contract as rescinded and can sue for damages of the breach.

According to this Section, if one party repudiates before due date other has two
courses of action. Either he may immediately accept the breach and bring the
action of damages the contract is rescinded and damages will be assessed
according to the prices then prevailing or he can wait for the date of delivery. In
the second case, the contract is open at risk and will be a benefit to both parties.
Ma be the party changes is mind and agree to perform and damages will be
assessed according to prices on the day of delivery.

Rights against goods

a- Lien

Lien is a right which seller of goods can exercise when a buyer has not paid the
price of goods, under this right seller can retain the possession of goods as an agent
or bailee for the buyer. The seller can retain his possession as per Section 47 under
the following circumstances:

1- In case the buyer is insolvent.

2- When the term of goods sold on credit is expired.

3- Goods sold without any stipulation as to credit.

When the goods are sold on credit the right to lien is suspended during the term
of credit and lien exist only for the price of goods, not any additional charges.
According to Section 48 if the seller has delivered a part of unpaid goods he can
exercise his right of lien on rest. In Grice V Richardson, the sellers had delivered
a part of the three parcels of tea comprised in the sales, and they had not been paid
for the part which remained with them. They were allowed to keep it till the
payment of the price. Where, however, a part of goods delivered which show an
agreement to waive the lien, the seller cannot the remainder.

Termination of lien takes place when the seller losses the possession of goods. As
per Section 49, under following circumstances right of lien is terminated-

1- Waiver of lien-

The right of lien is an implied right attached by law in every contract of sale, the
seller has the autonomy to waive this right, it may be expressed or implied from
the conduct of the seller.

2- When buyer or agent lawfully obtains possession of goods.

Once the buyer got the possession of goods from the seller, all the rights of the
seller in respect to goods are ceased even if the price is not paid. The seller can
recover the price as a normal debt because the acceptance of possession gives
absolute, unqualified and indefeasible right of goods to the buyer. When the goods
are given again to the seller for repair he can not access the right of lien.

3- When the seller delivers goods to a carrier or other bailee for the purpose
of transmission to the buyer without reserving the right of disposal of the
goods.

When the seller has delivered goods to the carrier for transmission, his right of lien
is ceased but the right to stoppage in transit is still accessible by him. In case seller
regains possession of goods in transit by stoppage his right to lien is revived.

Like in Valpy V Gibson, the goods were delivered to the buyer’s shipping agent,
who had put them on board a ship. But the goods were returned to the seller for
repacking, while they were still with the sellers the buyer became
insolvent and seller being unpaid seller claimed to retain the goods in the exercise
of their lien. It was held that they have lost their lien by delivery to the shipping
agent. On the contrary, when the seller has reserved the rights of disposal his right
of lien continues till the end of the transit. And the seller cannot lose his right to
lien just because he has obtained a decree for the price of goods.

b- Stoppage

When the goods have been transferred to carrier or bailee for the purpose of
transmission to the buyer, who has become insolvent, the seller has the right to
stop the goods in transit in order to protect himself against the loss that may arise
due to insolvency. As per Section 50, there are four essential requirements for
stopping the goods in transit:

1. Unpaid seller.
2. Buyer insolvent.
3. Property should have passed to the buyer.
4. Property should be in course of transit.

The course of transit depends upon the capacity of middleman to hold the goods.
Middleman should be an intervening person between the seller who has parted
with the goods and the buyer who has not yet received the goods as held in the
case of Schotsmans v Lancashire & Yorkshire Rly co.

Section 5 lays down the rules and regulations related to commencement and end
of the transit, this Section is divided into seven sub-Sections which solve all the
issues related to commencement and end of transit:

1- Delivery to the buyer- Goods are considered to be in transit from the time
when they are delivered to the carrier or other bailee for the purpose of
transmission to the buyer, till the goods are received by the buyer himself or his
agent takes delivery of them.

For example, in the case of Great Indian Peninsula v Hanmandas, the seller
consigned the goods with the GIP Ry Co for transportation to the buyer. On the
arrival at the destination, the company had delivered the goods to the buyer who
had loaded them on his cart, but the cart had not yet left the railway compound
when a telegram was received by the company to stop the goods. The company
did not do so and were sued by the seller in damages. It was held that the transit
had ended as soon as the goods were handed over to the buyer.

But when the buyer denies accepting the delivery even when it has been landed at
the place of destination, the transit does not end. This happened in the case of
James v Griffin where on arrival of goods at the port of destination in the river
Thames, the buyer sent his son to have goods landed, but told him that on account
of his insolvency he did not intend to receive the goods and would like the seller
to have them. When goods were so lying the seller’s instruction to stop them was
received. The buyer’s trustee in bankruptcy claimed the goods. It was held that the
goods were still in transit.

2- Interception by the buyer- When the buyer or the agent takes the delivery of
the goods from the carrier, the transit ends even before their arrival at the appointed
destination.

In case the carrier delivers the goods before the arrival of the buyer, although it is
wrongful and the carrier may be held liable for the damages but the transit ends
here.

In the case of Lyons v. Honffnung, the buyer takes his seat as a passenger in a
ship which was carrying the goods. The court said that this does not amount to
delivery to the buyer before their arrival at the appointed destination.

3- Acknowledgement to the buyer- The transit is considered to come to an end

when the goods arrive at the appointed destination and the carrier acknowledges
to the buyer or his agent that he is now holding the goods on his behalf. It is
immaterial if the gods are still in the carrier or the buyer has indicated another
destination. In order to put an end to the original contract of carriage, a very clear
acknowledgement is required.

In the case of Whitehead v. Anderson, a quantity of timber was consigned on

board. When the ship arrived at the destination, the buyer went bankrupt. The
buyer’s agent came to the board and told that he has come to take possession. The
captain said that he will deliver only when the freight is paid. Before this could be
done, the seller sent a notice to stop and asked to send the goods to be delivered to
the agent of the seller. The court said that since the transit has not ended, the carrier
was within his rights in returning the goods to the seller. The captain agreed to
deliver the goods on a condition and if the condition is not fulfilled, the buyer does
not acquire the constructive possession of goods.

4- Rejection by the buyer– When the buyer rejects the goods and the carrier or
other bailee continues to possess them, the goods are held to be still in transit. This
will also include the case when the seller himself refuses to take back goods.

5- Delivery to ship charted by the buyer- It is a question of fact whether the

carrier is acting independently or as an agent of the buyer at the time when the
goods are delivered to a ship charted by buyer. As soon as the goods are loaded on
the ship, the transit ends if the carrier is acting as an agent of the buyer.

Thus, for instance, Rosewear china clay co ltd, re, the contract was for the sale
of china clay at FOB Fowey. The buyer chartered a ship and instructed the seller
to load to the goods at Fowey, which was accordingly done. The destination of the
ship was not told to the seller nor any bill of lading signed. The seller gave notice
stopping the goods.

6- Wrongful refusal to delivery- When the carrier wrongfully denies delivering

the goods to the buyer or his agent the transit is at the end. It is obvious that goods
should have arrived at their destination because otherwise, the carrier has the right
to refuse to deliver them.

In the case of Bird v. Brown, the court discussed as to when it is wrongful to refuse
the delivery of goods. In this case, the goods arrived at the destination but the buyer
has become insolvent. A merchant was acting for the seller who gave stop notice
to the seller without authority.

Subsequently, the trustee of the buyer demanded the goods as the buyer was
insolvent. The carrier refused to deliver the goods and handed them to the
merchant. The court said that after the formal demand for goods by the trustee,
there could be no valid stoppage in transit.

7- Part delivery- in the case when the goods have been delivered partly, the seller
has a right to stop the delivery of the rest of the goods unless the part delivery
shows an agreement to the possession of the whole. For instance, A sells to B
20kg of wheat, 10kg has been transferred to B but rest 10kg is still in transit, in
case B fails to pay A has a right to stop the goods in transit.

c- Resale

Exercising the right of lien or stoppage does not rescind the agreement but reselling
of goods does and without this right, the other two rights of lien and stoppage
would not be of much usage because he can only retain goods under these right till
the buyer pays back the money.

The unpaid seller can exercise his right under following conditions and
circumstances-

1- Seller before reselling the goods needs to send a notice to the buyer except in
the case of perishable goods, giving him last chance to pay the price and take back
the goods within a reasonable time. If the buyer does not pay the money back seller
has the right to resell the goods. If the seller fails to give notice of his intention
to resell, he cannot claim damages from the buyer and he has to give any profit.

2- If there is any loss in the resale of goods he can claim the loss from the buyer,
on the contrary, if there is profit buyer cannot claim it.

3- Seller gives rightful ownership to buyer after the resale it does not matter notice
of resale is given or not to defaulted buyer.

4- Sometimes the seller reserves exclusive right to resale the goods if the buyer
makes a default in payment, in such cases the buyer cannot ask for profit on resale
if no notice is served and seller has the exclusive right to resale.
For instance, R V Ward V Bignall, there was a contract of sale of two cars,
vanguard and zodiac for 850$. The buyer deposited 25$ but afterwards did not pay
the price despite a reasonable notice. The seller then tried to resell but could be
sold only a vanguard for 359$. he then claimed damages for 475$ representing
the balance of price and 22$ as advertising expenses. Court held that once the
seller resells the goods the contract is rescinded and he cannot claim the money
but he can ask for advertising expenses and a shortfall in the price of the vanguard.

Rights against seller

1- Damages for non-delivery

Section 57 states that, whenever any seller or refuses to deliver the goods to the
buyer, the buyer may sue for non-delivery of goods. If the buyer has paid any
amount he is entitled to recover it. Quantum of damages is decided through market
forces, contract and market price on the day of the breach is considered as
damages. If the buyer wants to claim that damages he must prove it in the court of
law, otherwise, he cannot get a penny more than refund i.e., the amount he has
already paid. Buyer must try to keep the loss at a minimum by purchasing the
goods from other sources instead of waiting for the market to fluctuate.

2- Suit for specific performance

Acc to Section 58 when goods are specific or ascertained and there is a breach of
contract committed on the part of the seller then the buyer can appeal to the court
of law for specific performance. The seller has to perform the contract and he does
not have any option of retaining the goods by paying damages. The power of the
court to order specific performance is subject to the provisions of chapter II of
Specific Relief Act, 1963.

Thus on the sale of ship buyer was allowed to recover the ship specifically in the
case of Behnke V Bede Shopping, there was a ship named the city which
holds a unique value to the plaintiff but she was a cheap vessel being old but her
engines were new and as to satisfy the German regulations and hence plaintiff
could as a German shipowner have her at once put on the German register. A very
experienced ship-valuer has said that he knew only one other comparable ship, but
that may not be sold. Thus, on sale of a ship buyer was allowed to specifically
recover the ship.

3- Suit for breach of warranty

As stated under Section 59, the buyer cannot reject the goods solely on the basis
of breach of warranty on the part of the seller or when a buyer is forced to treat a
breach of condition as a breach of warranty. But he may sue the seller for damages
or set up against the seller the breach of the warranty in the extinction of the price.

The measure of damages is directly and naturally occurring loss in ordinary events
from breach of warranty. Mason V Burningham, the buyer of a second- hand
typewriter spends some money on getting it overhauled. Afterwards, the typewriter
was seized from her as stolen property. this was a breach on the part of the seller
of warranty of quiet possession. She was held entitled to recover damages
including the cost of repair. She did a natural thing in having the typewriter
repaired and the amount she had spent was a loss directly and naturally resulting
from the breach.

4- Suit for anticipatory breach

According to Section 60, the rule of anticipatory breach contract applies, wherein,
if any party repudiates the contract before the date of delivery the other party can
consider the contract as rescinded and can sue for damages of the breach.

According to this Section, if one party repudiates before due date other has two
courses of action. Either he may immediately accept the breach and bring the
action of damages the contract is rescinded and damages will be assessed
according to the prices then prevailing or he can wait for the date of delivery. In
the second case, the contract is open at risk and will be a benefit to both parties.
Maybe the party changes is mind and agree to perform and damages will be
assessed according to prices on the day of delivery.

Conclusion

The seller becomes an unpaid seller when either he had not been paid in full or the
buyer has failed to meet the maturity of bills of exchange or any other negotiable
instrument accepted by seller as a condition precedent. Under this situation, the
seller can resell the goods if he had exercised the right of lien or stoppage in transit,
after giving notice to the buyer and the new buyer will have good title over the
goods. In this case, the seller has the right to sue the buyer for failure to pay the
required amount as well as a lien. On the contrary, if the seller fails to deliver
goods to the buyer, he may sue the seller for non- performance and can claim
damages or specific performance.

