UG - B.com - Commerce (English) - B - Com - 102 24 - Mercantile Law

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102 24 NOITACUDE ECNATSIDDIRECTORATE

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MERCANTILE LAW
II - Semester
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B.Com.
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ALAGAPPA UNIVERSITY
[Accredited with ‘A+’ Grade by NAAC (CGPA:3.64) in the Third Cycle
and Graded as Category–I University by MHRD-UGC]
(A State University Established by the Government of Tamil Nadu)
KARAIKUDI – 630 003
B.Com.
II - Semester
102 24
MERCANTILE LAW
Authors
M C Kuchhal, Ex-Reader, SRCC, University of Delhi
Units: (1-8, 12.2.3, 13)
Dr Francis Cherunilam, Professor and Director, School of Management Studies, Cochin
Units: (9-10)
Dr Anjani Singh Tomar, Assistant Professor, Gujarat National Law University, Gandhi Nagar, Gujarat
Unit: (12.0-12.2.2, 12.2.4-12.9)
Vikas® Publishing House, Units: (11, 14)
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SYLLABI-BOOK MAPPING TABLE
Mercantile Law
BLOCK - I: INTRODUCTION, INDIAN CONTRACT ACT, SALE OF

GOODS ACT
UNIT 1: Business Law - Meaning and Scope - Sources of Law - Laws Unit 1: Introduction to
applicable to Business. Busines Law
UNIT 2: Indian Contract Act - 1872 - Definition and Meaning of Contract (Pages 1-5);
- Essentials of a Contract - Types of Contracts - Capacity of Parties - Unit 2: Indian Contract
Modes of Discharge of a Contract - Remedies for Breach of Contract. Act, 1872
UNIT 3: Law of Agency - Agent and Agency - Kinds of Agencies - Creation (Pages 6-40);
of Agency - Principal and Agent - Termination of Agency. Unit 3: Law of Agency
UNIT 4: Sale of Goods Act - 1930 - Contact of Sale of Goods - Essentials of (Pages 41-56);
a Contract of Sale - Price - Agreement to Sell at Valuation - Rights and Unit 4: Sale of Goods Act, 1930
Duties of Buyer - Right of Unpaid Seller - Conditions and Warranties - (Pages 57-104)
Transfer of Property - Performance of Contract.
BLOCK - II: NEGOTIABLE INSTRUMENT ACT, PARTNERSHIP ACT,

COMPANY ACT
UNIT 5: Negotiable Instruments Act - 1881 - Definition and Meaning of Unit 5: Negotiable Instruments
Negotiable Instrument - Promissory Note - Bill of Exchange - Cheque - Act, 1881
Parties to Negotiable Instruments - Maturity of Negotiable Instrument - (Pages 105-143);
Negotiation - Dishonor of a Negotiable Instrument - Notice of Dishonor - Unit 6: The Indian Partnership
Discharge of a Negotiable Instrument. Act, 1932
UNIT 6: Partnership Act - 1932 - Nature of the Partnership - Features of (Pages 144-169);
Partnership - Qualities of a Partnership - Advantages - Limitations - Kinds Unit 7: The Companies Act, 1956
of Partners, Partnership Deed - Registration of a Partnership - Effects of (Pages 170-197);
Registration - Effects of Non-Registration - Rights and Duties of Partners Unit 8: Consumer Protection Act
- Dissolution of Partnership. (COPRA), 1986
UNIT 7: Companies Act - 1956 - Definition and Characteristics - (Pages 198-229)
Classification of Companies - Incorporation of a Company - Share Capital
- Company Management - Meetings - Resolution.
UNIT 8: Consumer Protection Act [COPRA] - 1986 - Background -
Definitions - Consumer Protection Council - Central Consumer Protection
Council - Consumer Redressal Agencies - Administrative Control of
National Commission.
BLOCK - III: FOREIGN EXCHANGE MANAGEMENT ACT,

COMPETITION ACT, ENVIRONMENT PRODUCTION ACT
UNIT 9: Foreign Exchange Management Act - 1999 - Difference between Unit 9: Foreign Exchange
FERA and FEMA, Scope of FEMA - Salient Features and Provisions of Management Act, 1999
FEMA - Offences under FEMA. (Pages 230-241);
UNIT 10: Competition Act - 2002 - Meaning and Scope of Competition Act Unit 10: Competition Act, 2002
- Salient Features of Competition Act - Offences and Penalties under the (Pages 242-250);
Act. Unit 11: Environment Protection
UNIT 11: Environment Protection Act - 1986 - Background - Definitions - Act, 1986
Environment - Environmental Pollutant - Occupier - Power of Central (Pages 251-256);
Government. Unit 12: Intellectual Property Rights
UNIT 12: Intellectual Property Rights - Meaning and Scope of Patent Act (Pages 257-273)
and Amendments of WTO Agreements - Rights of Patentee - Infringement
- Remedies - Trademarks - Copyright.
BLOCK - IV: INFORMATION TECHNOLOGY ACT, MSME
DEVELOPMENT ACT
UNIT 13: Information Technology Act - 2000 - Background - Salient Unit 13: Information Technology
Features - Digital Signature - Electronic Governance - Regulation of Act, 2000
Certifying Authorities - Cyber Laws - Penalties for Offences. (Pages 274-300);
UNIT 14: Micro Small and Medium Enterprises Development Act - 2006 - Unit 14: Micro, Small and Medium
Classification of Micro, Small and Medium Enterprises, Salient Features of Enterprises Development
Micro - Small and Medium Enterprises Act - Reservation Policy - Credit Act, 2006
Policy - Government Policy Towards Taxation and Incentives. (Pages 301-312)
CONTENTS
INTRODUCTION
BLOCK I: INTRODUCTION, INDIAN CONTRACT ACT, SALE OF
GOODS ACT
UNIT 1 INTRODUCTION TO BUSINES LAW 1-5
1.0 Introduction
1.1 Objectives
1.2 Busines Law: An Overview
1.2.1 Meaning and Scope of Mercantile or Business Law
1.2.2 Sources of Mercantile or Business Law
1.2.3 Interpretation of Business Law: Laws Applicable to Business
1.3 Answers to Check Your Progress Questions
1.4 Summary
1.5 Key Words
1.6 Self Assessment Questions and Exercises
1.7 Further Readings
UNIT 2 INDIAN CONTRACT ACT, 1872 6-40
2.0 Introduction
2.1 Objectives
2.2 Definition and Meaning of Contract
2.3 Essential Features of A Contract
2.4 Types of Contract
2.5 Capacity of Parties
2.5.1 Minor
2.5.2 Minor’s Agreements
2.5.3 Persons of Unsound Mind
2.5.4 Disqualified Persons
2.5.5 Free Consent
2.5.6 Coercion
2.5.7 Undue Influence
2.5.8 Distinction Between Coercion and Undue Influence
2.5.9 Misrepresentation
2.5.10 Fraud
2.5.11 Mistake
2.6 Discharge of Contracts
2.7 Breach of Contract
2.9 Summary
2.10 Key Words
UNIT 3 LAW OF AGENCY 41-56
3.0 Introduction
3.1 Objectives
3.2 Agent, Agency and Principal: An Overview
3.2.1 General Rules of Agency
3.2.2 Kinds of Agents
3.2.3 Creation of Agency
3.2.4 Essentials of a Valid Ratification: Principle and Agent
3.3 Termination of Agency
3.3.1 When Termination of Agency Takes Effect
3.3.2 Irrevocable Agency
3.5 Summary
3.6 Key Words
UNIT 4 SALE OF GOODS ACT, 1930 57-104
4.0 Introduction
4.1 Objectives
4.2 Contract of Sale of Goods
4.2.1 Essentials of a Contract of Sale
4.2.2 Kinds of Goods
4.2.3 Effect of Perishing of Goods
4.2.4 The Price and its Mode of Fixing
4.2.5 Document of Title to Goods
4.3 Conditions And Warranties
4.3.1 Distinction between Condition and Warranty
4.3.2 Express or Implied Conditions and Warranties
4.3.3 Doctrine of Caveat Emptor
4.4 Transfer of Property: Importance and Rules
4.4.1 Rules of Transfer of Property
4.4.2 Rule of Transfer of Title on Sale
4.4.3 Transfer of Title By Non-Owners
4.5 Performance of Contract Sales
4.5.1 Delivery
4.5.2 Rules of Delivery of Goods
4.5.3 Acceptance of Delivery by Buyer
4.6 Unpaid Seller and His/Her Rights
4.6.1 Rights of an Unpaid Seller
4.6.2 Buyer’s Rights Against Seller
4.6.3 Auction Sale
4.8 Summary
4.9 Key Words
BLOCK II: NEGOTIABLE INSTRUMENT ACT, PARTNERSHIP ACT,
COMPANY ACT
UNIT 5 NEGOTIABLE INSTRUMENTS ACT, 1881 105-143
5.0 Introduction
5.1 Objectives
5.2 Negotiable Instruments: Definition, Nature and Types
5.2.1 Characteristics of a Negotiable Instrument
5.2.2 Examples and Presumptions of Instruments
5.2.3 Promissory Note
5.2.4 Essentials of a Promissory Note
5.2.5 Bill of Exchange
5.2.6 Distinction Between a Promissory Note and a Bill
5.2.7 Cheque
5.2.8 Distinction Between a Cheque and a Bill of Exchange
5.2.9 Bank Draft
5.2.10 Miscellaneous Provisions
5.2.11 Maturity Of Negotiable Instruments
5.2.12 Rules for Calculating Maturity
5.2.13 Payment in Due Course
5.2.14 Payment of Interest
5.2.15 Holder
5.3 Negotiation
5.3.1 Negotiation
5.3.2 Distinction between Negotiation and Assignment
5.3.3 Modes of Negotiation
5.4 Dishonour and Discharge of Negotiable Instruments
5.4.1 Noting
5.4.2 Protest
5.4.3 Discharge of the Instrument and the Parties
5.6 Summary
5.7 Key Words
UNIT 6 THE INDIAN PARTNERSHIP ACT, 1932 144-169
6.0 Introduction
6.1 Objectives
6.2 Nature and Features of Partnership
6.2.1 Essential Elements of Partnership
6.2.2 Test of Partnership
6.2.3 Partners, Firm and Firm Name
6.3 Qualities, advantages and limitations of Partnership
6.3.1 Formation of Partnership
6.3.2 Partnership Deed
6.3.3 Duration of Partnership
6.3.4 Kinds of Partners
6.3.5 Minor Admitted to the Benefits of Partnership
6.3.6 Registration of Firms
6.3.7 Register of Firms
6.3.8 Property of the Firm
6.4 Rights, Duties and Liabilities of Partners
6.4.1 Rights of Partners
6.4.2 Duties of Partners
6.5 Dissolution of a Partnership Firm
6.5.1 Dissolution of Firm
6.7 Summary
6.8 Key Words
UNIT 7 THE COMPANIES ACT, 1956 170-197
7.0 Introduction
7.1 Unit Objectives
7.2 Company: Meaning and Definitions
7.2.1 Characteristics of Company
7.2.2 Classification of Companies
7.2.3 Incorporation
7.3 Meetings, Company Management and Resolution
7.3.1 General Meetings
7.3.2 Types of General Meetings
7.3.3 Requisites of a Valid Meeting
7.3.4 Voting
7.5 Summary
7.6 Key Words
UNIT 8 CONSUMER PROTECTION ACT (COPRA), 1986 198-229
8.0 Introduction
8.1 Objectives
8.2 Consumer Protection Act, 1986 Background and Definitions
8.2.1 Scope and Applicability of the Act
8.3 Understanding the Meaning of Consumer
8.3.1 Types of Consumers
8.4 Redressal of Complaints
8.4.1 Consumer Protection Councils
8.4.2 Consumer Disputes Redressal Agencies
8.4.3 District Forum
8.4.4 State Commission
8.4.5 National Commission
8.4.6 Powers of the Consumer Forums
8.6 Summary
8.7 Key Words
BLOCK III: FOREIGN EXCHANGE MANAGEMENT ACT, COMPETITION ACT,
ENVIRONMENT PRODUCTION ACT
UNIT 9 FOREIGN EXCHANGE MANAGEMENT ACT, 1999 230-241
9.0 Introduction
9.1 Objectives
9.2 Foreign Exchange Management Act (FEMA), 1999
9.2.1 Differences Between FERA and FEMA
9.2.2 Need for FEMA
9.2.3 Objectives of FEMA
9.2.4 Characteristics of FEMA
9.2.5 FEMA’s Power to Make Rules and Regulations
9.2.6 Offences Under FEMA
9.4 Summary
9.5 Key Words
9.6 Self-Assessment Questions and Exercises
UNIT 10 COMPETITION ACT, 2002 242-250
10.0 Introduction
10.1 Objectives
10.2 Competition Act, 2002: Meaning, Scope and Salient Features
10.2.1 Meaning and Scope
10.2.2 Salient Features
10.3 Offences and Penalties Under the Act
10.5 Summary
10.6 Key Words
UNIT 11 ENVIRONMENT PROTECTION ACT, 1986 251-256
11.0 Introduction
11.1 Objectives
11.2 The Environment (Protection) Act, 1986
11.2.1 Background
11.2.2 Scope and Definitions
11.2.3 Power of Central Government
11.2.4 Prevention, Control and Abetment of Environment Pollution
11.2.5 Penalties
11.4 Summary
11.5 Key Words
UNIT 12 INTELLECTUAL PROPERTY RIGHTS 257-273
12.0 Introduction
12.1 Objectives
12.2 Meaning and Scope of Patent Act
12.2.1 Indian Patent Act, 1970
12.2.2 Amendment in WTO Agreements on IPR
12.2.3 Rights of Patentee
12.2.4 Patent Infringement and Remedies
12.3 Trademarks
12.3.1 Transfer and Infringement of Trademarks
12.3.2 Infringement of Trademarks and its Remedies
12.4 Copyright
12.4.1 Transfer and Infringement of Copyright
12.4.2 Infringement of Copyright
12.4.3 Remedies for the Infringement of Copyright
12.4.4 Copyright Amendment Bill 2010
12.6 Summary
12.7 Key Words
BLOCK IV: INFORMATION TECHNOLOGY ACT, MSME
DEVELOPMENT ACT
UNIT 13 INFORMATION TECHNOLOGY ACT, 2000 274-300
13.0 Introduction
13.1 Objectives
13.2 Information Technology Act: An Introduction
13.2.1 Digital Signature
13.3 Electronic Governance
13.3.1 Regulation of Certifying Authorities
13.3.2 Digital Signature Certificates
13.3.3 Penalties and Adjudication
13.3.4 Cyber Laws
13.5 Summary
13.6 Key Words
UNIT 14 MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006 301-312
14.0 Introduction
14.1 Objectives
14.2 Salient Features of Micro, Small and Medium Enterprises Act, 2006
14.2.1 Classification of Micro, Small and Medium Enterprises
14.2.2 Advisory Committee
14.2.3 Memorandum of Micro, Small and Medium Enterprises
14.2.4 Measures for Promotion, Development and Enhancement of Competitiveness of MSME
14.2.5 Establishment of Micro and Small Enterprises Facilitation Council
14.3 Reservation Policy, Credit Policy, Government Policy towards
Taxation and Incentives
14.3.1 Reservation Policy
14.3.2 Credit Policy
14.3.3 Taxation
14.3.4 Government Incentives
14.5 Summary
14.6 Key Terms
Introduction
INTRODUCTION
The term ‘Mercantile Law’ may be defined as that branch of law which comprises
NOTES laws concerning trade, industry and commerce. It is an ever growing branch of
law with the changing circumstances of trade and commerce. With the increasing
complexities of the modern business world, the scope of business regulations has
enormously widened. It is generally understood to include the regulations relating
to contracts, sale of goods, partnership, companies, negotiable instruments,
insurance, insolvency, carriage of goods, and arbitration. It is indispensable for the
people engaged in economic and commercial pursuits to acquaint themselves with
the general principles of the basic business regulations.
Prior to the enactment of the various Acts constituting business regulations,
business transactions were regulated by the personal laws of the parties to the suit.
The subject matter has been discussed in a simple and intelligible language,
maintaining clarity and cohesion throughout the book, so that even a student without
any background of law will be able to understand the otherwise difficult provisions
of the various legislations covered. The book unfolds the intricate points of law in
a lucid manner and seeks to answer tricky questions which might intrigue the mind
of a curious reader.
This book, Mercantile Law is divided into fourteen units that follow the
self-instruction mode with each unit beginning with an Introduction to the unit,
followed by an outline of the Objectives. The detailed content is then presented in
a simple but structured manner interspersed with Check Your Progress Questions
to test the student’s understanding of the topic. A Summary along with a list of Key
Words and a set of Self Assessment Questions and Exercises is also provided at
the end of each unit for recapitulation.
Self-Instructional
12 Material
Introduction to
BLOCK - I Busines Law
INTRODUCTION, INDIAN CONTRACT ACT,

SALE OF GOODS ACT
NOTES
UNIT 1 INTRODUCTION TO
BUSINESS LAW
Structure
1.0 Introduction
1.1 Objectives
1.2 Busines Law: An Overview
1.4 Summary
1.5 Key Words
1.0 INTRODUCTION
In this unit, you will learn about ‘law’. You will be introduced to the definitions of
law, as well as the sources of mercantile or business law and its scope and
interpretation. You will learn that business law is an ever-growing branch of law in
the ever-changing world of trade and commerce. In addition, you will also learn
about the principles of natural justice and the economic principles enshrined in the
Indian Constitution.
1.1 OBJECTIVES
After going through this unit, you will be able to:

 Understand the meaning of law
 Enumerate the definition and scope of mercantile or business law
 Analyse the sources of business law
 Understand the interpretation of business law
 Enumerate the harmonious construction of various Acts
Self-Instructional
Material 1
Introduction to
Busines Law 1.2 BUSINES LAW: AN OVERVIEW
According to the Oxford English Dictionary, the word ‘law’ means ‘rule made by
NOTES an authority for the proper regulation of a community or society or for correct
conduct in life.’ In the words of Woodrow Wilson, ‘Law is that portion of the
established habit and thought of mankind which has gained distinct and formal
recognition in the shape of uniform rules backed by the authority and power of the
Government.’ Broadly speaking, the term ‘law’ denotes rules and principles either
enforced by an authority or self-imposed by the members of a society to control
and regulate people’s behaviour with a view to securing justice, peaceful living
and social security.
The term ‘mercantile law’ may be defined as that branch of law which comprises
laws concerning trade, industry and commerce. It is an ever growing branch of
law with the changing circumstances of trade and commerce.
With the increasing complexities of the modern business world, the scope
of mercantile law has enormously widened. It is generally understood to include
the laws relating to contracts, sale of goods, partnership, companies, negotiable
instruments, insurance, insolvency, carriage of goods, and arbitration.
The main sources of Indian mercantile law are as follows:
1. English Mercantile Law: The English mercantile law constitutes the
foundation on which the super-structure of the Indian mercantile law has
been built. Even now, despite the enactment of various statutes relating to
matters falling within the purview of the mercantile law, our courts generally
take recourse to the English Law where some principles are not expressly
dealt within an Act, or where there is ambiguity.
2. The Statute Law: When a Bill is passed by the Parliament and signed by
the President, it becomes an ‘Act’ or a ‘statute’. The bulk of Indian mercantile
law is statute law. The Indian Contract Act, 1872: The Negotiable Instruments
Act, 1881; The Sale of Goods Act, 1930; The Indian Partnership, Act,
1932; The Companies Act, 1956 are instances of the statute law.
3. Judicial decisions or Case Law: Judicial decisions are usually referred
to as precedents and are binding on all courts having jurisdiction lower to
that of the court which gave the judgement. They are also generally followed
even by those of equal jurisdiction in deciding similar points of law. Whenever
an Act is silent on a point or there is ambiguity, the judge has to decide the
case according to the principles of justice, equity and good conscience.
Self-Instructional
2 Material
4. Customs and usages: Custom or usage of a particular trade also guides the Introduction to
Busines Law
courts in deciding disputes arising out of mercantile transactions, but such a
custom or usage must be widely known, certain and reasonable, and must not
be opposed to any legislative enactment. But where a statute specifically
provides that the rules of law contained therein are subject to any well NOTES
recognized custom or usage of trade, the latter may over-ride the statute law.
The Indian Contract Act, 1872; The Negotiable Instruments Act, 1881; The Sale of
Goods Act, 1930; The Indian Partnership Act, 1932 and The Companies Act, 1956
are instances of Statute Law in the field of ‘business law’. These Acts may be
interpreted according to the intention of the legislature. The reality, however, is that in
certain cases courts and lawyers are busy in unfolding the meaning of ambiguous
words and expressions and resolving inconsistencies. In such cases of doubt assistance
is sought from foreign decisions, mostly English, because many Indian Acts are
modelled on English Acts. Judicial decisions are usually referred to as precedents
and are generally followed by the courts. If no precedents are found anywhere, the
Courts will use their own judgement, perhaps on the basis of ‘equity, justice and
good conscience’ or upon the basis of ‘customs and traditions of the people’.
In the interpretation of an Act, the rule of harmonious construction should be
followed. An Act must be read as a whole and any one provision of the Act should
be construed with reference to other provisions in the same Act so as to make a
consistent enactment of the whole statute. The provisions of one section of an Act
cannot be used to defeat those of another; therefore Sections and Sub-sections of
an Act must be read as part of an integral whole and as being interdependent.
Check Your Progress

1. What do you mean by mercantile or business law?
2. List the main sources of Indian mercantile law.
1.3 ANSWERS TO CHECK YOUR PROGRESS

QUESTIONS
1. The term ‘mercantile law’ may be defined as that branch of law which
comprises laws concerning trade, industry and commerce. It is an ever
growing branch of law with the changing circumstances of trade and
commerce. With the increasing complexities of the modern business world,
the scope of mercantile law has enormously widened
2. The main sources of Indian mercantile law are as follows:
(i) English Mercantile Law: The English mercantile law constitutes the
foundation on which the super-structure of the Indian mercantile law
has been built. Self-Instructional
Material 3
Introduction to (ii) The Statute Law: When a Bill is passed by the Parliament and signed
Busines Law
by the President, it becomes an ‘Act’ or a ‘statute’. The bulk of Indian
mercantile law is statute law.
(iii) Judicial decisions or Case Law: Judicial decisions are usually referred
NOTES
to as precedents and are binding on all courts having jurisdiction lower
to that of the court which gave the judgement.
(iv) Customs and usages: Custom or usage of a particular trade also guides
the courts in deciding disputes arising out of mercantile transactions,
but such a custom or usage must be widely known, certain and
reasonable, and must not be opposed to any legislative enactment.
1.4 SUMMARY
 Broadly speaking, the term ‘law’ denotes rules and principles either enforced
by an authority or self-imposed by the members of a society to control and
regulate people’s behaviour with a view to securing justice, peaceful living
and social security.
 The term ‘mercantile law’ may be defined as that branch of law which
comprises laws concerning trade, industry and commerce. It is an ever
growing branch of law with the changing circumstances of trade and
commerce.
 The English mercantile law constitutes the foundation on which the super-
structure of the Indian mercantile law has been built.
 When a Bill is passed by the Parliament and signed by the President, it becomes
an ‘Act’ or a ‘statute’. The bulk of Indian mercantile law is statute law.
 Custom or usage of a particular trade also guides the courts in deciding
disputes arising out of mercantile transactions, but such a custom or usage
must be widely known, certain and reasonable, and must not be opposed
to any legislative enactment.
 The Indian Contract Act, 1872; The Negotiable Instruments Act, 1881;
The Sale of Goods Act, 1930; The Indian Partnership Act, 1932 and The
Companies Act, 1956 are instances of Statute Law in the field of ‘business
law’.
 Judicial decisions are usually referred to as precedents and are generally
followed by the courts. If no precedents are found anywhere, the Courts
will use their own judgement, perhaps on the basis of ‘equity, justice and
good conscience’ or upon the basis of ‘customs and traditions of the people’.
 The provisions of one section of an Act cannot be used to defeat those of
another; therefore Sections and Sub-sections of an Act must be read as
part of an integral whole and as being interdependent.
Self-Instructional
4 Material
Introduction to
1.5 KEY WORDS Busines Law
 The Indian Contract Act, 1872: It prescribes the law relating to contracts
in India. The Act was passed by British India and is based on the principles NOTES
of English Common Law.
 The Companies Act, 1956: It is an Act enacted in 1956 relating to
companies and certain other associations.
1.6 SELF ASSESSMENT QUESTIONS AND

EXERCISES
Short-Answer Questions
1. Write a short note on the term ‘law’.
2. Write a brief about the scope of mercantile law.
3. Write a short note on the statute law
4. Write in brief about interpretation of business law in India.
Long-Answer Questions
1. “Business law is an ever growing branch of law.” Justify this statement.
2. Discuss the main sources of business law.
3. Analyse the contribution of the English Acts in India’s business law.
1.7 FURTHER READINGS
Kuchhal, M.C. and Vivek Kuchhal. 2013. Business Law, sixth edition. Delhi:
Vikas Publishing House.
Kuchhal, M.C. and Vivek Kuchhal. 2012. Mercantile Law, eighth edition. Delhi:
Kuchhal, M.C. and Deepa Prakash. 2010. Business Legislations for
Management, second edition. Delhi: Vikas Publishing House.
Dransfield, Robert. 2003. Business Law Made Easy. Oxford: Nelson Thornes
(Part of Oxford University Press).
Pillai, R. S.N. and V. Bhagavathy. 2009. Business Law. New Delhi: Sultan Chand
Co & Ltd.
Kapoor, N.D. 2008. Elements of Mercantile Law. New Delhi: Sultan Chand
Co & Ltd.
Bansal, C.C. 2007. Business and Corporate Law. New Delhi: Excel Books.
Self-Instructional
Material 5
Indian Contract
Act, 1872
UNIT 2 INDIAN CONTRACT
ACT, 1872
NOTES
Structure
2.0 Introduction
2.1 Objectives
2.2 Definition and Meaning of Contract
2.3 Essential Features of A Contract
2.4 Types of Contract
2.5 Capacity of Parties
2.5.1 Minor
2.5.2 Minor’s Agreements
2.5.4 Disqualified Persons
2.5.5 Free Consent
2.5.6 Coercion
2.5.10 Fraud
2.5.11 Mistake
2.6 Discharge of Contracts
2.7 Breach of Contract
2.9 Summary
2.10 Key Words
2.0 INTRODUCTION
The law of contract is the foundation upon which the superstructure of modern
business is built. This unit will introduce you to the Indian Contract Act, 1872. You
will learn about contract, its definition, kinds and characteristics. As you progress,
you will learn about valid factors that contribute to make a party competent. An
essential element of a contract is that the parties must be competent to enter into a
contract.
2.1 OBJECTIVES

 Understand contract, know its essential features, and identify its types
 Learn about offers and acceptance
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 Understand the meaning and essentials of consideration Indian Contract
Act, 1872
 Analyse competence of parties
 Understand the meaning of breach of contract
NOTES
2.2 DEFINITION AND MEANING OF CONTRACT
The law of contract in India is contained in the Indian Contract Act, 1872. It
extends to the whole of India except the state of Jammu and Kashmir and came
into force on 1 September 1872. The Act is not exhaustive. It does not deal with
all the branches of the law of contract. There are separate Acts that deal with
contracts relating to negotiable instruments, transfer of property, sale of goods,
partnership, insurance, etc. Again, the Act does not affect any usage or custom of
trade (Sec. 1). A minor amendment in Section 28 of the Act was made by the
Indian Contract (Amendment) Act, 1996.
According to Section 2 (h) of the Indian Contract Act: ‘An agreement
enforceable by law is a contract.’A contract, therefore, is an agreement the object
of which is to create a legal obligation, i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially consists of two
elements: (1) An agreement, and (2) Legal obligation, i.e., a duty enforceable by
law. We shall now examine these elements in detail. These are as follows:
1. Agreement: As per Section 2(e), ‘Every promise and every set of
promises, forming the consideration for each other, is an agreement.’
Thus it is clear from this definition that a ‘promise’ is an agreement.
What is a ‘promise’? The answer to this question is contained in Section
2(b) which defines the term: ‘When the person to whom the proposal
is made signifies his assent thereto, the proposal is said to be accepted.
A proposal, when accepted, becomes a promise.’ An agreement,
therefore, comes into existence only when one party makes a proposal
or offer to the other party and that other party signifies his assent (i.e.,
gives his acceptance) thereto. In short, an agreement is the sum total
of ‘offer’ and ‘acceptance’.
2. Legal obligation: As stated above, an agreement to become a
contract must give rise to a legal obligation, i.e., a duty enforceable by
law. If an agreement is incapable of creating a duty enforceable by
law, it is not a contract. Thus an agreement is a wider term than a
contract. ‘All contracts are agreements but all agreements are not
contracts.’Agreements of moral, religious or social nature, such as a
promise to lunch together at a friend’s house or to take a walk together
are not contracts because they are not likely to create a duty
enforceable by law for the simple reason that the parties never intended
that they should be attended by legal consequences.
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Indian Contract In business agreements, the presumption is usually that the parties intend to
Act, 1872
create legal relations. Thus, an agreement to buy certain specific goods at an agreed
price e.g., 100 bags of wheat at 430 per bag is a contract because it gives rise
to a duty enforceable by law, and in case of default on the part of either party, an
NOTES action for breach of contract could be enforced through a court provided other
essential elements of a valid contract as laid down in Section 10 are present,
namely, if the contract was made by free consent of the parties competent to
contract, for a lawful consideration and with a lawful object.
Thus, it may be concluded that the act restricts the use of the word ‘contract’
to only those agreements that give rise to legal obligations between the parties.
2.3 ESSENTIAL FEATURES OF A CONTRACT
A contract has been defined in Section 2(h) as ‘an agreement enforceable by

law’. To be enforceable by law, an agreement must possess the essential elements
of a valid contract as contained in Sections 10, 29 and 56. According to Section
10, all agreements are contracts if they are made by the free consent of the parties
competent to contract, for a lawful consideration, with a lawful object, are not
expressly declared by the Act to be void, and, where necessary, satisfy the
requirements of any law as to writing or attestation or registration. We now will
discuss the essential features of a contract in brief here.
The essential elements of a valid contract are as follows:
1. Offer and acceptance: There must be a ‘lawful offer’ and a ‘lawful
acceptance’ of the offer, thus resulting in an agreement. The adjective ‘lawful’
implies that the offer and acceptance must satisfy the requirements of the
Contract Act in relation thereto.
2. Intention to create legal relations: There must be an intention among
the parties that the agreement should be attached by legal consequences
and create legal obligations. Agreements of a social or domestic nature do
not contemplate legal relations, and as such they do not give rise to a contract.
An agreement to dine at a friend’s house is not an agreement intended to
create legal relations and therefore is not a contract. Agreements between
husband and wife also lack the intention to create legal relationship and thus
do not result in contracts.
These can be shown by the following illustrations. These are:
(a) M promised his wife N to get her a saree if she would sing a song. N
sang the song but M did not bring the saree for her. N could not bring
an action in a Court to enforce the agreement as it lacked the intention
to create legal relations.
(b) The defendant was a civil servant stationed in Sri Lanka. He and his
wife were enjoying leave in England. When the defendant was due to
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return to Sri Lanka, his wife could not accompany him because of her
8 Material
health. The defendant agreed to send her £30 a month as maintenance Indian Contract
Act, 1872
expenses during the time they were forced to live apart. She sued for
breach of this agreement. Her action was dismissed on the ground
that no legal relations had been contemplated, and therefore there
was no contract. (Balfour vs Balfour) NOTES
3. Lawful consideration: The third essential element of a valid contract is the
presence of ‘consideration’. Consideration has been defined as the price
paid by one party for the promise of the other. An agreement is legally
enforceable only when each of the parties to it gives something and gets
something. The something given or obtained is the price for the promise and
is called ‘consideration’. Subject to certain exceptions, gratuitous promises
are not enforceable at law.
The ‘consideration’ may be an act (doing something) or forbearance (not
doing something) or a promise to do or not to do something. It may be past,
present or future.
4. Capacity of parties: The parties to an agreement must be competent to
contract, otherwise it cannot be enforced by a court of law. In order to be
competent to contract the parties must be of the age of majority and of
sound mind and must not be disqualified from contracting by any law to
which they are subject (Sec. 11).
5. Free consent: Free consent of all the parties to an agreement is another
essential element of a valid contract. ‘Consent’ means that the parties must
have agreed upon the same thing in the same sense (Sec. 13). There is
absence of ‘free consent’ if the agreement is induced by: (i) coercion, (ii)
undue influence, (iii) fraud, (iv) misrepresentation, or (v) mistake (Sec. 14).
6. Lawful object: For the formation of a valid contract, it is also necessary
that the parties to an agreement must agree for a lawful object. The object
for which the agreement has been entered into must not be fraudulent or
illegal or immoral or opposed to public policy or must not imply injury to the
person or property of another (Sec. 23). If the object is unlawful for one or
the other of the reasons mentioned above the agreement is void. Thus,
when a landlord knowingly lets a house to a prostitute to carry on prostitution,
he cannot recover the rent through a court of law.
7. Writing and registration: According to the Indian Contract Act, a contract
may be oral or in writing. But in certain special cases it lays down that the
agreement, to be valid, must be in writing or/and registered. For example, it
requires that an agreement to pay a time barred debt must be in writing and
an agreement to make an out of natural love and affection must be in writing
and registered (Sec. 25). Similarly, certain other Acts also require writing
or/and registration to make the agreement enforceable by law which must
be observed. Thus, (i) an arbitration agreement must be in writing as per the
Arbitration and Conciliation Act, 1996; (ii) an agreement for a sale of
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Material 9
Indian Contract immovable property must be in writing and registered under the Transfer of
Act, 1872
Property Act, 1882, before they can be legally enforced.
8. Certainty: Section 29 of the Contract Act provides that ‘Agreements, the
meaning of which is not certain or capable of being made certain, are void’.
NOTES
In order to give rise to a valid contract, the terms of the agreement must not
be vague or uncertain. It must be possible to ascertain the meaning of the
agreement, for otherwise, it cannot be enforced.
Illustration: A agrees to sell B ‘a hundred tons of oil’. There is nothing
whatever to show what kind of oil was intended. The agreement is void for
uncertainty.
9. Possibility of performance: Yet another essential feature of a valid contract
is that it must be capable of performance. Section 56 lays down that ‘An
agreement to do an act impossible in itself is void’. If the act is impossible in
itself, physically or legally, the agreement cannot be enforced at law.
Illustration. A agrees with B to discover treasure by magic. The agreement
is not enforceable.
10. Not expressly declared void: The agreement must not have been expressly
declared to be void under the Act. Sections 24–30 specify certain types of
agreements which have been expressly declared to be void. For example,
an agreement in restraint of marriage, an agreement in restraint of trade,
and an agreement by way of wager have been expressly declared void
under Sections 26, 27 and 30 respectively.
Before dealing with the various essentials of a valid contract one by one in
detail, it will be appropriate to discuss the ‘kinds of contracts’, first, because we
shall be using the terms like ‘voidable contract’, ‘void contract’, ‘void agreement’,
etc., very often in the course of our discussion.
2.4 TYPES OF CONTRACT
A. Types of Contracts on the basis of Enforceability

On the basis of enforceability, a contract may be valid or voidable or void or
unenforceable or illegal.
1. Valid contract: A valid contract is an agreement enforceable by law. An
agreement becomes enforceable by law when all the essential elements of a
valid contract are present.
2. Voidable contract: According to Section 2(i), ‘an agreement which is
enforceable by law at the option of one or more of the parties thereto, but
not at the option of the other or others, is a voidable contract’. Thus, a
voidable contract is one which is enforceable by law at the option of one of
the parties. Until it is avoided or rescinded by the party entitled to do so by
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10 Material
3. Void contract: Literally the word ‘void’ means ‘not binding in law’. Indian Contract
Act, 1872
Accordingly the term ‘void contract’ implies a useless contract which has
no legal effect at all. Such a contract is a nullity, as there has been no contract
at all. Section 2(j) defines: ‘A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable.’ It follows from the NOTES
definition that a void contract is not void from its inception and that it is valid
and binding on the parties when originally entered into but subsequently it
becomes invalid and destitute of legal effect because of certain reasons.
4. Unenforceable contract: An unenforceable contract is one which is valid
in itself, but is not capable of being enforced in a court of law because of
some technical defect such as absence of writing, registration, requisite stamp,
etc., or time barred by the law of limitation. For example, an oral arbitration
agreement is unenforceable because the law requires an arbitration agreement
to be in writing.
5. Illegal or unlawful contract: The word ‘illegal’ means ‘contrary to law’
and the term ‘contract’ means ‘an agreement enforceable by law.’As such,
to speak of an ‘illegal contract’ involves a contradiction in terms, because it
means something like this—an agreement enforceable by law and contrary
to law. There is an apparent contradiction in terms. Moreover, being of
unlawful nature, such an agreement can never attain the status of a contract.
Thus, it will be proper if we use the term ‘illegal agreement’ in place of
‘illegal contract’. An illegal agreement is void ab-initio.
B. Types of Contracts on the basis of Mode of Creation
Contracts, on the basis of mode of creation, may be express or implied or
constructive.
1. Express contract: When both the offer and the acceptance constituting an
agreement are enforceable by law are made in words spoken or written, it
is an express contract. For example, when A tells B on telephone that he
offers to sell his car for ‘ 20,000 and B in reply informs A that he accepts
the offer, there is an express contract.
2. Implied contract: Where both the offer and acceptance constituting an
agreement enforceable by law are made other than in words, i.e., by acts
and conduct of the parties, it is an implied contract. Thus, where A, a coolie
in uniform, takes the luggage of B to be carried out of the railway station
without being asked by B, and B allows him to do so; then the law implies
that B agrees to pay for the services of A, and this is an implied contract.
3. Constructive or quasi-contract: The term ‘constructive or quasi-contract’
is a misnomer. The cases grouped under this type of contracts have little or
no affinity with a contract. Such a contract does not arise by virtue of any
agreement, express or implied, between the parties but the law infers or
recognizes a contract under certain special circumstances. For example,
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Indian Contract or liability of a person to whom money is paid by mistake to repay it cannot
Act, 1872
be said to arise out of a contract even in its remotest sense, as there is
neither offer and acceptance nor consent, but these are covered under quasi
contracts as per Sections 71 and 72. The Contract Act has rightly named
NOTES such contracts as ‘certain relations resembling those created by contract’.
A quasi-contract is based upon the equitable principle that a person shall
not be allowed to retain unjust benefit at the expense of another. Sections 68–72
of the Contract Act describe the cases which are to be deemed ‘quasi-contracts’.
C. Types of Contracts on the basis of the Extent of Execution

On the basis of the extent of execution a contract may be executed or executory.
1. Executed contract: A contract is said to be executed when both the parties
to a contract have completely performed their share of obligations and nothing
remains to be done by either party under the contract. For example, when
a bookseller sells a book on cash payment it is an executed contract because
both the parties have done what they were to do under the contract.
2. Executory contract. It is one in which both the obligations are outstanding,
one one either party to the contract, either wholly or in part, at the time of
the formation of the contract. In other words, a contract is said to be executory
when either both the parties to a contract have still to perform their share of
obligations in toto, or there remains something to be done under the contract
on both sides.
2.5 CAPACITY OF PARTIES
Section 11 lays down that ‘every person is competent to contract who is of the
age of majority according to the law to which he is subject, and who is of sound
mind, and is not disqualified from contracting by any law to which he is subject’.
Thus this Section declares that a person is incompetent to contract under the
following circumstances:
1. If he is a minor, according to the law to which he is subject,
2. If he is of unsound mind, and
3. If he is disqualified from contracting by any law to which he is subject.
2.5.1 Minor
According to Section 3 of the Indian Majority Act 1875, as amended by the
Majority (Amendment) Act, 1999, a person, domiciled in India, who is under 18
years of age is a minor. Accordingly every person who has completed the age of
18 years becomes a major.
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2.5.2 Minor’s Agreements Indian Contract
Act, 1872
The law regarding a minor’s agreements may be summed up as under:
1. An agreement by a minor is absolutely void and inoperative as
against him: The law acts as the guardian of minors and protects their NOTES
rights, because their mental faculties are not mature—they do not possess
the capacity to judge what is good and what is bad for them. Accordingly,
where a minor is charged with obligations and the other contracting party
seeks to enforce those obligations against minor, the agreement is deemed
as void ab-initio. In the leading case of Mohori Bibi vs Dharmo Das
Ghosh, a minor executed a mortgage for ` 20,000 and received ` 8,000
from the mortgagee. The mortgagee filed a suit for the recovery of his
mortgage money and for sale of the property in case of default. The Privy
Council held that an agreement by a minor was absolutely void as against
him, and therefore the mortgagee could not recover the mortgage money
nor could he have the minor’s property sold under his mortgage.
2. Beneficial agreements are valid contracts: As observed earlier, the
court protects the rights of minors. Accordingly, any agreement which is of
some benefit to the minor and under which he is required to bear no
obligation, is valid. In other words, a minor can be a beneficiary e.g., a
payee, an endorsee or a promisee under a contract. Thus, money advanced
by a minor can be recovered by him by a suit because he can take benefit
under a contract.
3. No ratification on attaining the age of majority: Ratification means the
subsequent adoption and acceptance of an act or agreement. A minor’s
agreement being a nullity and void ab-initio has no existence in the eye of
law. It cannot be ratified by the minor on attaining the age of majority, for,
an agreement void ab-initio cannot be made valid by subsequent ratification
(Mohendra vs Kailash).
4. The rule of estoppel does not apply to a minor: The rule of estoppel
does not apply to a minor, i.e., a minor is not estopped from pleading his
infancy in order to avoid a contract, even if he has entered into an agreement
by falsely representing that he was of full age (Sadiq Ali Khan vs Jai
Kishore).
Thus, if a minor obtains a loan by fraudulent representation and purchases a
motor car out of that, although the loan transaction is invalid, the court may
direct the minor to restore the motorcar to the lender. But once the identity of
the property or money has been lost because it has been spent wastefully, it is
no longer possible to invoke the aid of the ‘equitable doctrine of restitution’.
5. Minor’s liability for necessaries: The case of necessaries supplied to a
minor is governed by Section 68 of the Contract Act which provides that ‘if
a person, incapable of entering into a contract, or any one whom he is
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Indian Contract legally bound to support, is supplied by another person with necessaries
Act, 1872
suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person’.
6. Specific performance: Specific performance means the actual carrying
NOTES
out of the contract as agreed. Since an agreement by a minor is absolutely
void, the court will never direct ‘specific performance’ of such an agreement
by him. But a contract entered into, on behalf of a minor, by his guardian or
by the manager of his estate, is binding on the minor and can be specifically
enforced by or against the minor, provided: (a) the contract is within the
authority of the guardian or manager; and (b) it is for the benefit of the
minor.
7. Minor partner: A minor being incompetent to contract cannot be a partner
in a partnership firm, but under Section 30 of the Indian Partnership Act, he
can be admitted to the ‘benefits of partnership’ with the consent of all the
partners by an agreement executed through his lawful guardian with the
other partners. Such a minor will have a right to such share of the property
or profits of the firm as may be agreed upon and he would have access to
and inspect and copy any of the accounts of the firm.
8. Minor agent: A minor can be an agent (Sec. 184). He shall bind the principal
by his acts done in the course of such an agency, but he cannot be held
personally liable for negligence or breach of duty. Thus in appointing a minor
as an agent, the principal runs a great risk.
9. Minor and insolvency: A minor cannot be adjudicated an insolvent, for
he is incapable of contracting debts. Even for necessaries supplied to him,
he is not personally liable, only his property is liable (Sec. 68).
10. Contract by a minor and adult jointly: Where a minor and an adult
jointly enter into an agreement with another person, the minor has no liability
but the contract as a whole can be enforced against the adult (Jamna Bai
vs Vasanta Rao). In Sain Das vs Ram Chand, where there was a joint
purchase by two vendees, one of whom was a minor, it was held that the
vendor could enforce the contract against the major vendee.
11. Surety for a minor: Where in a contract of guarantee an adult stands
surety for a minor, the adult is liable under the contract, although the minor
is not (as for there is a direct contract between the surety and the third
party) (Kashiba vs Shripat). In fact, in such a case there cannot be a
contract of guarantee in the true sense.
12. Position of a minor’s parents: The parents of a minor are not liable for
agreements made by a minor, whether the agreement is for the purchase of
necessaries or not. The parents can be held liable only when the child is
contracting as an agent for the parents.
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13. Minor shareholder: A minor, being incompetent to contract, cannot be a Indian Contract
Act, 1872
shareholder of a company. A company can also refuse to register transfer
or transmission of shares in favour of a minor unless the shares are fully
paid. It follows from it that a minor, acting through his lawful guardian, may
become a shareholder of the company in case of transfer or transmission of NOTES
fully paid shares to him. Logically also, if a minor could legally hold property
in his name, it would be wrong to debar him from holding fully paid up
shares in his own name.
14. Minor’s liability in tort: A ‘tort’ is a civil wrong (not having its genesis in
contractual or equitable relationship) for which the ordinary remedy is
damages. A minor is liable for his tort, unless the tort is in reality a breach of
contract. Thus, where a minor hired a horse for riding and injured it by
over-riding, he was not held liable (Jennings vs Rundall).
As stated earlier, as per Section 11 of the Contract Act, for a valid contract it is
necessary that each party to it must be of ‘sound mind’.
What is a ‘sound mind’? Section 12 of the Contract Act defines the term
‘sound mind’ as follows: ‘A person is said to be of sound mind for the purpose of
making a contract, if, at the time when he makes it, he is capable of understanding
it and of forming a rational judgment as to its effects upon his interests.’
According to this Section, therefore, the person entering into the contract
must be a person who understands what he is doing and is able to form a rational
judgment as to whether what he is about to do is to his interest or not. The Section
further states that:
(i) ‘A person who is usually of unsound mind, but occasionally, of sound
mind, may make a contract when he is of sound mind.’ Thus a patient
in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals.
(ii) ‘A person who is usually of sound mind, but occasionally of unsound
mind, may not make a contract when he is of unsound mind.’ Thus, a
sane man, who is delirious from fever, or who is so drunk that he
cannot understand the terms of a contract, or form a rational judgment
as to its effect on his interest, cannot enter a contract in such a state.
Effects of agreements made by persons of unsound mind: An agreement
entered into by a person of unsound mind is treated on the same footing as that of
minor’s, and therefore an agreement by a person of unsound mind is absolutely
void and inoperative as, against him but he can derive benefit under it (Jugal
Kishore vs Cheddu). The property of a person of unsound mind is, however,
always liable for necessaries supplied to him or to any one whom he is legally
bound to support, under Section 68 of the Act.
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Indian Contract 2.5.4 Disqualified Persons
Act, 1872
The third type of incompetent persons, as per Section 11, are those who are
‘disqualified from contracting by any law to which they are subject’. Those are:
NOTES (a) Alien enemies: An alien (citizen of a foreign country) living in India can
enter into contracts with citizens of India during peace time only, and that
too subject to any restrictions imposed by the Government in that respect.
On the declaration of a war between his country and India, he becomes an
alien enemy and cannot enter into contracts. ‘Alien friend can contract but
an alien enemy can’t contract’. Contracts entered into before the declaration
of the war stand suspended and cannot be performed during the course of
war; of course, they can be revived after the war is over provided they have
not already become time-barred.
(b) Foreign sovereigns and ambassadors: One has to be cautious while
entering into contracts with foreign sovereigns and ambassadors, because
though they can sue others to enforce the contracts entered upon with them,
they cannot be sued without obtaining the prior sanction of the Central
Government. Thus they are in a privileged position and are ordinarily
considered incompetent to contract.
(c) Convict: A convict is one who is found guilty and is imprisoned. During the
period of imprisonment, a convict is incompetent (a) to enter into contracts,
and (b) to sue on contracts made before conviction. On the expiry of the
sentence, he is at liberty to institute a suit and the Law of Limitation is held
in abeyance during the period of his sentence.
(d) Married women: Married women are competent to enter into contracts
with respect to their separate properties (Stridhan) provided they are major
and are of sound mind. They cannot enter into contracts with respect to
their husbands’ properties. A married woman can, however, act as an agent
of her husband and bind her husband’s property for necessaries supplied to
her, if he fails to provide her with these.
(e) Insolvent: An adjudged insolvent (before an ‘order of discharge’) is
competent to enter into certain types of contracts, i.e., he can incur debts,
purchase property or be an employee but he cannot sell his property which
vests in the Official Receiver. Before ‘discharge’ he also suffers from certain
disqualifications, e.g., he cannot be a magistrate or a director of a company
or a member of local body, but he has the contractual capacity except with
respect to his property. After the ‘order of discharge,’ he is just like an
ordinary citizen.
(f) Joint-stock company and corporation incorporated under a special
Act: A company/corporation is an artificial person created by law. It cannot
enter into contracts outside the powers conferred upon it by its Memorandum
of Association or by the provisions of its special Act, as the case may be.
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16 Material
Again, being an artificial person (and not a natural person) it cannot enter Indian Contract
Act, 1872
into contracts of a strictly personal nature, e.g., marriage.
2.5.5 Free Consent
According to Section 10, ‘free consent’ of all the parties to an agreement is one of NOTES
the essential elements of a valid contract.
‘Consent’ defined: Section 13 of the Contract Act defines the term
‘consent’ and lays down that ‘two or more persons are said to consent when they
agree upon the same thing in the same sense’. Thus, consent involves identity of
minds or consensus ad-idem i.e., agreeing upon the same thing in the same sense.
If, for whatever reason, there is no consensus ad-idem among the contracting
parties, there is no real consent and hence no valid contract.
‘Free Consent’ defined: Section 14 lays down that ‘Consent is said to be
free’ when it is not caused by —
1. Coercion, as defined in Section 15, or
2. Undue influence, as defined in Section 16, or
3. Misrepresentation, as defined in Section 18, or
4. Fraud, as defined in Section 17, or
5. Mistake, subject to the provisions of Sections, 20, 21 and 22.’
When consent to an agreement is caused by coercion, undue influence,
misrepresentation or fraud, there is ‘no free consent’ and the contract is voidable
at the option of the party whose consent was so caused (Sections 19 and 19A).
But when consent is caused by ‘bilateral mistake’ as to a matter of fact essential to
the agreement, the agreement is void (Sec. 20). In such a case there is ‘no consent’
at all.
2.5.6 Coercion
Section 15 of the Contract Act defines ‘coercion’ as follows: ‘Coercion is the
committing or threatening to commit, any act forbidden by the Indian Penal Code,
or the unlawful detaining or threatening to detain, any property, to the prejudice of
any person whatever, with the intention of causing any person to enter into an
agreement.’
A. Threat to commit suicide: Neither ‘suicide’ nor ‘threat to commit
suicide’ is punishable under the Indian Penal Code; only ‘an attempt to
commit suicide’ is punishable under it. In Chikkam Ammiraju vs Chikkam
Seshamma, there arose a question as to whether ‘a threat to commit
suicide’ amounts to coercion, and their Lordships of the Madras High Court
answered the question in the affirmative holding that this amounts to coercion.
In that case a person, by a threat to commit suicide, induced his wife and
son to execute a release deed in favour of his brother in respect of certain
properties which they claimed as their own. The transaction was set aside
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Indian Contract on the grounds of coercion. It was stated by the majority of judges that
Act, 1872
though ‘a threat to commit suicide’ was not punishable under the Indian
Penal Code, it must be deemed to be forbidden by that Code, as ‘an
attempt to commit suicide’ was punishable under Section 309 of that Code.
NOTES Their Lordships observed: ‘The term ‘any act forbidden by the Indian Penal
Code’ is wider than the term ‘punishable by the Indian Penal Code.’ Simply
because a man escapes punishment, it does not follow that the act is not
forbidden by the Penal code. For example, a lunatic or a minor may not be
punished. This does not show that their criminal acts are not forbidden by
the Penal Code.’
B. Effect of Coercion: A contract brought about by coercion is voidable at
the option of the party whose consent was so caused (Sec. 19). This means
that the aggrieved party may either exercise the option to affirm the transaction
and hold the other party bound by it, or repudiate the transaction by exercising
a right of rescission. As per Section 64, if the aggrieved party opts to rescind
a voidable contract, he must restore any benefit received by him under the
contract to the other party from whom received.
The burden of proof that coercion was used lies on the party who wants to
set aside the contract on the plea of coercion.
A. Definition of undue influence

Section 16(1) defines the term ‘undue influence’ as follows:
‘A contract is said to be induced by undue influence where, (i) the relations
subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other, and (ii) he uses the position to obtain an unfair
advantage over the other.’
The phrase ‘in a position to dominate the will of the other’ is clarified by the
same Section under subsection (2), thus:
Section 16(2). A person is deemed to be in a position to dominate the will
of another—
(a) Where he holds a real or apparent authority over the other, e.g., the
relationship between master and the servant, police officer and the
accused; or
(b) Where he stands in a fiduciary relation to the other. Fiduciary relation
means a relation of mutual trust and confidence. Such a relationship is
supposed to exist in the following cases: father and son, guardian and
ward, solicitor and client, doctor and patient, Guru (spiritual adviser)
and disciple, trustee and beneficiary, etc.; or
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18 Material
(c) Where he makes a contract with a person whose mental capacity is Indian Contract
Act, 1872
temporarily or permanently affected by reason of age, illness, or mental
or bodily distress, e.g., old illiterate persons.
It is to be observed that for proving the use of undue-influence, both the
NOTES
elements mentioned above, namely, (i) the other party was in a position to dominate
his will, and (ii) the transaction was an unfair one, must be established.
B. Presumption of Undue Influence
Undue influence is presumed to exist under the circumstances mentioned above in
sub-clauses (a), (b) and (c). In other words, for example, where the relationship
between the contracting parties is that of master and servant, father and son,
doctor and patient, solicitor and client, etc., or where one of the parties to the
contract is an old illiterate person, there is no need of proving the use of undue
influence by the party whose consent was so caused. Merely status of parties is
enough to prove the existence of undue influence in these cases. Presumption of
undue influence is also there, in case of a contract by or with a ‘pardanashin
woman’.
C. Effect of Undue Influence
‘When consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the party whose consent was so caused. Any
such contract may be set aside either absolutely or, if the party who was entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as
the court may seem just’ (Sec. 19-A).
Both coercion and undue influence vitiate consent and make the consent of one of
the parties to the contract unfree. But the following are the points of distinction
between the two:
1. In coercion, the consent of the aggrieved party is obtained by committing
or threatening to commit an act forbidden by the Indian Penal Code or
detaining or threatening to detain some property unlawfully. While in undue
influence, the consent of the aggrieved party is affected from the domination
of the will of one person over another.
2. Coercion is mainly of a physical character involving mostly use of physical
or violent force, whereas undue influence is of moral character involving use
of moral force or mental pressure.
3. There is no presumption of coercion by law under any circumstance. The
burden of proof that coercion was used lies on the party whose consent
was so caused. In the case of undue-influence, however, there is presumption
as to the same in the case of certain relationships. In these cases, there is no
need of proving the use of undue-influence by the party whose consent was
so caused. Self-Instructional
Material 19
Indian Contract 4. While in the case of rescission of a contract procured by coercion, any
Act, 1872
benefit received by the aggrieved party has to be restored under Section
64 of the Contract Act; in the case of rescission of a contract procured by
undue influence, as per Section 19-A, the Court has the discretion to direct
NOTES the aggrieved party for restoring the benefit whether in whole or in part or
set aside the contract without any direction for refund of benefit.
5. The party exercising coercion exposes himself to criminal liability under the
Indian Penal Code, besides an action on contract. There is no criminal
liability in case of undue influence.
A representation means a statement of fact made by one party to the other, either
before or at the time of contract, relating to some matter essential to the formation
of the contract, with an intention to induce the other party to enter into the contract.
It may be expressed by words spoken or written or implied from the acts or
conducts of the parties (e.g., by any half statement of truth).
A representation when wrongly made, either innocently or intentionally, is
termed a misrepresentation. To put it differently, misrepresentation may be either
innocent or intentional or deliberate with an intent to deceive the other party. In
law, for the former kind the term ‘misrepresentation’ and for the latter the term
‘fraud’ is used.
According to Section 18, ‘misrepresentation’ means and includes:
(a) The positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true;
or
(b) Any breach of duty which, without an intent to deceive, gains an advantage
to the person committing it, or any one claiming under him, by misleading
another to his prejudice or to the prejudice of any one claiming under him;
or
(c) Causing, however innocently, a party to an agreement, to make a mistake
as to the substance of the thing which is the subject of the agreement.
Thus, as per Section 18, there is misrepresentation in the following three
cases:
(a) Positive assertion of unwarranted statements of material facts
believing them to be true: If a person makes an explicit statement of fact
not warranted by his information (i.e., without any reasonable ground), under
an honest belief as to its truth though it is not true, there is misrepresentation.
(b) Breach of duty which brings an advantage to the person committing
it by misleading the other to his prejudice: This clause covers those
cases where a statement when made, was true but subsequently before it
was acted upon, it became false to the knowledge of the person making it.
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20 Material
to disclose the change in circumstances to the other party, otherwise he will Indian Contract
Act, 1872
be guilty of misrepresentation.
(c) Causing mistake about subject-matter innocently: If one of the parties
induces the other, though innocently, to commit a mistake as to the quality
NOTES
or nature of the thing bargained, there is misrepresentation.
A. Essentials of misrepresentation
From the foregoing discussion, it follows that for alleging misrepresentation, the
following four things are necessary:
(i) There should be a representation, made innocently, with an honest belief as
to its truth and without any desire to deceive the other party, either expressly
or impliedly.
(ii) The representation must relate to facts material to the contract and not to
mere opinion or hearsay.
(iii) The representation must be, or must have become untrue.
(iv) The representation must have been instrumental in inducing the other party
to enter into a contract (As per the Explanation to Section 19).
B. Effects of Misrepresentation
In case of misrepresentation, the aggrieved party has two alternative courses open
to him— (i) he can rescind the contract, treating the contract as voidable; or (ii)
he may affirm the contract and insist that he shall be put in the position in which he
would have been if the representation made had been true (Sec. 19).
Misrepresentation does not entitle the aggrieved party to claim damages by way
of interest or otherwise for expenses incurred.
Illustration: A, in good faith tells B that his TV set is made in Japan. B, thereupon
buys the TV set. However, it turns out to be an Indian make. A is guilty of
misrepresentation. B may either avoid the contract or may insist on its being carried
out. In the latter case, B may either ask for replacing the set by a Japanese-made
set or may keep the Indian-made set and claim the difference in price between
that set and a Japanese-made set.
2.5.10 Fraud
The term ‘fraud’ includes all acts committed by a person with an intention to deceive
another person. According to Section 17, ‘fraud means and includes any of the
following acts committed by a party to a contract’, or with his connivance, or by
his agent, with intent to deceive or to induce another party thereto or his agent, to
enter into the contract:
1. The representation that a fact is true when it is not true by one who
does not believe it to be true: Thus a false statement intentionally made is
fraud. An absence of honest belief in the truth of the statement made is
essential to constitute fraud. Self-Instructional
Material 21
Indian Contract 2. The active concealment of a fact by a person who has knowledge or
Act, 1872
belief of the fact: Active concealment of a material fact is taken as much a
fraud as if the existence of such fact was expressly denied or the reverse of
it expressly stated. Mere non-disclosure is not fraud, where there is no duty
NOTES to disclose. Caveat Emptor or ‘Buyer Beware’ is the principle in all
contracts of sale of goods. As a rule the seller is not bound to disclose to the
buyer the faults in the goods he is selling.
Illustrations: (a) A, a horse dealer, sells a mare to B. A knows that the
mare has a cracked hoof which he fills up in such a way as to defy detection
or on enquiry from B, A affirms that the mare is sound. The defect is
subsequently discovered by B. There is ‘fraud’ on the part of A and the
agreement can be voided by B as his consent has been obtained by fraud.
(b) A, sells by auction, to B a horse, which he knows to be unsound. A says
nothing to B about the horse’s unsoundness. This is not ‘fraud’ because A is
under no duty to disclose the fact to B, the general rule of law being ‘let the
buyer beware’ [Illustration (a) to Section 17].
3. A promise made without any intention of executing it: If a man while
entering into a contract has no intention to execute his promise, there is
fraud on his part.
4. Any other act fitted to deceive: ‘The fertility of man’s invention in devising
new schemes of fraud is so great that it would be difficult, if not impossible,
to confine fraud within the limits of any exhaustive definition. All surprise,
trick, cunning, dissembling and other unfair way that is used to cheat anyone
is considered fraud and sub-section (4) is obviously intended to cover all
those cases of fraud which cannot appropriately be covered by the other
subsections.
5. Any such act or omission as the law specially declares to be
fraudulent: This subsection refers to the provisions in certain Acts which
make it obligatory to disclose relevant facts. Thus, for instance, under Section
55 of the Transfer of Property Act, the seller of immovable property is
bound to disclose to the buyer all material defects in the property (e.g., the
roof has a crack) or in the seller’s title (e.g., the property is mortgaged). An
omission to make such a disclosure amounts to fraud.
Thus, in order to allege fraud, the act complained of must be brought within
the scope of the acts enumerated above. A mere expression of opinion or
commendatory expression is not fraud. ‘The land is very fertile’ is simply a statement
of opinion or ‘our products are the best in the market’ is merely a commendatory
expression. Such statements do not ordinarily amount to fraud.
A. Can Silence be Fraudulent?
The explanation to Section 17 deals with cases as to when ‘silence is fraudulent’
or what is sometimes called ‘constructive fraud.’ The explanation declares that
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22 Material
‘mere silence as to facts likely to affect the willingness of a person to enter into a Indian Contract
Act, 1872
contract is not fraud, unless—
(i) The circumstances of the case are such that, regard being had to them, it is
the duty of the person keeping silence to speak, or
NOTES
(ii) Silence is, in itself, equivalent to speech.’ It therefore follows that —
1. As a rule, mere silence is not fraud because there is no duty cast by
law on a party to a contract to make a disclosure to the other party of
material facts within his knowledge.
2. Silence is fraudulent, if the circumstances of the case are such that ‘it
is the duty of the person keeping silence to speak’. In other words,
silence is fraudulent in contracts of ‘utmost good faith’ i.e., contracts
‘uberrimae fidei.’ For example, the following contracts come within
the class of ‘uberrimae fidei’ contracts:
(a) Contract of marriage engagement: Every material fact must
be disclosed by both parties to a contract of marriage otherwise
the other party is justified in breaking off the engagement (Haji
Ahmed vs Abdul Gani.)
(b) Share allotment contracts: Promoters and directors, who issue
the prospectus of a company to invite the public to subscribe for
shares and debentures, possess information which is not available
to the general public and as such they are required to disclose all
information regarding the company with strict and scrupulous
accuracy.
3. Silence is fraudulent where the circumstances are such that ‘silence is,
in itself, equivalent to speech’. Where, for example, B says to A — ‘If
you do not deny it, I shall assume that the horse is sound.’ A says
nothing. Hence A’s silence is equivalent to speech. If the horse is
unsound A’s silence is fraudulent.
B. Effect of Fraud
A party who has been induced to enter into a contract by fraud, has the following
remedies open to him. These are as follows:
1. He can rescind the contract, i.e., he can avoid the performance of the
contract; being voidable at his option (Sec. 19).
2. He can ask for restitution and insist that the contract shall be performed,
and that he shall be put in the position in which he would have been, if the
representation made had been true (Sec. 19).
3. The aggrieved party can also sue for damages, if any. Fraud is a ‘civil
wrong’ hence compensation is payable. For instance, if the party suffers
injury because of unsound horse, which was not disclosed despite enquiry,
compensation can be demanded. Similarly, where a man was fraudulently
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Material 23
Indian Contract induced to buy a house, he was allowed to recover the expense involved in
Act, 1872
moving into the house as damages (in addition to rescission of the contract)
[Doyle vs Olby (Ironmongers) Ltd.].
NOTES C. Distinction between Fraud and Misrepresentation

The following are the points of distinction between fraud and misrepresentation:
1. Fraud implies an intention to deceive, it is deliberate or wilful; whereas
misrepresentation is innocent without any intention to deceive.
2. Fraud is a civil wrong which entitles a party to claim damages in addition to
the right of rescinding the contract. Misrepresentation gives only the right to
avoid the contract and there can be no suit for damages.
3. In case of misrepresentation, the fact that the aggrieved party had the means
to discover the truth with ordinary diligence will prevent the party from
avoiding the contract. But in case of fraud, excepting fraud by silence, the
contract is voidable even though the party defrauded had the means of
discovering the truth with ordinary diligence.
2.5.11 Mistake
Mistake may be defined as an erroneous belief concerning something. It may be
of two kinds: Mistake of law, and Mistake of fact.
1. Mistake of Law
Mistake of law may be of two types:
(i) Mistake of law of the country or mistake of law: Everyone is deemed
to be conversant with the law of his country, and hence the maxim ‘ignorance
of law is no excuse’. Mistake of law, therefore, is no excuse and it does not
give right to the parties to void the contract. Stating the effect of mistake as
to law, Section 21 declares that ‘a contract is not voidable because it was
caused by a mistake as to any law in force in India’. Accordingly, no relief
can be granted on the ground of mistake of law of the country.
However, if one of the parties makes a ‘mistake of law’ through the
inducement, whether innocent or otherwise, of the other party, the contract
may be voided.
(ii) Mistake of foreign law: Mistake of foreign law stands on the same footing
as the ‘mistake of fact’. Here the agreement is void in case of ‘bilateral
mistake’ only, as explained under the subsequent heading.
2. Mistake of Fact
Mistake of fact may be of two types:
i. Bilateral mistake: Where the parties to an agreement misunderstood each
other and are at cross purposes, there is a bilateral mistake. Here, there is
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24 Material
no real correspondence of offer and acceptance, each party obviously Indian Contract
Act, 1872
understanding the contract in a different way. In fact in such cases, there is
no agreement at all, there being entire absence of consent. In case of
bilateral mistake of essential fact, the agreement is void ab-initio. Section
20 provides that ‘where both the parties to an agreement are under a mistake NOTES
as to a matter of fact essential to the agreement, the agreement is void’.
Thus for declaring an agreement void ab-into under this Section, the fact
must be essential to the agreement, i.e., the fact must be such which goes
to the very root of the agreement.
ii. Unilateral mistake: Where only one of the contracting parties is mistaken
as to a matter of fact, the mistake is a unilateral mistake. Regarding the
effect of unilateral mistake on the validity of a contract. Section 22 provides
that ‘a contract is not voidable merely because it was caused by one of the
parties to it being under a mistake as to a matter of fact’. Accordingly, in
case of unilateral mistake a contract remains valid unless the mistake is
caused by misrepresentation or fraud, in which case the contract is voidable
at the option of aggrieved party. On the basis of judicial decisions, however,
in certain exceptional cases even a unilateral mistake, whether caused by
fraud, misrepresentation, etc., or otherwise, may make an agreement void
ab-initio.
Check Your Progress

