5contract-II - Study Notes On Contract Law 2

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Sl.No Chapters / Unit Pg.No

1 Indemnity, Guarantee 1-23
2 Bailment & Pledge 24-77
3 Agency 76-109
4 Sale of Goods Act, 1930 110-197
5 Indian Partnership Act, 1932 198-248
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Contract 3 II
Special Types of Contracts
The Act as enacted originally had 266 Sections, it had wide scope and
÷ General Principles of Law of Contract 3 Sections 01 to 75

÷ Contract relating to Sale of Goods 3 Sections 76 to 123
÷ Special Contracts- Indemnity, Guarantee, Bailment & Pledge and Agency 3
Sections 124 to 238
÷ Contracts relating to Partnership 3 Sections 239 to 266
Previously, the Indian Contract Act, 1872 contained provisions relating to Sale
of Goods (Movable Property) and Partnership. But now these two provisions
have been removed from the Act and are placed in two separate acts known as
the Sale of Goods Act, 1930 and the Indian Partnership Act, 1932. So at present,
the Indian Contract Act includes the General Principles of Contract and Special
Contracts only.
The Indian Contract Act brings within its ambit the contractual rights that have
been granted to the citizens of India. It endows rights, duties and obligations on
the contracting parties to help them to successfully conclude business- from
everyday life transactions to evidencing the businesses of multi-national
companies. The Indian Contract Act, 1872 was enacted on 25th April, 1872
[Act 9 of 1872] and subsequently came into force on the first day of September
1872. The essence of the India Contract Act has been modelled on that of the
English Common Law. The extent of modifications made in the Act as per the
Indian conditions and its adaptability to the Indian economy is an important area
of research. In this regard it is pertinent to note that since the enactment of the
Act there have been no amendments and thus the Law that was made in 1872
still stands good.
During the entire ancient and medieval periods of human history in India, there
was no general code covering contracts. Principles were thus derived from
numerous references- the sources of Hindu law, namely the Vedas, the
Dhramshatras, Smritis, and the Shrutis give a vivid description of the law
similar to contracts in those times. The rules governing contracts form a part of

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the law called Vyavaharmayukha. During the Muslim rule in India, all matters
relating to contract were governed under the Mohammedan Law of Contract.
The English common and statute law in force at that time came into India by the
Charters of the eighteenth century which established the Courts of justice in the
three presidency towns of Calcutta, Madras and Bombay, so far it was
applicable to Indian circumstances. The English law of contract, it has been,
was evolved and developed within the framework of assumpsit.
By the charter of 1661 and 1726 the English law has deep impact on the Indian
legal system. Prior to the enactment of the Indian Contract Act, 1872, The
English Law is applied into the Presidency towns of Madras, Bombay and
Calcutta by the Charter granted in 1726 by King George I to the East India
Company
It is a matter of controversy whether English law was introduced by the Charter

of 1726 by which the statutes up to that date would be enforced in India with the
same amount of force as in England, or subsequently by the Charters of 1753-74
so as to embrace statutes up to 1774.
Anyways, since there was an indiscriminate application of English law to

Hindus and Mahommedans within the jurisdiction of the Supreme Court it led
to many inconveniences. To obviate this, the statute of 1781 empowered the
Supreme Court at Calcutta and the statute of 1797 empowered the Courts of
Madras and Bombay (recorders courts), to determine all actions and suits of
contractual nature against the natives of the said towns in the case of
Mahommedans by the laws and the usages of the Mahommedans and in the case
of Hindus (called 8Code of Gentoo Laws9 in the Statutes) by the laws and
usages of the Hindus, and where only one of the parties was Mahommedan or
Hindus, by the laws and the usages of the defendant.
In 1781, the Act of Settlement was passed by the British government which
says that in the matters of inheritance and succession, contracts dealing with
parties in the case of Mohammedans and Hindus, their respective laws were
considered. In cases where only one of the parties is a Mohammedan or Hindu,
the laws and usages of the defendant are considered. This rule was applied in
the Presidency Towns. In places outside the presidency towns, judgment was
decided according to the justice, equity and good conscience And this continued
until the enactment of the Indian contract act.