Auction Sale

The word “Goods” include in ‘The Sales of Goods Act’

The word goods include the following things as movable property –

1. Growing Crops (which The Transfer of Property Act excludes)- Growing

crops are the crops which are planted in bulk in the farms or in fields by
the farmers.
2. Standing Timber- The timber trees in which the timber can be cut off and
sold.
3. Grass- The thin, green, dense plant which covers most areas of the earth.
4. Old currency- It is considered as movable property as it cannot be used
to buy goods, it is treated as an antique item.
5. Water- The water in its natural form in sea, rivers, water streams etc.
6. Gas- Gas is considered as movable property as it expands freely to
anywhere and everywhere.
 7. Electricity- The electricity power generated to run the day to day usage
of it in various sectors and parts of human life is considered as movable
property.
8. Trademark- Unique symbol or sign used to signify a particular brand,
company.
9. Patent – It can be described as a license issued by the Government.
10.Copyright- It is a legal right of an individual which is given to protect
the unique piece of artwork.
11. Share of the Company- After allotment of the share of the company it is
treated as the movable property.
12. Goodwill of the Company- A company’s reputation or image in the
market is an added asset to the company which is also included under a
movable property.
13. Stock- Stock of company which can be divided into shares are considered
as movable property.

What are all excluded from the word “Goods” under the Sale of Goods

Act?

1. Immovable property
2. Actionable claim
3. Money / Currency

Classification of Goods

Goods can be classified into ‘Existing Goods’ which are the goods existing at the
time of contract of sale. Existing goods are further divided into three categories
which are specific goods, unascertained goods and ascertained goods. Specific
goods are the goods which cannot be replaced, unascertained goods are the goods
which are in bulk and which cannot be specifically identified at the time of
Contract of Sale, whereas ascertained goods are the goods which are easily
separated from the bulk at the time of Contract of Sale.

The other category of goods is ‘Future Goods’. These are the goods which are yet
to be produced or manufactured. The seller manufacture certain goods like
jewellery on the order of the buyer, such goods are known as future goods. The
last category of the goods is ‘Contingent Goods’. These are the types of goods
which may or may not be produced subject to certain conditions. The seller may
deliver the goods if the conditions are fulfilled and if the condition is not fulfilled
the seller may not deliver the goods.

Statutory Provisions of Auction Sales under Sale of Goods Act, 1930

The statutory provisions pertaining to auction sale are found in Sale of Goods Act,
1930. Section 64 of the Act provides rules regarding the auction sale. The rules
are explained below.

1. When the goods are in lots and they are put up for auction sale, each of
the categories or a lot of goods will be subjected to separate contract of
sale.
2. The sale of goods in the auction is said to be complete only when the
auctioneer declares it to be completed by fall of the hammer or any other
usual method or by announcing. Until then the bidder can anytime
drawback his bid.
3. The seller at the auction can reserve his right to bid and he has to
expressly reserve such right. He can appoint a person to bid on his behalf.
4. If the seller does not expressly notify his right to bid, he cannot bid at the
auction nor can he appoint anyone on his behalf to bid at the auction.
Also the auctioneer should not accept and entertain such bids. Any sale
which is done in contradiction to this rule is unlawful and will be
declared as fraudulent by the buyer.
5. The reserve price once declared the auctioneer cannot sell the subjected
goods in price below the reserve price.
6. In any case, if the seller or his agent purposely and knowingly pretend to
bid to raise the price of the goods then such sale is voidable at the option
of the buyer
7. The property in the auction cannot be sold on credit and as per the wish
of the auctioneer.
CASE LAWS

 COFFEE BOARD V. FAMOUS COFFEE AND TEA WORKS

In this case under the Madras High court, the seller expressly declared that he can
accept any bid be it the highest bid or the lowest bid whichever he likes or
whichever he believes to be a fair price to the property. This will be completely
his decision and he is not bound by the highest bid. He is also not bound to give
any reasons for his decision and his decision shall be final and conclusive.

 MCMANUS V. FORTESCUE

In this case, the auctioneer mistakenly sold the said property below the reserved
price which was stated in a catalogue for each lot because of which the seller
refused to sign the memorandum of sale. The court relieved the auctioneer as it
was done mistakenly.

 BOMBAY SALT AND CHEMICAL V. JOHNSON & ORS.

In this case, it was held that the highest bidder can claim his rights over the
property in the auction sale only when the auction sale is accepted by the seller
and has been approved by the seller and also the sale deed is executed in his favour.
Until then the highest bidder has no rights over the property.

 BARRY V. DAVIS

In this case, it was stated that if there exists no reserve price for the property that
has to be sold or to be put in the auction then the property should be sold to the
genuine highest bidder. There are also certain exceptions to this such as unlawful
selling of goods, seller not authorised to sell, the buyer has no right to buy or the
buyer does not have enough money to buy the property.

 PAYNE V. CAVE

In this case, Mr Cave was the buyer and he made the highest bid for a good at the
auction. Later Mr Cave decided to not to buy the property and withdrew his bid
before the auctioneer put down the hammer. It was held that as the Mr. Cave
has withdrawn his bid before the auction was completed and he had all the rights
to withdraw his bid anytime before the auction is declared to be complete. He is
not liable to purchase the goods.

 HARRIS V. NICKERSON

In this case, an advertisement was given in the newspaper that certain items are to
be sold and would be auctioned on a particular place for three days. The plaintiff
wanted to buy certain goods but the goods were withdrawn. The plaintiff sued the
defendant for the loss of time and travel expenses. The court held that
advertisement for auction does not amount to offer and therefore the advertiser can
withdraw goods anytime prior to the auction.

ILLUSTRATIONS

1. A being the auctioneer in the auction sale. A accepted the highest bid by
B. A declared that the auction is complete. Later B decides not to buy the
property at Auction sale to which he agreed to buy. B cannot deny buying
the property and he will have to pay the consideration to A.
2. A held the auction of a House. B made the highest Bid. But before the
hammer was slammed down by the auctioneer the seller decides to
withdraw the property. B cannot enforce the selling of the property to
him.
3. A was the auctioneer in the auction sale. A sold the property at the price
below the reserve price to B. The seller denied selling his property. B
cannot claim the property from the seller.

Conclusion

The auction sale is covered under Section 64 of ‘The Sales of Goods Act, 1930’.
The Sales of Goods Act specifically deals with a movable property only. Auction
sale can be defined as a public sale in which various prospective buyers are invited
to a particular area where the auction is to be conducted. There are two main
parties involved one is the auctioneer who conducts the auction of a
property and the other is the buyer who will bid the highest than any other buyer
in the auction.

The auction is complete only when the hammer is dropped down or in a customary
manner, the auction is declared to be complete. The ownership of the property thus
passes from the owner to the highest bidder on the fall of the hammer. The seller
himself cannot bid and he also cannot appoint anyone to bid on his behalf.The
auctioneer can be the seller or his agent. Auctioneer should always be an
authorised person and should act in the benefit of the seller with a bonafide
intention. The bidder can revoke his bid any time before the completion of the
auction. A bid can be said to an offer and to which acceptance is completed only
when the sale deed has been executed in the name of the highest bidder.
PARTNERSHIP ACT 1932

Partnership is one of the specific contracts which were a part of the Indian Contract
Act. 1872. In 1930, however, the provisions relating to partnership contract were
repealed and a separate Act called the Indian Partnership Act, 1932 was passed
which is in force till today. It extends to the whole of India except the State of
Jammu and Kashmir. It has come into force on the 1st day of October 1932 except
Section 69, which came into force on the 1st day of October 1933.

Partnerships in India are governed by the Indian Partnership 1932.

Partnership is formed as result of an agreement between two or more persons
who have agreed to share the profits of a business carriedby all or any of them acting for all.
Hence the general principles of law of contracts and agency (as contained in the
Indian Contract Act 1872) also apply to partnerships except where the Act
specifically provides to the contrary. The Act mainly contains the provisions
relating to the formation of partnership the rights, duties and liabilities of partners
and the procedure for its and various types of partners including the position of a
minor partner the procedure for its dissolution etc

Meaning and Definition

Partnership is the relation between persons who have agreed to share the profits
of a business carried on by all or any one of them acting for all (Section 4). It,
therefore, follows that a partnership consists of three essential elements:
(i) It must be a result of an agreement between two or more persons.
(ii) The agreement must be to share the profits of the business.
(iii) The business must be carried on by all or any of them acting for all.
All these essentials must coexist before a partnership can come into existence.
Example: A manager, as a part of his remuneration, may be given a share in
profits of the business.
MEANING OF 'PARTNER', 'FIRM' AND 'FIRM NAME' [SECTION 4]
Persons who have entered into partnership with one another are called
individually ‘partners’ and collectively ‘a firm’, and the name under which their
business is carried on is called the 'firm name'.
MAXIMUM LIMIT ON NUMBER OF PARTNERS
(a) In case of a partnership firm carrying on a banking business-maximum10
members
(b) In case of a partnership firm carrying on any other business-maximum20
members
If the number of partners exceeds the aforesaid limit, the partnership firm
becomes an illegal association.
 Essential Elements of Partnership: The aforesaid definition clearly indicates the
essential elements of partnership as below

1) Two or more Persons - There must be at least two persons to form a partnership
and all such persons must be competent to contract. According to Section 11 of
the Indian Contract Act, 1872, every person except the following, is competent to
contract:

(i) Minor

(ii) Persons of unsound mind (e.g. lunatics, idiots), and

(iii) Persons disqualified by law (e.g., alien enemies, insolvents)

Shivaram v. Gauri Shankar in this case court held that There must be at
least two persons and such persons must be competent to contract But after the
formation of partnership, a minor can be admitted to the benefits of partnership
with the consent of all other partners of the firm as per the provisions of Section
30 of the Act.

The partnership can be formed between Companies but firms cant foerm
partnership because act makes it clear that by way of an agreement between
competent person partnership can be established company being artificial person
can be a party to the partnership deed but unlike company firm is not legal person
and therefore, firm is not capable of entering in to partnership deed. (Dulichand
v. Comissioner of income tax, Nagpur)

2) Agreement: Partnership must be the result of an agreement between two or

more persons. An agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and from a consistent
course of conduct being followed, showing mutual understanding between them.
It may be oral or in writing. This essential element is further clarified under Section
5. Section 5 provides that the relation of partnership arises from contract and not
from status. That is why; a Hindu undivided family carrying on a family business
is not considered a partnership. The reason is that the coparceners of a Hindu
undivided family acquire interest in the business because of their status (i.e., birth)
in the family and not because of any agreement between them. Thus, partnership
is voluntary and contractual in nature
3) Business - There must exist a business. According to Section 2(b), the term
‘Business’ includes every trade, occupation and profession. For example, when
two or more persons agrees to share the income of it joint property (e.g.. rent
from a building). It does not amount to a partnership because there does not exist
any business. Similarly, an association created for charitable, religious or social
purpose cannot be regarded as partnership because there does not exist any
business. It may also be noted that an agreement to carry on business at a future
time does not result in partnership unless that time arrives and the business is
started. [R.R. Sorna, v. Reuben]

When goods purchased for self Consumption not for the re-sale then it is not
considered as business transaction, accordingly there will be no
Partnership.(Coope v. Eyre) Business should be carried on and business should
be of lawful business as per section 23 of the contract act 1872.

4) Sharing of Profits – There must be sharing of profits. Unless otherwise agreed,

sharing of profits implies sharing of losses too. It may also be noted that sharing
of profits is a prima facie evidence and not a conclusive evidence of partnership.
Because of that everyone who shares the profits of business need not necessarily
be a partner. For example, a manager who receives a particular share in the profits
of a business as part of his remuneration is simply an employee and not a partner
.

5) Mutual Agency There must existence of a mutual agency relationship among

the partners. 'Mutual Agency' relationship means that each partner is both an
agent and a principal. Each partner is an agent in the sense that he has the
capacity to bind other partners by his acts done. Each partner is a principal in
the sense that he is bound by the acts of other partners.

The mutual relationship of agency is emphasised in Section 18 of the Indian

Partnership Act, which reads as under: "Subject to the provision of this Act, a
partner is the agent of the firm for the business of the firm."Moreover, the use
of the words ‘carried as by all or by any of them acting for all, in Section 4 of
the Act clearly emphasises agency relationship.

Because of the existence of mutual agency relationship amongst the partners,

the law of partnership is also regarded as an extension of the general law of
agency. It may be noted that the mutual agency relationship distinguishes a
partnership from co-ownership and simple agreement for sharing profits.
In cox v. Hickman it has been held that although the trustees were managing
tha business of smith and son but they did not become partners. Because trustees
were acting as agents but they were not the principals.