1. Define ‘contract’.
2. List some essential elements of a valid contract.
3. What are the types of contract on the basis of mode of creation?
2.6 DISCHARGE OF CONTRACTS
When the rights and obligations arising out of a contract are extinguished, the
contract is said to be discharged or terminated. A contract may be discharged in
any of the following ways:
1. By performance—actual or attempted.
2. By mutual consent or agreement.
3. By subsequent or supervening impossibility or illegality.
4. By lapse of time.
5. By operation of law.
6. By breach of contract.
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Material 25
Indian Contract 1. Discharge by Performance
Act, 1872
Performance of a contract is the principal and most usual mode of discharge of a
contract. Performance may be: (i) Actual performance; or (ii) Attempted
NOTES performance or Tender.
i. Actual performance. When each party to a contract fulfils his obligation
arising under the contract within the time and in the manner prescribed, it
amounts to actual performance of the contract and the contract comes to
an end or stands discharged. But if one party only performs his promise, he
alone is discharged. Such a party gets a right of action against the other
party who is guilty of breach.
ii. Attempted performance or tender. When the promisor offers to perform
his obligation under the contract, but is unable to do so because the promisee
does not accept the performance, it is called ‘attempted performance’ or
‘tender’. Thus ‘tender’ is not actual performance but is only an ‘offer to
perform’ the obligation under the contract. A valid tender of performance
is equivalent to performance.
A. Essentials of a valid tender
A valid tender or offer of performance must fulfil the following conditions:
(i) It must be unconditional. A conditional tender is no tender.
(ii) It must be made at proper time and place. A tender before or after the due
date or at a place other than agreed upon is not a valid tender.
(iii) It must be of the whole obligation contracted for and not only of the part.
Thus deciding of his own to pay in instalments and offering the first instalment
was held an invalid tender as it was not of the whole amount due (Behari
Lal vs Ram Gulam).
(iv) If the tender relates to delivery of goods, it must give a reasonable
opportunity to the promisee for inspection of goods so that he may be
sure that the goods tendered are of contract description.
(v) It must be made by a person who is in a position and is willing to perform
the promise. A tender by a minor or idiot is not a valid tender.
(vi) It must be made to the proper person, i.e., the promisee or his duly
authorized agent. Tender made to a stranger is invalid.
(vii) If there are several joint promisees, an offer to any one of them is a valid
tender. But the actual payment must be made to all joint promisees, and not
to any one of them, for a valid discharge of the contract, for, Section 45
provides that when a promise is made to two or more persons jointly, the
right to claim performance rests with all of them jointly.
(viii) In case of tender of money, exact amount should be tendered in the legal
tender money.
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26 Material
B. Effect of refusal to accept a valid tender Indian Contract
Act, 1872
The effect of refusal to accept a properly made ‘offer of performance’ is that the
contract is deemed to have been performed by the promisor, i.e., tenderer, and
the promisee can be sued for breach of contract. A valid tender, thus, discharges NOTES
the contract. (Section 38).
Exception. Tender of money, however, does not discharge the contract. The money
will have to be paid even after the refusal of tender, of course without interest from
the date of refusal. In case of a suit, cost of defence can also be recovered from
the plaintiff, if tender of money is proved (Jagat Tarini vs Naba Gopal).
2. Discharge by Mutual Consent or Agreement
Since a contract is created by means of an agreement, it may also be discharged
by another agreement between the same parties. Sections 62 and 63 deal with
this subject and provide for the following methods of discharging a contract by
mutual agreement:
i. Novation: ‘Novation occurs when a new contract is substituted for an
existing contract, either between the same parties or between different parties,
the consideration mutually being the discharge of the old contract. If parties
are not changed then the nature of the obligation (i.e., material terms of the
contract) must be altered substantially in the new substituted contract, for a
mere variation of some of the terms of a contract, while the parties remain
the same, is not ‘novation’ but ‘alteration’. When the parties to a contract
agree for ‘novation’, the original contract is discharged and need not be
performed.
The following points are also worth noting in connection with novation:
(a) Novation cannot be compulsory, it can only be with the mutual consent
of all the parties.
(b) The new contract must be valid and enforceable. If it suffers from any
legal flaw, e.g., want of proper stamp or registration etc., on account
of which it becomes unenforceable, then the original contract revives
(Mahabir Prasad vs Satyanarain).
ii. Alteration: Alteration of a contract means change in one or more of the
material terms of a contract. If a material alteration in a written contract is
done by mutual consent, the original contract is discharged by alteration
and the new contract in its altered form takes its place. A material alteration
is one which alters the legal effect of the contract, e.g., a change in the
amount of money to be paid or a change in the rate of interest. Immaterial
alteration, e.g., correcting a clerical error in figures or the spelling of a name,
has no effect on the validity of the contract and does not amount to alteration
in the technical sense.
It is relevant to state that a material alteration made in a written contract by
one party without the consent of the other, will, make the whole contract Self-Instructional
Material 27
Indian Contract void and no person can maintain an action upon it. It comes under ‘discharge
Act, 1872
of a contract by operation of law’ which will be discussed later.
The difference between ‘novation’ and ‘alteration’ may be noted. In case
of novation, there may be a change of parties also while in case of alteration
NOTES
parties remain, the same, only the terms of a contract are altered.
iii. Rescission: A contract may be discharged, before the date of performance,
by agreement between the parties to the effect that it shall no longer bind
them. Such an agreement amounts to ‘rescission’ or cancellation of the
contract, the consideration for mutual promises being the abandonment by
the respective parties of their rights under the contract. An agreement of
rescission releases the parties from their obligations arising out of the contract.
Such agreements are to be distinguished from ‘agreements in restraint of
legal proceedings’ which are void as per Section 28. Law cannot force the
parties to take a legal action for breach of contract and, therefore, if they
consent to treat non-performance or part performance of a contract
equivalent to full performance or discharge of the contract, it is perfectly
alright.
iv. Remission: Remission may be defined ‘as the acceptance of a lesser sum
than what was contracted for or a lesser fulfilment of the promise made’.
Section 63 deals with remission of performance and lays down that a
promisee may remit or give up wholly or in part, the performance of the
promise made to him, and a promise to do so is binding even though there
is no consideration for it. The Section further provides that an agreement to
extend the time for the performance of a promise also does not require
consideration to support it on the ground that it is a partial remission of
performance.
v. Waiver: Waiver means the deliberate abandonment or giving up of a right
which a party is entitled to under a contract, whereupon the other party to
the contract is released from his obligation. Strictly speaking, there is no
need of an agreement for a waiver but because we are discussing it as a
method of discharge under ‘mutual consent’, we presume that the other
party consents to it.
3. Discharge by Subsequent or Supervening Impossibility or Illegality
i. Impossibility at the time of contract: There is no question of discharge
of a contract which is entered into to perform something that is obviously
impossible, e.g., an agreement to discover treasure by magic, because, in
such a case there is no contract to terminate, it being an agreement void ab-
initio by virtue of Section 56, Para I, which provides: ‘an agreement to do
an act impossible in itself is void.’ Notice that this paragraph of the Section
speaks of something which is impossible inherently or by its very nature and
which may or may not be known to both the parties at the time when the
Self-Instructional contract is made.
28 Material
ii. Subsequent impossibility: In fact it is this case, where the impossibility Indian Contract
Act, 1872
supervenes after the contract has been made, which is material to our study
of discharge of contracts. In this connection, Section 56, Para 2, declares:
‘A contract to do an act which, after the contract is made, becomes
impossible, or, by reason of some event which the promisor could not prevent, NOTES
unlawful, becomes void when the act becomes impossible or unlawful’.
In order that the Section would apply the following conditions must be
fulfilled: (1) that the act should have become impossible; (2) that impossibility
should be by reason of some event which the promisor could not prevent;
and (3) that the impossibility should not be self-induced by the promisor or
due to his negligence. Further, the word ‘impossible’ should be construed
here in its practical sense and not only in a physical or literal sense.
Thus, under Section 56 (Para 2), where an event which could not reasonably
have been in the contemplation of the parties when the contract was made,
renders performance impossible or unlawful, the contract becomes void
and stands discharged. This is known as frustration of the contract brought
about by supervening impossibility. It is also known as the doctrine of
supervening impossibility. The rationale behind the doctrine is that if the
performance of a contract becomes impossible by reason of supervening
impossibility or illegality of the act agreed to be done, it is logical to absolve
the parties from further performance of it as they never did promise to
perform an impossibility.
iii. Cases where the doctrine of supervening impossibility applies. A
contract will be discharged on the ground of supervening impossibility in the
following cases:
1. Destruction of subject-matter: When the subject-matter of a
contract, subsequent to its formation, is destroyed, without the fault
of the promisor or promisee, the contract is discharged. Note that it is
so only when specific property or goods are destroyed which cannot
be regained.
2. Failure of ultimate purpose: Where the ultimate purpose for which
the contract was entered into fails, the contract is discharged, although
there is no destruction of any property affected by the contract and
the performance of the contract remains possible in literal sense.
3. Death or personal incapacity of promisor: Where the performance
of a contract depends upon the personal skill or qualification or the
existence of a given person, the contract is discharged on the illness
or incapacity or the death of that person.
4. Change of law: A subsequent change in law may render the contract
illegal and in such cases the contract is deemed discharged. The law
may actually forbid the doing of some act undertaken in the contract,
or it may take from the control of the promisor something in respect of
which he has contracted to act or not to act in a certain way. Self-Instructional
Material 29
Indian Contract 5. Outbreak of war: All contracts entered into with an alien enemy
Act, 1872
during war are illegal and void ab-initio. Contracts entered into before
the outbreak of war are suspended during the war and may be revived
after the war is over provided they have not already become time-
NOTES barred.
iv. Cases not Covered by Supervening Impossibility: “He that agrees to
do an act must do it or pay damages for not doing it”, is the general rule of
the law of contract. Thus, unless the performance becomes absolutely
impossible (as discussed above), a person is bound to perform any obligation
which he has undertaken, and cannot claim to be excused by the mere fact
that performance has subsequently become unexpectedly burdensome, more
difficult or expensive. Some of the cases where impossibility of performance
is not an excuse are as follows:
1. Difficulty of performance: Increased or unexpected difficulty and
expense do not, as a rule, excuse from performance.
2. Commercial impossibility: When in a transaction profits dwindle to
a very low level or actual loss becomes certain, it is said that the
performance of the contract has become commercially impossible.
Such a situation may arise on account of higher price of the raw material
or increase in the wage bill etc. Commercial impossibility also does
not discharge a contract (Sachindra vs Gopal).
3. Impossibility due to the default of a third person: The doctrine of
supervening impossibility does not cover cases where the contract
could not be performed because of the impossibility created by the
failure of a third person on whose work the promisor relied.
4. Strikes and lock-outs: A strike by the workmen or a lock-out by
the employer also does not excuse performance because the former
is manageable (as labour is available otherwise) and the latter is self-
induced. Where the impossibility is not absolute or where it is due to
the default of the promisor himself, Section 56 would not apply. As
such these events also do not discharge a contract.
5. Failure of one of the objects: When a contract is entered into for
several objects, the failure of one of them does not discharge the
contract.
4. Discharge by Lapse of Time
The Limitation Act lays down that in case of breach of a contract legal action
should be taken within a specified period, called the period of limitation, otherwise
the promisee is debarred from instituting a suit in a court of law and the contract
stands discharged. Thus in certain circumstances lapse of time may also discharge
a contract. For example, the period of limitation for simple contracts is three years
under the Limitation Act, and therefore on default by a debtor if the creditor does
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30 Material
time-barred on the expiry of three years and the creditor will be deprived of his Indian Contract
Act, 1872
remedy at law. This in effect implies discharge of contract.
5. Discharge by Operation of Law
A contract terminates by operation of law in the following cases: NOTES
(a) Death: Where the contract is of a personal nature, the death of the promisor
discharges the contract. In other contracts, the rights and liabilities of the
deceased person pass on to the legal representatives of the dead man.
(b) Insolvency: A contract is discharged by the insolvency of one of the parties
to it when an Insolvency Court passes an “order of discharge” exonerating
the insolvent from liabilities on debts incurred prior to his adjudication.
(c) Merger: Where an inferior right contract merges into a superior right
contract, the former stands discharged automatically.
(d) Unauthorized material alteration: A material alteration made in a written
document or contract by one party without the consent of the other, will
make the whole contract void. Thus, where the amount of money to be
received is altered, or an additional signature is forged, on a promissory
note by a creditor, he cannot bring a suit on it and the pro-note cannot by
enforced against the debtor even in its original shape. The effect of making
such an alteration is exactly the same as that of cancelling the contract (Gour
Chunder vs Prasanna). However, the document, though altered, can be
used as proof of the transaction and the creditor may be allowed to claim
refund of money actually advanced by him under Section 65 of the Contract
Act which is based on the equitable doctrine of restitution (Ananthrao vs
Kandikanda).
6. Discharge by Breach of Contract
Breach of contract by a party thereto is also a method of discharge of a contract,
because ‘breach’ also brings to an end the obligations created by a contract on the
part of each of the parties. Of course the aggrieved party, i.e., the party not at fault
can sue for damages for breach of contract as per law; but the contract as such
stands terminated.
2.7 BREACH OF CONTRACT
Breach of contract, as explained above, may be of two kinds: (1) Anticipatory

breach and (2) Actual breach.
1. Anticipatory breach: An anticipatory breach of contract is a breach of
contract occurring before the time fixed for performance has arrived. It
may take place in two ways:
(a) Expressly by words spoken or written: Here, a party to the contract
communicates to the other party, before the due date of performance, Self-Instructional
Material 31
Indian Contract his intention not to perform it. For example, A contracts with B to
Act, 1872
supply 100 bags of wheat for ` 60,000 on 1st March. On 15th
February, A informs B that he will not be able to supply the wheat.
There is express rejection of the contract.
NOTES
(b) Impliedly by the conduct of one of the parties: Here a party by
his own voluntary act disables himself from performing the contract.
For example, (i) a person contracts to sell a particular horse to another
on 1st of June and before that date he sells the horse to somebody
else; (ii) A agrees to marry B but before the agreed date of marriage
she marries C. In both the above cases there occurs an anticipatory
breach of contract brought about by the conduct of one of the parties.
Section 39 of the Contract Act deals with anticipatory breach of contract
and provides as follows: ‘When a party to a contract has refused to perform,
or disabled himself from performing, his promise in its entirety, the promisee
may put an end to the contract, unless he has signified, by words or conduct,
his acquiescence in its continuance’
Effect of an anticipatory breach: When there is an anticipatory breach
of contract, the promisee is excused from performance or from further
performance. Further, it gives an option to the promisee (i.e., the aggrieved
party) whereby:
(i) He may either treat the contract as rescinded and sue the other party
for damages for breach of contract immediately without waiting until
the due date of performance, or
(ii) He may elect not to rescind but to treat the contract as still operative,
and wait for the time of performance and then hold the other party
responsible for the consequences of non-performance. But in that case,
he will keep the contract alive for the benefit of the other party as well
as his own, and the guilty party, if he so decides on reconsideration,
may still perform his part of the contract and can also take advantage
of any supervening impossibility which may have the effect of
discharging the contract.
2. Actual breach. Actual breach may also discharge a contract. It occurs
when a party fails to perform his obligation upon the date fixed for
performance by the contract, as for example, where on the appointed day
the seller does not deliver the goods or the buyer refuses to accept the
delivery. It is important to note that there can be no actual breach of contract
by reason of non-performance so long as the time for performance has not
yet arrived. Actual breach entitles the party not in default to elect to treat
the contract as discharged and to sue the party at fault for damages for
breach of contract.
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Whenever there is breach of a contract, the injured party becomes entitled Indian Contract
Act, 1872
to any one or more of the following remedies against the guilty party:
1. Rescission of the contract
2. Suit for damages NOTES
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for an injunction
As regards the last two remedies stated above, the law is regulated by the
Specific Relief Act, 1963.
1. Rescission of the Contract
When there is a breach of contract by one party, the other party may rescind the
contract and need not perform his part of obligations under the contract and may
sit quietly at home if he decides not to take any legal action against the guilty party.
But in case the aggrieved party intends to sue the guilty party for damages for
breach of contract, he has to file a suit for rescission of the contract. When the
court grants rescission, the aggrieved party is freed from all his obligations under
the contract; and becomes entitled to compensation for any damage which he has
sustained through the non-fulfilment of the contract (Sec. 75).
Thus, applying to the court for ‘rescission of the contract’ is necessary for
claiming damages for breach or for availing any other remedy. In practice a ‘suit
for rescission’ is accompanied by a ‘suit for damages,’ etc., in the same plaint.
2. Suit for Damages
Damages are a monetary compensation allowed to the injured party for the loss
or injury suffered by him as a result of the breach of contract. The fundamental
principle underlying damages is not punishment but compensation. By awarding
damages the court aims to put the injured party into the position in which he would
have been, had there been performance and not breach, and not to punish the
defaulter party. As a general rule, ‘compensation must be commensurate with the
injury or loss sustained, arising naturally from the breach.’ ‘If actual loss is not
proved, no damages will be awarded.’
Different kinds of damages. Damages may be of four kinds:
1. Ordinary (Sec. 73)
2. Special damages (Sec. 73)
3. Exemplary, Punitive or Vindictive damages
4. Nominal damages
1. Ordinary Damages: When a contract has been broken, the injured
party can, as a rule, always recover from the guilty party ordinary or
general damages. These are such damages as may fairly and reasonably
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Material 33
Indian Contract be considered as arising naturally and directly in the usual course
Act, 1872
of things from the breach of contract itself. In other words, ordinary
damages are restricted to the “direct or proximate consequences” of
the breach of contract and remote or indirect losses, which are not the
NOTES natural and probable consequence of the breach of contract, are
generally not regarded.
2. Special Damages: Special damages are those which arise on account
of the special or unusual circumstances affecting the plaintiff. In other
words, they are such remote losses which are not the natural and
probable consequence of the breach of contract. Unlike ordinary
damages, special damages cannot be claimed as a matter of right.
These can be claimed only if the special circumstances which would
result in a special loss in case of breach of contract are brought to the
notice of the other party. It is important that such damages must be in
contemplation of the parties at the time when the contract is entered
into. Subsequent knowledge of the special circumstances will not create
any special liability on the guilty party.
3. Exemplary or Vindictive Damages: These are such damages which
are awarded with a view to punishing the guilty party for the breach
and not by way of compensation for the loss suffered by the aggrieved
party. As observed earlier, the cardinal principle of the law of damages
for a breach of contract is to compensate the injured party for the loss
suffered and not to punish the guilty party. Hence, obviously, exemplary
damages have no place in the law of contract and are not recoverable
for a breach of contract. There are, however, two exceptions to this
rule:
(a) Breach of a contract to marry: In this case, the amount of the
damages will depend upon the extent of injury to the party’s
feelings. One may be ruined, other may not mind so much.
(b) Dishonour of a cheque by a banker when there are
sufficient funds to the credit of the customer: In this case
the rule of ascertaining damages is, ‘the smaller the cheque, the
greater the damage’. Of course, the actual amount of damages
will differ according to the status of the party.
4. Nominal Damages: Nominal damages are those which are awarded
only for the namesake. These are neither awarded by way of
compensation to the aggrieved party nor by way of punishment to the
guilty party. These are awarded to establish the right to decree for
breach of contract when the injured party has not actually suffered
any real damage, and consist of a very small sum of money, say, a
rupee or two.
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34 Material
Liquidated Damages and Penalty Indian Contract
Act, 1872
Let us first know what we mean by the two terms. ‘Liquidated damages’ means a
sum fixed up in advance, which is a fair and genuine pre-estimate of the probable
loss that is likely to result from the breach. ‘Penalty’ means a sum fixed up in NOTES
advance, which is extravagant and unconscionable in amount in comparison with
the greatest loss that could conceivably be proved to have followed from the
breach. Thus, the essence of a penalty is a payment of money stipulated as in
terrorem of the offending party.
Sometimes the parties fix up at the time of the contract the sum payable as
damages in case of breach. In such a case, a distinction is made in English Law as
to whether the provision amounts to ‘liquidated damages’ or a ‘penalty’. Courts in
England usually allow ‘liquidated damages’ as stipulated in the contract, without
any regard to the actual loss sustained. ‘Penalty’ clauses, however, are treated as
invalid and the courts in that case calculate damages according to the ordinary
principles and allow only reasonable compensation.
Under the Indian Law, Section 74 does away with the distinction between
liquidated damages’ and ‘penalty’. This Section lays down that the courts are not
bound to treat the sum mentioned in the contract, either by way of liquidated
damages or penalty, as the sum payable as damages for breach. Instead the courts
are required to allow reasonable compensation so as to cover the actual loss
sustained, not exceeding the amount so named in the contract. Thus, according to
the Section, the named sum, regardless whether it is a penalty or not, determines
only the maximum limit liability in case of the breach of contract. The section does
not confer a special benefit upon any party; it merely declares the law that
notwithstanding any term in the contract pre-determining damages or providing
for forfeiture of any property by way of penalty, the Court will award to the party
aggrieved only reasonable compensation not exceeding the amount named or
penalty stipulated.
Exception. There is, however, one exception provided for by Section 74 to the
above rule. When any person enters into any bail-bond, recognizance or other
instrument of the same nature, or under the provisions of any law or under the
orders of the Government, gives any bond for the performance of any public duty
or act in which the public are interested, he shall be liable to pay the whole sum
mentioned therein upon breach of the condition of any such instrument.
Cost of suit. The aggrieved party is entitled, in addition to the damages, to
get the costs of getting the decree for damages from the defaulter party. The cost
of suit for damages is in the discretion of the court.
3. Suit Upon Quantum Meruit
The third remedy for a breach of contract available to an injured party against the
guilty party is to file a suit upon quantum meruit. The phrase quantum meruit
literally means ‘as much as is earned’ or ‘in proportion to the work done.’A right
Self-Instructional
Material 35
Indian Contract to sue upon quantum meruit usually arises where after part performance of the
Act, 1872
contract by one party, there is a breach of contract, or the contract is discovered
void or becomes void.
NOTES Illustrations:
(a) A engages B, a contractor, to build a three-storey house. After a part is
constructed A prevents B from working any more. B, the contractor, is
entitled to get reasonable compensation for work done under the doctrine
of quantum meruit in addition to the damages for breach of contract.
(b) A contracts with B to repair his house at a piece rate. After a part of the
repairs have been carried out, the house is destroyed by lightning. Although
the contract becomes void and stands discharged because of destruction
of the house, A can claim payment for the work done on quantum meruit.
Note that if under the contract a lump sum is to be paid for the repair job as
a whole, then A cannot claim quantum meruit because no money is due till
the whole job is done.
4. Suit for Specific Performance
Specific performance means the actual carrying out of the contract as agreed.
Under certain circumstances an aggrieved party may file a suit for specific
performance, i.e., for a decree by the court directing the defendant to actually
perform the promise that he has made.
A decree for specific performance is not granted for contracts of every
description. It is only where it is just and equitable so to do, i.e., where the legal
remedy is inadequate or defective, that the courts issue a decree for specific
performance. It is usually granted in contracts connected with land, buildings, rare
articles and unique goods having some special value to the party suing because of
family association. Notice that in all these contracts, monetary compensation is
not an adequate relief because the injured party will not be able to get an exact
substitute in the market.
Specific performance is not granted, as a rule, in the following cases:
(i) Where monetary compensation is an adequate relief. Thus, the courts
refuse specific performance of a contract to lend or to borrow money
or where the contract is for the sale of goods easily procurable
elsewhere.
(ii) Where the court cannot supervise the actual execution of the contract,
e.g., a building construction contract. Moreover, in most cases,
damages afford an adequate remedy.
(iii) Where the contract is for personal services, e.g., a contract to marry
or to paint a picture. In such contracts ‘injunction’ (i.e., an order which
forbids the defendant to perform a similar personal service for other
persons) is granted in place of specific performance.
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36 Material
5 Suit for an Injunction Indian Contract
Act, 1872
‘Injunction’ is an order of a court restraining a person from doing a particular act.
It is a mode of securing the specific performance of the negative terms of the
contract. To put it differently, where a party is in breach of negative term of the NOTES
contract. (i.e., where he is doing something which he promised not to do), the
court may, by issuing an injunction restrain him from doing, what he promised not
to do. Thus ‘injunction’ is a preventive relief. It is particularly appropriate in cases
of ‘anticipatory breach of contract’ where damages would not be an adequate
relief.
Check Your Progress

4. List the different categories of reciprocal promises.
5. What are main essentials of a valid tender?

QUESTIONS
1. A ‘contract’ is an agreement, the object of which is to create a legal obligation,

i.e., a duty enforceable by law.
2. The essential elements of a valid contract are:
(a) Offer and acceptance
(b) Lawful consideration
(c) Capacity of parties
(d) Free consent
(e) Writing and registration
3. The types of contract on the basis of mode of creation are:
(a) Express contract
(b) Implied contract
(c) Constructive or quasi-contract
4. Reciprocal promises may be classified into three categories: (1) Mutual and
Independent, (2) Mutual and Dependent, and (3) Mutual and Concurrent.
Sections 51 to 54 of the Contract Act lay down the rules regarding the
order of performance of reciprocal promises.
5. A valid tender or offer of performance must fulfil the following conditions:
(i) It must be unconditional. A conditional tender is no tender.
(ii) It must be made at proper time and place. A tender before or after the
due date or at a place other than agreed upon is not a valid tender.
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Material 37
Indian Contract (iii) It must be of the whole obligation contracted for and not only of the
Act, 1872
part.
(iv) If the tender relates to delivery of goods, it must give a reasonable
opportunity to the promisee for inspection of goods so that he may be
NOTES
sure that the goods tendered are of contract description.
(v) It must be made by a person who is in a position and is willing to
perform the promise. A tender by a minor or idiot is not a valid tender.
2.9 SUMMARY
 Contract is an agreement, the object of which is to create a legal obligation,

i.e., a duty enforceable by law. The law of contract in India is contained in
the Indian Contract Act, 1872. Contract consists of two elements—
agreement and legal obligation.
 Section 2 (a) of the Indian Contract Act defines a proposal as when one
person signifies to another his willingness to do or to abstain from doing
anything with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
 According to Section 10, all agreements are contracts if they are made by
the free consent of the parties competent to contract, for a lawful
consideration, with a lawful object, are not expressly declared by the Act to
be void, and, where necessary, satisfy the requirements of any law as to
writing or attestation or registration.
 When contracting parties are face to face and negotiate in person, there is
instantaneous communication of offer and acceptance, and a valid contract
comes into existence the moment the offeree gives his absolute and unqualified
acceptance to the proposal made by the offeror.
 Section 2 (d) of the Indian Contract Act defines consideration as when at
the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing, or promises to do or
to abstain from doing, something, such act or abstinence or promise is called
a ‘consideration for the promise’.
 According to Section 11, a person is incompetent to contract if he is a
minor, according to the law to which he is subject; he is of unsound mind, or
if he is disqualified from contracting by any law to which he is subject.
 The Constitution of India guarantees the freedom of trade and commerce
to every citizen and therefore Section 27 declares ‘every agreement by
which any one is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void’.
 A contract brought about by coercion is voidable at the option of the party
whose consent was so caused. This means that the aggrieved party may
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38 Material
either exercise the option to affirm the transaction and hold the other party Indian Contract
Act, 1872
bound by it, or repudiate the transaction by exercising a right of rescission.
 An unenforceable contract is one which is valid in itself, but is not capable
of being enforced in a court of law because of some technical defect such
NOTES
as absence of writing, registration, requisite stamp, etc., or time barred by
the law of limitation.
 A representation when wrongly made, either innocently or intentionally, is
termed as ‘misrepresentation’. To put it differently, misrepresentation may
be either innocent or intentional or deliberate with an intent to deceive the
other party.
2.10 KEY WORDS
 Contract: An agreement enforceable by law

 Promise: A proposal after acceptance
 Unenforceable contract: A contract which is valid in itself, but is not
capable of being enforced in a court of law because of some technical
defect
 Executed contract: When both parties to a contract have completely
performed their share of obligations and nothing remains to be done by
either party under the contract

EXERCISES
1. Write in brief about the legal obligation in contract.
2. Write a short note on essential features of contract.
3. Write a shrot note an breach of contract.
4. State the mode of discharge of contract.
1. ‘All contracts are agreements, but all agreements are not contracts’. Justify
the statement.
2. Analyse the various types of contracts on the basis of enforceability.
3. Discuss in detail the circumstances when an offer lapses and becomes
invalid.
4. Discuss the conditions when a person is incompetent to contract.
Self-Instructional
Material 39
Indian Contract
Act, 1872 2.12 FURTHER READINGS
NOTES Vikas Publishing House.
Co & Ltd.
Co & Ltd.
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40 Material
Law of Agency
UNIT 3 LAW OF AGENCY

Structure NOTES
3.0 Introduction
3.1 Objectives
3.2 Agent, Agency and Principal: An Overview
3.3 Termination of Agency
3.5 Summary
3.6 Key Words
3.0 INTRODUCTION
In this unit, you will learn about the concept of ‘agency’. Section 182 of the Contract
Act explains that an ‘agent’ is one who is employed to do any act on behalf of or
represents another person or entity (such as a firm). A ‘principal’ is the person or
entity who is represented by an agent. An agency is the contract between a principal
and an agent. You will also read about the general rules that are in operation
agencies and how one is created. There are various ways an agency can be created,
such as by an implied or expressed agreement, or by necessity. Finally, you will
learn how an agency can be terminated. Sections 203–207 of the Contract Act
provide the legal guidelines for the termination of an agency by the parties involved.
Sections 201 and 209 of the Act explain how an agency comes to an end
automatically by the operation of law.
3.1 OBJECTIVES

 Understand the general rules of agency
 Identify the various types of agents
 Recognize different ways of creation of an agency
 Interpret how an agency can be terminated
 Understand what is an irrevocable agency
Self-Instructional
Material 41
Law of Agency
3.2 AGENT, AGENCY AND PRINCIPAL:
AN OVERVIEW
NOTES The two terms — ‘agent’ and ‘principal’— have been defined in Section 182 of
the Contract Act as follows:
‘An agent is a person employed to do any act for another or to represent
another in dealings with third persons. The person for whom such act is done, or
who is represented, is called the principal.’
The contract which creates the relationship of ‘principal’ and ‘agent’ is called
an ‘agency’. Thus where A appoints B to buy ten bags of sugar on his behalf, A is
the ‘principal,’ B is the ‘agent’ and the contract between the two is ‘agency.’ If, in
pursuance of the contract of agency, the ‘agent’ purchases the bags of sugar from
C, a wholesale dealer in sugar, on credit, then in the eye of law the ‘principal’ and
the wholesale dealer are brought into direct contractual relations and the contract
of purchase is enforceable both by and against the ‘principal.’
It will be seen that under a contract of agency the agent is authorised to
establish privity of contract between the principal (his employer) and a third party.
As such the function of an agent is essentially to bring about contractual relations
between the principal and third parties. In a way, therefore, an agent is merely a
connecting link. After entering into a contract on behalf of the principal with a third
party, the agent drops out and ceases to be a party to the contract and the contract
binds the principal and the third party as if they have made it themselves.
There are two important general rules regarding agency. These are:
1. Whatever a person competent to contract may do by himself, he may do
through an agent, except for acts involving personal skill and qualifications.
In fact, where the work to be done is obviously personal, no agent can be
employed. For example, a person cannot marry through an agent, cannot
paint a picture through an agent, and so on.
2. ‘He who does through another, does by himself.’ In other words, ‘the acts
of the agent are, for all legal purposes, the acts of the principal.’ Section
226 provides to the same effect: ‘Contracts entered into through an agent,
and obligations arising from acts done by an agent, may be enforced in the
same manner, and will have the same legal consequences, as if the contracts
had been entered into and the acts done by the principal in person.’
Agency exists ‘whenever a person has the authority to act on behalf of the
other and to create contractual relations between that other and third persons.’
When this kind of power is not enjoyed, the relationship is not one of agency.
Thus a person is not an agent merely because he gives another advice in matters of
business (Mahesh Chandra vs Radha Kishore ). Similarly, a person rendering
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42 Material
personal service to his master or working in his factory cannot be called an agent Law of Agency
because in these cases he is not acting for another in dealings with third persons. It
is only when one acts as a representative of the other in business dealings so as to
create contractual relations between that other and third persons, that he is an
agent and there is an agency (Krishna vs Ganapathi ). The following aspects NOTES
need to be taken into account while discussing the role of agent. These are:
(a) Distinction between Agent and Servant
A servant acts under the direct control and supervision of his employer, that is, he
has to act according to the orders of the master in every particular case. He does
not create relations between his employer and third persons and cannot bind the
master to third parties. If, for some purpose, he is authorised to bind the master,
then to that extent he is an agent.
An agent is not subject to the direct control and supervision of the principal.
He has often a large discretion to act within the scope of his authority. A ‘principal’
directs the agent ‘as to what is to be done’ while a ‘master’ has the further right to
direct ‘how the work is to be done.’ Thus a very minute difference exists between
the two. Further, an agent is appointed to bring the principal into contractual relations
with third parties.
An agent as such is not a servant but a servant is generally for some purposes
his master’s agent, the extent of agency depending upon the duties or position of
the servant (Laxminarayan Ram Gopal & Sons Ltd. vs Hyderabad Govt.).
(b) Distinction between Agent and Independent Contractor
An independent contractor is one who is employed to perform certain specified
work but the manner and means of performance are entirely left to his discretion.
He is free to do the specified job independently of the employer’s control or
interference. Such a contractor also differs from an agent. The main point of
distinction is that while the contractor does not represent his employer in relation
to other persons and as such cannot bind the employer by contracts entered into
with others, the agent, on the other hand, does represent his employer in relation
to other persons and can bind the employer (his principal) by contracts entered
into with other persons within the scope of his authority.
(c) Who may employ an Agent?
According to Section 183, ‘any person who is of the age of majority according to
the law to which he is subject, and who is of sound mind, may employ an agent.’
As such any person competent to contract may employ an agent and a minor, a
lunatic or a drunken person cannot employ an agent.
(d) Who may be an Agent?
Section 184 lays down in this regard that ‘as between the principal and third
persons any person may become an agent.’ Thus even a minor or a person of
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Law of Agency unsound mind can be appointed as agent. It is so because the act of the agent is
the act of the principal and therefore the principal is liable to third parties for the
acts of a minor agent. Of course, in appointing a minor or a person of unsound
mind as an agent, the principal runs a great risk because he cannot hold such an
NOTES agent liable for his misconduct or negligence.
(e) No Consideration is Necessary
‘No consideration is necessary to create an agency’ (Sec. 185). The fact that the
principal has agreed to be represented by the agent is a sufficient ‘detriment’ to
the principal to support the contract of agency, i.e., to support the promise by the
agent to act in that capacity. It is to be noted, however, that a gratuitous agent is
not bound to do the work entrusted to him by his principal. But once he begins the
work, he is bound to complete it. Usually an agent is paid remuneration for his
services.
From the point of view of the extent of their authority, agents may be classified
into:
1. General agent: A general agent is one who is employed to do all acts
connected with a particular business or employment, e.g., 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 the third party acts bona fide.
Third parties may assume that such an agent has power to do all that which
is usual for a general agent to do in the business concerned.
2. Special agent: A special agent is one who is employed to do some particular
act or represent his principal in some particular transaction, e.g., an agent
employed to sell a motor car. As soon as the act is performed, the authority
of such an agent comes to an end. If a 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. They should, therefore,
make proper enquiry as to the extent of his authority before entering into
any contract with him.
3. Universal agent: A universal agent is said to be one whose authority is
unlimited, i.e., who is authorised to do all the acts which the principal can
lawfully do and can delegate. He enjoys extensive powers to transact every
kind of business on behalf of his principal.
From the point of view of the nature of work performed by them, agents
may be classified into:
1. Mercantile agents: A mercantile agent is one who has authority either
to sell goods or to buy goods or to raise money on the security of
goods [Sec. 2(9) of the Sale of Goods Act]. The various kinds of
Self-Instructional mercantile agents are as follows:
44 Material
(a) Factor: A factor is a mercantile agent to whom goods are Law of Agency
entrusted for sale. He enjoys wide discretionary powers in relation

to the sale of goods. He sells the goods in his own name upon
such terms as he thinks fit. He may pledge the goods as well.
NOTES
(b) Commission agent: A 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 goods or not.
(c) Del credere agent: He is one who in consideration of an extra
commission, guarantees his principal that the third persons 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 as
well as of an agent.
(d) Broker: 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 acts as a connecting link and
brings the two parties together to bargain and if the transaction
materialises he becomes entitled to his commission called
brokerage. He makes contracts in the name of his principal.
2. Non-mercantile agents: They include advocates, attorneys, insurance
agent, wife, etc.
An agency may be created in any one of the following ways:
1. Agency by Express Agreement
Normally agency is created by an express agreement, specifying the scope of the
authority of agent. The agent may, in such a case, be appointed either by word of
mouth or by an agreement in writing (Sec. 187). However, in certain cases, e.g.,
to execute a deed for sale or purchase of land, the agent must be appointed by
executing a formal ‘power of attorney’ on a stamped paper.
2. Agency by Implied Agreement
Implied agency arises when there is no express agreement appointing a person as
an agent, but instead the existence of agency is inferred from the circumstances of
the case, or from the conduct of the parties on a particular occasion, or from the
relationship between parties (Sec. 187). Such an agency may take the following
forms:
(a) Agency by estoppel
(b) Agency by holding out
(c) Agency by necessity
Self-Instructional
Material 45
Law of Agency We shall deal with each of these in turn.
(a) Agency by estoppel: Such an agency is based on the ‘doctrine of estoppel’
which may briefly be stated thus, ‘Where a person by his words or conduct
has wilfully led another to believe that certain set of circumstances or facts
NOTES
exists, and that other person has acted on that belief, he is estopped or
precluded from denying the truth of such statements, although such a state
of things did not in fact exist.’
Section 237 of the Contract Act, which deals with agency by estoppel, also
provides to the same effect. The Section lays down that ‘when an agent
has, without authority, done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts or obligations, if
he has by his words or conduct induced such third persons to believe that
such acts and obligations were within the scope of agent’s authority.’
We may sum up thus, an agency by estoppel is created when the alleged
principal by his conduct or by words spoken or written, leads wilfully the
other contracting party into an honest belief that the supposed agent had
authority to act as such and bind the principal. Such a principal will be
estopped from denying subsequently his agent’s authority, although the agent
did not in fact possess any authority whatever.
(b) Agency by holding out: Such an agency is based on the ‘doctrine of holding
out’ which is a part of the law of estoppel. In this case also the alleged
principal is bound by the acts of the supposed agent, if he has induced third
persons to believe that they are done with his authority. But, unlike an
‘agency by estoppel’, an ‘agency by holding out’ requires some affirmative
or positive act or conduct by the principal to establish agency subsequently.
Thus, where an employer has been accustomed to pay for goods bought
on his behalf by his employee from P, the employer may be liable for a
purchase made in the customary manner, even though it is made, by the
employee fraudulently after he has left the employment. The employer’s
conduct in ‘holding out’ his employee to be his agent (paying for purchases
made by the employee on previous occasions) estops him from denying
that his authority was not still in existence.
It may be noted that where the agent is ‘held out’ as having only a ‘limited
authority’ to do acts, the principal is not bound by an act outside the authority.
(c) Agency by necessity: In certain circumstances the law confers an authority
on one person to act as agent for another without any regard to the consent
of the principal. Such an agency is called an agency of necessity. Bowstead
has rightly observed: ‘An agency by necessity is conferred by law in certain
cases, where a person is faced with an emergency in which the property or
interests of another are in imminent danger, and it becomes necessary in
order to preserve the property or interests, to act before the instructions of
Self-Instructional
46 Material
the owner can be obtained. The law assumes the consent of the owner to Law of Agency
the creation of the relationship of principal and agent.’ Thus, the conditions
which enable a person to act as an agent of necessity of another are as
follows:
NOTES
(i) There should be a real necessity for acting on behalf of the principal.
(ii) It should be impossible to communicate with the principal within the
time available.
(iii) The alleged agent should act bona fide in the interests of the principal.
Generally the ‘agency by necessity’ arises in the following cases:
(i) Where the agent exceeds his authority, bona fide, in an emergency.
For example, where A consigns fruits to B at Allahabad with directions
to send them immediately to C at Varanasi, and B, finding that the
fruits are perishing rapidly, sells them at Allahabad itself for the best
price obtainable, the sale will bind the principal and the agent cannot
be held liable for exceeding his authority as under the circumstances
of the case there arises agency of necessity.
(ii) Where the carrier of goods acting as a bailee, does anything to
protect or preserve the goods, in an emergency, although there is
no express authority in that regard. Thus a master of a ship is entitled,
in cases of accident and emergency, to sell or pledge the goods in
order to save their value and the sale or pledge will bind the cargo
owners. Similarly, a land carrier of goods, in case of accident or
emergency, becomes an agent of necessity, for example, if a public
carrier develops an engine trouble, the driver can pledge a part of the
goods loaded thereon in order to raise the money necessary for repairs
and the pledge will be binding on the owner of goods. Notice that in
these cases it is not practicable to communicate with the principal.
(iii) Where a husband improperly leaves his wife without providing
proper means for her sustenance. In a special circumstance the case
of husband and wife also provides an instance of agency by necessity.
When the wife has been deserted by the husband and thus forced to
live separate from him, the wife is regarded as the agent of necessity
of the husband and she has the authority of pledging her husband’s
credit for necessaries even against her husband’s wishes. However,
this rule does not apply where the wife improperly leaves the husband.
It is relevant to state that in the ordinary course of things there is an
implied agency between the husband and wife and the wife is presumed
to have implied authority to pledge her husband’s credit for necessaries
suiting to the couple’s joint style of living. But a husband enjoys no
corresponding right to pledge his wife’s credit for necessaries.
Self-Instructional
Material 47
Law of Agency 3. Agency by Ratification
Ratification means the subsequent adoption and acceptance of an act originally
done without instructions or authority. Thus where a principal affirms or adopts
NOTES the unauthorised act of his agent, he is said to have ratified that act and there
comes into existence an agency by ratification retrospectively.
Section 196 deals with the effect of ‘ratification.’ It provides that ‘where
acts are done by one person on behalf of another, but without his knowledge or
authority, he may elect to ratify or to disown such acts. If he ratifies them, the same
effects will follow as if they had been performed by his authority.’
a. Ratification relates back to time of contract: Ratification has got
retrospective effect. By ratifying the unauthorised act of the agent, the principal
becomes bound by the act as if it had been originally done by his authority.
Thus ratification amounts to ‘prior authority’. It relates back to the original
making of the contract. This means that the agency comes into existence
from the moment the agent acted and not from the time when the principal
ratified.
b. Ratification may be express or implied: Section 197 provides; ‘Ratification
may be expressed or may be implied in the conduct of the person on whose
behalf the acts are done.’
A valid ratification must fulfil the following conditions:
1. The agent must purport to act as agent for a principal who is in
contemplation. The agent must expressly contract as an agent for a principal
in the knowledge of third parties. The principal must be named or must be
‘identifiable’ and it is not sufficient to indicate simply that he is acting as
agent of some one. The word ‘identifiable’ here means that there must be
such a description of the principal as shall amount to a reasonable designation
of him, for example, it would cover the expressions like ‘on behalf of the
Vice-Chancellor, Delhi University’ or ‘on behalf of my elder brother.’ Thus,
to be valid, a ratification must be done by the person on whose behalf the
agent professed to act. An undisclosed principal cannot step in and ratify
acts done by a third person. Similarly, a person entering into a contract in
his own name cannot later shift it on to a third party.
2. There should be an act capable of ratification. The act to be ratified
must be a lawful one. There can be no ratification of an illegal act or an act
which is void. Thus, the shareholders of a company cannot ratify an ultra
vires contract made by the directors.
3. The principal must be in existence. For a valid ratification it is essential
that the principal must be in existence at the time when the original contract
is made, because rights and obligations cannot attach to a non-existent
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48 Material
person. Thus contracts, entered into by promoters of a company on its Law of Agency
behalf before its incorporation, cannot be ratified by the company after it

comes into existence. The Specific Relief Act, however, provides for certain
exceptions where a company can ratify its pre-incorporation contracts.
NOTES
4. The principal must be competent to contract. The principal must have
contractual capacity both at the time of original contract and at the time of
ratification. Thus a person cannot ratify a contract made on his behalf during
his minority. Similarly, a person cannot ratify a contract of insurance made
by an unauthorised agent on his behalf after he has become aware that the
event insured against has in fact occurred, because he could not himself
insure in such circumstances (Grover & Grover vs Mathews).
5. The principal must have full knowledge of material facts. Section 198
declares: ‘No valid ratification can be made by a person whose knowledge
of facts of the case is materially defective.’ Thus to constitute a valid
ratification, the principal must, at the time of ratification, have full knowledge
of all material facts or give such an unqualified acceptance that the inference
may be drawn that he intended to ratify the contract whatever the facts may
be.
6. Whole transaction must be ratified. Ratification must be of the whole
contract. Once a part is accepted, it is an implied acceptance of the whole
(Sec. 199). There cannot be partial rejection and partial ratification. The
principal cannot reject the burdens attached and accept only the benefits.
7. Within reasonable time. A ratification to be effective must be made within
a reasonable time after the original contract is made. Where a time is
expressly fixed for the performance of the contract, ratification must be
made within that time.
8. Ratification must not injure a third person (Sec. 200). A ratification cannot
be effective where its effect is to subject a third person to damages, or
terminate any right or interest of a third person.
Check Your Progress

1. What do you understand by the terms, ‘agent’ and ‘principal’?
2. Define agency by estoppel.
3. List some of the essentials of valid ratification.
3.3 TERMINATION OF AGENCY
An agency may be terminated in any of the following ways:

A. By act of the parties, or
B. By operation of law
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Material 49
Law of Agency We will consider these methods one after another.
A. Termination by act of the Parties
An agency comes to an end by act of the parties in the following cases:
NOTES
1. Agreement: An agency, like any other contract, can be terminated at any
time by the mutual agreement between the principal and the agent.
2. Revocation by the principal (Secs. 203 and 207): Section 203 empowers
the principal to revoke the authority of the agent at any time before the
agent has exercised his authority so as to bind the principal, unless the agency
is irrevocable. Further, revocation may be expressed or implied in the
conduct of the principal (Sec. 207). Thus where A empowers B to let A’s
house and afterwards lets the house himself, it is an implied revocation of
B’s authority. Revocation of authority by the principal is, however, subject
to the following conditions:
(i) In the case of a continuous agency, the principal may revoke it for the
future. It cannot be revoked with regard to acts already done in the
agency. Again, before revoking the authority for the future, reasonable
notice of the same should be given to the agent and also to third parties.
If reasonable notice is not given, the principal will be liable to compensate
the agent for damages resulting thereby (i.e., for the agent’s loss of
salary if no immediate job is available), and be bound by the acts of the
agent with respect to third parties. (Secs. 204 and 206)
(ii) Where an agency has been created for a fixed period and the principal
revokes the authority of the agent before the expiry of the period,
without sufficient cause, the principal is bound to pay compensation
to the agent for the resulting loss, even if the authority is revoked after
reasonable notice. (Sec. 205)
3. Renunciation by the agent: An agency may also be terminated by an
express renunciation by the agent because a person cannot be compelled
to continue as agent against his will. But he must give a reasonable notice of
renunciation to the principal, otherwise he will be liable to compensate the
principal for any damage resulting thereby (Sec. 206). If the agency is for a
fixed period and the agent renounces it without sufficient cause before the
expiry of the period, he shall have to compensate the principal for the resulting
loss, if any (Sec. 205).
B. Termination by Operation of Law
An agency comes to an end automatically by operation of law in the following
cases:
1. Completion of the business of agency: An agency automatically comes
to an end when the business of agency is completed (Sec. 201). Thus, for
example, an agency for the sale of a particular property terminates on the
Self-Instructional
50 Material
completion of the sale. Similarly, where a lawyer is appointed to plead in a Law of Agency
suit, his authority comes to an end with the judgment.

2. Expiry of time: If the agent is appointed for a fixed term, the expiration of
the term puts an end to the agency, even though the business of the agency
NOTES
may not have been completed.
3. Death of the principal or the agent: An agency is terminated automatically
on the death of the principal or the agent (Sec. 201). After coming to know
about the principal’s death although the agency terminates but the agent
must take all reasonable steps for the protection of the interests of the late
principal entrusted to him (Sec. 209).
4. Insanity of the principal or the agent: An agency also stands terminated
when the principal becomes of an unsound mind (Sec. 201). Here also it is
the duty of an agent to protect the interests of the former principal by taking
all reasonable steps (Sec. 209). Likewise when the agent becomes insane
during the agency, his authority terminates at once and the agency comes to
an end (Sec. 201). It is interesting to mention that a person of unsound
mind can be initially appointed as an agent.
5. Insolvency of the principal: An agency is also terminated by the insolvency
of the principal (Sec. 201). Whether the insolvency of an agent puts an end
to the agency or not is a disputed question, Section 201 is silent on this
point.
6. Destruction of the subject-matter: An agency which is created to deal
with certain subject-matter will be terminated by the destruction of that
subject-matter. For example, where the agency was created for the sale of
a house and the house is destroyed by fire, the agency ends.
7. Dissolution of a company: If the principal or agent is an incorporated
company, the agency automatically ceases to exist on dissolution of the
company.
8. Principal or agent becomes alien enemy: If the principal and agent are
nationals of two different countries and a war breaks out between the two
countries, the contract of agency is terminated. The outbreak of war renders
the continuance of the principal and agent relationship unlawful because
now the principal or agent becomes an alien enemy.
As between the principal and the agent, termination of agency is effective only
when it becomes known to the agent, and so far as the third parties are concerned
termination of agency takes effect when it is made known to them (Sec. 208). For
example, in the case of termination of agency by revocation of agent’s authority,
the agency comes to an end as between the principal and the agent not from the
moment of posting the letter of revocation, but from the time the agent receives the
letter of revocation. Although after receiving the letter of revocation the agent’s
Self-Instructional
Material 51
Law of Agency authority ends but he can still bind the principal towards third parties, if the third
parties do not know the fact of the termination of agency. Thus the principal must
also give a public notice regarding the fact of the termination of agency in order to
make termination effective vis-a-vis third parties as well. Even when the agency is
NOTES terminated automatically by the death, insanity or insolvency of the principal,
knowledge of the agent is essential for completing termination as between him and
the principal; and knowledge of third party is essential for making termination
effective as between the third party and principal.
When the authority given to an agent cannot be revoked, it is said to be an
irrevocable agency. An agency becomes irrevocable in the following cases:
1. Where the agency is coupled with interest (Sec. 202): Where the agent
has himself an interest in the subject-matter of agency, the agency is said to
be coupled with interest. Such an agency is created with the object of
protecting or securing any interest of the agent. So where a creditor is
employed for valuable consideration as an agent to collect rents due to the
principal (debtor) for adjusting the amount towards his debt, the principal
thereby confers an interest on the agent and the authority cannot be revoked
unilaterally during the subsistence of the interest, in the absence of an
express contract to the contrary.
It is important that the doctrine of agency coupled with interest applies only,
if the authority was intended for the protection of an interest of the agent
existing at the time of the creation of the agency and it is not sufficient
that it does so incidentally. It, therefore, cannot apply where the interest
arises after the creation of the agency.
It must also be noted that an agency coupled with interest is not terminated
even by the death, insanity or insolvency of the principal.
2. When revocation would cause the agent personal loss: Where the
agent has, in pursuance of his authority, contracted a personal liability, the
agency becomes irrevocable and the principal cannot revoke the authority
unilaterally. This is so because the principal cannot be permitted to defeat
rights already established.
3. When the authority has been partly exercised by the agent (Sec.
204): Where the agent has partly exercised his authority, it becomes
irrevocable so far as regards such acts and obligations as arise from acts
already done in the agency.
Check Your Progress

4. List the various ways of terminating an agency.
5. When does an agency become irrevocable?
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52 Material
Law of Agency
QUESTIONS
1. ‘An agent is a person employed to do any act for another or to represent NOTES
another in dealings with third persons. The person for whom such act is
done, or who is represented, is called the principal.’
2. Agency by estoppel is based on the ‘doctrine of estoppel’ which may briefly
be stated thus, ‘Where a person by his words or conduct has wilfully led
another to believe that certain set of circumstances or facts exists, and that
other person has acted on that belief, he is estopped or precluded from
denying the truth of such statements, although such a state of things did not
in fact exist.’
3. A valid ratification must fulfil the following conditions:
(i) The agent must purport to act as agent for a principal who is in
contemplation. The agent must expressly contract as an agent for a
principal in the knowledge of third parties.
(ii) There should be an act capable of ratification. The act to be ratified
must be a lawful one. There can be no ratification of an illegal act or
an act which is void.
(iii) The principal must be in existence. For a valid ratification it is essential
that the principal must be in existence at the time when the original
contract is made, because rights and obligations cannot attach to a
non-existent person.
(iv) The principal must be competent to contract. The principal must have
contractual capacity both at the time of original contract and at the
time of ratification. Thus a person cannot ratify a contract made on his
behalf during his minority.
(v) The principal must have full knowledge of material facts. Section 198
declares: ‘No valid ratification can be made by a person whose
knowledge of facts of the case is materially defective.’
4. The various ways of terminating an agency are as follows:
(i) By act of the parties
(ii) By operation of law
5. When the authority given to an agent cannot be revoked, it is said to be an
irrevocable agency. An agency becomes irrevocable in the following cases:
(i) Where the agency is coupled with interest (Sec. 202): Where the
agent has himself an interest in the subject-matter of agency, the agency
is said to be coupled with interest. Such an agency is created with the
object of protecting or securing any interest of the agent. It must also
be noted that an agency coupled with interest is not terminated even
by the death, insanity or insolvency of the principal. Self-Instructional
Material 53
Law of Agency (ii) When revocation would cause the agent personal loss: Where the
agent has, in pursuance of his authority, contracted a personal liability,
the agency becomes irrevocable and the principal cannot revoke the
authority unilaterally.
NOTES
(iii) When the authority has been partly exercised by the agent (Sec. 204):
Where the agent has partly exercised his authority, it becomes
irrevocable so far as regards such acts and obligations as arise from
acts already done in the agency.
3.5 SUMMARY
 In a way, an agent is merely a connecting link. After entering into a contract

on behalf of the principal with a third party, the agent drops out and ceases
to be a party to the contract and the contract binds the principal and the
third party as if they have made it themselves.
 Agency exists ‘whenever a person has the authority to act on behalf of the
other and to create contractual relations between that other and third
persons.’ When this kind of power is not enjoyed, the relationship is not
one of agency.
 According to Section 183, ‘any person who is of the age of majority according
to the law to which he is subject, and who is of sound mind, may employ an
agent.’As such any person competent to contract may employ an agent and
a minor, a lunatic or a drunken person cannot employ an agent.
 A special agent is one who is employed to do some particular act or represent
his principal in some particular transaction, e.g., an agent employed to sell a
motor car.
 Implied agency arises when there is no express agreement appointing a
person as an agent, but instead the existence of agency is inferred from the
circumstances of the case, or from the conduct of the parties on a particular
occasion, or from the relationship between parties (Sec. 187).
 Section 196 deals with the effect of ‘ratification.’ It provides that ‘where
acts are done by one person on behalf of another, but without his knowledge
or authority, he may elect to ratify or to disown such acts. If he ratifies them,
the same effects will follow as if they had been performed by his authority.’
 An agency may also be terminated by an express renunciation by the agent
because a person cannot be compelled to continue as agent against his will.
But he must give a reasonable notice of renunciation to the principal, otherwise
he will be liable to compensate the principal for any damage resulting thereby
(Sec. 206).
Self-Instructional
54 Material
 Even when the agency is terminated automatically by the death, insanity or Law of Agency
insolvency of the principal, knowledge of the agent is essential for completing

termination as between him and the principal; and knowledge of third party
is essential for making termination effective as between the third party and
principal. NOTES
 It is important that the doctrine of agency coupled with interest applies only,
if the authority was intended for the protection of an interest of the agent
existing at the time of the creation of the agency and it is not sufficient that it
does so incidentally. It, therefore, cannot apply where the interest arises
after the creation of the agency.
3.6 KEY WORDS
 Agent: A person employed to do any act for another or to represent

another in dealings with third persons.
 General agent: One who is employed to do all acts connected with a
particular business or employment.
 Special agent: One who is employed to do some particular act or
represents his principal in some particular transaction.
 Ratification: Subsequent adoption and acceptance of an act originally done
without instructions or authority.

EXERCISES
1. Write a short note on the general rules of agency.
2. Write in brief about various kinds of mercantile agents.
3. Write in short the main rights of agent.
4. Write a brief note on termination by act of the parties.
5. Write a short note on termination by operation of law.
1. “An agent is merely a connecting link.” Justify this statement.
2. Discuss the legal effects of the appointment of a sub-agent.
3. Analyse some of the rights and duties of an agent.
4. Analyse the various ways of termination of agency.
Self-Instructional
Material 55
Law of Agency
NOTES Vikas Publishing House.
Self-Instructional
56 Material
Sale of Goods Act, 1930
UNIT 4 SALE OF GOODS ACT, 1930

Structure NOTES
4.0 Introduction
4.1 Objectives
4.2 Contract of Sale of Goods
4.3 Conditions And Warranties
4.4 Transfer of Property: Importance and Rules
4.5 Performance of Contract Sales
4.5.1 Delivery
4.5.2 Rules of Delivery of Goods
4.6 Unpaid Seller and His/Her Rights
4.6.3 Auction Sale
4.8 Summary
4.9 Key Words
4.0 INTRODUCTION
The Sale of Goods Act, 1930, which came into force on 1 July 1930, contains the
law relating to sale of goods. The Act contains 66 Sections and extends to the
whole of India except the State of Jammu and Kashmir. A few minor amendments
in the Act were made by the Sale of Goods (Amendment) Act, 1963.
In this unit, you will learn that the general provisions of the Indian Contract
Act continue to be applicable to the contract of sale of goods in so far as they are
not inconsistent with the express provisions of the Sale of Goods Act. Thus, for
example, the provisions of the Contract Act relating to capacity of the parties, free
consent, agreements in restraint of trade, wagering agreements and measure of
damages continue to be applicable to a contract of sale of goods. But the definition
Self-Instructional
Material 57
Sale of Goods Act, 1930 of consideration stands modified to the extent that in a contract of sale of goods
consideration must be by way of ‘price’, i.e., only money consideration.
A contract of sale of goods results, like any other contract, by an offer by
one party and its acceptance by the other. Thus, you will understand that it is a
NOTES
consensual transaction. The parties to the contract enjoy unfettered discretion to
agree to any terms they like relating to delivery and payment of price, etc. The
Sale of Goods Act does not seek to fetter this discretion. It simply lays down
certain positive rules of general application for those cases where the parties have
failed to contemplate expressly for contingencies which may interrupt the smooth
performance of a contract of sale, such as the destruction of the thing sold, before
it is delivered or the insolvency of the buyer, etc. The Act leaves the parties free to
modify the provisions of the law by express stipulations.
4.1 OBJECTIVES

 Explain the essentials of a contract of sale of goods
 Describe the conditions and warranties implied in a contract of sale of goods
 Discuss the general rules regarding the transfer of property
 Identify the rules relating to delivery of goods and acceptance of goods
 Understand the concept of an ‘unpaid seller’ and the remedies available to
an ‘unpaid seller’
4.2 CONTRACT OF SALE OF GOODS
The law relating to sale of goods is contained in the Sale of Goods Act, 1930,
which came into force on 1st July 1930. The Act contains sixty-six Sections and
extends to the whole of India except the State of Jammu and Kashmir. A few
minor amendments in the Act were made by Sale of Goods (Amendment) Act,
1963.
The general provisions of the Indian Contract Act continue to be applicable
to the contract of sale of goods in so far as they are not inconsistent with the
express provisions of Sale of Goods Act (Sec. 3). Thus, for example, the provisions
of the Contract Act relating to capacity of the parties, free consent, agreements in
restraint of trade, wagering agreements and measure of damages continue to be
applicable to a contract of sale of goods. But the definition of consideration stands
modified to the extent that in a contract of sale of goods consideration must be by
way of ‘price,’ i.e., only money consideration [Secs. 2(10) and 4].
A contract of sale of goods results, like any other contract, by an offer by
one party and its acceptance by the other. Thus, it is a consensual transaction. The
Self-Instructional
58 Material
parties to the contract enjoy unfettered discretion to agree to any terms they like Sale of Goods Act, 1930
relating to delivery and payment of price, etc. The Sale of Goods Act does not
seek to fetter this discretion. It simply lays down certain positive rules of general
application for those cases where the parties have failed to contemplate expressly
for contingencies which may interrupt the smooth performance of a contract of NOTES
sale, such as the destruction of the thing sold, before it is delivered or the insolvency
of the buyer, etc. The Act leaves the parties free to modify the provisions of the
law by express stipulations.
Section 4(1) of the Sale of Goods Act defines a contract of sale of goods as, “a
contract whereby the seller transfers or agrees to transfer the property in goods to
the buyer for a price.”
This definition reveals the following essential characteristics of a contract of
sale of goods:
1. Two parties: The first essential is that there must be two distinct parties to
a contract of sale, viz., a buyer and a seller, as a person cannot buy his own
goods. Thus, for example, when students of a hostel take meals with a
mess run by themselves on cooperative lines, there is no contract of sale.
The students are ‘undivided joint owners’ of the meals they are consuming.
As a matter of fact every member of the mess is consuming his own goods
on the basis of understanding that he must restore to the mess what he
consumed so that the mess continue to provide meals for its members. An
‘undivided joint owner’ must be distinguished from a ‘part-owner’ who is a
joint owner with divisible share. According to Section 4(1), there may be a
contract of sale between one part-owner and another, e.g., if A and B
jointly own a computer, A may sell his ownership in the computer to B,
thereby making B sole owner of the goods. Similarly, a partner may buy the
goods from the firm in which he is a partner and vice-versa. There is,
however, one exceptional case when a person may buy his own goods.
Where a person’s goods are sold in execution of a decree, he may himself
buy them, so as to save them from a transfer of ownership to someone else
(Moore vs Singer Manufacturing Co.).
2. Transfer of property: ‘Property’ here means ‘ownership’. Transfer of
property in the goods is another essential of a contract of sale of goods. A
mere transfer of possession of the goods cannot be termed as sale. To
constitute a contract of sale the seller must either transfer or agree to transfer
the property in the goods to the buyer. Further, the term ‘property,’ as used
in the Sale of Goods Act, means ‘general property’ in goods as distinguished
from ‘special property’ [Sec. 2(11)]. If P who owns certain goods pledges
them to R, he has general property in the goods, whereas R (the Pawnee)
has special property or interest in the goods to the extent of the amount of
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Sale of Goods Act, 1930 advance he has made to the pawnor. Similarly, in the case of bailment of
goods for the purpose of repair, the bailee has special interest in goods
bailed to the extent of his labour charges.
3. Goods: The subject-matter of the contract of sale must be ‘goods’.
NOTES
According to Section 2(7), ‘goods means every kind of movable property
other than actionable claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale.’
Thus every kind of movable property except actionable claim and money is
regarded as ‘goods’. Goodwill, trademarks, copyrights, patent rights, water,
gas, electricity, decree of a court of law, are all regarded as goods. Shares
and stock are also included in goods. With regard to growing crops, grass
and things attached to or forming part of the land, such things are regarded
as goods as soon as they are agreed to be separated from the land. Thus
where trees were sold so that they could be cut out and separated from the
land and then taken away by the buyer, it was held that there was a contract
for sale of movable property or goods (Kursell vs Timber Operators &
Contractors Ltd. ). But contracts for sale of things ‘forming part of the
land itself’ are not contracts for sale of goods. For example, a contract for
the sale of coal mine or building-stone quarry is not a contract of sale of
goods.
‘Actionable claims’ means claims which can be enforced by a legal action
or a suit, e.g., a book debt (i.e., a debt evidenced by an entry by the
creditor in his Account Book or Bahi). A book debt is not goods because
it can only be assigned as per the Transfer of Property Act but cannot be
sold. The right of a partner to sue for an account of a dissolved firm is an
actionable claim (Sunrise Associates vs Govt. of NCT of Delhi and
Others). Similarly, a bill of exchange or a promissory note represents a
debt, i.e., an actionable claim and implies the right of the creditor to recover
its amount from the debtor. But since these can be transferred under
Negotiable Instruments Act by mere delivery or indorsement and delivery,
such instruments cannot be sold.
‘Money’ means current money. It is not regarded goods because it is the
medium of exchange through which goods can be bought. Old and rare
coins, however, may be treated as goods and sold as such.
It may be mentioned that sale of immovable property is governed by the
Transfer of Property Act, 1882.
4. Price: The consideration for a contract of sale must be money consideration
called the ‘price.’ If goods are sold or exchanged for other goods, the
transaction is barter, governed by the Transfer of Property Act and not a
sale of goods under this Act. But if goods are sold partly for goods and
partly for money, the contract is one of sale (Aldridge vs Johnson ).
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60 Material
5. Includes both a ‘sale’ and ‘an agreement to sell.’ The term ‘contract of Sale of Goods Act, 1930
sale’ is a generic term and includes both a ‘sale’ and an ‘agreement to sell’
[as is clear from the definition of the term as per Section 4(1) given earlier].
Sale: Where under a contract of sale the property in the goods is immediately
NOTES
transferred at the time of making the contract from the seller to the buyer,
the contract is called a ‘sale’ [Sec. 4(3)]. It refers to an ‘absolute sale’,
e.g., an outright sale on a counter in a shop. There is immediate conveyance
of the ownership and mostly of the subject-matter of the sale as well (delivery
may also be given in future). It is an executed contract.
An agreement to sell: Where under a contract of sale the transfer of
property in the goods is to take place at a future time or subject to some
condition thereafter to be fulfilled, the contract is called ‘an agreement to
sell’ [Sec. 4(3)]. It is an executory contract and refers to a conditional sale.
‘An agreement to sell’ becomes a ‘sale’ when the time elapses or the
conditions are fulfilled subject to which the property in the goods is to be
transferred [Sec. 4 (4)].
6. No formalities to be observed (Sec. 5). The Sale of Goods Act does not
prescribe any particular form to constitute a valid contract of sale. A contract
of sale of goods can be made by mere offer and acceptance. The offer may
be made either by the seller or the buyer and the same must be accepted by
the other. Neither payment nor delivery is necessary at the time of making
the contract of sale. Further, such a contract may be made either orally or in
writing or partly orally and partly in writing or may be even implied from the
conduct of the parties. Where articles are exhibited for sale and a customer
picks up one and the sales assistant packs the same for him, there has
resulted a contract of sale of goods by the conduct of the parties.
It is essential to clearly understand the distinction between sale and agreement
to sell, sale and hire purchase, hire purchase and agreement to sell, and sale and
contract for work and labour. These are as follows:
A. Distinction between ‘Sale’ and ‘Agreement to Sell’
The following are the main points of distinction between a ‘sale’ and ‘an agreement
to sell’:
1. Transfer of property (ownership): In a ‘sale’, the property in goods passes
to the buyer immediately at the time of making the contract. In other words,
a sale implies immediate conveyance of property so that the seller ceases to
be the owner of the goods and the buyer becomes the owner thereof. It
creates a jus in rem, i.e., gives right to the buyer to enjoy goods as against
the whole world.
In ‘an agreement to sell’ there is no transfer of property to the buyer at the
time of the contract. The conveyance of property takes place later so that
the seller continues to be the owner until the agreement to sell becomes a
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Sale of Goods Act, 1930 sale either by the expiry of certain time or the fulfilment of some condition.
Thus where A agrees to buy 50 kg wheat from B and the wheat is yet to be
weighed, the transaction is an agreement to sell because as per Section 22,
in such a case the property does not pass to the buyer till the goods are
NOTES weighed and the buyer has notice thereof. The transaction becomes a sale
and the property in the goods passes to the buyer after the wheat is weighed
and the buyer has notice thereof. An agreement to sell creates a jus in
personam, that is, it gives a right to either buyer or seller against the other
for any default in fulfilling his part of the agreement.
It is worth noting that this is the basic point of distinction between a ‘sale’
and ‘an agreement to sell.’ All other points of distinction follow from this
basic difference, i.e., whether the property in the goods has passed or is yet
to pass from seller to buyer.
2. Risk of loss: The general rule is that unless otherwise agreed, the risk of
loss prima facie passes with property (Sec. 26). Thus in case of sale, if the
goods are destroyed the loss falls on the buyer even though the goods may
never have come into his possession because the property in the goods has
already passed to the buyer. On the other hand, in case of an agreement to
sell where the ownership in the goods is yet to pass from the seller to the
buyer, such loss has to be borne by the seller even though the goods are in
the possession of the buyer,
3. Consequences of breach: In case of sale, if the buyer wrongfully neglects
or refuses to pay the price of the goods, the seller can sue for the price,
even though the goods are still in his possession. In case of an agreement to
sell, if the buyer breaks his promise, the seller can only sue for damages and
not for the price, even though the goods are in the possession of buyer.
4. Right of resale: In a sale, the property is with the buyer and as such the
seller (in possession of goods after sale) cannot resell the goods. If he does
so, the subsequent buyer having knowledge of the previous sale does not
acquire a title to the goods. The original buyer can sue and recover the
goods from the third person as owner, and can also sue the seller for the
breach of contract as well as for the tort of conversion. The right to recover
the goods from the third person is, however, lost if the subsequent buyer
had bought them bona fide without notice of the previous sale (Sec. 30).
In an agreement to sell, the property in the goods remains with the seller
and as such he can dispose of the goods as he likes and the original buyer
can sue him for the breach of contract only. In this case, the subsequent
buyer gets a good title to the goods, irrespective of his knowledge of previous
sale. Further, goods forming the subject-matter of an agreement to sell can
also be attached in execution of a decree of a court of law against the seller.
5. Insolvency of buyer before he pays for the goods: In a sale, if the
buyer is adjudged insolvent before he pays for the goods, the seller, in the
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62 Material
absence of a ‘right of lien’ over the goods, must deliver the goods to the Sale of Goods Act, 1930
Official Receiver or Assignee. The seller is entitled only to a rateable dividend

for the price of the goods. But in an agreement to sell, in these circumstances,
the seller may refuse to deliver the goods to the Official Receiver or Assignee
unless paid for, as ownership has not passed to the buyer. NOTES
6. Insolvency of seller if the buyer has already paid the price: In a sale,
if the seller is adjudged insolvent, the buyer is entitled to recover the goods
from the Official Receiver or Assignee, as the property in the goods rests
with the buyer. On the other hand, in an agreement to sell, if the buyer has
already paid the price and the seller is adjudged insolvent, the buyer can
only claim a rateable dividend (as a creditor) and not the goods because
property in them still rests with the seller.
B. Distinction between Sale and Hire Purchase
Contracts of sale resemble contracts of hire purchase very closely, and indeed the
real object of a contract of hire purchase is the sale of the goods ultimately.
Nonetheless, a sale has to be distinguished from a hire purchase as their legal
incidents are quite different. Under hire purchase agreement the goods are delivered
to the hire purchaser for his use at the time of the agreement but the owner of the
goods agrees to transfer the property in the goods to the hire purchaser only when
a certain fixed number of instalments of price are paid by the hirer. Till that time,
the hirer remains the bailee and the instalments paid by him are regarded as the
hire-charges for the use of the goods. If there is a default by the hire purchaser in
paying an instalment, the owner has a right to resume the possession of the goods
immediately without refunding the amount received till then, because the ownership
still rests with him. Thus, the essence of hire-purchase agreement is that there is no
agreement to buy, but there is only a bailment of the goods coupled with an option
to purchase them which may or may not be exercised.
It may be noted that mere payment of price by instalments under an
agreement does not necessarily make it a hire-purchase, but it may be a sale. For
example, in the case of ‘Instalment Purchase Method,’ there is a ‘sale,’ because in
this case the buyer is bound to buy with no option to return and the property in
goods passes to the buyer at once.
The main points of distinction between the ‘sale’ and ‘hire-purchase’ are as
follows:
1. In a sale, property in the goods is transferred to the buyer immediately
at the time of contract, whereas in hire-purchase the property in the
goods passes to the hirer upon payment of the last instalment.
2. In a sale the position of the buyer is that of the owner of the goods but
in hire purchase the position of the hirer is that of a bailee till he pays
the last instalment.
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Sale of Goods Act, 1930 3. In the case of a sale, the buyer cannot terminate the contract and is
bound to pay the price of the goods. On the other hand, in the case of
hire-purchase the hirer may, if he so likes, terminate the contract by
returning the goods to its owner without any liability to pay the remaining
NOTES instalments.
4. In the case of a sale, the seller takes the risk of any loss resulting from
the insolvency of the buyer. In the case of hire purchase, the owner
takes no such risk, for if the hirer fails to pay an instalment the owner
has the right to take back the goods.
5. In the case of a sale, the buyer can pass a good title to a bona fide
purchaser from him but in a hire-purchase, the hirer cannot pass any
title even to a bona fide purchaser.
6. In a sale, sales tax is levied at the time of the contract whereas in a
hire-purchase sales tax is not leviable until it eventually ripens into a
sale (K. L. Johar & Co. vs Dy. Commercial Tax Officer ).
C. Hire-purchase and an agreement to sell
A contract of hire-purchase may also be distinguished from ‘an agreement to sell’
(or ‘an agreement to buy’ from buyer’s point of view). As already observed, a
hire-purchase agreement initially is merely an irrevocable offer for sale, that is,
under it the owner is bound to sell the goods later if the hirer pays all the instalments
as agreed, but on the part of the hire purchaser there is an option to buy or to
return the goods and the hirer cannot be compelled to buy. ‘An agreement to
buy’, on the other hand, imports a legal obligation to buy and therefore there is no
option available to the buyer to buy or to terminate the contract in this case. Again,
in a hire-purchase agreement, delivery of goods to the hire-purchaser is necessary
whereas it is not so in an ‘agreement to sell.’
D. Distinction between Sale and Contract for Work and Labour
A distinction has to be made between a contract of sale and a contract for work
and labour mainly because of taxation purpose. Sales tax is levied only in the case
of a contract of sale. When property in the goods is intended to be transferred and
goods are ultimately to be delivered to the buyer, it is a contract of sale even
though some labour on the part of the seller of the goods may be necessary.
Where, however, the essence of the contract is rendering of service and exercise
of skill and no goods are delivered as such, it is a contract of work and labour and
not of sale. In fact, the difference between the two is very minute.
‘Goods’ form the subject-matter of a contract of sale. We have already seen the
meaning of the term ‘goods’ as per Section 2(7). Goods may be classified into the
following types:
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1. Existing goods;
64 Material
2. Future goods; and Sale of Goods Act, 1930
3. Contingent goods.
1. Existing goods: Goods which are physically in existence and which are in
seller’s ownership and/or possession, at the time of entering the contract of NOTES
sale, are called ‘existing goods.’ Where seller is the owner, he has the general
property in them. Where seller is in possession, say, as an agent or a pledgee,
he has a right to sell them.
Existing goods may again be either ‘specific’ or ‘unascertained.’
(a) Specific goods: Goods identified and agreed upon at the time of the
making of the contract of sale are called ‘specific goods’ [Sec. 2(14)].
It may be noted that in actual practice the term ‘ascertained goods’ is
used in the same sense as ‘specific goods.’ For example, where A
agrees to sell to B a particular DVD player bearing a distinctive number,
there is a contract of sale of specific or ascertained goods.
(b) Unascertained goods: The goods which are not separately identified
or ascertained at the time of the making of the contract are known as
‘unascertained goods.’ They are indicated or defined only by
description. 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.
The distinction between ‘specific’ or ‘ascertained’ and ‘unascertained’
goods is important in connection with the rules regarding ‘transfer of
property’ from the seller to the buyer. These rules will be discussed
later in Chapter 18—Transfer of Property.
2. Future goods: Goods to be manufactured, produced or acquired by the
seller after the making of the contract of sale are called ‘future goods’ [Sec.
2(6)]. These goods may be either not yet in existence or be in existence but
not yet acquired by the seller. It is worth noting that there can be no present
sale of future goods because property cannot pass in what is not owned by
the seller at the time of the contract. So even if the parties purport to effect
a present sale of future goods, in law it operates only as an ‘agreement to
sell’ [Sec. 6(3)].
3. Contingent goods: Goods, the acquisition of which by the seller depends
upon an uncertain contingency are called ‘contingent goods’ [Sec. 6(2)].
Obviously they are a type of future goods and therefore a contract for the
sale of contingent goods also operates as ‘an agreement to sell’ and not a
‘sale’ so far as the question of passing of property to the buyer is concerned.
In other words, like the future goods, in the case of contingent goods also
the property does not pass to the buyer at the time of making the contract.
It is important to note that a contract of sale of contingent goods is
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Sale of Goods Act, 1930 enforceable only if the event on the happening of which the performance of
the contract is dependent happens, otherwise the contract become void.
NOTES Sections 7 and 8 deal with the effect of perishing of goods on the rights and
obligations of the parties to a contract of sale. Under these Sections the word
‘perishing’ means not only physical destruction of the goods but it also covers:
(a) Damage to goods so that the goods have ceased to exist in the commercial
sense, i.e., their merchantable character as such has been lost (although
they are not physically destroyed), e.g., where cement is spoiled by water
and becomes almost stone or where sugar becomes sharbat and thus are
unsaleable as cement or sugar;
(b) Loss of goods by theft (Barrow Ltd. vs Phillips Ltd.);
(c) Where the goods have been lawfully requisitioned by the government (Re
Shipton, Anderson & Co.).
It may also be mentioned that it is only the perishing of specific and
ascertained goods that affects a contract of sale. Where, therefore, unascertained
goods form the subject-matter of a contract of sale, their perishing does not affect
the contract and the seller is bound to supply the goods from wherever he likes,
otherwise be liable for breach of contract. Thus where A agrees to sell to B ten
bales of Egyptian cotton out of 100 bales lying in his godown and the bales in the
godown are completely destroyed by fire, the contract does not become void. A
must supply ten bales of cotton after purchasing them from the market or pay
damages for the breach.
The effect of perishing of goods may be discussed under the following heads:
1. Perishing of specific goods at or before making of the contract (Sec.
7). 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 agreement 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.
(ii) In case of perishing of only ‘a part’ of the goods: Where in a
contract for the sale of specific goods, only part of the goods are
destroyed or damaged, the effect of perishing will depend upon
whether the contract is entire or divisible. If it is entire (i.e., indivisible)
and part only of the goods has perished, the contract is void. If the
contract is divisible, it will not be void and the part available in good
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condition must be accepted by the buyer.
66 Material
2. Perishing of specific goods before sale but after agreement to sell Sale of Goods Act, 1930
(Sec. 8). Where 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 passes to the buyer, the agreement is thereby avoided,
i.e., the contract of sale becomes void, and both parties are excused from NOTES
performance of the contract. This provision is based on the ground of
supervening impossibility of performance which makes a contract void.
Notice that under Section 7 the agreement is void ab-initio while under this
Section the contract becomes void later.
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)].
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 Coupland, 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:
The money consideration for a sale of goods is known as ‘price’ [Sec. 2(10)]. We
have already seen that the price is an essential element in every contract of sale of
goods, that is, no valid sale can take place without a price. The price should be
paid or promised to be paid in legal tender money, unless otherwise agreed. It
may be paid in the form of a cheque, hundi, bank deposit, etc. For, it is not the
mode of payment of a price but the agreement to pay a price in money that is
requisite to constitute a valid contract of sale. Some important aspects of the price
are:
A. Modes of fixing the price
According to Section 9 the price may be fixed by one or the other of the following
modes:
1. It may be expressly fixed by the contract itself. This is the most usual
mode of fixing the price. The parties are free to fix any price they like and
the court will not question as to the adequacy of price. But the sum should
be definite. Where an alternative price is fixed, the agreement is void ab- Self-Instructional
Material 67
Sale of Goods Act, 1930 initio as it involves an element of wager (Bourke vs Short). Thus, where A
agrees to sell his cow to B for 5,000 if the cow gives 10 kg milk every day
but for 100 only if it fails to do so, there is a wagering agreement void ab-
initio.
NOTES
2. It may be fixed in accordance with an agreed manner provided by the
contract. For example, it may be agreed that the buyer would pay the
market price prevailing on a particular date, or that the price is to be fixed
by a third party (i.e., valuer) appointed by the consent of the parties. But in
the following cases where the agreement of the parties as to price is uncertain,
price is deemed as ‘not capable of being fixed’ and hence the agreement is
void ab-initio for uncertainty:
(a) If the price is agreed to be whatever sum the seller be offered by any
third party; or
(b) If the price is left to be fixed by one of the contracting parties, expressly.
Remember that if no price is fixed then the contract is not void for uncertainty
because in that case law usually allows market price prevailing on the date
of the supply of goods as the price bargained for.
3. It may be determined by the course of dealings between the parties.
For example, if the buyer has been previously paying to a particular seller
the price prevailing on the date of placing the order, the course of dealings
suggest that in subsequent transactions also the price as on the date of
order will be paid.
4. If the price is not capable of being determined in accordance with any
of the above modes, the buyer is bound to pay to the seller a ‘reasonable
price.’ What is a reasonable price is a question of fact dependent on the
circumstances of each particular case. Ordinarily, the market price of the
goods prevailing on the date of supply is taken as reasonable price.
B. Agreement to sell at valuation (Sec. 10)
Where there is an agreement to sell goods on the terms that the price is to be fixed
by the valuation of a third party and such third party fails to fix the price (either
because he cannot value or because he does not want to value), the contract
becomes void, except as to part of goods delivered and accepted, if any, under
the contract, as regards which the buyer is bound to pay a reasonable price. If,
however, any one of the two parties, namely, the seller or the buyer, prevents the
third party from making the valuation, the innocent party may maintain a suit for
damages against the party in fault. Notice that although in this case also the contract
becomes void, yet the party at fault is bound to compensate the other party for the
actual loss suffered by him because of the act of prevention.
It is to be remembered that unless otherwise agreed, payment of the price
and delivery of the goods are concurrent conditions (Sec. 32). Again, Section 64-
A, which provides for ‘Escalation Clause,’ is important. As per Section 64-A,
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68 Material
unless otherwise agreed, where, after making of the contract and fixing the price Sale of Goods Act, 1930
but before the delivery of the goods, a new or increased custom or excise duty or
sale or purchase tax is imposed and the seller has to pay it, the seller is entitled to
add the same to the price. Conversely, if the rate of duty or tax is lowered, the
buyer would be entitled to a reduction in price. NOTES
C. Earnest or Deposit
Money deposited with the seller by the buyer as security for due fulfilment of the
contract is called ‘earnest’ or ‘deposit’. Where the contract is carried through,
earnest money counts as part payment and only the balance of the price is required
to be paid. But if the contract goes off because of the fault of the buyer, the seller
is entitled to forfeit it and where it falls through because of the default of the seller,
the buyer is entitled to recover the earnest money in addition to damages for
breach. If on the breach of the agreement by the buyer, the seller sues him for the
breach, the earnest, although forfeited, is to be taken into account as diminishing
the amount of damages (Jaganadhayya vs Ramanatha).
D. Stipulations as to Time
Stipulations as to time in a contract of sale fall under the following two heads:
1. Stipulation relating to time of delivery of goods.
2. Stipulation relating to time of payment of the price.
As regards the time fixed for the delivery of goods, time is usually held ‘to
be of the essence of the contract.’ Thus if time is fixed for the delivery of goods
and the seller makes a delay, the contract is voidable at the option of the buyer. In
case of late delivery, therefore, the buyer may refuse to accept the delivery and
may put an end to the contract.
As regards the time fixed for the payment of the price, the general rule is
that ‘time is not deemed to be of the essence of the contract,’ unless a different
intention appears from the terms of the contract (Sec. 11). Thus even if the price
is not paid as agreed, the seller cannot avoid the contract on that account. He has
to deliver the goods if the buyer tenders the price within reasonable time before
resale of the goods. The seller may, however, claim compensation for the loss
occasioned to him by the buyer’s failure to pay on the appointed day.
Any document which is used in the ordinary course of business as proof of the
possession or control of goods, or authorising or purporting to authorise, either by
endorsement or by delivery, the possessor of the document to transfer or receive
goods thereby represented is a document of title to goods [Sec. 2(4)]. Thus a
document of title is a proof of the ownership of the goods. It authorises its holder
to receive goods mentioned therein or to further transfer such right to another
person by proper endorsement or delivery.
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Sale of Goods Act, 1930 A document of title to goods contains an undertaking on the part of the
issuing authority to deliver the goods to the holder thereof unconditionally. Although
such a document can be transferred by mere delivery or by endorsement, yet it is
regarded as ‘quasi negotiable instrument’ because the title of the transferee (even
NOTES if bonafide) will not be superior to that of the transferor in the case of transfer of
such document.
Bill of lading, dock-warrant, warehouse keeper’s certificate, wharfinger’s
certificate, railway receipt, delivery order, etc., are popular examples of the
documents of title to goods.
Check Your Progress