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Scope of the Act
It is not an exhaustive law on all classes of contract. The contract act does not
profess to be a complete code dealing with the law relating to contracts. It
appears from preamble.
Act not retrospective 3 the provisions of this act do not apply to contracts
made before the act came into force.
Principles of construction of contracts 3 a person is only entitled to enforce

his contractual rights in a reasonable way and a court will not support an
attempt to enforce them in an unreasonable way. The courts should not, in
commercial transactions, be astute to defeat the efficacy of documents which
parties have acted on, by seeking to apply to their construction rule such as the
8subject to contract rule9. Such rules are but guide. They must not become
tyrants, compelling a construction which in the circumstances of a particular
case, produces a wholly artificial and unreal result.
The Rights are available under the Indian Contract Act 3

There are two kinds of rights, one is Right in rem, and the other is Right in
personam.
The Indian Contract Act, 1872 provides right in personam to the parties who have
bound their promises in a contract. Thus, the parties in such a situation can only
enforce their contractual rights against each other only and not against the world at
large.
Example 3 X and Y enter into a contract for delivering ten books on a specified
date. If Y fails to deliver the same to X, then X can sue only Y and not anybody
else. The rest of the world is concerned with this contract.
Classification of Contracts 3
Contracts can be classified into three broad branches 3
1. Based on 2. Based on formation 3. Based on performance 3
Enforceability 3 3
Contract Executed contract
Express contract Executory contract -
Voidable agreement
Tacit contract a) Unilateral contract
Void Agreement
Implied/Quasi contract b) Bilateral contract
Agreement
Illegal agreement
Voidable contract

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Definition of a Contract 3
Section 2(h) of the Indian Contract Act defines the term contract as <an
agreement enforceable by law is a contract.= So, a contract is an agreement plus
legal enforceability.
Law means a 8set of rules9 which governs our behaviours and relating in a
civilized society. So there is no need of Law in a uncivilized society. One
should know the law to which he is subject because ignorance of law is no
excuse.
<Every agreement and promise enforceable at law is a contract.= 3 Pollock
<A Contract is an agreement between two or more persons which is intended to

be enforceable at law and is contracted by the acceptance by one party of an
offer made to him by the other party to do or abstain from doing some act.= 3
Halsbury
<A contract is an agreement creating and defining obligation between the

parties= 3 Salmond.
Sources of Mercantile Law in India
1-English Mercantile
2-Indian Status Law
3-Judicial Decisions
4-Customs and Usages
The Law of Contract constitutes the most important branch of Mercantile or

Commercial Law. It is the foundation upon which the superstructure of modern
business is built. It affects everybody, more so, trade, commerce and industry. It
may be said that the contract is the foundation of the civilized world.
The Indian Contract Act is divisible into two parts.
The first part (Section 1-75) deals with the general principles of the law of
contract and therefore applies to all contracts irrespective of their nature.

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The second part (Sections124-238) deals with certain special kinds of

contracts, namely contracts of Indemnity and Guarantee, Bailment, Pledge, and
Agency.
CONTRACT OF INDEMNITY
The term Indemnity literally means <Security against loss=. In a contract of

indemnity one party 3 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 3 <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.

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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 3
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 3 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.

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Thus it is clear that this contract is contingent in nature and is enforceable only
when the loss occurs.
Right of the indemnity holder 3 (Section 125)
An indemnity holder (i.e. indemnified) acting within the scope of his authority
is entitled to the following rights 3
1. Right to recover damages 3 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 3 He is entitled to recover all costs incidental to the

institution and defending of the suit.
3. Right to recover sums paid under compromise 3 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 3 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

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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 promisor9s request.
However, the right cannot be negatived in case of oversight. [Yeung v HSBC]
Right of Indemnifier 3
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 indemnifier9s 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]

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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.

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(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.

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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 surety9s 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) Surety9s 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) Surety9s 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

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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

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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 A9s 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

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gives notice of revocation. C dishonours the bill at maturity. A is liable upon his
guarantee
Lloyd9s 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

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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.

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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-

lOMoARcPSD|19064238
18
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 D9s 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.
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.
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.

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19
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.

lOMoARcPSD|19064238
20
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.

lOMoARcPSD|19064238
21
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.

lOMoARcPSD|19064238
22
(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
1. In indemnity there are two, one who 1.There are three parties, Principal
is indemnified and the other debtor, surety and the Creditor.
indemnifier. 2.There are three contracts between
2. It consists of only one contract surety, principal debtor and creditor.
under which indemnifier promises to
pay in the event of certain loss. 3. The object of contract of guarantee
3. The contract of indemnity is made is the security of the creditor.
to protect the promise against some 4.In guarantee the liability of surety is

lOMoARcPSD|19064238
23
likely loss. only a secondary, when principal

4. The liability of the indemnifier in a debtor default.
contract of indemnity is a primary one. 5.The liability arises only on the non-
5. The liability arises only on the performance of an existing promise or
happening of a contingency. non-payment of an existing debt.
6. The indemnifier need not act at the 6. The surety acts at the request of the
request of indemnity-holder. principal debtor.
7. The indemnifier cannot sue a third 7. 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