NATURE OF A PARTNERSHIP FIRM

A partnership firm is not a person in the eyes of law [except under Section 2(31)
of the Income Tax Act, 1961]. It has no separate legal entity apart from the partners
constituting it [Malabar Fisheries Co. v. CIT]. Thus, firs themselves cannot enter
into a contract for partnership though their partners can. For example, two firms,
namely, M/s A&B and M/s X&Y, themselves cannot form a new partnership
though the partners of the individual firms can form a partnership.
Partnership is a form of business in which two or more persons come together with
their resources to invest in a common business with the purpose of sharing the
profits of the business.

There are some limitations of Sole proprietorship viz limited capital, no risk
sharing, limited skill etc. Partnership is the solution to such problems faced by a
sole proprietor. In a partnership a few persons can come together to start a new
business with an agreement to share the profits and losses of the business.

TEST OF PARTNERSHIP [SECTION 6]

According to Section 6, "In determining whether a group of persons is or is not a

firm, regard shall be had to the real relation between the parties as shown by all
relevant facts taken together." The real relation between the partners can be
ascertained as under:

i. If there is an express contact: The real relation is ascertained from the terms
of partnership contact.

ii. If there is no express contract: The real relation is ascertained from all the
relevant factors such as contract of parties, books of accounts, statement of
employees etc.

The Section 6 is based on the principle laid down in an important case of Cox v.
Hickman (1860). The analysis of this section reveals that the following is the true
test of partnership:
(a) The partnership is determined from the real relation between partners and
such relation must show the existence of mutual agency relationship, and

(b) The sharing of profit is prima facie evidence but not a conclusive test of
partnership.

A group of persons shall be regarded as partnership if the real relation between the
partners shows that all essential elements of partnership are present.

Cases where the Partnership Relation does not Exist [Explanations I and II to
Section 6]

The two cases where the partnership relation does not exist are given below:

(a) Joint owners of some property sharing profits or gross returns arising from
the property [Explanation I to Section 6).

Example X and Y jointly purchased a building and contributed capital equally to

convert the building into a hotel. They let it out on a rent of As 1,00,000 per annum
and share the rental Income equally. Here X and Y are regarded as co- owners and
not partners. Because X and Y do not have mutual agency relationship. [Leading
case: Govind Nair v. Maga]

(b) Persons sharing the profits but not having mutual agency [Explanation II to
Section 6] - The sharing of profits is prima facie evidence. This statement is true
in the sense that some persons though sharing the profits of a business are not
regarded as partners since they do not have mutual agency relationship. Such
persons are:

(i) Money lender (who has lent money to the firm) who receives a share of
profits: [Mallow Mantle & Co. v. The Court of Wards and Cox v. Hickman]

(ii) Widow or child of a deceased partner sharing profits; Sometimes on the death
of the partner the widow or child of the deceased partner may be given share of
profits according to terms and conditions of contract. Merely sharing profits such
widow or child doesn’t become partner in the firm [Holme v. Hammond in this
case court held that executors of deceased partner who shares profit had not
become partners and therefore they couldn’t made liable.

And I.T. Commissioner v. Kesharmal Keshardeo ` there is no bar to the widow

or son of the deceased partner to join firm after the death of the partner based on
the terms and conditions provided in the agreement. ]
(iii) a servant or an agent who receives a share of profits as part of his
remuneration; In partnership sometimes share may be given profits to the servants
or agents to carry out the firm’s business effectively merely, sharing profits he
doesn’t become partner in the partnership [Munshi Abdul Latif v. Gopeshwar and
Walker v. Hrisch]

iv) The seller of the goodwill sharing the profits . seller of goodwill also may be
entitle to the share in the profits in the form of consideration for the sale of
goodwill, such person person doesn’t become partner.[Rawlinson v. Clarke and
Pratt v. Strick]

Who are not partners?

The following persons are not treated as partners:

(a) Members of a Hindu undivided family (HUF) carrying on family business.

(b) Burmese Buddhist husband and wife carrying on a business.

Thus, partnership can be presumed when (a) there is an agreement to share the
profits of a business and

(b) The business must be carried on by all or by any of them acting for all. Even
when the exclusive power and control is vested with one partner under an
agreement, partnership shall be presumed to exist. [K.D. Kamath & Co. v.
Commissioner of Income Tax, ]

PARTNERSHIP AND CO-OWNERSHIP

Co-ownership means joint ownership of some property. The two or more persons
who own some property jointly arc called co-owners. As per Explanation I to
Section 6, the joint owners of some property sharing profits or gross returns
arising from the property do not become partners.

Partnership Co-ownership

It arises from an agreement. It may or may not arise from agreement.

It is formed to carry on a business. It may or may not involve carrying on a

business.
 It involves profit or loss. It may or may not involve profit or loss.

Partners have a mutual agency Co-owners do not have a mutual agency

relationship. relationship.

The persons who form partnership are The persons who own some property
called partners jointly are called co-owners.

The maximum limit of partners is 10 for aThere is no maximum limit of co-

banking business and 20 for any otherowners.
business.

A partner cannot transfer his share to aA co-owner can transfer his share to a
stranger without the consent or otherstranger without the consent of other co-
partners. owners.

A partner has no right to claim partition of A co-owner has the right to claim
property but he can sue the other partnerspartition of property.
for the dissolution of the firm and accounts.

A partner has a lien on the partnershipA co-owner has no such lien.

property for expenses incurred by him on
behalf of the firm.

16.7 PARTNERSHIP AND HINDU UNDIVIDED FAMILY (HUF)

According to the Hindu Law, "Hindu undivided family is a family which consists
of all persons lineally descended from a common ancestor and includes their wives
and unmarried daughters." Three successive generations in the male line (son,
grandson, and great-grandson) who inherit the ancestral property are called
'Coparceners'.

The property which a man inherits from any of his three immediate mule ancestors
(i.e.. his father, grandfather and great grandfather), is called 'ancestral property'.

There are two schools of Hindu Law—Dayabhaga and Mitakshara. Under

Dayabliaga School of Law, which is applicable to West Bengal and Assam, a son
acquires an interest in the ancestral property only after the death of his father.
Under Mitakshara School of Law, which is applicable to whole of India
 (except West Bengal and Assam), each son acquires by birth an interest in the
ancestral property. The partnership and Hindu undivided family can be
distinguished as under:

Partnership Hindu undivided family

It arises from an agreement. It arises by status or operation of law.

It is governed by the Indian Partnership Act. It is governed by Hindu Law.

1932.

The persons who form partnership are called The persons who are the members of the
'partners’. HUF are called 'Coparceners'.

The maximum limit of partner is 10 for aThere is no maximum limit of

banking business and 20 for any othercoparceners.
business.

A person can be admitted to the existingA male person becomes a member

partnership with the consent of all othermerely by his birth.
partners.

A minor can be admitted to the benefits ofA male minor becomes a member merely
partnership with the consent of all the partners.by his birth.

A female can become a full fledged partner. A female does not become member
merely by her birth.

Each partner has implied authority to bind theOnly the Karta has implied authority.
firm by acts done in the ordinary course of the
business of the firm.

The liability of all the partners is unlimited, Only Karta's liability is unlimited and the
liability of the other coparceners is limited
only to their shares in the family property.

Each partner has a right to inspect and copy theThe coparceners have no right to ask for
account books and ask for the account ofthe account of past dealings.
profits and losses.
 Unless otherwise agreed partnership is The Hindu undivided family continues to
dissolved on the death of any partner. operate even after the death of a
coparcener.

Partnership and Company

A company is an artificial person created by law having, perpetual succession,

separate legal entity with limited liability and a common seal.

Partnership Company

A firm doesn't enjoy separate legalIt has a separate legal existence. A company
existence. Partners are collectively termedis separate from its members.
as a firm and individually as partners.

The liability of partners is unlimited. Liability of its members is limited to the

extent of the value of shares held by them.

It does not enjoy a long lease of life. Death,It enjoys perpetual existence. Even on the
sickness, retirement of partners may affectdeath of all the members company cant comes
its existence so as to dissolve it. Dissolutionto an end.
may take place on certain grounds.

Minimum number of partners is two.A public company must have a minimum 7

Maximum may be ten (in case of bankingmembers to start with. However, there is no
business) or twenty (in case of non- bankinglimit on the maximum number of members of
business). a company. In case of private company
minimum 2 maximum 200 members.

A partner cannot transfer his share without A member may transfer his shares as and when
the consent of other partners. he likes. There is no restriction on transfer of
shares.

Each partner represents the other partners There is no agency relation-ship among
so as to bind and be bound to others. members of a company as they do not bind
each other with their actions.

Profits are distributable among partners as There is no such compulsion that profits
per the partnership deed. must be distributed. Only when the
dividends are declared that the members get
 a share of profits.

The entire management lies with all the Members cannot participate in management
partners. unless appointed as directors. However,
members may attend and vote at meetings
while making the appointment of Directors,
Auditors etc.

Property of the firm the joint property of Property of the company is not the properly of
all its partners. its members as the company and members
have separate legal existence.

DURATION OF PARTNERSHIP

On the basis of duration, the partnership can be classified in to two types

namely
1) Partnership at will
2)Particular Partnership.

Partnership at Will (Section 7]

When there is no provision in partnership agreement for duration of the

partnership, the partnership is called 'Partnership at Will'. A partnership at will
may be dissolved by any partner by giving a notice in writing to all other partners
of his intention to dissolve the firm.

Particular Partnership [Section 8]

When a partnership is formed for a specific venture or for a particular period, the
partnership is called a ‘Particular Partnership’. Such partnership comes to an end
on the completion of the venture or on the expiry of the period. If such partnership
is continued after the expiry of term or completion of the venture, it is deemed to
be a partnership at will. A particular partnership may be dissolved before the
expiry of the term or completion of the venture only by the mutual consent of all
the partners.
TYPES OF PARTNERS
Actual or Sleeping or Nominal Partner in Sub-partner
ostensible dormant partner partner profits
partner only
He takes an He does not He lends his He shares the He is a third
active pan in take an active name to the profits only person with
the conduct of pan in the firm without and not whom a
the business. conduct of the having any losses, partner agrees
business. real interest to share his
in the firm. profits derived
He neither from the firm.
contrib. tries
to the capital
nor shares
the profits or
takes part in
the conduct
of the
business of
the firm.
He along with He along with He along He along with He has no
other partners other partners with other other partners rights against
is liable to is liable to third partners is is liable to the firm nor is
third panics panics for the liable to third parties he liable for the
for all the acts acts of the firm. third panics for all the acts acts of the firm.
of the firm. for all acts of the firm.
of the firm
as if lie
is an
actual
partne
r.
He must give He need not He must give He must give There is no
public notice of his give public public notice public notice question of
retirement. notice of his of his of his public notice at
retirement. retirement. retirement. all since he is a
third person
and not a
partner.
His insanity His insanity His His His
or or insanity insanity insanity or
permanent permanent or or permanent
incapacity to in capacity to permane permanent incapacity to
perform his perform nt incapacity perform his
duties may be a incapac to duties is no
ground for the his duties ground for the
duties is no ity to perform his
dissolution of perform duties may be a dissolution of
the firm. ground for his ground for the the firm since he
the duties dissolution of is a third
dissolution is no the firm. person and
of the firm. ground not a partner.
for the
 dissoluti
on of
the
firm.

Partner by Estoppel or Holding out [Section 28(1)]

A person is held liable as a partner by estoppel or holding out if the following two
conditions are fulfilled:

(a) He must have represented himself to be a partner by word spoken or written

or by his conduct (such type of representation may be called as active
representation), or

He must have knowingly permitted himself to be represented as a partner (such

type of representation may be called as tacit representation); and

(b) The other person acting on the faith of such representation must have given
credit to the firm. It is immaterial whether the person so representing to be a
partner, is aware or not that the representation has reached the other person.

Example: Harish, a sole proprietor of Harish Shirish& Co. employed Shirish as

manager. Harish introduced Shirish as his partner to X. a supplier of goods. Shirish
remained silent. Treating Shirish partner X supplied the goods on credit. Harish
failed to pay the price of goods. X filed a suit against both Harish and Shirish for
the recovery of the price. Here, Shirish is liable as a partner by holding out because
he has knowingly permitted himself to be represented as a partner and the S
the4supplier has acted on the faith of such representation. [Martyn v. Grag]

Position of a Retiring Partner as Partner by Holding Out [Section 28(2)]

Where, after the retirement of a partner, the firm uses the retired partner's name as
a partner, the retired partner who has not given public notice of his retirement, is
held liable on grounds of holding out to third parties who give credit to the firm
on the faith that he is still a partner.

Exceptions to the Principle of Holding out [Sections 28(2) and 34]

The principle of holding out does not apply in the following cases:

(a) Where, after the death of a partner, the firm uses the deceased partner's name
as a partner. the estate of the deceased partner or his legal representatives cannot
be held liable for acts of the firm done after his death. It may be noted that a public
notice of a partner's death is not required.