1. What are the various types of goods?
2. What is ‘price’?
3. What are the various modes of fixing price?
4.3 CONDITIONS AND WARRANTIES
A contract of sale of goods contains various terms or stipulations regarding the

quality of the goods, the price and the mode of its payment, the delivery of goods
and its time and place. But all of them are not of equal importance. Some of these
stipulations may be major terms which go to the very root of the contract and
their breach may frustrate the very purpose of the contract, while others may be
minor terms which are not so vital that their breach may seem to be a breach of
the contract as such. In law of sales major terms are called ‘conditions’ and minor
terms are called ‘warranties’.
From terms of the contract, it is necessary to distinguish mere statements of
commendation or praise or expressions of opinion made by the seller in reference
to his goods. Such commendatory statements are neither ‘conditions’ nor
‘warranties’. They do not form a part of the contract and as a result give no right
of action. For example, where a horse dealer, while praising his horse, states that
the horse is very lucky and one whosoever shall purchase it must very soon become
a millionaire, his statement, being mere commendatory in nature, does not form a
part of the contract and its breach (i.e., if the buyer of the horse does not actually
become a millionaire later) does not give rise to any legal consequences.
A ‘condition’ is essential to the main purpose of the contract, the breach of
which gives the aggrieved party a right to repudiate the contract itself [Sec. 12(2)].
In addition, he may maintain an action for damages for loss suffered, if any, on the
footing that the whole contract is broken and the seller is guilty of non-delivery
(Miller’s Machinery Co. Ltd. vs David Way & Son ).
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A ‘warranty’ is a stipulation collateral to the main purpose of the contract, Sale of Goods Act, 1930
the breach of which gives the aggrieved party a right to sue for damages only, and
not to avoid the contract itself. [Sec. 12(3)]
It will be seen that the above definitions explain both the meaning and the
NOTES
legal effect of a ‘condition’ and a ‘warranty’. Accordingly, a ‘condition’ forms the
very basis of a contract of sale, the breach of which causes irreparable damage to
the aggrieved party so as to entitle him even to repudiate the contract, whereas a
‘warranty’ is only of secondary importance, the breach of which causes only such
damage as can be compensated for by damages. In fact a breach of ‘condition’ is
followed by the same consequence as the breach of a ‘condition precedent’ in
other contracts; namely, the innocent party has a right to rescind the contract, and
claim damages.
There is no hard and fast rule as to which stipulation is a condition and
which one is a warranty. Section 12(4) lays down to the same effect, thus, ‘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.’ Thus the court is not to be guided by the terminology
of the parties but has to look to the intention of the parties by referring to the terms
of the contract, its construction and the surrounding circumstances to judge whether
a stipulation was a condition or a warranty. The most suitable test to distinguish
between the two terms is that if the stipulation is such that its breach would be fatal
to the rights of the aggrieved party, then such a stipulation is a condition and where
it is not so, the stipulation is only a warranty.
But if P says to R, ‘I want a good horse.’ R shows him a horse and says,
‘This is a good horse and it can run at a speed of 30 kilometers per hour,’ and P
buys the horse and finds later on that it can run at a speed of 20 kilometers per
hour only, there is a breach of warranty because the stipulation made by the seller
did not form the very basis of the contract and was only subsidiary one. The seller
gave the assurance about the running speed of the horse of his own without being
asked by the buyer hence it is only of secondary importance.
The above illustrations are a clear proof of the fact that an exactly similar
term may be a condition in one contract and a warranty in another depending
upon the construction of the contract as a whole.
The points of distinction between a condition and a warranty may be summed up
as under:
1. As to value: A condition is a stipulation which is essential to the main purpose
of the contract, whereas a warranty is a stipulation which is collateral to the
main purpose of the contract. [Sec. 12(2)(3)].
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Sale of Goods Act, 1930 2. As to breach: The breach of a condition gives the aggrieved party the right
to repudiate the contract and also to claim damages, whereas the breach of
warranty gives the aggrieved party a right to claim damages only.
3. As to treatment: A breach of condition may be treated as a breach of
NOTES
warranty. But a breach of warranty cannot be treated as a breach of
condition.
Section 13 deals with cases where a breach of condition is to be treated as
a breach of warranty, as a consequence of which the buyer loses his right to
rescind the contract and has to be content with a claim for damages only. These
cases are as follows:
1. Voluntary waiver by buyer: Although on a breach of condition by the
seller, the buyer has a right to treat the contract as repudiated and reject the
goods, but he is not bound to do so. He may instead elect to waive the
condition, i.e., to treat the breach of condition as a breach of warranty and
accept the goods and sue the seller for damages for breach of warranty.
2. Acceptance of goods by buyer: Where the buyer has accepted the goods
and subsequently he comes to know of the breach of condition, he cannot
reject them, but can only maintain an action for damages. This case does
not depend upon the will of the buyer but the law compulsorily treats a
breach of condition as a breach of warranty.
Acceptance of only part of the goods. If the buyer has accepted only part
of the goods and the contract is indivisible, he will have to treat the breach of
condition as a breach of warranty and accept the remaining part also. But in case
of divisible contracts, he can repudiate as regards remaining goods, if he has
accepted only part thereof. Indivisible contracts are those where price for a lot,
consisting goods of different qualities, as such is fixed and not fixed per unit or per
bag or per ton, etc.
Meaning of ‘acceptance’. Taking possession or delivery of the goods does
not by itself amount to acceptance. According to Section 42, the buyer is deemed
to have accepted the goods:
(i) when he intimates to the seller that he has accepted them; or
(ii) when he does any act in relation to goods which is inconsistent with
the ownership of the seller, e.g., consumes, uses, pledges or resells
the goods or puts his mark on them, etc., or
(iii) when, after the lapse of reasonable time, he retains the goods without
intimating the seller that he has rejected them. On rejection of goods,
however, mere informing the seller is enough and the buyer is not
bound to return the rejected goods actually (Sec. 43).
Conditions and warranties may be either express or implied. They are said to be
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72 Material
are said to be implied when the law presumes their existence in the contract Sale of Goods Act, 1930
automatically though they have not been put into it in express words. Implied
conditions and warranties may, however, be negative or varied by express
agreement, or by course of dealing between the parties, or by usage of trade
(Sec. 62). This provision is merely an application of the general maxim of law, NOTES
‘what is expressly done puts an end to what is tacit or implied,’ and ‘custom and
agreement over-rule implied conditions and warranties.’
A. Implied Conditions
Unless otherwise agreed, the law incorporates into a contract of sale of goods the
following implied conditions:
1. Condition as to title [Sec. 14 (a)]: In every contract of sale, the first
implied condition on the part of the seller is that, in the case of a sale, he has
the right to sell the goods and that, in the case of an agreement to sell, he
will have a right to sell the goods at the time when the property is to pass.
Ordinarily the seller has the right to sell the goods if either he is the owner of
the goods or he is owner’s agent. As a result of this condition, if the seller’s
title turns out to be defective the buyer is entitled to reject the goods and to
recover his price. Notice that in the case of breach of condition as to title
the buyer has no option to treat the breach of condition as breach of warranty
and accept the goods and sue the seller for damages. In this case he must
return the goods to the true owner. He can of course recover the price from
the seller because of a total failure of consideration.
It may be noted that the implied condition as to title makes it obligatory
upon the seller that he must not only be the owner but also must be able to
uphold the validity of the contract. Thus if the goods sold bear labels infringing
the trade mark of another, the seller is guilty of breach of this condition
although he had full ownership of the goods.
It may further be noted that ‘where a seller having no title to the goods at
the time of the sale, subsequently acquires the title (e.g., by paying off the
true owner) before the buyer seeks to repudiate the contract, that title
feeds the defective titles of both the original and subsequent buyers and it
will then be too late for the buyer to repudiate the contract (Patten vs
Thomas Motors).
2. Condition in a sale by description: ‘Where there is a contract of sale of
goods by description, there is an implied condition that the goods shall
correspond with the description.....’’ (Sec. 15). Lord Blackburn observed:
‘If you contract to sell peas, you cannot oblige a party to take beans. If the
description of the article tendered is different in any respect, it is not the
article bargained for, and the other party is not bound to take it.’ It is important
that the goods must correspond with the description whether it is a sale of
specific goods or of unascertained goods. Further, the fact that the buyer
has examined the goods will not affect his right to reject the goods, if the Self-Instructional
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Sale of Goods Act, 1930 deviation of the goods from the description is such which could not have
been discovered by casual examination, i.e., if the goods show any latent
defects.
The description may be in terms of the qualities or characteristics of the
NOTES
goods, e.g., long staple cotton, Kalyan wheat, sugar C-30, basmati rice or
may simply mention the trade mark, brand name or the type of packing,
etc.
3. Condition in a sale by sample (Sec. 17): When under a contract of sale,
goods are to be supplied according to a sample agreed upon, the implied
conditions are:
(i) that the bulk shall correspond with the sample in quality;
(ii) that the buyer shall have a reasonable opportunity of comparing the
bulk with the sample;
(iii) that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable
examination of the sample. In other words, there should not be any
latent defect in the goods. If the defect is patent one, that is, easily
discoverable by the exercise of ordinary care, and the buyer takes
delivery after inspection, there is no breach of implied condition and
the buyer has no remedy.
4. Condition in a sale by sample as well as by description (Sec. 15):
When goods are sold by sample as well as by description, there is an implied
condition that the bulk of the goods shall correspond both with the sample
and with the description. If the goods supplied correspond only with the
sample and not with the description or vice versa, the buyer is entitled to
reject the goods. The bulk of the goods must correspond with both.
5. Condition as to fitness or quality [Sec. 16 (1)]: Ordinarily, in a contract
of sale there is no implied condition or warranty as to quality or fitness for
any particular purpose of goods supplied; the rule of law being ‘Caveat
Emptor’, that is, let the buyer beware. But an implied condition is deemed
to exist on the part of the seller that the goods supplied shall be reasonably
fit for the purpose for which the buyer wants them, if the following conditions
are satisfied:
(i) The buyer, expressly or impliedly, should make known to the seller
the particular purpose for which the goods are required;
(ii) The buyer should rely on the seller’s skill or judgement; and
(iii) The goods sold must be of a description which the seller deals in the
ordinary course of his business, whether he be the manufacturer or
not.
The purpose must be made known expressly if the goods to be supplied
can be used for several purposes, otherwise the condition as to fitness will
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not be implied and the buyer will have no right to reject the goods merely Sale of Goods Act, 1930
because they are unfit for the specific purpose he had in mind.
The purpose need not be told expressly if the goods are fit for one particular
purpose only or if the nature of the goods itself tells the purpose by
NOTES
implication. In such cases the purpose is deemed to be made known to the
seller impliedly.
Sometimes the implied purpose may also be gathered from usage of the
trade, e.g., mobiloil for a scooter implies ‘two T’s mobiloil.’
It is important that the implied condition applies only in the case of sale of
goods to a normal buyer. If the buyer is suffering from an abnormality; say,
is allergic to particular foods, medicines, dust, etc., and it is not made known
to the seller at the time of sale, this condition does not apply.
Sale under patent or trade name: Proviso to Section 16 (1) lays down
that in the case of a contract for the sale of a specified article under its
patent or other trade name, there is no implied condition as to its fitness for
any particular purpose. It is so because in such a case the buyer is not
relying on the skill and judgement of the seller but relies on the good
reputation that the goods came to acquire and buys them on the strength of
that reputation. The seller’s duty is to supply the goods of the same trade
name as demanded by the buyer, whether they are fit for any particular
purpose or not, is not his concern.
But the condition as to fitness will apply if the buyer relies on the seller’s
skill and judgement as regards the suitability of the goods for a particular
named purpose and makes known to the seller that he so relies on him,
even though the article is described in the order by its trade name.
6. Condition as to merchantability [Sec. 16(2)]: This condition is implied
only where the sale is by description. We have already seen that there is an
implied condition in such cases, as per Section 15, that the goods should
correspond with the description. This sub-section lays down another implied
condition in such cases, that is, that the goods should be of ‘merchantable
quality.’ But for making this condition applicable, not only that the sale must
be by description, but the following conditions must also be satisfied:
(i) The seller should be a dealer in goods of that description, whether he
be the manufacturer or not; and
(ii) The buyer must not have any opportunity of examining the goods or
there must be some latent defect in the goods which would not be
apparent on reasonable examination of the same.
If the buyer had an opportunity of making the examination but he avoids to
examine, or if he has examined the goods, there is no implied condition as
to merchantability as regards defects which such examination ought to have
revealed [Proviso to Sec. 16(2)].
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Sale of Goods Act, 1930 The phrase ‘merchantable quality’ means that the goods are of such quality
and in such condition that a reasonable man, acting reasonably, would accept
them under the circumstances of the case in performance of his offer to buy
those goods, whether he buys them for his own use or to sell again (S.S.
NOTES Mendse vs Balkrishna Chettiar ). Stated briefly, in order to be
‘merchantable’ the goods must be such as are reasonably saleable under
the description by which they are known in the market.
7. Condition as to wholesomeness: This condition is implied only in a
contract of sale of eatables and provisions. In such cases the goods supplied
must not only answer to description and be merchantable but must also be
wholesome, i.e., free from any defect which render them unfit for human
consumption.
B. Implied Warranties
Unless otherwise agreed, the law also incorporates into a contract of sale of goods
the following implied warranties:
1. Warranty of quiet possession [Sec. 14(b)]: In every contract of sale, the
first implied warranty on the part of the seller is that ‘the buyer shall have
and enjoy quiet possession of the goods.’ If the quiet possession of the
buyer is in any way disturbed by a person having a superior right than that
of the seller, the buyer can claim damages from the seller. Since disturbance
of quiet possession is likely to arise only where the seller’s title to goods is
defective, this warranty may be regarded as an extension of the implied
condition of title provided for by Section 14(a). In fact the two clauses of
Section 14 [i.e., (a) and (b)] are overlapping and it is not easy to see what
additional rights this warranty confers on the buyer over and above those
conferred by the implied condition as to title contained in Section 14(a).
2. Warranty of freedom from encumbrances [Sec. 14(c)]: The second
implied warranty on the part of the seller is that ‘the goods shall be free
from any charge or encumbrance in favour of any third party not declared
or known to the buyer before or at the time when the contract is made.’ If
the goods are afterwards found to be subject to a charge and the buyer has
to discharge the same, there is breach of warranty and the buyer is entitled
to damages. It is to be emphasised that the breach of this warranty occurs
only when the buyer in fact discharges the amount of the encumbrance, and
he had no notice of that at the time of the contract of sale. If the buyer
knows about the encumbrance on the goods at the time of entering into the
contract, he becomes bound by the same and he is not entitled to claim
compensation from the seller for discharging the same.
3. Warranty of disclosing the dangerous nature of goods to the ignorant
buyer: The third implied warranty on the part of the seller is that in case the
goods sold are of dangerous nature he will warn the ignorant buyer of the
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probable danger. If there is breach of this warranty the buyer is entitled to Sale of Goods Act, 1930
claim compensation for the injury caused to him. Romer L.J. observed, ‘I
think that, apart from any question of warranty, there is a duty cast upon a
vendor, who knows of the dangerous character of goods which he is
supplying, and also knows that the purchaser is not, or may not be, aware NOTES
of it, not to supply the goods without giving some warning to the purchaser
of that danger.’’
The maxim of caveat emptor means ‘let the buyer beware.’ According to the
doctrine of caveat emptor, it is the duty of the buyer to be careful while purchasing
goods of his requirement and, in the absence of any enquiry from the buyer, the
seller is not bound to disclose every defect in goods of which he may be cognisant.
The buyer must examine the goods thoroughly and must see that the goods he
buys are suitable for the purpose for which he wants them. If the goods turn out to
be defective or do not suit his purpose, the buyer cannot hold the seller liable for
the same, as there is no implied undertaking by the seller that he shall supply such
goods as suit the buyer’s purpose. If, therefore, while making purchases of goods
the buyer depends upon his own skill and makes a bad choice, he must curse
himself for his own folly, in the absence of any misrepresentation or fraud or
guarantee by the seller.
However, the doctrine of caveat emptor is subject to the following
exceptions:
1. Where the seller makes a mis-representation and the buyer relies on it, the
doctrine of caveat emptor does not apply. Such a contract being voidable
at the option of the innocent party, the buyer has a right to rescind the
contract.
2. Where the seller makes a false representation amounting to fraud and the
buyer relies on it, or where the seller actively conceals a defect in the goods
so that the same could not be discovered on a reasonable examination, the
doctrine of caveat emptor does not apply. Such a contract is also voidable
at the option of the buyer and the buyer is entitled to avoid the contract and
also claim damages for fraud.
3. Where the goods are purchased by description and they do not correspond
with the description (Sec. 15). (See implied condition ‘in a sale by description’
discussed earlier).
4. Where the goods are purchased by description from a seller who deals in
such class of goods and they are not of ‘merchantable quality’, the doctrine
of caveat emptor does not apply. But the doctrine applies, if the buyer has
examined the goods, as regards defects which such examination ought to
have revealed [Sec. 16(2)]. (See implied condition ‘as to merchantability’
discussed earlier).
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Sale of Goods Act, 1930 5. Where the goods are bought by sample, the doctrine of caveat emptor
does not apply if the bulk does not correspond with the sample, or if the
buyer is not provided an opportunity to compare the bulk with the sample,
or if there is any hidden or latent defect in the goods (Sec. 17). (See implied
NOTES condition ‘in a sale by sample’ discussed earlier).
6. Where the goods are bought by sample as well as by description and the
bulk of the goods does not correspond both with the sample and with the
description, the buyer is entitled to reject the goods (Sec. 15). (See implied
condition ‘in a sale by sample as well as by description’ discussed earlier).
7. Where the buyer makes known to the seller the purpose for which he requires
the goods and relies upon the seller’s skill and judgement but the goods
supplied are unfit for the specified purpose, the principle of caveat emptor
does not protect the seller and he is liable in damages [Sec. 16(1)]. (See
‘condition as to fitness or quality’ discussed earlier).
8. Where the trade usage attaches an implied condition or warranty as to
quality or fitness and the seller deviates from that, the doctrine of caveat
emptor does not apply and the seller is liable in damages [Sec. 16(3)].
Check Your Progress

4. Define ‘warranty’.
5. State the points on the basis of which ‘condition’ and ‘warranty’ can be
differentiated.
4.4 TRANSFER OF PROPERTY: IMPORTANCE

AND RULES
While defining a contract of sale, we have seen that a sale is primarily the transfer
of property in goods by the seller to the buyer. The phrase ‘transfer of property in
goods’ means transfer of ownership of the goods. ‘Property in goods’ is different
from possession of goods. Possession refers to the custody over the goods. So
the property in goods may pass from the seller to the buyer but the goods may be
in possession of the seller either as unpaid seller or as a bailee for the buyer. In
other cases the property in goods may still be with the seller although the goods
may be in possession of the buyer or his agent or a carrier for transmission to the
buyer.
The precise moment of time at which property in goods passes from the
seller to the buyer is of great importance from various points of view. Of these the
following require special notice:
1. Risk ‘prima-facie’ passes with property: As a general rule the risk of
the loss of goods is prima-facie in the person in whom property is. Section
26 provides to the same effect, thus, ‘Unless otherwise agreed, the goods
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remain at the seller’s risk until the property therein is transferred to the Sale of Goods Act, 1930
buyer, but when the property therein is transferred to buyer, the goods are
at the buyer’s risk whether delivery has been made or not.’ Thus, if after the
contract the goods are destroyed or damaged the question who is to bear
the loss is to be decided not on the basis of possession of the goods but on NOTES
the basis of ownership of goods. Whosoever is the owner of the goods at
the time of loss must bear the loss.
The opening words of Section 26, namely, ‘unless otherwise agreed’ are of
great significance. These words imply that ‘risk passes with property’ is not
an absolute or inflexible rule, but a prima-facie one. Risk is no test of
property passing. There is nothing to prevent the parties from contracting
that risk shall pass even before passing of property or vice versa.
The proviso to Section 26 also lays down an exception to the rule that ‘risk
follows ownership.’ It provides that where delivery of the goods has been
delayed through the fault of either buyer or seller, the goods are at the risk
of the party in fault as regards any loss which might not have occurred but
for such fault.
2. Action against third parties: If after the contract of sale, the goods have
been damaged by a third party, it is only the person in whom the property
vests who can take action against the wrongdoer.
3. Suit for price: Generally speaking the seller can only sue for the price if the
property in goods has passed to the buyer.
4. Insolvency of the seller or the buyer: In the event of insolvency of either
the seller or the buyer, the answer to the question whether the Official
Receiver or Assignee can take over the goods or not, shall depend upon
whether the property in goods was with the party who has become insolvent.
For example, if the seller becomes insolvent before giving delivery of the
goods but the property in goods has already passed to the buyer who has
paid the price, the Official Receiver can have no claim against the goods.
We shall be studying the rules regarding transfer of property under the following
two heads:
A. Transfer of property in specific or ascertained goods.
B. Transfer of property in unascertained and future goods.
A. Transfer of Property in Specific or Ascertained Goods
Where there is a contract for the sale of specific or ascertained goods the property
in them is transferred to the buyer at such time as the parties to the contract intend
it to be transferred. For the purpose of ascertaining the intention of the parties
regard shall be had to the terms of the contract, the conduct of the parties and the
circumstances of the case [Sec. 19(1) (2)]. Thus, in the case of specific goods, the Self-Instructional
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Sale of Goods Act, 1930 transfer of property takes place when the parties intend to pass it. The parties may
intend to pass the property at once at the time of making of the contract or when
the goods are delivered or when the goods are paid for.
It is only when the intention of the parties cannot be judged from their contract
NOTES
or conduct or other circumstances that the rules laid down in Sections 20, 21, 22
and 24 apply [Sec. 19(3)]. These rules are as follows:
1. When goods are in a deliverable state (Sec. 20): Where there is an
unconditional (i.e., not subject to any condition precedent to be fulfilled by
the parties) contract for the sale of specific goods in a deliverable state, the
property in the goods passes to the buyer as soon as the contract is made,
and it is immaterial whether the time of payment of the price or the time of
delivery of the goods, or both are postponed.
The goods are said to be in a ‘deliverable state’ when they are in such a
state that the buyer would, under the contract, be bound to take delivery of
them [Sec. 2(3)]. For example, in illustration (b) above, if the seller has to
polish the table to make it acceptable to the buyer, it is not in a deliverable
state until it is so polished, and the buyer does not acquire property at the
time of the contract.
2. When goods have to be put into a deliverable state (Sec. 21): Where
there is a contract for the sale of specific goods and the seller is bound to do
‘something’ to the goods for the purpose of putting them into a deliverable
state, the property does not pass until such thing is done and the buyer has
notice thereof. The word ‘something’ here means an act like packing the
goods, or loading them on rail or ship, or filling them in containers or polishing
them in order to give a finished shape, etc. It is to be noted that merely
putting the things in a deliverable state would not result in the transfer of
property in the goods from the seller to the buyer. It is further necessary that
the buyer must have notice thereof, i.e., the fact that the goods have been
put in a deliverable state must come to the knowledge of the buyer in some
way or the other.
3. When the goods have to be measured etc., to ascertain price (Sec.
22): Where there is a contract for the sale of specific goods in a deliverable
state, but the seller is bound to weigh, measure, test or do some other act or
thing with reference to the goods for the purpose of ascertaining the price,
the property does not pass until such act or thing is done and the buyer has
notice thereof.
It may be noted that if the seller has done all what he was required to do
under the contract and nothing remains to be done by him, the property
passes to the buyer even if the buyer has to do something for his own
satisfaction.
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4. When goods are delivered on approval (Sec. 24): When goods are Sale of Goods Act, 1930
delivered to the buyer on approval or ‘on sale or return,’ or on other similar

terms, the property therein passes to the buyer:
(i) When he signifies his approval or acceptance to the seller or does any
NOTES
other act adopting the transaction, e.g., uses the goods, pledges the
goods or resells them;
(ii) If he does not signify his approval or acceptance to the seller but
retains the goods, without giving notice of rejection, beyond the time
fixed for the return of goods, or if no time has been fixed, beyond a
reasonable time.
B. Transfer of Property in Unascertained and Future Goods
The rule relating to transfer of property in unascertained and future goods is
contained in Sections 18 and 23. These Sections provide that where goods
contracted to be sold are not ascertained or where they are future goods, the
property in goods does not pass to the buyer unless and until the goods are
ascertained or unconditionally appropriated to the contract so as to bring them in
a deliverable state, either by the seller with the assent of the buyer or by the buyer
with the assent of the seller. Such assent may be expressed or implied, and may be
given either before or after the appropriation is made.
It must be noted that the above rule (as contained in Secs. 18 and 23) is a
fundamental rule and it applies irrespective of what the parties intended. Until
goods are ascertained or appropriated there is merely ‘an agreement to sell.’ Thus
a sale of ten quintals of wheat from a granary containing a large quantity, has not
the effect of transferring property in the ten quintals to the purchaser. It amounts
only to ‘an agreement to sell.’ It is only when ten quintals are appropriated to the
contract by the seller and the buyer has notice thereof, that property shall pass
from the seller to the buyer.
The process of ascertainment or appropriation consists in earmarking or
setting apart goods as subject-matter of the contract. It involves separating,
weighing, measuring, counting or similar acts done in relation to goods with an
intention to identify and determine the specific goods to be delivered under the
contract. The distinction between ‘ascertainment’ and ‘appropriation’ is that
whereas ‘ascertainment’ can be a unilateral act of the seller, that is, he alone may
set apart the goods, ‘appropriation’ involves the element of mutual consent of the
seller and the buyer.
The following points should be noted as regards a valid or proper
appropriation of the goods:
(i) The appropriation must be of goods answering the contract description,
both as to quality and quantity.
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Sale of Goods Act, 1930 (ii) The appropriation must be intentional, i.e., it must be made with
intention to appropriate goods to specific contract, and it must not be
due to mere accident or mistake.
(iii) The appropriation must be made either by the seller with the assent of
NOTES
the buyer or by the buyer with the assent of the seller. Assent of the
other party is thus necessary; whether before or after the appropriation
is made; for a valid appropriation.
(iv) The appropriation must be unconditional, i.e., the seller should not
reserve to himself the right of disposal of the goods until and unless
certain conditions are fulfilled.
Delivery to carrier [Sec. 23(2)]: A seller is deemed to have unconditionally
appropriated the goods to the contract where he delivers the goods to a carrier or
other bailee (whether named by the buyer or not) for the purpose of transmission
to the buyer, and does not reserve the right of disposal. Thus delivery to a
carrier without reserving the right of disposal is a delivery to the buyer and the
property passes at once at the time of delivery to the carrier. For example, if
goods have been loaded on rail and railway receipt is taken in the name of the
buyer and the same is sent to him direct, the ownership is passed immediately on
delivery to the railway company. But if the railway receipt, instead of sending
direct to the buyer, is sent to the bank with instruction to deliver it to the buyer on
payment of the price, the right of disposal is said to have been reserved and no
property passes to the buyer on delivery to the railway company.
Reservation of right of disposal (Sec. 25): Reservation of the right of disposal
means reserving a right to dispose of the goods until certain conditions (like payment
of the price) are fulfilled. When the seller reserves such a right the property in the
goods does not pass until those conditions are fulfilled. The seller may reserve
such a right expressly while making a contract or while making appropriation of
unascertained goods. He may also reserve this right by implication, for example,
when the seller while transporting goods takes the railway receipt or the bill of
lading in his own name or where the seller has taken the R/R or B/L in the name of
the buyer but has delivered the same to his bank with the instructions that the
document is to be delivered to the buyer only when he makes payment of the price
or accepts the bill of exchange, the right of disposal is said to be reserved impliedly.
The general rule relating to the transfer of title on sale is that ‘the seller cannot
transfer to the buyer of goods a better title than he himself has.’ If the title of the
seller is defective the buyer’s title will also be subject to the same defect. Section
27 also lays down to the same effect and provides that ‘where goods are sold by
a person who is not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires no better title to the
goods than the seller had....’ This rule is expressed by the maxim, ‘nemo det
quod non habet,’’ which means that no one can give what he has not got.
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The general rule aims at protecting the interests of the true owner and is Sale of Goods Act, 1930
deemed necessary in the larger interest of society. So if a thief disposes of stolen

property, the buyer acquires no title though he may have purchased the goods
bona fide for value, and the real owner of the goods is entitled to recover possession
of goods without paying anything to the buyer. Similarly, where a hirer of goods NOTES
under a hire purchase agreement sells them before he had paid all the instalments,
the buyer, though acting in good faith, does not acquire the property in the goods
against the true owner and, on default of payment by the hirer, the true owner can
recover the goods from the buyer (Whiteley & Co. vs Hilt ).
Thus a buyer cannot get a good title to the goods unless he purchases the
goods from a person who is the owner thereof or who sells them under the authority
or with the consent of the owner.
The above general rule as to title is subject to the following exceptions where the
buyer gets a better title to the goods than what the seller himself possesses:
1. An unauthorised sale by a mercantile agent (Sec. 27): A mercantile
agent means an agent having in the customary course of business as such
agent authority either to sell goods, or to consign goods for the purposes of
sale, or to buy goods, or to raise money on the security of goods [Sec.
2(9)]. Thus as a rule a mercantile agent having an authority to sell goods
conveys a good title to the buyer. But by virtue of this provision (proviso to
Sec. 27) a mercantile agent can convey a good title to the buyer even
though he sells goods without having any authority from the principal to
do so, provided the following conditions are satisfied:
(a) He should be in possession of the goods or documents of title to the
goods in his capacity as mercantile agent and with the consent of the
owner,
(b) He should sell the goods while acting in the ordinary course of business,
(c) The buyer should act in good faith without having any notice, at the
time of the contract, that the agent has no authority to sell.
2. Transfer of title by estoppel (Sec. 27): In the words of Lord Halsbury:
‘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, estoppel
means that a person who by his conduct or words leads another to believe
that certain state of affairs existed, would be estopped from denying later
on that such a state of affairs did not exist. The basis of estoppel is that it
would be unfair or unjust to allow a party to depart from a particular state
of affairs which he has permitted another person to believe to be true (Central
Newbury Car Auctions Ltd. vs Unity Finance Ltd ). Sometimes the
doctrine of estoppel may estop or preclude the true owner from denying
seller’s right to sell the goods and thus an innocent buyer may have a good
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Sale of Goods Act, 1930 title despite the want of authority of the seller. When the true owner of the
goods by his conduct or words or by any act or omission leads the buyer to
believe that the seller is the owner of the goods or has the authority to sell
them, he cannot afterwards deny the seller’s authority to sell. The buyer in
NOTES such a case gets a better title than that of the seller. In reference to sale of
goods, estoppel may arise in any of the following ways:
(i) The owner standing by, when the sale is effected, or
(ii) Still more, by his assisting the sale, or
(iii) By permitting goods to go into the possession of another with all the
insignia of possession thereof and apparent title, or
(iv) If he has otherwise acted or made representations so as to induce the
buyer to alter his position to his prejudice.
3. Sale by a joint owner (Sec. 28): If one of several joint owners of goods
has the sole possession of them by permission of the co-owners, the property
in the goods is transferred to any person who buys them from such joint
owner in good faith without notice of the fact that the seller has no authority
to sell. It may be noted that in the absence of this provision (i.e., Sec. 28),
the buyer would have obtained only the title of the co-owner and would
have become merely a co-owner with the other co-owners. Hence the
provision constitutes an exception to the rule — ‘no one can give what he
has not got.’
4. Sale by person in possession under voidable contract (Sec. 29): When
a person has obtained possession of the goods under a voidable contract
and he sells those goods before the contract has been rescinded, the buyer
of such goods acquires a good title to them provided the buyer acts in good
faith and without notice of the seller’s defect of title. The Indian Contract
Act also provides to the same effect when it lays down that the right to
avoid a voidable contract exists only so long as the interests of a third person
have not intervened. If before it is exercised the interests of a third person
have intervened, i.e., the buyer has sold the goods to a sub-buyer, the
latter, if acting bona fide gets a good title and the original vendor cannot
claim the goods back from the sub-buyer.
It is to be noted that this Section (Sec. 29) does not apply unless there is a
contract. Thus it does not apply to a contract originally void or where goods
have been obtained by theft.
5. Sale by seller in possession after sale [Sec. 30(1)]: Where a seller,
after having sold the goods, continues to be in possession of the goods or of
the documents of title to them and again sells or pledges them either himself
or through a mercantile agent, he will convey a good title to the buyer or the
pledgee provided the buyer or the pledgee acts in good faith and without
notice of the previous sale. For the application of this exception it is essential
that the possession of the seller must be as seller and not as hirer or bailee.
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6. Sale by buyer in possession after ‘agreement to buy’ [Sec. 30(2)]: Sale of Goods Act, 1930
Where a buyer has agreed to buy the goods and has obtained possession
of the same or the documents of title to them with the consent of the seller,
resells or pledges the goods either himself or through a mercantile agent, he
will convey a good title to the buyer or the pledgee provided the person NOTES
receiving the goods acts in good faith and without notice of any lien or other
right of the original seller in respect of those goods.
It is to be noted that a person who has got merely ‘an option to buy,’ as in
a hire-purchase agreement, cannot convey a good title to a sub-buyer,
however bona fide, for ‘an option to buy’ is not ‘an agreement to buy’
(Belsize Motor Supply Co. vs Cox ). In order to make this exception
applicable it is essential that the person must have obtained possession of
the goods under ‘an agreement to sell’ (i.e., under ‘an agreement to buy’
from the buyer’s point of view).
7. Resale by an unpaid seller [Sec. 54(3)]: Where an unpaid seller, who
has exercised his right of lien or stoppage in transit, resells the goods (of
which ownership has passed to the buyer), the subsequent buyer acquires
a good title thereto as against the original buyer, even though the resale may
not be justified in the circumstances, i.e., no notice of the resale has been
given to the original buyer.
8. Exceptions under other Acts: Other Acts also contain some provisions
under which a non-owner may pass to the buyer a better title than he himself
has. For example:
(a) Sale by finder of lost goods under certain circumstances (Sec. 169,
The Indian Contract Act).
(b) Sale by pawnee or pledgee under certain circumstances (Sec. 176,
The Indian Contract Act).
(c) Sale by Official Receiver or Assignee in case of insolvency of an
individual and Liquidators of companies. These persons are not owners
of the properties they deal in, but convey a better (good) title to the
buyers than they themselves possess.
(d) Under the Negotiable Instruments Act, a holder in due course gets a
better title than what his endorser had. In other words, a person who
takes a negotiable instrument in good faith and for value becomes the
true owner even if he takes it from a thief or finder.
Check Your Progress

6. What do you understand by transfer of property in goods?
7. What is the distinction between ‘ascertainment’ and ‘appropriation’?
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4.5 PERFORMANCE OF CONTRACT SALES
‘It is the duty of the seller to deliver the goods and of the buyer to accept and pay
NOTES for them, in accordance with the terms of the contract of sale’ (Sec. 31). Thus, the
performance of a contract of sale implies delivery of goods by the seller and
acceptance of the delivery of goods and payment for them by the buyer, in
accordance with the contract. The parties are free to provide any terms they like
in their contract about the time, place and manner of delivery of goods, acceptance
thereof and payment of the price. But if the parties are silent and do not provide
any thing regarding these matters in the contract then the rules contained in the
Sale of Goods Act are applicable.
4.5.1 Delivery
Delivery of goods means voluntary transfer of possession of goods from one
person to another [Sec. 2(2)]. If transfer of possession of goods is not voluntary,
i.e., possession is obtained under pistol point or by theft, there is no delivery.
Modes of Delivery
Delivery of goods may be made in any of the following ways:
1. Actual delivery: Where the goods are physically handed over by the seller
(or his authorised agent) to the buyer (or his authorised agent), the delivery
is said to be actual. For example, the seller of a car hands over the car to
the buyer, there is actual delivery of the goods.
2. Symbolic delivery: Here the goods remain where they are (probably
because they are bulky), but the means of obtaining possession of goods is
delivered. For example, the seller hands over to the buyer the key of the
godown where the goods are stored, or transfers a document of title (i.e.,
bill of lading or railway receipt) to the buyer which will entitle him to obtain
the goods.
3. Constructive delivery or delivery by attornment. Such a delivery takes
place when the person in possession of the goods of the seller acknowledges,
in accordance with the seller’s order that he holds the goods on behalf of
the buyer and the buyer has assented to it. Note that in such a delivery all
the three parties, namely, the seller, the person holding the seller’s goods
and the buyer, must concur. For example, where the seller hands over the
‘delivery order’ to the buyer and the warehouseman, who was holding the
goods as a bailee of the seller, agrees and acknowledges to hold them on
behalf of the buyer, there is a constructive delivery. Similarly, where the
seller after selling the goods agrees to hold them on behalf of the buyer as
his bailee there is deemed to be delivery of the goods to the buyer.
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4.5.2 Rules of Delivery of Goods Sale of Goods Act, 1930
The rules regarding delivery of goods are as follows:

1. Delivery may be either actual or symbolic or constructive (Sec. 33):
Delivery of goods sold may be made by doing anything which the parties NOTES
agree shall be treated as delivery or which has the effect of putting the
goods in the possession of the buyer or of any person authorised to hold
them on his behalf. Thus, the delivery of the goods may be either actual, or
symbolic or constructive. (These terms have already been explained under
the preceding heading.)
2. Delivery and payment are concurrent conditions (Sec. 32): Unless
otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, that is, the seller should be ready and willing to
deliver the goods to the buyer in exchange for the price and the buyer
should be ready and willing to pay the price in exchange for possession of
the goods simultaneously, just like in a cash sale over a shop counter.
3. Effect of part delivery, when property in goods is to pass on delivery
(Sec. 34): A delivery of part of the goods, in progress of the delivery of the
whole, has the same effect, for the purpose of passing the property in such
goods, as a delivery of the whole. In other words, when a delivery of part
of the goods has been made with the intention of delivering the rest also, the
property in the whole of the goods is deemed to pass to the buyer as soon
as some portion is delivered.
But when a part of the goods is delivered with the intention of severing it
from the whole, it is not regarded as delivery of the whole of the goods and
the property is deemed to pass to the buyer in that portion of the goods
only which has been delivered.
It may be emphasised that the above stated rules are applicable only when
passing of property has been made dependent on delivery of the goods. In
fact these rules are declaratory of the general law relating to transfer of
property (which has already been discussed in the preceding unit).
4. Buyer to apply for delivery (Sec. 35): Although it is the duty of the seller
to deliver the goods according to the contract, yet he is not bound to deliver
them until the buyer applies for delivery. It is the duty of the buyer to demand
delivery, and if he fails to do so, he cannot blame the seller for the non-
delivery. The parties may, however, agree otherwise.
5. Time of delivery [Sec. 36(2) & (4)]: Where under the contract of sale the
seller is bound to send the goods to the buyer, but no time for sending them
is fixed, the seller is bound to send them within a reasonable time. Further,
demand of delivery by the buyer or the tender of delivery by the seller
should be made at a reasonable hour. What is a reasonable hour is a question
of fact.
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Sale of Goods Act, 1930 6. Place of delivery [Sec. 36(1)]: The place of delivery may be stated in the
contract of sale, and where it is so stated, the goods must be delivered at
the named place during business hours on a working day. But where no
place is mentioned in the contract, the following rules must be followed:
NOTES
(i) In the case of ‘sale,’ the goods are to be delivered at the place at
which they are at the time of the sale.
(ii) In ‘an agreement to sell,’ the goods are to be delivered at the place
where they are at the time of the agreement to sell.
(iii) In the case of future goods, the goods are to be delivered at the place
at which they are manufactured or produced.
Where the seller of goods agrees to deliver them at his own risk at a
place other than that where they are when sold, the buyer must,
nevertheless, unless otherwise agreed, take any risk of deterioration
in the goods necessarily incidental to the course of transit (Sec. 40).
7. Delivery of goods where they are in possession of a third party [Sec.
36(3)]: Where the goods at the time of sale are in the possession of a third
person, there is no delivery by the seller to the buyer unless and until such
third person acknowledges to the buyer that he holds the goods on his
behalf. Such a delivery is known as ‘constructive delivery’ or ‘delivery by
attornment’ and requires the consent of all the three parties, the seller, the
buyer and the person having possession of the goods. Where the seller
hands over the ‘delivery order’ to the buyer, there is no delivery unless the
seller’s agent holding the goods has assented thereto.
But where the goods have been sold by the transfer of the document of title
to goods, e.g., railway receipt or bill of lading, the buyer is deemed to be in
possession of the goods represented by such document, and the assent of
the third party is not required.
8. Expenses of delivery [Sec. 36(5)]: Unless otherwise agreed, the expenses
of and incidental to putting the goods into a deliverable state must be borne
by the seller.
9. Delivery of wrong quantity or different quality (Sec. 37): As already
observed, a seller is duty bound to deliver the goods to the buyer strictly in
accordance with the terms of the contract. A defective delivery, i.e., delivery
of a quantity less or more than that contracted for or delivery of goods
mixed with the goods of a different description not included in the
contract, entitles the buyer:
(i) to reject the whole, or
(ii) to accept the whole, or
(iii) to accept the quantity and quality he ordered and reject the rest of the
goods so delivered.
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Remember that in case of rejection of goods because of defective delivery Sale of Goods Act, 1930
the buyer is not bound to return them to the seller, but it is sufficient if he
intimates to the seller that he refuses to accept them (Sec. 43). Further, the
right to reject the goods is not equivalent to right to cancel the contract. If
the buyer rejects the goods, the seller has a right to tender again goods of NOTES
contract quality and quantity subject to the terms and conditions of the
contract and the buyer is bound to accept the same (Vilas Udyog Ltd. vs
Prag Vanaspati ).
Where the buyer accepts the goods, he must pay for what he has actually
accepted, at the contract rate. In case the buyer has accepted short delivery
he is entitled to claim damages for the same from the seller. If, however, the
deficiency or excess is so small as to be negligible, the court does not take
account of that, and the buyer must accept the goods. This is based on the
maxim that ‘the law does not take trivial deviations into account.’
The above provisions are subject to any usage of trade, special agreement
or course of dealing between the parties [Sec. 37(4)].
10. Instalment deliveries (Sec. 38): Unless otherwise agreed, the buyer of
goods is not bound to accept delivery thereof by instalments. If the parties
so agree then only the delivery of the goods may be made by instalments.
When the parties agree that the delivery is to be made by instalments and
each instalment is to be separately paid for, and either buyer or seller commits
a breach of contract in respect of one or more instalments, there arises a
question as to whether such a breach amounts to a breach of the whole of
the contract or a breach of only a part of it? The answer to this question
depends upon the terms of the contract and the circumstances of the case.
Unless otherwise agreed the following two factors must be borne in mind in
deciding the whole matter:
(a) The quantitative proportion which the breach bears to the contract as
a whole, and
(b) The degree of probability of the repetition of the breach (Maple Flock
Co. Ltd. vs Universal Furniture Products Ltd. ).
Generally, failure to deliver or pay for one instalment does not amount to a
breach of the whole contract, unless from the special circumstances of the
case (e.g., the factory is closed because of a labour strike or the buyer
becomes insolvent) it can be inferred that similar breaches will be repeated.
11. Delivery to carrier or wharfinger (Sec. 39): Where the seller is authorised
or required to send the goods to the buyer, delivery of the goods to a
carrier, whether named by the buyer or not, for the purpose of transmission
to the buyer, or delivery of the goods to a wharfinger for safe custody, is
prima facie deemed to be a delivery of the goods to the buyer.
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Sale of Goods Act, 1930 Seller’s duty: Unless the buyer requires to despatch the goods at owner’s
risk, it is the duty of the seller, when he delivers the goods to the carrier or
wharfinger, to enter into a reasonable contract on behalf of the buyer for the
safety of the goods, and if he fails to do so, and the goods are lost or
NOTES damaged, the buyer may decline to treat the delivery to the carrier or
wharfinger as a delivery to himself, or may hold the seller responsible in
damages.
Sea transit. Unless otherwise agreed, where goods are sent by the seller
to the buyer by a route involving sea transit, where it is usual to insure, the
seller must inform the buyer in time to get the goods insured during their sea
transit, and if the seller fails to do so, the goods shall be deemed to be at his
risk during such sea transit.
12. Liability of buyer for neglecting or refusing to take delivery of goods
(Sec. 44): When the seller is ready and willing to deliver the goods and
requests the buyer to take delivery, and the buyer does not within a reasonable
time after such request take delivery of the goods, he becomes liable to the
seller for any loss occasioned by his neglect or refusal to take delivery, and
also for a reasonable charge for the care and custody of the goods.
The mere fact that the buyer has taken the delivery of the goods does not amount
to acceptance of them. According to Section 42, the buyer is deemed to have
accepted the goods in either of the following circumstances, namely:
1. When he intimates to the seller that he has accepted the goods.
Before intimating about acceptance the buyer has a right, under Section 41,
to examine and test the goods in order to be sure as to whether they are in
conformity with the contract regarding quality etc. He may even use the
goods, if it is necessary for the purpose of testing, e.g., in the case of a
horse sale conditioned to run at 25 kilometers per hour it is necessary to
use the horse for ascertaining, whether the horse is in conformity with the
contract. But if he is not satisfied, he must act promptly to inform the seller
about rejection.
2. When he does any act in relation to the goods which is inconsistent with the
ownership of the seller, e.g., consumes, uses, pledges or resells the goods
or puts his mark on them.
3. When, after the lapse of a reasonable time, he retains the goods without
intimating the seller that he has rejected them. What is reasonable time is a
question of fact. If time for rejection is stipulated, rejection must be within
that period. It may be mentioned that on rejection of goods because of
defective delivery, mere informing the seller is enough and the buyer is not
bound to return the rejected goods to the seller (Sec. 43).
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Check Your Progress

8. What do you understand by the term ‘delivery of goods’?
9. What is ‘symbolic delivery’? NOTES
4.6 UNPAID SELLER AND HIS/HER RIGHTS
The seller of goods is deemed to be an ‘unpaid seller’ (a) when the whole of the
price has not been paid or tendered; or (b) where a bill of exchange or other
negotiable instrument has been received as a conditional payment, i.e., subject to
the realisation thereof, and the same has been dishonoured.
The term ‘seller’ here 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 had been endorsed,
or a consignor or agent who has himself paid, or is directly responsible for, the
price. (Sec. 45)
This definition emphasises the following characteristics of an ‘unpaid seller’:
1. He must sell goods on cash terms and not on credit, and he must be
unpaid.
2. He must be unpaid either wholly or partly. Even if only a portion of the
price, however small, remains unpaid, he is deemed to be an unpaid
seller. Where the price is paid through a bill of exchange or other
negotiable instrument, the same must be dishonoured.
3. He must not refuse to accept payment when tendered. If the price has
been tendered by the buyer but the seller wrongfully refuses to take
the same, he ceases to be an unpaid seller.
An unpaid seller has two-fold rights. These are as follows:
1. Rights of unpaid seller against the goods, and
2. Rights of unpaid seller against the buyer personally.
We shall now examine these rights in detail.
1. Rights of Unpaid Seller against the Goods
An unpaid seller has the following rights against the goods notwithstanding the fact
that the property in the goods has passed to the buyer:
i. Right of lien;
ii. Right of stoppage of goods in transit;
iii. Right of resale [Sec. 46(I)].
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Sale of Goods Act, 1930 i. Right of Lien (Sec. 47)
‘Lien’ is the right to retain possession of goods and refuse to deliver them to the
buyer until the price due in respect of them is paid or tendered. An unpaid seller in
NOTES possession of goods sold is entitled to exercise his lien on the goods in the following
cases:
(a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goods have been sold on credit but the term of credit has expired;
(c) Where the buyer becomes insolvent, even though the period of credit may
not have yet expired.
In the case of buyer’s insolvency the lien exists even though goods had been
sold on credit and the period of credit has not yet expired. When the goods are
sold on credit the presumption is that the buyer shall keep his credit good. If,
therefore, before payment the buyer becomes insolvent, the seller is entitled to
exercise this right and hold the goods as security for the price. The effect of buyer’s
insolvency is that all stipulations as to credit are put to an end and the seller has a
right to say, ‘I will not deliver the goods until I see that I shall get my price paid’
(Griffiths vs Perry).
The unpaid seller’s lien is a possessory lien, i.e., the lien can be exercised as
long as the seller remains in possession of the goods. He may exercise his right of
lien notwithstanding that he is in possession of the goods as agent or bailee for the
buyer [Sec. 47(2)]. Transfer of property in the goods or transfer of documents of
title to the goods does not affect the exercise of this right, provided the goods
remain in the actual possession of the seller. In fact when property has passed to
the buyer then only retaining of goods is called technically ‘lien.’ Where the property
in goods has not passed to the buyer and the title is still with the seller then it is,
strictly speaking, anomalous to say that the seller has a lien against his own goods.
The seller’s lien when property has not passed to the buyer is termed as ‘a right
of withholding delivery.’ Accordingly, Section 46(2) provides:
‘Where the property in goods has not passed to the buyer, the unpaid seller
has, in addition to his other remedies, a right of withholding delivery similar to and
coextensive with his rights of lien and stoppage in transit where the property has
passed to the buyer.’
This right of lien can be exercised only for the non-payment of the price and
not for any other charges, e.g., maintenance or custody charges, which the seller
may have to incur for storing the goods in exercise of his lien for the price. This
right of lien extends to the whole of the goods in his possession even though part
payment for those goods has already been made. In other words the buyer is not
entitled to claim delivery of a portion of the goods on payment of a proportionate
price. Further, where an unpaid seller has made part delivery of the goods, he may
exercise his right of lien on the remainder, unless such part delivery has been made
under such circumstances as to show an agreement to waive the lien (Sec. 48).
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Also, the lien can be exercised even though the seller has obtained a ‘decree’ for Sale of Goods Act, 1930
the price of the goods [Sec. 49(2)].

As already observed, lien depends on physical possession of goods. Once
the possession is lost, the lien is also lost. Section 49 accordingly provides that the
NOTES
unpaid seller of goods loses his lien thereon in the following cases:
(a) When he delivers the goods to a carrier or other bailee for the purpose
of transmission to the buyer without reserving the right of disposal of
the goods; or
(b) When the buyer or his agent lawfully obtains possession of the goods;
or
(c) When the seller expressly or impliedly waives his right of lien. An
implied waiver takes place when the seller grants fresh term of credit
or allows the buyer to accept a bill of exchange payable at a future
date or assents to a sub-sale which the buyer may have made.
It may be noted that right of lien, if once lost, will not revive if the buyer
redelivers the goods to the seller for any particular purpose. Thus, where a
refrigerator after being sold was delivered to the buyer and since it was not
functioning properly, the buyer delivered back the same to the seller for repairs, it
was held that the seller could not exercise his lien over the refrigerator (Eduljee vs
John Bros.).
ii. Right of Stoppage of Goods in Transit
The right of stoppage in transit means the right of stopping further transit of the
goods while they are with a carrier for the purpose of transmission to the buyer,
resuming possession of them and retaining possession until payment or tender of
the price. Thus, in a sense this right is an extension of the right of lien because it
entitles the seller to regain possession even when the seller has parted with the
possession of the goods.
An unpaid seller can exercise this right (Sec. 50) only when:
(a) The buyer becomes insolvent: The buyer is said to be insolvent when
he has ceased to pay his debts in the ordinary course of business, or
cannot pay his debts as they become due, whether he is declared an
insolvent or not [Sec. 2(8)]; and
(b) The property has passed to the buyer: If property has not passed to
the buyer then this right is termed as the ‘right of withholding delivery’
[Sec. 46(2)]; and
(c) The goods are in the course of transit: This means that goods must
be neither with the seller nor with the buyer nor with their agent. They
should be in the custody of a carrier as an independent middleman
(i.e., in his own right as a carrier) e.g., railways and common carriers
whose business is to transport goods of others. The carrier must not
be either seller’s agent or buyer’s agent. Because if he is seller’s agent, Self-Instructional
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Sale of Goods Act, 1930 the goods are still in the hands of seller in the eye of law and hence
there is no transit, and if he is buyer’s agent, the buyer gets delivery in
the eye of law and hence question of stoppage does not arise.
Some other aspects of transit and stoppage are:
NOTES
(a) Duration of transit (Sec. 51): Since the right of stoppage in transit can be
exercised only so long as the goods are in the course of transit, it becomes
necessary to know as to when the transit begins and when it comes to an end.
When the transit comes to an end the right of stoppage cannot be exercised.
According to Section 51, goods are deemed to be in course of transit from
the time when they are delivered to a carrier or other bailee for the purpose of
transmission to the buyer, until the buyer or his agent takes delivery of them. Thus
the transit continues so long as the goods are not delivered to the buyer or his
agent, no matter whether they are lying at the destination with the carrier awaiting
transmission or are in actual transit. The goods are still deemed to be in transit if
they are rejected by the buyer and the carrier or other bailee continues in possession
of them, even if the seller has refused to receive them back.
The transit is deemed to be at an end and the seller cannot exercise his right
of stoppage in the following cases:
(a) When the buyer or his agent takes delivery after the goods have reached
destination.
(b) When the buyer or his agent obtains delivery of the goods before their
arrival at the appointed destination.
(c) When the goods have arrived at their destination and the carrier
acknowledges to the buyer or his agent that he holds the goods on his
behalf.
(d) When the goods have arrived at their destination but the buyer instead
of taking delivery requests the carrier to carry the goods to some
further destination and the carrier agrees to take them to the new
destination.
(e) When the carrier wrongfully refuses to deliver the goods to the buyer
or his agent.
(f) When part delivery of the goods has been made to the buyer with an
intention of delivering the whole of the goods, transit will be at an end
for the remainder of the goods also which are yet in the course of the
transit.
(b) How right of stoppage is exercised (Sec. 52): The unpaid seller may exercise
his right of stoppage in transit either:
(a) By taking actual possession of the goods, or
(b) By giving notice of his claim to the carrier or other bailee in whose possession
the goods are.
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Such notice may be given either (a) to the person in actual possession of the Sale of Goods Act, 1930
goods, or (b) to his principal. In the latter case, notice must be given well in advance
to enable the principal to communicate with his agent or servant in time, so as to
prevent delivery to the buyer.
NOTES
It is the duty of the carrier, after receiving due notice, not to deliver the
goods to the buyer but to redeliver them to, or according to the directions of the
seller. If by mistake he delivers the goods to the buyer, he can be made liable for
conversion. The expenses of redelivery are to be borne by the seller.
c. Distinction between Lien and Stoppage in Transit
The main points of distinction between these two rights of an unpaid seller are as
follows:
1. The seller’s lien attaches when the buyer is in default, whether he be solvent
or insolvent. The right of stoppage in transit arises only when the buyer is
insolvent.
2. Lien is available only when the goods are in actual possession of the seller
while right of stoppage is available when the seller has parted with possession
and the goods are in the custody of an independent carrier.
3. The right of lien comes to an end once the seller hands over the possession
of the goods to the carrier for the purpose of transmission to the buyer. On
the other hand, the right of stoppage in transit commences after the seller
has delivered the goods to a carrier for the purposes of transmission to the
buyer and continues until the buyer has acquired their possession.
4. The right of lien consists in retaining the possession of the goods while the
right of stoppage consists in regaining possession of the goods.
d. Effect of Sub-sale or Pledge by Buyer upon the ‘Two Rights of the Unpaid
Seller’ discussed above (Sec. 53)
The unpaid seller’s right of lien or stoppage in transit is not affected by any sale or
other disposition (e.g., pledge) of the goods which the buyer might have made.
For example, P sells certain goods to R and delivers them to a carrier for
transmission to R. Before the goods reach their destination P comes to know that
R has become insolvent. In the meanwhile R sells those goods to Q. The sale of
goods between P and Q will not affect the right of P to stop them in transit.
But there are two exceptional cases when these two rights of the unpaid
seller are affected by a sale or other disposition (e.g., pledge) of the goods by the
buyer. These exceptions are:
(i) When the seller has assented to the sale or other disposition (e.g., pledge)
which the buyer may have made.
(ii) When a document of title to goods (e.g., a bill of lading or railway receipt)
has been issued or transferred to a buyer, and the buyer transfers the
document to a person who takes the document in good faith and for
consideration, then, Self-Instructional
Material 95
Sale of Goods Act, 1930 (a) if such last mentioned transfer was by way of sale, the unpaid seller’s right
of lien or stoppage in transit is defeated, and
(b) if such last mentioned transfer was by way of pledge, the unpaid seller’s
right of lien or stoppage in transit can only be exercised subject to the rights
NOTES
of the pledgee. But in this case the unpaid seller may require the pledgee to
satisfy his claim against the buyer first out of any other goods or securities of
the buyer in the hands of the pledgee.
iii. Right of Resale
The right of resale is a very valuable right given to an unpaid seller. In the absence
of this right, the unpaid seller’s other rights against the goods, namely, ‘lien’ and
‘stoppage in transit,’ would not have been of much use because these rights only
entitle the unpaid seller to retain the goods until paid by the buyer. If the buyer
continues to remain in default, then should the seller be expected to retain the
goods indefinitely, especially when the goods are perishable? Obviously, this cannot
be the intention of the law. Section 54, therefore, gives to the unpaid seller a
limited right to resell the goods in the following cases:
(a) Where the goods are of a perishable nature; or
(b) Where such a right is expressly reserved in the contract in case the buyer
should make a default; or
(c) Where the seller has given a notice to the buyer of his intention to resell and
the buyer does not pay or tender the price within a reasonable time.
If on a resale there is a loss to the seller, he can recover it from the defaulting
buyer. But if there is a surplus on the resale, the seller can keep it with him because
the buyer cannot be allowed to take advantage of his own wrong. If, however, no
notice of resale [as required in case (c) above] is given to the buyer, the right of
seller to claim loss and retain surplus, if any, is reversed. In other words, if the
unpaid seller fails to give notice of resale to the buyer, where neither the goods
are of perishable nature nor such a right was expressly reserved, he cannot recover
the loss from the buyer and is under an obligation to hand over the surplus, if any,
to the buyer, arising from the resale. Thus, it will be seen that giving of notice to
the buyer, when so required, is very necessary to make him liable for the breach
of contract. It is so because such a notice gives an opportunity to the buyer either
to pay the price and have the goods, or, if he cannot pay, to supervise the sale to
see that the same is properly made.
It is important that absence of notice, when so required, affects the rights of
the unpaid seller himself only as discussed above and it does not affect the title of
the subsequent buyer who will acquire a good title to the goods. Section 54(3)
specially declares— ‘Where an unpaid seller who has exercised his right of lien or
stoppage in transit resells the goods, the buyer acquires a good title thereto as
against the original buyer, notwithstanding that no notice of the resale has been
given to the original buyer.’
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2. Rights of Unpaid Seller against the Buyer Personally Sale of Goods Act, 1930
The unpaid seller, in addition to his rights against the goods as discussed above,
has the following three rights of action against the buyer personally:
1. Suit for price (Sec. 55): Where property in goods has passed to the buyer; NOTES
or where the sale price is payable ‘on a day certain’, although the property
in goods has not passed; and the buyer wrongfully neglects or refuses to
pay the price according to the terms of the contract, the seller is entitled to
sue the buyer for price, irrespective of the delivery of goods. Where the
goods have not been delivered, the seller would file a suit for price normally
when the goods have been manufactured to some special order and thus
are unsaleable otherwise.
2. Suit for damages for non-acceptance (Sec. 56): Where the buyer
wrongfully neglects or refuses to accept and pay for the goods, the seller
may sue him for damages for non-acceptance. The seller’s remedy in this
case is a suit for damages rather than an action for the full price of the
goods.
The damages are calculated in accordance with the rules contained in Section
73 of the Indian Contract Act, that is, the measure of damages is the estimated
loss arising directly and naturally from the buyer’s breach of contract. Where
the goods have a ready market the principle applicable is that the seller may
recover from the buyer damages equal to the difference between the contract
price and the market price on the date of the breach of the contract. Thus,
if the difference between the contract price and market price is nil, the seller
can get only nominal damages (Charter vs Sullivan). But where the goods
do not have any ready market, the measure of damages will depend upon
the facts of each case. For example, in Thompson Ltd. vs Robinson, the
damages were assessed on the basis of profits lost. In that case, T Ltd.,
who were car dealers, contracted to supply a motorcar to R. R refused to
accept delivery. It was found as a fact that the supply of cars exceeded the
demand at the time of breach and hence in a sense there was no market
price on the date of breach. Hence, T Ltd., were entitled to damages for
the loss of their bargain viz., the profit they would have made, as they had
sold one car less than they otherwise would have sold. To take another
illustration, if the goods have been manufactured to some special order and
they are unsaleable and have no value at all for other buyers, then the seller
may even be allowed the full price of the goods as damages.
3. Suit for special damages and interest (Sec. 61): This Section entitles
the seller to sue the buyer for ‘special damages’ also for such loss ‘which
the parties knew, when they made the contract, to be likely to result from
the breach of it.’ In fact the Section is only declaratory of the principle
regarding ‘special damages’ laid down in Section 73 of the Indian Contract
Act. The Section also recognises unpaid seller’s right to get interest at a
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Material 97
Sale of Goods Act, 1930 reasonable rate on the total unpaid price of the goods sold, from the time it
was due until it is actually paid (Telu Ram Jain vs Aggarwal & Sons).
NOTES The buyer has the following rights against the seller for breach of contract:
1. Suit for damages for non-delivery (Sec. 57): Where the seller wrongfully
neglects or refuses to deliver the goods to the buyer, the buyer may sue the
seller for damages for non-delivery.
The damages are assessed in accordance with the rules contained in Section
73 of the Indian Contract Act, that is, the measure of damages shall be the
estimated loss directly and naturally resulting, in the ordinary course of events,
from the seller’s breach of contract. If the goods in question have a ready
market the measure of damages is prima facie to be ascertained by the
difference between the contract price and market price on the date of breach.
Section 61 entitles the buyer to sue the seller for ‘special damages’ also for
such loss which the seller knew when they made the contract to be likely to
result from the breach of it.
2. Suit for specific performance (Sec. 58): Where there is breach of a
contract for the sale of specific or ascertained goods, the buyer may file a
suit for the specific performance of the contract. This remedy is discretionary
and will only be granted when damages would not be an adequate remedy,
for instance, the subject-matter of the contract is rare goods, say, a picture
by a dead painter.
3. Suit for damages for breach of warranty (Sec. 59): Where there is a
breach of warranty by the seller, or where the buyer elects or is compelled
to treat breach of condition as breach of warranty, the buyer is entitled to
file a suit for damages if the price has already been paid. But if the buyer has
not yet paid the price he may ask the seller for a reasonable reduction in
price.
Here also damages are to be ascertained in accordance with the provisions
of Section 73 of the Indian Contract Act. Thus, the loss arising directly and
naturally from the breach, i.e., the difference between the value of the goods
as delivered, and the value they would have had if the goods had answered
to the warranty, can be recovered.
4. Suit for rescission of contract and for damages for breach of
‘condition’: The breach of ‘condition’ entitles the buyer to treat the contract
as repudiated [Sec. 12(2)]. Accordingly, where there is a breach of
‘condition’ by the seller, the buyer is entitled to file a suit for rescission of
the contract. Also, he may claim damages for loss suffered on the footing
that the whole contract is broken and the seller is guilty of non-delivery
(Millar’s Machinery Co. Ltd. vs David Way & Son).
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5. Suit for recovery of the price together with interest (Sec. 61): If the Sale of Goods Act, 1930
buyer has already paid the price of the goods to the seller and the goods
are not delivered or they are stolen one, he can sue the seller for the refund
of the price and also for the interest at reasonable rate from the date of
payment to the date of refund. NOTES
4.6.3 Auction Sale

In an auction sale, the auctioneer invites bids from prospective purchasers and
sells the goods to the highest bidder. Section 64 lays down the following rules
relating to an auction sale:
1. Where goods are put up for sale in lots, each lot is prima facie deemed to
be the subject of a separate contract of sale.
2. The sale is complete when the auctioneer announces its completion by the
fall of the hammer or in other customary manner, say, by saying words like
‘one, two, three’ or ‘going, going, gone;’ and, until such announcement is
made, any bidder may retract his bid. On the other hand, the auctioneer is
also not bound to accept the highest bid if he feels that it is much below his
expectation. Of course, his not accepting the highest bid would injure his
business reputation because it is the custom of trade that goods must be
sold to the highest bidder.
In the language of the Contract Act, a notice or advertisement of an auction
sale is simply ‘an invitation to an offer.’ The bid constitutes the ‘offer,’ and
the fall of hammer constitutes the ‘acceptance.’ An offer can always be
withdrawn before its acceptance, and need not necessarily be accepted. In
this connection, it may be of interest to note that the auctioneer has the right
to make the auction subject to any conditions he likes (The Coffee Board
vs Famous Coffee and Tea Works). Thus, if the auctioneer expressly
announces that biddings once made cannot be withdrawn, then that will
hold good and the normal contractual rule, i.e., an offer may be revoked
before its acceptance will not apply.
3. The seller or any one person on his behalf can bid at the auction, provided
such a right to bid has been expressly reserved at the time of notifying the
auction sale. (The employment of a second puffer is fraudulent even if the
right to bid is expressly reserved). If the seller makes use of pretended
bidding to raise the price without expressly notifying about the same, the
sale may be treated as fraudulent by the buyer and he may avoid the contract
on that ground.
4. The sale may be notified to be subject to a reserved or upset price It is a
price below which the auctioneer will not sell, and if he by mistake knocks
down the lot for less than the reserved price, no valid contract comes into
existence and he can refuse to deliver the goods to the highest bidder
(Rainbow vs Hawkins). Where the sale is ‘without reserve’ the goods
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Sale of Goods Act, 1930 must be sold to the highest bidder, irrespective of the bid amount. But it is
only a usage or custom of the trade because otherwise the auctioneer is free
to accept or reject any offer or bid made to him.
5. A ‘knock out’ agreement between intending buyers not to bid against each
NOTES
other is not illegal (Lachman Dass & Others vs Sita Ram & Others).
6. The auctioneer cannot sell goods on credit or accept payment by means of
a bill of exchange. Also, he cannot be compelled to accept a cheque for the
purchase price.
Check Your Progress

10. Who is an ‘unpaid seller’?
11. How is the right of stoppage exercised?

QUESTIONS
1. Goods may be classified into three types–Existing goods, Future goods

and Contingent goods.
2. The money consideration for a sale of goods is known as ‘price’. It is an
essential element of a contract of sale of goods and no valid sale can take
place without a price.
3. Price may be either expressly fixed by the contract itself, or it may be fixed
in accordance with an agreed manner provided by the contract, or may be
determined by the course of dealings between the parties. If the price is not
capable of being determined in accordance with any of the above modes,
the buyer is bound to pay to the seller a ‘reasonable price’.
4. A ‘warranty’ is a stipulation collateral to the main purpose of the contract,
the breach of which gives the aggrieved party a right to sue for damages
only, and not to avoid the contract itself.
5. The points of distinction between a condition and a warranty may be summed
up as under:
 As to value
 As to breach
 As to treatment
6. The phrase ‘transfer of property in goods’ means transfer of ownership of
the goods.
‘Property in goods’ is different from possession of goods. Possession refers
to the custody over the goods. So the property in goods may pass from the
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seller to the buyer but the goods may be in possession of the seller either as Sale of Goods Act, 1930
unpaid seller or as a bailee for the buyer. In other cases the property in
goods may still be with the seller although the goods may be in possession
of the buyer or his agent or a carrier for transmission to the buyer.
NOTES
7. The distinction between ‘ascertainment’ and ‘appropriation’ is that whereas
‘ascertainment’ can be a unilateral act of the seller, that is, he alone may set
apart the goods ‘appropriation’ involves the element of mutual consent of
the seller and the buyer.
8. Delivery of goods means voluntary transfer of possession of goods from
one person to another.
9. Symbolic delivery is when the goods remain where they are (owing to their
weight, or size, etc.) but the means of obtaining possession of goods is
delivered. For example, the seller hands over to the buyer the key of the
godown where the goods are stored, or transfers a document of title (i.e.,
bill of lading or railway receipt) to the buyer entitling him to obtain the
goods.
10. The seller of goods is deemed to be an ‘unpaid seller’ (a) when the whole
of the price has not been paid or tendered; or (b) where a bill of exchange
or other negotiable instrument has been received as a conditional payment,
i.e., subject to the realization thereof, and the same has been dishonoured.
11. The unpaid seller may exercise his right of stoppage in transit either:
(a) by taking actual possession of the goods, or
(b) by giving notice of his claim to the carrier or other bailee in whose
possession the goods are.
4.8 SUMMARY
 The general provisions of the Indian Contract Act continue to be applicable

to the contract of sale of goods in so far as they are not inconsistent with the
express provisions of Sale of Goods Act (Sec. 3).
 The goods which are not separately identified or ascertained at the time of
the making of the contract are known as ‘unascertained goods.’ They are
indicated or defined only by description.
 It is to be remembered that unless otherwise agreed, payment of the price
and delivery of the goods are concurrent conditions (Sec. 32). Again, Section
64-A, which provides for ‘Escalation Clause,’ is important.
 A contract of sale of goods contains various terms or stipulations regarding
the quality of the goods, the price and the mode of its payment, the delivery
of goods and its time and place. But all of them are not of equal importance.
 Conditions and warranties may be either express or implied. They are said
to be express when at the will of the parties they are inserted in the contract, Self-Instructional
Material 101
Sale of Goods Act, 1930 and they are said to be implied when the law presumes their existence in the
contract automatically though they have not been put into it in express words.
 According to the doctrine of caveat emptor, it is the duty of the buyer to be
careful while purchasing goods of his requirement and, in the absence of
NOTES
any enquiry from the buyer, the seller is not bound to disclose every defect
in goods of which he may be cognisant.
 Property in goods’ is different from possession of goods. Possession refers
to the custody over the goods. So the property in goods may pass from the
seller to the buyer but the goods may be in possession of the seller either as
unpaid seller or as a bailee for the buyer.
 The general rule relating to the transfer of title on sale is that ‘the seller
cannot transfer to the buyer of goods a better title than he himself has.’ If the
title of the seller is defective the buyer’s title will also be subject to the same
defect.
 Sometimes the doctrine of estoppel may estop or preclude the true owner
from denying seller’s right to sell the goods and thus an innocent buyer may
have a good title despite the want of authority of the seller.
 The performance of a contract of sale implies delivery of goods by the
seller and acceptance of the delivery of goods and payment for them by the
buyer, in accordance with the contract.
 Constructive delivery or delivery by attornment takes place when the person
in possession of the goods of the seller acknowledges, in accordance with
the seller’s order that he holds the goods on behalf of the buyer and the
buyer has assented to it.
 In case of rejection of goods because of defective delivery the buyer is not
bound to return them to the seller, but it is sufficient if he intimates to the
seller that he refuses to accept them (Sec. 43).
 The seller of goods is deemed to be an ‘unpaid seller’ (a) when the whole
of the price has not been paid or tendered; or (b) where a bill of exchange
or other negotiable instrument has been received as a conditional payment,
i.e., subject to the realisation thereof, and the same has been dishonoured.
 The unpaid seller’s lien is a possessory lien, i.e., the lien can be exercised as
long as the seller remains in possession of the goods. He may exercise his
right of lien notwithstanding that he is in possession of the goods as agent or
bailee for the buyer.
 According to Section 51, goods are deemed to be in course of transit from
the time when they are delivered to a carrier or other bailee for the purpose
of transmission to the buyer, until the buyer or his agent takes delivery of
them.
 It is the duty of the carrier, after receiving due notice, not to deliver the
goods to the buyer but to redeliver them to, or according to the directions
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of the seller. If by mistake he delivers the goods to the buyer, he can be Sale of Goods Act, 1930
made liable for conversion. The expenses of redelivery are to be borne by

the seller.
 If on a resale there is a loss to the seller, he can recover it from the defaulting
NOTES
buyer. But if there is a surplus on the resale, the seller can keep it with him
because the buyer cannot be allowed to take advantage of his own wrong.
 The damages are assessed in accordance with the rules contained in Section
73 of the Indian Contract Act, that is, the measure of damages shall be the
estimated loss directly and naturally resulting, in the ordinary course of events,
from the seller’s breach of contract.
 The sale is complete when the auctioneer announces its completion by the
fall of the hammer or in other customary manner, say, by saying words like
‘one, two, three’ or ‘going, going, gone;’ and, until such announcement is
made, any bidder may retract his bid.
4.9 KEY WORDS
 Contract of sale of goods: A contract whereby the seller transfers or

agrees to transfer the property in goods to the buyer for a price
 Actionable claims: Claims which can be enforced by a legal action or a
suit, e.g., a book debt (i.e., a debt evidenced by an entry by the creditor in
his Account Book)
 Warranty: A stipulation collateral to the main purpose of the contract,
the breach of which gives the aggrieved party a right to sue for damages
only, and not to avoid the contract itself.
 Caveat emptor: The duty of the buyer to be careful while purchasing
goods of his requirement and, in the absence of any enquiry from the buyer,
the seller is not bound to disclose every defect in goods of which he may be
cognisant
 Estoppel: A person who by his conduct or words leads another to believe
that certain state of affairs existed, would be estopped from denying later
on that such a state of affairs did not exist

EXERCISES
1. Write a short note on the Sale of Goods Act, 1930 and its relevance.
2. Write a brief note on the distinction between ‘Sale’ and ‘Agreement to
Sell’.
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Material 103
Sale of Goods Act, 1930 3. Write in short about the doctrine of caveat emptor.
4. Write in brief about transfer of property in unascertained and future goods.
5. Write a brief note on rights of unpaid seller against the goods.
NOTES 6. Write a short note on rules relating to an auction sale.
1. Discuss the essential characteristics of a contract of sale of goods.
2. Analyse the main points of distinction between the ‘sale’ and ‘hire-purchase’.
3. Discuss the various rules of transfer of property.
4. Analyse various modes and rules of delivery of goods.
5. ‘It is the duty of the seller to deliver the goods and of the buyer to accept
and pay for them in accordance with the terms of the agreement.’ Elucidate
this statement.
6. Enumerate the rights of the buyer against the seller for breach of contract.
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Negotiable Instruments
BLOCK - II Act, 1881
NEGOTIABLE INSTRUMENT ACT, PARTNERSHIP

ACT, COMPANY ACT
NOTES
UNIT 5 NEGOTIABLE
INSTRUMENTS ACT, 1881
Structure
5.0 Introduction
5.1 Objectives
5.2 Negotiable Instruments: Definition, Nature and Types
5.2.5 Bill of Exchange
5.2.7 Cheque
5.2.8 Distinction Between a Cheque and a Bill of Exchange
5.2.9 Bank Draft
5.2.15 Holder
5.3 Negotiation
5.3.1 Negotiation
5.4 Dishonour and Discharge of Negotiable Instruments
5.4.1 Noting
5.4.2 Protest
5.6 Summary
5.7 Key Words
5.0 INTRODUCTION
The law relating to ‘negotiable instruments’ is contained in the Negotiable

Instruments Act, 1881. The Act extends to the whole of India. The Negotiable
Instruments Act, 1881, has been amended more than a dozen times so far. The Self-Instructional
Material 105
Negotiable Instruments latest in the series are: (i) the Banking, Public Financial Institutions and Negotiable
Act, 1881
Instruments Laws (Amendment) Act, 1988 (effective from 1 April 1989), and (ii)
the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002
(effective from 6 February 2003). The Negotiable Instruments Act, 1881 as
NOTES amended, deals with three kinds of negotiable instruments, i.e., Promissory Notes,
Bills of Exchange and Cheques. According to Section 4, a promissory note is ‘an
instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking signed by the maker, to pay a certain sum of money
only to, or to the order of, a certain person, or to the bearer of the instrument’.
Section 5 of the Negotiable Instruments Act defines a bill of exchange as ‘ an
instrument in writing containing an unconditional order, signed by the maker, directing
a certain person to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument’. Section 6 defines a cheque as ‘a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form’.
This unit aims at analysing various aspects of negotiable instruments.
5.1 OBJECTIVES

 Understand negotiable instruments
 Enumerate the characteristics of negotiable instruments
 Explain the essential requirements of a promissory note
 Learn the essentials of bills of exchange
 Know the distinction between a promissory note and a bill of exchange
 Be familiar with the definitions of a cheque and bank draft
 Learn the distinction between a cheque and a bill of exchange
 Understand negotiation and assignment
 Learn dishonour and discharge of negotiable instruments
5.2 NEGOTIABLE INSTRUMENTS: DEFINITION,

NATURE AND TYPES
The word ‘negotiable’ means ‘transferable by delivery’, and the word ‘instrument’
means ‘a written document by which a right is created in favour of some person’.
Thus, the term ‘negotiable instrument’ literally means ‘a written document
transferable by delivery’.
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According to Section 13 of the Negotiable Instruments Act, ‘a negotiable Negotiable Instruments
Act, 1881
instrument means a promissory note, bill of exchange or cheque payable either
to order or to bearer’. ‘A negotiable instrument may be made payable to two or
more payees jointly, or it may be made payable in the alternative to one or two, or
one or some of several payees’ [Section 13(2)]. NOTES
The Act, thus, mentions three kinds of negotiable instruments, namely notes,
bills and cheques, and declares that to be negotiable they must be made payable
in any of the following forms:
1. Payable to order: A note, bill or cheque is payable to order which is
expressed to be ‘payable to a particular person or his order’. For
example, (i) Pay A, (ii) Pay A or order, (iii) Pay to the order of A, (iv)
Pay A and B, and (v) Pay A or B are various forms in which an
instrument may be made payable to order. But it should not contain
any word prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to A and
none else’ is not treated as ‘payable to order’ and therefore, such a
document shall not be treated as negotiable instrument because its
negotiability has been restricted. It may be noted that documents
containing express words prohibiting negotiability remain valid as a
document (i.e., as an agreement) but they are not negotiable instruments
as they cannot be negotiated further. There is, however, an exception
in favour of a cheque. A cheque crossed ‘Account Payee only’ can
still be negotiated further, of course, the banker is to take extra care
like a blood-hound in that case.
2. Payable to bearer: ‘Payable to bearer’ means ‘payable to any person
whosoever bears it’. A note, bill or cheque is payable to bearer which
is expressed to be so payable or on which the only or last endorsement
is an endorsement in blank. Thus, a note, bill or cheque in the form
‘Pay to A or bearer’, or ‘Pay A, B or bearer’, or ‘Pay bearer’ is
payable to bearer. Also, where an instrument is originally ‘payable to
order’, it may become ‘payable to bearer’ if endorsed in blank by the
payee. For example, a cheque is payable to A. A endorses it merely
by putting his signature on the back and delivers it to B with the intention
of negotiating it (without making it payable to B or B’s order). In the
hands of B, the cheque is a bearer instrument.
It is important to note that the above definition is subject to the provisions of
Section 31 of the Reserve Bank of India Act, 1934, which as amended by the
Amendment Act of 1946, provides as under:
1. No person in India other than the Reserve Bank or the Central
Government can make or issue a promissory note ‘payable to bearer’.
2. No person in India other than the Reserve Bank or the Central
Government can draw or accept a bill of exchange ‘payable to bearer
on demand’.
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Material 107
Negotiable Instruments 3. A cheque ‘payable to bearer on demand’ can be drawn on a person’s
Act, 1881
account with a banker. The effect of the above provisions is that:
(i) A promissory note cannot be originally made ‘payable to
bearer’, no matter whether it is payable on demand or after a
NOTES
certain time. It must be made ‘payable to order’ initially. However,
on being endorsed in blank it can become ‘payable to bearer’
or ‘payable to bearer on demand’ subsequently and it shall be
valid in that case.
(ii) A bill of exchange may be originally made ‘payable to bearer’
but it must be payable otherwise than on demand (say, payable
three months after date) in that case. If it is ‘payable on demand’
then it must be made ‘payable to order’. However, on being
endorsed in blank subsequently, it can become ‘payable to bearer
on demand’.
(iii) A cheque drawn on a bank can be originally made ‘payable to
bearer on demand’ and it shall be valid. In fact, cheques are
always payable on demand.
The object of the above provisions of the Reserve Bank of India Act is to
prevent private persons from infringing the monopoly of the Reserve Bank and the
Government of Note Issue in India. For, if individuals are allowed to issue
instruments ‘payable to bearer on demand’, then there may be someone so rich
and well-known person whose bills of exchange and promissory notes may be
taken as currency notes. A currency note bears the words ‘I promise to pay the
bearer the sum of Rupees 10, 50 or 100, as the case may be. The general public
is, therefore, prohibited to issue such notes or bills. Section 32 of the Reserve
Bank of India Act, 1934, makes the issue of such bills or notes a criminal offence
and declares them illegal and unenforceable at law. Accordingly, ‘a promise to pay
A or bearer’ or ‘a promise to pay the bearer’ is not enforceable at law and the
document containing such a promise is illegal and void.
The definition given in Section 13 of the Negotiable Instruments Act does
not set out the essential characteristics of a negotiable instrument. Possibly, the
most expressive and all-encompassing definition of negotiable instrument had been
suggested by Thomas which is as follows:
‘A negotiable instrument is one which is, by a legally recognised custom of
trade or by law, transferable by delivery or by endorsement and delivery in such
circumstances that (a) the holder of it for the time being may sue on it in his own
name and (b) the property in it passes, free from equities, to a bona fide transferee
for value, notwithstanding any defect in the title of the transferor’.