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24
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 bailee9s act inconsistent with conditions.
154. Liability of bailee making unauthorized use of goods bailed.
155. Effect of mixture, with bailor9s consent, of his goods with bailee9s.
156. Effect of mixture, without bailor9s consent, when the good can be separated.
157. Effect of mixture, without bailor9s 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. Bailee9s 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. Bailor9s 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. Bailee9s particular lien.
171. General lien of bankers, factors, wharfingers, attorneys and policy-brokers.
BAILMENT
Chapter IX (Section 148 3 181) of the Indian Contract Act, 1872 deals with the
general rules relating to bailment. The Chapter is not exhaustive on the topic of
bailment 3 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.

lOMoARcPSD|19064238
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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 8bailment9 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 3 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

lOMoARcPSD|19064238
26
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 8delivery 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
respectively9.
Justice Blackstone defines Bailment as 8a delivery of goods in trust, upon

contract, either expressed or implied, that the trust shall be faithfully executed
on the part of the bailee9.
Bailment can also be described as 8the delivery of goods to another person for a
particular use9.
Only 8goods9 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 8goods9 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 master9s 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 bank9s locker and storing things in it would not constitute a

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27
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. A9s valuables
went missing. A9s control over the valuables in that locker had gone because the
locker could be operated even without A9s key. The bank was liable for the loss
of A9s 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 3 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.

lOMoARcPSD|19064238
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Example: A9s 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 3A person is already in possession of goods of owner. Such person contracts

to hold the goods as a bailee for a third person. Then 3Such 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 3 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

lOMoARcPSD|19064238
29
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 3returned (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

lOMoARcPSD|19064238
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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.

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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 3 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

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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 3
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.

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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

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34
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 3 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.

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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

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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:

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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.
Bailor9s 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.
Bailor9s 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

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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 3 (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 3 Gratuitous Bailment
Bailor is liable only for those losses which Bailor is liable for damages whether or not he
arise due to non 3 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

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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.

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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 3 Gratuitous

Bailment
Bailor shall repay to Bailee, all Bailor is liable to repay only extra 3
necessary expenses incurred by him ordinary expenses, and not the
for the purpose of Bailment ordinary expenses.

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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.

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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 3 the bailment is gratuitous; and for a specific period.
Then 3
(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.
Bailee9s 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

lOMoARcPSD|19064238
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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

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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

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45
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 bailor9s 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 can9t 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)

lOMoARcPSD|19064238
46
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).
Bailor9s 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 bailor9s 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.

lOMoARcPSD|19064238
47
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 make9s 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.

lOMoARcPSD|19064238
48
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.
Bailee9s 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).

lOMoARcPSD|19064238
49
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

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50
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 seller9s lien- sec 47, sale of goods act, 1930
(vii) Partner9s lien 3 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

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51
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

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52
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

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53
finds Z9s 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 Bailee9s Particular and General Lien
Basis of distinction Bailee9s particular lien Bailee9s general lien
1. Natural of right Particular lien gives right General lien gives right
to retain only such goods to 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.

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54
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. Bailee9s inconsistent act-A contract of
bailment 8is voidable (terminated) at the option of the bailee does any act with
regard to the goods bailed9 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.

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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
expiry of the specified period April 3
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 son9s
purpose accomplished. engagement. G shall
return
them once the
engagement
functions are over
3. Bailee9s 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 K9s garage. K gives it
bailment, the Bailor may to his son for racing. J
terminate the bailment. can terminate the
bailment.
4. Destruction of When goods bailed are K hires a cycle from L.
subject matter destroyed, Bailment comes to When
an 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

lOMoARcPSD|19064238
56
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
8Bailor9, which means 8to security for payment of a debt or
2 deliver. It means possession performance of a promise, it is called
voluntarily from one person to Pledge.
another.
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 Example: If a Farmer delivers to

to John, a tailor making a shirt. bank 50 bags of wheat as security for
The contract between Sam and obtaining a loan, it is called pledge.
4 John is bailment

lOMoARcPSD|19064238
57
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
of an obligation. It may be for an obligation.
purpose like repairs, safe
custody, etc.
6 The Bailee can use the goods. Pledgee cannot use the goods.
Bailee can use the goods bailed Pledgee has no right of using goods
as per terms of contract. pledged.
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 Pledgee can exercise lien even for
goods only for labour and non payment of interest.
8
service
9 Sale of Goods-There is no right Sale of Goods-Pawnee, i.e. Pledgee

of sale to the has a right of sale of goods pledged
Bailee. Bailee may either 3 (a) on default of Pawnor. He can do so
retain goods, or (b) sue the by giving a notice to the pawnor.
Bailor for non 3 payment of his
dues.
Distinction between Bailment and Agency:

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No. Bailment Agency
1 Meaning: Meaning :
The term bailment is derived When a person appoints another to

from the French word 8Bailor9, act on his behalf with a third party,
which means 8to deliver9. it is called 8Agency9.
Definition : Definition:
2
Voluntarily Change of 8Agency9 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
8X9 delivers a cloth to 8Y9, a 8X9 appoints 8Y9 to purchase some
Tailor for making a shirt. The property on his behalf. Here 8X9 is
contract between 8X9 and 8Y9 Principal and 8Y9 is Agent.
is bailment. 8X9 is a Bailor and
8Y9 is a Bailee.
In bailment, the Bailee does The agent represents his principal,

4 not represent the Bailor. He and derives certain power from his
does not derive any authority principal.
from the Bailor.
In Bailment, A Bailee cannot In Agency, an agent can sell the

5 sell the property under property.
bailment
6 A Bailee cannot transfer the An agent can transfer the ownership

ownership of the property. of the property.