(b) The estate of the insolvent partner cannot be held liable for the acts of the firm
done after the date of the order of adjudication [Section 341. It may be noted that
a public notice of a partner's insolvency is not required

POSITION OF MINOR AS A PARTNER

As per section 11 of Indian Contract Act 1872 minor is not capable of entering
into a contract, an agreement by or with a minor is void ab-initio (Mohni Bibi
v. Dharamdas Ghosh). partnership is a result of an agreement, a minor cannot
enter into a partnership agreement, on the basis of the general rule than a minor
cannot be a promisor, but can be a promisee or a beneficiary, Section 30 of the
Indian Partnership Act 1932, provides as under:

"With the consent of all the partners for the time being, a minor may be admitted
to the benefits of partnership."

An analysis of the above provision highlights the following three conditions:

i) Before admission of a minor as a partner, there must be an existence of

partnership;

ii) There must be mutual consent of all the partners;

iii) A minor can be admitted only to the benefits of partnership.

In Shivaram v. Gourishankar court opined that there cannot be a partnership

consisting of all the minors or of one major and all other minors.

Rights and Liabilities of' a Minor Partner before Attaining Majority

Rights

(a) He has a right to share the profits and property of the firm in accordance
with the agreement. [Section 30(2)]

(b) He has at right to have access to, and inspect and copy, any of the accounts of
the firm. But he does not enjoy such rights in respect, of books other than account
books. (Section 30(2)1

(c) He has a right to file a suit for his share of profits or the property of the firm
when he is not given his due share of profits. However, he can exercise this
right only when he decides to sever his connections with the firm [Section 30(4)].

Liabilities

(a) He is liable only to the extent of his share in the profits and the property of
the firm. He is not personally liable to third parties. [Section 30(3)]

(b) He cannot be declared insolvent on declaration of firm's insolvency, his

share vests in the Official Receiver or Official Assignee.

Rights and Liabilities of a Minor Partner on Attaining Majority [Sections

30(5), (6), (7)]

Within six months of date of his attaining majority or date of his obtaining
knowledge that he had been admitted to the benefits of firm, whichever is-later,
the minor partner has to exercise his option whether or not to become a partner.
Such option is required to be exercised by giving a public notice within the period
of six months. If he fails to give a public notice, he is deemed to have become a
partner in the firm on the expiry of the said six months [Section 30(5).The various
rights and liabilities of a minor partner after attaining age of majority

When he elects to become a partner

(a) He becomes personally liable to third parties for all acts of the firm since he
was admitted to the benefits of partnership (Section 30(7) (a)].

(b) His share in the property and profits of the firm remains the same as he was
entitled as a minor [Section 30(7) (b)].

When he elects not to become a partner

(a) His rights and liabilities continue to be those of minor up to the date of
giving public notice (Section 30(8) (a)I.

(b) His share is not liable for any acts of the firm done after the date of the
public notice [Section 30(8) (b)].

(c) He is entitled to sue the partners for his share of the property and profits in
the firm [Section

30(8)(c)].
MUTUAL RIGHTS AND DUTIES
The mutual rights and duties of partners are governed by
(a) The Partnership Agreement and
(b) The Partnership Act.

The various provisions of the Partnership Act governing the mutual rights and
duties of partners as follows:
Mandatory Duties of Partners [Sections 9 and 10] These provisions cannot
be changed by an agreement amongst the partners.
The mandatory duties are:
A) to carry on the business of the firm to the greatest common advantage,

B) to be just and faithful to each other, i.e. every partner should act in good faith.
Good faith requires that a partner should not deceive the other partner by
concealment of material facts.
C) to render true accounts and full information of all things affecting the firm to
any partner or his legal representative.

D) to indemnify (i.e., to make good or to compensate) the firm for loss caused to
it by his fraud in the conduct of the business of the firm.

General Duties of Partners

The general duties of partners as provided in the Act are subject to the clauses
inserted in agreement by partners. They can be changed by an agreement amongst
the partners. Unless otherwise agreed by the partners, every partner has the
following duties:
(a) To attend diligently [Section 12(b)]: Every partner is bound to attend carefully
to his duties in the conduct of his business.

(b) Not to claim remuneration for taking part [Section 13(a)]: A partner is not
entitled to receive remuneration for taking part in the conduct of the business.

(c) To contribute equally to the losses [Section 13(b)]: A partner must contribute
equally to the losses sustained by the firm.

(d) To indemnify the firm [Section 13(f)]: A partner must indemnify (i.e.,
compensate) the firm for any loss suffered by the firm due to his wilful neglect in
the conduct of the business of the firm. The term 'wilful neglect', is something
more than a mere 'negligence' and has been described as 'culpable negligence'.
(e) To hold and use firm's property for business purpose [Section 15]. The partners
must hold and use the firm's property for the purposes of the business.

(f) To account for and pay the personal profits from transactions firm etc. [Section
16(a)]: Every partner must account for and pay to the firm the profits earned by
him from any transaction of the firm or from the use of firm's property, business
connection or name in Bentlay v. Crawen. If a partner is entrusted with the job of
buying sugar for the firm and he supplies sugar to the firm at a higher price from
personal supplies held by him, he is liable to account for profits made

(g) To account for and pay the personal profits from a competing business
[Section 16(b)]: Every partner must account for and pay all profits earned by him
in the competing business. It may be noted that Section 11(2) permits the partners
to enter an agreement restraining a partner from carrying on any business other
than the business of the firm so long as he is a partner.

Rights of Partners
The rights of partners as provided in the Act are subject to the agreement between
the partners. They can be changed by an agreement amongst the partners. Unless
otherwise agreed by the partners, every partner has the following rights:
(a) Right to take part in the conduct of the business [Section 12 (a)]: Every
partner has a right to take part in the conduct of the business.
(b) Right to express opinion [Section 12(c)]: Every partner has the right to
express his opinion before the matter is decided. All matters except the change in
the nature of the business, may he decided by a majority of the partners. The
change in the nature of the business may be made only with the unanimous consent
of all the partners .
Ex: admission of new partner to the firm, change in the nature of firms business.
Power of majority opinion has to be exercised in good faith. For instance if the
majority of the partners decided to expel one of the partner without justifiable
reason such expulsion would be set aside.
(c) Right to have access to books of the firm [Section 12(d)]: Every partner has
a right to have access to and to inspect and copy any of the books of the firm. A
partner may exercise this right personally or by engaging his agent.
(d) Rights to share profits [Section 13(b)]: generally A partner is entitled to
share the profits of the business of the firm equally. Partners are entitled to share
equally in the profits earned and so contribute equally to the losses sustained by
the firm. The amount of a partner’s share must be ascertained by enquiring whether
there is any agreement in that behalf between the partners. If there is no agreement
then you should make a presumption of equality and the burden of proving that the
shares are unequal, will lie on the party alleging the same.

(e) Right to receive interest on capital out of profits [Section 13(c)]: Suppose
interest on capital subscribed by the partner is payable to him under the partnership
deed, then in such a case the interest will be payable only out of profits. As a
general rule, interest on capital subscribed by partners is not allowed unless there
is an agreement or usage to that effect. The principle underlying this provision of
law is that with regards to the capital brought by a partner in the business, he is not
a creditor of the firm but an adventurer.
The following elements must be before a partner can be entitled to interest on
moneys brought by him in the partnership business:
(i) an express agreement to that effect, or practice of the particular partnership or
(ii) any trade custom to that effect; or

(iii) a statutory provision which entitles him to such interest.

(f) Right to claim interest on advances [Section 13(d)]: A partner is entitled to
claim interest on advances made by him to the firm 6t 6% p.a. Interest on advances
is payable whether there are profits or losses. It may be noted that the
partner is not entitled to interest after the date of dissolution of firm unless
otherwise agreed.
(g) Right to be indemnified [Section 13(e)]: A partner has a right to recover from
the firm the payments made and liabilities incurred by him:
(i) in the ordinary and proper conduct of the business, and
(ii) in doing act in emergency for the purpose of protecting the firm from loss if
he has acted in a manner as a person of ordinary prudence would have acted in
similar circumstances in his own case.
(h) Right to prevent the introduction of a new partner [Section 31]: Every
partner has the right to prevent the introduction of a new partner without the
consent of all the existing partners.
(i) Right to retire [Section 32]: Every partner has the right to retire with the
consent of all other partners and in the case of a partnership at will, by giving
notice to that effect in writing to all the other partners.
(j) Right not to be expelled [Section 33]: Every partner has the right not to be
expelled from the firm by any majority of partners unless such power is conferred
by partnership agreement and is exercised in good faith. Thus expulsion may be
exercised subject to the following conditions.

(k) Right to carry on competing business [Section 36(1)]: Every outgoing

partner has a right to carry on a competing business and to advertise such business.
But, he cannot
(i) use the firm's name;
(ii) represent the firm, or
(iii) solicit the firm's customers.
(l) Right to share subsequent profits [Section 37]: Every outgoing partner or the
estate of any partner who ceased to be a partner has the right to claim either a
share in the subsequent profits of the firm or interest @ 6% p.a. on his share in the
firm's property till the accounts are finally settled.
(m) Right to dissolve the firm (Section 40): A partner has the right to dissolve
the partnership with the consent of all partners. But where the partnership is at will
the firm may be dissolved by any partner giving notice in writing to all other
partners of his intention to dissolve the firm.
(a) It must be approved by majority of the partners.
(b) It Must be exercised in good faith without any private animosity.
(c) The concerned partner must be given an opportunity to make a representation.

RELATION OF PARTNERS WITH THIRD PARTIES [SECTION 18]

The relations of partners with third parties are governed by the mutual agency
relationship existing among the partners. According to Section 18, "every partner
is an agent of the firm for the purposes of the business of the firm." In other words,
every partner has the capacity to bind other partners by his acts done in firm's
name. Therefore, all partners are liable to third parties for the acts of every partner.

IMPLIED AUTHORITY OF A PARTNER [SECTION 19]

The authority of a partner means the capacity of a partner to hind the firm by his
act. This authority may be express or implied. The authority conferred on a partner
by mutual agreement is called 'express authority'. The authority conferred on a
partner by the provisions of Section 19 of the Indian Partnership Act is called
'implied authority'. Reading together Sections 19(1) and 22. Implied authority
covers those acts of partners which fulfill the following three conditions:
(a) The act must relate to the normal business of the firm;
(b) The act must have been done in the usual way of carrying on the business of
the firm;
(It may be noted that the question as to what is usual and what is unusual in a
business depends on the nature of business and the usage of trade, e.g. taking loan
is considered as usual activity in case of a trading concern but unusual activity in
case of a professional concern of solicitors.)
(c) The act must be done in the firm's name or in any other manner expressing
or implying an intention to bind the firm.

In Mathuranath v. Bageshwari Rani A firm was engaged in trapping elephants.

One of the partners of the firm hired out an elephant without the consent of the
other partners. Held, the act fell within the implied authority of the partner
Example A, B, C, D and E are partners of a banking lint State the legal position of
firm for the following acts of partners
(a) A borrows money in the name of the firm,
(b) B orders for a certain quantity of wine, on the firm's letter head.
(c) C receives money from a borrower of a firm and utilised this amount for
personal use without informing other partners about the receipt of this money.
(d) D borrows money on his own credit by giving his own promissory note and
utilizes subsequently this amount for firm's use.
Acts within the Implied Authority
An implied authority of a partner of business of the firm include the following
act:
(a)To purchase goods of the kind that are used in the business of the firm;
(b)To sell the goods of the firm;
(c) To settle accounts with the persons dealing with the firm;
(d) To receive payment of the debts due to the firm and issue receipts for the
same;
(e) To engage servants for the business of the firm;
(f) To engage a lawyer to defend an action brought against the firm;
(g)To borrow money for the purpose of the firm's business;
(h) To pledge the goods of the firm as security for the repayment of borrowings
made for the purpose of firm's business;
(i) To draw, accept, endorse Bill of Exchange and other negotiable instruments
in the name of the firm.
Restrictions on the Implied Authority of a Partner [Sections 19 and 20]
Rrestrictions on the implied authority of a partner may be of two kinds:
I) Statutory Restrictions and

II) Restrictions imposed by mutual agreement.