An examination of the given definition of negotiable instrument reveals the following
essential characteristics of negotiable instruments which make them different from
an ordinary chattel. These are as follows:
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108 Material
1. Easy negotiability: They are transferable from one person to another Negotiable Instruments
Act, 1881
without any formality. In other words, the property (right of ownership) in
these instruments passes by either both endorsement and delivery (in case
it is payable to order) or by delivery merely (in case it is payable to bearer),
and no further evidence of transfer is needed. NOTES
2. Transferee can sue in his own name without giving notice to the
debtor: A bill, note or a cheque represents a debt, i.e., an ‘actionable
claim’ and implies the right of the creditor to recover something from his
debtor. The creditor can either recover this amount himself or can transfer
his right to another person. In case he transfers his right, the transferee of a
negotiable instrument is entitled to sue on the instrument in his own name in
case of dishonour, without giving notice to the debtor of the fact that he has
become the holder. In case of transfer or assignment of an ordinary
‘actionable claim’ (i.e., a book debt evidenced by an entry by the creditor
in his account book or bahi), under the Transfer of. Property Act, notice to
the debtor is necessary in order to make the transferee entitled to sue in his
own name, otherwise he has always to join his transferor, i.e., the original
creditor before he can recover his claim from the debtor.
3. Better title to a bona fide transferee for value: A bona fide transferee
of a negotiable instrument for value (technically called a holder in due course)
gets the instrument ‘free from all defects’. He is not affected by any defect
of title of the transferor or any prior party. Thus, the general rule of the law
of transfer of title applicable in the case of ordinary chattels that ‘nobody
can transfer a better title than that of his own’ does not apply to negotiable
instruments. A man may sell to another a stolen radio set but the true owner
may claim back the radio set from the buyer even though he may have got
it in good faith for consideration.
4. Presumptions: Certain presumptions apply to all negotiable instruments.
These presumptions shall be discussed later in this unit.
i. Examples of negotiable instruments

The following instruments have been recognized as negotiable instruments by statute
or by usage or custom: (i) bills of exchange; (ii) promissory notes; (iii) cheques;
(iv) government promissory notes; (v) treasury bills; (vi) dividend warrants; (vii)
share warrants; (viii) bearer debentures; (ix) port trust or improvement trust
debentures; (x) hundis; (xi) railway bonds payable to bearer, etc.
ii. Examples of non-negotiable instruments
These are (i) money orders; (ii) postal orders; (iii) fixed deposit receipts; (iv) share
certificates; (v) letters of credit.
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Material 109
Negotiable Instruments iii. Examples of quasi-negotiable instruments
Act, 1881
There are some instruments called ‘documents of title’, e.g., (i) bills of lading; (ii)
dock warrants; (iii) railway receipts and (iv) wharfinger certificates, which, like a
NOTES negotiable instrument, are capable of being transferred by endorsement and/or
delivery, but the transferor of such documents cannot give to the holder any better
title to the goods than he himself possesses. Such instruments are termed as ‘quasi-
negotiable instruments’, and the provisions of the Negotiable Instruments Act do
not apply to them.
iv. Presumptions as to negotiable instruments
Sections 118 and 119 lay down the following presumptions in respect of negotiable
instruments, unless the contrary is proved:
1. That every negotiable instrument was made, drawn, accepted, indorsed or
transferred for consideration;
2. That every negotiable instrument bearing a date was made or drawn on
such date;
3. That every bill of exchange was accepted within a reasonable time after
its date and before its maturity;
4. That every transfer of a negotiable instrument was made before its maturity;
5. That the endorsements appearing upon a negotiable instrument were made
in the order in which they appear thereon;
6. That a lost negotiable instrument was duly stamped,
7. That the holder of a negotiable instrument is a holder in due course; but
this presumption would not arise where it is proved that the holder has
obtained the instrument from its lawful owner, or from any person in lawful
custody thereof, by means of an offence, fraud or for unlawful consideration
and in such a case the holder has to prove that he is a holder in due course;
8. That the instrument was dishonoured, in case a suit upon a dishonoured
instrument is filed with the court and the fact of ‘protest’ is proved.
The above presumptions are rebuttable by the defendant.
According to Section 4, a promissory note is ‘an instrument in writing (not being a
bank note or a currency note) containing an unconditional undertaking signed by
the maker, to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument’.
Before analysing the essentials of a promissory note as contained in this
definition, the following facts are worth noting:
1. A promissory note payable ‘only to a particular person’ is valid if it
satisfies the requirements of the definition, but it shall not be a negotiable
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instrument within the meaning of the Negotiable Instruments Act as its Negotiable Instruments
Act, 1881
transferability is restricted. To put it differently, it would appear from
the above definition that negotiability is not essential to the validity of a
promissory note as an instrument.
NOTES
2. As observed earlier, under Section 31 of the Reserve Bank of India
Act, 1934, no person in India except the Reserve Bank or the Central
Government can make or issue a promissory note payable to bearer.
Accordingly, a promissory note cannot be originally made ‘payable
to bearer’. Thus, the words ‘or to the bearer of the instrument’ included
in the above definition have become redundant and ineffective. In fact,
these words ought to have been deleted after the passing of the Reserve
Bank of India Act, 1934.
3. Bank notes (i.e., promissory notes issued by a banker payable to
bearer on demand) and currency notes (i.e., promissory notes issued
by the Reserve Bank of India or the Central Government payable to
bearer on demand) are excluded from the definition of a promissory
note because both of them are treated as money. The issue of bank
notes, however, is now prohibited by the Reserve Bank of India Act.
But Government promissory notes, which are issued by the
Government for raising loans, are within the definition.
4. The person who makes the promise to pay is called the ‘maker’. He
is the debtor and must sign the document. The person to whom
payment is to be made (i.e., the creditor) is called the ‘payee’.
From the definition given in the Act, it follows that to be a valid promissory note,
an instrument must fulfil the following essential requirements:
1. It must be in writing: A promissory note has to be in writing. An oral
promise to pay does not become a promissory note. The writing may be on
any paper, on any bahi or book. It may be in pencil or in ink and includes
printing or typing. No particular form of words is necessary, even a promise
contained in a letter will suffice, provided the other requirements of Section
4 are complied with. Of course the words used must import a clear
undertaking to pay, but it is not necessary that the word ‘promise’ should
be used (Balmukund vs Munnalal).
The following is the usual form of a promissory note:
1,000 Delhi, 25 July 2004

Sixty days after date I promise to pay to Mr. J.N. Vaish or order the sum of rupees
one thousand only with interest thereon at 12 per cent per annum for value
received.
Revenue Stamp
Sd. Ram Kishore
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Material 111
Negotiable Instruments Illustrations. A signs the instruments in the following terms:
Act, 1881
(a) “I promise to pay B or order 500.”
(b) “I acknowledge myself to be indebted to B 1,000 to be paid on
NOTES demand, for value received.”
Both the above Instruments are valid promissory notes.
2. It must contain a promise or undertaking to pay: There must be a
promise or an undertaking to pay. The undertaking to pay may be gathered
either from express words or by necessary implication. A mere
acknowledgement of indebtedness is not a promissory note, although it is
valid as an agreement and may be sued upon as such.
Illustrations. A signs the instruments in the following terms:
(a) ‘Mr B I.O.U. (I owe you) 1,000’.
(b) ‘I am liable to pay to B 500’.
(c) ‘I have taken from B 2,000 and I am accountable to him for the
same with interest’.
The above instruments are not promissory notes as there is no undertaking
or promise to pay. There is only an acknowledgement of indebtedness.
Where, however, the acknowledgement of indebtedness contained in the
document is in a defined sum of money payable on demand, there is a
valid promissory note even though the words ‘promise to pay’ may not
have been used. It is so because the phrase ‘payable on demand’ necessarily
implies ‘a promise to pay at once or immediately’.
Illustration. Where A signs the instrument in the following terms: ‘I,
acknowledge myself to be indebted to B in 1,000, to be paid on demand,
for value received’, there is a valid promissory note.
3. The promise to pay must be unconditional: Certainty is very necessary
in the commercial world. As such, a promissory note must contain an
unconditional promise to pay. The promise to pay must not depend upon
the happening of some uncertain event, i.e., a contingency or the fulfilment
of a condition. It must be payable absolutely. If an instrument contains a
conditional promise to pay, it is not a valid promissory note and will not
become valid and negotiable even after the happening of the condition (Hill
vs Halford).
Illustrations. A signs the instruments in the following terms:
(a) I promise to pay B 500 seven days after my marriage with C.
(b) I promise to pay B 500 on D’s death, provided D leaves me enough
to pay that sum.
(c) I promise to pay B 500 as soon as I can.
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The above instruments are not valid promissory notes as the payment is Negotiable Instruments
Act, 1881
made dependent upon the happening of an uncertain event which may never
happen and as a result the sum may never become payable.
But a promise to pay is not conditional if the amount is made payable at a
NOTES
particular place or after a specified time or on the happening of an event
which must happen, although the time of its happening may be uncertain
(Sec. 5, para 2). Thus, if A signs an instrument stating: ‘I promise to pay B
500 seven days after C’s death’, the promissory note is valid because it is
not considered to be conditional, for it is certain that C will die, though the
exact time of his death is uncertain.
4. It must be signed by the maker: It is imperative that the promissory note
should be duly authenticated by the ‘signature’ of the maker. ‘Signature’
means the writing or otherwise affixing a person’s name or a mark to represent
his name, by himself or by his authority with the intention of authenticating a
document. The signature may be in any part of the instrument and need not
necessarily be at the bottom. The intention to sign, however, must in all
cases be proved. It may be in pencil or in ink. When the maker of a pronate
is illiterate, his thumb mark is sufficient. But facsimile impressions, whether
affixed in printing or by perforation or in some other form, and impressions
by a rubber stamp are not recognized as signatures unless the parties
specifically agree to treat them as such.
5. The maker must be a certain person: The instrument itself must indicate
with certainty who is the person or are the persons engaging himself or
themselves to pay. In case a person signs in an assumed name, he is liable
as a maker because a maker is taken as certain if from his description
sufficient indication follows about his identity. Where there are two or more
makers, they may bind themselves jointly, or jointly and severally. But
alternative promisors are not permitted in law because of the general rule
that ‘where liability lies no ambiguity must lie’. Thus, a note in the form ‘I,
Alok Kumar promise to pay’ and signed by Alok Kumar or also Satish
Chandra is a good note as against Alok Kumar only.
6. The payee must be certain: Like the maker the payee of a pronote must
also be certain on the face of the instrument. A note is valid even if the
payee is misnamed or indicated by his official designation only (Sec. 5,
para 4), provided he can be ascertained by evidence. It may be made
payable to two or more payees jointly or it may be made payable in the
alternative to one of two, or one or some of several payees [Sec. 13(2)].
Thus alternative payees are permissible in law. But it must be made payable
to order originally. A note originally made payable to bearer is illegal and
void as per Reserve Bank of India Act, 1934. Also, a note in favour of
fictitious person is illegal and void, for it is treated as payable to bearer. A
pronote made payable to the maker himself is a nullity, the reason being
the same person is both the promisor and the promisee. Self-Instructional
Material 113
Negotiable Instruments 7. The sum payable must be certain: For a valid promissory note, it is also
Act, 1881
essential that the sum of money promised to be payable must be certain and
definite. The amount payable must not be capable of contingent additions
or subtractions.
NOTES
Illustrations. A signs instruments in the following terms:
(a) ‘I promise to pay B 500 and all other sums which shall be due to
him’.
(b) ‘I promise to pay B 500, first deducting there out any money which
he may owe me’.
(c) ‘I promise to pay B 500 and all fines according to rules’.
(d) ‘I promise to pay B 100 on or before 15 August 2004, and a similar
sum monthly every succeeding month’.
The above instruments are invalid as promissory notes because the exact
amount to be paid by A is not certain.
But, according to Section 5, para 3, the sum does not become indefinite
merely because:
(i) There is a promise to pay the amount with interest, provided the rate
of interest is stated;
(ii) The amount is to be paid at an indicated rate of exchange or according
to the course of exchange; or
(iii) The amount is payable by instalments, even with a provision that on
default being made in payment of an instalment, the balance unpaid
shall become due.
8. The amount payable must be in legal tender money of India: A
document containing a promise to pay a certain amount of foreign money or
to deliver a certain quantity of goods is not a promissory note. Similarly, a
promise to deliver paddy either in the alternative or in addition to money
does not constitute a promissory note. Thus, an instrument signed by A,
saying, ‘I promise to pay B 500 and to deliver to him my black horse on
1st January next’ is not a valid promissory note.
9. Other formalities: Though it is usual and proper to state in a note the
place where it is made and the date on which it is made but their omission
will not render the instrument invalid. Even where the amount is made payable
at a certain time after the date, omission of the date does not invalidate the
instrument and the date of execution can be independently ascertained or
proved. The words ‘value received’ are also not an essential part of the
form of a pronote, because, as per Section 118, consideration is presumed
until the contrary is proved. But a promissory note must be properly stamped
as required by the Indian Stamp Act and each stamp must also be duly
cancelled. The maker’s signature with the date across the stamp cancels
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the stamp effectively. Although an unstamped or inadequately stamped Negotiable Instruments
Act, 1881
promissory note is invalid, but the amount of loan can be recovered if proved
otherwise.
5.2.5 Bill of Exchange NOTES
Section 5 of the Negotiable Instruments Act defines a bill of exchange as follows:
‘A bill of exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person or to the bearer of the instrument’.
At the very outset the following two facts must be noted:
(i) Although a bill of exchange directing to pay ‘only to a particular person’
is valid if it satisfies the requirements of the definition but it shall not be
a negotiable instrument within the meaning of the Negotiable
Instruments Act as its transferability is restricted.
(ii) Although a bill of exchange may be originally drawn ‘payable to bearer’
but in such a case it must be payable otherwise than on demand (say,
three months after date). In other words, a bill cannot be drawn ‘payable
to the bearer on demand’. If it is ‘payable on demand’, then it must be
made ‘payable to order’ (Sec. 31 of the Reserve Bank of India Act).
Parties to a bill of exchange: There are three parties to a bill of exchange
viz., drawer, drawee and payee. The person who makes the bill is called the
‘drawer’. The person who is directed to pay is called the ‘drawee’. The person to
whom the payment is to be made is called the ‘payee’. The drawer, or, if the bill is
endorsed to the payee, the endorsee, who is in possession of the bill is called the
‘holder’. The holder must present the bill to the drawee for his acceptance. When
the drawee accepts the bill, by writing the words ‘accepted’ and then signing it, he
is called the ‘acceptor’.
It is not necessary, however, that three separate persons should answer to
the description of drawer, drawee and payee. One person may fill any two of
these positions. Thus, one may become ‘drawer and payee’ (when the bill is drawn
‘Pay to me or my order’), or ‘drawee and payee’ (when the bill is subsequently
endorsed in favour of the drawee), or ‘drawer and drawee’ (when one draws a
bill upon himself). In the last case, the holder may treat the instrument as a bill of
exchange or as a promissory note. What is required is that the three parties, drawer,
drawee and payee must be pointed out in the bill with certainty.
Drawee in case of need: Sometimes the name of another person may be
mentioned in a bill of exchange as the person who will accept the bill, if the original
drawee does not accept it. Since another person so named is to be approached in
case of need, he is known as ‘drawee in case of need’. (Sec. 7)
Acceptor for honour: When a bill of exchange has been noted or protested
for non-acceptance or for better security, and any person accepts it supra protest
for honour of the drawer or of any one of the indorsers, such person is called an Self-Instructional
Material 115
Negotiable Instruments ‘acceptor for honour’ (Sec. 7). Thus any person may voluntarily become a party
Act, 1881
to a bill as an ‘acceptor for honour’.
Now let us explain some other aspects of a bill of exchange. These are:
NOTES A. Essentials of a bill of exchange
To be a valid bill of exchange an instrument must comply with the requirements of
the definition given in Section 5, which are as follows:
1. It must be in writing.
2. It must contain an order to pay. A mere request to pay on account will not
amount to an order. But an order may be expressed in polite language.
3. The order to pay must be unconditional.
4. It must be signed by the drawer.
5. The drawer, drawee and payee must be certain. A bill cannot be drawn
on two or more drawees in the alternative because of the rule of law that
‘where liability lies, no ambiguity must lie’. But a bill may be made payable
in the alternative to one of two or more payees (Sec. 13).
6. The sum payable must be certain.
7. The bill must contain an order to pay money only.
8. It must comply with the formalities as regards date, consideration, stamps,
etc.
It will be seen that the fundamental essentials of a bill enumerated above are
more or less similar to that of a promissory note. As such the rules that apply to
promissory notes in regard to those essentials are in general applicable to bills of
exchange as well. (For details of these essentials, see notes to promissory note.)
B. Special benefits of bill of exchange
The special benefits of using bills of exchange in the world of commerce are as
follows:
1. A bill of exchange is a double secured instrument. If the bill is dishonoured
by the acceptor, the holder or the payee may look to the drawer of the bill
for payment.
2. In case of immediate need of money, a bill can be discounted with a bank
by the payee.
3. Two separate trade debts can be discharged by a bill of exchange. Hence,
where A buys goods on credit from B for 1,000 to be paid three months
after date and B buys goods on credit from C on similar terms for similar
amount, an order by B to A to pay the sum of 1,000 to C will discharge
two separate trade debts.
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116 Material
C. Specimen of a bill of exchange Negotiable Instruments
Act, 1881
NOTES

The points of distinction between a promissory note and a bill of exchange are as
follows:
1. Number of parties: In a promissory note there are two parties: (i) the
maker of the note and (ii) the payee. In a bill of exchange, there are three
parties: (i) the drawer, (ii) the drawee and (iii) the payee.
2. The maker of a note cannot be the payee: In the case of a promissory
note, the maker cannot be the payee for the simple reason that the same
person cannot be both the promisor and the promisee. But in a bill of
exchange, the drawer and the payee may be one and the same person as
where a bill is drawn ‘Pay to me or my order’.
3. Promise and order: In a promissory note, there is a promise to make the
payment, whereas in a bill of exchange there is an order for making the
payment.
4. Acceptance: A promissory note requires no acceptance as it is signed by
the person who is liable to pay. The drawer of a bill of exchange is generally
the creditor of the drawee, and therefore it must be accepted by the drawee
before it can be presented for payment.
5. Nature of liability: The liability of the maker of a pronote is primary and
absolute but the liability of a drawer of a bill of exchange is secondary and
conditional. It is only when the acceptor does not honour the bill that the
liability of the drawer arises as a surety. (Sections 30 and 32)
6. Maker’s position: The maker of a promissory note stands in immediate
relation with the payee, while the maker or drawer of an accepted bill stands
in immediate relation with the acceptor and not the payee (Explanation to
Sec. 44).
The position of the maker of a pronote also differs from the position of the
acceptor of a bill. A promissory note must contain an unconditional promise
to pay and therefore the maker, who himself is the originator of a note,
cannot make it conditional. In the case of a bill of exchange although the
drawer, who is the originator of a bill, has to make an unconditional order to
pay but under Section 86 the acceptor may accept the bill conditionally. Self-Instructional
Material 117
Negotiable Instruments 7. Payable to bearer: A promissory note cannot be drawn ‘payable to
Act, 1881
bearer’, while a bill of exchange can be so drawn provided it is not drawn
‘payable to bearer on demand’.
8. Notice of dishonour: In case of dishonour of a bill of exchange, notice of
NOTES
dishonour must be given by the ‘holder’ to all prior parties who are liable to
pay (including the drawer and endorsers), whereas in case of dishonour of
a promissory note, no notice is necessary to the maker.
9. Applicability of certain provisions: The provisions relating to presentment
for acceptance, acceptance, acceptance supra protest and drawing of bills
in sets are applicable only to a bill of exchange, they are not applicable to a
promissory note.
It is essential to understand some other bills. These are:
i. Accommodation bill
An accommodation bill is apparently quite similar to an ordinary trade bill of
exchange. The special feature which distinguishes it from an ordinary bill is that
such a bill is not supported by any consideration or a trading transaction. The
drawer does not give any consideration to the drawee but instead it is drawn with
an object of providing financial help either to the drawer or to both the drawer and
the drawee. Thus, the relationship between the drawer and the drawee is not that
of a creditor and a debtor in the case of an accommodation bill. Actually, it is a
sort of mercantile credit where one person lends out his name on the bill so that the
other person taking the bill can get the same discounted from the bank and get
money for the same. Since such bills are drawn and accepted without any
consideration with a view to accommodating or obliging friends, they are rightly
termed as ‘accommodation bills’.
Illustration: P desires to have 5,000 for three months and approaches Q for
that purpose. Q has no funds in hand but has credit in the market. Q agrees to help
P. It is arranged, therefore, that P will draw a bill on Q for 5,000 payable after
three months and Q will accept the bill. P can discount the bill with his bankers and
get the money or can negotiate the bill in discharge of his debt. Before the maturity
of the bill, P will provide Q with funds sufficient to meet it. Thus P is able to get the
required funds for three months. Such a bill is called an ‘accommodation bill’.
The party accommodating (i.e., Q) is called the ‘accommodation party’
and the party accommodated (i.e., P) is called the ‘accommodated party’.
Sometimes a party may be accommodated by endorsing an existing bill
with consideration. Such an endorser is called the ‘backer’ and the operation is
called ‘backing the bill’.
The Negotiable Instruments Act lays down the following rules regarding
accommodation bill:
1. An accommodation bill creates no obligation of payment between the
Self-Instructional parties to the transaction. In other words, the accommodation party
118 Material
is not liable on the bill to the accommodated party on maturity date, if Negotiable Instruments
Act, 1881
the bill is in the hands of the accommodated party because of subsequent
indorsement in his favour, or if the bill has been paid by the
accommodated party (i.e., the drawer) on its dishonour by the acceptor
(i.e., the accommodation party), as the contract between them is not NOTES
based on any consideration. (Sec. 43)
2. The accommodation party is liable on the bill to any subsequent ‘holder
for value’. even if such a holder knew at the time of taking the bill that
it is an accommodation bill (Sec. 43). Of course, the accommodation
party is entitled to recover from the accommodated party whatever
he pays on the bill.
3. An accommodation bill can be negotiated after maturity (i.e., when it
becomes overdue), with all benefits of a ‘holder in due course’ to the
transferee (i.e., the transferee acquiring a better title than the transferor)
(Sec. 59). (The transferee of an overdue ordinary bill of exchange
gets no better title than his transferor as he cannot be a ‘holder in due
course’. Section 9 provides that a ‘holder in due course’ should acquire
the instrument before maturity).
4. Non-presentation of an accommodation bill to the acceptor for payment
does not discharge the drawer. [Section 76 (d) provides that presentation
is not necessary when drawer could not suffer damage]. It is an exception
to the general rule contained in Section 64 whereby a bill must be
presented for payment to the acceptor by the holder otherwise other
parties thereto are not liable thereon to such a holder.
5. When an accommodation bill is dishonoured, failure to give notice of
dishonour does not discharge the liability of prior parties, as it does in
the case of an ordinary bill [Sec. 98 (c)].
ii. Fictitious bill
When in a bill of exchange the names of both the drawer and the payee are fictitious,
the bill is said to be a fictitious bill. Such a bill is drawn in a fictitious name and is
made payable to the drawer’s order and as such the names of both the drawer
and the payee are said to be of a fictitious person. A fictitious person is one who
has no existence, i.e., who is imaginary. If a real existing person’s name is forged
as drawer and payee, then the bill is a ‘forged bill’, which is a nullity and confers
no title even to a holder in due course. In a forged instrument there is complete
absence of title as distinct from defect of title.
A fictitious bill even if accepted by a genuine person is not a good bill and
cannot be enforced by law. However, such a bill, if accepted by a genuine person,
becomes a good bill in the hands of a holder in due course provided he can show
that the first indorsement on the bill and the signature of the supposed drawer
(being the holder as well) are in the same handwriting, and the acceptor is liable on
the bill to him (Sec. 42). Self-Instructional
Material 119
Negotiable Instruments ii. Documentary bill
Act, 1881
When documents relating to the goods represented by the bill, e.g., bill of lading
or railway receipt, invoice, marine insurance policy, etc., are attached to a bill, the
NOTES bill is called a documentary bill. Such documents are delivered to the buyer only
on acceptance or payment of the bill. Such bills are usually used in foreign trade.
In inland trade, generally ‘clean bills’ are used with which no other documents are
attached.
5.2.7 Cheque
Section 6, as substituted by the Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002 defines a cheque as follows:
‘A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes the electronic
image of a truncated cheque and a cheque in the electronic form’.
‘Explanation I: For the purposes of this Section, the expression:
(a) ‘a cheque in the electronic form’ means a cheque which contains the
exact mirror image of a paper cheque, and is generated, written and
signed in a secure system ensuring the minimum safety standards with
the use of digital signature (with or without biometrics signature) and
asymmetric crypto system;
(b) ‘a truncated cheque’ means a cheque which is truncated during the
course of a clearing cycle, either by the clearing house or by the bank
whether paying or receiving payment, immediately on generation of
an electronic image for transmission, substituting the further physical
movement of the cheque in writing.
Explanation II: For the purposes of this Section, the expression ‘clearing
house’ means the clearing house managed by the Reserve Bank of India or a
clearing house recognised as such by the Reserve Bank of India’.
Thus, a cheque is a bill of exchange with two distinctive features, namely:
(i) It is always drawn on a bank, and
(ii) It is always payable on demand.
Specimen of a cheque
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5.2.8 Distinction Between a Cheque and a Bill of Exchange Negotiable Instruments
Act, 1881
A cheque, being, a species of a bill of exchange, must satisfy almost all the essentials
of a bill, e.g., signed by the drawer, containing an unconditional order to pay a
certain sum of money, to the order of a person or the bearer, etc. Yet there are few NOTES
points of difference between the two, namely:
CHEQUE BILL OF EXCHANGE
Cheque is always supposed to be drawn by a banker Bill of exchange may be drawn on any person,
including a banker
Cheque can only be drawn payable on demand Bill of exchange can be drawn payable to
demand or on the expiry of a certain period after
date or site
A cheque drawn ‘payable to bearer on demand’ is valid Bill of exchange drawn ‘payable to bearer on
demand’ is absolutely void and illegal
Cheque does not require acceptance by the drawee Bill of exchange requires acceptance by the
before payment can be demanded. drawee before he can be made liable upon it.
Cheque does not require any stamp Bill of exchange needs to be properly stamped
Number days of grace are allowed in the case of cheque Three days of grace are allowed while
as it is always payable on demand calculating the maturity date in the case of time
bills, i.e., bills drawn after expiry
Cheques can be crossed Bills of exchange cannot be crossed
There is no system of noting or protest in cheques There is a system of noting and protest in bills of
exchange
Payment of cheque can be countermanded by drawer Payment of bills of exchange cannot be
countermanded by the drawer
Drawer of cheque will not be discharged from liability The drawer of bills of exchange is discharged
in case of delay of the older in presenting it for from liability
payment.
5.2.9 Bank Draft

A bank draft is an order issued by one bank on another bank or on its own
branch (usually drawn on its own branch) instructing the latter to pay a specified
sum of money to a specified person or his order. It is a negotiable instrument and
is very much like a cheque, with the following distinctions:
(a) It can be drawn only by a bank on another bank or on its other branch and
not by an individual as in the case of a cheque.
(b) It cannot so easily be countermanded as a cheque.
(c) It cannot be made payable to bearer.
A. Time and demand instruments

An instrument payable after a fixed time (say, after three months) or on a specified
date (say, on 25 August 2004) is termed as a ‘time instrument’. An instrument
payable after the happening of an event which is certain to happen, e.g., death,
though the time of its happening may be uncertain, is also called a time instrument.
In the case of time instruments, the period of limitation begins to run from the
maturity date. It may be noted that there can be a ‘time bill’ or a ‘time note’ but not
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Material 121
Negotiable Instruments a ‘time cheque’, the reason being that a cheque cannot be expressed to be payable
Act, 1881
otherwise than on demand.
An instrument payable on demand or at sight (i.e., on presentation in case
of a cheque or a promissory note, and on acceptance in case of a bill of exchange)
NOTES
is termed as a ‘demand instrument’. Again, a promissory note or a bill of exchange
in which no time for payment is specified is also a demand instrument (Sec. 19).
In case of demand instruments, the period of limitation begins to run from the
date of their execution except where they are made payable ‘at sight’ in which
case the period of limitation commences from the date of presentation.
B Ambiguous Instruments
An instrument, which in form is such that it may either be treated as a bill of
exchange or as a promissory note, is an ambiguous instrument. In such a case, the
holder may either treat it as a bill of exchange or a promissory note, but once he
has made his choice, the instrument shall henceforth be treated accordingly. (Sec.
17).
The following are the examples of ambiguous instruments:
1. Where in a bill the drawer and the drawee are the same person. Thus,
where a bill is drawn by an agent, acting within the scope of his
authority, upon his principal, the holder may, at his option, treat it as a
note or a bill because the drawer and the drawee are the same person
in the eye of law. But where drawer and payee are the same, e.g.,
where a bill is drawn payable to the drawer’s order, it is not an
ambiguous instrument and is a valid bill of exchange.
2. Where in a bill the drawee is a fictitious person or a person not having
the capacity to contract. Thus, where P draws a bill on Q and negotiates
it away, and Q is a fictitious or a minor drawee, the holder may treat
the bill as a note made by P.
C Inchoate instruments
An incomplete or blank negotiable instrument properly stamped and signed is
termed as an ‘inchoate instrument’. Section 20 deals with inchoate stamped
instruments and provides that ‘where one person signs and delivers to another a
paper stamped in accordance with the law relating to negotiable instruments, either
wholly blank or having written thereon an incomplete negotiable instrument, he
thereby gives prima facie authority to the holder thereof to make or complete, as
the case may be, upon it a negotiable instrument, for any amount specified therein
and not exceeding the amount covered by the stamp. The person so signing shall
be liable upon such instrument, in the capacity in which he signed the same, to any
holder in due course for such amount. But a person other than a holder in due
course cannot recover from the person delivering the instrument anything in excess
of the amount intended by him to be paid thereunder’.
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It is to be emphasized that delivery of a stamped paper to the holder is Negotiable Instruments
Act, 1881
necessary for the application of this Section, otherwise the maker or acceptor will
not be liable even to a subsequent holder in due course. Where, for example, a
person signed a blank acceptance and kept it in his drawer, and some person stole
it and filled it up for 1,500 and negotiated it to an innocent person for value, it NOTES
was held that the signer to the blank acceptance was not liable to the holder in due
course because he never delivered the instrument intending it to be used as a
negotiable instrument (Baxendale vs Bennett).
It is also important to note that although the Section makes the person
signing and delivering the inchoate instrument liable to a ‘holder’ as well as to a
‘holder in due course’, but there is a difference in their respective rights. A ‘holder’
can recover only what the signer intended to be paid under the instrument, while a
‘holder in due course’ can recover the whole amount made payable by the
instrument provided that it is covered by the stamp, even though the amount
authorised was smaller.
Illustration: P owes Q some money on account of credit purchases made by
him. P gives a promissory note, after affixing one rupee revenue, stamp and signing,
leaving the amount blank to Q authorizing him to fill it up in accordance with the
account. Q fills 450 while actual amount due is 300 only. Q cannot recover
more than 300. But if Q transfers it to R, a holder in due course, R can recover
450, the full amount, from P. If, however, the amount filled in by Q is 5,200; R
cannot recover it, for the amount is not covered by the stamp.
D Escrow
When a negotiable instrument is endorsed and delivered conditionally or for a
special purpose only, e.g., as collateral security or for safe custody, and not for the
purpose of absolutely transferring property therein, it is called an escrow. In this
case, the property in the instrument does not pass to the endorsee, and he is
merely a bailee with limited title and power of negotiating it. This, however, does
not affect the rights of a holder in due course.
‘Maturity’ means the date on which the payment of an instrument falls due. An
instrument payable on demand or at sight such as a cheque becomes payable
immediately on the date of its execution and there is no question of its maturity. Its
payment falls due at once on the date of its issue. The question of maturity, therefore,
arises only in the case of a promissory note or a bill of exchange which is expressed
to be payable otherwise than on demand.
Every promissory note or bill of exchange expressed to be payable on a
specified day, or at a certain period after date or after sight, or at a certain period
after the happening of an event which is certain to happen is at maturity on the third
day after the day on which it is expressed to be payable (Sec. 22). A time bill or
note is as such entitled to three days of grace and matures or falls due on the last
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Material 123
Negotiable Instruments day of grace (and not on the date on which it is expressed to be payable). For
Act, 1881
example, a bill of exchange drawn on 1 January, if expressed payable three months
after date, is at maturity on 4 April. Such a bill or note must be presented for
payment only on the last day of grace, and if dishonoured, the suit can be filed on
NOTES the next day after maturity. Any presentment for payment earlier to the third day of
grace is invalid, even if the word ‘punctually’ is added to a fixed date.
Sections 23 to 25 lay down the following rules for calculating the maturity of a
time bill or note:
1. If it is made payable a stated number of months after date or after sight,
or after a certain event, it matures (or becomes payable) three days after
the corresponding date of the month after the stated number of months.
Illustration: A negotiable instrument, dated 30 August 1977, is made
payable three months after date. The instrument is at maturity on 3 December
1977. [See Illustration (b) to Section 23]
2. If the month in which the period would terminate has no corresponding
date, the period shall be held to terminate on the last day of such month.
Illustrations:
(a) A negotiable instrument dated 30 January 1977, is made payable at
one month after date. The instrument is at maturity on the third day
after 28 February 1977 (i.e., 3 March 1977) [See Illustration (a) to
Section 23].
(b) A promissory note or bill of exchange, dated 31 August 1977, is made
payable three months after the date. The instrument is at maturity on 3
December, 1977 [See Illustration (c) to Section 23].
3. If it is made payable a certain number of days after date or after sight, or
after a certain event, the maturity is calculated by excluding the day on
which the instrument is drawn or presented for acceptance or sight or on
which the event happens. Note that only one day is to be excluded.
Illustrations:
(a) A bill of exchange dated 1 March, is made payable 20 days after
date. The period of 20 days will be counted from 2 March, and the
bill will be at maturity on 24 March.
(b) A bill of exchange, dated 1 January, and payable 20 days after sight,
is presented for acceptance on the 5 January. The bill shall mature on
28 January.
4. If the date on which a bill or note is at maturity is a public holiday, the
instrument shall be deemed to be due on the next preceding business day.
The expression ‘public holiday’ includes Sundays and any other day declared
by the Central Government, by notification in the Official Gazette, to be a
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124 Material
public holiday. Thus, if the maturity of an instrument falls on Sunday, it shall Negotiable Instruments
Act, 1881
be deemed to be due on Saturday. If the maturity falls on an emergency
holiday, the instrument shall be deemed to be due on the next succeeding
business day.
NOTES
5. If an instrument is payable by instalments, three days of grace are to be
allowed on each instalment (Sec. 67).
The payment of the amount due under a negotiable instrument must amount to
‘payment in due course’ in order to operate as a valid discharge of the instrument
against the holder. Section 10 provides that in order to constitute a payment of a
negotiable instrument as a ‘payment in due course’, the following conditions must
be fulfilled:
1. The payment must be in accordance with the apparent tenor of the
instrument: It should be made at or after maturity. A payment before
maturity is not a payment in due course so as to discharge the instrument.
Thus, if a bill of exchange is paid before the last day of grace and is
subsequently indorsed over, it is valid in the hands of a holder in due course
and the acceptor will be liable to pay again on the instrument. Similarly, if
the banker makes payment of a post-dated cheque before the date mentioned
therein, he acts against the apparent tenor of the instrument i.e., against the
true intentions of the drawer and hence the payment will not be treated as
payment in due course.
2. The payment must be made in good faith and without negligence: It
must be honestly made in the bona fide belief that the person demanding
payment is legally entitled to it. The payer must not be guilty of any negligence
in making the payment. If there are suspicious circumstances and the payer
fails to make necessary inquiry which may reveal the defects, the payment
is not a payment in due course. Thus, if a specially endorsed bill of exchange
is paid without inquiry as to the payee or if a cheque with forged signature
of the drawer is paid, it will amount to negligence on the part of the payer
and the payment will not be treated as payment in due course.
3. The payment must be made to a person in possession of the instrument
under circumstances which do not arouse suspicion about his title to possess
the instrument and to receive payment of the amount therein mentioned. A
payment cannot be a payment in due course if it is made without requiring
production of the instrument and, therefore, the payer must insist on seeing
the instrument before making the payment and must obtain the instrument
on payment.
4. The payment must be made in money only, unless the holder agrees to
accept payment in any other medium or by cheque or draft.
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Material 125
Negotiable Instruments To sum up, ‘payment in due course’ implies payment: (i) according to the
Act, 1881
apparent tenor of the instrument at or after maturity (ii) in good faith and without
negligence (iii) in money (or by cheque if acceptable to the holder) (iv) to a person
who is legally entitled to the instrument and is in possession of the same.
NOTES
The Negotiable Instruments Act lays down the following provisions regarding the
payment of interest:
1. When rate specified: When interest at a specified rate is expressly made
payable on a promissory note or bill of exchange, interest shall be calculated
at the rate specified, on the amount of the principal money due thereon,
from the date of the instrument, until tender or realization of such amount, or
until such date after the institution of a suit to recover such amount as the
Court directs (Sec. 79).
2. When no rate specified: When no rate of interest is specified in the
instrument, or when no mention is made of interest at all, interest on the
amount due thereon shall, notwithstanding any oral agreement relating to
interest between any parties to the instrument, be calculated at the rate of
18 per cent per annum, from the date at which the same ought to have been
paid by the party charged, until tender or realization of the amount due
thereon, or until such date after the institution of a suit to recover such
amount as the Court directs (Sec. 80).
3. When the party charged is the indorser of an instrument dishonoured by
non-payment, he is liable to pay interest only from the time that he receives
notice of the dishonour (Explanation to Section 80).
5.2.15 Holder
The ‘holder’ of a negotiable instrument means any person entitled to possess the
instrument in his own name and to receive or recover the amount due thereon from
the parties liable thereto (Sec. 8). Thus, in order to be called a ‘holder’, a person
must satisfy the following two conditions:
1. He must be entitled to the possession of the instrument in his own
name: Actual possession of the instrument is not essential. What is required
is a right to possession under some legal or valid title. He should be a ‘de
jure holder’ and not necessarily a ‘de facto holder’. It means that the
person must be named in the instrument as the payee or the indorsee, or he
must be the bearer thereof, if it is a bearer instrument. However, the heir of
a deceased holder or any other person becoming entitled by operation of
law is a holder although he is not the payee or indorsee or bearer thereof.
If a person is in possession of a negotiable instrument without having a right
to possess the same, he cannot be called the holder. Thus, although a thief,
or a finder on the road, or an indorsee under a forged indorsement, may be
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126 Material
he does not acquire legal title thereto and hence is not entitled in his own Negotiable Instruments
Act, 1881
name to the possession thereof. Similarly, a beneficial owner claiming through
a benamidar in whose favour the instrument had been made or drawn is
not a holder because he is not entitled to the possession in his own name
and cannot by himself maintain an action on the instrument (Subba Narayana NOTES
vs Ramaswami).
2. He must be entitled to receive or recover the amount due thereon from
the parties liable thereto: In order to be called a holder, besides being
entitled to the possession of the instrument in his own name, the person
must also have the right to receive or recover the amount of the instrument
and give a valid discharge to the payer. Thus, one may be the bearer or the
payee or indorsee of an instrument but he may not be called a holder if he is
prohibited by a court order from receiving the amount due on the instrument.
It may, thus, be concluded that both the above conditions must be satisfied
by a person to be called a holder. For instance, where an instrument payable to
order is, without endorsement, entrusted by the payee to his agent, the agent does
not become the holder of it, although he may receive its payment, because he has
no right to sue on the instrument in his own name.
The holder of a negotiable instrument is a very important party to the
instrument as such. It is he alone who can sue upon a negotiable instrument, can
negotiate it (with certain exceptions) and can give a valid discharge for it.
Check Your Progress

1. What do you mean by the term ‘negotiable instruments’?
2. List some examples of negotiable instruments.
3. What are ‘quasi-negotiable instruments’?
4. List the essentials of a ‘promissory note’.
5. What are the essential characteristics of a ‘bill of exchange’?
6. What is an ‘ambiguous instrument’?
5.3 NEGOTIATION
Easy transferability being one of the essential features of negotiable instruments,

they are frequently transferred from one person to another for making payment
and discharging business obligations. Generally, the person who is entitled to receive
the payment of a negotiable instrument (i.e., the holder) does not retain it till maturity
but transfers it to one of his creditors in payment of his debt, who in turn again
transfers it to his creditor and so on. The ownership of a negotiable instrument
continues to be transferred from one to another. This process of transferring the
title or ownership of negotiable instruments is called ‘negotiation’.
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Material 127
Negotiable Instruments 5.3.1 Negotiation
Act, 1881
According to Section 14, ‘when a promissory note, bill of exchange or cheque is
transferred to any person, so as to constitute that person the holder thereof, the
NOTES instrument is said to be negotiated’. Thus, negotiation implies a transfer of negotiable
instrument so as to constitute the transferee a holder thereof, who should be entitled
in his own name to sue on the instrument and recover the amount due thereon.
Handing over a bearer instrument to a servant for safe keeping is not negotiation;
there must be a transfer with intention to pass title and in the manner prescribed by
the Act.
Every maker, drawer, payee or indorsee, and if there are several makers,
drawers, payees or indorsees, all of them jointly can negotiate an instrument, provided
the negotiability of such instrument has not been restricted or excluded by any
express words used in the instrument. But the maker, drawer, payee or indorsee
cannot negotiate an instrument, unless he is in lawful possession or is holder thereof
(Sec. 51). The case when a maker or drawer has to indorse an instrument arises
where the instrument is made or drawn payable to his own order, e.g., ‘pay to
myself or order’.
A negotiable instrument may be negotiated until payment or satisfaction
thereof by the maker, drawee or acceptor at or after maturity, but not after such
payment or satisfaction (Sec. 60). Thus, negotiability of an instrument stops only
when the party ultimately liable thereon pays it at or after maturity. It can be
negotiated even at or after maturity if it has not been paid or satisfied. A payment
before maturity does not stop negotiability. The acceptor or maker who receives
the instrument after payment but before maturity may reissue it.
The Negotiable Instruments Act does not prohibit transfer of negotiable instruments
otherwise than by negotiation. The equitable title to the instrument may also be
transferred by ‘assignment’ by a separate deed in writing, in accordance with the
Transfer of Property Act. The various points of distinction between negotiation
and assignment are stated below:
1. Formalities: Negotiation requires mere ‘delivery’ of a ‘bearer’ instrument
and ‘indorsement and delivery’ of an ‘order’ instrument to effectuate a
transfer. Assignment requires a written document signed by the transferor
irrespective of whether the instrument is a ‘bearer’ or ‘order’ one.
2. Notice of transfer: In the case of assignment, a notice of transfer of debt
is required to be given by the assignee to the debtor in order to complete his
title. No such notice is required to be given in the case of negotiation.
3. Title: In the case of negotiation, if the transferee takes the negotiable
instrument for value and in good faith, i.e, as holder in due course, he takes
it free from all defects in the title of the previous transferors. But in the case
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128 Material
of assignment, the assignee takes the instrument subject to the defects in the Negotiable Instruments
Act, 1881
title of his assignor, even though he took the assignment for value and in
good faith.
4. Consideration: Consideration is always presumed in the case of transfer
NOTES
by negotiation, whereas there is no such presumption in the case of transfer
by assignment, where the burden of proof of consideration lies upon the
assignee.
From the foregoing differences, it will be seen that the rights which the
transferee of a negotiable instrument by negotiation acquires are substantially
superior to those of an assignee under assignment, and it is for this reason that the
method of transfer by assignment is very rarely used while transferring negotiable
instruments.
There are two ways of negotiating or transferring a negotiable instrument:
1. Negotiation by mere delivery: A negotiable instrument payable to bearer
is negotiable by delivery thereof (Sec. 47). Thus, a bearer instrument may
be negotiated by delivery only. It does not require signature of the transferor
(i.e., indorsement) and the transferee becomes the holder thereof by mere
possession. The transferor of a bearer instrument is not liable on its dishonour
because by not signing as indorser he has not added his credit to the
instrument.
2. Negotiation by indorsement and delivery; A negotiable instrument
payable to order is negotiable by the holder by indorsement and delivery
thereof (Sec. 48). Thus, the negotiation of an order instrument requires two
formalities—first the holder should indorse it and then deliver to his indorsee.
Check Your Progress

7. Who can negotiate an instrument?
8. List the modes of negotiation.
5.4 DISHONOUR AND DISCHARGE OF

NEGOTIABLE INSTRUMENTS
A negotiable instrument may be dishonoured by: (i) non-acceptance or (ii) non-

payment. As presentment for acceptance is required only in case of bills of exchange,
it is only the bills of exchange which may be dishonoured by non-acceptance. Of
course any type of negotiable instrument—promissory note, bill of exchange or
cheque—may be dishonoured by non-payment. There are various aspects of
dishonour. These are:
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Negotiable Instruments i. Dishonour by non-acceptance
Act, 1881
A bill of exchange is said to be dishonoured by non-acceptance in the following
cases:
NOTES 1. When the drawee or one of several drawees (not being partners) makes
default in acceptance upon being duly required to accept the bill. It may be
recalled that the drawee may require 48 hours’ time (exclusive of public
holidays) to consider whether he will accept or not (Sec. 63).
2. Where the presentment for acceptance is excused and the bill is not
accepted, i.e., remains unaccepted.
3. Where the drawee is incompetent to contract.
4. Where the drawee makes the acceptance qualified.
5. If the drawee is a fictitious person or after reasonable search cannot be
found (Sec. 61).
It is important to note that where a ‘drawee in case of need’ is named in a
bill of exchange, the bill is not dishonoured until it has been dishonoured by such
drawee (Sec. 115).
ii. Dishonour by non-payment
A promissory note, bill of exchange or cheque is said to be dishonoured by non-
payment when the maker of the note, acceptor of the bill or drawee of the cheque
makes default in payment upon being duly required to pay the same (Sec. 92).
Also, a promissory note or bill of exchange is dishonoured by non-payment when
presentment for payment is excused expressly by the maker of the note or acceptor
of the bill and the note or bill remains unpaid at or after maturity (Sec. 76).
iii. Effect of dishonour
As soon as a negotiable instrument is dishonoured (either by non-acceptance or
by non-payment) the holder becomes entitled to sue the parties liable to pay
thereon. The drawer of cheque, maker of note, acceptor and drawer of bill and all
the indorsers are liable severally, and jointly to a holder in due course. The holder
must, however, give ‘notice of dishonour’ to all parties against whom he intends
to proceed. He may (at his option) also have the instrument ‘noted and protested’
before a notary public.
iv. Notice of dishonour
Notice of dishonour means formal communication of the fact of dishonour. It is
given to the party sought to be made liable and, therefore, it serves as a warning to
the person to whom the notice is given that he could now be made liable. Such a
notice also serves the purpose of enabling the person so notified to protect himself
against his prior parties.
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130 Material
a. Notice by whom? Notice of dishonour must be given by the holder or by Negotiable Instruments
Act, 1881
some party to the instrument who remains liable thereon (Sec. 93). Further,
any party receiving notice of dishonour must also transmit the same within a
reasonable time to all prior parties in order to render them liable to himself.
He cannot sue any prior party to whom he has not transmitted the notice NOTES
unless that party has received due notice from the holder or some other
party to the instrument (Sec. 95). It may be noted that where a number of
persons are required to give notice to certain persons it is not necessary
that all of them must give the notice. If some of them have given notice of
dishonour, the other persons can take advantage of the same.
Notice of dishonour can also be given by the duly authorized agent of the
person who is bound to give notice. When an instrument is deposited with
an agent for presentment and is dishonoured the agent can himself give
notice to prior parties on behalf of the holder. But it is not obligatory on him
to do so. He may give notice to his principal within the same time as if he
were the holder and the principal may then give notice to parties to whom
he wants to hold liable. The principal is also entitled to a further like period
to give notice of dishonour (Sec. 96).
b. Notice to whom? Notice of dishonour must be given to all parties (other
than the maker of a note, acceptor of a bill or drawee of a cheque) to whom
the holder seeks to make liable or to their duly authorized agents. Where
there are two or more persons jointly liable as drawers or indorsers, notice
to any one of them is sufficient. No notice need be given to the maker of a
note, or acceptor of a bill or drawee of a cheque who are the principal
debtors and have themselves dishonoured the instrument (Sec. 93). In case
of death of a person, notice must be given to his legal representative, or,
where he has been declared an insolvent, it must be given to his Official
Assignee (Sec. 94). When the party to whom notice of dishonour is
despatched is dead, but the party despatching the notice is ignorant of his
death, the notice is sufficient to bind the estate of the deceased (Sec. 97).
Thus if the fact of death is known to the holder, a notice addressed to the
dead person is a nullity. In such a case, notice must be addressed to his
legal representative.
c. Mode of giving notice: According to Section 94 the notice of dishonour
may be oral or written. If it is written it may be sent by post. A notice duly
addressed and posted is good even though it may be miscarried. The notice
may be in any form but the language used must indicate that the instrument
has been dishonoured and in what way dishonoured, and that the recipient
will be held liable thereon. It should be given within a reasonable time after
dishonour, at the place of business or (in case such party has no place of
business) at the residence of the party for whom it is intended.
Self-Instructional
Material 131
Negotiable Instruments d. What is reasonable time? In determining what is a reasonable time for
Act, 1881
giving notice of dishonour, regard shall be had to the nature of the instrument,
the usual course of dealing with respect to similar instruments and the distance
between the parties, and, in calculating such time, public holidays shall be
NOTES excluded (Sec. 105). Section 106 further provides that if the holder and the
party to whom notice of dishonour is given carry on business or live (as the
case may be) in different places, such notice shall be deemed to be given
within a reasonable time if it is despatched by the next post or on the day
next after the day of dishonour. If the said parties carry on business or live
in the same place, such notice is within reasonable time if it is despatched in
time to reach its destination on the day next after the day of dishonour.
If a party who receives the notice of dishonour is to transmit the same to his
own prior parties, the transmission is within reasonable time if he transmits
it within the same time after its receipt as he would have had to give notice
if he had been the holder (Sec. 107).
e. When a notice of dishonour is unnecessary: Notice of dishonour is
not necessary, i.e., the parties are liable without any notice of dishonour in
the following cases mentioned in Section 98:
1. When it is dispensed with by the party entitled to the notice. For
example, where the indorser while signing in that capacity adds the
words ‘notice of dishonour waived’, no notice of dishonour is required.
2. When the drawer of a cheque has countermanded payment, no notice
of dishonour is required to charge the drawer.
3. When the party charged could not suffer damage for want of notice.
For example, when the cheque is dishonoured because the drawer
had closed his account with the banker, or in case of accommodation
bills, no notice of dishonour to the drawer is required.
4. When the party entitled to notice cannot, after due search, be found;
or the party bound to give notice is, because of some justifiable reason
(e.g., death, accident or serious illness), unable to give it.
5. When the drawer also happens to be the acceptor.
6. In the case of a promissory note which is not negotiable. Since such a
note is not negotiable, the payee ought not to indorse it, and if it is
indorsed, the indorsee cannot have any claim against the maker of the
note or the indorser. Therefore, no one is prejudiced for want of notice.
7. When the party entitled to notice promises to pay unconditionally the
amount due on the instrument after dishonour and with full knowledge
of facts.
f. Consequences of not giving notice of dishonour: Any party to a
negotiable instrument (other than the maker of a note, acceptor of a bill or
drawee of a cheque) to whom notice of dishonour is not sent by the holder
Self-Instructional is discharged from his obligation under the instrument and cannot be sued
132 Material
by the holder, unless the circumstances are such that no notice of dishonour Negotiable Instruments
Act, 1881
is required to be sent. The drawer or indorser who has not received notice
is discharged not only on the bill or note but also in respect of the original
consideration (Mohd. Raffi vs Qazi Mazhar).
NOTES
5.4.1 Noting
‘Noting’ is the authentic and official proof of presentment and dishonour of a
negotiable instrument. The question of noting does not arise in the case of dishonour
of a cheque because in such a case the bank, while refusing payment, returns back
the cheque giving reasons in writing for the dishonour of the same, and that itself
acts as an authentic evidence of the fact of dishonour. Even in the case of inland
bills or notes, noting is not compulsory (Sec. 104).
According to Section 99, when a promissory note or a bill of exchange has
been dishonoured by non-acceptance or non-payment, the holder may cause such
dishonour to be noted by a Notary Public upon the instrument, or upon a paper
attached thereto, or partly upon each. For this the holder takes the bill or note to
the notary public who makes a demand for acceptance or payment upon the
drawee or acceptor or maker formally and on his refusal to do so notes the same
on the bill or note. Thus ‘noting’ means recording the fact of dishonour on the
dishonoured instrument or on a paper attached thereto for the purpose. Noting
must be made within a reasonable time after dishonour and must specify: (i) the
date of dishonour; (ii) the reason assigned for such dishonour; and (iii) the notary’s
charges.
5.4.2 Protest
‘Protest’ is a formal certificate of dishonour issued by the notary public to the
holder of the bill or note, on his demand (noting is merely a record of dishonour on
the instrument itself) (Sec. 100).
Protest for better security: Such protest can be made in the case of bills only.
When the acceptor of a bill of exchange has become insolvent, or his credit has
been publicly impeached, before the maturity of the bill, the holder may, within a
reasonable time, cause a Notary Public to demand better security of the acceptor,
and on its being refused, may within a reasonable time cause such facts to be
noted and certified as aforesaid. Such certificate is called a protest for better
security (Sec. 100, Para 2). It may be noted that in spite of such a protest the
holder shall have to wait till the date of maturity to take any action against the
acceptor, drawer or indorsers. The only advantage of protest for better security is
that it enables the bill to be accepted for honour, for Section 108 provides that
when a bill of exchange has been noted or protested for non-acceptance or for
better security, the same can thereafter be accepted for honour.
Noting and protest of inland bills or notes is not compulsory, but foreign
bills must be protested for dishonour if so required by the law of the place where
they are drawn (Sec. 104).
Self-Instructional
Material 133
Negotiable Instruments The protest must contain the following particulars (Sec. 101):
Act, 1881
1. The instrument itself or a literal transcript of the instrument and of
everything written or printed thereupon.
NOTES 2. The name of the person for whom and against whom the instrument
has been protested.
3. The fact and the reasons for dishonour, i.e., a statement that payment
or acceptance, or better security, as the case may be, was demanded
by the notary public from the person concerned and he refused to
give it or did not answer, or that he could not be found.
4. The place and time of dishonour.
5. The signature of the Notary Public.
6. In the case of acceptance for honour or payment for honour, the names
of the persons by whom and for whom it is accepted or paid.
The term ‘discharge’ in relation to negotiable instruments has two connotations,
viz., (i) discharge of the instrument, and (ii) discharge of one or more parties from
liability on the instrument.
(i) Discharge of the instrument
A negotiable instrument is said to be discharged when it becomes completely
useless, i.e., no action on that will lie, and it cannot be negotiated further. After a
negotiable instrument is discharged the rights against all the parties thereto comes
to an end, and no party, even a holder in due course, can claim the amount of the
instrument from any party thereto.
Discharge of the party primarily and ultimately liable on the instrument results
in the discharge of the instrument itself. For example, in the following cases the
instrument is deemed to be discharged:
1. When the party primarily liable on the instrument (i.e., the maker of
the note, acceptor of the bill or drawee bank) makes the payment in
due course to the holder at or after maturity (Sec. 78). A payment by
a party who is secondarily liable does not discharge the instrument
because in that case the payer holds it to enforce it against prior
indorsers and the principal debtor.
2. When a bill of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, the instrument is
discharged (Sec. 90).
3. When the party primarily liable becomes insolvent, the instrument is
discharged and the holder cannot make any other prior party liable
thereon. Notice that in the case of insolvency, the acceptor or maker
is unable to pay and it is only on refusal to pay that the instrument is
Self-Instructional
134 Material
deemed to be dishonoured and prior parties can be made liable Negotiable Instruments
Act, 1881
thereon. Similarly, an instrument stands discharged when the primary
party liable is discharged by material alteration in the instrument (Sec.
87), or by lapse of time making the debt time barred under the
Limitation Act. NOTES
4. When the holder cancels the instrument with an intention to release
the party primarily liable thereon from the liability, the instrument is
discharged and ceases to be negotiable (Sec. 82).
(ii) Discharge of One or More Parties
A party is said to be discharged from his liability when his liability on the instrument
comes to an end. When only some of the parties to a negotiable instrument are
discharged, the instrument continues to be negotiable and the undischarged parties
remain liable on it. Thus, the discharge of one or more parties to an instrument
does not discharge the instrument and the rights under it can still be enforced
against those parties who continue to be liable thereon.
One or more parties to a negotiable instrument is/are discharged from liability
in the following ways:
1. By cancellation [Sec. 82(a)]: When the holder of a negotiable
instrument deliberately cancels the name of any of the party (by drawing
a line through the name) liable on the instrument with an intent to
discharge him from liability thereon, such party and all indorsers
subsequent to him, who have a right of action against the party whose
name is so cancelled, are discharged from liability. Thus, if the maker’s
or acceptor’s name has been cancelled the liability of all other parties
to the instrument, who must have obviously become parties thereto
subsequent to the maker or acceptor and as such must be in the position
of sureties to him, comes to an end, which in effect discharges or
cancels the instrument itself. But if the name of an indorser has been
cancelled, then all the indorsers subsequent to him will be discharged
but those prior to him will remain liable. Section 40 contains a similar
provision, according to which if the holder, without the consent of the
indorser, destroys or impairs the indorser’s remedy against a prior
party, the indorser is discharged from liability.
It is important to note that where the cancellation is done under a
mistake, or without the authority of the holder it would be inoperative
and will not discharge any party.
2. By release [Sec. 82 (b)]: If the holder of a negotiable instrument
releases any party to the instrument by any method other than
cancellation of names (i.e., by a separate agreement of waiver, release,
or remission), the party so released and all parties subsequent to him,
who have a right of action against the party so released, are discharged
from liability. Self-Instructional
Material 135
Negotiable Instruments 3. By payment [Sections S2(c) and 78]: When the party primarily
Act, 1881
liable on the instrument makes the payment in due course to the holder
at or after maturity, all the parties to the instrument stand discharged,
because the instrument as such is discharged by such payment.
NOTES
4. By allowing drawee more than 48 hours to accept (Sec. 83): If
the holder of a bill of exchange allows the drawee more than forty
eight hours, exclusive of public holidays, to consider whether he will
accept the same, all previous parties not consenting to such allowance
are thereby discharged from liability to such holder.
5. By taking qualified acceptance (Sec. 86): If the holder of a bill
agrees to a qualified acceptance all prior parties whose consent is not
obtained to such an acceptance are discharged from liability.
6. By not giving notice of dishonour: Any party to a negotiable
instrument (other than the party primarily liable) to whom notice of
dishonour is not sent by the holder is discharged from liability as against
the holder, unless the circumstances are such that no notice of dishonour
is required to be sent.
7. By non-presentment for acceptance of a bill (Sec. 61): When a
bill of exchange is payable certain period after sight, its holder must
present it for acceptance to the drawee within a reasonable time after
it is drawn. If he makes a default in making such presentment the
drawer and all indorsers who were liable towards such a holder are
discharged from their liability towards him.
8. By delay in presenting cheque (Sec. 84): It is the duty of the holder
of a cheque to present it for payment within reasonable time of its
issue. If he fails to do so and in the meanwhile the bank fails causing
damage to the drawer, the drawer is discharged as against the holder
to the extent of the actual damage suffered by him.
9. By material alteration: Any material alteration of a negotiable
instrument renders the same void, i.e., discharges the instrument itself,
and all parties thereto at the time of making such alteration and not
consenting to the change are discharged from liability thereon (Sec.
87). But persons who become parties to the instrument after the
alteration are liable under the instrument as altered. In other words,
those who take an altered instrument cannot complain (Sec. 88).
It is worth noting that the material alteration of the instrument discharges
all the parties liable thereon at the time of making such alteration, and
it makes no difference whether the alteration is for the benefit or
detriment to any party to the instrument or whether it is made by the
holder of the instrument or by a stranger while the instrument was in
the custody of the holder, because the party in custody of the instrument
is bound to preserve it in its integrity (Davidson vs Cooper) But
Self-Instructional
136 Material
alteration made by a stranger without any negligence on the part of the Negotiable Instruments
Act, 1881
holder does not affect the liability of the parties there to
(Guorochandra vs Krushna Charana).
It is not every alteration that necessarily would affect the validity of an
NOTES
instrument or the rights of parties thereto. Only when the alteration is
‘material’, the validity of the instrument or the rights of parties would
come in for question. The Negotiable Instruments Act is silent on the
question—what constitutes a material alteration? Courts in India have,
therefore, followed the English Common Law and held that anything
which has the effect of altering the legal relations between the
parties or the character of the instrument or the sum payable
amounts to a material alteration.
The following are the examples of material alteration:
(i) Any alteration of the date, the sum payable, the time of payment
and the place of payment
(ii) Alteration by the addition of a new party to the instrument
(Gardener vs Walsh).
(iii) Alteration of the rate of interest (Verco Pvt. Ltd. vs
Newandram).
(iv) Tearing off the material part of the instrument.
There is no material alteration so as to vitiate the instrument in
the following cases, as they do not prejudice the rights and liabilities
of the parties thereto:
(i) Alteration made for the purpose of correcting a mistake or a
clerical error.
(ii) Alteration made to carry out the common intention of the original
parties (Sec. 87).
(iii) Alteration made before the instrument is issued.
(iv) Alteration made with the consent of the parties liable on the
instrument.
(v) Conversion of bearer cheque into an order cheque.
(vi) Filling blanks in the case of inchoate or incomplete instruments
(Sec. 20). Thus, putting a date on the undated cheque by the
payee does not amount to material alteration rendering the
instrument void (Bhaskaran Chandrasekharan vs
Radhakrishnan).
(vii) Conversion of blank indorsement into an indorsement in full (Sec.
49).
(viii) Making qualified acceptance (Sec. 86).
(ix) Crossing of an uncrossed cheque (Sec. 125).
Self-Instructional
Material 137
Negotiable Instruments (x) Alteration which is the result of an accident, e.g., mutilation by
Act, 1881
washing, ravages by white ants or rats, document torn by a child,
document burnt in part by the hot end of a cigarette (Hongkong
and Shanghai Banking Corporation vs Lo Lee Shi).
NOTES
Sometimes, a negotiable instrument is materially altered but does not
appear to have been so altered, for example, a cheque is drawn for
500 with space left before the amount in both words and figures and
the payee fraudulently alters the amount of 3,500 which is not
apparent. In such cases, if the person or banker liable to pay makes
the payment according to the apparent tenor and otherwise is due
course, then he will be discharged from liability and such payment
cannot be questioned by reasons of the instrument having been altered
[Sec. 89(1)].
Where the cheque is an electronic image of a truncated cheque, any
difference in apparent tenor of such electronic image and the truncated
cheque shall be a material alteration and it shall be the duty of the
bank or the clearing house, as the case may be, to ensure the exactness
of the apparent tenor of electronic image of the truncated cheque
while truncating and transmitting the image [Sec. 89(2). Any bank or
a clearing house which receives a transmitted electronic image of a
truncated cheque, shall verify from the party who transmitted the image
to it, that the image so transmitted to it and received by it, is exactly
the same [Sec. 89(3)].
10. By ‘negotiation back’ of a bill: When a bill of exchange comes
back to the acceptor by process of negotiation and he becomes its
holder, it is called ‘negotiation back’. If a bill of exchange which has
been negotiated is, at or after maturity, held by the acceptor in his
own right, all rights of action thereon are extinguished (Sec. 90).
Check Your Progress

9. How is a negotiable instrument dishonoured?
10. What do you understand by discharge of instrument?

QUESTIONS
1. The term ‘negotiable instrument’ literally means ‘a written document

transferable by delivery’. According to Section 13 of the Negotiable
Instruments Act, ‘a negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer’. ‘A negotiable
instrument may be made payable to two or more payees jointly, or it may
Self-Instructional be made payable in the alternative to one of two, or one or some of several
138 Material
payees’ [Section 13(2)]. Negotiable Instruments
Act, 1881
2. The following instruments have been recognized as negotiable instruments
by statute or by usage or custom: (i) bills of exchange; (ii) promissory notes;
(iii) cheques; (iv) government promissory notes; (v) treasury bills; (vi) dividend
NOTES
warrants; (vii) share warrants; (viii) bearer debentures; (ix) port trust or
Improvement Trust debentures; (x) hundis; (xi) railway bonds payable to
bearer, etc.
3. There are some instruments called ‘documents of title’, e.g., (i) bills of lading;
(ii) dock warrants; (iii) railway receipts and (iv) wharfinger certificates, which,
like a negotiable instrument, are capable of being transferred by endorsement
and/or delivery, but the transferor of such documents cannot give to the
holder any better title to the goods than he himself possesses. Such
instruments are termed as ‘quasi-negotiable instruments’ and the provisions
of the Negotiable Instruments Act do not apply to them.
4. The essentials of a ‘promissory note’ are as follows:
(i) It must be in writing.
(ii) It must contain a promise or undertaking to pay.
(iii) The promise to pay must be unconditional.
(iv) It must be signed by the maker.
(v) The maker must be a certain person.
(vi) The payee must be certain.
(vii) The sum payable must be certain.
(viii) The amount payable must be in legal tender money of India.
(ix) The note must be properly stamped.
5. The essential characteristics of a ‘bill of exchange’ are as follows:
(i) It must be in writing.
(ii) It must contain an order to pay.
(iii) The order to pay must be unconditional.
(iv) It must be signed by the drawer.
(v) The drawer, drawee and payee must be certain.
(vi) The sum payable must be certain.
(vii) The bill must contain an order to pay money only.
(viii) It must comply with the formalities as regards date consideration,
stamps, etc.
6. An instrument, which in form is such that it may either be treated as a bill of
exchange or as a promissory note, is an ‘ambiguous instrument’. In such a
case, the holder may either treat it as a bill of exchange or a promissory
note, but once he has made his choice, the instrument shall henceforth be
treated accordingly. Self-Instructional
Material 139
Negotiable Instruments 7. Every maker, drawer, payee or indorsee, and if there are several makers,
Act, 1881
drawers, payees or indorsees, all of them jointly can negotiate an instrument,
provided the negotiability of such instrument has not been restricted or
excluded by any express words used in the instrument. But the maker,
NOTES drawer, payee or indorsee cannot negotiate an instrument, unless he is in
lawful possession or is holder thereof (Sec. 51).
8. The two modes of negotiating or transferring a negotiable instrument are:
(i) negotiating by mere delivery, and (ii) negotiating by indorsement as well
as delivery.
9. A negotiable instrument may be dishonoured by: (i) non-acceptance or (ii)
non-payment. As presentment for acceptance is required only in case of
bills of exchange, it is only the bills of exchange which may be dishonoured
by non-acceptance. Of course any type of negotiable instrument—
promissory note, bill of exchange or cheque—may be dishonoured by non-
payment. There are various aspects of dishonour.
10. A negotiable instrument is said to be discharged when it becomes completely
useless, i.e., no action on that will lie, and it cannot be negotiated further.
After a negotiable instrument is discharged the rights against all the parties
thereto comes to an end, and no party, even a holder in due course, can
claim the amount of the instrument from any party thereto. Discharge of the
party primarily and ultimately liable on the instrument results in the discharge
of the instrument itself.
5.6 SUMMARY
 Negotiable instruments are different from other documents because they

are easily negotiable; the transferee can sue in his own name without giving
notice to the debtor, a bona fide transferee of a negotiable instrument for
value gets the instrument ‘free from all defects’ and certain presumptions
apply to all negotiable instruments.
 Bills of exchange, promissory notes, cheques, government promissory notes,
treasury bills, dividend warrants, share warrants, etc., are all examples of
negotiable instruments; whereas money orders, postal orders, fixed deposit
receipts, share certificates and letters of credit are all examples of non-
negotiable instruments.
 Negotiation is a transfer of negotiable instrument so as to constitute the
transferee a holder thereof, who should be entitled in his own name to sue
on the instrument and recover the amount due thereon. Therefore, mere
handing over of a bearer instrument to a servant for safekeeping will not be
called ‘negotiation’. There must be a transfer with intention to pass title and
in the manner prescribed by the Act.
Self-Instructional
140 Material
 A cheque, being, a species of a bill of exchange, must satisfy almost all the Negotiable Instruments
Act, 1881
essentials of a bill, e.g., signed by the drawer, containing an unconditional
order to pay a certain sum of money, to the order of a person or the bearer,
etc.
NOTES
 An instrument payable on demand or at sight (i.e., on presentation in case
of a cheque or a promissory note, and on acceptance in case of a bill of
exchange) is termed as a ‘demand instrument’.
 ‘Payment in due course’ implies payment: (i) according to the apparent
tenor of the instrument at or after maturity (ii) in good faith and without
negligence (iii) in money (or by cheque if acceptable to the holder) (iv) to a
person who is legally entitled to the instrument and is in possession of the
same.
 If a person delivers a negotiable instrument to his servant for safe custody
or to his solicitor for filing a suit, the delivery does not amount to negotiation
and the servant or the solicitor acquires no title to the instrument.
 ‘When the maker or holder of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation, on the back
or face thereof or on a slip of paper annexed thereto, or so signs for the
same purpose a stamped paper intended to be completed as negotiable
instrument, he is said to indorse the same, and is called the indorser’.
 Notice of dishonour means formal communication of the fact of dishonour.
It is given to the party sought to be made liable and, therefore, it serves as
a warning to the person to whom the notice is given that he could now be
made liable. Such a notice also serves the purpose of enabling the person
so notified to protect himself against his prior parties.
 According to Section 94 the notice of dishonour may be oral or written. If
it is written it may be sent by post. A notice duly addressed and posted is
good even though it may be miscarried.
 ‘Noting’ is the authentic and official proof of presentment and dishonour of
a negotiable instrument. The question of noting does not arise in the case of
dishonour of a cheque because in such a case the bank, while refusing
payment, returns back the cheque giving reasons in writing for the dishonour
of the same, and that itself acts as an authentic evidence of the fact of
dishonour. Even in the case of inland bills or notes, noting is not compulsory
(Sec. 104).
 ‘Protest’ is a formal certificate of dishonour issued by the notary public to
the holder of the bill or note, on his demand (noting is merely a record of
dishonour on the instrument itself) (Sec. 100).
 When a bill of exchange comes back to the acceptor by process of
negotiation and he becomes its holder, it is called ‘negotiation back’.
Self-Instructional
Material 141
Act, 1881 5.7 KEY WORDS
 Negotiable instrument: A written document transferable by delivery

NOTES  Promissory note: An instrument in writing (not being a bank note or a
currency note) containing an unconditional undertaking signed by the maker,
to pay a certain sum of money only to, or to the order of, a certain person,
or to the bearer of the instrument
 Bill of exchange: An instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person or to the bearer of the
instrument

EXERCISES
1. Write a short note on the various forms which are used in negotiable
instruments.
2. Write in a brief about special benefits of bill of exchange.
3. Write in short about conditional indorsement.
4. Write in brief about dishonour by non-payment.
5. Write a brief note on distinction between negotiation and assignment.
6. Write a short note on noting and protest in negotiable instruments.
7. Write in brief about discharge of one or more parties.
1. Analyse in detail the essentials of a promissory note.
2. Enumerate the distinction between a ‘promissory note’ and a ‘bill’.
3. Discuss the role of miscellaneous instruments.
4. Analyse various privileges that a holder in due course enjoys under the
negotiable Act.
5. Discuss the various ways in which one or more parties is/are discharged
from liability.
Self-Instructional
142 Material
5.9 FURTHER READINGS Act, 1881
Vikas Publishing House. NOTES
Co & Ltd.
Self-Instructional
Material 143
The Indian Partnership
Act, 1932
UNIT 6 THE INDIAN
PARTNERSHIP ACT, 1932
NOTES
Structure
6.0 Introduction
6.1 Objectives
6.2 Nature and Features of Partnership
6.2.1 Essential Elements of Partnership
6.3 Qualities, Advantages and Limitations of Partnership
6.3.7 Register of Firms
6.4 Rights and Duties of Partners
6.5 Dissolution of a Partnership Firm
6.7 Summary
6.8 Key Words
6.0 INTRODUCTION
Enacted in India in 1932, Section 4 of the Indian Partnership Act states that partnership
is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all. To emphasize the element of contract,
Section 5 expressly provides that ‘the relation of partnership arises from contract
and not from status’’. The Partnership Act does not mention any thing about the
maximum number of persons who can be partners in a partnership firm but Section
11 of the Companies Act, 1956, lays down that a partnership consisting of more
than 10 persons for banking business and 20 persons for any other business would
be illegal. Although sharing of profits is an evidence of partnership, this is not the
conclusive test of partnership. There may be persons sharing the profits of a business
but who do not by that reason become partners. Persons who have entered into
partnership with one another are called individually ‘partners’ and collectively a ‘firm’
Self-Instructional and the name under which their business is carried on is called the ‘firm name’ (Sec.
144 Material
4). A firm is merely a collective name of the individuals composing it. Hence, unlike The Indian Partnership
Act, 1932
a company which is a separate legal entity distinct from its members, a firm cannot
possess property or employ servants, neither can it be a debtor nor a creditor.
The partnership should be registered as soon as it is formed with the Registrar
NOTES
of Firms of the area. In the absence of registration, the firm will not be able to
enforce its legal remedies against outsiders, and the partners also cannot enforce
the conditions laid down in the ‘partnership deed’ through a court of law. A
partnership may be formed by oral or by written agreement or agreement of
partnership can be inferred from the conduct of the parties. Partnership is based
on mutual contract and, therefore, only those who possess the capacity to contract
can be partners in a partnership firm.
This unit aims at analysing the various aspects of Indian Partnership Act,
1932 and explains essential elements of partnership.
6.1 OBJECTIVES

 Understand the Indian Partnership Act
 Enumerate the nature of partnership
 Explain the essential elements of a partnership
 Analyse the meaning and features of firm and partner
 Enumerate the qualities and limitation of partnership
 Understand the partnership deed
 Explain the kinds of partnership
 Understand the registration of partnership
 Enumerate the rights and duties of partnership
 Explain the dissolution of partnership.
6.2 NATURE AND FEATURES OF PARTNERSHIP
The law of partnership is contained in the Indian Partnership Act, 1932, which
came into force on 1 October 1932, except Section 69 (dealing with the effect of
non-registration of firms, which came into force on 1 October 1933). Since
partnership comes into existence only by a contract between the parties for the
purpose, the provisions of the Indian Contract Act, except when they are inconsistent
with the express provisions of the Partnership Act, continue to apply to partnership
firms (Sec. 3). Section 4 of the Indian Partnership Act, 1932, defines ‘partnership’
in the following terms:
‘Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all’. Self-Instructional
Material 145
The Indian Partnership 6.2.1 Essential Elements of Partnership
Act, 1932
There are five elements which constitute a partnership, namely: (1) there must be
a contract; (2) between two or more persons; (3) who agree to carry on a business;
NOTES (4) with the object of sharing profits; and (5) the business must be carried on by all
or any of them acting for all (i.e., there must be mutual agency).
All the above elements must coexist in order to constitute a partnership. If
any of these is not present, there cannot be a partnership. We now discuss these
elements one by one. These are:
1. Contract: Partnership is the result of a contract. It does not arise from
status, operation of law or inheritance. Thus at the death of father, who was
a partner in a firm, the son can claim share in the partnership property but
cannot become a partner unless he enters into a contract for the same with
other persons concerned. Similarly, the members of Joint Hindu Family
carrying on a family business cannot be called partners because their relation
arises not from any contract but from status. To emphasize the element of
contract, Section 5 expressly provides that ‘the relation of partnership arises
from contract and not from status’.
Thus a ‘contract’ is the very foundation of partnership. It may, however, be
either express or implied. Again, it may be oral or in writing (Laxmibai vs
Roshan Lap).
2. Association of two or more persons: Since partnership is the result of a
contract, at least two persons are necessary to constitute a partnership.
The Partnership Act does not mention any thing about the maximum number
of persons who can be partners in a partnership firm but Section 11 of the
Companies Act, 1956, lays down that a partnership consisting of more than
10 persons for banking business and 20 persons for any other business
would be illegal. Hence, these should be regarded as the maximum limits to
the number of partners in a partnership firm.
Only persons competent to contract can enter into a contract of partnership.
Persons may be natural or artificial. A company may, being an artificial legal
person, enter into a contract of partnership, if authorized by its Memorandum
of Association to do so. There could even be a partnership between a
number of companies (Steel Bros. & Co Ltd. vs Commissioner of Income-
tax). A partnership firm, since it is not recognized as a legal person having
a separate entity from that of partners, cannot enter into contract of
partnership with another firm or individuals (Duli Chand vs Commissioner
of Income-tax). When a firm (under a firm name) enters into a contract of
partnership with another firm or individual, in that case, in the eye of law the
members of the firms or firm become partners in their individual capacity
(Commissioner of Income-tax vs Jadavji Narsidas & Co.).
3. Carrying on of business: The third essential element of a partnership is
Self-Instructional that the parties must have agreed to carry on a business. The term ‘business’
146 Material
is used in its widest sense and includes every trade, occupation or profession The Indian Partnership
Act, 1932
[Sec. 2(A)]. If the purpose is to carry on some charitable work, it will not
be a partnership. Similarly, if a number of persons agree to share the income
of a certain property or to divide the goods purchased in bulk among
themselves, there is no partnership and such persons cannot be called NOTES
partners because in neither case they are carrying on a business.
4. Sharing of profits: This essential element provides that the agreement to
carry on business must be with the object of sharing profits among all the
partners. Impliedly the partnership must aim to make profits because then
only profits may be divided among the partners. Thus, there would be no
partnership where the business is carried on with a philanthropic motive
and not for making a profit or where only one of the partners is entitled to
the whole of the profits of the business. The partners may, however, agree
to share profits in any ratio they like. Here two aspects of sharing need to
be taken into account: These are:
i. Sharing of losses not necessary: To constitute a partnership it is
not essential that the partners should agree to share the losses
(Raghunandan vs Harmasjee). It is open to one or more partners to
agree to bear all the losses of the business. The Act, therefore, does
not seek to make agreement to share losses a test of the existence of
partnership. Section 13(A), however, provides that the partners are
entitled to share equally in the profits earned, and shall contribute
equally to the losses sustained by the firm, unless otherwise agreed.
Thus scaring of losses may be regarded as consequential upon the
sharing of profits and where nothing is said as to the sharing of losses,
an agreement to share profits implies an agreement to share losses as
well. It must be noted that even though a partner may not share in the
losses of the business, yet his liability vis-a-vis outsiders shall be
unlimited because there cannot be ‘limited partnerships’ in our country
under the Partnership Act.
ii. Sharing of profits not conclusive test: Although sharing of profits
is an evidence of partnership, this is not the conclusive test of
partnership. There may be persons sharing the profits of a business
but who do not by that reason become partners. In this respect,
Explanation II to Section 6 clearly states: ‘The receipt by a person of
a share of the profits of a business, or of a payment contingent upon
the earning of profits or varying with the profits earned by a business,
does not of itself make him a partner with the persons carrying on the
business; and, in particular, the receipt of such share or payment:
(a) By a lender of money to persons engaged or about to engage in
any business,
(b) By a servant or agent as remuneration,
(c) By a widow or child of a deceased partner as annuity, or Self-Instructional
Material 147
The Indian Partnership (d) By a previous owner or part-owner of the business as
Act, 1932
consideration for the sale of the goodwill or share thereof, does
not itself make the receiver a partner, with the persons carrying
on the business’.
NOTES
The question whether a person sharing profits of a business is a partner or
not depends upon the real relation between the parties, as shown by all
relevant facts taken together (Sec.6).
5. Mutual agency: The fifth element in the definition of a partnership provides
that the business must be carried on by all the partners or any (one or more)
of them acting for all, that is, there must be mutual agency. Thus every
partner is both an agent and principal for himself and other partners, i.e., he
can bind by his acts the other partners and can be bound by the acts of
other partners in the ordinary course of business. To test whether a person
is a partner or not, it should be seen, among other things, whether or not the
element of agency exists, i.e., whether the business is conducted on his
behalf. It is on the basis of this test that a widow of a deceased partner or a
manager having a share in the profits is not a partner, because business is
not carried on, on the widow or the deceased behalf. If she or he does
something the firm is not legally bound by that.
As it has been clear from the above discussion of various elements of partnership,
there is no single test of partnership. For example, in one case there may be sharing
of profits but may not be any business; in the other case there may be business but
there may not be sharing of profits; in yet another case there may be both business
and sharing of profits but the relationship between persons sharing the profits may
not be that of principal and agent. And in either case, therefore, there is no
partnership. Thus, all the essential elements mentioned before must co-exist in
order to constitute a partnership. To emphasize this fact, Section 6 expressly
provides that ‘in determining whether a group of persons is or is not a firm or
whether a person is or is not a partner in a firm, regard shall be had to the real
relation between the parties, as shown by all relevant facts taken together’. Thus,
the existence of partnership has to be determined with reference to the real intention
of the parties, which must be gathered from all the facts of the case and the
surrounding circumstances.
Persons who have entered into partnership with one another are called individually
‘partners’ and collectively a ‘firm’ and the name under which their business is
carried on is called the ‘firm name’ (Sec. 4).
A ‘firm’ is not a separate legal entity distinct from its members. It is merely
a collective name of the individuals composing it. Hence, unlike a company which
is a separate legal entity distinct from its members, a firm cannot possess property
Self-Instructional
148 Material
or employ servants, neither can it be a debtor nor a creditor. It cannot sue or be The Indian Partnership
Act, 1932
sued by others. It is only for the sake of convenience that in commercial usage
terms like ‘firm’s property’, employee of the firm’, ‘suit against the firm’ and so on
are used, but in the eye of law that simply means ‘property of the partners’,
‘employee of the partners’ and ‘a suit against the partners’ of that firm. It is relevant NOTES
to state that for the purposes of the Income Tax Act, a partnership firm is an entity
quite distinct from the partners composing it and is assessable separately.
The partners are free to choose any name for the firm subject to the following rules:
1. The name must not be too identical or similar to the name of another existing
firm doing similar business so as to lead to confusion (Havana Cigars
Factories Ltd. vs Oddenino). The reason for this rule being that the
reputation or goodwill of a firm may be injured, if a new firm could adopt an
allied name.
2. The name must not contain words like Crown, Emperor, Empress, Empire,
Imperial, King, Queen, Royal, or words expressing or implying the sanction,
approval or patronage of Government except when the State Government
signifies its consent to the use of such words as part of the firm name by
order in writing [Sec. 58(3)].
Check Your Progress