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59
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 transfer to the purchaser.
goods 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, possess any connection with the
during and after the period of property sold.
Bailment.

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5 In Bailment, the Bailor pays In contract of sale, the transferee

some nominal charges to the shall have to pay the full market
Bailee for the services rendered value of the property to buy
by him. Sometimes, he is not property.
required to 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 property has no such right of lien.
of 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.

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Hiring of locker 3 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 3 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- bailor9s
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.

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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 8Pledge9, 8Pawnor9, 8Pawnee9 (Sec.172)

8Pledge9: The bailment of goods as security for payment of a debt or
performance of promise is called 8pledge9.
8Pawnor9: The bailor in case of a pledge is called as 8pawnor9.
8Pawnee9: The bailee in case of pledge is called as 8pawnee9.

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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
person to another for a
Meaning to another as security for repayment
specific purpose is known
of debt is known as the pledge.
as 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 person who delivers the

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

Purpose goods is for safekeeping or act as security for repayment of
repairs etc. debt or performance of the promise.

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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 Z9s 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

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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
Act, 1872.
since 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
Dealing in owner, therefore he can deal in the
pledged, the owner loses the
Property property subject to certain
right to 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.

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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 8document of title9 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,
warehousekeeper9s certificate, wharfinger9s certificate, railway receipt, warrant
or order for the delivery of goods and any other document used in the ordinary

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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.

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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 3
3 returned (either in original form or in altered form); or
3 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 master9s
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.

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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 pawnee9s duties duly
enforced.

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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 3
(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.

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(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.

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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 3 (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

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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 3 (a) he had no notice of the
Pawnor9s 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 pawnee9s intention to dispose of the security. It
can9t 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 3 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.

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Indemnify the pawnee: If loss is caused to the pawnee due to defect in

pawnor9s 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
8reasonable notice9 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.

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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 bank9s contention
that the sale notice should be inferred from the pawner9s 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 pawnee9s ordinary right 8to
recover the balance of the loan unsatisfied on the sale of the pledge9. And if
there is any surplus amount from such sale, it must be accounted for and
refunded to the pawner. The words 8such sale9 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 pawnee9s 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 Pledgee9s 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.
Pawner9s Right to Redeem:-
Section 177 of the Act provides for the most valuable right of the pawner:

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Defaulting pawnor9s 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 8will9 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 employee9s 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.)

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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 heir9s 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.

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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 8Third Person9.
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.

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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 agent9s 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 3
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

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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 principal9s 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.

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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 agent9s authority to act on behalf of the principal in a situation of
8emergency9
3- By the conduct of the principal, which creates an agency on the basis of
the law of estoppel.
4- By ratification of the agent9s act by the principal, even though the same
has been done without the principal9s prior authority.
5- By presumption of agency in husband- wife relationship.
1- Express authority 3 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.

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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 Ali9s 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 employee9s 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

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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- Necessity3 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 another9s
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:- 8A9 a common interest carrier carries dairy product of 8B9 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 8B9 cannot sue against 8A9 because of no authority. Here 8A9 is
treated as an agent of 8B9 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 husband9s credit to buy all necessaries of life according to the
position of the husband even against his wishes
4- Estoppel (Section 237)3 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

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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 agent9s
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- Ratification3 When an act of a person, who acted as another person9s

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 principal9s
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

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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 8Agent9 and
another person is 8Principal9. Though another person (principal) gives positive
response to person (agent) the date when person 8agent9 starts the work for
another person (principal) should be called the agency)
Ratification is not allowed in the following cases
When the person9s 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 agent9s transaction and
accept liability. In this way, an agency by ratification arises.
This is ex post facto agency4 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)

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÷ 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 agent9s 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 Principal9s power
9- Communication
10- Agency by operation of law

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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 8a delegate
cannot delegate9. 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 principal9s 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-

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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 A9s 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.

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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

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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

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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 husband9s credit for what is necessary for her to live. But in
cases where they are separated because of the wife9s own whims or faults, for
no just reason, the husband is not liable for the wife9s 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
husband9s 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 other9s agents for making contracts in the
ordinary course of the partnership business.
Sub-Agent
Who is a sub-agent?