I. Statutory Restrictions [Section 19(2)] In the absence of any usage or, custom
of trade to the contrary, the implied authority of a partner does not empower him
to do the following acts namely-
(a) To submit a dispute to arbitration relating to the business of the firm;
(b) To open a Bank Account on behalf of the firm in partner's own name;
(c) To compromise or relinquish any claim or portion of the claim by the firm;
(d) To withdraw a suit or proceedings filed on behalf of the firm;
(e) To admit any liability in a suit or proceedings against the firm;
(f) To acquire immovable property on behalf of the firm;
(g) To transfer immovable property belonging to the firm; and
(h) To enter into partnership on behalf of the firm.
A partner can do above-mentioned acts only with express authority given to
him to do that act or the usage or custom of the trade permits him to do that act.
For example, a partner may open a Bank Account on behalf of the firm in his
own name if he is expressly authorised to do so by mutual agreement

Liability of the Firm for the Restricted Acts of Partner

The firm is not liable to third party for the above mentioned restricted acts of a
partner whether or not the person dealing with the firm have knowledge about such
restrictions.
II) Restrictions Imposed by Mutual Agreement [Section 20] - The partners of
a firm by mutual agreement may extend or, restrict the scope of implied
authority of any partner. But a third party is not bound by any such restriction
unless it has the, knowledge of such restriction. In other words, the firm is liable
to third party only if the third party has no knowledge of the restrictions.
For example, A, B and C are partners in a trading firm. By an agreement, they
decided that no partner shall have the right to buy goods beyond the value of Rs
2,00,000 without the consent of other partners. A third party who had no
knowledge of such restriction sold goods worth Rs 3,00,000 to A who did not
consult his other partners about this transaction. The firm is liable to pay the full
amount to the third party.

Implied Authority and Third Parties [Sections 20, 23 to 27]

All partners are liable to third parties for all acts of a partner which fall within the
scope of his implied authority. Their liability to third partties
(a) Effect of Restriction on Implied Authority [Section 20] - The partners of a
firm by mutual agreement, may extend or restrict the scope of implied
authority of any partner. But, the third party is not bound by any restriction
imposed on the implied authority of a partner unless it has the knowledge
of such restriction.
(b) Effect of Admissions by a Partner [Section 23] - Any admission or
representation (e.g., acknowledgement signed by a partner) by a partner is
sufficient evidence against the firm if the following two conditions are
fulfilled:
(i) Such admission or representation must relate to the affairs of the
firm; and
(ii) Such admission or representation must be made in the ordinary
course of business.

(c) Effect of Notice to an Acting Partner [Section 24] - Any notice to a

partner operates as a notice to the firm if the following three conditions are
fulfilled:
(i) Such notice must relate to the affairs of the firm;
(ii) Such notice must be given to a working partner and not to a sleeping
partner.
 (iii) There must not be any fraud committed by the partners and the third
party against the firm.
(d) Contractual Liability [Section 25] - Every partner is liable jointly with other
partners and also severally (i.e., individually) for all those acts of the firm which
have been done while he was a partner.
Example X, Y and Z were partners in a firm when infringement of a trademark
took place. X retired. Later on, damages arising out of the alleged infringement
arose after the dissolution of the firm. It was held that all the partners who were
members of the firm at the time when infringement of a trademark took place, were
liable.Thomas Bear & Sons v. Ralia Ram]
(e) Liability for torts and Wrongful Acts of a Partner [Section 26] - The firm
is liable to the same extent as the partner for any loss or injury caused to any third
party or any penalty by the wrongful act or omission of a partner if either of the
following two conditions is fulfilled:
(i) Such wrongful act or omission must have been done by a partner while he was
acting in the ordinary course of business of the firm, or
(ii) Such wrongful act or omission must have been done by a partner with the
authority of the other partners.(Lloyd v. Grace,smith &Co.)
(f) Liability for misappropriation by a partner: Section 27 provides that (a)
when a partner, acting within his apparent authority, receives money or other
property from a third person and misapplies it or (b) where a firm, in the course of
its business, received money or property from a third person and the same is
misapplied by a partner, while it is in the custody of the firm, is liable to make
good the loss.
It may be observed that the workings of the two clauses of Section 27 are designed
to bring out clearly an important point of distinction between the two categories of
cases of misapplication of money by partners. Clause (a) covers the
misapplication of money or property belonging to a third party made by the partner
receiving the same. For this provision to the attracted, it is not necessary
that the money should have actually come into the custody of the firm. On the
other hand, the provision of clause (b) would be attracted when such money or
property has come into the custody of the firm and it is misapplied by any of the
partners. The firm would be liable in both the cases.
If receipt of money by one partner is not within the scope of his apparent authority,
his receipt cannot be regarded as a receipt by the firm and the other partners will
not be liable, unless the money received comes into their possession or under their
control.
example: 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. For this liability, the firm is
liable for the acts of A.
(g) Partner's Authority in Emergency Section 21
A partner's authority in an emergency covers those acts which fulfil the following
two conditions:
(a) The act must be done to protect the firm from loss; and
(b) The act must be such as a prudent man would undertake under similar
circumstances in his own case.
It may be noted that these acts do not form part of the implied authority of the
partner but, nevertheless, they would bind the firm. A partner's authority in an
emergency is similar to that of an agent in similar circumstances u/s 189 of the
Indian Contract Act.
Example: A, B and C are partners in a trading firm. By an agreement, they decided
that no partner would have authority to sell goods of the firm above the value of
Rs 50,000 without the consent of other partners. Owing to a sudden drop in the
market, the prices crashed. One partner, in order to save the firm from loss, sold
all the stock worth Rs 5,00,000 without consulting any other partner. Such an act
would bind the firm.

RECONSTITUTION OF A FIRM (INCOMING AND OUTGOING

PARTNERS)

The reconstitution of a firm takes place when there is any change in the
composition of the partnership. Chapter V (Section 31 to 38) of Indian
Partnership Act contains provisions with respect to incoming and outgoing
partners. By the following ways firm is reconstituted

1. Introduction of a Partner [Section 31] Subject to provisions of Section 30

(regarding minor partner), a person may be admitted as a partner either-

(i) Introduction with consent of all the partners, or

(ii) Introduction in accordance with a contract between the existing partners

Example The partnership agreement between X and Y provides that X could

introduce into partnership any of his sons on attaining the age of majority. X
decides to admit his son (who has attained majority) as a partner. Y refused to
consent, Y's consent is not required since the clause in the partnership agreement
operated as consent (Byrne v. Reid)

Liability of an Incoming Partner for Firm's Acts done before his Admission an
incoming partner is not liable for all the acts of the firm done before his admission.
This general rule has two exceptions which are as follows:

(a) An incoming partner is liable for the acts done before his admission if (a)
the new firm assumes the liabilities of the old firm, and (b) the creditors accept the
new firm as their debtor and discharge the old firm from its liability.

(b) A minor who, on attaining majority decides to become a partner, is liable

for all acts of the firm done since he was admitted to the benefits of partnership.

iii) A minor admitted to the benefits of partnership becoming a partner(sec.30)

Liability of an Incoming Partner for Firm's Acts done after his Admission -
An incoming partner is liable for all the acts of the firm done after his admission.

Outgoing Partners

2. Retirement of a Partner [Section 32] - A partner may be retire from the

firm in any of the following ways:

(i) with the consent of all the other partners; or

(ii) in accordance with an express agreement among the partners; or

(iii) in the case of partnership at will, by giving a notice to all other partners of
his intention to retire.
In case of a partnership at will, a partner may retire by notice even if the
pending contracts have not been completed. [Keshav Lal v. Bhai Lai]

Liabilities of a Retiring Partner - The liabilities of a retiring partner may be as

follows :

(a) For Firm's acts before his retirement [Section 32(2)] He continues to be
liable to third party unless he is discharged for the same by a tripartite agreement
between him, third party and the partners of the reconstituted firm.

(b) For Firm's acts after his retirement [Section 32(3), (4)] He continues to be
liable to third party (other than one who deals with the firm without knowing that
he was a partner) until public notice of his retirement is given either by himself or
any of the other partners. This liability of a retiring partner is based on the
principle of holding out.(Sec.28)

Rights of a Retiring Partner (Section 36 and 37)

(a) Right to carry on competing business [Section 36] He may carry on a

business competing with that of the firm and may advertise such business but
unless otherwise agreed he cannot-

(i) use the firm's name;

(ii) represent himself as carrying on firm's business;

(iii) solicit the old customers.

(b) Right in case of no final settlement of accounts [Section 37] He at his

option, is entitled to claim, either of the following:

(i) such share of profits earned after his retire- ment which is attributable to the
use of his share of the property of the firm, or

(ii) Interest at the rate of 6% p.a. on the amount of his share in the property.
This right is available to a retiring partner even if only a part of his property is used
in the business. Ramakrishna Ayyar v. Muthu-swami Ayyar]

This right is also available to the legal representatives of a deceased partner.

3. Expulsion of a Partner [Section 33] - A partner may be expelled if the

following three conditions are satisfied:
(a) the power to expel a partner must have existed in a contract between the
partners;

(b) the power must have been exercised by a majority of the partners, and

(c) the power must have been exercised in good faith without any private
animosity.

(d) The affected partner must be given an opportunity to make a representation

before being dismissedThe expulsion, without the satisfaction of the aforesaid
conditions, is said to be an irregular expulsion which is null and void. The partner
who has been wrongly expelled, has a right to claim re-installment as a partner and
not to recover damages for wrongful expulsion

Rights and liabilities of expelled partner are similar as like of rights and liabilities
of retired partner.

4. Insolvency of a Partner [Section 34] – The following are the effects of the
insolvency of a partner:

(a) He ceases to be a partner on the date of the orders of adjudication:

(b) Unless otherwise agreed, the firm is dissolved; [Section 42(d)]

(c) His estate is not liable for firm's acts done after the date of the order,

(d) Firm is not liable for his acts done after the date of the order.

No public notice is required on the insolvency of a partner. [Section 45]

5. Death of a Partner [Sections 35 and 42(c)] - Unless otherwise agreed by the

partners, a firm is dissolved on the death of a partner [Section 42(c)]. Where under
the contract a firm is not dissolved by the death of a partner, the estate of the
deceased partner is not liable for any act of the firm done after the date of his
death [Section 35].

No public notice is required on the death of a partner. (Section 45]

Example X was a partner in a firm. The firm ordered goods in X's life time but the
delivery of the goods was made after X's death. In such a case, X's estate would
not be liable for this debt because there was no debt due in respect of such goods
in X's life time. ( Beget v. Miller)
6. Rights of Transferee of a Partner's Share [Section 29] - A partner may transfer
his interest in the firm by sale, mortgage or charge fully or partially. The rights
of such a transferee are as follows:

(a) During the continuance of the partnership: He is entitled to receive the

share of the profits of the transferring partner and the account of profits agreed to
by the partners. He is not entitled

i) to interfere with the conduct of the business

ii) to inquire accounts;

iii) to inspect the books of the firm.

(b) On the dissolution of firm or on the retirement of the transferring partner

He is entitled to receive

(i) the share of the assets of the transferring partner and

(ii) an account as from the date of the dissolution for the purpose of ascertaining
the share.

Sub-partnership: A sub-partnership arises when a partner of a firm agrees to

share his share in the firm, with a stranger. It was assumed in Venkatratnam v.
Venkatratnum that a sub- partner is a transferee within the meaning of Section
29. Thus, the rights of a sub-partner are the same as those of a transferee of
partner's share under Section 29.

7. Effect of the Change in the Constitution of the Firm on Continuing

Guarantee [Section 38] - A continuing guarantee is a guarantee which extends to
a series of transactions. Unless otherwise agreed by the partners, a continuing
guarantee given to a firm or to a third party in respect of the transaction of a firm
is revoked as to the future transactions from the date of any change in the
constitution of the firm.

8. Rights and Duties of Partners after Change in the Firm [Section 17] - The
rights and duties of the partners of the reconstituted firm shall be the same as they
were before the change in the firm. Section 17 provides for the following three
types of changes in the firm:

a) Where there is a change in the Constitution of the firm. [Section

17(a)]
 b) Where the firm continues after the expiry of the term of the firm.
[Section 17(b)]

c) Where the firm carries on an additional undertaking. [Section

17(c)]

DISSOLUTION OF FIRM [SECTIONS 39 TO 47]

Meaning of Dissolution The term 'dissolution' stands for discontinuation. Under

the Indian Partnership Act, 1932, the dissolution may be either of Partnership or
of a firm.

Meaning of Dissolution of Partnership: Dissolution of partnership means

coming to an end of the relation known as partnership, between various partners.
The firm continues its business after being reconstituted. This may happen on
admission, retirement or death of a partner in the firm.

Example X, Y and Z are partners in a firm. X retires. The partnership between X

Y and Z comes to an end and new partnership between Y and Z comes into
existence. This new partnership between Y and Z shall be known as ‘reconstituted
firm’. Thus, on retirement of partner, the old partnership stands dissolved, but the
firm continues its business with the remaining partners le and Z.

Meaning of Dissolution of Firm – According to Section 39 Dissolution of a firm

means the dissolution of partnership between all the partners of a firm. In such a
situation, the business of the firm is discontinued, its assets are realized, the
liabilities are paid off and the surplus (if any) is distributed among the partners
according to their rights.

Example: Firm consisting of A,B and C all of them cease to be partners with one
another, it amounts to dissolution of the firm.