1. What do you understand by partnership?
2. List the main elements of partnership.
6.3 QUALITIES, ADVANTAGES AND LIMITATIONS

OF PARTNERSHIP
In this section, we will discuss the formation and registration of a partnership deed.
We know that a partnership may be formed by oral or by written agreement or
agreement of partnership can be inferred from the conduct of the parties. The
following basic facts must be borne in mind by the persons desirous of entering
into an agreement of partnership:
1. The successful working of a partnership depends upon mutual confidence
and utmost good faith among the partners because each partner is an agent
of others and binds them to the fullest extent of their fortunes. It is therefore,
necessary that the partners of a firm be sleeted with extreme care and caution.
2. All the essential elements of a valid contract must be present. There must be
free consent of the parties who must be competent to contract, and the
object of the partnership should not be forbidden by law or immoral or
opposed to public policy. Self-Instructional
Material 149
The Indian Partnership 3. The mutual rights and obligations of partners must be discussed in detail
Act, 1932
and should be put in black and white in the shape of a ‘partnership deed’,
before the partnership is actually started. An oral agreement may be alright
till the going is normal but in times of adversity or windfall gains, there may
NOTES be dispute among the partners, on sharing the losses or profits respectively.
In such circumstances, an oral agreement is futile as on its basis it is difficult
to prove that such and such conditions were agreed upon. It is, therefore,
best to have a written agreement.
4. The partnership should be registered as soon as it is formed with the Registrar
of Firms of the area. In the absence of registration, the firm will not be able
to enforce its legal remedies against outsiders, and the partners also cannot
enforce the conditions laid down in the ‘partnership deed’ through a court
of law.
The document in which the respective rights and obligations of the members of a
partnership are set forth is called a ‘partnership deed’. It should be drafted with
care and be signed by all the partners. It must be stamped in accordance with the
Indian Stamp Act. Each partner should have a copy of the Deed. The firm should
be registered and copy of the Deed should be filed at the time of registration with
the Registrar of Firms because in the absence of such registration partners cannot
enforce the conditions laid down in the Deed through a court of law. The Deed
should cover the following points:
(i) The name of the firm and the names and addresses of partners who compose
it.
(ii) Nature of business and the town and place where it will be carried on.
(iii) Date of commencement of partnership.
(iv) The duration of partnership.
(v) The amount of capital to be contributed by each partner and the methods
of raising finance in future if so required.
(vi) The ratio of sharing profits and losses.
(vii) Interest on partners’ capital, partners’ loan, and interest, if any, to be charged
on drawings.
(viii) Salaries, commissions, etc., if any, payable to partners.
(ix) The method of preparing accounts and arrangement for audit and safe
custody of cash, etc.
(x) Division of task and responsibility, i.e., the duties, powers and obligations
of all the partners.
(xi) Rules to be followed in case of retirement, death and admission of a partner.
(xii) Expulsion of partners in case of gross breach of duty or fraud.
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150 Material
(xiii) Section 11(2) clearly provides that the Deed may provide that a partner The Indian Partnership
Act, 1932
shall not carry on any business other than that of the firm while he is partner,
notwithstanding anything contained in Section 27 of the Indian Contract
Act where agreements in restraint of trade are void.
NOTES
(xiv) The circumstances under which the partnership will stand dissolved.
(xv) Arbitration in case of dispute among the partners.
The terms laid down in the Deed may be varied by consent of all the partners,
and such consent may be expressed or may be implied by a course of dealing
[Sec. 11(1)].
From the duration point of view, the partnerships may be classified into the following
two categories:
1. Partnership at will: Where no provision is made by contract between the
partners for the duration of their partnership or for the determination of
their partnership, the partnership is ‘partnership at will’ (Sec. 7). Thus, the
essence of a ‘partnership at will’ is that the partners do not fix any term of
partnership and are free to break their relationship at their sweet will. It is a
partnership for an indefinite period. Such a partnership may be dissolved
by any partner by giving a notice to that effect to all the other partners [Sec.
43(1)]. It may be noted that if this freedom to dissolve the firm at will is
curtailed by agreement, say, if the agreement provides that the partnership
can be dissolved by mutual consent of all the partners only, it will not constitute
a ‘partnership at will’.
2. Particular partnership: When a partnership is formed for a particular
period or for a specific venture, e.g., for working a coal mine or producing
a film, it is called a ‘particular partnership’ (Sec. 8). In such a case, the
partnership is automatically dissolved at the expiry of the fixed term or on
the completion of the venture (Sec. 42). Before such time the partnership
would not be dissolved unless all the partners agree to it (Sec. 40). If the
partners decide to continue such a partnership even after the expiry of the
fixed term or the completion of the specific venture then it becomes a
‘partnership at will’.
There may be various types of partners in a partnership firm. These are as follows:
1. Active or actual partners: Partners who take an active part in the conduct
of the partnership business are called ‘actual’ or ‘ostensible’ partners. They
are full-fledged partners in the real sense of the term. Such a partner must
give public notice of his retirement from the firm in order to free himself
from liability for acts after retirement.
Self-Instructional
Material 151
The Indian Partnership 2. Sleeping or dormant partners: Sometimes, however, there are persons
Act, 1932
who merely put in their capital (or even without capital they may become
partners) and do not take active part in the conduct of the partnership
business. They are known as ‘sleeping’ or ‘dormant’ partners. They do
NOTES share profits and losses (usually less than proportionately), have a voice in
management, but their relationship with the firm is not disclosed to the general
public. They are liable to the third parties for all acts of the firm just like an
undisclosed principal. They are, however, not required to give public notice
of their retirement from the firm.
3. Silent partners: Those who by agreement with other partners have no
voice in the management of the partnership business are called ‘silent’
partners. They share profits and losses, are fully liable for the debts of the
firm and may take active part in the conduct of the business.
4. Partner in profits only: A partner who has stipulated with other partners
that he will be entitled to a certain share of profits, without being liable for
the losses, is known as a ‘partner in profits only’. As a rule such a partner
has no voice in the management of the business. However, his liability vis-a-
vis third parties will be unlimited because in India we cannot have ‘limited
partnership’.
5. Sub-partner: When a partner agrees to share his share of profits in a
partnership firm with an outsider, such an outsider is called a ‘sub-partner’.
Such a sub-partner has no rights against the firm nor he/she is liable for the
debts of the firm.
6. Partner by estoppel or holding out (Sec. 28): If a person represents to
the outside world by words spoken or written or by his conduct or by
lending his name, that he is a partner in a certain partnership firm, he is then
estopped from denying his being a partner, and is liable as a partner in that
firm to anyone who has on the faith of such representation granted credit to
the firm. Actually such a person is not a partner in that firm—no agreement,
no sharing in profits and losses, no say in the management, may not be
knowing exact place of business, but as he holds himself out to be a partner;
he becomes responsible to outsiders as a partner on the principle of estoppel
or holding out. It is for this reason that such a person is called as ‘partner
by estoppel’ or ‘partner by holding out’. He may also be called as ‘quasi-
partner’ for he is not a partner in the full implications of the term; only in the
eyes of outside world he is considered a partner. He may also be known as
‘nominal partner’.
It is to be emphasized that in order to entitle a person to bring an action
under the doctrine of holding out it must be shown that he acted on the faith of the
representation while giving credit to the firm. It does not matter whether the person
representing himself, or represented to be a partner, does or does not know that
the representation has reached the other person so giving credit. But a person
Self-Instructional who knows nothing about the representation or who knows but does not believe
152 Material
it or who knows about it subsequently cannot take advantage of this doctrine and The Indian Partnership
Act, 1932
make the supposed partner liable as a partner (Juggilal Kamalapat vs Shiv
Chand Bagree).
Illustrations: NOTES
(a) P represents to R that he is a partner in the firm of X, Y and Z, while actually
he is not a partner. On the faith of this representation R gives credit to the
firm. The firm of X, Y and Z becomes insolvent. R can make P liable on the
basis of holding out and P is estopped from denying that he is a partner in
the firm.
(b) A, B and C are partners in a firm. D, who is generally seen in the company
of A, B and C, tells M that he is also a partner in the firm. P, who overhears
this talk of D to M and thinking D to be a partner of the firm, gives credit to
the firm. P can make D liable for the credit given to the firm on the basis of
holding out because for taking advantage of the doctrine of holding out it is
not necessary that the representation must be made directly to the person
so giving credit.
(c) X, who is not a partner in the firm consisting of Y and Z, represents to A that
he is also a partner in the firm. B, who does not know of the representation
gives credit to the firm of Y and Z. B cannot make X liable for the credit
given to the firm on the basis of holding out because he has not actually
acted on the faith of the representation while giving credit to the firm.
(d) A partnership firm consists of A, B, C and D. D retires from the firm, but
fails to give public notice of his retirement and his name continues to be
used on letter heads. D is liable as a partner by holding out to creditors who
have lent on the faith of his being a partner.
It must be noted that the doctrine of holding out does not extend to make
the estate or legal representatives of a deceased partner liable for the acts of the
firm done after the death of the partner even though no public notice of partner’s
death is given and the business is continued in the old firm name [Sec. 28(2)]. The
principle of holding out does not apply in the case of insolvent partner also (Sec.
45).
Partnership is based on mutual contract and, therefore, only those who possess
the capacity to contract can be partners in a partnership firm. According to the
Indian Contract Act an agreement by a minor is void ab-initio as against him but
he can derive benefit under it. As such a minor cannot be a full-fledged partner, he
can at most be admitted to the benefits of a partnership. Section 30 of the Partnership
Act thus provides that though a minor cannot be a partner in a firm, but, with the
consent of all the partners for the time being, he may be admitted to the benefits of
partnership by an agreement executed through his guardian with the other partners.
The following points must be noted in this connection: Self-Instructional
Material 153
The Indian Partnership (i) A minor can be admitted to the benefits of a partnership with the consent of
Act, 1932
all the existing partners. Consent only of the majority of partners would not
be sufficient.
(ii) There must be a partnership in existence before a minor can be admitted to
NOTES
its benefits.
(iii) There cannot be a partnership consisting of all minors (Shriram Didwani
vs Gourishanker).
(iv) If a minor is made a full-fledged partner under the terms of a partnership
deed, the deed would be invalid not only vis-a-vis the minor but also in
regard to other partners. Since a minor cannot enter into any contract of
partnership, the deed representing the contract is void ab-initio in toto and
cannot be enforced even vis-a-vis the remaining adult partners (Dharam
Vir vs Jagan Nath).
The rights and liabilities of a minor who has been admitted to the benefits of
partnership are governed by the following rules:
1. The minor is entitled to receive his agreed share of the property and of
the profits of the firm.
2. The minor has the right of inspecting and taking copies of the books of
accounts of the firm. He has, however, no such right in respect of
books other than accounts, as they may contain secrets which should
be restricted to real partners alone.
3. The minor is not personally liable to third parties for the debts of the
firm, but his liability is limited only up to his share in the partnership
assets and profits. If partnership assets fall short in clearing the debts
of the firm the separate personal property of the minor cannot be
applied for payment of the firm debts. To put it differently, the minor
shall be a partner in profits only and shall not share in the losses except
when liability to third party has arisen, but then too up to his share in
the profits and property of the firm.
4. The minor is not entitled to take part in the conducting of the business
as he has no representative capacity to bind the firm.
5. The minor cannot bring about any suit against the partners for an
account or payment of his share of the property or profits of the firm
except when he severs his connection with the firm.
6. On attaining majority or on knowing that he had been admitted to the
benefits of partnership, whichever date be later, the minor must decide
within six months whether he would or would not like to become a
partner in the firm and give public notice of his decision. If he remains
silent and fails to give such a notice, it will be presumed that he has
elected to be a partner in the firm.
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154 Material
The burden of proving the fact that the minor had no knowledge of his The Indian Partnership
Act, 1932
being a partner until a particular date after the expiry of six months of
his attaining majority lies on the person asserting that fact.
7. Where the minor becomes a partner either by his own election or by
NOTES
his failure to give notice within the specified time, he becomes personally
liable to the third parties for all the debts and obligations of the firm
retrospectively from the date of his admission to the benefits of
partnership. Of course, his share in the property and profits of the
firm shall be the same to which he was entitled as a minor.
8. Where the minor chooses not to become a partner:
(a) his rights and liabilities continue to be those of a minor up to date
of his giving public notice;
(b) his share is not liable for any acts of the firm done after the date
of the public notice;
(c) he is entitled to sue the partners for his share of the property and
profits in the firm.
9. If after attaining majority but before choosing to become a partner the
minor represents or knowingly permits himself to be represented as a
partner in the firm, he will be personally liable to anyone who has on
the faith of such representation granted credit to the firm on the ground
of ‘holding out’.
Prior to the passing of the Indian Partnership Act, 1932, there was no provision
for the registration of partnership firms in India. As a result it was difficult for a
third person to prove the existence of partnership and make his claim against all
the members of the firm. Whenever the question of partners’ liability arose, they
did not hesitate to deny their membership of the partnership in question. As such
there was a demand for compulsory registration, as prevalent in England, so that
necessary particulars regarding the constitution of the firm could be made available
to those who may be dealing with the firm.
In view of the very large number of small partnership firms working in India,
where registration may not produce much public benefit, the present Act has made
the registration optional entirely at the discretion of partners. Under the Partnership
Act, it is not compulsory for every partnership firm to get itself registered, but an
unregistered firm suffers from a number of disabilities. In practice, therefore, few
partnerships would deem it advisable to remain unregistered. Here it is essential to
look into the following aspects:
i. Time of registration: Registration may take place at any time during the
continuance of the partnership firm. Where the firm intends to institute a suit
in a court of law to enforce rights arising from any contract, registration
must be effected before the suit is instituted otherwise the court shall not
Self-Instructional
Material 155
The Indian Partnership entertain the suit. Registration may also be effected even after a suit has
Act, 1932
been filed by the firm, but in that case it is necessary to withdraw the suit,
get the firm registered and then file a fresh suit. Registration of the firm
subsequent to the institution of the suit cannot by itself cure the defect.
NOTES
ii. Procedure of registration (Sec. 58): The procedure of registration is
very simple. An application in the prescribed form along with the prescribed
fee has to be submitted to the Registrar of Firms of the State in which any
place of business of the firm is situated or proposed to be situated. The
application or statement must be signed by all the partners, or by their agents
especially authorized in this behalf, and must contain the following particulars:
1. The name of the firm.
2. The place or principal place of business of the firm.
3. The names of any other places where the firm carries on business.
4. The date when each partner joined the firm.
5. The names in full and permanent addresses of the partners.
6. The duration of the firm.
When the Registrar is satisfied that the above provisions have been duly
complied with, he shall record an entry of the statement in a register called
the Register of Firms, and shall file the statement (Sec. 59). This completes
the procedure of registration.
iii. Change of particulars: With a view to keep the Registrar of Firms posted
with up-to-date information regarding the firm, if any change takes place in
any of the particulars given above, it should be notified to the Registrar,
who shall thereupon incorporate the necessary change in the Register of
Firms. Further, the Registrar should also be informed when any partner
ceases to be a partner by retirement, expulsion, insolvency or death, or
when a new partner is admitted or a minor, having been admitted, elects to
become or not to become a partner, or when the firm is dissolved. (Sections
60–63).
iv. Penalty for false particulars: If any person knowingly or without belief
in its truth signs any statement, amending statement, notice or intimation
containing false or incomplete information to be supplied to the Registrar,
he shall be punishable with imprisonment which may extend to three months,
or with fine, or with both. (Sec. 70).
v. Effects of non-registration (Sec. 69): An unregistered firm and its partners
suffer from the following disabilities:
1. No suit in a civil court by a partner against the firm or other co-partners:
If any dispute arises among the partners or between a partner and the
firm or between a partner and ex-partners, and the dispute is based
upon the rights arising from contract (i.e., partnership deed) or upon
the rights conferred by the Partnership Act, then a partner of an
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156 Material
unregistered firm cannot institute a suit to settle such disputes. However, The Indian Partnership
Act, 1932
criminal proceedings can be brought by one partner against the other(s).
Thus, if a partner steals the property of the firm or sets fire to the
buildings of the firm, any partner can prosecute him for the same.
NOTES
2. No suit in a civil court by firm against third parties: An unregistered
firm cannot file a suit against a third party, if it so becomes necessary,
to enforce any right arising from contract, e.g., for the recovery of the
price of goods supplied. Of course, criminal proceedings can be
brought against the wrong doers. It may be noted that a suit by a third
party against the firm or its partners is not prohibited, it is only a suit
by the firm, and that too arising out of a contract, against a third party
which is prohibited.
3. The firm or its partners cannot make a claim of set-off or other
proceeding based upon a contract. The above two disabilities also
apply to a claim of set-off or other proceeding to enforce a right
arising from a contract. Thus, if a third party sues the firm to recover a
sum of money, the firm cannot claim a set-off, i.e., the firm cannot say
that the third party also owes some money to the firm and the same
should be adjusted against the claim in question. Similarly, if an
unregistered firm institutes a suit for the reduction of rent against its
landlord, such a suit is not maintainable because the suit falls under the
disability relating to ‘other proceeding’ to enforce a right arising from
a contract (Gappulal Gordhandas vs Chunilal Shyamla).
However, there are a few exceptions. Non-registration of a firm does not,
however, affect the following rights, namely:
1. The right of third parties to sue the firm or any partner.
2. The right of partners to sue for the dissolution of the firm or for the
accounts of a dissolved firm or for the realisation of the property of a
dissolved firm (i.e., for claiming share of the assets of a dissolved firm
or for recovering money from firm’s debtors).
3. The power of an Official Assignee or Receiver or the Court, as the
case may be, to realise the property of an insolvent partner and to
bring an action therefore, if necessary, on behalf of the insolvent.
4. The rights of firm or partners of firm having no place of business in
India.
5. The right to sue or claim a set-off if the value of suit does not exceed
100 in value.
It may be mentioned that registration of firms from income-tax point of view
is different from the registration of firms discussed above. For the purpose of
assessment of income-tax separate registration with the income-tax department is
needed. However, this is also optional.
Self-Instructional
Material 157
The Indian Partnership 6.3.7 Register of Firms
Act, 1932
The Register of Firms maintained at the Registrar of Firms’ office contains complete
and up-to-date information about each registered firm regarding all matters likely
to affect the interests of those persons who propose to deal with the firm. The
NOTES
Registrar is empowered to rectify any mistake in the Register of Firms (Sec. 64).
The Registrar is bound to amend the entry in the Register, if so directed by the
Court as a consequence of its decision relating to a matter concerning the registered
firm (Sec. 65). The Register of Firms shall be open to inspection by any person on
payment of the prescribed fee (Sec. 66). The Registrar is bound to supply on
demand, on payment of the prescribed fee, a copy of any entry in the Register of
Firms (Sec. 67). The Register of Firms is a conclusive proof of the truth of the
matters contained therein as against the parties signing the statements on the basis
of which the Register is prepared. The third party, however, is allowed to challenge
the fact of a statement and prove that it is false (Sec. 68). As such if a person’s
name does not appear in the Register of Firms as a partner, the third party may
prove that he is a partner in the firm.
Section 14 provides that subject to contract between the partners, the property of
the firm includes all property and rights and interest in property originally brought
into the stocks of the firm, or acquired by purchase or otherwise, by or for the
firm, or for the purpose and in the course of the business of the firm, and includes
also the goodwill of the business. If a partner brings in immovable property as his
share of capital in the firm, that becomes the property of the firm even without a
formal document of transfer in the name of the partnership firm. Similarly, property
purchased with the partnership money is deemed to be the property of the firm
even if a partner purchases that in his own name, unless a contrary intention appears
from the conduct of the partner concerned.
Illustrations:
(a) A and B are partners. A buys railway shares in his own name with the
moneys and on account of the firm. The shares are partnership property.
(b) A and B are partners. A buys land with partnership moneys, for his sole
benefit. Thereafter A debits himself in the firm books’ and becomes a debtor
to the firm for the amount of the purchase money. The land is not partnership
property, because there was clearly a contrary intention (Smith vs Smith).
Check Your Progress

3. How is partnership formed?
4. What is partnership deed?
5. List the kinds of partner.
6. How can a minor be a part of partnership?
Self-Instructional 7. What is the procedure of the registration of partnership firms in India?
158 Material
6.4 RIGHTS AND DUTIES OF PARTNERS Act, 1932
‘Subject to the provisions of this Act, the mutual rights and duties of the partners
of a firm may be determined by contract between the partners, and such contract NOTES
may be express or may be implied by a course of dealing. Such contract may be
varied by consent of all the partners, and such consent may be express or may be
implied by a course of dealing’ [Sec. 11(1)]. Thus, except in cases where the
Partnership Act makes a mandatory provision, the partners are entitled to agree
to the terms and provide for their mutual rights and duties.
Subject to contract between the partners, the Partnership Act confers the following
rights upon the partners of a firm:
1. Right to take part in the conduct of the business [Sec. 12 (a)]: Every
partner, irrespective of the amount of capital contribution, has an inherent
right to take part in the conduct of the business of the firm. Although one
may agree not to participate in the management of the business, the right of
participation should be available to each partner.
2. Right to be consulted [Sec. 12 (c)]: Every partner has a right to be
consulted and heard before any matter is decided. Any difference arising as
to ordinary matters connected with the business may be decided by a
majority of the partners. But no change may be made in the nature of the
business or the constitution of the partnership, e.g.; admission of a new
partner, without the consent of all the partners. The partnership deed may,
however, provide that in all matters consent of all the partners is necessary
or that all matters shall be decided by majority opinion. It may be noted that
majority powers should be exercised in good faith for the benefit of the
firm. If the majority of the partners decide to expel a partner without sufficient
cause, the expulsion would be set aside.
3. Right of access to books [Sec. 12(d)]: Every partner has a right to have
access to and to inspect and copy any of the books of the firm.
4. Right to share the profits [Sec. 13 (b)]: Every partner, irrespective of
the amount of capital contribution or business expertise, has a right to share
equally in the profits earned by the firm.
5. Right to interest on capital [Sec. 13 (c)]: Where a partner is entitled to
interest on capital subscribed by him, such interest shall be payable only out
of profits.
6. Right to interest on advances [Sec. 13(d)]: Where a partner makes, for
the purpose of the business, any payment or advance beyond the amount of
capital he has agreed to subscribe, he is entitled to interest thereon at the
rate of 6 per cent per annum.
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Material 159
The Indian Partnership 7. Right to indemnity [Sec. 13 (e)]: Every partner has a right to claim
Act, 1932
indemnity from the firm in respect of payments made or liabilities incurred
by him:
(a) in the ordinary and proper conduct of the business, and
NOTES
(b) in doing such act, in an emergency, for the purpose of protecting the
firm from loss, as would be done by a person of ordinary prudence, in
his own case, under similar circumstances.
For the sake of clarity, we shall be studying the duties of partners inter se under
the following two heads:
1. Absolute duties.
2. Qualified duties.
1. Absolute duties: These duties are imposed by law and are not subject to
a contract to the contrary. Being mandatory in nature, these duties are
applicable to all partnership and cannot be varied by agreement among the
partners. The following are the absolute duties of partners:
i. Duty to carry on the business to the greatest common
advantage (Sec. 9): Every partner is bound to carry on the business
of the firm to the greatest common advantage. It implies that every
partner must use his knowledge and skill for the benefit of the firm and
not for his personal gain. He must conduct the business with the best
of his ability and secure maximum benefits for the firm.
ii. Duty to be just and faithful inter-se (Sec. 9): An ideal partnership
is one where there is mutual trust and confidence, and spirit of
helpfulness and goodwill among the partners. As such every partner
must be just and faithful to his co-partners. He must observe utmost
good faith and fairness towards other partners of the firm.
iii. Duty to render true accounts (Sec. 9): Every partner must render
true and proper accounts to his co-partners. It implies that each partner
must be ready to explain the accounts of the firm and produce vouchers
in support of the entries. No partner should think of making a secret
profit at the expense of the firm.
iv. Duty to provide full information (Sec. 9): Every partner must give
full information of all things affecting the firm to his co-partners. A
partner, being an agent of other partners, must not conceal any
information concerning the firm from the other partners by reason of
the law of agency as well. Law of agency provides that knowledge to
the agent is deemed to be knowledge to the principal.
v.. Duty to indemnify for loss caused by fraud (Sec. 10): A partner
can cause loss to the firm by his neglect or want of skill or omission or
Self-Instructional fraud while acting in the ordinary course of business. The general
160 Material
practice is that when the loss caused by neglect or want of skill or The Indian Partnership
Act, 1932
omission, it is borne by the firm. But when the loss is caused by fraud
committed against a third party by a partner, the same must be
recovered from the guilty partner and cannot be shared among all the
partners. Section 10 gives statutory recognition to this rule and provides NOTES
that ‘every partner must indemnify the firm for any loss caused to it by
his fraud in the conduct of the business of the firm’. The object of this
provision is to discourage partners to deal fraudulently in the conduct
of the business.
vi. Duty to be liable jointly and severally (Sec. 25): Every partner is
liable, jointly with all the other partners and also severally, to third
parties for all acts of the firm done while he is a partner. The liability of
all the partners is not only joint and several but is also unlimited. Thus
if a firm fails to pay a creditor, he may at his discretion bring an action
against some or all the partners for the whole amount.
vii. Duty not to assign his interest (Sec. 29): No partner can assign or
transfer his partnership interest to any other person so as to make him
a partner in the business without the consent of all other partners. He
can, however, assign his share of the profit and his share in the assets
of the firm but the transferee shall not have any right to interfere in the
conduct of the business.
2. Qualified duties: Qualified duties are those which depend upon the contract
between the partners and it is only in the absence of a contract to the contrary
that these duties, as laid down by the Indian Partnership Act, are applicable.
In other words, the partners are free to vary these duties by mutual agreement,
express or implied, and if the partnership agreement is silent then only the
duties contained in the Indian Partnership Act will be the duties of the partners.
Subject to contract between the partners, the Partnership Act prescribes
the following duties of partners inter-se:
1. Duty to attend diligently to his duties [Sec. 12(b)]: Every partner
is bound to attend diligently to his duties in the conduct of the business.
2. Duty to work without remuneration [Sec. 13(a)]: A partner is not
entitled to receive remuneration for taking part in the conduct of the
business:
3. Duty to contribute to the losses [Sec. 13(b)]: The partners are
bound to contribute equally to the losses sustained by the firm,
irrespective of the amount of capital contribution by each one of them.
4. Duty to indemnify for wilful neglect [Sec. 13]: Every partner is
under a duty to indemnify the firm for any loss caused to it by his wilful
neglect in the conduct of the business of the firm. The expression ‘wilful
neglect’ means the failure to perform a duty, or to do something which
a partner ought to have done, intentionally and deliberately. An act
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Material 161
The Indian Partnership done in good faith and bona fide or a mere error of judgment cannot
Act, 1932
be termed as wilful neglect.
5. Duty to use firm’s property exclusively for the firm [Sec. 15]: It
is the duty of every partner to use the property of the firm exclusively
NOTES
for the purposes of the business. No partner should use partnership
property for his personal benefit.
6. Duty to account for personal profits derived [Sec. 16(a)]: If a
partner derives any profit for himself from any transaction of the firm or
from the use of the property or business connection of the firm or the
firm name, he must account for that profit and pay it back to the firm.
7. Duty not to compete with the business of the firm [Sec. 16(b)]:
A partner must not carry on any business which is similar to or likely
to compete with the business of the firm. If he does that, he is bound
to account for and pay to the firm all profits made by him in that
business. A partner may, however, carry on a non-competing business
and may retain the profits of that business to himself.
6.5 DISSOLUTION OF A PARTNERSHIP FIRM

The Indian Partnership Act distinguishes between:
(a) Dissolution of firm, and
(b) Dissolution of partnership.
Section 39 provides that the dissolution of partnership between all the
partners of a firm is called the ‘dissolution of the firm’.
When one or more partners cease to be partners of the firm but others
continue the business in partnership, it is called ‘dissolution of partnership’. In this
case, the firm is reconstituted without any dissolution.
It follows that the dissolution of the firm necessarily involves the dissolution
of partnership as well, but the dissolution of the partnership may or may not involve
the dissolution of the firm. For example, where A, B and C were partners in a firm
and A died, retired or adjudged insolvent, the ‘partnership firm’ as well as the
‘partnership’ would come to an end in the absence of a contract to the contrary.
But if the partners have agreed that the death, retirement or insolvency of a partner
would not dissolve the firm, then on the happening of any of these events,
‘partnership’ would certainly come to an end, although the ‘firm’ may continue
under the same firm name.
A firm may be dissolved in any one of the following ways:
1. By agreement (Sec. 40): A firm may be dissolved with the consent of all
the partners or in accordance with a contract between the partners.
Self-Instructional Partnership is created by contract, it can also be terminated by contract.
162 Material
2. By notice (Sec. 43): Where the partnership is at will, the firm may be The Indian Partnership
Act, 1932
dissolved by any partner giving notice in writing to all the other partners of
his intention to dissolve the firm. A notice of dissolution once given cannot
be withdrawn without the consent of other partners (Jones vs Lloyd). The
firm is dissolved as from the date mentioned in the notice as the date of NOTES
dissolution or, if no date is so mentioned, as from the date of the
communication of the notice.
3. On the happening of certain contingencies (Sec. 42): Subject to
contract between the partners, a firm is dissolved:
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by
the completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dissolved
in any of the aforementioned circumstances. Such a provision is valid.
4. Compulsory dissolution (Sec. 41): A firm is compulsorily dissolved under
any of the following circumstances:
(a) When all the partners, or all the partners but one, are adjudged
insolvent;
or
(b) When some event has happened which makes it unlawful for the
business of the firm to be carried on or for the partners to carry it on
in partnership (e.g., when any partner, who is a citizen of a foreign
country, becomes an alien enemy because of the declaration of war
between his country and India). Where, however, a firm is carrying
on more than one adventures or undertakings, the illegality of one or
more shall not of itself cause the dissolution of the firm in respect of its
lawful adventures or undertakings.
5. Dissolution by the Court (Sec. 44): Dissolution of a firm by the Court is
necessitated when there is a difference of opinion between the partners
regarding the matter of dissolution. For example, where one of the partners
has become insane, some of the partners may be willing to continue the firm
and share profits with the insane partner, while the other partners) may be
insisting on the dissolution of the firm. Obviously in these circumstances,
intervention by the Court becomes necessary. On receiving the petition for
the dissolution of the firm the Court is not bound to decree dissolution and
it enjoys complete discretion in the matter. It may or may not order for the
dissolution of the firm depending upon the merits of each case.
Section 44 enumerates the various grounds on which a petition may be
made to the court for the dissolution of the firm. The Section lays down that
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Material 163
The Indian Partnership at the suit of a partner, the Court may dissolve a firm on any of the following
Act, 1932
grounds:
(a) Insanity: When a partner becomes insane. In this case the Section
permits not only any of the partners but also the next friend of the
NOTES
insane partner to file the suit for dissolution of the firm.
(b) Permanent incapacity: When a partner, other than the partner suing,
becomes permanently incapable of performing his duties as partner.
(c) Misconduct: When a partner, other than the partner suing, is guilty of
misconduct, which is likely to affect prejudicially the carrying on of the
business of the firm. It is not necessary that the misconduct which is
made the ground of dissolution should be connected with partnership
business. Conviction for travelling without ticket or the adultery by
one partner with another partner’s wife are good grounds for the
dissolution of the firm. Under this clause, the suit cannot be brought
by the guilty partner for that would allow him an excuse for getting a
firm dissolved at his will.
(d) Persistent breach of agreement: When a partner, other than the
partner suing, commits frequent breaches of the partnership agreement
or otherwise so conducts himself in matters relating to the business
that other partners find it impossible to carry on the business in
partnership with him. Taking away the books of accounts, using firm’s
monies for his private debts, continuous quarrelling with other partners
are good grounds for the dissolution.
(e) Transfer of interest: When a partner, other than the partner suing,
has transferred the whole of his interest in the firm to a third party or
has allowed his share to be sold in execution of a decree. Transfer or
assignment of partner’s interest does not by itself dissolve the firm.
But the other partners may apply to the Court to dissolve the firm if
such a transfer occurs.
(f) Continuous losses: When the business of the firm cannot be carried
on except at a loss.
(g) Just and equitable: When on any other ground the Court considers
it just and equitable that the firm should be dissolved, for example, if
partners are not on speaking terms.
Check Your Progress

8. List the types of duties of partners.
9. What do you mean by dissolution of partnership?
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164 Material
6.6 ANSWERS TO CHECK YOUR PROGRESS Act, 1932
QUESTIONS
1. Section 4 of the Indian Partnership Act, 1932, defines ‘partnership’ in the NOTES
following terms: ‘Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all or any of them
acting for all’.
2. There are five elements which constitute a partnership, namely: (i) there
must be a contract; (ii) between two or more persons; (iii) who agree to
carry on a business; (iv) with the object of sharing profits; and (v) the business
must be carried on by all or any of them acting for all (i.e., there must be
mutual agency).
3. A partnership may be formed by oral or by written agreement or agreement
of partnership can be inferred from the conduct of the parties. However,
there are some basic facts which must be borne in mind by the persons
desirous of entering into an agreement of partnership.
4. The document in which the respective rights and obligations of the members
of a partnership are set forth is called a ‘partnership deed’. It should be
drafted with care and be signed by all the partners. It must be stamped in
accordance with the Indian Stamp Act. Each partner should have a copy of
the Deed.
5. There may be various types of partners in a partnership firm. These are as
follows:
i. Active or actual partners: Partners who take an active part in the
conduct of the partnership business are called ‘actual’ or ‘ostensible’
partners. They are full-fledged partners in the real sense of the term.
ii. Sleeping or dormant partners: Sometimes, however, there are persons
who merely put in their capital (or even without capital they may become
partners) and do not take active part in the conduct of the partnership
business. They are known as ‘sleeping’ or ‘dormant’ partners.
iii. Silent partners: Those who by agreement with other partners have no
voice in the management of the partnership business are called ‘silent’
partners.
iv. Partner in profits only: A partner who has stipulated with other partners
that he will be entitled to a certain share of profits, without being liable
for the losses, is known as a ‘partner in profits only’.
v . Sub-partner: When a partner agrees to share his share of profits in a
partnership firm with an outsider, such an outsider is called a ‘sub-
partner’.
vi. Partner by estoppel or holding out (Sec. 28): If a person represents to
the outside world by words spoken or written or by his conduct or by Self-Instructional
Material 165
The Indian Partnership lending his name, that he is a partner in a certain partnership firm, he is
Act, 1932
then estopped from denying his being a partner, and is liable as a
partner in that firm to anyone who has on the faith of such representation
granted credit to the firm.
NOTES
6. As such a minor cannot be a full-fledged partner, he can at most be admitted
to the benefits of a partnership. Section 30 of the Partnership Act thus
provides that though a minor cannot be a partner in a firm, but, with the
consent of all the partners for the time being, he may be admitted to the
benefits of partnership by an agreement executed through his guardian with
the other partners.
7. The procedure of registration is very simple. An application in the prescribed
form along with the prescribed fee has to be submitted to the Registrar of
Firms of the State in which any place of business of the firm is situated or
proposed to be situated. The application or statement must be signed by all
the partners, or by their agents especially authorized in this behalf, and must
contain the following particulars:
i. The name of the firm.
ii. The place or principal place of business of the firm.
iii . The names of any other places where the firm carries on business.
iv. The date when each partner joined the firm.
v. The names in full and permanent addresses of the partners.
vi. The duration of the firm.
8. There are two types of duties of partners. These are:
i Absolute duties:These duties are imposed by law and are not subject
to a contract to the contrary. Being mandatory in nature, these duties
are applicable to all partnership and cannot be varied by agreement
among the partners.
ii. Qualified duties: Qualified duties are those which depend upon the
contract between the partners and it is only in the absence of a contract
to the contrary that these duties, as laid down by the Indian Partnership
Act, are applicable. In other words, the partners are free to vary these
duties by mutual agreement, express or implied, and if the partnership
agreement is silent then only the duties contained in the Indian
Partnership Act will be the duties of the partners.
9. When one or more partners cease to be partners of the firm but others
continue the business in partnership, it is called ‘dissolution of partnership’.
6.7 SUMMARY
 Section 4 of the Indian Partnership Act, 1932, defines ‘partnership’ in the

Self-Instructional following terms: ‘Partnership is the relation between persons who have
166 Material
agreed to share the profits of a business carried on by all or any of them The Indian Partnership
Act, 1932
acting for all’.
 There are five elements which constitute a partnership, namely: (1) there
must be a contract; (2) between two or more persons; (3) who agree to
NOTES
carry on a business; (4) with the object of sharing profits; and (5) the business
must be carried on by all or any of them acting for all (i.e., there must be
mutual agency).
 The successful working of a partnership depends upon mutual confidence
and utmost good faith among the partners because each partner is an agent
of others and binds them to the fullest extent of their fortunes. It is therefore,
necessary that the partners of a firm be sleeted with extreme care and caution.
 The document in which the respective rights and obligations of the members
of a partnership are set forth is called a ‘partnership deed’. It should be
drafted with care and be signed by all the partners. It must be stamped in
accordance with the Indian Stamp Act. Each partner should have a copy of
the Deed.
 When a partner agrees to share his share of profits in a partnership firm with
an outsider, such an outsider is called a ‘sub-partner’. Such a sub-partner
has no rights against the firm nor is he/she liable for the debts of the firm.
 The minor cannot bring about any suit against the partners for an account or
payment of his share of the property or profits of the firm except when he
severs his connection with the firm.
 The procedure of registration is very simple. An application in the prescribed
form along with the prescribed fee has to be submitted to the Registrar of
Firms of the State in which any place of business of the firm is situated or
proposed to be situated.
 ‘Subject to the provisions of this Act, the mutual rights and duties of the
partners of a firm may be determined by contract between the partners,
and such contract may be express or may be implied by a course of dealing.
Such contract may be varied by consent of all the partners, and such consent
may be express or may be implied by a course of dealing’ [Sec. 11(1)].
 When a partner is expressly authorized by an agreement of all the partners
to do certain acts on behalf of the firm, it is called ‘express authority of a
partner’. The firm is bound by all acts of a partner done within the scope of
his express authority even if the acts are not within the scope of the partnership
business.
 Mutual confidence and trust among the partners being an essential ingredient
of an ideal partnership, it is very much natural that there must be a consent
of all the partners to the introduction of a new partner, unless the partners
have already agreed otherwise.
Self-Instructional
Material 167
The Indian Partnership  A retiring partner also continues to be liable for the acts of the firm, even
Act, 1932
after retirement, until public notice is given of the fact of retirement. Similarly,
the partners of the reconstituted firm continue to be liable for the acts of the
retired partner though done after retirement, until public notice is given of
NOTES the retirement.
 Where a partner in a firm is adjudicated as insolvent, he ceases to be a
partner on the date on which the order of adjudication is made, whether or
not the firm is thereby dissolved will depend upon the agreement of
partnership between the partners.
 A continuing guarantee given to a firm, or to a third party in respect of the
transactions of a firm, is, in the absence of agreement to the contrary,
revoked as to future transactions from the date of any change in the
constitution of the firm.
 When one or more partners cease to be partners of the firm but others
continue the business in partnership, it is called ‘dissolution of partnership’.
In this case, the firm is reconstituted without any dissolution.
 Dissolution of a firm by the Court is necessitated when there is a difference
of opinion between the partners regarding the matter of dissolution. For
example, where one of the partners has become insane, some of the partners
may be willing to continue the firm and share profits with the insane partner,
while the other partners) may be insisting on the dissolution of the firm.
6.8 KEY WORDS
 The Registrar of Firms: A process of Registration is done with the Registrar

of Firms (ROF), ROF is the body which regulates the registration of
Partnership Firm. ROF also check the functions of the Registered Partnership
Firms.
 Retiring partner: A partner, who goes out of a firm, is called retiring partner
or outgoing partner.
 Insolvency: This is the state of being unable to pay the money owed, by a
person or company, on time; those in a state of insolvency are said to be
insolvent.

EXERCISES
1. Write a short note on the Indian Partnership Act, 1932.
2. Write in a brief about the role of ‘contract’ in partnership.
Self-Instructional
168 Material
3. Write a short note on the registration of a partnership deed. The Indian Partnership
Act, 1932
4. Write in brief about liability of an incoming partner.
5. Write a brief note on dissolution of partnership.
Long-Answer Questions NOTES
1. Analyse the concept and nature of a partnership firm in India.

2. Discuss the various points that Partnership Deed should cover.
3. Analyse the effects of non-registration in partnership.
4. “If a minor is made a full-fledged partner, the deed would be invalid.” Justify
this statement with relevant illustrations.
5. Discuss the continuing liability of partners after dissolution as stated in Section
45.
Co & Ltd.
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Material 169
The Companies Act, 1956
UNIT 7 THE COMPANIES ACT, 1956

NOTES Structure
7.0 Introduction
7.1 Unit Objectives
7.2 Company: Meaning and Definitions
7.2.2 Classification of Companies
7.2.3 Incorporation
7.3 Meetings, Company Management and Resolution
7.3.4 Voting
7.5 Summary
7.6 Key Words
7.0 INTRODUCTION
The Companies Act, 1956, constitutes the Company Law in India. It contains
elaborate provisions relating to the formation, powers and responsibilities of the
directors and managers, raising of capital, holding of company meetings,
maintenance and audit of company accounts, powers of inspection and investigation
of company affairs, and winding up of companies. The Act contains 658 Sections
and XV Schedules. The Central Government exercise control over the Registrars
of Companies through the respective Regional Directors who happen to be senior
officers of the Company Law Board. A company may be incorporated either by a
special Act of legislature or under the Companies Act and accordingly a company
may be: (i) statutory company, or (ii) incorporated company.
A company is brought into existence by a legal process called incorporation.
This is effected by registration with the Registrar of Companies. The memorandum
of association of a company is its principal document. ‘It is a document of great
importance in relation to the proposed company’. No company can be registered
without a memorandum of association and that is why it is sometimes called a life
giving document.
In this unit, we shall study the meaning and nature of a company, the Act
constituting the Company Law in India and its administration has also been
discussed in detail.
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170 Material
7.1 UNIT OBJECTIVES
 Learn the meaning and essential characteristics of a company NOTES
 Analyse the various types of companies
 Understand the Company Law in India
 Enumerate the meaning and concept of incorporation
 Analyse the role of meeting and voting
7.2 COMPANY: MEANING AND DEFINITIONS
Section 3(l)(i) and (ii) of the Companies Act, 1956, define a company as ‘a
company formed and registered under this Act or an existing company. An ‘existing
company’ means a company formed and registered under any of the former
Companies Acts’.
This definition does not reveal the distinctive characteristics of a company.
Perhaps, the clearest description of a company is given by Lord Justice Lindley:
By a company is meant an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business, and
who share the profit and loss (as the case may be) arising therefrom. The common
stock so contributed is denoted in money and is the capital of the company. The
persons who contribute to it, or to whom, it belongs, are members. The proportion
of capital to which each member is entitled is his share. Shares are always transferable
although the right to transfer them is often more or less restricted.
A more comprehensive legal definition of a company giving its essentials,
has been given by L.H. Haney: ‘A company is an incorporated association, which
is an artificial person created by law, having a separate entity, with a perpetual
succession and a common seal.’
A company, thus, may be defined as an incorporated association, which is
an artificial legal person, having a separate legal entity, with a perpetual succession,
a common seal, a common capital comprising transferable shares and carrying
limited liability.
An examination of the definitions reveals the following essential characteristics of a
company:
(i) Incorporated association: A company must necessarily be incorporated
or registered under the prevalent Companies Act. Registration creates a
joint stock company and it is compulsory for all associations or partnerships,
having a membership of more than 10 in banking and more than 20 in any
other trading activity, formed for carrying on a business with the object of
earning profits. Self-Instructional
Material 171
The Companies Act, 1956 (ii) Artificial legal person: A company is an artificial legal person in the sense
that on the one hand, it is created by a process other than natural birth and
does not possess the physical attributes of a natural person, and on the other
hand, it is clothed with many of the rights of a natural person. It is invisible,
NOTES immortal (law alone can dissolve it) and exists only in the eyes of law. It has
no body, no soul, no conscience, neither is it subject to the imbecilities of the
body. It is because of these physical disabilities that a company is called an
artificial person. However, it cannot be treated as a fictitious entity because
it really exists. As a rule, a company may acquire and dispose of property; it
may enter into contracts through the agency of natural persons and it may be
fined for the contravention of the provisions of the Companies Act. Thus, for
most legal purposes, a company is a legal person just like a natural person,
who has rights and duties at law. In short, it may be said, therefore, that a
company being an artificial legal person can do everything like a natural person,
except of course that, it cannot take oath, cannot appear in its own person in
the court (must be represented by counsel), cannot be sent to jail, cannot
practice a learned profession like law or medicine, nor can it marry or divorce.
(iii) Separate legal entity: A company is a legal person having a juristic
personality entirely distinct from and independent of the individual persons
who are for the time being its members (Kathiawar Industries Ltd vs
C.G. of Evacuee Property). It has the right to own and transfer the title to
property in any way it likes. No member can either individually or jointly
claim any ownership rights in the assets of the company during its existence
or in its winding up (Mrs B.F. Gazdar vs the Commissioner of Income
Tax). It can sue and be sued in its own name by its members as well as
outsiders. Creditors of the company are creditors of the company alone
and they cannot directly proceed against the members personally.
A company is not merely the sum total of its component members, but it is
something superadded to them. In mathematical language, it may be defined
as n + 1th person, where n stands for the total number of members and
the 1th person for the company itself. Even if a shareholder owns virtually
the whole of its shares, the company is a separate legal entity in the eyes of
law as distinguished from such a shareholder. This principle was judicially
recognized by the House of Lords in the famous case of Salomon vs
Salomon & Co. Ltd.
Lord Macnaghten observed in this case:
The company is at law a different person altogether from the subscribers to
the Memorandum; and though it may be that after incorporation the business
is precisely the same as it was before, and the same persons are managers,
and the same hands receive the profits, the company is not in law the agent
of the subscribers or trustee for them. Nor are the subscribers, as members
liable, in any shape or form, except to the extent and in the manner provided
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by the Act.
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It is not a citizen. Although a company is a legal person having nationality in The Companies Act, 1956
accordance with the country of its incorporation and a domicile in accordance

with the place or state of its incorporation or registration, it is not a citizen
(State Trading Corporation of India Ltd vs Commercial Tax Officer).
NOTES
(iv) Perpetual existence: A company is a stable form of business organization.
Its life does not depend upon death, insolvency or retirement of any or all
shareholder(s) or director(s). The provision for transferability of shares in
case any shareholder wishes to drop out, as also for transmission of shares to
the successor(s) of the deceased in case any shareholder dies, helps to preserve
the perpetual existence of a company. Law creates it and law alone can dissolve
it. Members may come and go, but the company can go on forever. The
company may be compared with a flowing river where water keeps changing
continuously, still the identity of the river remains the same. Thus, a company
has a perpetual existence, irrespective of changes in its membership.
(v) Common seal: A company being an artificial person has no body similar to
natural person and as such it cannot sign documents for itself. It acts through
natural persons who are termed as directors. However, having a legal
personality, it can be bound by only those documents which bear its signature.
Therefore, the law has provided for the use of a common seal, with the
name of the company engraved on it, as a substitute for its signature. Any
document bearing the common seal of the company will be legally binding
on the company.
(vi) Limited liability: The liability of the members for the debts of the company
is limited to the amount unpaid on their shares howsoever heavy losses the
company might have suffered. For instance, if a shareholder buys 100 shares
of 10 each and pays 5 on each share, he has paid 500 and can be made
no pay another 500, but he cannot be made to pay more than 1,000 in all.
No shareholder can be called upon to pay more than the nominal or face
value of shares held by him, in case of a company with limited liability. Thus,
by virtue of this characteristic the personal property of the shareholder cannot
be seized for the debts of the company, if he holds a fully paid-up share.
(vii) Transferability of shares: The shares of a public company are freely
transferable and members can dispose of their shares whenever they like
without seeking any permission from the company or the other members.
In a private company, however, some restriction on the right to transfer is
essential in its articles as per Section 3(l)(iii) of the Act, but absolute restriction
on the right of the members to transfer shares contained in the articles shall
be void.
It may, however, be noted here that a company possesses all these
characteristics by virtue of its incorporation or registration under the Companies
Act. Although a partnership—the main alternative to the company as a form of
business organization—may also be registered under the Indian Partnership Act,
1932, yet it does not possess any of these characteristics. Self-Instructional
Material 173
The Companies Act, 1956 7.2.2 Classification of Companies
A company may be incorporated either by a special Act of legislature or under the
Companies Act and accordingly, a company may be:
NOTES (i) Statutory company, or
(ii) Incorporated company.
(i) Statutory company: It is incorporated by a special Act passed either by the
Central legislature or state legislature. Companies intending to carry on some business
of national importance are formed in this way. Examples of such companies include:
Reserve Bank of India, State Bank of India, Life Insurance Corporation, Food
Corporation of India, Unit Trust of India, etc. The powers which are to be exercised
by such companies are defined by the Acts constituting them and therefore, they are
not required to have a memorandum of association (a document which defines the
limitation of the powers of a company), as also to use the word ‘Limited’ as part of
their names. The audit of such companies is conducted under the supervision and
control of the Auditor General of India. Although each statutory company is governed
by the provisions of its special Act, the provisions of the Companies Act, 1956, also
apply to them, in so far as the said provisions are not inconsistent with the provisions
of the special Acts under which these companies are formed (Sec. 616).
(ii) Incorporated or registered company: A company registered under the
Companies Act is known as ‘incorporated’ or ‘registered’ company. All existing
companies in India, except the statutory companies, have been formed in this way
and are governed by the provisions of the Companies Act, 1956. It may, however,
be noted that insurance, banking and electric supply companies though incorporated
under the Companies Act are also governed for most of their operative matters by
provisions of their special Acts, viz., the Insurance Act, 1938, the Banking Regulation
Act, 1949, and the Electricity SupplyAct, 1948, and the provisions of the Companies
Act will be applicable to these companies only to such extent as these are not
inconsistent with those contained in the special Acts governing them (Sec. 616).
Registered companies can further be classified in two ways:
1. On the basis of number of members
2. On the basis of liability of members.
1. Types of registered companies on the basis of number of members
On the basis of the number of members a registered company may be: (i) private
company or (ii) public company.
(i) Private company: According to Section 3(l)(iii), a ‘private company’ means
a company which has a minimum paid-up capital of `1 lakh or such higher
paid-up capital as may be prescribed, and by its articles of association:
(a) Restricts the right of the members to transfer shares, if any;
(b) Limits the number of its members to 50, excluding members who are
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174 Material
(c) Prohibits any invitation to the public to subscribe for any shares in, or The Companies Act, 1956
debentures of, the company; and

(d) Prohibits any invitation or acceptance of deposits from persons other
than its members, directors or their relatives.
NOTES
The significance of the words if any used in sub-clause (a) above may be
borne in mind. As a result of these words, the articles of association of a
private company having no share capital shall have to place restrictions
specified in the aforesaid sub-clauses (b), (c) and (d) only. In other words,
in the case of a private company having no share capital, articles of
association need not contain restriction regarding the right of the members
to transfer shares.
For the purpose of counting the number of members in compliance of sub-
clause (b) of the above definition, the Section further lays down that:
(i) Members who have been formerly in the employment of the company
shall not be counted provided they were members while in that
employment and have continued to be members after the employment
ceased; and
(ii) Where two or more persons hold one or more shares of the company
jointly, they shall be treated as a single member.
It is worth mentioning that the Companies (Amendment) Act, 2000, has,
for the first time, prescribed capital adequacy norm for incorporation of
companies so that only genuine companies with serious business intentions
come into existence.
It may be noted that private companies existing on or before the date of
commencement of the Amendment Act, 2000 (i.e., 13 December 2000),
are also required is this requirement of minimum paid-up capital [sub-section
3]. However, a ‘licensed company’ registered under Section 25 has been
exempted from complying with the requirement of minimum paid-up capital,
as aforesaid [Sec. 3(6)].
The minimum number of members required to form a private company is 2.
Such a company must add the word ‘private’ in its name. A private company
enjoys some exemptions and privileges (i.e., some of the provisions of the
Companies Act do not apply to such a company) which will be discussed
later in this unit.
(ii) Public company: As per Section 3(1)(iv), a ‘public company’ means a
company which:
(a) is not a private company;
(b) has a minimum paid-up capital of 5 lakh or such higher paid-up capital,
as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not
a private company, i.e., which is a subsidiary of a public company.
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Material 175
The Companies Act, 1956 Elaborating Clause (a) of the above definition, a ‘public company’ is one,
which:
(i) does not have any restriction on the transfer of shares, if any:
NOTES (ii) does not limit the maximum number of members,
(iii) can invite public for the subscription of its shares and debentures (of
course it is under no obligation to invite public for this purpose if it is
confident of obtaining the required capital privately); and
(iv) can invite or accept deposits from the public.
The Companies (Amendment) Act, 2000, has added Clauses (b) and (c)
stated above in the definition of a ‘public company’. Thus, all new public companies
incorporated on or after the commencement of the Amendment Act (i.e., 13
December 2000), must have the minimum prescribed paid-up capital of `5 lakh.
Further, a public company now includes a ‘private company which is a subsidiary
of a company which is not a private company’. As a result of this provision, a
private company which is a subsidiary of public company shall become a public
company on and from the commencement of the Amendment Act, 2000.
Consequently, such a company will henceforth be regulated like a public company.
It will, however, continue to retain the basic characteristics of a private company
in terms of Section [3(1)(iii)].
It may further be noted that public companies existing on or before the date
of commencement of the Amendment Act, 2000, are also required to meet their
requirement of minimum paid-up capital [Sec. 3(3)]. However, a ‘licensed
company’ registered under Section 25 shall not be required to have minimum
paid-up capital as stated above [Sec. 3 (6)].
The minimum number of members required to form a public company is 7.
2. Types of registered companies on the basis of liability of members
On the basis of liability of members, the Companies Act, 1956, makes provision
for the registration of three types of companies, namely:
i. Companies limited by shares, or
ii. Companies limited by guarantee, or
iii. Unlimited companies
Each of these types may be a ‘public company’ or a ‘private company’
(Sec. 12).
i. Companies limited by shares: A company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them is termed ‘a company limited by shares’
[Sec. 12(2)(a)]. Such a company is popularly called a limited liability
company. The liability can be enforced at any time during the existence and
also during the winding up of the company. Such a company must have
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share capital as the extent of liability is determined by the face value of
176 Material
shares. Most of the companies in India are of this type and it is with The Companies Act, 1956
companies of this class that we are mainly concerned.

ii. Companies limited by guarantee: A company limited by guarantee may
be defined as ‘a company having the liability of its members limited by its
NOTES
memorandum to such amount as the members may respectively thereby
undertake to contribute to the assets of the company in the event of its
being wound up’ [Sec. 12(2)(b)]. The amount guaranteed by each member
cannot be demanded until the company is wound up, hence it is in the nature
of a ‘reserve capital’. It is to be observed that in such types of companies
the liability of the members can only be implemented after the commencement
of winding up of the company; whereas in the case of companies limited by
shares, the liability (if any) can be enforced at any time during the existence
as well as during winding up of the company.
Such companies may or may not have share capital. However, they are
formed generally without share capital for non-trading purposes, e.g., for
the promotion of commerce, art, science, culture, sports, etc., because if
they are formed for trading purposes, they must, in practice, possess a
share capital for carrying on business, and the registration of a guarantee
company with a share capital would be in no way better than registration in
the ordinary way as a company limited by shares. The Chambers of
Commerce, trade associations and sports clubs are usually guarantee
companies because they neither require huge capital nor aim at making
profit. The articles of association of such a company must state the number
of members with which the company is to be registered.
iii. Unlimited companies: A company having no limit on the liability of its
members is an unlimited company [Sec. 12(2)(c)]. Thus, the liability of
members in such companies is unlimited, i.e., it may extend to the personal
property of the members. Like a partnership, every member is liable to
contribute, in proportion to his interest in the company, towards the amount
required for payment in full of the total liabilities of the company, and if one
is unable to contribute anything then the additional deficiency is to be shared
among the remaining members in proportion to their capital in the company.
However, it is different from an ordinary partnership in one important respect,
i.e., creditors of such a company cannot sue members directly and they can
only resort to the winding up of the company on default, the reason is that
being a registered company it has a separate entity in law. It must be noted,
however, that here also the liability of a member is enforceable only at the
time of winding up.
Such a company may or may not have share capital. The articles of
association of an unlimited company must state the number of members with which
the company is to be registered and, if the company has a share capital, the amount
of share capital with which the company is to be registered [Sec. 27(1)]. As the
capital, if any, is stated in the articles and not in the memorandum, it may be Self-Instructional
Material 177
The Companies Act, 1956 varied—increased or reduced—by passing a special resolution, without the sanction
of the court (Re Borough, etc., Building Society). Again, an unlimited company is
free from the restriction imposed by Section 77 and can purchase its own shares.
Such companies are, however, rare these days.
NOTES
7.2.3 Incorporation
A company is brought into existence by a legal process called incorporation. This
is effected by registration with the Registrar of Companies. After completing the
promotional work and before getting the proposed company actually registered
the promoter takes the following preparatory steps:
(i) To ascertain from the Registrar of Companies whether the name by which
the new company is to be started is available or not;
(ii) To get a Letter of Intent (to be converted later on into an Industrial Licence)
under Industries (Development and Regulation) Act, 1951, if the company’s
business comes within the purview of the Act;
(iii) To fix up underwriters, brokers, bankers, solicitors, auditors and signatories
to the memorandum;
(iv) To get Memorandum and Articles of Association prepared and printed.
After taking these preliminary steps, the promoter makes an application to
the Registrar of Companies of the state in which the registered office of the company
is to be situated, for registration of the company. The application must be
accompanied by the following documents:
1. Memorandum of association duly stamped, signed and witnessed [Sec.
33(1)(a)].
2. Articles of association properly stamped, duly signed by the signatories
of the Memorandum and witnessed. The filing of Articles is optional in the
case of a public company with limited liability, which may adopt ‘Table A’,
the model set of Articles, in its entirety. But where a public limited company
adopts ‘Table A’, the fact must be specified on the Memorandum ‘Registered
without articles’ which will mean automatic adoption of ‘Table A’. For all
other companies, filing of separate Articles is essential [Sec. 33(1)(b)].
3. The agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing or whole-time director or manager
[Sec. 33(1)(c)].
4. A written consent of the directors to act in that capacity, duly signed by
each director, along with a written undertaking by them to take the necessary
qualification shares, if any, as provided in the Articles [Sec. 266(1)]. The
document is, however, not to be filed in the case of: (i) a company without
share capital; (ii) a private company; and (iii) a company which was a private
company prior to its becoming a public company [Sec. 266(5)].
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178 Material
5. The notice of address of the registered office of the company. It may, The Companies Act, 1956
however, be filed within 30 days of incorporation (Sec. 146).

6. A statutory declaration stating that all the legal requirements of the Act
precedent to incorporation have been complied with. It must be signed by
NOTES
an advocate of the Supreme Court or of a high court, or by an attorney or
a pleader entitled to appear before a high court, or by a secretary, or a
chartered accountant, in whole-time practice in India, who is engaged in
the formation of the company or by a person named in the Articles as a
director, managing director, manager or secretary of the company [Sec.
33(2)].
Along with the above documents necessary filing fees and registration fees
at the prescribed rates are also to be paid. Schedule X, given at the end of the
Companies Act, prescribes the rates of filing fees and registration fees.
The Registrar will scrutinize these documents and if they are in order, he will
register the company and will issue a certificate of incorporation (the company’s
‘birth certificate’). On obtaining this certificate, the company becomes a body
corporate, with perpetual succession and a common seal [Sec. 34(2)].
The Registrar of Companies will allocate a Corporate Identity Number
(CIN) to each company registered on or after 1 November 2000. Further, the
Government [Department of Company Affairs’ (DCA)] has decided that all
companies registered under the Companies Act, 1956, prior to 1 November 2000
will be allotted a CIN within a year up to April 2002 in a phased manner. The
DCA has directed all Registrar of Companies (ROCs) to act accordingly.
Check Your Progress

1. What do you mean by a company?
2. List the essential characteristics of a company.
3. List types of registered companies on the basis of number of members.
4. What do you mean by incorporation?
7.3 MEETINGS, COMPANY MANAGEMENT AND

RESOLUTION
Meetings are the opportunities provided to the shareholders to let them know
about the working of the company. Thus, shareholders gather together and review
the progress of the company. A statutory meeting is a must for all public companies
which have a share capital except unlimited companies. Before the conduction of
the meeting a statutory report is to be send to all the members, at least 21 days
before the meeting.
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Material 179
The Companies Act, 1956 Meetings that are held each year to review to progress of the company are
called annual general meetings. Voting is a way of knowing about the general
sense of all the members on any particular proposal that has been made in a
meeting. Voting is done using various methods, such as showing hands, by poll,
NOTES etc.
Meetings of shareholders are called general meetings. Such meetings are of vital
importance in the working of a company. For, although the general powers of
management of a company are vested in the Board of Directors, the consent of
members on such major issues as specified in Section 293 (already discussed in
the preceding unit) has to be obtained in their general meeting. Also, it is fair to
provide an opportunity to the shareholders to come together and review the working
of the company. Hence, the Companies Act has provided for various types of
meetings of the shareholders of a company.
There are three types of general meetings of shareholders:
(i) Statutory meeting
(ii) Annual general meetings
(iii) Extraordinary general meetings
In addition to the above types of meetings, sometimes a meeting of a particular
class of shareholders may also be held. Such meetings are called class meetings.
They are convened either by the company or by the court to affect variations in
the rights of that particular class of shareholders (Sec. 106) or in connection with
a scheme of arrangement (Sec. 394) or at the time of winding up of the company.
A class meeting is not a general meeting, but similar rules relating to convening and
conducting of a meeting apply to it (Sec. 170).
It is the first official general meeting of the shareholders. All public companies
having share capital except unlimited companies are required to hold a statutory
meeting compulsorily. It implies that private companies, unlimited companies, and
companies limited by guarantee but not having a share capital are not required to
hold such a meeting. Statutory meeting must be held after one month but within six
months of obtaining the ‘certificate to commence business’ [Sec. 165(1)]. Unlike
other types of general meetings, this meeting is held only once in the lifetime of a
company.
The object of the statutory meeting is to provide an opportunity to the
members, as early as possible, of acquainting themselves with the assets and
properties acquired so far and to discuss the success of the flotation. The members
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180 Material
are free to discuss any matter relating to the formation of the company or arising The Companies Act, 1956
out of the statutory report. But they cannot pass any resolution without previous
notice of at least 21 days [Sec. 165(7)].
Statutory report: In order to enable the members to make the best use of this
NOTES
opportunity, the directors are required to prepare and send to every member a
document known as the ‘statutory report’ at least 21 days before the day on which
the meeting is to be held. If the report is sent later it will still be valid if it is so agreed
to by a unanimous vote of the members entitled to attend and vote at the meeting
[Sec. 165(2)]. The report should be certified as correct by at least two directors,
one of whom shall be the managing director where there is one and must also be
certified by the auditors [Sec. 165(4)]. A copy of this report must be filed with the
Registrar forthwith at the time of sending it to the members [Sec. 165(5)].
The statutory report must set out the following information:
(i) The total number of shares allotted, distinguishing those issued
otherwise than for cash and stating in the case of partly paid up shares,
the extent to which they are so paid;
(ii) The total amount of cash received by the company in respect of all the
shares allotted;
(iii) An abstract of the receipts and payments up to a date within seven days
of the report and the balance in hand. The abstract must show, under
distinctive headings, the receipts of the company from shares, debentures
and other sources and shall give an account or estimate of the preliminary
expenses of the company showing separately any commission or discount
paid or to be paid on the issue or sale of shares or debentures;
(iv) The names, addresses and occupations of the company’s directors,
auditors, managing director or manager and secretary and the changes,
if any, that have occurred since incorporation;
(v) The particulars of any contract to be submitted to the meeting for
approval and its modification done or proposed, if any;
(vi) The extent to which any underwriting contract has not been carried
out and the reasons therefor;
(vii) The details of arrears of calls due from directors and managing director
or manager; and
(viii) The particulars of any commission or brokerage paid or to be paid to
directors and manager in connection with the sale of shares or
debentures of the company.
If any default is made in filing the statutory report with the Registrar or in
holding the statutory meeting, every director or other officer of the company
responsible for the default shall be punishable with a fine up to ‘ 5,000 [Sec.
165(9)]. Further, if the statutory meeting is not held in time, the court may, under
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Material 181
The Companies Act, 1956 Section 433, order the compulsory winding up of the company, on a petition filed
by the Registrar or by any member after the expiry of 14 days from the date on
which the statutory meeting was to be held [Sec. 439(7)].
NOTES (ii) Annual general meeting