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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.

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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 the agency as is entrusted to him.
of, the original agent in the
business of the agency.
Substituted Agent works under the

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

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No Sub-Agent Co-agent /Substituted Agent
1 Who is sub-agent? Sub Who is co-agent/ Substituted

Agent is a person employed Agent? Substituted agent is a person,
by the original agent. who is 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

Contract Act, 1872 - Deals Act deals with the Appointment of a
with Sub Agent Co-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
Hence, He is the agent of The agent of the Agent
Principal.
4
There is no privity of contract There is privity of contract between
between the principal and the principal and substituted agent.
sub-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:

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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
principals at a time master 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 control and supervision of his owner.
under a direct control and supervision. He has no discretionary power.
He has a discretionary power
An agent is employed with an but servant does not ordinarily do this
authority to bring the principal into kind of acts.
legal 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 make his master liable only when it is
principal. The agent isn9t responsible committed at the time of employment
personally 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.

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An agency can be terminated or is terminated in the following different ways

and with different rules.
1- When the agent9s 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.

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16- On termination of sub-agent9s 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 agent9s 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

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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: 3 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 Law9s 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 isn9t 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.

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The act done and representation made by an agent aren9t 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:-
ø To do at for himself.
ø To run commercial transaction by agent.
ø To do transaction with third person.
ø To establish legal relation with principal and third person.
We may note that the contract relating to agency is legally recognized in
following criteria:-
ø Whatever a person can lawfully do he may also does the same

through an agent.
ø He who acts through another is considered to have acted
personally.
All Contracts are agreements but all agreements are not contracts.
Agent9s 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 3 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

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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 3 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 principal9s funds & for the agent9s
funds, no intermingling is permitted
o Repudiation of contract by principal when agent deals on his own
account -sec -215
o Principal9s right to claim benefit when agent acting on his own
account 3 sec 216.
÷ Duty to communicate with Principal and to obtain Principal9s
instructions 3 Sec. 214,An agent has the duty to communicate any
difficulty whatsoever he may come across while doing the Principal9s
business. He is supposed to perform due diligence in this regard. Duty to
communication in cases of difficulty, it will be also the agent9s 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
Principal9s consent in dealings 3 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 3 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

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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 agent9s 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 3 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 8Delegatus non protest delegare9. 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. Don9t 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.

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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.
Principal9s 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 Agent9s 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 principal9s request. Must compensate (indemnify) agent for any
costs incurred as a result of principal9s failure to perform the contract
÷ Cooperation: must cooperate with & assist an agent in performing his
duties Provide safe working conditions. Agent9s 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

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the acts of an agent which are lawful and within the scope of agent9s
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 3 The principal is not bound for
excess acts done by the agent. If no 3 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 Agent9s claim for Indemnity
÷ Normal contract & tort remedies, Principal9s 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 agent9s
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 3 219) 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

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his remuneration and advances made or expenses properly incurred by him in

conducting such business.
÷ Right of Lien-(sec 3 221)-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 Principal9s 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 3 222- 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
Principal9s 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 retainer3(sec 3 217 &218) An agent has the right to retain any
remuneration or expenses incurred by him while conducting the Principal9s
business.
Right to Compensation3 (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.

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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.
- Principal9s liability when agent exceeds authority- principal
is not liable.
- Position when the authorized and unauthorized acts are
separable sec- 227
- Principal9s liability for notice to the agent 3 sec 299
- Principal9s liability for agent9s fraud, misrepresentation and
torts (sec -238)- do not fall within their authority 3 it do not
affect their principals.
Personal Liability of an Agent
General Rule 3 No personal liability [Sec.230], In the absence of contract to
contrary, an Agent cannot 3 (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

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The Agent is personally liable in the following cases 3

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 3 sec 231
Right of third person against undisclosed principal 3 sec 232
Liability of pretended agent 3 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

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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 3 (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 3Induces 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 3
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 Agent9s Torts: Principal may be liable for agent9s torts if they
result from the following:

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Principal9s own tortious conduct
Principal9s authorization of tortious act
Agent9s 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 employee9s
act benefit the employer
Liability for employee9s 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 employee9s intentional torts: if torts committed within scope of

employment
Liability for Independent Contractor9s 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 Agent9s Crimes: General rule is that a principal or employer is not
liable for agent9s or employee9s 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)

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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 another9s 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

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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 3 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

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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 doesn9t 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:

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÷ 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 8contract of sale9 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 8sale9,
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 8agreement to sell9 [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 8contract of sale9 includes both a sale and an
agreement to sell.