Dissolution of partnership is different from the dissolution of firm.

Dissolution of a partnership firm merely involves a change in the relation of

partners; whereas the dissolution of firm amounts to a complete closure of the
business. When any of the partners dies, retires or become insolvent but if the
remaining partners still agree to continue the business of the partnership firm, then
it is dissolution of partnership not the dissolution of firm. Dissolution of
partnership changes the mutual relations of the partners. But in case of dissolution
of firm, all the relations and the business of the firm comes to an
end. On dissolution of the firm, the business of the firm ceases to exist since its
affairs are would up by selling the assets and by paying the liabilities and
discharging the claims of the partners. The dissolution of partnership among all
partners of a firm is called dissolution of the firm.

Modes of Dissolution(Section 40-41)

A firm may be dissolved in the following ways:

1) By Agreement
2) Compulsory dissolution
3) On happening of certain events
4) By Notice
5) By the court

1) Dissolution by mutual agreement [Section 40]: - A firm may be dissolved by

mutual agreement among all the partners. Even a firm for a fixed duration may be
dissolved by mutual agreement.
2) Compulsory dissolution [Section 41]: A firm is compulsorily dissolved in the
following two circumstances:
(i) If all the partners, or all but one partner of the firm are declared insolvent; [The
reason is that there must be at least two persons to continue a firm and such
persons must be competent to contract].
(ii) If some event takes place which makes it unlawful for the firm's business to be
carried on.
Example A a resident of India and Y a resident of Pakistan, are partners in a firm.
War breaks out between India and Pakistan. In such a situation, on outbreak of
war, the business of the firm becomes unlawful to be carried on.
3) Dissolution on the happening of contingent event (S.42) A firm may be
dissolved on the happening of any of the following contingent event
(i) Expiry of Fixed Period
A firm constituted for a term is of course not exempt from dissolution by any of
the other possible cause before the expiration of the term. The contract may
expressly provide that the partnership will determine in certain circumstances but
even if there is no such express term, an implied term as to when the partnership
will determine may be gathered from the contract and the nature of the business.
The provision of this section make it clear that unless some contract between the
partners to the contrary is proved, the firm, if constituted for a fixed term would
be dissolved by the expiry of that term.
(ii) On achievement of specific task
A partnership constituted to carry out contracts with specified persons during a
particular season would be taken to be dissolved once the contracts are closed. In
the case of Basantlal Jalan v. Chiranjilal, Where the firm was constituted for a
specific undertaking to supply certain quantity of grain and the contract was
prematurely terminated after supply of a part of the goods, it was held that the
partnership did not come to an end and was dissolved only on the final realization
of the assets

(iii) Death of Partner

When the deed of partnership did not provide that the death of a partner would not
dissolve the partnership, the partnership stood dissolve on the death of a partner.
Firm, stands dissolved automatically on death of one partner. Continuance of
business after such death would not tantamount to continuance of earlier
partnership.

(iv) Insolvency of Partner

In the absence of a contract to the contrary, the insolvency of any of the partner
may dissolve the firm. The rule shall apply even though the partnership has been
constituted for a fixed term and the term has not yet expired or has been constituted
for particular adventure and the same has yet not been completed.

(v) Resignation of Partner

Resignation by any of the partners dissolves the partnership If all the partners
or all but one partner of the firm are dead or becomes insolvent , the firm shall be
compulsorily dissolved even if the partnership agreement provided that the firm
shall not be dissolved on the death of a partner. The reason is that there must be at
least two partners to continue a firm
4.Dissolution by notice(S.43) In case of partnership at will, a partner can dissolve
it by giving written notice of dissolution to other partners duly signed by him.
Notice must be very clear and certain. A notice once given cannot be withdrawn
without the consent of other partners was held in case of Banarsidas
v. Kanshi Ram. In those cases where a partner has given notice of dissolution at a
time when dissolution will give him some advantage over the other partners, he
may be held in the firm till the pending transactions are completed
Dissolution by Court (S 44)

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner

On the application of any of the partner, court may order for the dissolution of the
firm if a partner has become of an unsound mind. Lunacy of a partner does not
itself dissolve the partnership but it will be a ground for dissolution at the instance
of other partners. It is not necessary that the lunacy should be permanent. In the
case of a dormant partner the court may not order dissolution even on the ground
of permanent insanity, except in special circumstances.

(ii) Incapacity of Partner

If a partner has become permanent in capable of discharging his duties and

obligations then court may order for the dissolution of firm on the application of
any of the partner. where a partner is imprisoned for a long period of time the court
may dissolve the partnership was held in case of Whitwell v. Arthur

(iii) Misconduct of Partner

If any partner other than partner suing is responsible for any loss to the firm, which
amounts to misconduct and prejudicially affects the carrying on of business then
the court may order for the dissolution of the firm. In Carmichael v. Evans a
partner of the firm was convicted on account of travelling without ticket in Rail,
the court ordered the firm to be dissolved on petition by other partners as such act
of the partner was detrimental to the interest of the firm.

Similarly, in Abbot v. Grump the court ordered the firm to be dissolved on account
of adultery committed by one partner against the wife of the other partner.
Dissolution was ordered as such act of adultry would adversely affect the mutual
trust and confidence among partners.

(iv) Constant breach of agreement by partner

The court may order for the dissolution of the firm if the partner other than the
suing partner is found guilty for constant breach of agreement regarding the
conduct of business or the management of the affairs of the firm and it becomes
impossible to continue the business with such partner.
(v) Transfer of Interest

When any of the partner other than the suing partner transfers whole of its share
to the third party for permanently.

(vi) Continuous Losses

The court may order for dissolution if the firm is continuously suffering losses and
there is no more capital available for the future growth of the firm.

(vii) Just and Equitable

The court may order for dissolution on any other ground which court think is just,
fair and equitable. e.g. loss of total confidence between the partners was held in
Abbot v. Crump where adulterous act has been committed by one partner with
another partners wife was held to be valid ground for the dissolution of firm by
the court.

RIGHTS AND LIABILITIES OF A PARTNER ON DISSOLUTION

Rights of a Partner on Dissolution [Sections 46, 51 to 53]

The various rights of a partner on dissolution are as follows:

(a) Partner's General Line [Section 46]: Every partner or his representative is
entitled-

(i) to have the firm's property applied in payment of the firm's debts, and

(ii) to have the surplus distributed amongst the partners or the representatives
according to their respective rights.

(b) Right to Claim the Return of Premium on Premature Winding Up

[Section 51]: If a partner joined a firm for a fixed term and had paid a premium
and the firm is dissolved before the fixed term, he is entitled to return of the
premium. The amount of premium will depend upon (i) the terms upon which he
became a partner, and (ii) the length of the time during which he was a partner.
However, such a partner cannot claim any return of the premium in the following
three circumstances:

(i) When the dissolution is due to the death of partner,

(ii) When the dissolution is mainly due to the misconduct of the partner who paid
the premium; or
(iii) The dissolution is according to an agreement which had no provision for the
return of premium or any part thereof.

(c) Rights of a Partner in Case of Dissolution on Account of Fraud or

Misrepresentation [Section 52]: Where the partnership is rescinded on grounds
of fraud or misrepresentation, the aggrieved partner, besides other rights under
other provisions, has the following rights:

(i) He has a right of lien on the surplus assets after the payment of firm's debts, for
any sum paid by him for purchase of a share in the firm or for any capital
contributed by him;

(ii) He is entitled to rank as a creditor of the firm in respect of any payment made
by him towards firm's debts;

(iii) He is entitled to be indemnified by the partners) guilty of fraud or

misrepresentation against all the debts of the firm.

(d) Right to Restrain from Use of Firm Name or Firm Property [Section 53]:
Unless otherwise agreed by the partners, every partner or his rep tentative may
restrain any other partner or his representative from carrying on a similar business
in the firm name or from using the property of the firm for his own benefit till the
affairs of the firm are completely wound up.

(e) Agreements in restraint of trade (S.54)

Partners may, upon or in anticipation of the dissolution of the firm, make an

agreement that some or all of them will not carry on a business similar to that of
the firm within a specified period or within specified local limits; and
notwithstanding anything contained in section 27 of the Indian Contract Act,
1872 such agreement shall be valid if the restrictions imposed are reasonable
Curt Brothers Ltd. V. Webster in this case A sells the goodwill of his business
to B and sets up a new business. X who remains customer of the old firm deals
his own accord with the new firm set by A. A is not entitled to solicit even such
a customer as X, though if X continues to deal with A of his own accord, A would
be entitled to deal with him.
Liabilities of a Partner on Dissolution [Sections 45 and 47]

Continuing Liability for acts of partners done after dissolution ( S.45)

This section provides that despite dissolution, the partners cannot escape their
liability to third parties for acts done even thereafter unless public notice of
dissolution is given. These provision emphasis the necessity of giving a public
notice before a partner could terminated his future liability whether it is a case of
dissolution, retirement or expulsion.
Continuing authority of partners for purposes of winding up ( S.47)
After the dissolution of a firm the authority of each partner to bind the firm, and
the other mutual rights and obligations of the partners continue notwithstanding
the dissolution, so far as may be necessary to wind up the affair of the firm and to
complete transactions begun but unfinished at the time of the dissolution, but not
otherwise:
PROVIDED that the firm is in no case bound by the acts of a partner who has been
adjudicated insolvent; but this proviso does not affect the liability of any person
who has after the adjudication represented himself or knowingly permitted himself
to be represented as a partner of the insolvent.
Mode of settlement of accounts between partners (S.48)In settling the accounts of
a firm after dissolution, the following rules shall, subject to agreement by the
partners, be observed-
(a) Deficiencies of capital

When a partnership is dissolved, and after the debts to the third parties have been
paid and advances made by a partner have been repaid, the assets are insufficient
to repay each partner his capital in full, any deficiencies must be borne by the
partners in the same proportion as the profits would have been divided
(b) The assets of a firm are to be applied in paying
1. joint debts to third parties
2. advances, as distinguished from capital, of each partner
3. to each partner what is due from the firm to him in respect of capital.

In after the above payments are made, there is surplus, that surplus is to be divided
in the proportion.

Nowell v. Nowell in this case A and B trade as partners and it is agreed that profits
should be shared and losses borne equally. On dissolution it is found that A has
advanced more capital than B to the extent of Rs.1900. the net assets were only
Rs.1400. there is thus a deficiency of capital to the extent of Rs500. Under sub
section(a) both the partners must contribute in the proportion in which they have
agreed to share profits that is equally. Therefore B should pay to A sum of Rs 250.
Payment of firm debts and of separate debts ( S.49)
Where there are joint debts due from the firm, and also separate debts due from
any partner, the property of the firm shall be applied in the first instance in payment
of the debts of the firm, and, if there is any surplus, then the share of each partner
shall be applied in payment of his separate debts or paid to him. The separate
property of any partner shall be applied first in the payment of his separate debts,
and the surplus (if any) in the payment of the debts of the firm.
TREATMENT OF LOSS ARISING DUE TO INSOLVENCY OF A
PARTNER
The Capital Account of a partner may show a debit balance after making-all
adjustments (including the share of any profit or loss on realization and the receipts
from his private estate, if any). It may be noted that the private estate of each
partner is applied first to pay off his private debts and the surplus (i.e. excess of
private estate over private debts), if any, is applied to pay off the
firm's debts. If a partner having a debit balance in his Capital Account is unable to
bring in the necessary cash to make up the deficiency, he is said to be an insolvent
partner. The h-recovered debit balance is called the loss arising due to the
insolvency of a partner. Now the question arises, should this loss be regarded as
an ordinary loss (which is shared by the partners in their profit sharing ratio) or an
extraordinary one? This issue was involved in the leading case of Garner v.
Murray .

DECISION IN GARNER V. MURRAY

Justice Joyce held that the loss arising due to the insolvency of a partner must be
distinguished from an ordinary loss (including realisation loss). Unless otherwise
agreed, the decision in Garner v. Murray requires-
(a) that the solvent partners should bring in cash equal to their respective shares of
the loss on realisation;
(b) that the solvent partners should bear the loss arising due to the insolvency of a
partner in the ratio of their Last Agreed Capitals.

Personal profits earned after dissolution (S.50)

Where a partner, after dissolution and before the affairs of the partnership are
wound up, derives any personal profit for himself from any transactions of the
firm, or from the use of the property or business connection of the firm or the firm
name, he shall account for the profit and pay his share to the surviving partner or
the representative of the deceased partner. But if a partner carries on another
business of a similar nature, this section would not apply.

Proviso – Where on dissolution a partner has bought the goodwill of the firm, he
may use the firm name even before the affairs of the partnership have been
completely wound up. Clements v. Hall In this case A and B carry on business in
partnership. The firm holds leasehold for the purpose of the business. A
dies.before the affairs of the firm are completely wound up, the lease expires and
B renews it. The renewed property is partnership property.