Every company must, in each year, hold in addition to any other meetings a general
meeting as its annual general meeting [Sec. 166(1)]. It is the most important meeting
of the members of a company. It is held each year with a view to reviewing and
evaluating the overall progress of the company during a year. The annual general
meeting is sometimes called ‘ordinary general meeting’ as it usually deals with the
so-called ‘ordinary business.’The following ordinary business must be transacted
at the annual general meeting of a public company [Sec. 173(1)(a)]:
(i) The consideration of the Annual Accounts, Balance Sheet and the Reports
of the Board of Directors and Auditors
(ii) The declaration of a dividend
(iii) The appointment of directors in the place of those retiring
(iv) The appointment of, and the fixation of the remuneration of, the auditors
Any other business on agenda except the above-mentioned ones shall be
considered as special business and may also be transacted at the annual general
meeting, provided appropriate notice has been given. It is to be noted that in the
case of extraordinary general meetings all business shall be treated as ‘special
business’ [Sec. 173(1)(b)]. It is relevant to state that the ‘ordinary business’ requires
an ordinary resolution while the ‘special business’ may require ordinary or special
resolution as per articles or the Act. A special resolution is, however, required for
any appointment of auditors, although it is an item of ordinary business, in the case
of a company in which not less than 25 per cent of the subscribed share capital is
held, whether singly or jointly by a public financial institution or a Government
company or Central Government or any state Government or a nationalized bank
or a general insurance company (Sec. 224-A).
It may be noted that a private company may make its own provisions by its
articles in respect of ‘ordinary business’ to be transacted at an annual general
meeting [Sec. 170(1)(ii)].
Other statutory requirements: The Companies Act imposes the following
obligations on every company, public or private, as regards convening of the
annual general meetings:
1. The first annual general meeting of a company must be held within eighteenth
months from the date of its incorporation, and if such a general meeting is
held within that period, it shall not be necessary for the company to hold
any annual general meeting in the year of its incorporation or in the following
year. It may be noted that there can be no extension of period beyond 18
months in case of this meeting even by the Registrar [Sec. 166(1)].
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2. Subsequent annual general meetings must be held each year within six The Companies Act, 1956
months of the end of the company’s financial year [Sec. 210(3)(b)], but
the interval between any two annual general meetings must not be more
than 15 months. The Registrar may, however, for any special reason extend
the above time by a period not exceeding three months [Sec. 166(1)]. NOTES
In connection with subsequent annual general meetings, it is worth noting
that the holding of an annual general meeting in each calendar year is a
statutory necessity, and it is not enough that they are held within 15 months
of each other. ‘There should be one meeting per year and as many meetings
as there are years’ (Shri Meenakshi Mills Co. Ltd vs Assistant Registrar
of Joint Stock Companies). Further, though the annual general meeting of
a company may be adjourned to a subsequent date and the adjourned
meeting is to be deemed to be a continuation of the earlier meeting, the
adjourned meeting too must be held within 15 months of the previous meeting
(Bejoy Kumar Karnani vs Asst. Registrar of Companies).
3. The annual general meeting must be held on a day that is not a public holiday
during business hours at the registered office of the company or at some
other place within the city where the registered office of the company is
situated [Sec. 166(2)].
4. At least 21 day’s written noticeto call an annual general meeting must be
given to every shareholder, directors and auditors of the company, and to
every such person on whom the shares of any deceased or insolvent member
may have devolved [Sections 171(1) and 172(2)]. The meeting may be
held with a shorter notice, if it is so agreed unanimously by all members
entitled to vote in such a meeting [Sec. 171(2)]. A private company may,
however, by its articles make its own regulations as regards length of period
of notice and to whom it should be given [Sec. 170(1)(ii)].
A copy of Directors’ Report, audited Annual Accounts and Auditors’
Reportmust be annexed to every such notice [Sec. 219(1)].
The holding of annual general meeting is also governed by Sections 171 to
186 which contain provisions relating to convening and conducting of all types of
general meetings under the Act.
Default in holding the annual general meeting: If a company fails to call an
annual general meeting within the prescribed time limits, the Company Law Board
may, on the application of any member of the company, call or direct the calling of
the meeting and give such ancillary or consequential directions as it thinks expedient
in relation to the calling, holding and conducting of the meeting. The directions that
may be given by the Company Law Board may include a direction that one member
of the company present in person or by proxy shall be deemed to constitute a
meeting (Sec. 167).
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The Companies Act, 1956 Further, the company and every officer who is in default is liable to a fine
which may extend to 50,000 and in the case of a continuing default, with a
further fine which may extend to 2,500 for every day after the first during which
such default continues (Sec. 168).
NOTES
(iii) Extraordinary general meeting
All general meetings other than the statutory and annual general meetings are called
extraordinary general meetings. Regulation 47 of ‘Table A’ defines: ‘All general
meetings other than annual general meetings shall be called extraordinary general
meetings’. These meetings may be convened by the company at any time. The
business transacted at an extraordinary general meeting comprises anything which
cannot be postponed till the next Annual General Meeting, such as, changes in
memorandum and articles of association, reduction and reorganization of share
capital, issue of debentures, etc. All business transacted at this meeting is called
‘special business’ [Sec. 173(1)(b)]. The convening and conducting of this meeting
is governed, like the annual general meeting, by Sections 171 to 186.
Extraordinary general meetings may be called:
1. By the directors: The directors, may, whenever they think fit, convene
an extraordinary general meeting by passing a resolution to that effect
in the Board’s meeting.
2. By the directors on requisition (Sec. 169): The directors must
convene an extraordinary general meeting on the requisition (written
demand) of members holding not less than one-tenth of the total voting
rights on the matter of requisition. The requisition must state the matters
for the consideration of which the meeting is to be called. It must be
signed by the requisitionists and deposited at the registered office of
the company. The directors should within 21 days from the date of
the deposit of a valid requisition, move to call a meeting and should
give 21 days’ notice to members for calling such a meeting and the
meeting should actually be held within 45 days from the date of the
requisition.
It may be noted that the requisitionists are not bound to disclose reasons
for the resolution they propose to move at the meeting (Life Insurance
Corporation vs Escorts Ltd). Further, no business other than the
business for which the meeting has been expressly convened can be
transacted at the requisitioned meeting.
3. By the requisitionists themselves (Sec. 169): If the directors fail
to call the meeting within aforementioned time limits, the requisitionists
or such of the requisitionists as represent not less than one-tenth of
the total voting rights of all the members, may themselves convene a
meeting within three months of depositing the requisition. Such a
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meeting should be called in the same manner, as nearly as possible, as The Companies Act, 1956
that in which meetings are called by the Board. Any reasonable

expenses incurred by the requisitionists must be repaid to them by the
company, and any sum so paid shall be retained by the company out
of any sums due or likely to become due to the directors by default. NOTES
4. By the Company Law Board (Sec. 186). If for any reason it is
impracticable to call or conduct an extraordinary general meeting, the
Company Law Board may, either of its own motion or on the
application of any director or any member who would be entitled to
vote, order a meeting to be called, held and conducted in such manner
as the Company Law Board thinks fit and may give such directions as
it thinks expedient, including a direction that one member present in
person or by proxy shall be deemed to constitute a meeting.
It may be noted that unlike an annual general meeting an extraordinary general
meeting can be convened on a public holiday and at a place other than the registered
office of the company or the city in which the registered office is situated.
A general meeting of shareholders is said to be valid when it is properly convened
(i.e., when proper notice is issued by a proper authority to all those entitled to
receive the notice) and legally constituted (i.e., when there is a proper person in
the chair, requisite quorum is present and the provisions of the Act and the articles
are complied with). For transacting legally binding business, the meeting must be
validly held. Any irregularity in convening or conducting the meeting shall invalidate
the proceedings of the meeting. Such an invalidation, however, does not affect the
interests of third parties, who have no notice of the irregularity, on the principle of
Indoor Management’ as laid in the case of Royal British Bank vs Turquand).
Sections 171 to 186 of the Companies Act contain provisions relating to
the holding of valid general meetings which must be compulsorily followed by
every public company, in addition to any other rules provided in the articles of the
company [Sec. 170(1)(i)]. A private company is free to make its own regulations
by its articles with respect to general meetings and the provisions of Sections 171
to 186 shall apply to such a company only if its articles do not provide otherwise
[Sec. 170(1)(ii)].
The following are the requisites of a valid general meeting as per the Companies
Act:
1. Proper convening authority: A valid meeting must be called by a proper
authority. The proper authority to convene a general meeting of shareholders
is the directors who should pass a resolution at a Board meeting for the
same. Of course in the event of default by the directors, the requisitionists
or the Company Law Board shall become the proper authority to call such
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The Companies Act, 1956 a meeting. It may be noted that the resolution to call a general meeting must
be passed at a valid Board’s meeting, otherwise, the notice calling the general
meeting will itself become invalid and the proceedings of the meeting shall
not be effective (N.V.R. Nagappa Chettiar vs The Madras Race Club).
NOTES
2. Proper notice: A proper notice of the meeting must be given to every
shareholder (equity and preference), auditors of the company, each director
of the company and to every such person who is entitled to attend the
meeting, i.e., the persons on whom the shares of any deceased or insolvent
member may have devolved. Deliberate omission to give notice to even a
single member may invalidate the meeting, although an accidental omission
to give notice to, or the non-receipt of notice by, any member or other
persons to whom it should be given shall not invalidate the proceedings of
the meeting [Sec. 172(2)(3)].
The notice should be in writing and must be given at least 21 days before
the date of the meeting (Sec. 171). In calculating 21 days, 48 hours from
the date of posting should be excluded (Sec. 53).
The notice must specify the place, day and hour of the meeting, and must
contain an ‘agenda’, namely a statement of the business to be transacted at
the meeting [Sec. 172(1)]. It must also specify the date of notice, the name
of the company, the type of meeting, the exact wording of any proposed
resolution, the authority by which notice is issued and the name of the person
issuing the notice. In the case of special business, there must be annexed to
the notice of the meeting an explanatory statement mentioning all the material
details concerning each such item of business, including in particular the
nature of interest, if any, therein of every director or other managerial
personnel [Sec. 173(2)]. The notice must also state that a member is entitled
to appoint a proxy, where allowed under the Act or the articles, and that a
proxy need not be a member [Sec. 176(2)]. The object of mentioning the
various items of business in the Notice is to give the persons concerned
sufficient opportunity to consider the different items before they come for
discussion in the general meeting.
The notice may be sent to a member either personally or by post, to his
registered address, or the address given by him for sending the notices to
him, in India. The notice sent by post should be properly addressed, prepaid
and posted. A notice may be sent to the joint-holders of shares by serving
it on the joint-holder named first in the Register of Members in respect of
those shares (Sec. 53).
3. Requisite quorum: The third important condition for a valid meeting is
that the quorum must be present. A quorum is the specified minimum number
of qualified persons (members) whose presence is necessary for transacting
legally binding business at the meeting. The members constituting the quorum
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must be effective members entitled to vote at the meeting. Where no quorum The Companies Act, 1956
is present the meeting is not legally constituted and the business transacted
at the meeting or any resolution passed thereat becomes invalid. However,
third parties without notice are not affected by reason of any irregularity in
the quorum (County of Gloucester Bank vs Rudry Morthyr). NOTES
Section 174(1) of the Act prescribes the minimum number of members
who shall constitute the quorum of general meetings. The sub-section states
that unless the articles provide for a larger number, the quorum shall be two
members personally present in the case of a private company, and five
members personally present in the case of a public company for all general
meetings of the members. The following further points are to be noted as
regards quorum of a general meeting:
 The articles cannot provide for a smaller quorum than fixed by the Act
but can provide for a larger number to constitute the quorum.
 Only members present in person, and not proxies, can be counted for
purposes of quorum.
 A person appointed as a representative of a company, which is a
member of the company, is deemed to be personally present for the
purpose of quorum [Sec. 187(2)].
 A nominee of the President of India or the Governor of a state, where
the latter holds shares in a company, shall be counted towards the
number forming the quorum (Sec. 187A).
 Joint-holders of shares are treated as one member for the purpose of
quorum.
 If the total number of members of a company is reduced below the
quorum fixed by the Articles, the rule as to quorum may be deemed to
be satisfied if all the members, though less than the quorum, are present.
 If business proposed to be transacted at a general meeting does not
include any item or resolution proposed to be passed, which directly
affects the rights of the preference shareholders, their presence should
not be taken into account for purpose of determining the quorum, but
where the subject matter includes any resolution in which the rights of
preference shareholders are directly affected, their presence should
be taken into account for the purpose of the quorum.
 There is always a presumption as to the existence of the quorum unless
the records of the meeting show anything to the contrary.
The Act is silent on the point of ‘time of presence’ of the quorum at the
meeting. Regulation 49(1) of Table A, however, states: ‘No business shall
be transacted at any general meeting unless a quorum of members is present
at the time when the meeting proceeds to business.’ It follows from these
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The Companies Act, 1956 wordings that quorum is required to be present at the beginning of meeting.
It need not be present throughout or at the time of taking votes on any
resolution. Similar ruling was given in Hartley Baird Ltd case. It may be
recalled that a quorum must be present throughout in the case of Board’s
NOTES meeting.
Regarding the procedure for observing quorum, Section 174 states that
unless the articles provide otherwise, the following provisions shall apply to
every company, public or private:
(a) If within half an hour from the time announced for holding a meeting of
the company, a quorum is not present, the meeting, if called upon the
requisition of members, shall stand dissolved. In any other case, the
meeting shall stand adjourned to the same day in the next week at the
same time and place unless the Board of Directors determine otherwise.
(b) If at the adjourned or the reassembled meeting also, a quorum is not
present within half-an-hour from the time announced for holding the
meeting, the members present shall be a quorum.
4. Proper Chairman: The fourth requisite for a valid meeting is that there
must be a Chairman to preside over the proceedings of the meeting. In this
regard, Section 175 lays down:
 Unless the articles of a company otherwise provide, the members
personally present at the meeting shall elect one of themselves to be
the chairman thereof on a show of hands.
 If a poll is demanded on the election of the chairman, it shall be taken
forthwith in accordance with the provisions of this Act, the chairman
elected on a show of hands exercising all the powers of the chairman
under the said provisions.
 If some other person is elected chairman as a result of the poll, he
shall be the chairman for the rest of the meeting.
It may, however, be noticed that this Section leaves the appointment of the
chairman to be regulated by the articles of the company and the provisions of this
Section shall apply only if the articles do not otherwise provide. The articles
generally contain provisions on the lines of ‘Table A’—Regulations 50–52. These
Regulations are reproduced below:
Regulations 50: The chairman, if any, of the Board shall preside as
chairman at every general meeting of the company.
Regulations 51: If there is no such chairman, or if he is not present within
15 minutes after the time appointed for holding the meeting, or is unwilling to act
as chairman of the meeting, the directors present shall elect one of their number to
be chairman of the meeting.
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Regulations 52: If at any meeting no director is willing to act as chairman The Companies Act, 1956
or if no director is present within 15 minutes after the time appointed for holding
the meeting, the members present shall choose one of their number to be chairman
of the meeting.
NOTES
Duties and powers of the chairman: The chairman of a general meeting
is responsible for conducting the business at the meeting successfully. He must
preserve order in the meeting. He must ensure that the business is within the scope
of the meeting and that the sense of the meeting is properly ascertained. He must
act impartially and must not abuse his powers.
The chairman has prima facie authority to decide all incidental questions
which arise at the meeting. But he has no power to stop or adjourn a meeting unless
there is absence of quorum or there is disorder or there remains some with the
articles. If he wrongly adjourns the meeting, the meeting may appoint another chairman
and continue the business (Narayanan Chettiar vs Kaleshwar Mills Ltd). He has
also no power to change the order of the items of business to be transacted at the
meeting as set out in the Agenda. However, the order of items on the Agenda may
be changed with the consent of the meeting, if necessary. Again, the chairman has no
right to prevent discussion upon a mater which forms part of the notice convening
the meeting. Of course he may refuse a member to talk as much as he likes.
Note that the chairman is entitled to a casting or second vote in the case of
an equality of votes, unless the articles of the company specifically provide
otherwise.
7.3.4 Voting
The word ‘vote’ means an expression of a wish or opinion in an authorized formal
way for or against any proposal. After a ‘proposed resolution’ or a ‘motion’ has
been discussed in the meeting by the members it is put to vote for ascertaining the
sense of the house. The ‘articles’ prescribe regulations and procedure for voting
at general meetings subject to the provisions of the Act.
A. Voting rights
Every holder of ‘equity shares with voting rights’, whose name appears on the
register of members has the right to vote on every resolution placed before the
company at a general meeting. In other words, the holder of such equity shares
possesses normal voting rights. Further, his voting rights on a ‘poll’ (a method of
voting) shall be in proportion to his share of the paid-up equity capital of the
company [Sec. 87(1)].
The preference shareholders do not possess normal voting rights. They
are, however, entitled to vote in the following two cases:
(i) When any resolution directly affecting their rights is to be passed. It is
worth noting here that any resolution for winding up of the company
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Material 189
The Companies Act, 1956 or for the repayment or reduction of its share capital is to be regarded
as a resolution directly affecting the rights of the preference
shareholders, and therefore they are entitled to vote on such a
resolution.
NOTES
(ii) When the dividend due (whether declared or not) on their preference
shares or part thereof has remained unpaid:
(a) in the case of cumulative preference shares, for an aggregate
period of not less than two years preceding the date of the
meeting; and
(b) in the case of non-cumulative preference shares, either for a
period of two consecutive years or for an aggregate period of
not less than three years comprised in the six years ending with
the expiry of the financial year immediately preceding the date
of the meeting.
It may be observed that when the dividend due on their preference shares
has remained unpaid for periods specified above, the preference shareholders
become entitled to vote on every resolution placed before the company at any
general meeting.
The Act further provides that where a preference shareholder has a right to
vote on any resolution in accordance with the provisions mentioned above, his
voting right on a ‘poll’ shall be in the same proportion as the capital paid up in
respect of the preference shares bears to the total paid up equity capital of the
company [Sec. 87(2)]. It is important to note that the above provisions relating to
voting rights of preference shareholders do not apply to a private company. Such
a company can issue preference shares carrying normal voting rights or even
disproportionate voting rights [Sec. 90(2)].
In the case of joint shareholders, the vote of the senior joint-holder (whose
name appears first in the register of members) shall be accepted. An insolvent
shareholder is entitled to exercise the votes which are attributed to his status as a
member provided his name appears on the Register of Members (Morgan vs
Gray).
In the case of a public company, any restriction in the articles of the company
on a member’s right to vote, except on the ground of non-payment of calls or
other sums due against him, shall be void (Sections 181 and 182). A member can
exercise his right to vote for his own interest and even against the interests of the
company (Greenwell vs Porter).
B. Methods of voting
Voting at a general meeting takes place by: (i) show of hands, and (ii) poll. Voting
by secret ballot is not allowed by the Companies Act. However, in case of licensed
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companies under Section 25 of the Act, i.e., companies not carrying on business The Companies Act, 1956
for profit or prohibiting the payment of a dividend to their members, such as clubs,
chambers of commerce, etc., voting by ‘ballot’ can be provided by their articles
(Sec. 263A).
NOTES
i. Voting by poll and voting by secret ballot distinguished: We have
observed earlier that the Companies Act prohibit voting by secret ballot.
The differences between voting by poll and voting by secret ballot must,
therefore, be noted. Where each member has one vote and voting is secret
it is called ‘voting by secret ballot’. In case of a poll each member has votes
in proportion to his shareholding and the voting is not secret. The members
are required to sign on the vote cards. Again, proxies are not allowed in
voting by secret ballot whereas they are allowed in a poll.
ii. Who can demand a poll? (Sec. 179): A poll may be ordered by the
chairman of his own motion. But he shall be bound to take a poll if demanded:
(a) in case of a public company having share capital, by any member or
members, having the right to vote on the resolution and present in person
or by proxy, holding at least one-tenth of the total paid-up capital of that
class, or holding shares of the paid-up value of at least 50,000;
(b) in the case of a private company having share capital, by one member
entitled to vote on the resolution and present in person or by proxy if
not more than seven such members are personally present, and by
two such members present in person or by proxy if more than seven
such members are personally present;
(c) in the case of any other company, by any member or members present
in person or by proxy holding at least one-tenth of the total voting
power regarding the particular resolution.
The demand for a poll may be withdrawn at any time by the person or
persons who made the demand. When a poll is taken a member is free to split his
votes for and against the same resolution. He has the right to distribute his votes in
any manner he likes (Sec. 183). When more than one resolution is to be passed,
poll is to be taken on each separately.
A poll demanded on a question of adjournment or the election of a chairman
must be taken forthwith. In any other case, it must be taken within 48 hours of the
demand for poll (Sec. 180). When a poll is to be taken the chairman of the meeting
shall appoint two scrutineers, one of whom should be a member of the company,
to scrutinise the votes given on the poll and to report thereon to him (Sec. 184).
The chairman of the meeting shall have the power to regulate the manner in which
a poll shall be taken. The result of the poll shall be deemed to be decision of the
meeting on the resolution on which the poll was taken (Sec. 185). The declaration
of the result by the chairman and an entry to that effect in minutes’ books of the
company is conclusive and final (Sections 194 and 195).
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Material 191
The Companies Act, 1956 C. Proxies
A proxy is a member’s authorized agent for the purpose of voting. The term is also
applied to the instrument by which the appointment to act on his behalf is made by
NOTES the member. As per Section 176, the provisions relating to proxies are as follows:
1. Members of a company having share capital have a statutory right to appoint
proxies, notwithstanding anything to the contrary in the articles. In other
companies, proxies may be appointed if allowed in the articles.
2. Unless the articles otherwise provide, a proxy shall not be allowed to vote
except on a poll.
3. Unless the articles otherwise provide, a member of a private company is
not entitled to appoint more than one proxy to attend on the same occasion.
(For every resolution, poll is taken separately and for every resolution
separate proxy may be appointed in a public company).
4. A proxy must be in writing in the proper form duly signed by the appointer
and stamped. If the appointer is a body corporate the instrument of proxy
should be under its seal and be signed by a duly authorised officer.
5. A proxy may be lodged at the company’s registered office not later than 48
hours before the commencement of the meeting. If the articles of a company,
other than a private company, require a longer period than 48 hours, that
will be inoperative and the shareholders will have the right to deposit proxies
48 hours before the meeting.
6. For each meeting a separate proxy is required.
7. A proxy need not be a member of the company.
8. A proxy shall not have any right to speak at the meeting.
9. Every notice calling a general meeting must state with reasonable prominence
that a member is entitled to appoint a proxy and that the proxy need not be
a member. If default is made in complying with this provision every defaulting
officer is punishable with a fine up to ‘ 5,000.
10. No invitation to appoint any person as proxy shall be issued at company’s
expense and if any such invitation is issued every officer of the company
who is knowingly in default shall be punishable with fine which may extend
to 10,000.
11. After giving three days’ notice to the company, members may inspect proxies
lodged with the company during 24 hours (within business hours) before
the time fixed for the meeting and till the conclusion of the meeting.
12. Subject to the provisions in the articles, a proxy can be revoked by intimating
the company, at any time, before it is acted upon. Death or insanity of the
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principal also revokes the authority of the proxy but proper intimation to the The Companies Act, 1956
company is necessary. Moreover, a member can prevent the proxy from

exercising the right to vote by himself attending and voting at the meeting.
13. Where a company is a member of another company or where the Government
NOTES
is a member of a company, their properly appointed representative enjoys all
the rights of a member. He can speak at the meeting and vote on a show of
hands as well as on a poll [Sections 187(2) and 187 A(2)].
It may be noted that a private company is free to make its own provisions
by its articles as regards ‘proxies’ and the provisions of Section 176 (as stated
above under points 1 to 11) shall apply to such a company only if its articles do not
otherwise provide [Sec. 170(i)(ii)].
Check Your Progress

5. What is the role of meetings in a company?
6. List the various types of general meetings.
7. What do you mean by ‘voting rights’ in a company?

QUESTIONS
1. Section 3(l)(i) and (ii) of the Companies Act, 1956, define a company as ‘a
company formed and registered under this Act or an existing company. An
‘existing company’ means a company formed and registered under any of
the former Companies Acts’ .A company may be defined as an incorporated
association, which is an artificial legal person, having a separate legal entity,
with a perpetual succession, a common seal, a common capital comprising
transferable shares and carrying limited liability.
2. The essential characteristics of a company are:
(i) Incorporated association
(ii) Artificial legal person
(iii) Separate legal entity
(iv) Perpetual existence
(v) Common seal
(vi) Limited liability
(vii) Transferability of shares
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Material 193
The Companies Act, 1956 3. On the basis of the number of members a registered company may be: (i)
private company or (ii) public company.
4. A company is brought into existence by a legal process called incorporation.
This is effected by registration with the Registrar of Companies.
NOTES
5. Meetings are the opportunities provided to the shareholders to let them
know about the working of the company. Thus, shareholders gather together
and review the progress of the company. A statutory meeting is a must for
all public companies which have a share capital except unlimited companies.
Before the conduction of the meeting a statutory report is to be send to all
the members, at least 21 days before the meeting. Meetings that are held
each year to review to progress of the company are called annual general
meetings
6. There are three types of general meetings of shareholders:
(ii) Annual general meetings
(iii) Extraordinary general meetings
In addition to the above types of meetings, sometimes a meeting of a particular
class of shareholders may also be held. Such meetings are called class
meetings.
7. Every holder of ‘equity shares with voting rights’, whose name appears on
the register of members has the right to vote on every resolution placed
before the company at a general meeting. In other words, the holder of
such equity shares possesses normal voting rights. Further, his voting rights
on a ‘poll’ (a method of voting) shall be in proportion to his share of the
paid-up equity capital of the company [Sec. 87(1)].
7.5 SUMMARY
 The Companies Act, 1956, constitutes the Company Law in India. It contains
elaborate provisions relating to the formation, powers and responsibilities
of the directors and managers, raising of capital, holding of company meetings,
maintenance and audit of company accounts, powers of inspection and
investigation of company affairs, and winding up of companies. The Act
contains 658 Sections and XV Schedules.
 A company must necessarily be incorporated or registered under the
prevalent Companies Act. Registration creates a joint stock company and
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it is compulsory for all associations or partnerships, having a membership of The Companies Act, 1956
more than 10 in banking and more than 20 in any other trading activity,
formed for carrying on a business with the object of earning profits
 A company registered under the Companies Act is known as ‘incorporated’
NOTES
or ‘registered’ company. All existing companies in India, except the statutory
companies, have been formed in this way and are governed by the provisions
of the Companies Act, 1956.
 A company may be incorporated either by a special Act of legislature or
under the Companies Act and accordingly a company may be statutory or
incorporated.
 On the basis of the number of members, a registered company may be
private or public.
 On the basis of liability of members, the Companies Act makes provision
for the registration of three types of companies, namely:
o Companies limited by shares.
o Companies limited by guarantee.
o Unlimited companies.
 A private company may either automatically become a public company or
can be deliberately convened into a public company.
 A company is brought into existence by a legal process called ‘incorporation’.
This is effected by registration with the Registrar of Companies.
 Meetings that are held each year review to progress of the company are
called ‘annual general meetings’. Voting is a way of knowing about the
general sense of all the members on any particular proposal that has been
made in a meeting. Voting is done using various methods, such as showing
hands, by poll, etc.
 Voting at a general meeting takes place by: (i) show of hands, and (ii) poll.
Voting by secret ballot is not allowed by the Companies Act. However, in
case of licensed companies under Section 25 of the Act, i.e., companies
not carrying on business for profit or prohibiting the payment of a dividend
to their members, such as clubs, chambers of commerce, etc., voting by
‘ballot’ can be provided by their articles (Sec. 263A).
 Section 408, as amended by the Companies (Amendment) Act, 1988, has
further empowered the Central Government to interfere for preventing
oppression or mismanagement. Accordingly, the Central Government may
appoint such number of directors as the Company Law Board may, by
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Material 195
The Companies Act, 1956 order in writing, specify as being necessary to effectively safeguard the
interests of the company, or its shareholders, or the public interest, for a
period not exceeding three years on any one occasion.
NOTES
7.6 KEY WORDS
 Company: An incorporated association, which is an artificial legal person,

having a separate legal entity, with a perpetual succession, a common seal,
a common capital comprising transferable shares
 Private company: This is a company which has a minimum paid-up capital
of 1 lakh or such higher paid-up capital as may be prescribed, by its
articles of association
 One-man company: Where one man holds practically the whole of the
share capital of a company and takes a few more dummy members simply
to meet the statutory requirement of the minimum number of persons such a
company is known as ‘one-man company’.

EXERCISES
1. Write a short note on the Companies Law in India.
2. Write in brief about the incorporated or registered company.
3. Write in short about companies limited by shares.
4. Write a short note on the special provisions of the Companies Act relating
to Government companies.
5. Write in brief about the role of general meetings in a company.
6. Write a short note on requisites of a valid meeting.
1. “A company is an artificial legal person.” Justify this statement.
2. Discuss the various types of companies under the Companies Act, 1956.
3. Analyse the significance of the Company Law Board in companies’ affairs.
4. Analyse the provisions relating to proxies as given in the companies Act,
1956.
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Vikas Publishing House. NOTES
Co & Ltd.
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Material 197
Consumer Protection Act
(COPRA), 1986
UNIT 8 CONSUMER PROTECTION
ACT (COPRA), 1986
NOTES
Structure
8.0 Introduction
8.1 Objectives
8.2 Consumer Protection Act, 1986 Background and Definitions
8.2.1 Scope and Applicability of the Act
8.3 Understanding the Meaning of Consumer
8.4 Redressal of Complaints
8.4.6 Powers of the Consumer Forums
8.6 Summary
8.7 Key Words
8.0 INTRODUCTION
The law relating to ‘consumer protection’ is contained in Consumer Protection

Act, 1986. This Act, 1986 was enacted to meet the long-felt necessity of protecting
the consumers from getting cheated by unscrupulous suppliers of goods and services
for which remedy under various existing laws like the Sale of Goods Act, the
Prevention of Food Adulteration Act, the Standards of Weights and Measures
Act, the Dangerous Drugs Act, etc., have become illusory. These laws require the
aggrieved consumer to initiate action by way of a civil suit involving expensive and
time-consuming legal processes. It is a known fact that in the Civil Courts, judgement
in a suit takes years. The Consumer Protection Act, 1986 attempts to provide an
inexpensive, simpler and quicker access to redressal of consumer grievances. The
Act has provided a machinery whereby consumers can file their complaints against
defective goods or deficient services with Consumer Forums, namely, the District
Forum at the District level, State Commission at the State level and National
Commission at the National level. The Act provides for an alternative system of
consumer justice by summary trial. There is no need to engage a lawyer to present
the case and there is a time limit for disposal of a case.
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This unit aims at analysing the ‘Consumer Protection Act of 1986’, explains Consumer Protection Act
(COPRA), 1986
the various provisions of the Act and brings in an in-depth discussion on redressal
mechanism for consumers.
NOTES
8.1 OBJECTIVES

 Understand the objectives of Consumer Protection Act, 1986
 Explain the meaning of consumer
 Enumerate the parts of consumers
 Understand the redressal of complaints
 Enumerate the role of consumer protection councils
 Explain the functioning of consumer disputes redressal agencies
 Understand the composition of state and nation commissions
8.2 CONSUMER PROTECTION ACT, 1986

BACKGROUND AND DEFINITIONS
The Consumer Protection Act, 1986 is one of the benevolent pieces of legislation
intended to protect a large body of consumers from exploitation. It aims to protect
the interests of consumers by recognising them in the form of rights. The various
rights of consumers recognized under the Act which are to be promoted and
protected by the Consumer Protection Councils are as follows:
i. Right to safety: To be protected against the sale of goods and services
which are spurious or hazardous to life and property.
ii. Right to information: To be informed about the quality, quantity, weight and
the price of goods or services being paid for, so that they are not cheated
by unfair trade practices.
iii. Right to choose: To be assured, wherever possible, access to a variety of
goods and services at a competitive price.
iv. Right to be heard: To be heard and to be assured that their interest will
receive due consideration at appropriate forums.
v. Right to seek redressal against exploitation: To seek legal redressal against
unfair or restrictive trade practices or exploitation.
vi. Right to consumer education: To have access to consumer education. Unless
the consumers are aware of their rights and remedies, protection of their
interest shall remain a myth.
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Consumer Protection Act 8.2.1 Scope and Applicability of the Act
(COPRA), 1986
The Consumer Protection Act, 1986 extends to the whole of India except the
State of Jammu and Kashmir. The Act applies to all goods and services except
NOTES those notified by the Central Government (Sec. 1). The provisions of the Act are
in addition to and not in derogation of the provisions of any other law (Sec. 3). As
such, the provisions of the Act grant additional remedy to the consumers. Thus, an
arbitration clause in an insurance policy is no bar to a proceeding under the
Consumer Protection Act.
8.3 UNDERSTANDING THE MEANING OF

CONSUMER
According to Sec. 2 (1) (d), a ‘consumer’ means:

(i) Any person who buys any goods for a consideration which has been paid
or promised or partly paid and partly promised, or under any system of
deferred payment, and includes any person who uses such goods with the
approval of the buyer. It does not include a person who buys goods for
resale or for any commercial purpose; or
(ii) Any person who hires or avails any services for a consideration which has
been paid or promised or partly paid and partly promised, or under any
system of deferred payment, and includes any person who is a beneficiary
of such services with the approval of the hirer. It does not include a person
who avails of such services for any commercial purpose.
For the purposes of this clause, ‘commercial purpose’ does not include use
by a person of goods bought and used by him and services availed by him
exclusively for the purpose of earning his livelihood, by means of self-employment.
The term ‘person’ includes a firm, Hindu Undivided Family, company,
cooperative society, and every other association of persons whether registered
under the Societies Registration Act, 1860 or not.
It may be observed that the above definition of the term ‘consumer’ is in two
parts:
I. Consumer of goods.
II. Consumer of services.
I. Consumer of Goods
The important features of the definition of ‘consumer of goods’ may be stated as
follows:
1. Buying goods for consideration: There must be a contract of sale of
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200 Material
i.e., a trader or manufacturer, and the buyer should be ‘consumer buyer’, Consumer Protection Act
(COPRA), 1986
i.e., who buys goods for consumption or private use. The buying of goods
must be for consideration, which may be paid immediately or promised to
be paid later—even in instalments. Thus, it includes credit sale and hire
purchase transactions also. Consideration may be in terms of money or NOTES
other goods and services.
The meaning of the term ‘goods’ is to be construed according to the Sale of
Goods Act. According to Section 2(7) of the Sale of Goods Act, ‘goods
means every kind of movable property other than actionable claims and
money; and includes stock and shares, growing crops, grass, and things
attached to or forming part of the land which are agreed to be severed
before sale or under the contract of sale.’ Thus, goodwill, trademarks,
copyrights, patent-rights, are all regarded as goods.
2. User of goods with the approval of the buyer: The term ‘consumer’
also includes any person who uses the goods with the permission of the
buyer though he is himself not a buyer. When a person buys goods, they
may be used by his family members, relatives and friends. The actual user
of the goods may come across the defects in goods. Thus, the law treats
rightful user of the goods as consumer.
Illustration: A purchased a car. One of his family members B was using it
from the date of purchase. B had a complaint regarding the car. B sued the
seller. The seller pleaded that since B did not buy the car, he was not a
consumer under the Act. The Delhi State Consumer Disputes Redressal
Commission held that B, the complainant was using it with the approval of
A, the buyer, and therefore, he was a consumer under the Act (Dinesh
Bhagat vs Bajaj Auto Ltd.).
3. Goods should not be purchased for resale or for any commercial
purpose: The term ‘consumer’ does not include a person who buys goods
for ‘resale’ or for any ‘commercial purpose’. The expression ‘commercial
propose’ implies that the goods are bought to commercially exploit them
with the object to earn profits. Thus, where a company purchases a computer
system to facilitate its work, the said purchase is a purchase for ‘commercial
purpose’ and the company is not a ‘consumer’ under the Act.
Illustration: A charitable trust was running a diagnostic centre, where patients
taking advantage of X-ray, CT scan, etc. were ordinarily required to pay
for the same and only 10% of them being provided free service. It was held
that the machines purchased by the ‘Trust’ for use in the diagnostic centre
were meant for ‘commercial purpose’, and therefore the ‘Trust’ was not a
consumer (Kalpavraksha Charitable Trust vs Toshniwal Brothers
(Bombay) (P) Ltd.).
4. Person buying goods for self-employment is a consumer: When the
goods are bought and used by the buyer himself, exclusively for the purpose
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Consumer Protection Act of earning his livelihood, by means of self-employment, then such buyer/
(COPRA), 1986
user is also recognised as a consumer under the Act. Thus a person who
purchases a taxi, or a sewing machine or a Photostat machine exclusively
for the purpose of earning his livelihood by means of self-employment, will
NOTES be a ‘consumer’.
Illustration: P, an eye surgeon, purchased a machine from R for his private
nursing home. The machine was found to be defective one. P sued R for
damages. R contended that P was not a consumer under the Act as the
machine was brought for commercial purposes. The National Commission
rejected this contention and held that P is a medical practitioner, a professional
working by way of self-employment by using his knowledge to earn his
livelihood and therefore, he is a ‘consumer’ (Rampion Pharmaceuticals
vs Dr. Preetam Shah).
II. Consumer of Services
The second category of ‘consumer’ is that of ‘consumer of services’. A person is
a ‘consumer of service’ if he satisfies the following criteria:
1. Hiring of services for consideration: There must be a transaction of
hiring or availing of service for consideration. However, the payment of
consideration need not necessarily be immediate. It may be paid later. If the
service is provided without charging anything in return, the person availing
the services is not a ‘consumer’.
2. Beneficiary of service is also a ‘consumer’: A beneficiary of services,
though not the hirer himself, is also regarded as a ‘consumer’ provided the
beneficial use is made with the approval of the person who hired the service.
Thus, a nominee under and insurance policy and an actual user of the
subscriber’s telephone have been held to be ‘consumer’.
Illustration: R takes his wife S to a doctor to get his wife treated for a
fracture. The doctor charged 1200 for the treatment. Here R is a hirer of
services of the doctor and S is beneficiary of the service. For the purpose
of the Act, both R and S are ‘consumers’.
3. Service should not be availed for any commercial purpose: The term
‘consumer of service’ does not include a person who avails service for any
‘commercial purpose’. Thus, where a person hires the services of a goods
carrier and starts plying it on hire as public carrier with the object to earn
profits, the said hiring of services of a goods carrier is for ‘commercial
purpose’ and the person is not a ‘consumer’ under the Act.
Section 2 (1)(Q) defines the term ‘service’ as follows:
‘Service’ means service of any description which is made available to potential
users and includes, but not limited to, the provision of facilities in connection with
banking, financing, insurance, transport, processing, supply of electrical or other
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energy, boarding or lodging or both, housing construction, entertainment, amusement Consumer Protection Act
(COPRA), 1986
or the purveying of news or other information. However, it does not include the
rendering of any service free of charge or under a contract of personal service.
The expression ‘contract of personal service’ means contract to render
NOTES
service in a private capacity to an individual. For example, where a servant enters
into a contract with a master for employment, it is a contract of personal service.
The rationale for excluding a ‘contract of personal service’ from the definition of
‘service’ is that the master can discontinue the service at any time according to his
will, he need not approach Consumer Forum to complain about deficiency in
service.
Check Your Progress

1. What does the term ‘consumer’ mean?
2. List the types of consumers.
3. What do you understand by the term ‘service’?
8.4 REDRESSAL OF COMPLAINTS
Let us now discuss the redressal mechanism of complaints.

The Consumer Protection Councils are established at Center level, State level and
District level. We have one Central Council, many State Councils and many District
Councils. These Councils work towards the promotion and protection of the rights
of the consumers. They give publicity to the matters concerning consumer interests,
take steps towards furthering consumer education and protecting consumer from
exploitation. They advise the Government in matters of policy formulation regarding
protection of the consumer rights. The Government has notified, ‘The Consumer
Protection Rules, 1987’ with a view to prescribe procedure in regard to the
transaction of business by the Central Council and to prescribe the rules as to the
composition of the Central Council. These rules also prescribe the terms and
conditions of service of the members of the National Commission, procedure to
be followed for conduct of business and for hearing of appeal by the National
Commission.
A. Central Consumer Protection Council (Central Council)
Section 4 provides that:
(1) The Central Government shall, by notification, establish with effect from
such date as it may specify in such notification, a council to be known as the
Central Consumer Protection Council (hereinafter referred to as the Central
Council).
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Consumer Protection Act (2) The Central Council shall consist of the following members, namely:
(COPRA), 1986
(a) The Minister-in-charge of Consumer Affairs in the Central
Government, who shall be its Chairman, and
NOTES (b) Such number of other official or non-official members representing
such interests as may be prescribed.
i. Constitution of Central Council
The constitution of Central Council has since been prescribed under Rule 3 of the
Consumer Protection Rules, 1987. It provides that the Central Council shall consist
of the following members, not exceeding 150, namely:
(i) The Minister-in-charge of Consumer Affairs in the Central Government
who shall be the Chairman of the Central Council.
(ii) The Minister of State (where he is not holding independent charge) or Deputy
Minister-in-charge of Consumer Affairs in the Central Government who
shall be the Vice Chairman of the Central Council.
(iii) The Minister-in-charge of Consumer Affairs in States.
(iv) Eight Members of Parliament – Five from Lok Sabha and three from the
Rajya Sabha.
(v) The Secretary of the National Commission for Scheduled Castes and
Scheduled Tribes.
(vi) Representatives of the Central Government departments and autonomous
organisations concerned with consumer interests – not exceeding twenty.
(vii) The Registrar, National Consumer Disputes Redressal Commission, New
Delhi.
(viii) Representatives of the Consumer Organisations or consumers – not less
than thirty-five.
(ix) Representatives of women – not less than ten.
(x) Representatives of farmers, trade and industries – not exceeding twenty.
(xi) Persons capable of representing consumer interests not specified above –
not exceeding fifteen.
(xii) The Secretary-in-charge of Consumer Affairs in the Central Government
shall be the member secretary of the Central Council.
It may thus be observed that members of the Council are selected from the
various areas affecting consumers’ interest, who are leading members of state-
wide organisations representing segments of the consumer public, so as to establish
a broadly based and representative Central Council.
a. Term: The term of the Council shall be three years.
b. Vacancy: Any member may, by writing under his hand to the Chairman
of the Central Council, resign from the Council. The vacancies, so
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caused or otherwise, shall be filled from the same category by the Consumer Protection Act
(COPRA), 1986
Central Government and such person shall hold office so long as the
member whose place he fills would have been entitled to hold office,
if the vacancy had not occurred.
NOTES
ii. Procedure for meetings of the Central Council (Sec. 5).
The Central Council shall meet as and when necessary, but at least one meeting of
the Council shall be held every year. It shall meet at such time and place as the
Chairman may think fit and shall observe such procedure in regard to the transaction
of business as may be prescribed.
Rule 4 of the Consumer Protection Rules, 1987 provides that the Central
Council shall observe the following procedure in regard to the transaction of its
business:
(1) The meeting of the Central Council shall be presided over by the
Chairman. In the absence of the Chairman, the Vice-Chairman shall
preside over the meeting of the Central Council. In the absence of the
Chairman and the Vice-Chairman, the Central Council shall elect a
member to preside over that meeting of the Council.
(2) Each meeting of the Central Council shall be called by giving not less
than ten days from the date of issue, notice in writing to every member.
(3) Every notice of a meeting of the Central Council shall specify the place
and the day and hour of the meeting and shall contain statement of
business to be transacted thereat.
(4) No proceeding of the Central Council shall be invalid merely by reasons
of existence of any vacancy in or any defect in the constitution of the
Council.
(5) For the purpose of performing its functions, the Central Council may
constitute from amongst its members, such working groups as it may
deem necessary to perform the assigned functions. The findings of
such working groups shall be placed before the Central Council for
its consideration.
(6) The non-official members attending meeting of the Council or its
Working Group shall be entitled to travelling and daily allowances at
the specified rates.
(7) The resolution passed by the Central Council shall be recommendatory
in nature.
iii. Objects of the Central Council (Sec. 6).
In fact the objects of the Central Council are the various rights of consumers
recognised under the Act which are to be promoted and protected by the Council.
Thus the Act (under Section 6) has enumerated some rights of consumers which
need to be protected by the Council. These rights of consumers are:
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Consumer Protection Act (1) Right to safety: This right has been recognised by Section 6(a) as, ‘the
(COPRA), 1986
right to be protected against the marketing of goods and services which are
hazardous to life and property’. The rationale behind this provision is to
ensure physical safety of the consumers. The law seeks to ensure that those
NOTES responsible for bringing goods to the market, in particular, manufacturers,
distributors, retailers and the like should ensure that the goods are safe for
the users. In case of dangerous or risky goods, consumer should be informed
of the risk involved in improper use of goods. Vital safety information should
be conveyed to consumers.
Illustration: M bought an insecticide from N. N did not inform M that
touching this insecticide with bare hands can create skin problem. M, while
using the insecticide came in contact with it and suffered from skin problem
consequently. Here N can be held liable under the Act.
(2) Right to information: Under Section 6(b), this right has been recognised
as, ‘the right to be informed about the quality, quantity, potency, purity,
standard and price of goods or services, as the case may be, so as to
protect the consumer against unfair trade practices’. Adequate information
is very important in order to make a right choice of goods to be purchased.
This right ensures that the consumer should be made aware of the quality,
weight, contents and price of the product at the very pre-purchase stage.
The fixing of ISI mark and Agmark enables the consumer to know about its
quality. Under some other legislations, it is mandatory for the manufacturers
and packers to provide information on the package to the consumers about
the contents, weight, purity and potency of the product being sold.
Consumers suffer much on the price front as the prices often printed or
tagged in the product are misleading and no price control is there except
with respect to essential commodities. Advertisements also often mislead
the consumers.
(3) Right to choose: This right has been recognised by Section 6(c) as, ‘the
right to be assured, wherever possible, access to a variety of goods and
services at competitive prices’. Fair and effective competition must be
encouraged so as to provide consumers with maximum information about
the wide variety of competing goods available in the market. Shoppers or
buyers guide should be made available to the consumers by the Government
or Business Organisations to protect this right of consumers.
(4) Right to be heard: This right is ensured by Section 6(d) as, ‘the right to be
heard and to be assured that consumers’ interests will receive due
consideration at appropriate forums.’ The Consumer Protection Act, 1986
has well taken care of this right by providing three stages redressal machinery
to the consumers, namely, District Forum, State Commission and National
Commission. Every consumer has a right to file complaint and be heard in
that context. Further, with a view to providing better protection of this right,
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206 Material
Ombudsman (Complaint cells) to provide redressal to consumer complaints Consumer Protection Act
(COPRA), 1986
outside the courts.
(5) Right against exploitation: This right is guaranteed under Section 6(e) of
the Act as, ‘the right to seek redressal against unfair trade practices or
NOTES
restrictive trade practices or unscrupulous exploitation of consumers.’
Consumers are the most helpless lot in our country due to very many factors.
When consumers are exploited, adequate remedy must be made available.
The Act has thus ensured to prevent exploitation of consumers by invoking
the jurisdiction of Consumer Forums in cases involving unfair trade practices
and restrictive trade practices.
(6) Right to education: This right has been recognised under Section 6(f) of
the Act as, ‘the right to consumer education.’The right to consumer education
is a right which ensures that consumers are informed about the practices
prevalent in the market, their rights and the remedies available to them.
Unless the consumers are aware of their rights and remedies, protection of
their interest shall remain a myth. In this connection, the role of Consumer
Protection Councils is very vital. The Central Council must ensure to educate
the consumers about their rights and remedies under the Act throughout the
country and the State Councils and the District Councils must ensure to
educate about these rights to consumers within their territories. For spreading
this education, media, school curriculum and cultural activities, etc. may be
used as a medium.
B. State Consumer Protection Councils (State Councils)
The power to establish State Councils is with the States. Section 7 provides that:
(1) The state Government shall, by notification, establish with effect from such
date as it may specify in such notification, a council to be known as the
State Consumer protection Council (hereinafter referred to as the State
Council).
(2) The State Council shall consist of the following members, namely:
(a) The Minister-in-charge of Consumer Affairs in the state Government who
shall be its Chairman;
(b) Such number of other official or non-official members representing such
interests as may be prescribed by the State Government;
(c) Such number of other official or non-official members, not exceeding ten,
as may be nominated by the Central Government.
(3) The State Council shall meet as and when necessary but not less than two
meetings shall be held every year.
(4) The State Council shall meet at such time and place as the Chairman may
think fit and shall observe such procedure in regard to the transaction of its
business as may be prescribed by the State Government.
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Consumer Protection Act It may thus be observed that the state Government has been empowered to
(COPRA), 1986
decide the number and qualifications of the members of State Council besides the
members nominated by the Central Government. The State Government has been
further empowered to prescribe the procedure to be followed by the State Council
NOTES in regard to the transaction of its business.
Objects of the State Council (Sec. 8): ‘The objects of every State Council shall
be to promote and protect within the State the rights of the consumers laid down
in Clauses (a) to (f) of Section 6.’ Thus, the objects of the State Councils are
same as that of the Central Council discussed above.
C. District Consumer Protection Councils (District Councils)
Section 8-A and 8-B of the Consumer Protection Act added by the Amendment
Act of 2002 deals with the establishment of the District Councils at district level.
Section 8-A provides that:
(1) The State Government shall establish for every district, by notification, a
council to be known as the District Consumer Protection Council with effect
from such date as it may specify in such notification.
(2) The District Consumer Protection Council (hereinafter referred to as the
District Council) shall consist of the following members, namely:
(a) The Collector of the District (by whatever name called), who shall be
its Chairman; and
(b) Such number of other official and non-official members representing
such interests as may be prescribed by the State Government.
(3) The District Council shall meet as and when necessary but not less than two
meetings shall be held every year.
(4) The District Council shall meet at such time and place as the Chairman may
think fit and shall observe such procedure in regard to the transaction of its
business as may be prescribed by the State Government.
Objects of the District Council (Sec. 8-B): ‘The objects of every District Council
shall be to promote and protect within the district the rights of the consumers as
laid down in clauses (a) to (f) of Section 6.’ These clauses have already been
discussed under the sub-heading: Objects of the Central Council.
The Consumer Protection Act, 1986 provides for a three-tier remedial machinery
for speedy redressal of consumer disputes. According to Section 9, there shall be
established for the purposes of this Act, the following agencies, namely:
(1) Consumer Disputes Redressal Forum to be known as the ‘District Forum’.
It is to be established by the State Government in each district of the state
by notification. The State Government may, if it deems fit, establish more
than one district forum in a district.
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(2) State Consumer Disputes Redressal Commission (SCDRC) to be known Consumer Protection Act
(COPRA), 1986
as ‘State Commission’. This is also to be established by the State
Government in the State by notification.
(3) National Consumer Disputes Redressal Commission (NCDRC) to be
NOTES
known as ‘National Commission’. This is to be established by the Central
Government by notification.
These Forums have not taken away the jurisdiction of the civil courts but
have provided an alternative remedy. Their prime objective is to relieve the
conventional courts of their burden which is ever increasing and delaying the disposal
of suits due to technicalities. These agencies are quasi-judicial bodies. They are
manned by qualified persons and have been vested with considerable powers.
They are required to assign reasons for their conclusions. Obligation to give reasons
not only introduces clarity but it also excludes, or at least minimises, the chances of
arbitrariness.
Let us discuss the various features of District Forum. These are:
A. Composition of the District Forum
Section 10 elaborates upon the composition of the District Forum. It provides that
each District Forum shall consist of:
(a) A person who is, or has been, or is qualified to be a District Judge, who
shall be its President;
(b) Two other members, one of whom shall be a woman, who shall have the
following qualifications, namely:
(i) Be not less than 35 years of age;
(ii) Possess a bachelor’s degree from a recognised university; and
(iii) Be persons of ability, integrity and standing and have adequate
knowledge and experience of at least 10 years in dealing with problems
relating to economics, law, commerce, accountancy, industry, public
affairs or administration.
B. Disqualifications
A person shall be disqualified for appointment as member if:
(a) He has been convicted and sentenced to imprisonment for an offence
involving moral turpitude; or
(b) He is an undischarged insolvent; or
(c) He has been adjudged to be of unsound mind; or
(d) He has been removed or dismissed from the service of the Government or
a body corporate owned or controlled by the Government; or
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Consumer Protection Act (e) He has, in the opinion of the State Government , such financial or other
(COPRA), 1986
interest as is likely to affect prejudicially the discharge by him of his functions
as a member; or
(f ) He has such other disqualifications as may be prescribed by the State
NOTES
Government.
C. Appointing authority [Sec. 10(1-A)].
Every appointment of the President and members of the District Forum shall be
made by the State Government on the recommendations of a selection committee
consisting of the following:
(i) President of the State Commission—Chairman.
(ii) Secretary, Law Department of the State—Member.
(iii) Secretary in-charge of the Department dealing with consumer affairs in the
State—Member.
Where the President of the State Commission is, by reasons of absence or
otherwise, unable to act as Chairman of the Selection Committee, the State
Government may refer the matter to the Chief Justice of the High Court for
nominating a sitting judge of that High Court to act as Chairman.
D. Term of office [Sec. 10(2)]
Every member of the District Forum shall hold office for a term of 5 years or up
to the age of 65 years, whichever is earlier. However, he shall be eligible for re-
appointment subject to similar conditions as stated here-in-before.
E. Terms and conditions of service [Sec. 10(3)]
The salary or honorarium and other allowances payable to, and the other terms
and conditions of service of the members of the District Forum shall be such as
may be prescribed by the State Government.
In terms of proviso to Section 10(3), the appointment of a member on
whole-time basis shall be made by the State Government on the recommendation
of the President of the State Commission taking into consideration such factors as
may be prescribed including the work-load of the District Forum.
F. Jurisdiction of the District Forum
The term, jurisdiction may be defined as authority or legal power to hear and
decide the cases. Thus, a court may adjudicate only those matters which fall under
its jurisdiction. The question of jurisdiction has to be considered with reference to
the value, place and the nature of subject-matter. For example, where A and B
reside in Bombay and they have some dispute, their dispute may be subjected to
the jurisdiction of the Bombay courts only. Courts of any other place cannot
adjudicate the issue.
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i. Pecuniary jurisdiction [Sec. 11(1)]: The District Forum shall have Consumer Protection Act
(COPRA), 1986
jurisdiction to entertain complaints where the value of goods or services
and the compensation, if any, claimed does not exceed 20 lakh.
In Farook Haji Ismail vs Gavabhai Bhesania, the Gujarat High Court
NOTES
held that the pecuniary jurisdiction depends upon the amount of the relief
claimed and not upon the value of the subject-matter, nor upon the relief
allowed by the Forum.
Thus, the District Forum entertains the cases where the value of claim is up
to 20 lakhs. Where a claim exceeds this limit, the matter is beyond the
jurisdiction of the Forum.
ii. Territorial jurisdiction [Sec. 11(2)]: A complaint shall be instituted in a
District Forum within the local limits of whose jurisdiction:
(a) The opposite party or each of the opposite parties, where there are
more than one, at the time of the institution of the complaint, actually
and voluntarily resides or carries on business, or has a branch office
or personally works for gain; or
(b) Any of the opposite parties, where there are more than one, at the
time of the institution of the complaint, actually or voluntarily resides,
or carries on business or has a branch office, or personally works for
gain, provided the other parties not so residing or working agrees or
the District Forum gives permission in this regard; or
(c) The cause of action, wholly or in part, arises.
It may be recalled that a limitation period has also been prescribed under
Section 24-A. Accordingly, a complaint can only be lodged within two years
from the date on which the cause of action has arisen.
G. Manner in Which Complaint Shall be Made (Sec. 12)
Section 12(1) lists the persons who can file a complaint. This has been explained
earlier under the side-heading: ‘Who can file a Complaint’. The expression,
‘complaint’ has also been explained earlier.
Section 12(2)(3)(4) elaborates the manner in which complaint shall be made.
It provides that:
(1) Every complaint filed with a District Forum shall be accompanied with such
amount of fee and payable in such manner as may be prescribed.
The fee for making complaints before District Forum and the manner in
which the fee shall be payable have since been prescribed under Rule 9A of
the Consumer Protection Rules, 1987. It provides that:
Every complaint filed with a District Forum shall be accompanied by a fee,
as specified in the table given below, in the form of crossed Demand Draft
drawn on nationalised bank or through a crossed Indian Postal Order drawn
on in favour of the Registrar of the State Commission and payable at the
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Consumer Protection Act respective place where the State Commission is situated. The concerned
(COPRA), 1986
District Forum shall deposit the amount of fee so received in the State
Government Receipt Account.
Fee Schedule
NOTES
Sl. No. Value of goods or services and the Amount of
compensation claimed fee payable
(i) Up to 1 lakh 100
(ii) 1 lakh and above but less than 5 lakh 200
(iii) 5 lakh and above but less than 10 lakh 400
(iv) 10 lakh and above but not exceeding 20 lakh 500
(2) On receipt of a complaint, the District Forum may, by order, admit the
complaint or reject the same. However, a complaint shall not be rejected
unless an opportunity of being heard has been given to the complainant.
The admissibility of the complaint shall ordinarily be decided within 21 days
from the date on which the complaint was received.
(3) Where a complaint is admitted, the District Forum shall follow the procedure
prescribed in Section 13 (explained under the next heading).
(4) Once a complaint is admitted by the District Forum, it shall not be transferred
to any other court or tribunal set up under any other law.
Note: The above provisions of Section 12 and the rules made thereunder regarding
the fee payable for making complaints shall also be applicable to the disposal of
disputes by the State Commission and National Commission as per Section 18
and Section 22 (1) respectively.
H. Procedure to be followed on Admission of a Complaint (Sec.13)
The procedure to be followed by the District Forum on admission of a complaint
can be discussed under the following two heads:
1. Where laboratory test is required to determine the defects in goods.
2. Where no laboratory test is required to determine the defects in goods or
the complaint relates to services.
1. Where laboratory test is required to determine the defects in goods:
The procedure to be followed is as follows:
(a) The District Forum shall refer a copy of the admitted complaint, within 21
days from the date of its admission, to the opposite party directing him to
give his version of the case within a period of 30 days which can be extended
by a period up to 15 days.
(b) Where the opposite party, on receipt of the complaint referred to him, admits
the allegation, the District Forum shall decide the matter on the basis of
merits of the case and documents before it.
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(c) Where the opposite party, on receipt of a complaint referred to him, denies Consumer Protection Act
(COPRA), 1986
or disputes the allegations contained in the complaint, or omits or fails to
take any action to represent his case within the time given by the District
Forum, the District Forum would take the following steps to settle the dispute:
NOTES
(i) The District Forum may require the complainant to deposit specified
fee for payment to the appropriate laboratory for carrying out the
necessary analysis or test in relation to the goods in question.
(ii) The District Forum will obtain a sample of the goods from the
complainant, seal it, authenticate it and refer the sample so sealed to
the appropriate laboratory, for an analysis or test, whichever may be
necessary, with a view to finding out whether such goods suffer from
any defect and to report its findings thereon to the District Forum
within a period of 45 days of the receipt of the reference or within
such extended period as may be granted by the District Forum.
(iii) The District Forum will remit the fees to the appropriate laboratory to
enable it to carry out required analysis or test.
(iv) Upon receiving the laboratory’s report, its copy will be forwarded by
the District Forum to the opposite party along with its own remarks.
(v) In the event of any party disputing the correctness of the findings, or
the methods of analysis or test adopted by the appropriate laboratory,
the District Forum shall require the objecting party to submit his
objections in writing.
(vi) The District Forum will give a reasonable opportunity of being heard
to the objecting party.
(d) The District Forum shall issue an appropriate order under Section 14 after
hearing the parties.
2. Where no laboratory test is required to determine defects in goods or
the complaint relates to services. In such a case the following procedure is
followed:
(a) The District Forum shall refer a copy of the admitted complaint, within 21
days from the date of its admission, to the opposite party directing him to
give his version of the case within a period of 30 days which can be extended
by a period not exceeding 15 days.
(b) The opposite party on receipt of the complaint referred to him may:
(i) Admit the allegation, or
(ii) Deny or dispute the allegations contained in the complaint, or
(iii) Omit or fail to respond within the time given by the District Forum.
(c) (i) Where the opposite party admits the allegation, the District Forum shall
decide the matter on the basis of the merits of the case.
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Consumer Protection Act (ii) Where the opposite party denies or disputes the allegations made in the
(COPRA), 1986
complaint, the District Forum will proceed to settle the dispute on the basis
of the evidence brought to its notice by both the parties.
(iii) Where the opposite party omits or fails to respond within the time
NOTES
given by the District Forum, the Forum will proceed to settle the dispute
ex-parte on the basis of evidence brought to its notice by the complainant.
(d) The District Forum shall issue an appropriate order, under Section 14, after
hearing the parties and taking into account available evidence.
(e) Where the complainant fails to appear on the date of hearing before the
District Forum, the Forum may either dismiss the complaint for default or
decide it on merits.
I. Time limit for disposal of complaint [Sec. 13(3A)]
Every complaint shall be heard as expeditiously as possible and endeavour shall
be made to decide the complaint within a period of 3 months from the date of
receipt of notice by opposite party where the complaint does not require analysis
or testing of commodities and within 5 months if it requires analysis or testing of
commodities. In the event of a complaint being disposed of after the period specified
above, the District Forum shall record in writing the reasons for the same.
J. Power to pass interim order [Sec 13(3B)]
Where during the pendency of any proceeding before the District Forum, it appears
to it necessary, it may pass such interim order as is just and proper in the facts and
circumstances of the case.
Note: The above provisions of Section 13 regarding procedure to be followed by
the District Forum on admission of a complaint shall also be applicable to the
disposal of disputes by the State Commission and National Commission as per
Section 18 and Section 22(1) respectively.
After the District Forum, State Commission is next in the hierarchy of Consumer
Disputes Redressal Agencies under the Act. Let us discuss some of the features of
State Commission. These are:
A. Composition of the State Commission
Section 16 contains the provisions regarding the composition of the State
Commission. These are:
(1) Each State Commission shall consist of:
(a) A person who is or has been a judge of a High Court, appointed by the
State Government, who shall be its President. But no such appointment
shall be made except after consultation with the Chief Justice of the High
Court;
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(b) At least two other members or such higher number of members as may be Consumer Protection Act
(COPRA), 1986
prescribed, one of whom shall be a woman, who shall have the following
qualifications, namely:
(i) Be not less than 35 years of age;
NOTES
(ii) Possess a bachelor’s degree from a recognised university; and
(iii) Be persons of ability, integrity and standing, and have adequate
knowledge and experience of at least 10 years in dealing with problems
relating to economics, law, commerce, accountancy, industry, public
affairs or administration:
Provided that not more than 50 per cent of the members shall be from
amongst persons having a judicial background.
Explanation: For the purpose of this clause, the expression ‘persons having
judicial background’ shall mean persons having knowledge and experience for at
least a period of 10 years as a presiding officer at the district level court or any
tribunal at equivalent level.
B. Disqualifications
A person shall be disqualified for appointment as member if:
(a) He has been convicted and sentenced to imprisonment for an offence
involving moral turpitude; or
(b) He is an undischarged insolvent; or
(c) He has been adjudged to be of unsound mind; or
(d) He has been removed or dismissed from the service of the Government or
a body corporate owned or controlled by the Government; or
(e) He has, in the opinion of the State Government, such financial or other
interest, as is likely to affect prejudicially the discharge by him of his functions
as a member; or
( f ) He has such other disqualifications as may be prescribed by the state
Government.
C. Appointing authority [Sec. 16(1-A)]
The provisions as to the process of appointment of the President and members of
the state Commission are similar to those discussed in the context of appointment
of the President and members of the District Forum. Refer preceding centre heading
‘District Forum’ for details.
D. Benches [Sec. 16(1-B)]
The jurisdiction, powers and authority of the State Commission may be exercised
by Benches thereof. A Bench may be constituted by the President with the one or
more members as the President may deem fit.
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Consumer Protection Act If the members of a Bench differ in opinion on any point, the point shall be
(COPRA), 1986
decided according to the opinion of the majority. But if the members are equally
divided, they shall state the point or points on which they differ, and make a reference
to the President who shall either hear the point(s) himself or refer the case for
NOTES hearing on such point(s) by one or more or the other members and such point(s)
shall be decided according to the opinion of the majority of the members who
have heard the case, including those who first heard it.
E. Terms and conditions of service [Sec. 16(2)]
The salary or honorarium and other allowances payable to, and the other terms
and conditions of service of the members of the State Commission shall be such
as may be prescribed by the State Government. Provided that the appointment of
a member on whole-time basis shall be made by the State Government on the
recommendation of the President of the State Commission taking into consideration
such factors as may be prescribed including the work load of the State Commission.
F. Term of office [Sec. 16(3)]
Every member of the State Commission shall hold office for a term of 5 years or
up to the age of 67 years, whichever is earlier. However, he shall be eligible for re-
appointment subject to similar conditions as stated here-in-before. Further, a person
appointed as President of the State Commission shall also be eligible for re-
appointment.
G. Jurisdiction of the State Commission
i. Pecuniary jurisdiction [Sec. 17(1)]: The State Commission shall have
and compensation, if any, claimed exceeds 20 lakh but does not exceed
1 crore.
It may be recalled that the decisive factor regarding pecuniary jurisdiction is
the value of claim. Thus, the State Commission entertains cases where the
value of claim is more than 20 lakh but is up to 1 crore.
ii. Territorial jurisdiction [Sec. 17(2)]: A suit can be instituted in the State
Commission within the local limits of whose jurisdiction:
(a) The opposite party or each of the opposite parties, where there are
more than one, at the time of the institution of the complaint, actually
and voluntarily resides or carries on business or has a branch office or
personally works for gain; or
(b) Any of the opposite parties, where there are more than one, at the
time of the institution of the complaint, actually and voluntarily resides,
or carries on business or has a branch office, or personally works for
gain, provided the other parties not so residing or working agrees or
the State Commission gives permission in this regard; or
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216 Material
iii. Appellate jurisdiction [Sec. 17(1)(a)(ii)]: The State Commission has power Consumer Protection Act
(COPRA), 1986
to entertain the appeals against the orders of any District Forum within the
State within 30 days from the date of service of the order to the appellant.
iv. Revisional jurisdiction [Sec. 17(1)(b)]: The State Commission has power
NOTES
to call for the records and pass appropriate orders in any consumer dispute
which is pending before or has been decided by any District Forum within
the State, where State Commission is of the view that the District Forum:
(i) Has exercised a jurisdiction/power which it was not entitled to, or
(ii) Has failed to exercise a power which was vested in it, or
(iii) Has exercised its authority illegally or with material irregularity.
Such revisional power may be exercised by the State Commission either on
its own or on the application of a party.
H. Procedure to be followed by the State Commission
As observed earlier, the provisions of Section 13 regarding procedure to be
followed by the District Forum, which have already been discussed, shall be
applicable also to the disposal of disputes by the State Commission as per Section
18.
The National Commission is the top most layer in the three-level hierarchy of the
Consumer Disputes Redressal Agencies. Let us discuss some of the features of
National Commission. These are:
A. Composition of the National Commission
Section 20 elaborates upon the composition of National Commission. It provides
that:
(i) The National Commission shall consist of:
(a) A person who is or has been a judge of the Supreme Court, to be
appointed by the Central Government, who shall be its President. But
no such appointment shall be made except after consultation with the
Chief Justice of India.
(b) At least four other members or such higher number of members as
may be prescribed, and one of them shall be a woman.
The provisions as to the qualifications and disqualifications of the members of
National Commission are similar to those discussed under the preceding centre
heading: ‘State Commission’.
B. Appointing authority
The appointment of members of the National Commission is made by the Central
Government on the recommendation of a Selection Committee consisting of the
following: Self-Instructional
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Consumer Protection Act (i) A person who is a judge of the Supreme Court, to be nominated by the
(COPRA), 1986
Chief Justice of India – Chairman.
(ii) The secretary in the Department of Legal Affairs in the Government of
India – Member.
NOTES
(iii) Secretary of the Department dealing with the consumer affairs in the
Government of India – Member.
C. Benches [Sec. 20(1A)]
The jurisdiction, powers and authority of the National Commission may be
exercised by Benches thereof. A Bench may be constituted by the President with
one or more members as the President may deem fit.
D. Term of office [Sec. 20(3)]
Every member of the National Commission shall hold office for a term of 5 years
or up to the age of 70 years, whichever is earlier. However, he shall be eligible for
re-appointment subject to similar conditions as stated here-in-before. Further, a
person appointed as President of the National Commission shall also be eligible
for re-appointment.
E. Jurisdiction of National Commission
i. Pecuniary jurisdiction [Sec. 21(a)(i)]: The National Commission shall have
and compensation, if any, claimed exceeds 1 crore.
Since National Commission is the highest level of the Consumer Forum, it
entertains all the cases where the value of claim is more than 1 crore.
ii. Territorial jurisdiction: The territorial jurisdiction of the National
Commission is the whole of India except the State of Jammu and Kashmir.
iii. Appellate jurisdiction [Sec. 21(a)(ii)]: The National Commission has
jurisdiction to entertain appeals against the order of any State Commission,
within 30 days from the date of service of the order to the appellant.
iv. Revisional jurisdiction [Sec. 21(b)]: The National Commission has power
to call for the records and pass appropriate orders in any consumer dispute
which is pending before or has been decided by any State Commission,
where it is of the view that the State Commission:
(i) Has exercised a jurisdiction/power not vested in it by law, or
(ii) Has failed to exercise a power which was vested in it, or
(iii) Has exercised its authority illegally or with material irregularity.
Such revisional power may be exercised by the National Commission either
on its own or on the petition of a party.
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F. Procedure to be followed by the National Commission Consumer Protection Act
(COPRA), 1986
Rule 14 of the Consumer Protection Rules, 1987, as amended by the Consumer
Protection (Amendment) Rules, 2004, lays down the procedure, which is as
follows: NOTES
(1) A complaint containing the following particulars shall be presented by the
complainant in person or by his agent to the National Commission or be
sent by registered post:
(a) The name, description and address of the complainant;
(b) The name, description and address of the opposite party or parties,
as the case may be, so far as they can be ascertained;
(c) The facts relating to complaint and when and where it arose;
(d) Documents in support of the allegations contained in the complaint;
(e) the relief which complainant claims.
(2) Every complaint filed with the National Commission shall be accompanied
by the relevant fee as is specified in Rule 9A of the Consumer Protection
Rules, 1987. For details refer to the Side Heading: ‘Manner in which
complaint shall be made to the District Forum’ (given before).
(3) The National Commission shall, in disposal of any complaint before it, as
far as possible, follow the procedure as laid down in Section 13 in relation
to the complaints received by the District Forum (discussed already under
the Side Heading: ‘Procedure to be followed on Admission of a Complaint’).
Section 22(1) also provides to the same effect.
(4) On the date of hearing, it shall be obligatory on the parties or their agents to
appear before the National Commission. Where the complainant or his
agent fails to appear, the National Commission may either dismiss the
complaint for default or decide it on merits. Where the opposite party or its
agent fails to appear on the date of hearing, the National Commission may
decide the complaint ex-parte.
(5) The complaint shall be decided, as far as possible, within a period of three
months from the date of notice received by the opposite party where
complaint does not require analysis or testing of commodities and within
five months if it requires analysis or testing of commodities. In the event of
a complaint being disposed of after the period specified above, the National
Commission shall record in writing the reasons for the delay.
(6) After the proceedings, the National Commission shall issue an appropriate
order under Section 14. It shall also have the power to direct that any order
passed by it, where no appeal has been preferred under Section 23, be
published in the Official Gazette or through any other media.
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Consumer Protection Act 8.4.6 Powers of the Consumer Forums
(COPRA), 1986
For the purpose of adjudicating a consumer dispute, Section 13(4) has vested
the Consumer Forums, namely, District Forum, State Commission and National
NOTES Commission, with certain powers of a civil court. Apart from these powers, the
Central Government has provided some additional powers to them under Rule 10
of the Consumer Protection Rules, 1987. Finally, Section 14(1) has given them
the power to issue orders. Here, we will also discuss some of special/additional/
appellate powers of the consumer forums. These are:
A. Powers similar to those of civil court [Sec. 13(4)]
The Consumer Forums are vested with the powers of a civil court, while trying a
suit, in respect of the following matters:
(i) Summoning and enforcing the attendance of any defendant or witness and
examining the witness on oath;
(ii) Discovery and production of any document or other material object
producible as evidence;
(iii) Receiving of evidence on affidavits;
(iv) Requisitioning of the report of the concerned analysis or test from the
appropriate laboratory or from any other relevant source;
(v) Issuing of any commission for the examination of any witness; and
(vi) Any other matter which may be prescribed.
Sub-Section(5) of Section 13 further provides that every proceeding before
the District Forum, the State Commission or the National Commission, as the
case may be, shall be deemed to be a judicial proceeding within the meaning of
Sections 193 and 228 of the Indian Penal Code (punishment for false evidence
and intentional insult or interruption to public servant sitting in judicial proceeding)
and the Forums shall be deemed to be civil courts for the purposes of Section 195
and Chapter XXVI of the Code of Criminal Procedure, 1973 (prosecution for
contempt and provisions as to offences affecting the administration of justice).
B. Additional powers of the consumer forums (Rule 10 of the
Consumer Protection Rules, 1987)
The National Commission, the State Commission and the District Forum have the
following additional powers:
(a) Requiring production of any books, accounts, documents, or commodities
from any person and getting them examined by an officer specified in this
behalf.
(b) Obtaining information required for the purpose of the proceedings from
any person.
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(c) Authorising any officer to enter and search any premises and seize from Consumer Protection Act
(COPRA), 1986
premises such books, papers, documents and commodities as are required
for the purpose of proceedings under the Act.
(d) On examination of such seized documents or commodities, ordering the
NOTES
retention thereof or returning them to the party concerned.
C. Power to issue order [Sec. 14(1)]
If, after the proceeding conducted under Section 13 (explained earlier), the National
Commission, the State Commission or the District Forum, as the case may be, is
satisfied that the goods complained against suffer from any of the defects specified
in the complaint or that any of the allegations contained in the complaint about the
services are proved, it shall issue an order to the opposite party directing him to
do one or more of the following things:
(a) To remove the defect pointed out by the appropriate laboratory from the
goods in question;
(b) To replace the goods with new goods of similar description which shall be
free from any defect;
(c) To return to the complainant the price, or, as the case may be, the charges
paid by the complainant;
(d) To pay such amount as may be awarded by it as compensation to the
consumer for any loss or injury suffered by the consumer due to the negligence
of the opposite party. The Consumer Protection (Amendment) Act, 2002
has further empowered these Forums to grant punitive damages in such
circumstances as it deems fit;
(e) To remove the defects in goods or deficiencies in the services in question;
(f ) To discontinue the unfair trade practice or restrictive trade practice or not
to repeat it;
(g) Not to offer the hazardous goods for sale;
(h) To withdraw the hazardous goods from being offered for sale;
(i) To cease manufacture of hazardous goods and to desist from offering services
which are hazardous in nature;
(j) To pay such sum as may be determined by it if it is of the opinion that loss
or injury has been suffered by a large number of consumers who are not
identifiable conveniently, provided that the minimum amount of sum so
payable shall not be less than 5% of the value of such defective goods sold
or service provided, as the case may be, to such consumers, and the amount
so obtained shall be credited in favour of such person and utilised in such
manner as may be prescribed;
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Consumer Protection Act (k) To issue corrective advertisement to neutralize the effect of misleading
(COPRA), 1986
advertisement at the cost of the opposite party responsible for issuing such
misleading advertisement;
(l) To provide for adequate costs to parties.
NOTES
Sub-Section (2) of Section 14 provides that every proceeding is required
to be conducted by the President of the Forum and at least, one member thereof
sitting together. Where the member, for any reason, is unable to conduct the
proceeding till it is completed, the President and the other member shall continue
the proceeding from the stage at which it was last heard by the previous member.
Sub-Section (2A) of Section 14 provides that every order made under this
Section shall be signed by the President and the member or members who conducted
the proceedings.
D. Special Powers of State Commission
Through Consumer Protection (Amendment) Act, 2002 two new provisions have
been added for conferring additional powers on the State Commission in the interest
of justice. These provisions are as follows:
1. Transfer of cases (Sec. 17A): On the application of the complainant or of
its own motion, the State Commission may, at any stage of proceeding,
transfer any complaint pending before the District Forum to another District
Forum within the state if the interest of justice so requires.
It may thus be noticed that the State Commission has been given the power
to transfer cases from one District Forum to another, that too at any stage
of proceeding. The transfer of case can be ordered either on the application
of the complainant or on its own motion. However, the defendant cannot
move for transfer of case.
2. Circuit benches [Sec. 17B]: The State Commission shall ordinarily function
in the State Capital but may perform its functions at such other place as the
State Government may, in consultation with the State Commission, notify in
the Official Gazette from time to time.
E. Special Powers of National Commission
The National Commission too has been conferred additional powers by the
Consumer Protection (Amendment) Act, 2002 which are as follows:
1. Power to set aside ex-parte orders (Sec. 22A): Where an order is passed
by the National Commission ex-parte against the opposite party or a
complainant, as the case may be, the aggrieved party may apply to the
Commission to set aside the said order in the interest of justice.
It may be observed that the insertion of this new Section will obviously
lessen the number of appeals from going to the Supreme Court from the
orders of the National Commission.
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2. Transfer of cases (Sec. 22B): On the application of the complainant or on Consumer Protection Act
(COPRA), 1986
its own motion, the National Commission may, at any stage of proceeding,
in the interest of justice, transfer any complaint pending before the District
Forum of one State to a District Forum of another State or before one
State Commission to another State Commission. NOTES
3. Circuit benches (Sec. 22C): The National Commission shall ordinarily
function at New Delhi and perform its functions at such other place as the
Central Government may, in consultation with National Commission, notify
in the Official Gazette, from time to time.
4. Power to make regulations (Sec. 30A): The National Commission may,
with the previous approval of the Central Government, by notification, make
regulations not inconsistent with this Act to provide for all matters for which
provision is necessary or expedient for the purpose of giving effect to the
provisions of this Act.
In particular, such regulations may make provisions for the cost of
adjournment of any proceeding before the District Forum, the State Commission
or the National Commission, as the case may be, which a party may be ordered to
pay.
F. Enforcement of Orders of the Consumer Forums (Sec. 25)
Regarding the enforcement of orders of the District Forum, State Commission or
the National Commission, Section 25 provides as follows:
(1) Where an interim order made under this Act is not complied with, the District
Forum or the State Commission or the National Commission, as the case
may be, may order the property of the person not complying with such
order to be attached.
(2) No attachment made under sub-section (1) (stated above) shall remain in
force for more than 3 months at the end of which, if the non-compliance
continues, the property attached may be sold and out of the proceeds thereof,
the District Forum or the State Commission or the National Commission
may award such damages as it thinks fit to the complainant and shall pay
the balance, if any, to the party entitled thereto.
(3) Where any amount is due from any person under an order made by a
District Forum, State Commission or the National Commission, as the case
may be, the person entitled to the amount may make an application to the
concerned Forum and such Forum may issue a certificate for the said amount
to the Collector of the District and the Collector shall proceed to recover
the amount in the same manner as arrears of land revenue.
G. Appeals against Orders of the Forums
1. Appellate power of the State Commission (Sec. 15): Any person
aggrieved by an order made by the District Forum may prefer an appeal
Self-Instructional
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Consumer Protection Act against such order to the State Commission within a period of 30 days from
(COPRA), 1986
the date of the order or within such extended time as the Commission may
allow if it is satisfied that there was sufficient cause for not filing it within that
period. However, no appeal by a person, who is required to pay any amount
NOTES in terms of an order of the District Forum, shall be entertained unless the
appellant has deposited fifty per cent of that amount or 25,000, whichever
is less.
It is worth noting here that the High Court is not a statutory appellate authority
under the provisions of the Consumer Protection Act, 1986.
2. Appellate power of the National Commission (Sec. 19): Any person
aggrieved by an order made by the State Commission may prefer an appeal
against such order to the National Commission within a period of 30 days
from the date of the order. The National Commission may, however, entertain
an appeal after the expiry of the said period of 30 days if it is satisfied that
there was sufficient cause for not filing it within that period. But no appeal
by a person, who is required to pay any amount in terms of an order of the
State Commission, shall be entertained unless the appellant has deposited
fifty per cent of that amount or 35,000, whichever is less.
Hearing of appeal (Sec. 19A): An appeal filed before the State
Commission or the National Commission shall be heard as expeditiously as
possible and an endeavour shall be made to finally dispose of the appeal
within a period of 90 days from the date of its admission.
3. Appeal to the Supreme Court (Sec. 23): Any person aggrieved by an
order made by the National Commission may prefer an appeal against such
order to the Supreme Court within a period of 30 days from the date of the
order or within such time as the Supreme Court allows. However, no appeal
by a person, who is required to pay any amount in terms of an order of the
National Commission, shall be entertained unless the appellant has deposited
fifty per cent of that amount or 50,000, whichever is less.
H. Administrative Control
Section 24 B gives power to the National Commission to exercise administrative
control over all the State Commissions. It also empowers the State Commissions
to exercise administrative control over all the District Forums within their respective
jurisdiction.
Vacancies or Defects in Appointment not to Invalidate Orders (Sec. 29A):
No act or proceeding of the District Forum, the State Commission or the National
Commission shall be invalid by reason only of the existence of any vacancy amongst
its members or any defect in the constitution thereof.
I. Dismissal of Frivolous or Vexatious Complaints (Sec. 26)
Where a complaint instituted before the District Forum, the State Commission or,
Self-Instructional as the case may be, the National Commission, is found to be frivolous or vexatious,
224 Material
it shall, for reasons to be recorded in writing, dismiss the complaint and make an Consumer Protection Act
(COPRA), 1986
order that the complainant shall pay to the opposite party such cost, not exceeding
10,000, as may be specified in the order.
J. Penalties NOTES
Regarding the penalties, Section 27 provides as follows:
(1) Where a trader or a person against whom a complaint is made or the
complainant fails or omits to comply with any order made by the District
Forum, the State Commission or the National Commission, as the case
may be, such trader or person or complainant shall be punishable with
imprisonment for a term which shall not be less than one month but which
may extend to three years, or with fine ranging between 2,000 and
10,000, or with both.
(2) The District Forum or the State Commission or the National Commission,
as the case may be, shall have the power of a Judicial Magistrate of the
First Class for the trial of offences under this Act, and on such conferment
of powers, they shall be deemed to be Judicial Magistrate of the First Class
for the purpose of the Code of Criminal Procedure, 1973.
(3) All offences under this Act may be tried summarily by the District Forum or
the State Commission or the National Commission, as the case may be.
Check Your Progress

4. What is the purpose of ‘The Consumer Protection Rules, 1987’?
5. Who are the members of the Central Council?
6. List the rights of consumers.
7. Which Sections deal with the establishment of the District Councils at district
level?

QUESTIONS
1. The term ‘Consumer’ means:

(i) Any person who buys any goods for a consideration which has been
paid or promised or partly paid and partly promised, or under any
system of deferred payment, and includes any person who uses such
goods with the approval of the buyer. It does not include a person
who buys goods for resale or for any commercial purpose; or
(ii) Any person who hires or avails any services for a consideration which
has been paid or promised or partly paid and partly promised, or
under any system of deferred payment, and includes any person who
Self-Instructional
Material 225
Consumer Protection Act is a beneficiary of such services with the approval of the hirer. It does
(COPRA), 1986
not include a person who avails of such services for any commercial
purpose.
2. Consumer is of two types: Consumer of goods and Consumer of services.
NOTES
3. ‘Service’ means service of any description which is made available to
potential users and includes, but is not limited to, the provision of facilities in
connection with banking, financing, insurance, transport, processing, supply
of electrical or other energy, boarding or lodging or both, housing
construction, entertainment, amusement or the purveying of news or other
information. However, it does not include the rendering of any service free
of charge or under a contract of personal service.
4. The Government has notified, ‘The Consumer Protection Rules, 1987’ with a
view to prescribe procedure in regard to the transaction of business by the
Central Council and to prescribe the rules as to the composition of the Central
Council. These rules also prescribe the terms and conditions of service of the
members of the National Commission, procedure to be followed for conduct
of business and for hearing of appeal by the National Commission.
5. The Central Council consists of (i) the Minister-in-charge of Consumer
Affairs in the Central Government, who shall be its Chairman, and (ii) such
number of other official or non-official members representing such interests
as may be prescribed.
6. The rights of the consumers are (i) Right to safety (ii) Right to information
(iii) Right to choose (iv) Right to be heard (v) Right against exploitation and
(vi) Right to education.
7. Section 8-A and 8-B of the Consumer Protection Act added by the
Amendment Act of 2002 deals with the establishment of the District Councils
at district level. Section 8-A provides that the State Government shall establish
for every district, by notification, a council to be known as the District
Consumer Protection Council with effect from such date as it may specify
in such notification.
8.6 SUMMARY
 The term ‘consumer’ includes any person who uses the goods with the
permission of the buyer though he is himself not a buyer. When a person
buys goods, they may be used by his family members, relatives and friends.
The actual user of the goods may come across the defects in goods. Thus,
the law treats rightful user of the goods as consumer.
 The Consumer Protection Councils are established at Center level, State
level and District level. We have one Central Council, many State Councils
and many District Councils. These Councils work towards the promotion
Self-Instructional and protection of the rights of the consumers.
226 Material
 The objects of the Central Council are the various rights of consumers Consumer Protection Act
(COPRA), 1986
recognised under the Act which are to be promoted and protected by the
Council.
 The state Government has been empowered to decide the number and
NOTES
qualifications of the members of State Council besides the members
nominated by the Central Government. The State Government has been
further empowered to prescribe the procedure to be followed by the State
Council in regard to the transaction of its business.
 The Consumer Protection Act, 1986 provides for a three-tier remedial
machinery for speedy redressal of consumer disputes.
 Where the President of the State Commission is, by reasons of absence or
otherwise, unable to act as Chairman of the Selection Committee, the State
Government may refer the matter to the Chief Justice of the High Court for
nominating a sitting judge of that High Court to act as Chairman.
 The fee for making complaints before District Forum and the manner in
which the fee shall be payable have since been prescribed under Rule 9A of
the Consumer Protection Rules, 1987.
 The State Commission shall have jurisdiction to entertain complaints where
the value of goods or services and compensation, if any, claimed exceeds
20 lakh but does not exceed 1 crore.
 The State Commission has power to call for the records and pass appropriate
orders in any consumer dispute which is pending before or has been decided
by any District Forum within the State.
 Every complaint filed with the National Commission shall be accompanied
by the relevant fee as is specified in Rule 9A of the Consumer Protection
Rules, 1987.
 Sub-Section(5) of Section 13 further provides that every proceeding before
the District Forum, the State Commission or the National Commission, as
the case may be, shall be deemed to be a judicial proceeding within the
meaning of Sections 193 and 228 of the Indian Penal Code.
 Any person aggrieved by an order made by the State Commission may
prefer an appeal against such order to the National Commission within a
period of 30 days from the date of the order.
 Where a trader or a person against whom a complaint is made or the
complainant fails or omits to comply with any order made by the District
Forum, the State Commission or the National Commission, as the case
may be, such trader or person or complainant shall be punishable with
imprisonment for a term which shall not be less than one month but which
may extend to three years, or with fine ranging between 2,000 and
10,000, or with both.
Self-Instructional
Material 227
(COPRA), 1986 8.7 KEY WORDS
 Consumer: Any person who purchases goods and services for personal
NOTES use is known as a consumer.
 Complaint: Complaint means a formal allegation against a party.
 Defect: It refers to frailty or shortcoming that prevents an item from being
complete, desirable, effective, safe, or of merit, or makes it to malfunction
or fail in its purpose.