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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 3 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, 8price9)
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. 8Buyer9 means
a person who buys or agrees to buy goods [Sec. 2(1)]. 8Seller9 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

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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 8sale9. A person cannot be the seller of his
own goods as well as the buyers of them.
However, when a bankrupt person9s 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 8goods9 is defined in Section 2(7). It states that 8goods9 <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, 8immovable property9 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 3
<&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

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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 3 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 8possession9 is with seller, but 8ownership9 is with buyer.
The Act uses the term 8general property9 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) 8price9 means the money

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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.

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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 3 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
8perishing9 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.).

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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 8a part9 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.

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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 buyer9s 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, 8Fault9 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

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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 M9s 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 C9s 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
8Goods9 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 8Act9). 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,

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(2) Lottery tickets, and
(3) Software programs.

Definition of <goods=
8Goods9 is defined as per Section 2 (7) of the 8Act9 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 8includes9
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

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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 8thing9 and an 8article9 and also as 8tangible personal property9,
but there has been no judicial decision which includes electricity within the
definition of 8goods9 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 8goods9 under the article 366 (12) of the Constitution as
well as S. 2 (7) of the 8Act9. This proposition was affirmed in a Madras High
Court case where the learned judge held that electricity was under the definition
of 8goods9 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 8goods9 under S. 2(7) of the 8Act9. Meanwhile, the Supreme Court
while discussing about the definition of 8goods9 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.=

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However, Pollock & Mulla, in their commentaries, have expressed their

concerns over the applicability of the 8Act9 for electricity because, there is no
contractual obligation on part of the public authority to supply 8electricity9,
rather it is a statutory obligation on part of the authority providing these
8goods9. The supply of such commodities would not amount to a 8sale9 for the
purposes of the 8Act9. 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 8electricity9 comes under the definition of
8goods9 however the applicability of the 8Act9 in case of sale of electricity is a
dubious proposition.
Electronic T.V. Signals are goods 3 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 Black9s Law Dictionary, 8lottery9 is defined as 8a chance for a prize for
a price9. For the purposes of the 8Act9 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=.

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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 3 being intellectual creations of human
mind 3 be treated as <goods= for the purposes of the 8Act9 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 8canned software9, 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

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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 8Act9.
Exclusion of 8Money9 from the definition
Money and actionable claim are specifically excluded from the definition of
<goods= under S.2(7) of the 8Act9, 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 8sui generis9=. 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 8Act9. 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

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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 8Existing Goods9. 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 8specific goods9 [Sec. 2(14)]. It may be noted
that in actual practice the term 8ascertained goods9 is used in the same sense as
8specific goods,9 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.

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(c) Unascertained goods. The goods, which are not separately identified or
ascertained at the time of the making of the contract, are known as 8unascertained
goods.9 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 don9t
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 8specific9 or 8ascertained9 and 8unascertained9 goods is

important in connection with the rules regarding 8transfer of property9 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 8an agreement to sell.9
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

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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 keeper9s 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

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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 8ownership9 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

The property in the goods
sale on the expiry of prescribed time or
Transfer of sold passes to the buyer at
the fulfilment of certain conditions. It
property the time of contract. It
takes place at a future time or subject to
passes immediately.
fulfilment of conditions.

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It creates a right in rem 3 a

Conveyance right to enjoy the goods It creates a right in personam 3 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.
Transfer of transferred, the risk also
The loss will be borne by the seller even
risk passes to the person. If
though the goods are in possession of
there is loss of goods, it
the buyer.
will fall 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
buyer in case He can sue the seller for damages only.
the third party who bought
of breach
those goods for the goods.
Insolvency of
He can claim the goods
seller in He cannot claim the goods but only a
from the Official assignee
possession of rateable dividend for the money paid.
or 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

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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] 3 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

They are governed by Hire Purchase
Law by the Sale of Goods Act,
Act, 1972- sec 2(c )
1930.- 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

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ownership transferred immediately. payment is made.
The hirer is a bailee, and not the

The buyer becomes the full owner until he pays all the instalments
Buyer
owner of the goods of the price in full or exercises the
option to purchase.
The buyer can transfer a good

Transfer to The hirer cannot transfer a good title
title to third parties because
third to a third party as ownership has not
ownership of goods has been
parties been transferred.
transferred.
The hire vendor has a right to

Right to The seller can sue for price but
repossess the goods if the hirer
repossess he cannot repossess the goods.
defaults in the payments.
In a sale, there is no option to

Right to The hirer can terminate the agreement
the buyer to return the goods
terminate before the ownership is transferred.
bought.
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 3 whether
only delivery of goods is intended or exercise of skill and labour with regard to
the goods has to be delivered.

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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 artist9s 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 8to be fitted into her mouth9. 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 3 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 8SALE9 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

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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

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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)-8A 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
repudiated9.
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.