Alder v. Fouracare. In this case A,B and C are partners. A agrees to take a lease
in his own name, but in fact fact partnership purpose, and dies before the lease is
executed. The representative of A cant deal with lease without the permission of
B and C

Return of premium on premature dissolution ( S.51)

Where a partner has paid a premium on entering into partnership of a fixed term,
and the firm is dissolved before the expiration of that term otherwise than by the
death of a partner, he shall be entitled to repayment of the premium or of such part
thereof as may be reasonable, regard being had to the terms upon which he became
a partner and to the length of time during which he was a partner, unless-

(a) the dissolution is mainly due to his own misconduct, or

(b) the dissolution is in pursuance of an agreement containing no provision for
the return of the premium or any part of it.

Airey vs. Barbam in this case A and B entered into a partnership for five years. A
paid premium to B. The partnership was dissolved with into two years as a result
of mutual disagreement due to A’s failure to devote time to business as agreed. It
was held that no part of premium was payable because the dissolution has been
caused by the misconduct on the part of A

Atwood v. Maude In this case A and B entered as solicitors for a term of seven
years.A paying a premium of Rs.800.B before entering into the partnership know
that A was inexperienced and incompetent. After the expiration of two
years B complained that A’s incompleteness was injuries to business and called
him to dissolve the partnership. A thereupon filed a suit for repayment of
proportionate premium. A succeed.

Pease v. Hewitt In this case A and B become partners for 10years. A paying B a
premium of Rs1000. A quarrel occurs at rhe end of eight years, both parties being
in the wrong and dissolution is decreed. A is entitled to a return of Rs.200.

Sale of goodwill after dissolution (S.55)

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject
to contract between the partners, be included in the assets, and it may be sold either
separately or along with other property of the firm.

(2) Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold
after dissolution, a partner may carry on a business competing with that of the
buyer and he may advertise such business, but, subject to agreement between him
and the buyer, he may not-
(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its
dissolution.
16.1 PUBLIC NOTICE (SECTION 72)
When a Public Notice is Required to be Given
A public notice is required to be given in the following three cases:
(a) on the retirement or expulsion of a partner, or
(b) on the dissolution of the firm,
(c) on the election to become or not to become a partner by a minor on
his attaining majority.
 When a Public Notice is not Required to be Given
A public notice is not required to be given in the following two cases:
(a) on the death of a partner;
(b) on the insolvency of a partner.

Mode of Giving Public Notice

The mode of giving public notice is given as under.
In case of a registered firm In case of an unregistered firm
It must be given by publication in the It must be given by publication in the
Official Gazette. Official Gazette.

It must be given by publication in at least one It must be given by publication in at

vernacular newspaper circulating in the least one vernacular newspaper
district where the firm to which it relates has circulating in the distinct where the
its place or principal place of business. firm to which it relates has its place or
principal place of business.

It must be given to the Registrar of Finns.

Consequences of not Giving a Public Notice

If a public notice is not given in cases in which it is required to be given, the
consequences will be as follows:
(a) On election to become or not to become a partner by a minor on his attaining
majority: Minor is deemed to have become a partner on the expiry of 6 months
[Section 30(5)].
(b) In case of retirement of a partner: Retiring partner and the other partners
continues to be liable as partner to the third parties for firm's acts done after
retirement [Section 32(3)].
(c) In case of expulsion of a partner: The expelled partner and the other partners
continue to be liable to third parties for firm's acts done after his expulsion (Section
33(2)).
(d) in case of dissolution of a firm: All the partners continue to be liable to third
parties for firm's acts done after the dissolution of firm [Section 45].
REGISTRATION OF PARTNERSHIP (CHAPTERVII) (SECTIONS 56 TO
71)
The Act does not make the registration of partnership firms compulsory in India
nor does the Act impose any penalties for non-registration. However, certain
disabilities are provided in s 69 of the Act for unregistered firms and their partners.
The procedure for registration is very simple and the disadvantages of non-
registration are so great that generally the partners of a firm would like to get the
firm registered.
Ss 58 and 59 deal with the procedure for the registration of a firm. The registration
of a firm may be affected by submitting to the Registrar of Firms a statement in
the prescribed form and accompanied by the prescribed fee. The Registrar of Firms
are appointed by the State Government and State Government is also to define the
areas within which the Registrars shall exercise their powers and perform their
duties. U/Sec 57 of the Act The application for registration has to be made in the
prescribed form,and the same has to be accompanied by the prescribed fee. The
State Government has been authorised to make rules prescribing the fee but that
shall not exceed the maximum fees specified in Schedule 1, which is Rs. 3/- for
the purpose. The application must state the following:
a) The firm‟s name,
b) The place or principal place of business of the firm,
c) The names of any other places where the firm carries on business,
d) The date when each partner joined the firm,
e) The names in full and permanent addresses of the partners, and
f) The duration of the firm.
The statement shall be signed by all the partners, or by their agents specially
authorised in this behalf. Each person signing the statement shall also verify it in
the manner prescribed.[Sec 58(2)]
A firm may be got registered at any time after the creation of partnership. It is not
necessary that it should be registered at the time of its formation. Moreover, the
Act does not lay down any time limit within which the firm should be registered.
Therefore, there is no period of limitation either for the original registration, or
recording of subsequent changes, as contemplated in s 63 of the Act. Thus, the
concept of any limitation period or that of reasonable time cannot be introduced
either for original registration or for subsequent changes in a firm. Hence, any
legislation by the State Government laying down any time limit
either for original registration or for recording of subsequent changes will be ultra
virus the Partnership Act and, therefore, bad in law. In Harijan Boot House v
Registrar of Firms The Registrar of Firms cannot reject an application for
recording changes in the constitution of the firm on the ground of inordinate delay
in submitting the application.
If a firm remains unregistered, the firm and its partners would suffer from the
disabilities mentioned in s 69. If the firm is registered but some partner or partners
have not been registered, e.g., they join after the registration of the firm, such
partners who are not registered, will be subject to the disabilities mentioned in s
69 91) and (2).

A firm‟s name shall not contain any of the following words, namely (Section 58(3)
Crown‟, „Emperor‟, „Empress‟, „Imperial‟, „King‟, Queen‟, „Royal‟, or words
expressing or implying the sanction, approval or patronage of
Government except when the State Government signifies its consent to the use of
such words as part of the firm name by order in writing.
When the Registrar is satisfied that the above-mentioned requirements have been
complied with, he shall record an entry of the statement in the register called the
Register of Firms, and shall file the statement. This amounts to the registration of
the firm.
Penalty for furnishing false particulars (Section70)
Information given to the Registrar through various documents filed with him in
connection with the registration of a firm serves the purpose of making the third
parties conversant with the firm and the partners so that third parties dealing with
the firm are not misled. Correct and complete information should be available with
the Registrar. Section 70 imposes penalty for making any false declaration in any
document filed with the Registrar. According to Section 70:
Any person who signs any statement, amending statement, notice or
intimation under this Chapter containing any particular which he knows to
be false or does not believe to be true, or containing particulars which he
knows to be incomplete or does not believe to be complete, shall be punishable
with imprisonment which may extend to three months, or with fine, or with
both.
Power to make Rules (Section71)
Section 71 grants power to the State Government to make rules prescribing the
fees payable, statements to be submitted, regulating the procedure to be
prescribed by the Registrar when disputes arise, filing of documents, inspection of
documents, and with regard to carrying out the purposes of Chapter VII concerning
the Registration of Firms. In Salem Chit Funds v State of Tamil Nadu, it has been
held by the Madras High Court that Rule 3A of the T.N. Partnership (Registration
of Firms) Rules, 1932 requiring every registered firm to file with the Registrar a
declaration to the effect that registered firm had been carrying on its business or
has been in operation during the financial yearis intra vires rule making power.
Therefore, the requirement of the filing of the return every year was held to be
valid.
Subsequent changes and alterations (Ss 60-65)
Some times after the registration, there may be some changes as in the firm‟s name
or the principal place of business, or closing or opening of branches by the firm,
or in the names and addresses of the partners, or consequent on the dissolution of
the firm or by an order of the court, etc. the alterations may have to be recorded
by the Registrar. The Act contains the following provisions in this connection:
1) Alteration in the firm’s name and principal place of business Section 60:
When there is an alteration in the firm‟s name or in the location of principal place
of business of a registered firm, the same kind of formalities as have been
mentioned in Section 58 are to be observed. When the Registrar is satisfied that
the necessary formalities have been complied with, he shall amend the entry in the
Register of Firms.

2) Closing and opening of branches Section 61: When there is closing or

opening of branches of an already existing firm, any partner or agent of the firm
may send intimation thereof to the Registrar, who shall then make necessary
changes in the Register of Firms.

3) Changes in names and addresses of partners Section 62: In case there is any
change in the name or permanent address of any partner of a registered firm, an
initiation of the alteration may be sent by any partner or agent of the firm to the
Registrar. The Registrar shall then make necessary changes in the Register of
Firms.

4) Changes in the constitution of the firm or on dissolution of the firm. -

Changes in the constitution of the firm may occur either on the introduction of a
partner1to the firm, or when a partner ceases to be a partner by retirement,
expulsion, insolvency, or death. No fresh registration is needed on the death of a
partner or otherwise in case of a change in the constitution of the firm, but it is
sufficient to notify the Registrar, who can make a note in the relevant register.
When change in the constitution of the firm occurs or the firm is dissolved, its
notice thereof, may be given to the Registrar by the incoming or outgoing
partner, or by any of the continuing partners or by a duly authorized agent of any
of the above stated persons. Like registration of a firm, the notice of the change in
the constitution of the firm or its dissolution is not compulsory. However, in the
case of retirement or expulsion of a partner or on the dissolution of a firm, public
notice of such retirement, expulsions or dissolution has to be given, otherwise the
liability of the partners for the act of each other continues to be the same as before.
In the case of a registered firm, public notice includes notice to the Registrar
under s 63.

When a minor has been admitted to the benefits of partnership, such a minor on
attaining the age of majority has to give a public notice of his election as to whether
he becomes a partner or not Public notice in the case of a registered firm also
includes notice to the Registrar.
The Act does not lay down any time limit within which notice of a change under
Section 60, 61, 62 and 63of the Act is to be given to the Registrar..
On receipt of the notice as stated above the Registrar shall make a record of the
notice in the entry relating to the firm in the Register of Firms, and shall file the
notice along with the statement relating to the firm filed under Section 59.
In Sharad Vasant Kotak v Ramniklal Mohanlal Chawda, there was change in the
constitution of a registered firm in so far as on the death of one of the partners, a
new partner was introduced in his place. It was held that by such a change the
registration of the firm had not ceased, and there was no need of fresh registration
of the firm. Information about the change in the constitution of the firm has to be
given to the Registrar under Section 63. Failure to comply with Section 63 only
attracts penalty under s 69A of the Act. Moreover, the person whose name does
not find a place in Register of the Firms may suffer certain disabilities under Sec
69 clauses (1) and (2), but that does not affect the Registration of the Firm.
5) Rectification of mistakes (Sec 64).- Sec 64 (1) empowers the Registrar to
correct any mistake which may have been there in the Register of Firms in order
to bring the Register relating to any firm in conformity with the documents filed
under this Chapter.
Sometimes there may be some mistake in the documents filed with the Registrar
or in the records of the Registrar. Sec 64 (2) provides that on application made by
all the parties who have signed documents relating to a firm, the Registrar may
rectify any mistakes in such documents in the records or note thereof made in the
Register of Firms.
6) Amendment of Register by order of Court (Sec 65).-
Sometimes as a consequence of a decision relating to a registered firm, the need
for amendment in the entry in the Register of Firms may arise. In such a case, the
Court deciding any matter relating to a registered firm has been empowered by Sec
65 to direct the Registrar to make any amendment in the entry of the Register of
Firms as may become necessary as a consequence of the decision.
Inspection of documents and grant of copies (section 66 & 67)
The Register of Firms shall be open to inspection by any person on payment of
such fees as may be prescribed. Moreover, all statements, notices and intimations
filed under this Chapter shall be open to inspection, subject to such conditions and
payment of such fee as may be prescribed.
Maximum fee which can be charged for inspection of any document or obtaining
copies from the Registrar has been mentioned in Schedule I. The State Government
has, however, been empowered to prescribe such charges in respect of the above,
but such charges cannot exceed the maximum amount mentioned in Schedule I.
Evidentiary value of entries in the Register of Firms (Section 68)
The following rules have been stated in sec 68 to explain the evidentiary value of
entries in the Register of Firms:
1. The documents filed with the Registrar, on the basis of which he prepares his
record and Register of Firms, shall be conclusive proof of the facts contained
therein as against any person by whom or on whose behalf such document was
signed. Therefore, if a person‟s name is there in the Register of Firms as a partner,
he would be liable as a partner. The object of the provision is to compel the partners
to have the changes in the constitution of the firm notified to the Registrar. When
a partner retires or is expelled or the firm is dissolved, the partners continue to be
liable for the act of each other unless a public notice of such retirement, or
expulsion, or dissolution, of the firm is given. Public notice in the case of a
registered firm includes notice to the Registrar of Firms.
2. A certified copy of an entry relating to a firm in the Register of Firms may be
produced to prove either the registration of the firm or some other statements, etc.
filed with the Registrar.