EXERCISES
1. Write a short note on the objectives of the Consumer Protection Act, 1986.
2. Write in brief about consumer of services.
3. Write a short note on the jurisdiction of District Forums.
4. Write in brief about the terms and conditions of service of the members of
the State Commission
5. Write a short note on ‘Special Powers’ of National Commission as a
consumer redressal agency.
1. Discuss the impact of the Consumer Protection Act, 1986 among consumers.
2. Analyse the various rights of consumers as enunciated by the Consumer
Protection Act, 1986.
3. Discuss the main purpose behind the establishment of Consumer Protection
Councils in India.
4. Discuss the procedure to be adopted by the District Forum on admission of
a complaint.
5. Discuss the powers of the National Commission as a Consumer Disputes
Redressal Agency. .
Self-Instructional
228 Material
8.9 FURTHER READINGS (COPRA), 1986
Stott Vanessa and David L. Kobrin. 1980. Negotiable Instruments. London:

Anderson Keenan Publishing Limited. NOTES
Aggarwal S.K. 2006. Indian Business Laws. New Delhi: Galgotia Publications.
Iyengar Vijayaragavan. 2009. Introduction to Banking. New Delhi: Excel Books
India.
Heggade D. Odeyar. 2000. Banker-Customer Relationship in India. Meerut:
Mohit Publications.
Shekhar, K C. 2010. Banking Theory and Practice - 20th Edition. New Delhi:
Vikas Publishing House Pvt. Limited.
Singh Nirmal. 2003. Business Laws. New Delhi: Deep and Deep Publications.
Self-Instructional
Material 229
Foreign Exchange
Management Act, 1999 BLOCK - III
FOREIGN EXCHANGE MANAGEMENT ACT,
COMPETITION ACT, ENVIRONMENT
NOTES PROTECTION ACT
UNIT 9 FOREIGN EXCHANGE

MANAGEMENT ACT, 1999
Structure
9.0 Introduction
9.1 Objectives
9.2 Foreign Exchange Management Act (FEMA), 1999
9.2.1 Differences Between FERA and FEMA
9.2.2 Need for FEMA
9.4 Summary
9.5 Key Words
9.6 Self-Assessment Questions and Exercises
9.0 INTRODUCTION
Indian Government notified the Foreign Exchange Management Act (FEMA) 1999,
to replace the Foreign Exchange Regulation Act (FERA. Consequently, FEMA
came into operation from June 1, 2000. There was a lot of demand for a substantial
modification of FERA in the light of the ongoing economic liberalization and
improving foreign exchange reserves position. Industry stakeholders demanded a
new law that should be compatible with the emerging geo-economic realities and
facilitate the country’s growth journey through increased foreign trade and
investments. FEMA focused on proper regulation of foreign exchange rather than
control as under FERA. FEMA enabled a new foreign exchange management
laws consistent with the WTO. Also, the enactment of FEMA led the enactment
of the Prevention of Money Laundering Act of 2002, which came into effect from
1 July 2005.
Provisions of FEMA are compatible to policies with regard to the external
sector reforms that began in 1991. FEMA has also diluted the rigorous enforcement
provisions which were the hallmark of the erstwhile foreign exchange legislation
Self-Instructional
230 Material
Onus of proving the proof of guilt for foreign exchange violations is now on Foreign Exchange
Management Act, 1999
prosecution unlike in FERA. Under FERA, the accused was subject to both
monetary penalty and criminal punishment. On the other hand, under FEMA,
categorization of offences is only civil and no criminal punishment can be passed.
The RBI and Enforcement Directorate (ED) are assigned an important role in the NOTES
administration and enforcement of this Act. The FEMA empowers the central
government to impose restrictions on dealings in foreign exchange and foreign
security and payments to and receipts from any person outside India. Section 47
of FEMA empowers the RBI, by notification, to make regulations to carry out the
provisions of this Act and the rules there under.
This unit aims at analysing the enactment of Foreign Exchange Management
Act (FEMA), 1999 and explain its scope and objectives in India’s foreign exchange
regulations.
9.1 OBJECTIVES

 Understand foreign exchange transactions
 Analyse the role of Foreign Exchange (Regulations) Act (FERA)
 Learn the differences and similarities between FERA and FEMA
 Analyse the feature, scope and provisions of FEMA
 Understand what are considered offences under FEMA
9.2 FOREIGN EXCHANGE MANAGEMENT ACT

(FEMA), 1999
Foreign exchange transactions were regulated in India by the Foreign Exchange

(Regulations) Act (FERA), 1973. This Act also sought to regulate certain aspects
of the conduct of business outside the country by Indian companies and foreign
companies in India.
The main objective of FERA, framed against the background of severe
foreign exchange problem and the controlled economic regime, was conservation
and proper utilization of the foreign exchange resources of the country.
There was a lot of demand for a substantial modification of FERA in the
light of the ongoing economic liberalization and improving foreign exchange reserves
position. Accordingly, a new Act, the Foreign Exchange Management Act (FEMA),
1999, replaced the FERA.
The FEMA, which came into effect from 1st of June, 2,000, extends to the
whole of India and also applies to all branches, offices, and agencies outside India,
owned or controlled by a person and resident in India.
Self-Instructional
Material 231
Foreign Exchange 9.2.1 Differences Between FERA and FEMA
Before we discuss FEMA, it is important to understand the history of foreign
exchange regulation in India. Post-Independence, India passed the Foreign
NOTES Exchange Regulation Act (FERA), 1948 in order to tighten its control on forex
reserves. Provisions of FERA were similar to exchange regulations passed by the
British Government to control forex reserves and strengthen its control over its
colonies. India also needed a similar law as the country had more imports than
exports.
Provisions of FERA were made even more stringent after the fall of fixed
exchange rate system and the steadily increasing energy prices worldwide in 1973.
There was scarcity of foreign exchange reserves due to increasing imports
particularly high energy prices which have taken away India’s forex reserves. FERA
remained in force till 30 May 2000 and was replaced with FEMA. In an era of
economic reforms, increasing exports of goods and services, increasing forex
reserves and industrial deregulation, foreign exchange was no longer a ‘precious
and rare’ commodity for the forex-starved Indian after 1994. Industry stakeholders
demanded a new law that should be compatible with the emerging geo-economic
realities and facilitate the country’s growth journey through increased foreign trade
and investments. The Indian Government came up with FEMA in 1999. FEMA
focused on proper regulation of foreign exchange rather than control as under
FERA. There are some similarities and differences between FERA and FEMA
which are explained in Table 9.1.
Table 9.1 Similarities and Differences between FERA and FEMA
Similarities Differences
1. Both, FERA and FEMA have been 1. FERA was prohibitive however; FEMA
created by an Act of the Indian is facilitative to the needs of trade,
Parliament. investments and industry.
2. Both the Acts are aimed at 2. FEMA permits current account
regulation and management of transactions with reasonable restrictions
foreign exchange. imposed by the RBI. FERA was
3. Under Acts, FERA and FEMA, completely prohibitive.
basic statute empowers the 3. FERA has legal restrictions on loan
government and RBI, to regulate, repayments. FEMA has no such
allow or prohibit transactions. restrictions.
4. Under both Acts, several rules, 4. Penalty if any levied was criminal under
regulations, circulars and FERA, however it is civil under FEMA.
notifications were issued. 5. The focus of FERA was ‘Control’. The
5. Under both Acts, exemptions if any focus of FEMA is ‘Management’.
were given through notifications. 6. FERA had 81 sections however, FEMA
has only 49 sections.
Source: Bare Act (FERA and FEMA)
9.2.2 Need For FEMA

Industry as well as investors demanded a simple, transparent and globally compatible
Self-Instructional foreign exchange law. Accordingly, the Government of India appointed Tarapore
232 Material
Committee. The Committee recommended the changes to be made in the legislative Foreign Exchange
framework governing foreign exchange transactions. This would enable the foreign
exchange law to meet the changed economic realities post economic reforms and
globalization. Provisions of FEMA are compatible to policies with regard to the
external sector reforms that began in 1991. FEMA has also diluted the rigorous NOTES
enforcement provisions which were the hallmark of the erstwhile foreign exchange
legislation (FERA). Onus of proving the proof of guilt for foreign exchange violations
is now on prosecution unlike in FERA. Under FERA, the accused was subject to
both monetary penalty and criminal punishment. On the other hand, under FEMA,
categorization of offences is only civil and no criminal punishment can be passed.
In order to deal with the changes in economic realities, the government
realised the need to enhance the confidence of both trader and investor and attract
more foreign investment to meet the foreign capital needs of the country. Intentional
or unintentional contravention of any FEMA provisions is now dealt with civil law
procedures. A transparent administrative system has been created for effective
regulations of FEMA in the form of Compounding Rules. For time bound
implementation of same; adjudicating authority/special director (appeals) and
appellate tribunal have also been established. For example, if someone contravenes
the rules and regulations under FEMA, compounding process is required to be
completed within 180 days.
The RBI and Enforcement Directorate (ED) are assigned an important role
in the administration and enforcement of this Act. The FEMA empowers the central
government to impose restrictions on dealings in foreign exchange and foreign
security and payments to and receipts from any person outside India. The Act
imposes restrictions on persons who are resident in India on acquiring, holding or
owning foreign exchange, foreign security and immovable property abroad and
on transfer of foreign exchange or security abroad.
The FEMA lays down that all dealings in foreign exchange or foreign security
and all payments from outside the country to India shall be made only through
authorized persons, except with the general or special permission of the Reserve
Bank of India (RBI). The Act also prohibits any payment outside India except
with the general or special permission of the Reserve Bank.
The FEMA permits dealings in foreign exchange through authorized persons
for current account transactions. However, the central government can impose
reasonable restrictions in public interest. The FEMA permits a person or resident
in India to hold, own, transfer or invest in foreign currency, foreign security or any
immovable property situated outside India if such currency, security or property
was acquired, held or owned by such person when he was resident outside India
or inherited from a person who was resident outside India.
RBI is empowered by this Act to prohibit, restrict, or regulate establishment
in India of a branch, office or other place of business by a person resident outside
India, for carrying on any activity relating to such branch, office or other place of
business. However, the RBI shall not impose any restriction on the withdrawal of Self-Instructional
Material 233
Foreign Exchange foreign exchange for payments due on account of amortization of loans or for
depreciation of direct investments in the ordinary course of business.
The Act requires the exporters to furnish to the RBI or to such other authority
certain details regarding the exports. For the purpose of ensuring that export value
NOTES
of the goods is received without any delay, the Reserve Bank may direct any
exporter to comply with such requirements as it deems fit.
Where any amount of foreign exchange is due or has accrued to any person,
he shall take all reasonable steps to realize and repatriate it to India within the time
and in the manner prescribed by the RBI. Several exemptions are, however, granted
to this clause.
Any contravention of the provisions of FEMA is a civil offence punishable
with fine.
FEMA enabled a new foreign exchange management laws consistent with
the WTO. Also, the enactment of FEMA led the enactment of the Prevention of
Money Laundering Act of 2002, which came into effect from 1 July 2005.
The FEMA was constituted broadly to serve the twin purposes. These are: (i.) to
facilitate external trade and payments and (ii.) to promote the orderly development
and maintenance of foreign exchange market. The main objectives of the Foreign
Exchange Management Act, 2000 are as follows:
(i) To regulate the import and export of currency traded under foreign exchange
markets.
(ii) To regulate acquisition in India by foreigners and by Indians abroad including
the acquiring of immovable property in India by non-residents and holding
of immovable property outside India by Indian owned subsidiary/their
branches/offices and agencies.
(iii) To regulate dealings in foreign exchange and securities both direct and indirect.
(iv) To regulate the exchange transactions of foreign companies in India.
(v) To regulate the exchange transactions that officiate foreign exchange directly
or indirectly.
(vi) To regulate employment of foreign nationals in India including Indian owned
subsidiaries/offices/branches and agencies outside India.
(vii) Above all, to conserve the foreign exchange resources of India and to utilize
them for furthering the economic interests of the country for faster economic
development.
Main characteristics of Foreign Exchange Management Act (FEMA) are:
(i) FEMA is aimed at facilitating trade and investments. It also aims at preventing
Self-Instructional the misuse of foreign exchange.
234 Material
(ii) FEMA is compatible with India economic realities for example; the definitions Foreign Exchange
of capital account transaction and current account transaction have been
introduced under FEMA in order to reflect their purpose correctly. In
addition, it has also been kept in mind that India is yet to have capital account
convertibility. NOTES
(iii) All current account transactions are allowed under FEMA except some
exceptions whereby RBI notifies the list of such restrictions citing reasons.
(iv) RBI also classifies those capital account transactions that are to be permitted
under FEMA and regulate the transfer and issue of foreign securities by a
resident in/outside India as well as setting up of branches/offices by foreign
companies in India.
(v) FEMA has significantly simplified the key sections of FERA relating to
dealings, holding and payments in foreign exchange.
(vi) FEMA has simplified the rules and regulations governing the export of goods
and services.
(vii) FEMA aims at regulation unlike FERA which aims at control.
(viii) FEMA is advanced, relevant and compatible to India’s needs in an era of
liberalization. Enforcement provisions under FEMA reflect that the attitude
is of putting trust in the persons/firms involved.
(ix) Non-compliance of rules and regulations is dealt under civil law unlike
criminal law in FERA.
A. Power to Make Rules

Section 46 of FEMA empowers the Central Government, by notification, to make
rules to carry out the provisions of the Act. Such rules may provide for the following:
 Imposition of reasonable restrictions on current account transactions
 Manner in which the contravention may be compounded
 Manner of holding an inquiry by the adjudicating authority
 Form of appeal and fee for filing such an appeal
 Salary and allowances payable to and other terms and conditions of service
of the chairperson and other members of the appellate tribunal and the
special director (appeals)
 Salaries and allowances and other conditions of service of the officers and
employees of the Appellate Tribunal and the office of the Special Director
(Appeals)
 Additional matters in respect of which the Appellate Tribunal and the Special
Director (Appeals) may exercise the powers of a civil court under clause (i)
of sub-section 2 of Section 28
Self-Instructional
Material 235
Foreign Exchange  Authority or person and the manner in which any document may be
authenticated
 Any other matter which is required to be or may be prescribed
NOTES B. Power to Make Regulations
Section 47 of FEMA empowers the RBI, by notification, to make regulations to
carry out the provisions of this Act and the rules there under. Such regulations may
provide for:
 Permissible classes of capital account transactions, limits of admissibility of
foreign exchange for such transactions, and the prohibition, restriction or
regulation of certain capital account transactions
 Manner and form in which declaration is to be furnished
 Period within which and the manner of repatriation of foreign exchange
 Limit up to which any person may possess foreign currency or foreign coins
 Class of persons and limit up to which foreign currency account may be
held or operated
 Limit up to which foreign exchange acquired may be exempted
 Limit up to which foreign exchange acquired may be retained
 Any other matter which is required to be or may be specified
Although FEMA provides for the repeal of FERA, it also provides that offences
committed under the repealed Act shall continue to be governed by the provisions
of the repealed Act as if it had not been repealed. This important aspect has to be
borne in mind when discussing the penal provisions of FEMA and also comparing
them with those in FERA.
i. FEMA classifies violation of its provisions into two categories, ‘quantifiable’
and ‘not quantifiable’. For any quantifiable violation, the infringer is liable to
a penalty up to twice the sum involved. In cases where amounts or values
are not quantifiable, the penalty can be up to a lakh of rupees. In both
cases, the same quantum of additional penalty is leviable when the
contravention is a continuing one. On the other hand, FERA makes no such
distinction and in both types of contravention, the penalty can be up to five
times the amount or value involved or 5,000 whichever is more.
ii. If the penalty is not paid within 90 days, FEMA stipulates that the contravener
is liable to civil imprisonment. He can be detained up to three years when
the penalty exceeds 1 crore and up to six months in other cases. The
detainee is to be released even during the period of detention if the liability
is cleared. He cannot be arrested a second time after his release for the
Self-Instructional
236 Material
same violation even if the penalty remains unpaid. Under FERA also, a Foreign Exchange
person who defaults in payment of any penalty, can be imprisoned for a
term up to two years or with fine or with both.
iii. FEMA bars the jurisdiction of the civil court in respect of matters to be
NOTES
dealt with by the Adjudicating Authority or by the Appellate Tribunal. In
contrast, FERA provides that in addition to any award of penalty, the infringer
can also be detained under orders of a court for a term which shall not be
less than six months but not more than seven years and a fine if the amount
or value of the contravention exceeds 1 lakh and up to three years or with
fine or with both in other cases.
iv. Surprisingly, FEMA does not seem to have any provision for recovery of
dues. This in essence means that an infringer can enjoy his ill-gotten wealth
without fear of further prosecution or with recovery proceedings, once he
is released from detention. This is disturbing. On the other hand, FERA
provides that arrears of penalty can be recovered by collectors as if they
are arrears of land revenue.
v. It is interesting to note that FEMA’s sister Bill on Prevention of Money
Laundering empowers the authorities concerned to take recourse to recovery
proceedings as laid down in the Income-tax Act, that is, arrears of penalty
can be recovered in the same way as a Tax Recovery Officer recovers tax
arrears.
vi. FERA had a healthy provision that a court while convicting an infringer
could also impose the condition that the person shall not carry on business
which was likely to facilitate the commission of such offence for a period
not exceeding three years. FEMA is silent on this point.
vii. FE MA also does not provide for more stringent punishment for a second
or every subsequent offence. Under FERA, in such cases, the court could
sentence the person convicted to imprisonment for a term not less than six
months and not more than seven years and with fine.
Check Your Progress

1. What is the Foreign Exchange (Regulations) Act (FERA)?
2. How did the Foreign Exchange Management Act (FEMA), 1999 replace
the FERA?
3. What is the role of the RBI and Enforcement Directorate (ED) in FEMA?
4. List a few of objectives of FEMA.
5. List some of characteristics of FEMA.
6. How does FEMA empower the RBI to make regulations to carry out the
provisions of this Act?
Self-Instructional
Material 237
Foreign Exchange
Management Act, 1999 9.3 ANSWERS TO CHECK YOUR PROGRESS
QUESTIONS
NOTES 1. Foreign exchange transactions were regulated in India by the Foreign

Exchange (Regulations) Act (FERA), 1973. This Act also sought to regulate
certain aspects of the conduct of business outside the country by Indian
companies and foreign companies in India. The main objective of FERA,
framed against the background of severe foreign exchange problem and
the controlled economic regime, was conservation and proper utilization of
the foreign exchange resources of the country.
2. There was a lot of demand for a substantial modification of FERA in the
light of the ongoing economic liberalization and improving foreign exchange
reserves position. Accordingly, a new Act, the Foreign Exchange
Management Act (FEMA), 1999, replaced the FERA. The FEMA, which
came into effect from 1st of June, 2,000, extends to the whole of India and
also applies to all branches, offices, and agencies outside India, owned or
controlled by a person and resident in India.
3. The RBI and Enforcement Directorate (ED) are assigned an important role
in the administration and enforcement of this Act. The FEMA empowers
the central government to impose restrictions on dealings in foreign exchange
and foreign security and payments to and receipts from any person outside
India.
4. The main objectives of the FEMA are as follows:
(i) To regulate the import and export of currency traded under foreign
exchange markets.
(ii) To regulate acquisition in India by foreigners and by Indians abroad
including the acquiring of immovable property in India by non-residents
and holding of immovable property outside India by Indian owned
subsidiary/their branches/offices and agencies.
(iii) To regulate dealings in foreign exchange and securities both direct and
indirect.
(iv) To regulate the exchange transactions of foreign companies in India.
(v) To regulate the exchange transactions that officiate foreign exchange
directly or indirectly.
5. Some of the characteristics of FEMA are:
(i) FEMA is aimed at facilitating trade and investments. It also aims at
preventing the misuse of foreign exchange.
(ii) FEMA is compatible with India economic realities for example; the
definitions of capital account transaction and current account
transaction have been introduced under FEMA in order to reflect
Self-Instructional
238 Material
their purpose correctly. In addition, it has also been kept in mind that Foreign Exchange
India is yet to have capital account convertibility.
(iii) All current account transactions are allowed under FEMA except some
exceptions whereby RBI notifies the list of such restrictions citing
NOTES
reasons.
(iv) RBI also classifies those capital account transactions that are to be
permitted under FEMA and regulate the transfer and issue of foreign
securities by a resident in/outside India as well as setting up of branches/
offices by foreign companies in India.
(v) FEMA has significantly simplified the key sections of FERA relating
to dealings, holding and payments in foreign exchange.
6. Section 47 of FEMA empowers the RBI, by notification, to make regulations
to carry out the provisions of this Act and the rules there under. Such
regulations may provide for:
 Permissible classes of capital account transactions, limits of admissibility
of foreign exchange for such transactions, and the prohibition, restriction
or regulation of certain capital account transactions
 Manner and form in which declaration is to be furnished
 Period within which and the manner of repatriation of foreign exchange
 Limit up to which any person may possess foreign currency or foreign
coins
9.4 SUMMARY
 There was a lot of demand for a substantial modification of FERA in the

light of the ongoing economic liberalization and improving foreign exchange
reserves position. Accordingly, a new Act, the Foreign Exchange
Management Act (FEMA), 1999, replaced the FERA.
 The Government of India appointed Tarapore Committee. The Committee
recommended the changes to be made in the legislative framework governing
foreign exchange transactions.
 FEMA has also diluted the rigorous enforcement provisions which were
the hallmark of the erstwhile foreign exchange legislation (FERA). Onus of
proving the proof of guilt for foreign exchange violations is now on
prosecution unlike in FERA.
 The RBI and Enforcement Directorate (ED) are assigned an important role
in the administration and enforcement of this Act. The FEMA empowers
the central government to impose restrictions on dealings in foreign exchange
and foreign security and payments to and receipts from any person outside
India.
Self-Instructional
Material 239
Foreign Exchange  The FEMA permits dealings in foreign exchange through authorized persons
for current account transactions. However, the central government can
impose reasonable restrictions in public interest.
 FEMA enabled a new foreign exchange management laws consistent with
NOTES
the WTO. Also, the enactment of FEMA led the enactment of the Prevention
of Money Laundering Act of 2002, which came into effect from 1 July
2005.
 The FEMA was constituted broadly to serve the twin purposes. These are:
(i.) to facilitate external trade and payments and (ii.) to promote the orderly
development and maintenance of foreign exchange market.
 FEMA is compatible with India economic realities for example; the definitions
of capital account transaction and current account transaction have been
introduced under FEMA in order to reflect their purpose correctly. In
addition, it has also been kept in mind that India is yet to have capital account
convertibility.
 FEMA classifies violation of its provisions into two categories, ‘quantifiable’
and ‘not quantifiable’. For any quantifiable violation, the infringer is liable to
a penalty up to twice the sum involved.
 Surprisingly, FEMA does not seem to have any provision for recovery of
dues. This in essence means that an infringer can enjoy his ill-gotten wealth
without fear of further prosecution or with recovery proceedings, once he
is released from detention. This is disturbing. On the other hand, FERA
provides that arrears of penalty can be recovered by collectors as if they
are arrears of land revenue.
9.5 KEY WORDS
 Foreign Exchange Regulation Act (FERA), 1973: This was an Act of

the Parliament of India to consolidate and change the law relating to foreign
exchange. The Act imposed strict regulations on certain kinds of payments.
 Foreign Exchange Management Act (FEMA): The Government of India
formulated FEMA or Foreign Exchange Management Act to encourage the
external payments and across the border trades in India.
 Prevention of Money Laundering Act (PMLA), 2002: This is an Act of
the Parliament of India to prevent money-laundering and to provide for
confiscation of property derived from money-laundering. PMLA and the
Rules notified there under came into force with effect from July 1, 2005.
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240 Material
Foreign Exchange
9.6 SELF ASSESSMENT QUESTIONS AND Management Act, 1999
EXERCISES
Short-Answer Questions NOTES
1. Write a short note on the purpose of Foreign Exchange Management Act

(FEMA), 1999.
2. Write a brief about the drawbacks of Foreign Exchange Regulation Act
(FERA), 1973.
3. Write a short on the rules and regulations of FEMA.
4. Write in brief about FEMA’s restrictions on persons acquiring, holding or
owning foreign exchange’
5. Write a brief note on offences under FEMA.
1. Discuss the economic situations which led to the enactment of FEMA in
India.
2. Analyse the differences and similarities between FERA and FEMA.
3. Discuss the procedure in which contravention of any FEMA provisions is
dealt with.
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Material 241
Competition Act, 2002
UNIT 10 COMPETITION ACT, 2002

NOTES Structure
10.0 Introduction
10.1 Objectives
10.2 Competition Act, 2002: Meaning, Scope and Salient Features
10.3 Offences and Penalties Under the Act
10.5 Summary
10.6 Key Words
10.0 INTRODUCTION
The regulation of competition is a relatively new phenomenon in India. The earliest

known attempt to regulate competition can be found in the Monopolistic and
Restrictive Trade Practices (MRTP) Act, 1969. The Competition Act 2002,
enacted in 2003, following the recommendation of the High Level Committee on
Competition Policy and Law, is a landmark legislation that aims at promoting
competition through prohibition of anti-competitive practices, abuse of dominance
and regulation of combinations beyond a certain sizes. Certain amendments to the
Competition Act were effected in 2007 and 2009. This Act, which extends to the
whole of India except the State of Jammu and Kashmir, deals mainly with anti-
competitive agreements, combinations and abuse of dominance and it provides
for the establishment of a Competition Commission to control these. Competition
Commission of India (CCI) Rules came into existence on 1 March 2009.
In this unit, you will learn about the various provisions of the Competition
Act, including the provisions relating to offences and penalties under it.
10.1 OBJECTIVES

 Understand the meaning and scope of the Competition Act,2002
 Discuss the salient features of the Competition Act,2002
 Explain the offences and penalties under the Competition Act,2002
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242 Material
Competition Act, 2002
10.2 COMPETITION ACT, 2002: MEANING, SCOPE
AND SALIENT FEATURES
The common law doctrine of ‘restraint of trade’ has played a crucial role in the NOTES
development of modern competition law. The essence of this doctrine is that it is
contrary to public policy to enforce contracts that are in the nature of unreasonable
restraints of trade. What is unreasonable was to be determined by considering
whether the restraint was so large as to interfere with the interests of the general
public. In the US, the common law doctrine of restraint of trade and the rule of
reason approach to interpret their Sherman Act are the guiding force to deal anti-
competitive practices. This approach has the effect of the restraint between the
parties. Where the EU does also apply the common law doctrine of restraint of
trade but that have the effect on the market.
According to the introductory paragraph of the Act, it is an Act to provide, keeping
in view of the economic development of the country, for the establishment of a
Commission to prevent practices having adverse effect on competition, to promote
and sustain competition in markets, to protect the interests of consumers and to
ensure freedom of trade carried on by other participants in markets, in India.
The competition Act, 2002 extends to the whole of India except the State of
Jammu and Kashmir.
The main provisions of the Act pertain to prohibition of anti-competitive
agreements; prevention of abuse of dominant position and regulation of
combinations. In competition law, restraints have been broadly categorized into
horizontal and vertical. Horizontal agreements are agreements between firms which
operate at the same market level. Vertical agreements are between firms that are
in some supply relationship. Horizontal agreements are almost always of concern
to competition authorities, as these agreements tend to increase the chances of
monopoly. Doubts have been raised on the benefits or harms to competition by
regulating the vertical agreements in India. Though the India Competition Act does
not use the words horizontal or vertical agreements, it treats certain kinds of
horizontal agreements more severely, by presuming them to have adverse effects
on competition. According to Section 3(3), agreements between parties (including
cartels) that: (1) directly or indirectly determine purchase or sales prices; (2) limit
or control production, supply, markets, technical development, investment or the
provision of services; (3) share the market or source of production or provision of
services by way of allocation of the geographical area of the market, type of
goods or services, or number of customers in the market or any other similar way;
and (4) directly or indirectly result in bid rigging or collusive bidding are ‘presumed
to have appreciable adverse effects on competition.’ Self-Instructional
Material 243
Competition Act, 2002 Section 3(4) of the Act deals vertical agreements. It lists, in particular, five
types of vertical agreements - tying, exclusive supply, exclusive distribution, refusal
to deal, and resale price maintenance, which would be in contravention of Section
3(1), only if they cause or are likely to cause appreciable adverse effects on
NOTES competition in India.
US Courts relied on rule of reason which requires the initial burden lies on
the plaintiff to show that the agreement in question is anticompetitive, on the other
hand the EU applies the test for adverse effects. Presently, the Indian law borrowed
the rule of reason approach of the US in determination of anti-competiveness of
the agreement.
The Act also provides for the establishment of a Competition Commission
to take care of these provisions and to protect the interests of consumers.
Abuse of dominant position
1. No enterprise shall abuse its dominant position.
2. There shall be an abuse of dominant position under sub-section (1), if an
enterprise,-
a. directly or indirectly, imposes unfair or discriminatory-
i. condition in purchase or sale of goods or service; or
ii. price in purchase or sale (including predatory price) of goods or
service.
Explanation: For the purposes of this clause, the unfair or
discriminatory condition in purchase or sale of goods or service referred
to in sub-clause (i) and unfair or discriminatory price in purchase or
sale of goods (including predatory price) or service referred to in sub-
clause (ii) shall not include such discriminatory condition or price which
may be adopted to meet the competition; or
b. limits or restricts-
i. production of goods or provision of services or market there
for; or
ii. technical or scientific development relating to goods or services
to the prejudice of consumers; or
c. indulges in practice or practices resulting in denial of market access;
or
d. makes conclusion of contracts subject to acceptance by other parties
of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such
contracts; or
e. uses its dominant position in one relevant market to enter into, or
protect, other relevant market. Explanation.-For the purposes of this
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section, the expression-
244 Material
f. “dominant position” means a position of strength, enjoyed by an Competition Act, 2002
enterprise, in the relevant market, in India, which enables it to-

i. operate independently of competitive forces prevailing in
the relevant market; or
NOTES
ii. affect its competitors or consumers or the relevant market
in its favour;
g. “predatory price” means the sale of goods or provision of
services, at a price which is below the cost, as may be determined
by regulations, of production of the goods or provision of
services, with a view to reduce competition or eliminate the
competitors. Regulation of combinations
Competition Commission and Competition Appellate Tribunal
The Competition Act provides that there shall be established by the Central
Government a Commission to be called the Competition Commission of India,
consisting of a Chairperson and not less than two and not more than six other
members. The Commission shall be an expert body which would function as a
market regulator for preventing and regulating anti-competitive practices in the
country in accordance with the Act and it would also have advisory and advocacy
functions in its role as a regulator.
Regulation of Combinations
The Act provides for regulation of combination through mergers and acquisitions
which causes or is likely to cause an appreciable effect on competition.
Power to exempt
The Central Government is empowered to exempt from the application of this
Act, or any provision thereof, and for such period as it may specify:
(a) any class of enterprises if such exemption is necessary in the interest of
security of the State or public interest;
(b) any practice or agreement arising out of and in accordance with any obligation
assumed by India under any treaty, agreement or convention with any other
country or countries;
(c) any enterprise which performs a sovereign function on behalf of the Central
Government or a State Government, provided that in case an enterprise is
engaged in any activity including the activity relatable to the sovereign functions
of the Government, the Central Government may grant exemption only in
respect of activity relatable to the sovereign functions.
Competition Law Review Committee
In pursuance of its objective of ensuring that Legislation is in sync with the needs
of strong economic fundamentals, in 2018, the Government constituted a nine-
member Competition Law Review Committee to review the Competition Act. Self-Instructional
Material 245
Competition Act, 2002 The Competition Act was passed in the year 2002 and the Competition
Commission of India was set up in pursuance of the same. The Commission started
functioning in right earnest from 2009 and has contributed immensely towards the
development of competition and fair play practices in the Indian market. During
NOTES the past nine years the size of the Indian Economy has grown immensely and India
is today amongst the top five economies in the World and poised to forge ahead
further. In this context, it is essential that Competition Law is strengthened, and re-
calibrated to promote best practices which result in the citizens of this country
achieving their aspirations and value for money.
The Terms of References of the Committee are as follows:
i. To review the Competition Act/ Rules/ Regulations, in view of changing
business environment and bring necessary changes, if required;
ii. To look into international best practices in the competition fields,
especially anti-trust laws, merger guidelines and handling cross border
competition issues;
iii. To study other regulatory regimes/ institutional mechanisms/ government
policies which overlap with the Competition Act;
iv. Any other matters related to competition issue and considered
necessary by the Committee.
Check Your Progress

1. What is the objective of the Competition Act, 2002?
2. What is the provision regarding the constitution of the Competition
Commission of India?
10.3 OFFENCES AND PENALTIES UNDER

THE ACT
Chapter VI of the Competition Act provides for the provisions for various offences
under the Act. Important ones are as follows:
Contravention of orders of Commission
 Without prejudice to the provisions of this Act, if any person contravenes,
without any reasonable ground, any order of the Commission, or any
condition or restriction subject to which any approval, sanction direction or
exemption in relation to any matter has been accorded, given, made or
granted under this Act or fails to pay the penalty imposed under this Act, he
shall be liable to be detained in civil prison for a term which may extend to
one year, unless in the meantime the Commission directs his release and he
shall also be liable to a penalty not exceeding rupees ten lakhs.
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 The Commission may, while making an order under this Act, issue such Competition Act, 2002
directions to any person or authority, not inconsistent with this Act, as it

thinks necessary or desirable, for the proper implementation or execution
of the order, and any person who commits breach of, or fails to comply
with, any obligation imposed on him under such direction, may be ordered NOTES
by the Commission to be detained in civil prison for a term not exceeding
one year.
Penalty for failure to comply with directions of Commission and Director-
General
 If any person fails to comply with a direction given by-
a. the Commission under sub-section (5) of section 36; or
b. the Director General while exercising powers referred to in sub-section
(2) of section 41, the Commission shall impose on such person a penalty
of rupees one lakh for each day during which such failure continues.
Penalty for making false statement or omission to furnish material
information
 If any person, being a party to a combination,-
a. makes a statement which is false in any material particular, or knowing it
to be false; or
b. omits to state any material particular knowing it to be material, such
person shall be liable to a penalty which shall not be less than rupees
fifty lakhs but which may extend to rupees one crore, as may be
determined by the Commission.
Penalty for offences in relation to furnishing of information
 Without prejudice to the provisions of section 44, if any person, who furnishes
or is required to furnish under this Act any particulars, documents or any
information,-
a. makes any statement or furnishes any document which he knows or has
reason to believe to be false in any material particular; or
b. omits to state any material fact knowing it to be material; or
c. wilfully alters, suppresses or destroys any document which is required
to be furnished as aforesaid, the Commission shall impose on such person
a penalty which may extend to rupees ten lakhs.
 Without prejudice to the provisions of sub-section (1), the Commission
may also pass such other order as it deems fit.
Power to impose lesser penalty
 The Commission may, if it is satisfied that any producer, seller, distributor,
trader or service provider included in any cartel, which is alleged to have Self-Instructional
Material 247
Competition Act, 2002 violated section 3, has made a full and true disclosure in respect of the
alleged violations and such disclosure is vital, impose upon such producer,
seller, distributor, trader or service provider a lesser penalty as it may deem
fit, than leviable under this Act or the rules or the regulations: Provided that
NOTES lesser penalty shall not be imposed by the Commission in cases where
proceedings for the violation of any of the provisions of this Act or the rules
or the regulations have been instituted or any investigation has been directed
to be made under section 26 before making of such disclosure:
 Provided further that lesser penalty shall be imposed by the Commission
only in respect of a producer, seller, distributor, trader or service provider
included in the cartel, who first made the full, true and vital disclosures
under this section: Provided also that the Commission may, if it is satisfied
that such producer, seller, distributor, trader or service provider included in
the cartel had in the course of proceedings,-
a. not complied with the condition on which the lesser penalty was imposed
by the Commission; or
b. had given false evidence; or
c. the disclosure made is not vital, and thereupon such producer, seller,
distributor, trader or service provider may be tried for the offence with
respect to which the lesser penalty was imposed and shall also be liable
to the imposition of penalty to which such person has been liable, had
lesser penalty not been imposed.
Check Your Progress

3. Which chapter of the Competition Act provides for the provisions for various
offences under the Act?
4. What is the penalty for making false statement or omission to furnish material
information?

QUESTIONS
1. The objective of the Competition Act, 2002 is to provide for the establishment
of a Commission to prevent practices having adverse effect on competition,
to promote and sustain competition in markets, to protect the interests of
consumers and to ensure freedom of trade carried on by other participants
in markets, in India.
2. The Competition Act provides that there shall be established by the Central
Government a Commission to be called the Competition Commission of
India, consisting of a Chairperson and not less than two and not more than
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six other members.
248 Material
3. Chapter VI of the Competition Act provides for the provisions for various Competition Act, 2002
offences under the Act.

4. If any person, being a party to a combination, makes a statement which is
false in any material particular, or knowing it to be false; or omits to state
NOTES
any material particular knowing it to be material, such person shall be liable
to a penalty which shall not be less than rupees fifty lakhs but which may
extend to rupees one crore, as may be determined by the Commission.
10.5 SUMMARY
 The common law doctrine of ‘restraint of trade’ has played a crucial role in
the development of modern competition law. The essence of this doctrine is
that it is contrary to public policy to enforce contracts that are in the nature
of unreasonable restraints of trade.
 The main provisions of the Competition Act pertain to prohibition of anti-
competitive agreements; prevention of abuse of dominant position and
regulation of combinations.
 In competition law, restraints have been broadly categorized into horizontal
and vertical. Horizontal agreements are agreements between firms which
operate at the same market level. Vertical agreements are between firms
that are in some supply relationship.
 Horizontal agreements are almost always of concern to competition
authorities, as these agreements tend to increase the chances of monopoly.
 Section 3(4) of the Act deals with vertical agreements. It lists five types of
vertical agreements: tying, exclusive supply, exclusive distribution, refusal
to deal, and resale price maintenance, which would be in contravention of
Section 3(1), only if they cause or are likely to cause appreciable adverse
effects on competition in India.
 The Act provides for the establishment of a Competition Commission of
India to protect the interests of consumers.
 The Act provides for regulation of combination through mergers and
acquisitions which causes or is likely to cause an appreciable effect on
competition.
 Chapter VI of the Competition Act provides for the provisions for various
offences under the Act.
10.6 KEY WORDS
 Restraint of Trade: It refers to any action that interferes with free

competition in a market.
Self-Instructional
Material 249
Competition Act, 2002  Horizontal Agreements: These are the agreements between firms which
operate at the same market level.
 Vertical Agreements: These are the agreements between firms that are in
some supply relationship.
NOTES

EXERCISES
1. What is the meaning and scope of the Competition Act, 2002?
2. What is the objective of the Competition Commission of India?
3. List the cases in which the Central Government can allow exemptions from
the Competition Act, 2002.
1. Discuss the salient features of the Competition Act, 2002.
2. Identify the various offences and penalties under the Competition Act, 2002.
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250 Material
Environment Protection
UNIT 11 ENVIRONMENT Act, 1986
PROTECTION ACT, 1986

NOTES
Structure
11.0 Introduction
11.1 Objectives
11.2 The Environment (Protection) Act, 1986
11.2.1 Background
11.2.4 Prevention, Control and Abetment of Environment Pollution
11.2.5 Penalties
11.4 Summary
11.5 Key Words
11.0 INTRODUCTION
The Environment (Protection) Act was enacted in 1986 with the objective of
providing for the protection and improvement of the environment. It empowers
the Central Government to establish authorities charged with the mandate of
preventing environmental pollution in all its forms and to tackle specific environmental
problems that are peculiar to different parts of the country. The Act was last amended
in 1991.
In this unit, you will learn about important provisions under the Environment
(Protection) Act, 1986.
11.1 OBJECTIVES

 Understand the background of the Environment (Protection) Act
 Define important terms used in the Act
 Identify the various environmental pollutants
 Discuss the power of the Central Government in the implementation of the
Act
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Material 251
Act, 1986 11.2 THE ENVIRONMENT (PROTECTION)
ACT, 1986
NOTES 11.2.1 Background

The need for protection and conservation of environment and sustainable use of
natural resources is reflected in the constitutional framework of India and also in
the international commitments of India. The Constitution under Part IVA (Art 51A-
Fundamental Duties) casts a duty on every citizen of India to protect and improve
the natural environment including forests, lakes, rivers and wildlife, and to have
compassion for living creatures. Further, the Constitution of India under Part IV
(Art 48A-Directive Principles of State Policies) stipulates that the State shall
endeavour to protect and improve the environment and to safeguard the forests
and wildlife of the country.
Several environment protection legislations existed even before
Independence of India. However, the true thrust for putting in force a well-
developed framework came only after the UN Conference on the Human
Environment (Stockholm, 1972). After the Stockholm Conference, the National
Council for Environmental Policy and Planning was set up in 1972 within the
Department of Science and Technology to establish a regulatory body to look
after the environment-related issues. This Council later evolved into a full-fledged
Ministry of Environment and Forests (MoEF).
MoEF was established in 1985, which today is the apex administrative
body in the country for regulating and ensuring environmental protection and lays
down the legal and regulatory framework for the same. Since the 1970s, a number
of environment legislations have been put in place. The MoEF and the pollution
control boards (“CPCB”, ie, Central Pollution Control Board and “SPCBs”, ie,
State Pollution Control Boards) together form the regulatory and administrative
core of the sector.
The Act came into force on 19 November, 1986. The Act extends to the whole of
India. Some terms related to environment have been described as follows in the
Act:
 Environment includes water, air and land and the interrelationship that
exist among and between them and human beings, all other living organisms
and property.
 Environmental pollution means the presence of any solid, liquid or gaseous
substance present in such concentration as may be or tend to be injurious
to the environment.
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252 Material
 Environmental pollutant means any solid, liquid or gaseous substance Environment Protection
Act, 1986
present in such concentration as may be, or tend to be, injurious to
environment.
 Hazardous substance means any substance or preparation which by its
NOTES
physico-chemical properties or handling is liable to cause harm to human
beings, other living organisms, property or environment.
 Handling, in relation to any substance, means the manufacture, processing,
treatment, package, storage, transportation, use, collection, destruction,
conversion, offering for sale, transfer or the like of such substance.
 Occupier, in relation to any factory or premises, means a person who has,
control over the affairs of the factory or the premises and includes in relation
to any substance, the person in possession of the substance.
The Act has given powers to the Central Government to take measures to protect
and improve environment, while the state government coordinate the actions. The
most important function of Central Government under this act includes:
Setting up of:
a. The standards of quality of air, water or soil for various areas and
purposes.
b. The maximum permissible limits of concentration of various
environmental pollutants for different areas.
c. The procedures and safeguards for the handling of hazardous
substances.
d. The prohibition and restrictions on the handling of hazardous substances
in different areas.
e. The prohibition and restriction on the location of the industries and to
carry on processes and operations in different areas.
f. The procedures and safeguards for the prevention of accidents which
may cause environmental pollution and providing for remedial measures
for such accidents.
The power of entry and inspection, power to take samples, etc., under this
Act lies with the Central Government or any officer empowered by it.
For the purpose of protecting and improving the quality of the environment
and preventing and abating pollution, standards have been specified under Schedule
I-IV of Environment (Protection) Rules, 1986, for emission of gaseous pollutants
and discharge of effluents/waste water from industries.
These standard vary from industry to industry and also vary with the medium
into which the effluent is discharged or the area of emission.
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Environment Protection 11.2.4 Prevention, Control and Abetment of Environment Pollution
Act, 1986
Chapter III of the EPA deals with prevention, Control and abetment of
Environmental Pollution. Some important provisions of this chapter provide that,
NOTES No person carrying on any industry, operation or process shall discharge or emit
or permit to be discharged or emitted any environmental pollutant in excess of
such standards as may be prescribed. No person shall handle or cause to be
handled any hazardous substance except in accordance with such procedure and
after complying with such safe guards as may be prescribed. Where the discharge
of any environmental pollutant in excess of the prescribed standards occurs or is
apprehended to occur due to any accident or other unforeseen act or event, the
person responsible for such discharge and the person in charge of the place at
which the discharge occurs shall be bound to prevent or mitigate the environmental
pollution. and shall also:
(a) intimate the fact of such occurrence or apprehension of such occurrence;
and
(b) be bound, if called upon, to render all assistance. On receipt of such
information, the authorities or agencies shall cause such remedial measures
to be taken as are necessary to prevent or mitigate the environmental
pollution.
The expenses incurred by any authority or agency may be recovered from
the person concerned as arrears of land revenue or of public demand.
11.2.5 Penalties
Section 15 provides for Penalties for contravention of the provisions of the Act as
well as the Rules, Orders and Directions. Whoever fails to comply with or
contravenes any of the provisions, rules, orders or directions of this Act shall be
punishable with imprisonment for a term which may extend to five years or with
fine which may extend to one lakh rupees, or with both. In case the failure or
contravention continues, with additional fine which may extend to five thousand
rupees for every day during which such failure or contravention continues.
If the failure or contravention continues beyond a period of one year after
the date of conviction, the offender shall be punishable with imprisonment for a
term which, may extend to seven years.
Check Your Progress

1. Which is the apex body in India for regulating environmental issues?
2. Who is vested with the power of entry and inspection, power to take
samples, etc., under the Environment Protection Act?
3. What do Environment (Protection) Rules, 1986 relate to?
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254 Material
11.3 ANSWERS TO CHECK YOUR PROGRESS Act, 1986
QUESTIONS
1. The Ministry of Environment and Forests (MoEF) is the apex administrative NOTES
body in the country for regulating and ensuring environmental protection
and lays down the legal and regulatory framework for the same.
2. The power of entry and inspection, power to take samples, etc., under this
3. Environment (Protection) Rules, 1986 relate to emission of gaseous pollutants
and discharge of effluents/waste water from industries.
11.4 SUMMARY
 After the Stockholm Conference, the National Council for Environmental

Policy and Planning was set up in 1972 within the Department of Science
and Technology to establish a regulatory body to look after the environment-
related issues.
 The Environment Protection Act came into force on 19 November, 1986.
It extends to the whole of India.
 The Act has given powers to the Central Government to take measures to
protect and improve environment, while the state government coordinate
the actions.
 The power of entry and inspection, power to take samples, etc., under this
 For the purpose of protecting and improving the quality of the environment
and preventing and abating pollution, standards have been specified under
Schedule I-IV of Environment (Protection) Rules, 1986, for emission of
gaseous pollutants and discharge of effluents/waste water from industries.
11.5 KEY WORDS
 Environmental pollution: It refers to the presence of any solid, liquid or

gaseous substance present in such concentration as may be or tend to be
injurious to the environment.
 Environmental pollutant: It means any solid, liquid or gaseous substance
present in such concentration as may be, or tend to be, injurious to
environment.
 Hazardous substance: It means any substance or preparation which by
its physico-chemical properties or handling is liable to cause harm to human
beings, other living organisms, property or environment.
Self-Instructional
Material 255
Act, 1986 11.6 SELF ASSESSMENT QUESTIONS AND
EXERCISES
NOTES Short-Answer Questions

1. Write a short note on the background of the Environment Protection Act.
2. Define the following:
 Hazardous substance
 Handling
 Occupier
1. Discuss the powers of the Central Government under the Environment
Protection Act.
2. Describe the provisions regarding prevention, control and abetment of
environment pollution and penalties for violation of the Act.
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256 Material
Intellectual Property Rights
UNIT 12 INTELLECTUAL
PROPERTY RIGHTS
NOTES
Structure
12.0 Introduction
12.1 Objectives
12.2 Meaning and Scope of Patent Act
12.3 Trademarks
12.3.1 Transfer and Infringement of Trademarks
12.4 Copyright
12.6 Summary
12.7 Key Words
12.0 INTRODUCTION
The term ‘intellectual property right’ (IPR) comprises of three words, ‘intellectual’,
‘property’ and ‘right’. Students of law understand that these words are different
and have their own meaning. To understand the complete meaning of the term
intellectual property right, one must look at each of these words one by one.
Intellectual means ‘a person who places a high value on or pursues things of
interest to the intellect or the more complex forms and fields of knowledge, like
aesthetic or philosophical matters, especially on an abstract and general level’. On
the other hand, the word property has been defined by different philosophers
differently.
Various jurists have given different categories to rights; one finds that rights
can be tangible and intangible. The rights which are normally possessed by a person
in physical form are tangible, while the rights in the form of goodwill, image in
society, copyright, trademark, patent, shares, etc., are intangible rights. Whether
rights are tangible and intangible, all rights need to be protected by law. This can
only be possible if the person who claims it to be his/her own should have de-jure
ownership over it. This can be only possible if there is abidance of legal procedure.
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Intellectual Property Rights Thus, the term Intellectual Property Right can be understood to be the right
of ownership of property which is the outcome of the application of the intellect of
a person. The application of the intellect is in different fields like inventions, designs
for industrial articles, literary, artistic work, symbols that are ultimately used in
NOTES commerce. Intellectual property rights define a variety of legal rights in protecting
products of intellectual efforts of creativity in the fields of applied art, knowledge
and fine arts.
These rights are statutory rights which need protection through various
statutes. These intellectual property rights are classified into different categories,
they include: Patent, Industrial Design, Trademarks, Copyright, Geographical
Indications, Lay out designs of integrated circuits and Protection of undisclosed
information/Trade Secret according to TRIPs agreements.
12.1 OBJECTIVES

 Describe what intellectual property rights mean
 Discuss the meaning and scope of the Patent Act
 Identify the WTO Agreements on patent
 Discuss the rights of patentee and patent infringement provisions
 Explain the provisions relating to trademarks and copyright
12.2 MEANING AND SCOPE OF PATENT ACT
It is a quintessential principle of patent legislation in India that a patent is granted

only for inventions which are new and useful and which have industrial application.
This principle is evident from the definition of invention. Secondly, it is not considered
in public interest to grant patent rights in respect of discoveries of a scientific
principle or an invention injurious to public health, or a method of agricultural or
horticulture or a process for the treatment of human beings, animals or plants. The
consideration for granting a patent is through the disclosure of the invention in the
detailed specification which is open to public inspection so that on expiry of the
term of the patent any member of the public can use the invention. The State can
impose any conditions/restrictions while granting a patent monopoly. To prevent
the abuse of monopoly rights created by grant of patent, the Patent Act provides
for compulsory licensing of the patented invention on certain grounds.
The patent law of India has the following salient features that decide whether a
patent will be granted or not:
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(a) The object: The object of patent law is to encourage scientific research, Intellectual Property Rights
new technology and industrial progress. The price of the grant of the
monopoly is the disclosure of the invention at the Patent Office, which, after
the expiry of the fixed period of the monopoly, passes into the public domain.
NOTES
(b) Inventive step: The fundamental principle of patent law is that a patent is
granted only for an invention which must have novelty and utility. It is essential
for the validity of a patent that it must be the inventor’s own discovery as
opposed to mere verification of what was, already known before the date
of the patent.
(c) Useful: The previous Act, i.e., the Act of 1911, does not specify the
requirement of being, useful, in the definition of ‘invention”, but courts have
always taken the view that a patentable invention, apart from being a new
manufacture, must also be useful.
(d) Improvement: In order to be patentable, an improvement on something
known before or a combination of different matters already known, should
be something more than a mere workshop improvement, and must
independently satisfy the test of invention or an inventive step. It must produce
a new result, or a new article or a better or cheaper article than before. The
new subject matter must involve “invention” over what is old. Mere collocation
of more than one, integers or things, not involving the exercise of any
inventive faculty does not qualify for the grant of a patent.
(e) The guiding tests: To decide whether an alleged invention involves novelty
and an inventive step, certain broad criteria can be indicated. Firstly if the
‘manner of manufacture’ patented, was publicly known, used or practiced
in the country before or at the date of the patent, it will be negative novelty
or `subject matter’. Prior public knowledge of the alleged invention can be
by word of mouth or by publication through books or other media. Secondly,
the alleged discovery must not be the obvious or natural suggestion of what
was previously known.
In short the ‘invention’ must involve an inventive step and the same must be
capable of ‘industrial application’. It must be supplemented by the concept
of ‘non-obviousness’.
Patents Rules
Under the provisions of Section 159 of the Patents Act, 1970, the Central
Government is empowered to make rules for implementing the Act and regulating
patent administration. Accordingly, the Patents Rules, 1972 were notified and
brought into force w.e.f. 20.4.1972. These rules were amended from time to time
till 20 May 2003, when new Patents Rules, 2003, were brought into force by
replacing the 1972 rules. These rules were further amended by the Patents
(Amendment) Rules, 2005 and the Patents (Amendment) Rules, 2006. The last
amendments are made effective from 5 th May 2006.
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Intellectual Property Rights Advantage of Patent Rights
A patent does not give a right to make or use or sell an invention. Rather, a patent
provides the right to exclude others from making, using, selling, offering for sale,
NOTES or importing the patented invention for the term of the patent, which is usually 20
years from the filing date subject to the payment of maintenance fees. A patent is a
limited property right the government gives inventors in exchange for their agreement
to share details of their inventions with the public. Like any other property right, it
may be sold, licensed, mortgaged, assigned or transferred, given away, or simply
abandoned.
Patented inventions have, in fact, pervaded every aspect of human life, from
electric lighting (patents held by Edison and Swan) and plastic (patents held by
Baekeland), to ballpoint pens (patents held by Biro) and microprocessors (patents
held by Intel).
All patent owners are obliged, in return for patent protection, to publicly
disclose information on their invention in order to enrich the total body of technical
knowledge in the world. Such an ever-increasing body of public knowledge
promotes further creativity and innovation in others. In this way, patents provide
not only protection for the owner but valuable information and inspiration for future
generations of researchers and inventors.
Thus, patents provide incentives to individuals by offering them recognition
for their creativity and material reward for their marketable inventions. These
incentives encourage innovation, which assures that the quality of human life is
continuously enhanced.
The amendment to the WTO Trade Related Aspects of Intellectual Property Rights
(TRIPS) Agreement in 2017 marks the first time since the organization opened its
doors in 1995 that WTO accords have been amended. Members took the decision
to amend the TRIPS Agreement specifically to adapt the rules of the global trading
system to the public health needs of people in poor countries. This action was
peceded by repeated calls from the multilateral system for acceptance of the
amendment.
This is an extremely important amendment. It gives legal certainty that generic
medicines can be exported at reasonable prices to satisfy the needs of countries
with no pharmaceutical production capacity, or those with limited capacity. By
doing so, it helps the most vulnerable access the drugs that meet their needs,
helping to deal with diseases such as HIV/AIDS, tuberculosis or malaria, as well
as other epidemics.
Unanimously adopted by WTO members in 2005, the protocol amending
the TRIPS Agreement makes permanent a mechanism to ease poorer WTO
members’ access to affordable generic medicines produced in other countries.
The amendment empowers importing developing and least-developed countries
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facing public health problems and lacking the capacity to produce drugs generically Intellectual Property Rights
to seek such medicines from third country producers under “compulsory licensing”
arrangements. Normally, most medicines produced under compulsory licences
can only be provided to the domestic market in the country where they are produced.
This amendment allows exporting countries to grant compulsory licences to generic NOTES
suppliers exclusively for the purpose of manufacturing and exporting needed
medicines to countries lacking production capacity.
Grant of Patent: Where an application for a patent has been found to be in
order for grant of the patent, the patent shall be granted as expeditiously as possible
to the applicant with the seal of the patent office and the date on which the patent
is granted shall be entered in the register.
On the grant of the patent, the controller shall publish the fact that the patent
has been granted and thereupon the application, specification and other documents
related to the patent shall be open for public inspection (Sec. 43)
Date of Patent: Every patent shall be dated as of the date on which the
application for the patent was filed. (Sec. 45)
Form, Extent and Effect of Patent: Every patent shall be in the prescribed
form and shall have effect throughout India. A patent shall be granted for one
invention only. (Sec. 46)
Rights of Patentee: The patent granted under this Act shall confer upon
the patentee the exclusive right to prevent third parties, who do not have his consent,
from the act of making, using, offering for sale, selling or informing for those purposes
the patented product in India. (Sec. 48)
Term of Patent: The term of every patent shall be twenty years from the
date of filing the application for the patent. (Sec. 53)
Generally speaking, the following acts when committed without the consent of the
patentee shall amount to infringement:
 making, using, offering for sale, selling, importing the patented product
 using the patented process, or using, offering for sale, selling or importing
the product directly obtained by that process
Exclusions from Infringement
The law however enumerates certain exceptions to infringement:
(a) Experimental and Research: Any patented article or process can be
used for the following purposes:
 Experiment
 Research
 Instructing the pupils Self-Instructional
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Intellectual Property Rights It is also permitted to make, construct, use, sell or import a patented invention
solely for the uses reasonably related to the development and submission of
information required under any law for the time being in force, in India, or in
a country other than India, that regulates the manufacture, construction,
NOTES use, sale or import of any product. All such acts, if within the bounds as
created above, cannot be challenged as infringing the rights of the patentee.
(b) Parallel Importation under certain conditi Patented article or article
made by using the patented process can be imported by government for its
own use. Also a patented process can be used by the government solely for
its own use. Moreover, the government can import any patented medicine
or drug for the purposes of its own use or for distribution in any dispensary,
hospital or other medical institution maintained by the government or any
other dispensary, hospital or medical institution notified by the government.
Remedies
For filing a suit for infringement, the Court of first instance in India is the District
Court. Now, where in such a suit the defendant pleads invalidity of the patent and
makes a counter claim for revocation of the patent, the suit of infringement along
with the counter claim is necessarily transferred to the High Court having
Jurisdiction. As a matter of practice, in almost all the suits of infringement the
defendant challenges the validity of the patent and makes a counter-claim for
revocation. The effect of this is that infringement suits are generally decided by the
High courts. In Low Heat Driers (P) Ltd. v. Biju George [2001 (21) PTC 775
(Ker)] it was held that once the defendants file a counter claim seeking revocation
of patent, the District Court will lose jurisdiction to proceed with the matter any
further. That deprivation of power will necessarily include the power to deal with
all interlocutory applications pending as on that day.
Like any other civil suit the jurisdiction shall be determined in accordance
with the rules of Code of civil procedure. The appropriate forum would be:
(a) Principal place where the plaintiff carries on his business; or
(b) Principal place where the defendant carries on his business; or
(c) Place where the infringing articles are manufactured/sold or infringing
process is being applied or where the articles manufactured by the
infringing process is being sold;
Burden of Proof
The traditional rule of burden of proof is adhered to with respect to patented
product and accordingly in case of alleged infringement of a patented product the
‘onus of proof’ rests on the plaintiff. However, TRIPS-prompted amendment has
resulted in ‘reversal of burden of proof’ in case of infringement of patented process.
Under the current law, the Court can at its discretion shift the burden of proof on
the defendant, in respect of process patent if either of the two conditions are met:
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identical product is made by the process and plaintiff has made reasonable efforts Intellectual Property Rights
to determine the process but has failed.

Declaration as to non-infringement
Infringement suits are dilatory, may hamper the flow of business and involve NOTES
considerable costs. To keep them at bay, a suit for declaration as to non-
infringement can be instituted. For this the plaintiff must show that following: (a)
the plaintiff applied in writing to the patentee or his exclusive licensee for a written
acknowledgement to the effect that the process used or the article produced by
him does not infringe the patent and (b) patentee or the licensee refused or neglected
to give such an acknowledgement. It is not necessary that the plaintiff must
anticipate an infringement suit.
Relief in Suit for Infringement
When speaking of any legal proceeding, probably the most important concern in
the nature and scope of relief available to the ‘aggrieved party’. It is seen that like
any other civil proceedings, the infringement suits are often protracted and if the
aggrieved party were made to wait till the end, the damage inflicted would be
irreparable.
Check Your Progress

1. What is the objective of the patent law?
2. What is the term of a patent under Indian law?
3. Where does the onus of proof lie in case of infringement of patent?
12.3 TRADEMARKS
The Trade Marks Act, 1999 was enforced on September 15, 2003 and was
amended by Trade Marks (Amendment) Act, 2010 which now governs trademark
laws in India. The new Act was implemented to introduce various other provisions
in conformity with the International trademark Legislations. The Indian Intellectual
Property Office (IIPO) is the primary office, which comprises of the Trade Marks
Registry, the Patent Office, and the Designs Office in India. The Trade Marks
Registry has 5 branches in India. They are located at New Delhi, Mumbai, Chennai,
Kolkata and Ahmedabad. The functioning of the Trade Marks Registry is
decentralized and all offices are empowered to handle cases of their jurisdiction.
The five Trade Mark Offices share a central database and any registrations or
decisions issued by such branches are valid all over India.
While an Indian applicant has to file applications in the registry in its zone, a
foreign applicant can choose to file an application where its representative law firm
has an office. In India, one can protect a trademark for goods or services, on the
basis of either use or registration or on basis of both elements. A registration of a Self-Instructional
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Intellectual Property Rights trademark is always granted only for a limited period of time, but it is renewable
without restriction in time. Therefore, a trademark may be protected indefinitely.
The trademark signifies the quality of product and services of the trademark owner;
it is in the interest of corporations or individuals to get the trademark registered in
NOTES India to exclude others from using the same or deceptively similar trademark in
India.
With effect from September 15, 2003, Trade Marks Act, 1999 have been
enforced, old Trademarks and Mechandising Act, 1958 has been repealed. The
new Trade Marks Act 1999 is TRIPS compliant and more in conformity with US
Federal and State Trade Marks laws than it was earlier. Service Marks are now
registrable in India2.
Types of Trademarks
A trademark is designated by the following symbols:
 ™ (for an unregistered trade mark, that is, a mark used to promote or
brand goods)
 ®, (for an unregistered service mark, that is, a mark â,, superscript SM
used to promote or brand services)
Trademark and Service Marks: Trademarks and Service Marks are those
that are affixed to identify goods or services of certain producers.
The different types of trademarks which are available for adoption are:
 Any name (including personal or surname of the applicant or predecessor
in business or the signature of the person), which is not unusual for trade
to adopt as a mark.
 An invented word or any arbitrary dictionary word or words, not being
directly descriptive of the character or quality of the goods/service.
 Letters or numerals or any combination thereof.
 The right to proprietorship of a trademark may be acquired by either
registration under the Act or by use in relation to particular goods or
service.
 Devices, including fancy devices or symbols.
 Monograms.
 Combination of colours or even a single colour in combination with a
word or device.
 Shape of goods or their packaging.
 Marks constituting a 3- dimensional sign.
 Sound marks when represented in conventional notation or described
in words by being graphically represented.
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12.3.1 Transfer and Infringement of Trademarks Intellectual Property Rights
Let us now study how trademarks can be transferred from one holder to another.
Trademarks can be transferred through assignment, transmission and licensing.
Assignment means an assignment in writing by an act of the parties concerned. NOTES
While in case of licensing, the right in the trademark continues to vest with the
proprietor, the assignment of the trademark leads to a change in the ownership of
the mark. A registered trademark is assignable with or without the goodwill in
respect of all or only some of the goods/services for which the mark is registered.
India is a member to TRIPS and Article 21 of the TRIPS dealing with Licensing
and Assignment mandates that ‘... the owner of a registered trademark shall have
the right to assign the trademark with or without the transfer of the business to
which the trademark belongs.’ Section 39 of the (Indian) Trade Marks Act, 1999
allows for the assignment of an unregistered trademark with or without the goodwill
of the business concerned.
Indian law contains embargo on the assignments of trademark, whether
registered or unregistered, whereby multiple exclusive rights would be created in
more than one person which would result in deception/confusion. However, the
assignment with limitations imposed, such as goods to be sold in different markets,
i.e., within India or for exports are valid. The Registrar is authorized to issue a
certificate of validity of the proposed assignment on a statement of case by the
proprietor of a registered trademark who proposes to assign the mark. The said
certificate as to validity is conclusive unless vitiated by fraud.
Trademark Infringement is a violation of exclusive rights attaching to a trademark
without the authorization of the trademark owner or any licensee. Trademark
infringement mostly occurs when a person uses a trademark which may be either
a symbol or a design, with resembles to the products owned by the other party.
The trademark owner may begin a legal proceeding against a party, which infringes
its registration.
There are two types of remedies available to the owner of a trademark for
unauthorized use of its imitation by a third party. These remedies are:-an action for
passing off in the case of an unregistered trademark and an action for infringement
in case of a registered trademark. An infringement action and an action for passing
off is quite different from each other, an infringement action is a statutory remedy
and an action for passing off is a common law remedy. Accordingly, in order to
establish infringement with regard to a registered trademark, it is necessary only to
establish that the infringing mark is deceptively similar to the registered mark and
no further proof is required. In the case of a passing off action, proving that the
marks are deceptively similar alone is not sufficient. The use of the mark should be
likely to deceive confusion. Further, in a passing off action it is necessary to prove
that the use of the trademark by the defendant is likely to cause injury to the
plaintiff’s goodwill, whereas in an infringement suit, the use of the mark by the Self-Instructional
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Intellectual Property Rights defendant need not cause any injury to the plaintiff. Trademark infringement laws
help the trademark holders to keep awareness about infringement of trademark.
Under the Trade Marks Act, both civil and criminal remedies are
simultaneously available against infringement and passing off. Infringement of
NOTES
trademark is violation of the exclusive rights granted to the registered proprietor of
the trademark to use the same. A trademark is said to be infringed by a person,
who, not being a permitted user, uses an identical/ similar/ deceptively similar mark
to the registered trademark without the authorization of the registered proprietor
of the trademark. However, it is pertinent to note that the Indian trademark law
protects the vested rights of a prior user against a registered proprietor which is
based on common law principles. Passing off is a common law tort used to enforce
unregistered trademark rights. Passing off essentially occurs where the reputation
in the trademark of party A is misappropriated by party B, such that party B
misrepresents as being the owner of the trademark or having some affiliation/
nexus with party A, thereby damaging the goodwill of party A. For an action of
passing off, registration of a trademark is irrelevant.
In an action for passing off under the law of trademarks, it is essential to
prove that the consumer is misled into believing that the impugned goods are the
goods of or are connected with the goods of a prior user of the trademark. When
this is not proved, the prior user cannot enforce a passing off action against the
new user, even if the goods in relation to which the trademark is used fall in the
same class. This was the view taken by the Delhi High Court in the case of
M/s Microlube India Ltd. v. Maggon Auto Centre and Another, decided on
7th February 2008.9
In the case, the plaintiffs were the registered users of the trademark MICO
registered in relation to their petroleum products including oils, grease, lubricants
and coolants. They filed a suit for infringement and passing off against the defendants
for using the same mark in relation to their lubricants and also got an ex parte order.
When the defendants contented that they could not be restrained from the use of the
trademark by the plaintiffs in view of Section 28(3) of the Trademarks Act, 1999
which relates to concurrent use of trademarks by two persons; the plaintiffs took
help of Sections 27(2), 33 and 34 of the Trademarks Act 1999 as having an overriding
effect on Section 28, and made their ground for the relief of passing off.
However, the defendants averred that the plaintiffs had suppressed material
facts and did not inform the court about the fact of registration of the trademark
MICO by the defendant in 2005, thereby misleading the court that the latter were
an unregistered user. Also, there was lack of research and misidentification of the
principal parties by the plaintiffs, which led to non-presence of the defendants at
the time of first hearing and obtaining of ex parte order by the plaintiffs. The plaintiffs
argued that no provision of the Act bars an action for passing off by an anterior
user of a trademark against a registered user of the same. Under section 27(2) of
the Act, a prior user of a trade mark can maintain an action for passing off against
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266 Material
The defendants further questioned the validity of the passing off action of Intellectual Property Rights
plaintiffs, contending that the requirements for the claim were not met. ‘The law of
Passing Off as it has developed permits an action against a registered proprietor
of a trade mark for its mendacious use for inducing and misleading the consumers
into thinking that his goods are the goods of or are connected with the goods of a NOTES
prior user of the trade mark.’
12.4 COPYRIGHT
As you learned, copyright is a right given by the law to creators of literary, dramatic,
musical and artistic works and producers of cinematograph films and sound
recordings. In fact, it is a bundle of rights including, inter alia, rights of reproduction,
communication to the public, adaptation and translation of the work. There could be
slight difference in the symphony of the rights depending on the work done and the
medium selected by the person. The Copyright Act, 1957 protects original literary,
dramatic, musical and artistic works and cinematograph films and sound recordings
from unauthorized uses. Unlike the case with any other IPR, copyright protects the
expressions and not the ideas. There is no copyright on an idea. The most important
thing that need to be proved to be worthy of the copyright is to have the originality of
the work. Originality is a word which has been expressed by various courts in different
matters but the conclusion of the same can be expressed as what was held in the
Privy Council in the MacMillan case1. In this the Privy Council held that an original
work is the product of the labour, skill and capital of one man which must have been
distinct and not appropriated by the other.
Copyright ensures certain minimum safeguards of the rights of authors over
their creations, thereby protecting and rewarding creativity. Creativity being the
cornerstone of progress, no civilized society can afford to ignore the basic requirement
of encouraging the same. Economic and social development of a society is dependent
on creativity. The protection provided by copyright to the efforts of writers, artists,
designers, dramatists, musicians, architects and producers of sound recordings,
cinematograph films and computer software, creates an atmosphere conducive to
creativity, which induces them to create more and motivates others to create.
An idea cannot be protected by the copyright, as the protection lies only in
the expression in any dimension. If in any instance the idea of one person has been
shared or taken up by the other, it cannot be protected under any provision of law.
The Apex court of India in the R.G. Anand case held that copyright does not lie in
the idea or any plot, it lies only to an expression.
Copyright does not ordinarily protect titles by themselves or names, short
word combinations, slogans, short phrases, methods, plots or factual information.
Copyright does not protect ideas or concepts. To get the protection of copyright
a work must be original. But in cases of the celebrities like Lata Mangeshkar or
Shilpa Shetty endorsing their own launched products with their names, they can
have protection as trademarks, but they cannot get copyright over their names. Self-Instructional
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Intellectual Property Rights The broad imperative is that copyright lasts for life time of the creator and 60
years after the death of the copyright holder. This is true in case of original literary,
dramatic, musical and artistic works. The 60-year period is counted from the year
following the death of the author. In the case of cinematograph films, sound
NOTES recordings, photographs, posthumous publications, anonymous and pseudonymous
publications, works of government and works of international organizations, the
60-year period is counted from the date of publication.
Let us now study the transfer of copyright in India. Like any other type of the
property, copyright is also transferable. They can be transferred through different
ways. The contractual way of transferring copyright is called the assignment. The
other way of transfer of copyright is through the deposition of the same to the
government of India, which can also be understood as the surrender of IPR.
Assignment of Copyright
The owner of copyright in an existing work or the prospective owner of the copyright
in a future work may assign to any person the copyright either wholly or partially and
either generally or subject to limitations and either for the whole term of the copyright
or any part thereof. The assignment should be in writing signed by the assignor or by
his duly authorized agent. It shall identify the specific works and specify the rights
assigned and the duration and territorial extent of such assignment. It shall also specify
the amount of royalty payable, if any, to the author or his legal heirs during the
currency of the assignment and the assignment shall be subject to revision, extension
or termination on terms mutually agreed upon by the parties. Where the assignee
does not exercise the rights assigned to him within a period of one year from the date
of assignment, the assignment is deemed to have lapsed after the expiry of one year.
Usually the period of the assignment depend on the terms of the contract between
the parties, but if it is not stated, it is presumed to be five years from the date of
assignment. Similarly if the territorial extent of assignment of the rights is not specified,
it shall be presumed to extend within the whole of India.
As mentioned earlier, the author of a work may surrender all or any of the
rights comprising the copyright in the work by giving notice in the prescribed form
to the registrar of copyrights.
The following are some of the commonly known acts involving the infringement of
copyright:
 Making infringing copies for sale or hire or selling or letting them for hire;
 Permitting any place for the performance of works in public where such
performance constitutes infringement of copyright;
 Distributing infringing copies for the purpose of trade or to such an extent
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268 Material
 Public exhibition of infringing copies by way of trade; and Intellectual Property Rights
 Importation of infringing copies into India.

Normally we find that the court of justice under whose jurisdiction such
type of violation is taking place will have the power to take cognizance of the NOTES
infringement. They can award damages as well as fine the wrong doer. Along with
this, the person whose rights have been infringed upon can also ask for any
appropriate remedy. Usually such cases are tried by the Metropolitan Magistrate
or a Judicial Magistrate of the first class, under whose jurisdiction such violation is
committed. Where any infringement takes place at the premises of third person
and he also gets the gains out of such an activity, that person can also be held for
copyright violation under the provision of the Act, unless the person has evidence
to show that he was not aware and had no reasonable ground for believing that
such communication to the public would be an infringement of copyright.
The copies which are made through the infringement of the copyrighted
material are also subjected to the retention of the owner and it would be deemed
to be his own property, as the original work. The investigation of the violations
would be tried by any police officer, not below the rank of a sub inspector on his
satisfaction that an offence in respect of the infringement of copyright in any work
has been, is being, or is likely to be committed, seize without warrant, all copies of
the work and all plates used for the purpose of making infringing copies of the
work, wherever found, and all copies and plates so seized shall, as soon as
practicable be produced before a magistrate.
There are two types of remedies that are available to the violation of any copyright
in India, which encompass civil and criminal remedies. In terms of civil remedies,
the copyright owner is entitled to remedies for the infringement of copyright by
way of injunctions, damages and accounts of profits.
Any person who knowingly infringes or abets the infringement of the copyright
in any work commits criminal offence under Section 63 of the Copyright Act.
Criminal remedies include imprisonment, with fine as well as the seizure of the
infringed material and sharing of the profits of the infringed sale. The minimum
punishment for infringement of copyright is imprisonment for six months with the
minimum fine of 50,000. In the case of a second and subsequent conviction the
minimum punishment is imprisonment for one year and fine of two lakh.
The copyright amendment bill 2010 which has been floating in abeyance since
quite long was finally introduced before the Rajya Sabha (Upper House of the
Parliament) on 19th April, 2010. The said bill proposes various substantial changes
in the copyright law mainly addressing the concerns of the entertainment industry
in respect of the law on ‘version recording’, ‘parallel imports’, and rights of the
director of a film. The various noteworthy proposals are as follows: Self-Instructional
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Intellectual Property Rights (i) New Copyright included in the Bundle - The bill amends the meaning of
copyright per se by including, storage of work on any medium by electronic
or other means and ‘commercial rental of a copy of work’ (not for artistic
work) as a part of the bundle of rights to which the owner of an artistic
NOTES work, film and sound recording is entitled.
(ii) Recognizing the Rights of a Film Director – The bill for the first time
recognizes the principle director of a cinematograph film as its joint first
owner and also a co-author along with the producer thereof while film itself
would be a work of joint authorship.
(iii) Numerous exceptions to Copyright Infringement Introduced – The
bill takes special note of incidental/transient copying or storage of a work
for private purposes as Fair Use of the work not amounting to copyright
infringement. Importantly, the bill further protects making of a Three-
Dimensional Object from a two-dimensional/technical drawing from liability
under infringement if such Three-Dimensional object is made for the purposes
of industrial application of any purely functional part of a useful device.
(iv) Introduction of Digital Rights Management Provisions - With special
emphasis on better protection and management of copyright the bill enacts
new provisions for rights management information system containing authentic
data about the identity of each copyright work or performance so as to identify
the author/owner thereof and terms and conditions of use, if any, existing on
such work. The Bill also provides for strict protection of such technological
measures taken for protection of copyright and lays down harsh criminal
punishments for any circumvention of the said technological measures.
(v) Statutory Licensing of Version Recordings - Catering specifically to
the demands of the entertainment industry especially the music industry, the
bill provides for statutory licensing of version recordings/cover versions of
songs and lays down a scheme of giving prior notice and advance royalty to
the author of the original version.
(vi) Statutory Licensing of Broadcast - The bill further provides a set of
conditions and guidelines for the broadcast of any published work by a
broadcasting organization under the terms of a statutory license from the
owner of copyright.
Besides, the aforesaid, the Copyright Amendment Bill, 2010 also seeks to
make vast changes in respect of the provisions relating to assignment, receipt
of royalties, term of copyright in photograph, etc., and in effect causes a
major overhaul of the existing copyright law in order to achieve greater
international parity and make the copyright law of the country internationally
uniform.
(vii) E-Filing of Copyright Applications – The system of electronic filing of
copyright applications has been introduced since the last year and is
expected to start functioning with all its might by the end of the present year.
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(viii) Digitization of Data and Online Search facility - The government has Intellectual Property Rights
also initiated steps for complete digitization of all data related to copyright
registration and set up a system of online public search of such data including
registered as well as pending copyright applications on the same lines as
already available with the trademark, patent registries. NOTES
(ix) Complete Overhaul of the Copyright Board – Taking note of the
directions passed by Ld. Delhi High Court (Division Bench in WP 2516 of
2010) in a writ petition started suo moto by the court, the central government
has initiated steps towards a complete overhaul of the administrative setup
of the Copyright Board including steps such as providing a new, permanent
office, recruitment of permanent staff and permanent judges etc.
Check Your Progress

4. What are Trademarks and Service Marks?
5. What does the copyright ensure?
6. What is the minimum punishment for infringement of copyright?

QUESTIONS
1. The objective of patent law is to encourage scientific research, new technology

and industrial progress.
2. The term of every patent shall be twenty years from the date of filing the
application for the patent.
3. The traditional rule of burden of proof is adhered to with respect to patented
product and accordingly in case of alleged infringement of a patented product
the ‘onus of proof’ rests on the plaintiff.
4. Trademarks and Service Marks are those that are affixed to identify goods
or services of certain producers
5. Copyright ensures certain minimum safeguards of the rights of authors over
their creations, thereby protecting and rewarding creativity.
6. The minimum punishment for infringement of copyright is imprisonment for
six months with the minimum fine of 50,000.
12.6 SUMMARY
 It is a quintessential principle of patent legislation in India that a patent is

granted only for inventions which are new and useful and which have
industrial application.
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Intellectual Property Rights  The consideration for granting a patent is through the disclosure of the
invention in the detailed specification which is open to public inspection so
that on expiry of the term of the patent any member of the public can use the
invention.
NOTES
 To decide whether an alleged invention involves novelty and an inventive
step, certain broad criteria can be indicated.
 Under the provisions of Section 159 of the Patents Act, 1970 (as amended
in 2003), the Central Government is empowered to make rules for
implementing the Act and regulating patent administration.
 Where an application for a patent has been found to be in order for grant of
the patent, the patent shall be granted as expeditiously as possible to the
applicant with the seal of the patent office and the date on which the patent
is granted shall be entered in the register.
 The traditional rule of burden of proof is adhered to with respect to patented
product and accordingly in case of alleged infringement of a patented product
the ‘onus of proof’ rests on the plaintiff.
 The Trade Marks Act, 1999 was enforced on September 15, 2003 and
was amended by Trade Marks (Amendment) Act, 2010 which now governs
trademark laws in India. The new Act was implemented to introduce various
other provisions in conformity with the International trademark Legislations.
 Under the Trade Marks Act, both civil and criminal remedies are
simultaneously available against infringement and passing off.
 Copyright ensures certain minimum safeguards of the rights of authors over
their creations, thereby protecting and rewarding creativity.
 The owner of copyright in an existing work or the prospective owner of the
copyright in a future work may assign to any person the copyright either
wholly or partially and either generally or subject to limitations and either
for the whole term of the copyright or any part thereof.
12.7 KEY WORDS
 Intellectual Property: It is a category of property that includes intangible

creations of the human intellect.
 Patent: It refers to a government authority or licence conferring a right or
title for a set period, especially the sole right to exclude others from making,
using, or selling an invention.
 Assignment: It means an assignment in writing by an act of the parties
concerned.
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 Trademark Infringement: It refers to a violation of exclusive rights Intellectual Property Rights
attaching to a trademark without the authorization of the trademark owner

or any licensee.
 Copyright: It is a right given by the law to creators of literary, dramatic,
NOTES
musical and artistic works and producers of cinematograph films and sound
recordings.