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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 8wedding9 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 doesn9t 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

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conditions are assumed by the parties as if it is incorporated in the contract

itself. Let9s study these conditions briefly:
Warranty
Sec 12(3)-8A 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 repudiated9.
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:

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÷ 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: 8X9 purchased a second-hand bike from 8Y9. 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.

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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 Injured party can only claim
the goods as well as claim damages in damages in case of breach of
case 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 Section 12(3) of the Sale of

Provision of Goods Act, 1930 Goods Act, 1930 defines
defines Condition. Condition.
Purpose Condition is basic for the

It is a written guarantee for
formulation of the

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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.

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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 8in 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 pass9.
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

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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 3 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 didn9t 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.

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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. Ram9 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

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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-

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(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.

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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.

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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 8Buyer Beware9. 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 doesn9t 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.

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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

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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.

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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 8an implied warranty that the buyer shall
have and enjoy quiet possession of the goods9 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 seller9s 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 customer9s wrong choice.In
order to ensure purchase of an appropriate good by the seller, it is suggested that

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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

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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 they9re
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 they9re 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.

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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 A9s home. However, at the
time where he selects the smart TV, it doesn9t 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.

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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. He9ll 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

Deepak9s 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
Deepak9s 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 they9re as follows:
Section 23(1) Sale of unascertained goods by description:

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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 doesn9t 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 aren9t 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 they9re taken as goods whose ownership is yet to be
transferred. In that case, they9re 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 doesn9t 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 hasn9t been fixed,

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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 doesn9t 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 aren9t 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.

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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.

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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 buyer9s 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

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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 somebody9s 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
buyer9s title will also be subject to the same defect. This rule does not imply
that buyer9s 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

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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:
ø Sale under the implied authority of the owner, or transfer of title by

estoppel (S. 27) 2.
ø Sale by a mercantile agent (proviso to S. 27)
ø Sale by one of joint owners (S. 28)
ø Sale by a person in possession under a voidable contract (S. 29)
ø Sale by the seller in possession of goods, the property in which has
passed to the buyer (S. 30(1))
ø Sale by the buyer in possession of the goods before the property in them
has passed to him (S. 30(2))
ø Re-sale of the goods by an unpaid seller after he has exercised the right of
lien or stoppage in transit (S. 54(3))
ø Sale by finder of goods (S. 169, Indian Contract Act)
ø 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 3
÷ 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 seller9s 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

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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 doesn9t 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 Oliver9s house. Once the World Cup is over, the TV is still at his
house. One day, Oliver9s 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.

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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 3 an innocent buyer. In this case, Olivia cannot recover the ring from
Julia since she didn9t 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 seller9s authority
to sell, the buyer gets a good title. However, to get a good title by estoppel, it

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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
Peter9s 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.

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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 hasn9t 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.

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÷ 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 seller9s 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.

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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, let9s 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.

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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 it9s 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.

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÷ 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.

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÷ 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.

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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.

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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 3 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 3 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 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 3 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 8delivery to the buyer9 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.

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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 buyer9s 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.

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Sec-45. <Unpaid seller= defined4

(1) The seller of goods is deemed to be an <unpaid seller= within the meaning
of this Act4
(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 hasn9t 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 3 jus in rem ( right against property)

÷ Against the buyer 3 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.

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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 hasn9t 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 isn9t 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 hasn9t 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
Seller9s 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.

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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

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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)]

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÷ 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 seller9s agent or
customer9s agent. Because, if he is the seller9s 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 customer9s 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.

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÷ 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.

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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 seller9s 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

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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 seller9s right of
lien and stoppage is defeated.
÷ If the last mentioned transfer is by way of a pledge, the original seller9s 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 won9t 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

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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 seller9s 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
÷ Seller9s Remedies against Buyer 3 Sections 55 and 56

÷ Buyer9s remedies against Seller 3 Sections 57, 58 and 59
÷ Remedies available to both buyer and seller 3 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 seller9s remedies in case there is a
breach of contract by the buyer. These remedies can be against:

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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.

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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.

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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.

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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 buyer9s 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

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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

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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 seller9s instruction to
stop them was received. The buyer9s 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

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buyer9s 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 buyer3 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

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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.

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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

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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

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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 8The Sales of Goods Act9
The word goods include the following things as movable property 3
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.

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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 3 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 company9s 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 8Existing Goods9 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 8Future Goods9. These are the goods which are
yet to be produced or manufactured. The seller manufacture certain goods like

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jewellery on the order of the buyer, such goods are known as future goods. The
last category of the goods is 8Contingent Goods9. 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.

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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

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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 8The Sales of Goods Act,
19309. 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

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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.

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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 8partners9 and collectively 8a firm9, 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.

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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

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3) Business - There must exist a business. According to Section 2(b), the term
8Business9 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 3 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 8carried 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.