In the case of Shivraj Reddy and Brothers v Raghuraj Reddy,the application for
registration of a firm contained signature of plaintiff, therefore, he could be said
to be a partner in the firm and plea that he was only nominally shown as partner
was held not tenable.
Effects of Non-Registration (Sec 69)
Sec 69 contains the provision describing the effects of non-registration of a
partnership firm.
It may be noted that the Partnership Act neither makes the registration of a firm
compulsory nor does it impose any penalties for non-registration. However, it
provides certain disabilities for an unregistered firm and the partners of such a firm
or the partners whose names have not been shown as registered partners even
though the firm is registered. Sec 69 (1) provides that no suit can be instituted to
enforce rights arising from a contract or conferred by the Partnership Act by any
partner against his co-partners or against the firm. Similarly, according to sSec 69
(2), no suit can be instituted to enforce any right arising from a contract by an
unregistered firm against any third party. Sub- section (3) also provides that the
disability mentioned in sub-sections (1) and (2) shall also apply into a claim of set
off or other proceedings to enforce a right arising from a contract. The idea behind
making these provisions is that in their own interest, the partners may get the firm
registered and thereby the interest of the third parties with whom the firm may be
dealing may be protected. The procedure for registration is very simple and
disabilities being too compelling that generally the partners would like to get the
firm registered at one time or the other. Certain exceptions, where the disabilities
do not apply, have been stated in Section 69,sub-sections (3) and (4). The
disabilities on non-registration of a partnership firm and the exceptions thereto
may be noted.
1. Suits between partners and the firm
According to s 69 (1), no suit to enforce a right arising from a contract or conferred
by the Partnership Act can be instituted in any Court unless the following two
requirements are satisfied:
i) The partnership firm is registered; and
ii) The partners filing the suit have been shown in the Register of Firms as the
partners of the firm.
In Neelakantan Omana v Neelakantan Raveendran, it was held that if firm is
unregistered, the suit by a partner demanding rendition of accounts would not be
maintainable.
In Oriental Fire & General Insurance Co. Ltd. V The Union of India, it has been
held that when a firm takes an insurance policy on a motor vehicle belonging to
the firm, the claim under that policy arises out of a contract of insurance, rather
than out of statute, i.e., the Insurance Act, and therefore, the same cannot be
enforced by filing a suit if the firm is unregistered.

In Mahendra Singh Chaudhary v Tej Ram Singh, one of the partners of the
firm, i.e. A‟ brought an action for injunction requiring that the cheques for
payment to the firm should not be paid singly to the other partner „B‟, but should
be paid in the joint name of A & B so that the money could reach the coffers of
the firm. The said firm was unregistered. It was held that the suit brought by A was
on behalf of the firm, and the firm being unregistered, the suit was not maintainable
under section 69.
In Popular Automobiles v G.K. Channi, the suit was filed on behalf of the firm.
The plaint was signed by the manager of the firm. No power of attorney was given
to him by the firm to verify and sign plaint on behalf of the firm, nor did his name
appear in the Register of Firms as a partner. It was held that the suit was bad for
non-compliance of mandatory provision contained in s 69(2) requiring the filing
of the suit by a partner or an authorised person. Such suit is liable to be dismissed.
Such defect cannot be cured by subsequent incorporation of verification and
signatures by a partner.
2. Suits between the firm and the third parties

According to Sec 69 (2), if the firm is unregistered, no suit to enforce a right arising
from a contract can be instituted by the firm or its partners against a third party.
Sub-section (2) also requires two conditions to be fulfilled before a suit can be
instituted against a third party:
i. The firm must be a registered firm;
ii. The persons suing must be shown in the Register of Firms as partners of the
firm.
To enforce the rights against third parties, it is not enough that the firm is
registered, it is further necessary that “the person suing is or has been shown in the
Register of Firms as a partner in the firm.”
In Gandhi & Co v Krishna Glass Pvt. Ltd.it was held that if the name of one of
the partners had not been shown in the Register of Firms, the suit filed by the
partnership firm must fail.
42 S
Arbitration proceedings not barred under Section 69
Sec 69 puts a bar on the enforcement of contract by an unregistered firm. It has
been held by the Supreme Court in Kamal Pushpa Enterprises v D.R.
Construction Company, that bar under Sec 69 has no application to proceedings
before the arbitrartor. Proceedings for enforcement of the arbitration award is not
a right under contract.
Suit against infringement of trade mark not barred under Section69(2)
In Haldiram Bhujjawala v Anand Kumar Deepak Kumar, that a suit for perpetual
injunction to restrain the defendant from infringing plaintiff‟s trade mark and
passing defendant‟s goods as those of the plaintiff, and a claim of damages in that
regard, is not barred by Sec 69 (2). Such right does not arise out
of contract. In such a case there is enforcement of a statutory right arising under
the Trade Marks Act.
No disability against third parties
As is obvious from sub-sec (2), the disability is against an unregistered firm or its
partners but it is not against the third party. Therefore, a third party is not barred
from bringing an action against an unregistered firm. In Kantilal Jethalal Gandhi
v Ghanshyam Ratilal Vyas, as Section 69, clauses (1) & (2) do not bar an action
by a third party against the firm, the bar under Sec 69(1) & (2) does not operate
against suit for recovery of debt due and payable by an unregistered dissolved firm.

Exceptions
1. Suit for dissolution etc. [Section 69 (3) (a)]
S 44 mentions certain circumstances under which on the suit of a partner the court
may dissolve a firm. Sec 69 (3) (a) permits a suit even by the partners of an
unregistered firm to sue for the dissolution of a firm or for the accounts of a
dissolved firm. In case the firm has already been dissolved, the partners of the
unregistered firm can realize the property of the dissolved firm. In case the firm
has already been dissolved, the partners of the unregistered firm can realise the
property of the dissolved firm. The right includes enforcing a claim arising from
contract prior to dissolution. The disability for non-registration works only during
the subsistence of the partnership. After the firm is dissolved, it is not the disability
mentioned in sub-sections (1) and (2) of Sec 69 which governs the position, but it
is the provisions of Sec 69 (3) (a) which operate giving the partners power to
“realise the property of the dissolved firm.” In Biharilal Shyamsunder v Union of
India, the plaintiffs claimed damages for non- delivery of a bale of cloth
despatched from Ahmedabad to Muzaffarpur through railway. The said action was
brought after the dissolution of the firm which was unregistered. It was held by the
Patna High Court that the partners of the dissolved firm are entitled to bring the
suit for compensation from the railway for non-delivery of the consignment of
cloth.
In Gujarat Water Supply & Severage Board v Sundardas, all the partners of an
unregistered firm except one had retired, and all the rights and liabilities of the
firm were transferred to the remaining partner. It was held that a suit by the
remaining partner against the Government for damages for the breach of contract
between the Government and the erstwhile firm was maintainable
In Navinchandra v Moolchand, it has been held that even a suit for damages for
misconduct brought by one partner against another after the dissolution of an
unregistered firm would be permitted because the amount so realised should be
divided between the partners and that is, therefore, the property of the dissolved
firm.
In Premlata v Ishar Dass Chaman Lal,it has been held by the Supreme Court that
the right to sue for the dissolution of the firm also means right to enforce the
arbitration clause for resolving disputes of the dissolved firm and also for the
rendition of accounts or any right or power to realise the property of the dissolved
firm.
2. Suit on behalf of an insolvent partner [Sec 69 (3) (b)]
Sec 69 (3) (b) mentions another exception when an action would be brought on
behalf of an insolvent partner against an unregistered firm. It provides that an
official assignee, receiver of Court have a power to bring an action to realise the
property of the insolvent partner.
Dismissal of suit under Section 69(1) is no bar to a subsequent suit under
Section 69(3) (a)
In Ramesh Kumar Bhalotta v Lalit Kumar Bhalotta, a partner of an unregistered
firm filed a suit against the firm claiming declaration of share, proper
administrationof firm and rendition of the accounts of the firm. The suit was
dismissed as barred under Sec 69(1).
The same partner subsequently filed another suit praying for the dissolution of the
firm, and the accounts of the dissolved firm.
It was held that the subsequent suit was maintainable as it was permissible under
Section 69(3) (a) and dismissal of the earlier suit was no bar to the present suit.
Moreover, the suit was not barred under Order 2, Rule 2of the C.P.C., as the cause
of action under the two suits was different.
In Kishore Kumar v Navin Chandra, it has been held that if a suit has been filed
in the individual capacity by a person who had been a partner of the dissolved firm
against another person who had also been a partner of the dissolved firm, the bar
under s 69(2A) would not be attracted.
In this case, plaintiffs No. 1 & 2 and defendants No. 1 & 2 were the partners of an
unregistered firm, which was dissolved. These persons then became co- owners of
the property which earlier belonged to the dissolved firm. Defendants No. 1 & 2
thereafter recovered rent of that property on behalf of the plaintiffs also. Plaintiffs
No.
1 & 2 filed a suit against defendants No. 1 and 2 to recover a sum of Rs. 4, 83, 480
with interest being a proportionate share of the rent due in favour of the plaintiffs.
It was held that in this case the suit was not filed by the plaintiffs in the capacity
of partners of the dissolved firm, nor is it a suit for the recovery of the property of
the dissolved firm. It was a suit filed in an individual capacity by co-owners of
the property. The suit was not barred by the provisions of s 69 (2) or 69 (2A) of
the Indian Partnership Act.
3. Suit where provisions relating to Registration of Firms do not apply
[Section 69(4)(a)]
Sec 69 (4) (a) exempts such firms from the operation of the provisions of this
section whose place of business is not in India or whose place of business is in
such areas, where because of notification under Sec 56, this Chapter does not
apply. It has already been noted above that s 56provides that the Government of
any State may, by notification in the Official Gazette, direct that the provisions of
this Chapter shall not apply to that State or to any part thereof specified in the
notification.
4. When value of the suit does not exceed Rs. 100 [s 69(4)(b)]
Sec 69 (4) (b) provides an exception for firms having small claims. If the value of
the suit does not exceed Rs. 100/-, an unregistered firm or its partner can bring an
action against the third party.
Once the registration is made, it would continue to be valid in the eyes of law until
the same was cancelled. Thus, there is no nee of fresh registration on the death of
a partner or when there is otherwise any change in the constitution of the firm in
such cases, it is sufficient to notify the Registrar about the change so that he could
note the same in the relevant register.

Registration subsequent to the filing of the suit

If the firm is not registered “no suit shall be instituted” either between the partners
inter se or against any third party. In case the firm is unregistered, such a suit shall
be liable to be dismissed. There is no specific provision in the Act for the
dismissal of the suit suo moto. A plea for the dismissal of the suit on the ground
of non-registration has to be made. If the plaintiff admits that his suit is on behalf
of an unregistered partnership, the Court must immediately dismiss the suit in
view of the express and mandatory provisions of Sec 69.
In M/s Jammu Cold Storage v M/s Khairati Lal and Sons, M/s Khairati Lal and
Sons instituted a suit to recover a sum of Rs. 1000/- from m/s Cold Storage and
General Mills Ltd on 15th April 1959. The firm was not registered on that day but
it was got registered subsequently on 30th May1959. It was held by the J & K
High Court that since the firm was not registered on the date of the institution of
the suit, the suit cannot proceed further and it must be dismissed.

BIbIlIOGRAPHy

 Singh, Avtar, Law of Contract and Specific Relief, 11th Edition,

(Lucknow: Eastern Book Company, 2013)
 Law of Special Contracts by Dr. R.K Bangia
 Nair, Krishnan, Law of Contract
 Saharay H. K, Indian Partnership and Sale of Goods Act, (Universal,
2000)
 Pollock and Mulla, Indian Contract and Specific Relief Act,14th Edition,
(New Delhi: Lexis Nexis, 2013)
 Anson, William, Law of Contract, 29th Edition, (Oxford University
Press, 2010)
 Avtar Singh, Principles of the Law of Sale of Goods and Hire Purchase,
(Lucknow; Eastern Book House Ltd, 1998)

 Verma J.P (ed.,) Singh and Gupta, The Law of Partnership in India, (New
Delhi: Orient Law House, 1999)