EXERCISES
1. What are the advantages of patent rights?
2. List the exceptions to infringement under the Indian Patent Act.
3. What are different types of trademarks which are available for adoption?
4. List the acts that are considered as the infringement of copyright.
1. Discuss the salient features of the Indian Patent Act.
2. Explain the provisions for the transfer and infringement of trademarks in
India.
3. List and describe the remedies available for the infringement of copyright.
Co & Ltd.
Co & Ltd.
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Information Technology
Act, 2000 BLOCK - IV
INFORMATION TECHNOLOGY ACT, MSME
DEVELOPMENT ACT
NOTES
UNIT 13 INFORMATION
TECHNOLOGY ACT, 2000
Structure
13.0 Introduction
13.1 Objectives
13.2 Information Technology Act: An Introduction
13.3 Electronic Governance
13.3.1 Regulation of Certifying Authorities
13.3.2 Digital Signature Certificates
13.3.4 Cyber Laws
13.5 Summary
13.6 Key Words
13.0 INTRODUCTION
The term ‘information technology’ (IT) does not have a precise meaning. It is
generally applied to a broad area of activities and technologies associated with the
use of computers and communication. We can explain IT as an application of
computers to create, store, process and use information particularly in the field of
commerce. Basically, IT enables the corporate management to have access to
timely, accurate and relevant data, with the use of computers, communication and
telephone, Internet, etc., which helps in informed decision-making, minimizes the
response time and enables better coordination in the organisation resulting in reduced
costs or increased profits.
Cyber law is the law relating to communications and automatic control
systems. Thus, cyber law covers: (i) Information technology law, which regulates
transactions relating to computers and the internet, (ii) Communications Law, which
regulates telecommunications and broadcasting, including radio, television,
telephony and cable. It is covered by (i) the Indian telegraph act, 1885, (ii) the
wireless telegraphy act, 1933, and (iii) the cable television networks regulation
act, 1995.
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13.1 OBJECTIVES Act, 2000

 Discuss the rationale of IT Act, 2000 NOTES
 Identify those documents where provisions of the IT Act, 2000, are not
applicable
 Understand the law relating to digital signature
 Describe the provisions of IT Act, 2000 relating to e-governance
 Discuss the functions and duties of certifying authorities
 Explain the penalties for various offences under the IT Act, 2000
13.2 INFORMATION TECHNOLOGY ACT:

AN INTRODUCTION
The ‘Statement of Objects and Reasons’ appended to the ‘Informa-tion Technology

Bill, 2000,’ explains the rationale behind the IT Act, 2000. Excerpts from the said
statement are given below:
‘New communication systems and digital technology have made dra-matic
changes in the way we live. A revolution is occurring in the way people transact
business. Businesses and consumers are increasingly using computers to create,
transmit and store information in the electronic form instead of traditional paper
documents. Information stored in electronic form has many advantages. It is
cheaper, easier to store, retrieve and speedier to communicate. Although people
are aware of these advantages, they are reluctant to conduct business or conclude
any transaction in the electronic form due to lack of appropriate legal framework.
The two prin-cipal hurdles which stand in the way of facilitating electronic commerce
and electronic governance are the requirements as to writing and signature for
legal recognition. At present many legal provisions assume the existence of paper
based records and documents, and records which should bear signatures. The
law of evidence is traditionally based upon paper based records and oral testimony.
Since electronic commerce elimi-nates the need for paper based transactions,
hence to facilitate e-commerce, the need for legal changes have become an urgent
necessity. International trade through the medium of e-commerce is growing rapidly
in the past few years and many countries have switched over from tradi-tional
paper based commerce to e-commerce.’
‘There is a need for bringing in suitable amendments in the existing laws in
our country to facilitate e-commerce. It is, therefore, proposed to provide for
legal recognition of electronic records and digital signatures. This will enable the
conclusion of contracts and the creation of rights and obligations through the
electronic medium.’
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Information Technology ‘With a view to facilitate Electronic Governance, it is proposed to provide
Act, 2000
for the use and acceptance of electronic records and digital sig-natures in the
Government offices and its agencies.’
The law relating to ‘information technology’ is contained in the In-formation
NOTES
Technology (IT) Act, 2000 which came into force on 17th October, 2000. It is
the first Cyber Law in India. It is mainly based on the UNCITRAL Model Law.
The United Nations Commission on International Trade Law (UNCITRAL)
adopted the Model Law on Electronic Commerce in 1996. This Model Law
provides for equal legal treatment of users of electronic communication and paper
based communication.
The Information Technology (IT) Act, 2000 has been designed to give boost
to Electronic Commerce (e-commerce), e-transactions and similar activities
associated with commerce and trade, and also to facilitate Elec-tronic Governance
(e-governance) by means of reliable electronic records. With a view to making the
citizens interaction with the Government offices hassle free, the IT Act provides
for the use and acceptance of electronic records and digital signatures in the
Government offices. To prevent the possible misuse arising out of the transactions
and other dealings con-cluded over the electronic medium, the IT Act also provides
for a regu-latory regime to supervise the Certifying Authorities issuing Digital
Sig-nature Certificates. Briefly stated, it may be said that IT Act mainly con-tains
provisions relating to e-commerce, e-governance, electronic record and digital
signature.
A few minor amendments in the Act were made by Information Technology
(Amendment) Act, 2002.
Electronic Commerce
The term Electronic Commerce (e-commerce) refers to the business transacted
electronically. In common usage, the term refers to trading of goods over the
Internet. It is online sale and purchase of goods and services for value by using
internet technologies, such as internet processing, e-mail and world wide web
(www) or just web browsing. E-commerce in its present form is in the stage of
infancy in India. During the eight years of post IT Act period, the increase in e-
commerce is taking place at a slow rate. From e-commerce standpoint, the major
challenges offered by the Internet Technology are reliability, bandwidth, speed
and security of transactions.
Internet
Electronic word has become the most popular form of commnication today.
Electronic word is communicated through the Internet. The Internet system
represents the network of networks under which the inter-connected computers
the world over, communicate with each other and exchange data at a very high
speed. In simple terms, Internet is a global network which connects various global
servers and computers around the world using a standard protocol (TCP/IP).
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For using Internet on a computer, one has to obtain an Internet connection Information Technology
Act, 2000
from one of the various Internet Service Providers (ISPs). The ISP supplies a ‘Modem’
to the user which provides connectivity between the computer and the ISP server.
The use of Internet does not require any special computer skills or training.
NOTES
Today Internet is used by millions of people for sending and receiving e-
mail, voice telephony, chatting and making friends, access to information and
multimedia communications.
Scheme of the IT Act, 2000
The Information Technology Act, 2000 consists of 13 Chapters di-vided into 94
Sections. Chapters I to VIII are mostly digital signature related. Chapters IX to
XIII are regarding penalties, offences, etc. The Act has four Schedules on
consequential amendments in respect of certain other Acts.
The First Schedule makes amendments to the Indian Penal Code, 1860,
and the Second Schedule makes amendments to Indian Evidence Act, 1872 to
provide for necessary changes in the various provisions which deal with offences
relating to documents and paper based transactions. The Third Schedule makes
amendments to the Bankers’ Books Evidence Act, 1891 to give legal sanctity for
books of account maintained in the elec-tronic form by the banks. The Fourth
Schedule makes amendments to the Reserve Bank of India Act, 1934 to facilitate
electronic fund transfers between the financial institutions and banks.
Exceptions [Sec. 1(4)]. The provisions of the IT Act, 2000 shall not apply
to the following documents:
1. Execution of a Negotiable Instrument (other than a cheque) under the
Negotiable Instruments Act, 1881.
2. Execution of a Power of Attorney under the Powers of Attorney Act,
1882.
3. Creation of a Trust under Indian Trusts Act, 1882.
4. Execution of a ‘Will’ under the Indian Succession Act, 1925 includ-ing
any other testamentary disposition by whatever name called.
5. Entering into a contract for the sale or conveyance of immovable
property or any interest in such property.
6. Execution of such class of documents or transactions as may be notified
by the Central Government in the Official Gazette.
The reason for excluding the above-mentioned documents from the purview
of the Act is that such documents are required to be authenti-cated only by the
handwritten signatures. Moreover, these require special attestation and/or
registration formalities, which also explain their exclu-sion.
With a view to facilitate electronic payments, the provisions of the IT Act,
2000 have been made applicable to a ‘‘cheque’’. The concept of an electronic
cheque and the truncated cheque was introduced by the Information Technology
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Information Technology (Amendment) Act, 2002, by inserting a new Section 81A. Accordingly, the
Act, 2000
definition of a cheque under the Negotiable Instruments Act was suitably amended,
by the Amendment Act, 2002, and now it includes the electronic image of a truncated
cheque and a cheque in the electronic form.
NOTES
The Law of Information Technology recognises the digital signature so that the
Internet contract is authenticated and becomes binding on the parties. These are
the electronic equivalent of the handwritten signatures. In an electronic message or
transaction affixing handwritten signature is not possible. Authentication of the
record has to be achieved by some electronic or digital method. ‘Affixing digital
signature’ has been defined in Section 2(l)(d) of the Act to mean adoption of any
methodology or procedure by a person for the purpose of authenticating an
electronic record by means of ‘digital signature’.
The expression ‘digital signature’ has been defined in Section 2(l)(p) of the
Act to mean authentication of any electronic record by a subscriber, i.e., a person
in whose name the ‘Digital Signature Certificate’ is issued, by means of an electronic
method or procedure in accordance with the provisions of Section 3.
Authentication of Electronic Records (Sec. 3)
Any subscriber may authenticate an electronic record by affixing his digital signature.
The authentication of the electronic record shall be effected by the use of ‘asymmetric
crypto system’ and ‘hash function’ which envelop and transform the initial electronic
record into another electronic record.
Explanation — For the purposes of this sub-section, ‘hash function’ means an
algorithm mapping or translation of one sequence of bits into another, generally
smaller, set known as ‘hash result’ such that an elec-tronic record yields the same
hash result every time the algorithm is executed with the same electronic record as
its input making it computationally infeasible—
(a) to derive or reconstruct the original electronic record from the hash result
produced by the algorithm;
(b) that two electronic records can produce the same hash result using the
algorithm.
Verification. Any person by the use of a public key of the subscriber can verify
the electronic record. The private key and the public key are unique to the subscriber
and constitute a functioning key pair.
In the case of electronic transmission of business or legal message/ documents,
it is necessary to ensure that these are authentic and have not been tampered with
by any person during transmission. With this end in view, the above stated Section
3 provides that authentication of the elec-tronic record is to be effected by the use
of ‘asymmetric crypto system’, i.e., by using ‘encryption’ (coding) and ‘decryption’
(decoding) method-ologies and software tools.
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An ‘encryption software program’ takes the normal, readable text message Information Technology
Act, 2000
(‘plaintext’) and scrambles the message into unreadable coded text or ‘ciphertext’.
The recipient then uses another software program (the corresponding decryption
program) to decrypt such ciphertext back into normal plaintext. Any one who
intercepts the message will, therefore, not be able to read or tamper with the NOTES
message, unless he has the key, i.e., the corresponding decryption program, thereby
rendering it secure.
In ‘asymmetric crypto system’, each person will have two corres-ponding
and matched keys — one called the ‘private key’ which is always kept secure
with such person, and the other called the ‘public key’ which the person shares
with others and makes available to others on specialised databases called
‘repositories’ or through Certification Authorities. These two keys, public key and
private key, are used to encrypt and decrypt the message respectively. The sender
uses the intended receiver’s public key (which he can freely obtain from the receiver
or download from a public repository) to encrypt the message. The receiver, on
receiving the coded message, uses his corresponding private key (which is available
only with him) to decrypt the encrypted message. The public key and the private
key of any person or entity would be so mathematically linked that a message
encrypted using one key can only be decrypted by using the correspond-ing other.
Briefly stated, the use of digital signature involves the following procedure:
(i) To obtain digital signature, one has to apply in the prescribed form to
the Certifying Authority (CA) together with the necessary documents
such as proof of identity, proof of residence, etc., and the necessary
fee.
(ii) The CA verifies the documents submitted. The case is approved if the
documents are in order.
(iii) On approval, the CA issues a digital certificate to the applicant. It also
provides a ‘private key’ and a ‘public key’ is to the applicant. The
certificate guarantees that the holder of the ‘public key’ is the same
person who holds the ‘private key’. The certificate is digitally signed.
(iv) On receiving a digital certificate, the holder can use his distinct keys
for the transmission of data or for other purposes. These keys are
mathematically related and are used to encrypt and decrypt the digitally
signed documents. One of the two keys can encrypt data and the
other key can decrypt that data.
(v) The sender prepares the message to be sent including his name on a
computer.
(vi) The sender applies a ‘hash function’ (‘hash function’ has already been
defined above), i.e., a mathematical formula or algorithm, in the form
of a computer software, on the message to encrypt it using addressee’s
public key, which gives out a ‘hash result’, i.e., a unique mathematical
value. This ‘hash result’ is also called the ‘message digest’.
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Information Technology (vii) The sender encrypts this ‘message digest’ further using his own ‘private
Act, 2000
key’. The outcome of this encryption is accepted as the digital signature
of the sender. In other words, the digital signature consists of this
encrypted ‘message digest’. This signature is unique to the message
NOTES and will be different for each new message.
(viii) The sender typically attaches or appends his digital signature to the
message.
(ix) The sender sends the digital signature and the encrypted message or
unencrypted (original) message to the recipient electronically.
(x) The recipient uses the sender’s ‘public key’ to verify the sender’s
digital signature. Verification using the sender’s ‘public key’ proves
that the message is authentic, unaltered and sent by the sender only.
(xi) The recipient also creates a ‘message digest’ of the message, using
the same secure hash algorithm. If this ‘message digest’ is the same as
the ‘message digest’ received from the sender, the receiver can be
sure that no alteration has been made in the orginal message. The
recipient can read the message by decrypting it with his ‘private key’.
Digital signature is safer than a hand written one as it can’t be forged. If a
contract is signed by the parties on the last page, there is no way to find whether
other pages have been tampered with. But digital signatures on the same contract
will ensure that orginal contract is intact and not even a single letter is changed.
The various expressions used above have been defined in the Act as follows:
Asymmetric crypto system [Sec. 2(1)(f)]. It means a system of a secure
key pair consisting of a private key for creating a digital signature and a public key
to verify the digital signature.
Electronic record [Sec. 2(1 )(t)]. It means data, record or data gener-ated,
image or sound stored, received or sent in an electric form or micro-film or computer
generated micro-fiche.
Key pair [Sec. 2(l)(x)]. In an asymmetric crypto system, ‘key pair’ means
a private key and its mathematically related public key, which are so related that
the public key can verify a digital signature created by the private key.
Private key [Sec. 2(l)(zc)]. It means the key of a key pair used to create a
digital signature.
Public key [Sec. 2(l)(zd)]. If means the key of a key pair used to verify a
digital signature and listed in the Digital Signature Certificate.
Subscriber [Sec. 2(l)(zg)]. It means a person in whose name the Digi-tal
Signature Certificate is issued.
Verify [Sec. 2(l)(zh)]. ‘Verify’ in relation to a digital signature, elec-tronic
record or public key, with the grammatical variations and cognate expressions
means to determine whether—
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(a) the initial electronic record was affixed with the digital signature by the Information Technology
Act, 2000
use of private key corresponding to the public key of the sub-scriber;
(b) the initial electronic record is retained intact or has been altered since
such electronic record was so affixed with the digital signature.
NOTES
13.3 ELECTRONIC GOVERNANCE
The term Electronic Governance refers to the application of informa-tion technology

to the processes of Government functioning in order to bring about Simple, Moral,
Accountable, Responsive and Transparent (SMART) governance. It involves
electronic filing of documents with the government agencies and creating a network
of e-services and e-adminstration. Electronic Governance (e-governance) is fast
catching up and more and more government processes are going online resulting
in less bureaucracy, more transparency and openness. It may be mentioned that
electronic filing, using digital signatures, has been made mandatory for companies
from 16th September, 2006. The companies will now be able to file any form,
application or any other document in the electronic form online and make payment
of fee by using credit card and Internet banking.
With a view to facilitating electronic governance, IT Act, 2000 accords
legal recognition to electronic records, digital signatures and electronic form of
dealing with Government offices and its agencies. The retention of information in
electronic format has also been accorded legal recogni-tion provided the information
remains accessible and usable in future. The Act contains the following provisions
to facilitate e-governance:
1. Legal Recognition of Electronic Records (Sec. 4). Where any
law provides that information or any other matter shall be in writing or
in the typewritten or printed form, then, notwithstanding anything
contained is such law, such requirement shall be deemed to have been
satisfied if such information or matter is:
(a) rendered or made available in an electronic form; and
(b) accessible so as to be usable for a subsequent reference.
2. Legal Recognition of Digital Signatures (Sec. 5). Where any law
provides that information or any other matter shall be authenticated
by affixing the signature or any document shall be signed or bear the
signature of any person then, notwithstanding anything con-tained in
such law, such requirement shall be deemed to have been sat-isfied, if
such information or matter is authenticated by means of digital signature
affixed in such manner as may be prescribed by the Central
Government.
Explanation—For the purposes of this Section, ‘signed’, with its
grammatical variations and cognate expressions, shall, with reference
to a person, mean affixing of his handwritten signature or any mark on
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Information Technology any document and the expression ‘signature’ shall be construed
Act, 2000
accordingly.
3. Use of Electronic Records and Digital Signatures in Government
and its Agencies (Sec. 6). Where any law provides for:
NOTES
(a) the filing of any form, application or any other document with
any office, authority, body or agency owned or controlled by
the appropriate Government in a particular manner;
(b) the issue or grant of any licence, permit, sanction or approval by
whatever name called in a particular manner;
(c) the receipt or payment of money in a particular manner, then,
notwithstanding anything contained in any other law for the time
being in force, such requirement shall be deemed to have been
satisfied in such filing, issue of grant, receipt or payment, as the
case may be, is effected by means of such electronic form as
may be prescribed by the appropriate Government.
The appropriate Government may, by rules, prescribe:
(a) the manner and format in which such electronic records shall be
filed, created or issued;
(b) the manner or method of payment of any fee or charges for
filing, creation or issue of any electronic record under clause (a)
stated above.
It may be observed that this Section lays down the foundation of
electronic governance.
4. Retention of Electronic Records (Sec. 7). Where any law provides
that documents, records or information shall be retained for any specific
period, then, that requirement shall be deemed to have been satisfied
if such documents, records or information are retained in the electronic
form, if:
(a) the information contained therein remains accessible so as to be
usable for a subsequent reference;
(b) the electronic record is retained in the format in which it was
originally generated, sent or received or in a format which can
be demonstrated, to represent accurately the information
originally generated, sent or received;
(c) the details which will facilitate the identification of the origin,
destination, date and time of despatch or receipt of such
electronic record are available in the electronic record.
However, the above rule does not apply to any information which is
automatically generated solely for the purpose of enabling an electronic
record to be despatched or received. Further, the Section shall not
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apply to any law that expressly provides for the retention of documents, Information Technology
Act, 2000
records or information in the form of electronic records.
Legal requirement for retaining record is generally laid down for
ac-counting and tax purposes.
NOTES
5. Publication of Rules, Regulations, etc., in Electronic Gazette
(Sec. 8). Where any law provides that any rule, regulation, order,
bye-law, notification or any other matter shall be published in the Official
Gazette, then, such requirement shall be deemed to have been satisfied
if such rule, regulation, order, bye-law, notification or any other matter
is published in the Official Gazette or electronic Gazette.
Provided that where any rule, regulation, order, bye-law, notification
or any other matter is published in the Official Gazette or Electronic
Gazette, the date of publication shall be deemed to be the date of the
Gazette which was first published in any form.
Electronic Gazette means Official Gazette published in the electronic
form [Sec. 2(l)(s)].
6. No Right to insist that the Document should be accepted in
Electronic Form (Sec. 9). Sections 6, 7 and 8 shall not confer a right
upon any person to insist that any Ministry or Department of the Central
Government or the State Government or any authority or body
established by or under any law or controlled or funded by the Central
or State Government should accept, issue, create, retain and preserve
any document in the form of electronic records or effect any monetary
transaction in the electronic form.
7. Central Government empowered to make Rules in respect of
Digital Signature (Sec. 10). The Central Government is empowered
to make rules in respect of digital signature prescribing:
(a) the type of digital signature;
(b) the manner and format in which the digital signature shall be
affixed;
(c) the manner or procedure which facilitates identification of the
person affixing the digital signature;
(d) control processes and procedures to ensure adequate integrity,
security and confidentiality of electronic records or payments; and
(e) any other matter which is necessary to give legal effect to digital
signatures.
The Central Government has notified the ‘Information Technology (Certifying
Authorities) Rules, 2000. Rule 3 of these Rules provides the manner in which the
information is to be authenticated by means of digital signature. Rule 4 provides
the manner of creation of digital signature, and Rule 5 provides the manner of
verification of digital signature.
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Information Technology The IT Act, 2000 has defined the various expressions used above as follows:
Act, 2000
Information [Sec. 2(l)(v)]. It includes data, text, images, sound, voice,
codes, computer programmes, software and databases or micro film or computer
generated micro fiche.
NOTES
Electronic form [Sec. 2(1)(r)]. ‘Electronic form,’ with reference to
information, means any information generated, sent, received or stored in media,
magnetic, optical, computer memory, microfilm, computer generated micro fiche
or similar device.
Accessibility or Access [Sec. 2(l)(a)]. It means gaining entry into, instructing
or communicating with the logical, arithmetical or memory func-tion resources of a
computer, computer system or computer network.
The various expressions used in the above definitions have been defined in
the Act as follows:
Computer [Sec. 2(1 )(i)]. It means any electronic, magnetic, optical or
other high-speed data processing device or system which performs logi-cal,
arithmetic, and memory functions by manipulations of electronic, magnetic or optical
impulses, and includes all input, output, processing, storage, computer software,
or communication facilities which are connected or related to the computer in a
computer system or computer network.
Computer network [Sec. 2(l)(j)]. It means the interconnection of one or
more computers through:
(i) the use of satellite, microwave, terrestrial line or other communica-tion
media; and
(ii) terminals or a complex consisting of two or more interconnected
computers whether or not the interconnection is continuously
maintained.
Computer resource [Sec. 2(l)(k)]. It means computer, computer sys-tem,
computer network, data, computer database or software.
Computer system [Sec. 2(1)(I)]. It means a device or collection of devices,
including input and output support devices and excluding calcu-lators which are
not programmable and capable of being used in conjunc-tion with external files,
which contain computer programmes, electronic instructions, input data, and output
data, that performs logic, arithmetic, data storage and retrieval, communication
control and other functions.
Data [Sec. 2(1 )(o)]. It means a representation of information, knowl-edge,
facts, concepts or instructions which are being prepared or have been prepared in
a formalised manner, and is intended to be processed, is being processed or has
been processed in a computer system or computer network, and may be in any
form (including computer printouts, magnetic or optical storage media, punched
cards, punched tapes) or stored inter-nally in the memory of the computer.
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Function [Sec. 2(1)(u)]. In relation to a computer, it includes logic, control, Information Technology
Act, 2000
arithmetical process, deletion, storage and retrieval and commu-nication or
telecommunication from or within a computer.
13.3.1 Regulation of Certifying Authorities NOTES
With a view to creating regulations for certification, the IT Act, 2000 provides for
the appointment, functions, powers and duties of ‘Controller of Certifying
Authorities’ and other officers. The procedure for issuing a licence to a ‘Certifying
Authority’, as well as the procedure for suspen-sion or revocation or renewal of
the licence has also been laid down. The Act also provides for the functions and
duties of Certifying Authorities.
Appointment of Controller and other Officers (Sec. 17)
(1) The Central Government may, by notification in the Official Gazette, appoint
a Controller of Certifying Authorities for the purposes of this Act and may
also by the same or subsequent notification appoint such number of Deputy
Controllers and Assistant Controllers as it deems fit.
(2) The Controller shall discharge his functions under this Act subject to the
general control and directions of the Central Government.
(3) The Deputy Controllers and Assistant Controllers shall perform the functions
assigned to them by the Controller under the general superintendence and
control of the Controller.
(4) The qualifications, experience and terms and conditions of service of
Controller, Deputy Controllers and Assistant Controllers shall be such as
may be prescribed by the Central Government.
(5) The Head Office and Branch Office of the office of the Controller shall be
at such places as the Central Government may specify, and these may be
established at such places as the Central Government may think fit.
(6) There shall be a seal of the Office of the Controller.
Functions of Controller (Sec. 18)
The Controller may, perform all or any of the following functions, namely:
(a) exercising supervision over the activities of the Certifying Authorities;
(b) certifying public keys of the Certifying Authorities;
(c) laying down the standards to be maintained by the Certifying Authorities;
(d) specifying the qualifications and experience which employees of the Certifying
Authorities should possess;
(e) specifying the conditions subject to which the Certifying Authori-ties shall
conduct their business;
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Information Technology (f) specifying the contents of written, printed or visual materials and
Act, 2000
advertisements that may be distributed or used in respect of a Digital
Signature Certificate and the public key;
(g) specifying the form and content of a Digital Signature Certificate and the
NOTES
key;
(h) specifying the form and manner in which accounts shall be main-tained by
the Certifying Authorities;
(i) specifying the terms and conditions subject to which auditors may be
appointed and the remuneration to be paid to them;
(j) facilitating the establishment of any electronic system by a Certi-fying
Authority either solely or jointly with other Certifying Authorities and
regulation of such systems;
(k) specifying the manner in which the Certifying Authorities shall conduct their
dealings with the subscribers;
(l) resolving any conflict of interests between the Certifying Authori-ties and
the subscribers;
(m) laying down the duties of the Certifying Authorities;
(n) maintaining a database containing the disclosure record of every Certifying
Authority containing such particulars as may be specified by regulations
which shall be accessible to public.
Recognition of Foreign Certifying Authorities (Sec. 19)
Subject to such conditions and restrictions as may be specified by regulations, the
Controller may with the previous approval of the Central Government, and by
notification in the Official Gazette, recognise any foreign Certifying Authority as a
Certifying Authority for the purposes of this Act [Sec. 19(1)].
Where any Certifying Authority is recognised under sub-section (1), the
Digital Signature Certificate issued by such Certifying Authority shall be valid for
the purposes of the Act [Sec. 19(2)].
Revocation of recognition. The Controller may if he is satisfied that any
Certifying Authority has contravened any of the conditions and restrictions subject
to which it was granted recognition under sub-section (1) he may, for reasons to
be recorded in writing, by notification in the Official Gazette, revoke such recognition
[Sec. 19(3)].
Controller to Act as Repository (Sec. 20)
A ‘repository’ is an online database of Digital Signature Certificates and other
related information useful for those who conduct their business operations through
the medium of computer internet or e-commerce.
The Controller shall be the repository of all Digital Signature Certifi-cates
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To ensure that the secrecy and security of the digital signatures are assured Information Technology
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the Controller shall:
(a) make use of hardware, software and procedures that are secure from
intrusion and misuse;
NOTES
(b) observe such other standards as may be prescribed by the Central
Government [Sec. 20(2)].
The Controller shall maintain a computerised database of all public keys in
such a manner that such database and the public keys are avail-able to any member
of the public [Sec. 20(3)].
Grant of Licence to Certifying Authorities to Issue
Digital Signature Certificates (Sec. 21)

Any person may make an application, to the Controller, for a licence to issue
Digital Signature Certificate, provided he fulfils such requirements with respect to
qualification, expertise, manpower, financial resources and other infrastructure
facilities, which are necessary to issue Digital Signa-ture Certificates as may be
prescribed by the Central Government [Sec. 21(1) (2)].
A licence granted under this Section shall:
(a) be valid for such period as may be prescribed by the Central
Government;
(b) not be transferable or heritable;
(c) be subject to such terms and conditions as may be specified by the
regulations [Sec. 21(3)].
Application for licence (Sec. 22). Every application for issue of a licence
shall be in such form as may be prescribed by the Central Govern-ment. The
application for issue of a licence shall be accompanied by:
(a) a certification practice statement;
(b) a statement including the procedures with respect to identification of
the applicant;
(c) payment of such fees, not exceeding twenty-five thousand rupees as
may be prescribed by the Central Government;
(d) such other documents, as may be prescribed by the Central
Government.
Certification practice statement [Sec. 2(l)(h)]. ‘It means a statement
issued by a Certifying Authority to specify the practices that it employs in issuing
Digital Signature Certificates.’ This statement specifies a set of rules and
requirements which are to be followed by a Certifying Authority (CA) in its operation
and issuing certificates.
Procedure for grant or rejection of licence (Sec. 24). The Controller
may, on receipt of an application for a licence to issue Digital Signature Certificate, Self-Instructional
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Information Technology after considering the documents accompanying the application and such other
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factors, as he deems fit, grant the licence or reject the application. However, no
application shall be rejected under this Section unless the applicant has been given
a reasonable opportunity of present-ing his case.
NOTES
Renewal of licence (Sec. 23). An application for renewal of a licence
shall be-:
(a) in such form;
(b) accompanied by such fees, not exceeding five thousand rupees, as
may be prescribed by the Central Government and shall be made not
less than forty-five days before the date of expiry of the period of
validity of the licence.
Suspension of licence (Sec. 25). The Controller may, if he is satisfied
after making an inquiry, revoke the licence where a Certifying Authority has,—
(a) made a statement in, or in relation to, the application for the issue or
renewal of the licence, which is incorrect or false in material particulars;
(b) failed to comply with the terms and conditions subject to which the
licence was granted;
(c) failed to maintain the procedures and standards specified in Section
30;
(d) contravened any provisions of this Act, rule, regulation or order made
thereunder.
However, no licence shall be revoked unless the Certifying Authority has
been given a reasonable opportunity of showing cause against the proposed
revocation [Sec. 25(1)].
The Controller may, if he has reasonable cause to believe that there is any
ground for revoking a licence under sub-section (1), by order suspend such licence
pending the completion of any inquiry ordered by him. However, no licence shall
be suspended for a period exceeding ten days unless the Certifying Authority has
been given a reasonable oppor-tunity of showing cause against the proposed
suspension [Sec. 25(2)]. Further, no Certifying Authority whose licence has been
suspended shall issue any Digital Signature Certificate during such suspension [Sec.
25(3)].
Notice of suspension or revocation of licence (Sec. 26). Where the
licence of the Certifying Authority is suspended or revoked, the Controller shall
publish notice of such suspension or revocation, as the case may be, in the database
maintained by him. Where one or more repositories are specified, the Controller
shall publish notices of such suspension or re-vocation, as the case may be, in all
such repositories. However, the da-tabase containing the notice of such suspension
or revocation, as the case may be, shall be made available through a website
which shall be accessible round the clock.
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13.3.2 Digital Signature Certificates Information Technology
Act, 2000
The purpose of a digital signature certificate is to authenticate the identify of an
individual. It ensures that the purported sender is infact the person who sent the
message. It is signed digitally by the Certifying Authority. NOTES
Certifying Authority to Issue Digital Signature Certificate (Sec. 35)
Application. Any person may make an application to the Certifying Authority for
the issue of a Digital Signature Certificate in such form as may be prescribed by
the Central Government. The application shall be accompanied:
(a) by such fee not exceeding twenty-five thousand rupees as may be prescribed
by the Central Government. However, different fees may be prescribed for
different classes of applicants.
(b) by a ‘certification practice statement’ or where there is no such statement,
a statement containing such particulars, as may be specified by regulations.
Grant of certificate. On receipt of an application for the issue of Digital
Signature Certificate, the Certifying Authority may, after consider-ation of the
‘certification practice statement’ or the other statement re-ferred above and after
making such enquiries as it may deem fit, grant the Digital Signature Certificate or
for reasons to be recorded in writing, reject the application. However, no Digital
Signature Certificate shall be granted unless the Certifying Authority is satisfied
that:
(a) the applicant holds the private key corresponding to the public key to be
listed in the Digital Signature Certificate;
(b) the applicant holds a private key, which is capable of creating a digital
signature;
(c) the public key to be listed in the certificate can be used to verify a digital
signature affixed by the private key held by the applicant.
Representations upon issuance of Digital Signature Certificate (Sec. 36)
While issuing a Digital Signature Certificate, the Certifying Authority certifies that,
the information contained in it is accurate and that:
(a) it has complied with the provisions of this Act and the rules and regulations
made thereunder;
(b) it has published the Digital Signature Certificate or otherwise made it available
to such person relying on it and the subscriber has accepted it;
(c) the subscriber holds the private key corresponding to the public key, listed
in the Digital Signature Certificate;
(d) the subscriber’s public key and private key constitute a function-ing key
pair; and
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Information Technology (e) it has no knowledge of any material fact, which if it had been included in the
Act, 2000
Digital Signature Certificate would adversely affect the reliability of the
representations made in clauses (a) to (d).
NOTES Suspension of Digital Signature Certificate (Sec. 37)

The Certifying Authority which has issued a Digital Signature Certifi-cate may
suspend such Digital Signature Certificate:
(a) on receipt of a request to that effect from:
(i) the subscriber listed in the Digital Signature Certificate; or
(ii) any person duly authorised to act on behalf of that sub-scriber;
(b) if it is of opinion that the Digital Signature Certificate should be suspended
in public interest.
A Digital Signature Certificate shall not be suspended for a period exceeding
fifteen days unless that subscriber has been given an oppor-tunity of being heard in
the matter. Further, on suspension of a Digital Signature Certificate under this
Section, the Certifying Authority shall communicate the same to the subscriber.
Revocation of Digital Signature Certificate (Sec. 38)
A Certifying Authority may revoke a Digital Signature Certificate issued by it:
(a) where the subscriber or any other person authorised by him makes a request
to that effect; or
(b) upon the death of the subscriber; or
(c) upon the dissolution of the firm or winding up of the company where the
subscriber is a firm or a company.
The Certifying Authority may also revoke a Digital Signature Certifi-cate which
has been issued by it at any time, if it is of opinion that:
(a) a material fact represented in the Digital Signature Certificate is false or has
been concealed;
(b) a requirement for issuance of the Digital Signature Certificate was not
satisfied;
(c) the Certifying Authority’s private key or security system was compromised
in a manner materially affecting the Digital Signature Certificate’s reliability;
(d) the subscriber has been declared insolvent or dead or where a subscriber is
a firm or a company, which has been dissolved, wound-up or otherwise
ceased to exist.
A Digital Signature Certificate shall not be revoked unless the sub-scriber
has been given an opportunity of being heard in the matter. Fur-ther, on revocation
of a Digital Signature Certificate under this Section, the Certifying Authority shall
communicate the same to the subscriber.
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Notice of suspension or revocation (Sec. 39). Where a Digital Signa-ture Information Technology
Act, 2000
Certificate is suspended or revoked under Section 37 or Section 38, the Certifying
Authority shall publish a notice of such suspension or revocation, as the case may
be, in the repository specified in the Digital Signature Certificate for publication of
such notice. Where one or more repositories are specified, the Certifying Authority NOTES
shall publish notices of such suspension or revocation, as the case may be, in all
such repositories.
Inspite of security measures adopted by an owner of the computer, com-puter
system and computer network, there are theft and intrusion. Legal protection has
therefore been provided against the wrongdoers. Under the Act penalty is imposed
by way of damages to be paid as compensation to the affected party for damage
caused to any computer, computer net-work etc. by introduction of computer
virus, unauthorised access and other types of mischief.
Penalty for Damage to Computer, Computer System, etc. (Sec. 43)
If any person indulges in any of the following acts, without permis-sion of the
owner or any other person who is incharge of a computer, computer system or
computer network, he shall be liable to pay damages by way of compensation not
exceeding one crore rupees to the person so affected:
(a) accesses or secures access to such computer, computer system or computer
network;
(b) downloads, copies or extracts any data, computer database or information
from such computer, computer system or computer network including
information or data held or stored in any removable storage medium;
(c) introduces or causes to be introduced any computer contaminant or computer
virus into any computer, computer system or computer net-work;
(d) damages or causes to be damaged any computer, computer system or
computer network, data, computer database or any other programmes
residing in such computer, computer system or computer network;
(e) disrupts or causes disruption of any computer, computer system or computer
network;
(f) denies or causes the denial of access to any person authorised to access
any computer, computer system or computer network by any means;
(g) provides any assistance to any person to facilitate access to a computer,
computer system or computer network in contravention of the provisions
of this Act, rules or regulations made thereunder;
(h) charges the services availed of by a person to the account of another person
by tampering with or manipulating any computer, computer system, or
computer network.
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Information Technology Explanation—For the purposes of this Section:
Act, 2000
(i) ‘computer contaminant’ means any set of computer instructions that are
designed:
NOTES (a) to modify, destroy, record, transmit data or programme residing within
a computer, computer system or computer network; or
(b) by any means to usurp the normal operation of the computer, computer
system, or computer network;
(ii) ‘computer database’ means a representation of information, knowl-edge,
facts, concepts or instructions in text, image, audio, video that are being
prepared or have been prepared in a formalised manner or have been
produced by a computer, computer system or computer network and are
intended for use in a computer, computer system or computer network;
(iii) ‘computer virus’ means any computer instruction, information, data or
programme that destroys, damages, degrades or adversely affects the
performance of a computer resource or attaches itself to another computer
resource and operates when a programme, data or instruction is executed
or some other event takes place in that computer resource;
(iv) ‘damage’ means to destroy, alter, delete, add, modify or rearrange any
computer resource by any means.
Penalty for Failure to Furnish Information, Return, etc. (Sec. 44)
If any person who is required under this Act or any rules or regula-tions made
thereunder to:
(a) furnish any document, return or report to the Controller or the Certifying
Authority fails to furnish the same, he shall be liable to a penalty not exceeding
one lakh and fifty thousand rupees for each such failure;
(b) file any return or furnish any information, books or other docu-ments within
the time specified therefor in the regulations fails to file return or furnish the
same within the time specified therefor in the regu-lations, he shall be liable
to a penalty not exceeding five thousand rupees for every day during which
such failure continues;
(c) maintain books of account or records fails to maintain the same, he shall be
liable to a penalty not exceeding ten thousand rupees for every day during
which the failure continues.
Penalty where no Specific Penalty is Provided Elsewhere in the Act (Sec. 45)
Whoever contravenes any rules or regulations made under this Act, for the
contravention of which no penalty has been separately provided, shall be liable to
pay a compensation not exceeding twenty-five thousand rupees to the person
affected by such contravention or a penalty not exceeding twenty five thousand
rupees.
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Adjudication — Appointment of Adjudicating Officer (Sec. 46) Information Technology
Act, 2000
For the purpose of adjudging whether any person has committed a contravention of
any of the provisions of this Act or of any rule, regu-lation, direction or order made
thereunder the Central Government shall appoint any officer not below the rank of a NOTES
Director to the Government of India or an equivalent officer of a State Government
to be an Adjudicating Officer for holding an inquiry in the manner prescribed by the
Central Government. However, no person shall be appointed as an Adjudicating
Officer unless he possesses such experience in the field of Information Technology
and legal or judicial experience as may be prescribed by the Central Government.
The Adjudicating Officer shall, after giving the person referred to above,
give a reasonable opportunity for making representation in the matter and if, on
such inquiry, he is satisfied that the person has commit-ted the contravention, he
may impose such penalty or award such com-pensation as he thinks fit in accordance
with the provisions of that Sec-tion.
Where more than one Adjudicating Officers are appointed, the Central
Government shall specify by order the matters and places with respect to which
such officers shall exercise their jurisdiction.
Powers. Every Adjudicating Officer shall have the powers of a civil court
which are conferred on the Cyber Appellate Tribunal under sub--section (2) of
Section 58, and:
(a) all proceedings before it shall be deemed to be judicial proceedings
within the meaning of Sections 193 and 228 of the Indian Penal Code,
1860;
(b) shall be deemed to be civil court for the purposes of Sections 345 and
346 of the Code of Criminal Procedure, 1973.
Factors to be taken into account by the Adjudicating Officer (Sec.
47). While adjudging the quantum of compensation, the Adjudicating Officer shall
have due regard to the following factors, namely:
(a) the amount of gain of unfair advantage, wherever quantifiable, made
as a result of the default;
(b) the amount of loss caused to any person as a result of the default;
(c) the repetitive nature of the default.
13.3.4 Cyber Laws
Here the IT Act, 2000 deals with the establishment of one or more Appellate
Tribunals to be known as Cyber Regulations Appellate Tribunal or Cyber Appellate
Tribunal to exercise jurisdiction, powers and authority as conferred under the Act.
Establishment of Cyber Appellate Tribunal (Sec. 48)
The Central Government shall, by notification, establish one or more appellate
tribunals to be known as the Cyber Regulations Appellate Tri-bunal. It shall also
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Information Technology specify, in the notification the matters and places in relation to which the Cyber
Act, 2000
Appellate Tribunal may exercise jurisdiction.
Composition of Cyber Appellate Tribunal (Sec. 49). A Cyber Appel-late
Tribunal shall consist of one person only (hereinafter referred to as the Presiding
NOTES
Officer of the Cyber Appellate Tribunal) to be appointed, by notification, by the
Central Government.
Orders constituting Appellate Tribunal to be final and not to invalidate
its proceedings (Sec. 55). No order of the Central Government ap-pointing any
person as the Presiding Officer of a Cyber Appellate Tribunal shall be called in
question in any manner and no act or proceeding before a Cyber Appellate Tribunal
shall be called in question in any manner on the ground merely of any defect in the
constitution of a Cyber Appellate Tribunal.
Staff of the Cyber Appellate Tribunal (Sec. 56). The Central Govern-ment
shall provide the Cyber Appellate Tribunal with such officers and employees as
that Government may think fit. The officers and employees of the Cyber Appellate
Tribunal shall discharge their functions under general superintendence of the
Presiding Officer. The salaries and allow-ances and other conditions of service of
the officers and employees of the Cyber Appellate Tribunal shall be such as may
be prescribed by the Central Government.
Qualifications for appointment as Presiding Officer of the Cyber
Appellate Tribunal (Sec. 50). A person shall not be qualified for appoint-ment as
the Presiding Officer of a Cyber Appellate Tribunal unless he:
(a) is, or has been, or is qualified to be, a Judge of a High Court; or
(b) is, or has been a member of the Indian Legal Service and is holding,
or has held a post in Grade I of the Service for at least three years.
Term of office (Sec. 51). The Presiding officer of a Cyber Appellate Tribunal
shall hold office for a term of five years from the date on which he enters upon his
office or until he attains the age of sixty-five years, whichever is earlier.
Salary, allowances and other terms and conditions of service of
Presiding Officer (Sec. 52). The salary and allowances payable to, and the other
terms and conditions of service including pension, gratuity and other retirement
benefits of, the Presiding Officer of a Cyber Appellate Tribunal shall be such as
may be prescribed. Further, the salary and allowances and the other terms and
conditions of service of the Presiding Officer shall not be varied to his disadvantage
after appointment.
Filling up of vacancies (Sec. 53). If, for reason other than temporary
absence, any vacancy occurs in the office of the Presiding Officer of a Cyber
Appellate Tribunal, then the Central Government shall appoint another person in
accordance with the provisions of this Act to fill the vacancy and the proceedings
may be continued before the Cyber Appellate Tribu-nal from the stage at which
the vacancy is filled.
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Resignation [Sec. 54(1)]. The Presiding Officer of Cyber Appellate Tribunal Information Technology
Act, 2000
may, be notice in writing under his hand addressed to the Central Government,
resign his office. However, he shall, unless he is permitted by the Central
Government to relinquish his office sooner, continue to hold office until the expiry
of three months from the date of receipt of such notice or until a person duly NOTES
appointed as his successor enters upon his office or until the expiry of his term of
office, whichever is the earliest.
Removal [Sec. 54(2)(3)]. The Presiding Officer of a Cyber Appellate
Tribunal shall not be removed from his office except by an order by the Central
Government on the ground of proved misbehaviour or incapacity after an inquiry
made by a Judge of the Supreme Court in which the Presiding Officer concerned
has been informed of the charges against him and given a reasonable opportunity
of being heard in respect of these charges. The Central Government may, by rules,
regulate the procedure for the investigation of misbehaviour or incapacity of the
aforesaid Presiding Officer.
Appeal to Cyber Regulations Appellate Tribunal (Sec. 57)
Any person aggrieved by an order made by Controller or an Adjudicating Officer
under this Act may prefer an appeal to a Cyber Appellate Tribunal having jurisdiction
in the matter. However, no appeal shall lie from an order made by an Adjudicating
Officer with the consent of the parties.
Period allowed for appeal. Every appeal shall be filed within a period of
forty-five days from the date on which a copy of the order made by the Controller
or the Adjudicating Officer is received by the person aggrieved and it shall be in
such form and be accompanied by such fee as may be prescribed. However, the
Cyber Appellate Tribunal may entertain an ap-peal after the expiry of the said
period of forty-five days if it is satisfied that there was sufficient cause for not filing
it within that period.
Order by Cyber Appellate Tribunal. On receipt of an appeal, the Cyber
Appellate Tribunal may, after giving the parties to the appeal, an opportunity of
being heard, pass such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against. The appeal shall be dealt with by it as
expeditiously as possible and endeavour shall be made by it to dispose of the
appeal finally within six months from the date of receipt of the appeal. The Cyber
Appellate Tribunal shall send a copy of every order made by it to the parties to the
appeal and to the concerned Controller or Adjudicating Officer.
The appellant may either appear in person or authorise one or more legal
practitioners or any of its officers to present his or its case before the Cyber
Appellate Tribunal (Sec. 59).
Powers of the Cyber Appellate Tribunal (Sec. 58)
The Cyber Appellate Tribunal shall not be bound by the procedure laid down by
the Code of Civil Procedure, 1908. It shall, however, be guided by the principles Self-Instructional
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Information Technology of natural justice, provisions of the Act and rules made thereunder. Natural justice
Act, 2000
means to act in good faith, fairly, justly and impartially and never arbitrarily. It shall
have powers to regulate its own procedure including the place at which it shall
have its sittings.
NOTES
The Cyber Appellate Tribunal shall have, for the purposes of dis-charging
its functions under this Act, the same powers as are vested in a civil court under
the Code of Civil Procedure, 1908, while trying a suit, in respect of the following
matters, namely:
(a) summoning and enforcing the attendance of any person and exam-ining
him on oath;
(b) requiring the discovery and production of documents or other electronic
records;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or docu-ments;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) any other matter which may be prescribed.
Every proceeding before the Cyber Appellate Tribunal shall be deemed to
be a judicial proceeding within the meaning of Sections 193 and 228, and for the
purposes of Section 196 of the Indian Penal Code and the Cyber Appellate Tribunal
shall be deemed to be a civil court for the purposes of Section 195 and Chapter
XXVI of the Code of Criminal Pro-cedure, 1973.
The Central Government has notified the ‘Cyber Regulations Appel-late
Tribunal (Procedure) Rules, 2000.’
Civil Court not to have Jurisdiction (Sec. 61)
The Adjudicating Officer and the Cyber Appellate Tribunal have ex-clusive
jurisdiction to decide specific issues for which they have been empowered. Section
61 provides that:
(a) No court shall have jurisdiction to entertain any suit or proceeding in respect
of any matter which an Adjudicating Officer appointed under this Act or the
Cyber Appellate Tribunal constituted under this Act is empowered by or
under this Act to determine; and
(b) No injunction shall be granted by any court or other authority in respect of
any action taken or to be taken in pursuance of any power conferred by or
under this Act. Injunction is a specific order of the court directing the
defendant to refrain from doing certain act.
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Appeal to High Court (Sec. 62) Information Technology
Act, 2000
Any person aggrieved by any decision or order of the Cyber Appel-late Tribunal
may file an appeal to the High Court within sixty days from the date of communication
of the decision or order of the Cyber Appellate Tribunal to him on any question of NOTES
fact or law arising out of such order. However, the High Court may, if it is satisfied
that the appellant was prevented by sufficient cause from filing the appeal within
the said period, allow it to be filed within a further period not exceeding sixty days.
Check Your Progress

1. What do you understand by the term e-governance?
2. What do you understand by the term digital signature?
3. State two duties of the certifying authority.

QUESTIONS
1. The term ‘e-governance’ or electronic governance refers to the application

of information technology to the processes of Government functioning in
order to bring about Simple, Moral, Accountable, Responsive and
Transparent (SMART) governance. It involves electronic filing of documents
with the government agencies and creating a network of e-services and e-
administration. Electronic Governance (e-governance) is fast catching up
and more and more government processes are going on-line resulting in
less bureaucracy, more transparency and openness. Companies will be able
to file any form, application or any other document in the electronic form
and get Licenses/Certificates on-line.
2. Digital signatures are the electronic equivalent of the handwritten signatures.
In an electronic message or transaction affixing handwritten signature is not
possible. Authentication of the record has to be achieved by some electronic
or digital method. ‘Affixing digital signature’ has been defined in Section
2(l)(d) of the Act to mean adoption of any methodology or procedure by a
person for the purpose of authenticating an electronic record by means of
‘digital signature’.
3. The two duties of the Certifying Authority are as follows:
(a) To ensure that every person employed or otherwise engaged by it
complies, in the course of his employment or engagement, with the
provisions of the Act, rules, regulations and orders made thereunder
(Sec. 31).
(b) To display its licence at a conspicuous place of the premises in which
it carries on its business (Sec. 32).
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Act, 2000 13.5 SUMMARY
 The law relating to ‘information technology’ is contained in the In-formation

NOTES Technology (IT) Act, 2000, which came into force on 17th October, 2000.
It is the first Cyber Law in India.
 The Information Technology (IT) Act, 2000 has been designed to give boost
to Electronic Commerce (e-commerce), e-transactions and similar activities
associated with commerce and trade, and also to facilitate Elec-tronic
Governance (e-governance) by means of reliable electronic records.
 The Information Technology Act, 2000 consists of 13 Chapters di-vided
into 94 Sections. Chapters I to VIII are mostly digital signature related.
Chapters IX to XIII are regarding penalties, offences, etc. The Act has four
Schedules on consequential amendments in respect of certain other Acts.
 The Law of Information Technology recognises the digital signature so that
the Internet contract is authenticated and becomes binding on the parties.
These are the electronic equivalent of the handwritten signatures.
 The term Electronic Governance refers to the application of informa-tion
technology to the processes of Government functioning in order to bring
about Simple, Moral, Accountable, Responsive and Transparent (SMART)
governance.
 In view of the fact that the communicated electronic records and messages
must be secure and reliable for giving boost to e-commerce, the IT Act,
2000 lays down the legal presumptions as to when the ‘electronic record’
and ‘digital signature’ are deemed secure.
 A ‘repository’ is an online database of Digital Signature Certificates and
other related information useful for those who conduct their business
operations through the medium of computer internet or e-commerce.
 Under the Act penalty is imposed by way of damages to be paid as
compensation to the affected party for damage caused to any computer,
computer net-work etc. by introduction of computer virus, unauthorised
access and other types of mischief.
13.6 KEY WORDS
 Electronic Commerce: Electronic commerce (ecommerce) is a type of

business model, or segment of a larger business model, that enables a firm
or individual to conduct business over an electronic network, typically the
Internet.
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 Digital Signature: It refers to a digital code (generated and authenticated Information Technology
Act, 2000
by public key encryption) which is attached to an electronically transmitted
document to verify its contents and the sender’s identity.
 Electronic Records: It refers to information captured through electronic
NOTES
means, and which may or may not have a paper record to back it up. Also
called machine readable record.
 Adjudication: It refers to a formal judgement on a disputed matter.

EXERCISES
1. What do you understand by the term Information Technology? Explain the
rationale behind the Information Technology Act, 2000.
2. Explain the terms ‘e-commerce’ and ‘e-governance’ with reference to
Information Technology Act, 2000.
3. What are the objectives of Cyber Laws? Explain.
1. Discuss the powers of ‘Controller of Certifying Authorities’ under the
Information Technology Act, 2000.
2. Discuss the duties of ‘Certifying Authority’ under the Information Technology
Act, 2000.
3. Discuss the provisions of Information Technology Act, 2000 relating to
‘Digital Signature Certificate’.
4. How is ‘Cyber Appellate Tribunal’ established? What are its powers under
the Information Technology Act, 2000? Discuss.
5. Discuss the provisions of Information Technology Act, 2000 relating to
appointment, term of office, salary, resignation and removal of the
Chairperson of the Cyber Appellate Tribunal.
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Material 299
Information Technology Kuchhal, M.C. and Deepa Prakash. 2010. Business Legislations for
Act, 2000
NOTES
Co & Ltd.
Co & Ltd.
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Micro, Small and Medium
UNIT 14 MICRO, SMALL AND Enterprises Development

Act, 2006
MEDIUM ENTERPRISES
NOTES
DEVELOPMENT ACT, 2006
Structure
14.0 Introduction
14.1 Objectives
14.2 Salient Features of Micro, Small and Medium Enterprises Act, 2006
14.2.3 Memorandum of Micro, Small and Medium Enterprises
14.2.4 Measures for Promotion, Development and Enhancement of
Competitiveness of MSME
14.3 Reservation Policy, Credit Policy, Government Policy towards
Taxation and Incentives
14.3.3 Taxation
14.5 Summary
14.6 Key Terms
14.0 INTRODUCTION
Micro, small and medium enterprises (MSMEs) have a very important role in
developing the Indian economy. They help reduce poverty by creating jobs for the
country’s growing labour force. They stimulate economic development in rural
and far-flung areas. Often rightly termed as ‘the engine of growth’ for India, MSME
has played a prominent role in the development of the country in terms of creating
employment opportunities. MSME has employed more than 50 million people,
scaling manufacturing capabilities, curtailing regional disparities, balancing the
distribution of wealth, and contributing to the GDP. MSME sector forms 8 per
cent of GDP. Though India is still facing infrastructural problems, lack of proper
market linkages, and challenges in terms of flow of institutional credit, it has seen a
tremendous growth in this sector.
In view of the ever growing importance of the MSME sector, the Indian
Parliament enacted the Micro, Small and Medium Enterprises (MSME) Act in
2006 to provide for facilitating the promotion and development and enhancing the
competitiveness of MSME and for matters connected therewith or incidental Self-Instructional
Material 301
Micro, Small and Medium thereto. With the introduction of the MSME Act, service sector has been included
Enterprises Development
Act, 2006 in the definition of MSME, which is a historic development.
NOTES
14.1 OBJECTIVES

 Classify various enterprises into micro, small and medium enterprises
 Discuss the salient features of the Micro, Small and Medium Enterprises
(MSME) Act , 2006
 Describe the reservation, credit and taxation policies relating to MSME of
the government
 List the government’s incentives for the promotion of the MSME sector
14.2 SALIENT FEATURES OF MICRO, SMALL AND

MEDIUM ENTERPRISES ACT, 2006
A single comprehensive act for development and regulation of small enterprises

had been a long outstanding demand of the Sector so as to free it from a
plethora of laws and regulations and visit of inspectors, which it had to face
with limited awareness and resources. The need has been emphasized from
time to time by stake holders at different fora. In addition, recommendations
to provide for a proper legal framework for small sector to relieve it of the
requirements to comply with multiple rules and regulations were made by the
Committees such as the Abid Hussain Committee (1997) and Study Group
under Dr. S.P. Gupta (2000).
While the small scale industries continued to be important for the economy,
in the recent years the small scale services have also emerged as a significant
sector contributing substantially to the economy and employing millions of workers.
Therefore, it became necessary, as is the practice worldwide, to address the
concerns of both the small scale industries and services together and recognize
them as small enterprises. The worldwide as a composite sector. In a fast growing
economy like ours, the natural mobility of small enterprises to medium ones has to
be facilitated through appropriate policy interventions and legal framework. With
these objectives in view, the Government came with an exclusive legislation for
micro, small and medium enterprises known as the Micro, Small and Medium
Enterprises Development Act, 2006.
According to the MSME Act:
(a) In the case of the enterprises engaged in the manufacture or production
of goods pertaining to any industry specified in the First Schedule to the
Self-Instructional Industries (Development and Regulation) Act, 1951, an enterprise is:
302 Material
(i) a micro enterprise, where the investment in plant and machinery does Micro, Small and Medium
not exceed twenty- five lakh rupees; Act, 2006
(ii) a small enterprise, where the investment in plant and machinery is
more than twenty-five lakh rupees but does not exceed five crore
NOTES
rupees; or
(iii) a medium enterprise, where the investment in plant and machinery is
more than five crore rupees but does not exceed ten crore rupees;
(b) In the case of the enterprises engaged in providing or rendering of
services, an enterprise is:
(i) a micro enterprise, where the investment in equipment does not exceed
ten lakh rupees;
(ii) a small enterprise, where the investment in equipment is more than ten
lakh rupees but does not exceed two crore rupees; or
(iii) a medium enterprise, where the investment in equipment is more than
two crore rupees but does not exceed five crore rupees.
sThe Central Government shall, by notification, constitute an Advisory Committee
consisting of the following members, namely:—
(a) the Secretary to the Government of India in the Ministry or Department of
the Central Government having administrative control of the small and
medium enterprises who shall be the Chairperson, ex officio;
(b) not more than five officers of the Central Government possessing necessary
expertise in matters relating to micro, small and medium enterprises,
members, ex officio;
(c) not more than three representatives of the State Governments, members,
ex officio; and
(d) one representative each of the associations of micro, small and medium
enterprises, members, ex officio.
The Member-Secretary of the Board shall also be the ex officio Member-
Secretary of the Advisory Committee. The Central Government shall, prior to
classifying any class or classes of enterprises, obtain the recommendations of the
Advisory Committee. The Advisory Committee shall examine the matters referred
to it by the Board and furnish its recommendations to the Board. The Advisory
Committee shall, after considering the following matters, communicate its
recommendations or advice to the Central Government or, as the case may be,
State Government or the Board, namely:—
(a) the level of employment in a class or classes of enterprises;
(b) the level of investments in plant and machinery or equipment in a class or
classes of enterprises;
Self-Instructional
Material 303
Micro, Small and Medium (c) the need of higher investment in plant and machinery or equipment for
Act, 2006 technological upgradation, employment generation and enhanced
competitiveness of the class or classes of enterprises;
(d) the possibility of promoting and diffusing entrepreneurship inmicro, small or
NOTES
medium enterprises; and
(e) the international standards for classification of small and medium enterprises.
14.2.3 Memorandum of Micro, Small and Medium enterprises
Any person who intends to establish,—
(a) a micro or small enterprise, may, at his discretion; or
(b) a medium enterprise engaged in providing or rendering of services may, at
his discretion; or
(c) a medium enterprise engaged in the manufacture or production of goods
pertaining to any industry specified in the First Schedule to the Industries
(Development and Regulation) Act, 1951, shall file the memorandum of
micro, small or, as the case may be, of medium enterprise with such authority
as may be specified by the State or the Central Government,
Provided that any person who, before the commencement of this Act, established—
(a) a small scale industry and obtained a registration certificate, may, at his
discretion; and
(b) an industry engaged in the manufacture or production of goods pertaining
to any industry specified in the First Schedule to the Industries (Development
and Regulation) Act, 1951 ,having investment in plant and machinery of
more than one crore rupees but not exceeding ten crore rupees and, in
pursuance of the notification of the Government of India in the erstwhile
Ministry of Industry (Department of Industrial Development), shall within
one hundred and eighty days from the commencement of this Act, file the
memorandum, in accordance with the provisions of this Act.
The form of the memorandum, the procedure of its filing and other matters
incidental thereto shall be such as may be notified by the Central Government after
obtaining the recommendations of the Advisory Committee in this behalf. The
authority with which the memorandum shall be filed by a medium enterprise shall
be such as may be specified, by notification, by the Central Government. The
State Government shall, by notification, specify the authority with which a micro
or small enterprise may file the memorandum.
14.2.4 Measures for Promotion, Development and Enhancement of
Competitiveness of MSME
 Measures for promotion and development: The Central Government
may, from time to time, for the purposes of facilitating the promotion and
development and enhancing the competitiveness of micro, small and medium
Self-Instructional
304 Material
enterprises, particularly of the micro and small enterprises, by way of Micro, Small and Medium
development of skill in the employees, management and entrepreneurs, Act, 2006
provisioning for technological upgradation, marketing assistance or
infrastructure facilities and cluster development of such enterprises with a
view to strengthening backward and forward linkages, specify, by NOTES
notification, such programmes, guidelines or instructions, as it may deem fit.
 Credit facilities: The policies and practices in respect of credit to the
micro, small and medium enterprises shall be progressive and such as may
be specified in the guidelines or instructions issued by the Reserve Bank,
from time to time, to ensure timely and smooth flow of credit to such
enterprises, minimise the incidence of sickness among and enhance the
competitiveness of such enterprises.
 Procurement preference policy: For facilitating promotion and
development of micro and small enterprises, the Central Government or
the State Government may, by order notify from time to time, preference
policies in respect of procurement of goods and services, produced and
provided by micro and small enterprises, by its Ministries or departments,
as the case may be, or its aided institutions and public sector enterprises.
 Funds: There shall be constituted, by notification, one or more Funds to be
called by such name as may be specified in the notification and there shall
be credited thereto any grants made by the Central Government.
 Grants by Central Government: The Central Government may, after
due appropriation made by Parliament by law in this behalf, credit to the
Fund or Funds by way of grants for the purposes of this Act, such sums of
money as that Government may consider necessary to provide.
The State Government shall, by notification, establish one or more Micro and
Small Enterprises Facilitation Councils, at such places, exercising such jurisdiction
and for such areas, as may be specified in the notification.
The Micro and Small Enterprise Facilitation Council shall consist of not less than
three but not more than five members to be appointed from amongst the following
categories, namely:—
(i) Director of Industries, by whatever name called, or any other officer not
below the rank of such Director, in the Department of the State Government
having administrative control of the small scale industries or, as the case
may be, micro, small and medium enterprises; and
(ii) one or more office-bearers or representatives of associations of micro or
small industry or enterprises in the State; and
(iii) one or more representatives of banks and financial institutions lending to
micro or small enterprises; or
Self-Instructional
Material 305
Micro, Small and Medium (iv) one or more persons having special knowledge in the field of industry, finance,
Act, 2006 law, trade or commerce.
The person appointed under clause (i) of sub-section (1) shall be the
Chairperson of the Micro and Small Enterprises Facilitation Council. The
NOTES
composition of the Council, the manner of filling vacancies of its members and the
procedure to be followed in the discharge of their functions by the members shall
be such as may be prescribed by the State Government.
Check Your Progress

1. Which is a micro manufacturing enterprise as per the MSME Act?
2. Which is a small service enterprise as per the MSME Act?
3. Who is the Chairperson of the Advisory Committee constituted under the
MSME Act?
4. How many persons can be elected for the Micro and Small Enterprise
Facilitation Council?
14.3 RESERVATION POLICY, CREDIT POLICY,

GOVERNMENT POLICY TOWARDS
TAXATION AND INCENTIVES
In this section, you will learn about government’s reservation, credit, taxation and
incentive policies for the promotion of the MSME sector.
An Advisory Committee constituted under the Industries (Development &
Regulation) Act, 1951 on de-reservation periodically evaluates products /items
reserved for exclusive production by MSME. India has opened up its economy
since 1991 through a forward looking policy which led to de-licensing of items.
Over the years list of items reserved for manufacture by MSME Sector has been
reduced from over 800 to 20. On the recommendation of Advisory Committee,
Government of India decided in 2015 to deserve remaining twenty items presently
reserved for exclusive manufacture by MSME Sector. Accordingly following items
are de-reserved:-
(i) Pickles and Chutneys, (ii) Bread, (iii) Mustard Oil (except solvent
extracted), (iv) Ground Nut Oil (except solvent extracted), (v) Wooden furniture
and Fixtures, (vi) Exercise Books and Registers, (vii) Wax Candles, (viii) Laundry
Soap, (ix) Safety Matches, (x) Fire works, (xi) Agarbatties, (xii) Glass Bangles,
(xiii) Steel Almirah, (xiv) Rolling shutters, (xv) Steel chairs – all types, (xvi) Steel
tables – all other types, (xvii) Steel Furniture – all other types, (xviii) Padlocks,
(xix) Stainless steel utensils, (xx) Domestic utensils – Aluminium.
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306 Material
The above policy initiatives have been taken to encourage greater investment, Micro, Small and Medium
including the existing MSME units, to incorporate better technologies, standard Act, 2006
and branch building to enhance competition in Indian and global markets for these
products.
NOTES
Bank’s lending to the Micro and Small enterprises engaged in the manufacture or
production of goods specified in the first schedule to the Industries (Development
and regulation) Act, 1951 and notified by the Government from time to time is
reckoned for priority sector advances. However, bank loans up to .5 crore per
borrower / unit to Micro and Small Enterprises engaged in providing or rendering
of services and defined in terms of investment in equipment under MSMED Act,
2006 are eligible to be reckoned for priority sector advances. Lending to Medium
enterprises is not eligible to be included for the purpose of computation of priority
sector lending. Priority sector lending include only those sectors, as part of the
priority sector that impact large sections of the population, the weaker sections
and the sectors which are employment-intensive such as agriculture, and Micro
and Small enterprises.
As per extant policy, certain targets have been prescribed for banks for
lending to the Micro and Small enterprise (MSE) sector. In terms of the
recommendations of the Prime Minister’s Task Force on MSMEs banks have
been advised to achieve a 20 per cent year-on-year growth in credit to micro and
small enterprises, a 10 per cent annual growth in the number of micro enterprise
accounts and 60% of total lending to MSE sector as on preceding March 31st to
Micro enterprises.
In order to ensure that sufficient credit is available to micro enterprises within the
MSE sector, banks should ensure that:
 40 per cent of the total advances to MSE sector should go to micro
(manufacturing) enterprises having investment in plant and machinery up to
10 lakh and micro (service) enterprises having investment in equipment
up to 4 lakh.
 20 per cent of the total advances to MSE sector should go to micro
(manufacturing) enterprises with investment in plant and machinery above
10 lakh and up to 25 lakh, and micro (service) enterprises with investment
in equipment above 4 lakh and up to 10 lakh.
Thus, 60 per cent of MSE advances should go to the micro enterprises.
14.3.3 Taxation
One of the best and easiest ways of providing assistance to MSMEs is through
tax-related benefits. With the presentation of the budget in 2018, the government
made clear its intention towards the MSME sector.
Self-Instructional
Material 307
Micro, Small and Medium  Benefiting nearly 96% of the companies, the 5% reduction in corporate tax
Act, 2006 rates from 30% to 25% for domestic SMEs with an annual turnover of 50
crores in the year 2015-16, was aimed not only at providing tax relief to
companies, but also at incentivising partnerships firms to move to the
NOTES structured form of business by transforming into limited companies.
 By listing on the SME exchange, SME companies benefit from easier access
to capital and equity finance, and higher visibility while enjoying tax benefits
such as 0% long-term capital gains tax and 15% short-term gain tax.
 The timeframe for carrying forward MAT (minimum alternate tax) was raised
to 15 years from 10 years, helping business enterprises to further reduce
their tax liability in the future.
 Reduction in presumptive tax by 2% for companies with a turnover of up to
2 crores reduced the financial burden on them.
Benefits of GST for SMEs
Implementation of GST, though considered cumbersome and tedious by most
SMEs, will actually benefit them in the longer run. The replacement of multiple
taxes by a single, uniform one not only removes the cascading effect of multiple
taxes but also makes it easier to administer and comply with.
 GST allows SMEs opportunities to access a wider market country-wide,
bringing both out-of-state player and local seller on par through a seamless
flow of tax credits.
 Ease of business is enabled by the application of the unified GST, which has
replaced the multiple taxes levied at different by different authorities.
 GST improves profitability by widening the scope of input credits to include
services also.
 It also makes compliance easier through a reduction in the number of returns
and switchover to the online regime. Businesses with turnover less than
20 lakhs can have multi-state operations without the need for GSTN
registration. Also when turnover is less than 1.5 crores, only quarterly
returns need to be filed.
 The limit for the composition scheme has been raised to 1.5 crores. Though
subject to some restrictions, the scheme is highly beneficial for local
businesses that do not deal in restricted products or sell in other states.
While GST may require an initial investment in technology and putting in
place procedures to ensure compliance, GST, in the long run, is expected to be
highly beneficial to SMEs, increasing the competitiveness and pushing growth.
MSMEs form the backbone of our economy and need assistance and protection
from other big companies as they lack in resources and technology. To do this the
Self-Instructional government provides some schemes, rebates or counselling to these enterprises.
308 Material
Some of the MSME incentive schemes launched by the government are as follows: Micro, Small and Medium
 Udyog Aadhaar memorandum: Aadhaar card is a 12 digit number given Act, 2006
to all individuals by the government. In this, the Aadhaar card is a mandatory
requirement. The benefit of registering in this scheme is ease in availing NOTES
credit, loans, and subsidies from the government. Registration can be done
both ways in the online mode or the offline mode.
 Zero Defect Zero Effect: In this model, goods that are manufactured for
export have to adhere to a certain standard so that they are not rejected or
sent back to India. To achieve this the government has launched this scheme.
In this, if the goods are exported these are eligible for some rebates and
concessions.
 Quality Management Standards and Quality Technology Tools:
Registering in this scheme will help the micro, small and medium enterprises
to understand and implement the quality standards that are required to be
maintained along with the new technology. In this scheme, activities are
conducted to sensitize the businesses about the new technology available
through various seminars, campaigns, activities etc.
 Grievance Monitoring System: Registering under this scheme is beneficial
in terms of getting the complaints of the business owners addressed. In this,
the business owners can check the status of their complaints, open them if
they are not satisfied with the outcome.]
 Incubation: This scheme helps innovators with the implementation of their
new design, ideas or products. Under this from 75% to 80% of the project
cost can be financed by the government. This scheme promotes new ideas,
designs, products etc.
 Credit Linked Capital Subsidy Scheme: Under this scheme, new
technology is provided to the business owners to replace their old and
obsolete technology. The capital subsidy is given to the business to upgrade
and have better means to do their business. These small, micro and medium
enterprises can directly approach the banks for these subsidies.
 Women Entrepreneurship: This scheme is especially started for women
who want to start their own business. The government provides capital,
counseling, training and delivery techniques to these women so that they
manage their business and expand it.
Check Your Progress

5. How many items are reserved for manufacture by MSME sector?
6. What percentage of MSME advances should go to micro enterprises?
7. How is GST helpful for MSMEs?
Self-Instructional
Material 309
Enterprises Development 14.4 ANSWERS TO CHECK YOUR PROGRESS
Act, 2006
QUESTIONS
NOTES 1. As per the MSME Act, a manufacturing enterprise where the investment in
plant and machinery does not exceed twenty- five lakh rupees is a micro
enterprise.
2. As per the MSME Act, a service enterprise where the investment in
equipment is more than ten lakh rupees but does not exceed two crore
rupees is a small enterprise.
3. The Secretary to the Government of India in the Ministry or Department of
the Central Government having administrative control of the small and
medium enterprises is the Chairperson, ex officio, of the Advisory Committee.
4. The Micro and Small Enterprise Facilitation Council shall consist of not less
than three but not more than five members.
5. Items reserved for manufacture by MSME Sector have been reduced from
over 800 to 20.
6. Sixty per cent of MSE advances should go to the micro enterprises.
7. The replacement of multiple taxes by a single, uniform GST not only removes
the cascading effect of multiple taxes but also makes it easier to administer
and comply with.
14.5 SUMMARY
 In the case of the enterprises engaged in the manufacture or production of

goods pertaining to any industry specified in the First Schedule to the
Industries (Development and Regulation) Act, 1951, an enterprise is a micro
enterprise, where the investment in plant and machinery does not exceed
twenty- five lakh rupees.
Industries (Development and Regulation) Act, 1951, an enterprise is a small
enterprise, if the investment in plant and machinery is more than twenty-five
lakh rupees but does not exceed five crore rupees.
Industries (Development and Regulation) Act, 1951, an enterprise is a
medium enterprise, if the investment in plant and machinery is more than
five crore rupees but does not exceed ten crore rupees.
 In the case of the enterprises engaged in providing or rendering of services,
an enterprise is a micro enterprise, if the investment in equipment does not
Self-Instructional exceed ten lakh rupees.
310 Material
 In the case of the enterprises engaged in providing or rendering of services, Micro, Small and Medium
an enterprise is a small enterprise, if the investment in equipment is more Act, 2006
than ten lakh rupees but does not exceed two crore rupees.
 In the case of the enterprises engaged in providing or rendering of services, NOTES
an enterprise is a medium enterprise, where the investment in equipment
is more than two crore rupees but does not exceed five crore rupees.
 The form of the memorandum of MSME, the procedure of its filing and
other matters incidental thereto shall be such as may be notified by the
Central Government after obtaining the recommendations of the Advisory
Committee in this behalf.
 The policies and practices in respect of credit to the micro, small and medium
enterprises shall be progressive and such as may be specified in the guidelines
or instructions issued by the Reserve Bank, from time to time, to ensure
timely and smooth flow of credit to such enterprises, minimise the incidence
of sickness among and enhance the competitiveness of such enterprises.
 An Advisory Committee constituted under the Industries (Development &
Regulation) Act, 1951 on de-reservation periodically evaluates products /
items reserved for exclusive production by MSME.
 Bank’s lending to the Micro and Small enterprises engaged in the
manufacture or production of goods specified in the first schedule to the
Industries (Development and regulation) Act, 1951 and notified by the
Government from time to time is reckoned for priority sector advances.
 GST allows SMEs opportunities to access a wider market country-wide,
bringing both out-of-state player and local seller on par through a seamless
flow of tax credits.
 Ease of business is enabled by the application of the unified GST, which has
replaced the multiple taxes levied at different by different authorities.
14.6 KEY WORDS
 Buyer: It refers to who buys any goods or receives any services from a
supplier for consideration.
 Enterprise: It refers to an industrial undertaking or a business concern or
any other establishment, by whatever name called, engaged in the
manufacture or production of goods, in any manner, pertaining to any industry
specified in the First Schedule to the Industries (Development and
Regulation) Act, 1951 or engaged in providing or rendering of any service
or services.
 Goods: It refers to every kind of movable property other than actionable
claims and money.
Self-Instructional
Material 311
Enterprises Development 14.7 SELF ASSESSMENT QUESTIONS AND
Act, 2006
EXERCISES
NOTES Short-Answer Questions

1. How are enterprises engaged in the manufacture or production of goods
classified into micro, small and medium enterprises?
2. How are enterprises engaged in providing or rendering services classified
into micro, small and medium enterprises?
3. Write a note on constitution and composition of the Micro and Small
Enterprises Facilitation Council.
4. List the items reserved for manufacture by MSME Sector in India.
1. Describe the measures provided in the MSME Act for promotion,
development and enhancement of competitiveness of MSME.
2. Write notes on: (i) Memorandum of Micro, Small and Medium enterprises
and (ii) Reservation Policy for MSME.
3. How does the government provide incentives to the MSME sector though
its credit and taxation policies?
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Self-Instructional
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MERCANTILE LAW
B.Com.
II - Semester

UG - B.com - Commerce (English) - B - Com - 102 24 - Mercantile Law

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102 24 NOITACUDE ECNATSIDDIRECTORATE

"The copyright shall be vested with Alagappa University"

Vikas® is the registered trademark of Vikas® Publishing House Pvt. Ltd.

BLOCK - I: INTRODUCTION, INDIAN CONTRACT ACT, SALE OF

BLOCK - II: NEGOTIABLE INSTRUMENT ACT, PARTNERSHIP ACT,

BLOCK - III: FOREIGN EXCHANGE MANAGEMENT ACT,

INTRODUCTION, INDIAN CONTRACT ACT,

After going through this unit, you will be able to:

Check Your Progress

1.3 ANSWERS TO CHECK YOUR PROGRESS

1.6 SELF ASSESSMENT QUESTIONS AND

1.7 FURTHER READINGS

After going through this unit, you will be able to:

2.3 ESSENTIAL FEATURES OF A CONTRACT

A contract has been defined in Section 2(h) as ‘an agreement enforceable by

2.4 TYPES OF CONTRACT

A. Types of Contracts on the basis of Enforceability

C. Types of Contracts on the basis of the Extent of Execution

2.5 CAPACITY OF PARTIES

A. Definition of undue influence

NOTES C. Distinction between Fraud and Misrepresentation

Check Your Progress

2.6 DISCHARGE OF CONTRACTS

2.7 BREACH OF CONTRACT

Breach of contract, as explained above, may be of two kinds: (1) Anticipatory

Check Your Progress

2.8 ANSWERS TO CHECK YOUR PROGRESS

1. A ‘contract’ is an agreement, the object of which is to create a legal obligation,

 Contract is an agreement, the object of which is to create a legal obligation,

2.10 KEY WORDS

 Contract: An agreement enforceable by law

2.11 SELF ASSESSMENT QUESTIONS AND

UNIT 3 LAW OF AGENCY

After going through this unit, you will be able to:

entrusted for sale. He enjoys wide discretionary powers in relation

behalf before its incorporation, cannot be ratified by the company after it

Check Your Progress

3.3 TERMINATION OF AGENCY

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

suit, his authority comes to an end with the judgment.

Check Your Progress

 In a way, an agent is merely a connecting link. After entering into a contract

insolvency of the principal, knowledge of the agent is essential for completing

3.6 KEY WORDS

 Agent: A person employed to do any act for another or to represent

3.7 SELF ASSESSMENT QUESTIONS AND

UNIT 4 SALE OF GOODS ACT, 1930

After going through this unit, you will be able to:

4.2 CONTRACT OF SALE OF GOODS

Official Receiver or Assignee. The seller is entitled only to a rateable dividend

(Sec. 8). Where there is an agreement to sell specific goods, and

Check Your Progress

4.3 CONDITIONS AND WARRANTIES

A contract of sale of goods contains various terms or stipulations regarding the

Check Your Progress

4.4 TRANSFER OF PROPERTY: IMPORTANCE

delivered to the buyer on approval or ‘on sale or return,’ or on other similar

deemed necessary in the larger interest of society. So if a thief disposes of stolen