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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:

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(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 doesn9t 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 couldn9t 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. ]

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(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 firm9s business effectively merely, sharing
profits he doesn9t 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 doesn9t 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.

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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 areThe persons who own some property
called partners jointly are called co-owners.
The maximum limit of partners is 10 for a There is no maximum limit of co-

banking business and 20 for any other owners.
business.
A partner cannot transfer his share to a A co-owner can transfer his share to a
stranger without the consent or other stranger 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 partners partition of property.
for the dissolution of the firm and
accounts.
A partner has a lien on the partnership A 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 Law4Dayabhaga 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

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(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
'partners9. HUF are called 'Coparceners'.
The maximum limit of partner is 10 for a There is no maximum limit of

banking business and 20 for any other coparceners.
business.
A person can be admitted to the existing A male person becomes a member

partnership with the consent of all other merely by his birth.
partners.
A minor can be admitted to the benefits of A male minor becomes a member merely
partnership with the consent of all the by his birth.
partners.
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 Only the Karta has implied authority.
the 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 The coparceners have no right to ask for
the account books and ask for the account of the account of past dealings.
profits and losses.

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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 legal It has a separate legal existence. A company
existence. Partners are collectively termed is 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. It enjoys perpetual existence. Even on the
Death, sickness, retirement of partners death of all the members company cant
may affect its existence so as to dissolvecomes to an end.
it. Dissolution 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 banking members to start with. However, there is no
business) or twenty (in case of non- limit on the maximum number of members
banking business). of a company. In case of private company
minimum 2 maximum 200 members.
A partner cannot transfer his share withoutA member may transfer his shares as and
the consent of other partners. when 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

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a share of profits.
The entire management lies with all theMembers 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
all its partners. of 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 8Particular Partnership9. 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.

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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 permane permanent incapacity to
perform his to perform nt incapacity perform his
duties may be a his duties incapac to duties is no
ground for the ity to perform his ground for the
dissolution of duties is no dissolution of
ground for perform duties may be a
the firm. his ground for the the firm since
the duties dissolution of he is a third
dissolution is no the firm. person and
of the firm. ground not a partner.
for the

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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

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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

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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)].

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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'.

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(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.

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(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 partner9s 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

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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.

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(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.)

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(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;

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(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

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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.

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(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

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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

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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.

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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 retirement 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:

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(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] 3 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)

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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)]

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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
8reconstituted firm9. 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 3 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

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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.

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(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

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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.

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(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

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(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

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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

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(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

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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 3 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

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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 A9s 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

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years B complained that A9s 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.

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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 It must be given by publication in at

one vernacular newspaper circulating in the least one vernacular newspaper
district where the firm to which it relates circulating in the distinct where the
has 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].

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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

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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

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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 firm9s 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

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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).-

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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)

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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

lOMoARcPSD|19064238
244
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

lOMoARcPSD|19064238
245
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

lOMoARcPSD|19064238
246
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.

lOMoARcPSD|19064238
247
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.

lOMoARcPSD|19064238
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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)
___________________________________________________________

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lOMoARcPSD|19064238

Sl.No Chapters / Unit Pg.No

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÷ General Principles of Law of Contract 3 Sections 01 to 75

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It is a matter of controversy whether English law was introduced by the Charter

Anyways, since there was an indiscriminate application of English law to

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Scope of the Act

Principles of construction of contracts 3 a person is only entitled to enforce

The Rights are available under the Indian Contract Act 3

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<Every agreement and promise enforceable at law is a contract.= 3 Pollock

<A Contract is an agreement between two or more persons which is intended to

<A contract is an agreement creating and defining obligation between the

Sources of Mercantile Law in India

4-Customs and Usages

The Law of Contract constitutes the most important branch of Mercantile or

The Indian Contract Act is divisible into two parts.

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The second part (Sections124-238) deals with certain special kinds of

The term Indemnity literally means <Security against loss=. In a contract of

The English law definition of a contract of indemnity is 3 <it is a promise to

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

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

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

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New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao &

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

Nature of Contract of Indemnity 3

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

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

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

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.

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Right of the indemnity holder 3 (Section 125)

1. Right to recover damages 3 he is entitled to recover all damages which he

2. Right to recover costs 3 He is entitled to recover all costs incidental to the

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

4. Right to sue for specific performance 3 he is entitled to sue for specific

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

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

A <contract of guarantee = is a contract to perform the promise, or discharge the

PARTIES TO CONTRACT OF GUARANTEE

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

Meaning of Principal Debtor [Section 126]

Meaning of Creditor [Section 126]

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Meaning of Surety [Section 126]

A guarantee may be either oral or written.

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

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

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

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

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ESSENTIAL FEATURES OF A CONTRACT OF GUARANTEE